Manufacturing Will Be New Growth Secret Weapon

By Marco Annunziata, Consultant, Economist, Forbes Columnists and SCOOP Partner

As vaccination programs gain traction across a broader range of countries attention, and expectations, are focussing on the post-pandemic recovery. But how quickly will it take off, how robust will it be, and how many jobs will it create?

In the coming months, as more economies gradually reopen, services will steal the limelight. It stands to reason. Services that involve person-to-person interaction have been most directly affected by the restrictions governments imposed to limit contagion. Across the world people are eager to go back to restaurants, theaters, gyms and airports. As restrictions are lifted, these services will enjoy a strong and very visible rebound.

Innovation trumps low labor costs

But manufacturing will soon emerge as the most important driver of the recovery, shaping the economic future of the global economy and of individual countries in a very fundamental way.

The reasons for this predate the pandemic shock, and the digital-industrial revolution plays a key role. For an extended period, manufacturing shifted to emerging economies, attracted by lower labor costs, while advanced economies focused on services. But over the last few years, digital-industrial innovations have eroded the importance of low labor costs. Now what matters is the availability of high-quality talent, access to good infrastructure and being embedded in the right ecosystem.

Moreover, digital-industrial innovations have eroded the old distinction between manufacturing and services: the products of the manufacturing sector are increasingly becoming a vehicle to offer and sell services. An “intelligent” industrial product will improve, and in some cases, expand its functionality over its lifetime, providing increasing efficiency and reliability. This spills over into changes in business models – a jet engine becomes a means to sell flight-hours.

Local trumps global

Digital-industrial innovations, through greater flexibility and efficiency, make it possible to produce at smaller scale, closer to the customer, giving greater freedom in choosing where to locate production. At the same time, two important things have happened:

• First, repeated disruptions from protectionist waves and then the pandemic have underscored the vulnerabilities of global supply chains, and the importance for manufacturing companies (and countries) to achieve better security and resilience in their operations.
• Second, countries have become increasingly cognizant of the fact that a stronger domestic manufacturing sector can play a crucial role in fueling innovation and growth, and in creating better and higher-paying jobs – in the process creating the incentives and conditions to improve a country’s human capital over time.

These factors have created a convergent interest from both private corporations and policymakers to build more robust local supply chains and manufacturing ecosystems. This does not totally negate the importance and benefits of globalization. Manufacturing companies still strive to find the best suppliers and partners globally, and to expand their footprint into global markets. But more and more they want to build their global operations on a stronger local base of talent, technology and partners. Governments in turn understand they need to do more to foster a domestic manufacturing sector, through a combination of infrastructure investment, financial assistance and other supportive measures.

Manufacturing builds your future

As life gradually returns to normal during the remainder of 2021 (with fingers crossed!), a strong and quick rebound in services will create a lot of enthusiasm. But to see how the economic future of different countries shapes up we will need to look beyond that, to how different manufacturing sectors respond to the challenges of the post-pandemic environment and to the new initiatives launched by their respective governments.

The pandemic shock has increased the gap between stronger and weaker companies. The best players in the manufacturing sector have increased efficiency, they have learned how to focus their innovation investment efforts, with emphasis on execution and the rapid and effective deployment of new technologies, and are moving to build stronger local ecosystems. We are seeing it across regions, from Europe to Asia to North America.

The success of the manufacturing sector could prove to be the secret weapon for growth, the one that will make or break a country’s ability to boost its human capital and living standards in a sustained manner over the next few decades.