Martin Flanagan: No place like home as outsourcing loses appeal

Published on Wednesday 30 December 2009 19:54

IT'S clearly not always greener on the other side. A new survey showing that 14 per cent of manufacturers who had switched production overseas in the past two years had now moved it back to the UK will surprise quite a few.

After all, lower overseas labour costs, an apparently greater foreign work ethic and the buzz-phrase that is "international outsourcing" – from banks to news agencies – have all steadily entered the UK corporate mindset in the past couple of decades.

But the survey by UK manufacturers trade body EEF and accountancy firm BDO suggests disenchantment has set in with "abroad".

Two of the biggest factors behind Britain's manufacturing boomerang, apparently, are shoddy quality in overseas operations and rising freight prices. Logistics and quality are a powerful combination in assessing any business model – and it seems the pendulum might be starting to swing the UK's way.

In addition, a key reason for moving factories overseas has always been to capitalise on (exploit?) lower labour costs. But it could be this foreign advantage is wearing away as living standards rise in places such as eastern Europe and Asia.

Everything is relative, and labour costs are still likely to be lower in such locations, but relocation overseas is now clearly not the no-brainer it was once deemed to be by many captains of British industry.

The UK's growing – it would be exaggerating to call it resurgent – competitiveness is also being helped short-term by the weakness of the pound. Sterling's woes have made it dearer to import products.

The report, which was based on interviews with 300 manufacturers, also said three in five companies were worried about the financial health of their overseas suppliers.

This is understandable as supplier insolvencies abroad are almost bound to create significantly more trouble for a British business than similar disruption on home ground.

A 14 per cent repatriation swing is far from a game-changer. We are not seeing any sea change in attitudes here.

But it is still a high enough percentage of business deciding to "come home" to be interesting and stoke the debate on where UK companies' main production operations should be based.

Back from the brink

THE stock market bounce in 2009 will have surprised many, as the FTSE 100 looks set to have recovered two-thirds of its losses sustained in that extraordinary flirting-with-financial-apocalypse year of 2008.

A sturdy display by equities suggests the Footsie will close tonight up about 22 per cent from where it began the year, after losing 31 per cent in the previous 12 months.

It has gained about 55 per cent from the nadir touched last spring of just above 3,500 compared with its position now. At that time the bulls started to see value again in stocks battered almost indiscriminately by the ramifications of the recession.

This chimes with old stock market lore that market professionals normally spot the "turn" in the economy six to nine months ahead of it happening.

It looks like the market feels we are through the economic worst, that earnings and dividends will gradually recover, and that there will be no double-dip recession in 2010.

It is a big call and much could derail recovery. But I am in that guardedly optimistic camp.

My guess is people will not be too disappointed next year – either in the economic backdrop or stock market returns – if their expectations are modest.

The year ahead looks on the balance of probabilities to be, at best, one of consolidating a fragile recovery.

We will get a sense of how sanguine the market is about economic prospects when there is a more definite move into cyclical stocks – hotels, airlines, retail, etc – and out of defensive sectors such as transport and utilities that have formed investor ramparts in the troubled period since 2007.

Meanwhile, everyone from small investors to pension funds should be grateful for small mercies in seeing some returning equity value in the difficult year just closing.