Does Manufacturing Matter?

European Strait #144

Hi, it’s Nicolas from The Family. Today, I’m discussing this obsession that many people have with bringing back manufacturing jobs. What used to make manufacturing so great?

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I’ve just finished Middle England, a novel by Jonathan Coe. My wife Laetitia had mandated that this year I only read novels by female authors, but she nonetheless recommended this male-written one because she found it enlightening, funny, and timely in the context of the endless Brexit nightmare (we live in the UK 🇬🇧).

Indeed Middle England is a great work of fiction by one of Britain’s most-acclaimed living authors. It introduces a gallery of characters, each of whom reflects a facet of Britain’s current turmoil. One of them, Colin, the father of the main character Benjamin Trotter, used to be a factory worker in the Birmingham area.

One day, Colin asks his son to drive him to the old factory, only to realize that it has been entirely wiped out and replaced with a shopping mall, some housing projects, and a huge, empty lot. What follows is a heartbreaking monologue about the supposed importance of manufacturing in today’s Western economies:

What I don’t understand is, where it’s going to end? How we can keep going like this. We don’t make anything any more. If we don’t make anything then we’ve got nothing to sell, so how … how are we going to survive?

That’s what worries me…If there’s no factory, how are people supposed to make the money to spend in the shops? How are people supposed to make the money to buy the houses? It doesn’t make sense.

Indeed for years, Western nations have been traumatized by manufacturing jobs being sent overseas. In reaction, the vast majority of politicians keep campaigning on the idea of “making [Country X] great again”—which is code for the idea that we can go back to creating good jobs in manufacturing and reliving the post-war boom (France’s Trente Glorieuses; Germany’s Wirtschaftswunder).

Yet we need to remind everyone that this obsession is a dead end. In the age of robots, manufacturing has changed a great deal and it can’t create as many jobs as it did in the past. Above all, this ill-advised focus on manufacturing prevents everyone (politicians, academics, activists, and journalists) from getting interested in what really matters—that is, jobs in what I call proximity services (in hospitality, cleaning, healthcare, education), and the transformative impact of computing and networks.

Last week, this newsletter discussed the idea of Europe applying the 1970s East Asian playbook for developing its economy. But since manufacturing was a core component of successful strategies at the time, it’s all the more important to remind readers that manufacturing doesn’t matter as much as it did back then. Read along 👇

Does Manufacturing Matter?

1/ Our collective passion for manufacturing takes many forms. The most frequent one, however, is that whenever a politician wants to talk about jobs, they go and visit a factory, have a photo op with a helmet on, and talk about how they’re committed to supporting working families. Trump is a caricature of that. His lifelong obsession with tariffs reveals that he sees the economy as about producing goods and moving them around. But really, every politician plays by these rules. Our collective representation of what work is all about is dominated by assembly lines staffed by (mostly male) workers wearing overalls, helmets, and safety shoes. Nevermind that this category of workers has never represented more than a third of the US working population. You simply aren’t going to see politicians talking about jobs while visiting restaurant kitchens, retirement houses, or childcare facilities.

2/ It’s useful to realize why manufacturing was so central in the Fordist Age. Standardized parts (the “American system of manufacturing”) and scientific management (otherwise known as “Taylorism”) were the two keys that helped unlock unprecedented productivity gains from the early 20th century onward. Thanks to these, assembly lines emerged as the segment of the productive economy generating superior increasing returns to scale: the larger those assembly lines were, the more productive they became (up to a certain point, of course). We tried to apply this recipe of mass production to every sector, but it really was in manufacturing that this mode of production thrived. As a result, manufacturing created an economic surplus that could then be redistributed (through the market, taxes, and regulations) to the rest of society. And even if most people were ignorant about the microeconomic details, we as a society collectively felt how important those factories were to our well-being.

3/ Manufacturing also raised the bar in terms of how we treat workers. From a production perspective, the Fordist Age was about standardized parts and assembly lines. But Fordism was much more than that. It was also a social contract that said that all workers should be treated like those working in the most productive sector that was manufacturing. Even in service sectors that didn’t generate the same returns as manufacturing, workers were supported just as well as those working in factories (albeit with notable exceptions). When that didn’t happen thanks to the market, redistribution was orchestrated from the sectors with increasing returns to scale (manufacturing) to those with diminishing returns to scale (services), by way of a higher minimum wage or public-sector jobs. This is why, in our collective psyche, manufacturing is synonymous with overall prosperity. The manufacturing surplus made it possible to treat all workers better, leaving everyone better off as a result. As a result, as Ben Casselman once wrote, we don’t really miss manufacturing—we miss the social contract that it once brought about.

4/ The crisis in manufacturing has inspired different reactions over time. At some point in the 1990s, leading Western politicians seemed resigned to the idea of manufacturing disappearing altogether. This was when the likes of Bill Clinton and Tony Blair made a big fuss about lifelong education—how every blue collar worker would go back to school to learn a white collar job. But that approach backfired: voters were skeptical from the very beginning; then it never really materialized; and above all, now economists reckon that education doesn’t really make a difference when it comes to creating good jobs. Thus the next generation of politicians had to find a different positioning, and they started to talk about how technology can bring about a new breed of manufacturing, one that’s driven by technology yet keeps on generating an economic surplus that can be redistributed to make life better for everyone. It takes different forms (“Industry 4.0”, “The New Manufacturing Stack”), but you get the idea.

5/ Here’s the crux of the matter, however: manufacturing as we know it isn’t coming back. The reason is that the system was rooted in what consumption looked like in the Fordist Age. Manufacturers didn’t only dominate industrial value chains because they enjoyed increasing returns to scale. It was also that they were producing what consumers were demanding. One aspect was in the design of the value chain: the first iteration was that of the Ford Motor company, which sold cars directly to consumers; then General Motors realized that it wasn’t necessary for them to bother with interacting with consumers, so they invented independent car dealerships. Another iteration was in the key trade-off that came with mass production, and which led to the grand bargain: standardization in exchange for affordability. In the end, manufacturers emerged as the strongest link in most industrial value chains, but they had to ensure they were firmly rooted to consumer demand at the bottom. Mass consumption, more than mass production, is what made the West so great.

6/ So what can be done to give new life to manufacturing in the 21st century? Today, consumption is less about manufactured goods and more about tech-driven experiences (Clayton Christensen’s “jobs to be done”). And this is the starting point for designing upstream value chains. For instance, we still need those cars and bikes, but it’s less about selling them to consumers than about providing urban mobility on demand. And this calls for a new approach to manufacturing. As has already happened in the fashion industry, this new manufacturing needs to be much more responsive to the market, to make room for customization, and to evolve at the fast pace of consumer-driven entrepreneurial innovation down the stream. 

7/ Manufacturing also needs to fulfill the rising demand for accountability and transparency. There’s an interesting approach known as “supply chain visibility”. It makes sense for improving things all along the supply chain. It also accounts for what consumers expect now that information and activism have become widespread. Today’s consumers want to see what goes into the goods they use and where and how they were manufactured. They also want to see more recycling so as to preserve the environment. (And by the way, manufacturing must account for the coming wave of climate change-related differences as well: the idea that we'll go back to manufacturing physical goods (= resource-heavy production) for generations that are, from the womb, heavily motivated to fight climate change is a pipe dream.)

8/ Politicians need to rethink how upstream enterprise services can (or cannot) contribute to making manufacturing great again. What they don’t realize is that manufacturing won’t be reborn because of robots and even higher productivity. Rather it will be reborn in order to make downstream consumer products more relevant and affordable. China provides us with a good example of how manufacturing changes as a result of consumer behavior. The Chinese are currently catching up in manufacturing computer chips not only because of the “Second Cold War”, but also because they have grown large consumer tech companies that express unprecedented needs for more powerful chips. And now their tech industry is moving up the stream, reinventing the semiconductor industry in the process. Europe, alas, cannot emulate this approach: we don’t have large tech companies in the consumer space, which means that any effort to upgrade manufacturing is disconnected from domestic demand. At best, we’ll be mere suppliers for foreign customers down the stream. At worst, we’ll be wiped out.

9/ All need to accept that manufacturing isn’t the only sector blessed with increasing returns to scale anymore. Today, increasing returns to scale are much more powerful down the stream, where tech companies interact with networked individuals, than they are along assembly lines up the stream. And so manufacturers have been out-powered by tech companies, no longer generating the biggest economic surplus in the economy. If it’s about growing the pie, any nation is much better off with large consumer tech companies than with manufacturing giants. Operating a tech consumer product at a very large scale might not create many jobs, but it does create and capture much more value than any manufacturing business. So while we still need manufacturing, it’s not the core of industrial value chains anymore—and it likely won’t be as important in our future collective psyche as it was in the Fordist Age.

10/ Because in the end, this new breed of manufacturing won’t create as many jobs as in the past. As Joe Studwell explains in How Asia Works, manufacturing used to matter in development economics because it could scale and generate productivity gains while creating mostly domestic jobs. Manufacturing made it possible to produce at home while selling overseas, whereas service businesses could only scale up by creating jobs in other countries. Yet now that manufacturing has become essentially jobless, this job-creation advantage has all but disappeared. And such job-poor, “lights out” manufacturing cannot contribute to shaping the social contract anymore. It still generates an economic surplus thanks to increasing returns to scale. But it isn’t able to raise the bar so as to improve the economic condition of all workers whether they work in manufacturing or in services.

Our politicians (and we ourselves) should acknowledge that the Entrepreneurial Age is changing what manufacturing is about. What matters is not manufacturing in and of itself. Rather the important thing is generating an economic surplus to be redistributed via a social contract that provides stability and dignity to everyone. In the Fordist Age, manufacturers made that possible. Today, the working class is in proximity services, not manufacturing. And it’s thanks to large tech companies—those with increasing returns to scale—that people will make the “money to spend in the shops, and to buy the houses”. I know that can be a bit hard to explain to Middle England’s Colin Trotter, but at least I hope this newsletter stands as a well-thought attempt.

Please scroll down to dig deeper into the shifting role of manufacturing in the Entrepreneurial Age.

🇫🇷 Next week at The Family in Paris, we've got a full slate of events covering a broad range of startup topics:

  • On the consumer side, Antoine Martin, CEO of Zenly, will be with us on Monday to talk about exponential growth, completing a Series A and B round in the same year, and going through a big acquisition. Tickets here.

  • Then on the B2B side of things, Jeremy Jawish, CEO of Shift Technology, will come in to talk about helping the insurance industry fight fraud. Having raised €90M to support growth and built a team that's 250-strong, he knows what it's like to tackle serious pain points in a major industry. Tickets here.

  • Finally, my colleague Zineb Mekouar has been working with L'Obs (a major French weekly magazine, at which I’m a columnist) to put together an event on the future of work in 2049. If you're interested (and who isn't, given that it's a topic that will affect us all!), you can sign up right here.

Here are more readings so that you can make your own opinion about the decreasing importance of manufacturing:

From Munich, Germany 🇩🇪