Manufacturing & Engineering Report 2016/17€¦ · The weakening of the pound following the Brexit...

Manufacturing & Engineering Report 2016/17

Contents


Foreword

The Scottish View

Key Scottish Findings

Growth and Employment

Exports

EU Referendum

Investment in R&D

Funding and Grants

Sustainable Manufacturing

Client Focus

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4

5

6

7

9

10

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11

13

Foreword

Gavin BlackPartnerManufacturing GroupHenderson Loggie

Derek MacGarvieSME Area DirectorManufacturingBank of Scotland

Now in its fifth year, our survey, in conjunction with MHA and Bankof Scotland, continues to provide a useful insight into the views ofmanufacturing and engineering businesses across Scotland.

As the report highlights, it is a challenging time for Scottishmanufacturers. Whilst there is optimism for growth for the yearahead, this is down on last year. Across Scotland and the UKmanufacturers continue to report that they find it a challenge torecruit the skilled technicians their businesses rely on for futuregrowth, which is set against a backdrop of economic uncertaintyfollowing the vote to leave the EU. Now, more than ever, it isessential for the UK and Scottish Governments to provide theconditions as well as the incentives to support this key sector.

While the result of the EU Referendum has left Scottishmanufacturers with some questions over how they will fulfil theirfuture plans, many are actively investing in research anddevelopment to help deliver sustainable growth.

Manufacturing has never been more important to the successand growth of the Scottish economy, and closing the skills gapremains crucial to sustain the long-term success of the industry.We continue to work closely with firms through this evolvingeconomic landscape to provide the support and funding theyneed to help ensure they maintain their competitive position indomestic and global marketplaces.



The Scottish View

Henderson Loggie is a member of MHA, a fast-growing association of eight like-minded, progressive and respected accountancy and business advisoryfirms located around the UK. The 49 nationwide offices allow MHA to balance the national access provided by the association with the local insight andperspective that individual member firms offer their clients. MHA members can assist clients with their needs wherever they are in the UK, as well asglobally through our international association.

Membership of MHA

Henderson Loggie, MHA and Bank of Scotland surveyed over560 clients and contacts in the manufacturing and engineeringsectors in July 2016. Respondents ranged from companiesturning over less than £1m to global giants with a significantindustry presence, nationally and internationally.

This report was produced in September 2016 using data fromthe UK-wide MHA manufacturing and engineering survey. Itfocuses on respondents from Scotland and, where appropriate,considers these results as part of a UK-wide picture.

Economic ContextThe most recent Scottish Engineering survey reported the lowest orders since 2009. Almost half of all businesses surveyed in their report said outputvolumes had fallen in the past three months. The report also highlighted reduced employment levels and low levels of business confidence.

In contrast, figures released by the UK Manufacturing Purchasing Managers’ Index (PMI) reported that Britain’s manufacturing output reached itshighest level for more than two years in September, as the industry bounced back from a post Brexit vote slump, 55.4 in September, up from 53.4 inAugust. The weakening of the pound following the Brexit vote had continued to boost exports, the survey found. However it has also pushed upcosts for importers significantly.

The Office for National Statistics (ONS) confirmed that the UK economy grew by 0.7% in the three months to the end of June. Services grew 0.6%,up from 0.5%, exports fell 1%, while imports rose 1.3%.

Background

i

ii

iii


Key Scottish Findings

think their business will growover the next 12 months

said they currently export

believe the uncertainty followingthe EU vote will be a main

barrier to growth

made some investment in R&Dexpect to take ontrainees/apprentices next year

rate sustainable manufacturing asa high or medium priority

60% 50%

23%

58% 83%

62%


Growth andEmployment

Manufacturing output in Scotland was down 2.6% forthe first three months of 2016 according to officialfigures released by the Scottish Government and thelatest quarterly review from industry body ScottishEngineering shows sharp falls in orders, outputs andexports in the three months to September. Despitethese challenging conditions, 45% of Scottishrespondents reported growth for the last 12 months,compared to 59% for the UK as a whole. However,this is down 22% from last year for Scotland and 7%for the UK.

Looking ahead only 60% anticipate growth, a 14%decrease on last year. 58% expect to take onapprentices in 2016 and 46% of respondents anticipatestaff numbers will increase in the next 12 months. Interms of recruitment, the main challenge forrespondents lies in finding skilled technicians,experienced engineers and other skilled staff. For bothScotland and the UK, recruiting skilled staff is seen as akey barrier to growth.

Growth over the last 12 months

Anticipate growth over the next12 months

45%

60%

46%

58% expect to take onapprentices in 2016

anticipate staff numberswill increase in the next 12months

23%believe the uncertaintyfollowing the EU vote willbe a main barrier to growth

iv

v


Exports

The UK has long been running a trade deficit andfigures released recently from the Office for NationalStatistics (ONS) suggest that the fall in the value ofthe pound since the EU vote has increased the cost ofimports for manufacturers. Input prices faced bymanufacturers rose 4.3% in the year to July,compared with a fall of 0.5% in the year to June. 50%of Scottish respondents said they currently export, a19% increase on last year. Scottish respondentscurrently export to the Eurozone (30%), Europeexcluding Eurozone (20%), North America (20%) andAsia excluding China (18%).

20%

30% export to the Eurozone

export to Europe excluding theEurozone

20% export to North America

18% export to Asia excluding China

vi

Reducing business rates,corporation tax and red tapetopped the table of the threethings the Government coulddo to help manufacturers.


EU Referendum

According to the results from last year’s survey, only4% of Scottish respondents and 10% of allrespondents for the UK as a whole, thought it wouldbenefit British business and the economy to leave theEU. When asked about the EU referendum result thisyear in terms of business confidence, only 13% had apositive outlook, with 39% reporting a negativeoutlook. As it could be several years before we havea full understanding of the impact of Brexit, notsurprisingly, 48% remained neutral. of respondents from 2015 who

thought it would benefit Britishbusiness to leave the EU

4% 10%

Scotland UK as a whole

Positive Outlook Neutral Negative Outlook


Investment inR&DCurrently 83% of Scottish respondents invest in R&Dcompared to 88% for the UK as a whole. ForScotland, this is an increase of 17% on last year.Scottish awareness of R&D Tax Credits continues tobe lower than the UK average (82% vs 90%).

Funding andGrants

55% of Scottish respondents (compared with 46% forthe UK as a whole) received Government or grantfunding in the past 5 years, split as follows: 36% RSA,18% Smart Grants and 45% other. 97% ofrespondents have received bank funding in the last 12months, with only 3% waiting to hear the outcome ofa funding request.

83%

88%

18%

10%

Percentage of respondents who are not aware ofR&D Tax Credits

Percentage of respondents who invest in research anddevelopment

55%

46%

Percentage of respondents who receivedGovernment or grant funding in the past 5 years

have received bank funding in thelast 12 months97%



SustainableManufacturingSustainable manufacturing is still a consideration forScottish manufacturers and is an essential element inScotland’s economy going forward. 62% ratedsustainable manufacturing as a high or mediumpriority (72% UK), 28 % rated as a low priority (19%UK) and 10% rated as not a priory (9% UK). So farhowever, only 10% are already sourcing energyproduced using renewables and a further 10%signalled their intention to use energy fromrenewable sources in the future. Despite theimportance attached to sustainable manufacturing,62% plan to remain reliant on traditional energyproviders.

rated sustainable manufacturingas a high or medium priority

62% 72%

are already sourcing energyproduced from renewables10%signalled their intention to useenergy from renewable sources10%plan to remain reliant ontraditional energy providers62%

rated sustainable manufacturingas a low priority

28% 19%

rated sustainable manufacturingas not a priority

10% 9%


97% of respondents indicated thatthey expect their costs to increasein the next 12 months, largely as aresult of the increased price of rawmaterials (35%), increased wagecosts (31%) and increased price ofcomponents (18%).


Client Focus

Tracey Hogarth, Freedom Brands -Go Coco going places withHenderson Loggie

Aware of growing health consciousness and theemerging trend for ethical consumerism, Ross Currieand Tracey Hogarth launched Freedom Brands in2011 to produce wholesome, natural, functionalbeverages and snacks. It’s fair to say that both Ross, achiropractor, and Tracey, who previously ran aproperty business, were sailing into unchartedterritory. But recognising the increasing popularity ofcoconut water, they took the plunge and put theirown energies into creating Go Coco, a natural energydrink with many health benefits made from the watercontained in young coconuts.

Fast-forward five years and the future is bright. GoCoco has signed a UK retail distribution deal withHighland Spring that will see the brand expandbeyond independent and wholesale distribution intosupermarkets across the country. They have launchednew brand Nudie Snacks and a dairy free, gluten freeplant based milk shake, with plans for a new birchwater drink in the pipeline. The Highland Spring dealmeans they can focus on international expansion.Freedom Brands is going places, and HendersonLoggie has been with them every step of the way.

“We did look at other accountancy firms when welaunched the business but there was no doubt thatDouglas Woodhouse and his team at HendersonLoggie was a good fit,” says Tracey, who manages thebusiness from its Glasgow headquarters.

“We see the team at Henderson Loggie as ourfinance partners in the business. We don’t have afinancial background and have relied heavily on theirprofessional advice. They are not one of the big fouraccountancy firms, but we were drawn to them fromthe outset because they have so many specialists withexpertise we need, especially in terms of exports. Thefact that they could immediately call on tax advicefrom their contacts in the US has been very helpful."

“Greig Rowland’s depth of knowledge aboutcorporate finance and fundraising has beeninvaluable to us as we have grown. And when wehad a VAT inspection Alan Flavelle was absolutelybrilliant in helping us through it. We had furthervalue from his expertise and relationships withHMRC when we launched Nudie Snacks and he gaveus guidance on VAT which we had to consider forour NPD."

“In a business like ours cash flow is tight. When itcomes to tax, Kenneth McEwen has beenparticularly good at advising us how to effectivelyand efficiently manage our affairs including takingadvantage of relief available for new productdevelopment. In fact we have now moved all ourpersonal tax over to Henderson Loggie."

“As a growing business we obviously attract manywould-be suitors but none of them give us the warmand fuzzy feeling we have in our dealings with theHenderson Loggie team. They are down to earthand, above all, jargon free and we appreciate thepersonal service they give us.”

58 Queens RoadAberdeenAB15 4YE01224 322100

The Vision Building20 GreenmarketDundeeDD1 4QB01382 200055

34 Melville StreetEdinburghEH3 7HA0131 226 0200

Gordon Chambers90 Mitchell StreetGlasgowG1 3NQ0141 221 6807

Henderson Loggie is a member of MHA, an independent member of Baker Tilly International.Arrandco Investments Limited is the registered owner of the UK trade mark for Baker Tilly and its associated logo.

Designed by Andy CampbellHenderson Loggie Chartered Accountants 2016 ©

www.hlca.co.uk

Offices in: Aberdeen, Dundee, Edinburgh and Glasgow

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Sourcesi, v - Scottish Engineering – September 2016 Quarterly Reviewii - UK Manufacturing Purchasing Managers’ Index (PMI), September 2016iii, vi - Office of National Statistics - Second Estimate of GDP, Quarter 2 (Apr to June) 2016iv - Quarterly National Accounts Scotland (QNAS) – Scottish Government

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