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The latest news to hit the headlines is a gloomy forecast suggesting that industry will not recover from the recession until the middle of 2010, with the manufacturing sector contracting by five per cent this year alone.
Is this the case or are there sectors which are less affected?
For sure, we know that the Automotive sector has been hit hard, with reports that leading OEM’s have in one instance, reduced production capacity from 240,000 cars per annum to 120,000 – the knock-on effects to Tier 1 & 2 suppliers will be equally severe, if not more so.
We also know that suppliers to the Construction industry are also suffering from the overnight halt to orders from the credit crunch – but I also hear mixed feedback, with a manufacturer of bathroom shower doors not experiencing a particularly tough time, why? His view was that families are spending money on affordable improvements to their home – this would explain why businesses who were manufacturing more ‘basic’ integral products to the new build sector such as roof frames are suffering; but it seems at odds with reports from the DIY retail sector.
Possible themes? A number of companies in my view were struggling before the onset of the credit crunch, and the withdrawal of banking facilities has arguably fast tracked the process – even the DIY chains were not having a great time 12 months ago when they should have been at the top of their game just before market and consumer confidence began to tank, and I’m amazed to still hear stories from seasoned Interim Managers who have just finished assignments where debtor books are laden with unpaid invoices stretching back years; where contracts are accepted without being properly costed; where Lean techniques are deemed ‘guru speak’ and ignored… Room for improvement? Certainly looks like UK Manufacturing PLC in some sectors has a lot to learn, but may not get the chance!
Another possible factor seems to be the ‘Ostrich’ factor – a refusal to look and act quickly enough to shore up a business and bunker down to ride out the storm, something that Management and arguably the banks are both guilty of.
A number of Interim Managers have expressed concern that the mistakes made in the 1980’s are being repeated – scepticism that ‘outsiders’ can stabilise a business (which could explain why some Interim’s are facing extended time lags between assignments) until the window of opportunity has passed and the only option is to put the business into administration – with the inevitable knock-on to suppliers which exacerbates the problems facing industry.
This was apparently the favoured option 20 years ago – but as the experience of our highly experienced Interim talent testifies, if action is taken quickly, the write-off in shareholder value can be avoided. High profile casualties, well, Wagon Automotive and Wedgwood would seem to spring to mind, but how can we act quickly enough to educate the banks and management that there is an alternative and they don’t necessarily ‘know best’? Suggestions please…
Less affected sectors? As a generalisation, on the ground it would seem businesses with good management who have a clear strategic goal and common sense; where Lean practices have been embraced and implemented; and with ‘traditional’ Balance sheets (i.e not leveraged to the hilt) are coping – particularly those in Precision Engineering.
This is backed up by a recent conversation with the UK MD of a multi-national Engineering business, who although stunned by the decline in the company share price, felt optimistic as the order book was strong and spanned the next 18 months plus, they carry very little debt, their HR policy had built in the training and flexibility required to cope with the downturn so redundancies have been limited to a small number of Agency staff rather than the core, highly skilled technicians and their products were not aimed at industries reliant upon domestic demand, such as roofing and cars.
January 22nd, 2009 at 3:22 pm
This year could be the veritable ‘Curate’s Egg’ of distress and opportunity.
How willing will banks be to swap debt for equity to resolve over gearing and broken covenants in the private sector? – given their risk aversion and preference for cash I would have thought that this fell into the category of last resort.
Will the PE community open their coffers to start serious bottom feeding either by taking the banks out at a discount or using the pre-pack option? As an aside the pre-pack has been getting very bad press recently as it inevitably damages unsecured creditor businesses.
To what extent will the wall of maturing corporate bank debt and bonds (c £100bn for 2009) be refinanced and how aggressive will the terms be? Will this be a significant restructuring and M&A driver, as a means of avoiding fire sales during 2009/10?
How much more public funding will be required to offset the additional impairment and write offs required on bank balance sheets? Even the Government admits it doesn’t know.
How does UK plc avoid damage to its healthy mid market businesses, that should be part of the engine for economic recovery?
Will/can banks and government stop playing to the media and think/act beyond the politically correct soundbites – with more than a tinge of intellectual dishonesty?
Bold decisive operational restructuring, process improvement, disposals and mergers will be required, driven by hard nosed strategy – the natural comfort zone for many Interim Managers. The timing may be still uncertain but the requirement is inevitable.
January 28th, 2009 at 5:11 pm
The issues facing this sector are well documented – the causes are more varied and deeper rooted than the Gordon Brown mantra of “It’s all the fault of the USA and those naughty banks – not my fault at all”. This is simply not true.
The banks have made some bad business decisons – but as far as I know none were illegal. The banks operated within the rules laid out for them by the relevant Government department – which department – The Treasury.
Who has been in charge of The Treasury for the last 10 years – Gordon Brown.
Also – since Gordon Brown became Chancellor ~ 1 million jobs in Engineering / Manufacturing have been destroyed – mainly due to higher indirect costs imposed by this Government which drove the jobs overseas.
To artificially keep unemployment figures down ~ 1 million jobs in the Public Sector have been created. So – 1m jobs that created primary wealth (which can then be taxed) have been destroyed to be replaced by ~ 1m jobs that are financed solely out of taxes from a lower taxable base. The result has been a catastrophic deterioration in the Public Finances – supported (amongst other measures) by stealing £5 billion a year from our pension funds.
However we are where we are – so what to do:-
1) Longer Term – the Government has to have a long term strategy that supports the formation of jobs that create primary wealth – not a strategy that destroys them. This strategy needs to be driven by business logic – not media soundbites.
2) Right now – for those companies which are in distress / or even think they might be – act right now, today – get good advice from mangers who have been there / done it / been through previous recessions and know what to do. Delay / denial is fatal!