Survey shows manufacturers upping game on investment though concerns ahead if Banks tighten lending

However, the results also pointed to concerns ahead for small firms, following last week’s Bank of England report showing that lenders are now tightening their lending criteria. This is likely to hit disproportionately small firms as the survey showed that the lack of a long and stable track record was more of a hurdle for companies in that sector.

According to the survey, in the last year, over 53% of companies had increased investment, with 36% holding investment steady and only 11% proposing to cut back.

These figures contrast with official data which it is suggested is not accurately capturing actual investment in manufacturing. However, there are a number of reasons for this, including the shift to intangible investment in areas such as design, marketing and R&D, as well as more investment taking place abroad. These factors highlight the changing face of industry and the shift away from capital intensive manufacturing which is a feature of many countries in the first world.

Of equal importance to the actual levels of investment, the survey also shows that the quality of management decision making has improved. Since 2003 there has been a decline in the use of management discretion to block investment projects that have passed any technical criteria and, an increase in those receiving the green light, despite not meeting payback periods or hurdle rates.

Furthermore, average payback periods have lengthened from 2.9 years to 3.3 years. Small companies used the longest payback periods with almost two in five saying they used four years or more.

The survey also showed that retained earnings continue to be the main source of finance for investment, with four fifths of companies citing it as the main source and only one third using an external source in the last two years.

However, those that had used an external source had a positive view of their experience, with only a small proportion unable to raise any finance.

Overall, the survey showed that there is no significant market failure for raising finance for manufacturing investment. However, EEF believes more could still be done to support the competitive tax position address the needs of small and medium size companies. In response, it has made a number of recommendations to ensure the business environment remains competitive an attractive location to make both intangible and traditional forms of investment. In addition, where problems occur they tend to be amongst smaller companies and, as such, EEF believes there is a case for looking again at the barriers faced by smaller firms in attracting funding for investment.

1. Tax Competitiveness – in recent years, the UK economy has seen its tax competitiveness eroded. It is vital that steps are taken to address this to ensure that new investment is attracted to compete with overseas competitors.
2. Environment for intangible investment – The forthcoming Sainsbury Review of the government’s science and innovation policy must take steps to ensure the UK remains an internationally competitive location for research, design and innovation. This should include improving links between business and universities, helping business attract finance to commercialise new ideas and increasing the flow of people with skills in science, technology, engineering and mathematics entering industry.
3. Improving management – a more coherent approach is needed to stimulate demand for management training and development. Improved linkages between business support agencies, such as Business Link and the Manufacturing Advisory Service, and skills brokers could play an important role in achieving this.
4. Small firms finance – government should conduct examine whether there are more effective ways to address the issue of finance for small firms, including a review of the Small Firms Loan Guarantee Scheme.

Commenting on the report, EEF Chief Economist, Steve Radley, said:

“Manufacturing businesses are evolving rapidly and entering new markets, increasing innovation and investing overseas all impact on how companies choose to invest. This suggests recent gloom over official data showing sluggish investment levels may have been overdone, given the shift in focus away from capital intensive investment into intangible areas.

“However, where barriers remain, they tend to be faced by smaller companies and we would be concerned at any moves to restrict lending because of the recent crisis in the financial markets.”

ENDS

‘Strategies for Success: How manufacturing is changing investment priorities’ can be downloaded from www.eef.org.uk

The survey of 500 companies was carried out in April 2007