Manufacturing credentials
Published: 10 March, 2010
Finance in Industry
Manufacturing credentials
The banking sector has been blamed heavily for the extent of the recession along with the current Government, but one bank that is pushing its manufacturing credentials is Barclays. Aaron Blutstein spoke to Graeme Allinson, head of manufacturing, transport and logistics at Barclays Commercial Bank.
AB: Could you just give me a brief overview of where Barclays Commercial fits into the overall Barclays structure and your role and responsibility with regards to manufacturing.
GA: If you look at Barclays Commercial Bank we provide general corporate banking facilities to corporates with turnover from £1M to £500M/ £1B. When turnover gets above a £1M we specialise. We have specialist teams who will just look after customers in a particular sector - for example a property team/ retail and wholesale team etc. I look after the manufacturing/ transport and logistics team. I have a team who looks after the manufacturing part of it who just deal 100% with manufacturing customers. There is another team who deal with just transport and logistics. We believe that by having our relationship directors solely dealing with manufacturing customers they will gain a better understanding and knowledge of the issues those customers face in manufacturing in the UK now – my view is that this is absolutely right. By understanding the issues and problems they face, understanding the business environment which they operate, you're more likely to be able to identify opportunities to help them.
We brought transport and logistics together with manufacturing at the beginning of 2009, really because UK manufacturers are now operating in a lean environment in terms that stocks have to be managed at the lower levels, stocks are replenished in some factories 2/3/4 times a day depending on arrangements they have in place. Therefore one of the key drivers of the successful manufacturer is a very strong supply chain. Having a good logistics company that you can work with is key. Therefore there are quite interesting similarities between the two sectors and synergies in terms of how they work together.
AB: Has Barclays been supporting industry in the UK?
GA: Barclays is putting a lot more into available finance. Within the overall London market a lot of foreign banks have moved out of London or downscaling their operations. If you go back 2006/2007 at times some 40% of the lending that was done in the UK - this is big lending - syndicated deals in London were done by foreign institutions. A lot of those banks have downscaled their UK operations. So there has been liquidity moving out of the London market. The UK clearers are stepping up, the issue is can the UK clearers step up enough to make up for the short fall, bearing in mind the foreign banks have now pulled back. My view is no they can"t – it’s just to big a gap to fill. Therefore you have a double whammy whereby at the higher level there is less liquidity around but at an individual bank level, banks such as Barclays are lending more. So there are two dynamics.
AB: Has Barclays lending criteria changed?
GA: Barclay’s criteria for lending hasn’t changed. Clearly where you have a sector where GDP is down 13%, year on year (speaking in 2009), some of those sector’s demand has fallen away 30/40% clearly you would look at those sectors/ companies very closely.
Clearly we review what our lending books looks like. We look at the customers we have in that sector. For example if you look at the automobile sector in terms of the component suppliers within that what you find when you actually get down to it is the vast majority are not just producing things that go into cars they’re producing components that go into aircraft, be it civil aircraft or military aircraft. They can be components that go into military vehicles too. A lot of them can expand that across into medical equipment etc. So actually while they may be producing into the car sector it’s not they don’t have all their eggs in one basket, it’s the power of diversity that comes out. A lot of those sectors I’ve talked about are actually holding up very well. And therefore that enables them and gives them the scope to manage and deal with the fall off in demand.
Most have recognised that having all your eggs in one basket is never a good strategy wherever that basket may be.
AB: Why has manufacturing in the UK suffered badly since the onset on the downturn/ credit crunch, especially since the sector has transformed itself since the low point of the early 1980s?
GA: Manufacturing has suffered worse than the rest of the economy. But if you look at UK manufacturing compared to Germany for example or Japan then the reduction there has been, much, much worse. The reduction in manufacturing GDP in Germany is about 28% (2009 year on year), Japan is running at a reduction of manufacturing GDP of 30% (2009 year on year). So what caused it was the sudden fall off in worldwide demand. Whereby it was very, very sudden, far swifter than anyone would have expected. Destocking had a part in that as well. What I think you’ve seen now is destocking reversing out, stock levels have been reduced down, people are starting to want to purchase so the whole thing is moving down the supply chain.
UK manufacturing has been hard hit certainly a lot more than the rest of the economy, but compared with the other key manufacturers it has actually done well.
AB: Can manufacturing recover to pre-recession levels?
GA: Prior to the recession UK manufacturing was on a long-term growth of about 1% per annum and I don’t see any reason why we shouldn’t be able to get to that ultimate growth trend, it’s just a question of will it take a while given the severity. Having come down 13% year on year because of destocking and an abnormal reduction in demand I think there will be a considerable early pick-up in that, it’s really where it goes after that.
Manufacturers, considering the fall in GDP, have adapted very well. They’ve downsized and most importantly right-sized their businesses. When demand picks up I think they will be in a position to do quite well.
UK manufacturers have had huge changes to deal with. They had the impact of low cost manufacturing coming from China, coming from Eastern Europe, this fundamentally affects your model. You’ve had the price of your raw materials, commodities and oil rise to levels that were quite unbelievable compared to where they were before. You’ve had to adapt that all through your model. You’ve had to adapt your model to a low inflation environment, and all this has impacted in the last five or six years really. And yet UK manufacturing has continued to grow. I think if you can manage a business given those huge external factors coming into you, a lot of which are negative and still manage to have a good business at the end of it, then that puts you in a good place for dealing with the current issues that you have now – without underestimating what those issues are I have to say. I would hope that most of them are match fit.
AB: Is there anything, which manufacturers could have done during the economic downturn?
GA: Diversity – It’s important to have an international spread, depending on the size your business. An international spread in terms of production which will then allow you to take advantage of exchange rate movement, wage costs, etc, but also then an international market for your products so you’re not solely relying on the UK/ Europe/ USA – you have to be global. If you have that diversity you have more chance of riding it out than others that don’t. Clearly you’ve still got to have the right product and produce it at the right costs, you’ve got to be profitable, you’ve got to manage your cash, and not rely on one particular market, but have a broad spread.
AB: What type of recovery do you think will emerge?
GA: I don’t think it is realistic to expect the economy to rebound substantially and see high levels of growth. I believe the levels of growth will be relatively anaemic, but will generally be positive. I think then if that’s the case then rather than being hugely positive, we would have moved away from the double dip, which is something we wouldn’t want. Talking to your customers is the best way of understanding what’s going on.
AB: How does Barclays help those businesses in difficulty?
GA: We have early warning signs – and we do feel that we get in earlier than some of our competitors. For example covenants breached, account behaviour, deteriorating trends, over exceeding overdrafts.
When businesses have serious trouble then our business support unit is here to look at business restructuring. It is a particularly important part of Barclays Commercial.
We have specialist turnaround people who will then actually start to manage the relationship and look at the warning signs that suggest that these guys are really struggling, and to sit down with the management and explaining how can we get through this. Some of these guys (specialist turnaround people) have been doing the business support side for 25-30 years, they’ve been through the early 80s and early 90s and can bring in some of that management experience in a recession. We’ve found that very important, and very valuable to have. This has helped businesses turn around – this is not just about keeping them going, this is about helping them come out the other side.
Maintenance for the masses
Condition monitoring has been viewed for 20-25 years (or even longer) as an effective means of saving money through avoiding unnecessary maintenance costs. However Geoff Walker, Artesis managing director, suggests that condition based maintenance in the UK has in the past not been fully available for the masses due to the complexity and high expense of many systems. Therefore the potential financial savings resulting from condition monitoring are subsequently not being realised. During these challenging times perhaps the time is right to address this issue for UK manufacturing.
Walker explains: "If you had a good conditioning monitoring approach then that should give you absolutely the least cost maintenance regime, because you do nothing until you start to see something is becoming a problem. You then act to avoid it becoming a major issue. When you look at how many companies really do effective condition based maintenance it is probably about 1%, and that 1% is not surprisingly in places that you really can’t afford to fail. So for example in very expensive equipment such as turbines where you can afford to put numerous sensors on and you can afford to have the skilled people who can make sense of the signals you get back off those sensors.
“But the majority of industry has suffered from the fact that condition monitoring has been too difficult and too expensive in the past. If you could have a very simple to use, simple to install, easy to understand, inexpensive solution that would tell you how your equipment is performing and you could have confidence that it was ok not to do any maintenance until you got a signal to tell you there is something starting to develop - if you had a solution like that then suddenly condition based maintenance makes huge amounts of sense and you would stick that on all your equipment and you would save a lot of money.”
For further information please visit: www.artesis.com
