Supply chains suffered in the recession. As demand waned many suppliers cut back sharply and decisively. Whilst this enabled many firms to stay in business, it is now hampering their responsiveness to the dramatic increase in demand since the recession ended.
Yesterday the FT reported that electronic component makers are now operating at 94% capacity, up from 56% last year, and many are struggling to keep up with orders. This, in turn, is reducing the ability of large multinational companies to respond to increased demand.
In the UK one sector that is particularly reliant on its supply chain is Aerospace and Defence. According to ADS there are over 9000 defence SMEs in the UK. These SMEs often supply niche or high-tech components for the large defence multinationals.
The problem for the UK defence industry is that these SMEs are now facing a “double whammy”. Having cut back during the recession, these businesses are about to be hit by large cuts in government spending.
Whilst the multinationals will undoubtedly be hit by spending cuts these businesses are much less vulnerable than their suppliers because they have many markets; BAE, for example, generates just 20% of its revenue in the UK.
This matters for the large multinationals and it matters for the UK’s future defence capabilities. If the UK’s supply chain suffers in the short term, the UK’s ability to compete in this sector could be permanently diminished. This has political implications, too. If the UK’s capacity to manufacture defence equipment is reduced then so too is our ability to respond to a changing defence situation.
Whilst there may well be a role for government in supporting the defence supply chain, businesses are also looking at ways to help themselves. Larger defence companies are aware that their suppliers are struggling, and recently there have been some examples of firms buying out suppliers rather than see them go under.
Suppliers themselves are also diversifying by moving into new markets where demand for defence is growing; and moving into adjacent sectors such as security and intelligence.
These strategies are not without risk, UK businesses are not the only ones seeking to increase defence exports in those countries where defence spend is growing, however, it is this kind of adaptability that should stand UK manufacturers in good stead even in a tougher economic climate.