The uncertainty felt by many businesses in the UK caused by the impact of the pandemic is continuing with the loss of output, significant increase in balance sheet liabilities and increased debt burden. The Make UK/BDO Manufacturing Outlook Q3 2020 survey provides first hand evidence that many manufacturers are continuing to struggle and despite clawing back some lost ground compared to what was a cataclysmic Q2 for the sector, several indicators remain in negative territory. It now looks increasingly likely that COVID-19’s impact on the global economy will weigh heavily on business confidence and consumer spending well into 2021 and beyond, leaving many UK manufacturers exposed. Lost output and income could significantly increase balance sheet liabilities and debt burden.
Navigating this new landscape will be a challenge and restructurings are likely to be common. This will not only affect jobs in individual companies; it will also affect companies within the interconnected supply chain and local economies. Most manufacturers responded well to the initial impact of COVID-19, focusing on minimising the immediate effects on business operations, reducing costs, preserving cash and implementing necessary measures to ensure employee safety.
Many business-operating models designed originally to address a short-term downturn, will now not be adequate for the anticipated long-term recession. But with a ‘V shaped’ recovery and a quick return to pre-COVID volumes looking increasingly unlikely, it could be two to three years before demand recovers for some manufacturing sectors. There are also specific sectors that look more exposed to the crisis compared to others – with aerospace and perhaps automotive being the most notable examples now. For these businesses to survive in the medium to long-term, measures that are more fundamental may be required.
Using our Rethink framework, Stephen Cooney and Ryan Grant explore how the pandemic has affected the UK manufacturing industry, identifies which sub sectors are more at risk and what management teams can be doing in the short, medium and long term to survive. Implementing one or a combination of strategies will require a business transformation programme to be set up and it is likely that management teams will require additional support to define, plan and implement agreed actions for change.
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For distressed manufacturing businesses, the new restructuring provisions within the recently introduced Corporate Insolvency and Governance Act 2020 (‘CIGA’) are a welcome addition to the available restructuring tools, especially as these are debtor-led processes that allow a company to control its own restructuring process.
Although COVID-19 has had a significant impact on the manufacturing sector, we would suggest that companies should respond positively to the challenges and use the pandemic as a catalyst for change and an opportunity to build resilience into their operations. Many of our clients have already embarked on this journey and are actively in the process of reshaping their businesses.
To discuss anything you have read in the article or to give you room to make the right strategic decisions for your business, please contact either Stephen Cooney or Ryan Grant.