Clock ticking on energy impact for manufacturers in 2023

Key findings:

Companies say energy reliefs are unlikely to prevent reduced production or headcount
Almost three quarters of companies expect to see energy costs increase
Two thirds of companies claim increased energy costs are their biggest threat
Almost two thirds of companies increasingly fear blackouts
Drive for energy efficiency and off-grid generation continues
Labour shortages driving talent premium for employment costs
Investment in training, Apprentices and capital holds up despite cost increases
Political instability impacted attractiveness of UK for investment

The impact of the seismic increases in energy prices show no signs of abating as manufacturers enter 2023, with any extension to the energy relief scheme announced this week likely to exacerbate planned reductions in headcount and production according to a major survey published today by Make UK and PwC.

The 2023 Make UK/PwC Senior Executive survey examines the views of over two hundred senior executives across manufacturing on the outlook for the year ahead. It shows the scale of uncertainty and increased costs that companies continue to face across the board, not just on energy, with ongoing supply chain disruption, access to labour and increased transport costs creating a potent mix of challenges for companies.

The survey also evidences the domestic political chaos of the last year has impacted the competitiveness of the UK as a place to manufacture and, made it less attractive for foreign investment.

According to the survey, almost three quarters of companies (70%) expect their energy costs to increase this year, with two thirds saying they still expect to take actions such as reducing production or cutting jobs despite the Government energy support package.

In addition, 60% of companies are increasingly concerned about blackouts affecting their business, almost two thirds of companies (64.3%) say increased energy costs are the biggest risk to their company, while more than two thirds (68.9%) say uncertainty around energy costs is the biggest risk to confidence.

Make UK has warned that a less generous relief package may not shield companies from the worst of these increases, while excluding some companies which have a high energy exposure but don’t currently fall under the traditional ‘energy intensive’ definition. Make UK added that extending the current scheme is essential to maintain the competitiveness of the UK compared to other countries such as Germany where there are more extensive and generous energy support schemes in place. Almost half of companies (45%) said this was the most important action the Government could take.

Commenting, Stephen Phipson, Chief Executive at Make UK, said:

“The year ahead is going to be very challenging for manufacturers with a potent mix of factors testing their resolve. Ongoing supply chain disruption, access to labour and high transport costs which show no sign of abating can be added to a growing sense of economic and political uncertainty in their main markets.

“The biggest risk, however, remains the eye watering increases in energy costs which has left the clock ticking for many companies. While an extension of the energy relief scheme will be welcome, to date it has just been a sticking plaster and making it less generous will make the situation worse for many companies. In fact, there is a very strong and urgent case for matching the more generous schemes our competitors have in place.

“Government must also ensure that all major users of energy are included in any extension, not just those traditionally regarded as ‘energy intensive’. Otherwise there are some very significant companies that will fall through the cracks.”

Cara Haffey, Manufacturing Leader at PwC UK, said:

“With the Covid veil now almost completely lifted, the immense challenges still faced by manufacturers means it’s no surprise that the impact of rising energy costs is the most pressing concern according to the firms we spoke to.

“UK manufacturers are resilient by nature, however we face another 12 months where it’s likely that global supply chains will remain stretched and a string of pressure points will continue to spring up, from sourcing and purchasing to fulfilment and distribution. All of this plus the need to continue to refine our relationship with the EU – especially in regards to the movement of people – will see manufacturers facing a packed, and somewhat, daunting to-do list.

“Given the scale of the cost challenges, and the backdrop of a long winter, it is imperative that the right balance is struck between keeping our collective eye on the ball in regards to our netzero commitments while ensuring vital support is given to ensure that the sector – as adaptable as it is – can withstand what is likely to be a difficult year ahead.”

The survey also shows that input costs as well as energy show no signs of easing. The demand for talent and increased pay settlements means nine in ten companies (91%) expect to see their employment costs increase, while a similar number (87.2%) expect to see transport costs increase.

There is also evidence that the political instability of the last twelve months has impacted the competitiveness of the UK as a manufacturing location, with the number of companies believing it to be a competitive location halving from last year (down to 31% from 63%). Over four in ten companies (43%) believe the UK is now less attractive to foreign investors, while more than half of companies (53.2%) believe that on-going political instability is damaging business confidence.

However, despite these challenges, manufacturers continue to show the same resilience they demonstrated at the height of the pandemic by boosting their growth prospects through continued investment. This includes a focus on developing new products (71.5%), upskilling or re-training existing staff (69.3%) while almost two thirds are increasing investment in capital equipment (61.7%). Encouragingly, over half of companies (55.4%) plan to increase investment in Apprenticeships.

According to Make UK, these investments are especially encouraging given they have traditionally been areas prone to cuts during previous economic downturns.

Furthermore, to tackle the increase in energy costs specifically, over half of companies (54%) are continuing investments in energy efficiency with one in four looking at on-site generation to take themselves off the grid. To aid this process further, Make UK is calling for greater incentives to adopt green technologies through capital allowances and tax reliefs, a move supported by over a quarter (28.5%) of companies.

As well as becoming more energy efficient, the survey shows that manufacturers have not been diverted from a wider focus on their Environment and Social Governance (ESG) responsibilities. More than half (51.1%) say ESG investments are now more important than two years ago while a similar number (50.6%) has a strategy led by the Board with almost four in ten companies (39.1%) having a nominated Board member responsible.

The survey of 235 companies was carried out between 1 and 22 November.