European companies that once offshored manufacturing production to take advantage of lower costs overseas are bringing production back to Europe. Driving this wave of reshoring is the rapidly increasing cost of labour in once-favoured offshoring locations. In China alone, labour costs have grown by as much as 25%, with the government stipulating a minimum wage increase of 13% per annum. In 2003, Hornby were said to have benefited from moving their manufacturing to China. Ten years later the company announced a loss, partly as a result of disruption caused by a Chinese supplier. Today they are reshoring to the UK.
Rising transport costs and quality issues – with their associated cost burden and negative impact on customer satisfaction – are also playing an important role in shift to reshoring. As a result, our analysis suggests that some 1,500 jobs have been created in manufacturing in the UK since 2011. The reshoring phenomenon has also been noted by the UK government, which has set up Reshore UK, an initiative to support companies that want to bring manufacturing production back to the UK.
The factors driving reshoring are, however, largely short term and tend to affect products manufactured for UK or European markets. Production capacities set up in emerging markets for local supply will not return. We know that it is possible to manage quality abroad and to find lower-cost manufacturing locations than the UK or even China, for example in Vietnam or Bangladesh. We have worked with our clients to demonstrate that, with effective knowledge transfer and continuous process improvement, offshore migrations can be successful (see Siemens in China or Stannah Stairlifts).
So quality and cost issues seem unlikely to lead to the long-term repatriation of manufacturing production to Europe. How, then, can the UK turn the current wave of reshoring into a long-lasting and sustainable trend?
We believe that UK businesses that want to be successful global manufacturers must embrace the fundamental transformation of industrial production that is heading our way. Nothing less than 'the reinvention of manufacturing' is where the future lies.
What will the transformation of industrial production look like?
For a start, the shift from mass-production to mass-customisation will allow manufacturers to offer greater variety and personalised products, at lower volume and with higher margins. Companies are using advanced techniques and materials to speed up time-to-market and make manufacturing more flexible and efficient. We saw this in our work with a global consumer healthcare company that wanted to increase the variety of items it sold under one brand. Our solution was to manufacture the base materials in bulk and then customise the product using a mixing and dosing system that allowed for new flavours and colours. This enabled the business to introduce new products at no extra cost.
We can expect to see conventional value chains in the manufacturing sector transform into flexible networks. These will be populated by smaller, more widely distributed specialist companies that plug into different global supply chains to buy and sell particular technologies – and disengage if the business goes away. As a result, companies serving global markets will be able to operate from their home base in high-cost economies, create and protect their IP, and still manufacture at the point of demand.
The reinvention of manufacturing will deliver exciting new business opportunities and models. At our technology centre in Cambridge, we are working with the new digital and production technologies that will create the personalised products consumers want, and which could see manufacturing increasingly return to Europe. For a major consumer products company, for example, we developed new technology that has enabled them to manufacture personalised products on a larger scale and at speeds approaching existing production lines.
Among the technologies mentioned above is big data, which provides the intelligence on consumer needs to which new manufacturing technologies must react. In addition, intelligent robotics allows machines to start making their own decisions about how to respond to production challenges. Other technologies that feature in our work include programmable, self-assembly nano machines, 3D printing, virtual production (which uses computational science for prototyping and scale-up) and new materials such as nanotechnology, cyber material and green plastics.
The UK government's reshoring initiative has great potential to encourage manufacturers to reshore manufacturing in the short term, particularly British-based companies that have kept their engineering and R&D in the UK. In the long term, bringing UK manufacturing back for good lies in the manufacturing sector's ability to reinvent itself to meet modern consumer needs, and to focus investment on relevant new technologies and talent.
In the future, the attractiveness of a location as a manufacturing base will depend on whether manufacturers can create new products and achieve flexible, high-quality production. The trends in manufacturing will support an advanced capability in the UK – one that is built on legacy, but with updated technology. The existence of such a capability will cancel out many of the arguments for basing manufacturing in low-cost economies.
To find out how PA can support your manufacturing and reshoring activity, please contact us now.