The manufacturing sector is a vital part of the UK’s economy, contributing 9.4% to the total economic output. It serves as the primary source of livelihood for millions of people in the country. However, recent months have witnessed a gradual decline in this sector due to the challenges posed by increasing inflation, elevated costs, and the lingering effects of the pandemic.

Arguably, this decline opens up promising investment prospects in distressed businesses, available at significantly reduced prices. These businesses can potentially be turned around with the correct strategies at the correct time. This week, we explore recent developments in manufacturing, spotlighting insolvencies and their relevance to investment prospects.

Sector Overview

The UK manufacturing industry continued to decline in August, with output and new orders showing sharp contractions, just like it did during the global financial crisis and the COVID-19 pandemic. The Purchasing Managers’ Index (PMI) stood at 45.3, its lowest since May 2020. This indicated an ongoing contraction for the 13th consecutive month. Vendor lead times shortened for seven months in a row, and purchasing costs fell at the sharpest rate since January 2016.

Factors like rising interest rates, the cost-of-living crisis, export losses, and market outlook concerns have severely impacted demand. Many companies, to combat this, are now adopting defensive measures, including cutting back on purchasing activity, inventory, and staffing levels. 

Food and drink manufacturing companies seem to be the worst hit, with insolvencies of greater than 123% (287 businesses) recorded so far. A rise in raw material prices and weakened supply chains has led to this. Partnering with experienced investors can drive potential turned around operations and increased profitability. 

However, there is a silver lining. The government has allocated over £50 million to 30 innovative manufacturing projects. Their aim is to solidify the UK’s position as a leading location for manufacturing. This funding will drive innovation in clean and green technologies, creating jobs and boosting economic growth.

£11 million is being granted to 12 fast-start projects, aiming to expedite product development in areas like motorcycles, buses, and cars. With industry match-funding, these projects will receive a total of £22.7 million for innovative automotive product development in a year.

Winning projects include White Motorcycle Concepts, working on a rapid-charge first responder motorcycle. Dolphin N2, responsible for developing a hydrogen-fueled tractor and Wrightbus accelerating the creation of zero-emission hydrogen fuel-cell electric coaches are also part of the list. The government’s commitment to investing in UK manufacturing underscores its dedication to maintaining competitiveness and supporting businesses.

Sigma 3’s Acquisition of Mereway Kitchens 

Wales’ largest kitchen manufacturer, Sigma 3 Group, has acquired Mereway Kitchens in Birmingham. The manufacturing business recently entered administration due to tough trading conditions. This move secures the jobs of Mereway’s 150 employees. The acquisition’s value remains undisclosed. 

Sigma 3 Group had previously announced a £20 million investment in a new manufacturing facility in Bridgend as part of its capacity expansion plan over the next three years. Sigma 3, with 250 employees and showrooms in south Wales and Surrey, views this acquisition as a significant milestone in its growth strategy. 

Brian Larkin, Sigma 3’s chairman, expressed enthusiasm for collaborating with Mereway Kitchens’ staff, customers, and suppliers. Acquiring five factories, including the newly acquired one in Bridgend, will significantly enhance their manufacturing capabilities.

Advanced Negotiations taking place for Pittards

Following unsuccessful takeover negotiations, Pittards, the historic Yeowil glove maker is shutting down operations. Staff redundancies have now been initiated/ Established in 1826, Pittards, located in Somerset, had a workforce of 135 employees in the UK and 900 in Ethiopia.

In August, the company initiated administrative proceedings due to the impact of rising interest rates and inflation. Efforts were made to negotiate with a potential buyer, no successful deal has unfortunately been made. Lucy Winterborne and Dan Hurd of EY-Parthenon’s Turnaround and Restructuring team were appointed as administrators on September 4.

In an official statement, they conveyed that, as no other party has expressed interest in acquiring the business, it has ceased operations immediately and let go of its UK employees. With regards to its Ethiopian operations, administrators are currently exploring options and engaging in discussions with local management.

The UK’s manufacturing sector is at a critical juncture today. Adopting digital first strategies to boost productivity and energy efficiency is the undebatable step ahead. However, there is a dearth of skilled workers who can help with this transition. By investing in distressed manufacturing businesses and addressing their skill and operational challenges, investors can position themselves for long-term growth as the sector adapts to the digital industrial revolution.