Manufacturing & Engineering Report 2016/17

Manufacturing & Engineering Report 2016/17

Contents Foreword The Scottish View Key Scottish Findings Growth and Employment Exports EU Referendum Investment in R&D Funding and Grants Sustainable Manufacturing Client Focus 3 4 5 6 7 9 10 10 11 13 Page 2

Foreword Gavin Black Partner Manufacturing Group Henderson Loggie Now in its fifth year, our survey, in conjunction with MHA and Bank of Scotland, continues to provide a useful insight into the views of manufacturing and engineering businesses across Scotland. As the report highlights, it is a challenging time for Scottish manufacturers. Whilst there is optimism for growth for the year ahead, this is down on last year. Across Scotland and the UK manufacturers continue to report that they find it a challenge to recruit the skilled technicians their businesses rely on for future growth, which is set against a backdrop of economic uncertainty following the vote to leave the EU. Now, more than ever, it is essential for the UK and Scottish Governments to provide the conditions as well as the incentives to support this key sector. Derek MacGarvie SME Area Director Manufacturing Bank of Scotland While the result of the EU Referendum has left Scottish manufacturers with some questions over how they will fulfil their future plans, many are actively investing in research and development to help deliver sustainable growth. Manufacturing has never been more important to the success and growth of the Scottish economy, and closing the skills gap remains crucial to sustain the long-term success of the industry. We continue to work closely with firms through this evolving economic landscape to provide the support and funding they need to help ensure they maintain their competitive position in domestic and global marketplaces. Page 3

The Scottish View Background Henderson Loggie, MHA and Bank of Scotland surveyed over 560 clients and contacts in the manufacturing and engineering sectors in July 2016. Respondents ranged from companies turning over less than 1m to global giants with a significant industry presence, nationally and internationally. This report was produced in September 2016 using data from the UK-wide MHA manufacturing and engineering survey. It focuses on respondents from Scotland and, where appropriate, considers these results as part of a UK-wide picture. Membership of MHA Henderson Loggie is a member of MHA, a fast-growing association of eight like-minded, progressive and respected accountancy and business advisory firms located around the UK. The 49 nationwide offices allow MHA to balance the national access provided by the association with the local insight and perspective that individual member firms offer their clients. MHA members can assist clients with their needs wherever they are in the UK, as well as globally through our international association. Economic Context The most recent Scottish Engineering survey reported the lowest orders since 2009. Almost half of all businesses surveyed in their report said output volumes had fallen in the past three months. The report also highlighted reduced employment levels and low levels of business confidence. i In contrast, figures released by the UK Manufacturing Purchasing Managers Index (PMI) reported that Britain s manufacturing output reached its highest level for more than two years in September, as the industry bounced back from a post Brexit vote slump, 55.4 in September, up from 53.4 in ii August. The weakening of the pound following the Brexit vote had continued to boost exports, the survey found. However it has also pushed up costs for importers significantly. The Office for National Statistics (ONS) confirmed that the UK economy grew by 0.7% in the three months to the end of June. Services grew 0.6%, iii up from 0.5%, exports fell 1%, while imports rose 1.3%. Page 4

Key Scottish Findings 60% 50% think their business will grow over the next 12 months said they currently export 58% 83% expect to take on trainees/apprentices next year made some investment in R&D 23% 62% believe the uncertainty following the EU vote will be a main barrier to growth rate sustainable manufacturing as a high or medium priority Page 5

Growth and Employment Manufacturing output in Scotland was down 2.6% for the first three months of 2016 according to official iv figures released by the Scottish Government and the latest quarterly review from industry body Scottish v Engineering shows sharp falls in orders, outputs and exports in the three months to September. Despite these challenging conditions, 45% of Scottish respondents reported growth for the last 12 months, compared to 59% for the UK as a whole. However, this is down 22% from last year for Scotland and 7% for the UK. Looking ahead only 60% anticipate growth, a 14% decrease on last year. 58% expect to take on apprentices in 2016 and 46% of respondents anticipate staff numbers will increase in the next 12 months. In terms of recruitment, the main challenge for respondents lies in finding skilled technicians, experienced engineers and other skilled staff. For both Scotland and the UK, recruiting skilled staff is seen as a key barrier to growth. 58% 46% expect to take on apprentices in 2016 anticipate staff numbers will increase in the next 12 months 23% believe the uncertainty following the EU vote will be a main barrier to growth Growth over the last 12 months 45% Anticipate growth over the next 12 months 60% Page 6

Exports The UK has long been running a trade deficit and figures released recently from the Office for National vi Statistics (ONS) suggest that the fall in the value of the pound since the EU vote has increased the cost of imports for manufacturers. Input prices faced by manufacturers rose 4.3% in the year to July, compared with a fall of 0.5% in the year to June. 50% of Scottish respondents said they currently export, a 19% increase on last year. Scottish respondents currently export to the Eurozone (30%), Europe excluding Eurozone (20%), North America (20%) and Asia excluding China (18%). 30% 20% 20% 18% export to the Eurozone export to Europe excluding the Eurozone export to North America export to Asia excluding China Page 7

Reducing business rates, corporation tax and red tape topped the table of the three things the Government could do to help manufacturers.

EU Referendum Scotland UK as a whole According to the results from last year s survey, only 4% of Scottish respondents and 10% of all respondents for the UK as a whole, thought it would benefit British business and the economy to leave the EU. When asked about the EU referendum result this year in terms of business confidence, only 13% had a positive outlook, with 39% reporting a negative outlook. As it could be several years before we have a full understanding of the impact of Brexit, not surprisingly, 48% remained neutral. 4% 10% of respondents from 2015 who thought it would benefit British business to leave the EU Positive Outlook Neutral Negative Outlook Page 9

Investment in R&D Currently 83% of Scottish respondents invest in R&D compared to 88% for the UK as a whole. For Scotland, this is an increase of 17% on last year. Scottish awareness of R&D Tax Credits continues to be lower than the UK average (82% vs 90%). Percentage of respondents who invest in research and development 83% 88% Percentage of respondents who are not aware of R&D Tax Credits 18% 10% Scotland UK as a whole Funding and Grants Percentage of respondents who received Government or grant funding in the past 5 years 55% 46% 55% of Scottish respondents (compared with 46% for the UK as a whole) received Government or grant funding in the past 5 years, split as follows: 36% RSA, 18% Smart Grants and 45% other. 97% of respondents have received bank funding in the last 12 months, with only 3% waiting to hear the outcome of a funding request. 97% have received bank funding in the last 12 months Page 10

Sustainable Manufacturing Sustainable manufacturing is still a consideration for Scottish manufacturers and is an essential element in Scotland s economy going forward. 62% rated sustainable manufacturing as a high or medium priority (72% UK), 28 % rated as a low priority (19% UK) and 10% rated as not a priory (9% UK). So far however, only 10% are already sourcing energy produced using renewables and a further 10% signalled their intention to use energy from renewable sources in the future. Despite the importance attached to sustainable manufacturing, 62% plan to remain reliant on traditional energy providers. 10% 10% 62% are already sourcing energy produced from renewables signalled their intention to use energy from renewable sources plan to remain reliant on traditional energy providers Scotland UK as a whole 62% 72% 28% 19% rated sustainable manufacturing as a high or medium priority rated sustainable manufacturing as a low priority 10% 9% rated sustainable manufacturing as not a priority Page 11

97% of respondents indicated that they expect their costs to increase in the next 12 months, largely as a result of the increased price of raw materials (35%), increased wage costs (31%) and increased price of components (18%).

Client Focus Tracey Hogarth, Freedom Brands - Go Coco going places with Henderson Loggie Aware of growing health consciousness and the emerging trend for ethical consumerism, Ross Currie and Tracey Hogarth launched Freedom Brands in 2011 to produce wholesome, natural, functional beverages and snacks. It s fair to say that both Ross, a chiropractor, and Tracey, who previously ran a property business, were sailing into uncharted territory. But recognising the increasing popularity of coconut water, they took the plunge and put their own energies into creating Go Coco, a natural energy drink with many health benefits made from the water contained in young coconuts. Fast-forward five years and the future is bright. Go Coco has signed a UK retail distribution deal with Highland Spring that will see the brand expand beyond independent and wholesale distribution into supermarkets across the country. They have launched new brand Nudie Snacks and a dairy free, gluten free plant based milk shake, with plans for a new birch water drink in the pipeline. The Highland Spring deal means they can focus on international expansion. Freedom Brands is going places, and Henderson Loggie has been with them every step of the way. Greig Rowland s depth of knowledge about corporate finance and fundraising has been invaluable to us as we have grown. And when we had a VAT inspection Alan Flavelle was absolutely brilliant in helping us through it. We had further value from his expertise and relationships with HMRC when we launched Nudie Snacks and he gave us guidance on VAT which we had to consider for our NPD." In a business like ours cash flow is tight. When it comes to tax, Kenneth McEwen has been particularly good at advising us how to effectively and efficiently manage our affairs including taking advantage of relief available for new product development. In fact we have now moved all our personal tax over to Henderson Loggie." As a growing business we obviously attract many would-be suitors but none of them give us the warm and fuzzy feeling we have in our dealings with the Henderson Loggie team. They are down to earth and, above all, jargon free and we appreciate the personal service they give us. We did look at other accountancy firms when we launched the business but there was no doubt that Douglas Woodhouse and his team at Henderson Loggie was a good fit, says Tracey, who manages the business from its Glasgow headquarters. We see the team at Henderson Loggie as our finance partners in the business. We don t have a financial background and have relied heavily on their professional advice. They are not one of the big four accountancy firms, but we were drawn to them from the outset because they have so many specialists with expertise we need, especially in terms of exports. The fact that they could immediately call on tax advice from their contacts in the US has been very helpful." Page 13

58 Queens Road Aberdeen AB15 4YE 01224 322100 The Vision Building 20 Greenmarket Dundee DD1 4QB 01382 200055 34 Melville Street Edinburgh EH3 7HA 0131 226 0200 Gordon Chambers 90 Mitchell Street Glasgow G1 3NQ 0141 221 6807 www.hlca.co.uk Offices in: Aberdeen, Dundee, Edinburgh and Glasgow Follow us on twitter @hendersonloggie Follow us on LinkedIn Like us on Facebook Subscribe on Youtube Sources i, v - Scottish Engineering September 2016 Quarterly Review ii - UK Manufacturing Purchasing Managers Index (PMI), September 2016 iii, vi - Office of National Statistics - Second Estimate of GDP, Quarter 2 (Apr to June) 2016 iv - Quarterly National Accounts Scotland (QNAS) Scottish Government Henderson Loggie is a member of MHA, an independent member of Baker Tilly International. Arrandco Investments Limited is the registered owner of the UK trade mark for Baker Tilly and its associated logo. Designed by Andy Campbell Henderson Loggie Chartered Accountants 2016