2025 MHA Manufacturing Report
Welcome to the latest iteration of MHA’s UK manufacturing report
The international economic turbulence over the last few years, from Brexit to the Covid 19 pandemic and more recently the ongoing uncertainty of tariffs, has no doubt left deep and permanent scars on the sector. Recent domestic events, including the increases in taxation and the ongoing skills shortages, as well as the inflationary and supply chain pressures caused by the war in Ukraine, have not helped either.
We surveyed 1,000 manufacturing business owners and C-suite across the country in May to understand both the challenges and opportunities 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 challenges facing their businesses are the tax increases announced by the UK government in October 2024 which has significantly increased their wage bill as well as creating uncertainty around investment.
Our survey also highlights that while businesses can see that technological and innovation will have a positive impact on their sector going forward and allow for more automation, the investment that is required still remains a challenge for manufacturing businesses.
Alongside this, they are continually having to be vigilant around the cyber threats to their businesses which, as we have recently witnessed in the retail sector, can cause not only a huge amount of disruption but also a fall in production and ultimately loss of revenue.
On a positive note, the research did highlight that the UK government has the opportunity to shift the dial for the manufacturing sector with the upcoming announcement of its Industrial Strategy. There was a consensus from our survey respondents that the government’s key priorities should be technology, skills and infrastructure.
And finally, the manufacturing sector and the people who work within it are above all resilient and innovative, so it comes as no surprise that despite all the challenges they face, they remain relatively positive about the future with a majority of respondents suggesting that they expect growth over the next 12 months.
Our specialist insight
"We hope that the report proves to be a valuable resource and we look forward to discussing its findings and conclusions. Many thanks to our clients who gave of their time to be interviewed, the authors and researchers who pulled the report together and to Professor Joe Nellis of Cranfield University, Richard Hobbs of Black Country Chamber of Commerce and my fellow MHA partners for their thoughtful contributions."
Economic overview from Joe Nellis
Manufacturing at the crossroads
An economic update from Professor Joe Nellis, economic adviser to MHA
UK economic activity dipped by 0.3% in April, marking the steepest monthly decline since late 2023. A record fall in exports — particularly to the United States due to new tariffs — was a major factor behind this downturn. However, the broader picture is more encouraging: the economy expanded by 0.7% in the first quarter, leading to a projected annual growth rate of around 1% this year, with a modest increase expected in 2026, which will provide the manufacturing sector with more certainty.
Inflation in May at 3.4% was well above the Bank of England's target and is likely to edge close to 4% by the end of 2025 before falling back again. But signs of stabilisation in wage growth, a persistent worry for the Bank of England, could lead to interest rate reductions later in the year. Government investment spending announced in the recent Spending Review — particularly in transport, energy, housing, defence, and digital technology — will provide much-needed and welcome support to economic recovery, although global uncertainties and rising business costs continue to pose challenges.
While no longer in the top 10 countries for manufacturing output, the sector remains a cornerstone of the UK economy, employing 2.6 million workers across the UK and generating an estimated £184 billion in GDP according to the most recent estimates in 2022. Figures released this month by the Government highlight that from October to December 2024, the manufacturing sector accounted for 8.6% of total UK economic output and 8.0% of employment. The sector is also a significant contributor to international trade and investment.
As an important serious plank of our domestic economy, the Government should actively and positively invest in the UK manufacturing sector, and the details of its long-awaited Industrial Strategy will be key to this.
With firms embracing automation, domestic production, and new trade links, the sector has the potential to grow steadily over the next decade — helping to underpin long-term, sustainable economic resilience.
Our specialist insight
"As an important serious plank of our domestic economy, the Government should actively and positively invest in the UK manufacturing sector, and the details of its long-awaited Industrial Strategy will be key to this.
With firms embracing automation, domestic production, and new trade links, the sector has the potential to grow steadily over the next decade — helping to underpin long-term, sustainable economic resilience."
Growth but challenges expected
UK plc has suffered from a series of economic woes since 2019 with the departure of the UK from the EU, the impact of the Covid 19 pandemic and its long drawn out fall out, economic volatility leading to stubbornly high interest rates and inflation and most recently macro uncertainty around the tariff regime with the United States.
Despite this negative backdrop, the UK manufacturing industry is positive 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 businesses will grow by more than 6% in the next year. Given the challenging last decade or more, this is a positive sign that, having fallen so far, the only way is indeed up and the sector is by now well-adjusted to the new economic reality.
The picture is not a uniform one across the country with a number of regions with a modest percentage of respondents suggesting that they do not anticipate any growth in the next 12 months but by contrast there is a more positive outlook in the West Midlands with 6% of businesses expecting to grow by over 10%.
% of companies expecting to grow by 3-5%
Challenges
While there is some positivity around growth from manufacturers, significant challenges remain across a varied spectrum of issues. Thirty-five percent of respondents (the biggest number) said that the recent employment tax increases were their biggest challenge, 34% said that the technological evolution was a concern and 33% stated that it was cyber security.
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 challenge and only manufacturing businesses in Yorkshire felt tariffs were one of their top three concerns.
Surprisingly, tariffs did not feature more prominently as a concern for more businesses. However, this may be due to the survey taking place after the UK and US agreed to remove some levies, but was completed before 4 June, when the US raised import taxes for steel and aluminium to 50%, with the levy temporarily remaining at 25% for the UK.
Similarly surprising was how few businesses mentioned energy costs as one of their key challenges which may have been down to when their contracts are expiring.
Regulation and the associated costs are deeply concerning for manufacturers, particularly post-Brexit. Many survey respondents commented that additional administration due to Brexit and ensuring that there is compliance across the UK and EU results in duplication, which comes at a huge cost and without visible benefit.
The trading relationship with the EU was another area where survey respondents commented that they would like to see the government focus on. As the UK’s largest trading partner and closest neighbour, respondents commented that better tariffs and easing the administrative burden of trading with Europe would markedly improve the growth opportunities for UK manufacturers.
For businesses with a turnover of less than £100m, the top three challenges were:
- tax increases (35%),
- energy costs (32%)
- supply chain challenges (32%).
Businesses with a turnover of between £100 - £250m flagged:
- the technological evolution (40%),
- tax increases (35%)
- skills shortages (33%).
Larger businesses with a turnover of more than £250m, listed:
- cyber security (36%) as a key challenge,
- followed by tax increases (36%)
- 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, have not featured higher on the list of challenges.
However, 45% of respondents with a turnover of under £100m said that they have a training partnership with a university or college, suggesting that the skills shortage is less of a concern for them. While 48% with a turnover of over £250m have been investing in AI with a view to closing the skills gap in a different way.
What are the top challenges currently impacting your business?
Addressing the challenges
When asked about what actions they would be taking to addressing these challenges and achieve the growth they are looking for over the next 12 months, our respondents (who could select multiple responses) had a variety of practical and innovative options: 43% said that they would be increasing their supply chain options, 42% said that they would be investing in strengthening their IT systems, 40% said that they would look at more efficient energy options, 39% said that they would be upskilling existing staff and 38% said that they would invest in new technology or AI. Only 27% said that they would respond by recruiting new staff, while at the same time, an equal proportion said they would actively reduce headcount.
What actions need to be taken to address these challenges?
Tax increases
Since April 2023, businesses across the UK have faced a series of tax increases that have impacted their growth and their ability to invest. The previous Conservative government increased corporation tax to 25% in April 2023, and in the Autumn Budget in 2024 the new Labour government announced an increase in employers' national insurance contributions, the change in thresholds and minimum wage that came as a surprising and potentially damaging blow to the sector which hardly instilled the confidence to grow. Several survey respondents commented that these increases had driven them to reduce their headcount and put a hold on future recruitment.
When asked about how the Autumn 2024 Budget had affected any future potential manufacturing investments, 68% of respondents said the increased costs because of the Budget would negatively impact their plans. The top three areas where investments were most likely to be scaled back were technology, AI and R&D all mentioned by 70% of companies. These are all areas where, ideally, companies should be investing in order to develop their businesses in view of the threats previously identified.
Welcome 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 the previous 12 months and even 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.
With regards to R&D, what are you planning on investing in, in the next 12 months?
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, 44% of all respondents said that they would be investing in process improvement, 43% in new product development and 43% in material development and testing.
For businesses with a turnover under £100m, 42% said that their biggest investment would be in Equipment and Machinery Development which was less of a priority for bigger companies. However, for businesses with a turnover of more than £250m, 46% of respondents said that material development and testing and technology adoption is where they would be investing.
Restrictions are coming in within the UK R&D tax credit regimes through the introduction of the merged scheme, which came in for the accounting period beginning 1 April 2024. Under these restrictions, a large majority of companies claiming R&D credits in the UK will no longer be able to claim on overseas costs.
However, there is a potential exemption that might apply to some manufacturing companies. If there is a reasonable basis to say that the conditions that exist in an overseas jurisdiction cannot be replicated within the UK in a specified time frame and at a specified level of skill, then it could be possible to include some of these as overseas costs. Manufacturing businesses still have a window of opportunity to reinvestigate their R&D position.
Industrial strategy
According to official figures, manufacturing now accounts for only 8.6% of GDP of the UK economy compared to 17% in 1990 as the services sector has taken over as the largest contributor to GDP. And, in July 2024, analysis from Make UK showed that the UK had fallen out of the top 10 manufacturing nations in the world for the first time since the Industrial Revolution as other major economies such as China, the US and EU continue to invest heavily.
Over the last few decades, there has been a lack of a well-defined plan to support manufacturers, which has led to a gentle and seemingly inevitable decline. For the UK to regain its position within the top 10 manufacturers, a comprehensive Industrial Strategy is urgently needed to put the manufacturing sector on the path to growth once again and to encourage foreign investment. A formal industrial strategy was drawn up by the Conservative government under Theresa May but was then dropped by her successors.
The launch of the long-awaited Industrial Strategy in March this year came as welcome news to manufacturers who understandably want some certainty around the Government’s plans for investment. As we await the announcement on the final Industrial Strategy, it is understood that it will focus on key areas including aerospace, pharmaceuticals, luxury car making and frontier technologies such as artificial intelligence, nuclear small modular reactors (SMRs), quantum computing, floating offshore wind turbines and more traditional sectors such as steel and defence.
While the announcement of the Industrial Strategy was by and large warmly received by the manufacturing sector as it highlighted the need to increase skills and attract foreign investment, the million dollar question for this and indeed several planks of the Government’s long term strategy) is whether it will lead to permanent economic growth.
While the Prime Minister had already set out key investment in infrastructure such as ports and gigafactories through the £7bn National Wealth Fund there were limited announcements from the Chancellor’s recent Spending Review.
The government’s 'Invest 2035: the UK's modern industrial strategy' has identified eight Growth Driving sectors:
- Advanced Manufacturing,
- Clean Energy Industries,
- Creative Industries,
- Defence,
- Digital and Technologies,
- Financial Services,
- Life Sciences
- Professional and Business Services.
Within this, it focuses on 12 key areas:
- skills,
- recruitment of international talent,
- data,
- R&D,
- technology,
- access to finance,
- competition,
- regulation,
- energy prices,
- grid connections,
- infrastructure
- planning.
However, there were some regional variations as to the most pressing issue:
Shelley Harvey
Shelley Harvey, a Partner in the Manufacturing and Engineering team at our Leicester office, shares her reflections on this year’s manufacturing outlook, offering insight into both national trends and the specific regional dynamics affecting the East Midlands. Her comments draw on her close work with clients in the sector and her interpretation of the report’s findings.
A Balanced Picture: Past, Present and Future
Shelley feels the report offers a fair and balanced overview of the manufacturing sector, recognising the significant challenges while also pointing to areas of opportunity. It shows how businesses have responded to a changing economic landscape and outlines how these pressures are expected to develop. Encouragingly, she sees positive signs of resilience and adaptability across the sector despite ongoing pressures.
Key Findings: What Will Affect Clients Most
One of the key concerns Shelley identifies is the continued impact of rising taxes and National Insurance contributions. She notes that these cost increases are affecting client decision-making, with many businesses seeing profits reduced and investment plans scaled back. This is particularly relevant for labour-intensive manufacturers, many of which are based in the East Midlands.
Shelley believes this financial pressure may drive more businesses to explore automation and the use of digital tools. While this could help boost efficiency and competitiveness, she points out that it also brings the challenge of upskilling staff.
Cybersecurity is another priority Shelley highlights. As manufacturing becomes more digital, she says the risks have grown significantly. This is a concern for many businesses she works with and is now viewed as a fundamental part of any future strategy.
The East Midlands Perspective
Shelley describes the East Midlands as a key part of the UK’s manufacturing base. While the region faces the same economic pressures outlined in the report, she finds it encouraging that 53.6% of East Midlands manufacturers expect growth of between 3% and 5% over the coming year. She believes this reflects both resilience and a willingness to adapt.
Although investment confidence has been affected, Shelley sees a determination among local businesses to move forward and embrace opportunities. The region’s position among the top five for expected growth underlines the strength and importance of its manufacturing base.
What Should Businesses Do Next?
Looking ahead, Shelley sees digital transformation as a vital opportunity. She believes that by embracing digitalisation and AI, manufacturers can improve efficiency, reduce downtime and become more agile in responding to change.
To prepare for the future, she suggests businesses should:
- Consider investing in new technology that supports smarter operations
- Manage costs carefully in the face of ongoing fiscal pressure.
- Stay open and flexible to evolving market conditions and remain responsive to changes.
Shelley believes the ability to innovate and remain resilient will be what sets successful businesses apart. Those that can adapt and make informed investments will be in the strongest position to thrive in 2025 and beyond.
The view from Midland’s businesses across various aspects of the survey broadly correlated with the National picture, but with some key variations were highlighted.
The top 3 key challenges faced by businesses nationally were increases in the tax burden, Cyber security and Regulation, and these also featured highly in responses from the Midlands.
However, these were all eclipsed in the Midlands by skills shortages, with over 41% of respondents identifying this as a key challenge. This was a notable variance to the national position and is a real indicator of the continuing difficulties facing businesses in this area[SH1] .
The proportion of businesses that highlighted Tariffs as a key challenge (32%) was also higher than the national position, likely reflecting the predominance of export-heavy industries with complex international supply chains —particularly automotive, aerospace, and advanced engineering.
Reflective of the national position, investment in IT, Technology / AI and supply chain options were the most common actions being taken to address challenges, and given the skills shortage issue, it is perhaps not surprising that actions being taken across businesses in the region are also highly focused on this area.
In seeking to address skills gaps, some 50% of businesses are actively upskilling existing staff, with 31% of respondents seeking to recruit new staff, outweighing the 19% who anticipate a reduction. This contrasts with a national position where the proportion of businesses seeking to recruit was offset by a similar proportion of businesses expecting a reduction (both being 27%).
In addition to the focus on the workforce, investment in AI has emerged as a key means of businesses addressing skills shortages - in fact in the Midlands it was the single most prevalent action being taken, with 58% of businesses actioning this compared to a national position of 44%.
Considering sustainability, companies have been particularly focused on supply chains – 59% using recyclable materials where possible, 51% partnering with sustainable suppliers, and over 62% are adopting renewable energy sources (vs 44% nationally). In contrast, the proportion targeting energy use reduction was 33% - relatively low compared to the UK position of 45%.
Looking forwards, respondents remain relatively optimistic with the vast majority anticipating growth in the next 12 months. This is mirrored by nearly all businesses anticipating increased R&D going forwards, primarily on New Product Development and Technology adoption.
In summary, Midlands manufacturing businesses have responded with cautious optimism and a positive outlook for growth and innovation. This is against a backdrop of the challenges shared across the UK manufacturing sector, and skills shortages in the region that remain to be fully addressed.
Steve Hale, Partner at MHA
It is evident that manufacturing and engineering is still a lynchpin of the Black Country and UK economy, with over 10% of the West Midlands employed in the manufacturing sector and 8% nationally.
It is a sector that is crying out for wider support to help propel the industry forward, to be more competitive, and increase productivity. The economic climate and policy changes have arguably impacted on the manufacturing sector more than any other sector in the past five years.
The drop off in manufacturing contribution to GDP in the past 35 years from 17% to nearer to 9% along with the UK no longer being one of the Top 10 manufacturing nations globally, the need for a lasting industrial strategy needs to be implemented and followed through with regardless of the presiding government. Policy directives on areas such as encouragement of foreign investment, skills and talent, connectivity and infrastructure, access to finance and R&D are vital to support the sector moving forward.
Despite the challenges from Covid to tariff uncertainty, manufacturing is an industry confident in its ability to grow over the next 12 months with over 20% of manufacturers expecting more than 6% in the next year. It’s pleasing to see so many West Midlands businesses confident in their growth.
The impact of national insurance increases, alongside the increase of minimum wage, have eaten into may businesses margins. The ripple effect is seeing businesses holding off on further investments while they assess the effect of the tax increases and how much they might pass on to customers. More companies are actively looking for grant and funding opportunities as a result to continue their growth ambitions.
Skills and talent retention and recruitment are a constant cause of corner for employers in the sector. More work can be done at an earlier age to promote manufacturing as a desirable sector to work in with a wider variety of career opportunities. Greater cohesion from the education sector is required to ensure relevant skills are being taught and keep up with an evolving sector.
Given the data in the report, it is pleasing to see how manufacturers are investing more in R&D to grow. Despite SMEs being more significantly affected by R&D rule changes, investments on process improvement and new product development lay clear groundwork for this size of business to meet their growth aspirations.
As digitalization becomes more prevalent in manufacturing, it is clear why technology and cyber security and two of the main challenges in the sector. There are practical and innovative ways for businesses to improve these areas such as implementing new IT systems that are bespoke to the needs of the business, investments in AI, and upskilling and recruiting staff to apply new technology.
As the Carbon Border Adjustment Mechanism (CBAM) takes effect along with cultural demands to be carbon neutral and Net Zero, pressure is clearly on the manufacturing industry to be more sustainable. Now more than ever there is a need to further implement lean manufacturing principles, adopt renewable energy solutions and monitor energy consumption further.
There is also a clear crossover between challenges facing manufacturing, with the ability to monitor energy and efficiency of factories in real time only being available to businesses with the correct infrastructure in place. When you add in needing the skill to interpret the data to make informed business decisions, it’s clear that suitable education is needed in areas that are not as typically found in manufacturing.
Manufacturers ultimately require a rounded approach to overcome barriers for growth. Further knowledge and understanding how actions can have various positive impacts across the business, as to not view them as mutually exclusive challenges to overcome.
Richard Hobbs, Partner at MHA
The North West of England remains one of the UK’s most significant manufacturing hubs in 2025, contributing substantially to national output. The region has shown resilience amid global economic pressures, although challenges persist. The region excels in advanced manufacturing, aerospace, automotive, and pharmaceuticals, with continued investment in digitalisation and green technologies.
The region faces a skills shortage, particularly in engineering and digital roles, prompting collaboration between industry and educational institutions to upskill the workforce. Our North West responses reflected what I am seeing in my clients, with recruitment, particularly of apprentices, being high on the agenda.
Manufacturers are grappling with increased energy prices, raw material costs, and employment taxes, which are expected to impact profit margins significantly into 2025 and beyond. Indeed, all these aspects featured heavily in responses from our respondents; grading skills shortages and energy costs as two of the top challenges facing their businesses.
Interestingly, the North West manufacturing responses considered technical evolution to be the number one challenge to business; considerably higher than the rest of the UK. Furthermore, nearly 51% of North West responses considered investment in strengthened IT systems as the critical step to address their challenges; being almost 10% higher than the average response nationally. This begs the question as to whether the North West, whilst steeped in manufacturing heritage, has been slow to develop local complimentary businesses in manufacturing tech and IT?
Andrew Matthews, Partner at MHA
Brian Garland
Brian Garland, a partner working closely with clients in Wales, shares his reflections on the latest manufacturing report. Drawing from his extensive industry knowledge, he offers valuable insight into the unique challenges and opportunities facing manufacturers across the region and beyond.
A Positive and Holistic View
Brian views the report positively. Many manufacturers focus narrowly on their own companies or industries, but this report provides a broader overview of key issues affecting manufacturing across the UK. This wider perspective can help businesses understand the market better and plan accordingly.
Unexpected Regional Concerns
While Brian was not surprised by most findings, he found some regional details notable. For example, the emphasis on supply chain issues in Wales surprised him. His experience suggests this is not always the primary concern for local manufacturers, yet the data shows it is significant for many. Brian expected taxation, rising costs and persistent skills shortages to feature more prominently.
The skills shortage is a frequent issue Brian encounters. Some clients in rural West Wales recruit skilled welders from overseas, including India, reflecting a broader trend where companies look beyond local labour markets.
The Challenge of Skills and Experience
Brian highlights the skills shortage as partly a legacy of changes in the industrial landscape. Historically, large employers like Tata Steel trained many workers who later joined smaller manufacturers. Since downsizing at these firms, a skilled labour gap emerged. He also notes inconsistencies in apprenticeships and training programmes have worsened the shortage.
Additionally, Brian observes a mismatch between qualifications and practical experience. While many young people hold degrees, they often lack hands-on workplace skills manufacturing requires. Fewer young people enter manual roles, which are physically demanding and less attractive.
A Strong Regional Manufacturing Base
Reflecting on Wales’ industrial heritage, Brian points to towns like Merthyr Tydfil, once dominated by large manufacturers employing thousands, which have transformed. Today, Wales’ manufacturing is driven by smaller firms producing components and specialised products, often replacing larger companies of the past.
He stresses maintaining the skills base by supporting smaller manufacturers. Without skilled workers and viable businesses, Wales risks losing industrial expertise built over generations.
The SME Focus and Government Support
Brian raises a critical point about government initiatives, feeling current policies often overlook small and medium-sized enterprises (SMEs), the backbone of UK manufacturing. Many support programmes focus on large firms or specific sectors but do not address the unique needs of smaller manufacturers.
He suggests more tailored consideration is needed to understand how policies affect SMEs with fewer employees and simpler structures. Greater attention to this segment would better support the manufacturing base overall.
Future Proofing Through Technology and Energy
Looking ahead, Brian stresses the importance of future proofing businesses through embracing new technology. He highlights artificial intelligence and automation as key areas for manufacturers to explore, especially amid skills shortages. However, investing in advanced machinery can be costly, and funding remains a challenge.
Securing reliable energy supplies is another priority Brian emphasises. Consistent and affordable power is crucial for manufacturers to maintain operations and pursue growth. Energy security must be central to any future strategy.
A Hopeful Outlook with Cautious Optimism
In closing, Brian recognises a positive tone in the report regarding government recognition of manufacturing’s importance. He welcomes the idea of a national blueprint to support the sector’s future but cautions against initiatives that amount to lip service. He hopes new strategies will translate into meaningful action to sustain and strengthen manufacturing across Wales and the UK.
The growth outlook figures are encouraging with 74.6% of respondents expecting to grow above inflation. It suggests a degree of confidence despite the constant curveballs from the likes of Covid, to Ukraine and the US trading deal uncertainty.
The statistics show that manufacturers are not resting on their laurels, as they continue to invest in R&D and technology – innovating and driving forward for the future. This will hopefully put them in a good position to take advantage of marketing opportunities that emerge.
Stuart MacPherson, Audit and Accounts Director at MHA
Not all is rosy in the garden. Our survey respondents and the manufacturing sector as a whole felt the Government in trailing these 12 priorities had done little to address the specific issues impacting SMEs, international trading relationships, particularly with Europe, and unsurprisingly the competitiveness of the UK’s taxation environment by contrast to our key trading partners. In addition, there were concerns from SMEs that the board of the Industrial Strategy was focused more on larger businesses.
Closing the skills gap
As the survey shows, the shortage of skills has been a perennial concern for manufacturers for years. For manufacturers while the Apprenticeship Levy was a good idea in theory when it was introduced in 2017 it is widely accepted that it has not had the desired impact. The problem has been exacerbated by the post-Brexit restrictions on the freedom of movement of workers.
Again, 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. Forty-five percent of businesses with a turnover of under £100m are planning to use a training partnership with a college or university 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.
The Growing Role of Technology in Manufacturing
Modern manufacturing is no longer solely about machinery. It’s increasingly driven by software, data, and digital systems. New tools such as AI, automation, and advanced data analytics are becoming just as essential as the physical machines on the shop floor.
For instance, software now controls machines to allow for quicker product adjustments and fewer costly errors. From an accounting and operations perspective, this translates to better asset utilisation, higher efficiency, and improved margins.
AI, in particular, is playing a transformative role. Manufacturers are using AI to:
- Predict machine breakdowns and reduce unplanned downtime
- Plan production more effectively in response to real-time demand
- Perform automated quality control to reduce waste and energy use
Interestingly, manufacturers tend to alternate between building in-house AI capabilities and outsourcing to consultants such as Cloud Factory, depending on their specific needs and internal capabilities.
Automation is also helping address ongoing labour shortages by taking over repetitive or hazardous tasks like packing or welding. This not only helps maintain output levels but also reduces labour costs and improves workplace safety.
Beyond the shop floor, technologies like Enterprise Resource Planning (ERP) systems and stock management modules are providing better oversight of inventory and workflows. These digital tools enable manufacturers to track costs, manage inputs more precisely, and improve cash flow and forecasting.
Emerging innovations such as digital twins (virtual models of physical systems) and 5G-enabled remote control are transforming how factories operate, allowing changes to be tested virtually before implementation and enabling remote troubleshooting that reduces downtime.
Capital Allowances and Incentives
Despite the technological momentum, many businesses may not be fully aware of the financial incentives available to support investment.
- Full expensing (from 1 April 2023) provides 100% first-year relief on qualifying plant and machinery.
- This replaced the super-deduction, which offered 130% relief on main-rate assets and 50% on special-rate assets purchased between 1 April 2021 and 31 March 2023.
- The Annual Investment Allowance (AIA) continues to provide 100% relief on qualifying expenditure up to £1 million.
There are, of course, considerations around how companies should use these allowances and specific rules attached to each, but overall the capital allowance regime is considered to be advantageous (and underused) in assisting businesses to claim relief for investment.
The future of manufacturing lies in deeper collaboration between tech firms and manufacturers. Examples include custom software to track parts through assembly lines, or advances in CNC machines that replace traditional engineering techniques. There is also growing interest in technologies such as 3D printing, quantum computing, and data management, which hold significant potential but may still be in early stages of adoption for many manufacturers.
Ultimately, those manufacturers who leverage emerging technologies (not just in equipment but also in data, systems, and strategy) are likely to outperform, both in terms of operational efficiency and long-term competitiveness.
Energy costs
One of the key focus areas for the government’s upcoming Industrial Strategy is energy costs. While the government is keen to grow the sector, the energy demands required to fulfil this growth is significant. The development of new technologies, such as data centres, as well as more traditional areas, such as steel production, require huge amounts of energy. However, currently, the UK’s energy costs are the highest among major economies and this is a key concern for all manufacturers as highlighted in our survey.
Manufacturing companies and Make UK have been lobbying the government to provide support to reduce energy costs to ensure that the UK remains competitive and attractive to investors. While the biggest energy-intensive companies already receive a subsidy through the British Industry Supercharger scheme, which was set up by the Conservatives in 2024 however, this does not support all manufacturers. According to recent reports, the Chancellor is looking at proposals to provide a £1bn annual subsidy to manufacturers to lower energy costs.
Sustainability
Approximately one-fifth of the world’s carbon emissions come from the manufacturing sector. The sector is under continued pressure to decarbonise and there are ongoing efforts to help the sector to become more sustainable. Currently, approximately 50% of manufacturing businesses have some form of sustainability framework within their business. Businesses with a turnover of under £500m do not have to do any material reporting; however, there is now an expectation from their customers, so they are voluntarily reporting on governance, risk, metrics and climate. For larger businesses, it is mandatory for them to report on their sustainability measures.
According to survey respondents, who were able to pick multiple options, 48% are using recyclable materials where possible, 47% are implementing lean manufacturing practices, 46% are partnering with sustainable suppliers, 45% are reducing energy consumption and 44% are adopting renewable energy sources.
While all manufacturing businesses are keen to invest in sustainable practices, this often comes at a cost to the business, which in this challenging economic environment means that they cannot do as much as they would like.
Looking ahead
Our specialist insight
"While the survey highlighted that there are considerable challenges for the manufacturing sector, it also showed that there are bright spots ahead in the next 12 months. The announcement of the long-awaited Industrial Strategy could and should be the impetus that the sector needs to set it on the path to more sustainable growth in the UK, with public and private investment and the ability to withstand any further economic volatility.
Regardless of its impact there is clear evidence from our research that despite the obvious challenges it faces UK manufacturing is above all resilient and looking to the future. Investments in technology, R&D and bridging the skills gap are all welcome signs of a sector that is charting its own course for success."
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