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Tough times ahead for manufacturers, but export opportunities are available

The difficult economic conditions of last year aren’t going away soon, but Lee Collinson argues the majority of Manufacturing, Transport and Logistics (MTL) companies are well-positioned to tackle the challenges and pursue opportunities in 2023.

Lee Collinson

Head of Manufacturing, Transport and Logistics, Barclays Corporate Banking

Looking back at 2022

The first half of 2022 got off to a flying start for many manufacturing, transport and logistics businesses as they seized the opportunities of the post-pandemic environment.

The second six months was a different story. The perfect storm of inflation, soaring energy costs, labour and materials shortages and significant supply chain issues hit almost every manufacturer to a greater or lesser degree, depending on their sub-sector and their ability to pass on costs to end customers.

Some MTL sub-sectors have weathered this better than others, for example shipping, defence, and capital goods manufacturers. Logistics businesses faired fairly well, as shortages of HGV drivers and wage pressures eased, despite a slight drop in confidence, and the sector saw plenty of M&A activity.

At the other end of the scale, consumer product manufacturers, particularly those producing big-ticket discretionary spend items such as cars, beds and furniture, were hit by the drop in demand from cash-strapped consumers as the impact of rising cost of living started to bite. Food and drink manufacturing was doing well until inflation started eating into their margins as they struggled to pass on rising costs in a timely manner to their large retail and wholesale clients.

Rising costs of doing business

The latest Government energy support package will see the Price Cap removed at the end of March for businesses in England, Scotland and Wales, replaced by a new discount mechanism based on wholesale prices. All businesses are likely to see a rise in costs although energy-heavy sectors will see higher discounts available, which may be positive news for manufacturers.

Many will also look for ways to reduce energy consumption - warehouses, for example, may look to reduce lighting or heating costs in line with health and safety requirements. To survive, businesses may have to pass on upshifts in costs to customers. But where they can’t do this and are already heavily leveraged and operating on tight margins there will almost inevitably be some business failures.

Whilst investment in longer term solutions may hit corporates as an extra cost in the short term, it might also be imperative for businesses to look at how they can future-proof their running costs by developing a more sustainable/renewable approach to their energy consumption.

Overall, companies will be cautious around costs, especially in a higher interest rate environment. So, where businesses are struggling, we may see less capital expenditure, reduced M&A activity in some sectors, delays in implementing some Environmental, Social and Governance (ESG) initiatives, and cutbacks in investment in new machinery, equipment and tech overall.

Mitigating this to some extent, is the fact that many of our MTL clients generally have strong balance sheets and have cash reserves along with available headroom in their banking facilities.

Material shortages

For most manufacturers the single most difficult issue to manage has been supply chain disruption in getting key components and materials from China – a post-pandemic hangover – which are also becoming increasingly expensive.

Additionally, raw materials like oil, wheat, and fertilisers are in short supply due to the war in Ukraine. Putting this into context, our recently published Chain Reaction report reveals 70% of UK manufacturers are holding incomplete items they cannot sell in their warehouses because key parts or materials are unavailable – goods worth an incredible £23.6bn.

I expect these supply chain issues, alongside energy costs, inflation and labour shortages seen at the end of 2022 to continue as the main challenges.

Export and acquisition opportunities

The outlook for 2023 is not all doom and gloom, however, and exporting is definitely one area where there are some clear opportunities across the manufacturing sector, with a weak pound making UK exported goods cheaper.

In addition, the government is encouraging UK companies to export across the world with such new innovations as the General Export Facility for SMEs looking to expand into international markets, which offers government guarantees of up to 80% of the value of the requested facility.

Barclays can support companies looking to boost their export activities through a range of solutions that can enhance their credibility and commitment to deliver in overseas markets.

And where businesses are looking to expand through merger or acquisition, an economic downturn can be an opportunity to pursue those ambitions by acquiring struggling companies at often more attractive multiples We have many strong clients with the available resources who could benefit from this and, where appropriate, we have additional facilities which may be available to help support those objectives.

Tough times, tough industry

There’s no denying this year is going to be tricky but there‘s definitely still a streak of optimism out there.

Although I expect some of our MTL clients could find 2023 challenging, the majority are well-positioned to weather the storm, tackle the challenges, exploit available opportunities and move forward.

For our part, we’re here to support our clients where we can and look forward to being able to help them thrive in the year ahead.

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