What’s the future for manufacturing?

As someone who teaches policies of competitiveness and chairs the Global Agenda Council on Advanced Manufacturing, I often get asked to explain the difference between manufacturing and advanced manufacturing.

Most people think the difference is more sophisticated manufacturing technologies. But really, it’s about a fundamental transformation of manufacturing from an industry based primarily on leveraging existing comparatives advantages, such as cheap labour, to one focused on building long-term capabilities like human capital development. The more the knowledge of manufacturing increases in an economy, and the more public and private sector incentives are aligned, the more it generates growth and job creation. Advanced manufacturing is effectively manufacturing 2.0 – what some policy-makers described recently as the “new industrial policy.”

The power of manufacturing should not be underestimated. Firstly because it employs a lot of people: about 300 million in 2010, representing 14% of global employment, according to the National Association of Manufacturers. It has also been shown to have a significant impact on things such as workforce skills, infrastructure and innovation. Finally, it has one of the highest impacts on other industries – what economists call the multiplier effect.

Yet manufacturing has been slowing down over the past 40 years. In the 70s, manufacturing activities and employment accounted for about 27% of global GDP. Today, that figure is about 17% and dropping. This transition is happening more quickly in some economies than others. Manufacturing accounted for just 12% of the US economy in 2010. However, manufacturing remains a staple of other economies – it accounted for 33% of the Chinese economy in the same year. Is this a good sign? The message is mixed: the decline reflects both productivity improvements, which is positive, but also the challenges faced by developed economies to limit outsourcing to developing economies.

The manufacturing sector itself is also transforming. In general, it currently has three stages, which depend on the level of development of the country – from sunrise to sunset.

Initially, a country or economy focuses on existing comparative advantages that already exist and can be built on. It could be a long-term advantage like access to energy, or a short-term one such as cheap labour. During this stage, the share of manufacturing is typically quite low and impact on GDP growth limited. This is the sunrise.

When policy-makers focus on improving these comparative advantages through deliberate strategies such as improving manufacturing standards and investing in infrastructure, education or access to finance, the sun is at its peak with a high share of manufacturing in an economy.

Yet the transformation of the industry begins when the sun start to go down, when the share of manufacturing starts to decline but GDP growth and capabilities continue to grow. This is the start of advanced manufacturing, which can be thought of as a long-term capability-building stage. It means that policy-makers and companies continue investing and developing capabilities to sustain or improve competitiveness while some comparative advantages start to decline. It also means that more complex value chains replace advantages like cheap labour. This third stage requires an advanced manufacturing approach, which is an alignment between corporate, government and social interests and the setting of standards.

What can be done to align the motivations of the public and private sectors regarding advanced manufacturing? If you are a company, you are typically motivated by higher returns and shareholder value. If you are a policy-maker, your drive is rather to increase jobs and disposable income for your community. The two motivations can be reconciled through a common “language.”

To do so, Global Value Chains (GVCs) and not just countries are increasingly being used as the underlying unit of analysis and common language between the private and public sectors. This means that GDP growth or shareholder value is just a way to measure performance but not an end in itself. Indeed, current metrics like manufacturing as a percentage of GDP do not accurately reflect the global and complex nature of manufacturing, especially as it relates to GVCs and their impact on capabilities and knowledge dissemination across value chains. This advanced manufacturing language focuses on building long-term capabilities like innovation of skills. Most GVCs are also connected, like a network, through common capabilities and knowledge, and can impact each other. For example, economic activities that use computer-aided design systems effectively can apply it to the textiles value chain, but also manufacturing of automotive components.

The bottom line is that a new language and platform are needed to transform the industry. To address and support the fundamental transformations of the manufacturing industries, we need to use more relevant and adapted metrics and further align public and private stakeholders at the global level. We need to identify and establish a common manufacturing capabilities language supporting public-private dialogue based on GVCs, knowledge networks and also manufacturing standards, which is one of the goals of the Global Agenda Council on Advanced Manufacturing. Another is to set up a global manufacturing platform for dialogue, which we are doing with UNIDO, the UN’s industrial development organization.

Read the Outlook on the Global Agenda 2014 report.

Author: Fadi Farra is Co-Founder and Partner at Whiteshield Partners and chair of the World Economic Forum’s Global Agenda Council on Advanced Manufacturing. The Summit on the Global Agenda will be taking place in Abu Dhabi, United Arab Emirates, 18 – 20 November, and “Creating Tomorrow’s Job” is one of its thematic pillars.

Image: A man inspects steel at a German steel company REUTERS/Fabian Bimmer.