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Fast Train to China Manufacturing

Hornby [1] is a famous British brand that makes high-quality, model trains and cars. The China-Britain Business Council’s [2]China-Britain Business Review (September, 2006), contained an interesting case study, by Humphrey Keenlyside, on the company’s move to manufacture in China.

According to the article, Hornby found itself facing hard times as competitors moved to China. Having employed around 2,000 people in their UK in the 1970s, this number had fallen to 750 by 1997. Big changes were needed to reverse the decline.

Interestingly, the main reason for the move was not simple cost-cutting (though tooling costs were cut in half) – that was just a means to an end, and the cost reductions allowed the firm to refocus spending on design and quality improvements, and to speed the introduction of new lines. At the same time, specialist design and engineering functions were kept in the UK.

The company decided to build on its relationship with a Hong Kong supplier, and to move manufacturing to China. This was done by transferring all of their specialist tooling equipment from the UK to Dongguan, in Guangdong. Frank Martin, the CEO, reported that the good relationship with their local partner was critical:

As the article points out, Hornby were perhaps lucky to be in a niche market where they had strong control of branding and distribution, and where the potential for piracy was relatively limited. Not all companies are so fortunate on that front – but all can benefit from remembering that, by avoiding the old “same bed, different dreams” issue, a lot of potential partnership problems can be avoided. The Review says:

While other European companies failed under competitive pressures, Hornby was able to make acquisitions – including a liquidated Italian firm (whose tooling was also sent to China). It has now “built up the broadest brand portfolio in the world” in its sector, and thinks that moving to China “was one of the best moves it has ever made”.

The figures in this case speak for themselves: Hornby now has 4 factories making their products in China, and has almost doubled sales, to GBP45 million (with profits of GBP8 million), since 2001. While local employment has fallen to around 130, it is surely better than if the firm had gone out of business like the Italians. At the same time, the local economy will see the benefits of a successful, growing business for a long time to come.

I like this story because it show how forward-looking manufacturing companies (yes, even European ones!) can overcome the challenges of globalisation, integrate China into their strategy, and use the advantages of cheap labour to help leverage their real strengths – in added-value areas such as R&D, branding and distribution.

It is a much better, and more positive, approach than slapping on short-term, protective tariffs or quotas – as EU and US policy-makers seem so fond of doing.