Britain’s manufacturers are continuing to reap the dividends of moving into higher value production, despite the continued growth of low cost, emerging markets.

This is one of the key conclusions of a new survey published by the manufacturers’ organisation EEF and accountants and business advisers BDO Stoy Hayward. 

While the competitive challenges posed by low cost regions have not diminished, fewer UK manufacturers are reporting a significant impact from price competition in key markets, compared with 2004.

Furthermore, whilst many low cost competitors, such as China, have been striving to become more innovative, only two fifths of companies saw higher value added goods from competitors as posing a threat and only 3 per cent a significant threat, down from half and 12 per cent respectively in 2004.

The challenge from low cost economies is firmly on companies’ radar and they are adopting a range of strategies including entering niche markets, increasing innovation and service delivery.

This means that manufacturers are competing less on price and more on quality and customer service as a result.

Range of strategies 

EEF chief economist Steve Radley said that the survey painted a positive picture of how manufacturing companies have adapted to the challenge of the global environment.

“Instead of competing on price alone they are adopting a range of strategies to take advantage of emerging markets. While there are many other challenges on the horizon, manufacturers look well-placed to rise to them,” Radley added.

Tom Lawton, head of manufacturing at BDO Stoy Hayward, said that the competition from emerging markets was likely to increase as these new economies moved further up the value chain.

He explained that China and India posed an increasing challenge as they develop the low cost models seen to date and begin to add innovation, research and increasing quality to the mix.

Outsource to lower cost economies 

Lawton warned, however, that the threat from established economies such as Germany and the US must not be overlooked.

“Like the UK, they are associated with quality and have access to sizeable home markets with the ability to tap into overseas markets. What’s more, manufacturers in these countries can also outsource to lower cost economies to shrink their cost base and boost their competitiveness,” he added.

The survey shows that manufacturers will continue to look overseas to reduce costs as part of their strategy.

Seventy per cent of companies who already have overseas operations expect this proportion to increase within the next five years and one third of companies with no production currently outside the UK expect this to change by 2012.

The survey also shows this will not lead to an exodus of manufacturing, however, with the UK remaining the centre for high value innovative activity.

Three quarters of companies expect the UK to be the primary location of research and development in five years’ time with only 3 per cent of companies locating production outside the UK to access new technologies.

This compares with two thirds of companies using overseas production to reduce labour costs.

Lawton pointed out that the UK is still the home of innovation for manufacturers, with 90 per cent of companies carrying out in some form here.

“Moreover, there is still a strong demand for the low volume local niche products that are required on a just in time basis by UK customers. This has helped maintain a number of smaller companies despite the turmoil of global competition,” he concluded.

Exploiting opportunities 

The survey shows the changing nature of competitive threats, but also the significant increase in companies identifying emerging markets as opportunities.

China and Eastern Europe remain perceived as major threats, at 25 per cent and 20 per cent in 2002 compared to approximately 80 per cent for both in 2007.

There has been a marked increase in the number of companies looking to take advantage of the rapid growth in Eastern Europe (68 per cent), China (58 per cent) and the Middle East, however, where a quarter of firms are already exploiting opportunities and a further firth expect to do so within five years.

India and Russia are also viewed more as an opportunity than a threat with over a fifth of companies seeing potential in both regions and a further third seeking opportunities within five years.

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