Gloom or doom?

Gloom or doom?

What the credit crunch means for your industry.

The UK Chancellor of the Exchequer, Alistair Darling, says that Britain is facing its worst financial crisis in 60 years. No question, today's global financial crisis has the makings of a perfect storm; chronically high borrowing costs, stubborn inflation, a falling dollar, reduced consumer demand and - just possibly - a very nasty recession.

Beyond the economics, the relevant question for E&T readers is how will it most likely affect the engineering and technology industries in the UK and in the world in general? Is this business as usual, or is a media-hyped financial meltdown in the offing?

To answer such questions, it's useful to try and assess exactly how big the UK technology sector is. According to trade association Intellect, it has over one million employees, and accounts for 10 per cent of GDP. This includes digital consumer electronics, IT equipment, software, IT services, telecom end-user equipment, network equipment and telecom carrier services.

According to a July 2008 survey by the European Information Technology Observatory, which draws together market data from across the European Union, turnover was €150.1bn but is forecast to grow much more slowly to €153.9bn in 2009. Over these two years, the strongest growth is anticipated to be in the IT services and software markets, whereas a major decline is expected in the growth of the digital consumer electronics sector.

Not everyone accepts that engineering is the same as manufacturing, but if you do, today's engineering industry, according to a survey by Prospect magazine on manufacturing, puts it at three million jobs and 13 per cent of GDP. The Engineering Employers' Federation (EEF), has a more precise definition of engineering, using industrial classification codes (SIC codes) 27-35 as defined by the Office of National Statistics, which amounts to engineering's contribution of 5 per cent of GDP and 40 per cent of manufacturing.

Whichever way the various sectors are defined, one good way of assessing the health of any industry is to talk to recruitment consultants. Their message is characteristically upbeat.

According to figures from Jobsite, the company behind recruitment website EngineerBoard, while engineering can be seen to be taking a slight downturn at the moment it's not as drastic as some commentators would have us believe. Jobsite has seen a 17 per cent increase in engineering vacancies from August 2007 to August 2008, confirming that the sector is actually continuing to grow.
The last three months (June-August 2008) saw engineering vacancy numbers hold steady over June and July, with an 8 per cent drop during August suggesting that some engineering firms are becoming more cautious about hiring.

The number of applications per vacancy has also increased over the last three months, showing that more people are going for the fewer jobs being advertised. However, this increase is minimal and is actually similar to the number of applications per vacancy of June-August 2007. It is also far smaller than the applications per vacancies in other sectors, indicating that engineering isn't being hit as hard as other professions. Engineering remains one of the core sectors on Jobsite and doesn't show any signs at the moment of seriously faltering.

Anecdotal evidence from Jobsite's engineering clients also suggests that at the moment they aren't feeling the effects of the economic downturn too harshly. While some have seen a slight decrease in business, at the moment it is still a manageable dip.

Sarah Drew, general manager of TheLadders.co.uk, a site specialising in executive roles offering pay of more than £50,000 a year, says "Right now, things have remained pretty stable in terms of the volume of jobs that recruiters are posting on TechnologyLadder. However, September has seen an increase in the number of professionals looking for jobs and so the market is going to be much more competitive as we move towards recession and 2009."

What's reassuring for job seekers in this sector, Drew adds, is that the war for talent that has been fought within the recruitment industry during 2008 does not look like it's abating.

All of this sounds like good news for industry, but any bias towards unfounded optimism needs to be corrected. Look at things from other perspectives and there are genuinely strong grounds for the engineering and technology industries to be worried.

As this issue of E&T went to press, the proposed $700bn bailout of toxic debt from the banks to the balance sheet of the US government was still in the balance. It's hard not to see this having a downward impact on the value of overseas earnings for leading engineering companies.

And then there are the higher borrowing costs that firms will discover when they rollover their loans and renew their debt facilities. This will seriously impact the financing possibilities of a nuclear replacement programme - a hitherto unappreciated angle. Finally, on the cost of debt, Jon Moulton, a leading financier who made his fortune by backing mid-sized - usually manufacturing - companies, said in a recent newspaper interview that firms need to think of their worst case scenario and prepare for it now. The cost of money had risen so high, that the availability of debt financing was only a quarter of what it was for buy out opportunities one year ago.

But financial woes are not all we should fear. Jeremy Nicholson of the Energy Intensive Users' Group said that British companies who will be seeking to renew their three-year electricity purchase contracts could be looking at a new record price of £100 per MWh this winter.

It may be that UK industry is caught in a pincer movement of higher energy prices, falling demand, a credit crunch and rivals discounting their products in a sales driven survival strategy. But technical recession is not upon us yet. That happens when we have two consecutive quarters of declining growth and the betting is that will happen in Q3 and Q4 of 2008 and into Q1 of 2009. The new discipline for firms will be about commercial survival. And for the ones that make it, they will be all the stronger come the recovery in 2010.

Dan Lewis is Research Director of the Economic Research Council www.ercouncil.org

The view from the coalface

International technology consultancy Cambridge Consultants promises to help firms keep one step ahead of their competitors. Deputy chief executive Alan Richardson gave E&T an insight into how it expects the credit crunch to affect businesses

What is the outlook for the UK's engineering and technology industries in the face of the financial crisis?

Both good and bad, depending on the profile of the businesses under scrutiny. For those companies driven by innovation and the creation of technological advantage, the prospects are good. The world goes on needing these things even if a few bankers and investment managers catch a cold. Companies that rely on providing base components and materials to cost-sensitive markets are more exposed to the harsh dynamics of the global marketplace and, given the irregularities of the financial crisis on the global scale, are more likely to find things difficult.

Another key differentiator between those that will continue to thrive and those that might struggle is their readiness to export. Recent trends in the Sterling/Dollar and Euro/Dollar exchange rates mean that the UK's export competitiveness has improved. Companies in the engineering and technology sectors with export strategies at the core of their businesses will probably do significantly better than those that don't have them.

Is this 'business as usual' or a disaster?

It's actually neither. For at least the medium term, there are still a great many problems around the world that require engineering and technology solutions. These aren't going to go away just because the financial sector has lost the plot. In the real economy, there are still a great many areas of buoyancy. We are seeing significant growth, for example, in the medical technology, wireless, consumer and transport sectors, as well as the quite staggering emergence of cleantech. We have seen a decline in the areas of our work that butt up directly against the financial sector - our technical due diligence work, for example - but there is still strong demand even for this from some parts of the world seemingly unaffected by our financial woes.

There is, of course, the risk that we could damage the real economy by talking it down, but the extent to which we feel we are in the midst of a disaster depends on how we choose to characterise the problem. At Cambridge Consultants, our optimism is well founded, but it is also self perpetuating. Strong companies like ours will find opportunities.

There is another risk, which is that political dithering in the UK will mean that many of the less internationally inclined engineering and technology companies will not get the opportunity to work on or supply to UK managed projects. A good example is the acquisition of the UK's once world-leading nuclear energy industry by the French-run EDF. I have no doubt that the country will benefit greatly from this acquisition, thanks to EDF's decisiveness and capacity to invest large sums in capital development quickly. But it is precisely the UK government's apparent inability to act decisively and quickly where required that has lost us this once great national industry. The next big loss will be to do with carbon capture and storage. While the UK dithers about what to do, the Germans have already done it. When we do finally make up our minds, it will be German industry that steps in to run the show.

Are there some unstoppable long-term trends that this crisis will not be affecting in the engineering and technology industries?

Yes, many. The energy crunch will carry on regardless of any financial crisis, meaning that the engineering and technology sector will have to find cleantech solutions for the carbon-related and sustainability problems we all now recognise as significant.

Demographic trends will continue of course, and in the UK, this will mean that we need to develop new and innovative medical technologies to cope with a vastly older population than we've ever known.

We appear to need ever-more sophisticated security technologies, too, and our hunger for increasingly involved communications and entertainment technologies continues to rise unabated.

Have you noticed any changes yet with respect to companies that rely on venture capital?

Cambridge Consultants has seen significant growth in business from venture capital funded clients, and so to us, all appears well. Much of this this is from overseas-based businesses, but about 10 per cent is from the UK. Anecdotally, we understand that it is getting more difficult for new businesses to get first round or seed funding, and that those that do get round one funds have to agree to meet more stringent milestones than their predecessors might have experienced. But where the money is needed by pre-seeded companies for further planned development, we are told that later round funds are still flowing freely.

This seems true in amongst the Cambridge cluster of engineering and technology businesses, where angel funds still appear to be plentiful for the right kind of start-ups, although it is likely to be offered in smaller, less exposed tranches.

What are the prospects now for the UK engineering and technology industries and how do they reflect the global market?

The biggest long-term issue is to do with the absence of a pipeline of qualified engineers and technologists. It is important to look beyond the short-term effects of the financial sector's incompetence on UK industries and to keep a view of the bigger picture. The country's long-term competitiveness is tied up with skills and, on current trends, the future for UK manufacturing is quite bleak. We have world-scale pharmaceutical and aerospace industries here still, but have lost energy and transport to Europe and will soon lose further ground to India and China as they mobilise for domination of the biotech and software industries. If we are to protect what we have left, and perhaps claw back a little of what we have already lost, we need to tackle the skills issue head on.

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