Is manufacturing important?
We regularly see in the media and general public discourse and some confusion about what manufacturing actually is, and consequently further discussion on what it might mean and how important it might be to our economy, becomes increasingly obscure. These are ideas that need to be crystal clear in order to properly inform and support judgments around policy.
What exactly is manufacturing? What do you think right now? Surprisingly, this is often misunderstood. Manufacturing is not simply the act or process associated with the production of goods. Production or production process is only one part of the manufacturing process. Manufacturing is the art of choosing what to produce, what supporting research and development to fund, how the product or process will go to market, at what price and via what channels. Production is the door that connects the intellectual effort to the value acquisition effort post production. That value chain, the focused intellectual effort, the act of production and the process of value captured is the essence of manufacturing and like any system all the parts require attention.
Once the all embracing nature of manufacturing as a system is in mind as opposed to production as a component of that wider system, then the value of manufacturing to the community can be properly considered.
Manufacturing provides job growth
Manufacturing has the highest job multiplier of any industry; this means that every job in manufacturing has the flow on effect of supporting 2 – 3 other jobs in the economy. It also has high flow on effects in terms of economic activity, for every $1 of value added in the manufacturing sector, $1.40 of value is added else where in the economy.
It is also important to consider the type or quality of jobs which manufacturing provides. Manufacturing jobs are higher than average incomes, so the more jobs in manufacturing the higher our general living standards will be.
Manufacturing jobs of necessity require higher skill levels, higher levels of innovation in all aspects of the system. Without these jobs in an economy, we should expect to experience the loss of people looking for innovative roles, further eroding our future capacity in many skilled and innovative areas. We lose the talent war.
Manufacturing drives complexity
Generally those economies which are successful are complex and diverse in nature. The Economic Complexity Index (ECI) measures the complexity within a country, and also what individual industries contribute to that complexity. Activities which contribute the most to economic complexity are Machinery (2.54 ECI), Chemicals and Health (2.52 ECI) and Electronics (2.25 ECI), whereas the industries which have the lowest values are Cotton, Rice, Soy and Others (-2.3 ECI) and Oil (-2.1 ECI).
We can also compare each countries ECI value, New Zealand is ranked 48th with an ECI of 0.27. When we compare New Zealand value with countries who value manufacturing highly, we score much lower: Japan (2.3 ECI), Germany (2.0 ECI) and Switzerland (1.9 ECI).
This is important because complex enterprises have positive flow on effects which build network effects. This means having access to all the business activities and services required to provide all the products and services needed to support different supply chains, manufacturing activities and production processes.
Manufacturing fuels innovation
Manufacturing has a high expenditure on research and development; it is the sector which actively develops science, engineering, products and innovation, which have future benefits in improving knowledge which then contributes to new product and service development.
Our economy desperately needs such innovation to sustain future growth and economic wellbeing. If our manufacturing capability is neglected and we must rely more and more on simple commodities; our future will be poorer.
We often heard the post-industrialist view that an economy can prosper by shifting the “dirty bits”, production, offshore, while keeping “shiny bits’, research and development, marketing and the like onshore. While this can work for some industries to a point, to capture all the benefits and continually improve the processes and create new products, production needs proximity to the other parts of the manufacturing process, particularly in low volume niche products. This production (“dirty bits”) don’t matter mindset extends to the belief that an economy can increasingly rely largely on services, but this ignores the huge co-dependence which the service sectors have with manufacturing. Manufacturing firms both demand and supply a large proportion of the services in any economy.
What does this mean for New Zealand?
The contribution of manufacturing to the community and the importance of manufacturing to the economy needs widespread recognition; it needs to become part of our culture. What we don’t value we don’t fight for. Is it inconceivable that schools in Germany would ever have allowed metalwork and woodwork slip from the school curriculum, but in New Zealand who cares? The ECI numbers above speak to this issue.
What we have right now is a bias to offshore activity, to regress towards the commodity end of the value chain. All the talk about value-add is meaningless when our track record and policy settings demonstrate, in general, the opposite. Falling complexity, more reliance on simple commodity outputs is not the road to a prosperous future.
The bias needs to shift in favour of increasing complexity and greater added value. For that to happen we need see the cultural shift that sees manufacturing as vital, not an optional extra. From there the necessary policy changes that will create an environment where manufacturing investment makes sense are largely obvious.