Trends in the Manufacturing Industry 2023

If 2021 was the year the UK manufacturing sector bounced back amid vaccine rollouts and rising demand, 2022 was supposed to be the year it built on the foundations for sustained growth - but it didn’t quite work out that way.

As 2022 drew to a close, it emerged that the sector had shrunk by around 4% against a backdrop of rising raw material costs, wilting consumer demand, labour shortages and higher interest rates. This year doesn't look much better, with manufacturing forecast to decline by a further 3.2%.

Despite this contraction, the UK remains the ninth-largest manufacturing nation in the world, with an annual output of £183 billion. It also injects £31 billion into the economy annually and provides 2.5 million jobs. With much to be bright about amid the recent gloom, the sector will experience highs as well as lows over the next twelve months.

Let's explore the manufacturing industry trends in 2023 that could impact small and medium-sized enterprises (SMEs) over the coming months.

Opportunities in the Manufacturing Industry

Following a tumultuous twelve months in the industry defined by soaring inflation, economic uncertainty, supply headwinds and labour shortages, manufacturers would be forgiven for battening down the hatches in 2023. But current trends in the manufacturing industry indicate opportunities abound for proactive businesses - not just to weather the storm, but to emerge into calmer waters longer term.

Investing in advanced technologies

The pandemic provided a wake-up call for manufacturers who were made acutely aware that digital transformation was no longer optional - a critical aspect to a business's strategy that has been amplified by the UK economy’s slide into a prolonged recession.

Businesses that accelerated digitalisation during the pandemic are demonstrating greater resilience in the face of economic hurdles - but they must not rest on their laurels. Continued investment in advanced manufacturing technologies is required to sustain agility in the long term.

In its 2023 manufacturing industry outlook, Deloitte suggests that manufacturers’ digital strategies over this uncertain period should be based on the following three dynamics:

• Maintain momentum: Investment in technologies that align with a manufacturer’s requirements can help them pivot quickly. For example, enhanced data and analytics capabilities can enhance forecasting.
• Protect long-term profitability: Introducing digital tools throughout the value chain can drive increased profitability and enhance digital sophistication.
• Broaden advanced manufacturing capabilities: Robotics and automation can enhance efficiency, but AI and machine learning capabilities have the power to provide a competitive edge.

Amid ongoing aftershocks from the pandemic and economic uncertainty, manufacturers should embrace digital trends in the manufacturing industry over the next twelve months - and beyond - to increase supply chain visibility, productivity, and connectivity with suppliers, partners, and consumers.

Global supply chain pressures to ease

The pandemic decimated global supply chains almost overnight, creating chaos at every level of these vital networks: shortages of key manufacturing components, order backlogs, delivery delays, driver shortages, and a spike in transportation costs and consumer prices.

Following two years of turmoil, supply chain pressures are forecast to abate at last this year. Several key factors are expected to contribute to the rebalance of supply and demand: improved production capacity, restored inventory levels, increased transportation capacity, and generally weaker growth in demand as economic performance slows. For example, in August, more than 40% of US manufacturers polled by the Philadelphia Fed expected improvements in delivery times over the next six months.

Increased shipping capacity is expected to cap - or even reduce - transportation costs in 2023, easing pressure on supply chains. According to BIMCO - the world's largest direct-membership organisation for shipowners, charterers, shipbrokers and agents - around 2.1 million 20-foot containers will be added to the global shipping capacity this year, compared to around 1 million in both 2021 and 2022.

However, persistent risks will continue to restrict the pace of recovery: China’s zero-Covid policy, soaring energy prices, and increased geopolitical tensions. Some manufacturers are navigating this long road to recovery by embracing digital supply networks and data analytics, for a more flexible, multi-tiered response to sudden disruptions.

Showcasing sustainability

Simply sharing commitments to net zero does not satisfy the modern environmentally aware consumer, who is demanding proof. Therefore, the dynamic environmental, social, and governance (ESG) landscape will require careful consideration in 2023 for manufacturers, who can create a competitive edge by taking sustainability seriously.

To achieve this, they must demonstrate their ESG commitments across their value chain - notably:

• Managing waste: By developing better capabilities for waste management and using technologies to improve product recycling, manufacturers can make their operations more sustainable.
• Increasing supplier diversity: By including supplier compliance and supplier diversity programmes in their strategies, manufacturers can combat social injustice.
• Harnessing smart buildings: Technology-enabled smart buildings can help manufacturers adopt a cleaner and more resilient power supply, reduce costs, and achieve carbon neutrality.
• Electrifying fleets: Some types of low-emission vehicles are eligible for a grant from the government so that you can buy them more cheaply - and the benefits of doing so are compelling: lower maintenance costs, no vehicle excise duty, reduced carbon footprint, future-proof your business from the 2030 ban on petrol and diesel motor vehicle sales, and they’re exempt from the London Congestion Charge.

Customers are increasingly conscious of the need for sustainable manufacturing processes and display this sentiment through their buying choices. This behaviour underscores the economic value of operating more sustainably throughout the increasingly complex product lifecycle.

Challenges in the Manufacturing Industry

British manufacturers started the year on the back foot after they reported one of their sharpest monthly falls in activity since the 2008-09 recession - and these three manufacturing challenges in 2023 could set it back even further.

Labour shortages

Labour shortages continue to be felt across industries in the UK following a surge in the number of people classed as "economically inactive": those not looking for jobs and not available for work - a post-pandemic trend that has been unique to the UK.

Many of the labour shortages in particular sectors - including manufacturing - have also been attributed to a drop in the number of foreign workers in the UK. Covid-19 and Brexit combined to force many EU nationals who worked in the UK to return to their countries of origin.

This confluence of factors has precipitated a rise in the number of resignations in the manufacturing industry. According to PwC’s Global Workforce Hopes and Fears Survey 2022, one in five employees are thinking of switching employers. The survey states that: “Retaining these employees will require more than just pay; fulfilling work and the opportunity to be one’s authentic self at work also matter to employees who are considering a job change.” For the majority, this appears a pipe dream at present, with the survey showing that just 40% of employees said their company is upskilling, and only 26% said their employer is automating or enhancing work through technology.

In July last year, Stephen Phipson, chief executive of manufacturing organisation Make UK, warned MPs that skills shortages in the manufacturing industry are costing the nation £7 billion in lost economic output - which equates to £21 million a day in lost gross domestic product (GDP) per worker. In a hearing with the Business, Energy and Industrial Strategy Committee, Phipson also said the sector was struggling to fill 95,000 vacancies.

Rising cost of raw materials

A perfect storm of soaring inflation and a plummeting pound drove up the price of raw materials in 2022 - choppy waters that contributed to a bleak forecast for UK manufacturing output this year. Around 71% of global companies highlight raw material costs as their number one supply chain threat for 2023.

Consumer price inflation stole the headlines in 2022, after soaring to its highest rate in more than four decades. But there’s another gauge of prices that’s more specific to industry and business: producer price inflation. This measures changes in the prices of goods bought and sold by UK manufacturers, including price indices of materials and fuels purchased (input prices) and factory gate prices (output prices).

Producer prices in the UK reached an all-time high of 137.4 points in October 2022. Looking ahead, prices are projected to trend around 140.02 points in 2023 and 143.24 points in 2024 - a surge that will be reflected on manufacturers’ balance sheets.

The beleaguered pound is exacerbating price pressures for manufacturers that import raw materials from overseas - particularly the US. The UK currency plummeted below $1.09 in September for the first time in 37 years following the infamous mini-budget. If its prolonged slump - amid red-hot inflation, interest rate hikes, and political turmoil - extends into 2023, these manufacturers will continue to feel the pinch. The early signs are worrying after the pound slid to its lowest level against the dollar since November on 6th January.

The cyber threat

Manufacturing's increasing reliance on data and technology has expanded the industry’s attack surface - making it a top target for cybercriminals. Research by IBM revealed that in 2001, when lockdowns were still the norm, the sector was the most popular target of cyber attacks - exceeding the number of incidents in the financial and insurance sectors for the first time in five years.

These threat actors doubled down in 2022 and executed attacks against more than two in five (42%) UK manufacturers, according to research by Make UK and BlackBerry. Of those organisations targeted, over a quarter (26%) experienced substantial financial losses, ranging from £50,000 to £250,000. According to those surveyed, the primary consequences of a cyberattack on their business included disruption to operations (65.2%) and reputational damage (42.9%).

The research also highlights the main obstacles to improving cybersecurity in this sector: maintaining legacy IT (45%), lack of cyber skills within the company (38%), and providing access to third parties for monitoring/maintenance (33%). The proliferation of cyberattacks against the manufacturing industry in 2022 is showing no signs of easing. Without the right skills, strategy and investment, this worrying trend will be perpetuated.

Cybercriminals understand the critical role manufacturing plays in global supply chains and how the failure of increasingly sophisticated systems can create problems for them to exploit. According to Stephen Phipson “...the need to increase the use of the latest technology makes mounting a proper defence against cyber threats essential. No business can afford to ignore this issue, and failing to get this right could cost the manufacturing industry billions of pounds, and put thousands of jobs at risk. Every business is vulnerable, and every business needs to take the necessary steps to protect themselves properly.”

Key Takeaways

In our 2022 article, we outlined two challenges that remain a headache for the sector today: labour shortages and cybercrime. As manufacturers grapple with these ongoing challenges, additional risks have emerged - notably inflation and intensified pressure on the pound.

Despite the gloomy outlook for UK manufacturing this year, proactive businesses can leverage another - more positive - trend we discussed in our 2022 report: digital transformation. This adoption of technology, which can increase productivity and enhance resilience, also underpins another opportunity that should be on their radar: gaining a competitive edge through sustainable practices.

Interestingly, supply chain instability, which remained acute in early 2022 amid pandemic-fuelled pressures, is expected to improve this year - a return to relative calm amid a wave of geopolitical turmoil that manufacturers hope will boost production.

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