One of the main themes that we discuss as a global Industrial sector team is the increasing trend to repatriate manufacturing operations from lower cost markets – such as China – back to domestic markets.
The main driver of this movement has been a narrowing in the cost benefits of manufacturing in China compared with domestic production. This is the result of several factors:
- Chinese workers’ aspirations are rising and reducing their appetite to work long hours in mundane factory jobs. This generation is not so keen to toil in factories and are often many days’ travel from family and friends;
- An overstretched labour market. The latest generation of workers is thin on the ground because of the country’s one-child policy; and
- New labour laws. Introduced in 2008, the Chinese government now provides more protection for workers, including the right to a permanent contract after a year of employment. This is coupled with workers becoming more aware of their rights, and thus red-tape is preventing the fluidity of labour movement.
The result is that even in a labour-intensive industry such as textiles, the cost benefit that China offers is quickly eroding. Groups are left facing a trade-off: the country has the world’s best supply chains of components for industry and its infrastructure works well. Firms have already invested heavily in being there and companies that initially came for the low labour costs now want to stay because it has become a huge domestic market in its own right. Nonetheless, the incremental decision to invest in new production capacity in China has become difficult.
According to the Engineering Employers Federation, around 15% of British companies are bringing some or all of their manufacturing home.
This is coupled with the UK and US (even more) attracting operations back:
- Costs in America are falling – the successful extraction of natural gas from shale is reducing the price of energy;
- Weakening of the dollar and the pound has made importing products more expensive;
- The US workforce is becoming more flexible and productivity continues to rise. High unemployment has brought a willingness to work for lower pay; and
- Governments are encouraging firms to re-shore through scheme such as the UK’s Regional Growth Fund.
Domestic operations generate many advantages for manufacturers:
- Greater visibility and control;
- More immediate and effective quality management;
- Greater proximity to end markets and thus an ability to be more responsive to customers, with a reduction in lead times and the greater ability to build to order;
- Improved payment terms – Chinese companies often demand upfront payment rather than offering credit terms; and
- For certain markets (e.g. the USA), the benefit of badging products “Made in America”.
Luckily for these companies, there are still robust manufacturing capabilities in both the UK and US, making it theoretically straightforward for small firms to make the switch back. However, the big challenge facing SMEs keen to come back is how to find and access the resources they need in a painless way.