Bringing it all back home
UK Equity team, Newton
After decades of corporate outsourcing of jobs to low cost high volume locations such as India or China, the move to bring production back to markets such as the UK from overseas is a growing trend. ‘Reshoring’ is a term gaining increasing recognition as companies look to improve quality and reassess their financial, logistical and distribution needs.
From a thematic perspective the challenges in the post financial crisis world have the potential to reverse some of the previous focus on increased globalisation. Current UK policy is calibrated to attract private sector investment and this can be either new investment or the return of previously offshored activities via reshoring.
According to analysts such as consulting firm PricewaterhouseCoopers (PwC), traditional UK manufacturing sectors such as textiles, electrical equipment and machinery look set to benefit the most from reshoring, though other areas such as business support services and telecommunications may also gain new business. The expected outcome of reshoring marries neatly with UK government efforts to rebalance the British economy away from its reliance on the service sector for jobs and growth.
UK manufacturing has diminished as a proportion of GDP in recent decades and currently makes up about 10% of GDP, 1 having been a significantly higher proportion than this in the 1970s. The decline has been attributed to both a lack of global competiveness and growth in service industries such as the financial sector. Against this backdrop, reshoring could give manufacturing a much needed boost.
PwC estimates the reshoring trend could create around 100,000-200,000 extra UK jobs over the next decade and boost annual national output by around £6bn-12bn at today’s values by the mid-2020s.2 In theory it could even boost the market value and equity performance of companies benefitting the most from reshoring in investment sectors such as industrial electronic and electrical engineering in the longer term.
A number of factors are encouraging UK companies to reshore, including quality control concerns, the weakening competitiveness of foreign labour markets and also significant recent reductions in corporation tax. Importantly, Janet Godsell, professor of operation and supply chain strategy at the Warwick Manufacturing Group (an academic department within Warwick University), says reshoring is gaining ground because businesses are starting to look at their cost base more holistically and are now less focused purely on production costs.3
A study of about 300 businesses by UK manufacturers’ trade association the Engineering Employers Federation (the EEF) and legal practice Squire Sanders found that one in six companies had brought production back from overseas within the last three years, chiefly for quality reasons.4
While the amount of new employment reshoring has generated so far is modest - government estimates suggest it has created about 1,500 jobs since 2011 - the long-term hope is that reshoring could provide many more opportunities.
Whether reshoring will actually fuel a manufacturing or industrial renaissance remains open to debate and its current impact should not be overestimated. However, the US experience suggests reshoring could bring some very positive benefits. According to recent estimates, it has helped shift about 80,000 manufacturing jobs back to the US from overseas, partly to support its booming shale energy sector.5
Professional services network Grant Thornton believes reshoring is about to dramatically reshape the US economy. Its November 2013 survey Strategic source and sell: Realities of reshoring it claimed more than one third of US businesses would move goods and services back to the US in the following 12 months and that even IT services, one of the first business functions to move offshore, would be likely to return within a year.6
This could mean that as much as 5% overall US procurement may come home. Grant Thornton said the huge numbers had the potential to dramatically impact US trade balances - and could provide an ‘enormous’ boost to domestic manufacturers, retailers, wholesalers/distributors and service providers.
In support of its findings Grant Thornton pointed to concrete corporate commitments to boost US production. It pointed out that in 2012 General Electric brought hot water heater and refrigeration production back to two new assembly lines in Kentucky. Elsewhere, Apple is investing US$100m to build a Mac production line in the US.7, In 2013, Wal-Mart also announced it was set to increase its purchases of US made goods by US$50bn (approximately US$5bn per year) within the next 10 years8
Opinion remains divided on the scale of the impact reshoring can have on national economies or the wider investment market. From a direct equity market perspective we expect limited impact from reshoring. However, we also believe a manufacturing renaissance would be very helpful to the UK economy and reshoring can play a part in this.
From a geographic perspective we believe reshoring presents particular advantages to the US due to the availability of low energy costs as a result of shale gas production. This cost advantage, coupled with cheaper transport costs for local demand could go a long way towards covering employment cost differentials. This is most significant when energy and transport costs form a high percentage of sales in sectors such as chemicals and heavy manufacturing.
At the very least, reshoring looks set to bring much needed jobs to economies such as the UK and US. In the longer term it may also help create new investment opportunities even help to economies heavily reliant on the service sector, such as the UK, to boost their domestic manufacturing industries whilst increasing logistical efficiencies. Time will tell.
Dates to watch in 2014
- Q4. UK Government Autumn statement.
- November US mid-term elections.
- December release of final 2014 monthly US employment and UK labour market figures.
1. UK economy expands by 0.8pc in first quarter. The Telegraph. 30.04.13.
2. Reshoring offers 200,000 jobs. FT. 12.03.14/PwC Reshoring – a new direction for the UK economy
3. Professor Janet Godsell/The Manufacturers. Do we really want to become the ‘Re-shore Nation’? 06.03.14
4. EEF/Squire Sanders Survey: Backing Britain – A manufacturing base for the future. 03.03.14
5. Reshoring offers 200,000 jobs. FT. 12.03.14/PwC Reshoring – a new direction for the UK economy
6,7. Grant Thornton survey: Strategic source and sell: Realities of reshoring. November 2013.
8. How Walmart plans to bring back ‘Made in America’. Time Magazine. 12.04.13