Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness A report from the Economist Intelligence Unit Sponsored by Lombard Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness About the study U pgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness is an Economist Intelligence Unit report, sponsored by Lombard, part of the Royal Bank of Scotland Group The report reviews the capital expenditure plans of British businesses to gauge spending trends, as well as related challenges and opportunities The research draws on several inputs, including: l A survey of 392 firms operating in the UK Firms of all sizes were represented: 25% were relatively small, with revenue under £100m; 42% had revenue of between £100m and £1bn; and 34% were large, with £1bn or more in revenue All major sectors were represented, with a weighting towards IT & technology (21%); manufacturing (16%); transport and logistics (15%); and financial services (11%) The survey sample was very senior: all respondents were from a management function, with 48% representing the board or C-suite l An analysis of 251 UK-listed companies that had reported 2010 data with regard to cash on their balance sheets, along with wide-ranging desk research l Interviews with 12 executives and experts We would like to thank the following people for their time and insight (listed alphabetically, by organisation): l Meziane Lasfer, professor, Cass Business School l Andrew Kakabadse, professor, Cranfield University School of Management l Bob Shanks, vice-president and controller, Ford Motor Company l Marc Silvester, senior vice-president and global chief technology officer, Fujitsu UK l Peter Cole, chief investment officer, Hammerson l Andrew Walker, chairman, Metalrax plc l Mike Tholen, economics and commercial director, Oil & Gas UK l Paul Harrison, group finance director, Sage  © The Economist Intelligence Unit Limited 2011 Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness l Andrew Pimblett, managing director, Street Crane Company l Colin McLean, founding partner and managing director, SVM Asset Management l Richard Dear, business manager, Ultra Electronics (CEMS) l Nick Mair, sales and marketing manager, Ultra Electronics (CEMS) l Julie Adams, managing partner, Menzies The author of the report is James Watson and the editor is Monica Woodley James Gavin and Sarah Fister Gale conducted a few of the interviews for this report  © The Economist Intelligence Unit Limited 2011 Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness Executive summary O ne of the indicators of a healthy economy is a sufficient level of capital investment, both from government and the private sector Such investment is crucial to maintaining the long-term competitiveness of both the country and individual businesses This Economist Intelligence Unit report, sponsored by Lombard (part of The Royal Bank of Scotland Group), reviews capital expenditure (CapEx) patterns within corporate Britain as the economy moves slowly out of recession while still facing daunting headwinds This report considers whether firms are planning to increase CapEx and in which areas, and how the decision-making process has changed since the financial crisis The key findings from the research include: l Capital expenditure is lagging confidence and capital levels Planned increases in CapEx not reflect the degree of confidence that management hold in the economy, or the cash held on many balance sheets While more than two-thirds (67%) of respondents express confidence about the future economic climate for their business and a similar number (70%) are holding cash, just 36% plan to increase capital expenditure For a similar number (37%), CapEx will remain flat In part, this is because many firms still have spare capacity, as demand remains below 2007/08 levels Just 23% plan to cut back or eliminate it entirely (4%) l Most, but not all, UK firms cut capital expenditure during the recession Nearly two-thirds (63%) of firms cut back investment during the financial crisis and subsequent recession One-quarter of survey respondents cut back all but the most essential of spending, while 38% simply pressed pause on all new investments Overall UK investment fell by 29% from a quarterly peak of nearly £38bn in late 2007 to just under £27bn in late 2009 However, not everyone was so cautious: some (14%) firms took advantage of the climate to invest for a competitive advantage, while nearly one-quarter of firms maintained all planned investments l Businesses are slowly, but surely, modernising their physical assets There is a small, but clear shift in CapEx allocation plans, with a trend towards acquiring new assets, whether IT systems, equipment and machinery, or telecommunications infrastructure, rather than simply spending on maintenance  © The Economist Intelligence Unit Limited 2011 Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness l Meeting the demands of existing customers is the main driver for investment Two-thirds of respondents agree that this has been the key motivation for capital spending However, keeping pace with technology or delivering more innovative products may be the real motivation, rather than increased capacity Improved efficiency and expanding the business are also cited as reasons for CapEx by 61% and 53%, respectively l A significant minority of companies are concerned that their lower level of CapEx is negatively affecting their businesses About four in ten (39%) believe they are falling behind their competitors because of reduced investment levels, while about one-third (34%) say they have been unable to expand into new markets (34%) or to expand their range of products and/or services (31%) l Reducing capital expenditure has bolstered profits, with many corporate balance sheets showing strong cash positions About four in ten (38%) firms say that spending cuts have boosted their profitability, with a further 30% saying this has at least helped to maintain consistent profits Reduced CapEx has contributed to rising levels of cash on many balance sheets In an analysis of 251 listed companies carried out for this report, cash levels rose by an average of 7% in 2010 compared with 2009 levels l Most firms believe belt-tightening has boosted productivity Over one-third (34%) of respondents have seen productivity improve where they have focused on innovation or efficiency improvement during the downturn A further 28% say productivity has stayed the same The key question is how long this cycle can be stretched out, as this is not a sustainable strategy for the long term  © The Economist Intelligence Unit Limited 2011 Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness Introduction T he UK has historically lagged other developed economies in terms of its overall rates of investment This is the case from a government investment perspective, in areas such as transport infrastructure, including roads and rail But it is also true from a business investment perspective, in terms of companies taking the decision to invest their capital in new factories, equipment and Chart 1: Gross fixed investment, 1980-2009 (% of GDP) Portugal 25.5 Spain 24.3 Switzerland 24.1 Austria 22.7 Norway 22.3 Finland 22.0 Average 21.3 Italy 21.1 Netherlands 21.1 Ireland 20.7 Greece 20.5 Germany 20.4 Belgium 20.1 France 19.9 Denmark 19.7 Sweden 18.7 United Kingdom 17.4 Source: Economist Intelligence Unit  © The Economist Intelligence Unit Limited 2011 Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness Chart 2: Total UK business investment (£ m) 40,000 40,000 35,000 35,000 30,000 30,000 25,000 25,000 20,000 20,000 15,000 15,000 10,000 10,000 5,000 5,000 0 1966 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 2000 02 04 06 08 10 Source: Office for National Statistics machinery, information technology and other areas Such investment is crucial for improving efficiency and competitiveness, and expanding overall capacity to cater for future growth From a macroeconomic perspective, the UK’s total investment, which is almost wholly comprised of the two elements above, as well as housing investment, is in fact the lowest of any country in western Europe The UK’s fixed investment as a percentage of GDP between 1980 and 2009 averaged around 17.4%, in comparison with an average of 21%, with some rates as high as 24%, across the 15 major European economies (see chart 1) During the past decade, levels of government investment in the UK tripled, while investment in housing soared during the property boom However, both of these are now being constrained, especially given the government’s plans to cut spending sharply in order to reduce its budget deficit substantially In terms of business investment, which accounts for about 60% of total UK investment, the longterm trend shows several periods of pick-up, all of which have ultimately stalled In both the 1980s and 1990s, investment started increasing, with the latter closely linked to the dotcom boom and an associated surge in IT-related investments More recently, a rise in capital expenditure during the 2000s has once again been cut short by the severe financial crisis that started in 2008 (see chart 2) As of the fourth quarter of 2010, total business investment was around £30bn, about the same at the end of 2001 This holds critical implications for the overall performance of the economy, as investment accounts for a sizeable proportion of overall demand More importantly, it is also a key determinant of future supply: business investment helps to expand capacity by enabling firms to either supply more goods overall as demand increases, or to supply the same amount of goods with fewer inputs through increased efficiency While capacity concerns have been low during the recent recessionary period, a failure to invest will leave many businesses exposed if a pick-up in the global economy gathers pace and demand returns  © The Economist Intelligence Unit Limited 2011 Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness The state of the UK economy Taking the decision to commit to investing capital is largely driven by the level of confidence that business leaders have in the overall economy, along with their companies’ prospects for growth both domestically and abroad Quite simply, managers facing uncertainty or volatility in their industry are unlikely to sign off on major capital spending plans for new production capacity, larger premises or other similar investments This link with confidence is reflected in the fact that levels of business investment over the past two decades have been highly volatile In terms of the overall economy, the picture is distinctly mixed After real GDP contracted by 4.9% in 2009, the largest annual fall since the second world war, growth in the UK resumed in 2010 at 1.3% This was sustained in part by government spending, as well as robust gains in the manufacturing sector in particular But the underlying picture remains fragile, not least as government stimulus spending nears an end and the outlook for domestic consumer demand remains weak Growth of 0.5% in the first quarter of 2011 followed a contraction of 0.5% in the last quarter of 2010—avoiding a double-dip recession but doing little to reassure that the economy is back on course Forecast GDP growth for 2011 is the same as last year’s, at 1.3%, while in 2012 the rate is forecast to rise slightly to 1.7% (see table 1) Nevertheless, one of the core aims of the current coalition government is to rebalance the economy through the diversification of business investment and exports, in order to reduce the concentration of economic activity in a few sectors like financial services Already, the UK has seen a bounceback in the manufacturing sector during 2010, although the sector’s absolute levels of production remain about 10% below their 2008 peak Some comeback was inevitable after the recession, but a sharp drop in the value of sterling against the US dollar from its peak in 2007 has also given manufacturers a competitive boost However, manufacturers have been battling with rising commodity prices, including a spike in oil prices, which has affected their input costs This is particularly the case for those manufacturers Table 1: Key UK data and forecasts (as of June 1st 2011) 2006 2007 2008 2009 2010 2011 2012 1,328 1,405 1,446 1,395 1,454 1,510 1,576 2.8 2.7 -0.1 -4.9 1.3 1.3 1.7 Gross domestic product Nominal GDP (£bn) Real GDP (% change) Expenditure on GDP Gross fixed investment (% real change) 6.4 7.8 -5 -15.4 3.0 5.8 3.6 Exports of goods & services 11.1 -2.6 -10.1 5.3 7.5 6.8 Imports of goods & services 9.1 -0.8 -1.2 -11.9 8.5 5.1 4.5 Agriculture 0.7 -4.8 0.2 -6.8 -1.0 1.0 2.0 Industry 0.3 0.9 -2.5 -10 3.0 1.9 0.8 Services 3.5 3.7 1.4 -3.6 1.1 1.1 1.9 Origin of GDP (% real change) Prices and financial indicators Exchange rate US$:£ (av) 1.84 1.86 1.56 1.55 1.63 1.61 Exchange rate €:£ (av) 1.47 1.46 1.26 1.12 1.17 1.19 1.28 Source: Economist Intelligence Unit, (2011-12 are forecasts)  © The Economist Intelligence Unit Limited 2011 Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness having to import raw materials “Raw materials are going up quite significantly in price,” notes Andrew Walker, the chairman of Metalrax plc, a Birmingham-based supplier of specialist engineering and consumer durables, and a non-executive director of several other firms “Quite a few of the businesses deal with polymers and they’re up 40-50% in the last year.” Bulging corporate balance sheets One of the other factors weighing on capital investment considerations is that many businesses have built up significant cash reserves on their balance sheets This has been a natural reaction to the recession, with firms seeking to stockpile cash in order to ensure that they can ride out the downturn Many planned projects were scrapped because firms simply did not know whether they would achieve expected returns given an uncertain demand outlook In addition, given the restriction of credit as banks sought to rebuild their own balance sheets, businesses decided they would rather hold onto their capital By the middle of 2010, UK non-financial firms had amassed more than £140bn in cash, the highest level since 1998, according to Morgan Stanley, an investment bank Precise data on corporate cash levels are limited, but an analysis of 251 UK-listed firms that had reported their financial data for 2010 showed that firms had increased the amount of cash or cash equivalents on their balance sheets by an average of 7%, or £16.7m, from 2009 levels The aggregate increase of nearly £4bn took total cash on hand to nearly £29bn across the group Of course, many firms are far from cash-flush, relying on what credit facilities they can get or simply surviving on month-by-month cash flows But for those with excess cash on their books, the question is what to with it, especially given low interest rates Sage, a business software firm headquartered in Newcastle Upon Tyne, has substantially reduced its net debt through strong cash generation Consequently, net debt is at modest levels today Shareholders are supportive of this but of course expect the capital to be deployed in some way over time, or else will start demanding it back “But I don’t think we are there yet,” says Paul Harrison, the firm’s group finance director (see case study) But such pressures are building within many firms “The puzzle now for firms is they invest, or give money back to shareholders, or something else with it,” says Professor Meziane Lasfer, a corporate finance specialist at Cass Business School Broadly speaking, there are five main options for business leaders: l Reduce liabilities Those firms with high levels of debt may take the chance to pare that back and repair their balance sheets Of the 392 firms surveyed for this report, 18% are planning to pay down debt Alternatively, it will be used to prop up other liabilities, such as pension funds, according to 7% of firms polled l Explore mergers and acquisitions (M&A) Eighteen percent of firms are looking at using their cash to acquire rivals Indeed, M&A deal volumes in the UK in 2010 increased by 10% over 2009, according to PricewaterhouseCoopers, and have continued to grow in 2011 so far l Return cash to shareholders Some capital will be returned to shareholders, mainly in the form of increased dividends, which is being considered by 14% of firms This also may be done via other  © The Economist Intelligence Unit Limited 2011 Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness mechanisms, such as share buybacks, with a view to propping up share prices In the US, share buybacks have soared over the past year l Fund innovation Others will seek to bolster their research and development efforts, to increase competitiveness Some 10% of firms polled say they are exploring this option l Increase capital expenditure Finally, some will be diverted back into increased capital expenditure, in order to bolster efficiency, replace worn out equipment or IT systems that have come to the end of their life, or add new capacity in expectation of a pick up in demand Just over one in three firms (36%) overall plan to increase their capital expenditure in the year ahead The rest of this report considers this final option more closely, exploring which industries have the most appetite for capital investment; what this spending will be directed towards; and how the CapEx decision-making process has changed Sage Group – After strengthening the balance sheet, options for cash return case study: Sage, one of the UK’s biggest business software firms with 6.3m customers worldwide, is not a traditionally CapEx-intensive business But Sage’s group finance director, Paul Harrison, acknowledges the impact of the recession on spending plans, reinforcing a focus on constraining costs and removing debt from the balance sheet “If we go back 18 months to two years and there were all sorts of reasonably dramatic prognoses around, this inevitably left businesses in a cautious state,” he says “Certainly we recognised that in the markets we serve, our customers would scale back their investment in the software part of the business and that would slow down new growth, which it did.” In response, Sage cut significant costs from the business during the recession As a firm that has used acquisitions as a key strategy,  it pared back M&A The main aim was to ensure that customer service was not compromised, so investment was sustained in providing frontline customer services As a result, the firm was able to pay down its net debt quite aggressively, to £106m at the end of March, from £219.8m at the end of last September “Our net debt was never at troublesome levels Nonetheless, it made sense to us to knuckle down, to take costs out, to reduce net debt,” says Mr Harrison Having now emerged with its balance sheet in stronger shape, Sage is planning to use its capital for a more concerted M&A push “Today we have a very low level of net debt, and, quite reasonably, the agenda with some of our shareholders is slowly but surely moving back to how we intend to deploy the cash,” says Mr Harrison “Quite rightly, shareholders want to be confident that you are using their money wisely, but what I don’t feel from shareholders is undue pressure to be acquisitive More than anything, shareholders want to ensure that management is taking appropriate decisions.” © The Economist Intelligence Unit Limited 2011 Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness uncertainty “People are going to scrutinise decisions very heavily now,” says Mr Tholen For the majority of businesses, however, government efforts are perceived as being businessfriendly, not least its headline cuts in corporate tax rates But from a macroeconomic perspective, concerns about overall inflation and particularly rapidly rising commodity prices, as well as currency exchange risks, all weigh on CapEx decisions “For companies, we are seeing not just a bit more fear over currencies, but a lot of uncertainty over raw material costs Companies have to price more frequently or change price, so that is causing a bit more concern,” says Mr McLean of SVM The finance challenge Although many firms appear to be sitting on substantial cash reserves, it is still an uphill battle to find credit on reasonable terms This is reflected across the industry: 38% of respondents agree that companies in their sector are slowed from increasing investment because of credit constraints This rises to 57% among firms with less than £100m in turnover Lord Adair Turner, the head of the UK Financial Services Authority, has noted that although bank lending in the UK tripled in the decade before the crisis, it was all targeted at the property boom Total lending to manufacturing companies, by contrast, was lower in 2007 than in 1997 Interviewees’ views on credit varied, but suggest that although credit availability has improved, it remains challenging “The banks are very choosy about what they are prepared to invest in It’s just not as free-flowing as they suggest,” says Ms Adams of Menzie Lack of credit for UK businesses has become the target of criticism from politicians, with the business secretary, Vince Cable, arguing that banks are not meeting the lending targets set by the Project Merlin accord agreed between the banking industry and government in February In June, the prime minister, David Cameron, threatened banks with new taxes if the targets were not met But according to figures for the quarter to March, banks seem to be on track to meet the annual target for overall corporate lending of £190bn, lending £47.3bn in the quarter However, banks are falling short on the target of £76bn for lending to small and medium-sized businesses, lending just £16.8bn in the first quarter Against this backdrop there remains some uncertainty about whether borrowing to invest at this time is the right decision Overall, firms are divided over whether this is a good time to borrow to invest: 36% agree that it is, whereas 29% disagree Views vary widely between specific industries, however Transport and logistics firms are far more strongly in favour than financial services firms, for example (see table 3) But an appetite for this appears to be rising in general Deloitte’s CFO survey suggests a (slight) positive balance of executives planning to increase gearing in their companies, for the first time in two and a half years Table 3: This is the right time to borrow to invest… % respondents agreeing vs disagreeing Tech & telecoms Transport & logistics Manufacturing Financial services Agree 36% 57% 35% 23% Disagree 26% 11% 16% 46% Source: Economist Intelligence Unit 16 © The Economist Intelligence Unit Limited 2011 Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness Chart 6: Which of the following funding techniques have you used in the last year? Select all that apply (% respondents) From your existing reserves 69 Equity transaction 29 Bank loan 26 Overdraft / current working capital 23 Asset finance (HP, finance lease, operating lease) 16 Trade finance 14 Director’s loan 10 Mortgage on property / premises Director’s guarantees Nevertheless, it is clear that the general preference for funding is from overall reserves, used by seven in ten firms overall last year A further one-quarter (26%) also relied on bank loans, rising to one-third (35%) among companies with revenue between £250m and £1bn For listed firms, equitybased transactions are also popular, selected by 29% overall, rising to 35% among large firms with revenue of £1bn or more For 16%, asset finance was used to fund CapEx One in five smaller companies, with revenue below £100m, also relied on director’s guarantees Tighter scrutiny over decision-making Given this backdrop, scrutiny of any CapEx decisions has inevitably increased within firms Overall, 61% of firms polled say that there is a greater focus than before on cost-benefit analysis when making CapEx decisions, while six in ten firms are ensuring that their board plays a greater role in such decisions too One example comes from Hammerson, a real estate investment trust that manages a £5.3bn property portfolio, largely in retail assets Although the firm continued to make acquisitions and other investments during the recession, especially from June 2009 as more attractive deals emerged onto the market, the decision-making process was considerably tougher “We have always been under tight scrutiny, but this was in a climate where all decisions were looked at from top to bottom, and we’re continuing to work that way now,” says Peter Cole, the firm’s chief investment officer However, specific CapEx aimed at the development of properties was essentially put on hold for two years, although this Chart 7: Do you agree or disagree with the following statements? Please rate on a scale from to 5, where = strongly agree, = neither agree nor disagree and = strongly disagree (% respondents) Strongly agree Neither agree nor disagree Strongly disagree A main drive for our capital expenditure is to help us meet the demands of existing clients 31 35 24 We are too cautious as a business when considering our capital expenditure plans 18 22 30 22 A focus on controlling costs is more important than investing in the business at this time 11 25 36 21 I am concerned about the availability of funding for capital expenditure 12 29 30 19 11 Availability of funding is the major constraint of our capital expenditure ambition 15 17 22 29 20 © The Economist Intelligence Unit Limited 2011 14 Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness is now returning “Our approach is one of very careful management of the overall risk Investing in development needs far more careful assessment, to manage risk versus returns,” he says “We’re living in a heightened risk world, and we need to be conscious of that.” For some firms, current CapEx decision-making fits into a longer investment cycle, which can help to justify maintaining investments during a difficult period in an economic cycle Just over one-half (54%) of the firms polled maintain a capital investment cycle, although many operate it on just a one- to two-year cycle Overall, however, about one in five firms invest in a cycle that lasts four years or more, such as many of the firms in the oil and gas sector Some run a hybrid model Fujitsu UK is one example, with the firm’s investment pattern guided by its Japanese owners The company maintains a two-track investment approach, which right now is being focused largely on developing the firm’s offerings of “cloud” technologies and services “There is a shorter 12-18-month near-term investment cycle, which is very customer- and industry-specific, and then there is a long-term overlay model that serves as the overriding road map,” says Marc Silvester, the company’s UK chief technology officer Within this, spending decisions are weighed up very carefully, with a number of decision points “Fujitsu is very careful and considered and takes quite a reasonable counsel across both the customer base and also its internal companies,” says Mr Silvester “So investment proposals will flow both up the company into Japan, and also from Japan through the rest of the company.” Assessing returns One factor in the decision-making process is the question of returns Average rates of return vary across industries, but data suggest that they will pick up slightly in the year ahead Across the overall sample, return on capital employed (ROCE)—one of various measures to assess how investments have performed—is expected to be between 15% and 20% Overall, investments during the last financial year generated returns on the lower side of that, whereas a pick-up is expected by executives for any investments in the year ahead (see table 4) If this bears out, it is likely to ease the decision-making process, as corporate boards see a return to relative normality in terms of their investments Table 4: Return on capital employed Sector averages, last financial year versus coming financial year Tech & telecoms Transport & logistics Manufacturing Financial services Past financial year Around 14% Around 13% Around 15% Around 14% Current financial year Around 17% Around 18% Around 18% Around 19% Source: Economist Intelligence Unit 18 © The Economist Intelligence Unit Limited 2011 Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness Conclusion: The productivity challenge A s noted at the beginning of this report, the UK’s record of investment has historically lagged that of other European economies Of course, determining an optimal level of investment is difficult, with both over-investment and under-investment raising problems At a corporate level, firms have clearly taken a cautious approach of cutting back investment during the recession, as demand dropped sharply and significant risks loomed in the economic outlook In the short term, this belt-tightening has raised productivity, as firms have squeezed more out of their people and their assets This is typical for any downturn, notes Professor Lasfer of Cass Business School “When the economy is doing well, you tend to slack a bit, as everyone gets a return You won’t be 100% efficient But when the economy is bad, there’s significant pressure, so you start thinking about how to improve the productivity of your workers to get as efficient as possible,” he says In all, 56% of executives polled for this report say that productivity has increased in their business, with another 28% saying that productivity levels have been maintained at similar levels Similarly, nearly four in ten firms (38%) have noticed an increase in corporate profits, with a further three in ten at least maintaining profit levels, all of which has contributed to the build up of cash on balance sheets The key question is how long this prudence and cautiousness can be stretched out before the strains are felt—or rivals start to gain competitive advantage “This strategy has limits,” warns Professor Lasfer “You might think ‘yes, we’re very efficient now’, but in the long run this will be detrimental to you.” Overall, it remains to see whether corporate Britain will successfully navigate this balancing act as firms reassess their investment plans for the year ahead Those that not could well find themselves short of capacity if demand returns, whereas those that over-invest in capacity might find themselves exposed if the economy turns down again Tough decisions lie ahead 19 © The Economist Intelligence Unit Limited 2011 Appendix Survey results Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness Appendix: Survey results Note: Chart totals may not add to 100% due to rounding of figures In which region of the UK are you located? (% respondents) London 36 South east 17 North 15 Midlands 13 South west Scotland Wales Northern Ireland Which of the following statements best describes your company’s position on investing in the business during the financial crisis and recession? (% respondents) We halted all planned investment until we fully understood the effect of the financial crisis on our company, unless it was of critical importance 25 We continued with regular maintenance of existing equipment, or replaced old equipment, but did not commit to any new investments during the recession, even those that we had originally planned 38 We maintained all planned investments through the financial crisis and recession 23 We took advantage of opportunities presented by the recession (eg, better deals), and as such increased investment during the crisis 14 Does your business operate a planned ‘capital investment cycle’? (% respondents) Yes 54 No 46 20 © The Economist Intelligence Unit Limited 2011 Appendix Survey results Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness If yes how frequent is this cycle? (% respondents) Every year 25 Every 1-2 years Every 2-3 years 19 Every 3-4 years 10 Every 4-5 years 16 Every 5-6 years 10 Every 6-7 years Every 7+ years Has your business: (% respondents) Increased capital expenditure this year compared to previous years 36 Maintained capital expenditure this year compared to previous years 37 Reduced capital expenditure this year compared to previous years 22 Completely cut capital expenditure this year What effect has your level of capital expenditure had on your business productivity? (% respondents) Improved, as we have invested across the business 22 Improved, as we have focused what spend we have on efficiency improvement 21 Improved, as we have been forced to innovate to compensate for reduced spend 13 Stayed the same 28 Decreased a little as our machinery and systems are no longer efficient Decreased a great deal as we have not been able to replace equipment as planned Don’t know – we don’t analyse in this way What effect has your capital expenditure had on profitability? (% respondents) Increased profits 38 Profits stayed the same 30 Decreased profits by a small amount 19 Decreased profits by a significant amount Don’t know – we don’t analyse in this way 10 21 © The Economist Intelligence Unit Limited 2011 Appendix Survey results Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness What is your usual level of capital expenditure in terms of return on capital employed (pre-tax operating profit or operating income, divided by capital employed or net assets)? (% respondents) 1-5% 10 5.1-10% 17 10.1-15% 20 15.1-20% 16 20.1-25% 17 25.1-30% 12 30.1-35% 35.1-40% 40.1-50% 50.1-60% 60%+ At what level was your last capital expenditure in terms of return on capital employed (pre-tax operating profit or operating income, divided by capital employed or net assets)? (% respondents) 1-5% 11 5.1-10% 19 10.1-15% 22 15.1-20% 21 20.1-25% 18 25.1-30% 30.1-35% 35.1-40% 40.1-50% 50.1-60% 60%+ 22 © The Economist Intelligence Unit Limited 2011 Appendix Survey results Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness At what level will your next capital expenditure be in terms of return on capital employed (pre-tax operating profit or operating income, divided by capital employed or net assets)? (% respondents) 1-5% 5.1-10% 15 10.1-15% 18 15.1-20% 18 20.1-25% 20 25.1-30% 10 30.1-35% 35.1-40% 40.1-50% 50.1-60% 60%+ Don’t know What are the main areas of your company that receive reinvestment during a normal cycle? Select up to five (% respondents) IT (new) 66 IT (maintenance of existing equipment) 49 Plant machinery and equipment (new) 45 Property 36 Telecoms (new) 35 Plant machinery and equipment (maintenance of existing equipment) 33 Specialist equipment unique to your industry 33 Office equipment 29 Telecoms (maintenance of existing equipment) 28 Vehicles 23 23 © The Economist Intelligence Unit Limited 2011 Appendix Survey results Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness What were the main areas of your company that received reinvestment in your last financial year (2009/2010)? Select up to five (% respondents) IT (new) 57 IT (maintenance of existing equipment) 43 Plant machinery and equipment (new) 42 Telecoms (new) 34 Property 34 Plant machinery and equipment (maintenance of existing equipment) 28 Specialist equipment unique to your industry 27 Vehicles 24 Telecoms (maintenance of existing equipment) 21 Office equipment 21 Which areas will receive reinvestment in your next financial year (2010/ 2011)? Select up to five (% respondents) IT (new) 62 Plant machinery and equipment (new) 46 IT (maintenance of existing equipment) 39 Telecoms (new) 37 Property 37 Specialist equipment unique to your industry 30 Plant machinery and equipment (maintenance of existing equipment) 24 Vehicles 23 Office equipment 22 Telecoms (maintenance of existing equipment) 19 Do you agree or disagree with the following statements? Please rate on a scale from to 5, where = strongly agree, = neither agree nor disagree and = strongly disagree (% respondents) Strongly agree Neither agree nor disagree Strongly disagree I’m confident about the future economic climate for our business 32 35 20 10 New investment in our business would be worthwhile at the current time 20 40 28 18 11 Borrowing money to invest in our business is the right decision at this time 26 36 Improving efficiency/effectiveness is a main driver for our business investment 25 36 22 15 Expanding the business is a main driver for our capital expenditure 23 24 30 30 11 © The Economist Intelligence Unit Limited 2011 Appendix Survey results Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness Do you agree or disagree with the following statements? Please rate on a scale from to 5, where = strongly agree, = neither agree nor disagree and = strongly disagree (% respondents) Strongly agree Neither agree nor disagree Strongly disagree A main drive for our capital expenditure is to help us meet the demands of existing clients 31 35 24 We are too cautious as a business when considering our capital expenditure plans 18 22 30 22 A focus on controlling costs is more important than investing in the business at this time 11 25 36 21 I am concerned about the availability of funding for capital expenditure 12 29 30 19 11 Availability of funding is the major constraint of our capital expenditure ambition 15 22 29 20 14 Which are your preferred funding sources for your capital expenditure requirements? Select up to three (% respondents) From your existing reserves 78 Equity transaction 33 Bank loan 32 Asset finance (HP, finance lease, operating lease) 21 Overdraft / current working capital 20 Trade finance 13 Director’s loan 10 Mortgage on property / premises Director’s guarantees Which of the following funding techniques have you used in the last year? Select all that apply (% respondents) From your existing reserves 69 Equity transaction 29 Bank loan 26 Overdraft / current working capital 23 Asset finance (HP, finance lease, operating lease) 16 Trade finance 14 Director’s loan 10 Mortgage on property / premises Director’s guarantees 25 © The Economist Intelligence Unit Limited 2011 Appendix Survey results Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness What are the most important qualitative considerations when making capital expenditure decisions at your company? Select up to two (% respondents) Relationship of project to business strategy 68 Product line or location and its significance to the enterprise 30 Project is necessary to comply with government regulations 28 Management, technical and marketing capacities or constraints 17 Timing of fund flows from the project versus the timing of fund flows required 15 Project is necessary for employee health and welfare 10 Project is necessary for protection of company property Desired balance in spending by product classification Do you agree or disagree with the following statements? Please rate on a scale from to 5, where = strongly agree, = neither agree nor disagree and = strongly disagree (% respondents) Strongly agree Neither agree nor disagree Strongly disagree We are falling behind our competitors due to our reduced level of reinvestment 22 17 20 27 15 We have been unable to expand our range of products and/or services due to our reduced level of reinvestment 13 18 30 26 13 We have been unable to expand into new markets due to our reduced level of reinvestment 26 28 23 15 Do you agree or disagree with the following statements? Please rate on a scale from to 5, where = strongly agree, = neither agree nor disagree and = strongly disagree (% respondents) Strongly agree Neither agree nor disagree Strongly disagree There is now more of a focus on cost/benefit analysis when making decisions on capital expenditure 25 36 28 There is now more involvement from the board on capital expenditure decisions 30 29 28 My company is very effective in planning, prioritising and selecting capital investment opportunities 12 34 31 16 All potential capital expenditure projects are ranked on the basis of quantitative criteria in order to determine which to prioritise for funding 14 37 32 12 17 Qualitative considerations often trump quantitative criteria when determining which capital expenditure projects to prioritise for funding 13 31 35 Sustainability, or sustainability related issues, is taken into consideration when my company makes capex-related business decisions 15 26 32 31 15 © The Economist Intelligence Unit Limited 2011 Appendix Survey results Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness Do you agree or disagree with the following statements? Please rate on a scale from to 5, where = strongly agree, = neither agree nor disagree and = strongly disagree (% respondents) Strongly agree Neither agree nor disagree Strongly disagree Companies in my industry significantly reduced their spending on capital expenditure as a result of the financial crisis 36 27 20 15 Companies in my industry are still hesitant to start reinvesting due to continued constraints on credit 17 28 34 17 Companies in my industry are still hesitant to start reinvesting due to continued concerns about the economic environment 13 33 35 15 Companies in my industry are still hesitant to start reinvesting due to concerns about government cutbacks 11 27 28 26 There is no longer a regular capital expenditure cycle for companies in my industry 19 40 23 What alternatives to capital expenditure are you considering for your corporate cash? (% respondents) Not applicable, we are not holding excess cash 30 M&A 18 Paying down debt 18 Paying or increasing dividends 14 R&D 10 Putting more cash into pension funds Retiring equity What are your annual revenues? (% respondents) £50m or less 22 £50m to £100m £100m to £250m 14 £250m to £500m 15 £500m to £1bn 13 £1bn to £5bn 18 £5bn or more 16 27 © The Economist Intelligence Unit Limited 2011 Appendix Survey results Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness What is your primary industry? (% respondents) IT and technology 21 Manufacturing 16 Transportation - freight and passenger 15 Financial services 11 Professional services Energy and natural resources Entertainment, media and publishing Construction, engineering & infrastructure Government/Public sector Education Agriculture and agribusiness Healthcare, pharmaceuticals and biotechnology Retailing Chemicals Telecommunications Consumer goods Aerospace/Defence Automotive Logistics and distribution Which of the following best describes your job title? (% respondents) Board member CEO/President/Managing director 14 CFO/Treasurer/Comptroller 14 CIO/Technology director Other C-level executive 10 SVP/VP/Director 19 Head of business unit Head of department Manager 14 Other 28 © The Economist Intelligence Unit Limited 2011 While every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in this white paper Cover image - © Fabio Berti/Shutterstock LONDON 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8500 E-mail: london@eiu.com NEW YORK 750 Third Avenue 5th Floor New York, NY 10017 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 1181/2 E-mail: newyork@eiu.com HONG KONG 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: hongkong@eiu.com GENEVA Boulevard des Tranchées 16 1206 Geneva Switzerland Tel: (41) 22 566 2470 Fax: (41) 22 346 93 47 E-mail: geneva@eiu.com .. .Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness About the study U pgrading Britain? The effect of capital expenditure trends on. .. pick-up in the global economy gathers pace and demand returns  © The Economist Intelligence Unit Limited 2011 Upgrading Britain? The effect of capital expenditure trends on productivity, profitability. .. infrastructure, rather than simply spending on maintenance  © The Economist Intelligence Unit Limited 2011 Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness