Reshoring - fact or fiction?

Many UK manufacturers looked to the Far East – China, in particular – in pursuit of competitive advantage. But with China suffering soaring costs and industrial unrest, and with many UK companies complaining of quality issues, punitive contracts and deteriorating turnaround times, things are changing. Some of what went is coming back – is being 'reshored', in the jargon. This has several drivers, according to the manufacturers' organisation EEF, such as: previous decisions taken on offshoring and its impact; company strategies on new markets; where organisations see their competitive advantage; and which locations offer the best potential to realise it – which might be the UK or might not be. Indeed, there isn't a big rush back home, it's more subtle than that, says the Manufacturing Technologies Association's (MTA) head of external affairs, Paul O'Donnell. "Yes, there are many instances of large companies coming back to the UK, recognising that they need to keep their supply chains more under their view, especially after the steep economic downturn of '08-09. But it's also about deciding when not to place particular component orders in China, for example, and looking instead to source a subcontractor locally. Across industry, there has been a move away from global sourcing towards more local sourcing; it fits with a more 'just in time' philosophy. Manufacturers need to be able to respond quickly on the ground, rather than having everything 8,000 miles and eight weeks away." On the matter of reduced cost competitiveness he says: "The Chinese government itself has admitted that year-on-year labour costs for manufacturers have shot up by around 20% – and that may well be understating it. Yes, it's still less than Western Europe, but there are other factors at work, too. Machine tools have changed enormously over the past 10 years – they are far more efficient and effective – and, if UK manufacturers can also make use of the latest emerging technologies, especially by adding an element of automation into their processes, then this starts to have a serious effect." MTA members are suppliers of such technology, in fact. "When you think that UK manufacturers can now run their operation lights out and much faster, using suppliers who are just down the road from them, the attractions are obvious. And, if there are problems, you can have these addressed quickly. If you are relying on suppliers thousands of miles away, that isn't so easy," Mr O'Donnell explains. Image: Paul O'Donnell - "Year-on-year labour costs for manufacturers [in China] have shot up by around 20%" Across the pond, in the USA, reshoring is almost a crusade. Its main champion providing the push is Harry Moser, who has 45 years' manufacturing experience, most recently as chairman emeritus of Charmilles Technologies Corporation (now GF AgieCharmilles). The effort has a professional website - www.reshorenow.org. Why is the UK so much more 'pull' (manufacturers reacting as single entities) rather than 'push' (having champions to promote their cause), then? INDIVIDUALISM RULES Mr O'Donnell again: "In the UK, such decision-making tends to happen at a more individual level. Manufacturers here are more globally enmeshed in supply chains, as opposed to the US, which is really big enough to supply everything. That is a significant difference." But reshoring in the UK is happening, though he says there are no real numbers to put on this. "If it was a case of closing a factory overseas and opening another here, that would make it easier to quantify. But it's more about deciding where a particular batch might be made." China will continue to exert its influence, the fact is that what was once a no-brainer for UK manufacturers, to go offshore, is no longer the case, he suggests. But sourcing from Poland or the Czech Republic, for example, where costs are much lower than in Western Europe, might be alternatives to China, of course. Mark Swift, head of communications at EEF, the UK manufacturers' organisation, also says it is hard to say exactly how strong the onshoring trend has now become. "A lot of companies just go ahead and do it," he says, "which we tend to pick up on through anecdotal evidence. However, one thing that came across particularly strongly in a recent EEF survey amongst its 6,000 member on supply chain risk is that, if you are involved in just-in-time or bespoke production, and you are relying on a supply chain halfway across the world that might become disrupted, you can be in a lot of trouble. One notable example is that, when the tsunami struck, many car manufacturers had parts stuck out there they couldn't access at that time." The main issue with offshoring, he says, is that, when it first started to take off, it was driven almost entirely by the need to move to lower cost production overseas and the perceived benefits that would bring. "However, over the last decade the cost differential has narrowed, for a variety of factors," Mr Swift points out. "Manufacturing in China and other such countries is not as cheap as it once was; the cost of transport has increased, there are issues of quality, plus much tougher environmental legislation, and production requirements from the major OEMs mean that, for many companies, it's better to manufacture locally or back in-house where they can have much greater control. Also, if you are involved in just-in-time production or have to manufacture at short notice, it can be very risky to have your supply chain located so far away." The overall picture the EEF is getting is that onshore/offshore remains very much a two-way process. China is not the only game in town; there are the CIVETS countries (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) that attract manufacturers. "All in all, the approach UK manufacturing is taking is pragmatic. If there are good reasons to reshore to the UK, that's the way they will go," he adds. COMING AND GOING Indeed, the picture is complex. While a survey in 2009 by the EEF, showed that about one in seven companies with production in a low labour cost economy had returned some of that activity to the UK in the previous two years, the proportion of manufacturing companies with some production outside the UK grew from 32-42% between 2009 and 2012 – with about a quarter expecting that to increase moderately in the next two years. So is anyone pushing the reshoring agenda? One that is the Associate Parliamentary Manufacturing Group (APMG) – set up to encourage the exchange of knowledge and understanding between Parliament and the manufacturing industries. It recently published a report on reshoring (http://is.gd/EwYUfr). Thomas Kohut, APMG manager and part of the Policy Connect think-tank advising MPs, says that the UK government retreated from reaching out to industry for its opinions and input, and that the offshoring phenomenon of the late 80s and 90s was just something that manufacturers did at that time, often driven by wage costs alone. Image: APMG Reshoring Breakfast meeting "Equally, it has taken industry itself to recognise the problems that offshoring has brought and the benefits that bringing manufacturing back to the UK can now deliver. It is culturally entrenched across certain parts of industry to situate portions of your business in different countries, but the nature of the manufacturing sector is changing. So much is now focused on the individual customer, which means that manufacturing businesses have to be fast on their feet, flexible and responsive – and that alone demands reshoring. You can't be as reactive to customers, if your components have to travel on a container ship from China," Mr Kohut highlights. "Someone in the sector recently said to me that they were not a manufacturer of products, but an innovator that makes things, reacting to customers and suppliers. That calls for a great deal of investment in plant and machinery, design capabilities, and is easier if your production is closer to home. Some individual manufacturing business owners are responding to this and bringing their production back to the UK of their own volition, just as they sent it elsewhere in the first place. "However, there is undoubtedly a role for trade associations in helping to link existing UK suppliers to manufacturers looking for the support they need to make reshoring a success. We have to shift the culture, so that it is not an automatic assumption that production happens offshore." Image: "We have to shift the culture, so that it is not an automatic assumption that production happens offshore," says Thomas Kohut PROMOTING UK SUPPLIERS Indeed, under the banner 'Bringing It Back To Britain', trade association GTMA is promoting the benefits of UK-based manufacturing. Its members range from UK mould tool makers and precision machinists, right across the design process to measuring the final part. Roger Onions, business development director for the GTMA (www.gtma.co.uk) and its Manufacturing Resource Centre, says reshoring is very much at the heart of what many of its member organisations are now involved in or considering. "We are finding, more and more, that Tier 1 organisations are looking to bring things back to the UK. Initially, this was for quality issues, but now it is increasingly about cost, particularly transportation, with fuel the big problem. It's hugely expensive to move items from the far side of Europe by truck, for example, while having them at sea for six weeks usually means you need to carry much more stock. Add to that problems with stock being held up and many Tier 1s start to feel that outsourcing is more hassle than it's worth," states Mr Onions. "They may be able to get a toolmaker in the low-cost economies for less than they can buy the steel here, but the quality of that steel may be in question. And, if you have to send your engineers out there to resolve quality issues, for example, it all adds to the disillusionment." Ecoegg is just such an example that has returned mould tools and moulding to the UK (see www.machinery.co.uk/48970). The GTMA has also formed a Tooling Alliance, which sees it approach Tier1 companies let them know they have identified a group of UK companies that will work closely together to take on some of the larger jobs that have previously been offshored. "This is not about being 'little Englanders', but is more a reflection of how many companies that offshored now see a time for change," Mr Onions adds. "And that is not just happening in the industries we look after. We have close relationships with other trade associations in rail, marine, automotive etc and they are seeing a similar response." Extended feature from here Box item 1 Bad experiences To what degree do manufacturers see 'offshoring/onshoring' now taking place in the UK – is it a flood, trickle, and what is influencing it most? "A steady trickle, maybe a little more," according to David Waghorn, managing director, machine tool supplier Hurco Europe. "Why it's happening is a combination of several factors, quality and speed of supply being the main reasons for coming back. Recent huge increases in freight costs must also be a significant factor." Then there are the particularly bad experiences that manufacturers have suffered from offshoring. "We know of mould makers who lost the business to China, who then were able to make a living out of remanufacturing the tools to get them to work, once they arrived back in the UK." Large companies, however, are still very hungry for some of the Chinese market, he points out, and are finding it almost impossible to access this without a presence, or some kind of manufacturing base, in China. "However, our customers tend to be sharper, leaner businesses, focused on high added value, small volume items. This is what the UK does extremely well. It is proving very difficult to move this type of work overseas, even if there appears to be a cost saving. We have seen several cases where we thought all work would be lost, once the overseas plant was established. In many cases, though, the UK business continues to thrive, making 'specials' or 'prototypes'." There is an understanding that certain types of labour-intensive, high volume production will be lost to developing markets for ever, Mr Waghorn states. "We don't necessarily see this as a bad thing. However, what we do see are some outstanding businesses in the UK becoming the recognised leaders at their speciality. By this method, they are growing and becoming more successful." Importantly, he believes that British industry is sufficiently flexible to support increased onshoring. "At the same time, there is a lack of quality, skilled people of the correct age to support a major change. We talk of a 'lost generation' of engineers – people aged 20-40, with the appropriate training and background." Should the government be doing more, then, to support manufacturing in the UK and the supply chain? "There are some really good grants and investment incentives available at the moment," he replies. "There should also be some type of incentive to get school leavers into engineering, rather than producing thousands of graduates that don't have a proper vocation." Box item 2 The tide is turning Brian Owen, managing director of Precision Products (Brighton), recounts how many sectors of OEM and even some subcontract companies climbed on the bandwagon of lower cost manufacturing opportunities in Asia and Eastern Europe, but slowly, through a combination of events and economic reasons, the turning international tide has lowered the return and advantages of the policy. "From our experience, and comments from other companies we know, work is now flowing at an ever greater rate back to the UK," he says. Mr Owen is adamant that the focus on continuous investment and the ability to retain skilled machinists, plus a void of skilled labour in the area being filled by expansion of its apprenticeship scheme, is enabling his business to benefit from what he defines as maximising the advantage from import substitution through UK production. "An overseas price advantage of some 80% a decade ago has been progressively eroded to nearer 30%, but it is the realisation once again that the flexibility of local supply, quality issues, lead times, volume demands and much easier face-to-face personal contact is driving the change to return to UK suppliers." Regular investment in his company – along with the use of a single source of supply of machines from Citizen Machinery UK – has been a major influence in continuing to build Precision Products' business over the last few years, he states. As work from the UK started to be sent offshore, he was able to maintain a core customer base, but admits some were relying on 'a top-up' fast reaction subcontract service, in the case of supply problems from overseas. However, this gradually began to change to more continuous work through dual sourcing against importers, which then became single-source supply. "More and more customers are now requesting added-value from us, such as sub-assembly, finishing and specialised packaging for direct to line supply." For instance, Precision Products is currently producing batches of 100 finished assemblies of flat screen television wall-mount brackets, 12 variants of automotive switch sub-assemblies that are shipped on three pallets a month, weighing a tonne apiece, and is producing 2,000 high precision water fitting assemblies for a prestigious domestic products company. For all these assemblies, Mr Owen has been able to schedule component production completely under his control, having total responsibility for quality and delivery to strict Kanban requirements. Box item 3 Forging powerful chains Machinery also asked Alex Robinson, supply chain development manager, SMMT (Society of Motor Manufacturers and Traders), for his thoughts on onshoring and, in particular, how an effective supply chain can help to bolster that. Q: Does a strong UK automotive supply chain help promote a greater UK manufacturing base? A: "Having a strong supply chain supports the future prosperity of the overall industry. Sustained, high value investment in UK automotive has created a wave of new business opportunities for the domestic supply chain, as vehicle manufacturers look to source components locally. This capitalises on lower transportation costs and greater flexibility. Therefore, the opportunity exists for suppliers to benefit and enhance the value of the UK-based supply chain." Q:What initiatives SMMT is involved in to help strengthen that supply chain? A:"SMMT supports companies applying through all the initiatives available to help strengthen and grow the UK's supply base in the UK. In addition to Automotive Manufacturing Supply Chain Initiative (AMSCI) and Regional Growth Fund, SMMT also runs its own events where members can discuss opportunities with OEMs [Meet the Buyer events] or to access finance. We held our first Meet the Funder event in November 2012, where 125 automotive companies met with finance providers to begin worthwhile conversations, which we hope will bear fruit." Q: Can you give examples of members investing more heavily in the UK? A:"More than £6 billion has been invested in UK automotive in the last two years, ranging from large OEM investments as well as suppliers throughout the supply chain. Just this year, we have seen Jaguar Land Rover add £150 million to the £355 million already committed to its new Engine Manufacturing Centre in Wolverhampton; Toyota Manufacturing UK announcing 70 new jobs at its Deeside plant in North Wales; and Aston Martin creating 20 new jobs at its facility in Gaydon," says Mr Robinson. "But it's not just the OEMs investing. We've seen six automotive projects selected to receive AMSCI funding – around £100 million in total; component manufacturer Rosti McKechnie Ltd has announced a long-term strategic investment, which will create up to 200 jobs at its site in Pickering, Yorkshire; Brose have confirmed a £15 million investment in its Coventry facility, advancing a range of projects and taking its workforce to 250 employees; and TRW announced a £15 million investment in its Sunderland facility. Also, component manufacturer Nifco UK Ltd has confirmed plans to move to a larger facility in Teesside, creating an additional 170 jobs." Q:What about the role of government? A:"Government plays a crucial role in supporting the manufacturing sector. Ultimately, improving overarching support, as well as initiatives and finance, are important and the work of the Automotive Council is important to helping all of this work. Access to finance is vital for the growth of the UK automotive supply chain and it is encouraging to see the finance sector show a willingness and commitment to build new relationships with the sector from the ground up. "Government now needs to build on the momentum we've generated, working closely with SMMT through the Automotive Council, to help deliver further growth in automotive manufacturing and the supply chain." Q:What is the current health of the UK automotive supply chain? A:The value of the UK's automotive supply chain industry is estimated to be around £4.5 billion. However, we mustn't be complacent. There are tangible opportunities to exploit, and companies at every level of the supply chain need to be able to access these prospects and grow their businesses to match OEM requirements. This is especially important during these challenging times when actively pursuing new opportunities could pay off in the long term. Indeed, last year the Automotive Council identified more than £3 billion of new business opportunities available for domestic suppliers to rebuild manufacturing capability and capacity in the UK. The recent investments in jobs and facilities in the UK equate to a long-term commitment to UK manufacturing over the next decade at least. Government now needs to build on this momentum, working closely with the Automotive Council, to help deliver growth in automotive manufacturing and the supply chain.