Sector focus: can UK manufacturing catch up with Germany?

The past few weeks have delivered positive growth figures in pockets within Europe as wounds from the financial crisis start to heal. The manufacturing sector has seen some of the most encouraging numbers, with UK manufacturing output rising 1.9% month-on-month in June, according to the Office of National Statistics, while industrial production jumped 1.1% in May. Over in Germany, according to the Economy Ministry, factory orders swelled in June by the greatest factor in eight months, surging 3.8% from the previous month.

The relationship between manufacturing and the asset class has been more subdued in recent years. The highest number of industrial machinery deals across Europe as a whole was seen in 2008 with 66 deals recorded, according to unquote" data. This figure slipped down to nearly half of that, 34, in 2009 as the financial downturn and currency fears kept investors at bay. In the UK there were 12 industrial machinery deals in 2008 but activity has been weak since with only seven in 2010, just three in 2011 and seven again in 2012.

Understandably, Germany has seen the bulk of the action in this sector with 15 deals in 2008, seven in 2009 and by 2012 deal numbers reached pre-crisis levels at a whopping 16. Over the last decade Germany has outstripped the rest of Europe when it comes to housing manufacturing deals with 87 deals in total compared with just 46 in the UK.

However, despite its formidable reputation as the top destination for industrial manufacturing, the impact of the financial crisis, the strong euro and the weakening of the pound in the UK, have caused a shift in attitudes towards the future of these countries' respective manufacturing markets.

In 2010, German turnaround house Perusa rescued insolvent Kammann Mashinebau, a provider of machinery to print on plastic and glass, out of administration. In the same year, CBR Management took ALVO Matalltechnik, a producer of metal sheet covers for machinery, out of insolvency. In a relatively limited turnaround market, the high level of distressed investing in the German manufacturing sector was a clear signal of the market's growing weakness.

In the driving seat
Drilling down into the manufacturing sector itself, Germany has long been a key player in the automotive industry. However, the UK is challenging this with an ever increasing and impressive list of car manufacturers now based in the UK. Names including Nissan, Toyota and Honda have joined the country's traditional and most celebrated names such as Aston Martin, Bentley, Jaguar Land Rover, Lotus, McLaren, Morgan, MG and Rolls Royce.

Furthermore, the UK government is keen to boost the country's growing strength in this sector with a £1bn commitment to building a new advanced propulsion centre to ensure it is at the forefront of new technologies, as well as the creation of a new Automotive Investment Organisation within the UK Trade and Investment (UKTI) department to invest £3m into strengthening the UK's automotive supply chain.

Outside of automotive, according to LDC's Rob Schofield, who oversees the captive's £300m commitment to manufacturing deals, the UK has carved out a sturdy stronghold in the global manufacturing market through its focus on niches and cost efficiency: "A lot of the 'me-too' offerings that don't possess intellectual property or other barriers to entry have moved to other parts of the world where labour and other costs are cheaper. Those left are manufacturing businesses with some sort of design, engineering, service proposition or manufacturing 'black art' that gives them a competitive advantage – something that can't be easily replicated."

Schofield believes the UK is a key player in the power generation, offshore oil and gas, aerospace and defence industries: "The UK has specific knowledge and technical capability in these industries that is still world leading, or close to it."

What's more, the UK labour force has increased its attractiveness to investors. "The UK has a relatively productive and flexible labour base with a high level of skill," says Schofield. This is further boosted by the UK's weakened currency making the country one of the cheapest and most flexible when it comes to manufacturing, as evidenced by a number of companies reversing outsourcing to Asia and bringing work back to the UK.

While wages in Germany's manufacturing sector have remained at high levels, those in the UK remain lower. "The labour force in Germany is more expensive per hour or unit of time than anywhere else in Europe," concedes Schofield. "But it is also by far the most productive labour force."

However, while the UK's cheaper workforce may be causing more investor interest for the time being, the country is limited by the number of people joining the sector and developing into skilled workers. Germany has long been the global leader in manufacturing thanks to its strong focus on apprenticeships. Its commitment to maintaining a highly skilled workforce sees almost two-thirds of its school leavers taking up apprenticeships with leading manufacturers including BMW, Volkswagen, and Mercedez-Benz.

In the UK, engineering apprenticeships are certainly gaining traction: they have rocketed by 86.8% over the past nine years, according to industry body Engineering UK, but are a far cry from the embedded system in Germany. Indeed, jobs in the manufacturing sector account for 28% of employment in Germany and just 14% in the UK.

For private equity, UK manufacturing deal numbers remain subdued as investors have increasingly turned to more service-based investments. While in Germany, despite a probable tidal wave of investors wanting a slice of the country's manufacturing expertise, the Mittlestand has historically kept its distance from the asset class.

However, German businesses are increasingly open to private equity and the liquidity solutions it can provide as risk-adverse lenders limit their outgoings. And in the UK, a dearth of deals is forcing buyout houses to return to manufacturing and engineering companies. The UK is certainly improving its manufacturing sector; however, the future of the industry lies in boosting new entrant numbers and ensuring high levels of expertise and IP-led innovation. While in Germany, the sector's infrastructure is robust: in order to hold on to its top spot, all the country needs to do is keep up the good work.

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• Topics
• Industrials
• UK / Ireland
• DACH
• LDC
• Perusa GmbH
• CBR Management GmbH
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