Electric avenues

The UK is one of the strongest players in the world's fastest growing industry - electronics. It currently has the world's fifth largest electronic manufacturing sector, covering electrical machinery, scientific instruments and information and communications technology. According to the Federation of the Electronics Industry, the sector's sales are worth more than £90bn, some 70% of the world's mobile phones contain a UK chip and more than 50% of Europe's semi-conductors are created in the UK.

In 2001, however, UK production declined by about 12%. The industry downturn was brought about by increasing competition from low-cost countries, such as Eastern Europe and China, and a global decrease in ICT spend. The UK electronics industry faces numerous challenges if it is to stay in the world league.

Higher competition

The UK cannot compete at the low end of the market, whether other newly-industrialised countries will always be more competitive. It has to compete at the higher end of products and services, where high levels of skill, research and development are essential.

Traditionally, the electrical machinery sector has been relatively low risk, from both a buyer and policy perspective. But the downturn is affecting sub-sectors within the electrical machinery book that rely heavily on the hard-hit ICT and telecommunications sectors, particularly cables and wires, semi-conductors and printed circuit boards.

Cables and wires saw 24% growth between 1996 and 2000, due to the high demand for products to carry increasing volumes for computers and communications.

Some 58% of these revenues were earned from ICT and telecommunications.

Not surprisingly, the downturn has had a detrimental impact, especially at the lower end of the market. The large costs of operating within the sector, owing to the need to supply a broad product base requiring high levels of investment and research. Small companies struggle to survive in this competitive and saturated market.

The UK computer manufacturing market, worth an estimated £569m in 2001, has seen global prices fall rapidly since 2000 owing to decreasing demand and over-capacity. Greater competition from low-cost countries is increasing the pressure on existing suppliers to relocate and many of the UK manufacturing bases are owned by international companies, which can easily close or move plants.

During 1999 to 2001, the telecommunications sector experienced a well-documented boom, attracting many new entrants into the market. The high level of investment from venture capitalists and the City saw the value of the telecoms companies inflate but many had unsustainable debt levels.

In addition, high competition and government intervention lead to a dramatic fall in prices.

Operators spent billions acquiring 3G licences from the government and building the infrastructure. In consequence manufacturers and network operators are now heavily reliant on the success of 3G, with an estimated 25,000 masts needed in the UK to enable operators to provide the coverage necessary. However, the mast building process is often drawn out due to the need for planning permission and a period of testing. Increasing external social pressures and health scares surrounding masts make this more difficult.

In 2001, the UK was the fifth largest market in the world for producing medical equipment and supplies. Growth in this sector in recent years has largely been attributed to the private finance initiative. Sales are mainly to the NHS and private hospitals but include laboratories and research and development facilities within the medical, pharmaceutical, chemicals and hi-tech engineering industries.

The scientific instruments sector will continue to expand, with the greatest opportunity seen by companies that can prove the benefit of their products relative to cost and withstand the health technology assessment.

IT projects

The current downturn in the economy is expected to continue to impact adversely on business confidence and spending plans. Major IT projects are likely to be reduced or delayed, and demand is unlikely to recover before 2004.

Even if demand does recover, however, the trend of manufacturing relocation to Eastern Europe and South-east Asia is likely to continue. In addition, the number of players in the electronics sector is expected to shrink further as more consolidation takes place.

But there is a lot of potential in a number of the industry's sub-sectors, including electrical machinery, scientific instruments, telecoms outsourcing solutions and ICT sub-sectors, including IT security and IT storage.

Within these sub-sectors, some of the industry's rising stars will emerge.