Offshoring

At the end of last month The Economist’s Debate on offshoring and outsourcing ended with the motion “Do multinational corporations have a duty to maintain a strong presence in their home countries?” winning by 54% to 46%. (The Economist Debate winners seem to range from just 51% to as much as 61%). So I was interested to read in The Times (£) on 26 February an article by Sir James Dyson, (who has provided the topic for posts here before, most recently in November 2012), Why we invent in Britain, but build abroad. In it he gives some background on his company having just opened a manufacturing plant in Singapore:

For the past 15 years Dyson’s highly skilled engineers have been developing a tiny revolution in our laboratories. It is a new motor a third the size of a traditional one, but which can spin 100,000 times a minute — five times faster than a Formula One engine. Making 6,000 adjustments a second for optimal performance, it can supercharge prosaic machines.  

… Our new motor performs like no other — and because we are developing it in our own laboratories, with our own people, no one else can get their hands on it (despite trying). This is good for Dyson, but also for Britain. The intellectual property is owned here and all the profits will flow back to the UK, where we pay more than 85 per cent of our global tax. But last week Dyson opened a new £150 million motor manufacturing facility in Singapore. Why?  

… Building a complex motor with minute tolerances requires the precision of a fully automated production line. The highly skilled workforce, the tax incentives and the nearby supply chain make Singapore appealing for us. We will make four million motors in 2013, increasing our production capacity by 100 per cent to meet rising demand, particularly from Japan and America. We source the motor’s 22 components from across Asia, so it makes little sense to ship them to Britain, only to export the finished motors back again. So Singapore is the obvious place for production.

Presumably many of these motors will be fed into the production line of the Dyson factories in Malaysia to which manufacturing was transferred from Malmesbury ten years ago. I hope that his confidence that his intellectual property will be safe in Singapore is not misplaced. The FT (£) recently touched on the island state’s place at the forefront of technology. Dyson would no doubt argue that he is committed to a “strong presence in [his] home country” because:

At Dyson we invest heavily in our ideas and develop all of our technology in Britain: all our research takes place in Malmesbury, where we employ 850 world-class design engineers and scientists — about a third of them recent graduates.

He thinks:

Britain should focus on generating ideas and patenting them, that is the high-value part of the process that will earn our country a competitive advantage. We must focus on being the best problem-solvers in the world, developing technology and then exporting it.  

Thankfully, Britain is moving in the right direction and there is a renewed desire to develop technology on our shores. After my Ingenious Britain report, David Cameron increased the research and development tax credit — which supports companies that take risks and invest in developing ideas for the future — to 225 per cent. As a result, patent applications rose 29 per cent in 2011 and investors have reacted positively. But we still have a deficit of 60,000 engineers.

which is a big “But”. What worries me about Dyson’s model for Britain is that it ignores the reality of there being a considerable spread in human abilities. Even with a perfect education system which develops the abilities of individuals to the full, not everyone is cut out for the rigours of STEM education. The validity of the IQ-based analysis of educational achievement used by Charles Murray is open to argument but most people would agree that only a minority of the population have the ability to function as “world class design engineers and scientists” – assuming men and women with such talents don’t chose other career paths.

So what do the lesser mortals do? The jobs at Dyson Malmesbury up to 2003 would have made use of more people with a broader range of abilities, skilled and semi-skilled, for manufacturing than are now needed for research. The most skilled would presumably have found similar work fairly easily – for example, Renishaw plc, not far from Malmesbury, undertakes manufacturing of very high technology. But in general employment opportunities for those not capable of more than semi-skilled work are probably less attractive and are poorly rewarded, as in fulfilment centres and retail.

And this seems to be the residual problem with offshoring the manufacturing base for a lot of consumer products, although the commercial logic of global markets and supply chains is unarguable. I think that the societal advantages which the UK and other advanced economies once possessed of a wide range of employment skill levels which accommodated the spectrum of ability in their citizens are being transferred elsewhere. Conversely, the recipient countries are unlikely to be content for long with just operating production lines. To quote from Dyson’s Ingenious Britain report (page 26):

Students from outside the UK now make up more than 70% of all engineering and technology postgraduates. Although their numbers have risen by almost 20% in the last five years, the growth has almost entirely been made up of overseas students. In other words, of the additional 3,825 students in postgraduate engineering education in 2008, only 70 came from the UK.

He doesn’t say how many of the 3,750 overseas postgrads came from Singapore or Malaysia!