Taking Back Control?

By Alexei Garan

Supply chains for UK businesses are under extraordinary pressure thanks to the impact of COVID, the war in Ukraine, and geopolitical tensions over Taiwan. Regardless of how geopolitical tensions play out, it is now time for SMEs (and businesses in general) in the UK and the rest of Western Europe to re-establish supply chains on their own shores in order to future-proof their interests.

The UK was the first nation in the world to industrialise. By the mid-nineteenth century, seismic, ground-breaking advances — from Arkwright’s water-powered cotton spinning mill and Watt’s steam engine, to the macadamisation of roads and the passenger railway — had powered the country far ahead of any of its international rivals.

The opportunities afforded by this economic revolution also had a transformative effect on its people. In the mid-eighteenth century, about 15 per cent of the English population lived in urban areas. By 1900, following the extraordinary expansion of various mass-employment industries, it was 85 per cent.

The eventual twentieth-century deindustrialisation of the UK not only involved the decline of heavy industries such as coal mining, shipbuilding, and steel manufacturing, it also saw a vast number of supporting supply-chain operations — and the highly skilled, well-paid jobs that went with them — offshored overseas. There was also the debilitating socioeconomic impact; the personal pride imparted by skilled employment in these cutting-edge industries could never be adequately replaced by an eight-hour shift in the local call centre.

Nevertheless, there are signs that reindustrialisation, “reshoring”, “backshoring” (call it what you will) of many of these operations back to the UK or the European nations on our doorstep is finally starting to take place. Recent research by Make UK¹ suggests that in response to the traumatic geopolitical climate, which has compounded the problems caused by the COVID pandemic, more than a third of UK manufacturers have increased the number of suppliers they use. However, most importantly, more than three-quarters of these companies are increasing their use of UK suppliers.

More strikingly, according to a survey from the Chartered Institute of Procurement & Supply (CIPS)², 40 per cent of UK organisations have switched at least one international supplier to a domestic alternative in the last year. Of those who had moved to a UK supplier, 70 per cent cited domestic suppliers as a more reliable source of supply as the reason for the change, while 59 per cent referenced shorter lead times.

So why has this started to happen? The supply chain crisis instigated by COVID and cemented by Russian troops in Ukraine only tells part of the story. One interesting factor is the rise in wages across Asia. What were once the hotbeds of cheap, obedient labour are now home to wage inflation and an aspirational populace who want to be paid more for their efforts. This “cheap labour” advantage, once the key reason for deindustrialisation across the West, has ebbed away, so much so that labour is now cheaper in Croatia than it is in China.

The Case for Reindustrialisation

There are two ways for UK SMEs to achieve the goal of resecuring their supply chain and, in effect, reindustrialising. Firstly, you can do it organically by investing in UK factories or facilities in countries within easy reach. Or you can do it by acquiring suppliers, thus ensuring that you will be the priority in terms of supply.

Not only does reindustrialisation provide you with the opportunity to exert greater control over your supply chain while affording the chance to better control quality, etc., it provides SMEs with much greater agility. Whereas larger corporations will take years to extricate themselves from their vast overseas operations, SMEs can use this opportunity as a huge competitive advantage, supplying customers with goods that are languishing in the vast Eastern warehouses of their monolith competitors.

Perhaps of highest social importance, reindustrialisation can also be hugely positive for high-quality, well-paid UK jobs, which, in turn, could have an untold positive impact on wider society as a whole. Bringing jobs, assets, and resources back home could increase GDP and bolster the economy, enabling improvements to major infrastructure projects and public services, not to mention the Chancellor’s tax-take.

Challenges

In terms of challenges, the choice of jurisdiction will be a key hurdle to overcome. As a business owner, you may fancy the labour costs associated with Croatia, but do you know how to do business there? Are you familiar with local regulations? There are many factors to take into account – legal frameworks, ease of export-import transportation, proximity/supply of raw materials and energy, tax regimes, subsidies, local incentives such as free ports/free economic zones, etc., all of which need to be weighed up.

There will also be significant challenges closer to home. It is a wonderful – and noble – idea to regenerate parts of the UK that suffer from high levels of unemployment (particularly those areas of Wales and the North of England that were the driving force behind the country’s prosperity). To develop business in these areas, however, any company could face significant challenges in terms of finding qualified and skilled workers as well as the operational and production personnel required to execute such strategies.

Finding the Money

So, in the current climate, where do you find the funding for any attempt at reindustrialisation? Well, the funding market for the UK’s SMEs has changed dramatically since the financial crisis of 2008. The global meltdown heralded a more cautious approach from the traditional lenders, with product ranges, financing, and even the number of support personnel for SME customers all shrinking considerably. Whereas, in days gone by, an SME could work with their local bank manager on a 15-year loan agreement that would provide the business with a certain amount of strategic stability, now banks are only willing to provide terms for typically three years and five years at most.

One positive is that this caution has led to the rise of an alternative lending market that is now valued at over £6bn³, thanks to a rapid growth in the number of providers, product ranges, and appetite for funding. For the country’s 5.94 million SMEs, however, this myriad of options for funding growth plans, acquisitions, or management buyouts is a bewildering minefield. It is therefore hardly surprising that they are either still ignoring viable lending options from the alternative market if their local bank manager says no, sometimes spending hundreds of hours ploughing through the options, or simply tying themselves to the wrong deal with damaging consequences.

However, it is necessarily the alternative lending market that is key to funding SME reindustrialisation initiatives, because these lenders are capable of analysing forward-looking projections vs banks that tend to require tangible asset security for their loans.

Who Should Reindustrialise?

The decision to reindustrialise is a difficult one to make. Some industries will be naturally more suited to reshoring by virtue of locally available natural resources and skilled labour. Medium-to-large companies will face significant logistical challenges by virtue of their scale and complexity. However, smaller and less complex enterprises that are no longer reliant on overseas materials or labour could generate a sustainable competitive advantage by bringing operations back home.

About the Author

Alexei Garan is a funding specialist and leads Shaw & Co.’s Business Funding team. He provides funding advice to UK SME clients across a range of sectors including energy & natural resources, food & drink, professional services, and public sector.  His typical mandates include all types of growth funding, acquisition, and MBI or MBO financing, with facilities ranging from £2m to £z00m.

References

1. https://www.makeuk.org/
2. https://www.cips.org/
3. Data Source https://integer-advisors.com/news/demystifying-the-uk-specialist-lending-markets/