Technology, skills and infrastructure should be key priorities in Government Industrial Strategy

Technology, skills and infrastructure should be the government’s top three priorities in its upcoming Industrial Strategy, according to MHA’s latest manufacturing report. 

The survey of 1,000 manufacturing business owners and C-suite across the country was undertaken in May to understand both the challenges and opportunities that they currently face and what lies ahead for the sector over the next 12 months.

In the short term at least, the outlook remains difficult. The majority of respondents said that the biggest current challenge facing their businesses are the tax increases announced by the UK government in October 2024, which have significantly increased their wage bill as well as creating uncertainty around investment. 

The survey also highlights that while businesses can see that technology and innovation are important for their sector going forward to allow for more automation, the ability to access the investment that is required to do this still remains a significant challenge. 

Industrial strategy

Across the UK respondents felt the top three priorities for the government’s Industrial Strategy should be technology, skills and infrastructure. Regionally though there were variations: in the East Midlands and South East manufacturers want the government to also look at regulation; in Greater London and the North East another concern is energy prices; in the North West it is data; in Wales it is grid connections; and in Scotland it is access to finance and competition.

In terms of what has already been published by the government as to the contents of the Strategy, respondents felt that the government had done little to address the specific issues impacting SMEs as well as implementing the detail of recent trading announcements and improving relationships, particularly with Europe.  Unsurprisingly there were also worries about the competitiveness of the UK’s taxation environment in contrast to our key trading partners and there were real concerns from SMEs that the board of the Industrial Strategy was focused more on larger businesses.

Tax increases remain biggest challenge for UK manufacturers

While there is some positivity around growth from manufacturers, significant challenges remain across a varied spectrum of issues. 

Skills shortages and regulation were also named by seven out of the 12 regions as one of their top three concerns, while five said supply chains as a challenge. Perhaps surprisingly, given the current focus on the issue, only two regions, Scotland and the North West flagged energy costs as a problem and only manufacturing businesses in Yorkshire felt tariffs were one of their top three concerns. 

For businesses with a turnover of less than £100m, the top three challenges were:

1. tax increases (35%)
2. energy costs (32%)
3. supply chain challenges (32%)

Businesses with a turnover of between £100 - £250m flagged:

1. the technological evolution (40%)
2. tax increases (35%)
3. skills shortages (33%).

Larger businesses with a turnover of more than £250m, listed:

1. cyber security (36%) as a key challenge
2. followed by tax increases (36%)
3. and then regulation (35%)

It is unsurprising that for larger businesses that the impact of tax, while important, is eclipsed by technology and cyber security. However, it is interesting that skills shortages, frequently touted as an ongoing concern for the manufacturing industry, has not featured higher on the list of challenges. 

When asked about how the Autumn 2024 Budget had affected future potential investments, 68% of respondents said the increased costs as a result of the Budget had negatively impacted their plans.

Optimism for the future

UK plc has suffered from a series of economic upheavals in the last decade. However, despite this, the manufacturing sector remains remarkably optimistic about the future with virtually all of our survey respondents anticipating some growth in the next 12 months. While fifty-five percent anticipate modest growth of between 3-5%, a significant minority - 22% - believe that their business will grow by more than 6% in the next year. Perhaps having fallen so far, the only way is indeed up and the sector is by now well-adjusted to the new economic reality. 

Investment in R&D

Despite the Autumn Budget, 55% of all survey respondents said that they would be investing between 3-5% more in R&D in the next 12 months compared to last year, and even more encouragingly, 27% said that they would be investing more than 6% above their previous budget.  These are positive signs for the long-term future of the sector. 

In the South West, 36% of businesses said that they would invest more than 6% in R&D, while in Wales it was 40% and over half, 52%, in the West Midlands. 

Typically, it was larger companies who were willing to invest more with 30% of businesses with a turnover of over £250m will invest between 6-10% compared to only 19% of businesses with a turnover of less than £100m in R&D. This may well reflect the fact that the changes made to the rules relating to R&D claims in recent years have affected small companies more significantly.

When asked where they would be spending their R&D budget, out of five choices, 

1. 44% of all respondents said that they would be investing in process improvement,
2. 43% in new product development,
3. 43% in material development and testing. 

Closing the skills gap across UK manufacturing

Although not their number one priority the shortage of skills has been a perennial concern for manufacturers for years. Our respondents are unwilling to wait for central government action. They are acting now to close the skills gap by creating an apprenticeship programme, training partnership with college or university or alternatively, investing in AI with a view to closing the skills gap in a different way all listed as equally valuable. 

For companies of different sizes, there were divergent options. 

1. Forty-five percent of businesses with a turnover of under £100m are planning to use a training partnership with a college or university,
2. whereas 48% of businesses with a turnover of over £250m are planning to invest in AI with a view to closing the skills gap in an alternative manner.