Engineering Forum
Outsourcing manufacturing overseas is a given but there are some signs of investment.
BIRDS OF A FEATHER
Engineering companies are flying east, but as the sector fights against global competition, there are at least some welcome signs of inward investment. Ian Halstead reports
The supposed death-knell of Britain's engineering sector has been sounded throughout the decades.
The first notable occasion came a century ago, amid fears that Germany was about to supplant this country as Europe's leading industrial nation. Since then it's become commonplace for business figures, politicians, union leaders and the like to report manufacturing's imminent demise.
Now though it would appear that significant damage is genuinely being done to the UK's industrial base.
In October the Office of National Statistics revealed that 700,000 manufacturing jobs had been lost in just five years. The worst-hit sector was textiles, but major redundancies were also identified in metals, chemicals, electrical equipment and the transport industry.
Manufacturing still employs some 3.5 million people - roughly one-in-seven of the UK's working population - but appears all too rarely on the government's policy agenda.
It's an omission that the new president of Birmingham Chamber of Commerce & Industry aims to rectify. David Grove has run a clutch of metals and industrial businesses, most notably today as boss of quoted plc Hill & Smith.
"It's a very tough time in engineering. We all have to work harder, and improve the quality of everything that we make, but we could certainly do with some assistance from the government," he says. "Labour likes to market itself as a business-friendly party, but has been short on delivery.
"If I meet people like John Prescott and Patricia Hewitt, I'll ask them to ease the regulatory burden that is particularly tough on SMEs. We have a large number of rules that have simply lost their relevance. I often think we need a Minister of Repeal just to abolish them all."
Grove is equally determined to make Labour realise the swathes of industrial jobs that are disappearing will not return.
"We can't build an economy on the service sector and professional services, and we can't afford as a nation to see engineering go the way of shipbuilding, mining and steel."
However, Grove accepts that some of the sector's current problems have been self-inflicted.
"If a company is producing low-value items with a high labour cost, it must invest to increase productivity and protect its margins. I think that's an area where as an industry more could have been done over the years."
Pleas for Britain's manufacturers to spend more heavily on R&D, skills training, and improving management quality have been a staple of union leaders' rhetoric for decades.
However, according to the country's largest industrial union, Amicus, the messages have gone largely unheeded.
Its regional West Midlands secretary, Terry Pye, says the latest international productivity league tables underline the depth of the crisis.
"Between 1996 and 2002, industrial production rose by an average 18 per cent in OECD countries, and 14.3 per cent in the EU," he says. "The UK recorded a pitiful minus 0.1 per cent, and was kept out of bottom slot only by Japan."
Pye says the data also destroys the myth that manufacturing in more advanced countries is suffering equally because of competition from such regions as Asia and Eastern Europe. "Over the six-year period, we see such predictable names as Hungary, Poland, the Czech Republic and South Korea making significant gains in industrial production," he says. "We are always being told of France and Germany's economic problems, but they both achieved improvements of 16.5 per cent, against the UK's negative figure."
Pye is equally vociferous in condemning the so-called flight east being witnessed in the UK economy.
"It began with call centres moving to India, and now manufacturers are following the trend. If the government doesn't act soon, it will blow a hole in our industrial base," he predicted.
The same issue also topped the agenda at the latest meeting of the CBI's regional council, according to Ronnie Bowker, managing partner at Ernst & Young's Birmingham office.
"It's being seen more and more, particularly in the automotive sector, and it's not just about taking costs out of the production process," he said.
"China, for example, has become a major market place, which is further increasing the pressure on motor manufacturers and also their tier one suppliers to have a presence there."
Bowker believes the attempt of union leaders to take the moral high ground in the outsourcing debate is doomed.
"We can't just ignore the trend and pretend that companies are somehow going to stop setting up production plants in the Far East," he says. "The days when the 'Made in China' label was regarded with derision by consumers are long gone."
Bowker accepts that a growing number of manufacturers will take at least some elements of their supply chain overseas.
"However I believe they will increasingly separate the pure engineering aspects from the manufacturing process, so the higher value-added intellectual property skills remain in the UK."
Bowker points to the strategic route chosen by James Dyson, whose eponymous business shifted production of vacuum cleaners and washing machines to Malaysia, but retained its R & D centre in the UK.
It's an observation that sends Amicus and its opposite numbers at the TGWU into a flat-spin.
"We lost almost 900 engineering jobs when Dyson switched production overseas. If all companies do likewise, all we'd have left is a country full of head offices and never-ending dole queues," retorts Pye.
Bowker is equally convinced though that such attitudes fail to reflect the impact of globalisation on manufacturing industry.
"If you look back ten years when the outsourcing of supply chains was first noticed, all you heard was people bleating and asking for help," he says. "Gradually most companies have recognised that we all operate in a global marketplace, and are revising and refining their strategies accordingly.
"Their future business model may not look like the old model, but there is a widespread realism about the scale of changes that must be made."
Somewhere between the pragmatism of Bowker and the idealism of Pye comes KMPG's motor industry specialist Mike Steventon.
Having spent several years working in LA before switching to the accountancy firm's Birmingham office, he's particularly well placed to assess the global engineering industry.
Steventon shares Bowker's view of the changing mindset among manufacturers about outsourcing.
"Companies are having to look at such locations as the Czech Republic, Vietnam and China and decide if the strategy is not only viable, but necessary," suggests the KPMG partner.
"Increasingly original engine manufacturers (OEMs) are pressuring their tier one suppliers to set up plants in these countries, partly to avoid logistical problems and import taxes, but also to gain a foothold in the market."
Recent research by KPMG's team in China suggested that demand for vehicles would hit seven million by 2010, making it the world's third largest market.
Steventon says overseas governments are now toughening their negotiating stance with manufacturers looking to relocate.
"China and India in particular are making it very clear they are not prepared to be treated just as low-cost production centres. At the same time, UK firms are equally determined to retain the intellectual property elements of their business here."
However, the oft-expressed union view that manufacturers close British plants because it is cheaper than taking the axe to operations in Europe or the US also strikes a chord with Steventon.
"The flexibility of our labour laws has certainly been important in attracting inward investment to the UK, especially in the motor industry. However, they also make it much cheaper to close plants as well.
"You would have to look at something like the closure of Ford's Dagenham site and wonder what criteria were used to select it."
Steventon expects the momentum of closures among European manufacturing plants to accelerate as the decade progresses.
"I do have concerns that whether we talk about Solihull, Stuttgart, Munich, Paris or even Detroit that the constant price-down pressures by the motor manufacturers will force their suppliers to join the flight east."
For the moment, the powerful United States auto unions are managing to withstand such moves, but Steventon says their fight is ultimately doomed.
"Protectionism is bound to fail in the long run. All they are doing is heaping further costs onto an already loss-making industry and weakening its fragile financial base even further."
Steventon says manufacturers need to look at both their processes and their products, and to intensify their focus on innovation.
However, in terms of employment, he is not optimistic about the impact of a shift toward high value-added products.
"Many companies will have to transform the way they operate, just to survive into the next generation, and there are likely to be significant redundancies along the way."
It's not all gloom though, and there are welcome signs that the influx of inward investment from the US is about to restart.
Traditionally, the West Midlands has been the favoured UK region for North American companies looking to establish a toe-hold in Europe.
Advantage West Midlands (AWM) and its East Midlands' counterpart, the East Midlands Development Agency (EMDA), are hoping to stimulate such activity via a joint project, The British Midlands (TBM). Catharine Arnston, vice-president of TBM in the Eastern USA, reports significant interest following her decision to eschew the usual trade show strategy and focus on the sponsorship route.
"You can spend days at a trade show and not meet a single one of what we call the c-level executives: the chief operating officer, the chief executive or the chief financial officer," she says.
Instead, Arnston persuaded TBM to sponsor the Ernst & Young 2003 New England Entrepreneur of the Year awards.
In September, the move gave her top-level access to a tent manufacturer looking to set up a production plant in the UK.
"It's a privately-owned firm with annual sales of around £330 million. Its biggest customer is the US government and its second is the UK government," says Arnston.
"They've just appointed a dealer in Birmingham and are now looking to set up a production site to target NATO work.
If I hadn't been given an entree to the company by E&Y, I'd never have got near them."
Later the same month, the same technique gave Arnston the chance to promote the Midlands to a food and drink manufacturer based in New York.
"Again, it's a very strong sector for our region, especially in Birmingham with the presence of Cadbury-Schweppes."
Both companies are now considering setting up manufacturing sites with multi-million pound investments, which would generate work for local engineering and construction companies.
"We've also lined up board-level meetings in October with at least another six manufacturers, all of whom are considering setting up production plants in the Midlands," says Arnston.
"The jury is still out on the new strategy, but I know if we'd just been visiting trade shows I'd have gone through several hundred business cards - and a pair of shoes - and probably still have nothing to show for it."
Upturn It's official
The past few months have shown increasing signs that the long awaited upturn in industrial sectors is getting underway, according to Ernst & Young's latest ITEM Club report.
It says there is increasing confidence that this revival will accelerate although it warns that it is important not to lose sight of the downside risks, most notably the sustainability of the US growth.
UK manufacturing output is estimated to have risen 0.5 per cent in 2003 Q2, finally reversing the long and pronounced decline. Meanwhile the statistics for engineering suggest that the severe reductions in activity since early 2000 have drawn to an end. Due to the time lag between the intermediate goods and capital goods areas, the monthly production figures for individual constituents remain erratic. But, despite the negative impact of weak European markets, new orders, particularly for mechanical equipment and machinery (less so yet for electrical and optical equipment), are showing more encouraging trends.
ITEM expects good revivals in metal goods, mechanical engineering and electrical equipment in 2004 and 2005, as these sectors respond particularly to the expected growth in global trade.
Transport equipment, an important area of engineering activity in its own right, has fallen sharply over the past two years, reflecting the steep decline in the commercial aircraft sector. Indeed, UK aerospace turnover fell by nearly 15 per cent in 2002, the sharpest downturn in 20 years. Recovery still looks some way off, but the decline on the civil side is now starting to level out, whilst the build up of Eurofighter production is a significant positive on the defence side.
In contrast to other sectors, motor vehicles was a notable bright spot in engineering through 2002. Production levels for both cars and commercial vehicles are so far holding their own in 2003 and, indeed, are expected to finish the year marginally ahead, despite the weak European markets.
Straight-talking women
midlands manufacturers could learn a thing or two from the veuve cliquot businesswoman of the year.
The air of gloom that so often pervades the manufacturing sector has lifted this autumn.
Positive messages were also heard in abundance at the Telford International Centre in October at the Manufacturer LIVE 2003.
Organised by the Norwich-based Manufacturing Alliance, the two-day event attracted more than 1,000 manufacturing managers to hear an impressive range of speakers from blue-chips on both sides of the Atlantic.
The highlight was a presentation by Dawn Gibbins, who chairs the specialist flooring group Flowcrete and is the current Veuve Cliquot Businesswoman of the Year.
Her effervescent style is a front for an astute business mind, and many manufacturers could learn from the Gibbins approach.
"It's no good baffling people with jargon. You simply have to explain to your staff and colleagues what you want to do, listen to them, and then see how you can move forward together," says Gibbins. "If you allow people to develop their own initiatives, it's surprising what can be achieved, but without giving people the freedom to make mistakes you won't make progress."
As a philosophy it sounds simplistic, but the results are evident. With turnover set for £325m this year, the Sandbach-based business dominates the UK's market for both industrial and commercial flooring products.
Heavy investment in technology has generated significant productivity improvements, but without lost jobs. Around a third of sales now come from overseas, though the international division was created almost by chance.
Flowcrete won work in Malaysia in 1997 and was informed that 70 per cent of the products had to be made locally. "We'd been looking to ship everything in from the UK, but we just rented some space in Kuala Lumpur, flew a technician in to set the plant up, and six weeks later we were manufacturing there," says Gibbins.
The company now also owns other plants in Sweden and Belgium, and operates six under licence spanning the rest of the world.
Gibbins' dislike of business-speak also hasn't blinded her to the importance of external support and advice to underpin Flowcrete's continued growth.
Production director Tony Longworth was recently dispatched to acquire a diploma from the Manufacturing Alliance. "He has become our champion for change, looking at all our processes," says Gibbins.
Longworth won't be tinkering just to prove he can though. "The most important element for any business is the bottom line. Change for change's sake helps no-one, but if something has to change there's no point being half-hearted," says Gibbins.
One woman beginning to make her mark on the Midlands' manufacturing scene is Esther Horwood. Her family has been running Walsall-based Stokes Forgings since the 1930s, but only recently has she peeked over the corporate parapet.
In September, CBI director-general Digby Jones returned to his old haunts to mark the completion of a £31.4m capital investment programme at Stokes.
Two new press lines, new die manufacturing equipment, and a business management IT system were all funded internally.
Horwood, who chairs Stokes, says it has now invested more than £33.5m on its sites in Walsall, Dudley and Brierley Hill in the last three years.
She has plans to transform Stokes into a significant player in the European metal-forming sector.
One of her biggest challenges is to boost productivity and increase turnover without redundancies among the 230-strong workforce. Horwood sees continued investment in plant, training and IT as vital.
"We've got three new high-speed milling machines and can produce virtually all our dies and tooling in-house. Our stock-turns and response times on inquiries, quotations and deliveries are also pretty much world-class."
The development of an ultra-sophisticated IT network has been critical.
Although the company has no manufacturing operations overseas, Horwood says that never-ending cost pressures may make such a move irresistible.
"Next year will be critical. We have a significant amount of work on a vehicle that goes out in the second quarter, and is then being outsourced by the customer," admits Horwood. "We have to keep an open mind with regard to Eastern Europe, India and even China."
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