Costs of energy, transportation, labour and global events are causing businesses to scrutinise their expenses and bring previously outsourced work in-house.
“When the market is tight, it can result in redundancies or downsizing of teams and so the current climate has caused business to scrutinise their costs a lot more,” Alan Lowry, chair of the Federation of Small Businesses (FSB) in Northern Ireland, says.
“I know of lots of subcontractors who have closed their doors. Fabricators, galvanisers, paint companies, are not getting the work they need to keep their doors open.”
According to a report by NI Chamber and chartered accountants BDO NI, only 16% of manufacturers in NI are operating at full capacity (compared to 35% across the UK) and confidence around profitability has dipped in prediction of the next 12 months. Northern Ireland remains one of the most expensive energy markets in Europe.
“Being an island off an island, off a continent, and moving goods across waters has always been an issue,” Alan Bridle, economist at Bank of Ireland UK, says.
Shipping costs have stabilised but remain high. “Shipping a container from here to one of our customers in the Far East cost about $3,000 not so long ago but at one stage it went to about $18,000,” says Alan Lowry, who is also head of Environmental Street Furniture.
“Now the cost has stabilised back down to about $6,000 – it’s still double what it was.”
The price of raw materials remains high, particularly metals.
“We’ve seen the cost of paint doubling. When you try to bounce that price rise to customers, some of them understand. Others say, ‘We took this job on at a fixed cost. We can’t afford to pay any more for it’.
“We hear the term ‘value engineering’ more and more across the UK and Ireland now.
“Contractors use it as an excuse to go back to the client or architect and use a substandard product, which instead of having a five or 10 year warranty, like our products have, maybe has a six month or a 12 month warranty.
“Materials are coming here from the Far East that lack quality. The push to drive prices down is affecting manufacturing here.”
Some factors behind the high costs of business in NI are unavoidable. Manufacturing and engineering companies that trade globally will be impacted by wars in Europe, the Middle East and concerns over China.
“That’s stopping international buyers from being confident to make big investments,” Stephen Kelly of Manufacturing NI says. “We’re seeing a significant downturn in engineering sectors that are globally focused, particularly since the start of 2024, which has resulted in labour demand drifting away.”
Recruitment shortfalls are attributed to demographics and immigration constraints in a post-Brexit environment (which are impacting food manufacturers in particular).
Sociological changes have also been afoot since the pandemic: a desire amongst employees to work fewer or more flexible hours, for example. “Covid changed lots of people’s attitude towards work,” Stephen says.
“But we need people in our manufacturing sector to be present and in one place because there’s someone to their left and right who they rely upon. The opportunity for flexible working within production environments is limited.”
Manufacturers also attribute high costs to government policy: what Stephen Kelly describes as a “never-ending barrage of policy costs” across everything from climate change to waste.
They believe the Executive does not take into consideration the significance of the manufacturing sector, which is valued at over £6bn and accounts for 13.4% of Northern Ireland’s economic output.
According to the NI Chamber report, 32% of manufacturers were concerned about business rates in quarter one 2024, compared to 15% the previous year. Interest rates across the UK, meanwhile, remain high and as a result, “businesses are maybe more reluctant to borrow,” according to Gerard Gildernew, of chartered accountants and business advisers Gildernew & Co.
Then there are labour costs. From April 2024, the national minimum wage rose from £10.42 to £11.44 an hour. “Whenever the living wage rises, people with grades further up rise alongside them,” Stephen says. “That’s added hundreds of thousands of pounds onto payrolls.”
Alan says: “As the bottom is lifted, it can cause an inflationary wage spiral. It’s one of the reasons why the Bank of England has been cautious about reducing interest rates – because of the potential for further wage pressure inflation in the UK.”
Manufacturers would like to see a reduction in corporation tax and certainty over the industrial derating scheme, which allows a 70% discount in rates for manufacturing space (but is currently under consideration for removal).
What will happen if industrial rating is jettisoned? “It will cost jobs, plain and simple,” Stephen says. “Some manufacturers, because of the physical nature of their premises, need large spaces.
They pay more than other sectors because of their scale. If the relief was removed, manufacturers would pay three to four times more than any other part of the economy.”
The energy market in NI might also be reformed, rebalancing energy companies profits into lower costs for customers, and there should be greater investment in manufacturing and engineering skills, suggests Alan.
“The education system in Northern Ireland isn’t closely aligned to the needs of manufacturers. We’re not generating enough young people coming out of college with apprenticeships. What can we do to reframe the education system?”
Business owners can be proactive in the high cost environment. Gerard advises them to “take a step back and reassess all areas of your business. Look at which parts of your businesses are working efficiently, which parts are delivering profits”.
“Make tough decisions… I’ve been doing this work for years and can spot signs [where businesses are running into difficulties] very quickly. You don’t need weeks to carry out a review of a business: you can get a sense as to where the business is at within an hour or two of being on site.
“Manufacturing and engineering businesses are asking for expertise in terms of addressing and rationalising their cost base, looking at how they can cut costs and make themselves more efficient. Some have had to take action to reduce headcount. They’ve had to change their approach to international travel and trade shows, for example. But it’s essential they don’t cut too far back and compromise their position in the market.”
New technologies can also address labour market shortages. Manufacturing NI has a mantra: “Assume from this day forward you will never be able to recruit anyone ever again. That’s an extreme piece of advice, but it’s to get you to shift strategically how you manage your businesses,” Stephen says.