The shifting economic axis: is manufacturing shifting back to US from China, and is this an opportunity for the UK?
Category: Thought for the day
Back in the 1980s there was an air of defeatism. Japan seemed unstoppable. It was only a matter of time before it rose to economic pre-eminence. Now they are saying the same thing, it is just that instead of Japan, the word China is being bandied about. But not so fast, yesterday appeared to provide evidence that the great changeover is reversing. Is economic power returning to the US, and – who knows – maybe Europe too.
The evidence came courtesy of Apple’s CEO Tim Cook. He announced that Apple is to invest $100 million on a US based manufacturing facility for Macs. The company began outsourcing to China in the 1990s, and the move appears to represent the first hint of a reversal in this strategy since then.
Okay, let’s not over-egg this. The Mac represents a small proportion of Apple’s business. iPads and iPhones are still very much assembled by Foxconn in China.
An article on ‘CNN Money’ quotes Karel Williams, a professor at the University of Manchester Business School, who specializes in global manufacturing. Williams said: “The Mac is a low-volume product that is irrelevant to shares. That means this is a PR move.” Williams added: “Apple needs huge Chinese assembly factories to make the next sexy product at moment’s notice. It needs Foxconn… No matter how well meaning Apple is, there are practical limits on the manufacturing business model for what they can bring back to United States.” After all, in China workers sleep in dormitories, ready at a moment’s notice to set to work assembling products to meet unanticipated orders. See: Throwing cold water on Apple’s made-in-the-U.S.A. Mac
But before we dismiss the Apple move as a gimmick, I want to remind you of a report covered here in October last year from Boston Club Consulting. The report said: “Predictions of the likely demise of US manufacturing are likely to prove wrong.” And added: “The conditions are coalescing for another US resurgence. Rising wages, shipping costs, and land prices – combined with a strengthening renminbi – are rapidly eroding China’s cost advantages. The US, meanwhile, is becoming a lower cost country. Wages have declined or are rising only moderately. The dollar is weakening. The work force is becoming increasingly flexible. Productivity growth continues.”
The report continued: “Wage and benefit increases of 15 to 20 per cent per year at the average Chinese factory will slash China’s labour-cost advantage over low-cost states in the US, from 55 per cent today to 39 per cent in 2015, when adjusted for the higher productivity of US Workers. Because labour accounts for a small amount of a product’s manufacturing costs, the savings gained from outsourcing to China will drop to single digits for many products.” Add in the cost of transport, and all of sudden it seems that US based manufacturing looks more attractive.
Okay in trying to link the Apple story with the Boston Club Report, maybe I am may be guilty of being sucked in by the PR hype. But for all that I think there is a link.
But what about in Blighty? The UK overseas trade performance is not good enough. Sure it’s improving, but we do rely too much on trade with the Eurozone, we don’t sell enough to emerging markets. As George Osborne is fond of saying, we sell more goods to Ireland than the BRICS (that’s including South Africa) combined.
This week Ratan Tata had a thing to say about UK manufacturing. He was quoted in the ‘Telegraph’ as saying: “The economic situation, the high cost of undertaking manufacturing, the supply chain – which is dying out as manufacturing undergoes hardship – make the UK not the first place you would look at to make a manufacturing investment.”
Mr Tata added the UK may be well advised to take a leaf out of Japan’s book from the 1960s and 1970s and “do everything possible for x number of years to make that industry globally competitive [such as] provide incentives to set up plants, to have R&D, to buy technology.”
I think the key here are the two words which make up the phrase “supply chain.” To be successful in manufacturing it’s no good setting up a few factories, you need a host of supporting services too. The City of London scores because it is equipped with so many companies and supporting services that together make it so indomitable. London’s strength is its network, and it’s a network that was built up over centuries.
Markets are ultra-efficient at allocating capital in the short run, but they are no good at long term planning. Markets will never provide the finance to create a network without an extra push.
The City may have reached its position of pre-eminence as much by an accident of geography as anything. Silicon Valley’s dominance in technology may have been down to lucky accidents in the first place, or perhaps a kind of Californian mindset. Or maybe it was sheet randomness. A hub has to exist somewhere; it just happens to be California.
So if it is the case that China is losing its edge in manufacturing and there is an opportunity for the US, maybe there is an opportunity for the UK too, and now is the time for the UK government to start picking winners, and apply a grand industrial strategy designed to create new networks of manufacturing excellence.
Maybe… but I can can’t help but feel it is too late. Look beneath the surface, and manufacturing is set to change in another way. It is becoming less job intensive, and more subject to automation. Do we really want an old fashioned industrial strategy designed to create old fashioned jobs, at a time when manufacturing is becoming the very opposite of old fashioned? Maybe what we want is technology strategy, designed to enhance hubs such as silicon roundabout in East London, and in so-called Oxford Cambridge arc. And if we need to promote our manufacturing capability, we should focus on those areas such as pharmaceuticals where we are already strong.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees