Nearly three-quarters of Scottish manufacturing businesses expect to grow between 3-10% in the next year, according to a new report released by MHA.

Despite citing cyber security, tax increases, skills shortages, energy costs and regulation as their biggest challenges, the vast majority surveyed for the report were optimistic of their firms thriving.

The UK-wide survey looked at what business leaders believed should be the government’s top three priorities in its upcoming Industrial Strategy.

In May, 1,000 manufacturing business owners and C-suite were surveyed to understand both the challenges and opportunities that they currently face and what lies ahead for the sector over the next 12 months.

In Scotland, the view of 71 respondents showed the short-term outlook remained difficult, with political action sought in areas such as increasing supply chain options, investment in strengthened IT systems and in upskilling existing staff.

MHA is one of the UK’s largest accountancy and business advisory firms. Its Scottish offices are based in Edinburgh and Aberdeen. Manufacturing is one of the key sectors for Stuart MacPherson, Audit and Accounts Director, based at MHA in Aberdeen’s Carden Place.

Commenting on the findings, he said: 
“The growth outlook figures are encouraging with 74.6% of respondents expecting to grow above inflation in the next 12 months. It suggests a degree of confidence despite the constant stream of uncertainties over recent years from Covid to the Russia/ Ukraine conflict, resultant material price volatility and supply chain issues, and the recent US tariff announcements.”

Some of the key highlights from the Scottish figures show:

• The top challenges impacting manufacturing business – cyber security (40.8%), tax increases (36.6%) and regulation, skills shortages and energy costs (all 31%).
• Actions needed to address these challenges – increase supply chain options (47.9%), upskilling existing staff (45.1%) and investment in strengthening IT systems (38%).
• In Scotland, 74.6% of respondents expect investment in R&D to grow by 3-10% more than previous 12 months, with process and material development topping the key areas.
• Since the Autumn Budget, Scots manufacturing businesses have increased investment in upskilling (64.8%), increased investment in technology (67.6%), a 66.2% increase in AI investment, 70.4% rise in machinery investment, and a 67.6% increase in sustainability investment.
• Apprenticeship programmes are high on the agenda with 47.9% of Scots manufacturers surveyed (compared to 44.3% UK-wide). 46.5% are also investing in AI to close the skills gap (44% across UK).
• In sustainability, 49.3% are using recyclable materials where possible, 47.9% are adopting renewable energy sources and 46.5% are reducing energy consumption.

Stuart added: 
“The statistics show that manufacturers are not resting on their laurels. They continue to invest in R&D and technology – innovating and driving forward for the future. This will hopefully put them in a good position to take advantage of those marketing opportunities that will undoubtedly emerge despite uncertainty.”

Looking at the UK picture, Chris Barlow, head of manufacturing at MHA, commented: 
“The national and international economic turbulence over the last few years, from Brexit to the Covid 19 pandemic and more recently the ongoing uncertainty of tariffs, has no doubt left deep and permanent scars on the sector. 

“While the manufacturing sector and the people who work within it are above all resilient and innovative, the UK government has the opportunity to shift the dial for the manufacturing sector with the upcoming announcement of its Industrial Strategy.” 

Industrial Strategy

Across the UK respondents felt the top three priorities for the government’s Industrial Strategy should be technology, skills and infrastructure. Regionally though there were variations: in the East Midlands and South East manufacturers want the government to also look at regulation; in Greater London and the North East another concern is energy prices; in the North West it is data; in Wales it is grid connections; and in Scotland it is access to finance and competition.

In terms of what has already been published by the government as to the contents of the Strategy, respondents felt that the government had done little to address the specific issues impacting SMEs as well as implementing the detail of recent trading announcements and improving relationships, particularly with Europe. Unsurprisingly there were also worries about the competitiveness of the UK’s taxation environment in contrast to our key trading partners and there were real concerns from SMEs that the board of the Industrial Strategy was focused more on larger businesses.

Tax increases remain biggest challenge for UK manufacturers

While there is some positivity around growth from manufacturers, significant challenges remain across a varied spectrum of issues. Thirty-five percent of respondents (the biggest number) said that the recent employment tax increases were their biggest challenge, 34% said that the technological evolution was a concern and 33% stated that it was cyber security. 

Skills shortages and regulation were also named by seven out of the 12 regions as one of their top three concerns, while five said supply chains as a challenge. Perhaps surprisingly, given the current focus on the issue, only two regions, Scotland and the North West flagged energy costs as a problem and only manufacturing businesses in Yorkshire felt tariffs were one of their top three concerns. 

UK-wide, for businesses with a turnover of less than £100m, the top three challenges were tax increases (35%), energy costs 32% and supply chain challenges (32%). Businesses with a turnover of between £100 - £250m flagged the technological evolution (40%), tax increases (35%) and skills shortages (33%). Larger businesses with a turnover of more than £250m, listed cyber security (36%) as a key challenge, followed by tax increases (36%) and then regulation (35%). 

It is unsurprising that for larger businesses that the impact of tax, while important, is eclipsed by technology and cyber security. However, it is interesting that skills shortages, frequently touted as an ongoing concern for the manufacturing industry, has not featured higher on the list of challenges. 

When asked about how the Autumn 2024 Budget had affected future potential investments, 68% of respondents said the increased costs as a result of the Budget had negatively impacted their plans. The top three areas where investments were most likely to be scaled back were technology, AI and R&D - all mentioned by 70% of companies. 

Addressing challenges - UK

The survey respondents, who could choose multiple options, had a variety of practical and innovative ways of how these challenges could be addressed: 43% said that they would be increasing their supply chain options, 42% said that they would be investing in strengthening their IT systems, 40% said that they would look at more efficient energy options, 39% said that they would be upskilling existing staff and 38% said that they would invest in new technology or AI. Only 27% said that they would respond by recruiting new staff, while at the same time, an equal proportion said they would actively reduce headcount. 

Closing the skills gap across UK manufacturing

Although not their number one priority the shortage of skills has been a perennial concern for manufacturers for years. Our respondents are unwilling to wait for central government action. They are acting now to close the skills gap by creating an apprenticeship programme, training partnership with college or university or alternatively, investing in AI with a view to closing the skills gap in a different way all listed as equally valuable. 

For companies of different sizes, there were divergent options. Forty-five percent of businesses with a turnover of under £100m are planning to use a training partnership with a college or university, whereas 48% of businesses with a turnover of over £250m are planning to invest in AI with a view to closing the skills gap in an alternative manner. 

Looking ahead

Barlow concluded: 
“While the survey highlighted that there are considerable challenges for the manufacturing sector, it also showed that there are bright spots ahead in the next 12 months. The announcement of the long-awaited Industrial Strategy could and should be the impetus that the sector needs to set it on the path to more sustainable growth in the UK, with public and private investment and the ability to withstand any further economic volatility. 

“Regardless of its impact there is clear evidence from our research that despite the obvious challenges it faces UK manufacturing is above all resilient and looking to the future. Investments in technology, R&D and bridging the skills gap are all welcome signs of a sector that is charting its own course for success.”