Engineering Sector suffering from the Brexit “Hokey – Cokey”
As the continued Brexit “in-out, in-out, shake it all about” uncertainty continues, we are seeing the lack of decision making having an extremely damaging effect in certain Industry Sectors.
In the last six months I have been appointed as Joint Administrator to two businesses involved in the general engineering and tool making sector. One, heavily reliant on the automotive industry and the other more general engineering but there have been common threads and shared issues on both appointments.
Both companies had suffered from the intense competition from India and China which had resulted in the loss of contracts and ever increasing pressure on price and margins. This has been particularly noticeable on the tool making side which saw our companies retain the more complex, long term tooling contracts and those where high quality product was essential with pretty much everything else being lost to overseas competition.
The effects of this has been falling turnover and increasing price pressure with customers expecting UK quality at overseas prices where labour and raw material prices are lower. Despite constant attempts to cut overheads, both companies had difficulty reducing fixed costs further and reducing workforce levels was both unproductive and, in both of these cases, extremely expensive given the skill level and length of service of the ageing work force.
However, what was also abundantly clear in these cases were the increasing issues being experienced due to Brexit uncertainties.
It was clear in both companies that key orders had been put on hold by customers and, cancelled altogether in some instances, as investment and strategy decisions were delayed pending further certainty on the Brexit position and consequences.
The knock on effects for these two companies were huge in terms of general day to day profitability and cash flow, but also long term planning decisions were impossible in terms of labour requirements and investment decisions such as replacing ageing plant and machinery.
Perhaps more worryingly, having traded both businesses for several weeks, neither could be sold as a going concern with most interested parties feeling unable to commit to such investment requirements in these challenging times.
During the run out in trading as these businesses were ultimately wound down, it also became abundantly clear that many of the customers own Brexit planning had concentrated on stock piling on overseas supply parts to avoid the potential lack of availability of product in the short term and the prospective price hikes anticipated by a no deal Brexit.
This had resulted in customers effectively taking their eye off the UK supply chain while they over concentrated on Brexit issues.
On one of these recent cases, we were inundated with additional panic orders given the risk of a limited supply period during the Administration and the inherent risk of losing a specialist supplier altogether.
In both of my recent Administration appointments, we were faced with emergency supply requirements that otherwise were in danger of closing production lines of a number of household name customers.
Clearly, if these orders had been forthcoming earlier, it may well have prevented the difficult conditions contributing to the failure of the businesses in question.
Finally, it was always my feeling that both of these businesses had the potential to be rescued with the right investment and support. Sadly, despite every effort to save them, potential purchasers were ultimately put off by the inherent uncertainties within the current economic environment.
In addition, both companies had a highly skilled but ageing workforce and the inherent TUPE liabilities with both entities provided a further stumbling block to rescue the business.
Indeed, with all these issues and risks, I have to wonder whether it is time to reconsider the TUPE rules which are seen as a significant barrier to rescuing and restructuring distressed businesses before the current generation of highly skilled engineers are lost to the industry forever.
If you have clients in this sector who are struggling with the impact of these issues, then we are here to help. Please contact us on 0121 200 2962.