The Disease of the Manufacturing Industry – an insider’s perspective

To a large extent the manufacturing sector inherited the consequences of a self inflicted disease. The outsourcing trend that started in early 1980, initially intended to help reduce cost, provided only a short lived advantage. The commercial sector (distributors and retailers) has become a lot more powerful in promoting cheap products to increase volume of consumption, and in the process setting in the minds of the buyers (individual consumers or institutional buyers) a new low in the value perception. DVD players sold at Wal-Mart for $39 is a relevant example.

Now, that even China becomes more expensive than in the past (the combination of labour cost going up, taxation, currency exchange etc.) the manufacturers are stuck with lower prices (consumers that were willing to pay $100 for an item produced in Canada before, got used to paying only $50 for the same item produced in China), and is impossible to recover from that position. Under such price pressure, any attempt to make the same product here is cost prohibitive. Who prospered in the process? The commercial sector is exploiting these circumstances to the demise of the manufacturers.

The constant decline of the manufacturing sector (frozen wages, high unemployment, stripped down benefits, uncertainty of the future) has definitely discouraged an entire generation of young people coming to the industry. The new high school graduates would rather work in any service sector, than enrolling into an apprenticeship program, or starting a manufacturing job. The work force is aging and the scarcity of new resources is concerning.

The manufacturing sector used to be the most solid contributor to the real economy – 3.8 multiplier of economic activity. Logic infers that such dominant power would confer its players privileges and protections aligned with their participation in the value creation process. Yet, these days, the speculators and manipulators are doing much better. People and organizations acting either as enablers (government, legal firms), connectors and advisors (consulting practices, agencies) or support providers (banks, IT) are currently representing societal activities that are more attractive and better rewarded than the companies actually producing or making available the goods or services the consumers need.

An entire infrastructure has been developed to support the manufacturing industry during its glory. Many of those sub-products - services, agencies or governmental departments – were dependent on the underlying domestic activity. However, with the globalization movement, all of these resources got exposure to international markets, and changed their business models to accommodate transactions across borders and continents. Now, that most of the manufacturing moved overseas, these service organizations are doing just fine independently of where the goods are produced – banks are lending money globally, logistic companies are moving product regardless of their point of origin, consultants learned to speak multiple languages and retailers are happy to sell higher margin goods at more affordable prices to the consumers.

It seems that the new arrangement no longer needs the local manufacturing economy that helped creating the system – for every person loosing a job in manufacturing, there will be almost four other people doing just fine. What is less often realized is that this approach is only short-lived. Soon enough the middle class employed in the manufacturing sector of the past will completely lose its purchasing power and, in spite of all the offshore goods being brought here and made available at cheaper prices, there will be much fewer interested or affording buyers.

The decline and struggles of the manufacturing industry is the elephant in the room. Everybody talks about it but it looks that the ones talking lauder are not insiders. There is an army of consultants, agents, and ‘concerned people” that are more interested in the process of fixing than on the result. It may sound cynical but a sick patient is more valuable to a revenue thirsty hospital than a healthy person…

Should the government do something about it? If we are really conscious of the fact that the manufacturing industry is at the core of our ability to prosper as a society, the answer is yes. It should regulate, subsidize and support its main contributor to the point that the sector regains its attractiveness for new, smart people, and keeps the existing ones happy. It may not be a popular thing with the elites, but a necessary measure in order to ensure the viability of our economy, the prosperity of our country and the sustainability of our society.