Manufacturing, along with other production sectors such as mining, electricity, water & waste management, and oil & gas extraction, plays a significant role in the UK economy, contributing a substantial portion to its total output and supporting around 8% of the country’s workforce.

In a situation where insolvency rates in the UK continue to surge, the manufacturing sector is amongst the top 5 worst hit. Moreover, elevated inflation and energy expenses, diminished consumer confidence, and volatile supply chains have collectively escalated these challenges even more. 

This situation poses significant implications for the manufacturing industry, which historically experiences early and severe impacts during recessions and economic downturns. Given these circumstances, manufacturers with fixed assets like factories and equipment face heightened vulnerability to insolvency. Let’s take a closer look at recent developments to understand this better

Sector overview

In March 2024, the UK manufacturing PMI (PDF) saw an increase to 50.3, up from February’s 47.5, marking the first time the index surpassed 50 since July 2022. The rise was primarily fueled by domestic orders.

In recent months, manufacturers’ confidence has strengthened, with 58% anticipating production growth over the next year, contrasting with only 7% expecting contraction. However, persistent supply chain disruptions resulting from the Red Sea crisis, coupled with sluggish export demand and rising input prices, continued to hamper production.

A recent forecast predicts that digital transformation, automation, and the green transition will drive a surge in manufacturing mergers and acquisitions in 2024. Despite a decline in dealmaking in 2023, optimism for acquisitions remains high in the sector, buoyed by various favourable factors. 

UK manufacturing M&A activity decreased by 11% last year, dropping from 793 deals in 2022 to 706 in 2023, as companies prioritised safeguarding cash flow amid ongoing inflationary pressures. However, sustainability has become a central consideration in nearly every deal, with a focus on digital transformation, automation, and environmental initiatives. Private equity firms retain substantial capital reserves for deployment, and opportunities in the capital markets may emerge towards the end of 2024. Another year of trading will reassure buyers and prompt them to explore the significant opportunities presented by acquisitions.

Opportunities for Distressed Business Buyers

Based on these market insights, this is a good time for distressed business buyers to explore acquisition opportunities including: 

Digital Transformation and Automation: Businesses struggling with outdated technology or inefficient processes may present opportunities for buyers skilled in digital transformation and automation. Investing in such distressed businesses can lead to efficiency improvements and cost savings, positioning them for long-term success.

Green Transition: As sustainability becomes increasingly important in the business landscape, distressed companies lacking environmental initiatives may offer opportunities for buyers interested in integrating green practices. Investing in distressed businesses with potential for sustainability improvements can align with growing consumer and regulatory preferences.

Supply Chain Optimisation: Given the ongoing supply chain disruptions mentioned in the text, distressed businesses facing challenges in this area could be attractive targets for buyers with expertise in supply chain management. Implementing strategies to mitigate supply chain risks and improve resilience can enhance the value of distressed acquisitions.

Hundreds of Redundancies at AVIC Cabin Systems

AVIC Cabin Systems, grappling with the repercussions of the pandemic, has issued notices to certain employees indicating potential job cuts. In a letter distributed to employees facing redundancy, leadership cited a projected decrease in workload starting next year as a key factor. The necessity for job reductions was also related to the significant operational expenses associated with the company’s large facilities.

AVIC Cabin Systems, with additional facilities in Cambridge and Auckland, New Zealand, has reportedly strengthened its operations in Cambridge while maintaining the status quo in New Zealand. The exact number of anticipated redundancies remains unclear, as the company has yet to provide this information despite inquiries from the Echo. Additionally, there are indications that the Aviation Business Park site, where the firm manufactures fixtures for aircraft interiors, may face closure in the foreseeable future. There is a clear uncertainty about the business’s future unless substantial new contracts materialise soon.

Employees are now entering a consultation period, expected to span 45 days, during which they will receive further details regarding their employment status. According to the letter, the Hurn-based factory is slated to cease manufacturing operations in two years, with engineering and support functions relocating to smaller premises nearby. AVIC Cabin Systems recently acquired sister company Aim Altitude for £2 million following the administration process initiated in the summer of 2022. Aim Altitude UK Ltd and its parent company, Aim Altitude Ltd, incurred significant losses in recent years, prompting calls from certain MPs, including former Conservative leader Sir Iain Duncan Smith, for government scrutiny of Chinese government involvement in these companies.

Concerns have been raised by employees regarding transparency from management, with speculation circulating that AVIC Cabin Systems may intend to shift manufacturing operations to China. Despite queries from the Echo seeking clarification on this matter, a company spokesperson declined to comment.

Architectural Glass and Aluminium Limited falls into Administration

County Durham-based architectural glass and aluminium company, Architectural Glass and Aluminium Limited (ARGLA), has announced its cessation of trading and imminent entry into administration. All 45 of its employees are anticipated to face redundancy.

Specialising in the design, manufacture, and installation of architectural glass and aluminium, ARGLA predominantly serves commercial clients. However, unforeseen losses incurred on a significant contract, compounded by an ongoing legal dispute with a key contractor, have led to substantial financial strain. Despite the directors’ efforts to address these challenges, securing additional financial support proved unattainable.

Consequently, the company has ceased its operations, with Gareth Harris and Lee Lockwood from RSM Restructuring Advisory LLP slated for appointment as joint administrators. The appointed administrators aim to optimise returns for the company’s creditors and are collaborating with management and suppliers to mitigate the potential impact on existing contracts. The sharp decline in profitability significantly undermined the company’s viability, necessitating the directors’ prompt decision to engage administrators.

In ARGLA’s most recent available accounts, spanning from June 1, 2021, to September 30, 2022, the directors reported a period of investment and growth, highlighted by the relocation to a newly constructed facility in Seaham, County Durham. Fixed assets were valued at £335,336, with current assets totaling £936,290, resulting in net assets of £7,410. This contrasts with the previous accounting period, with net liabilities nearly reaching £940,000.

Major UK Train Manufacturers may Face Closure 

Two major UK train factories face potential layoffs for over 2,000 workers due to a lack of orders, deepening the crisis in the rail industry. Redundancies have already started at Alstom’s Derby factory, a historic site with a long-standing tradition of train production. Similarly, Hitachi’s Newton Aycliffe plant in the north-east of England is on the brink of layoffs as it anticipates running out of work within a year.

This situation underscores the ongoing challenges confronting the cash-strapped rail sector since the onset of the pandemic. The absence of central planning for train construction exacerbates the industry’s boom-and-bust cycle since privatisation in the 1990s.

Industry leaders have described the present scenario as the worst in close to half a century, emphasising the need for urgent decision-making. Despite lobbying efforts by Alstom and Hitachi, the government’s failure to add extra orders to existing contracts compounds the plight of workers in Derby and Newton Aycliffe.

While Siemens prepares to assemble trains for the London Underground, warning of critical shortages in the wider UK railway have also surfaced. There is an urgent need for new train orders to be placed promptly in order for the sector to recover.

Government delays in awarding new contracts exacerbate the industry’s financial strain, with Alstom considering mothballing its Derby factory, putting 1,300 jobs at risk. The potential closure of these factories not only threatens thousands of jobs but also jeopardises the UK’s rich rail heritage and local economies reliant on the railway industry’s vitality.

The downturn in the train manufacturing industry may lead to consolidation, creating opportunities for buyers to expand their market share through acquisitions. Distressed business buyers can target companies with complementary products or geographic reach to strengthen their position in the market. Buyers can also diversify their portfolios by acquiring distressed businesses in related industries or sectors that are more resilient to economic downturns. For example, investing in rail infrastructure, maintenance services, or transportation technology may provide alternative revenue streams.

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