The financial crisis has left behind many lessons for developed economies. Among the most widely accepted is the need for advanced economies to re-balance towards manufacturing and other export-intensive activities, reversing decades of relative decline in manufacturing.
At times, the arguments in favour of manufacturing have taken on a moral character. We are often told that we need to get back to “making things”, replacing the dangerous alchemy of financial services with good, honest graft. This type of hand-wringing is not especially helpful, especially in a modern, diverse economy. Manufacturing is not important because it involves making things, but because it is highly export-intensive, innovative and productive (three things that all advanced economies desperately need at a time like this).
But there is another problem with characterising manufacturing as being about just “making things”: in short, it isn’t. Modern manufacturing is an incredibly complex industry, which includes a wide range of different activities, from design and development to marketing and after-sales care. The Work Foundation’s report More than making things argued that much of the future growth in manufacturing will come from “manu-services”, which involves combining advanced manufacturing with a range of different services.
This might sound far-fetched, but it is part of a trend that has been underway for years. In the UK, just 42% of manufacturing jobs are in production occupations; the rest are in service-related and professional roles. Ground-breaking research from Prof. Andy Neely suggested that almost 60% of US manufacturers now consider themselves to be manu-service firms, selling a combination of goods and services.
So what do these mysterious manu-services actually involve? While the answer seems straightforward – anything which combines manufacturing and services – in reality this encompasses a lot of different trends. Some manu-services involve designing bespoke products around the customer’s needs, so that neither buyer nor seller know what it will look like when they sign the contract (for instance, a defence firm might develop an advanced new system in this way). Others involve selling long-term service contracts, with maintenance and after-sales care guaranteed along with the product (the Rolls-Royce “power by the hour” model is the most famous example of this).
What matters is not which services are provided, but how they benefit the customer. For manufacturers, manu-services is not just a new market; it involves switching to an entirely new business model. Companies no longer sell goods – they sell whole packages, to provide experiences, outcomes or solutions. They develop lasting relationships with their customers, rather than relying on a series of one-off transactions. That means that they have a range of new ways to innovate and differentiate themselves; not only can they develop better and cheaper goods, they can also improve the services they offer.
In fact, we believe that manu-services have replaced “high-tech” manufacturing as the key source of potential comparative advantage for manufacturers within an increasingly competitive global economy. Many emerging economies are expanding rapidly into high-tech manufacturing – defined rather arbitrarily by the proportion of their turnover that companies spend on R&D – while some developed countries – especially Britain – are seeing their high-tech manufacturing base contract faster than low-tech manufacturing. By contrast, manu-services are hard to deliver, and therefore harder to copy. If a country can build up expertise in manu-services, it is likely to be able to hold on to it.
But all this integration of manufacturing and services, and the switch to a radically different business model, is not easy for companies to achieve. Neely’s research suggests that manu-service firms are less profitable, and more likely to go bust than “pure” manufacturers. And as it turns out, it is the biggest firms that appear to struggle most with the switch to manu-services. This is unexpected – you’d expect the most innovative firms to be most profitable – and it isn’t exactly clear what causes it. It may be due to the challenges of coordinating many different service activities, or the initial costs involved in changing business models. But whatever the causes, it is in our interest to help companies overcome these problems.
And this is where government policy comes in. We set out a range of measures that government can put in place to support manu-service companies, above and beyond the policies required to support manufacturing in general. We believe that governments should consider introducing Centres of Excellence for new business models, so that companies can benefit from the latest academic thinking. We’d like to see manu-service firms have access to advice, finance and insurance to help them cope with the extra risks involved in manu-services. We also need a skills agenda that provides graduates with a mix of engineering and business skills. But most of all, we need governments to take manu-services seriously, and embed it at the heart of their economic policies. At present, it is almost impossible to define and measure manu-services, let alone promote its growth.
Note: This post can also be seen on the OECD Communications blog.