Advanced Engineering Show 2

The next Government needs to rethink manufacturing policy

By: David Bailey @dgbailey
Published: Monday, March 2, 2015 - 08:45 GMT Jump to Comments

Rebuilding the UK’s fractured manufacturing supply chains is not going to happen on a significant scale without a major policy effort.

I’ve been banging on about the reshoring opportunity for some time and a new report reinforces what I’ve been saying. Reshoring in some industries could add £15.3 billion to the UK economy and create hundreds of thousands of jobs, according to EY’s report Reshoring – Time to seize the opportunity

It says there is a “once-in-a-generation” chance to add billions to GDP and rebalance the UK’s economy. Over 315,000 new jobs could be created for the country as the labour, transport and regulatory costs of producing goods in places like China and Thailand increase, pushing manufacturing back to the UK.

This EY report echoes detailed research that I have undertaken with Lisa De Propris at the Birmingham Business School.

Looking over a 10-year period to 2025, the EY report suggests that the aerospace, defence and automotive industries would see the biggest benefits. Regionally, the North West could benefit the most with the creation of an extra £2.4 billion of GDP, with the South East outside London next with a £2 billion boost, followed by the West Midlands with £1.8 billion. 

Echoing our own work, Mark Gregory, EY chief economist and author of the report, said the economics behind the pattern of declining UK manufacturing in favour of service industries was changing.

“Offshoring in the 80s and 90s saw a dramatic reduction in British manufacturing and a shift to services industries that resulted in a fundamental restructuring of the British economy,” he said.

“While some regions saw rapid growth and wealth creation, others suffered from high rates of unemployment.

“But the economics underpinning this trend appear to be reversing and presents the UK with a once-in-a-generation opportunity. While increasing wages in developing countries are eroding their labour cost advantage, there are many more factors driving business to choose British shores.

"The desire to guarantee quality and the imperative to reduce time to market are increasingly important drivers of location decisions.”

EY said that although the cost advantages of manufacturing in the developing world were decreasing, reshoring across the board was unlikely, as wages were still significantly lower than in the UK.

The report notes that capital intensive sectors such as aerospace, defence, automotive, petroleum products and clothing, serving the European market, were most likely to benefit from reshoring with the right incentives.

Steve Wilkinson, UK & Ireland managing partner, markets at EY said: “They will be businesses where quality and brand are important and consequently the supply of a highly skilled workforce is imperative.

“When firms do choose to reshore to the UK they will tend to cluster in regions that best serve their business, in close proximity to key suppliers, infrastructure and an able workforce.”

“Those businesses that do relocate to the UK will predominantly be capital intensive sectors such as aerospace, defence, automotive, petroleum products and clothing, serving the European market,”

“While steps have been taken to make the UK more attractive to businesses looking to reshore such as reducing the headline rate of corporation tax to the joint lowest in the G20, providing competitive reliefs for innovative and high tech industries, and UKTI’s ‘Britain is Great’ campaign, more can be done,” Gregory said.

The report concluded reshoring would create a better economic balance between regions and sectors and make the UK economy more robust.

Reshoring faces challenges, however, the report argues: Germany, France as well as a number of emerging Eastern European countries compete for reshoring opportunities.

“To address businesses’ key concerns, the government should focus on reducing labour costs and building up key skills, widen access to finance measures, support innovative business and reduce capital costs through tax breaks,” says EY in its report.

London will likely benefit little from reshoring – due to the higher cost of land and labour which blocks all but the most high-end manufacturers from operating there. But the UK’s economy could rebalance towards the regions and diversify as regional investment grows and expands into sectors like automotive and aerospace.

“By supporting those sectors which offer the greatest return from reshoring in terms of employment and GDP, the UK will have a far more balanced, healthy and robust economy where consumers, manufacturers, service businesses and other sectors are pulling in the same direction,” said Mark Gregory.

“This will lead to a more sustainable economy which is better able to weather future global shocks, helping set the UK on a path to where it is not only competing but winning in the race for global growth.”

The report highlights the need for policy interventions to make the most of the reshoring initiative.  On this, our own research suggests that the UK could learn from policy initiatives in the US where the government has been active in encouraging US-based firms to relocate some activities back to the US.

For example, President Obama has increased tax breaks for domestic production activities in advanced manufacturing, offered a 20% income tax credit to allow for the expenses of shifting operations back to the US, made permanent an expanded tax credit scheme for R&D, and removed tax breaks for firms offshoring manufacturing.

The US government has also funded a ‘Reshoring Initiative’, including an online costs calculator, based on the premise that manufacturers able to calculate costs more fully are more likely to outsource to domestic firms rather than overseas.

The US experience also highlights some of the constraints and limits to reshoring. Manufacturing activities being reshored will require fewer, more highly skilled workers as manufacturing productivity grows. That presents a challenge in terms of raising skill levels in manufacturing. Furthermore, while reshoring may assist in terms of output growth it may not create large numbers of new jobs.

Possibilities for manufacturing reshoring in the UK and Europe may also be more limited than in the US. In part this may be because the wage cost differential (adjusted for productivity) between Europe and China may not be close enough to create a ‘tipping point’ in some sectors as in the US.

But this still raises the issue of what policy can do to push the process along, and means recognising that smaller firms often followed larger firms in offshoring production as they wanted to be near their customers. So attracting them back means relocating not just individual firms but whole segments of the supply chain, and means support for smaller firms especially which face high costs when moving operations.

While there have seen some welcome moves by the British government in encouraging the process, these have been small scale and often do not reach smaller firms in particular. A key lesson of our won work in this area is that a much more concerted effort is needed as part of a wider industrial policy that looks to build manufacturing capacity.

That means one that stimulates investment in new technologies (for example through better capital allowances), that provides accessible finance for small and medium sized firms along the supply chain, that backs high growth firms and exporters, that encourages manufacturers to increase output and employment through tax breaks, and which supports better skills formation. On that, we would agree with some of the policy recommendations of the EY report.

Overall, there appears to be a real opportunity to rebuild some of the UK’s fractured manufacturing supply chains – particularly in the automotive case here in the West Midlands - given recent shifts in exchange rates, transport costs, rising wages overseas and heightened concerns over supply chain resilience. But the key message is that this is not going to happen on a significant scale without a major policy effort.

Professor David Bailey works at the Aston Business School.

The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of The Information Daily, its parent company or any associated businesses.

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