Manufacturers looking to ‘reshore’ activity to UK against a backdrop of COVID-19 caution

Simon O’Neill, Office Managing Partner at EY in the Midlands. Picture by Simon Hadley.

A significant proportion of manufacturers are looking to ‘reshore’ activity to the UK against a backdrop of COVID-19 uncertainty and a shift in investor priorities, according to EY’s latest UK Attractiveness Survey, which tracks the UK’s appeal as a destination for foreign direct investment (FDI).

Nearly a third (32%) of the manufacturing businesses surveyed said they would be looking to ‘reshore’ activity to the UK.

The figures are the latest evidence of the economic impact of the COVID-19 pandemic, which has created uncertainty around business investment and prompted a re-think of investor priorities.

The survey of 220 non-UK investment decision makers also found that 43% of respondents are continuing with the UK investments they planned before the pandemic, down from 72% in April.

According to EY’s analysis, these figures would mean 30-45% fewer FDI projects in the UK in 2020 than the 1,109 projects recorded in 2019 – equivalent to a fall of between 333 and 499 projects.

Attractiveness in manufacturing remains stable

As well as businesses sharing their intention to reshore, a further 32% of respondents from the manufacturing sector said they intended to invest in the UK over the next 12 months. This is good news for the Midlands economy, where manufacturing is a key driver for the local economy.

The research shows the shifts are being driven by major changes in supply chain strategies, which have become more pressing as a result of the pandemic. Sixty-six percent of all respondents – and 98% of manufacturing respondents – say they plan to remodel their supply chains in the future.

A move to ‘regional’ supply chains is on the agenda for 32% of all respondents and 40% of manufacturing respondents. Thirty percent of respondents intend to reduce their reliance on a single source country, a figure which rises to 42% among manufacturers.

Simon O’Neill, Office Managing Partner at EY in the Midlands, says: “An updated industrial strategy should identify the UK’s support for manufacturing and supply chain onshoring, which has the potential to have a positive impact on Midlands-based manufacturers. COVID-19 may actually have stimulated investment activity in the manufacturing sector by accelerating technology adoption and supply chain redesign.

“Pre-pandemic, and as part of their preparedness for Brexit, many businesses were already reviewing supply chains. The challenges the pandemic has posed to extended global supply chains have made a rethink all the more important. Regionalisation, reducing dependence on one source of supply and reshoring are all driving this shift.

“UK manufacturing is already established as a global leader and the Midlands will have opportunities as companies look to secure resilience and pre-pandemic productivity levels with a multi-location, regionalised approach to their global supply chain.”

The wider UK picture

The report also found that the proportion of overseas companies planning to invest in the UK in the next 12 months has fallen to 25% from a ten-year high of 31% in April.

Over one-third of respondents (35%) said they had scaled back their UK FDI plans and 17% have paused them. However, just 5% have cancelled UK plans entirely and 21% said they had increased UK investment in light of COVID-19 (up from 5% in April).

The UK’s longer-term outlook has improved, with 53% of respondents saying UK attractiveness will increase over the next three years compared to 34% in April and 26% in 2019.

In the latest survey, respondents felt the digital sector would be the biggest driver of future UK growth (50% of respondents, up from 26% of respondents surveyed in 2019), followed by health and wellbeing (36%, up from 15%), real estate and construction (31%, up from 10%), the consumer sector (19%, up from 12%), and the automotive sector (18%, up from 12%).

And, while down from April’s decade-high, the proportion of respondents planning UK investments in the next year (25%) is still at the second highest level since 2016.

Alison Kay, EY UK&I Managing Partner for Client Service, says: “The UK’s attractiveness as a destination for FDI remains comparatively strong despite COVID-19. Overall, the outlook for the UK looks stronger than that for Europe. With strengths in key areas like digital technology, Research & Development, and manufacturing, there is more than a solid base for the UK to build a future strategy on. These factors, combined with a growing interest in ‘reshoring’, present post-pandemic opportunities for the UK to meet investor needs and accelerate its levelling-up agenda.

“However, the UK will need to keep pace with the changing drivers of investment. Since the start of the year, COVID-19 has seen investors put an increasing premium on a country having measures in place to prevent a future crisis and its level of success in dealing with the pandemic.”

Investor appetites changing

EY’s report reveals the pandemic has prompted shifts in what matters to investors and in the types of project attracting investment, with 61% of survey respondents saying the changing economic model in major city centres will become an important part of their future investment strategy.

COVID-19 has also required investors to re-prioritise their investment criteria. Thirty-six per cent of respondents say their most important investment criteria is a country having measures in place to prevent a future crisis (up from 20% in the summer), followed by 27% prioritising a country’s success in tackling COVID-19 (up from 23%). Factors such as the quality of labour (down from 25% to 19%) and the labour supply (down from 21% to 17%) have become less important.

Simon concluded: “The pandemic has been a significant driver in boosting the importance of technology adoption and appetite for investment in health and wellbeing. The Government’s ambitious infrastructure plans also seem to have prompted interest in real estate and construction FDI. The decline in appeal of business services reflects the fact that this is a mature market with fewer new investment opportunities.

“It’s clear that investors will need to be convinced that a country can cope with future shocks before investing.”