STANDFIRST: Manufacturing’s death knell is being sounded once more, but IAN HALSTEAD hears that the doom-mongers are wrong - again.

Kelvin Campbell offers Ian Halstead an exclusive peek into the future.

Midlands Insider magazine - April 2009

STANDFIRST: Manufacturing’s death knell is being sounded once more, but IAN HALSTEAD hears that the doom-mongers are wrong - again.

When the debate turns to manufacturing, it’s always instructive to seek the views of David Grove; probably the West Midlands’ best-known industrialist.

A veteran of the region’s corporate sector, he chairs the plc, Hill & Smith Holdings, and is chief executive of his private vehicle, Grove Industries.

Grove underlined his belief in the former’s prospects just before Christmas - investing £160,000 to lift his shareholding up to the 920,000 mark - and is no less sanguine about the latter, and the wider manufacturing sector.

"I think by 2010, that business should be back to around 80% of what I call normal, but we certainly won’t be seeing trade at the level we experienced in 2007 and 2008, which for me was the manufacturing equivalent of the South Sea Bubble," he says.

"We have nine companies, and the one in automotive supply is seeing volumes down 50%, which is to be expected, but whilst demand for the products made by most of the others is ’soft’, it certainly hasn’t fallen off a cliff."

"We’re also doing a lot more exporting into Euro-land than we did, because of the pound’s weakness against the euro, especially of our polymer-based products."

Grove is bullish about manufacturing’s ability to survive the recession, because of the battering it has taken in previous downturns, and offers an intriguing analysis of the woes of the automotive sector.

"It seems that manufacturing gets bashed every five or six years, so most management teams know what to do, whereas people in financial services haven‘t experienced anything like this," he says.

"If you cut early, then you don’t need to cut hard. Unfortunately, the big motor manufacturers, and some suppliers, delayed and delayed making cuts, hoping demand would pick up, until they were forced to make massive cuts."

Grove has little time for those manufacturers who sit glumly in a corner, complaining that the banks are responsible for their plight.

"I really have a problem with the ‘blame culture’. If you run a business, you have to react to macro-economic changes, and then adapt. No-one is ever forced to borrow, whether you are an individual or a company."

He agrees that the arbitrary withdrawal of credit insurance is hitting the manufacturing sector, but prefers ‘jaw jaw’ to ‘war war’.

"If your cover is stopped, it is no good firing off angry letters. A customer of our pressings business had his credit insurance withdrawn, so he took his management team along to the insurer, opened up his books to them, and it was reinstated."

Indeed, whilst many others see only gloom ahead, Grove sees opportunities.

"If your management team is nimble and aware, they’ll find openings. Managing debt may be tricky when trade is down, but if you adopt an entrepreneurial - rather than a pessimistic - mindset, things can look different."

However, at the Sandwell-based trade association which represents most of Britain’s metal-forming companies, the mood isn’t quite as optimistic.

John Houseman, director-general of the Confederation of British Metalforming, reports that some of his member firms are on the cusp of closure.

"The core problem is access to finance, and particularly to the money which Lord Mandelson claimed would be available for companies dealing with the automotive sector," he says.

"No-one expected that they could apply online, and the cash would appear in their account, but the banks are demanding full due diligence on each business, which would cost £30,000 or more, and also build in further lengthy delays."

"Each week that passes brings companies closer to the edge, and I don’t think some can survive, even though they are well-run and had solid order books - until the automotive sector came to a halt."

Houseman isn’t a member of the ’blame culture’ brigade by nature, but says years of incessant pressure put on component suppliers, by the major motor manufacturers, has compounded the impact of the recession.

"The car firms have squeezed margins for so long, that most suppliers were barely profitable, before the downturn."

"When volumes rose, the buyers would demand cost-downs, in return for the extra business. When demand fell, they demanded further price cuts to protect their own margins."

"When I see the chief executive and directors of Jaguar Land Rover, and other motor manufacturers, pleading poverty, it makes me furious."

"If their company goes under, they’ll keep their homes, get decent pay-offs, and have good pensions. If our members lose their company, they will lose everything, as most are in hock to their banks, because of the sheer greed of the motor manufacturers."

Houseman does share Grove’s wider view though, that manufacturing certainly isn’t about to be written off.

"Our members working in aerospace, oil and gas, and medical technologies are as busy as they can be. In some sectors, where current business is down, companies are shifting their focus to R&D, so they’ll have new products when the upturn comes - if they can survive."

The likely length of manufacturing’s recession remains uncertain of course, but analysis released in March, by PricewaterhouseCoopers, identifies companies in the ‘metal products’ sector as the most likely to struggle.

"Metals are commodity products, operating in highly-competitive world markets, with relatively low returns on capital," says PwC’s regional partner, Mark Smith.

"With demand for these products hit badly by the global recession, this sector looks particularly vulnerable."

Ernst & Young’s senior partner in Birmingham, Ronnie Bowker, agrees with the CBM’s Houseman that access to finance is the key to survival.

"The lack of liquidity is not only making it harder for businesses to operate and pursue their investment strategies, but has also helped to undermine confidence," he says.

"Manufacturers are increasingly concerned that the banks won't renew their existing finance facilities, let alone grant them access to new funds. As a result, they are adopting short-term outlooks, rather than planning ahead for the upturn."

Bowker is equally apprehensive that those manufacturers currently able to survive, will suffer from the domino effect as suppliers go under.

"Many are specialist businesses and if they fail, usually only a handful of other companies can potentially fill the gap," he says.

"For any manufacturer, particularly in the automotive sector, supplier failure can be extremely disruptive, and may bring production to a standstill, whilst an alternative supplier is sourced."

However, Bowker’s major fear is that cash-strapped manufacturers will be forced to shed skilled labour in order to survive.

"Once you lose these skills, they are very difficult to get back. When we eventually make it through the downturn, businesses may find that they haven't got the workforce capacity to cope, which is where I think the corporate community needs additional government support."

One of the newest faces on the region’s manufacturing scene is Colin Tivey, who after almost 40 years with British Rail, Ford, Jaguar and Land Rover has become chairman of the Wolverhampton-based Manufacturing Advisory Service-West Midlands.

He joins the highly-rated organisation after a career which saw him become chief programme engineer behind the Jaguar X-Type launch, and operations director for the manufacturer’s Halewood plant on Merseyside.

Tivey is just the kind of enthusiastic and committed character which the region’s manufacturers need in a crisis, and his partnership with the ebullient MAS-WM chief executive, David Wright, promises much.

"We both understand the challenges, and think our organisation can do a great deal to assist companies, with their strategies, their research and design work, and their product development," he says.

"We need to ensure that manufacturers have all the right tools and techniques to allow them to spring back from recession. Our biggest fear though is that they downsize themselves to such a size to survive, that they can not then gear up for growth."

As someone with a lifetime in the automotive sector, Tivey understandably sees merit in the introduction of a ’scrappage’ system, offering consumers cash payments if they trade in their old vehicles, for newer and more environmentally-friendly models.

"I really don’t understand how the Germans, the French and the Italians can introduce this concept, but the UK government can’t. Nor do I see how the French can make up wages for people on short-time, but in this country, we claim that would be treated as state aid," says Tivey.

"We’re all in the EU, and no-one at Brussels has been complaining about what other member states are doing to help their domestic manufacturing sectors, so why can’t we do the same?"

The same thought has been vexing Martin Wassell, appointed regional director of the Engineering Employers Federation last October.

His major concern though is that the slump has now spread from automotive-related manufacturers, to those operating in almost all major sectors.

"It is a very unusual feature, of any recession, to see such a widespread fall in orders. The data in our latest Business Trends survey was very gloomy, and we now see only minimal recovery, even by 2010," he says.

"Manufacturing in the West Midlands does seem to be particularly badly off, with immense downward pressure on prices, cash-flow, margins and intended capital expenditure."

"We are urging members not to focus solely on short-term issues, as investment which is made today - whether in R&D, equipment or skills - will help improve productivity in two, three or five years time, although we appreciate the difficulties they are under."

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