Why don’t we build things anymore? This was an emotive
headline from a recent UK newspaper article. Manufacturing is for
many nations wrapped up with a sense of national pride and many in
Europe seem inclined to mourn its decline. However, as a recent
report into manufacturing discovered, investment in manufacturing
is far from insignificant – and asset finance is playing a major
part in making it happen across the continent. Grant Collinson
reports.

 

“There are misconceptions about manufacturing in the UK
from the populous,” says Mark Lee, head of manufacturing, transport
and logistics at Barclays Corporate.

“Many think of it as a declining
industry or a cyclical industry, but in many ways
neither of those things are true.”

The Annual Manufacturing Report
2011 (AMR), recently published by trade publication The
Manufacturer in conjunction with Barclays Corporate, found
asset finance to be the most popular form of capital expenditure
funding among UK manufacturers with the sole exception of cash
reserves.

Asked to select which methods they
had used to raise capital over the past two years, and which they
expect to use over the next two, 37% of UK manufacturers identified
asset finance.

 

Investment among
specialists

Richard Tilden, regional director of origination for
Lombard Corporate Asset Finance, responsible for Wales, the
Midlands and the south of England, agrees there are misconceptions
about the state of manufacturing in the UK and says his view of the
sector is much more positive.

“There seems to be a lot of
investment going on, especially among specialist manufacturers like
the automotive sector,” he says.

“They talk a good game and are
quite optimistic. A lot of manufacturers are shortening their
supply chain and bringing it back to the UK. Companies don’t want
to be over reliant on goods and services from abroad but are
boosting their local manufacturing base. That is fuelling a bit of
growth and optimism,” he adds.

Both Tilden and Lee agree the
perceived healthy investment level could be in part attributed to a
greater understanding of lease finance options, which is backed up
to an extend by the AMR.

However, as 2011 was the first AMR
to ask about asset finance, there is no comparative data.

“I think there is a pretty good
level of understanding across the manufacturing base about asset
finance compared to different sectors,” says Lee. “We tend to find
finance directors we deal with in manufacturing are pretty au fait
with asset finance.”

Tilden also believes manufacturers
are more aware of the benefits of asset finance and leasing and
says new business patterns at Lombard reflect this.

“Two or three years ago our asset
finance business was very much geared towards plant, yellow goods
and motor vehicles, but if you were to look at my deals in progress
now you would see 50-60% production equipment such as injection
moulding machines, canning equipment, paper mills; very much in the
manufacturing space,” he says.

“It has maybe grown from 20% to 60%
over the last few years. It is really encouraging.”

Significant growth in the leasing
of production equipment has also been seen in Germany.

The annual report of the German
leasing industry’s trade body, the Bundesverband Deutscher
Leasing-Unternehmen (BDL), showed 21% growth in the production
machinery sector for 2011.

The increase made a significant
contribution to the €46bn in new equipment leasing business
generated by the German leasing industry, which was up 12% across
the whole sector over the year.

Martin Mudersbach, president of the
BDL, attributed the surge to strong current demand, particularly
for mechanical engineering products, and a delay in recognition of
orders placed during the upturn in the economy following the
financial crisis of 2008-2009.

Mudersbach also said the
manufacturing sector was a growing customer segment for the German
leasing industry.

“In terms of their importance as a
customer group, manufacturing companies come second only to the
service sector.”

Manufacturers in Germany accounted
for 21% of all new leasing business transacted in 2011, which is up
significantly on the previous year.

 

A good fit

One reason for this increase, and
for the level of asset finance anticipated by UK manufacturers –
which all leasing professionals seem to agree on – is that leasing
suits the manufacturing sector.

Lee from Barclays Corporate told
Leasing Life: “It is a capital intensive sector; it
clearly has a lot of equipment and a lot of logistics within the
life cycle of the products being manufactured.

“Fundamentally, from a
usage-of-kit
perspective, this is sector which needs plenty of financing and if
you look at the financial profile of a manufacturer against the
profile of a company in another sector, asset finance is an
efficient way of funding businesses in this area.”

Carlo Marini, deputy general
manager responsible for international markets at UniCredit Leasing,
agrees.

“Capital intensive industries such
as manufacturing, mining, utilities and construction use leasing to
finance a large part of their investments in machinery and
industrial equipment,” he says.

The picture of a sector
well-matched to asset finance extends across the continent.
Jacqueline Mills, senior adviser at Leaseurope, said:
“Manufacturing is one of the most important sectors [to European
leasing]. Any capital intensive sector is likely to need to be able
to finance things and leasing is definitely one of the most popular
forms within that
sector.”

The Leaseurope Annual Statistical
Enquiry for 2010 showed 16% of the €224bn total new business volume
recorded was granted to finance machinery and industrial
equipment.

A more recent piece of Leaseurope
research from November 2011 conducted by Oxford Economics, The
Use of Leasing Amongst European SMEs, found leasing is an even
more significant funding tool for Europe’s small and medium-sized
manufacturers.

The research showed 44% of SMEs in
the manufacturing sector used leasing in 2010, compared to an
average of 40% of SMEs in all sectors taken together.

The funding penetration rate in the
SME manufacturing sector is higher than the overall SME rate –
17.3% compared to 16.7% overall.

The report, which covered eight
European markets (the UK, Italy, France, Germany, the Netherlands,
Poland, Spain and Sweden) also revealed 41% of SMEs used leasing to
finance machinery and production equipment.

UniCredit’s Marini agrees SME
manufacturers can gain particular benefit from asset finance.

“Some administrative and
operational
efficiencies, and the flexibility to change the leased asset once
the contract expires, help SMEs to concentrate their efforts to
better compete in an increasingly challenging economic
environment.”

He also said about one third of
UniCredit’s transactions are directly related to the manufacturing
sector and that the sector makes
up about a quarter of the company’s total portfolio.

Tilden identifies a longer-term
investment outlook in the manufacturing sector as helping to drive
longer-term leasing deals.

“We are seeing five, six and
seven-year contracts where traditionally they would have been two
or three year contracts. That makes it easier for us to get
comfortable with the lending proposition behind it as well,” he
added.

He admits, however, there are
challenges in the manufacturing sector, particularly around valuing
large production assets.

 

Cross-sell
potential?

The relationship between a
manufacturer and an asset finance provider can extend beyond
production machinery and the sales finance of equipment produced,
however.

The AMR revealed that the
percentage of manufacturers surveyed that had invested, or expected
to invest, in machinery in the current financial year had dropped
from 60% to 50% However, investment in communications
infrastructure increased marginally within the manufacturing
sector.

The AMR also found nearly a third
of manufacturers anticipated investing in communications
infrastructure and computer hardware, and 38% on software and
systems, over the next year.

These findings hint at the
potential for cross-selling for asset finance within the
sector.

“In addition to the productive
assets, [manufacturers] can lease all the other things businesses
need: cars, computers, telephones,” says Mills. Marini goes further
and says the
manufacturing sector can act as an entry point to other sectors
within the wider economy.

“Although leasing is a valuable
financing tool for many economic sectors, the manufacturing
industry – which is the backbone of many European economies –
represents an important partner.

“The ability to satisfy need in
that sector is the gateway to enter all the other sectors.”

Barclays’ Lee agrees there is
opportunity to cross-sell, but says it is less significant.

“I think manufacturers, to a large
extent, unless they have a programme in place for asset purchases,
tend to look at asset finance more for strategic capex.

“Purchasing other assets tends to
be sucked up into normal corporate funding or corporate
reserves.

“The starting point [for Barclays] is very much from a strategic capex point of view and we try to
migrate that down the chain into smaller bits of kit.”

Lee’s position is borne out by
further AMR findings which show UK manufacturers’ chief investment
concern continues to be production machinery.

The majority of respondents to the
survey expected investment in machinery to increase slightly over
the next two years, and major investment in machinery to do
likewise over the next five years.

In another potential boon for the
leasing industry, the survey also identified cost reduction and
cash flow increase as the most important focal points of financial
management for the companies surveyed.

 

Penetration growth
potential

Some manufacturers anticipate
investment, but with leasing penetration rates in the sector still
modest, there is a substantial amount
of ground to be made up by asset finance
providers.

“We see a lot of potential in the
manufacturing sector,” says Tilden. “The market is substantial and
a lot of it driven by bank debt and revolving credit facilities.
Leasing forms quite a small proportion and there is a bigger pool
of investment than in other sectors such as transportation. There
is a huge opportunity to expand in this market especially as banks
are finding it harder to lend – I think leasing is coming into its
own in this area.”

Lombard’s parent bank RBS, Tilden
says, is working more closely with his and other regional asset
finance teams to help the company expand in this market.

“We are seeing far more interaction
with our colleagues in RBS,” he says. “If a customer is seeking an
overdraft facility and it is for capex they are encouraged to look
to Lombard and a more appropriate, structured way to fund
assets.”

BDL’s Mudersbach also sees
potential to grow leasing penetration in the German
manufacturing sector.

“There is still plenty of potential
in this market segment, since leasing at present accounts for only
around 10% of the total market volume. That leaves plenty of room
for growth,” he says.

There may be room for growth and an
appetite for investment in two to five years time, but whether
growth can be realised in 2012 is less certain.

Mudersbach attributes the rise in
production machinery funding in Germany to a backlog of orders due
to long delivery times, which, he says, may continue into the first
half of this year, and although demand may slacken towards the end
of the year, he does not expect negative growth.

 

The wider view

From a pan-European point of view,
says Mills, it is harder to be positive.

“The German situation is a little
bit special – economically things are a little bit better there
than in the rest of Europe.”

She anticipates that the economies
which are currently stronger may see growth, but on the back of
catch-up, but says, overall, the outlook for equipment investment
is not too bright.

UniCredit Leasing’s Marini says
predictions are difficult given economic turbulence which, he says,
is impacting on consumer confidence.

Barclays Corporate head of asset
finance Alex Brown agrees things are difficult to predict and
believes the pattern of built-up orders forecast in Germany may not
apply in the UK.

“I think,” Brown says, “we can say
if you are stretching an asset, then eventually its useful life
will start to come into question. The maintenance cost against new
capex will come into it, but these are individual discussions on
individual assets.”

“This will take time to produce a
growth trend and I can’t say when that will kick off.” Brown adds,
however, Barclays Corporate is looking to expand in manufacturing
and says the sector is one which performs well.

Lombard too is seeking to develop
further its footing in manufacturing and has been involved in the
Institute of Mechanical Engineers’ Manufacturing Excellence Awards
programme in the UK. Tilden, who has been on the judging panel of
the programme, says the experience has not only heightened his and
his team’s knowledge of the sector, but encouraged his outlook for
the UK’s manufacturing sector. This, he says, means Lombard expects
growth.

“If we understand the sector more
we will gravitate towards it. We’ll see growth simply because of
the investment we are putting into the sector.

“It is difficult to say because we
are seeing more of the market, but that is where we are hunting, if
you will.

“Generally, I think investment
might a bit flat for the next 12 months, but there are no signs of
it going backwards.”

While this year may prove quieter than both lessors and their
partners in manufacturing would like, there is evidence to show the
hum and whirr of production lines across Europe is louder than many
might believe and there is opportunity for leasing to play an even
greater part in the continent’s economic backbone.