Weak public sector investment and a paralysing lack of liquidity are devastating the hvac sector, but there are ways to mitigate their impact, according to Paul Callaghan, commercial director of GDL Air Systems. Ian Vallely reports
Government spending has slowed to a trickle and businesses face an alarming scarcity of credit. This poisonous combination is a real challenge to a hard-pressed construction market that continues to suffer more pain than any other sector in our struggling economy.

As Paul Callaghan, commercial director of GDL Air Systems, points out: 'These are essentially environmental factors that we in the industry are unable to rectify on our own.

'Everybody wants to see growth in the market, but Government funding for public sector projects like schools has declined dramatically and that is hitting the industry hard. This leads to a big constraint on growth, but there is also a second problem - poor liquidity of credit.

Struggle with cashflow
'A lot of smaller m&e businesses, in particular, struggle with cashflow and simply don't have the funds to invest and expand.'

For Paul, these twin challenges are not resolvable solely from within the industry; they demand decisive government action.

However, he says, there are things that beleaguered building services companies can do to help themselves: 'Opportunities available solely from looking inwardly to the UK - and even towards Europe - are limited, but that is not to say that everybody should just be cast down in gloom and do nothing. Prospects still exist globally and the greatest opportunity for our manufacturers is in developing pioneering new products with a focus on making the UK a world leader in what we develop.'

And that, he says, demands a commitment to reviewing product ranges and implementing a fresh, innovative approach to manufacturing processes and procedures.

But, he adds: 'I feel as though the smaller m&e players are going to be under crippling pressure in the next couple of years because, even if they win bigger contracts, people will be frightened to give them credit. A lot of people rely on credit, but the banking system seems to be a machine that has broken down and the impact on smaller businesses has been shattering. Banks are not lending enough so many SMEs find it difficult to trade effectively; the tightness of credit is dangerously restricting their growth.'

On the other hand, Paul believes others - typically larger businesses - are hoarding cash. 'Under normal circumstances, they would use the money to invest in growth, but, in the current market conditions where they see no growth opportunities, they are probably concerned about losing business and they feel they need the money as a buffer to protect them.'

This is a luxury lacking in smaller companies, which inevitably struggle to take on bigger jobs without a credit facility. Paul again: 'Take an m&e company that turns over, say, £10 million. They might perhaps win a £3 million contract, but they are not going to be able to fund all of that from their own bank account. If they can't get a decent credit facility with a bank or, alternatively, f their suppliers won't offer them good credit because they think they might go under, that clearly restricts their competiveness.'

Having said that, Paul believes there has been an over-reliance on credit by many businesses in the hvac sector over a number of years. He thinks balance sheets will only get stronger if more companies can borrow less by self-funding projects. 'That may not be feasible in the next few years, but I don't feel the restriction on liquidity can last forever.

'Currently, the banks are trying to hold onto as much cash as possible because they still have to deal with high levels of toxic debt. Once this settles down in the next couple of years, I think we'll find a lot more lending taking place. After all, the original purpose of banks was to lend money. We need to get back to that.'

Lending and spending
Lending is important, but so is spending, says Paul. Nonetheless, he is no advocate of blind speculation to stimulate the economy: 'We don't want to be a one-trick pony and just pump more and more money into a bottomless pit. What we really need is to balance austerity with sensible investment.

'There are undoubtedly parts of the UK economy that are overspending and this needs to be checked. However, there are also certain essential projects that need to be taken seriously. Doing this has a double impact. If, for example, schools are being condemned, everybody loses - the kids don't get a decent education and the industry misses out on work.

'I believe that this is one area where the Government should be pumping more money in. Re-establishing the Building Schools for the Future programme, for example, would stimulate the economy and have the potential to put the industry back into growth.'

Indeed, growth is a major objective for GDL itself. In two years, the company aims to be turning over £10m. And that means driving sales hard. For Paul, achieving this will take an uncompromising commitment to value for money: 'People often try and negotiate a cheaper alternative because buyers and estimators are under pressure to make savings.

'The consultants are still pushing for quality I think; I don't believe they are trying to cut corners. But there may be a disconnection between what is specified and what actually gets used. The implications of buying inferior products are higher maintenance costs and hassle as reliability drops and equipment breaks down more often.

'We are dedicated to offering value for money and, to me, that simply means supplying a high quality product at a fair price.'

GDL in a nutshell
GDL Air Systems is a privately owned manufacturer and supplier of air distribution products for the heating, ventilation and air conditioning industries. It employs more than 50 people at its factory and head office based in Glossop, Derbyshire. It also has regional offices in London and Bristol.

Among the products supplied by the company - and supported by its technical team - are grilles, diffusers, louvres, dampers, natural ventilation and solar shading.

The company has full accreditation for the ISO 9001 quality certification and IS0 14001 environmental certification.

In 2009, hot on the heels of the global recession, the company introduced a five-year strategy 'using a structured business approach for accelerated growth which will include market share growth of existing products as well as the development of new products and services to existing and new customers'.

GDL has a customer charter which promises:

To supply the highest quality products manufactured in the UK.

A fair and consistent price.

100 per cent order accuracy

The best lead times in the industry

Dedicated technical support

A commitment to customer satisfaction.

In the last three years, GDL has grown sales by 25 per cent - it now turns over £7 million compared with £4.5m in 2009. Although he admits that his company is scrapping extra hard for the work, commercial director Paul Callaghan says: 'The way that we have viewed it is that if we can be more competitive and come up with new ideas, new products, and enter new markets, we will drive more sales. Obviously, there is a margin impact, but we have kept that at a reasonable level. We are still making a reasonable net margin at the bottom line.'

Paul believes the perception of GDL is changing: 'We were seen as a smallish regional supplier based in the North West. I feel that, in the last three years, we have become more recognised as a national player because we have grown our market share in Scotland and in the South East. We are also starting to win more overseas work in emerging markets.'