Business Economics - Manufacturing Industry in the UK in the Past - Case Study Example

Business Economics - Manufacturing Industry in the UK in the Past Table of Contents Business Economics - Manufacturing Industry in the UK in the Past 1 Manufacturing Industry in the UK in the Past 2 Reasons for decline in Manufacturing Industry in the UK. 4 Outsourcing 5 Globalization 6 Emergence of Service Industry 7 Discussion Summary 9 Conclusion 10 References 12 Introduction Manufacturing and service industries essentially operate in similar ways except that in service industry product is intangible. Manufacturing industry in UK started with great industrial revolution of the 19th century. The dominance of manufacturing industry in the UK probably continued till the 1980s. Then after it was the rise of service industry, which had occupied only a small percentage of the overall industry till then. The period between 1980 and 2000 saw gradual decline in the manufacturing industry in the UK (Lucey, 2008). Manufacturing industry produces products that are tangible and that have longer life. On the other hand, most of the products of service industry are used or spent in a few hours or a few days of purchase. Let us take an example of air travel. Airlines business belongs to service industry. One purchases the air ticket, flies to the destination and the product or rather service has been spent. Now let us take an example of the purchase of a digital compact music system such as an I-pod. The prices of both the products or service in the case of air travel are similar. However, I-pod lasts longer. It might take at least a year for the user to have the need for another portable music player. The point here is that products produced in the manufacturing industry have shelf life and unless population grows at a very rapid rate, the demand for products such as steel could come down. The overall demand for steel for example, could be many times more in the current decade as compared to the previous decade. However, the rate of increase in demand could have come down due to saturation of the use of it. The paper discusses the reasons behind the observation that more people in the UK are employed by the service industry currently than those employed by manufacturing industries. The paper tries to identify the reasons for the decline of manufacturing industry and the rise of service industry. Most importantly, the paper discusses two distinct contentions that the UK is now de-industrialized to the extent that service industries have taken over and the country is developing its businesses in line with the modern day market pressures. The paper finally takes a logical stand as a result of the discussions carried out in the paper. Manufacturing Industry in the UK in the Past London was the largest and wealthiest city in the world in the early 20th century (Museum of London, 2009). It was also the largest industrialized city in the UK back then. Now, most of the industrial activities have stopped and given way for other business activities such as service industry (Museum of London, 2009). The situation is not just of London or the UK. Industries in most of the early industrialized nations are becoming service oriented. When the manufacturing industry was at the boom in the beginning of the 20th century, the nation’s infrastructure was still being built. Newer inventions were surfacing every now and then such as airplanes and automobile industry. The labor market mostly catered to the manufacturing industry those days. Service industry was little heard of back then. The products manufactured by heavy industries such as steel find use in construction and other manufacturing activities. Majority of the infrastructure requirement in the developed nations including the UK have been met. We find railroads, roads, dams, bridges sufficiently built with little scope for further infrastructure development. In such a scenario, the products of the heavy industries find limited use domestically over a period of time. However, there are many developing nations that are still building infrastructure. Interestingly, these countries are becoming industrialized and their requirement of products manufactured by heavy industries is met domestically too. As a result of diminished demand many heavy industries closed down in the UK and the docks bore a deserted look by the close of the last century (Museum of London, 2009). However, Harvey (2006) has a different opinion backed by statistics. David Harvey (2006) opines that there is not real decline in the manufacturing industry in the UK. However, there has been declining employment in the manufacturing industry. Majority of the service components of the manufacturing industry such as catering, maintenance and distribution have been outsourced to specialist service companies in those fields (Harvey, 2006). This means fragmentation of hitherto unified processes of manufacturing industry. Now some of the service components of the manufacturing industry are directly handled by the service industry and hence the decline in employment in manufacturing industry and increase in employment in service industry. This is just one isolated argument in the favor of the still dominance of the manufacturing industry. However, there has been huge economic restructuring in developed nations, which cannot be ignored. Reasons for decline in Manufacturing Industry in the UK. The contribution to the UK economy by the manufacturing industry has declined over a quarter in over a decade (Padgham, 2004). There is a common trend of manufacturing industry decline among developed nations (Matsumoto, 1996). According to Lucey (2008), UK manufacturing industry has been on a free fall since 1980 with one after the other high profile manufacturing companies closing down. The decline in UK manufacturing industry has increased unemployment ratio in that sector (Pym, 2009). The manufacturing hub of the UK West Midlands has been witnessing unprecedented unemployment rate and is currently the highest among all the UK regions (Pym, 2009). The manufacturing industry is also forced to cut down on prices to retain customers (CBI, 2002). There are several factors that contributed to the decline of manufacturing industry in the UK. Some of them are recent trends in the business such as outsourcing, globalization, tax regime of the UK, diminishing demands for finished goods etc. Outsourcing One of the trends that is causing the decline in the manufacturing industry in the UK and in other developed nations such as the USA is that of outsourcing (Lucey, 2008). Many heavy industries are moving their operations to developing countries such as those in Asia and Africa, where infrastructure and manufacturing costs are lower. The focus of current management on cost reduction and the opening up of markets that were hitherto conservative such as that of India and China have enabled manufacturing industries in the developed countries to move their production facilities to those countries. This makes more business sense to the management of manufacturing companies although they might fail to meet their social responsibilities of creating jobs in their home nations. Once the manufacturing operations are moved outside the nation, the local job market is adversely affected and the job market in the host nation is benefited. If the local people lose jobs in the manufacturing sector due to shifting of operations to a third world country, the human resource in the third world country where the operations are moved is greatly benefited with fresh jobs and better salaries. Another reason that is adversely affecting the job market in manufacturing industry in the UK is increased automation and increased productivity per man-hour. The manufacturing operations of the yore were labor centric. More workers were required to carry out a manufacturing process such as production of steel or manufacturing of an automobile such as car. These days most of the processes in the manufacturing industry are automated with extensive use of electronic and computerized equipments. This would dramatically reduce the need for manual labor and hence the decreased need for human resource in the manufacturing sector. Globalization If some of the manufacturing companies are moving their operations to countries where manufacturing costs are lower, the companies that are still operating in the UK especially those in the textile industries are facing stiff competition from the companies from emerging economies such as India and China (Economic Outlook, 2007). The consumer electronics market is more or less occupied by the companies from South East Asia. The costs of the products manufactured in those countries are significantly lower. Another factor that works against the manufacturing sector in the UK is the tax structure. The strict tax regime in the UK is forcing companies to consider re-domiciling outside the UK (Financial Director, 2009). Re-domiciling is more than shifting operations. According to a KPMG report, the strict tax regime of UK that is targeting tax benefits earned by operations of companies in the developing countries, is the core reason for the companies in considering re-domiciling outside the UK. Opening up of markets due to globalization and red carpet welcome towards capital investment in developing countries have given more options to manufacturing industry than in the past. Manufacturing industries these days can contemplate on taking their operations to almost anywhere in the world where cheaper resources and skilled labor is available. And if the taxations in those countries also favor the business objectives of the manufacturing companies there could be no reason as to why a successful manufacturing company should not shift its operations there. Emergence of Service Industry Going by the theories of economics, consumers’ spending on manufactured good tends to grow proportionately lesser than the rise in their income. On the other hand, spending on services increases disproportionately as the income of the consumers increases (Padgham, 2004). This corroborates the example cited little earlier in this essay that the need to buy another portable digital player takes longer time than the need to fly in an airplane. As the nations become richer, people tend to spend more on luxuries and non-essential goods and services. Some of the non-essential services could be exotic foods, travel, leisure spending, spas, entertainment etc. Barring current recession, the UK has seen unprecedented economic growth in the late 90s and early 21st century. This has left a lot of disposable income with the population that wishes to spend on lifestyle products and services. According to Doug Godden, head of CBI, the premier business lobby organization of the UK, the shifting focus from manufacturing towards service industry is a symptom of dynamic economy (Padgham, 2004). When people have disposable incomes varied service providers surface adding to the comfort factors of the consumers. One such example of uncommon type of service at least as perceived in the past, is the presence of shifting and relocation consultants that assist in relocating individuals and families to another city or nation. When people have disposable incomes, all they look towards is to improve their life style and living conditions. The rise of service industry in the UK can partly be attributed to fragmentation of the manufacturing industry and in part attributed to buoyant economy. The current management trend in businesses is to retain core operations and to outsource peripheral operations to specialist service providers. Managers these days wish to focus on core areas of operations of their companies. And hence outsource non-core activities to specialist companies. An organization cannot be an expert in all the areas. If the organization retained all the peripheral activities then the focus on core processes that are breadwinners for the company may get diluted. If we take a simple example of how a food canteen in a manufacturing industry was run in the past and as to how it is being managed currently, we understand the extent of fragmentation of processes in the manufacturing industry. In the past even the kitchen and hence the canteen was managed by the manufacturing company. But today most of the cafeterias in manufacturing companies are looked after by third party catering companies. This means lesser number of workers directly employed by the manufacturing company and more number of workers in the service sector. The outsourcing of non-core activities encompasses many such activities such as logistics, supply chain, catering, maintenance, and many such related processes are part of manufacturing industry (Harvey, 2006). Discussion Summary The UK adopted industrialization like other developed countries much before the current developing and third world nations started industrializing. The products of heavy industries such as steel and cement are used once in while in any activity that requires its use such as construction. These nations have sufficiently built infrastructure and the need for building more infrastructure is diminishing. On the other hand, the developing nations are still building infrastructure such as roads, railroads, dams, ports etc. Products of manufacturing industry have long life compared to the service industry. Majority of the products once purchased last longer and the need to replace the product arises only after a while and not immediate. The fresh need to purchase a product arises when the existing product becomes unusable or obsolete and also when a new earning member is introduced to the society such as a freshly graduated employee. This is the inherent cause of the decline in the rate of growth in manufacturing industries in all the developed countries. Some other reasons are outsourcing, globalization, moving manufacturing processes to locations with cheaper costs, and strict tax regime of the UK. However, emergence of service industry is a byproduct of buoyant economy and fragmentation of manufacturing industry. It would be wrong to say that the emergence of service industry caused the decline of manufacturing industry. Manufacturing industry can reach a stage of saturation or saturated growth rate. On the contrary, demands for services are recurrent and service industry would thrive as long as the mankind exists. The only time when service industry gets hit is during recession. Emerging service industry is an indicator of economical growth. At the same time, when the economy of a nation is downhill, people may not wish to spend on non-essential services such as travel, recreation and entertainment. The first contention that service industries have taken over from the important manufacturing industry would be incorrect. Service industries are emerging as the economy of the nation is realigning with the current market trends of the millennium. Boom of service industry is an important byproduct of the economical growth. And manufacturing industry is more or less saturated. Saturation is the natural growth point of manufacturing industries. What the developed nations are now experiencing in the decline of manufacturing industries, the emerging economies will too experience a similar trend once their respective economies grow to an optimum level. What the nation is currently experiencing in the decline of manufacturing industry and in the boom of service industry is a natural progression. Therefore the contention that the country is developing its businesses according to the dictates of the modern market evolution holds ground. Conclusion The UK is witnessing a sharp decline in the manufacturing industry activities in the past few decades. There are many reasons for the decline such as extended life of manufacturing industry produces, current management trends of outsourcing, effects of globalization and fragmentation of manufacturing industry processes. The emergence of service industries can partly be explained by the fragmentation of manufacturing industry and outsourcing non-core activities to specialist companies. However, the emergence of service industry is mostly the outcome of buoyant economy. The paper finds the contention that the nation is aligning its businesses with the modern market evolution more accurate and appropriate than the contention that the nation is so de-industrialized that service industries have taken over. References Harvey, D (2006), UK economic growth confirms decline in manufacturing, viewed 12 November 2009, http://www.accaglobal.com/archive/news/articles/22688 Is UK Manufacturing in Terminal Decline?, Economic Outlook, Winter 2007, v. 31, iss. 1, pp. 9-13 Lucey, J (2008), The changing face of manufacturing in the UK, Management Services; Autumn2008, Vol. 52 Issue 3, p11-15, 5p Manufacturing slump dents UK profitability, Financial Director; Mar2009, p36-36, 2/3p Matsumoto, G (1996), Deindustrialization in the UK: a comparison analysis with Japan, International Review of Applied Economics; May 1996, Vol. 10 Issue: Number 2 p273-287, 15p Museum of London (2009), Exploring 20th Century London, viewed 14 November 2009, http://www.museumoflondon.org.uk/English/Collections/OnlineResources/X20L/Themes/1376/ Padgham, J (2004), Manufacturing sector's 10-year slump highlights decline of U.K. industry, Evening Standard (United Kingdom); 08/23/2004 Pym, H (2009), Where the recession has hit hardest, viewed 14 November 2009, http://news.bbc.co.uk/2/hi/8320631.stm UK manufacturing prices fall at second fastest rate since 1958 says CBI, Electronics Weekly; 1/30/2002, Issue 2037, p10, 1/8p Read More