The Far East has become the centre of manufacturing thanks to cheap labour. But as costs rise with a burgeoning middle-class in the east and rising shipping costs, many brands are bringing manufacturing back to the UK.
The return of manufacturing from offshore to the UK and other developed economies is more than just a rumour.
A survey earlier this year by EEF, the UK manufacturers’ organisation, and law firm Squire Sanders discovered that one in six UK manufacturing companies had relocated – or ‘reshored’ – production in the last three years and that one in six had reshored sourcing to a UK-based supplier.
The findings confirmed those from a 2009 survey, when one in seven had reshored, and they have been heralded by many as signs of a rebirth in British manufacturing. Indeed, in a further poll of EEF members at the organisation’s 2014 conference, they were almost unanimous in declaring that reshoring would help drive UK economic growth over the next five years, with 29 per cent saying it would do so significantly.
Others are coming to similar conclusions. In a report published earlier this year, professional services firm PwC estimated that the reshoring trend could create around 100,000 to 200,000 UK jobs over the next decade and boost annual national output by around £6bn to £12bn at current values by the mid-2020s – that represents a GDP boost of between 0.4 and 0.8 per cent.
“Manufacturing could benefit significantly from this trend, with additional UK jobs being created in sectors ranging from textiles to electrical equipment and other machinery,” the report’s authors said.
Made in Britain
In the latest EEF survey, the main reason for reshoring to the UK was improving the quality of products and components, closely followed by issues surrounding customer service, speed of delivery and the desire to minimise logistics costs. EEF members also mentioned labour costs and the more general aim of getting closer to customers.
They seem to be seeing results, with 40 per cent of companies saying their turnover had increased as a direct result of reshoring, while only 3 per cent had seen a fall. In addition, 60 per cent of companies said they had seen profits and employment increase, albeit only moderately.
However, other voices are more cautious – and, of course, the EEF survey implies that a significant proportion of British manufacturers still do production offshore. “The other five [in six] have previously offshored and their objectives are being met,” says EEF chief economist Lee Hopley. “The reasons for offshoring have changed though – it may have been to gain market access or for regulatory reasons, and the best way to do that was to be there, or it may simply have been to connect with customers there.”
What that means is that to manufacture outside the UK is no longer necessarily offshoring. As GKN’s CEO Nigel Stein points out, you may be British-headquartered, but if you sell globally you may well need to manufacture globally. “We never offshored,” he says. “We follow our customers around the world.”
So who is reshoring, who could or should do it and why, who will benefit – and were companies wrong to offshore in the first place? “The reshoring reasons haven’t changed significantly since we last surveyed this,” says Hopley. “We see people bringing production back on the basis of quality, supply chain weaknesses and so on.”
“When China joined the WTO [the World Trade Organization] we couldn’t compete, because they could sell cheaper than we could manufacture, so we set up a joint venture there,” says Tony Caldeira, CEO of home furnishings company Caldeira. “In the last few years though, Chinese costs have risen significantly faster than in the west and the UK has become more competitive – UK manufacturing has become leaner.
“We also found the classic reasons of culture, lead times, payment terms – lots of people have had these problems. You need to plan much further ahead when manufacturing in the Far East too, which ties up a lot of working capital and inventory.”
Chinese cost rises
Lower labour costs were a big part of why many companies offshored production, but while pay rates in the manufacturing industry in developed countries have stagnated or fallen in the years since the financial bust, in many emerging markets they have climbed dramatically. Pay and benefits for the average Chinese factory worker, for example, rose by 10 per cent a year between 2000 and 2005 and by up to 19 per cent a year between 2005 and 2010, according to the Boston Consulting Group.
Transportation costs have risen too and, although they have since settled somewhat they remain volatile, meaning that anyone who offshored on the assumption of cheap shipping has had to re-think. In addition, as the demand for more customised and individual products has risen, it has become less and less attractive to have goods in transit for weeks on end.
Of course high labour and shipping costs on their own will not push all the outsourcers to leave China. The country has a highly developed supply chain for industrial components and a good infrastructure. In addition the local market has grown, so that many of the manufacturers who moved there for cheaper labour are now staying in order to service the Chinese market. For them, what has changed is the decision on where to add extra manufacturing capacity and which elements of the process to do where.
Others are pursuing cheap labour though, moving from China perhaps to Vietnam, Bangladesh or Cambodia, or now that Western economic sanctions are lifting, to Myanmar (Burma). UK CEOs who have already reshored are sceptical, however.
“Most global companies already have a good solution for their low-cost products,” says Caldeira. “In an industry that’s very labour intensive maybe you chase cheap production, but because we are more efficient in the UK now, we don’t have to chase for the next low-cost labour zone. Chasing labour cost is chasing rainbows.”
Angus Thirlwell, the CEO of UK confectionery manufacturer Hotel Chocolat, points out that it is possible that such ‘investment’ may even become unwelcome to the host nations. “If your business model depends on low-cost, low-skill labour you’re going to be chasing developing nations around the world,” he says. “But what is that bringing to a developing nation? There’s no skill transfer or anything.”
“It depends on the nature of your business,” says John Hawksworth, chief UK economist at PwC and the co-author of PwC’s reshoring report. “There can still be some advantage if you have a commodity product, a homogeneous low-cost product where you can give clear instructions.”
He says that the labour cost squeeze has even affected China itself: “I was struck when I went to China last year, I went to buy some shoes and all the shoes in the shop were made in Vietnam!
“But when you’re trying to tailor a product more – it’s interesting that this came up when we spoke to people in textile manufacturing – or where there is fashion involved, a less homogeneous product and people want to order online, you want things close to hand.”
Getting the sums wrong
Still, if offshoring companies failed to spot that there was a lot more to the cost of production than just the factory gate cost, or that the laws of supply and demand would push up Chinese labour costs if everyone moved their production to China, or that the long-undervalued Chinese currency would eventually be allowed to appreciate, does that make them negligent or shortsighted?
“It did come up in our discussions that people had missed subtle things,” says Hawksworth, “like the costs of constantly having to send your purchasing people to the other side of the world, the quality of the output and the pressure to maintain decent working conditions, which means you spend more to avoid damage to your reputation.
“There’s volatility risks from these markets too – exchange rate volatility from capital flows in and out, extreme weather events too. Those may not have been fully factored in. Another reason for reshoring is to make your supply chain more resilient.”
Raspberry Pi co-founder Eben Upton agrees: “When you do the sums, it is bill-of-materials and labour for the factory gate cost, but then you have to add shipping, warranty, brand equity,” he says. “You have to make an allowance for possible brand damage – you shouldn’t weight that at zero, just in case your subcontractor is employing children or has staff jumping off the roof. It’s the intangibles and how you price risk.”
EEF’s Hopley is more circumspect. “Was it possible to anticipate those problems? Every investment carries risks, some of which you can account for, but there’s always the unknown unknowns,” she says. “Our survey did suggest that more companies are considering reshoring, so the trend will continue. There’s not enough evidence to say it will accelerate though.”
One other factor driving the reshoring trend is the need to be more agile – to shorten supply lines, get closer to UK customers, cut the lead time on expanded orders from four weeks to one, reduce the time needed to introduce new products and so on. A key enabler there is new manufacturing technologies, and of course robots and other new machinery, cost pretty much the same wherever in the world you install them.
Caldeira cites digital printing for textiles as an example: “This is a fashion business and it means faster delivery and makes lower print runs cost-effective,” he explains. “Even in cushion making, technology can bring advantage if it lets you set lower minimum order volumes and respond faster, so we could be setting up a whole new UK production line if digital printing comes off.”
But one thing that advanced manufacturing technology doesn’t do much for is headcount. “The irony of it is it’s sort of a jobless resurgence,” says Upton. “Of course Sony added more people to make the Raspberry Pi in Wales, but nowhere near as many as they’d have needed in the 1980s.”
That is particularly true for low-skilled factory work. “Companies that have [reshored production to the UK] or are sourcing more intermediate goods locally have seen a modest increase in headcount, but the nature of those jobs will be different,” says Hopley. “We are looking at more highly skilled and highly paid jobs now.”
That in turn points to one of the main challenges to the reshoring trend, which is the availability of manufacturing skills. “Everywhere I go, other than China and India, people say ‘It’s terrible, we can’t get the engineers’, and so on,” says GKN’s Stein.
“The skills shortage is a long-term issue across many developed economies – we haven’t filled the pipeline with enough people with appropriate STEM skills,” adds Hopley. “We’ve definitely seen a trend towards more training and in particular the recruitment of apprentices. There has been a lot of change, creating uncertainty over training programmes, but companies are recognising the need now to be responsible for training.”
Despite all this, one of the most interesting things that came out of talking to companies that had reshored was that while they had had to train people, the skilled nature of these new jobs aided both recruitment and retention. Once potential recruits realised that this wasn’t a dull assembly line job, the choice between being a shelf-stacker and helping to make something was an easy one.