Britain is playing catch-up to the US manufacturing boom – Telegraph.co.uk

One of the key drivers is cheap energy. Thanks to a much more benign attitude
than that seen in our paranoid, anti-growth Britain, US shale gas and oil
output has grown more than 50pc annually since 2007, creating jobs and
driving down costs. In its latest report, McKinsey, the consultancy,
calculates that shale could bolster US GDP by $690bn (£450bn) a year and
create 1.7m jobs across the economy by 2020, and not just in
energy-intensive industries. These are enormous figures; it is a scandal
that the Coalition has wasted so much time dithering about this, first
halting all shale development work and only now starting to allow the
industry to develop.

Another important shift is relative wages: US workers have been under pressure
for years, whereas Boston Consulting Group estimates that their Chinese
counterparts have been enjoying wage and benefit increases of 15pc to 20pc
per year, a trend which will have slashed China’s labour cost advantage over
the lowest cost US states to just 39pc by 2015, when adjusted for the higher
productivity of American workers.

That kind of gap is too small for China to remain competitive: the lengthy
supply chains required to produce such a long way away are rife with risk
and uncertainty. It takes ages to ship goods, which mean that lead times
need to be uncomfortably long, an increasing problem given the fast-changing
nature of modern markets and tastes.

The Hackett Group estimates that when all factors are taken into account, the
overall cost gap between the United States and China has halved since 2004,
and stands at about 16pc today, with rising fuel prices affecting shipping
costs.

The result of all of this, according to Boston Consulting, is that an extra 2m
to 3m manufacturing jobs will be created in the US, together with $100bn in
annual output, this decade, with companies such as Apple announcing that
they will be moving back some manufacturing work.

Liz Ann Sonders, Charles Schwab’s chief investment strategist, has compiled a
list of 39 major US and international firms that have either moved some
business back or are expanding their production in the United States. They
include giants such as Boeing, General Motors and Exxon, and the list keeps
getting longer.

Of course, the fact that China is losing its competitiveness doesn’t mean that
there are no cheap alternatives – lots remain in other parts of Asia and
Latin America and Africa. As long as some countries remain substantially
poorer than others, the present international division of production will
continue to make sense. But off-shoring for manufactured goods is a trend
that has now run its course, and we are about to see at least some
facilities move back to the West.

Unfortunately, the UK cannot just assume that these forces will automatically
help us rejuvenate our own manufacturing industry, even though wages have
also been falling here. America is a massive continent, and companies that
are starting to produce in the US again are choosing the most efficient
states to do business. Europe as a whole may benefit from some re-shoring –
but there is a good chance that multinationals decide to base their
operations in Poland, or Estonia, where workforces are well-educated,
hard-working and cheap, and where products can be transported cheaply to UK
stores within hours. This would be near-shoring, rather than on-shoring to
the UK itself.

There is zero chance of any significant return of lower, value-added
manufacturing to southern England, for instance, where costs, including
those of land, are prohibitive. The Boston Consulting report distinguished
between North America and other parts of the world, arguing that China will
remain “an important manufacturing platform for Asia and Europe”.

But that doesn’t mean that we too cannot fight back. UK manufacturers are
insufficiently profitable: their net rate of return was just 8.9pc in the
first quarter, against 15.1pc for services firms. We need a supply-side
revolution to bolster returns to manufacturing, encouraging more firms to
invest in the UK. The Coalition needs to pursue a four-prong policy,
starting immediately. Britain needs to embrace shale gas and stop obsessing
with costly renewable energy that is crippling industry. It must be made
easier for firms to expand by liberalising the planning system; this is
especially important given the rise of 3D printing, which will allow local
small-scale manufacturing. Increasingly, high value-added manufacturing is
traded by plane; we need more capacity in London and southern England to
allow our manufacturers better access to markets.

We must also start looking at the UK as a collection of regions with different
comparative advantages. Northern Ireland, with its much lower costs, could
be turned into a centre for manufacturing near-shoring, competing with
Eastern Europe: corporation and capital gains tax could be abolished
entirely, a raft of labour market and planning rules suspended, and National
Insurance Contributions slashed. Unless we start to think outside of the
box, the UK will miss out on the great re-shoring trend that is about to
transform America.

Allister Heath is editor of City AM