Midlands manufacturing faces ‘bleak future’, says latest Red Flag report

Midlands manufacturing could be facing a “bleak” future after the latest in a series of influential reports revealed that around 17,000 automotive businesses – many of the sited in our region – were in distress.

The latest Red Flag Alert research for Q3 2020 from Begbies Traynor shows that this represented an increase of more than 1,000 since the start of lockdown (15,311 Q1 2020, 16,878 Q3 2020). Many of these businesses sit within the automotive supply chain, which has a stronghold in the Midlands, where 10% more businesses are in distress than at the start of lockdown (60,482 Q1 2020, 66,545 Q3 2020).

“Unfortunately,” says the report “with the UK potentially heading for a no deal Brexit, the outlook for this sector looks somewhat bleak.”

Overall in the UK, the Red Flag Alert for Q3 recorded 57,000 businesses in “significant distress” after the largest quarterly leap in financially distressed companies since 2017. This 6% increase (from 527,000 in Q2 2020) in the last three months comes despite a backlog of court action preventing many CCJs and winding up petitions being issued.

This newly-published research from Begbies Traynor, also finds that there has been a 9% increase in significantly distressed companies since the end of the first quarter (509,000 Q1 2020, 557,000 Q3 2020) – two weeks into lockdown.

Since this time there have been double-digit percentage increases in financial distress in 10 out 22 sectors analysed. This includes food and drug retailers (14%, 13,018 Q1 2020, 14,806 Q3 2020), construction (11%, 65,456 Q1 2020, 72,402 Q3 2020) and real estate and property (11%, 56,421 Q1 2020, 62,615 Q3 2020) sectors.

The rise could have been much higher, were it not for reduced court activity due to the coronavirus pandemic, which has limited the number of CCJs and winding up petitions being issued against indebted companies and the ban on winding up petitions for Covid related debts.

Data shows there were 26,244 CCJs lodged against companies during July, August and September in 2019, with only 10,045 lodged during the same period in 2020, a fall of 62%. The situation is even more acute with regard to more serious winding up petitions. During July, August and September 2019, 1,019 were lodged compared to 101 during the same period in 2020, a fall of 90%.

Julie Palmer, partner at Begbies Traynor, said: “It is noteworthy that the number of businesses in significant distress have grown substantially in the last three months, even with court capacity significantly reduced due to the pandemic. With so many businesses limping along there could be a flood of insolvencies when the courts do get back to anywhere near normal capacity and attempt to clear the backlog of pending cases. This in itself, combined with the end of the furlough scheme and other government support measures, is likely to have a material impact on the UK business failure rate.

“Unfortunately for the many zombie companies in existence across the UK, a perfect storm is on the horizon. A combination of a grim economic backdrop and very poor trading conditions, particularly in the most vulnerable sectors, such as hospitality will take its toll and this is expected to feed through to Q1 2021, particularly when the government ends its high profile corporate life support measures.”