Manufacturing: Should We Let It Rest in Peace?
The question comes up repeatedly: Given the service sector's dominance (75 percent of jobs), do we really need manufacturing? We may want it. Those Gary, Indiana smokestacks are our continuing image of the real America. Yuppies at computer terminals in avant-garde, urban banking towers are not. Nonetheless, perhaps we could thrive as a nation of bankers and fast-food purveyors.
Consider one of the most robust economic tenets, developed by David Ricardo in 1817—the law of comparative advantage. It says that everyone should specialize in what they do relatively best. High-skill, knowledge-intense service activities may be our strongest suit.
Who would have dared to suggest a century ago, when 45 percent of the work force toiled on the farm, that today's two percent who are still farmers could feed us? Should we try to stave off this newer transformation from manufacturing to services, just as we earlier resisted the wrenching metamorphosis from farmer to factory hand?
Why shouldn't we let Brazil make the steel, Korea the cars, Japan the semiconductors, while the U.S. plays banker and broker? We're good at the new game. We already run a positive service-sector trade balance of $21 billion. But what of our historic nation-state bent for self sufficiency? This is not trivial—ask the Japanese who import 70 percent of their food and 90 percent of their energy.
To answer these questions we must begin with definitions: What's the difference between a manufacturing and a service business? A recent Business Week special report, "The Rewiring of America," notes that General Motors "uses a combination of cable, microwave, fiber optic, and satellite technology to move information among 500,000 terminals." Moreover, GM's acquisitions and use in automaking of Hughes Aircraft and Electronic Data Systems (especially EDS' lead role in the Saturn program) suggest that the borders between high technology manufacturing and lower technology manufacturing and service have all but disappeared.
Harvard Professor James Heskett further confounds the issue, observing that over a third of statistically classified manufacturing jobs are really service jobs already. He argues that "throughout the world, manufacturing is substituting information for [physical] assets"—in design, purchasing, the factory, marketing, and distribution. Dartmouth's J. Brian Quinn likewise points out that within manufacturing, 70 percent of the value added comes from service activities such as research and distribution.
Thus, we find Frito-Lay devotes as much attention to equipping its more than 10,000 servicepersons' trucks with onboard link-up computers as it does to developing yet another taste for Doritos. And similarly the issue that will determine the success of Compaq's new "Ferrari of home computers," as Newsweek calls it, is software availability.
To add to the confusion, as manufacturers are becoming more service intensive, service firms are becoming more capital intensive; that is, increasingly dependent on manufacturing's output. Institutional Investor magazine calls giant Citicorp a computer company in disguise. In fact, the bank's former boss, Walter Wriston, saw IBM and AT&T as his major competitors. The computer and telecommunications "factory" is now the heart of the bank, from the automatic teller machine to the global network of trading rooms.
The definitional muddle provides a key to our puzzle. The pace and effectiveness of the economy's transition is determined by the rate of fertile interchange among manufacturers of the latest technology (such as Intel and IBM), manufacturers of intermediate products (such as Frito-Lay), service industry firms (such as Safeway, MCI, and Citicorp) and the ultimate, fiber-optic cable-attached consumer. Economists rely on static models and overlook these interactions. The study of dynamic economics, which focuses on the role of such interactions per se, is still in its infancy. Yet the volume of permutations and combinations among players from the various sectors is precisely what breathes life into the emerging economy and drives—or fails to drive——long-term growth.
We may, then, want manufacturing to reinforce our macho self-image or to ensure self sufficiency. But we need manufacturing because without it there is no vitality or impetus to progress. The "smart car" and "smart building" and "smart credit card" are indicative of the basic revolution besieging almost every commonplace, as well as exotic, product. To remain at the forefront of the revolution we must ensure copious, tactile, if you will, interplay among manufacturing and service firms of every description.
The centrality of dynamic interchange also challenges the simplistic notion that manufacturers can make things offshore, while retaining just their engineering function onshore. Lowcost, global sourcing of subcomponents is important, but even the individual firm's real progress comes from the palpable commerce among its manufacturing, engineering, and marketing arms. Reduce the accessibility of any one link and the system shrivels.
Frankly, we don't have a clue as to where our new comparative advantage will lie! All bets are off, given the increasingly fuzzy manufacturing/service boundary. Amid the chaos, however, it is clear that our vitality depends upon the high velocity, face-to-face (onshore) interaction among sectors—each of which must be in the pink of health.
(c) TPG Communications
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