Max headroom: Making time and space for Welsh manufacturing SMEs to flourish

Pickernell, David et al. Article Max headroom: Making time and space for Welsh manufacturing SMEs to flourish Welsh Economic Review (WER) Provided in Cooperation with: Cardiff University Press Suggested Citation: Pickernell, David et al. (2024) : Max headroom: Making time and space for Welsh manufacturing SMEs to flourish, Welsh Economic Review (WER), ISSN 2397-8716, Cardiff University Press, Cardiff, Vol. 29, pp. 17-28, https://doi.org/10.18573/wer.268 This Version is available at: https://hdl.handle.net/10419/314319 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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David Pickernell1, Nick Rich1, Gareth Davies1, Annette Roberts2, Pouya Sarvghad Moghadam1, Gary Walpole3, and Alan Price1 1 Swansea University 2 Cardiff University 3 Cardiff Metropolitan University Doi: https://doi.org/10.18573/wer.268 Accepted: 25/10/23 Abstract The Welsh manufacturing sector has undergone significant change over the last decade, with new technologies, greater promotion of the circular economy by policymakers, and a competitive environment affected by Brexit, covid and energy price rises, all impacting the business landscape. Consequently, Welsh manufacturing businesses, the vast majority of which are micro, small, or medium-sized enterprises, face issues concerning supply chains, training and skills, innovation, finance, infrastructure, and sustainability. This report summarises a recent study conducted by Swansea University, on behalf of the Federation of Small Businesses (Pickernell et al 2023). The research investigated the issues faced by Welsh small and medium-sized enterprises (SMEs), and identified short-term problems with energy and infrastructure, and difficulties recruiting sufficient qualified staff, as well as a lack of Welsh-based suppliers for many of the resources Welsh SMEs required. The research also highlighted the gap between short-term pressures and long-term vision, but that bridging that gap would allow Welsh manufacturing businesses to place themselves on a more resilient footing, build skills and employment and prepare for future opportunities. Introduction Welsh manufacturing has undergone significant changes in recent years, with a greater focus on more advanced manufacturing, technology, and innovation (Welsh Government, 2021). Total employment (excluding self-employed) in manufacturing in Wales in 2021 was 137,400 (10.29% of total employment), 5.6% higher than in 2010 in terms of total numbers of employees (130,100), but marginally lower as a proportion of total employment (10.33%). The proportion of Welsh GVA from manufacturing has also slightly declined from 16.9% to 16.1% between 2010 and 2020. Whilst this can be seen as part of long-term economic trends for developed economies generally, it is also emblematic of long-term supply chain and consumption problems of the Welsh economy more widely (Pickernell, 2011). Previous research (Kapitsinis et al. 2019) has also shown that Wales has a similar share of medium-sized firm in enterprise count, and higher contribution to employment and turnover, compared to the UK average, the conclusion being that there is no ‘missing middle’ in terms of the proportion of mediumsized firms in the business count in Wales. The study by Pickernell et al (2023), however, found that whilst manufacturing in Wales has seen a modest (5%) rise in the total number of Welsh enterprises, this is unevenly distributed, the strongest rise occurring in large firms (with over 250 employees), increasing by over 15%, micro (1-9 employees) and medium sized firms (50-49 employees) increasing by nearly 10% This work is licensed under the Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/. 18 each, but small firms (10-49 employees) seeing a reduction of nearly 20%. Consequently, there appears to be a “disappearing middle” of those small firms that lie between the micro and medium-sized firms. Welsh manufacturing also suffers from the relative peripherality of the Welsh economy. This makes it more difficult to access the major sources of UK finance, including business angels (McCarthy et al. 2014) which tend to be concentrated in the South-East of England. This can also mean Welsh SMEs face greater difficulties accessing the financing they need to grow and invest in new technologies and processes. Another area, which can be linked to issues of perceived peripherality, concerns the historical difficulty faced by Welsh SMEs in accessing public procurement markets, compounded by nearly half of Wales’s own public procurement spend still being with organisations outside Wales (Clear et al., 2020). This shows an area with significant scope for growth as a market for Wales’s manufacturing SMEs, but also tensions and trade-offs for public procurement regimes when dealing with the increasingly prominent issue of community benefit in the Welsh procurement environment (Wontner et al., 2020). Welsh manufacturers have also historically been impacted by relatively poor infrastructure. This includes, but is not limited to, transport links, which tend to focus on connecting Wales up with the broader UK economy rather than within Wales itself. Access to broadband infrastructure, which can limit their ability to connect with customers and suppliers and adopt new technologies, has also been perceived as a particular problem in the past, leading to an extensive Welsh government-led programme of superfast broadband roll out (Henderson et al., 2021). Moreover, the UK's exit from the European Union has created significant uncertainty for Welsh manufacturers. This is particularly with regards to trade with the EU, which manufacturing in Wales has been relatively reliant upon (Dickenson et al., 2019), for exports, imports, and access to talent. Simultaneously UK trade within The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) countries in the post-Brexit trade era has been prioritised (Dickenson et al., 2019), Welsh manufacturers consequently facing significant competition from low-cost CPTPP economies, as well as China and India, which can offer lower-priced goods and services. Simultaneously, exploring new export opportunities through trade agreements and partnerships is also something being encouraged by Welsh Government policy (Welsh Government, 2021). Welsh manufacturers, however, also face a need for skilled workers as the global business environment transitions to a greener economy and the skills landscape is shaped accordingly (Michie et al., 2022). An ageing population, and population growth now dependent on inward migration, as Wales is part of a UK labour market where labour mobility takes place largely within, rather than between, regions and nations are also key factors constraining growth (Michie et al., 2022). There is, therefore, a tension implied in between the short-term emphasis on generating wealth and jobs and the longer-term goal of transitioning to a more circular economy, with growth within planetary boundaries / slower growth/ or degrowth (Clifton and Walpole, 2023). Data from prior to 2010 (Clifton et al., 2020) identifies that SMEs in Wales are often almost entirely focused on current competition and day-to-day firefighting so this is not a new problem. This prevents them from undertaking effective strategic planning and/or networking to achieve growth and innovation. Additionally, this survey of SMEs in Southeast Wales also showed, however, that where these activities are undertaken, the type of networking and information sought by SMEs from are often not those most associated with innovation and growth, specifically their networking activities were more general, and most respondents did not associate networking with the longer-term objectives and knowledge acquisition more associated with growth. The focus of the research was therefore to understand the challenges in manufacturing in Wales from a SME firms’ perspective, looking 19 at commonalities and the priorities as they see them. These views were compared with those as set out by Welsh Government and stakeholders in manufacturing sector, particularly public sector buyers of Welsh manufacturing suppliers. The aim was to compare these views, and to explore how they could be brought together in practice to a wider common horizon. Method Semi-structured interviews took place with manufacturing SMEs and key stakeholders covering local government, public sector, higher education procurement, economic development, and representative bodies, from across Wales. The interviews were carried out between April and June 2023, and the data collected from these organisations was anonymised. Whilst this was a small sample, the firms selected were chosen to enable the gauging of opinions from across as many of the sub-sectors of manufacturing as possible. Similarly, a wide variety of stakeholders were selected to allow a full range of opinions from across different organisational and SMEinteraction types. Finally, the sample was identified as covering the whole of the economic geography of Wales. Organisation Type Sector Location Size 1. University Education South Wales Large 2. Public Procurement Health Wales-wide Large 3. Public Procurement Health Wales-wide Large 4. Advocacy Group Manufacturing Wales-wide Small 5. County Council Enterprise and Regeneration North Wales Large 6. County Council Business Support North Wales Large 7. SME (30) Manufacture of other transport equipment Southeast Wales Small 8. SME (32) Other manufacturing Southeast Wales Micro 9. SME (22) Manufacture of rubber and plastic products Southwest Wales Small 10. SME (24) Manufacture of Basic Metals Southwest Wales Small 11. SME (25) Manufacture of fabricated metal products, except machinery and equipment Southeast Wales Medium 12. SME (28) Manufacture of machinery and equipment N.E.C. Southwest Wales Medium 13. SME (33) Repair of electrical equipment Southeast Wales Medium 14. SME (30) Manufacture of other transport equipment Southwest Wales Micro 15. SME (10) Manufacture of food products Mid Wales Medium 16. SME (25) Manufacture of fabricated metal products, except machinery and equipment Southwest Wales Medium Table 1: Interviewee Details Note: Figures in parentheses denote SIC code 20 Findings and Discussion The results of the interviews are outlined below, broken down into several sub-issues around objectives, and supply chain, innovation, finance, infrastructure, and sustainability issues. For each sub-section a summary table shows the top 3 issues identified by the interviews, both for SMEs and broader stakeholders, the subsequent discussion focusing on the specific issues of importance identified but also the key areas of agreement and divergence between the two groups. It is important to note that in each of these the responses were to open questions rather than a closed list of possibilities, and so reflected the concerns firms identified for themselves unfiltered by interviewer bias. SMEs are more likely to focus explicitly on growth as the primary objective, often seeing innovation (in various forms) as a vehicle for this, whilst acknowledging the need for staff recruitment to facilitate, and the difficulties the current situation creates. The following quote summarises this: - “We have a 3–5-year plan to grow the business from £5m to £8m, which will require us to recruit an additional 12 engineers.” Generally, stakeholders place much more emphasis on sustainability, with training as a facilitator, but also exporting (which many SMEs do not emphasise because they do not export / have faced issues caused by Brexit so have been dissuaded from prioritising). Summarising, one stakeholder involved in supporting SMEs, said: “SMEs tended to be just hanging on, needing help and with less viability. Their aims over the next few years must be to get the right workforce, dealing with the skills gaps they currently face, and upskilling the workforce they already have. They also need to deal with the consequences of Brexit in terms of the issues around exporting, which are a concern, and where they need additional guidance and support. Moving towards carbon zero is also an objective, with a need to share best practice in terms of supply chains and the circular economy.” More broadly, the interviews highlight the narrower current focus for SMEs, in an environment where short term survival is less certain than previously. One SME’s quote summarises this: “I've got to find 150,000 pounds worth of cost savings, just to stand still, and R&D disappears, and when your investment in people stops, they start to disappear”. Stakeholders have a longer-term focus, more likely influenced by government policy concerning sustainability and net zero. Typical of this: “In our purchasing, we are therefore looking at both value-added and the organisational target of net zero by 2035, which means we need to leverage our suppliers more and more going forward.” . Table 2: Aims and objectives of organisation over the next few years: (Top 3, 1 is top) Objective Firms Stakeholders Growth 1 Innovation and knowledge sharing 2 Training =2 Recruitment =3 Sustainability 1 Use of Technology =3 Exporting (including dealing with issues caused by Brexit) =2 21 Table 3: Most important issues, deficiencies, and future requirements with regards to supply chains and customers (Top 3) Issues: Number of firms Number of stakeholders Input costs (including staff and land) 2 =2 Lack of local (Welsh) suppliers 1 1 Automation / ICT =2 Brexit Costs 3 Overall, however, (and as articulated further below) this appears to be a matter of emphasis rather than of fundamental disagreement. In terms of supply chains there is consensus between firms and stakeholders on the lack of local Welsh suppliers as a major issue, with a need to facilitate development in this area, to assist in increasing the resilience of Welsh manufacturing as well as to bolster multiplier effects. As one SME stated: “In the past quality took the lead for us. We were not the cheapest, but we were very customer focused. Now it’s all about cost. …The Welsh Government need to make sure Welsh money stays in Wales. The supply chain is bleeding out the economywith money going to competitors.” SMEs (and stakeholders to a lesser extent) also highlight input costs as of major importance. The areas identified, raw materials, components, energy, land, and staffing costs, related to skills, and sustainability, are discussed further below. Generally, difficulties caused by Brexit could be seen as part of the wider suite of issues, not least the increased emphasis on price and costs incurred by longer delivery times: “For customers in Europe, Brexit is an issue. It has become more complicated, and pricing is now more of an issue, because we are not as competitive. Our customers want a price competitive product to move into, so we need to take cost out of the offering. Instead, we have lost market share because of the additional costs and complexity of shipping, delays. As a result, they’ve opted to go to a locally sourced alternative, now that it takes 10+ days, not 3 days for delivery after an order. Our sales have halved in Europe, though Covid has also affected this.” Table 4: Most important issues, deficiencies, and future requirements with regards to skills and innovation (Top 3) Issues: Number of firms Number of stakeholders Poaching of trained staff (including lost knowledge) =1 Lack of skilled workers (recruitment) =2 =1 Procurement skills =1 Need to train 1 Need for industrial strategy for skills =2 22 In terms of skills, there was a consensus about the seriousness of the situation, but different strategies being employed. The lack of skilled staff, poaching activities by rival firms, and necessity (but also difficulty in current market conditions) of paying staff more to retain staff were all mentioned by SMEs and stakeholders, with increased in-house training being the most popular solution for SMEs. “There is a deficit in the job market regarding skilled workers, and if there is a wellestablished candidate, they demand higher wages. So, (the organisation) offer higher salary to workers with minimal experience. To offset this (deficiency of skills and experience) (the organisation) have provided training in-house to the new employees of the organisation.” and “In the past there would have been large companies with large apprenticeship numbers and management training locations. These companies do not exist now, so whilst high level leadership training is available, training at the next level down is missing. As a result, succession planning is also a big issue as the skills and experience are not there.” Whilst SMES tended to focus on skills at the general level rather than specific skills, stakeholders identified specific areas of leadership, sustainability, and procurement as key to SME development. “The major deficiency we are finding is in terms of carbon awareness and carbon literacy, a problem that is admittedly wider than just SMEs. Our decarbonisation ambitions need us to know where materials come from, and for the knowledge to trickle down to SMEs from our larger suppliers to enhance greater understanding and the need for upskilling. In terms of innovation a lot is already happening, but we need to find ways to encourage more, particularly in terms of problem-solving pull innovation1 rather than the firm having a great product / innovation that they want to push2.” Again, this seemed to emphasise a more immediate, short-term focus for many of the SMEs, symptomatic of market uncertainties and pressures. Meanwhile the stakeholders emphasised skills sets more likely to bear fruit in the longer term. Issues: Number of firms Number of stakeholders Customer led; demand pull innovation as key USP =1 =1 Lack of investment by customers in latest innovation (including smart factories and sensors) =1 Lack of finance for SME innovation (including Difficulties obtaining grant finance because of Brexit induced cross subsidisation of university research) =1 More supportive government policy =1 =1 1 Innovaon soluons driven by customer idenfied needs / problems. 2 Innovaons driven by firms onto their customers. Table 5: Most important issues, deficiencies, and future requirements with regards to innovation (Top 3) 23 The discussion over innovation was much less pronounced than for skills. SME innovation activities tend to be reactive, customer led, demand pull in nature. “In terms of innovation for us this is incrementally focused not radical. Customers come to us, our products being a component not the whole for our customers’ products. This makes our innovation demand driven, our customers telling us the trends. So, we are listening to customers and being reactive, but needing to be more detailed as customers have very specific requirements. Even where they were more proactively sustainability focused, there was also importance placed on reducing costs: - “In components (and the final product) we look at the failures in the industry and look to improve by making the product lighter, production more efficient, and the product more suitable for customers. For example, we managed to reduce materials used in one part of the product, which has made a mega improvement in sustainability, making the product lighter and cheaper and production more efficient. We’ve also tried 25% recycled aluminium, which has proved to be stronger than newly made, meaning we can reduce the amount of material used, also making it cheaper”. The lack of customer investment in the latest innovations was also seen as a hindrance by some. “There was a piece of machinery that we repaired where the manual we used was 50 years old, as they didn’t want to have to replace a multi-million-pound piece of kit because of a small repair issue. We’ve even had some companies asking for our equipment to put in their museum! This is part of a broader issue in UK industry, that capital replacement isn’t as quick as it should be”. Access to finance for innovation was an issue for several businesses: “In terms of innovation, finances dictate what we are able to do.” There were also perceptions for some that because of Brexit, funding that could have gone to SMEs was going to larger businesses and universities to compensate for lost EU funding. “In terms of innovation, there is a need for (relatively small amounts of) money, but the grants process is very complicated, time consuming and arduous…Large companies get the vast majority of government money because of Brexit, to keep them in the UK, or it goes to universities to cover the funding lost because of Brexit, meaning that small companies lose out.” Issues: Number of firms Number of stakeholders Finance for renewing old equipment =2 Not in a position to increase debt 1 =2 Increasing interest rates on existing debt / lack of funds because of increasing costs =2 Being forced to look to crowd or joint venture to finance growth Lack of cash flow =2 =1 Finance not an issue because firms growing cautiously (+ need for longer term contracts) or have great ideas and no money =1 Difficulties obtaining grant finance (e.g., because of Brexit induced cross subsidisation of larger businesses) =2 Table 6: Finance Issues (Top 3) 24 This could also be seen in terms of the discussion over finance, where there was a general lack of importance placed on external finance, partly because the current environment had created a cash flow issue for many firms and a focus on only using internal funding, “We are not able to further increase debt. Instead, we have focused on product lines that are profitable, so we can invest those profits back into the business.” There was also perceived risk aversion from banks which led firms that were seeking external finance to look at alternative sources. “In terms of access to cash, I have to say the banking fraternity have not been very supportive. They are risk averse and became more risk averse post-Brexit and Covid. They talk about supporting green businesses… but I’d say they have short arms and deep pockets. We've got about 2,000 customers in about 50 countries, huge potential. But unlocking this means some of the things we want to do just needs us to borrow a bit of cash. The Development Bank of Wales are a bit more supportive, but the main banking support that we have, our main clearing bank, are not very supportive at all.” The discussion of infrastructure also highlighted a degree of difference between SMEs and stakeholders which could again be seen in terms of the difference in timeframe focused upon. There was consensus around the lack of suitable buildings / land for expansion as of key relevance for both SMES and stakeholders. One quote that summarised the frustrations around this was: “Affordable space is key issue…There is a lack of affordable industrial space. Business Wales send us to Business in Focus BUT they have offices NOT industrial units. There is a shortage of industrial units. We need subsidised space to facilitate our growth so that in a couple of years we can afford to leave that space and the next (business) can move in.”. Concerns over the availability of energy were relevant to others. “Costs are currently a key issue. Energy in particular is costing £1m a year more than last year.” And “It's not cost effective or expedient for individual units on the estate to invest in an energy infrastructure.” Issues: Number of Firms Number of stakeholders Suitable land / space for expansion = 1 =2 Building costs = 1 Building regulations =3 Lack of suitable energy infrastructure =3 Lack of energy security =3 Road infrastructure =2 Public transport infrastructure (including rail) =2 ICT infrastructure 1 Table 7: Infrastructure issues (Top 3)