Boon for the North West as foreign investor focus shifts to manufacturing and digital sectors

A shift in foreign investor priorities has seen the attractiveness of the UK as a location for investment into manufacturing – a major sector for the North West – rise against a backdrop of COVID-19 uncertainty, according to EY’s latest UK Attractiveness Survey.

As well as 32% of manufacturers looking to reshore activity to the UK – a figure higher than historic trends – another 32% of respondents from the manufacturing sector say they intend to invest in the UK over the next 12 months.

The figures are the latest evidence of the economic impact of the COVID-19 pandemic, which has created uncertainty around business investment and prompted a re-think of investor priorities.

The survey of 220 non-UK investment decision-makers also found that 43% of respondents are continuing with the UK investments they planned before the pandemic, down from 72% in April.

According to EY’s analysis, these figures would mean 30-45% fewer foreign direct investment (FDI) projects in the UK in 2020 than the 1,109 projects recorded in 2019 – equivalent to a fall of between 333 and 499 projects.

Shoring up of supply chains behind manufacturing growth

Manufacturing investment is being driven by major changes in supply chain strategies which have become more pressing as a result of the pandemic. Sixty-six percent of all respondents – and 98% of manufacturing respondents – say they plan to remodel their supply chains in the future.

A move to continental rather than global supply chains is on the agenda for 32% of all respondents and 40% of manufacturing respondents. Thirty percent of respondents intend to reduce their reliance on a single source country, a figure which rises to 42% among manufacturers.

Stephen Church, EY’s North Markets Leader and Managing Partner for Manchester, said: “There is a real opportunity here for the North West, which sees a significant proportion of its GVA come from manufacturing, and an updated industrial strategy should identify the UK’s support for manufacturing and supply chain onshoring. COVID-19 may actually have stimulated investment activity in the manufacturing sector by accelerating technology adoption and supply chain redesign.

“Pre-pandemic, many businesses were already reviewing supply chains given trade and geo-political tensions. The challenges the pandemic has posed to extended global supply chains have made a rethink all the more important and reducing dependence on one source of supply and reshoring are all driving this shift.

“UK manufacturing is already established as a global leader and the North West will benefit as companies look to secure resilience and pre-pandemic productivity levels with a multi-location approach to their global supply chain.

“This resurgence is dependent on the sector in which manufacturers operate – those in automotive and aerospace are likely to continue to see reduced demand while many food manufacturers are running at capacity. But there is also the opportunity for companies to diversify, as we have already seen with alcohol manufacturers turning to sanitiser production, for example.”

Digital growth gives more positive news for the North West

Digital, a high growth sector for the North West, has also seen its economic importance increase.

Fifty per cent of respondents said that digital projects would be the biggest driver of future UK growth, up from 26% of respondents surveyed in 2019. The next closest sector was health and wellbeing, seen as the biggest driver of future growth by 36% of respondents. By comparison, only 35% of respondents felt the digital sector would drive future European growth.

Importantly, digital investment will be a key theme in a number of future FDI projects in various sectors, with 56% of respondents saying that the ability to deploy technology to transform future operations would become more important to their investment strategy as a result of COVID-19. Fifty-three per cent of respondents said that digital customer connectivity would become another key theme.

Digital adoption is also in investors’ top-five criteria for where they back projects, with 21% of respondents saying that the level of technology adoption by consumers, citizens and administrations would be a key factor influencing their decision about whether to invest in a country.

UK-wide picture shows longer-term resilience

While sectors like manufacturing and digital are doing well from these new investor trends, the proportion of overseas companies planning to invest across all sectors in the UK in the next 12 months has fallen to 25% from a ten-year high of 31% in April.

Over one-third of respondents (35%) said they had scaled back their UK FDI plans and 17% have paused them. However, just 5% have cancelled UK plans entirely and 21% said they had increased UK investment in light of COVID-19 (up from 5% in April).

Positively, the UK’s longer-term outlook has improved, with 53% of respondents saying UK attractiveness will increase over the next three years compared to 34% in April and 26% in 2019.

And, while down from April’s decade-high, the proportion of respondents planning UK investments in the next year (25%) is still at the second highest level since 2016.

Alison Kay, EY UK&I Managing Partner for Client Service, said: “The UK’s attractiveness as a destination for FDI remains comparatively strong despite COVID-19. With strengths in key areas like digital technology, Research & Development, and manufacturing, there is more than a solid base for the UK to build a future strategy on. These factors, combined with a growing interest in ‘reshoring’, present post-pandemic opportunities for the UK to meet investor needs and accelerate its levelling-up agenda.

“However, the UK will need to keep pace with the changing drivers of investment. Since the start of the year, COVID-19 has seen investors put an increasing premium on a country having measures in place to prevent a future crisis and its level of success in dealing with the pandemic.”

Investor appetites changing

EY’s report reveals the pandemic has prompted shifts in what matters to investors and in the types of project attracting investment, with 61% of survey respondents saying the changing economic model in major city centres will become an important part of their future investment strategy.

COVID-19 has also required investors to re-prioritise their investment criteria. Thirty-six per cent of respondents say their most important investment criteria is a country having measures in place to prevent a future crisis (up from 20% in the summer), followed by 27% prioritising a country’s success in tackling COVID-19 (up from 23%). Factors such as the quality of labour (down from 25% to 19%) and the labour supply (down from 21% to 17%) have become less important.

Mark Gregory, EY’s Chief Economist, said: “The pandemic has been a significant driver in boosting the importance of technology adoption and appetite for investment in health and wellbeing. The Government’s ambitious infrastructure plans also seem to have prompted interest in real estate and construction FDI. The decline in appeal of business services reflects the fact that this is a mature market with fewer new investment opportunities.

“It’s clear that investors will need to be convinced that a country can cope with future shocks before investing.”