There is a strong case for contract manufacturing (CM) to be recognised as an industrial sector in its own right. It has quite different needs from the dedicated manufacturing function in companies that produce for their own markets. But it is currently lumped in with all manufacturing in terms of national statistics and planning.

It needs to stand out on its own as commodity manufacturing becomes the bedouin of the industrial world, always on the move chasing ever lower overheads. That means developed countries are losing their local production skills. But if a country is strong in design, innovation, prototyping, special services and other added-value activities, then CM could make good the loss.
If the CM industry did speak with a unified voice, it could lobby for an improved business environment which met its special needs. Better tax breaks on investment, for example; direct encouragement for innovation; help with global trade; and training. That would benefit companies individually and national economies as a whole. But there is a long way to go before that can happen.
Firstly, CM has to define itself and its needs so it can properly formulate its arguments. There are no figures for the contribution that CM makes to the economy - neither in the UK's Department of Trade and Industry nor the Office for National Statistics, for example. And there are still a number of people who do not understand its full role.
Then, it needs dedicated representation. Currently, there is no trade association specifically for CMs. But, about a year ago, The British Contract Manufacturers and Packers Association (BCMPA) decided to bring more CMs into its fold and changed its title accordingly. CEO, Rodney Steel says it is time for CM in the UK to be treated as an industrial sector in its own right. It has different needs from dedicated production and these have to be listed and assessed. It is a particularly important sector for the UK because it can fully utilise the country's strengths of innovation and design; and it is also vital as a replacement for the lost commodity manufacturing capacity so the country retains some production skills.

Government view

This view is echoed by government where a spokesman says it is appreciated that the country cannot compete with low wage economies in commoditised sectors and UK plc will have to generate and repatriate revenues from licensing IP overseas and consider higher value-added activities.
Perhaps it is beginning to recognise that CM is a sector that is ideal for making full use of Britain's strengths in innovation, design, prototyping and niche manufacturing. A sector that should also make a major contribution to the economy.
An innovation report from the Department of Trade and Industry, Competing in the Global Economy, published in December, lays out what industry should do. It urges all the existing organisations to co-ordinate more, but that prompts the question: "If they haven't delivered up to now, can they in the future?"
CM services generate a higher profit margin than commodity manufacturing and are more efficient users of a well-educated and trained workforce. This makes it ideal for developed countries.
Frank Coultard, of the Association of Contract Electronic Manufacturers group within the electronics organisation Intellect, says there are a large number of contract companies with many classed as SMEs, a key contributing group to the UK economy. But he says that a major initiative called the Electronics Innovation and Growth Team (EIGT), which has recently been set up by the DTI, will not highlight the CM sector in particular although it has to identify the key competitive challenges that face the industry in the future and will make recommendations as to how the UK can best respond.

The reason that CMs merit special attention stems from the fundamental difference between dedicated and contract manufacturing. The dedicated manufacturer has to convince its customers that its goods are fit for purpose while the contract manufacturer has to show that its facilities are suitable. The first case requires that the goods have to perform for the customer to be satisfied; but CMs have to show that their facilities will produce what their customers want.
So CMs have to maintain a high level of capital expenditure to ensure that their facilities are continually of the best. Such spending can be boosted or curtailed by government finance measures covering, for example, interest payments on loans, write-down periods and disposal of assets.
In addition, contract manufacturers traditionally offer more to clients than a basic production facility. They have to be strong in design, innovation, inventiveness and development, all expensive areas that would benefit from financial help. They also have to be prepared to offer extra services such as process design, component buying, product packaging and delivery.
A low-tax environment will boost the CM sector generally, not only by encouraging investment, hopefully leading to increased company turnover, but by providing a feel-good factor for directors and managers. If CMs can join together and lobby with a single voice, it can only help their trading position.

Customer benefits

From a customer's point of view, CM can be seen as a form of leasing. The CM takes on the capital expenditure and looks after the buying and selling of machines, plus repairs and maintenance. But the contract ensures the machines are available when the principal requires them. This arrangement also reduces the risk of a product that fails to sell.
The customer does not have the millstone of investment in expensive, fixed capital machines that are not being used.
CMs can also offer a great deal of expertise because they have built up a pool of knowledge from handling many different products from different clients.
But the managers of CM companies are a confident bunch, very independently-minded and strongly self-sufficient. Several people have said CMs are notorious for not attending meetings and not returning statistics questionnaires, for example. That makes them their own worst enemy in an area where they would be better off by collaborating.
The pressure to change everyone's outlook on CM will increase as machines continue to become more computerised and automated. Workforces will need less training and resettlement of a factory becomes easier. So volume manufacturing will continue to move round the world in search of low cost regions.

Survey results

There is also pressure from the country's leading entrepreneurs, a good source of CM start-ups. According to Ernst & Young's 5th Annual Enterpriser survey, confidence in government among British entrepreneurs has sunk to a record low.
Nearly 700 entrepreneurs across the UK were interviewed in depth about their views on the economy, the government, the challenges of being an entrepreneur, their intentions over the next 12 months, how they intend to fund expansion and what keeps them awake at night.
It found that government efforts appear to be wasted and entrepreneurs are growing frustrated with Whitehall despite a sustained campaign over the life of this Parliament from both the Treasury and the DTI.
But some individual initiatives launched by the government in the past 12 months have been welcomed, in particular the new rules relating to Research & Development tax credits and the capital gains tax treatment of business assets.
Les Clifford, Head of Entrepreneurial Growth Markets at Ernst & Young says: "These are such disappointing figures. Despite the focus on enterprise in the Pre-Budget Report and the April Budget, the massive investment in time and effort being made by the government is not reflected in a more positive attitude from entrepreneurs. It needs to look again at how it communicates with young and growing businesses that are such an important dynamic within the UK economy."
But, although they are unhappy with the government and remain wary about a sustained upturn in the economy, entrepreneurs have no hesitation in recommending the lifestyle and their business aspirations to others.

For more information, visit www.bcmpa.org.uk; www.ey.com; Intellect www.intellectuk.org