All the recent data from industry surveys indicate that engineering firms are enjoying something of a resurgence. Orders levels are strong, export markets are booming, and there has even been anecdotal evidence of recruitment picking up. The sector seems to be in a healthier shape than it has been for many years. And long may it continue.
But, despite this good news, there has been one aspect of performance that shows little sign of improving. Time and time again research from organisations like the manufacturers’ organisation the EEF shows that investment intentions remain stubbornly weak. Instead of investing in new capital equipment, many companies seem content to meet growing demand by sweating their assets and working longer hours. It’s a hesitance that is likely born of nervousness from what have been a tough few years and a desire to remain cash-rich rather than rely on lending.
There’s an element of sense in that conservative approach. But experts fear that, unless investment intentions start to rise, British firms risk losing pace with foreign rivals.
“For UK manufacturers there’s no such thing as sustainable competitive advantage – only continual investment in machinery, innovation and skilled people will keep them ahead of the competition,” says Lee Hopley, chief economist at the EEF. “The rapid obsolescence of machinery means manufacturers need to continuously reinvest in plant and machinery. Capital investment is not just about replacement – in high labour cost economies like the UK the productivity gains generated by state-of-the-art machinery are essential to staying competitive. Similarly, the increasing scale and complexity of manufacturers’ supply chains in a globalised economy places a premium on the ability to run them as productively as possible.”
Hopley says that investment in new machinery was a significant casualty for manufacturing and the wider economy during the recession. And she fears that, even though the sector is currently performing admirably, a lack of long-term visibility about the strength of demand combined with constraints on access to external sources of finance could hamper the recovery in investment through this year. “The rebalancing of the UK economy towards growth generated through investment, innovation and exporting is critical for sustainable growth across the economy,” says Hopley. “With the Chancellor’s budget statement not far off there is a timely opportunity for government and tax policy to send a strong signal to manufacturers that their next investment should take place in the UK.”
Some organisations have made a conscious decision to invest heavily off the back of their performance during the recession in an attempt to build momentum and secure continued expansion. Vehicle engineering and test organisation Mira is a good example of that kind of assertive attitude. It plans to invest £300 million over the next 10 years to support an aggressive drive into new countries and new market sectors.
The investment will see the construction of a 43,000m2 advanced engineering centre at Mira’s site in Nuneaton, allowing it to expand its range of design engineering, computer simulation, test and validation and certification services. Mira will also expand its adjacent technology park which is at 98% capacity. These investment intentions, Mira predicts, will see it grow from having a £37 million turnover in 2010 to £100 million by 2020. It also plans to create 2,000 jobs during that period.
“We have actually found that there is a very positive investment market out there. People are looking to support good ideas,” says George Gillespie, Mira’s chief executive.
“The potential has always been there – Mira is an established business that more than held its own during the recession. Indeed, during the past couple of years the success of the business has pushed us towards making what will be a huge investment. The technology park, for instance, is virtually full: we simply have to expand.”
Mira has identified low-carbon vehicles, intelligent mobility and defence as potential boom areas for its range of engineering services. Gillespie says that he sees huge potential for expanding overseas, with export markets serviced by the Nuneaton facility. “We will be looking to gain a significant foothold in China, India, Korea, Brazil, Japan and the US, enabling us to feed work back home. British engineering is still held in high regard around the world and we have the intellectual horsepower to help customers based in these overseas markets,” he says.
In 2010 Mira recruited 70 staff and its continued growth in the UK alone is expected to generate more than 400 jobs over a 10-year period and another 1,500 in the supply chain. It has also invested in its skills base by establishing a thriving apprenticeship scheme. “Skill shortages are a long-term problem and we want to do our bit to alleviate them,” says Gillespie.
It’s not just well-known companies with access to big budgets that have decided to bite the bullet and invest to grow their businesses. Proto Labs, for instance, is a relatively small injection moulding and CNC machining firm based in Telford, Shropshire. The company has recorded double-digit growth in recent years by sticking to a simple business model – customers upload their CAD models, and Proto Labs uses its injection moulding machines to make parts from resins such as polypropylene, acetal and nylon or CNC machines to make parts from materials such as aluminium in as little as one day. Speed and accuracy is of the essence – and that has required continued investment in new equipment.
“The company has been built on its ability to turn work round quickly and to a high standard and to enable us to handle new materials and larger geometries,” says John Tumelty, managing director of Proto Labs. “We have had to have the courage to invest – we have spent hundreds of thousands of pounds on CNC machines and injection moulding equipment and we are also moving into a new 130,000ft2 facility in Telford in anticipation of continued expansion over the next five years. The investment plans are about showing commitment, and they also send the right message to staff and customers alike.”
Tumelty says that he understands why other companies are hesitant about investing after the ups and downs of the past couple of years, but he sees it as an absolute business requirement. “I’ve always been of the mind that you’ve got to have faith in your business and not rest on your laurels. If you stop investing, it’s the death knell for your business,” he says. Tumelty says that some of the world’s most successful companies act as perfect examples of this. “Apple might have the iPhone 4, but you can bet that version 5 already exists as a prototype, version 6 is already in development and version 7 is already on the drawing board. If you don’t invest then I’m afraid you will get left behind,” he says.
Tumelty says his positive attitude has helped to drive Proto Labs forward at a time when other businesses have stalled. He believes the firm is still a long way from seeing a plateau in its sales, and he plans to recruit another 30 staff this year, taking the overall figure to 130 employees.
“Market conditions are good and we want to capitalise on that,” he says. “Product development has come back to life in a really strong way. The UK held up quite well anyway, but countries like France, Switzerland and Italy are now recording stunning growth too. Our January orders were amazing and there is a feeling of real buoyancy.”