In the wake of the COVID-19 pandemic, one of the positive economic headlines in recent weeks has been the timely upswing in demand and productivity for the manufacturing sector. News stories such as the beginning of construction of a new factory in the USA for exercise equipment manufacturer Peloton, or the £140m investment by Kraft Heinz in a new manufacturing plant based in the North West of England, give an impression of a global increase in demand for consumer products that is driving growth in the manufacturing industry.
The question for manufacturers now is how to meet that demand given the challenges before them. Internationally, the COVID-19 pandemic rages on and the severity of response to the pandemic varies widely from region to region. Nationally, the key issue will be adapting to the struggles caused by the UK’s exit from the European Union. Expansion might initially seem an attractive prospect for the manufacturing sector: the government’s announcements in the March budget on the new ‘super deduction’ tax allowance for capital expenditure were aimed at businesses investing in expansion across the next two years. However, there remain significant challenges presented by the COVID-19 pandemic and Brexit to any business looking to invest in expansion.
Ongoing pandemic challenges
While there may be a significant uptick in demand for manufacturers both in the UK and abroad in 2021, the national and international measures taken in 2020 to respond to the COVID-19 pandemic continue to have a significant impact on the ability of manufacturers to meet that demand.
Taking as an example the manufacturers involved in the automotive sector, demand for their products in 2020 slid to its lowest level since the turn of the century, and car manufacturing output dropped significantly in the wake of supply chain interruptions from overseas. Many manufacturers reduced their staff numbers in anticipation of supply chain interruptions and reduced consumer demand in 2020. Those businesses who were forced into difficult measures during 2020 may not be able to quickly return to pre-pandemic levels of supply to meet the new demand in 2021.
Elsewhere, certain of Birketts’ clients have refocussed parts of their manufacturing businesses in order to contribute to the nationwide response to the pandemic. Some companies pivoted their businesses to producing personal protective equipment for the UK government at the height of the shortages suffered in the first half of 2020. However, recent government criticism for the handling of the allocations of PPE production contracts, means that those businesses that did re-deploy their resources now face uncertainty as to whether long term demand for PPE will hold up. If manufacturing businesses are forced to discontinue pandemic-based revenue streams, they will need to consider how to best to make use of the investments made in staff and equipment that were taken on to service the needs of the pandemic.
Regardless of the specific product sector, the challenge for manufacturers now is how to meet the increased demand. Re-building and expansion of supply chains will be essential, but overseas supply chains have become unpredictable through the pandemic. From a legal perspective, manufacturing businesses are encouraged to ensure that their supply chains are underpinned by robust contracts, with clear terms for delivery. However for many businesses, such precautions may not give sufficient comfort, and management will instead look to how best to create, and where to store, necessary stockpiles to meet demand and cope with supply interruptions. That in turn will lead to demand for more warehouse space and a need for timely and commercial advice in relation to land acquisition opportunities.
The impact of Brexit has almost been underreported given the impact of the January to March lockdown in the UK. However, the latest reports are that many manufacturers are struggling to move goods into and out of the EU, due to problems with additional administrative or tax burdens created by Brexit.
Birketts’ experience is that some manufacturers have suffered longer delivery times or had to reduce supply to the EU as a result of problems moving products over the border. Even those who are successful in physically moving their goods into the EU, are struggling with the zero-tariff treatment that should apply to their products. Reports suggest that up to €2.5bn of British goods exported to the EU had tariffs charged on them, despite the fact that the goods were eligible for zero-tariff treatment. Businesses are citing overly complicated administrative procedures required to benefit from the zero-tariff as the reason for paying tariffs on qualifying goods. From a legal perspective, taking advice on the best ways to navigate the new rules of cross border trade with the EU will be important for manufacturers looking to expand.
It is therefore clear that, while expansion in the UK might look like an exciting prospect for manufacturing businesses, there remain a number of challenges that will need to be resolved in order to expand successfully. Taking proper advice on the impact of COVID-19 and Brexit will be a key contributor to that success.