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UK manufacturing in 2026: navigating risk and opportunity in a shifting landscape
Dave Atkinson, UK Head of Manufacturing SME & Mid Corporates, takes the opportunity to reflect on the key factors that will influence decision making in the years ahead.
Read time: 5 mins Added: 14/01/26
Turning challenges into growth
As we move into 2026, manufacturers face a landscape defined by heightened security threats, unprecedented cost pressures and geopolitical uncertainty. Alongside these challenges lie significant opportunities - from a £75 billion defence spending commitment to the transformative potential of Artificial Intelligence (AI).
For SMEs and mid-sized manufacturers, the path forward demands a clear-eyed assessment of the risks, strategic investment in resilience and the agility to capitalise on new growth avenues. Here are seven key factors that will help shape the sector during 2026.
Cybersecurity: the leading threat
Cybersecurity emerged as a top business risk during 2025, with a high-profile attack on Jaguar Land Rover. The threat landscape has evolved, manufacturing systems increasingly integrate digital technologies with physical operations, creating new attack surfaces. A breach doesn't just compromise data; it can halt production lines, disrupt delivery schedules and damage customer relationships. For manufacturers integrated into complex supply chains, a vulnerability in one supplier can cascade across multiple organisations.
The challenge is particularly acute for smaller manufacturers who may lack dedicated cybersecurity resources. Yet the cost of inaction - in lost production, remediation expenses and reputational damage - far exceeds the investment required to build digital resilience, including insurance and Cybersecurity as a service. For manufacturers, cybersecurity is not just an IT problem, but a fundamental business capability.
Defence expansion: a growth engine
The government's Defence Industrial Strategy represents a genuine opportunity for UK manufacturers. The £75 billion commitment over six years aims to make defence "an engine for growth", with SMEs placed at the centre of this vision.
The strategy explicitly targets regional ecosystems, innovation funds and export support to create jobs and build industrial capacity across the country. Regional defence clusters are creating pathways for SMEs to integrate into high-value supply chains. These clusters offer access to procurement opportunities, R&D funding and collaborative networks that can help smaller manufacturers scale and compete for contracts that might previously have seemed out of reach.
The strategy also addresses skills development through five new Defence Technical Excellence Colleges and regional training hubs, recognising that a skilled workforce is essential to delivering on defence commitments.
Cost pressures: the margin squeeze
Cost pressures have continued to intensify across the sector; in 2025 Make UK reported that 79% of manufacturers faced raw material cost increases and 70% expected energy costs to rise furtheri.
Rising employment taxes, logistics expenses and persistent inflation are impacting on margins and SMEs are often less able to absorb these increased costs. They typically have less pricing power with customers and have been slower to adopt automation technologies that might help offset labour cost increases.
The UK has some of the highest industrial electricity prices in the worldii, creating a structural disadvantage that affects competitiveness, and this will continue to present a significant challenge for manufacturers in 2026, who are particularly exposed.
Geopolitical uncertainty and supply chain disruption
Geopolitical instability continues to reshape global trade. Disruption in the Red Sea, the ongoing conflict in Ukraine and Middle East tensions have created persistent supply chain challenges and inflated logistics costs. This uncertainty is driving a significant shift toward reshoring and nearshoring.
For UK manufacturers, this presents both challenge and opportunity. Building resilient supply chains requires investment and relationship development. However, the trend toward regional sourcing is already creating openings for UK-based suppliers who can offer reliability and proximity advantages.
Digital transformation: the adoption gap
Manufacturers are making substantial investments in AI, robotics and digitalisation to help offset cost pressures and improve operational resilience. These technologies offer real productivity gains, including better quality control, predictive maintenance and reduced waste.
However, a significant adoption gap exists. Capital constraints, skills shortages and uncertainties over return on investment mean some SMEs are lagging behind larger firms.
But these transformative technologies will undoubtedly be decisive to future competitiveness. The opportunity lies in strategic, phased implementation rather than wholesale transformation.
A good starting point is to contact Lloyds’ long-term strategic partner MTC (Manufacturing Technology Centre), which employs a team of experts who visit manufacturers to carry out free line walks. It’s an opportunity to review how you work and identify opportunities to automate, drive productivity and adopt new technologies that can create the capability to diversify into new supply chains.
Workforce challenges: the £6bn problem
According to Make UK, labour shortages are costing the manufacturing sector £6bn in lost output every yeariii. While the skills pipeline remains weak, wage pressures have continued to rise.
At a time when manufacturers are struggling to attract young talent and retain experienced workers, apprenticeship programmes, upskilling initiatives and retention strategies will prove critical, both for individual businesses and the wider sector.
That will mean a focus on workforce development, creating clear career pathways, investing in training and building workplace cultures that value people. And the sector must also continue its work to engage with the education sector and promote STEM skills if we are to build the skilled workforce advanced manufacturers need.
Looking ahead: resilience and agility
The UK manufacturing sector enters 2026 facing significant headwinds, but there are equally substantial opportunities to access. Defence expansion, digital transformation and regional industrial clusters offer strategic growth pathways for manufacturers who can navigate this complex landscape.
The priorities for SME manufacturers must include resilience, agility and targeted investments in productivity, technology, sustainability and cybersecurity, as well as securing access to robust, diversified supply chains.
The manufacturers who thrive won't necessarily be the biggest or best resourced, but those who invest strategically in capabilities that matter, and remain agile enough to seize opportunities.
As ever, I remain optimistic and look forward to working with the sector during this time of transformation.
Meet the author
Dave Atkinson
UK Head of Manufacturing SME & Mid Corporates
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