Deep uncertainty caused by Theresa May's drive to Brexit has left one in three manufacturing firms planning to shift some operations out of the UK, a damning report reveals today.
The study from consultancy firm KPMG found that China and India - two countries Ms May is desperate to secure greater trade with - are set to be the main beneficiaries from the potential exodus.
The risk of the UK failing to secure any sort of future trade deal with Europe - something Ms May has threatened if Parliament does not approve the deal she agrees with Brussels - was cited as a key potential fear.
It comes just weeks before Philip Hammond gives his Budget, with the Government under pressure to help struggling companies and amid reports of big firms like HSBC and PWC potentially shifting hundreds of jobs out of the UK.
The report said that Brexit had become a "game-changer" for UK manufacturing with two thirds of firms believing the instability from Brexit would be bad for the economy generally.
The report reads: "Our research ﬁnds that companies are considering a number of measures to plan for this potentially radical change. For example, a third are considering relocating aspects of their plant or operations to another country in order to boost productivity or reduce costs, with China and India the most attractive destinations for relocation.
"There is also a slight but notable increase in consideration of moving elements of the supply chain away from the UK."
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It went on: "While this might seem counter-intuitive at a time when the low pound value is encouraging greater investment into the UK, businesses with interconnected pan-European supply chains may be planning for the possibility that the UK exits the EU Customs Union without an EU-UK Free Trade Agreement in place."
Ms May angered politicians both in Europe and abroad when she gave her historic Lancaster House speech on Brexit, in which she said "no deal is better than a bad deal".
The report then predicted rising prices for consumers, highlighting that firms will deal with increasing costs by passing increased prices onto the customer.
Karen Briggs, the KPMG's head of Brexit, said: "Although some are concerned about exchange rates, labour pressures and higher indirect taxation, they are also taking a range of practical measures to prepare.
“These include partial relocation, supply chain management, increased business development, and new sources of financing."
The document did give the Government some credit for having promised a more joined-up industrial strategy to help meet new challenges, posed by Brexit, digitisation and the need for skills, but added that it is unclear if it will translate into "longer-term, concrete action”.
It also found two out of five firms were undeterred by the referendum vote and did not believe that Brexit will make it harder to recruit staff.
But political opponents slammed the Government's approach to Brexit. Shadow international trade secretary Barry Gardiner said: "The Government keeps telling us that leaving the EU is good for the UK. So it is difficult for them to explain why so many of our key businesses appear to be leaving.
"These are British jobs that are being exported and UK economic growth that is being lost.
"People are keen to understand what are the alternative facts that Theresa May knows, but British business is so unaware of."
Tim Farron, the Liberal Democrat leader, called the research a “hammerblow” to Theresa May, urging her to “wake up” to the threat to the British economy.
“More businesses are admitting they are looking overseas. This, I believe, is because businesses want to keep their access to the Single Market,” he said.
“The Government's ‘hard Brexit’ is now threatening jobs and investment in Britain. The Government needs to wake up and act before it is too late.”
Liberal Democrats party leader Tim Farron (Getty)
Economists remain gloomy about the prospects for Brexit, despite the robust performance of the British economy since last June.
Growth will slow markedly in 2017, household incomes will be squeezed by higher inflation and businesses will hold back on investment decisions, according to the majority of economists in an annual Financial Times survey.
The UK is thought to have been one of the fastest-growing advanced economies in 2016.
But most of the 122 economists who responded now expected growth to slow - from about 2.1 per cent in 2016 to no more than 1.5 per cent in 2017.Reuse content
When one reads about these working conditions — 12-16 hour shifts, pay of ~$1 per hour or less, dormitories with 15 beds in 12x12 rooms — the obvious assumption is that it's all about money:
Greedy manufacturers want to make bigger profits, so they make their products in places with labor practices that would be illegal in America.
And money is certainly part of it.
But an amazing new article by Charles Duhigg and Keith Bradsher of the New York Times reveals that there's a lot more to it than that.
The article illustrates just how big a challenge the U.S. faces in trying stop the "hollowing out" process that has sent middle-class jobs overseas — and, with it, the extreme inequality that has developed in recent years.
The reason Apple makes iPhones and iPads in China, the article shows, is not just about money.
Manufacturing an iPhone in the United States would cost about $65 more than manufacturing it in China, where it costs an estimated $8. This additional $65 would dent the profit Apple makes on each iPhone, but it wouldn't eliminate it. (The iPhone average selling price is about $600, and Apple's average gross margin is about 40%. So Apple's gross profit on each iPhone is probably in the neighborhood of $250.)
The real reasons Apple makes iPhones in China, therefore, are as follows:
- Most of the components of iPhones and iPads — the supply chain — are now manufactured in China, so assembling the phones half-a-world away would create huge logistical challenges. It would also reduce flexibility — the ability to switch easily from one component supplier or manufacturer to another.
- China's factories are now far bigger and more nimble than those in the United States. They can hire (and fire) tens of thousands of workers practically overnight. Because so many of the workers live on-site, they can also press them into service at a moment's notice. And they can change production practices and speeds extremely rapidly.
- China now has a far bigger supply of appropriately-qualified engineers than the U.S. does— folks with the technical skills necessary to build complex gadgets but not so credentialed that they cost too much.
- And, lastly, China's workforce is much hungrier and more frugal than many of their counterparts in the United States.
On this last point, Duhigg and Bradsher tell the story of Eric Saragoza, an engineer who began working in an Apple factory near Sacramento in 1995. The plant made Macs, and for a few years, Saragoza did well, earning $50,000 a year, getting married and having kids, and buying a house with a pool.
Soon, however, Apple started shipping jobs overseas, because the costs of manufacturing in Asia were so much lower. Importantly, these reduced costs weren't just about wages — they were about being closer to the supply chain and the willingness of the workforce to put in over-time.
Saragoza was soon asked to work 12-hour days and come in on Saturdays. But, understandably, he wanted to watch his kids play soccer on the weekends.
Saragoza's salary was too high for him to take an unskilled job. And he didn't have the experience and credentials necessary to move into senior management. In 2002, his job was eliminated. Apple, meanwhile, turned the Elk Grove plant into an AppleCare facility, with call-center employees making $12 an hour.
Recently, desperate for work, Saragoza took a job at an electronics temp firm. Assigned to the AppleCare plant, he was paid $10 an hour to test repaired iPads before they were sent back to customers. That job paid so little (and was presumably so depressing) that the now 48-year-old Saragoza quit and is looking for work again.
Meanwhile, in Shenzhen, a young project manager named Lina Lin coordinates the manufacture of Apple accessories for a company in the Apple ecosystem. She makes a bit less than Saragoza made a decade ago as an Apple engineer. She lives in an 1,100-square foot apartment with her husband, their in-laws, and their son. They save a quarter of their salaries every month.
There are lots of jobs in Shenzhen, Lin says.
So, yes, money is part of why all of our gadgets are built in China. But what started a couple of decades ago as a reach for efficiency has now resulted in the entire electronics-manufacturing ecosystem being lifted up and transferred to China.
Apple doesn't build iPhones in the United States, in other words, because there is no longer an ecosystem here to support that manufacturing. There's no supply chain, there aren't enough super-low-cost workers, and there are not enough mid-level engineers. And many Americans looking for work are still hoping for a return to jobs, salaries, and lifestyles that have simply disappeared.
This is a complex problem, and there's no easy solution. But it's a problem this country is going to have to fix. Or the massive middle class that once drove America's prosperity will just cease to exist.
Now go read Duhigg and Bradsher...
How The US Lost Out On iPhone Work >