AdSlot 1 (Leaderboard)

Making it in China, UK manufacturing in the Far East

Debates about the future and fate of UK manufacturing tend to run into
trouble from the outset over the slippery nature of the term ‘manufacturer’. As
Finbarr Livesey, director for the Centre of Economic Development at the
Institute of Manufacturing points out, even trying to define manufacturing in a
loose kind of way as “making things” is now deeply problematic.

“What people think about when they consider manufacturing is probably not
what is happening in many so-called manufacturing companies any more. The whole
concept is changing and, at its most extreme, you might find a manufacturing
company that actually has no manufacture at all under its own control,” says

For Livesey, what characterises world class manufacturing companies today is
coordination and leadership skills. This means being able to push the whole
manufacturing process, from design to component building, out to a variety of
‘partners’. To do this successfully, a company has to have world-class
coordination skills to bring all these ‘inputs’ together at the right time, and
in the right order, through the various stages of finished manufacturing.

Moreover, Livesey points out that leading-edge UK manufacturers, such as
Rolls-Royce with its aero engines, are increasingly merging both manufacturing
and what used to be thought of as services (in Rolls-Royce’s case, the
maintenance and overhaul of engines) into one complete product for clients. It
follows that the usefulness of the old separation between manufacturing and
services is itself passing into history.

Along with the changes in how things are made, we are seeing equally sweeping
changes in where things are being made. The UK government’s own manufacturing
strategy now urges UK manufacturers to take advantage of low-wage countries to
reduce their labour costs and warns that we can expect all low-value,
high-volume manufacturing to move away from Europe and the US to low-wage
economies in India and China.

Relocating abroad

Ken Lever, finance director at the UK engineering giant, Tomkins, points out
that the company already has around 140 manufacturing locations around the
world. The majority of these are in North America, but the trend is for Tomkins
to site increasing numbers of plants in Asia and South America. At the same
time, the company has been reducing its manufacturing capability in the UK and
other high-wage countries.

One of Tomkins’ most successful hi-tech lines, for example, is its windscreen
wiper module. For years, this has been manufactured at Pontypool, southeast
Wales, but, in the current climate, that location no longer makes economic
sense. “We announced the winding down of that plant recently and most of the
production capacity there will be transferring to Mexico, where we already have
a significant installed base. However, some of the production might move to
China,” says Lever.

The company also announced the intended closure of its manufacturing
capability at St Neots, Cambridgeshire. The closure will take place over the
next few years as manufacturing moves to a low-wage area. However, Tomkins
intends to keep assembling product at St Neots and is building a large assembly
plant there, the idea being to retain and capitalise on the specific assembly
know-how of the skills base there.

“The fundamental idea is that where we have a business that is focusing on
technology and innovation, the UK remains an appropriate site. However, it is
inevitable that basic, low-cost manufacturing capability will migrate over time
to low-cost economies,” says Lever.

He emphasises, though, that no manufacturing company can afford to simply
chase low-wage economies. “After a few years, labour cost arbitrage simply
disappears. Mexico and Korea are already cases in point. Mexico looked low cost
a few years back, but now it doesn’t by comparison with India and China,” he

Very few companies can afford to move their factories every five or six ye
ars, chasing after the next low-cost phenomenon. The key, Lever says, is to
combine a move to a low-cost economy with a project to develop your capability
in a growing market. The fundamental appeal of India and China, he says, is that
they combine low-wage costs with high-market growth.

“At Tomkins, our products are very closely linked to GDP growth and
population growth, and if we want to grow faster than the GDP of a developed
country like the UK then we have to be in places where GDP growth exceeds the
western average,” he says.

A sure move

Of course, what works for a global manufacturer like Tomkins will not
necessarily work for every British manufacturer. John Guy, head of UK industrial
manufacturing at KPMG, has just finished a guide for the DTI’s Manufacturing
Advisory Service called Offshore – Be Sure!

“Often, what UK manufacturing companies find when they consider their options
carefully is that the answer is not to go to China – or not yet,” he says. It is
a simple fact that UK manufacturing in general is not as productive or as well
managed as US, French and German companies. That being the case, many companies
can bring about a fairly dramatic improvement in their cost ratios and their
performance without placing a huge bet by shipping factories to China or India,
he says.

“Our advice is to call in specialist help and experience, and look carefully
at your business processes to see what improvements you can make here at home,”
he says. “Look at your supply chain, your financing, your fixed and variable
costs. Then, ask yourself if you have sufficient spare time and resources to do
something in China or India,” he says.

Guy is not suggesting that companies should simply continue to hoe the same
old row and expect to hold on to their market share. “The only UK manufacturing
companies today which are not involved, right now, in a fundamental
re-examination of their entire business strategy are those which are in such a
protected niche business that they know they have a good safety margin, or those
that are just about to hit the cliff,” he says.

Companies that try to stick to their guns and stay with the status quo will
find the rest of the world changing around them. Sales and markets will melt
away, he says.

All change

An excellent example of how much things change, even when the product
involved looks ‘timeless’, is provided by that most iconic of British
manufactured items, the Rolls-Royce motor car. In 1998, BMW paid £40m to Vickers
for the right to use the Rolls-Royce logo and the Spirit of Ecstacy – the
girl-in-a-robe mascot designed in 1911 by the sculptor Charles Sykes. It
deliberately did not purchase the Rolls-Royce factory at Crewe, which went to
Volkswagen, or any of the plant or assembly line know-how that Rolls-Royce had
built up over the last century.

As Colin Kelly, Rolls Royce Motor Cars regional director for Asia explains,
BMW’s aim was to produce a new Rolls Royce, using modern technologies, while
staying true to the classic spirit of Rolls Royce design. Precisely because it
always intended to create a new factory to build its new car, BMW could, in
theory, have chosen to build the car anywhere in the world, including China or
India. However, building outside of Britain was “simply unthinkable”, Kelly

“If you are building a great British icon, you can’t build it anywhere else.
We had to produce a beautifully engineered car and it had to be seen and
accepted as a Rolls Royce. BMW might be the parent, with the deep pockets and
the technical expertise to back the project, but the build and the company had
to be British,” he says.

The choice of Goodwood as the location for the new factory came from the fact
that the south coast of England has a tradition of yacht building. People
skilled at working with wood and leather, which are key ingredients in any Rolls
Royce, were more available there than elsewhere. Creating a new factory from a
greenfield site in an abandoned quarry on Lord March’s estate at Goodwood cost
BMW a further £60m.

The figures suggest that the bet has paid off. The car has an average sales
price of around $350,000 (£190,000) – before various governments put their
luxury goods and import taxes on to the vehicle. Then there is the fact that the
company’s global sales last year for its Phantom Rolls Royce was 796 cars, the
highest number of Rolls Royce cars sold for 15 years – and sales to China
counted in the dozens. That adds up to a turnover of close to $300m. BMW does
not disclose Rolls Royce’s contribution to group profits, but the UK
subsidiary’s spokespeople say the company is well on the way to profitability.

Andrew Ball, communications director at Rolls Royce Motor Cars, points out
that there are4 several lessons for UK manufacturers from the Phantom
experience. The basic truth that you can build in Britain if you focus on
high-value production has been well and truly vindicated, he says. Second, the
Rolls Royce story illustrates the subtle shift in meaning of what constitutes
made in Britain and shows how intricate and finely meshed partnering
relationships in manufacturing now are. What has survived in the Rolls Royce
experience is the brand and BMW’s skill has been to breathe life back into the
brand with state-of-the-art German engineering allied to British craftsmanship.

This is not to say that Chinese or Indian engineers couldn’t design and
engineer to this kind of standard. Ken Lever warns that, however much Gordon
Brown might want the UK to become the centre of excellence in technology, we do
not have exclusive rights over innovation. China and India are educating 20
engineers and scientists to our one and are very keen to move up the value chain
as well.

“There are many parts of Asia where people are already very innovative and
where there are very good third-party design engineering consultancies
appearing. We are keen to outsource activities to that skills base,” he says.

Strong relationships

Where Lever sees a more enduring competitive advantage for established
western companies is in the developed nature of their relationships with their
customer bases. “We’ve been in our key markets for a very long time and we now
work with our customers to innovate. The important link for us is in having the
association with the end customer and in being able to anticipate and meet the
needs of those customers. Developing the distribution capability and access to
markets, along with a valued supplier-customer relationship is hard to do and we
have a head start over emerging economies in these matters,” he says.

Around 20% of Tomkins’ global business is in the after-sales market, and
building the distribution and logistics capacity to deliver after-sales support
to multiple markets takes years. “It is very hard for China and India to
replicate this. Also, we have a huge range of products. An emerging economy
manufacturer will have a narrower range of products, so they will be much more
successful with a strategy that emphasises low or no after sales requirement,
and that is focused on high-volume commodity products,” he says.

Betting on success

John Stuttard, sheriff of the City of London and one of the people
responsible for PricewaterhouseCoopers’ China operation for a decade, argues
that labour costs are just one among many factors that companies need to take
into account. Opening any kind of production capacity in China is still not
easy, he warns. It takes a substantial commitment in terms of resource and
personnel. “It cost PwC more than £100m to create our China operation and that
is a huge bet for an accountancy firm, by any standards. It is now a very
worthwhile operation for PwC and adds to the firm’s strength and global brand,
but the partners breathed a collective sigh of relief when the office finally
reached the breakeven point,” he says.

European and North American companies often fail to realise that the Chinese
market is actually not a single market, but is more like the Europe of the
1950s, with multiple markets at various stages of sophistication running side by
side, he warns.

“Anyone going into China today to set up any kind of manufacturing process
has to be prepared for the fact that their first steps will almost inevitably
turn out to be a set of costly mistakes. It is expensive and difficult and
things are done very differently there. You need an understanding board and
understanding shareholders.”

However, Stuttard does not see China as a big political risk, as far as
inward investment from UK manufacturers is concerned. “The political system is
probably the least unstable element in Chinese society. The fact that they have
an element of central planning means that the licensing regime is very
different. But it also allows them to take a very coherent strategic view of
where to invest, around the world. Their economy has been growing at between 7%
and 10% for the past 25 years and that itself shows that those in power have a
very firm and sure grip,” he says.

For Stuttard, one of the most difficult things about moving any kind of
high-value, high-intellectual property manufacturing to China is the absence of
European-style legislative protection for intellectual property. It is not just
the theft of IP that is the issue, he warns. The resulting copies of branded
products are often poor quality and can do the brand and the company concerned a
huge amount of damage. That makes yet another reasonably compelling reason for
companies to keep high value, high-intellectual property manufacturing in

Related reading