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The charge to repatriate production

THE TERM ‘made in China’ has become shorthand for bemoaning the collapse of the manufacturing industry in the UK. But amid all the gloom, including month after month of poor growth in the manufacturing sector, there is a small group of SMEs leading the charge to repatriate production.

They include the makers of childrens’ luggage, cushions, environmentally friendly detergent, flooring and paper cups – among many others.

The reasons for coming back vary. But the companies are united in believing that they are the first of many. So what are the chances of other SMEs following their lead? And what does it mean for insourcing more generally?

Closing the gap

Rob Law is the founder of Magmatic. His company produces the Trunki toy, which was famously rejected by the business leaders on BBC programme Dragons’ Den but helped contribute to his company’s £6m turnover last year.

In May this year, Magmatic announced that production of the Trunki was to move from China to Plymouth, creating ten jobs in the process.

As would be the case with most company owners and FDs, the bottom line that moved Law to make the decision was simple: cost.

“It has been a long-held dream of mine to be able to make Trunki in the UK,” Law tells Financial Director. “It just wasn’t economically viable six years ago. More recently – about a year ago – with the devaluation of sterling against the US dollar, the cost of manufacturing in China has pretty much trebled. We have been struggling to control our costs. I thought we should have another look at producing in the UK. A year later, the project comes to fruition.”

So China’s rapid growth and the economic stagnation in the UK has at least had one small benefit – the gap in cost of production between the two countries is now closing.

This was the main reason that Jonathan Duck, chief executive of flooring business Amtico, also closed his China operations – a move that brought 50 jobs back to the West Midlands.

“The Chinese costs tend to go up by 8% to 10% every year because their wage rates are going up and the renminbi is appreciating,” he says.

But despite this tendency, companies do need to focus on cost-cutting in order to close this gap further, adds Duck: “You just focus on factory efficiencies and formulation changes. We are working with the chemistry of the product. Also, we have tough negotiations with suppliers to get raw material costs down. You can say to them that I can buy this fully made product from the Far East or you can get more work.”

While China continues to offer low production prices, Amtico is given a yardstick against which it can improve. “You keep fighting to get your costs down to that level,” explains Duck.

Local delights

Amtico’s fight to cut UK costs to China levels shows that the UK is still a more expensive place to manufacture than China, despite the gradual convergence. However, for many companies, the tipping point has been reached and the gap is now small enough to justify bringing back production, which brings a host of other benefits.

“If you are similar on cost, it is easier if you are manufacturing locally because you can produce something when the customer wants it,” explains Duck. “Our customers don’t put their order in until seven days before they need a floor. If you are sourcing something out of the Far East, you are looking at six or seven months, so you have to hold a lot of stock that you may or may not be able to sell. So you can much more easily make things to order if you produce locally. Your supply chain is much easier.”

Lower lead times was a great attraction for Magmatic, says finance director Judith McIntyre, with the move back reducing it from 120 days to 30 days, “allowing the sales team to react to market demands, and a promise [that we’re] never out of stock”.

There are a number of other benefits, adds McIntyre, including more control over costs, reduced risks, freer cash flows and environmental factors.

For Tony Caldeira, founder of the Caldeira cushion company, being close to the customer was one of the main reasons that he brought production back to the north-west from China: “You are in the same time zone, the same language, and in many cases you can offer better credit terms – you just generally have a better understanding of what your customers want because you are closer to them.”

Away from finance, the British-made badge of honour helps with branding too. Dawn White, the co-founder of Ecoegg, an environmentally friendly detergent manufacturer, helped create 30 UK jobs this year when she brought production back to the UK.

“It absolutely helps with the branding,” says White. “We have just struck a deal with Lakeland. We’re going into their store in August and they loved the fact we were supporting UK industry. It is definitely worth it, paying that bit extra for the foot in the door with retailers. Generally, people like things to be locally sourced.”

As a result of all these factors, Law believes that more companies will be making the decision to return production to the UK: “Manufacturing is not about long assembly lines. There is high-tech manufacturing – from the likes of McLaren to the stuff we are doing. It’s just about being very clever with the way we engineer products to make them simple and cost-effective to make in the UK. It also has a great sustainability impact for our brand as well.”

Pick and mix

When it comes to high-tech manufacturing, there is no doubt that the UK can indeed compete with China on cost. There is, however, a danger of generalising around the costs of production. Manufacturing differs from company to company and in some cases within the business itself, meaning it may be more economically viable to keep some production in China while moving some back to the UK.

“What we have found is that the most expensive cushions in our Chinese range are just as cost-effective to produce in the UK,” says Tony Caldeira. “When you have an expensive item and have a low element of labour costs as a proportion of the total, it becomes more cost-effective to make it in the UK. And I never thought I would hear myself say that.”

However, there is an addendum: “The reality is that there are some products that are significantly cheaper to make in China. For example, something with embroidery or ready-made curtains – they take a lot more labour.”

For Mark Woodward, founder of the Printed Cup Company, there were real reasons for opening a factory in Clitheroe, Lancashire, and closing Chinese operations – but cost was not one of them.

“We started to see if there was a market for people who wanted products faster and we started to airfreight things from China to fulfil that market. That is when we started realising that people were willing to pay extra for faster service and so we started thinking we wanted to manufacture things here,” he says.

However, for the company, which relies on low-level manufacturing, there is no comparison on production costs – China wins hands down. “It is about double the price in the UK,” says Woodward.

Before making any decisions to come back, FDs and business leaders must ask themselves what are the advantages of moving back. “If you want to bring back manufacturing from China, you need to look at your USP,” Woodward says. “If it is coming down to price, the only way you will hit a price point is if you have got some fantastic machinery that runs ten times the speed of Chinese machines, with no labour. You could then sell it to the marketplace at a lower price. But that is a very difficult business plan to achieve.”

Indeed, for Woodward, the main reason for manufacturing in the UK is quality. “When you manufacture stuff in China, the quality can be very poor. It is difficult to get the quality control right from China. So some people are willing to pay more for European-manufactured products because it will be to a much higher standard,” he explains.

“This is where the secret is: you can’t just say that you are going to start competing with China – you have to look at your market place and see what they will pay more for.”

Quality, quality, quality

However, this might not be the case for long. All the business leaders agree that Chinese manufacturing is changing as the economy grows.

Before, the relative poverty in the country meant that the sole priority in Chinese manufacturing was bringing costs down so that their own people were able to afford the goods, adds Woodward.

“If people found a way of making that product cheaper, they were heroes,” says Woodward. “It didn’t matter if the product was now cheap and nasty because they were selling it to the community. If you could make lever arch folders for a couple of cents less, you were a hero because that meant the community would not have to pay so much for the product. But that is different for western companies that want quality, quality, quality. China is moving towards that model for export.”

Woodward likens this to Japan, which was chiefly famed for cheap production before becoming known for the quality of its manufacturing. The wage increases are both a sign and a cause of China moving towards quality – but it is not there yet.

Insource, outsource

In the region, it is not just China that is seeing growth. India is experiencing almost double-digit growth, and this is beginning to have an effect on outsourcing practices.

In July, Santander became the latest bank to bring back its call-centre functions, having moved them to India in 2003.

However, Punit Bhatia, who leads Deloitte’s BPO advisory practice, claims it is not necessarily increasing costs that lead to the insourcing of services.

“Everyone recognises that putting stuff offshore is still cheaper. It is true there is wage inflation overseas, but when you do a fact-based comparison, offshore is still much cheaper. But people are saying that their brand is worth it,” he says.

Santander itself acknowledged this tendency. It cited the large number of complaints it received about its Indian call centres as one of the reasons it is moving the service back onshore.

“A lot of them are saying that it has been an interesting experience but because of brand perception and customer experience, they want it to be provided onshore,” adds Bhatia. Indeed, a lot of banks have even made the UK call centres part of their marketing.

However, insourcing increases costs and that means something else has to give – at a time when FDs are looking to cut costs.

Lee Ayling, outsourcing partner at KPMG, explains what is happening: “As much as stuff is coming onshore, there is even more stuff going offshore.

“We are seeing a rebalancing of companies’ sourcing strategies. There may be a London company that has a low-cost delivery centre in Bournemouth, a near-shore delivery centre in the Czech Republic and an offshore delivery centre in Bangalore. They decide this based on cost, quality, language skills and security.”

Indeed, the obvious elements to keep offshore are the non-customer-facing and often labour-intensive roles. “What is slower to bring back is the back-office stuff where it genuinely doesn’t matter where it is done,” says Ed Ainsworth, managing director of 4C.

“Things like accounts payable processing, IT – those kind of things. If there is some natural advantage that can outweigh the cost disadvantage, it will able to be done in the UK. But if there is no structural advantage, it will be done in the place where it is most efficient.”

Welcome home?

Arguably, this is the most important point. It is true that costs are rising in China, India and the like, while the UK is stagnating. But all our homecoming businesses acknowledge that production and providing services are still more expensive in the UK, even if the difference is not as stark as before.

For certain types of manufacturing, mainly those at the higher end, the cost differentials are so small as to make it an obvious choice to manufacture in the UK. But, by their very nature, these are not the companies that will be creating vast numbers of jobs.

For the majority of manufacturers, which rely on labour and therefore still benefit from lower wages in China, there needs to be a real structural advantage. Lower lead times and greater control over the product might make it a price worth paying. But while cost-cutting remains the order of the day, it might be worth keeping the homecoming decorations in the cupboard for now. ?

 

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