April 21, 2024

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Why do companies repatriate their manufacturing?

Why do companies repatriate their manufacturing?

  • Written by Jonty Bloom
  • Business reporter

Image source, Sam Bagnall

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Ian Whately, left, and Chris Paul have seen orders rise at their UK manufacturing company

Chris Paul and Ian Whately sit around a large office table talking about how much they will benefit from bringing British businesses back to their new home.

Remanufacturing is when a company decides to stop carrying out manufacturing operations abroad, such as in China, and instead brings the work back to its country of origin.

Mr Paul and Mr Whateley are chairman of Shropshire-based Advanced Chemical Etching (Ace), which manufactures precision metal components for customers in the aerospace, automotive, electronics and telecommunications sectors.

They say Ace's order book is improving significantly as its customers increasingly bring manufacturing work to the UK. “We've recently had an increase of £800,000 in orders, probably in the region of £250,000 to £350,000 of that from relocation,” says Paul. “And there are a lot of things that are in the quote stage as well.”

We've all heard about offshoring, which began as a major economic movement in the 1990s, when companies began moving their industries abroad. They often went to China, where incentives offered by the Chinese government were generous and workers were cheap.

The result was a manufacturing boom in China, and a long supply chain from Europe and the United States to China and beyond.

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Studies indicate that more companies in the West are reshoring

But now the West is resisting, with a growing inclination toward resettlement. More than half of UK manufacturers are now returning home, According to one study At the beginning of this year.

Other companies are “near-subsidy,” meaning that while they still manufacture them overseas, they move them to a closer country.

Then there is what is called “buddy support”, where you keep your manufacturing abroad, but move it to a country that has friendlier relations with your own. Apple is He was told to do this Because it is increasingly moving production from China to India.

The drivers of this shift are complex and diverse, but fall into three main groups: economics, risk, and politics.

The big attraction in offshoring in the first place was that making things in places like China or Indonesia was cheaper, and therefore more profitable, not least because labor there was much cheaper. But several factors have reduced these benefits

First, wages have risen in such countries, while new technology means that Western factories need fewer employees and are therefore cheaper.

The increasing speed of product development is also fueling this trend. Phones, TVs, gaming stations, almost everything is being improved, changed and updated all the time.

It is much easier to do this in a capital-intensive factory in Birmingham or Baltimore, than in a factory in Beijing, explains Professor Denis Novy, an expert in trade economics at the University of Warwick.

“Production runs are much shorter, products change more quickly, and actually having access to manufacturers and suppliers in the local area makes you more flexible, so that's actually one of the factors behind that,” he says.

Then there's the “Amazon factor” – we're all increasingly demanding our new products tomorrow, at the latest. If they are manufactured nearby it is easy, if they are manufactured on the other side of the world there are obviously delays, or the company has to keep a large stock of goods in case orders need to be fulfilled immediately.

Inventories that are expensive to maintain and will be out of date once the product is updated.

Then there is the risk factor, as Covid has shown us that the supply chains we all depend on in the West are very long, stretched and weak. It was a wake-up call for the West: Is it safe to rely on many essential products in factories on the other side of the world, shipped over huge distances?

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Low water levels in the Panama Canal limited the number of ships that could pass through

In short, you cannot see Houthi attacks in the English Channel, or between Mexico and the United States, although Professor Novi believes these fears are exaggerated. “After all, this is not the first time the Red Sea has been in the news. Similar disturbances have occurred elsewhere… but I don't see this as a big headache.”

Finally, there is politics, as leaders in the United States and Europe have been encouraging the return of manufacturing. It is not just patriotic action, but Western governments are increasingly aware that they have become dependent on potentially hostile countries for advanced technology and supplies.

In America, Presidents Biden and Trump tried to address this issue, President Trump with tariffs, and President Biden with financial incentives. Biden has been spending hundreds of billions of dollars to get US industry to make things in the US, especially microchips, through the CHIP Act of 2022. This pledged $52bn (£41bn) to boost domestic production of computer chips.

Lisa Anderson, president of US management consultancy LMA Consulting Group, is a supply chain expert. She says the CHIP Act “certainly stimulated a significant amount of investment” in the sector.

Regarding the US manufacturing sector as a whole, reshoring and foreign direct investment announcements have been very successful in 2022 Highest rate ever.

That's according to the business group monitoring this development, the Reshoring Institute. She says the record highs continue The first half of last year, With the potential to create 300,000 new job opportunities for the year 2023 as a whole.

And American workers are not the only ones who benefit from American companies working to bring manufacturing closer to home. Ms. Anderson says that Mexico is also booming, noting that it is America's southern neighbor It now exports more goods to the United States than to China.

Mexico exported $475.6 billion worth of goods to the United States last year, a 5% increase from 2022, according to official US figures. Meanwhile, the United States imported a total of $427.2 billion from China, a decrease of 20%.

Mexico has all the advantages these days: cheap labor, easy and quick access to the US market, and a friendly neighbor of the US within the free trade zone. The classic example of both a friend and a supportive relative.

But Telford in Shropshire is also doing well. Ace's Mr. Paul says an airline is due to visit, “and they're looking to bring in things from other parts of the world.”

It is clear that the process of restoring support is well underway.

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