THE CAMBASHI VIEW: Engineering a Sustainable Economic Recovery

Engineering technologies can significantly contribute to a sustainable economy, argues Cambashi’s Tony Christian. But don’t expect government or the boardroom to recognize strategic opportunities all by themselves.

By Tony Christian

In addition to our usual activities at Cambashi researching the world of technical applications, I’ve been spending some time trying to understand the new economic environment that now provides the context for the development and deployment of technology. Why? Well, for one thing, I live in the UK, a country  that is borrowing and printing money at rates more usually seen in small economies on the edge of collapse. Also, as an engineer, I absorb the claims, assertions and excuses of economists, financiers and politicians with the same fascination that Alice must have felt after falling into Wonderland. In addition to the Wonderland-style contortions of logic and mathematics that characterize the economic debate, sometimes the language feels just as opaque.

Ugly Duchess of Wonderland mug
The Duchess of Wonderland, not to be confused with any contemporary government official or economist.

Said the Duchess to Alice in Wonderland: “Never imagine yourself not to be otherwise than what it might appear to others that what you were or might have been was not otherwise than what you had been would have appeared to them to be otherwise.”

Says almost any Western politician: “As long as GDP is growing, we don’t care what’s in it”

For years, scientists and engineers have been urged to learn about the financial side of business (but, interestingly, rarely vice-versa). It’s hard to disagree that this is good; technical staff might disagree with decisions being made regarding technology investments, but can at least see why they are made! At the level of national and international economics, of course, the situation is much more complex, but I’m not sure that complexity is the only reason for the lack of consideration of the role of STEM (science, technology, engineering and manufacturing) in economic policy making. Either STEM is important or it’s not.

For many policy makers, the front end R&D is, but the resulting manufacturing is not. Indeed, the prevailing view seems to be that the composition of GDP is not a matter for national policy; it will find the right mix in a free market environment. Of course, some technologists make a fuss about this, so in the UK the government has produced a ‘Manufacturing Strategy’ for them to read. This framework will trigger meetings and discussion, but is seen as a catalyst for, not a driver of, real action. In fairness, there have been some more focused attempts to analyze the role of manufacturing, for example a study entitled ‘Making the Most of Production’ carried out by Cambridge University in 2003.

Nevertheless, the prevailing economic wisdom is characterized in a recent article by a British economist, reporting on research undertaken at the University of California. The article argued that although something is made offshore, the bulk of the revenue from its sale can still go to the country of origin and this helps to explain why, in broad terms, a developed economy does not need a trade surplus (or even a balance) to survive.

Naturally, the example product was the iPod, assembled in China. There is a ‘complex economic web’ that results in the cash paid for an iPod being scattered to the different countries involved. The research showed that for $150 spent on a unit, Chinese producers retained around $4 on the basis that their contribution to the value chain is only assembly. Most of the cash flows back to the US (about 80%, apparently, although around 45% represented retail and distribution costs because, in the cases studied, the units were sold in the US). Apple gets about half of the selling price. The conclusion? ‘We (developed countries) don’t necessarily need to hammer steel and bash products together in order to become a better-balanced manufacturer.’

Stock image illustrating credit card crunch
For every credit boom there is a credit crunch, driving poor decisions.

A further consequence of the credit boom (a fading memory, but it preceded the credit crunch), as with the banking system, is that it has probably led to distortions in some markets. For example, in some areas of consumer products, one has to wonder whether it has led to oversupply, with bewildering choices such that the investments in promotion and selling required to achieve a market presence put pressure on the costs of design and production, further driving decisions to reduce the cost of the latter by off-shoring.

Particularly exciting for the economists is that these revenue benefits accrue, magically, with no risk! Manufacturing plants require high investment and high utilization. If recession hits, we can simply walk away from the liability. We take the profits, the developing countries take the risk.

So That’s All Right, Then (?)
This line of argument promotes the idea of a ‘post-industrial economy,’ in which the majority of the working population are absorbed into a service economy involving ‘more educated’ jobs. However, as with much economic analysis, it seems to ignore the wider implications. Where is an example of a services-based economy in a country of any significant size that works? There are many reasons why it’s too idealistic – the limits on the ability to protect ideas, the connection between innovation and manufacturing (those making soon learn the designing as well) and different countries’ attitudes to trade policy, to name a few. But from  the point of view of the sustainability of national economies, the most substantial reason is the pattern of industry  linkages. There is a brilliant, very detailed explanation of this in a prophetic book called Manufacturing Matters (Stephen S. Cohen and John Zysman, 1987).  Essentially the thesis is that most high level, high value service activity is complementary to manufacturing – shift out of manufacturing and you shift out of those services, too; where the hands go, the head will follow. It would be interesting to have a current view of the input-output analysis pioneered by Wassily Leontief in the 1960s that shows the level of trade between sectors within the US economy.

Certainly, governments try to encourage R&D, but focusing solely on the ‘innovation’ end of the process ignores the fact that such activity is (a) not sufficiently labour-intensive and (b) not sustainable in the long term without the expertise in the follow-through activities. A Booz Allen Hamilton analysis of world R&D spending showed that, for 2006, North America accounted for 43.7%, Europe 28.9%, while China and India together only contributed 0.6%.

It sounds good, but the West’s lead in R&D investment over the developing world is being eroded by (a) globalization, especially the rise of China and India  as consumers and, increasingly, suppliers of innovative products and services; and (b) the impact of information technologies that enable global supply chain collaboration in almost every industry.

cave man bashing a rock, illustrating manufacturing
”We don’t necessarily need to hammer steel and bash products together in order to become a better-balanced manufacturer.” Really?

The trend is well underway. I recently read a McKinsey report that suggests that because companies have been increasingly off-shoring their manufacturing (transformational) and clerical (or simple rule-based) activities, a growing proportion of the workforce in developed economies engages in ‘tacit interactions’ – negotiations and conversations, knowledge and judgment-based work and ‘ad hoc collaboration.’ The estimate for the proportion of the US workforce for whom these are the primary activity is 40%, predicted to rise to 44% by 2015.

What Does This Have to do With Technical Applications?
With respect to the role of  manufacturing in achieving a sustainable economy, the advanced technologies available today – design, simulation, analysis,  manufacturing, PLM at the front end and then manufacturing execution management, supply chain management and other operational support technologies – have a substantial role to play. They open up an array of strategic choices, from enabling world class vertical integration within the organization’s own boundaries (and mitigating the liability risks associated with ‘owning’ manufacturing), to establishing a dispersed, multi-country supply chain. In the  absence of a national context to provide guidance or incentives, manufacturers must decide how best to exploit the tools in the context of their own supply chain strategies. The arguments for retaining the technologically advanced aspects of manufacturing capability seem to me to be convincing but of course companies are going to act in the way that their business environment dictates – focusing on survival, higher profits, higher stock price etc. Continuing to offshore not only manufacturing but all manner of technology expertise seems to be a natural consequence of our current laissez faire (and financial services-driven) approach to economic policy. Maybe we would ultimately conclude that ‘we don’t necessarily need to hammer steel and bash products together in order to become a better-balanced manufacturer’ but a conclusive debate on the topic is urgently needed so that we understand the logic.

I have just seen another article explaining how the UK needs to borrow a further couple of hundred billion to continue spending its way out of recession. Oh, well, back to Wonderland … §

Tony Christian is Director of Sales and  Marketing for Cambashi, a global strategic IT advisory firm specializing in management, marketing, industry
analysis and market research for engineering, manufacturing, construction, and related industries. You may contact Cambashi at 52 Mawson
Road, Cambridge CB1 2HY, UK; Tel: +44 (0) 1223 460 439. © 2010 Cambashi Limited.