Manufacturing: nothing good about it

Well that’s an overstatement, but there’s been a long standing idea – going back to before Adam Smith that there’s something ‘good’ about “making things” to use some words that have suddenly become very popular. In reaction against this the economic establishment is of course against picking winners, and this occasionally manifests itself in a mindset that is almost anti-manufacturing.

In any event, I’ve never thought that there’s anything good about manufacturing – or better than other things. It produces some good jobs and quite a few awful ones, and the returns are not that high – it’s an area in which you get the ‘flying geese’ behind you threatening to catch up all the time – more so than in many services. One (not necessarily particularly strong) argument for assisting manufacturing was that it would help ‘diversify’ our economy and ameliorate the volatility of our terms of trade and our growth. Well not any more. Just as commodities used to come with a strong cycle, at least in this cycle, so has manufacturing.

As Glenn Stevens illustrates with this graphing (pdf) of the share of manufacturing against short term growth right now.

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7 Responses to Manufacturing: nothing good about it

  1. Tel_ says:

    It’s kind of difficult to do mass manufacturing without a good supply of commodities (and energy). If you figure out how, be sure to explain the details to me at least a year before you say anything to anyone else.

    Then again, a block of copper in 2009 is still a block of copper in 2020, but top of the line computer circuits in 2009 are a challenge for recyclers in 2020 (i.e. you can stockpile minerals, you cannot stockpile high-tech products).

  2. Nabakov says:

    Yet interestingly enough the US is still the world’s biggest manufacturer by a long shot and manufacturing accounts for the same percentage of its GDP as it does for India. China maybe higher in GDP percentage but not in value added terms.

    Mind you these days with global supply chains, who can say where the construction and assembly stops and the credit begins.

    However the US still totally dwarfs everyone else in terms of IP. Especially entertainment, software and pharmaceuticals. Sounds like a good night in to me.

  3. James Farrell says:

    Nicholas:

    Stevens’ main thesis, which is supported by his first graph, is that it’s the income-elastic consumer durables and investment goods that are most prone to collapse, while non-durables demand is fairly constant. On this basis you’d expect countries specialising in sophisticated manufactures to be below the line. Except for the case of Japan, the graph doesn’t seem to bear out the thesis. There are probably not enough data points, though, to read much into it.

    Nabakov:

    blockquote>China maybe higher in GDP percentage but not in value added terms.

    GDP is national value added, isn’t it?

  4. John Greenfield says:

    Nicholas is absolutely correct, and I wish he had shouted this much louder during the recent election campaign. Rudd said something to the effect, ‘I don’t want to live in a country that does not make things’.

    Firstly, what – yet another – an extraordinarily hypocritical attitude given how his missus makes their tens of millions. Secondly, anybody who has ever constructed, analysed, or even looked at a value chain, will instantly recognise the furphy of ‘manufacturing rules’. This insight was one of the exciting ones you get when you start your first real job. We were made to read Michael Porter’s Competitive Strategy: Techniques for Analyzing Industries and Competitors.

    In Australia, the manufacturing fetish is far more daft than the Blackarm bandits paint the Galipoli myth. I don’t have the data in front of me, but it has been many, many moons since manufacturing accounted for anywhere near even 40% of our GDP or employment.

    Whenever I hear a news report that some company – such as Pacific Brands – is relocating its manufacturing to some place like outer Mongolia – I cheer. Let them do the wage-intensive, low-skill part of the chain, that when located in Australia really saps value.

  5. Tel_ says:

    Nicholas is absolutely correct, and I wish he had shouted this much louder during the recent election campaign. Rudd said something to the effect, I dont want to live in a country that does not make things.

    In a way, Australia is in a better position to “make something” than ever before, chiefly because the Chinese are very interested in doing the grunt work for us. A small team of Australians can come up with a design for a product, come up with a few working prototypes and outsource the rest of the work to China, then have a workable product for sale. I’ve had people at trade shows offer to do small batches (down to a thousand units), search around on Skype for Chinese factory reps or run some keyword searching through your spam-email archives.

    Admittedly, there’s still some uncertainty over China’s respect for IP but if your design is easy to copy then at some stage they are going to get their hands on units to copy, no point wringing hands over what you can’t change. The standard ploy these days is to build the product around an industrial microprocessor chip and hide some software on those chips (they are specifically designed to be difficult to copy) — you will get maybe a 12 month headstart on the market.

    Whenever I hear a news report that some company – such as Pacific Brands – is relocating its manufacturing to some place like outer Mongolia – I cheer. Let them do the wage-intensive, low-skill part of the chain, that when located in Australia really saps value.

    It’s not as simple as that, seriously industrialised nations (like Japan) use robots, and also make and design those robots. There are intensely complex support systems and management systems behind the whole workflow of the factory. With the right technology and good application of human intelligence, manufacturing can be high-skill, high-productivity and deliver a better quality product than endless teams of low-paid Indians or Mongolians. The real problem with manufacturing in Australia is that we are not terribly good at it. The skills and knowledge base that we would need to construct in order to make the jump over that low-skilled phase and into state of the art manufacturing technology would take several generations, and we would still be running at it from way behind because the goalposts keep moving.

    This idea that manufacturing is a huge hall of low-paid guys with spanners and screwdrivers is equivalent to agriculture being fields of peasants with hoes or software being enough monkeys banging on keyboards or warfare being just bigger guns and mass bayonet charge (maybe go back and revise what we did learn at Galipoli). “There’s more than one way to do it.”

  6. Nabakov says:

    “Secondly, anybody who has ever constructed, analysed, or even looked at a value chain, will instantly recognise the furphy of manufacturing rules.”

    Not a Sigma Six standard comment.

  7. John Greenfield says:

    Nabakov

    Was that comment in anyway necessary or informative? Jeesuz.

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