Homeward Bound? Seizing Manufacturing Onshoring Opportunities. Part 1
This is the first of three blogs this week which develops and extends my recent Birmingham Post column on 'onshoring' opportunities in manufacturing which can be found here. Part 2 is on Wednesday and Part 3 on Friday.
'Offshoring' and 'outsourcing' have dominated much of the discourse on British manufacturing over the last decade, with many UK-based manufacturing firms shifting sourcing to low-labour cost locations such as China, with the latter running hefty trade surpluses with the UK.
But in recent years this shift of activity overseas has cooled and there have been some tentative signs of 'onshoring', in certain sectors at least, as the factors which propelled such outward shifts, notably low labour costs, have been eroded.
Of course, firms will still look to establish new production facilities overseas when they are expanding into new markets (think of Jaguar Land Rover expanding into the Indian and Chinese markets) but there appears to be less impetus to then import the goods produced back to the UK.
In fact, repatriating activity - including some sourcing - to the UK is very much on the agenda, although the debate has yet to catch up with that in the United States where it has become a major policy issue. In this sense the UK needs to consider how it can tailor an industrial policy focused on building manufacturing capacity, particularly in the supply chain.
A combination of a more competitive exchange rate (despite the very recent appreciation of sterling), increased transport costs, rising wages in key areas of China, and a greater awareness of supply chain resilience have all contributed to a perceived change in some business fundamentals.
The 'resilience' issue has had particular resonance in the wake of the Japanese earthquake and tsunami. Toyota for example was much more dependent on Japan for car assembly and component sourcing, and fared less well in the wake of the disaster than Nissan which had shifted more production nearer to end markets and which had second-sourcing options through its tie-up with Renault. In the wake of the tragedy, Toyota has shifted more production to Europe, and in so doing has favoured the UK.
Such concerns are more widespread than the auto industry, however: a survey by the manufacturing organisation EEF found that even during the 2008-2009 recession some 60% of British firms had concerns over the vulnerabilities of overseas suppliers, as against 20% being concerned over domestic suppliers.
Not surprisingly, around two thirds of firms had re-evaluated their supply chains to minimise such risks, with some bringing production back to the UK and other sourcing more components locally.
More firms would 'buy British' if the components were available from local suppliers, and if end users and component suppliers could be 'matched up' in the UK, thereby offering the potential for some supply chain activity to be repatriated. Rebuilding supply chains locally can also offer customers greater flexibility and reliability in production.
The issue of reliable delivery was highlighted in a 2007 EEF survey which highlighted that high-tech firms in particular saw logistics as a key competitive strength, with the auto and electronics sectors also seeing this as increasingly important in the future. This shouldn't be a surprise, as proximity often matters in just-in-time processes.
And today a new EEF survey of 150 firms found that in the wake of supply chain disruption, two fifths of companies were bringing some production back in house, and one quarter had increased their use of local suppliers .
The potential for some supply chain relocalisation also links in with the 'servitisation' of manufacturing and shift to a hybrid model where manufacturing and services are increasingly intertwined. As Merlin-Jones (2012) notes in an excellent recent Civitas report, many British manufacturers have been well placed to develop the sort of services and system solutions that end users are looking for, and this is one way in which they can differentiate themselves from rivals.
This in turn could offer the prospect of such firms co-locating such activities so as to maximise the quality of offering to customers in the UK and Europe, giving 'onshorers' a potential competitive advantage.
Professor David Bailey works at Coventry University Business School