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Society, Politics & Law

Making manufacturing motor

Updated Monday 8th June 2009

Using the motor industry as an example, Leslie Budd considers the role of manufacturing during the recession.

One enduring economic myth is that manufacturing does not matter in a modern economy as we move towards a comprehensive service economy. The evidence is appealing: in the United Kingdom, industry's share of national income is about 24%, whilst within this category manufacturing accounts for 15% of total national income. Services with around 75% and agriculture having 1% account for the rest.

GM Renaissance Center, Detroit Creative commons image Icon Wigwam Jones under CC-BY-NC-ND licence under Creative-Commons license
The GM Renaissance Center, Detroit

In the US and Germany, manufacturing’s share is around 12% and 23% respectively. The economic crisis and ensuing recession appears to reinforce this myth, particularly their impact on the automotive industry. The bankruptcies of car companies and the desperate scramble to rescue ailing ones around the globe are testimonies to a sorry state of affairs. Or are they? In this heart of darkness, more fundamental issues are overlooked.

fundamentally there is a false division between manufacturing and services

The genesis of the financial crisis was in the financial services sector which is one and a half time smaller than manufacturing in terms of Gross Domestic Product (GDP) in the UK. Manufacturing is five times as big as wholesale financial services (found mainly in the City of London) – so size does matter as does manufacturing, although perhaps perversely.

More fundamentally there is a false division between manufacturing and services. During my career I have frequently asked students (and colleagues) whether software is a manufacture or a service. Most reply that is it the latter – in fact it is both. Manufacturing in the UK accounts for 75% of Business Expenditure on Research and Development (BERD) and is a significant source of demand for advanced producer services (one of the mainstays of the ‘knowledge economy’) for example, in aerospace among many others. In the demands to rebalance the world’s leading economies, manufacturing starts to look like the key sector to make the economy motor again. In this, the car industry will play a major role, notwithstanding the collapse of General Motors and Chrysler.

It could be argued that industrial behemoths, like GM and Chrysler, should be allowed to collapse: it is the verdict of the market. They overproduced in good times; produced poor build quality in their vehicles; escaped emissions regulations by producing massive numbers of SUVs: the charge sheet goes on. As has been too painfully displayed in recent times, markets are not rational and strategic industries support more than just the immediate production of gas guzzlers and widgets.This appears to be the view taken by the Obama Administration.

It could be argued that industrial behemoths, like GM and Chrysler, should be allowed to collapse

The motor industry is an important source of large agglomeration economies in the regions they locate in; creates important supply and value chains associated with regional and global production systems; is in the forefront of technological and process innovation and; is a living manifestation of Keynes’ multiplier as it sustains successive layers employment, income and output in related industries and services in the economy.

Moreover, important externalities and spillovers to the education system are overlooked in the balance sheet of the industry and by government policy. Science begets engineering; engineering begets manufacturing; manufacturing begets services, in which education and skills developed ensure inter-generational economic sustainability. In the rescue package for GM and Chrysler, the US government has put has $30bn into the former and taken a 60% stake in the case of the latter it will jointly own 12% with the Canadian government. This still seems small beer compared to the bailout of the financial system, in the order of $800bn in the US and in the UK the £5m bridging loan to LDV (and then withdrawn) pales into micro-insignificance. Furthermore, it does seem surprising that the Bank of England did not include car financing companies in its quantitative easing programme, part of the potential £150bn bail-out of the UK financial system. 

In the UK, the stress on the high-valued end of manufacturing allied to creative industries is a bit like a Thunderbirds (the television puppet show of the 1960s) view of the future. The comparative and not absolute advantage of manufacturing in the UK rests on a continuum of high to low end value added activities. We may wish to motor the economy towards a Rolls Royce solution but versions of the Trabi are still important. The post-crisis world offers an opportunity for a more balanced and sustainable economy, if we make manufacturing matter. It certainly is motoring the new economic global players along.

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