The survey of over 200 senior executives from the manufacturing industry revealed that a third of firms are considering relocating some of their operations out of the UK over the next three years in order to boost productivity or reduce costs.
China and India were identified as the most attractive destinations for relocation, followed by the US, Czech Republic, Ireland, Belgium, Germany and the Netherlands.
The survey also revealed a “slight but notable increase” in consideration of moving elements of the supply chain away from the UK.
Over the next three years, the number of companies with 80-100% of their supply chain based in the UK will shrink from 21% to 18%, the survey found.
According to KPMG, this could be a result of businesses with interconnected pan-European supply chains planning for the possibility that the UK exits the EU Customs Union without an EU-UK free trade agreement in place.
Almost half of manufacturing executives surveyed (45%) believe a hard Brexit will have a negative impact on their organisation and two thirds of respondents said uncertainty from Brexit would be bad for economic stability.
However, the manufacturing industry is a “resolute group”, according to Karen Briggs, head of Brexit at KPMG.
Nick Harrison, a partner at KPMG UK, added that an event like Brexit can “spur companies to transform”.
“Brexit will force a paradigm shift. It could be putting a new CEO in place, leading to a new strategy, or it might be taking a fresh pair of eyes to the whole process, breaking it down, mapping it out and implementing practical process improvement,” he said.
Briggs added, “Although some are concerned about exchange rates, labour pressures and higher indirect taxation, they are also taking a range of practical measures to prepare.”
“These include partial relocation, supply chain management, increased business development, and new sources of financing.”
The majority of manufacturers think the key impacts of Brexit will include a rise in operating costs (63%), pressure on operating margins (62%) and a negative impact on the bottom line due to indirect taxation (63%).
Two thirds of manufacturers plan to offset any potential rise in costs by either saving costs elsewhere, or by absorbing them, while 35%, expect to pass costs on to the customer.
According to Justin Benson, director, KPMG in the UK, manufacturers should already be working on their relationships with banks.
“Manufacturers should be financing or re-financing their business to lock in lower cost of capital to mitigate longer lead times or payment periods.”
Briggs added, “UK manufacturers realise that Brexit will demand a burst of innovation from both the private and public sectors if the UK is really going to reach new global markets and deliver on its potential.”
On top of responding to Brexit, gearing up for Industry 4.0; increasing productivity and workforce skills; and the long-term industrial strategy were identified as the other key areas manufacturers are focusing on for the future.
Respondents cited investment in new technologies and access to a better-educated workforce as their top priorities for the government’s industrial strategy as they equip themselves for the fourth industrial revolution, known as Industry 4.0.
Almost three quarters (70%) of UK manufacturers surveyed want more financial support from the government to help them increase investment in emerging technologies, including artificial intelligence, advanced robotics and augmented reality in order to boost their tech abilities and developments.
Two thirds (65%) of respondents said improved access to skilled talent could help them increase productivity in their organisations, helping them remain competitive.
Stephen Cooper, UK head of industrial manufacturing at KPMG, highlighted the “appetite for new technologies” that exists in the manufacturing industry today but warned that the lack of skilled workers and the increasing gap between supply and demand for STEM talent remains a concern.
“Digital scientists, digital engineers, digital architects, cyber security engineers – none of these existed 20 years ago. Having access to the right skills and investment will be crucial to ensure Britain’s manufacturing sector unlocks its full potential and remains fit to compete on the international stage,” he said.
Cooper added, “The UK has an opportunity to position itself as a globally attractive and competitive base for advanced manufacturing.
“For this to become a reality requires industry to work closely with government to advance the UK’s industrial digitalisation, bring the right skills into the industry, and take advantage of the opportunity offered by the UK’s exit from the European Union.”
Welcoming the government’s recent industrial strategy green paper, Cooper said, “Collaboration between sectors, as well as between industry, government and the education sector will be critical.”
KPMG’s report outlines some immediate steps manufacturers should make in preparation for Brexit in 2019, and recommendations for longer-term strategic priorities that manufacturers and the UK Government should work on together.
“A focus on openness to foreign investment, access to talent, engagement with new markets, a positive regulatory and legal environment, as well as a coherent industrial strategy will drive the UK to new levels of competitiveness and ensure manufacturers are ready to capitalise on Industry 4.0,” Cooper said.