Manufacturing in the spotlight at Yorkshire Bank event

THE STATE of the manufacturing sector in the West Midlands was one of the main talking points at a Yorkshire Bank Corporate & Structured Finance-hosted economic lunch in Birmingham.

The bank’s chief economist Tom Vosa said the region’s below-average economic growth rate was due to an over-supply of low-value added manufacturing industries, but it was a further cause for concern that exchange rates hadn’t stimulated more a boom for exporting manufacturers.

“The only joy is the region’s slightly lower than average proportion of public sector workers which could bolster the West Midlands when spending cuts come through,” he said. “But it’s the lack of  manufacturing to respond to cheapest valuation of sterling for four or five years that’s a worry.”

“We talk about rebalancing away from finance to manufacturing, but the sector that’s been driving the economy is tourism, which, with 15% of GDP is slightly bigger than manufacturing. However, the  defence industry continues to grow as the strongest manufacturing sector, and food manufacturing is growing at about 3 to 4% per year.

Mike Ward, senior partner at Birmingham law firm HBJ Gateley Wareing  said one positive thing to come out the recession might be the realisation of the importance of manufacturing to the economy in the West Midlands and the whole country.

He said: “Not many people think any more you can have a service-based economy. We need to understand how much manufacturing has to be part of the economic forward planning.

Motor industry veteran Roy Kishor, however, wasn’t entirely convinced that exchange rates were material to all manufacturers. He said: “ I think this is a good time for manufacturing. The relative strength of the pound isn’t the issue. What is the issue is in the UK is people being prepared to get out and do business. There is a too much of a passive culture, but there’s not a problem doing business outside of the UK.”

Nick Brayshaw OBE, former chief executive of Wagon, agreed: “Most of the main manufacturing sectors are essentially dollar businesses, so the strength of the pound vs the dollar is relatively unimportant. The simplistic analysis that says lower exchange rates boost UK manufacturing is true to a point but isn’t going to be enough of a salvation I fear.”

Discussions also focused on the impact of changes in banking regulation to the dealmaking community, and to private equity in particular.

Mr Vosa said: “The private equity industry should keep a close eye on the changes to banking from Basel 3. Banks are being encouraged to exit the private equity industry: the capital charges against it will be too high. So the banks won’t be running it themselves, but will be happy to lend to other people. The investment banks will be forced to spin off their PE houses as a consequence. So you’ll get more competitors going for funding on the same terms currently achieved by PE houses.”

“It’s also a world in which banks will be forced to deleverage and remove their balance sheets. In the words of Governor King: ‘if you’re too big to fail you’re too big’.

“And certainly, the Bank of England is withdrawing about £400bn via its credit guarantee scheme. Overall UK banks need to raise around £800bn over next 30 months. That’s about £25bn a month. The record so far is about £15bn, which suggests balance sheets will shrink by one fifth of the current stock of lending. So lending will be far less available than it has been in the past. However, the Yorkshire Bank is open for business and we do have money to spend!”