September South West Aerospace and Defence Survey 2012

Transcription

1 September 2012 South West Aerospace and Defence Survey 2012

2 Contents Introduction 1 Highlights 2 1. Optimism returns but ongoing economic instability concerns remain 3 2. Export markets are vital but more help is needed 5 3. Increased pressure on margins and profits 6 4. Investing in the future, investing in engineering and technology 8 5. Managing the workforce an increasingly global and 9 complex problem

3 Introduction Firstly, I would like to thank Deloitte for undertaking this survey on behalf of WEAF and the sector in the South West. Intelligence is vital to both the industry and to WEAF to ensure all address the key issues affecting the sector, both now and into the future. It is good to know that companies even in a time of huge pressure see a little light at the end of what has been a long tunnel. However, what is clear is that we cannot sit back and expect to grow our businesses by expecting the customer to come knocking on our door. We need to ensure that we remain competitive, have a highly skilled workforce, invest in the company and finally seek new markets both in the UK and elsewhere in the world. We are already exporting huge amounts of our products but we need to do much more. WEAF mission statement A membership organisation that delivers value through services with an advanced engineering focus based on the following sectors: Aerospace (Civil and Defence), Energy, Transport (Marine, Rail and Land Systems) demonstrates just how we plan in the future to support our members and the sector to ensure we stay ahead of the game. The South West has the largest aerospace cluster in the UK; we want to keep it that way. WEAF and its members, including the Professional Service companies such as Deloitte intend to do their best to ensure we remain at the forefront of a sector that has the largest order book ever. Enjoy reading the results within this survey and if you have any comments or observations please do me at barry@weaf.co.uk Barry Warburton Chief Executive Follow WEAF on Linkedin A part of Funded by Led by The South West has the largest aerospace cluster in the UK; we want to keep it that way. WEAF and its members including the Professional Service companies such as Deloitte intend to do their best to ensure we remain at the forefront of a sector that has the largest order book ever. South West Aerospace and Defence Survey

4 Highlights 1. Optimism returns but economic instability concerns remain These are turbulent times and the speed of economic change remains without precedent, with concerns about the long term viability of the Eurozone being matched by a gloomier outlook for China and India. While this may be offset by an upcycle in production for the commercial aircraft sector, defence expenditure is expected to remain relatively flat. Our respondents view is that for companies in the West of England to succeed in this environment it is critical that there is a supply of available skilled labour so that companies in the region are not held back. 2. Export markets are vital but more help is needed It was surprising to find that small businesses exporting overseas are not making use of government assistance that is available. Clearly government agencies need to communicate not just with the larger players but also with smaller supply chain companies which drive growth. The UK Export Finance Department shares credit risks with banks and others in order to assist UK exporters by insuring against non payment by overseas buyers. This agency which backs 2.3bn of UK exports had only been used by 3% of respondents. 4. Investing in the future, investing in engineering and technology Companies in the West are continuing to invest in technology and product development however it was a surprise to see so few companies claiming R&D tax credits and equivalent government grants and incentives. Making the most of the incentives is vital for UK companies who are innovating to create and retain competitive advantage. Additionally a failure to claim these reliefs and benefits could put companies in the region at competitive disadvantage since many overseas competitors will be in receipt of equivalent assistance. 5. Managing the workforce an increasingly global and complex problem Employers are faced with challenging and complex changes to employment taxes regulation. It is essential that employers review their current employment tax arrangements to ensure compliance with the new regulations. At the same time, employers should be mindful that having internationally mobile employees can give rise to employer and employee reporting requirements, depending on the extent of business travel and the host country location. Whilst this does not mean that a business visitor will necessarily become taxable by virtue of spending a few workdays in the overseas country, tracking processes should be put in place to monitor the extent of overseas travel. 3. Increased pressure on margins and profits With increased pressure on margins and a greater sharing of risk and reward it is vital that businesses manage the basics in terms of efficiency and cost management while a professional approach to contract review and negotiation should counterbalance the tendency to take on more risk in order to win work. 2

5 1. Optimism returns but ongoing economic instability concerns remain The global economy is trying to return to growth but it is doing so at different speeds with the US and Japan growing faster than the Eurozone. Different dynamics are developing that underline this trend with unemployment decelerating in some regions but continuing to rise in others. Eurozone instability and fears of contagion spreading to other countries remains a major and fast-moving concern. The speed of change remains unprecedented with concerns remaining about the long-term viability of the Eurozone being joined by a sharp and unexpected recent downturn in growth forecasts in China and India that would not have been envisaged 12 months ago. The aerospace and defence industry is inevitably impacted by the wider economic context, but there are other factors that complicate the picture; indications are that the commercial aircraft sector is entering an upcycle in production at the same time that continued global economic challenges suggest that performance in the defence sector will remain flat or possibly contract. Furthermore it is not entirely clear how these factors impact the major players in the sector as opposed to their smaller entrepreneurial counterparts that make up the supply chain. The above uncertainty and inconsistency is reflected in the survey results. For example 58.8% of respondents expect their order book to be fuller in 6 month s time. However less than half of respondents are more optimistic about the economy now than before (see chart 1). Chart 1. Are you more or less optimistic about the economy? 9% Interestingly, nearly 50% of respondents believe the the West of England is faring better than rest of the UK with less than 6% of the opinion that the West of England is struggling compared to the rest of the UK. When looking at key factors that businesses believe are important to sustaining economic recovery in the region the normal factors such as supply of credit, interest rates and Eurozone stability are prevalent as would be expected (see chart 2). Interestingly, the results coming mainly from SME s reinforce that growth is and remains a major preoccupation for owners of companies in the supply chain with over 50% of respondents highlighting the need for higher demand for goods and services being key to their survival and growth. As such these companies will be looking over their shoulders at the ongoing prospects for the major players in the sector with a mixture of optimism and concern. Chart 2. Which of the following do you consider to be important in sustaining economic recovery in the West of England? Lower interest rates Higher demand for goods/services Lower pay settlements More inward investment Lower taxes Inflation Supply of credit Eurozone stability 47% 44% More Same Less South West Aerospace and Defence Survey

6 Looking forwards over the next 12 months, it is clear from the survey that the sector s ability to deal with many of the issues listed in chart 2 will determine future success for businesses involved in the sector. A key message from the survey is that many businesses (67%) are looking to hire new staff, however there is a perceived critical shortage of skilled labour available in the West of England that risks undermining their growth and investment plans. (see chart 3). Chart 3. Please list 3 key issues facing your business in the next 12 months 13.0% 5.6% 3.7% 3.7% 7.4% 37% Deloitte Insight These are turbulent times and the speed of economic change remains without precedent with concerns about the long term viability of the Eurozone being matched by a gloomier outlook for China and India. While this may be offset by an upcycle in production for the commercial aircraft sector, the defence expenditure is expected to remain relatively flat. For companies in the West of England to succeed in this environment it is critical that there is a supply of available skilled labour however it is disappointing to note that a lack of available skilled resource may hold companies back in the region. The war for talent will therefore be critical to success and a company s reward strategy will need to be high on the list of priorities both in terms of recruiting new talent but also retaining skilled resource within the business. 14.8% 14.8% Lack of skilled resources Low order book/customer demand Bank lending and credit Overseas competition Economic uncertainty Lack of working capital for investment Increase cost of raw materials Interest rates 4

7 2. Export markets are vital but more help is needed The UK government has said that it wants to rebalance the economy and has argued that an export led recovery can assist with this. Many of the companies which completed the survey are smaller companies in the UK supply chain. Export markets are still vital however and more than 77% of the companies which completed the survey export goods to overseas markets. Chart 5. To what extent do you feel the UK government and its related policies assist your business with exporting goods and services? % Chart 4. Do you export goods overseas? % 25.8% 10 23% 0 Not at all Only slightly A reasonble amount 3.2% Very much 77% Further communication of the help that is available is vital however as 50% of respondents had not heard of the UK Export Finance Department and of those that had only 3% had used it. Yes No Access to the European single market through the UK membership of the European Union is considered very important by nearly 60% of the business respondents in the West of England. However, despite the government s best intentions smaller companies surveyed in particular feel that the government needs to provide more help with the drive to export overseas. Deloitte Insight It is vital that small businesses exporting overseas have a greater awareness of the Government support available if they are to remain competitive in international markets. The UK Export Finance Department shares credit risks with banks and others in order to assist UK exporters by insuring against non payment by overseas buyers. This agency which backs 2.3bn of UK exports had only been used by 3% of respondents. Trade bodies such as WEAF and Professional advisers have a role to play in facilitating this two way communication and engagement. It is vital that small businesses exporting overseas have a greater awareness of the Government support available if they are to remain competitive in international markets. South West Aerospace and Defence Survey

8 3. Increased pressure on margins and profits With increased pressure on the public sector in the UK the ability of Aerospace companies in the West of England to find new UK and overseas customers will be an important factor in driving growth in the region. Fortunately the spread of work for member companies surveyed in the West of England appears to be well balanced. Chart 6. Broadly what proportion of your business is from? % 34% 37% As a consequence of this however the sharing of risk and reward is becoming a more common feature in contract negotiations and nearly 65% of respondents reported seeing an increase in this type of activity. 62% of respondents reported increased pressure on working capital and capital investment plans while working to secure new contracts. Although a massive 93% of companies surveyed found that the pressure on margins and pricing increased over the last 12 months less than 40% expect the same pressures to continue to increase over the next 12 months. Many more expect the pressure to remain the same while only 3% expect the pressure on margins and pricing to decrease. Chart 8. To what extent do you expect this pressure to change over the next 12 months? UK government UK private sector Overseas contracts 38.7% 58.1% In the midst of the current economic environment it is not surprising to find that most businesses have reported an increase in pressure on margins and pricing over the past 12 months. 3.2% Chart 7. Has your business experienced an increase in pressure on margins and pricing over the past 12 months? Increase Decrease Remain the same 35.5% 58.1% 6.4% No Yes, but not slightly Yes, to a significant extent 6

9 There are grounds for optimism however for companies in the West of England with nearly 50% of respondents reporting an increase in the length of the order book over the past 12 months. Chart 9. Over the past 12 months has the length of your order book % % % 0 Decreased Remained the same Increased Deloitte Insight With increased pressure on margins and a greater sharing of risk and reward it is vital that businesses manage the basics in terms of efficiency and cost management while a professional approach to contract review and negotiation should counterbalance the tendency to take on more risk in order to win work. South West Aerospace and Defence Survey

10 4. Investing in the future, investing in engineering and technology In a downturn, costs are cut and investment in research and development can be one of the casualties. However investment in engineering, technology and product development is key to helping companies in the West of England stay at the forefront of the Aerospace and Defence industry. In our survey 61% of the respondents confirmed that they continue to invest in research and development activity in the UK. Of those companies the majority plan to either maintain or increase their level of R&D expenditure over the next year as follows: Chart 11. Does your business receive European or UK grant funding? 16% 16% 13% 55% Chart 10. Over the next year is the level of R&D is likely to be 3.2% No grant funding received Yes, for carrying our R&D Yes, for employing individuals Yes, for investing in a particular area 51.6% 45.2% Broadly the same Increased Decreased However, despite the cost of funding investment in R&D there is evidence that companies are not making the most of the grants and incentives that are available from the UK government and other European institutions. Only 53% of respondents were claiming R&D tax credits while approximately 43% of respondents were claiming available grants as follows. In our survey 61% of the respondents confirmed that they continue to invest in research and development activity in the UK. In addition, our survey also found that more than 90% of responding member companies in the West of England plan to either maintain or increase levels of capital expenditure on productive plant and machinery over the next 12 months. Of these, 56% plan to accelerate capital expenditure and while there is often a lag between the acquisition of plant and machinery and increased production the news reflects the optimistic mood in the West of England found elsewhere in this report. Deloitte Insight It was a surprise to see so few companies claiming R&D tax credits and equivalent government grants and incentives. Making the most of the incentives is vital for UK companies who are innovating to create and retain competitive advantage. Additionally a failure to claim these reliefs and benefits could put our respondents at competitive disadvantage since many overseas companies against which our respondents compete will be in receipt of equivalent assistance. 8

11 5. Managing the workforce an increasingly global and complex problem In the introduction to this report we highlighted that many companies are struggling to hire skilled individuals. 59% of respondents employ less than 50 employees, and as such the proportion and role of skilled workers for those companies is critically important. At the same time a high percentage of respondents export goods overseas. It is then perhaps not surprising that companies are starting to look to the global market to both address resourcing needs and secure future revenue streams. Our survey shows that companies are increasingly sending their employees overseas. Whilst the number of employees on formal overseas secondments is low, there is a much higher level of employees undertaking business trips, in particular overseas from the UK. In recent times there have been some significant developments in the employment taxes area that impact most, if not all companies. This presents challenges for all businesses, yet the results from the survey suggest that there are wildly differing degrees of readiness for these upcoming changes. This is particularly the case with the Real Time Information (RTI) regulations and the potentially significant changes to employer annual compliance reporting requirements that this will bring. RTI will eventually require that all companies move to providing live and real-time payroll information to HMRC. This is a significant shift from current payroll legislation and working practices, yet our survey shows that nearly 60% of respondents are unaware of the RTI changes, and only a quarter of all respondents have taken action to address the implications of RTI for their business. With the Pensions Act 2011 now on the statute books, employers are gradually having to assess and comply with new legal requirements which will change how pensions are provided to their employees. These new Employer s Duties will require all employers to automatically enrol eligible employees into a Qualifying Pension Scheme and provide minimum levels of contributions or benefits. The picture here is more encouraging with more than half of respondents having taken action. Even so nearly 1 in 5 companies are unaware of these changes and as such are still to consider what implications they will bring for their business. Deloitte Insight Employers are faced with challenging and complex changes to employment taxes regulation. It is essential that employers review their current employment tax arrangements to ensure compliance with the new regulations. At the same time, employers should be mindful that having internationally mobile employees can give rise to overseas employer and employee reporting requirements, depending on the extent of business travel and the host country location. Whilst this does not mean that a business visitor will necessarily become taxable by virtue of spending a few workdays in the overseas country, tracking processes should be put in place to monitor the extent of overseas travel. Chart 12. What proportion of your workforce includes % 7% UK employees on formal secondment overseas? Overseas employees on formal secondment to the UK? 47% UK employees who frequently travel overseas? Chart 13. Are you aware of the Real Time Information (RTI) regulations? 58% Yes, and I have taken action Not aware of rules 26% 16% Yes, but I have not yet taken action Chart 14. Are you aware of the Employers Duties legislation? Yes, I have taken action Yes, but I have not yet taken action Not aware of regulations 19% 28% 14% Overseas employees who frequently travel to the UK? 53% % respondents South West Aerospace and Defence Survey

12 Contact us If you would like to discuss any of the issues raised in the report, please contact any of the following individuals in the Bristol office: Ian Stone Rob Barker Andrew Smith Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited ( DTTL ), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of DTTL and its member firms. Deloitte LLP is the United Kingdom member firm of DTTL. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication Deloitte LLP. All rights reserved. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) Fax: +44 (0) Designed and produced by The Creative Studio at Deloitte, London 20879A Member of Deloitte Touche Tohmatsu Limited