With the uncertainty of Brexit, UK manufacturers are doing their best to focus on what can be controlled. In our latest edition of ‘Focus on Manufacturing’ we concentrate on trends in the sector and opportunity including exploiting technology, new trade relationships, or the opportunity to take stock in order to evade risk.
Whilst we continue to patiently await the outcome of Brexit negotiations, UK manufacturers are doing their best to focus on what can be controlled. The current uncertainty can’t last forever, but by way of not succumbing to pessimism, this edition centres for the most part on opportunity. Whether that’s created through exploiting technology, new trade relationships, or the opportunity to take stock in order to evade risk, we’ve covered it all. Leading the theme, Simpler Consulting’s Richard Jenkinson looks at how the manufacturing industry is taking advantage of machinery in order to reduce risks and errors. Turn to page 6 to read Richard’s thoughts on how the future of continuous improvement might look. Following suit, Adam Kaucher, one of our Corporate partners, reflects on recent manufacturing mergers and acquisitions (M&A) and looks ahead to future trends in the sector. Paving the way to new relationships, Commercial solicitor Anna Ai tells all about her successful trade mission to Poland, whilst Laurence Gavin, one of our Commercial partners, looks into the dynamic global ambition of China’s manufacturing sector, where there are clear opportunities for UK manufacturers to benefit. Is it worth double-checking all your emails? Hackers are constantly targeting online payments, but we’ve got all you need to know on avoiding becoming a victim on page 26. There’s also a guide to safeguarding your supply contracts on page 24, and advice for manufacturers dealing with staff disciplinary hearings on page 20. Associate director, Paul Haycock, discusses Legal Professional Privilege and what happens when there’s suspected criminal activity in your place of work on page 28. Finally, we look at some important legislative matters. Turn to page 14 to find out what best practice looks like in matters relating to service charges and commercial property, and learn how new tax measures are on course to make life a little easier on page 22. All things considered, and despite a recent dip in the statistics recording orders and employment, a significant amount of UK manufacturers remain optimistic for the next 12 months. New product development, increasing capacity and new opportunities for exports are all cited as reasons for optimism. Whatever your view, we’re pleased to be able to help our manufacturing clients manage the risks facing their business to achieve a stable future, and seize opportunities to grow.
What is lean methodology? Lean methodology focuses on continuous improvement and respect for people. Manufacturing led on this for many years, and employed human creativity to analyse and improve work, develop physical automation solutions and drive significant improvements in productivity and quality. Dangerous, repetitive or laborious tasks, where human involvement can introduce risk or error, are now routinely performed by machines, allowing people to focus on more value-adding aspects of their jobs. Physical systems (e.g. Kanban cards) have evolved into software that runs semi-autonomously.
Looking forward We’re moving from an age in which people are supported by processes that are run by technology, to an era in which processes are run by technology with augmented support from people. In the past, improvement ideas have come from people’s analysis and creativity. Often, the improvements have looked for physical automation to increase productivity, improve flow, reduce waste and eliminate human error (poka-yoke). This has allowed significant improvements in the gathering of data for analysis. For example, an out-oftolerance torque reading from a drill used to assemble components can, in real-time, trigger an alarm, allowing engineers to compare the data from previous issues. This in turn allows them to assess the risk and determine if for example, the line should be stopped, or the product should be removed from the line, or reworked at the end of the line. As your data pool (from across your network of plants) increases, your ability to deploy artificial intelligence (AI) to support those human decisions also increases. We’re now in an era where improvement ideas come from both humans and technology. Non-physical improvements, such as data-cleansing and algorithm fixes, are sources of competitive advantage. Guided by an unwavering focus on adding value to customers, Industry 4.0 (connected assets) allows supply chains and business models to evolve. Rather than sequential, tiered supply base structures, manufacturers are increasing parts of ecosystems that share demand information in real-time and collaborate to respond effectively. Harnessing the power of data, businesses are migrating from selling products to services – using performance data to drive predictive maintenance, for example, and allowing clients to buy uptime, not assets. This allows them to focus on the real value-add part of their business model. Improved productivity Moreover, productivity gains (often in excess of 50%) and error-proofing in non-physical, ‘Extract – Transform – Load’ administrative functions are being realised through a combination of automation, AI and end-toend process simplification. If a decision can be made in less than one second, it can easily be automated. AI solutions (such as IBM Watson) can analyse documents, images, verbal/written conversations and so forth, and either make decisions that automation will then execute, or summarise to support human decisions. This allows everyone to perform with ‘full’ knowledge, reducing the impact of attrition on the labour force. Aiming for the minimum required human intervention, businesses should focus their people on adding value for customers and protecting their enterprise by collaboratively seeing and solving problems (continuous improvement), rather than working in sequenced silos. The robotic process sector is growing rapidly, and whilst research shows that many businesses are investigating the technology and rollingout some early proof-of-concepts, few are employing this so-called Next Generation Lean methodology to overhaul and future-proof their processes. As a result, many risk embalming 20th Century business procedures and missing the opportunity to create a 21st Century, digitally-enabled front/back-office. A world in which the human workforce innovates freely, and exercises judgment, empathy and creativity, and the digital workforce executes flawlessly and improves iteratively. This is the world of Next Generation Lean.
Many commentators have remarked positively on the UK’s strong dealmaking performance during a climate of economic and political uncertainty. This is despite Experian Market IQ figures showing the number of deals in the first half of 2018 didn’t quite match up to levels seen in the first half of last year. Overall, the number of completed deals fell in H1 2018 compared to last year, but it was interesting to not only see a stronger Q2 compared to the previous three months, but also a noticeable increase in transaction values. When the total value of UK deals during the first half of this year on the Experian Market IQ database is added up, the aggregate figure is almost 40% higher than it was in H1 2017. It’s also worth pointing out that, at £214 billion, this value is more than it has been for a decade. Manufacturing The manufacturing sector as a whole continues to attract a significant amount of this M&A activity. During the first half of 2018, it was beaten only by financial services. If we look closely at the data produced by Experian, during the first six months of this year there were 697 deals in the sector, compared to 772 within the same period of 2017. This 9% fall in volume, however, contrasts significantly to a 229% rise in the value of those transactions. This trend is certainly not unique to the manufacturing sector. The data shows, for example, that during the first half of the year, average deal sizes in the UK also increased in the media, pharma, telecoms and retail industries. Global trends This shift to larger value manufacturing-related deals is also evident outside of the UK. PwC’s Global industrial manufacturing deals insights: Q2 2018, for example, demonstrated a 68% increase in the value of international industrial manufacturing M&A compared to Q1 2018. Interestingly, this significantly outpaced global crosssector M&A which delivered a 7% growth in value over the same period. This study also highlighted the return of the megadeal in the manufacturing sector, with the first being recorded for over a year.
So what does the future hold for UK manufacturing M&A? A good starting point when examining trends within the sector is to take a close look at how it’s currently performing. There is plenty of data available, and the atest IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index for September 2018, for example, revealed an improvement in growth after a disappointing dip in August. The sector has now been in growth mode for over two years, and recent results point to many companies enjoying increased levels of new business boosted by rising exports. If we look at the most recent data from Experian for July 2017, there were 149 manufacturing-related deals compared to 145 in July this year. The total value of these deals this year stands at £12.4bn, slightly higher than the same period in 2017. The picture looks similar when August and September in 2017 are compared to the same months in 2018. Interestingly, when we examine activity from the first three quarters of 2018 with 2017, deal numbers are lower but values are up by 25%. Based on this data, it certainly looks like the trend for fewer but larger manufacturing-related deals will continue until at least the end of this year. Opportunities Of course, a key factor which makes the future difficult to predict with any certainty is Brexit. We know from independent research, and through speaking to our clients, that leaving the EU is a major worry for a large number of businesses. Many have it as their number one priority and concern, whilst some view it as an opportunity along with other macro issues, such as the impact of Industry 4.0. According to many industry experts, the digitisation and mass customisation of manufacturing will be the biggest driver of M&A in coming years, as weaker players are swallowed by stronger ones. Industry experts at the International Manufacturing Technology Show in Chicago earlier this year said that it would play a major role in deal activity over the next five years. It will be interesting to see what the impact of Brexit and Industry 4.0 will be, and also for how long the trend for lower volume, bigger ticket manufacturing deals will go on. What looks certain, however, is that manufacturing will continue to be a highly resilient sector, and drive significant UK and overseas deal activity in the future.