What's in store for the UK process plant engineering market?

Escalating economic worries, higher prices and tighter spending will combine to make 2008 a much tougher year in the Process Plant Engineering market, according to David Pattison senior analyst at Plimsoll Publishing, who looks back at 2007 and forward to the New Year:

Stockton-on-Tees, UK - Almost every sector of British business stands at a crossroads as it prepares for the coming 12 months. With uncertainty in the economy, some will want to sit tight and do nothing radical. Others will need to cut costs quickly to weather the possible storm. But some who have built up large cash reserves will be looking at this period of difficulty to make acquisitions at a bargain price. So which category are you likely to find yourself in?

The average growth in the process plant engineering sector in 2007 has been 3.2%. This is pretty much in line with our predictions at the start of the year. But this growth was by no means universal. 44% of companies actually saw their sales decline. It’s important, however, not to confuse sales with profit. Some smaller firms, with a turnover of £3m or less, lost out on sales but still enjoyed healthy margins.

They did so by keeping their costs under control and by carving out a specialist area in the market. These firms have managed to do very nicely for themselves by trading in niche products. This trend has been an important factor since 2006, and I see no reason why it shouldn’t continue.

In general, if you’re setting your budget for 2008, you should aim for a growth target of at least 3.6%. Frankly, though, you should expect to beat this with a combination of imagination, forward thinking and spotting the opportunities that others have missed. With pressure on sales certain to come, some companies will need to cut costs in 2008. Sadly, for most the term “cost cutting” translates into job losses.

Ernst and Young is already offering services to help firms implement cost reduction programmes, and more of this will come as the pressure increases. My advice is to reduce costs as part of a planned long-term strategy, rather than doing so in panic mode. By the time you do the latter, it’s usually too late. But don’t be too hasty – 2007 was not a bad year overall, with margins averaging 4.3%. Indeed, for some exceptional companies, that percentage was in the mid teens – in some cases for the second year in a row.

At the other end of the scale, those firms that find themselves in difficulty should not buy into the hype that they will be safe from takeover because potential bidders won’t want to take risks against the background of a chaotic credit market. Arguably, there has never been a better time to go on the offensive, and companies with large cash surpluses will be able to make some dirt-cheap acquisitions in 2008 as others begin to fail.

The predators in cases like this are likely to see growth much greater than the industry average during the coming 12 months. Takeover targets are probably relatively safe for the next few months, but once the early jitters of 2008 are over, the buyers will circle and pounce.

So which companies will have an unhappy New Year? Well, anyone who is already finding it a struggle is likely to experience even tougher times unless immediate measures are taken to reduce costs and improve margins. Any company with escalating debts will certainly find it difficult to stay competitive, and even in some cases to survive. If your company falls into this category, the warning lights should already be on.

In short, then, a difficult year ahead, but those who take steps to streamline their business model or who supply a particular demand can expect to emerge in a relatively healthy position.