It’s rare that politicians talk about supply chain management. So the British Prime Minister’s speech at the World Economic forum on Friday concerning what he described as the “practice of offshoring where companies move production facilities to low cost countries” is a little unusual. Of course it was designed to tap into the fashion to talk about the effects of the trend to out-source some production activity to China which began in the 1980’s and 1990’s which is blamed for the loss of lower skilled jobs in many western economies. In the US in particular, politicians and some in business claim that production activities are returning to the country from China, boosting employment in previously depressed regions.
David Cameron roughly followed the same line of argument, claiming that there is “now an opportunity for the reverse: there is now an opportunity for some of those jobs to come back” to Britain. He cited as evidence “a recent survey of small and medium sized businesses found that more than 1 in 10 has brought back to Britain some production in the past year. More than double the proportion sending production in the opposite direction”. He named a number of manufacturers, from the computer company Raspberry Pi to the fan engineer Vent-Axia, who were repatriating production operations out of China and into Britain.
The reasons behind this trend are, according to Mr Cameron, “Rising costs in the emerging markets, a natural consequence of these economies developing and their people becoming wealthier. Senior pay in China now matches or exceeds pay in America and Europe while rising oil prices and complex supply chains are increasing transport costs too.” This is questionable. With super post-panamax increasing fuel consumption and both sea and air freight rates so low that parts of the transport sector are barely economic its is hard to see much evidence for the notion that transport costs are driving a return to previous production locations.
David Cameron may be on firmer ground in his second point, where he asserts that “By shortening their supply chains, they can develop new products and react more quickly to changing consumer demand. More customisation. More personalization. Better and faster customer service.”
Importantly he also cited energy costs, with the effect of shale-gas in the US in particular driving for “re-shoring”.
What the Prime Minister was trying to articulate is that rather than returning to older, less productive production process, the increasing unit labour costs in China offer Britain and other advanced economies the opportunity to pick certain types of operations for inclusion in high productivity manufacturing operations whilst lower adding-value processes remain outsourced to either China or other emerging economies.
This is probably a fairly accurate portrayal of the changes taking place in the global economy. However quantifying the scale of this change and thus, its implications for sectors such as logistics is more difficult.
The speech was watched by Ti’s CEO, John Manners-Bell, who attended this year’s World Economic Forum meeting in Davos and spoke on subjects from e-commerce to food supply.For further insights on events at Davos please click here.