Brian Foster, head of industry finance at Siemens Financial Services in the UK, examines how asset finance can help the machine tool sector meet challenges caused by globalisation.
The UK’s manufacturing sector as a whole reached a two-and-a-half-year high in December 2016.
Companies benefited from strong inflows of new work from both domestic and overseas clients, the latter aided by the boost to competitiveness from the weak sterling exchange rate.
Machine tool manufacturers will be taking a cautious approach to this news, however. Currently ranked 11th in the world league table for production, the UK’s machine tool sector is coming under increasing financial pressure as globalisation drives down prices and drives up demand for quality.
In a recent study for Siemens Financial Services (SFS), SME manufacturers – particularly precision engineering and machining companies – report that they are operating in a globalised market and the majority (61%) face growing competition from foreign companies. At the same time, most (67%) say they expect their own export sales to increase over the next five years.
The sector also faces a degree of uncertainty following the UK’s recent decision to leave the EU. The UK is 13th in the league table of exporters of machine tools, and is the 14th-largest importer. Therefore, although a weaker sterling brings benefits for some, it also makes imports more expensive, meaning that some companies may not benefit from increased export competitiveness.
SMEs in particular are the most exposed. A recent survey by The Manufacturers’ Organisation, EEF (formerly the Engineering Employers’ Federation), found that 26% of small firms agree that a low but volatile exchange rate provides their businesses with more risks than opportunities, compared to 23% and 22% respectively for mid-sized and large companies. Brexit has also led to uncertainty surrounding the future relationship of the UK with the EU on the renewal of long-term contracts and agreements.
On the positive side, however, government support for the manufacturing sector is increasing. In 2015, 65% of manufacturers surveyed said that they had had contact with UK Trade & Investment (UKTI), the government organisation which helps businesses expand overseas.
Similarly, Innovate UK, the UK’s innovation agency, established in 2007, is working to drive the science and technology innovation that will help grow the UK economy.
Despite the unpredictable economic conditions, manufacturers remain focused on delivering long-term growth strategies in 2017. Transforming their technology base is seen as critical to their global competitiveness. In the SFS study, 80% say they are under pressure to upgrade to new-generation, digitalized production systems, while 76% also say that their company is upgrading machine tools technology more often to keep up with increased innovation cycles and the fully connected reality of the Internet of Things or Fourth Industrial Revolution.
Forward-thinking manufacturers are also taking advantage of additive manufacturing or 3D printing technology. Keeping up-to-date with developments in new technology will mean manufacturers can quickly adapt to their clients’ needs and increase production levels, helping to make them more competitive.
In light of the uncertain outlook, however, many machine tool companies will be reluctant to commit large amounts of capital to equipment and technology upgrades. Instead, companies are looking to access a broader range of flexible financing tools in order to acquire competitively critical technology.
Sixty percent of respondents to the SFS study said a broader range of financing techniques is ‘very important’ or ‘crucial’ in making their company more competitive and achieving growth in global markets. Asset finance was identified as a finance solution already being used, with 63% of respondents indicating that they had funded technology acquisitions in this way.
Asset financing techniques such as leasing and renting are coming to the fore as effective, alternative methods of funding equipment and technology investments and upgrades.
Such financing techniques spread the cost of the technology over an agreed financing period, with monthly finance payments arranged to align with expected benefits gained over time from new or retrofitted equipment, such as improved productivity, operating cost savings, energy efficiency and access to new markets.
This removes the need for a large initial outlay, thereby increasing the funds available for other expenditures. In other words, asset finance allows manufacturers access to the latest technologies without having to commit scarce capital or use traditional lines of credit.
Financing arrangements can also cover other costs such as installation, maintenance and service as well as providing the flexibility to upgrade technology in line with technology developments.
SME manufacturers understand the importance of consistently upgrading technology to maintain competitiveness. Economic uncertainty should not be a deterrent to investment to ensure they can compete with foreign players.
Alternative financing techniques are a vital tool in manufacturers’ armoury and will doubtless play an important role in machine tools manufacturers’ ability to compete on the global stage. <