How ‘reshoring’ could boost Northern Ireland’s economy

Posted on August 4, 2015 · Posted in Business Month

Trends move in one direction, but often then turn again. So it is with offshoring.

Back in the 1990s and early 2000s, many companies saw the opportunity to cut costs by transferring production away from the developed economies, to developing nations. Nowhere benefited more from this than China, with its low labour and other production costs. By the beginning of the 21st Century, a quarter of Western European manufacturing was produced offshore, while half of all US manufacturers offshored some production.

But things have changed. China is no longer as cheap as it was, with wages often rising at above the inflation rate of the West. When oil costs went up – before, more recently, going down again – much of the savings from lower wages were eaten by high logistical costs.

And then we had ‘just in time’ stock management systems adopted more widely. How could stock be managed effectively if it took weeks to receive ordered goods? And buyers were forced into making guesses about how fashions would change, many months ahead.

Move the clocks forward a few years and the trend has moved into reverse. Where we once had ‘offshoring’, now the focus is more on ‘reshoring’ and ‘nearshoring’. The prime example is manufacturers in the United States that have pulled production back from China to nearer countries, where it is quicker to bring goods to market, yet costs are still lower than within the US. Mexico, in particular, has benefited.

But even this is not the end of the story. The latest survey by AlixPartners of the ‘Reshoring/Nearshoring’ market has found that many US companies find even Mexico too far away. More manufacturers are now quoting rising labour costs, supply management challenges, shortages of skilled labour, quality control and regulatory and distribution problems as factors leading them to move even closer to home – within the US. That nearshoring movement has accelerated much faster because of cheap shale oil and it is one factor behind better than expected employment figures in recent months.

It is plausible that Northern Ireland could similarly benefit from the ‘nearshoring’ process, with UK companies pulling activities out of far away locations where they have insufficient control, over to Northern Ireland where costs are lower, yet it is easier to manage operations. In fact, this process has already begun.

Arkk Solutions is a London-based financial regulatory and compliance software company, which has just set-up a small operation in Belfast. The office will initially employ only 10 staff – but that is not the significant point. Rather, the significance lies in the fact that the company has opened the office in Belfast in place of one in India.

The company provides software services in the XBRL and iXBRL languages that are increasingly being used to tag, understand and report data, including for the filing of financial information for tax and regulatory purposes. There is an availability of skilled software engineers in Belfast to undertake the work, just as there is in India.

Arkk Solutions’ founder and CEO Richard Metcalfe explains the attraction of Northern Ireland. “We read in the press about a lot of firms moving to Belfast a couple of years ago and this seemed like an

interesting option for us,” he says. “We had started to have misgivings over our operations in India – costs were starting to rise whereas productivity wasn’t, so we needed to find a solution that would work well for the company.

“We hired someone in Belfast who we thought would be a great team lead, so strategically we had been considering the move for some time. With the support of Invest Northern Ireland who granted us £45,000 from their jobs fund we now have an office for 10 employees – seven currently hired – and we already think it isn’t big enough.

“Over recent years there has been vast investment in Northern Ireland, particularly in education and the technology sector. This has helped foster a spirit of entrepreneurship, IT innovation and product development – these are all things that complement Arkk Solutions and echo our rapid growth.

“Having our operations based within the same time zone as the majority of our clients allows us to be nimble and to be able to respond to our clients’ needs immediately. This, coupled with low office rents, labour costs that are lower than in many UK regions and the fact that the majority of our clients are based in the RoI, UK and mainland Europe makes the move to Belfast a low risk and very attractive proposition.”

Nor is Arkk alone. Last year mobile phone company EE – which is currently being bought by BT – reshored about a thousand call centre jobs from the Philippines. Around 250 of those jobs will be relocated to Londonderry.

Esmond Birnie, chief economist for accountants and consultants PwC in Northern Ireland, believes that this process of nearshoring could be an important economic trend. “There is potential,” he says. “A year ago, PwC published our economic outlook at a UK-wide level. We said that by the middle of the next decade, so in nine or ten years, nearshoring could potentially generate 100,000 to 200,000 extra jobs [in the UK] mainly in manufacturing, but also in business services.

“We see opportunities in textiles, clothing, computer and electronics manufacturing and in business services. We did not do any forecasting at a regional level, but I suppose Northern Ireland should get at least a pro rata share of that, so that would be 2,500 to 3,000 extra jobs by the middle of the next decade. But this is subject to Northern Ireland getting the policy right, as with so many other things in the economy.”

The prerequisites, suggests Birnie, include improving our transportation infrastructure, cutting our energy costs and ensuring that we have the right skills base. But our low labour costs and good digital infrastructure provide Northern Ireland with particular advantages in competing for nearshored jobs, he explains.

Many international companies that are ‘reshoring’ – bringing activities back, closer to home – have specific concerns driving their relocations, adds Birnie. These include fears of politically inspired disruptions and electricity supply anxieties. But logistics is another major worry. So Northern Ireland is in a weak situation in competing for nearshored activities if it cannot improve transport connectivity, including a wider range of air routes, he argues.

Despite this, the narrowing gap between wages in countries such as China and India with those of the UK, have in particular undermined the traditional offshoring business model, believes PwC. In any case, the firm explained in its reshoring report, the increased use of robotics and automation of traditionally manual activities make labour costs less significant in business planning now than in the past.

PwC points to a survey carried out in 2013 by the Manufacturing Advisory Service Barometer which found that 14% of businesses have already reshored some of their activities, with companies now more likely to ‘nearshore’ than to ‘offshore’. Northern Ireland just might be in line for a big bite of this new cake.