As a result of Brexit we have seen a significant drop in the value of Sterling against the US$. This week we have seen an increasing fall against the Euro and here at Presto we’ve been doing some lateral thinking about how the falling value of Sterling could impact UK manufacturing. The result is that we project renewed interest in UK businesses reshoring (also known as inshoring) their manufacturing and an increase in UK and overseas businesses sourcing components from UK suppliers.
So what led us to this conclusion?
To put our idea into context it’s useful to look at some background information starting with data comparing global manufacturing output in 2014 in the top 10 countries.
- Chinese manufacturing output was the highest in the world for the first time at $1.9 trillion.
- The USA were literally ’pipped at the post’ by China at $1.8 trillion having held the number 1 spot from 1970 to 2013.
- Japan took the number 3 spot with $1 trillion and the UK came in 9th with $247 billion, beaten by the other major European economies of Germany in 4th, France in 7th and Italy in 8th. To complete the top ten South Korea was 5th, India 6th and Taiwan 10th1.
With escalating labour costs in China and increased automation, China is no longer the low cost manufacturing option it was.
But how did it become such a powerhouse of productivity for the last 20 years?
A combination of clever policy, hard work, luck and timing all played their part. For example, in the 1980’s Margaret Thatcher and Ronald Reagan believed that western economies would move away from manufacturing towards service economies and also gave preferential treatment to the financial industry on Wall Street and in the City of London2. This coincided with China opening up and ‘plugging in’ to the global economy and the rest is history!
Although some particularly labour intensive functions or businesses are chasing lower wages in locations such as Vietnam, Bangladesh, Myanmar and the Philippines an increasing number of businesses see this as the right time to reshore.
Here are some of the reasons why:-
- Declining wage gaps – Chinese wage increases average 12% per annum since 2001
- Technology, for example 3D printing and Robotics3
- Security of Supply Chains
- Increasing transport costs
- The ability to rapidly respond to changing market requirements
- Cost of managing overseas operations
- Geopolitical Unrest4
As a UK manufacturer producing high quality visible machined parts at a fair price we know we can’t compete if a potential customer is comparing our price to that of a Chinese supplier. However, it is rather like comparing apples and pears. Here at Presto, as with other UK manufacturers, we only use European raw material, test everything we receive and have minimal, if any, scrap. In contrast we are aware that Chinese suppliers are likely to use low quality and untested raw material. These factors together with lower quality standards contribute to the high scrap rates many customers experience when sourcing components from China.
So let’s be positive as manufacturers and consider the lower value of Sterling an opportunity to lure manufacturing back to the UK.
As always we would love to hear your thoughts on the subject:-
Do you think we can use the current business climate to encourage businesses to reshore?
Have you any experience of reshoring?
Do give us a call on 01865 883508 or e mail us at email@example.com.
For more information about Presto Engineering please visit our website here and if you would like to discuss a project with us please call us on 01865 883508 or e mail Julian at firstname.lastname@example.org.
1Chris Rhodes, 2016, International Comparisons of Manufacturing. [pdf] available at http://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN05809#fullreport [Accessed 6 October 2016]
2Paul Denlinger, 2016, How did China become the manufacturing hub of the world? [online] available at https://www.quora.com/How-did-China-become-the-manufacturing-hub-of-the-world-What-are-some-of-the-things-that-other-developing-countries-can-learn-from-China-to-improve-manufacturing [Accessed 6 October 2016]
3Sarah O’Connor, 2016, Robots may cut off the path to prosperity in the developing world, FT.com [online] available at https://www.ft.com/content/5d0b1206-36f2-11e6-a780-b48ed7b6126f [Accessed 6 October 2016]
4PWC, 2014, Reshoring – a new direction for the UK economy? [pdf] Available at http://www.pwc.co.uk/services/economics-policy/insights/uk-economic-outlook/reshoring-a-new-direction-for-the-uk-economy-ukeo-march14.html [Accessed 6 October 2016]
ReshoringUK – http://www.reshoringuk.co.uk/
Reshoring Initiative – USA – http://www.reshorenow.org/