Time for Industry to come home?
It is time for industries to come home; time for the UK – and other Western nations for that matter – to repatriate their production capacity and re-establish supply chains on their own shores in order to futureproof their interests. To “reindustrialise”, as Zoltan Pozsar from Credit Suisse argues.
Supply chains for UK businesses are currently under extraordinary pressure, and such strain particularly affects SMEs as they have less control over their suppliers. This is one of the more serious by-products of the current geopolitical tensions across both Eastern Europe (war in Ukraine) and Southeast Asia (Taiwan), between – broadly speaking – East and West.
This exacerbates the supply chain crisis which began with the Covid-19 pandemic. Successive lockdowns, shortage of labour, and work processes breaking down in places such as coastal China, have been preventing goods from being shipped in time, which has then had a knock-on effect on many supply chains in the UK, Europe and the US. This then creates significant interruption in terms of the supply of both goods and services, leading to inflationary pressure and other negative side-effects. This is likely to continue simply because of the level of production capacity that has been relocated outside of the West over the last few decades.
This insecurity of supply chains will be the driving force for the UK and the rest of Western Europe needing to reindustrialise and return production capacity back on shore. Or, at least, somewhere where it can be controlled better and with more reliable supply routes. Indeed, the past couple of years have demonstrated to businesses their level of dependency on supply chains in ensuring their viability.
Cheap labour vs qualified labour
Another factor that could and should drive the trend for reindustrialisation is the disappearance of the ‘cheap labour’ advantage. The main reason for the offshoring of various production facilities to Asia over the years was lower wage costs. However, more recently wage inflation has been taking place across Asia. The wage advantage has been eroded and, in many cases, flipped. For example, labour on average is now cheaper in Croatia that it is in China, which further makes the case for returning production capacity closer to home, to areas which are still advantageous in terms of labour costs but are also, quite simply, geographically closer.
Furthermore, it’s also worth noting that a lot of British manufacturing tends to be niche, high precision, innovative, and technologically enhanced. Such specialised and niche products - for which we are world renowned - do not require, for their viability, the absolute cheapest labour in the world.
How can SMEs reindustrialise?
There are two ways for UK SMEs to achieve the goal of resecuring their supply chain and, in effect, reindustrialising:
Organically: Invest in opening factories at home or within friendlier, more controllable geographies or;
Acquisition: Acquiring suppliers and ensuring that the ‘mothership’ is the priority in terms of supply.
In the short term, SMEs could opt to hold more stock to buttress themselves from supply interruptions. This would put yet more pressure on the logistics and warehousing sector, as well as SME’s working capital needs. Assuming demand holds up, initiatives to re-secure supply chains can bring steadier and higher revenues (as revenues are exposed to inflation and higher costs can be passed on to the customer), because if you don’t have it in stock to sell, price becomes irrelevant.
All of this could be hugely positive for high-quality well-paid jobs if Western societies could deliver skilled labour with increased levels of productivity and develop domestic infrastructure, as opposed to exporting production capacity.
Challenges
In terms of challenges, the choice of jurisdiction will be a key hurdle to overcome. As a business owner, you may fancy the labour costs associated with Croatia or Portugal – geographies that one might consider to be outside of the friction between the big superpowers, but do you know how to do business there? Are you familiar with local regulations? There are many factors to take into account – legal frameworks, ease of export-import-transportation, proximity/supply of raw materials and energy, tax regimes, subsidies, local incentives such as free ports/free economic zones etc, all of which need to be weighed up.
Significant pockets of unemployment may exist in parts of the UK. But to develop business tin these pockets, you face several challenges just on the labour front in terms of finding qualified and trained workers while bringing in qualified operational and production personnel to execute such strategies.
Capital required
Regardless of whether these initiatives are organic or acquisition-based, SMEs will need significant capital which is unlikely to come from banks. Traditional banking institutions have retrenched into safer lending territories following the 2008 financial crisis. They will fund almost exclusively safe levels of tangible asset backed loans, but most modern SMEs do not possess such tangible assets. Reindustrialisation and reshoring may well be the best strategy for many UK SMEs, but the funding will have to come from the alternative funding markets capable of funding forward looking business plans.
The alternative funding markets have developed strongly over the last decade or so to present the UK SMEs with often the most realistic option of funding their reshoring and other growth initiatives. This market is deep and highly innovative, but with that innovation and churn comes a lot of complexity that SMEs need advice in navigating.
In summary, there are solutions and advice on hand for SMEs looking to boost their resilience and competitiveness, whilst also continuing to grow. As ever, it will take a lot of hard work for businesses to be on the front foot in order to, not only cope with the current challenges, but to come out on top.
