Reprogramming national economies and the reshoring of manufacturing

John Bryson - Professor of Enterprise and Economic Geography, the University of Birmingham.

Vida Vanchan - Associate Professor in the Department of Geography and Planning, SUNY Buffalo State.

Rachel Mulhall -  Market Analyst at Energy Systems Catapult, and Honorary Research Fellow, the University of Birmingham.

The UK has a new Industrial Strategy that is intended to increase productivity and living standards. This strategy must adopt an integrated approach that combines place- and people-based strategies that includes enhancing the quality of this country’s infrastructure and the business environment. Manufacturing is an important element of this strategy.

There is no question that manufacturing matters and continues to matter. Nevertheless, it is important to appreciate that manufacturing is, for the majority of countries, no longer simply a national concern. Rather, manufacturing has become part of complex global value chains or production networks. Manufacturing continues to change. From the 1950s, manufacturing firms, jobs and tasks were offshored from the UK to lower cost production locations. Nevertheless, over the last decade reverse offshoring has commenced or the reshoring (or repatriation) of manufacturing jobs to countries like the UK and the United States. It is this process that is explored in this blog and is considered in greater detail in the new ebook “What We Really Mean When We Talk About Industrial Strategy” that has been jointly published by Manchester Metropolitan University and the British Academy

Reprogramming national economies

The deindustrialisation of developed market economies reflects a longer-term process of comparative advantage. This process has been facilitated by innovations in logistics, predominantly containerisation. It has led to an increasingly interconnected global economy in which labour, raw materials, components and service inputs – the factors of production, produced in many different places – are combined together as part of co-ordinated value chains.

In political terms, the debate over reshoring is all about bringing jobs back, but in many cases these jobs have already been lost as they have been automated and replaced by technological innovation. For manufacturing in developed market economies what matters is output rather than jobs. In any case, developments in artificial intelligence and robotics will continue to increase manufacturing productivity and to transform manufacturing labour.

The drivers of reshoring

Detailed research on the reshoring process is still on-going, but eight drivers behind this process can be identified (see Bryson et al., 2013; Mulhall and Bryson, 2013; 2014; Vanchan et al., 2018):

1) Firms are reshoring production because cost savings were not as great as anticipated, and many of the labour cost savings are now being eroded by escalating shipping costs, combined with the substitution of labour by technology. Labour increasingly accounts for a small proportion of a product’s manufacturing costs.

2) Speed and closeness to market are becoming significant drivers of firm success. The implication is that offshore manufacturing will be undertaken closer to market or that firms will have production capabilities in lower-cost locations combined with production capability closer to market (Bryson and Ronayne, 2014).

3) Concerns with the quality of products supplied by producers located in low-cost locations are influencing the location of production.

4) Concerns related to the theft of intellectual property (Bryson and Rusten, 2011), including product and process innovations, are also influencing these decisions.

5) The economic downturn that commenced in 2008 reduced the order sizes for some components. Firms began to seek alternative local suppliers willing to supply smaller batches.

6) Companies are beginning to appreciate the benefits of co-locating design and development with production managers and assembly workers. This enables a close dialogue to occur between design, development and manufacturing (Bryson and Rusten, 2011).

7) During the twentieth century, labour differentials between national and regional labour markets played an important role in the evolving global geography of manufacturing. Energy differentials will play a much more important role during the current century, and may displace labour costs as an important local/national driver behind the evolving global geography of manufacturing (Mulhall and Bryson, 2013; 2014).

8) Alterations in trade policy, and particularly American imposed tariffs, for example on imports of steel, are having an impact too.

Policy implications

In October 2018, James Dyson announced that his company would build an electric car plant in Singapore. For many media commentators this was a surprising decision. But, this decision reflects many of the characteristics of manufacturing in 2018 – highly skilled, automated and with production facilities located closer to key target markets. This decision was partly based on supply chains, the availability of skilled labour in Singapore, the proximity of supply chains and access to markets. Singapore is well-known for expensive land and labour, but also for the reluctance of consumers to purchase electric vehicles. There is another part of the explanation for Dyson’s decision. His firm already employs 1,100 people in Singapore, making 21 million digital electric motors a year. He knows Singapore. In addition, electric cars are covered under Singapore’s free trade deal with China. These Dyson manufacturing jobs have not been offshored as they were never onshore in the UK and perhaps will never be ‘reshored’. But, within the UK Dyson employs 400 highly skilled people working on the research and development of this new product.

Dyson’s decision to develop the design for his new electric vehicle and to manufacture it in Singapore highlights that any attempt to reprogramme an economy towards manufacturing employment is based on a set of flawed premises. The key issue for any industrial strategy is that it must be based on understanding the complex plexus that supports national economic activity. It is important to differentiate between policy that creates a long-term supportive set of wider framework conditions that encourages entrepreneurship and economic activity, and policy that is intended to address an immediate political objective or problem. There are four critical elements of these wider framework conditions: the availability of highly skilled labour, appropriate levels of connectivity (including digital), a relatively stable policy environment and supportive free trade deals. These four types of policy interventions must be developed and applied both regionally and nationally.

This post is based on the authors’ contribution to What We Really Mean When We Talk About Industrial Strategy, edited by Craig Berry, and published by Future Economies at Manchester Metropolitan University with the support of the British Academy. The ebook is available for free.