British manufacturers say that adapting to a new trading relationship with the EU poses the greatest risk to their 2021 business plans, despite the two parties agreeing a last-gasp trade deal in late December.

According to a major industry survey carried out by PwC and Make UK, a trade body representing the manufacturing sector, businesses “will again be faced with a myriad of challenges” this year after months of adapting to Covid-19 containment measures.

However, with a vaccine on the horizon and adjustments to working practices and supply chains already largely in place, manufacturers’ greatest concerns are around potential customs delays, increased regulatory costs and pressure on input costs due to Brexit.

“Many manufacturers will only have known trading within the single market and customs union as an EU member state; therefore change will be inevitable, even with a trade agreement between the UK and the EU,” the survey says.

Nearly half of manufacturers say the biggest risk they face is the potential impact of customs delays and other administrative tasks on the shipping and receiving of goods.

With just-in-time supply chains previously the norm for such companies, the report warns that “adjusting and planning for potential delays beyond their control will be costly”.

39% of respondents raised concerns over the increased cost of meeting EU regulations, such as rules around transporting chemicals, while 31% are braced for “significant upward pressure on input costs” as a result of the new trading arrangement.

One of the most daunting prospects for manufacturers is around rules of origin, which will require exporters to prove that a certain percentage of their product originates in the UK or EU respectively – though companies have a one-year grace period before that paperwork is required.

The agreement was characterised by the European Commission as introducing “new barriers to trade in goods and services”, but others are more optimistic.

The deal was cheered by British Prime Minister Boris Johnson as an opportunity “to do even more business with our European friends”, and 53% of Make UK survey respondents say they are “confident” their overall exports to Europe will remain stable or improve during the year.


Support for exporters

One suggestion in the Make UK and PwC report is that manufacturers could consider expanding into new markets, in an attempt to benefit from the UK’s newly independent trade strategy.

Around a quarter of survey respondents say they believe exports to the US will increase this year, with optimism that a transatlantic free trade agreement can be agreed with incoming President Joe Biden, and a similar proportion expect growth in exports to the Asia Pacific region.

However, the report calls for support from Westminster in achieving that vision. Stephen Phipson, chief executive of Make UK, says that to “cement the role of industry in the future economy we need to see a strategic vision from government for the whole economy across the UK”.

“This must go way beyond short-term tinkering and involve an industrial strategy that takes at least a decade-long horizon with the whole of government putting its shoulder to the wheel to deliver it,” he says.

In terms of value of output, the UK is the 9th-largest manufacturing nation in the world, with production accounting for around 9% of GDP.

But difficulties around government support have long been a concern for UK exporters, and a benchmarking report from the British Exporters Association (BExA), published this week, notes that the Department for International Trade’s August 2018 export strategy appears to have “stalled”.

The strategy, which aimed to increase the share of national GDP derived from exports from 30% to 35%, has since faced stinging criticism for questionable targets, a focus on short-term deals and a concentration of value across a small number of markets.

Though a government inquiry was last year launched into the work of UK Export Finance, the country’s export credit agency (ECA), BExA’s benchmarking paper says it “has developed into one of the world’s leading ECAs”.

BExA’s suggestions for further improvements include widening the availability of fixed interest rates, reintroducing support for supplier credit transactions based on letters of credit, and offering its general export finance facility on a revolving credit basis.


Covid-19 uncertainty ahead

Despite the upheaval caused by virus containment measures taken by the government in 2020, including national lockdowns and travel bans, Make UK and PwC say the country’s vaccination programme “brings hope that the end of disruption is in sight”.

That said, the report says manufacturers “are determined that this will not signal a simple return to old working practices but rather present a new opportunity: to recognise that improving agility in an environment where shocks and uncertainty are increasing in frequency will be imperative to future success”.

The sector already showed its readiness for adaptation by improving agility across supply chains, supporting remote working and producing medical and personal protective equipment during critical shortages last year.

As a result, around half of survey respondents say they expect conditions within the manufacturing industry “to either moderately or significantly improve” – a far larger proportion than the 33% and 29% who expect improvements in the global and UK economies respectively.

43% say they are considering keeping remote working where possible, while 60% say the use of demand forecasting to ensure flexibility and reliability in their supply chains is now a top priority.

However, a separate study by the Federation of Small Businesses (FSB) finds that confidence among smaller companies is at its second-lowest point in a decade, with the nadir coming in March last year.

“A record number of small business owners are planning to close their firms over the coming 12 months, putting the UK on course to lose more than a quarter of a million businesses,” the FSB says in its small business index study for Q4.

Nearly 5% of 1,400 firms surveyed say they expect to close their doors permanently this year, while 80% do not expect their performance to improve during the first three months of 2021. Around a quarter have cut staff numbers.

Among SME exporters, half expect their international sales to drop in Q1 compared to the same period last year.

“We risk losing hundreds of thousands of great, ultimately viable small businesses this year,” says Mike Cherry, national chairman of the FSB, urging authorities to offer greater support to those in need.

“At the outset of the first national lockdown, the UK government was bold. The support mechanisms put in place weren’t perfect, but they were an exceptionally good starting point. That’s why it’s so disappointing that it’s met this second lockdown with a whimper.”