Article - Issue 16, July/August 2003
Sustaining competitive advantage in manufacturing
How UK manufacturers can prosper
The story of decline in the UK’s manufacturing industry is a well known one. Many ideas have been put forward over the last few decades about how this decline can be arrested, but it continues. Here Dr K Rajagopal outlines the current state of manufacturing and describes how one manufacturing company has flourished in a competitive industry.
The beneficial effects of manufacturing industry to the UK economy are enormous in proportion to its size. According to a study by the consultants, McKinsey, although manufacturing represented 14% of total UK employment in the year 2000, it accounted for 19% of economic output and 63% of exports.
A substantial number of additional services and consequently jobs, are supported by manufacturing industry. Manufacturing and service economies are increasingly interlinked as information technology enables manufacturing know-how to be easily recorded, enhanced and used to drive productivity.
In common with the other major advanced economies, the UK has inevitably seen manufacturing industry diminish over the past 30 years (Figure 1). The decline in the UK’s manufacturing industry has though been greater than the decline in some other countries.
There are many contributory factors, including:
inadequate capital investment
low labour productivity
a lack of management focus.
Much of the decline in UK manufacturing is a result of closure of operations. In several cases, manufacturing plants established by overseas companies, especially in the eighties and nineties, have closed as economic conditions have changed.
In the nineties, it became fashionable to accept decline in manufacturing as inevitable and even as a desirable step towards a post industrial UK reliant primarily on ‘services’. What these services might be to compensate for terminal decline in manufacturing was not clear. Fortunately that body of opinion no longer appears to be the main influence on Government and recent work by the Government in developing a ‘Manufacturing Strategy’ with support from the Secretary of State is encouraging.
The main reason for decline in manufacturing in the UK, however, is low productivity. Clearly, as less efficient plants close, as many did in the eighties, average productivity will increase. However, unless UK manufacturing productivity, on average, increases, the spiral of decline will continue inexorably to levels below the critical mass required to sustain serious manufacturing.
Unlike other major industrialised countries, the UK has seen a decline in a wide variety of industries to the point where decline appears terminal. The UK’s motor car, machine tool, and consumer electronics and white goods industries have all declined to very little. Core industries such as the steel industry are also under threat, without manufacturing demand to sustain them and with Asian manufacturers becoming increasingly efficient and sophisticated. More worryingly, it is increasingly difficult to source castings and forgings, control systems and drives, and other basic building blocks for other engineering products in the UK.
In contrast, while the USA has also seen and is continuing to see decline in many traditional industries, many US industries appear to have learned the lessons of their global competitors and stemmed or reversed the decline. Mini steel mills in the steel industry and the much publicised Harley Davidson stories are examples. The car industry has also emerged resurgent, having learned its lessons in terms of lean manufacturing, effective sourcing and rapid product development.
Importantly, the US has also seen the creation of many new industries in electronics, creating additional wealth and employment. Despite the recent industry downturn, companies such as Cisco, Dell, Intel and Applied Materials are manufacturing companies in the ‘new economy’ producing high technology products from know-how created by their employees and are well positioned to grow into the next decade and beyond.
McKinsey research suggests that UK capital productivity is comparable to that of other G7 countries although the amount of capital deployed is lower than in other countries.
Their view is that the gap is caused by labour productivity. By comparing UK managed companies with foreign owned companies in the UK they conclude that UK owned companies are only two-thirds as productive as some of their foreign owned counterparts. A useful and encouraging further conclusion from this work is that the inherent quality of the UK workforce is not the issue.
Although a very interesting piece of research, it is not clear from the report what other causal factors might have been present, such as average age of factories or businesses, business sectors, size of companies or whether many of the foreign owned companies were on ‘greenfield’ sites compared with UK companies on ‘brownfield’ sites with traditional labour management relationships and practices.
McKinsey’s conclusions are that the determining factor for labour productivity is management practice. These practices cover good manufacturing principles, management by walking around, and good general management practice such as articulation of clear objectives supported by effective performance management.
It is not clear however why foreign owned companies are able to achieve these good practices while UK owned companies fail.
Research by the National Institute for Economic & Social Research describes total factor productivity as the combination of physical capital intensity, skill levels within the workforce and management effectiveness.
Many researchers including the CBI and the TUC have identified physical capital intensity as a particular UK problem for a long time. It is not entirely clear why this should be although CBI work has identified volatility of the macro economy as a key contributing factor. It is not clear why macro economic stability in recent times has not lead to a corresponding increase in capital intensity although increasing global competition may be part of the reason.
Another reason put forward is the attitude of financial markets towards the kind of investment returns generated by manufacturing industry and the need for a longer term view.
In my experience, one of the main issues in the UK has been poor utilisation of invested capital equipment due to lack of management attention and, at times, poor management workforce relations or workforce skill.
The second reason for low productivity is lack of a suitably skilled and educated workforce. In an environment where the stated aim of Government is to get 50% of school leavers into higher education, it is unfortunate that certain liberal arts courses, with arguably lesser impact on the nation’s economic progress, receive more attention than appropriate training schemes for skilled workers.
With decreased industrial job security and employer/employee loyalty, traditional craft or technician apprentice schemes have not been replaced adequately. More importantly, respect and status accorded in the past to skilled craftsmen have disappeared, reducing non-financial incentives. In contemporary language, it is not ‘cool’ to spend 4 or 5 years training to be a skilled craftsman or technician.
Perhaps the main issue for UK manufacturing industry is the shortage of adequate management personnel and skills. Much research has been done in this area. In addition to the McKinsey work mentioned earlier, other consultancies as well as the National Skills task Force, the CBI and TUC research have pointed out the shortage of management skills as a key issue for UK manufacturing industry.
The UK produces many high quality graduates in appropriate disciplines. The issue appears to be in attracting these people to manufacturing industry. Not only is manufacturing not as well paid as other opportunities, it may be perceived as unattractive or undesirable, In fact, with the track record of manufacturing companies over the past few years, a career in manufacturing is not often at the top of career adviser priorities.
There are other factors that may contribute to the problem of productivity decline. Exchange rate volatility has been a significant issue over many years. Although the relationship between sterling and the US dollar has averaged around 1.5 to 1.6, the range has moved between 1 and 2. In effect this means margins for UK manufactured products sold in the US may vary by 50% over that range.
There are mitigating strategies for currency movement but these are not always consistent with sustained productivity improvement and recent volatility simply exacerbates the problem. The situation with other major currencies is similar.
Increasing workplace regulation is another major factor. While it is entirely appropriate that employees are treated with respect and consideration and protected from the excesses of poor management, bureaucratic regulation does not help anyone and acts as a further disincentive to investment. It also reduces management time available to be spent on improving business performance. Ultimately, such regulation harms enterprise and consequently the very employees it is designed to protect.
In earlier decades, management workforce relations have been a significant issue. These have improved immeasurably in the last decade. Thanks are due to enlightened trade union officials as well as capable management who have contributed to this improvement. The operating environment created by the Government of the day has been important in achieving these results.
Much of the improvement has been achieved through significant change in historical centres of poor industrial relations such as the car industry. However, it is to be hoped that, in closing factories with poor industrial relations, we have not also caused terminal decline of the industry itself.
A significant new theme to emerge in the nineties is the concept of ‘best practice’. Much favoured by consultants, this concept portrays an attractive image of easily transferable methodologies that can transform poor factories into good ones. The idea is seductive, particularly to senior executives with limited operational experience. One of the unfortunate consequences of this approach is that many of our best graduates migrate into consultancies where they are teaching best practice instead of working in industry and actually practising them.
In recent times global competition has had an increasing impact. For UK companies the main regions that have an impact are Asia and Eastern Europe.
Liberalisation of the Chinese economy has had a phenomenal worldwide effect on manufactured products.
Over the past decade a greater proportion of consumer goods are being manufactured in China with very low labour costs and, consequently, consumer prices. Manufacturing in China is becoming more sophisticated: the industrial parks around Shanghai, Zhangjiang or Suzhou are designed for semiconductor and bio tech manufacturing, not shoes or soft toys. These parks are set up to attract the most sophisticated international companies to relocate.
For example, the semiconductor company SMIC is rapidly approaching the latest standards of technology only 3 years after starting up in the Shanghai area. The Japanese company Ricoh, is increasing the speed at which its latest photocopiers are made in China after being developed in Japan. Many corporations are beginning to look towards China for its talent pool of scientists and engineers instead of just cheap labour or government incentives.
The other major country with an increasing influence is India. After near terminal decline of manufacturing capability in India during the latter centuries of the last millennium, there has been a resurgence of manufacturing activity and confidence.
Today, Tata Steel in Jamshedpur claim to be among the most efficient steel producers in the world. One of the few Deming prizes for quality won by companies outside Japan was won by an Indian company producing automobile ancillaries.
Other Asian countries
Smaller Asian countries such as Korea and Taiwan are even more advanced in manufacturing. Today, Koreans and Taiwanese are at the leading edge of semiconductor and liquid crystal display manufacturing. A substantial proportion of computers of varying sophistication from domestic PC’s to complex servers are made by Taiwanese companies, often in mainland China.
There is a view in some quarters that Asian companies cannot catch up with the most sophisticated industries and that these are ‘safe’. The trend I have described earlier contradicts this belief. It is inevitable that every industry will be affected by rapidly advancing Asian companies over time.
In fact, whereas smaller Asian economies focused mainly on export, countries such as China and India have the benefit of large and increasingly more affluent domestic markets. As these countries liberalise and encourage internal competition, they will rapidly create competitive industries that can feed on domestic demand as a precursor to internationally competitive positions.
Outsourcing service industry overseas
The increasing trend to outsource manufacturing, wholesale, to ‘lower cost’ economies such as China is seen by many as an inevitable evolution of the UK to a ‘post industrial’ service based economy. However, it is not just manufacturing industry that might move to countries like China or India.
Indeed, today, low skilled service sector jobs such as call centres are migrating to India, where not only are costs lower than in the UK, but economies of scale are available for global companies that increase the opportunity.
In addition to lower cost, call centre operators in India are often highly motivated graduates with intelligence and education. This compares with less well educated staff that populate some UK call centres that we experience in our daily lives. It is also clear that staff in India are comfortable, not only with the English language but are also able to cope with idiomatic and colloquial variations.
It is increasingly possible to get staff trained in continental European languages or Japanese. In addition to cost there is clearly an opportunity for quality of service in terms of accuracy, efficiency and also, importantly, attitude. Inevitably, this level of service also enables addition of further value added services to the same customers during each customer interaction.
It is clear that technology barriers are surmountable and as the opportunity becomes more evident, that rate of migration will increase despite attempts at protectionism such as those in some American states or among some trade unions in the UK.
Migration of higher added value services
Higher added value services such as software development might also migrate to countries such as India. In fact, there is a case for arguing that higher added value know-how services are easier to move to lower cost, but well educated, motivated and increasingly self confident populations.
There is clear evidence of successful examples of centres in India developing the most sophisticated software applications. Some of these are part of global high technology companies but equally these are examples of Indian companies competing in complex applications software. These companies are also offering services in developing embedded software and CNC programming.
The other area of potential competition is in research. Both India and China have large and growing populations of capable scientists and engineers and some global companies have set up research and development centres in those countries. If successful, these will show the way to more migration of sophisticated activities to lower cost countries.
There are clearly some services, such as restaurants or hairdressing that will always be local. This is also true for many complex and high value services such as sophisticated and interactive legal or financial services. However there are many services, low and high value added, that can move in the future, arguably with lower physical barriers to entry than manufacturing industry.
How BOC Edwards has used the UK’s competitive advantage
There is however an area of enterprise where the UK has competitive advantage and where the UK`s blend of scientific talent and tradition, flexible and skilled labour, and good industrial infrastructure make it an excellent home for high value, complex manufacturing operations where close alliance between design and manufacturing is paramount.
The UK has always had an excellent tradition of scientific endeavour. Our research centres are still among the best in the world and we regularly turn out scientists and engineers who are as good as any. The UK also has a highly skilled and educated workforce, albeit in decreasing numbers, that can utilise complex machinery to its fullest extent in manufacturing activities.
In manufacturing operations where rapid change is required together with a high level of scientific skill as well as manufacturing know-how, the UK continues to have the ability to compete effectively.
BOC Edwards is one of the few examples of a globally competitive business with substantial manufacturing operations in the UK. With additional manufacturing operations in Eastern and Western Europe, USA, Japan, China, Korea, India and Brazil, the company is in a good position to compare the merits of manufacturing in different countries and believe the UK offers some significant competitive advantages.
It is critical to have a well defined manufacturing strategy within the context of the wider business strategy. And then to follow through with sustained investment in manufacturing management and a high quality workforce, as well as in systems, plant and equipment over many years to achieve success. Without the context of a successful business strategy, starting with customer needs, market dynamics and associated practices such as good design for manufacturing, it is difficult for manufacturing companies to be successful.
The business environment in recent times has tended to put excessive focus and premiums on short-term results and instant gratification. In contrast, the approach outlined here seeks to create sustainable value over a long period of time and, I believe, ultimately creates the greatest value for shareholders, customers and employees as well as the national economy.
Reorganisation of manufacturing
BOC Edwards is an example of a mature UK business that made the transition to become globally competitive in a fast moving, high technology environment with international competitors and customers, including most of the leading electronics and semiconductor manufacturers.
Starting life as Edwards High Vacuum in 1919, the company became part of The BOC Group plc in the sixties. Not unlike some other UK manufacturers, BOC Edwards had a reputation for good products, although not well supported in the past, by good business leadership or manufacturing capability.
Under renewed business leadership in the early eighties, the main manufacturing operations were reorganised into manufacturing cells well ahead of so called ‘best practice’ at the time. Recognising the insidious effects of complexity, the company opted for operational simplicity as the watchword at a time when ‘best practice’ was manufacturing resources planning (MRP) and attempts at finite capacity scheduling.
BOC Edwards invested in advanced flexible machine tools capable of completing parts in one setting to minimise lead times and simplify logistics.
Instead of outsourcing electronics manufacturing wholesale, the company chose to make low volume, complex surface mounted printed circuit boards on sophisticated machines that minimised change over times and operator attendance.
Workforce skills and flexibility
A critical emphasis was placed on skilled and flexible employees who could progress with new technology as it became available. Management was based on active presence on the shop floor and an intimate knowledge of the detail of manufacturing operations. They were supported by manufacturing engineers who were required to be the ‘best’ machine operators as well as capable engineers.
There is no substitute for detailed knowledge, control and continuous improvement of manufacturing activities. Focus needs to be unrelenting and sustained.
In an industry where demand fluctuates hugely and globally, reliance on accurate demand forecasts was avoided. Instead, a ‘Rapid Response’ manufacturing strategy aimed at response within customer expectations was adopted as the core strategy, within the context of the business strategy aimed at market leadership in semiconductor vacuum pumping.
Our success has depended on a broad range of know-how, developed over time and applied rigorously. While computer based information systems play an important part in managing this know-how, they need to be complemented by detailed understanding of the way processes and systems operate.
Our combination of relatively low volumes and high variety as well as high technology products and processes and global reach place a substantial premium on know-how. This environment is the same for our competitors and our success depends on our ability to be better at managing these parameters and creating value for our customers.
The resulting growth
BOC Edwards grew from number four in the industry in the early eighties to market leader within a decade, despite competing with Japanese manufacturers with domestic markets to rely on for base business. During the same decade, the UK, despite inventing some of the key technologies involved, could only manage semiconductor plants that were subsidiaries of Japanese and US companies, installed in the boom years with subsidy support only to disappear during the downturns.
Given BOC Edwards’ reliance on the semiconductor market, with its renowned peaks and troughs, a flexible workforce is essential. We manage our manpower levels prudently to reflect the unpredictability of the market we serve.
Outsourcing – a strategy
From a manufacturing perspective, it makes sense to outsource the production of certain components and sub-assemblies to external suppliers, who in effect become a shared resource for a group of large manufacturers – a mutually beneficial solution.
Competitive challenges continue to develop, with the emergence of Asia as both manufacturing powerhouse and future market place for many products and services. With labour cost ratios of 5:1, countries such as China and India offer significant labour cost advantage over manufacturing in the UK.
Labour costs are only one element in the productivity equation. Equally important are the overall supply chain, technical support and infrastructure, automation opportunities and proximity to design and the market. Often, these factors mean that lower labour costs do not automatically correlate to higher cost effectiveness.
Consequently, it would be wrong to present outsourcing to lower cost economies as a holistic solution. In my view, the UK possesses a unique blend of scientific and engineering skills particularly suited to complex, high value manufactured products such as those produced by BOC Edwards.
This is especially true in an environment where customer demand is highly variable and design changes can evolve rapidly, making a close alliance between design and manufacturing paramount. In this environment, good judgment is required on those aspects that may be outsourced to lower cost economies and others that are best served by UK manufacturing.
An innovative approach adopted by BOC Edwards is to involve UK suppliers in providing design for manufacture capabilities and to manage outsourcing to low cost economies, thereby achieving the optimal blend of UK technical capability and Asian or East European costs.
Another example of judicious use of lower cost economies in BOC Edwards is our approach of manufacturing certain standard, relatively ‘low-tech’ vacuum products in the Czech Republic, whereas our value-added systems engineering expertise and applications knowledge within key markets such as seawater de-aeration and petrochemical refining remain resolutely in the UK. The net effect is to retain the core competencies that differentiate our products in the UK and balance that with outsourcing and overseas manufacturing of commodity items.
We live in an environment that is truly competitive on a global scale. Our customers operate globally. On a continuous basis, consumer purchases of computers at Fry’s in the San Francisco Bay area or a computer store in London affect production of computers and sub-assemblies in Taiwan. Motherboard production in Taiwan or China changes and in turn affects semiconductor device production levels at an Intel plant in the USA, Ireland or Israel as well as memory plants in Korea or elsewhere.
Out of these changes come demand for our products that we may service from plants in the UK, US, Japan or Asia. Our competition may be Japanese, European or Asian.
Our customers continually demand more for less and, in a globally competitive business, they can get this from somebody else if we do not deliver. We do not have a comfortable domestic market protected by regulations, economic or political barriers to entry. Our only competitive advantage is our ability to use our collective capabilities to satisfy our customers. On the other hand success in our business generates excellent returns for our shareholders and security and rewards for our people.
The key factors for success
As we have seen earlier, the key ingredient for success in achieving continuing improvements in productivity is effective management. Much of this is in our hands. However, without a supply of high quality graduates entering manufacturing industry and gaining appropriate experience, it is increasingly difficult to find and train effective manufacturing management. If there is one area where government can help, it is to help create an environment where a career in manufacturing is seen as attractive, financially and socially.
The second ingredient for a successful manufacturing operation is a skilled and flexible core workforce supplemented by temporary staff to help cover the peaks and troughs of customer demand. It is crucial that modern apprenticeships recognise the skills and capabilities needed and that these are made attractive to the right people.
Our operating environment requires flexible working. With core workers this will involve various skilled and flexible working practices and we will continue to need temporary workers to cover the peaks in demand. Increasing regulation is making this difficult and we need to ensure a regulatory environment where an effective and flexible temporary and core workforce can be operated while making sure people are treated fairly and honestly within the context of business needs.
The machine tool industry in the UK has been weak for a long time. Worryingly, as UK manufacturing diminishes, importers of high quality Japanese or German equipment will find it difficult to attract and support appropriate applications staff who can help customers use such equipment effectively. An associated issue in this regard is the number of high quality local subcontractors and tool makers still surviving.
An effective manufacturing operation requires competent suppliers who can form a key part of the overall supply chain. There is limited availability of high quality suppliers in the UK, particularly for critical technologies such as drives, controls and high technology castings.
Manufacturing industry will continue to be an integral and important part of the UK economy in the future and the country has some real competitive advantages in its favour. However, these advantages are eroding continuously as manufacturing industry in the UK diminishes in quality and quantity and global competition increases. For successful and productive manufacturing industry, it is crucial to ensure an effective manufacturing strategy within the context of the wider business strategy and then to follow through with sustained investment in manufacturing management, a high quality workforce and appropriate systems, plant and equipment over many years. However, it is difficult for individual businesses to pursue these strategies in isolation. Availability of capable management, skilled and flexible workers and an appropriate regulatory and financial environment are essential ingredients.
A successful manufacturing industry is an engine for creation of sustained value. In an environment where investor focus appears to be on short term value, it is critical that the financial community understand the sustained value creation potential of a UK manufacturing industry. Only through effective communication of their strategies for value creation can manufacturing companies achieve the longer view required for sustained success.
Priorities for action
I believe that UK plc is capable of sustaining competitive advantage in manufacturing. We still have a wealth of engineering talent and a few UK companies demonstrate that we can exploit that talent within the context of commercial acumen and a readiness to embrace change. So, my priorities for action are shown here. Manufacturing industry, especially in complex, sophisticated and high technology sectors that place a premium on our scientific and engineering know-how, skilled workforce and developed infrastructure remains a great opportunity for UK plc. However, without effective and cohesive action from government, business and the trade unions, UK manufacturers are likely to disappear over time, leading to further hollowing out of the UK economy and threatening the future prosperity of our country.
If there is one area where government can help, it is to help create an environment where a career in manufacturing is seen as attractive, financially and socially.
Chief Executive, BOC Edwards
Dr K.Rajagopal is chief executive of BOC Edwards and an executive director of The BOC Group plc. BOC Edwards is a global business, with sales of over £700m in 2002, involved in the manufacture and supply of vacuum, abatement and chemical dispense equipment, as well as gases, for semiconductor, scientific and industrial processes. It has manufacturing operations in the UK, Europe, USA and Asia. Dr. Rajagopal was awarded the IEE's Sir Eric Mensworth International Manufacturing Gold Medal for 2002, an annual award given to a person or group making an outstanding contribution to the advancement of manufacturing engineering technology or manufacturing management.