Homeward Bound? Seizing Manufacturing Onshoring Opportunities. Part 3
This is the third of three blogs which develops and extends my recent Birmingham Post column on 'onshoring' opportunities in manufacturing which can be found here.
Earlier blogs on this theme can be found here and here.
One of the more interesting efforts at relocalising auto component sourcing is the work by the Automotive Council (the joint industry-Government partnership) to map the supply chain's relative competitiveness and to identify opportunities where capabilities can be retained and built upon, looking at manufacturers' sourcing 'wish lists', and where suppliers envisage growth.
Its 2011 report identified over £1 billion worth of potential contracts which auto manufacturers would like to place in the UK. Building on such trends, the Society of Motor Manufacturers and Traders (SMMT) has tried to bring together assemblers and suppliers to see how they can be 'matched up'.
The Council recently released a 2012 update which identified some £3 billion of new purchasing opportunities for the UK based supply chain
Make no mistake, there is a window of opportunity here. As the Automotive Council found, the main reason why auto assemblers purchase in the UK is proximity (including lower logistics cost, the configuration of parts, and the support of UK-built vehicles). But quite what components suppliers consider as their competitive advantage, and whether that matches what assemblers think, is less clear.
More broadly, the work of the Council can be seen as a good example of how industrial policy can help firms and government together learning about underlying costs and opportunities and engaging in strategic coordination.
Such activities could usefully be extended, both in the auto case and to other industries (think of the Marine Industries Leadership Council, the Industrial Biotechnology Leadership Forum or the Aerospace Business Leaders group), with such groups helping to identify key fractures in industry supply chains and how to address them. This is no longer about industrial policy 'picking winners' but helping the private sector identify weaknesses and then addressing them.
Overall, the automotive sector offers a good example of what can be done, up to a point. Take the case of Jaguar Land Rover setting up a new engine plant in the West Midlands (itself a 'win' - the investment could have gone overseas). While the plant itself will create up to 750 jobs directly, critical will be maximising the benefits for the supply chain and the wider economy.
The new plant will require components from the auto components industry, creating new jobs in the supply chain. Suppliers with expertise in areas such as gears and engine controls, right through to specialists in castings, valve systems and fluid transmission could benefit.
While some media reports have whipped up hopes of 4000 jobs overall at JLR and in the wider economy, the reality is likely to be a smaller but still welcome figure of around 1500-2000 jobs. Of course that figure will depend on how much JLR will source locally, and on that JLR has simply said - realistically - that 'hundreds' of jobs are likely to be generated in the wider economy.
The Manufacturing Advisory Service (MAS) is already trying to raise awareness in component manufacturers so that they are in a position to bid for new orders. But even if successful they then need access to finance to gear up to produce (especially when the hard cash may take some time to appear) and access to skilled workers.
Critically, access to finance remains a major issue for some firms in some parts of the auto supply chain and, no doubt, in other manufacturing sectors. The Smith Institute and the SMMT recently highlighted a 'window of opportunity' to create thousands of new jobs in the auto supply sector but that access to finance remained a real problem which was effectively thwarting the realisation of such potential (see here).
Drawing on a survey of firms operating at different levels in the UK auto supply chain, the report found some 60% of firms were aspiring to grow in the future, one third so rapidly. But they faced significant financial challenges, including: relationships with the banks; a gap in growth finance (many have to fund investment through internal cashflow); problems in funding tooling development costs; payment and finance across the supply chain; and the nature of SME owner mangers. The report argues that, on the whole, banks have a poor understanding of the sector.
In tackling such issues, the report calls for a 'step change' in the engagement of the UK financial sector with the automotive industry, a bringing together and streamlining of financial initiatives by the government, a new taskforce to look at finance for tooling up, a move towards more long-term policy arrangements to make sure finance is available, and for owner managers to better assess the range of financial support available, with outside help where needed. The tooling issue seems especially pertinent from my own discussions with industry players.
More generally, the UK could learn from policy initiatives in the US where the government has been active in encouraging US-based firms to relocate some activities back to the US.
Earlier this year President Obama created tax incentives that for example offered a 20% income tax credit to allow for the expenses of shifting operations back to the US. The US government has also funded a 'Reshoring Initiative' (see here), including an online costs calculator, based on the premise that manufacturers able to calculate costs more fully are more likely to outsource to domestic firms rather than overseas.
Possibilities for repatriation of manufacturing to the UK and Europe may be more limited, as the Boston Consulting Group has concluded (see here) in part because the wage cost differential (adjusted for productivity) between Europe and China may not be close enough create a 'tipping point' in some sectors as in the US (see here). But this still raises the issue of what policy can do to push the process along as far as possible.
That's not going to be easy, and means recognising that smaller firms often followed larger firms in offshoring production as they wanted to be near their customers. So attracting them back means relocating not just individual firms but whole segments of the supply chain, and means support for smaller firms especially which face high costs when moving operations.
While we have seen some welcome moves by the government in encouraging the process, these have been small scale and often don't reach smaller firms in particular. A much more concerted effort is needed as part of a wider industrial policy that looks to build manufacturing capacity.
That means one that backs investment in new technologies (for example through better capital allowances), that provides accessible finance for small and medium sized firms, that backs high growth firms and exporters, that encourages manufacturers to increase output and employment through tax breaks, and which supports better skills formation.
Overall, there appears to be a real opportunity to rebuild some of the UK's fractured manufacturing supply chains given recent shifts in exchange rates, transport costs, rising wages overseas and heightened concerns over supply chain resilience. But the key message is that this is not going to happen on a significant scale without a major policy effort, as has been recognised in the US.
Professor David Bailey works at Coventry University Business School