Midlands manufacturers choosing to offshore production overseas to central and eastern Europe should not be put off by fraud and corruption, a leading professional services organisation says.
The manufacturing landscape of the Midlands has changed irrevocably in recent years, as the majority of the region’s volume automotive manufacturers have moved away, reducing demand for locally-supplied components.
Manufacturers in the region are focusing on higher value activities and many are choosing to source lower value parts and services from central and eastern Europe. In some cases they have shifted lower value production and light assembly work abroad.
Many Midlands firms have discovered while outsourcing production overseas brings significant cost benefits, it presents serious challenges.
The latest PricewaterhouseCoopers Global Economic Crime Survey has revealed one of the most common issues is fraud and 44 per cent of automotive manufacturers surveyed said they had experienced fraud.
Chris Hibbs, UK manufacturing leader at PricewaterhouseCoopers, located in the Midlands, said: "While it makes good sense to offshore lower value production, particularly where it involves smaller parts, there is a risk businesses could be put off by the potential issues that could arise.
"Businesses choosing to shift production overseas are exposed to a higher risk of certain types of fraud, such as procurement fraud – where employees accept cash or a kick-back from a supplier or service provider, without passing the saving to the company."
However, he added this type of fraud was avoidable.
"Businesses must take decisions carefully, based on local knowledge. It is not good enough to go on a trade delegation one week and acquire a production facility the next. Having made the move, it is also important to put proper operational and financial controls in place as soon as possible and keep a close eye on what is happening," said Mr Hibbs.
According to PwC, perceptions about corruption and fraud can act as an obstacle when companies think about moving east. Mr Hibbs said he believed companies should take a broader view.
"Our research shows perceptions of a country’s exposure to corruption vary considerably across central and eastern Europe. Estonia and Slovenia are perceived as being less corrupt than some other countries, like Spain and Portugal. Poland and Romania, on the other hand, are perceived as being the most corrupt in central and eastern Europe," he said.
PwC said other factors such as local regulatory or operational differences, reliability and capacity of the supply base, availability of skilled workers and the tax system were far more important and should be considered a priority.
"Often these differences need to be compared on a region-by-region or city-by-city basis and this kind of local knowledge is extremely valuable," added Mr Hibbs.
Gliwice and Wroclaw in Poland may be perceived as providing similar opportunities to UK business, yet are worlds apart in suitability as production locations because of the different political environments, cost structures and employee bases, he added. "If the Midlands’ manufacturing sector is to thrive it must continue to evolve to face global market conditions," said Mr Hibbs. "This means facing up to the risks associated with shifting lower value production overseas and being prepared to step up investment in research and development to deliver value to customers."