Technology, skills and infrastructure should be the government’s top three priorities in its upcoming Industrial Strategy, according to MHA’s latest manufacturing report. The survey of 1,000 manufacturing business owners and C-suite across the country, including more than 200 in the Midlands, was undertaken in May to understand both the challenges and opportunities they currently face and what lies ahead for the sector over the next 12 months. In the short term at least, the outlook remains difficult. The majority of respondents said that the biggest current challenge facing their businesses are the tax increases announced by the UK government in October 2024, which have significantly increased their wage bill as well as creating uncertainty around investment. The survey also highlights that while businesses can see that technology and innovation are important for their sector going forward to allow for more automation, the ability to access the investment that is required to do this still remains a significant challenge. Chris Barlow, head of manufacturing at MHA, said: “The national and international economic turbulence over the last few years, from Brexit to the Covid 19 pandemic and more recently the ongoing uncertainty of tariffs, has no doubt left deep and permanent scars on the sector. “While the manufacturing sector and the people who work within it are above all resilient and innovative, the UK government has the opportunity to shift the dial for the manufacturing sector with the upcoming announcement of its Industrial Strategy. “For manufacturers in the Midlands, who are among the most optimistic across the country, the number one pressing issue is skills shortages so anything the government could do in that area would be warmly welcomed.” Industrial Strategy Across the UK respondents felt the top three priorities for the government’s Industrial Strategy should be technology, skills and infrastructure. Regionally though there were variations: in the East Midlands and South East manufacturers want the government to also look at regulation; in Greater London and the North East another concern is energy prices; in the North West it is data; in Wales it is grid connections; and in Scotland it is access to finance and competition. In terms of what has already been published by the government as to the contents of the Strategy, respondents felt that the government had done little to address the specific issues impacting SMEs as well as implementing the detail of recent trading announcements and improving relationships, particularly with Europe. Unsurprisingly there were also worries about the competitiveness of the UK’s taxation environment in contrast to our key trading partners and there were real concerns from SMEs that the board of the Industrial Strategy was focused more on larger businesses. Tax increases remain biggest challenge for manufacturers in the UK While there is some positivity around growth from manufacturers, significant challenges remain across a varied spectrum of issues. Thirty-five percent of respondents (the biggest number) said that the recent employment tax increases were their biggest challenge, 34% said that the technological evolution was a concern and 33% stated that it was cyber security. Skills shortages and regulation were also named by seven out of the 12 regions as one of their top three concerns, while five said supply chains as a challenge. In the East Midlands 38% of manufacturers felt skill shortages was the biggest issue and the West Midlands 43%. Both were the highest response in each region. Perhaps surprisingly, given the current focus on the issue, only two regions, Scotland and the North West flagged energy costs as a problem and only manufacturing businesses in Yorkshire felt tariffs were one of their top three concerns. For businesses with a turnover of less than £100m, the top three challenges were tax increases (35%), energy costs 32% and supply chain challenges (32%). Businesses with a turnover of between £100 – £250m flagged the technological evolution (40%), tax increases (35%) and skills shortages (33%). Larger businesses with a turnover of more than £250m, listed cyber security (36%) as a key challenge, followed by tax increases (36%) and then regulation (35%). It is unsurprising that for larger businesses that the impact of tax, while important, is eclipsed by technology and cyber security. However, it is interesting that skills shortages, frequently touted as an ongoing concern for the manufacturing industry, has not featured higher on the list of challenges. When asked about how the Autumn 2024 Budget had affected future potential investments, 68% of respondents said the increased costs as a result of the Budget had negatively impacted their plans. The top three areas where investments were most likely to be scaled back were technology, AI and R&D – all mentioned by 70% of companies. These are all areas where, ideally, companies should be investing in order to develop their businesses in view of the threats previously identified. Addressing challenges The survey respondents, who could choose multiple options, had a variety of practical and innovative ways of how these challenges could be addressed: 43% said that they would be increasing their supply chain options, 42% said that they would be investing in strengthening their IT systems, 40% said that they would look at more efficient energy options, 39% said that they would be upskilling existing staff and 38% said that they would invest in new technology or AI. Only 27% said that they would respond by recruiting new staff, while at the same time, an equal proportion said they would actively reduce headcount. Optimism for the future UK plc has suffered from a series of economic upheavals in the last decade. However, despite this, the manufacturing sector remains remarkably optimistic about the future with virtually all of the survey respondents anticipating some growth in the next 12 months. While fifty-five per cent anticipate modest growth of between 3-5%, a significant minority – 22% – believe that their business will grow by more than 6% in the next year. This was 32% in the West Midlands. Perhaps having fallen so far, the only way is indeed up and the sector is by now well-adjusted to the new economic reality. Investment in R&D Despite the Autumn Budget, 55% of all survey respondents said that they would be investing between 3-5% more in R&D in the next 12 months compared to last year, and even more encouragingly, 27% said that they would be investing more than 6% above their previous budget. These are positive signs for the long-term future of the sector. In the South West, 36% of businesses said that they would invest more than 6% in R&D, while in Wales it was 40% and over half, 52%, in the West Midlands. Typically, it was larger companies who were willing to invest more with 30% of businesses with a turnover of over £250m will invest between 6-10% compared to only 19% of businesses with a turnover of less than £100m in R&D. This may well reflect the fact that the changes made to the rules relating to R&D claims in recent years have affected small companies more significantly. When asked where they would be spending their R&D budget, out of five choices, 44% of all respondents said that they would be investing in process improvement, 43% in new product development, and 43% in material development and testing. For businesses with a turnover under £100m, 42% said that their biggest investment would be in Equipment and Machinery Development, which was less of a priority for bigger companies. However, for businesses with a turnover of more than £250m, 46% of respondents said that material development and testing and technology adoption are where they would be investing. Closing the skills gap The shortage of skills has been a perennial concern for manufacturers for years and that remains true particularly in the Midlands. Respondents are unwilling to solely rely on central government action. They are acting now to close the skills gap by creating an apprenticeship programme, training partnership with college or university or alternatively, investing in AI with a view to closing the skills gap in a different way all listed as equally valuable. For companies of different sizes, there were divergent options. Forty-five percent of businesses with a turnover of under £100m are planning to use a training partnership with a college or university, whereas 48% of businesses with a turnover of over £250m are planning to invest in AI with a view to closing the skills gap in an alternative manner. Looking ahead Barlow concludes: “While the survey highlighted that there are considerable challenges for the manufacturing sector, it also showed that there are bright spots ahead in the next 12 months. The announcement of the long-awaited Industrial Strategy could and should be the impetus that the sector needs to set it on the path to more sustainable growth in the UK, with public and private investment and the ability to withstand any further economic volatility. “Regardless of its impact there is clear evidence from our research that despite the obvious challenges it faces UK manufacturing is above all resilient and looking to the future. Nowhere is that more true than in the Midlands. Investments in technology, R&D and bridging the skills gap are all welcome signs of a sector that is charting its own course for success.”