For several decades, the manufacturing sector in industrialized Western nations such as the U.S. and U.K. have seen much of their market shares shift to emerging global powers such as China, where manufacturing has blossomed based on competitive labor and production costs. But what if the very definition of manufacturing is outdated, asks The Wall Street Journal.
The Journal reports on a proposal set forth by the U.S. Office of Management and Budget to reclassify companies such as Apple as “factoryless goods producers.”
“[Apple] controls every aspect of the iPhones and other products it sells, except their actual fabrication [which is] done by Chinese contractor Foxconn,” says The Journal, who notes that the current classification system “is over six decades old and didn’t anticipate the rise of global production networks.”
Advocates claim that counting factoryless goods producers as a subcategory of manufacturing “has the potential to give us a clearer view of what’s really going on in the economy,” says Andrew Bernard, a Dartmouth University professor who is quoted in the piece by The Journal.
“If implemented, the proposal would impact an array of government gauges — from the producer price index to productivity — and would increase the number of American manufacturing jobs, since many but not all of the U.S.-based workers for the factoryless goods producers would be counted,” The Journal continues. Among the many implications: “The overall trade balance would remain the same, but the size of the trade deficit in goods could shrink.”
In light of Insigniam’s extensive work innovating business models — from pharmaceuticals, consumables, and the aircraft industry — the reclassification proposal not only makes for interesting headlines, but also food for thought.
For instance, would top-performing companies be incentivized to alter their business practices to align with this new manufacturing subcategory? It’s far too early to speculate since, even if approved, the reclassification initiative wouldn’t be implemented until at least 2017, The Journal notes.
And while the U.S. government’s balance sheets might look more attractive from a total output perspective, companies — particularly those in the manufacturing sector — shouldn’t see this as a solution for business models that lack a competitive edge or strategy innovation.
The reason Apple in particular was highlighted as an example has as much to do with the success of their business model, and their position as a sustained innovator, as it does with their ability to expand their profit margin by outsourcing production to a country with less overhead, such as China. After all, the company does have double the liquidity of the U.S. government, as reported by Forbes. But, whether the company is classified as a hardware/software manufacturer, factoryless goods producer, or engineering service company — the proof of their viability is in the circuitry, so to speak.
As globalization continues to revolutionize the world’s economy, countries that once relied on the strength of their manufacturing prowess will see market shares constrict. And for those across the manufacturing spectrum who wish to stay competitive, introspection is critical, from reassessing their competitive assets, supply chain solutions, and employee accountability.
Because, in the end, you can’t artificially manufacture a competitive advantage, no matter how you classify it.