“There is no crisis”
02 March 2009
At an EMSA (Electronics Manufacturing Services Association) meeting late last month, Peter Towler declared that the forecast for the future of the electronics outsourcing industry is incredibly optimistic. Is this a sunny outlook uttered at the dawn of a renaissance, or a reassuring declaration that the plethora of financial problems are not affecting our industry?
In a roundtable discussion at Intellect’s London offices, the Business Development Manager of Briton EMS and Vice Chair of EMSA went on to say: “We’re not in a contracting, decreasing market; the market is growing. The credit crunch has helped people to take a good hard look at their finances. We have new entrants and companies are outsourcing so it’s not a case that we’re fighting for a smaller and smaller part.” Chris Heal, Sales Manager at Custom Interconnect Ltd, added: “We’re very busy and although some areas are down, on the whole it’s looking very good.” And there is a benefit to the UK EMS companies in this time of uncertainty, as Peter Shawyer in Export Sales at Texcel Technology alluded to: “We’re doing overtime to meet demand. The Dollar and the Euro is such that our customers are doing well.”
For Paul Deehan, Chief Executive of AWS Group, things are positive: “We’re in a relatively healthy position and we’ve lost no customers or products. But Gordon Brown’s ‘We’ll spend our way out of this’ is a load of dross! I think there’s another 18 months yet before we hit the bottom of this recession.” Even so, enthusiasm for a profitable future remained. “Our sales plan is healthy and we’re expecting new business later this year,” stated Jacqui Malpass, Marketing Manager at Axiom Manufacturing Services. “We’re winning new customers and are overworked in RFQs,” said David Dickin, Prism Electronics Ltd’s Business Development Director. “We’ve not lost any business and have plenty of RFQs,” added Nick Mair, Sales and Marketing Manager at Ultra Electronics Ltd. “We’ve opened a new factory in Cambridge and don’t have a ‘doom and gloom’ feeling. The industry has been buffeted and molested in the past so we’re not an industry suddenly faced with a problem because we’ve faced these problems before. What we’re experiencing is a deep structural change that has been happening in the UK for over 20 years,” said Mair, before concluding: “UK companies outsource to save money but the UK is not in the long-term an attractive place for manufacturing. However, we are service providers and as long as we monitor what OEMs require and adjust our services accordingly, we’ll be ok. In small to medium volume high-reliability products, I believe the UK is more competitive in 2009 than it was in 2008.”
In support of this categorically positive view, MHM’s latest batch of 26 UK/Ireland OEM EMS outsourcing intention interviews shows that there is significant EMS potential in the UK and Ireland, with 59% of OEMs reportedly increasing outsourcing in 2009. However, Ireland’s strong Euro is proving to be a huge problem for Irish producers and an advantage for UK companies, who can enjoy a 30% accumulative price advantage.
However, as Chris Heal added: “The majority of our customers are UK ones, but we have to think about our customer’s customer. Many companies that we deal with are American-owned so we need to look at who the end customer is. Materials are bought in Dollars and Euros. Inflation is more embedded in the economy than most people think… The supply chain holds us to ransom.” Aled Williams, Business Manager at Remploy Electronics, said: “We believe that business is still out there and the low value of the pound means that we can win business back from Europe.”
An issue discussed at the EMSA meeting was whether R&D tax credits will be dropped. If so, the knock-on effect could be huge. According to the UK HM Revenue and Customs website: “Research and development tax credits are a company tax relief which can either reduce a company’s tax bill or, for some small or medium sized companies, provide a cash sum. The aim of the tax credits is to encourage greater R&D spending in order to promote investment in innovation. By early 2006 about 22,000 claims had been made, just over 19,000 of which were made under the SME scheme and just under 3000 of which were made under the large scheme, amounting to almost £1.8 billion of support claimed through both schemes. The R&D tax credit works by allowing companies to deduct up to 150% of qualifying expenditure on R&D activities when calculating their profit for tax purposes. Companies which are SMEs can, in certain circumstances, surrender this tax relief to claim payable tax credits in cash from the HM Revenue & Customs.”
The CBI (Confederation of British Industry) argues that R&D tax credits are particularly valuable during a recession. Publishing survey findings showing that companies doubled their savings on R&D under the scheme between 2005 and 2008, the UK’s employers’ group said it would send all the wrong signals if it were to be abandoned.
The survey, conducted with the support of three trade associations – AIRTO (Association of Independent Research & Technology Organisations), SBAC (Society of British Aerospace Companies), and Intellect (trade association for the UK technology industry) – shows that business confidence in R&D tax credits grew dramatically in the last three years. The credit is now an important factor for companies when deciding where to base R&D operations, and it improved the attractiveness of the UK as a destination for high value investment and jobs. In a recession, the CBI claims that it is even more important that firms are able to invest in new ways to compete so they are better placed when an upturn comes. The benefits of R&D also take time to materialise, so the CBI is urging government to think long-term, keep the incentive, and continue improving it for the benefit of the whole economy.
Richard Lambert, the CBI’s Director-General, said: “As our economy seeks to re-balance over the months ahead, the government must recognise the value of the R&D tax credit and commit to retaining it and encouraging more firms to invest in research and development. It should also go further by building on its success; extending the rate and range of credit, enabling more companies to apply and covering more of their associated overheads. All of our major competitor countries have and value such a scheme. Losing the tax credit now would be a real blow and could seriously affect Britain’s overall R&D investment. The UK currently has the highest proportion of business R&D financed from abroad of any OECD country.”
The CBI’s survey shows that most companies’ claims have been met in full, and 90% intend to claim it again. Furthermore, between 2005 - 2008, average savings delivered by the R&D tax credit doubled from 4% to 8%. Indeed, 37% of firms have increased R&D as a result of the credit; up from 18% in 2005. In the survey, conducted during November and December last year, half of businesses stated that the credit directly helps them keep R&D in the UK, whilst three-quarters say it helps in more indirect ways to maintain UK R&D. Tom Wills-Sandford from Intellect, said: “It is very encouraging that the UK’s R&D scheme is coming of age and delivering improved results, particularly for SMEs. In the technology sector, we have been delighted to see the change in culture at HMRC.”
It certainly looks like outsourcing is thriving at the moment and EMS companies can see light at the end of the tunnel. As long as there is money to help them and their OEM customers with R&D, they will get there.
What are your thoughts? Send an email and let me know.
This week’s leader was written by Paul Wolfe, EMTww’s Assistant Editor.
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