Archive for the ‘Manufacturing’ Category

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Re-shoring. If the last decade or so has been characterised by off-shoring, then maybe we are set to enter a new era in which manufacturing returns to home markets, or, failing that, to countries much closer to home. Re-shoring: if it proves to be real, it may provide real, underlying strength to economic recovery. If it proves to be real, then real hope can be added to economic commentary; hope that this time recovery can last. And now we have evidence that it may indeed be happening, right now.

Sometimes predictions can become descriptions. You can forecast what the weather is going to be like. It is much easier and more credible, although perhaps less interesting, to describe what the weather is like. But Boston Consulting has moved from forecaster to describer in one very crucial area. A couple of years ago it made headlines for forecasting a new trend in manufacturing, as companies opt to make their products nearer to their home markets. Now it reckons it has evidence that this is actually happening.

Being one of the world’s largest consultancies, Boston Consulting’s surveys tend to be pretty meaningful. It asked executives at US companies with sales greater than $1 billion about their manufacturing plans. A year ago, 37 per cent said they “are planning to bring back production to the US from China or are actively considering it.” In its latest survey, the results of which were published this week, that ratio rose to 54 per cent.

So why, oh why? 43 per cent of respondents cited labour costs; 35 per cent proximity to customers; and 34 per cent product gave quality as their reason for considering re-shoring.

Michael Zinser, from the consultancy, said: “Companies are becoming more sophisticated in their understanding of all the factors that must be considered when deciding where to manufacture…When you look at the total cost of production for many goods, the US appears increasingly attractive.”

The Boston Consulting survey probably provides the most compelling evidence to date that re-shoring is occurring, but it is far from being the only evidence.

Back in July a survey from YouGov on behalf of Business Birmingham revealed that one in three companies that currently use overseas suppliers are planning to source more products in the UK. John Lewis recently said that it plans to increase the volume of made in the UK products by 15 per cent between now and 2015.

This development is good news in more ways than one; it may even be very good news in quite a profound way, but more of that in a moment.

But what about China? This is surely not such an encouraging development for the economy behind the Great Wall. Well maybe it isn’t, but maybe it actually is. What China needs is for wages to rise, and for it to see more growth on the back of rising demand. Its economy is simply out of balance. No one is predicting the end of Chinese manufacturing, merely that it may lose some of its dominance. If this loss occurs because wages in China have risen, creating more demand, this is good news for China, its suppliers and the companies that sell to its consumers. Okay, changes are never smooth. There will be short-term headaches caused by re-shoring, but the overall impact will be positive rather than negative.

But there is another perhaps more important implication.

Over the last few decades we have seen growing inequality, and company profits taking up a higher proportion of GDP, while wages take up a lower proportion. Some think this is good thing, and accuse those who criticise of being guilty of the politics of envy. They miss the point. You may or may not think inequality is morally justified, but it is clear that from an economic point of view it is inefficient. For an economy to grow it needs demand to rise, and in the long run this can only occur if the fruits of growth trickle down into wage packets. It is perhaps no coincidence that the golden age of economic growth occurred in the 25 years after the end of World War II, an era which saw much more equality than we see today.

It is possible that re-shoring is symptomatic of changes in the balance of power across the markets. For years we have seen what the IMF calls the globalisation of labour: the reward to capital rose, the reward to labour fell. The underlying cause of this may have been the one-off effect of millions of Chinese workers joining the globalised economy. As this one-off effect begins to ebb, we may see the globalisation of labour work in reverse.

See also: Wages set to rise – in emerging markets

© Investment & Business News 2013

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It was good news across most of the world yesterday – at least it was good news as far as manufacturing went. And for the UK, which really needs a recovery made of more than just rising house prices, the news was especially good. Nay, ignore that. It was spectacularly good. Can it last?

Do you remember the summer of 1994? In July a chap called Tony Blair became the new leader of the British Labour Party. In August the Provisional Irish Republican Army declared a cease-fire. In that summer Brian Lara scored the highest individual score by a batsman in first class cricket and Wet Wet Wet’s song ‘Love Is All Around” went to number one and stayed there for what seemed like forever.

Something else happened in 1994. The Purchasing Managers’ Index (PMI) tracking UK manufacturing saw its index for manufacturing output and another tracking new orders hit a peak. Neither of the indices has been higher since.

But in August 2013, according to the latest PMI for Markit/CIPS, the index tracking output rose to its highest levels since July 1994, and as for new orders, this hit its highest point since August 1994.

Not a bad set of results.

That does not mean, however, that the latest data was all good. According to the Markit/CIPS report, input prices rose at the highest rate for two years.

The overall PMI takes it all into account: new orders, output input prices and a number of other measures. The surge in input prices meant that overall the index scored 57.2. That was a two year and a half year high. To put the reading into perspective, any score over 50 is meant to suggest growth.

The truth is that the apparent recovery in manufacturing across these shores provides genuinely encouraging news on UK plc.

A recovery led by rising house prices and consumers running up debt would be worrisome. One led by manufacturing, investment and exports, especially if those exports are to emerging markets which are themselves growing, is more encouraging. Right now, there are signs that the UK is enjoying both.

But, sorry to introduce a niggle, the index tracking new export orders points to growth, but it has not risen for a while now. Some fret that this may be a sign that much of the UK recovery in UK manufacturing is being led by internal demand, which itself is coming off the back of leverage.

The hope is we will get a kind of virtuous upwards circle. Remember, at the moment wage rises are lagging behind inflation. If consumers are spending more on average, they are doing this by running up debts. But if as a result of this, manufacturing output rises, and we see a rise in construction – especially residential construction – then we may see the creation of more better-paid jobs. This may help to create a more sustainable recovery. The fear is that we are just re-running the noughties. Back then consumers ran up debts, they spent, and the UK economy became more and more imbalanced.

What we need is more investment. Alas the latest lending data points to more mortgage lending and less business lending. It is tempting to say that the UK has the same old weaknesses, and that despite a very severe recession, nothing has really changed.

It may be more accurate to say we have seen changes, but also that banks and their models have not changed much. Before 2008, it was they who loved providing mortgages, but were reluctant to provide what they saw as high risk business loans. They feel the same today.

© Investment & Business News 2013

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The Luddites were sometimes right. Technology might be a good thing in the long run, but in the short run there are casualties. Actually, there are always casualties, but it’s possible that innovation has sometimes created economic depression before it created something special. It may be like that today, and 3D printing is a prime example.

Consider the age of symmetry. It lasted from around 1867 to 1914, and was perhaps the golden age of innovation. In fact, if you look at the history of innovation from learning how to tame animals to the Internet, it is possible that more innovation occurred in that half a century or so than throughout the rest of history put together. Yet 13 years later, the US entered the Great Depression, and the global economy limped forward into world war. It may have been a coincidence of course, but then again, does it not kind of make sense that innovation can create economic hardship?

Innovation can increase productive potential, but without a corresponding rise in demand the result of innovation may be fewer jobs. Fewer jobs mean less demand and things can become worse.

This does not mean innovation is bad and always destroys jobs; it just means that it can, under certain circumstances, particularly if the government does not try to counteract the negative impacts of innovation with stimulus. Maybe this has been happening of late. It does feel as though modern technology has left two types of jobs: the highly paid skilled jobs, and the manual jobs, such as cleaning. There is little in the middle.

And that brings us to the next wave of innovation: nanotechnology to the internet of things, might not these changes cut though the economy like a sickle though grass?

Take 3D printing: it’s hard to see how this can do anything but destroy jobs. It is hard to see this, but not impossible.

3D printing may provide the opportunity for local craftsman, experts in CAD, design, and materials to provide bespoke products for the customer, at a price that puts such products in reach of the mass market.

A similar point was made here the other day. See 3D printing: game changer or just fair game for the cynics? 
It was good to see others drawing similar conclusions. Kevin O’Marah of SCM World recently wrote “Store-based retail is getting killed by Amazon-addicted consumers whose loyalty is paper thin. Suppose, however, that stores did more than just carry product.

Additive manufacturing (aka 3D printing) has the potential to custom-make many consumer products given progress in the materials sciences that will go from simple resins to metals, ceramics, fabrics and more. Add some well-trained staff and the store could be a place where consumers come to solve problems and experiment with ideas. Imagine the retailer REI deploying these ideas for its ultra-loyal outdoorsy customer base – it’s not hard to see how this beats Amazon.” See Futureworld: 3D printing is the tip of the iceberg 

Maybe 3D printing won’t just have one effect, but will have different effects at different times, and in different sectors. It may lead to job losses and a recession for a while and in some regions, but it may also ultimately create a huge number of skilled and well-paid jobs, creating more wealth for most of us.

© Investment & Business News 2013

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There are those who are a tad cynical about talk that the UK economy is recovering. They look at debt – household and government debt – and with a somewhat sardonic smirk, say “Yeah sure, the UK economy is recovering.” But if you sign up to a school of thought that there has to be something real behind an economic recovery, then there is evidence that something real is there, slowly charging a real recovery, And this something real is based on companies bringing their manufacturing back home to Blighty.

John Lewis is at it. Its boss Andy Smith has said that he wants to see sales of UK-made products increase by 15 per cent across the retail chain in 2015, taking them to a value of around 12 per cent of the company’s turnover, or £550 million. He said: “We think our customers want to buy British if they can…A big area for us is home-based: our fitted kitchens are made in Birmingham, we have beds made in Leeds. We want to help British manufacturers to grow their share as much as we can.”

Earlier this month a report from YouGov on behalf of Business Birmingham found that a third of British Businesses, which currently use overseas suppliers, are planning to source more products from the UK.
There is no one reason. Businesses cited rising costs from overseas manufacturers and simpler transport and logistics as drivers for reshoring. Right now, the move back to the UK is modest. There is little sign of a new manufacturing boom. But everything starts small and if the surveys and anecdotal evidence prove right, the boom may yet follow.

But the UK – or indeed other developed economies – is not going to be the only winner. A recent survey produced by SCM also found that companies are bringing manufacturing closer to home but not always to home, with counties such as Mexico and Poland benefiting from the reshoring trend.

However, the SCM survey also found that much of the reshoring is symbolic. Kevin O’Marah at SCM said: “Our data and interviews with more than two dozen executives show that reshoring is symbolic. It does not represent the rebirth of American or European manufacturing.” The SCM survey suggests that reshoring is being driven by automation, and there ain’t many new jobs in that.

That may be true, and it is certainly the case that reshoring to the UK will not lead to a new jobs boom, but then again it will help.

Looking further ahead, the jury is out on what effect 3D printing will have. Will it destroy jobs, as commonsense might suggest, or create jobs, as businesses find it is viable to make products for consumers to order, tailoring them to individual customers?

© Investment & Business News 2013

New car registrations across the EU dipped by 5.9 per cent in May, falling to their lowest level recorded in the month of May since 1993. Intriguingly, the UK was one of the few countries in the region to see a rise in new car registrations. Meanwhile, the UK car export sector is one of the new sectors to see genuinely rapid growth. When you consider how awful the state of our main export market is, that is quite impressive.

According to the ONS: “In 2002, there was a deficit in trade in cars of around £7.5 billion. However, the value of exports of cars from the UK more than doubled over the 10 years to 2012, while the value of imports grew much more modestly so in 2012 this trade was close to break-even (that is, the levels of exports and imports were virtually the same).”

Tim Abbott, managing director of BMW UK operations, has forecast that the UK will be producing more cars than France by 2018, moving it into second place for car production in Europe.

Yet, look at car sales. According to the European Automobile Manufacturers Association, in May demand for new passenger cars declined by 5.9 per cent in the EU, reaching 1,042,742 units. In absolute figures, this is the lowest level recorded for a month of May since 1993 when new registrations stood below one million. Five months into the year, a total of 5,070,840 new cars were registered in the region, or 6.8 per cent less than in the first five months of 2012.

Sales were down 2.6 per cent in Spain and by 8.0 per cent in Italy. They fell 9.9 per cent in Germany and 10.4 per cent in France. The UK saw growth of 11.0 per cent.

So what can we read into this? Firstly, the fact that UK car registrations rose may be a sign of the UK economy picking up.

But it is genuinely impressive that the UK trade deficit in the car industry has shrunk and is possibly on the verge of going positive, at a time when our main market is stuck in depression, and at a time when UK domestic car sales are rising.

The UK car industry may actually do very well indeed once conditions return to normal. Indeed, even if they don’t return to normal, the UK only really needs to see the growth trajectory of its car exports to stay where it is, and by 2018 the UK car industry will once again be an important net contributor to UK GDP.

© Investment & Business News 2013

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Just a hint, but good news may have been lurking in the latest report on UK manufacturing. More to the point, it was exports – the one area in which the UK really does need to see a better performance – that provided the promise. On the surface there was nothing out of the way in the latest Purchasing Managers’ Index – or PMI – for UK manufacturing.

The index rose from 48.6 in March to 49.8. Any score under 50 is mean to suggest contraction. So the index is still suggesting UK manufacturing is in recession.

Furthermore, much of the gain can be put down to clearing backlogs of work, caused partly by all that nasty weather we had in March hitting production. The good news, however, relates to the more forward looking indicators. The output balance jumped from 47.8 to 50.5. Again, a reading of 50.5 is no great shakes, but everything is relative – and relative to recent months that is a good showing.

The sub index measuring exports, however, rose above 50 for the first time in a year, and in fact hit its highest level since July 2011.

Apparently, the companies which were surveyed to form the index reported rises in sales to clients in North America, the Middle East, Latin America and Australia.

Just to reiterate, things are relative.

UK manufacturing is still barely expanding, and export growth is trivial. Some of the improvement may have been down to catching up with output lost during that cold March. Furthermore, last week the CBI industrial trend survey indicated a decrease in total new orders driven by a fall in domestic demand in the last quarter. It recorded the fastest pace of decline since January 2012.

On its own this report does not point to recovery, not even an export recovery, but if other surveys support these findings over the next few weeks, that may not be sufficiently good news to justify opening a bottle of Champagne, maybe not even good enough to open a bottle of Prosecco, but a very small glass of cheap fizz may be forgivable.

© Investment & Business News 2013

Google Glass

Back in August 2001 the Boston Consulting Group issued a report with a pretty startling conclusion. It concerned what it sees as a great shift in manufacturing away from China, as many companies return their manufacturing plants to the US. And now it has emerged that Google is to make its goggles – products that may yet prove to be one of the most significant releases of the decade – in the US; in fact, in Silicon Valley. “China’s overwhelming manufacturing cost advantage over the US is shrinking fast. Within five years…Rising Chinese wages, higher U.S. productivity, weaker dollar, and other factors will virtually close the gap between the U.S. and China for many goods consumed in North America,” or so said Boston Consulting in August 2011.

See: Boston Consulting, Made in America again

In April 2012 Boston Consulting’s survey found: “More than a third of US based manufacturing executives at companies with sales greater than $1 billion are planning to bring back production to the United States from China or are considering it.” See: this Boston Consulting press release
Last November another Boston survey found that “more than 80 per cent of US consumers and, perhaps more surprisingly, more than 60 per cent of Chinese consumers say that they are willing to pay more for products labelled ‘Made in USA’ than for those labelled ‘Made in China’. See: this release

Now it has emerged that Google is planning to have its Project Glass – that’s those glasses which will enable wearers to access the Internet, and indeed film everything they are looking at, just about all the time – made in the US.

Then again, we are not exactly talking Foxconn scale manufacturing here. The glasses will sell for around $1,500 and Google is planning production in the low thousands. Given those facts, you can see the benefits of making the product in America.

Presumably the mark-up on manufacturing is so large that it makes little difference if a few dollars can be shaved off the cost by making the product in China. Presumably, Google also feels that for products as complex and important as its goggles, it needs to be close to the point of manufacture.

One can also presume that in due course the price will fall, fall some more and then fall again – so much that these glasses, or products of that type, will eventually sell for prices low enough to give them a mass market appeal. Only time will tell where the products will then be made.

©2013 Investment and Business News.

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