Manufacturing Comeback?

The Financial Times says reports of the death of manufacturing in developed countries are greatly exaggerated:

Western industry is learning again to compete, by Peter Marsh, Financial Times (free): If the doomsayers are to be believed, virtually all the world’s production is shifting to low-cost nations such as China, in a process that will make factories in rich countries about as rare as frock-coats and gramophones.

But the reality is different. Certainly, companies have in the past decade relocated a lot of production to countries outside the main developed nations – but western Europe, North America and Japan will this year still account for about three-quarters of world manufacturing output. China’s share is about 9 per cent, albeit substantially higher than the 4 per cent it accounted for a decade ago.

Moreover, an extensive series of interviews by the Financial Times has found top executives of many industrial companies strikingly upbeat about their capability to operate plants economically in in the high-cost countries, often in tandem with other production centres in the lower-cost regions.

It is becoming clear that a wide range of factories in high-wage nations are capitalising on positive factors that offset their larger cost burden. These include the ability to develop products using sophisticated technologies and to produce highly “configured” goods tailored to the needs of local customers. ...

A generally benign economic background – the result of an economic upturn in Europe and Japan along with strong growth in emerging nations such as China and India – has provided a sturdy platform for the strengthening role for manufacturing in the rich countries. “My feeling is that many companies based in the high-cost regions have pretty much reached the limit of what they intend in transferring jobs to China and other emerging economies on the grounds of costs,” says David Hensley, director of global economic co-ordination at JPMorgan, the US investment bank. ...

After a manufacturing recession in 2001, when global factory output fell 2.5 per cent, output increased by an average of 3.6 per cent a year starting in 2002. As part of that, many manufacturers operating in high-wage regions are showing distinct signs of life, though profits for many remain fairly low. ...

[R]ecently, manufacturers have started to explore a middle ground. In steel for example, the rush is on not to acquire production in low-cost developing countries but rather that low-cost producers are struggling to buy high-end plants in Europe and the US that can make specialised, high value-added products...

When the hybrid model works within a single company, linking the two sets of plants is a transfer of know-how in production and design, with the factories in the high-wage nations – the so-called mother plants – capitalising on their higher levels of technology by generally taking the lead in these relationships...

But, illustrating the flexibility of the model, the flow of ideas can also work the other way around, helping the high-cost plants to learn from activities in the low-wage nations. ...

In many instances, companies find the competitive position of their factories in high-wage nations is protected by working in areas of sophisticated technology or design, where the capabilities of rivals in low-cost nations are still some way behind...

Many groups find their high-cost plants to be valuable not just for making products for sale to the final customer. These also sometimes have a role producing high-tech components of use by the companies’ low-cost factories, which operate using lower levels of technology.

With these high-cost plants acting as “feeders” for the low-cost operations, the conventional way in which the hybrid model works – with parts channelled from low- to high-wage nations on the grounds of costs – is reversed. ...