Startups should take note about manufacturing

The UK government’s recent five-year industrial policy announcement might give the impression we are moving towards a pre-dominantly service based economy. Link this with the news of the impending demise of the video recorder as a major high-street electrical retailer said it would no longer sell them since DVD players were now massively oustripping sales of VCRs, and we see a trend in the commoditisation of mass comsumer products.

The link between both these developments is manufacturing. The DTI’s press release states, “Britain is winning in the global knowledge economy, but we need to do more to meet the challenge of rising economies such as China and India. We need greater exploitation of science and technology and a step-change in innovation in our economy, and our workplaces.”

The low cost consumer products made in the far east helping to speed up the obsoletion of long-established goods like the VCR. All reports suggest that manufacturing is moving to the far east and that the only way we can compete in the global economy is to build upon our research and knowledge base.

But is it possible to have a high-growth economy with only a service base. This is the question which was discussed as a hot topic at the recent Electronic Network Forum, chaired by The Chilli.

When something like a DVD player, VCR, mobile phone, PC or digital camera becomes a commodity the only thing that matters is price, and it is inevitable that companies are forced to look at the lowest cost manufacturing base – hence the smarter companies have outsourced this part of the process to Asia. In the technology sector, the traditional manufacturing companies that some readers might be familiar with – such as Plessey, Ferranti, and Marconi – did not grasp the potential of lowering their manufacturing cost base, hence their demise.

However, before a product becomes a mass commodity item, it is driven by technology innovation and requires a very close proximity to manufacturing. The products are usually fairly complex in design and require sophisticated manufacturing flow and equipment and this is where European manufacturing growth will certainly come from.

For both the ‘niche’ product players and the mass market consumer goods manufacturers, it’s also easy to forget that a successful business comprises much more than just manufacturing; other components of the whole management process include research and development, sales, marketing, finance, human resources and so on and these activities cannot be easily transported or exported easily.

This is where the strength of local support is important. For example, the complex PCB manufacturer might need to be close to the local R & D team in order to meet strict design tolerances or specifications, and to allow for several iterations of the design if needed. Also, sales and marketing needs to be close to the customer, not somewhere that’s in a completely different time zone. How many times have we heard business leaders of global companies talk about being ‘global but local’?

The bottom line is that we should not take it as read that UK manufacturing is dead. There are plenty of opportunities for local manufacturing. The key is to keep innovating for new products and markets. This is best coming from new startups, as they are not married to their legacy systems and processes.

The other criteria is knowing when is the right time to to outsource, and keep feeding the more complex products to the local manufacturing base. There are some products that are ideally suited for local manufacturing, such as high value, complex and low quantity in small batches.

At the end of the day it boils down to knowing one’s market and choosing the best place for manufacturing (not necessarily the lowest cost) and keeping the market share, as opposed to a strategy based on giving up market share when margins take a hit.

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