Sterling work

Sterling workThe effect of the value of sterling on the electronics manufacturing sector is not always clear. Alex Mayhew-Smith finds out what the analysts think
If you are someone who pays attention to the news and remembers things from one week to the next you could be very confused.
The vicissitudes of TV and newspaper reporters means that stories are scribed at short notice, to fill a space or to respond to some announcement. In the last month, according to various reports, the manufacturing industry is on the brink of recession, is in recession and is about to make a recovery. It is the longer term factors that concern analysts.
One long term factor felt by the UK manufacturing industry is the strength of the pound in recent years. According to the Bank of England’s Sterling Index, the value of the pound reached a six month high at the end of March. So what, you may well ask. Is this just another hyped, passing news story, forgotten the next day in order to fit in a story which contradicts the last?
In fact the pound has been through an unusually high period since the beginning of 1996. “The index was at 80 in January 1996, a 20 per cent rise is quite a startling increase,” says Elaine Barnett, an economic advisor at the Foundation for Manufacturing and Industry.  
  Pay day… The strengthening pound has made industry less competitive on world markets, says the CBI but overall demand for manufactured goods is now at its highest for seven months.
Managers agree with the observation that the strength of the pound is not a quick-fix news story. “From our point of view it is a long term problem, we are not so much influenced by peaks and troughs,” says Jeffrey Davis, Viasystems’ European president.
In the last year the phrase “due to the strength of the pound” has been uttered by various electronics companies like a mantra. The phrase normally comes hand in hand with bad news. Critchley Group recently sold its struggling electronic components division having warned that it too was suffering under the strength of the pound.
Bowthorpe, designers and manufacturers of specialist electronic products, also recently pointed to this malaise as a factor holding profits back in the second quarter of 1998 and the Federation of Electronics Industry (FEI) described the UK as “an unattractive location to manufacture” due to uncompetitive exchange rates.
And the long term problem can have catastrophic consequences. “It can severely curtail manufacturing. The electronics industry operates on a global basis – international organisations are ready to move manufacturing from one place to another when this happens,” says John Park, the FEI’s deputy director general. “Some in our industry say a move to the euro would assist the situation and others disagree. There seems to be no concerted voice for the industry.”
Of course opinion is divided on how best the strong pound can be curtailed. “If UK growth slowed down and European growth sped up it would help the situation,” says Barnett, while Davis foresees a crack of light at the end of the tunnel. “We can hope that interest rates will come down further. In 12 months from now I would expect normalisation. The euro could afford some relief,” he says.
However, not all companies even agree there is a problem at the moment. David Rhodes, chairman and CEOof Filtronic, which designs and manufactures microwave and millimetre wave radio frequency components and subsystems used in mobile phone networks, says: “It was a problem for us 18 months ago when an Italian competitor took some of our business.” The key, argues Rhodes, is to keep direct labour costs for manufacturing as low as possible.
According to the Confederation of British Industry (CBI) economic conditions for UK manufacturers remain weak but are improving. The strengthening pound has made industry less competitive on world markets, says the CBI but overall demand for manufactured goods is now at its highest for seven months. The CBI’s director general Adair Turner called on the UK to join the European single currency to protect UK exporters from damage caused by exchange rate swings.
However, it is not only the strength of the pound which determines the fortunes of UK manufacturers but it is a significant factor. After five successive interest rate cuts in the last six months, analysts say the slump has bottomed out. The Office of National Statistics says factory output edged up at the beginning of 1999 and prices at the factory gate rose.
For now the value of sterling remains high and there have just been 12 months of economic gloom. Manufacturers are going to need a little more good news before they believe better times are really on the way. STERLING AT A GLANCE The strength of the pound is measured by its exchange rate with other currencies. A strong pound will affect manufacturers because it becomes cheaper to importers in another country to buy its goods from a third country with a more favourable exchange rate. UK companies will also lose money in transactions due to the strong pound. Where they may have been getting ?1.10 for for every 10Fr previously, they may get only ?1.

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