The State of Manufacturing 2021 - Part 1 - With Make UK

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For this 2-part series, I’m joined by Jim Davison and Fhaheen Khan from Make UK, who represent manufacturers in the United Kingdom.

In the first episode of this series, we discuss the key trends that have affected manufacturing in 2021 and the challenges they have faced. You can listen to part 2 here.

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Key topics covered

  1. Key trends that have affected manufacturing in 2021
  2. What challenges were manufacturers facing and still facing?
  3. The shift to remote working
  4. Increasing cost of the price of materials

Niall Sullivan, Senseye: So today I'd like to welcome Fhaheen Khan and Jim Davison to the Trend Detection podcast. How are you guys today?

Jim Davison, Make UK: Yeah, really well, thanks, Niall. Good to join you this morning.

Fhaheen Khan, Make UK: Yeah, well as well, thank you. Good to be here.

Niall Sullivan, Senseye: Yeah. No. Really looking forward to the discussion today. So I guess it'd be really great to just hear a quick introduction to both of you and the organization you represent as well, Make UK. If, Fhaheen, you want to go first, maybe?

Fhaheen Khan, Make UK: Yeah. Yeah, no problem. So I am the senior economist here at Make UK. I sit within the policy team of the Make UK Trader Association.

My role is essentially to produce all the economic reports and research that we make at Make UK and to inform policy making and influence government, as well as review and analyze anything that government might make in order to ensure that manufacturers are best placed in terms of support and the challenges that they face.

I'll leave the explanation of Make UK to Jim, because he's been around for a lot longer than I have, but I hope that's okay with you, Jim.

Jim Davison, Make UK: Yeah, that's absolutely fine, Fhaheen. Yeah. My name's Jim Davison. I'm the region director for Make UK in the South of England.

My role is very much liaising with members, prospective members and the wider stakeholder group, making sure that the requirements and asks of manufacturers are heard at all levels within the UK government structures.

Make UK is a membership organization. We represent 20,000 manufacturing businesses across the whole of England and Wales. We've been in existence for 125 years supporting engineering and manufacturing businesses. And that's something that we're passionate about and busy working on behalf of the sector.

Niall Sullivan, Senseye: Right. Fantastic. Thank you for that introduction. Yeah. So really, so we're looking at this as a first part of a two part series where we're looking back at what's happened in the manufacturing world over the past sort of 12 months as we're nearing the end of the year now. And there's a lot to talk about, I'm sure. Hopefully have enough time to talk about it all. And then also a look ahead as well, because I know you've got a new report coming out. So I think in our second part... But so I guess the big overriding question is, well, the first question to start with, is what have been the key trends that have affected manufacturing in 2021?

Fhaheen Khan, Make UK: I'm happy to start that one off, Niall. I mean, from the policy perspective, we have, I guess, a barometer of manufacturing activity that we produce on a quarterly basis called The Manufacturing Outlook.

So it's a pretty popular publication. It's probably the leading kind of measurement of how manufacturers are doing in the economy. And I guess it is important to look over the last 12 months.

But to explain what's happened in 2021, you almost have to first explain what's happened in 2020, because the results that we produced over this year might be a little bit strange if you don't know actually what was causing that, that came on the year before it.

But for listeners who may not be aware of our data, the quarterly publication report that in terms of something called a balance of change, where we essentially measure manufacturers who have seen an improvement in indicators like output.

So this is how much stuff they make on orders and how many customers are buying stuff from them. And then see that between those who've got more of that stuff versus those who've got less of that stuff and take a difference to understand what direction the average industry is moving.

So if the increases are dominating the decreases, then we say that on average that the industry has expanded. So, that's to give you a bit of context on how I'm talking about these things. You almost can't avoid-

Niall Sullivan, Senseye: So...

Fhaheen Khan, Make UK: Yeah. Go on.

Niall Sullivan, Senseye: Yeah. No. I was just going to say, so let's start at 2020 then, if we go all the way back.

Fhaheen Khan, Make UK: Yeah. Very briefly one 2020. We know what happened, and manufacturing wasn't the only industry to be affected by this.

But in our data we saw record-breaking declines in output and orders, in investment, in employment, all the stuff that we measure, at the start of the pandemic, which was at Q2 2020. And it's important to understand what actually happened there.

I mean, the declines were so severe that we wiped off around £18 billion from the manufacturing industry's value, which is a significant amount. And it was roughly similar to the size that was wiped off by the Global Financial Crisis almost over 10 years ago.

So what we were seeing is that manufacturing was obviously coming back from a pretty low base. We had in 2020, from Q1, we saw a little bit of growth because that was tied to the economies reopening again. Lockdowns were ending. Government was allowing businesses to almost be active again.

We saw orders in output coming back, but then what we saw proceeding over the coming quarter, so Q2 of this year, Q3 of this year, is that we had almost a reverse of everything that we saw in 2020 where we had record-breaking declines in 2020 and we had record-breaking booms in growth.

So a massive bounce back in activity for manufacturers as the economy opened, people started buying things again. People were going back to the high streets and businesses started doing business again.

Our most recent figures show that that is still continuing to some extent. So despite 2020 being a very poor year, 2021 on average has been a very strong year, but not necessarily for all the right reasons. Almost, in some cases, we've seen too much demand.

Manufacturers were over capacity in many cases. We're starting to see the beginning of inflation. But in a positive note, that recovery has bounced back, has been so quick that we are forecasting manufacturing output to go back to its 2019 level by the end of next year, potentially, if things run as they are.

So, that's a bit of an overview. I mean, I didn't want to bore you with all the statistics, but to give you an idea, it's almost been a bit of a rollercoaster where you go down really quickly and then come back up again really quickly.

Niall Sullivan, Senseye: Oh, you're a stats man, Fhaheen, so I wouldn't expect any less, to be honest. But what I was going to ask Jim is if we dig deeper into those sort of challenges faced during... We didn't actually mention the words, but maybe we've had enough of actually saying the word, but COVID and the pandemic, which is still ongoing, of course. But so Jim, I guess when the pandemic really took hold on last year, it was very challenging. So what sort of challenges were manufacturers facing and still facing, I guess, as they recover?

Jim Davison, Make UK: I guess, Niall, there were three main pressures that they were exposed to as a result of COVID. And actually, it's very hard to split some of the Brexit impacts from the COVID impacts because one was masking the other and vice versa.

I think the biggest challenge for members at the start of the year, because I think 2021 has been a definite game of two halves, the first half of the year was very much restrictions on people moving. Could and should manufacturing people be in the office? If so, how can you keep them safe?

And I have to say that manufacturers did a fantastic job of protecting their workforce throughout the pandemic. And actually, I was talking to a member just this morning and he's grappling with yet more change and restriction. And what he's saying is, "Actually, our factory is one of the safest places that our workforce ever goes to," because of the protocols and the restrictions and protections that they've put in place.

It's just ironic that they can leave work in the evening, go to a pub and be with 500 or 499 other people without having to wear face masks and other protocols.

So I think the availability of people was definitely a challenge. Or getting people able to come into the factory, particularly at different times of the year because of things like being in close proximity to somebody in your private life that has had COVID or potentially has had COVID has had a big impact on very short notice absence from the workforce.

So I think it's that volatility, particularly around whether somebody was going to be able to come into work or not, depending on whether they'd been pinged by the NHS app because they'd been close to somebody, was one of the key challenges. The other challenge was very much the-

Niall Sullivan, Senseye: Oh, sorry. Sorry. Just on that point. So, I don't mean to interrupt. Just on that point, that's quite interesting. So I completely understand the challenges of allowing people safely into the workplace, and maybe we're looking ahead to next year, but as we're, I say, coming out of the pandemic but coming to a slightly better place, has there been a shift to more remote working? Obviously, some positions can't be remote, clearly, but has that helped manufacturers to shift to that?

Jim Davison, Make UK: There are opportunities from that, Niall, definitely. One of the biggest challenges for the sector right now is actually just the availability of people. So actually, by offering flexible working options, potentially recruiting people that don't live on the doorstep of the factory has been very, very useful, particularly for roles that don't have to be within the factory walls, if that makes sense.

But actually, so many functions actually do benefit from being available and part of the day-to-day operation. Most members, where they can, have offered more of a blended approach, so typically three days in the office or three days in the factory and two days potentially working from home, because they're keen not to just have 100% remote working.

Because you do run the risk of people just not being connected with the business, with the key objectives, and actually getting too remote from actually the making process, if that makes sense.

So it's very much a blend, but there definitely are some opportunities that have come from it. I can think of a member of mine that are based in North Oxfordshire, and they've just recruited a finance director that actually lives in the North East of England.

And she's been able to split her time and obviously contribute to the business, be there when she needs to be, but also she can spend time in the North East. So, that's just an obvious glaring example of the flexibility and the change of approach and attitude that companies I think have developed over this nearly two years of grappling with the effects of COVID.

Niall Sullivan, Senseye: Yeah. It's interesting that, yeah, it covers manufacturing across a lot of industries. Yeah, a shift. There's been a shift to remote work even in an industry such as manufacturing where a lot of the time you have to be on-site. It's good to see there's been opportunities there for them as well.

Jim Davison, Make UK: Well, I think the most obvious highest profile example, Niall, is the fact that teams, remote teams from different companies, were able to pull together and manufacture thousands of ventilators when the country was short of ventilators.

Some of those engineering teams still to this day have not actually met face-to-face. And they were able to were to set up production facilities, utilize things like 3D printing or additive manufacturing and pull disparate groups from different manufacturing companies with no historical links together.

And to me, that just shows the power of what you can do remotely when there's a challenge, a common purpose and objective that we need to achieve. So for me, that's the gold star example of what you can do remotely.

Niall Sullivan, Senseye: And actually, beyond remote working, but digitalization and digital transformation, I guess, has there been a big shift as the pandemic and Brexit push that to the forefront of manufacturer's minds?

Jim Davison, Make UK: Yeah, definitely. There are good examples where companies had a four or five year strategy to roll out their digital infrastructure, and the pandemic accelerated those plans. And actually within six or seven, eight weeks they'd realized and delivered those changes. And that has meant that those organizations were able to function throughout that whole phase, which is amazing.

It just shows how quickly organizations can change. As part of that, though, and again related to the pandemic, then actually there were shortages caused because all of the demand for things like PCs and laptops meant that the chip manufacturers switched away from producing chips for other industrial applications, for automotive applications, for example, because they needed to satisfy the demand for IT infrastructure.

And then, of course, we've now got knock-on effects of automotive supply chains that are very much stop-start, able to produce, not able to produce. Not because they can't get steel, but fundamentally, it's the chips that are needed for a modern vehicle. And that's been a yo-yo effect that's been really apparent since, I would say, the middle of this year. And it's not just automotive. It's lots of other sectors where chips in particular are now identified as being a fundamental limitation in their supply chains.

Niall Sullivan, Senseye: Is there other examples, chips is good example, during the pandemic where there's been a shortage which has affected production? Is there other examples of materials that have been in short supply?

Jim Davison, Make UK: Yeah.

Niall Sullivan, Senseye: I'm sure there are.

Jim Davison, Make UK: Yeah. Steel is a great example. Literally two years ago in Europe, we were worried about markets being flooded with steel, and that would depress the price of steel.

China is a net producer. They produce 50% of the global supply of steel. And this year, as they've bounced back from the impacts of COVID, and they have massive demands. China is now a net importer of steel, and that's why you're seeing things like the cost of steels and other materials, aluminums and other types of metals have gone up, not insignificantly. You're talking about 400% increases in the prices per ton-

Niall Sullivan, Senseye: Wow.

Jim Davison, Make UK: .... that companies were paying before this whole thing happened.

Fhaheen Khan, Make UK: So, yeah, and I would actually add something to that, Jim. I mean, actually, it is interesting from our own surveys that we've published, I guess, over the last couple weeks on cash and liquidity. I mean, we've actually seen that in terms of the cost of inputs, so like steel, like semiconductors, but even other things, even like plastics and paper, that that sort of stuff has come up in conversation.

I mean, it's probably the biggest concerns that manufacturers have right now is the actual increasing cost of the price of materials. And it's not just the price itself, but even independent of cost is the access to material. So even if you can pay that price, so if that 400% increase, you're willing to pay that price, just being able to get that delivered to your factory so that you can start producing products with that steel, with those semiconductors, it's been very difficult, and that's just down to an insufficient capacity and logistics.

It's the lack of, so, the HGV drivers that we've had in the UK but also across Europe. So there's many challenges that are almost outside of the control of manufacturers, because the inflationary problem is a global issue at the moment, and it's something that is very difficult to actually tackle.

We don't really see that being affecting consumers yet, and that's probably why it's not become a much bigger media issue, I suppose, because consumer prices haven't been rising at the rate that we thought it might.

But if you look upstream where the prices actually affect manufacturers, we're looking at 10 to 15% rises on average across the board from every cost. And our members have said that. And anything up above 20% for the majority of them would be a tipping point for those firms in terms of whether or not they'd be able to stay open for business.

So we're getting very close to that level as well. So some big concerns that are this year, maybe towards the end of this year, and I think those are going to filter into next year as well.

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