SURVEY: MANUFACTURING

The world as a single machine
Jun 18th 1998
From The Economist print edition

Rich countries worry that manufacturing is passing into the
hands of poor countries. It is, but it’s not a worry, says Iain
Carson

CHANGE always frightens people. And today the world’s economy
is going through two great changes, both bigger than an Asian
financial crisis here or a European monetary union there.

The first change is that a lot of industrial production is moving
from the United States, Western Europe and Japan to developing
countries in Latin America, South-East Asia and Eastern Europe;
the classic example is the exodus of textiles from the rich world
over the past two decades (see chart 1). In 1950, the United
States alone accounted for more than half of the world’s economic
output. In 1990, its share was down to a quarter. Even then,
North America, Europe and Japan were between them still
producing three-quarters of the world’s output. But, as DeAnne
Julius and Richard Brown, two economists working in Britain,
pointed out in a famous essay in 1993, times are a-changing.
Quite soon now, many big western companies will have more
employees (and customers) in poor countries than in rich ones.

The second great change is that, in the rich countries of the
OECD, the balance of economic activity is swinging from
manufacturing to services (see chart 2). In the United States and
Britain, the proportion of workers in manufacturing has shrunk
since 1900 from around 40% to barely half that. Even in Germany
and Japan, which rebuilt so many factories after 1945,
manufacturing’s share of jobs is now below 30%. The effect of the
shift is increased as manufacturing moves from rich countries to
the developing ones, whose cheap labour gives them a sharp
advantage in many of the repetitive tasks required by mass
production.

These trends have caused an agonised debate about the
“deindustrialisation of the West”. When the oil-price rises of the
1970s brought inflation to Europe and America, many people feared
a rapid decline in manufacturing as output shifted to developing
countries with cheaper labour. By the mid-1980s, a lot of
Americans had come to believe that their country’s industry was
being “hollowed out” as its basic activities moved to low-wage
areas in Mexico and Asia. A sudden cancer, it seemed, had gripped
the entrails of American industry.

It was not like that. A change was happening, but it was not
simply a destructive change, and it had already been happening
for quite a long time. For years before the mid-1980s, the
structure of American industry had been altering. The familiar
picture of solid old companies like IBM, General Motors and Ford
pulling together for the greater good of corporate America had
long since turned brown at the edges. International competition
had arrived ages ago.

Much of what an innocent American consumer might have thought
of as “Made in America” was by 1985 the product of factories in
many different parts of the world. By 1990, 40% of IBM’s
employees were non-Americans; Whirlpool, America’s leading
supplier of domestic appliances, made most of its products in
Mexico and Europe, having cut its American labour force by 10%;
and General Electric was the biggest private-sector employer in
Singapore, where American-owned factories employed over
100,000 Singaporeans to make electronic components to be
shipped to the United States. By the early 1990s about a fifth of
the total output of American firms was being produced by
non-Americans outside America. As chart 3 shows, foreign
investment in the past three decades has risen faster than trade
and world output.

American industry had for years been changing, as the low-cost
production of things like textiles, clothing, shoes, handbags, car
seats and electrical wiring migrated to Mexico. Much that wore a
Detroit car maker’s badge or a computer company’s brand was
really the product of an elaborate international web of suppliers
and assemblers. But it took a couple of decades for the politicians
to realise what was going on. When they eventually did—as the
car makers of Detroit and the computer companies of California
imported more and more of their components, from axles to
microchips—there arose desperate cries about “Japanese
dominance” of high-tech industries and the “collapse” of much
American production. And it was not only in America that people
were falling into despair.

There is something curious about this. Why did French and Belgian
politicians get themselves into a lather when Renault, France’s
leading car maker, decided to close a factory near Brussels last
spring? Why do fears of similar protests lead General Motors and
Ford to keep surplus capacity across Europe, when a closer look at
how many cars they can actually sell should lead them to axe their
least efficient factories?

The broad answer, especially in Europe, is that many people still
vaguely believe that manufacturing somehow matters more than
any other economic activity; that making things you can drop on
your foot is in some way superior to fingering a computer or
cutting somebody’s hair. Never mind that more than two-thirds of
output in the OECD countries, and up to four-fifths of employment,
is now in the service sector. Making things in factories is still what
real men do (as, 150 years ago, growing things in fields was what
real men did). Quietly strip 3,000 jobs out of a national network of
retail banks, and no one will raise an eyebrow. Open a telephone
sales centre in the north-east of England, creating 3,000 new
jobs, and it might get a mention on the local news. Close a steel
mill, and the gasps of dismay go on for weeks. Open a
semiconductor plant, and the hosannas echo for months.

For most of today’s rich countries, there was indeed a period when
economic success was synonymous with manufacturing. Plenty of
Britons who have no memory of the real thing still feel a pang of
artificial nostalgia about Birmingham as “the workshop of the
world” and Clyde-built ships that ruled the waves. Moreover,
success in manufacturing was linked to geopolitical power. The
democracies were able to defeat Germany in two world wars
because America’s industrial machine poured out such a flood of
tanks and warships and bombers. Best of all, in some ways,
manufacturing was for long a source of reasonably reliable and
well-paid jobs for young men with plenty of muscle and little else.
It still is, to some extent. “We employ the guys who are never
going to be Microsoft programmers,” says one manufacturing boss
at Chrysler.

It isn’t special

So should the rich world worry that its manufacturing sector now
seems to be migrating to low-wage competitors? Without big
factories that ship steel, cars, machine tools and television sets to
foreign customers, how can rich countries earn their keep in the
world, finding the wherewithal to buy their food and oil and other
raw materials? Ms Julius and Mr Brown, in that 1993 essay, called
this the “Manufacturing is Something Special” argument.
Manufacturing, in this way of looking at things, brings more
growth, better-paid jobs, fatter export earnings and greater
technological progress than any other economic activity.

Not so, the Julius-Brown essay explained. A household can use
only so many cars and refrigerators and dishwashers in its
members’ lifetime. As countries get richer, a rising share of income
goes on holidays, health and education. Busy people want to hire
other people to clean their homes, launder their clothes and so on.
Anyway, many jobs traditionally thought of as part of
“manufacturing”, such as the design and marketing of products,
are really service jobs. As demand for them increases, these
service jobs become better paid and more interesting compared
with the drudgery of factory work—much of which is in any case
moving overseas. Services are growing fast as a component of
international trade, encouraged by widespread deregulation. The
chunky, capital-intensive making of cars, chemicals and computers
is starting to look middle-aged. If you want the vitality of youth,
turn to things like telecommunications, aviation, biotechnology or
the health-care industry.

In all rich countries, manufacturing’s share of total output is
shrinking, and its payroll is shrinking even faster. The same thing
happened with agriculture. At the beginning of this century, 68%
of Japan’s labour force worked on the land, 44% of America’s and
about 20% of Britain’s. Today, agriculture accounts for only 7% of
workers in Japan, 3% in America and 2% in Britain. Yet the fading
of agriculture did not bring impoverishment to these countries. Nor
will the fading of factories. There will be other things for their
people to do, which will bring comfortable incomes and may
anyway be more interesting than hoeing fields or pulling levers on
production lines.

This survey will look at the ways in which manufacturing is
changing in both rich countries and poorer ones. Its various stages
are becoming separate and dispersed, rather than being under one
roof, or inside one company. The distinction between
manufacturing and services is getting blurred. And, not least, new
computer software is helping companies to organise themselves
better around the task of serving their individual customers; this is
rewriting the rules of mass production.

All this feeds back into the structure of manufacturing. Whole
industries no longer migrate, as shipbuilding did from Europe to Asia
in the 1970s. Drawing on examples from the industrial heartland of
America, from the maquiladora factories in Mexico and from the
Hong Kong-based manufacturing network, the survey will argue
that today manufacturing is becoming a genuinely international
affair. The fancy work gets done in rich countries by skilled
workers, the simpler parts elsewhere in the global supply chain.
More and more of the process is handled by multinational
companies, quick to see what is best done where. There is nothing
to fear in this. Any country that is willing to use the skills it
possesses will gain from joining in.