To build or to buy

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To make or buy? That is the question…

You have no doubt noticed the recent announcements about BMW’s difficulties with Rover. At the same time Raleigh announced both its exit from frame building and then the sale of its factory site in Nottingham. These and other announcements from various sectors of the manufacturing industry seem to indicate that we are in another of our periodic rounds of consolidation in this country. What are the forces that drive manufacturers to close manufacturing plants in the UK in favour of importing?

Well I’ve worked for both sides. The early part of my career was spent with Toshiba where my job was to beat up the Brits in the TV and Hi-fi industry, more recently my time at Raleigh was spent on the other side of the fence trying to resist the importers. Let me summarise the pros and cons from my perspective.

1)UK manufacturing:

1-1. People:
I’ve always found the average Brit factory workers to be the good guys in this equation, sure it all went a bit pear shaped in the 60’s and 70’s when the unions lost the plot but that really is a thing of the past. Today our people are just as capable and just as committed as any I’ve met around the world. Furthermore our engineers are generally world class. There’s something about our culture/schooling that helps us be mavericks in the Lab. We’re good at design break-through’s and innovation, look at the work John Whyte and Mike Burrows have done.

1-2. Emotion and the “Greens”:
Manufacturing here gives us the moral high ground
a)We’re employing local people
b Our tight environmental regulations mean we’re forced to manufacture in a green” way. Also as consumers we feel good about supporting the home team.

1-3. Logistics:
Furthermore from a purely commercial point of view, manufacturing close to your market should give you an advantage in terms of logistics (you can respond quickly to demand swings).

1-4. Government:
The BMW/Rover fiasco highlighted the impotence and naivety of government. We are in a global village and governments who play by the rules are really powerless to stop economic trends. If it’s cheaper to manufacture elsewhere, shareholders will force management to do it. You only stop or slow down these trends by intervening, something the French and Chinese governments understand very well!

2) Importing:
Some of the arguments for importing are well known…

2-1. The strength of the pound
Yes this really is a problem, we all know how far the pound now goes on our holidays to Europe, but do people also understand that the problem was compounded by the Far Eastern currencies being devalued two years ago? Taiwan for example panicked when surrounding countries like Thailand devalued during their economic slump. The subsequent devaluation further widened the gap between the cost of manufacturing in the UK and the price of importing.

2-2. Taiwan is the world centre of the bike business!
In the bike world a further consideration is that Taiwan in particular is now the centre of production and innovation in bike components. Many of your fancy US branded bikes are in fact made in Taiwan.This means there is an infrastructure of sophisticated low cost manufacturing and an abundance of choice out there. The intense local competition also results in amazing speed and flexibility.whereas we may take months to design and produce an idea, in Taiwan it will take a fraction of the time.

2-3. Level playing fields:

It’s also important to understand the wider picture on manufacturing. Despite the apparent animosity between China and Taiwan at a political level, commerce is flourishing. Taiwanese businessmen rely on China for the bulk of production and seem to move between the two countries with ease. Now this is where another advantage kicks in for the importer. The legislation in China on environmental and working conditions is far less stringent than in the West, so a factory out there is not carrying the overheads that it would over here. I also suspect (but it’s difficult to prove) that “help” is given in terms of rates, rent, utility costs and even employee costs by local authorities further widening the running cost v the UK.

3. In summary…
When you add all this together you have a pretty compelling case for importing; not only do you get a considerable cost saving but you also simplify your business by not having to worry about running a factory, you also probably gain in terms of flexibility of design/choice of componentry as you are no longer tied to the things you can produce.

Faced with such a strong commercial case the management will be under extreme pressure from their shareholders, (particularly if they are US based) to switch to importing in order to further boost profits.

The only risks of this strategy are:
a) your supply chain gets longer, you have to commit to production well in advance in order to factor in shipping time, so if you get it wrong the problem is bigger than with local manufacturing. However as most components now come from the Far East the gap in terms of cost has closed.
b) if there were to be a war between China and Taiwan bike supply would be severely disrupted – a similar position occurred recently when Taiwan had a big earthquake.
c) If sterling suddenly plummeted the gap would reduce but I really think we are now beyond the point of return in terms of ever being competitive in what is essentially low cost manufacturing.

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