The top growth hurdles for the electronics manufacturing SMEs in 2019

Within a mixed overall picture, the recent performance of the electronics sector represents a bright spot on the UK manufacturing landscape.

In 2019 it is building on two successive years of growth, by 4.4% in 2017 and 12.4% in 2018. Last year, electronics – which represents only 5% of all UK manufacturing, contributed two-thirds of the sector’s overall growth, according to Make UK (formerly the EEF). The industry body has credited the increasing focus on automation as a key catalyst for this growth, while the forthcoming rollout of 5G is set to continue that trend. Its quarterly barometer shows that the sector is continuing to expand in the first half of this year, and it expects growth in the region of 1.9% for 2019.

Despite the positive recent record, however, there are some clouds on the horizon for electronics SMEs. These are the challenges that companies in the sector need to be aware of, and planning for.

A drag on international trading

With the new Government increasingly focused on preparations for a ‘no deal’ Brexit, the electronics industry is one of many that must prepare for significant disruption to business as normal. As a sector dependent on importing materials and talent, and exporting its products, electronics is especially vulnerable to the changes a sudden exit from current trade agreements may bring. Make UK classifies electronics as the most import-intensive sector of UK manufacturing, with a quarter of demand coming from overseas.

As such, electronics companies must prepare for a possible future, as soon as the later part of this year, where there are potential delays to their supply chains, increased costs should new tariffs be imposed, and disruption to distribution channels across the EU. At a minimum, extensive contingency planning is needed.

And it’s not just Brexit casting doubt over the medium-term future of EU trade. Another potential growth hurdle is the ongoing trade dispute between the US and China. Already, this has made an impact on the global sector, with production rising in the US and tailing off in China in 2019 so far. These are fluctuations that UK companies are exposed to, given their role in global supply chains. Alongside Brexit, the trade war adds yet more uncertainty to existing arrangements and makes it even harder for electronics companies to plan for the future with confidence.

Components shortage

Increased demand has been a tailwind for the electronics industry in the last few years, as the Internet of Things and automation have increased the need for a whole range of electronic components. At the same time, however, it has been storing up a potentially major issue in the form of a components shortage.

With production having failed to keep pace with growing demand, many areas of the industry are facing delays in accessing components at the scale they need to grow. With order books already backed up, companies are being told to expect the delays to continue into next year at the very least.

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The electronics sector has significant growth opportunities to pursue, but also challenges to overcome. While companies in this industry should be focused on favourable trends such as automation and 5G, they are having to dedicate significant time and resources to planning for political and economic disruption that threatens their business models. As electronics companies make these preparations, many will be looking for sources of funding that enable them to invest appropriately. Read about how we work with manufacturing businesses to provide working capital headroom through our take on the business overdraft, GrowthLine – our core offering for companies on the expansion path.

Written on in Business Insights