PETE FLOCKHART
Manufactured exports play an integral part of our economy, making up around half of Scotland’s total value of exports to the rest of the world, excluding oil and gas.
With the ongoing political and economic uncertainty, it is more important than ever to support this key contributor to the ongoing health of Scottish manufacturing businesses in 2017, as they look to carve out new markets and push productivity to the limit in order to grow, rather than contract as experienced during 2016.
Recent statistics announced last month by the Scottish Government’s Index of Manufactured Exports (IME) showed that the volume exports fell by 3.8% during the third quarter of 2016, compared to contraction of 0.8% in the second quarter.
According to the IME, comparing the most recent four quarters to the previous four quarters, exports fell by 5.3%. This resulted in employment slipping as costs increased, amid sluggish GDP growth relative to the rest of the UK.
Yet manufacturers have started the year with confidence. Figures from Bank of Scotland’s Purchasing Managers' Index (PMI) for February show Scottish private sector increased output at the quickest pace for 19 months. The upturn was driven by a strong performance in the manufacturing sector, where production increased at the fastest pace since January 2014.
Businesses attributed this to a rise in demand from EU customers following the decline in the value of sterling, which is at its weakest since its last big depreciation in 2009 during the global financial crisis. This has made UK products and services more competitive for those buying in other currencies.
But at the same time, the weakness of the pound is putting increasing cost pressures on Scottish firms. So, while businesses recognise they have limited influence over external factors impacting their businesses, as a result of continued uncertainty, they are placing greater importance on productivity measures to maximise efficiencies, profitability and growth.
Investing in efficiency
Businesses are determined to take growth opportunities when they arise, while keeping an eye on external risks. And there are opportunities there for the taking.
To do this cash needs to be available so businesses can capitalise and invest in future growth prospects. As a result, finance directors across the country are more and more committed to working with their banks to ensure their businesses are funded as effectively as possible, driving working capital and looking at alternative funding solutions.
One method that works for some businesses in certain circumstances is unlocking cash tied up in assets to increase their working capital. This can be done by raising funds against existing assets as security such as stock, plant, property or debtors. Money can then be released from these assets into the business, funding growth plans and helping smooth over peaks and troughs in revenue.
This has been done successfully by one of Scotland’s leading single malt and blended Scotch whisky producers, Inver House Distillers, which positioned itself for growth by securing a £45million asset-based lending facility. Secured against the company’s inventory of whisky stocks, the facility will provide the business with flexible access to working capital, which will help improve its margins over the next five years and provide increased headroom to support its overseas expansion in India and Poland. It will also enable the company to respond quickly to growth opportunities in new markets.
Overseas opportunities
Exporters are also looking for new opportunities to widen their markets. Our latest Business in Britain report, released in January, identified that over the next six months, the overall net balance of firms anticipating stronger export sales was at 55 per cent. This is a significant increase from zero per cent in September.
This upturn was led by a big increase in the number of companies anticipating stronger exports to non-EU markets including Asia Pacific, the US and Canada, and Latin America.
To help take advantage of these new markets, as well as assist those considering exporting for the first time, there is lots of free support and tools businesses can draw on from professional advisers to organisations such as Scottish Development International and Scottish Chamber of Commerce. The Bank of Scotland also recently launched a new International Trade Portal, which can help identify target businesses to trade with, giving insight into trading conditions, identifying public and private tender opportunities, providing market reports and more.
Whatever obstacles 2017 presents, the drive to tackle the productivity challenge by investing in technology and skills will be key for manufacturing export growth in the coming year. By working together, in collaboration with the public and private organisations, we can continue to turn Scotland’s potential into prosperity.
Pete Flockhart is a relationship director for mid-markets banking at Bank of Scotland
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