Reshoring: Many happy returns

The manufacturing sector’s contribution to UK GDP has declined steadily over the years: it actually halved to 11% between 1990 and 2009, as many companies moved manufacturing offshore in the quest for lower-cost production.

However, the tide is starting to turn. Many UK manufacturing companies are beginning to move in the other direction by reshoring – that is, manufacturing more in the UK, or sourcing from local rather than overseas suppliers. The original offshoring was done for economic reasons. Now, prevailing conditions dictate that reshoring can make more financial sense.

Some of the positive factors behind reshoring are:

•    Product quality: it is easier to audit local manufacturing facilities, and re-order (or avoid) faulty parts;

•    Lead times: delivery times may be a few weeks for local manufacture, but a few months for, say, the Far East;

•    Order quantities: small, multiple orders are practical with local suppliers, but not offshore companies; and,

•    Comparable prices: wages in developing economies are rising, making local prices ever more competitive.

A good recent example of reshoring is the rise in UK-based manufacturing of copper-based components – from power semiconductors and solenoids to parts for electric vehicles. Economics is the overriding reason for the move, but there are several factors at work here.

For instance, delivery times for some copper components from China has been steadily increasing. For fast-moving industries like automotive, these delays simply cannot be tolerated – and will drag down economic performance. The typical failure rate on imported products – of around 7% – is also eroding the cost benefit of buying from the Far East. The combined effect of delivery times and failure rates – plus ongoing uncertainty about Brexit – is encouraging local UK sourcing and boosting the process of reshoring.

Reshoring trend

Warwick Manufacturing Group recently surveyed more than 250 UK-based manufacturing organisations, to build up a picture of reshoring activities since 2008. It found a recent trend towards reshoring – both direct and indirect: direct reshoring is when a company transfers manufacturing back to the UK, while indirect reshoring is a strategic decision to expand operations in the UK rather than abroad.

According to WMG, 40% of companies set up offshore manufacturing between 2008 and 2016. Of these, around one-third maintained this overseas production, with no kind of reshoring. However, the remaining two-thirds all made some kind of reshoring decision. A small proportion – nearly 8% of these companies – carried out direct reshoring only. More than half of them carried out both direct and indirect reshoring. In addition, around 30% of all surveyed companies carried out indirect reshoring only.

It means that more than half the companies surveyed – around 55% – carried out some kind of reshoring. Indirect reshoring was by far the most prevalent.

“Over the last nine years there were 594 incidences of indirect reshoring, and 127 incidences of direct reshoring,” said the report. “Looking forward, this trend reverses – with 70% of respondents likely to consider direct reshoring while only 20% would consider indirect reshoring.”

Overall, 30% of respondents made no ‘shoring decisions’ – meaning they never moved any manufacturing out of the UK in the first place. According to WMG, there is a mix of reasons for companies deciding to reshore their operations.

“An emphasis on the competitive priorities of time and flexibility is more prevalent in companies that have reshored,” said the report. “Access to qualified personnel, skills, technology, innovation and reducing supply chain risk were other factors influencing their decision.”

The report also shows that reshoring can have a huge effect on output: 58% of respondents that directly reshored said they had increased output, while 75% of companies that indirectly reshored reported higher output. It may seem a retrograde step to shutter an overseas plant that took time, effort and money to set up – but WMG’s research shows that the economic benefit speaks for itself.