Economics

Explanations

What is the role of manufacturing in today’s economy?

Tom White

22nd January 2017

Manufacturing is in the spotlight as a way to revitalise economies. The Economist takes a look, and I’ve summarised some of the article.

Donald Trump has promised to create “millions of manufacturing jobs”. George Osborne, Britain’s former finance minister talked of “a Britain carried aloft by the march of the makers”, which continues with the “comprehensive industrial strategy” promised by Theresa May.

What is manufacturing? Assembling parts into cars, washing machines or aircraft adds less value than once it did; design, supply-chain management, aftercare and servicing add much more. Manufacturing is harder to define than it seems, and to capture in statistics. Does manufacturing have the capability to generate millions more jobs? There are still a lot of them; but many of the good jobs for the less skilled are never to return, according to the authors.

Manufacturers are more likely to be exporters than businesses in other parts of the economy and, as you would expect given the demands of competing in a broader market, exporting firms tend to be more productive than non-exporting firms. They may even be more innovative. Such firms also tend to be more capital-intensive, because selling into those broader markets allows firms to capture economies of scale. And a sector that has higher-than-average productivity and high capital intensity will, other things being equal, be able to offer better wages.

Globalisation driven by container shipping and information technology has allowed firms to unbundle the different tasks—from design to assembly to sales—that made up the business of manufacturing. It became possible to co-ordinate longer and more complicated supply chains, and thus for various activities to be moved to other countries, or to other companies, or both. At the same time computers and computer-aided design made automation more capable. High wages gave owners the incentive they needed to take advantage of those opportunities. As a result many manufacturing jobs vanished from the rich world.

Tens of millions of jobs went, and as manufacturing became more productive, and prices dropped, its share of GDP fell, too. At the same time the number of people in manufacturing in developing countries exploded. I’ve blogged about this in the past, since industrialisation is assumed to be a part of most poor countries’ development model:

Industrialisation in Africa

Can poorer countries follow China's growth model?

Routine work, which is not particularly valuable (it has a low marginal revenue product – MRP) will easily move to poor countries where labour is cheaper. If poor places have the capacity to take the high-value bits, they will no longer be poor.

According to the article, this is why promises to bring jobs back to the rich world aren’t going to happen . High wage semi-skilled manufacturing jobs are not going to return because they were not simply shipped abroad. They were destroyed by new ways of boosting productivity and reducing costs.

Where does manufacturing fit into the economies of rich countries? Astonishingly, by some estimates, putting together Airbus airliners accounts for just 5% of the added value of their manufacture and assembly in China accounted for just 1.6% of the retail cost of early Apple iPads.

Most pre-production value added comes from R&D and the design of both the product and the industrial processes required to make it. More is provided by the expert management of the complex supply chains that provide the components for final assembly. After production, taking products to market and after-sales repair and service and disposal all add more value. A study published in 2015 reckoned that the 11.5m American jobs counted as manufacturing work in 2010 were outnumbered almost two to one by jobs in manufacturing-related services, bringing the total to 32.9m. A British study in 2016 came to a similar conclusion: that 2.6m production jobs supported another 1m in pre-production activities and 1.3m in post-production jobs.

I’ve learned that the definition of manufacturing is so complex that the term needs to be handled with thought and reflection – which is good when making evaluation statements.

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