We are witnessing one of the greatest periods of transformation in history. The convergence of powerful technological, political, economic and cultural forces are shaping the 21st century. For many manufacturers and workers, adapting to this reality is proving difficult—but necessary.

New Factors Changing Our Lives

Technological advances in microelectronics, computers, telecommunications, biotechnology and other fields are changing the way we live and work. The fall of Communism, which added one-third of humanity to the capitalistic ranks, is sharply boosting global competition and creating new markets.

Globalization, made possible by the technological revolution, is empowering companies to source and sell anything anywhere. Concurrently, many traditional cultures are resisting the modernization pressures that globalization brings.

In response to these seemingly chaotic events, many faiths are retreating into religious fundamentalism in order to regain certainty in an uncertain world.

How Did We Get Here?

After shifting from nomadic hunting to settled agriculture, which lasted about 8,000 years, change began to accelerate. Industrialization emerged in the very late 1700s in Great Britain and early 1800s in the United States and Germany. The invention of the steam engine and its application to railroads enabled the speedy transport of mass produced goods across large distances. And the invention of electricity, which virtually turned night into day, established new paradigms.

The recent integration of new technologies, global markets and improved supply chain management has again altered our production and distribution models with fantastic results. Productivity has climbed to new highs while innovation has flourished. The shift from brawn power—use of muscle on the factory floor—to brainpower is nearly complete. Today, self-directed workers operate in teams and apply more sophisticated skills to create and run new processes.

What Is the Result?

The manufacturing contribution to gross domestic product (GDP) is declining—from 22 percent in 1979 to 12.9 percent in 2002. Yet, output continues to rise while the number of workers, as well as inflation-adjusted prices, continue to fall.

We’ve seen these trends before. In 1940, 9.5 million U.S. workers were employed on farms. By 2003, this number fell to 2.3 million. Yet, U.S. agricultural output skyrocketed. In the process, the U.S. did not lose 7.2 million farm jobs: they shifted to emerging industries, resulting in higher standards of living and a more prosperous economy.

Since 1970, the number of working Americans has grown by 85 percent to 131.5 million. According to the Labor Department, the U.S. will generate another 21.3 million net jobs from 2002 through 2012. However, manufacturing jobs have fallen from a high of 21 million in 1979 to 14.4 million in August 2004. Many blame this on rising imports and offshoring. But analysis reveals that new technologies, high levels of productivity and improved manufacturing processes are the primary causes.

Consider this. U.S. job churn results in the average loss of 31 million jobs annually. But new ones are created even faster. In turn, resources are shifting from low-technology production to higher value, higher technology processes that create new industries and higher skilled, higher paying jobs.

This pattern is not new. Automobile workers replaced buggy makers, and ATMs and voice mail eliminated many bank teller and receptionist jobs.

During the production evolutionary process, pressure is put on manufacturers to adapt. For many, this means subscribing to Joseph Schumpeter’s process of creative destruction: where the new destroys the old. For many companies, this means replacing winning products while sales are still good.

The New Focus

Looking forward, manufacturers must compete less on price and more on product design, branding strategies, productivity, flexibility, quality and responsiveness to customer needs. This puts a high premium on skills.

Consequently, it’s no surprise that unemployment is lower among workers with higher levels of education. For example, in August 2004, the U.S. unemployment rate for workers age 25 years and older without a high school diploma was 7.5 percent. It declined to 4.7 percent for high school graduates, 4.1 percent for those with some college education, and 3 percent for college graduates.

In an attempt to adapt, companies are increasingly specializing in more complex, value-added goods and services. In turn, workers are seeking greater expertise. This pattern, however, is not without consequences.

The previous shift from an agrarian society to an industrial economy compelled workers to leave farms in search of factory jobs. Workers were required to learn new skills. But the skills demanded today are far more sophisticated, and are probably creating even more fear and anxiety than before.

The Production Sharing Alternative

For low technology manufacturers that are likely to suffer if they maintain their entire production process in the U.S., production sharing, also known as co-production or cross-border manufacturing, may provide some relief.

Production sharing occurs when producers in different countries share in the manufacturing of a product. It allows companies to:

  • Complement each others’ strengths in order to create greater value;
  • Gain access to unique technology, raw materials, and specialized intermediate inputs;
  • Reduce overall costs;
  • Provide an important market for a company’s component exports;
  • Retain higher wage jobs, product development and design, capital-intensive manufacturing, and marketing-related activities in the United States; and sometimes
  • Provide the only means to keep companies in business.

Production sharing is not unique to the United States. For example, companies in Japan, Korea and Taiwan primarily co-produce in China, Indonesia, Malaysia, Thailand and the Philippines with a focus on computer hardware, telecommunications equipment, electronic components and appliances.

In the European Union most co-production involves apparel, auto parts and electronic products and occurs mainly in Poland, the Czech Republic, Hungary, and Slovenia—countries with inexpensive but well-educated labor forces. A growing share of European co-production also is taking place in Northern Africa.

One of the best examples of production sharing involves the U.S. computer industry. Catherine Mann of the Institute for International Economics says offshoring of computer manufacturing resulted in a 10 to 30 percent drop in computer costs. In turn, sales of PCs soared. This led to a rapid rise in U.S. productivity and added $230 billion in cumulative GDP from 1995 through 2002. The result: many new jobs emerged, far exceeding those lost to production sharing.

The Backlash and Response

As the U.S. manufacturing sector evolves, less competitive industries will increasingly demand import protection via creative subsidies, quotas and regulations from policymakers. Higher tariffs will be more difficult to obtain. In the past, different tactics were used. For example, in the early 19th century, the English Luddites destroyed textile machines because they replaced weavers.

Since protectionism will result in the further erosion of manufacturing jobs, it will be necessary to establish long-term, pro-trade advocacy efforts. But, policies that support life-long learning and global integration will help prepare our workers and companies for the challenges ahead. And companies that nurture proactive global corporate cultures and learn faster than their competitors likely will be successful in the next decade.

This article appeared in Impact Analysis, September-October 2004.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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