Manufacturing sector report – challenges mount as its finances deteriorate

Our latest UK manufacturing sector analysis reveals further challenges across the industry

Manufacturing sector report – challenges mount as its finances deteriorate

Despite the myth that the Thatcherite years in the 1980s decimated the UK’s manufacturing base, the industry remains a key part of the economy, although technical innovation and lower costs elsewhere around the world have forced much of it to re-focus onto more specialist production methods, output and markets.

The scale and scope of the manufacturing sector

  • There are currently 76,747 UK-registered parent companies and groups operating within the wide range of manufacturing activities, according to Companies House records.
  • Product sales value in 2022 was £430bn, up 7% on 2021.
  • It is the eight largest manufacturing sector globally, having just overtaken France.
  • Gross value added in 2022 was £204bn, some 9% of UK GDP.
  • Office for National Statistics Labour Force statistics show that there were 2.6m people employed in manufacturing in Q3 23, down from 6.5m in 1980.
  • The major sub-sectors are:
    • Food (21%)
    • Vehicles (17%)
    • General machinery (8%)
    • Metal fabrication (8%)
    • Chemicals (7%)

Financial characteristics

The latest published accounts of the 76,747 manufacturing companies filed at Companies House show that they have combined:

  • total assets of £710bn
  • total borrowings of £193bn
  • total net worth of £272bn

Financial risk profile

We have used the database and analytics maintained by the financial health monitoring specialists, Company Watch, to dissect and then summarise the latest financial statements filed at Companies House by the 76,747 manufacturing companies registered in the UK. It should be noted that because of the extended filing timeline for accounts, the figures we have analysed will on average represent the financial trading and asset profiles of the businesses around a year ago. A summary of our detailed analysis can be found here.

Overall financial health of the manufacturing sector

Overall, UK manufacturing companies have an average financial health rating of 43, which is significantly below the economy as a whole where this rating is close to 50.  The same set of companies had a health rating of 44 a year previously, the first of a series of adverse trends to be seen across a range of key financial indicators.

Failure risk

Our research highlighted another worrying statistic. Company Watch uses complex analytics to generate a financial health score (H-Score®) for companies out of a maximum of 100. An H-Score of 25 or less indicates that the company concerned has a one in four risk of going through a formal insolvency process or a significant financial restructuring leading to stakeholder losses during the next three years.

Out of our sample of 76,747 companies, 28,518 (37%) are in the Company Watch warning area with a score of 25 or less. Across the economy as a whole, the expectation is that no more than a fifth should be in the warning area. This is a clear warning sign on the financial fragility of the sector.  A year previously, only 34% of the companies were in the warning area, another deteriorating aspect and in this instance a major heightening in financial risk.


Fortunately, debt does not appear to be a major issue in the sector, with its total of £192bn borrowings representing gearing of only 26% against total assets and 69% against net worth. Debt is reducing slightly, coming down from £193bn a year previously and from £2.8m per company to the current level of £2.5m. Nevertheless, there will be an impact on profitability and cash flow from the higher interest rates prevailing now.

Zombie companies

In recent years, more and more companies have turned to utilising financing models where reliance on equity funding has been replaced by debt leverage. Across the economy as a whole, there are approximately 250,000 companies with negative balance sheets, where their liabilities exceed the value of their assets by a de minimis limit of £20k. These are often referred to as ‘zombie’ companies.

In our population of manufacturing entities, 10,004 (13%) are zombies and have combined balance sheet deficits totalling £8.4bn. A year previously, the percentage of zombies was lower at only 12%.

Negative working capital

Another modern day dilution of traditional financial rectitude is the tendency to run businesses with higher short term liabilities due within a year than the value of easily realisable assets, such as cash, trade receivables and inventory. This phenomenon is known as negative working capital.

This measure has deteriorated among our manufacturing companies, where there are now 12,194 (16%) such businesses with combined working capital deficits of £21bn. A year previously, these figures were 15% and £17bn, respectively, representing another warning sign flashing on the financial dashboard.

Insolvency and business failure issues in the manufacturing sector

For the UK economy as a whole, 2023 is threatening to be a record breaking year for business failures, eclipsing the previous high seen in 2009 at the height of the global financial crisis. For manufacturing, there were 1,734 corporate insolvency filings in the first ten months of 2023, representing 8% of total insolvencies. This is consistent with failure levels in 2022, but slightly better than pre-pandemic in 2019, when the percentage was 9%.

With higher interest rates stretching viability and stressing cash flows, the economy in a ‘no growth’, low investment phase and the sector’s financial profile worsening, the prospects for avoiding an increase in manufacturing failures in 2024 are not good.

Challenges facing the manufacturing sector in 2024

Life for manufacturing businesses never seems to get any less challenging but it certainly gets different as new issues appear over the horizon. The list is endless, but we have highlighted those likely to put the most pressure on the owners and managers of this key sector in the year ahead.

Supply chain disruptions

From the pandemic to more recent geopolitical tensions in Eastern Europe and now the Middle East, global events have significantly impacted supply chains for UK manufacturers. Supply chain disruptions often have a major effect on manufacturing operations, affecting everything from material availability to production timelines and ultimately, market delivery. Individual issues currently include:

  • Geopolitical tensions.
  • The continuing aftermath of Brexit.
  • The ongoing disruption to business models from the pandemic.

Manufacturers will continue to seek ways to bring as much of their supply chains closer to home as possible and preferably to ‘onshore’ them where circumstances permit.

Global economic uncertainty

The significant volatility of the worldwide economy will inevitably have a direct impact on UK manufacturing. This uncertainty stems from a variety of sources, but with the current economic and political climate, specific issues to consider for 2024 include:

  • Fluctuating exchange rates.
  • Economic policies of our major trading partners, in particular China, the USA and major European players such as France and Germany.
  • Global trade policies, particularly the imposition of tariffs and the erection of trade barriers.

Technological advancement & adoption

2023 was a year of unprecedented technological advancement at a pace that has been dizzying, most notably with the breathtaking development of Artificial Intelligence (AI) capabilities. Among the consequentials for manufacturers are:

  • Up-skilling & re-skilling of the labour force.
  • The need to invest in new technologies.
  • Keeping up with and ahead of direct competitors.

Environment & sustainability (ESG) considerations

Environmental concerns are leading to tighter regulation and a push towards greater sustainability. As awareness of environmental issues increases globally, manufacturers can expect greater scrutiny and pressures to demonstrate that they conform to the ESG expectations and requirements of their trading partners and other stakeholders, such as investors and lenders. Key considerations will cover:

  • Extending the life span of raw materials by facilitating recycling.
  • Merging technology & sustainability by optimising manufacturing processes, reducing waste and improving energy efficiency.
  • Reconciling the increased costs and the less quantifiable benefits of ESG compliance.

Workforce issues for the manufacturing sector

Ongoing skilled labour shortages have been an issue for a broad range of UK sectors since Brexit and then the pandemic. However, UK manufacturers face their own specific workforce challenges, including:

  • An aging workforce demographic, especially for higher skilled staff.
  • The impact of technology advances on recruitment and retention of talent.
  • Mistaken public perception of the manufacturing environment as labour intensive, low-skilled and demanding long hours with low wages.

Without overcoming these recruitment and retention challenges, manufacturers face reduced productivity, operational inefficiencies and could struggle to compete with global competitors with better access to skilled labour.

How will the UK manufacturing sector  fare in 2024?

Our review of the UK manufacturing sector’s finances is not encouraging, with too many key ratios and indicators heading in the wrong direction and an overall health financial health and risk profile well below par.

At the same time, the prospects for the UK economy are poor with either no growth or ultra-low growth likely into the foreseeable future. The global economy remains susceptible to geopolitical risks and the uncertainty of elections due in a number of major jurisdictions, most notably the USA.

There will be growth and acquisition opportunities for entrepreneurs running soundly-financed, viable businesses and with an appetite for risk, provided their ambition is tempered by heightened risk awareness and a commitment to thorough due diligence. For the more cautious, it will be a year of battened down hatches and strict financial discipline.

December 2023

If you would like to discuss any of the points in the report or believe you have been affected by any of these issues,  you can speak to one of our Partners who can discuss options with you.

We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.

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Key facts

Our UK manufacturing sector analysis reveals further challenges across the industry