Hard-pressed manufacturers are falling under eastern influence on labour costs

02 July 2002

Hard-pressed manufacturers are falling under eastern influence on labour costs. Engineering companies with the energy to invest and find niches can survive, forecast Peter Marsh and Toby Shelley (Financial Times 02 July 02).

Engineering companies with the energy to invest and find niches can survive, forecast Peter Marsh and Toby Shelley

If you can't beat them, join them. Jim Doherty followed this adage by shutting his Birmingham factory, and transporting his 35 machine tools by truck to a new plant in Hungary to take advantage of cheaper labour costs.

The £2.5m move 1,000 miles east has paid off: Mr Doherty's parts manufacturing company, called Doherty Group, is now making money, while at the time of the change it was struggling.

Mr Doherty's unusual relocation to the site of a former supermarket in Oroshaza where it employs 90 people underlines the pressures on small UK manufacturers hit by increasing competition from low cost countries.

In an informal poll of 20 small engineering companies conducted by the Financial Times, half said imports from rivals in regions such as eastern Europe and southeast Asia were threatening their livelihoods.

Ken Ronson, managing director of MRT Castings, a company with 40 employees in Andover, Hampshire, is seeing an increasing threat from Chinese competitors that use equipment that his company cannot afford. "The strength of sterling is irrelevant," he says.

Paul Hunt, sales manager of LIC, an engineering contractor in Coventry, says: "We feel very vulnerable. In the past 12 months a lot of our work has gone as a result of customers replacing UK made parts with components produced in Mexico, China and Poland."

Companies such as LIC have been hit by the increasing sophistication of rivals in the low cost countries, which are helped by wage costs being 60 to 80 per cent lower, in the case of eastern Europe, or just a tenth of UK rates in some parts of Asia.

Also, to counter the strength of sterling, larger UK companies in sectors such as cars, construction equipment and general engineering are increasingly turning to overseas suppliers for components, bypassing their traditional supply base at home.

But the picture is by no means uniformly gloomy. In the FT's poll, the same number of companies said their business was good or improving, as said things were getting worse. The key, says Nigel Plaskett, managing director of East Sussex based SphericTrafalgar, is to invest in machinery and specialise in parts few others can make.

Spheric, which employs 65 people and has sales of £10m a year, produces precise balls used in bearings and other machinery. In some cases, they are less than a millimetre in diameter, and are shaped with an accuracy of 10 nanometres or billionths of a metre. The company's most expensive products cost £1,000.

Rowan Precision, of Birmingham, is this year exporting 15 per cent of its expected £2.5m sales up from zero exports a year ago on the back of a £500,000 investment in high tech machinery. "Because we can make parts more efficiently than a lot of competitors, even in South East Asia, we are going from strength to strength," says Martin Barker, a director.

Graham Porter, sales director of Currie & Warner, a Birmingham engineering contractor that is also reporting higher sales, says: 'The trick is to position yourself in higher value parts, where instead of having 200 competitors you have 20 to 30.'

Ironically, some companies are doing better mainly because their UK rivals have gone out of business. Mark Hull, sales director of Bird Stevens, a supplier of sheet metal in the West Midlands, says this is the reason why, for his company, "things are better" than a year ago. But overall, his industry was in a bad way".

Economists believe a muted recovery in engineering should begin later this year. Even so, the Engineering Employers' Federation believes 90,000 jobs will disappear on top of 70,000 last year. The FT's poll indicates, that assuming companies can summon up the energy to invest and find niches where competition is lower survival is not impossible.