After years of offshoring, British businesses are now, according to a flurry of reports and one government initiative, bringing it back home en masse. Could reshoring be a shot in the arm for your company, not to mention the wider UK economy?
According to former Financial Times columnist Marcus Gibson, “it was the greatest movement of de-industrialisation in human history”.
He’s referring to the mass offshoring of British manufacturing and services which took place for over a decade and a half from the mid-1990s. Soon-to-be-published research by EY (formerly Ernst & Young) uses import intensity figures to estimate that, between 1995 and 2011, around 710,000 jobs and $40bn (£26.2bn) of output were transported to distant lands offering cheaper labour costs and vast untapped skills resources.
“Highly profitable, well-run companies were taken apart in favour of ultra-low-cost imports on which there were no restrictions,” says Gibson, who has established a unique database (gibsonindex.if5.com) of 50,000 UK-based high-potential, small companies.
“Entire domestic industries – consumer goods, food and drink, building products, plastics and composites, consumer electronics – were destroyed. Ninety-five per cent of light manufacturing disappeared in an incredibly short space of time, losing out firstly to imports and secondly to a property boom that made manufacturing a wholly uncompetitive asset class.”
Now, though, a year after David Cameron assured a World Economic Forum in Davos that his government would build on the “small but discernible trend where some jobs that were once offshored are coming back from East to West”, the plan to make Britain “the reshore nation” is showing signs of coming true.
A survey of SMEs, conducted by the Manufacturing Advisory Service shortly after his claim, saw 11 per cent of respondents say they’d brought some production to the UK within the last year, compared with five per cent doing the opposite.
UK Trade & Industry (UKTI), meanwhile, has identified around 1,500 manufacturing jobs that have been repatriated since 2011 and, in October, joined forces with the Manufacturing Advisory Service to launch Reshore UK, a service to facilitate companies bringing production home with advice and support including a matching and location service.
This development came six months after business secretary Vince Cable pledged millions of pounds more in funding to assist firms wishing to bring production back from overseas. So what is turning the offshoring tide?
“Increasing labour costs in many offshore destinations have often been the trigger,” explains Steve Varley, UK & Ireland managing partner at EY, “and increasingly, companies are seeing the need to improve their time to market, their ability to innovate and, most importantly, to manage and guarantee quality as reasons to reshore.”
Counterfeiting and even theft are reportedly among other factors diminishing the advantages of overseas production. David Atkinson, head of manufacturing at Lloyds SME commercial banking, agrees with Varley.
“There’s a clear commercial argument for bringing production back,” he says, “with shorter supply chains and lead times, lower transport costs and a business-friendly environment among a number of factors influencing board decisions.” A Lloyds report, Fuelling Growth, which was published in December, found that 70 per cent of the UK motoring sector intend to move at least a portion of their manufacturing back to Britain, and predicted that this could create up to 50,000 jobs here over the next two years.
“Businesses in the car industry are motivated to support local communities in the UK with the creation of new jobs, and also feel responsible to minimise their impact on the environment,” continues Atkinson. “The UK economy has long been a leading player in the global automotive industry, and home to some of the world’s most recognisable brands.
So the sector has built up a robust infrastructure to support automotive production, led by cutting-edge research and development facilities and an extensive supply chain with a talented and highly experienced labour force. All these factors, along with the ‘Made in the UK’ quality badge, create a strong pull for firms looking to reshore supplies.”
BRINGING IT BACK
Supporting the notion that the automotive sector is ripe for reshoring, Aston Martin recently moved production of its Rapide S model from China back to its Gaydon, Warwickshire, HQ. Topshop, River Island and Santander UK are among the other giant names to have brought some operations home (the latter moved its call centres from India to England in 2011 after complaints from customers).
Symington’s – the Leeds-based manufacturer of Golden Wonder’s Pot Noodles – has now relocated the manufacturing of the student staple snack from China to Leeds. But what about smaller businesses? Last year, Coventry-based engineering firm RDM Group brought production of a rechargeable torch it makes for Jaguar Land Rover back from China to the Midlands.
“There were a few reasons,” explains RDM spokesman Miles Garner. “On paper, in the early days, overseas looked cheap, but the cost went up and up and up. Once you take everything into consideration – increasing cost of transport, added extras we weren’t aware of when signing the contract – it became too expensive. Lead times were a factor – we often need to up quantities with a very short lead time – and the 10-hour time difference was challenging, too, in terms of communication. Also, it was just a personal ambition to manufacture our own products. Jaguar and Land Rover are British brands which like having products manufactured here.”
But reshoring, Garner points out, isn’t cheap. “Getting the machinery and personnel here is quite a big cost which you have to take on the chin, and recovering the cost can take a long time – it’s a bit of a gamble. If the business hadn’t carried on we’d have been lumbered with all this machinery. But we found we had more highly qualified people available here.”
So what advice does Garner have for those thinking of taking the plunge? “You have to turn over all the rocks,” he says. “I’d say that it’s really easy to get carried away with this whole idea about things being cheaper abroad, and it’s only when you add up all the numbers, and take everything into account that you start to consider doing it in your own backyard where you can control everything. Cost-saving policies [like offshoring] aren’t always as good as they seem at first once you add everything up.”
Garner is not alone in pointing out the complications of reshoring. Ecoegg, a supplier of eco-friendly cleaning equipment launched in 2008, initially found that manufacturing in China was 40 per cent cheaper than doing it in the UK.
In 2012, though, the company founder Rob Knight decided to move manufacturing back to his native Swindon, having concluded that the cost benefits of operating in China had significantly reduced and the pros of making his products locally were manifold. Knight lists the usual suspects among the benefits – shorter lead times (down from 12 weeks to 10 days), quality control, easy accessibility of partners – plus advantageous financial aspects (in the UK, unlike in China, he is granted credit terms of 30 or 60 days).
“It was the best thing we could have possibly done,” he says. “We are an eco-friendly company making eco-friendly products and shipping goods halfway round the world was just not the right thing to do. We are really proud of being able to say we are made in the UK.”
It’s not been plain sailing, though. In China, one factory produced his entire product, while here, it requires 12 different suppliers to make individual parts for assembly in Swindon.
“Our business has become much more complicated,” he says. “Before, we could send one email to our supplier in China with an order for 10,000 units; now we’ve had to take on two people just dedicated to logistics.” Meanwhile Colin George of Rotigrill, a purveyor of rotisserie barbecues, hog roasters and spit roasters, is finding reshoring something of a logistical nightmare.
“Starting our company, we were faced with a choice: we could either buy stuff in and flog it or we could listen to our customers and design and make what they want,” he says, adding that, having originally opted to manufacture offshore, he is striving now to bring production home. “We’re just not large enough to have a representative in China,” he says. “We also had quality control problems and the cost of shipping doubled in 18 months.”
So far, so good. But George has found a frustrating number of obstacles. “I’ve wasted an awful lot of time talking about reshoring, only for things to go wrong when it comes to the crunch – suppliers suddenly raising costs by stupid amounts, realising a certain minor component would have to come from overseas, whatever.”
At the time of writing, George remains on the hunt for a similar-sized UK company to help with the manufacturing of his wares. It would be wrong, then, to say reshoring offers nothing but benefits. Many companies, in fact, have been put off. “Sunk costs and contracts play a part [in dissuading UK companies from reshoring],” says EY’s Varley, “and there are still concerns over the depth of UK supply chains and skills availability.”
The Lloyds report, meanwhile, highlights fears of international competition as a pressing concern for manufacturers.
“It’s vital that we continue to invest in R&D, skills and sustainable production to ensure the UK remains competitive on a number of factors and at the forefront of the industry’s development,” Atkinson points out. Gibson, meanwhile, predicts another option – “near-shoring” – will prove tempting to many.
“It’s likely that much manufacturing will move to low-cost economies in eastern Europe such as Poland, Bulgaria and the Czech Republic,” he writes in his October 2014 report, Bringing Manufacturing Back, adding that Asian nations such as Indonesia and Vietnam are also increasingly attractive. Rocketing UK property prices are, he believes, a deterrent.
“The sad truth is that UK industrial companies must work very hard to produce goods that are worth more than the four walls in which they are made,” he says.
But if not yet an established trend, reshoring looks to be an emerging one, with great potential for the right enterprise. And it’s not just happening here: “Onshoring is a trend we are seeing across a lot of [global] manufacturing markets,” says Atkinson. “The repatriation of manufacturing in the US has been widely reported and has played a pivotal role in its economic recovery in recent years.”
The government’s zeal for reshoring is not surprising – last year, PwC estimated reshoring could create up to 200,000 extra UK jobs over the next decade, and boost annual national output by around £6bn-12bn by the mid-2020s. So what can be done to promote it long term? “It’s still early days of what has to be a 10-year programme across multiple areas, such as skills, property, regulation and taxation,” says Varley.
“The challenge is to develop an integrated policy and convince businesses this is a long-term programme with real resources committed to it. The next stage will be to develop the individual building blocks further: for example, tax policy to favour investment, not just profit; support for training and apprenticeships; possibly even national insurance breaks for recruiting young people.”
The restoration of the ‘Made in Britain’ tag, a source of misty-eyed pride in decades gone by, isn’t a concrete reality just yet, but it is a distinct possibility – and one with potentially enormous benefits, both for the national economy and for businesses of all sizes, should it come to fruition.