There is increasing evidence that the onshoring – or reshoring – of manufacturing back to the UK is starting to gather pace. What has been a gradual trend is now turning into a clearer rebalancing of the share of production seen by the UK’s manufacturing base.
With the manufacturing industry playing an important part in the strengthening of the UK’s economic recovery, further onshoring of production can only help to secure the revival. The UK is already highly regarded for its capabilities in sectors such as aerospace, automotive and oilfield equipment, so the potential for increasing manufacturing quality through onshoring is clear.
Whereas historically outsourcing to locations such as China and Eastern Europe was driven by the simple issue of manufacturing savings, the well documented rise in labour costs in emerging markets now makes this a much less significant driver. Equally, businesses which pride themselves on the design and manufacturing of highly-engineered, world-leading products now demand much greater control over quality which in turn means that UK production is becoming more attractive. Whilst component-level sourcing will always have its place in lower-cost locations, the production of best-of-breed finished goods in the UK is now gathering importance.
Customer intimacy, speed of component delivery, logistics costs, customer services and brand reputation are also playing their part in onshoring. Gone are the days when customers had no option but to deal with the unpredictability of the sourcing and shipping of products from overseas locations. Factors such as these, combined with increasingly exacting quality standards in many industries, mean that ever greater control of the supply chain is critical.
Support for onshoring is also coming from more flexible regulatory environments in Western markets. The increasing availability of manufacturing grants allow for high-value manufacturing to be repatriated, in addition to the increased support for apprenticeships and training in the manufacturing industry. There is no doubt that businesses which are able to innovate, retain their best people and grow are much more able to compete in a global market.
These issues all have an impact on mergers and acquisitions (M&A) in the manufacturing industry. Whilst the high standards of engineering in the UK have always been an attraction to overseas acquirers, onshoring is now adding to their appetite for UK targets. Accessing a pool of highly skilled labour in this way is becoming a key driver for M&A activity.
For many corporate acquirers, there is also a view that a manufacturer with production operations located far away from its customers is now deemed to have less control over its product quality and supply chain. This in turn makes it a much riskier acquisition target, as many businesses with overseas manufacturing activities are no longer able to satisfy the exacting demands of their customers. An evident solution for a potential acquisition target in this situation is to repatriate its production or, should timing pressures be too great, acquire a business with existing UK production operations.
The only exceptions in these cases are when overseas manufacturing operations are used to serve the local geography in which they are located. This in turn can add increasing value to the overall business should it come up for sale, particularly if the company has been able to successfully transfer its UK operating model into emerging markets.
The clear message from overseas corporate acquirers in industrial markets is that the UK has always been an important target destination. However, the ideal acquisition targets now have to fulfil a broad suite of acquisition criteria including market-leading products, control over their supply chain, strong leadership, talented employees and of course well-invested UK production facilities. These factors in turn broaden the appeal of UK manufacturing businesses and may in addition make them more attractive to a wider of pool of potential acquirers.