Investing for future growth
After a big push in the Eighties and Nineties to move manufacturing and back-office functions to low-cost economies overseas, many UK companies are now looking at reshoring to increase productivity. Where should you be focusing investment?
Three or four decades ago, UK plc cottoned on to the attractiveness of low-cost economies like India, China and the Philippines, and manufacturers and services businesses alike moved production and capabilities offshore. Now, after years of under-investment in domestic plant and facilities, the tide is turning, and both supply and demand-side factors are motivating a reshoring of activities closer to home.
One of the functional drivers for such a shift is the gradual wage inflation taking place in these low-cost economies, which means the cost differential is no longer as attractive as it once was. Equally, the supply of highly skilled staff overseas is not always up to the standard which companies now feel they can find in the UK.
Tim Nye, a partner in the London corporate department, says: "There also appears to be a much higher attrition rate of labour in offshore markets, because the labour force is much more opportunistic and likely to move, delivering more churn than you would necessarily find in the UK."
Another key motivator for a potential move is the need to increase efficiency, by locating manufacturing plants closer to core customers. This was the reason given by Symington's, the maker of food brands like Ragu, Chicken Tonight and Golden Wonder pot noodles, when it moved production of its noodles from China to the UK, creating 50 jobs with a new factory in Yorkshire. Likewise, Hornby, the toy train maker, moved production back to East Sussex from India recently.
Many factors will influence a company's decision on where to invest resources, but Nye says that companies would be well-advised to take a long-term perspective before considering re-shoring.
"Fundamentally, what determines where you want to be located should be your existing markets and locations, and your future growth strategy," he says. There is no point moving back to the UK if your business plan says that over the next three to five years, you want to break into Asian markets."
For many companies which are focused on selling to UK customers, however, it can make sense to bite the bullet and refocus resources. "If you're a UK corporate and your markets are predominantly UK, and if you're ultimately trying to drive efficiency and increase productivity, moving onshore can significantly reduce the lead times involved in getting products to market."
Not only can such a move generate supply-chain efficiencies, it can also remove elements of risk involved in the transport of goods across geographies. The global nature of supply chains give rise to risks around customs and tariffs and, they also mean that geopolitical events and environmental disasters can become a concern. The 2011 earthquake and tsunami which hit Japan had an almost paralysing effect on the global automotive industry, for example, because so many car component factories were hit in the port cities along Japan's northeast coast. Since then, car manufacturers around the world have changed ways of doing business, often double-sourcing more parts and holding bigger inventories for fear of future disruption.
Another key factor influencing decisions on investment location is around the political costs of doing business, whether in terms of the costs of business incorporation, the taxation burden, or the levels of government support available. The UK's fiscal regime may not be the most favourable globally, but even in light of the Brexit vote, this remains a politically stable jurisdiction and business taxes are pretty competitive.
The current government at Westminster has also shown itself to be willing to offer support to businesses considering moves abroad to cut costs. Nissan, the car manufacturer, was famously persuaded against reducing UK production following assurances from politicians, who reportedly told the company they would make every effort to ensure the UK automotive industry remains competitive post Brexit, as well as consulting on new technologies to benefit the car industry.
Production of the popular credit card-sized computer Raspberry Pi was also switched back from China to Wales after its success meant it was cost effective to produce it closer to home. Being able to boast the logo 'Made in Britain' was important to the device's inventors, and that consumer angle is often another important consideration for business owners.
Consumers increasingly place considerable value in knowing the provenance of their purchases, particularly in sectors like fashion and fast-moving consumer goods, where people are often willing to pay more for something which is locally produced and has been delivered with minimum air miles.
Nye says: "When you're looking at where to locate and how to channel investment for future growth, there are a number of different elements to consider. Whereas, previously, decisions had come to be driven by low costs, and moving to keep production expenditure down, now, the questions about what will provide greater productivity and efficiency are more complex and often the pre-eminent factor."
He adds, "While we have seen the costs of doing business in these offshore markets increase, and the availability of skills and talent falter, that doesn't mean that reshoring will suit everyone. It may well be that some businesses need to maintain an offshore structure because it gives them access to a global supply chain, which will benefit their customers if they are focused on global markets."
Even where companies have decided to reshore, or remain onshore, that does not mean they have necessarily shunned the use of low-cost centres. Increasing numbers of UK-headquartered corporations are now basing many of their activities away from head office, with banks and law firms moving in recent years to locate back-office functions in Belfast, Northern Ireland, for example.
"By onshoring," says Nye, "many business leaders choose to move to multi-sites and find low cost centres within the UK away from their headquarters."
In such a way, onshoring has been proven to decrease risk, increase efficiency and bolster productivity in many companies, even if it is not an easy-win for everyone.