The global market place is in a state of flux. Over the past 18 months soaring global demand has turned to recession. UK manufacturers have gone from working at full capacity and struggling to find enough skilled workers to grappling with the slump in world trade and implementing a combination of short-time working, temporary lay-offs and redundancies. Commodity prices that were rising at double digit rates month-on-month have fallen back to 2006 levels and exchange rate volatility is adding to uncertainty.
The strategic decisions around sourcing and investment have been under review in many companies for some time. The usual concerns about quality, reliability of supply and logistics have been added to by consideration of the actual cost advantages of low labour cost economies. Because of this some manufacturers in the developed world started to rethink their off-shoring activities and returned production home.
Was that the right move? There are good reasons to support the decisions to return activities back to the UK for some manufacturers. We have seen significant increases in the cost of transport and stock holdings, which offset the labour cost advantage of emerging markets. UK manufacturers’ focus on product and service quality was not always supported by their off-shoring partners, and even before the massive impacts of the de-stocking caused by the recession, lean and local supplies were becoming vital to many supply chains. The global downturn has probably added to the reasons for returning more production to the UK
However, there are also equally good reasons why maintaining an offshore manufacturing base has its advantages. The gap between labour costs in the developed world and emerging markets remains a substantial one. And while there has not been universal satisfaction with product quality in recent years there has, in many cases, been consistent improvements. It may be that companies that have brought production home may have been too quick to do so and may be looking again at lower cost options when demand recovers and competitive pressures heat up again.
More significantly, major emerging markets, such as China and India will continue to offer real growth opportunities in future. Companies that have gone overseas with an eye on the market as well as the lower cost sourcing opportunities appear to be more willing to stick out the current turmoil. The UK is not alone in facing serious economic imbalances; China for example has been too reliant on external trade at the expense of domestic consumption.
Rebalancing will need to address this and production will need to respond to the demands of domestic consumers as well as international ones. If successful, this will open up greater opportunities for market growth, particularly for companies with a presence there, and support the development of deeper and more sophisticated supply chains.
A year into this recession global manufacturing stands at a crossroads.