For many the title of this chapter is in itself a huge problem, it creates a large divide in opinion. Can an advanced economy survive without a manufacturing base?
The demise of manufacturing isn’t something experienced just in the UK, the USA, a manufacturing giant has suffered a somewhat similar experience. In 2015 not a single kettle, toaster or TV was made in the USA.
To many that statement would seem incredible. The USA is the world’s largest economy, and yet it now operates a trade deficit whereby it buys in more from abroad than it sends back.
Many people have argued that this is just a symptom of a positively changing economy. One that’s shifting from manufacturing to services, and the growth in services should more than cover the cost of buying products from abroad.
Buying from abroad also has certain advantages. It’s usually done because it’s cheaper too, so higher service based incomes have lower expenditures on goods as a result. A win win.
The problem is that without any manufacturing the economy can often become hugely reliant on singular services like banking, leaving it with little to fall back on in hard times. Take for example the miraculous birth of Facebook. When it floated in 2013 it had just 3000 employees yet its market value was astronomical. We’re all now familiar with facebooks high profits, but there’s a hidden flaw in the facebook model. Like most service entities it has a relatively small but high skilled employee set, again something governments laud, leaving low cost employees to either be outsourced abroad or non-existent.
Of course this creates a lot of income for those 3000 employees, but aside from that all the profit facebook makes goes to the highest earners in society, increasing their wealth. In effect services then make the rich, richer, create a highly paid high skill worker class and leave the rest in the dust.
A service economy promotes poor wealth distribution, something most governments don’t want you to know.
As an alternative then take a manufacturing led economy then, one with high labour rates of low to middle skilled workers. In 2012 Boeing, a company valued less than facebook employed over 150,000 workers. That’s 150,000 people earning a wage and spending money.
The net effects of that 150,000 work force might be a lower profit margin and lower market value, but the benefit given to the economy is huge in comparison to facebook when you consider the wealth creation effect. Boeing, a company that makes high tech products simply by its own existence helps spread wealth from rich to poor, the complete opposite of a service business.
Of course there has to be a happy medium, you need services and manufacturing in an economy and it’s unrealistic to expect that all low skilled but high labour reliant (making wages a big factor in production costs) would remain in the UK.
Because of this there’s a desire that economies shifting to mainly service focused constraints should retain a manufacturing base, by focusing on high end, technologically advanced production, leaving simple items to be mass produced abroad.
Take for example Nissan in Sunderland. Not many people realise it but that one factory produces more cars in a single year than the entire output of cars in Italy. Nissan continually invests in Sunderland, having recently committed to enlarge the factory and build two new models there from 2018.
The reasons for this commitment are simple. Sunderland has a skilled workforce, with a higher productivity level than anything comparable, for a reasonable wage. You have to remember that the UK now has a living wage, meaning it’s hardly the cheapest in terms of wages, but productivity vs wages is often where the UK exceeds. If you have someone who’s twice as productive, then their wage can be twice as high, or not if you want them to be more effective for their money.
Factories like Sunderland are aspirational to many, but there’s no reason why other high end production couldn’t return to the UK from abroad. Take for example Smart TV’s. Long gone are the days of cheap television sets, todays televisions are super computers and as such they require a high skill level to get right, products like this are ripe to return to an advanced economy.
Wealth distribution aside, when understanding the importance of manufacturing, you have to consider that it stands almost at the start of a large chain of production elements that add value to an economy. Whether that be resource demands, fuel to get staff to work, electricity, accountants, marketing, sales; it all begins with manufacturing. Remove the factory and what you get is an economy that only starts half way through the buying cycle.
In a lot of ways the loss of manufacturing can be compared to the introduction of new house builders to the housing market. If a first time buyer were to buy a house, this would often kick start a long cycle of house deals in order to free up one house.
For example, in order to sell the house to the first time buyers, the couple that are selling it would need to buy a larger house, and in turn the people they are buying from would need to buy another house too.
From a simple start of perhaps a £150,000 first time buyer’s house, you might get 3 or 4 purchases totalling over £1,000,000 in sales, with agency fees, lawyers’ fees and the subsequent renovations that come with house purchases. It really is amazing how a butterfly effect can take place.
Now imagine that the first time buyer buys from a house builder. This chain is stopped dead. The net benefit to the economy and job creation is tiny in comparison. So what can we learn from this? Well firstly the government should be stimulating private first time buyers to buy privately (and not from builders) perhaps through lower stamp duty etc but in terms of manufacturing there are lessons too.
In a factory sense, the house builder is the factory abroad with profits and associated deals lost. Keeping manufacturing in the UK would keep the side deals and dependent job creation here too. Yet this cannot always be the case. In a situation where a manufacturing role is simple, the job will inevitably go to the place with the lowest wages.
This then is why we need to focus on manufacturing where wages aren’t the key component and in some cases stimulate investment, like in Sunderland through tax deals. The money lost through tax deals would be more than made up through increased income tax and taxes on those other companies in the chain that benefit.
Chapter Summary:
• The benefit an organisation gives to a community should be measured by more than just profit
• Companies that make low profits might help communities more than those with huge profits as they distribute wealth to employees simply through higher employment
• We should promote businesses that distribute wealth rather than hoard it for a select few; although the caveat here is that these select few might in turn choose to distribute their wealth in other ways.
Read our next blog post “The idea, the marketing & the sales”.
