EEF blog

Insights into UK manufacturing

Business Growth Fund launch - now we need to see access to finance improve

Andrew Johnson May 19, 2011 09:39

Today in Birmingham the BBA Taskforce banks are launching the Business Growth Fund (BGF), providing equity investments for growing SMEs with turnovers of £10-£100 million, looking for £2-10 million.

For the avoidance of doubt this is the banks’ fund, which they committed to as part of their Taskforce commitments in October. The Merlin agreement in February bumped it up from £1.5 billion to £2.5 billion (viz Cable on the radio this morning not a representative of the banks) but there is no government money in here, not even the £50 million previously set aside for the idea that preceded the BGF, the Growth Capital Fund.

We’ve welcomed the intent to address the growth capital gap, identified most recently in the 2009 Rowlands Review, that is holding back some promising UK companies from growing.

Even though this is funded by the banks, it does go towards supporting an increase in sources of finance outside of traditional bank lending – especially important for fast growing companies where bank lending is not appropriate.

This is an area where we have previously called for progress. And we’re further encouraged by positive noises about the BGF’s board including people with real business (even manufacturing!) expertise, again something we’ve been looking for in the financial sector.

However, the launch of the fund again highlights the limited progress being made in increasing the provision of mezzanine debt finance that the Rowlands Review recommended as the best way to address the growth capital gap.

This is important because often growing SMEs have an aversion to giving up an equity stake in their business and the control that goes with that. The BGF will take a seat on the board in the companies it invests in with stakes ranging from 10-50%.

How much this impedes the progress of the Business Growth Fund i.e. by discouraging take up will need to be closely monitored.

With the launch of the BGF all 17 of the Taskforce banks’ commitments set out in October are underway. And of course we have the government’s ‘Project Merlin’ agreement with the banks to increase lending to UK businesses.

However, signs of an improving landscape, particularly for SMEs have been slow to emerge following the financial crisis.

So now we get to the point of all this – improving access to finance. We need to see it happen – and sooner rather than later. And we need to start hearing from the government what that improvement looks like and by when.

The Prime Minister said on Tuesday that Merlin was very much his. While I couldn’t follow his logic on gross v net lending targets, I do agree with him that, so far, results in lending trends have been disappointing. Cable said this morning there's PwC analysis out on Monday looking at performance so far, my hunch is that this too will disappoint.

However, the PM believes the performance of banks needs to judged over the full year of the agreement not off partial data. Fair enough.

But the clock is nevertheless ticking for the actions of both the banks and the government to deliver results. And the benchmark isn't some number on gross lending, which could turn out meaningless if net lending is withdrawn from the economy. The benchmark is meeting the government’s own ambition set out in the Plan for Growth to see ‘more finance for start ups and business expansion’ and inadequate access to finance no longer holding back growth.

With the actions announced so far we’re hopeful of seeing access to finance improve but progress is far from guaranteed.

We need to be thinking now about what more could be done if present measures prove insufficient. Growing companies looking for credit and the UK recovery more generally cannot afford to wait.

Weathering the eurostorm in 2011

Andrew Johnson January 11, 2011 17:33

We've blogged in the last couple of days about access to finance and commodity prices. The third of our four forces to watch in 2011 is the eurozone crisis. Will it get worse, will it pass over, or will it be much like 2010, muddling through with a bailout or two for weak peripheral countries but no major collapse? And what will be the consequences for the UK?

2011 has kicked off in a very similar fashion to 2010 with the Guardian reporting heightened nerves regarding Portugal's growth prospects - a familiar sound to what preceded the Irish bailout late last year. How will this impact on exports to the eurozone?

Our Economic Prospects report out yesterday shows that a testing 2010 did see exports to struggling eurozone economies go backwards. In fact, exports to many other eurozone countries went backwards too, including France and the Netherlands - not usually listed with the sovereign debt basket cases. The one notable exception was Germany where the share of UK export growth was similar to Germany's share of UK total exports.

One of the PM's favourite rallying calls to action is that we export more to Ireland than all the BRICs combined. True maybe but on the other hand exporters are fast remedying that through strong growth to these key markets. So despite lacklustre demand from Europe, UK exports grew strongly overall with demand from key emerging markets more than compensating. With growth prospects for Europe and emerging markets continuing to show a divergent story in 2011, much the same pattern could repeat itself.

 That's not to say that Europe's prospects aren't still very important for the UK economy. In its December meeting minutes the MPC talks about three generalised impacts from the sovereign crisis in order of impact: a reduction in exports to stricken markets, a generalised loss of confidence, and a systemic failure transmitted through the financial system. So far we've only really seen the first impact - and this has been offset to a degree by a strong Germany.

If on the other hand confidence were to start to fall and the eurozone's prospects for holding the euro together were to weaken considerably there is a possibility the pound could start appreciating considerably. Because such a large stock of UK trade still goes to and comes from Europe this is likely to reduce exports to and increase imports from Europe. The contribution from net trade to growth would be considerably reduced. We model one such scenario in Economic Prospects with a 10% appreciation against our central forecast, which in the short run drastically reduces the much sought after boost to growth from net trade.

So even the eurozone storm has so far failed to seriously impact on the UK, it is a key one to keep watching in 2011.

Growth is the next challenge for manufacturers

Jeegar Kakkad November 22, 2010 09:02

How well prepared are UK manufacturers for the next challenge of turning their investments in productivity and competitiveness over the past decade into transformational growth in the next?

To answer this question and to understand the current state of British industry, our new report - The Shape of British Industry - Growing from strong foundations - draws on a survey of 300 manufacturers as well as in-depth discussions with dozens of businesses.

What comes out is a picture of an industry starting from strength, but cautious about growth. Having weathered the recession, UK manufacturing emerges as an innovative, diverse and globally engaged sector. Firms have continued to boost productivity and competitiveness, even if they have struggled to deliver profits or meet their ambitions. According to our new report there's both good and bad news.

Chart 1 - SMEs less likely to turn productivity boost into profits or growth
% balance with increase in productivity, profits and meeting growth objectives

There is, however, one striking feature: the UK, has relatively fewer large manufacturers – those employing more than 250 people – than our closest competitors.

Chart 2 - UK has relatively fewer larger manufacturers,
Number of manufcturers with 250+ employees (US figure is for firms with 500+ employees), and large companies as % of total manufacturers

The twin dynamics that could drive growth in manufacturing are large companies creating markets for a dynamic, diverse supply chain and innovative, agile suppliers attracting large, mobile multinationals to the UK. The danger for manufacturing and the economy is that the lack of larger companies could slow this dynamic, leading to a hollowing out of supply chains and placing a cap on future growth

After a deep recession in which the economy shrunk by 6%, a manufacturing-led recovery has helped drive a year of good economic news. Exports to developing economies are booming and the private sector is slowly creating jobs again. But with public sector cuts looming and a currency war threatening to derail the global economy, we cannot take this growth for granted.

Generating long-term, sustainable growth will require the private sector and government to work together to build on the strengths of sectors – such as manufacturing – that are essential to tackling our future challenges, such as global security, demographic change and climate change. Government, therefore, has a big part to play in providing the right framework that will support and catalyse private sector investment and business growth.

As the Prime Minister stated in his speech on growth, this will mean more than government getting out of the way.

Instead it will need to be clear about what its role is in generating and supporting growth.

The previous government’s preferred approach was overly focused on industrial champions. The current government’s attention to start-ups and young businesses is helpful, but is in danger of swinging too far in the opposite direction.

Yet growth is not a big or small issue. It is about providing sufficient demand to sustain a dynamic and diverse supply network. It is about big businesses with the capacity to drive innovation and productivity down supply chains. And it is about growing bigger businesses with the scale and muscle to invest in tackling our long-term economic challenges.

Prior to the recession, manufacturers’ investments in innovation, their collaboration and their agility were paying dividends. But knocked off their plans for growth during the recession, many companies are now justifiably cautious about investing in growth until they gain greater certainty over the economic and business environment.

Growing more, larger manufacturers is, in part, about continuing to attract new ones to the UK. But it is also about ensuring small and medium-sized manufacturers overcome barriers that constrain them.

The limited availability of affordable finance traps some young and small companies in a Catch-22: unable to get the necessary finance, their ability to plan for growth is constrained, yet unable to demonstrate clear ambitions for growth, some firms find it difficult to get the appropriate finance. If they do manage to grow, these firms would be caught in the thicket of tax and red tape that helps make mid-sized cautious about planning to become truly global in scale.

Chart 13 Tax and regulation are major concerns for mid-size firms
% balance of companies citing UK strengths by company size

The Prime Minister has challenged industry to commit “to create and innovate; to invest and grow; to develop and break boundaries”.

This report shows that manufacturers are already rising to the challenge, but it also sets out where both manufacturers as well as government must make better progress if we are to grow a generation of bigger manufacturers.

Maintaining momentum behind the recovery is crucial. But not all economic growth is equal: imbalanced and unsustainable growth can leave a terrible legacy, as the recent financial crisis and recession have shown.

To ensure our economy can pay its own way in the future, the UK does not need a handful of bigger manufacturers, we need hundreds of them.

 

Trade figures look good: how can government maintain the momentum?

Felicity Burch November 09, 2010 09:41

The UK’s trade deficit in goods improved in September, falling to £8.2 bn compared with £8.5 bn in August.

The value of exported goods rose by £0.5bn over the month, and there was an increase in import values of £0.2bn. This is good news in both cases - increased exports mean there is a potential for more balanced economic growth, while continued demand for imports reflects strength in consumer demand.

The value of UK exports has grown markedly and is currently nearly 25% higher than at the low-point of the recession. Year on year growth in exports is well above the long-term average.

What is more, the outlook for trade is good.

Emerging markets are providing opportunities for export growth. Between 2004 and 2009 (the last complete year for which there is data) the volume of exports to BRIC countries rose by 77%. The proportion of UK exports going to China and India more than doubled. UK manufacturers are keen to take advantage of these opportunities and have been developing their presence in emerging markets. This is already paying dividends: according to UKTI in the first eight months of 2010 alone goods exports to China rose by 44%, to £4.5 billion. Even better news is that recent surveys have repeatedly showed companies reporting increased export orders. One thing is clear: exports have the potential to drive growth.

However, the global marketplace is likely to become an increasingly competitive environment. And the potential for trade wars is threatening the global recovery. The government is rightly keen to promote UK exports, something which is clear from current Trade Mission to China. The importance of trade missions should not be understated. However a long-term strategy for growth is what industry needs to provide the clarity and certainty that will enable the necessary investment to drive exports. Therefore, manufacturers will be looking to the Prime Minister to make good on his commitments to back industries where the UK has a competitive advantage in the government’s upcoming White Paper on growth, and the Manufacturing Framework.

Going for growth

Jeegar Kakkad October 26, 2010 10:45

On Monday, we launched our 10-point plan for growth designed to complement the government's commitments on tax and spend.

And in response to the Prime Minister's Speech on growth, Stephen Radley, EEF's Director of Policy, said:

"Industry will have been encouraged to hear the Prime Minister talking about the government's plan for growth and moving beyond the tired old belief that economic success is somehow a choice between laissez faire and interventionism. For years other countries have recognised and supported industries where they have an economic advantage.

"The Prime Minister is therefore right to say that government policy can be used to support growth in areas like advanced manufacturing and offshore wind where the UK is already strong and could be stronger. This isn’t always about money, but more about all parts of government pulling together to back growth sectors."

The plan would ensure manufacturing and the rest of the private sector are ready to take much greater responsibility for creating jobs, generating wealth through new businesses and delivering the infrastructure needed for a modern economy.

All this week we're going to be taking an in-depth look at growth, putting the UK's performance into context so that we can clearly set out what manufacturers and the government can do generate jobs and investment.

Any comments on the posts - or the plan - can be made via our twitter account @EEF_Economists, or via email.

Going for growth in the UK  

Monday: A 'Plan A' for growth 

Tuesday: The UK is OK (for now): Putting growth into context

Wendesday: Growth Plan Part I - A better partner to business

Thursday: Growth Plan Part II - A stable and predictable business environment

Friday: Growth Plan Part III - Investing in the future of growth

 

Disclaimer
This is an informal blog about manufacturing and the economy written by EEF's policy and representation staff. While it is written from an EEF perspective, contributions should not be taken as formal statements of EEF policy, unless stated otherwise. Nor does it cover all the issues on which we campaign - you can check these out in more detail at our main site.

We welcome and encourage comments, but we reserve the right to remove any that are offensive or irrelevant. We are not responsible for the content of external internet sites.

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EEF helps manufacturing businesses evolve and compete.  We provide business services that make them more efficient and management intelligence that helps them plan.  Our work with government encourages policies that make it easy for them to operate, innovate and grow.

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