Re-shoring tide is starting to turn

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Moving manufacturing operations back home is in full swing in the US and UK, and is starting to happen here, as Alan Johnson reports.

WITH the Australian dollar now firmly ensconced around the 75c level against the US greenback, more and more manufacturers are seriously looking at moving their manufacturing operations back to Australia.

The move will counter decades of off-shoring, which to date has faced no substantial market-based challenge within Australia.

The trend of “off-shoring” – sending work overseas – hit manufacturing across the developed world decades ago, and in most cases it was inevitable, as it was just not feasible at the time to compete with Asia on cost for repetitive manual labour.

Today, global competition has steered Australian manufacturing towards its advantages, for example investing in automation and hi-tech machinery, as well as meeting specialised local requirements, such as flexibility and fast turnarounds.

Given these advantages, the balance between off-shoring and re-shoring production, also known as on-shoring, is now finely balanced in Australia.

Not so in the UK for example, where last year one in six manufacturers brought production back from overseas, or are in the process of doing so.

According to a study by the UK government’s Manufacturing Advisory Service, 15 per cent of SMEs returned production, compared with only 4 per cent  who offshored in the past year.

Its findings suggest that re-shoring has been modest in scale so far but may be gaining momentum.

More than a quarter of respondents (26 per cent) said concern over the cost of off-shore production was the principal reason for re-shoring, followed by improving quality (20 per cent) and reducing lead times (18 per cent).

It’s a similar story in the US. According to a study by the US’s Reshoring Initiative, 60,000 manufacturing jobs were added in the US last year versus just 12,000 in 2003, either through re-shoring, or foreign companies moving production to the US.

The US is working hard, at federal and state level, to make manufacturing in the US more competitive, with lower energy prices, less union powers, and government incentives.

In fact, according to a survey of 500 senior manufacturing executives by the US Council on Competitiveness, America’s manufacturing industry is poised to overtake China as the world’s most competitive country by 2020.

It’s not happening like that here yet, but according to many observers it is slowly changing, with more manufacturing work returning to Australia.

China’s costs rising

Ty Hermans, Managing Director of the Evolve Group, said the perception of off-shore manufacturing profitability persists even though the reality rarely reflects this.

“Australian businesses are sinking millions into off-shore manufacturing in the misled belief it reduces production costs and increases product profitability.

“The reality is far from ideal, with many companies encountering time wastage, high freight expenses, and hidden costs eating into profitability and in some cases preventing a product’s delivery to market.

“Australian businesses are being blindsided by hidden costs often beyond their control in their quest to increase product profitability or even bring a new product to market,” Hermans told Manufacturers’ Monthly.

“We have seen countless product designs head overseas to be manufactured without businesses taking into consideration all the steps involved in this process and how it will impact their business.”

He said his company is re-shoring work every other week; work that had previously been sent to China.

“The main reason is the cost of manufacturing is rising in China, with higher labour costs just one component.”

Plus, he said China is getting harder to deal with, even with the language barrier opening up.

“My father has been dealing with China for 36 years now, so we know Asia very well, because that’s where we started out.

“Now they have their own economy, there is an internal demand for their time and effort, and are not just relying on exports anymore.

“With higher labour costs and our lower dollar, it’s all making China less attractive to do business with.”

At the same time, Hermans has warned companies about hidden costs; areas companies often don’t take into account.

“Probably one of the most common costs that companies seem to ignore is their time and staff and travel expenses of going to China. Plus, the cost of managing a project off-shore.

“It sounds very simple, and something people would know to include in their cost base, but in my experience, it just doesn’t happen.”

He cited an example, where his company was competing on a job where $5000 was the difference on a job producing stock to cover them for three months.

“But they hadn’t added the cost of two people going to China twice and their travel expenses to check out the factory and set up the deal.

“That must be over $10,000 and they hadn’t even started the project. Obviously they would have had to go over and check on quality, probably more than once.”

Hermans said other hidden costs include currency fluctuations in China’s internal currencies.

“Things that you don’t actually see until it’s too late. And that’s when the quality drops.”

According to Hermans, quality is the first thing the Chinese will allow to slip. 

“If they are having internal cost increases, maybe because their currency has changed or material costs have risen, normally the first time companies will see that is in a drop in quality, using cheaper materials or whatever it might be.

“Generally, off-shore companies are reluctant to increase their pricing, because they know they have only won the contract on price. They rarely win contracts on value of service or ease of doing business, for example.”

As well as quality being a problem, Hermans said the chances of companies losing their IP is still a big risk off-shore.

“Part of the problem is lack of recourse. If someone did the wrong thing here in Australia, there are very clear steps to be taken. We have a fairly rigid system to protect a company’s IP.

“However, that’s not the case in China. Even with my many high ranking contacts in China, I would have trouble getting something back in line if it went awry over there,” Hermans said.

Australia’s advantages

Hermans admited there are always going to be occasions when manufacturing off-shore can be cheaper.

“But a company like ours, which offers product design and quality manufacturing, often proves that it is cheaper to manufacture here in Australia.

“Every other week we are picking up work that had been sent to China, even as early as five or ten years ago. We are re-shoring and bringing it back to Australia.”

Hermans said it’s predominantly plastic components and high technical machinery, mainly because companies can’t get the quality off-shore.

“Some of the plastic components are sub-assembled or fully assembled products here in our factory. We specialise in short run manufacturing, but we do a lot of long runs as well.”

Hermans said the company has invested heavily in equipment and its people.

“It has allowed us to do short run work, which would normally be impossible to do here in Australia, and certainly difficult and expensive to do off-shore.

“Because we have created complete end-to-end manufacturing supply chain, we are able to turn around jobs very quickly, with some jobs designed and manufactured in under three weeks.

“Short lead times are absolutely critical, and is something you can only offer when you have all the services under one roof.

“As soon as someone starts to outsource parts of the process, it adds time and complexity and the opportunity for errors arise.”

When it comes to toolmaking, Hermans admited China does make “fantastic” tools, supplying some of the biggest companies in the world.

“But when it comes to price, it’s always difficult to get something done for a price, and still get quality.

“So when a tool is quite price sensitive, and requires a fairly high level of accuracy, we will make the tool here in our toolshop here on site.”

As well as tool design, and tool fabrication, the Evolve Group also has a tool repair service.

“This is an important service, especially when things go wrong on the floor and the company needs to get a tool repaired quickly, with quality.”

Hermans said he has the right formula to be a manufacturing success in Australia.

“Everything happens under the one roof. We understand all the elements in manufacturing, with all the services required to manufacture a product, not just design or manufacturing, but transport and logistics and marketing international shipping which we do for ourselves and all our customers.”

He said companies who purely look at a product as a widget, and how cheaply it can be made, have lost the game, because they are only competing with China on price.

“Instead, we value add and look at all those different areas. There are different ways of designing a product so that it can be manufactured and shipped better.”

But he warned that this is something that needs to be done at the start, at the design stage.

“It’s not something to look at five years down the track when the company is losing market share to someone else.”

Hermans said the ability for clients and manufacturers to meet face-to-face and sit-down to discuss their designs in detail, was what made manufacturing viable in Australia.

“By working with a client right from the start of a new idea, through to manufacturing and launching to market, it allows manufacturers the opportunity to give sound advice quickly to get the best result and reduce costs,” Hermans said.

During its 10-year history, he said the Evolve Group, which specialises in end-to-end product design, development and manufacturing, has helped a large number of clients revise product designs for effective manufacturing and in the process help them save significantly on their project.

“In some cases we’ve shortened the design to market process and manufacturing has occurred in just over a week. This is a massive saving when compared to overseas scoping, design to manufacturer, product sitting on the dock, and transportation time.

“If ever there is a time to get something made in Australia, now is the time,” Hermans said.

Evolve Group

07 3283 1196

www.evolvegrp.com