Journal 2013 resolution: time to think differently about manufacturing

 

2013 resolution: time to think differently about manufacturing

28 December 2012

At the 2012 Summit in Cernobbio Mr. Romano Prodi, former Italian Prime Minister and President of the European Commission, has recently declared to the economic newspaper Il Sole 24 Ore (9 settembre 2012) his satisfaction for the renewed attention at European level to the industrial sector, and particularly to manufacturing.

I cannot agree more: we have been giving too much relevance to finance.  It's now time to talk about manufacturing, the true center of gravity of the European economy, and, to the surprise of many, of the Italian one.

Nowadays it is a priority to protect and revive our production systems.  Prodi was telling a story about AppleTim Cook  has had a recent conversation with the President of the United States.   When asked why Apple could not restore production in the United States, he responded to Obama that this wouldn't be possible anymore, and not due to cost issues, but because the supply chain is no longer there, and can't be transferred back.

This should make us think.  Just a few years ago, when I was working for IBM, major production was still carried out in two Italian plants, near Milan and near Rome.  Today, however, Asia seems to represent the largest manufacturing system in the world.  But this may not last forever, and Europe should be able to build a production system as flexible as the Asian one. It is like the game is starting over again, and we must be fully aware of our strengths and how we could play.

If someone asked me if manufacturing is still a crucial and irreplaceable factor for the growth of western economies, my answer would be "of course!", as it is based on the opportunity to create more jobs, and so redistributing income.

One of the reasons why, until now, it has made little sense to fully outsource the industrial production to the most competitive nations has been the "cost of distance", i.e., the additional burden coming from the logistics, compared to the target markets.  However, due to the growth of the economies of these so-called emerging countries, this argument is losing steam.

About the future of manufacturing in Europe, there are, in a nutshell, two opposite positions:

1) All the production would be destined to move to the Emerging Markets, due to the elimination of the cost of distance, the progressive removal of trade barriers, the low cost of labor, combined with the explosive growth of those markets;

2) the whole industrial production should be moved back to the Western Countries, precisely because the factors mentioned above would be subject to a profound change: in this hypothesis, the cost of distance wouldn't be irrelevant at all due to both the potential crisis that these emerging economies may have to deal with and to the size of Western economies. In addition, we could easily witness the rebirth of the same trade barriers, thanks to a growing protectionism.

As usual, the most likely scenario will be the synthesis between these two positions: what is likely to be expected, thanks to the markets' globalization, is a substantially balanced cost of distance, while the the production costs will remain the decisive factor.  It is true that they are significantly growing in the emerging markets, however, Europe, and especially Italy, must do much more from this point of view, if they want to guarantee this future source of employment and social welfare.

How to reduce production costs, then?  Reducing the incidence of labor costs, without necessarily having to reduce wages, but instead by increasing productivity through increased automation, improved capacity utilization, and finally the renegotiation of labor contracts.

Unfortunately, this has been a hard adjustment that the United States and Germany have adopted in a timely fashion, and that Italy has not yet been fully able to adopt.  As an example, the value added per worker in Italy amounts to 72.438$, well below the US at 128.850$, but also below Japan, France, UK, and Germany.  Or one may consider the loss of competitiveness over the past fifteen years, with manufacturing unit costs increased by 30% in Italy vs flat in Germany during the same period.

Even the example of Apple should make us think: it looks like only a fraction of the value of their products is generated out of China (about 15%, in contrast to what one might imagine) or Japan, while the vast majority remains in the U.S., where they have maintained research, design, marketing, etc.  It is an example of how the outsourcing of manufacturing could be made while managing to retain much of the value in the Company's home country, thanks to productivity and innovation.

I agree with Mr. Prodi: manufacturing is a challenge that we can not lose.  Either the industrial sector moves forward or it is going to die.  However, it will take European industrial policies, research, innovation, quality of manual labor.  We need a policy that encourages the use of new technologies, as well as innovation impacting both the business processes and the products. It takes the information highways. We need, above all, a constructive attitude that favors the development of the enterprises, as it was during the years of the economic boom, and not the passive resignation that we breathe too often.

In essence, we must learn how to share best practices, innovation, and research. And not only at the Italian level, but throughout Europe.

Maybe we need more Europe, and not less Europe.  This is often preached while talking about spreads and finance... doesn't it apply, and perhaps even more, for the comeback of the manufacturing industry?

And we hope that this may also become a central theme of the upcoming Italian electoral campaign...

 

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