Opportunity knocks for UK manufacturers

on May 17, 2013

Nick Moules reports on an eye-opening seminar earlier this week that focused on how the growth of the Asian middle class can fuel a manufacturing revival in the UK.

Time was, several years ago where absolutely everything plastic seemed to have “Made in China” etched on to it.

China’s low wages and unlimited workforce made it the go-to destination for UK manufacturers struggling to keep up with rising wages and social aspiration in the UK. Even factoring in the costs of shipping goods back halfway around the world made commercial sense. I always wondered how that was ever possible, but wages really were that low. In 1990, 60 per cent of China’s population was defined as ‘poor’ by the World Bank (living on $1.25 a day). In the next 15 years, this reduced to just 16 per cent.

According to Chris Hills, Chief Investment Officer at Investec Wealth & Investment, China’s wage inflation is set to grow by 13 per cent this year. That’s on top of a 14 per cent rise in 2012, and 13 per cent rises in the two preceding years.

Importers in Europe simply can’t pass on these costs to a society that is experiencing minimal and even negative growth.

That might be bad news for one business model, but it logically opens another.

As is widely reported, Asia has a rapidly growing middle class (expected to be six times what it is today by 2030) who are becoming exposed to consumerism in the same way Western society is accustomed to. They want access to branded consumer goods and, as anyone who’s been to Bangkok to buy imitation designer clothes will know, they’ll copy them if they can’t get the real thing.

But as one of the presenters, James Henderson of Henderson Global Partners pointed out: “They (China and other growing Asian nations) can copy Burberry coats, but there are some things they will not be able to replicate, like the Rolls Royce Trent engine.”

Why is the Trent engine so important? You have to ask yourself what an aspiring middle class wants to do. It will want to travel for pleasure and aspire to own goods of status, like cars. Henderson believes the Trent Engine, designed and manufactured by Rolls Royce, will be the engine that transports the growing middle class across the globe, while UK car manufacturing was up by 16% in April, fuelled partly by a rise in demand from non-European markets.

Henderson has managed a fund for over 20 years that has invested a third of its capital into industrials and his view is that the role of manufacturer and consumer, for so long East to West is turning round to be West to East.

There appears to be an unmissable opportunity for high quality manufacturing companies with a global export view, like Rolls Royce, to capitalise on a combination of this trend and a relatively weak pound to spearhead a new era in exports. 

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