How will British companies stack up against European rivals once everyones’ prices are being quoted in euros? This issue of price transparency is one of the biggest headaches for UK manufacturers. Many believe that once the smokescreen created by floating exchange rates clears, we could end up looking expensive.
This week, an exclusive survey carried out by PS Industry Group for The Engineer can reveal that of all British industry’s misgivings about the onset of the euro next year, price transparency could be the least of our worries. Because in a detailed comparison of manufacturing costs linked to specific engineering orders believed to be the first of its kind the UK comes out as one of the lowest-cost locations for manufacturing in the whole of Europe.
The survey has been carried out using PS Industry Groups’ sophisticated costing model called Kapes (Knowledge aided planning and estimating system), which brings together a vast amount of data derived from official statistics, combined with knowledge of production processes supplied by experienced engineers, to allow an accurate, operation-by-operation costing of a component to be built up. UK users of the system include Vickers, Pilkington Optronics, Jaguar, Rover, Smiths Industries and GEC.
For our comparison, we chose six components that a large manufacturer would be likely to outsource,covering a range of different operations and industry sectors. The line up was as follows: a machined component; a pressed aluminium cover; a reasonably complex injection moulding in high- density polyethylene; a desk cable cover made of plastic parts but needing some manual assembly; a printed circuit board; and a welded component.
We then looked at the cost of producing each one in 13 countries the European Union (with the exception of Greece, Luxembourg and Ireland), plus Norway. The total costs for each component include raw materials and bought- in component costs, as well as labour and factory overheads.
On the next two pages we rank the countries in order of these various production costs. Materials and bought-in component costs dominate the overall price of some of the items the PC network card, for example but vary little from country to country, so have not been illustrated. All costs have been converted to sterling using a rolling average exchange rate over the three months to the end of July. In each case it is assumed the factory works a double shift, resulting in lower overhead costs but slightly higher labour rates than single-shift working.
Tooling costs are not included: the costs below are for a run-on or call-order for parts for which any tooling has already been produced and amortised over a previous order.
The results make interesting reading. Portugal has the lowest costs, Spain is second in most categories, but the surprise is how closely these countries are followed by the UK.
On overall and labour costs, Austria, Belgium, Germany, the Netherlands and Norway, are constantly the most expensive five nations. France, Italy, Sweden, Denmark and Finland form the middle ranking.
The range between the least and greatest cost varies considerably. The biggest difference is for the desk insert, where the highest price exceeds the lowest by a factor of over three. For the PCB network card, the highest to lowest price ratio is only 1.27. Ignoring the network card, UK totals vary from 15% to 50%(for the desk insert) over Portugal, but are between 26% and 42% lower than Germany.
So should companies rush to outsource to Portugal? If material costs rather than labour or overheads dominate the price, there is no great advantage in outsourcing abroad. But if the job is labour intensive, labour rates in Portugal are in most cases around half their nearest competitor, something with which the UK is unlikely to be able to compete.
The figures do not cover transport costs, however. Also, a UK company would need to allow for the potential greater difficulty in monitoring and managing a contract in Portugal from these shores and putting the systems in place to do this.
The figures raise the question: how does German manufacturing industry still manage to thrive? The answer is that these figures relate to relatively simple components. The strength of Germany and the other high-cost economies lies in making complex, high-value-added products, such as machine tools, where profit margins are also higher.