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| Subir Roy: There is a fear of Asia | | As the pall of gloom over the US, Europe and Japan refuses to lift, developed country opinion leaders are counting their worry beads again |
| Subir Roy / New Delhi Jul 21, 2010, 00:41 IST |
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The developed world in general and the United States in particular are worried about losing their manufacturing competitiveness to emerging economies, especially leading Asian players. This is a rerun of the anxiety that had gripped the US in the late 80s when it saw its leadership position threatened by Japan. The Japanophobia then gripping the US was reflected in the anti-Japan polemic in the thriller Rising Sun by Michael Crichton.
At a more serious level, a detailed study, Made in America, by the MIT Commission focused on the need for strategy in production, better balance between cooperation and individualism and investment in physical and human capital. It didn’t quite ask for the “developmental state” that was supposedly at the root of the Japanese success but was a step away from the notion that a developed economy wedded to neo-liberal economics did not need an industrial policy.
Today, in the aftermath of the financial crisis and the pall of gloom over the US, Europe and Japan (it is on the other side of the fence now) that refuses to lift, developed country opinion leaders are counting their worry beads again. A joint study by the US Council of Competitiveness and the consultancy alliance Deloitte Touche Tohmatsu has evolved a global manufacturing competitiveness index which places three Asian countries — China, India and South Korea, in that order — at the top. They are followed by the US, Brazil, Japan, Mexico, Germany, Singapore and Poland (in that order) to make up the top-10. What is even more serious is that in five years, Brazil, Mexico, Poland and Thailand (it will become the 10th country) will move up and the US, Japan and Singapore will move down a notch or two. China, India and Korea will retain their ranks at first, second and third. While China will remain at the top with an unchanged score of 10, India will improve its score slightly whereas Korea’s will decline a little.
Importantly, this is not a mixture of cross-country data and polled perceptions, which usually go to make up such league tables, but wholly made up of the latter. It is based on how manufacturing CEOs view manufacturing competitiveness around the world. They were asked to rank the importance of components of manufacturing competitiveness and then the overall competitiveness of 26 countries today and five years from now. Larger, more global companies have been given a greater weightage (they know more about how manufacturing-friendly countries of the world are) and, therefore, have had a greater impact on the outcome of the survey. However, 50 per cent of the respondents operate out of developing countries. The executives have identified many drivers of manufacturing competitiveness but talent-driven innovation — made possible by the steady supply of highly skilled workers, scientists, researchers and engineers — is considered the most important in the long run. Low cost — material and structural (regulatory environment) — is important but more is being able to gain entry. Sustainability will come from talent. This is what puts China, India and Korea at the top. India particularly scores by its ability to play host to design, development and manufacturing and is, therefore, becoming “an integral part of their (many executives’) global manufacturing enterprise and location strategy”.
So, are the developed countries in permanent decline? Not necessarily. There also has to be an energy and environmental sustainability agenda. US, Japan and Germany, which currently appear to be losing out in manufacturing, may have a renaissance through their sustainable policies. Significantly, the report sees a paradox emerging. Western nations with more democratic, social and environmental policies are in decline whereas emerging markets with their large government infusions for manufacturing — some leading manufacturers are government-owned — are on the rise. Governments, especially in emerging markets, are competing with nations.
Declining nations, says the study, are outsourcing their core manufacturing strength — a key link in the innovation equation of research-design-manufacture-after sales. These factors are synergistic — and with the manufacturing step missing, much know-how is taken out of the equation. Industrialised countries need to address the larger issues of manufacturing and the supply chains that are built on complex and often incoherent and fragmented patchworks of social, political and economic systems. As such, there will be a growing tension between free-market capitalism and state-run enterprises, especially when security frictions are involved. (Huawei, the Chinese telecom equipment manufacturer, is currently making heavy weather in the US.) The bogeyman of the state as a driver of aggressive challengers in manufacturing competitiveness is emerging again, reminiscent of the late 80s.
A lot of the logic in the report has impeccable academic backing. Michael Spence, a Nobel prize winning economist, in a recent article in the Financial Times joins his voice with the Intel chief to warn that manufacturing is vanishing in the US and manufacturing jobs are moving offshore. Spillovers between R&D, product development and manufacturing will be lost if manufacturers leave. US President Barack Obama’s new export council is a move in the right direction, he says, and calls for a public-private partnership to invest in technologies which create capital-intensive jobs. Their high labour productivity will support high rich country incomes. So, there is both hard rational thinking and some possibly exaggerated fears, as was the case earlier.
Where does this leave India? The second rank, for whatever it is worth, does not mean that the massive unfinished agenda in infrastructure and regulatory cost reduction, not to speak of the need to remove poverty, can be forgotten. The great asset which has to be built upon is the ability to address the whole product lifecycle — design, develop and manufacture. And the greatest need is to remember that the global situation is intensely dynamic. (The rise and stagnation of Japan is a lesson from recent history.) Complacency or hubris will inevitably bring nemesis.
subirkroy@gmail.com
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