UK SME manufacturers navigate cost pressures, supply risks, and shifting trade patterns

UK SME manufacturers face converging trade, geopolitical, macro, and policy shifts that are reshaping costs, demand, pricing, and investment. 

Against this backdrop, five interconnected risk factors define the market outlook for SME manufacturers. Individual companies’ ability to mitigate and capitalise on these forces will determine performance and competitiveness: (1) global trade and geopolitics; (2) access to finance; (3) cost pressures; (4) energy and input costs; and (5) company-level resilience.

For lenders, these categories inform sector appetite and borrower profiles; for private equity owners and buyers, they should feed directly into due diligence.

Global Trade, Regulation and Geopolitics: Strategic Limits for SMEs
US tariff uncertainty has eased for now, but long-term trade alignments paint a mixed picture. The recent US-UK agreement cut the threatened 27.5% tariff on UK car exports to 10%, averting multi-billion-pound trade losses and protecting thousands of jobs. However, the reduced rate applies only to the first 100,000 vehicles annually – roughly matching 2024’s volumes – creating a hard cap on growth in the UK’s largest car export market and reinforcing the need for market diversification.

The EU’s new General Product Safety Regulation (GPSR), introduced in December 2024, has raised compliance, risk assessment, and quality control demands, prompting some SMEs to set up EU subsidiaries, pause expansion, or exit the market. Similar US and East Asian rules in electronics, machinery, aerospace, and medical devices are lengthening launches and raising costs, demanding greater agility and liquidity discipline from smaller exporters.

Geopolitical instability continues to distort supply chains. The Red Sea crisis has lengthened transit times and driven up freight costs, with the automotive sector highly exposed to even short delays. While direct disruption has eased – shipping rates on the Asia-Mediterranean corridor have fallen nearly 20% since mid-June, according to Freightos – longer alternative routes and network adjustments will remain until a durable political resolution is reached, sustaining higher input costs, and insurance premiums. Elsewhere, ongoing wars in Ukraine and the wider Middle East continue to unsettle global supply chains, adding to volatility in energy and commodity markets.

Financial Conditions: Capital Constraints in a Cost-Heavy Sector
These trade and compliance headwinds feed directly into financing. Despite the Bank of England’s August interest rate cut, borrowing remains expensive for manufacturing SMEs, with margins compressed by high UK energy costs, input prices, shipping, and tech capex demands.

Larger manufacturers are better able to refinance and roll out automation, AI, and robotics to offset rising costs. By contrast, SMEs are more likely to defer investment until the autumn budget clarifies the policy outlook, tax treatment and potential policy incentives, and interest rates fall further. Markets have priced in another 50 basis points of cuts before year end. In the meantime, the gap between well-capitalised firms and the rest of the industry is widening, influencing both lender appetite and investor screening criteria. Recent PMI data fell to a five-month low of 46.2 in September, due to low new export work and a high-cost environment exacerbated by tax and labour cost rises. Suppliers connected to Jaguar Land Rover are also experiencing a temporary hit following the September cyber-attack. 

Cost Pressures as a Competitive Divider
Labour costs remain the top concern for most SME manufacturers. April’s rise in employer National Insurance Contributions (NICs) and the higher National Living Wage (NLW) have hit labour-intensive firms hardest, particularly those with limited pricing power. Many have responded with hiring freezes, reduced hours, or workforce reductions. In the three months to July, manufacturing vacancies slumped 26.6% to ~46,000, ONS data shows, partly attributed to higher NICs and the increased NLW. Since 2022, manufacturing vacancies have halved, signaling potential demand softness. The sharp fall in vacancies simultaneously relieves wage inflation and reinforces lender concerns over demand softness.

Domestic and export prices are lagging rising unit costs, pressuring margins. Average manufacturing costs rose for the third consecutive quarter to July – the fastest in over two years, CBI data shows – driven by higher transportation, shipping, and supplier costs, eroding offshoring benefits. Larger firms have been quicker to offset cost pressures through automation, AI, and robotics, while many SMEs face higher upfront costs and skills shortages that slow adoption. In credit analysis, lenders place greater weight on firms’ ability to pass through cost increases, secure multi-year supply contracts, and demonstrate forward-hedging discipline to offset company-specific risks.

Energy and Input Costs
UK industrial electricity prices are almost 90% higher than the EU average for medium users, and remain the highest prices compared to all 27 member states. Prices have eased from 2023 peaks but remain around 100% above pre-2021 levels, UK government data shows. Energy-intensive sectors like steel, chemicals, and paper pay nearly five times Finland’s rates, leaving them structurally disadvantaged. Global energy markets remain fragile, with geopolitical tensions and the UK’s reliance on volatile natural gas for electricity generation leaving prices highly susceptible to renewed shocks.

Source: Department for Energy Security and Net Zero

Raw material costs remain elevated and volatile. Commodity prices remain ~60-70% above pre-2021 levels with metals and energy prices swinging sharply on supply constraints and geopolitical events. Steel, nickel, aluminium, and copper have all experienced sharp price swings in 2025, leaving aerospace, automotive parts, and industrial machinery SMEs particularly exposed due to reliance on traded metals and global supply contracts. Such volatility complicates cash flow forecasting and debt service planning, increasing the premium placed on forward contracts, hedging discipline, and supplier diversification in credit assessments.

Lead times for high-end semiconductor chips (e.g., AI accelerators, advanced CPUs) remain extended at 30-40+ weeks, driven by capacity constraints and surging AI-related demand, while legacy chips (e.g., microcontrollers for industrial and automotive uses) have seen prices stabilise and lead times normalise to 10-14 weeks. Semiconductor dependency is now viewed as a material operational risk, with supplier diversification and proactive inventory planning key elements of SME manufacturers’ risk management strategies.

Company-Level Resilience – The Decisive Factor
For UK SME manufacturers, resilience can be measured by managing energy costs and efficiency, diversifying suppliers, maintaining disciplined working capital, and targeting capex where margin and productivity gains are clearest. Those able to act decisively in these areas will be best placed to protect margins and capture market share as risks ease.

For lenders, the focus is on cash-flow visibility – how well a business can absorb input price volatility, service debt under tighter covenants, and sustain liquidity during demand or supply shocks. For private equity buyers, the priority is to identify management teams with clear cost-control roadmaps, realistic automation adoption plans, and diversified revenue streams.

While scale still matters, it is not insurmountable. SMEs that embed cost and risk discipline, invest selectively in productivity-enhancing technologies, and deepen customer relationships can position themselves as acquisition targets or consolidate share from weaker rivals.

BTG Advisory can assist your manufacturing company in making informed decisions for the long-term growth of your business. For a confidential discussion about your specific circumstances, please contact our team today.