Low wages don’t matter in modern manufacturing

Millions of people moving from the countryside to urban factories as a recipe for the economic no longer works. Products that provide a decent margin are manufactured by workers in developed countries, and some of them will soon be replaced by robots and 3D printers.

“If labor represents a smaller share of costs, more production may happen in richer countries, closer to consumers,” explains Mary Hallward-Driemeier, an economist with the World Bank and co-author of the report “Trouble in the Making? The Future of Manufacturing-Led Development”.

Industry will certainly remain a lever for economic growth for developing countries, but it is no longer the perfect tool as it was back in the mid-1900s for the countries of Southeast Asia. So far, industrialization has provided two advantages: higher productivity and the creation of many jobs. Low but widely available wages limited social inequality and tension. This is a thing of the past, however, as modern factories do not need so many workers anymore. Industrialization continues to bring economic growth, but no longer promises mass employment.

This is obviously a far-reaching generalization, because there is no such thing as a single industry employing one type of employees. The great value of the report is that it distinguishes five manufacturing subsectors on the basis of their labor intensity and export ratios.

In the first group there are labor-intensive and capital-intensive regional industries (wood, food, metals etc.). In the second group there are commodity-based regional industries (chemicals, fuel). Export ratios in excess of 50 per cent are only found in the subsequent groups – labor-intensive manufacturing employing low-skilled workers (textiles, furniture), as well as those slightly better skilled (machine manufacturing). The fifth group, i.e. global innovative production requiring high skills (computers, electronics, pharmaceuticals), is in a class of its own. In that group export ratios exceed 75 per cent, and employment is low.

“Some manufacturing industries will remain feasible entry points for hitherto less industrialized countries and drivers of low-skill employment,” the economists of the World Bank state reassuringly, adding that this applies, for example, to the second group, i.e. manufacturers basing themselves on local commodities, as neither automation nor exports limited by distances have a significant impact here. Countries with low labor costs still have a chance in the third group, i.e. in the labor-intensive production of basic goods. The automation process has not yet gone very far in the production of textiles, shoes and clothing. Finally, newcomers to the industrialization process are also left with the traditional start from low-quality and low-price production for the internal market.

This is how China started before it became the world’s factory. Today it produces 25 per cent of goods on the planet, while 60 per cent are produced in highly developed countries. Back in 1994 these proportions were quite different – highly developed countries had a share in the global production close to 90 per cent, and China’s share did not exceed 5 per cent.

China’s climb up the global production ladder is also partly responsible for the current problems of the countries that would like to repeat its success, even if on a smaller scale. Firstly, China has practically monopolized simple manufacturing, leaving no room for others. Secondly, global trade has slowed down significantly, not only due to the crisis of 2008, but also due to the end of the commodities super-cycle, which is most visible in the decline of Chinese orders. Thirdly, China’s dominant position has spurred protectionist measures in many developed countries.

Taking all this into account, the report brings better news for workers in developed countries than those in developing ones. Yes, a technological revolution is already taking place: Industry 4.0 based on robots, automation, artificial intelligence, and increasingly mass-scale 3D printing of smaller product series. Employees may therefore feel threatened, but according to the World Bank they should not. Automation itself only poses a threat to 2-8 per cent of today’s jobs and certainly will also bring about the creation of entirely new professions.

This can be seen clearly in the famous example of Adidas’ so-called speed factories in Ansbach, Germany and in Atlanta, USA. These plants, based on 3D printing, shortened the design-to-production cycle of one shoe model from 18 months to one week, and their production capacity is 500,000 pairs of shoes per year. A thousand unskilled workers in Vietnam have lost their jobs to 160 technicians in Germany and the USA. These numbers are impressive until we realize that Adidas produces 300 million pairs of shoes per year, and still employs thousands of people in Asia for this purpose. The relocation of production of such a scale to 3D printers, if considered at all, would probably take years.

The report on manufacturing brings one more valuable observation: that production is paradoxically not the most important thing. The support and services related to the finished product are more valuable. And so in the case of the Nokia N95 phone, the parts accounted for only 33 per cent of its value, while their assembly accounted for barely 2 per cent, and services accounted for the remaining 66 per cent of the value.

It is therefore clear that countries that want to develop not only need a wise industrial policy, but also need to find advantages in the product value chain that could become global.

The full report can be found here

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