Manufacturing 'Reshoring': What It Is, What's Driving It, and Why It's a Big Inward Investment Opportunity for UK Regions

Friday, 12 December 2014
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Bringing it all back home: automotive manufacturing in the UK

There's been plenty of media coverage recently on the subject of manufacturing 'reshoring' (or 'onshoring'). So here's a summary of what it is, why it's happening, and the scale of the inward investment opportunity for the UK's producer regions.


What is manufacturing 'reshoring' (or 'onshoring')?

In brief, manufacturing reshoring is the process of companies returning production operations to the locations from which they were originally 'offshored' (i.e. removed to other, typically lower cost, overseas locations).

Why did offshoring happen?

To reduce production costs. Not so many years ago it seemed that the process of businesses relocating manufacturing operations was, in general, a one-way street to lower cost locations. The view was widely held that developed western countries like the UK were simply too high cost to be competitive for manufacturing. As a consequence, their manufacturing sectors were destined for inevitable, irreversible decline...

But nothing stays the same forever...

However, with the benefit of hindsight, it's clear that this belief was based on one or two false assumptions, including:

1. The assumption that the cost factors influencing manufacturing location decisions were unlikely to change significantly - notably the primary importance of cheap labour and the huge cost differentials between developed countries (e.g. UK) and developing countries (e.g. China)

2. The assumption that the benefits of reducing production costs overrode all the other, potentially negative, consequences of offshoring manufacturing operations.

So how have the cost calculations changed?

A number of cost factors have changed and combined to swing calcuations back in favour of producing in the UK and similiar 'high cost' economies. These include:
  • Rising costs in developing countries such as China (e.g. Chinese workers aren't as cheap as they used to be)
  • The increasing substitution of labour for capital (i.e. machinery) in the production of more advanced manufactured products (making labour a less critical part of the cost equation)
  • An increasing focus within businesses on evaluating the 'full costs' of manufacturing operations (i.e. costs such as freight - which have also increased - as well as the direct costs of production)

And it's not just about production costs...

Meanwhile, manufacturers have become increasing aware of other significant, if less tangible, benefits of keeping manufacturing close to HQ and close to market. These include:
  • Improved efficiences resulting from the co-location of product design, R&D and manufacture. (e.g. a 2007 CBI survey found that 64% of manufacturers said it was 'very important' to co-locate 'design and development' with 'production and assembly')
  • Reduced risk resulting from shorter, more manageable supply chains
  • The reduced risk of intellectual property theft (i.e. competitors far away from home stealing your inventions and designs..)
  • The increased potential to produce goods flexibly and rapidly to very specific customer specifications (that white car with the red seats and the big black alloys you always wanted...)

The inward investment opportunity for the UK's 'producer' regions

Overall, it's clear that that factors influencing manufacturing location decisions have changed, as have the ways in which businesses evaluate them. For regions in the UK and other developed countries, the challenge is to develop an understanding of these manufacturing location choice drivers, align them with their location 'benefits', and effectively communicate the resulting location value propositions to investing businesses.

It should be pointed out that reshoring has its limitations - many low value-added manufacturing operations that have been offshored to access low-cost labour will inevitably stay where they are (or move on to somewhere even lower cost!). However, for higher value manufacturing operations, the UK's regions are presented with a significant opportunity - according to 2014 research by Lloyds Bank (recently cited in the Telegraph), 70% of car manufacturers or companies in their supply chains are planning to return production to the UK in the next 2 years, creating an estimated 50,000 new jobs. By any standards, that's an inward investment opportunity to be taken seriously.


Author:
Nick Smillie
MD, Clarity Business Strategies Ltd.
Dec. 2014



Sources:
CBI (2007)
Lloyds Bank (2014)
The Telegraph (5th December, 2014)

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