Global Agenda Enabling Sustainable Global Manufacturing 4 Enabling Sustainable Global Manufacturing
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Enabling Sustainable Global Manufacturing
© World Economic Forum
2012 - All rights reserved.
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3Enabling Sustainable Global Manufacturing
4 Manufacturing Matters
4 The Need for an Advanced Manufacturing Framework
6 Convergence and Disruptive Factors Determining the Future of Advanced Manufacturing
8 Scenarios for Future Advanced Manufacturing
9 Is there a Trade-off between National Manufacturing and Trade Liberalization?
4 Enabling Sustainable Global Manufacturing
1. Manufacturing Matters
The Great Recession of 2008/2009 once again triggered the debate about the importance of manufacturing as a foundation of economic development, employment, social stability and national security. All developed economies – the United States, Germany and Japan among them – have emerged over strong manufacturing bases. Emerging economies such as China, Brazil and India also rely on manufacturing to drive their economic development, expand export markets and trigger economic and social inclusion. According to the National Association of Manufacturers, manufacturing has the highest economic multiplier effect of all sectors, while the wholesale and finance sectors have the lowest multipliers2. Manufacturing not only provides gainful employment, but also brings about capabilities for capital accumulation and innovation.
A proposed Advanced Manufacturing Framework for policy- makers, the private sector and society On behalf of the Members of the Council on Advanced Manufacturing1
Manufacturing is a core element of wealth creation and has traditionally been the foundation for economic development in advanced nations. However, the share of GDP accounted for by the manufacturing sector in most developed economies has declined over the last several decades. For instance, the contribution of manufacturing activities to the United States national GDP stayed at a level of 20 to 25% from 1945 through the middle 1990s and then declined in the last two decades to the current level of 13%. Such a trend was experienced across other developed countries. At global level this share dropped from about 27% in 1970 to 17% in 20103. This is partly due to the fact that the manufacturing sector became increasingly productive with growing levels of output and lower levels of labour. The practice of outsourcing and offshoring has also contributed to the decline of the manufacturing contribution to GDP in many developed countries and has been a factor of industrialization in a number of developing countries. Additionally, the setting of global supply chains relies on a variety of activities, many of them services such as transportation or product design, which provide added value but do not count as manufacturing. This shift in the balance of contribution of economic sectors questions the current size of the service sector, particularly the Finance, Insurance and Real Estate (FIRE) “industry”, where the bulk of job creation has been taking place, notably in developed economies.
Globalization has had a profound impact on the manufacturing landscape. Traditional region-centric manufacturing strategies have been changed in response to the opportunities to compete on global markets. Access to emerging consumer centres around the world as well as to low cost labour, the development of global sourcing and supply networks, and foreign direct investments (FDI) have contributed to the transformation of global manufacturing in global economic systems. Corporate decision-makers are driven by the need to provide best shareholder value in their manufacturing and business strategies. Wherever parts and final goods can be produced and distributed in the most cost effective ways, manufacturing plants are likely to be established. Governments and policy-makers are increasingly challenged to foster the creation of high-paying jobs and the generation of economic growth. Beyond traditional policy and institutional levers, governments around the world are being compelled to use
stimulus packages, job creation programmes, financial incentives and regulatory regimes to promote economic growth. New studies on “economic complexity” also suggest focusing much more on reducing capability, skills and innovation gaps to improve productivity, economic growth and prosperity4. At the same time, environmental sustainability has become a matter of concern to societies, a priority for private and public policy-makers and an emerging source of economic opportunities.
All these issues bring salient questions that are reflected upon by public and private interests: How can incentives and the interests of stakeholders in manufacturing be better aligned? Which factors could further incite the convergence towards sustainable advanced manufacturing and which factors would be the most disruptive for such an endeavour? Based on those factors, what are potential scenarios about how manufacturing developments could unfold for different types of economies? Who is likely to benefit the most?
This paper is a collective effort of the Global Agenda Council on Advanced Manufacturing of the World Economic Forum, a group of policy-makers, business leaders and academics who are involved in various aspects of developing public policies, business models and technologies that impact the future development of global manufacturing.
Based on a common framework, it examines the key factors and drivers affecting the future development of manufacturing industries. These discussions will be carried out from the viewpoints of government, business and sustainability. As a result, potential future scenarios are outlined for four types of economies: developed, emerging, energy-based and least developed5. Finally, based on a proposed framework, some key recommendations will be presented for policy-makers, corporate decision-makers and NGOs.
2. The Need for an Advanced Manufacturing Framework
Manufacturing is a highly complex activity, which is affected by many key factors including – but not limited to – government policies, trade agreements, infrastructure, FDI, workforce and talent development, wage growth, energy supply, access to resources, innovation ecosystem and currency exchange. Advanced manufacturing is defined in this paper as the technological, organizational, social and environmental strategies that improve manufacturing so that it can meet the goals of enterprises, society and governments and adapt to change. This definition reflects the growing level of embeddedness to the functions of production, distribution and consumption.
The fundamentals behind a successful advanced manufacturing strategy include focusing on identifying and addressing capability and innovation gaps through manufacturing, effective FDI strategies, strong talent and infrastructure developments, and also access to finance. Putting manufacturing back at the centre of country competitiveness can help address, in the longer term, both job creation and higher productivity challenges.
5Enabling Sustainable Global Manufacturing
There are, however, a number of trade-offs and conflicting requirements when establishing a more comprehensive and sustainable manufacturing strategy. Those include trade- offs between local jobs vs global outsourcing, job creation vs productivity, protectionism vs free trade, national technology development vs technology transfers, technology enabling vs standalone manufacturing, short-term vs long-term strategies.
The framework below highlights the need to align public and private sectors incentives far more extensively to develop an effective advanced manufacturing strategy. Institutions and public private dialogue play a significant part in aligning these incentives.
Aligning incentives to improve manufacturing capabilities is the main objective of this proposed framework. There is, however, little evidence to indicate what the optimal share of GDP manufacturing should be, implying that a high share is not necessarily associated with high development levels. Also, issues related to definition are arising at the boundaries of manufacturing and services, as traditional manufacturing processes are becoming digitized (which also enables them to be performed remotely). Consequently, they are now often classified within service industries rather than manufacturing. While the share of manufacturing in global economic output has diminished, the level of manufacturing output has increased substantially, as has the level of economic development.
Figure 1: Proposed Advanced Manufacturing Framework
6 Enabling Sustainable Global Manufacturing
Figure 2: Manufacturing Output Gain per Country (2009)6
It has also been recognized that the competitive model based on traditional economic theory needs to be challenged - it has focused on how one nation can gain advantage and dominance over others. Indeed, countries are not the only unit of analysis: the nation-state is only one part of global society. What works for part does not necessarily work for the world economy as a whole, e.g. the export-driven strategy of East Asian economies and now China cannot be replicated by all nations globally.7
3. Convergence and Disruptive Factors Determining the Future o