A constant change

Phil Ruthven considers the evolution of manufacturing over the decades and what that means for goods in a services-led age.

The industrial age of goods production gave way to a new age just over 50 years ago and did so across most of the developed world. That was two-and-a-half generations ago, just as the last of the baby boomers were born in 1965. Since then, Generation X has arrived, followed by the Net Generation and now Generation Z. These three generations, totalling more than 17 million Australians and accounting for 70 per cent of our 24.5 million population, have no real-life experience of an age when goods production dominated the employment and spending arenas. Only one in five jobs (22 per cent) are now in goods production and around the same share (21 per cent) account for household expenditure, including taxes. Yet more than three-quarters of all investment goes into tangible capital expenditure in the form of housing, buildings, machinery and equipment and stocks – in short, “goods-based infrastructure”.

But it is not only in investment terms that goods dominate; it does so in revenue terms too, as the chart opposite reveals. However, the revenue size accounts for a lot of multiple counting of the same goods as they proceed down the input-output chain, all with value-added along the way.

If we add up all the revenue, it totals more than $2.4 trillion of the nation’s total revenue of $4.8 trillion in the 2016 calendar year, some 52 per cent. That said, the final value of all goods and services was just under $1.7 trillion in 2016, so the extent of multiple counting is obvious. However, services revenues will displace goods in the coming decade.

Dominant services

Services already dominate the economy and the labour force. Goods production generated 25.5 per cent of the total value added of $1.7 trillion in 2016. Distribution through wholesale, transport and retail service industries added a further 13 per cent of gross domestic product (GDP) – all up, just under 40 per cent of GDP. But the distributive industries of wholesaling, transport and retailing are service industries, not goods industries, so really, the goods industries generate just the aforementioned 25.5 per cent of GDP, and the service industries dominate with 74.5 per cent of GDP.

When it comes to jobs, 22.4 per cent were in goods production and a further 18.4 per cent in the distributive industries of wholesaling, transport and retailing. But again, it is not valid to assume that the distributive industries’ 18.4 per cent of jobs are part of goods production. This means services now dominate the employment scene too, accounting for 77.6 per cent. Interestingly, less than 8 per cent of the new jobs created over the past five years went into goods production, and more than 92 per cent went into service industry jobs. So the blowtorch heat is now on the goods industries and it has emerged in many forms:

• Near-saturation of goods in per capita terms, favouring growth in services.
• The juxtaposition of supply side control with buyer control.
• Free-trade that has facilitated import competition.
• Stage two of the information and communication technology (ICT) utility (now commonly termed the digital era) that has lowered costs.

This creates a potent cocktail with fast-slimming outcomes for consumption and job growth and economic importance for goods.

Further analysis

Taking each of these in turn, we begin with the consumption of goods by households. At the time of federation in 1901, 62 per cent of household incomes went to goods; that is now 20.5 per cent and falling, while the volume of goods consumption per capita keeps rising.

The second impact has been the emergence of buyer strength over supply power, and the emergence of market orientation. This came about through the growth of retailers that absorbed the wholesaling function via bulk warehousing and became far bigger than manufacturers in revenue terms and therefore, in buying power. Manufacturers, in turn, turned their residual buying power on the extractive industries, or formed strategic alliances with them for efficiency and mutual benefit.

These days there are really just two mega-links in the input-output chain: the retail/wholesale or hospitality/wholesale link at the customer end; and the manufacturer/extractive link on the supply end.

The third impact has been the emergence of reduced protectionism and free trade agreements from the early 1980s. Australia, with its tiny population, could never compete across the range of goods it had been making from 1908 onwards when protectionism began. This has been even more visible with the end of the nation’s car industry and other appliance manufacturing. At its peak in the 1960s, manufacturing accounted for almost 30 per cent of GDP; now it is below six per cent.

And the final impact has been via the harnessing of the ICT utility, especially the stage two digital era of fast broadband, AI software, big data and analytics, from 2007 onwards. Supply chain logistics transformed the goods industries via lower stocks, tracking technology, and buying-habit feedback up the supply chain.

The digital era is adding to these efficiencies – and shrinking the economic share of goods industries – via online shopping. Coupled with international supply, online purchasing is slashing selling prices. In some cases, such as newspapers and magazines, it is making industries obsolete, a trend now being seen in the appliance and motor vehicle product areas. Food and beverages are now in the firing line too. Is nothing sacred? It would seem not.

Many old-guard citizens who proudly owned, managed or worked in goods businesses in the industrial age believed they created all the money via goods production upon which the services industries and their subsequent growth depended. That, of course, was never true, but they also often predicted that our standard of living would decline without a vibrant manufacturing industry. That didn’t happen and our real standard of living has almost trebled since 1965 when the industrial age gave way to the present infotronics age; the new age already over 50 years old, that should last until the late 2040s.

Even today the luddites are alive and vocal, predicting that job losses will create a permanent unemployed block of depressed and poor citizens. Just look at the robots, the online shopping, driverless cars, the AI software that will replace lawyers, accountants and other professionals.

The reality is that we have created almost seven times more jobs than we have lost over the past five years; and more than 90 per cent of them were in the service sectors.

The world is in constant change. We either go with the flow, or fight it and become unnecessarily depressed. I suspect our youngest generations are going with the flow, and helping to create it. So should those of us who are older.