Production line not yet in sight

In some parts of the OECD, mainly in the West, a popular view would be that manufacturing long ago ceased to be of any import, if only because many industrial areas have become shopping centres.

Manufacturing, however, is a very important economic sector, responsible for between 13% and somewhat more than 30% of economic activity, depending on the country in question.  Curiously, its share of employment is not inordinately high nor is its gross value added. The sector is, nonetheless, in a state of flux and there may be important new trends developing. Furthermore, when allied with open political and educational systems, it can be a fertile breeding ground for innovation and ‘game changing’ technologies. 

For example, a recent report from the Boston Consulting Group (BCG) foresees a manufacturing renaissance in the United States, on the back of the sector’s high relative productivity and improving cost comparisons (including lower wages), over the next five years. 

So, while the weight of manufacturing in some regions of the world has been declining very considerably in the last few decades (from 21% in 1980 to 13% now in the United States), its importance remains undiminished.  Just try and imagine a life without cars, aeroplanes or telecommunications equipment, never mind the inconceivable agony – for the younger generation at least – of life without a mobile phone.

Another measure of manufacturing’s importance is the role that it is playing in helping to rebalance world growth. Germany’s very high value added capital equipment exports, for example, are a backbone of economic activity, allowing its economy, to a certain extent, to buttress the entire Eurozone, while in the United States and Great Britain manufacturing has recently helped by taking up the slack from construction and even consumption. In Asia, meantime, it is beyond dispute that the sector has been a mainstay of its export led development strategies, allowing an entire region of the globe to prosper, even if in an unbalanced way.

Like so many things in economics, there may be new trends taking hold at the macroeconomic level with the potential to substantially modify the global manufacturing landscape. One of these is that headway may finally be being made in the effort to rebalance global growth. This is potentially of enormous importance in and of itself and with positive implications for all. As the International Monetary Fund indicates in its most recent World Economic Outlook (WEO), this is a “must have” condition for sustainable growth in the medium term.

Progress in the above regard will also serve to stave off protectionism in many corners. This must not be over-looked, for protectionism is the greatest threat of all. Nor should the other side of this debate be ignored. A successful conclusion of the Doha round of trade liberalization could act as a powerful counterweight to some of the negative economic headwinds which now exist. World trade Organization (WTO) consultations in this respect are currently in progress. Not coincidentally, some believe that one of the things that the West most wants out of those talks is greater access for its manufacturing industries to emerging markets. Reciprocity is the term now in vogue. Not surprisingly either, some nations, mainly in Latin America, are afraid that this may give China more access to their markets. 

Recent remarks from some Chinese leaders seem to point in the direction of a greater openness to market forces, which is to be welcomed, and the concomitant rebalancing of world growth which that entails. In fact, at the end of April the Chinese Yuan rose past 6.5 versus the US dollar, for the first time since 1993. By extrapolating the year to date gains in the Yuan some observers deduce that China may revalue its currency´s nominal value (at least versus the US dollar) by 10% this year, twice the rate that had been expected by some. Although there may still be some scepticism, such a move, in turn, would also facilitate other Asian nations doing much the same, as some countries have resisted allowing their own currencies to move due to the fear of losing competitiveness to Beijing.

Yet if protectionism (in all it varieties) is the great threat, then technological innovation is definitely one of the great hopes. There are several trends in this area which may now again be transforming this sector and, with it, the rest of the global economy. A particularly good example of one of these is the introduction of more fuel efficient, and electric, vehicles, by US and Japanese car manufacturers towards the year end. This is nothing short of a revolution with strong and quite positive macroeconomic implications. So much so that General Motors´ latest monthly sales figures showed a double digit gain, largely thanks to greater sales of fuel efficient models. Likewise, some of the most recent readings for the Chicago NAPM (National Association of Purchasing Management) have seen that indicator reaching levels not seen since the beginnings of the 80s.  

In the latter case it should be observed that the tragic tsunami which hit Japan this spring could affect those plans significantly, as well as having a potentially broad effect on global supply chains.

Yet this tale would not be complete if we did not also comment on the passions and frictions which sometimes arise in the global manufacturing arena. A very well-known case is the multi-decade long transatlantic sparring between Boeing and EADS, but less well known, perhaps, are the suspicions held in the West about the possible links of companies such as Huawei Technologies to China´s military establishment.

Recent Chinese advances in the civil aeronautics field have also not gone unnoticed, and its policies have been the focus of criticism from some pundits. Of great interest as well are the considerable frictions recently between China and Japan over exports of rare earth minerals.  Finally, we would call attention to the fierce competition in the consumer electronics space between Apple and Nokia or allegations of copyright theft by the American manufacturer versus its rival Samsung. This underlines another very important issue, the need to defend copyrights and intellectual property.  

In parallel to all of the above, President Obama recently alluded in a speech to the importance of innovation and he was spot on in this regard, although some have criticized what they see as an excessive emphasis on the importance of competing with other nations versus innovation for its own sake, with all of the benefits that it can bring to a society or country.

So, if we are right and there is a real tendency and will towards global rebalancing, and it does seem inevitable, then the outlook should point to some considerable changes in future patterns for global manufacturing. The process will be slow, but now it may well be underway in earnest.

Lastly, the outlook for this year, more specifically, for the manufacturing sector world-wide, was until recently quite positive despite some downside related to possible oil price spikes or excessive tightening in emerging countries, particularly in the US. The great exceptions were Japan, which is expected to take the better part of the year to recover from the recent tsunami and earthquake, and the European periphery, for obvious reasons.

So as we can see, it is hard to imagine global rebalancing, technological innovation and greater trade liberalization moving forward without manufacturing playing a part and, in turn, itself being affected. Moreover, the manufacturing sector is a useful prism through which to observe those trends. While the economic structure and the patterns of trade and capital flows are always in flux, even if at times imperceptibly so, now it is quite evident that changes are underway. Therein lie the risks and the opportunities, both for manufacturing but for the economy at large as well, which we will report on in this Global Manufacturing Survey.