Low-cost overseas operators are eroding margins for the UK specialist manufacturing sector. Or are they? Informer’s experts unearth the opportunities behind the threat
Words by Gary Eastwood
Globalisation has radically altered the canvas of UK manufacturing. It is impossible to compete with China and India on price, so emphasis has shifted to the power of innovation – with British companies among the trendsetters.
What advice would you give UK manufacturers considering outsourcing production?
David Silver, director in investment banking at Baird UK companies are now assembly operations rather than manufacturing operations – bringing in commodity products from India and China – and are focusing on value-add products. It’s about technical innovation and working with customers to produce products tailored to customers’ needs.
Philip Barker, director of Cavendish Corporate Finance Outsourcing sounds like a highly desirable thing to do but it needs to be very carefully managed. It’s a key trend where labour costs are a very high proportion of the manufacturing cost – in that instance, it’s fair to say that the only way UK manufacturers can hope to be competitive is to outsource production. But outsourcing is not the answer for many highly innovative and niche engineering businesses. One client, for example, produces high pressure, performance-critical valves used in nuclear submarines for the MoD. The customer is not interested in the potential savings of a low-cost country, as the risk is too great.
Sam Watkinson, investment director at August Equity Intelligent outsourcing is here to stay. It is critical to maintain a tight rein on the core differentiators of Informer debate your product whilst outsourcing specific elements to suppliers that can provide you with quality and reliability and are able to meet your delivery expectations. Too often outsourcing is a price-driven decision and the other business fundamentals suffer to the detriment of the customer experience. As a result, the outsourced suppliers should not necessarily reside solely in India and China – they could be on your doorstep.
How important is it to retain tight control over intellectual property when you outsource?
John Lane, director at PwC Corporate Finance Outsourcing can cause the leakage of IP, but you have to consider that there are two ways of shifting production to low-cost countries. You can outsource, or you can move your own operations out there – which means you retain greater control of your IP. But the question should be: “Do I outsource everything or just some parts? If so, which parts?” Outsourcing a commoditised part of the manufacturing or product is a lot less risky than outsourcing the real nugget that makes your product better than everyone else’s.
Sam Watkinson: If you lose control of your IP you lose control of your business. IP doesn’t necessarily mean technical know-how. It can just as easily be a business’s customer relationships, brand strength or service provision – often the kind of IP that can’t be patented or legally protected. The best manufacturers understand this and fiercely defend control of the unique aspects of their products and processes.
David Silver: Good businesses with interesting niches are protected from the threat of low-cost imports in a number of ways. For one, their extensive relationships and distribution networks are a barrier to entry for low-cost manufacturers from abroad.
In terms of protecting IP, the products made in India and China, where quality is patchy and there is less innovation, are simpler. Geography can also be a barrier: it can be difficult or expensive to import large goods; and being flexible and providing tailored products is not easy when you’re halfway across the world.
Places such as India and China present both an opportunity and a threat. Multinationals are moving their production to these locations, but they still want to work with suppliers that they trust – which means those in Western Europe.
How important is innovation to the development of the UK manufacturing industry?
Philip Barker: If a product has a very high labour content there’s no way UK manufacturers can remain competitive for long without the need for constant innovation – even then there’s no guarantee.
But innovation comes in two forms: constantly introducing new and better products to market is critical; but just as important is driving labour costs out of existing products. Innovation isn’t important just for countering the threat from low-cost countries – it’s also just good housekeeping to remain one step ahead of all your competitors, wherever they’re based.
Are UK manufacturers moving to an “on-demand” model of production in order to compete?
David Silver: It’s not so much a trend as a necessity. Good businesses have to do a very good job of managing capital – so they don’t want to produce to inventory, they want to produce to sell. Good businesses are those with strong relationships with the client, and are not producing commoditised products. They are manufacturing in response to client or one-off project needs. As a result, manufacturers are now playing a consulting role so they can manufacture the right products for the customer. UK manufacturers are having to find ways to make money by adding value to the manufacturing process and leveraging existing customer relationships.
Sam Watkinson: On-demand is an ideal that many aspire to, but not all can reasonably achieve. Although on-demand is the best solution – if you can drive the perfect level of demand, at perfect intervals to keep your production line humming – a fully integrated sales, marketing and manufacturing function is more realistic.
This should enable businesses to produce optimum production schedules through understanding what the customer-facing functions expect. As a result you get many of the benefits of on-demand without the need for the perfect solution.
What will the UK manufacturing industry look like in the next five years?
John Lane: We’ve been on an evolutionary path for some time and I don’t see anything changing radically in the next five years. It will just be a further movement towards UK manufacturers specialising more at the higher value-add end of production.
Sam Watkinson: All we can predict is that manufacturing is here to stay in the UK. Fifty years ago, manufacturing was all about heavy industry – now, we’re much more at the light industrial end of the spectrum. In the future, we believe it will be much more of a level playing field globally. Those that excel at what they do and understand their customer and supply- chain propositions can be resident anywhere in the world.
The UK will continue to be an exceedingly strong base from which to run a well-managed, well-controlled, market-leading manufacturer.
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