Blog: Dave LeggettSeismic shifts in manufacturing

Dave Leggett | 5 February 2008

There can be little doubt that the automotive industry globally is at the forefront of shifts in the global economy. For starters, there's the breaklneck growth of incomes and demand for automotive products in rapidly expanding emerging economies. A lot of people are suddenly becoming enthusiastic consumers with access to disposable income and credit. And there's the emergence of low-cost production bases and the wave of outsourcing by vehicle makers and Tier 1 systems integrators looking to lower costs.

But I was reminded last week that the global economy is a complex thing, movements in all directions of varying strengths. Manufacturing activity will not just completely locate to China and India. For example, there are transportation costs to consider and low wage rates might not tell the whole story, by any means (and the more these economies develop, the wages go up, don't forget). Just how labour intensive is the value added in the manufacturing process? Are there productivity offsets (look at what is happening at Wolfsburg)? How educated does the workforce need to be (breaking the tasks down, it's perhaps not all simple assembly work)?

One of the terms increasingly being bandied around is 'best cost' - not quite the same as 'lowest cost'. Standardisation and common systems can take you a long way, but no two plants are exactly identical. Is quality a uniform thing? No. Is a Chinese worker as good as an American one? It depends what we're talking about, but there's much more to it than many firms let on. The Chinese worker may be a tenth of the price, but the manufacturing process will generally be different in China - more workers and less machines involved. There might be quality consequences of that.   

In terms of the global economy, there are movements of labour and capital in all directions. Certainly, there is an overall rebalance in favour of big emerging markets going on, but it's not the only thing happening. And developed countries generally need to be moving up the value chain - in terms of economic activity and manufacturing specialisation - to avoid competing in low-cost and commoditised activities where the writing is perhaps on the wall. Make high-margin, upscale things if you possibly can, where things like education and training become competitive differentiators.

One example of a developed country having a particularly tough time with the world's current economic shifts is Australia. It's a mature economy and car market, not a huge one either, and it's not all that far from much lower cost manufacturing places in Asia (but Australia is nevertheless a bit detached from the world geographically - not ideal for global sourcing). It can't easily compete on cost when it comes down to the basics and ideally needs to be innovating so that it isn't competing with China to make the next Camry, or whatever. Germany and Australia: compare and contrast their industrial landscapes and cultures. Germany won't be losing many automotive plants anytime soon.

I wonder what happened to that Orbital two-stroke engine that was being investigated by Ford a few years ago? 

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