Manufacturing: out of "crisis", a revolution

Manufacturing is in “crisis”. Long live manufacturing.

The “crisis” is in job destruction. But manufacturing is evolving fast, not just in location around the globe but in how it is done and what it includes. Some call this a new industrial revolution.

The policy issue for the government — and for the Labour party which trumpets the “crisis” — is what manufacturing can most effectively be done here and how to sell into rapidly changing global markets.

The problem — common to all “advanced” economies, which ours allegedly is — is that last century many manufacturing jobs were well paid, needed relatively modest education and skills and financed a broad middle of society into houses and a reasonably comfortable living.

From the 1960s and particularly from the 1980s, as freight costs fell, these jobs migrated from “advanced” economies to “emerging” economies where factory wages were much lower but still lifted their workers out of rural subsistence.

New Zealand began losing jobs in well-paid manufacturing in the late 1970s despite import protection, then in droves when protection was axed from the late 1980s. Except in dairy product processing and some other resource-based industries and more recently in some food processing, those “traditional” jobs continue to disappear — off to lower-cost economies or consolidated in bigger-market Australia.

The alternative for these displaced workers is mostly lower-wage jobs in the service sector. The middle has been hollowed out.

Add in an overpriced currency which ministers declare they are powerless to tame and last year there was another wave of destruction of well-paid jobs — not just here but in Australia, where a rash of big layoffs has been reported since November.

In the United States one traditional industry, car making, has been expanding after a massive taxpayer rescue (socialism by another name) but it has halved wages for new workers. Much the same applies across a swathe of other engineering industries there.

Put that together with rising wages in China: according to the Financial Times on January 9, “in 2000 United States wages were almost 22 times higher than China’s. By 2015 that multiple will have declined to four.”

A McKinsey Global Institute report in November on a “new era in manufacturing” found that manufacturing’s share of GDP (total output) peaks between 20 and 35 per cent when an economy reaches “middle-income status”. It then falls. Manufacturing’s share of jobs (that is, jobs actually making things) fell from 25 per cent in 1950 to 9 per cent in 2008 in the United States, from 35 per cent in 1970 to 18 per cent in 2008 in Germany and from 28 per cent in 1989 to 17 per cent in 2008 in South Korea.

But manufacturing is more than just actually making things. It incorporates research and technology development, “big data” mining, marketing and customer support, which McKinsey says account for a third of advanced-economy manufacturing jobs. It also needs external inputs such as IT and telecommunications, transport and banks which McKinsey reckons at 20-25 per cent of advanced-economy manufacturing output. Many of these jobs are well paid.

Apply this to New Zealand’s exported manufactured goods, as the OECD did in a groundbreaking report on global “trade in value-added” last week, and “services (mostly domestic) represent 46 per cent of the value of exports”. Much of this was in manufactured goods which “incorporate a large share of value-added from the services sector.”

And note that New Zealand’s competitive niche and medium/high- and high-tech manufacturers account for about 10 per cent of goods exports, though down from 12 per cent in 2006. (A side question for the future: is Weta Digital a manufacturer?)

Moreover, manufacturing is changing.

Radical new technologies are at last exploiting the productivity potential of post-1970 information science to transform some manufacturing.

These are canvassed in a new book by Chris Anderson, Wired magazine’s editor (Makers: the new industrial revolution). They include a new generation of robots and 3D “printing” of single or multiple objects at the flick of a mouse.

One outcome is that advanced economies’ producers can make some products as cheaply as low-wage economies can, adjusted for freight and supply chain complexities. This “insourcing” is now significant in the United States (though it doesn’t make many jobs).

A second outcome is the use of internet platforms to bring together consumers, designers, makers and funders/investors in ways that speed up development, get products funded, target them to consumers’ predilections and reel in the customers. Of special value to tiny, isolated New Zealand is that tiny producers of micro-niche items that may appeal to only 10,000 people worldwide can find those buyers.

All that is challenge and opportunity — “crisis” and space to grow — for makers here, if inventive enough and if policymakers get out of the 2000s and into the 2010s.