Like so much of the UK economy, manufacturing has been hit hard by the succession of recent financial and commercial shocks: Brexit, the pandemic, supply chain disruption caused by the Ukraine war, rampant input cost inflation and higher interest rates. Now it is facing possibly the biggest challenge of all: global trading chaos caused by the USA tariff war.
In this report, we focus on the industries’ finances in the context of the potential harm to manufacturing from these tariffs. We last looked at the sector in September 2024.
The scale and scope of the sector
According to research published by MakeUK, key statistics for the manufacturing sector include:
- Gross value added is £217bn, some 9.3% of UK GDP.
- Manufacturing exports are 45% of the UK’s total exports.
- 6m people are employed in manufacturing, equivalent to 8.1% of the UK workforce.
- Manufacturing accounts for 47% of the UK’s total research and development spending.
- Business investment in the sector is £38.8bn or 14% of total UK investment.
Financial characteristics
The latest published accounts of the 75,203 manufacturing companies registered at Companies House show that they have combined:
- Total assets of £681bn
- Total borrowings of £170bn
- Total net worth of £259bn
Financial risk profile
We have used the database and analytics maintained by the financial health monitoring specialists, Company Watch to review and then summarise the latest financial statements filed at Companies House by the 75,203 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 as they were around a year ago. A summary of our detailed analysis can be found here.
Overall financial health
Our manufacturing companies have an average financial health rating of 41, which is significantly below the economy as a whole where this rating is close to 50. This compares to an overall health rating of 42 in September 2024, 43 in December 2023 and 44 in December 2022. This is the first of a series of adverse trends to be seen across a range of key financial indicators for the sector.
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 75,203 companies, 29,205 (39%) are in the health score 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 this warning area. This is a clear warning sign on the financial fragility of the sector. The current high risk percentage compares to 34% in December 2022. This a very significant increase in financial risk in little more than two years.
Borrowings
Fortunately, debt does not appear to be a major issue in the sector, with its total of £170bn borrowings representing gearing of only 25% against total assets and 66% against net worth, neither of which is a challenging ratio. Having reduced only slightly between December 2022 and September 2024, it has now dropped significantly by over 10% in the past six months. In terms of the latest average debt per company of £2.3m, this is 9% down compared to September 2024 and 20% lower than in December 2022 at the end of the recession.
Zombie companies
In recent years, more and more companies have changed 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.
Our research shows that:
- 10,224 (14%) of manufacturing entities are zombies.
- Between them they have combined balance sheet deficits totalling £19.3bn.
- This percentage is little changed from September 2024 or December 2023.
- The percentage was only 12% in December 2022.
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.
There are now 13,084 (17%) manufacturing companies with negative working capital, their combined working capital deficits adding up to £23bn. There has been only a marginal deterioration in this measure since September 2024, but looking back to December 2022, these figures were 15% and £17bn, respectively. The continuing increase in this negative indicator is not a positive sign.
Insolvency and business failure issues
There were 1,962 manufacturing insolvencies in England & Wales in the twelve months to January 2025, representing 8% of total insolvencies. This compares with the sector’s 9.1% share of national GDP. With the potential disruption to the sector from disturbances in global trade initiated by the new USA tariff regime, there is a significant risk that the absolute number of failures may increase as this year progresses.
Recent trading performance
The UK manufacturing sector experienced a mixed performance in 2024, with periods of growth and decline, particularly in the latter half of the year. While some indicators suggested a return to stable growth, especially in Q4, other factors like rising costs and weak domestic markets hindered overall progress.
Following a similar pattern, 2025 has started unevenly, mainly reflecting the ongoing sluggishness of the UK economy. Manufacturing output increased by 2.2% between January and February 2025 following a decrease of 0.9% between December 2024 and January 2025. Output for the three months to February 2025 rose by 0.6% compared to the three months to November 2024 and was 0.4% lower than output in the same period the previous year.
A key measure, the UK Purchasing Managers Index for manufacturing was 44.9 in March 2025, down from 46.9 in February. Any reading below 50 shows that output is slowing, not growing. Production declined faster than at any point since October 2023, driven by a slowdown in new business. Employment decreased and input costs continued to rise, although the rates for both were less severe than in previous months. Business confidence was also down, as manufacturers worried about both domestic issues and global trade.
In our previous reports, we have highlighted ongoing challenges apart from geopolitical factors, all of which are persisting in 2025:
- The continuing impact of Brexit.
- Technological advancement & adoption, most especially AI and automation.
- Environment & sustainability (ESG) considerations.
- Workforce issues with an aging demographic, a lack of modern skills and over 60,000 vacancies.
The trade war
All of this was before the so-called ‘Liberation Day’ on 2 April, when President Trump announced a raft of swingeing tariffs on goods imported into the USA from around the world. Few industry experts doubt that the tariffs, which vary from country to country, will have a significant effect on UK manufacturing. Subject to the outcome of ongoing bilateral trade talks, they currently add a 10% surcharge on everything exported from the UK to the USA, but there is a far higher 25% tariff for aluminium, steel and automotive imports into the USA.
Our initial response to Liberation Day identified that out of the £60.4bn of exports from the UK to USA, the great majority was from various parts of the wider manufacturing sector: engineering, pharmaceuticals, aerospace, automotive, food and beverages. In several of these sub-sectors, US exports make up almost a quarter of total exports. Overall, exports are well over a third of all manufacturing output, so global trade has always been vital to the sector.
While the use of tariffs as the core of trade policy had long been trailed by the Trump 2024 election campaign and indeed personally by the President for decades before, uncertainty over what shape they would take left companies in the dark about how to plan their response. Various approaches could have included a flat rate for all countries to the different levels that were eventually unveiled. Now UK manufacturers are rushing to react, even though ongoing trade talks with the UK and many other countries mean there is still no certainty about the medium or longer term outcome and may not be any for several months yet.
How manufacturers react will be key to them surviving and thriving in the sector. They must adapt as quickly as possible by investing in those areas of their business which will make them more nimble and operationally efficient. The focus is likely to be even more on AI and robotic process automation.
Future prospects for UK manufacturing
Our review of the sector’s finances makes far from positive reading, with most key ratios and indicators continuing to deteriorate and an overall health financial health and risk profile well below par. At the same time, economic conditions both in the UK and around the world are plagued by uncertainty.
This creates a major conundrum for manufacturing businesses. Despite efforts by the government to create a more stable policy environment, especially on planning, infrastructure and taxation, the geopolitical situation and the low growth profile of the UK economy are acting as major disincentives to business investment.
Nevertheless, without that investment, there will be no UK growth and manufacturers will struggle to cope with the tariff turbulence. As far back as December 2023, we were bemoaning the UK’s poor record on business investment stretching back decades. Unfortunately, there has been little improvement since then.
In such difficult times, manufacturers will need to think carefully about any opportunities for growth through organic expansion and acquisitions. For those companies with robust finances, sound internal disciplines and a firm commitment to stringent due diligence, a growth strategy will be the way to move forward, though they must avoid losing sight of the inherent risks. Other businesses will need to be pursuing a more conservative policy unless and until meaningful and sustained economic growth takes hold in the UK and until the picture and implications of the tariff war become clearer.
If you would like to read our previous reports about the sector, click here.
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.