China Syndrome

Until recently reversing the flow of manufacturing towards Asia would have been seen as an impossible dream but now supporters of automation technology are claiming it could soon be a reality.

With low costs, huge new markets and a seemingly unstoppable momentum on its side, what can stem the tide of production out of the UK and towards Asia? Step forward an unlikely superhero in the form of automation technology. Those in the industry claim its hour has come; that it is now sufficiently advanced and affordable to make retaining production in the UK a viable option.

A bold claim indeed, especially when DaimlerChrysler, General Motors and Siemens are just a few of the global manufacturing and engineering giants to have announced investments running into billions of dollars in China alone over the past month.

Even the Chinese are getting worried about the scale of the dash, adding fuel as it is to the blazing fire of their economy. They fear that the whole thing could overheat and crash.

But here’s a local David against the Asian goliath: Treworrick Engineering, a precision engineer based in West Sussex, had cause to celebrate when it recently won back a contract it had lost to the Far East. Treworrick had seen a long-standing customer, a hi-fi manufacturer, source a 150,000 unit-per-year new component from Asia on cost grounds. The UK company was not even given the chance to bid against its Far Eastern rival and could have been forgiven for thinking the work was lost forever. That it wasn’t was the result of Treworrick investing rather than entrenching – combined with a slice of luck.

The company had spent £250,000 on two Daewoo automated turning cells, slashing machining times for a typical steel part by more than half and drastically cutting the need for operator intervention. Clive Lambert, Treworrick’s co-owner, said the costs and efficiency advantages of the company’s Far Eastern rivals were all but wiped out.

Then came the good fortune. When its ex-customer encountered quality problems with the imported parts it returned to Treworrick with an order for a small production run to tide it over. ‘We came in within one per cent of what they were paying abroad,’ said Lambert. ‘When you took shipping costs and the fact that we offered local support into account, we were ahead.’

So the work returned to the UK engineer. The company is now putting in more machines and claims its labour cost issues have effectively been eliminated. ‘We have the same number of people running more machines,’ said Lambert.

He accepted, however, that much standard engineering production is likely to remain in the East for the forseeable future. ‘But we’re in a good position to compete for more specialised work,’ he said.

Stories such as Treworrick’s are music to the ears of suppliers of automation technology. While they can and do provide production systems to the Far East, they are also keen to defend their existing markets in the UK and the rest of Western Europe.

And some are now making the bold claim that technology can reverse the eastward tide. Nick Fossey, UK managing director of Rockwell Automation, claimed that highly automated and efficient production processes are giving manufacturers options that would not have been available 10 years ago.

‘At one stage you got a feeling that the only option was to move offshore but now, through degrees of automation, companies have more choice,’ Fossey said.

A major factor is the cost of the systems, according to Fossey. ‘What would have cost £30,000 10 years ago is £3,000 today. Software and development tools are becoming more readily available,’ he said.

‘There’s technology available that allows manufacturers, through highly automated facilities, to compete with such a low cost base that there is no longer a requirement to outsource to low-cost labour markets.

He added: ‘What we’re trying to do is give a range of opportunities so that companies can consider providing their manufacturing at a local level. I’m not saying we can manufacture everything in the UK and be cost-effective, but there are examples of where we can and have done that.’

But not many examples, it seems. Rockwell’s automation technology is used at Toyota’s Burnaston plant in Derbyshire and a resin manufacturer installed Rockwell equipment to boost production and cut wastage, allowing it to compete with chemical multinationals. It might be significant that Fossey’s top example of a businesses transforming itself through automation is one of its own subsidiaries: the Swiss contractor manufacturer Sprecker and Schuhe.

So is it that simple? Could a few hundred thousand pounds of investment in automation technology be the salvation of UK production? The real picture is rather more complex.

There are few more notorious examples of a UK company moving its production than vacuum cleaner and washing machine manufacturer Dyson, which last year completed the transfer of all its production facilities to Malaysia. The firm, which had always emphasised its Britishness, had much to lose in PR terms and faced a media backlash.

But Dyson felt then that the arguments for offshoring were compelling and, according to the company’s chief executive Martin McCourt, the economic sense of the decision is now plain to see. One of the main reasons for this is that the assembly process for Dyson’s cleaners is highly reliant on manual labour – which was also the case when they were manufactured in the UK. ‘While it wouldn’t apply to a car, we believe that people can put our product together more efficiently and reliably than machines,’ said McCourt.

The prospect of a highly automated production facility was not a compelling enough reason to stay in the UK. Far more significant factors, according to McCourt, were the cost of materials -which were being procured in increasingly large quantities from the Far East – the cost of factory infrastructure and, of course, the cost of labour.

An additional constraint was the physical limit placed on the Wiltshire plant’s expansion by planning regulations. ‘The potential for us to expand was virtually zero,’ said McCourt. ‘It became clear that continuing to manufacture in a high-cost zone contrasted so markedly with manufacturing in a low-cost region that if we wanted to continue to invest in product development we had to move,’ he said.

Dyson’s appliances are sold in 35 countries and this year the company expects to ship 2.5 million cleaners – a million more than when they were made in Malmesbury. And Malaysia is not only a good place to be in terms of low labour costs – it also happens to be closer than the UK to some of Dyson’s most promising new markets.

Two-thirds of Dyson’s business this year will come from outside the UK. The company is doing increasingly lively business in Australia, New Zealand and Japan, and launches across the Far East are likely soon.

McCourt claimed that none of this would have been possible had the company kept its production facilities in the UK. ‘This year we expect to sell over a million cleaners in the US. This would have been hard for us to contemplate if we hadn’t moved to the Far East. The move to Malaysia has not only helped ensure that we have the capacity but also, and more importantly, that we have the funds to support it,’ he said.

While Dyson had to deal with the political fall-out of relocating production of one of the UK’s iconic products, Flextronics – the $14.5bn (£8bn) global contract manufacturer that makes Microsoft’s X-box – has no such loyalty issues to worry about. Flextronics will do business in the most advantageous place for itself and its customers.

Therefore, one might expect the company to recommend the wholesale relocation of every manufacturing facility to low-cost economies such as China. But surprisingly Caroline Dowling, Flextronics’ senior vice president of sales, is more cautious. She believes that in many cases manufacturing is better staying put.

The problem, according to Dowling, is that many OEMs have a simplistic view. Enticed by low labour costs and the individual cost of the component, they fail to consider the bigger picture that can make moving manufacturing to the Far East an economically unsound decision.

‘There’s a view on Wall Street that if you’re not in China, you’re not giving a competitive solution, but that’s not true in every case,’ said Dowling. ‘Many firms fail to understand that you have to analyse your whole cost base by considering the cash tied up in the business, the supply chain and the customers. Sometimes it makes no sense to go East.’

She said there are numerous examples of large OEMs who, after a thorough analysis, decided not to move their production. They reached this view after taking into account a range of factors including the cost of borrowing, duty implications on raw materials and the location of their customers.

‘If you’re trying to grow your market in Asia then China is a good answer and you should go there,’ she said. ‘But if it’s a global market you’re servicing – which most OEMs now are – then you have to consider a host of other things.’

First among these considerations is the location of the firm’s customers and in many cases, said Dowling, it makes more sense to manufacture in the EU accession states. ‘If you’re manufacturing a printer in China and you end up air-freighting more than seven per cent of that product to the EU, it’s cheaper to leave it in the EU. And if you’re manufacturing a mobile phone and air-freighting over 12 per cent, again it’s cheaper to manufacture in Europe.’

Despite the low labour costs in China, the spiralling cost of air-freight (Dowling claimed that the oil crisis could lead to an increase of up to 25 per cent) and high export duties (China recently introduced an additional four per cent export tax for foreign manufacturers) can conspire to make it an expensive option.

Dowling also pointed out that, according to some analysts, the Chinese currency is currently undervalued by up to 25 per cent. With the government under immense pressure to revalue, the costs of manufacturing could soon change dramatically.

An additional global economic factor that manufacturers would do well to anticipate is that the currently weak dollar – which has put Europe at something of a disadvantage – is widely tipped to strengthen following the November US presidential elections.

Dowling said that although her experience relates primarily to the electronics industry, the principles are applicable to manufacturing as a whole. ‘If you’re moving products from one country to another, you’re incurring costs. If you’re keeping products in storage, there’s cash tied up. You must know how to analyse these costs and bring them down,’ she said.

So Bratislava is sometimes a better bet than Beijing, but a stronger hand for the new EU states does little for the UK’s embattled production sector. High-cost economies such as the UK are as much in competition with their nearer neighbours as they are with China and India.

France discovered this recently when car giant Renault decided to build its cheap and cheerful Logan model in Romania, citing a cost base no Western European state could match. Additionally, the Logan is targeted at consumers in low-cost economies. In fact, similar plants are due to be built in Morocco, Iran and Columbia, creating what Renault sees as a ‘virtuous’ business model of cheap cars produced cheaply, close to their point of sale.

It’s a tough proposition to argue against, especially when it becomes clear that it is underpinned by cheap manual labour and not the latest automated production technologies.

Some commentators believe the UK may be missing the point. The Warwick Manufacturing Group (WMG), one of the country’s best-known academic centres for engineering and manufacturing, announced this month that it is setting up an operation in China. This is not, according to WMG senior fellow Nick Matthews, a cause for gloom. ‘We think the best companies in Britain are global businesses, and we think globally too.’

Matthews believes more emphasis should be placed on what the UK is producing than how it is producing it. ‘We are focused on process, which is fine if you are making things that people want to buy but pretty irrelevant if you’re not. By all means improve productivity and take on best practice but don’t forget about the product. Many companies see improving production as an end in itself,’ said Matthews.

The UK’s best hope, Matthews suggested, lies in the innovative, rapid development of products that the burgeoning middle classes of nations such as China and India will want to buy. ‘We can either replicate China’s cost base or we can develop products faster than they can consume them. The rate of innovation has got to be faster and the time to market shorter.’

‘China is an enormous market. It has a huge demand for commodity products and relatively much smaller demand for quality products. But even if it is only one or two per cent, that is an awful lot of people. Instead of seeing these economies as a production threat we are better seeing them as a sales opportunity.’

Another leading researcher in the manufacturing sector holds out the tantalising prospect of a future in which advances in technology turn the economic base of production on its head, overturning assumptions that have been in place since the Industrial Revolution.

Dr. Bill O’Neill of the Institute for Manufacturing at Cambridge University, expects rapid manufacturing techniques to evolve to the point at which small again becomes beautiful. Then the economies of scale that have driven businesses to look for ever larger volumes would no longer apply. ‘We’d like to make production systems that could make a million things the same or a million each different without a cost penalty.’

In O’Neill’s world the ‘local factory’ would become not just possible but essential. Production volumes could be small, timely and near to the point of consumption. Of course, China, India and the rest of the world would have their own equivalents, but if the UK was exporting the technology rather than the goods used to produce it, the pendulum would have swung decisively back in its favour.