First Thoughts
  By Dan Gilmore - Editor-in-Chief  
     
   
  September 25, 2008  
     
  Supply Chain Perspective: Back to the Product Economy?  
 

I was planning to write about something completely different this week, but with the current US financial crisis, it’s hard to focus much on anything else right now.

We received lots of great Feedback, both public and private, from my column last week on the Supply Chain, AIG, and What’s Next.

From the many letters I received, what especially seemed to ring a bell was this statement: “Finally, I will say I think the US economy for awhile has been too driven by the financial industry. Those days are obviously gone for many years to come. Whatever form it takes, the “real product” economy is going to have a bigger impact on our economic growth than it has the past few years – and that’s good for the supply chain.”

Gilmore Says:
We’re giving too much intellectual property away to China and others, and often ignoring the “cost innovation” that is increasingly the basis of Chinese competition – not just low wages. Etc.

Click Here to See Reader Feedback

We received some two dozen short responses that looked favorably on the potential for that kind of evolution – back to the future, if you will.

Chris Alder of Access Business Group, for example, wrote, “I also hope for the day when we become (again) a product-driven producer-society, and not that of 'financial products'.”

Jerry Saltzman of Wyeth added that “I, too, would like to believe Dan Gilmore's assertion that the influence of "real product" will be stronger for the foreseeable future. The financial industry should serve as the economy's electric grid, providing the power to drive factories. For the last 8-10 years, however, the financial industry has acted more like factories, creating incredible wealth for a few while the "real product" factories are forced to make short-term sacrifices to keep up or be bought up. Unfortunately, when the power lines go down, everyone suffers.”

He certainly hit the nail on the head with those comments.

So, is there a real chance the “product economy” in the US and maybe parts of Europe (see below) will see some re-ascendance?

One huge question out there is whether the misgivings in many quarters about the speed and fallout from globalization will lead to modest, or even heavy, protectionism of some kind – forcing, if you will, more products to be made domestically.

Pat Buchanan is among the protectionist-leaning commentators (he from the right, many others from the left), and I thought his summary of the situation that tied the current financial crisis to offshoring was interesting:

This generation decided we must march bravely forward into a Global Economy, where we all depend on one another. American companies morphed into “global companies” and moved plants and factories to Mexico, Asia, China and India, and we began buying more cheaply from abroad what we used to make at home: shoes, clothes, bikes, cars, radios, TVs, planes, computers,” Buchanan wrote a few days ago. “As the trade deficits began inexorably to rise to 6 percent of GDP, we began vast borrowing from abroad to continue buying from abroad.”

I can’t find it now, but I read another column earlier this week that noted that since the early 1990s, too many of the best and brightest of US graduates didn’t move into “product economy” jobs, but rather Wall Street, hedge funds, and other financial industry careers. While there always has, will be, and should be some of that, the point was that it had become far too unbalanced, as huge salaries were being made moving money instead of building and moving goods.

So, will we see the movement of more graduates into fields like engineering, and business majors heading for Midwest manufacturers looking for jobs instead of the financial sector? Probably Yes in the short term, as the opportunities won’t exactly look bright on Wall Street for a few years.

This isn’t just a US issue. Below is a snippet from an article last week in London’s Daily Sun newspaper: “The government is not alone in touting the charms of the factory floor: newspapers are full of articles urging Britain to return to its industrial roots. And small wonder, for the financial-services sector, long the engine of economic growth, is on its uppers.” It added: “Manufacturers, who generally consider themselves officially ill-used, are pleased that the government is recognizing their importance.”

The article notes that in 1978, manufacturing represented 26% of UK’s GDP. Today, it is just 14%. In the US, the number is about 12.5% of GDP, and that is also down sharply from two decades ago. But, the National Association of Manufacturers has data that shows the US share of global manufacturing has actually remained constant for many years, and argues (persuasively) that among the key factors in the decline of manufacturing as a share of GDP is that prices for manufactured goods have not risen nearly as fast as raw production output, and in many cases even declined. Meanwhile service prices (such as, hmmm, financial services) have risen during the same time at a much higher rate. Let’s face it, the services sector is not nearly as price competitive in a global sense as is manufacturing, and simply doesn’t have much, if any, productivity growth. So, its share of total GDP rises as a result.

Of course, the issue is complex. Apple and Nike are certainly “product companies;” they just don’t make any of it here, as with a growing array of others. Even the US automotive companies are increasingly talking about outsourcing production to low-cost countries.

Again, contrary to what many believe, US manufacturing has actually continued to enjoy overall solid growth over the past decade. It just can do it now with a lot less workers to achieve the output (productivity increases and automation). At the same time, supply chain developments (i.e., The World is Flat) have certainly been the key enablers in making offshoring work in terms of costs and time.

We can’t and shouldn’t try to put globalization back in the bottle. I am largely a free trader, and will let the politicians and the elections hash out whether we should make some checks on the current situation. But I don’t think we should just stand still.

We can’t rely on the financial sector any more to be the world economic leader. The US still has by far the largest GDP, but I believe we will need to rethink where our attention, resources and investment go. Our manufacturers have among the highest tax and health care costs in the world. We are the about the only country that adds duties on offshore components coming into Free Trade Zones for final assembly. Most of the Harvard Business School graduates have been looking at Wall Street or consultancies instead of companies that actually make things. We’re giving too much intellectual property away to China and others, and often ignoring the “cost innovation” that is increasingly the basis of Chinese competition – not just low wages. Etc.

We just need to re-assess and act based on what adds real value to the economy. It isn’t an endless series of derivatives and other new financial instruments. The design, innovation, and (where it makes sense) actual production of real products needs to move up the priority list - in a hurry.

Do you think we can – or should – focus more on the “real product” economy? What can the US and European countries do to put more vigor back in the manufacturing sector? Do you think this financial crisis will lead to real action? Let us know your thoughts at the Feedback button below.

 
 
     
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