Why Manufacturing Matters & Where Best to Do It

If this was a volte-face by a major consultancy as some folks have alleged, it's being skillfully done and with some strong reasoning behind it. Manufacturing, says market research firm McKinsey, is essential to a nation or region and its presence or absence can have some significant impact on an economic area. Until I read the McKinsey report, I had been wondering if I wasn't mistaken in disagreeing with the massive, decades-long transfer -- or outsourcing, if you prefer -- of Western production activities to the Far East and Easter Europe.

McKinsey gave me back my faith in the efficacy of manufacturing as a critical element of economic development, growth, and sustainability. Yet, it doesn't blindly advocate that manufacturing should be conducted by all economic regions. It, in fact, outlines the critical factors that companies and political leaders should consider before voting on whether or not to establish plants in their locality.

You may be similarly convinced if you download the 184-page document and spend as much time poring through its findings, analysis, and conclusions. I am happy, though, to share some of these with you here, peppered with my own assessment of why manufacturing matters, no matter the economic region or nation under focus.

First, some bullet points from the McKinsey report highlighting the role manufacturing plays in both developed and developing economic settings.

• Wealth creator: Manufacturing continues to provide a path to middle-income and wealthy-nation status for developing economies
• Driver of productivity growth and innovation: Manufacturing continues to make outsize contributions to research and development, accounting for up to 90 percent of private R&D spending in major manufacturing nations.
• Job creator: Manufacturing remains a significant contributor to employment across economies. But its role varies between economies and changes over time. Even when manufacturing's relative size in the economy is diminished, it continues to make outsized contributions in exports, productivity growth, R&D, and broader innovation.

As important as manufacturing is to all economies, however, it must be emphasized that its significance varies depending on several factors, including the size of the economy, its composition, development level, and future growth strategy. It cannot and shouldn't be assumed that all nations must be involved in all manufacturing activities in order to grow. The reality, according to McKinsey, is that each manufacturing sector has its own requirements, and a nation or region may lack the essential ingredients for achieving success in making a specific set of products. In such instances, being involved in making such products would be counter-productive for the specific economy.

McKinsey identified what it described as five segments of global manufacturing: Local markets; Regional processing; Energy/resource-intensive commodities; Technologies/innovators; and Labor-intensive tradables. In order to determine whether or not to participate in any of these manufacturing segments, a country or region must first identify the resources that can help determine success in each of these activity sectors. The next step would be to honestly determine whether it has enough of these resources to be competitive in the chosen manufacturing segment.

The "success" factors to be considered include the following -- broken down by manufacturing segment:

1. Local Markets
   • Proximity to demand
   • Government regulation and intervention policies
   • Ability to innovate
   • Access to supply chains
2. Regional Processing
   • Access to raw materials and suppliers
   • Transport costs and infrastructure
   • Proximity to demand
3. Energy-resource Intensive Commodities
   • Access to raw materials
   • Proximity to demand
   • Transport cost and infrastructure
   • Cost and availability of energy
4. Global Technologies/Innovators
   • Ability to innovate
   • Low labor costs
   • Access to supply chains
5. Labor-intensive Tradables
   • Low labor costs
   • Short lead times to market

These classifications seem to make sense, and company executives as well as economic planners should consider them when deciding where to establish manufacturing plants or build support infrastructure. As with everything, though, this looks good on paper, but companies and nations may still have other reasons for investing in manufacturing segments they are least prepared for due to various factors such as the desire to satisfy local political demands.

The McKinsey report also didn't discuss the potential impact of other geo-political issues such as regional turbulence, war, etc. Those may be quite as important as the logical items outlined above.