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PII Oct-Nov 2013

£ Intelligent financing techniques for smart manufacturing investments £ by Julian Hobbs, Sales Director, Siemens Financial Services Manufacturing £ sector on the rise As the UK economy turns the corner, the manufacturing sector seems to have put the doldrums behind it. The Markit/CIPS Purchasing Managers’ Index (PMI) for September indicated that UK manufacturing had grown for sixth consecutive month1. The British Chambers of Commerce (BCC) revealed in its Q3 survey that six of its key manufacturing indicators were “at an all-time high”, including domestic sales (+38%), employment (+32%) and employment expectations (+29%), cash flow (+22%), turnover confidence (+66%) and full capacity (+46%)2. While the pace of the sector’s expansion is expected to moderate following the recent spurt, such figures point towards a rebound of manufacturing industry in general, and the process industries in particular. £ During the recessionary period, aggravated economic conditions, compounded by limited liquidity in the market, had propelled many manufacturing firms to put their investment plans on ice. Now, as the economy is gathering steam, manufacturers are warming up to the idea of embarking on essential equipment investments. According to the latest survey from manufacturers’ association EEF and accountants BDO LLP, a balance of 24% of companies intended to buy machinery and equipment in the year ahead, up from 7% in the previous poll in May3. This was the highest reading since the financial crisis in 2007 and the second-highest since the quarterly survey began in the mid- 1990s. The rising appetite for investment expansion is also reflected in another study from the Manufacturing Advisory Services (MAS). Its MAS Barometer survey published in August revealed that half of respondents expected to spend more on new machinery and premises over the next six months, a 12% rise on the same period last year. Forty per cent of the respondent firms also expressed their intention to fund more activity related to new technologies4. Financial bottleneck must not stifle investment ambitions These are all very welcoming signs for the process industries. However, translating that investment ambition into reality might not prove straightforward given the financial hurdles facing manufacturers, in particular smaller-sized companies. The Bank of England’s Q3 credit conditions survey showed that lending spreads only fell slightly for small businesses in Q3 and are expected to be little changed in Q45. The extent to which businesses’ investment plans can be derailed due to a lack of financing is clearly illustrated in a recent poll from Siemens Industry and the Energy Institute. The survey unveiled that one of the most significant issues facing businesses wanting to invest in energy-efficient technologies has been accessing the required finance6. A substantial 88% of respondents said that banks and the financial sector were either not interested in supporting investment in green technologies or provided “little feedback”. Approximately one in ten respondents had “positive feedback” but less than 1% or one respondent had actually received finance for this type of investment. Clearly, traditional bank lending cannot sufficiently fulfil businesses’ financing needs for new investments. Process industry manufacturers wishing to acquire new equipment or execute technology upgrades therefore must look beyond bank borrowing. Indeed, not only is there an imperative for manufacturers to explore other financing options, they also need to become more financially nimble in order to adapt to a post-crisis world where working capital optimisation has become a high priority. Research from Siemens’ financial services unit calculated that up to £2.17 billion a year is tied up in the UK industry due to outright equipment purchases7, capital that could be freed for other business-driven activities if asset financing solutions such as leasing and renting were more widely employed. For manufacturers, just finding enough cash to cover the purchase price of essential equipment or new technology is no longer adequate nowadays. They must address the need to ensure that investments are funded in a way that will prove most financially efficient for the business. Overcoming the financing challenge The increasing prevalence of this mindset has encouraged manufacturers to pay more attention to asset financing techniques as a tool to enable investments. Based on each businesses’ requirements and profile, these tailored financing solutions can combine equipment, installation, service, maintenance, training and upgrades into a single financing package. Monthly lease payments are aligned with the expected benefits (savings/productivity) enabled by the new equipment, allowing companies access to the latest technologies without having to commit scarce capital or use traditional lines of credit. Following several years of fluctuations in the price of credit, businesses are increasingly attracted by financing methods which secure an alternative, predictable level of monthly payments for the whole financing period (safe from market and economic volatility), and which cannot be foreclosed during that period so long as payments are maintained. By spreading capital expenditure in this way, the need for periodic outlay of large sums is reduced, increasing the funds available for operating expenditure. Asset finance solutions are particularly valuable in facilitating energy efficiency investments, a topical investment area that is receiving growing attention from manufacturing industry. Since the industrial sector in general, and the process industries in particular, use massive amounts of energy, it is best placed to reap the financial rewards of lower energy consumption, as demonstrated in a study from the Energy Efficiency Financing scheme, a joint initiative between the Carbon Trust and Siemens Financial Services. Their analysis shows that the industrial sector is overspending by £2.22 billion a year on energy8. This substantial waste on money and resources is particularly alarming when viewed in a context of rising electricity prices. Manufacturing industry has seen the average price paid for electricity, excluding the Climate Change Levy (CCL), rise from 4.237 pence per kilowatt hour (kWh) in 2005 to 7.641 pence per kWh in the second quarter of 20139 (most recent available data), a significant increase of over 80%. The inexorable rise in energy prices is especially damaging for energy-intensive industries such as chemicals, steel, cement, aluminium, glass, paper and ceramics, squeezing businesses’ hardearned profits yet further. The acquisition of environmental-friendly equipment can be made affordable through asset finance. Finance payments can be arranged to be at least equal to, or lower than, the energy savings and in many cases deliver savings and net positive cash flow immediately after installation has been completed. Where a project cannot completely offset the equipment upgrade with energy-efficiency cost savings, the financing arrangement can nevertheless cater for the larger part of the upgrade cost. In the manufacturing sector, this is often highly attractive as up-to-date equipment may not only lower energy costs, but also boost productivity and extend manufacturing capability, generating more revenue and margin. Generating growth with smart finance Up-to-date equipment and advanced technology are crucial to achieving manufacturing superiority. As technology tends to advance in sudden leaps, businesses operating with previous generation equipment are likely to be less efficient and productive and therefore find it difficult to be competitive in increasingly globalised markets. The ever shorter equipment replacement periods makes it all the more important for manufacturers to harness technological innovation. At the same time, financial efficiency has become a critical factor in determining business success, especially since higher capital adequacy requirements for banks herald a new era of banking with tighter lending conditions. In order to pave the way for sustainable growth for a sector that is crucial to the UK economy, process industry manufacturers must develop an intelligent investment strategy that not only boosts manufacturing prowess but also maximises financial agility of the business. Siemens Financial Services Can be contacted on: Tel: +44 1753 434075 E-mail: julian.hobbs@siemens.com Web: http://finance.siemens.com/financialservices/uk 1 Markit/CIPS UK Manufacturing PMI, 1 October 2013 2 British Chamber of Commerce, Quarterly Economic Survey, Q3 2013 3 EEF/BDO Q3 Manufacturing Outlook, September 2013 4 Manufacturing Advisory Service Barometer, Q1 April – June 2013 5 Bank of England, Credit Conditions Survey 2013 - Q3 6 Energy Institute, Firms struggling to access green finance as half think carbon targets will be missed, 2 October 2013 7 Siemens Financial Services, Frozen Capital in industry, May 2012 8 Industrial sector overspending on energy by £2.2 billion per year, reveals new analysis from the Energy Efficiency Financing scheme, April 2013 9 Department of Energy & Climate Change, Prices of fuels purchased by manufacturing industry, 26 September 2013 Process Industry Inforem r October-November 2013 5


PII Oct-Nov 2013
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