“Almost two-thirds of Businesses asked intend to increasingly move supply back to the UK”
Manufacturing in the U.K. counts for around 10% of the economy and 9% of employment; the U.K. is a primarily service driven economy, meaning services such as Research and Development, Legal and Financial Services to name a few, accounts for the majority.
Although making up what appears to be a relatively low percentage of the economy, Manufacturing’s importance is evident as it contributes a highly disproportionate share of total exports (45%), wages in Manufacturing are around 15% higher than the national average and Manufacturing accounts for around 60-65% of private sector research and development spend.
Taking service industry links to manufacturing into account, such as R and D and machinery repair, it can be said manufacturing is responsible for 15-22% of the economy and 18-27% of employment in the U.K.
How Globalisation Has Impacted British Manufacturing
Globalisation is not a new and recent invention, merchants have always traded goods across continents and globalisation in fact has been around for millennia. As early as the first century BC, luxury products from China found their way to the edge of the Eurasia continent. Fast forward to the early 19th century and the first wave of globalisation as we now know it began as the British industrial revolution caused shockwaves within global trade. On one hand innovations such as the steam train, coupled with boats allowed for goods to be carried across the country with relative ease and exported to other countries much quicker than with previous methods. In addition, the industrialisation of Britain meant it could manufacture products which were highly sought after worldwide.
Following the second World War, the EU and other free trade countries headed by the USA became responsible for a lot of the growth within international trade. Then when the Soviet Union fell and the dividing wall in Germany was brought down, globalisation began to accelerate further. The World Trade Organisation was founded 1st January 1995, encouraging countries globally to enter into free trade agreements, which most did. China, which for a lot of the 20th century was a segregated economy, joined the WTO on 11th December 2001.
The internet was invented during the third wave of globalisation, connecting people all over the world. Orders now were not having to be made by post or phone but instead being done by the click of a button. The internet not only made things easier for the consumer but allowed for further global integration of value chains within businesses. R and D can be done in one country, sourcing and production in others and the end products shipped worldwide far easier than ever before.
Once signed with the WTO, it did not take long for China to not only take over but dominate global imports, exports and manufacturing. China currently stands as a global manufacturing powerhouse, accounting for nearly 30% of global manufacturing – over 10% higher than that of America, who sit as the second biggest global manufacturer. Key reasons for this include lower labour costs, possessing a strong business ecosystem, lack of regulatory compliance, low taxes and duties and competitive currency practices (China have been accused of deliberately lowering the value of the Yuan to bring down the value of its exports against competitors such as America).
There are many winners as a result of this, such as workers being able to move to higher income economies and economies with low-labour costs who have the infrastructure to export; there are many losers, too.
One loser to come out of globalisation is manufacturing in Britain. Lower costs and increased output prompted a lot of brands and manufacturers to begin sourcing their component parts and even fully manufactured goods from the likes of China and South Korea etc.
How Brexit and Coronavirus Has Impacted British Manufacturing
The last few years have provided some incredible challenges socially, economically and environmentally across Britain – as well as the rest of the world.
Brexit caused a surge of uncertainty when it was first announced in June 2016. Unlike other major events where markets get used to the changes relatively quickly and the uncertainty subsides, with Brexit this has persisted and looks to continue for the foreseeable future.
A Harvard Business Review study of how Brexit impacted variables such as prices, sales, investment and employment shows it led to a 6% reduction in investment the first two years after the referendum, 1.5% decrease in employment and the majority of businesses anticipate Brexit will eventually reduce sales and increase costs.
This opinion of Brexit being disruptive and negative to industry, resonates through most manufacturers too – the extent of just how disruptive and negative was reliant on a deal happening and the outcome of the deal that has been done still raises concerns around tariffs on some goods, and long delays at the GB-EU border.
To add to this, a global pandemic has caused monumental levels of disruption around the world for a wide array of reasons. For businesses, it has impacted global supply chains, increased import and export costs and drastically increased already substantial lead times for businesses who import component parts or finished products from across the world into the UK.
For example, air and sea freight costs have risen to some of their highest levels due to fluctuating levels of demand throughout the pandemic. The cost of shipping one 40-foot container from Asia to Northern Europe has increased from around $2000 to more than $9000.
The Institute for Supply Management conducted a study on the impact of Coronavirus on global supply chains, at the time of the survey 86% of respondents reported longer lead times from China, with 57% stating lead times had doubled.
The Coronavirus pandemic coupled with Brexit has forced businesses to review their supply chain, with businesses across varying industries now choosing to bring production back to Britain.
Christopher Nieper, the chief executive of David Nieper, said: “Manufacturing in Britain makes business accountable and allows control over each step of the production process.”
This trend has been happening for several years as the weaknesses within global supply chains and heavy reliance placed on sourcing products from countries thousands of miles away are now on show – this trend, however, has been accelerated due to recent events.
A sponsor of the Reshoring UK facility, research from Lloyds banks, showed 37% of companies asked were in the planning stages of reshoring their manufacturing processes back to the UK which were previously offshored to Asia and eastern Europe – this was before the pandemic; 71% of respondents at this time said a primary reason for this decision was to improve quality.
Looking ahead two years from now, a study from Make UK found that over a third of manufacturers asked said they intend to moderately increase their use of UK based suppliers, while a further 12% stated they would significantly increase their use of UK based suppliers.
Moving forward, mitigating risks with dual-sourcing so as to not put all eggs in one basket will likely become a common trend – opting for shorter lead times, lower shipping costs and improved service and quality over low manufacturing costs.
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