The Significance of Manufacturing

Manufacturing is critical for the economic well-being of nations. A country rich in resources but without the manufacturing know-how is unlikely to prosper, while countries that are resource poor but have this knowledge will grow rich. Globalization is leading the surge for output, and only the countries that have the knowledge to apply manufacturing technologies efficiently will remain competitive.

In this chapter, we provided a synopsis of the world economy and the impact of globalization. We discussed why it is important to pay attention to manufacturing. We also discussed the broad meaning of manufacturing; it is much more than simply converting some raw materials into finished products by means of processes. Finally, we defined and discussed some of the basic terms that are important in the overall understanding of the product design, development, and manufacture process.

Keywords

Globalization; emerging economies; gross domestic product (GDP); manufacturing; capital circulation; manufacturing capability; mass production; interchangeability; technology growth cycle; concurrent engineering; design for “X”; problem solving

1.1 Globalization and the world economy

Globalization of the marketplace is synonymous with, or akin to, the free flow of goods and services, labor, and capital around the world. Aided by huge improvements in global communication and the transport industry, the barriers to free trade are being eroded, and most countries are advancing on the path to embracing market capitalism. This includes not only traditional capitalist nations such as the United States and United Kingdom, but communist giants such as China and social republics such as India. In countries such as India and Brazil, large pools of inexpensive and relatively skilled workers are putting pressure on jobs and wages in the rich countries in Europe and North America and, lately, China (a machine operator in China earns about $6405 compared to $4817 in India; Time, 2013). For consumers, the benefits of free trade are reflected in cheaper and better quality imports, giving them more for their money. This, in turn, forces the domestic producers to become increasingly competitive by raising their productivity and producing goods that can be marketed overseas.

For a long time, the West (North America and Western Europe) dominated the world economy by accounting for most of the global output of products and services. This picture has undergone a major change in the last few years; currently over half the global economic output, measured in purchasing power parity (to allow for lower prices in economically poorer countries), is accounted for by the emerging world. Even in terms of GDP (gross domestic product), the emerging world countries (also referred to as the Third World or poor countries) account for nearly one-third the total global output and more than half the growth in global output. The trend clearly indicates that economic power is shifting from the countries of the West to emerging ones in Asia (King and Henry, 2006; Oppenheimer, 2006). At the present time, developing countries consume more than half the world’s energy and hold nearly 80% of the foreign exchange reserves; China leads the pack, with nearly $3.66 trillion in foreign exchange reserves (The Wall Street Journal, 2013). The exports of emerging economies in 2012 were approximately 50% of total global exports. Clearly, this growth in the emerging world countries, in turn, accelerated demand for products and services from traditionally “developed” countries. Globalization, therefore, is not a zero-sum game: China, India, Brazil, Mexico, Russia, and South Korea are not growing at the expense of Western Europe and North America. As individuals in emerging economies get richer, their need and demand for products and services continue to grow.

As the emerging economies have become integrated in the global economy, the Western countries’ dominance over the global economy has weakened. Increasingly, the current boost to global economy is coming from emerging economies, and rich countries no longer dominate it. With time, industrial growth in the developing countries, as indicated by the growth in energy demand (oil), is getting stronger. Figure 1.1 shows emerging economies in comparison to the whole world using a number of measures. For instance, growth in emerging economies has accounted for nearly four-fifths of the growth in demand for oil in the past 5 years. Further, the gap between the emerging economies and developed economies (defined by membership in the Organization for Economic Cooperation and Development prior to 1994), when expressed in terms of percentage GDP increase over the prior year (growth rate), has widened (Figure 1.2). Between 2003 and 2013, the emerging economies have averaged nearly 8.5% annual growth in GDP (International Monetary Fund, 2013) compared to just over 2.5% for the developed economies. Figure 1.3, for instance, shows the trend in the US GDP growth. If such trends continue, the bulk of future global output, as much as nearly two-thirds, will come from emerging economies.

When the current and anticipated future GDP growth are put in historical perspective, the post-World War II economic growth and the growth during the Industrial Revolution appear to be extremely slow. It would be fair to say that the world has never witnessed the pace of economic growth, it has undergone in the last two decades. Owing to lower wages and reduced capital per worker, the developing economies have the potential to raise productivity and wealth much faster than the historic precedent. This is particularly true in situations where the know-how and equipment are readily available, for instance, in Brazil, Russia, and India; China has been losing the wage advantage as labor costs there are getting increasingly higher.

Associated with fast economic growth are higher living standards for the masses and greater buying power. While, on one hand, this has increased the global demand for products and services, on the other hand, it has created a fear of job and industrial output migration to less capital-intensive emerging economies. Such fears are baseless, as the increased demand in emerging economies is creating greater demand for products and services from both internal and external sources in the newly developing markets. The huge and expanding middle-class markets in China and India just prove the point. It is anticipated that the global marketplace will add more than a billion new consumers within the next decade. And, as these consumers mature and become richer, they will spend increasingly more on nonessentials, becoming an increasingly more important market to developed economies (Ahya et al., 2006).

While the integration of emerging economies is resulting in redistribution of income worldwide and a lowering of the bargaining power (lowering of wages and shifting of jobs to low wage countries) of workers in the West, it should be realized that emerging economies do not substitute for output in the developed economies. Instead, developing economies boost incomes in the developed world by supplying cheaper consumer goods, such as microwave ovens, televisions, and computers, through large multinationals and by motivating productivity growth in the West through competition. On the whole, growth in emerging economies will make the developed countries better off in the long run. Combined with innovation, management, productivity improvements, and development of new technologies, the developed economies can continue to create new jobs and maintain their wage structures. If wages remain stagnant or rise more slowly, this would have more to do with increasing corporate profit than competition from emerging economies. Figure 1.4 makes the point that corporate profits in the G7 countries have been increasing in the last four decades (U.S. Department of Commerce, 2012). Increased competition, however, should reduce profits and distribute benefits to consumers and workers over a period of time. An estimate by the Petersen Institute for International Economics states that globalization benefits every American family to the tune of $10,000 per year or nearly 10% of the family annual income (Bergsten, 2010). This translates into almost $1 trillion in benefits to the American economy and a tremendous boost in output.

1.2 Importance of manufacturing

The synopsis of globalization and the state of the world economy presented in the previous section leads to a simple conclusion: global output will continue to rise, and at a faster pace as the consumer markets around the world get bigger and bigger. This presents both emerging and established economies with an unprecedented...