Memorandum submitted by Engineering and
Machinery Alliance
1. BACKGROUND
1.1 The Engineering and Machinery Alliance (EAMA)
is a grouping of 10 like-minded trade associations:
British Automation and Robot Association;
British Paper Machinery Suppliers Association;
British Plastics Federation;
British Turned Part Manufacturers Association;
Confederation of British Metalforming;
Gauge and Toolmakers Association;
Manufacturing Technologies Association;
Printing, Papermaking and Converting Suppliers
Association;
Processing and Packaging Machinery Association;
UK Industrial Vision Association.
1.2 These 10 associations represent 1,400 firms,
mostly SMEs in mechanical engineering, with total sales of approximately
£7 billion, split pretty evenly between capital goods and
components for capital goods.
1.3 UK mechanical engineering turnover is some
£37 billion, with 70% of it derived from sales overseas.
According to the Office for National Statistics (ONS), mechanical
engineering is one of only two manufacturing sectors that regularly
contribute a positive trade balance to the UK economy—over
£3 billion in 2008. (The chemicals sector contributed over
£5 billion.)
1.4 Mechanical engineering companies typically
supply "enabling technologies" to other sectors (eg
automotive, aerospace, medical, power and food industries) in
the form of machinery or packages combining services and products
tied up as solutions. This is not just the preserve of the large
company. There are also many innovative entrepreneurial SMEs pushing
the boundaries of factory performance, extending the envelope
of the physically feasible to new levels in terms of speed, precision
and migration into novel technologies and materials.
2. THE CURRENT
BUSINESS ENVIRONMENT
2.1 The recession isn't over in our sector.
Real business to business demand remains depressed.
2.2 As a result companies' primary concerns
are to find new customers and access to finance. The finance is
doubly important, not just for them, but for their customers.
Lack of availability has hit their sales as well as their ability
to invest.
2.3 In June, alongside our monthly survey monitoring
whether activity rose, fell or remained unchanged compared with
the previous month, we asked firms how sales compared with a year
ago.
Of the 80 firms that replied to this portion
of the survey, 9% reported increases (from two to 200%), 11% no
change and 80% falls (from 10 to 75%). Amongst the "fallers",
over a third had recorded declines of 30-35% and over a quarter
said business had dropped 50% or more.
TURNOVER COMPARED WITH A YEAR EARLIER
| % fall on year ago | 10
| 15 | 20 | 25 |
30 | 35 | 38 | 40
| 50 | 54 | 56 |
60 | 75 |
| Number of firms | 1 | 1
| 11 | 5 | 15 |
8 | 1 | 4 | 11
| 1 | 1 | 4 |
1 |
| % of all "fallers" |
| | 17 | 8 |
23 | 13 | | 6
| 17 | 11 | |
| |
Source: EAMA Monthly Business Monitor (June 2009)
2.4 Our monthly Business Monitor continued to show a declining
balance for export orders until a stuttering lift off the bottom
in September and October. This came after some depressingly negative
data in our August Monitor which were also subsequently reflected
in ONS manufacturing reports for the month.
ORDERS % FIRMS COMPARED WITH MONTH EARLIER
| Up |
Same | Down
| Up/Down Difference |
| UK | Export
| UK | Export | UK
| Export | UK | Export
|
| January | 18 | 20
| 20 | 32 | 62 |
48 | -44 | -28 |
| February | 18 | 21
| 31 | 29 | 51 |
50 | -33 | -29 |
| March | 11 | 18
| 28 | 42 | 61 |
40 | -50 | -22 |
| April | 21 | 30
| 23 | 33 | 56 |
37 | -37 | -7 |
| May | 20 | 5 |
35 | 46 | 45 | 49
| -25 | -44 |
| June | 39 | 19
| 28 | 49 | 33 |
32 | +6 | -13 |
| July | 37 | 22
| 26 | 42 | 37 |
36 | 0 | -14 |
| August | 33 | 22
| 23 | 41 | 44 |
37 | -11 | -15 |
| September | 51 | 34
| 26 | 43 | 23 |
23 | +28 | +11 |
| October | 40 | 23
| 43 | 56 | 17 |
21 | +23 | +2 |
Source: EAMA Business Monitor.
3. EXPORTING—FINDING
AND DEVELOPING
NEW CUSTOMERS
3.1 This is the area where there should be major potential
to rebalance the economy and exit the recession.
3.2 Practical measures
3.2.1 Exporting is very hard work.
3.2.2 The UK used to have an export promotion service that
fitted in well with the mechanical engineering sector's way of
doing business. It can take several years and even many visits
to establish market credibility before a company is prepared to
try your machinery in their factory for the first time. Visibility
and confidence development were central to the scheme, helping
firms take their equipment to shows where they could display it
and if it all went well make that initial sale.
3.2.3 Budgetary pressure on UKTI has reduced this capability,
just as global competition is increasing and the UK is more dependent
on trade than ever before (55% of UK GDP depends on trade according
to the World Trade Organisation). Sometimes the pressure is so
extreme that UK exporters are asked to pay for Embassy or Consulate
room hire, as well as for market information, while major competitor
economies have a more supportive and less penny-pinching relationship
with their exporters.
Luckily, several EAMA associations have their own offices
overseas to support their members' export activities.
3.2.4 There is a view that the UK lags both in its promotion
of the UK brand and in the range of different services to involve
companies of different sizes in exporting across the world as
a positive benefit to the economy as a whole. Work is progressing,
but:
— The UK needs a national agency that champions UK exports
and exporters. To match the best in the world this agency should
be totally separate from inward investment activities and staff.
— The regime should be far simpler, run with a national
focus, not subservient to regional priorities.
— Companies should be supported when they show commitment
and proper preparation, not on the basis of their exporting "virginity".
— The Export Credit Guarantee Department's cover needs
to be remodelled to be competitive across a far wider range of
business.
— Following the recent consultation on the letter of
credit guarantee, we have urged the Government to implement it
as soon as possible.
3.3 Trade Credit Insurance Top-Up
3.3.1 A main concern for all manufacturers, the withdrawal
of trade credit insurance, has also hit mechanical engineering,
because firms supplying into a particular sector have had to suffer
the same conditions imposed on them as on their customers. This
action, by German, Swiss and French based insurers, is affecting
the home market as well as exports.
3.3.2 The Government sponsored Trade Credit Insurance Top-Up
Scheme was very welcome in this regard, but was designed to help
domestic business exclusively and not exporters.
3.3.3 However, take-up has been very limited. Certainly for
our members with 70+% of their turnover derived from sales overseas,
this will be the reason why they haven't used it.
3.3.4 But unfortunately that's not the only damage. Invoicing
discount houses and factors will refuse to make payment on goods
as they leave the country for the export customer if there is
no credit insurance cover. So the lack of cover cuts extra deep
into cash flow as payment will be further delayed—creating
a further drag on the upswing.
— The scheme should be amended so that it works for
exporters. As a start it might be used for customers in the EU
and the European Economic Area and some other well established
markets, where the financial reporting systems are easily accessible
to the insurers.
3.4 Guaranteeing the customer's deposit and the Enterprise
Finance Guarantee Scheme
3.4.1 In mechanical engineering it is standard practice for
a customer to pay a 30% deposit to confirm their order. It happens
all over Europe and in the USA. In return for the deposit, the
customer expects to receive a guarantee, normally from a bank,
that they will receive the machine they have ordered or their
money back.
3.4.2 If the company making the machine is any good, this
is all very low risk, for which the banks make a charge.
3.4.3 Whereas French, German and US banks provide the guarantee
for a small (sometimes no) charge, UK banks often deduct the deposit
from the company's overdraft at the bank, so that the manufacturer
is no better off for having received the deposit. There's no benefit
to company cash flow. Just think of the impact if your SME firm
is regularly building £million+ machines!
3.4.4 And now some banks have doubled the interest they charge
(to 3½%) and increased their administration charges. Others
have placed ceilings on the total amount they will guarantee for
any one manufacturer, effectively slapping a cap on the size of
the firm's order book, or forcing them to forego the benefit of
the deposit, which opens them up to increased risk.
3.4.5 Faced with so much uncertainty, some companies report
trying to use the Enterprise Finance Guarantee Scheme, which was
conceived to help improve the availability of working capital
for SMEs.
3.4.6 However, despite its conception to help innovative
firms, the terms specifically exclude support for "individual
export orders". If a firm is 100% export, all their activity
is excluded. In mechanical engineering it is quite common to find
firms that are 90% export, which in practice means they too are
excluded.
3.4.6 Apparently such difficulties do not arise in other
countries, because they run a "Bond Support Scheme"
with government backing, so that any orders where the deposit
may be too big to be handled by the usual channels, can be covered
competitively.
— If the UK is to develop a strong offer internationally
it must be able to compete in the provision of such guarantees
without putting its own manufacturers at a disadvantage.
17 November 2009
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