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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.

14 comments on “Why Manufacturing Matters & Where Best to Do It

  1. Susan Fourtané
    January 19, 2013

    Thanks for this peppered report, Bolaji. 

    As important for any nation as manufacturing is, I wonder what the real future of manufacturing is.  There is no doubt with the present changes, not only outsourced labour, but robotics in the workplace, and more recently software machines the way in which manufacturing is done will be suffring a transformation. 

    -Susan

  2. SunitaT
    January 20, 2013

    Manufacturing remains a significant contributor to employment across economies.

    Unfortunately this scenario might change soon. For example companies like Foxconn has already begun replacing workers with robots. No doubts this will automate the process and will help the company achieve higher profit margins but it will definitely lead to more unemployment.

  3. SP
    January 20, 2013

    ABsolutely agree that manufacturing is extremely essential for the growth of a nation. As long as cost to manufacture remains much lower that selling price you it makes sense to manufacture locally else you need to go to low cost regions.

  4. SunitaT
    January 20, 2013

    As long as cost to manufacture remains much lower that selling price you it makes sense to manufacture locally else you need to go to low cost regions.

    @SP, I agree with your opinion. But its important to consider the transportation cost as well. Oil prices are slowly moving up and this will further push the prices of the products higher.

  5. mfbertozzi
    January 20, 2013

    @tirlapur: good point, that item appears really strong for making a credible reduction action; other way would be the adoption of telecommuting paradigm – if credible for some professions – for reducing costs labour and the adption of innovative e-platforms, for selecting right supplier in the local region. Believe it or not, that usage is still not so prevalent.

  6. _hm
    January 20, 2013

    If manufacturing is green and not much burden to environment, industry will bring back manufacturing. However, if process is not good to environmnet, it will kept outsourced.

  7. mfbertozzi
    January 21, 2013

    @_hm: it is a good point in my opinion, but I don't know how much is applicable a realistic, maybe it could be applied locally; in fact, we have assisted to several difficulties in sharing a common “green” vision worldwide; Kyoto agreement, for istance, resumes very well strong steps still to run.

  8. Mr. Roques
    January 22, 2013

    Great points covered in the report. I agree with them that manufacturing matters, because it takes some raw materials and adds value. The result is greater than the sum of the inputs, in a way. Doing that, a country can create a surplus between exports and imports.

  9. mfbertozzi
    January 22, 2013

    That's right Mr.Roques, it would be good to consider your model globally, maybe positive effects should be distributed abroad; my feeling for now, is that beneficts are still restricted to a few countries, probably those – as of today – are having a good net cash.

  10. bolaji ojo
    January 23, 2013

    Gradually, it seems the outsourcing of manufacturing to China and low-cost centers is heading for a slowdown. Maybe companies are finally examining the total picture that experts have been trying to draw attention to for some time.

  11. bolaji ojo
    January 23, 2013

    Tirlapur, If automation takes out additional human costs from the manufacturing process, shouldn't local manufacturing become even more important then? I think it's likely in that scenario for manufacturers to put even more emphasis on the points noted in the McKinsey report such as raw materials availability and proximity to consumers and other buyers.

  12. bolaji ojo
    January 23, 2013

    The decision about where to conduct manufacturing in a capitalist economy does not rest on the government but on private enterprise. The government's support is essential but it's not the main factor companies consider.

  13. bolaji ojo
    January 23, 2013

    Mr. Roques, Countries are concerned about surpluses but companies are concerned about profits. These two goals can at times clash and they have in manufacturing.

  14. Mr. Roques
    January 29, 2013

    Well, governments should look after the country, and think beyond a couple of years. That, hopefully, helps businesses as well (although they might not agree with that).

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