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Without manufacturing, there is no growth in services: a virtuous strategy for the Italian economy

“No services without manufacturing.” Being led by a talented economist such as Luca Paolazzi, it’s only natural that it would be the Confindustria Research Centre to shed light on the false dichotomies in growth that drove the uninspired public debate of the 2000s (such as the decline of manufacturing and the rise of the service industry, with the economies of developed nations increasingly “emancipated from any grubby involvement with the physical world”, to use a Paul Krugman quote from 1996 in reference to the dirty, ugly factory). Indeed, the June issue of Confindustria’s Scenari Industriali featured a segment packed with facts and data about the importance of manufacturing, the complementary role played by services and the community, and the rise of “local” industrial policy. The message is clear. A “headquarters economy” specialised solely in the production of high-value services is not sustainable over the long term. In other words, without a “factory economy”, there can be no future even for a significant part of the service industry.

The observations of Confindustria fall within the now-established context of a return to the importance of manufacturing, both in the US (where Obama is emphasising the development of digital technologies as applied to large-scale manufacturing) and in the EU, engaged in establishing a sound “industrial compact” (investing some 150 million euros in the reindustrialisation of Europe to increase manufacturing to 20% of GDP by 2020, which is five percentage points higher than it is now), and point to the rising trend of “reshoring” (or “back-shoring”), i.e. the return of industrial investment from countries where labour costs were low back to their more industrialised countries of origin in search of quality, high value added in manufacturing and competitive excellence in the tools used. (In Italy in recent years, 79 cases of back-shoring and 12 cases of near-shoring, i.e. shifting investing to geographic areas that are very near to the organisation’s headquarters and main production facilities, have been documented.) And why? Because this is the only way to take advantage of sophisticated skills, high-quality supply chains, and a series of innovative services related to production, all of which are essential to the new way of viewing competitiveness.

According to Confindustria, demand for services in Italian manufacturing is as high as 17% of total value of production, a level which is uniform across all of the various industries with few exceptions, and leading the way are technical and scientific consulting and analysis (at 33% of all services purchased), followed by transport and sales services (24%) and financial services (10%). Actually, Italian manufacturers themselves generate services of over 6% of total value of production, although this varies significantly from one segment to another, with peaks of higher than 15% in electronic equipment and heavy transport vehicles.
If we look closely at how manufacturing has changed, we clearly see that it is at the heart of a sort of web that unites the factory to business and logistics services, to telecommunications, transport and utilities, to finance and construction, to agriculture and to extraction activities in a complex series of mutually beneficial relationships that involve both the strengths of the districts that feature high levels of specialisation and the capabilities of the value chains and of the so-called “meta-districts”.  Indeed, the main strategic role of manufacturing is that of connecting the various nodes of the economy’s production network.
So we need to get back to manufacturing in Italy and to strengthen those manufacturing skills that we fortunately still possess, to rediscover our “industrial pride” and to again see manufacturing as a means of “redemption” or “liberation” (to use terms from Italian journalism, including a recent work by Filippo Astone about manufacturing, Europe and how to revive the Italian economy).  In its recent study, Confindustria confirms the factual bases of the knowledge economy and reiterates the vital interconnections between product manufacturing and the services that both precede and follow the making of the product and that require a certain geographic continuity for the entire process to even take place. In other words, without manufacturing, demand for such services would simply not exist, and without a constant interaction with manufacturing, these services would not advance or improve and knowledge and know-how would not progress.
Hence the sense of urgency for governments to establish industrial policy that goes beyond out-dated and pointless “industry plans” and the current plethora of incentives to focus, instead, on the fundamentals of (high-value) production and of Italy’s competitiveness as a whole, bringing together manufacturing and business services. As Confindustria notes, public action is justified in theory in that it focuses on promoting a progressive aggregation of industrial activities around innovative projects and with a more systemic view – i.e. that involves multiple parties in segments that go beyond just manufacturing – and complementary specialisations. It’s a good start and a road to be followed quickly and effectively and with an emphasis on both the regions of industry and the various European strategies.

“No services without manufacturing.” Being led by a talented economist such as Luca Paolazzi, it’s only natural that it would be the Confindustria Research Centre to shed light on the false dichotomies in growth that drove the uninspired public debate of the 2000s (such as the decline of manufacturing and the rise of the service industry, with the economies of developed nations increasingly “emancipated from any grubby involvement with the physical world”, to use a Paul Krugman quote from 1996 in reference to the dirty, ugly factory). Indeed, the June issue of Confindustria’s Scenari Industriali featured a segment packed with facts and data about the importance of manufacturing, the complementary role played by services and the community, and the rise of “local” industrial policy. The message is clear. A “headquarters economy” specialised solely in the production of high-value services is not sustainable over the long term. In other words, without a “factory economy”, there can be no future even for a significant part of the service industry.

The observations of Confindustria fall within the now-established context of a return to the importance of manufacturing, both in the US (where Obama is emphasising the development of digital technologies as applied to large-scale manufacturing) and in the EU, engaged in establishing a sound “industrial compact” (investing some 150 million euros in the reindustrialisation of Europe to increase manufacturing to 20% of GDP by 2020, which is five percentage points higher than it is now), and point to the rising trend of “reshoring” (or “back-shoring”), i.e. the return of industrial investment from countries where labour costs were low back to their more industrialised countries of origin in search of quality, high value added in manufacturing and competitive excellence in the tools used. (In Italy in recent years, 79 cases of back-shoring and 12 cases of near-shoring, i.e. shifting investing to geographic areas that are very near to the organisation’s headquarters and main production facilities, have been documented.) And why? Because this is the only way to take advantage of sophisticated skills, high-quality supply chains, and a series of innovative services related to production, all of which are essential to the new way of viewing competitiveness.

According to Confindustria, demand for services in Italian manufacturing is as high as 17% of total value of production, a level which is uniform across all of the various industries with few exceptions, and leading the way are technical and scientific consulting and analysis (at 33% of all services purchased), followed by transport and sales services (24%) and financial services (10%). Actually, Italian manufacturers themselves generate services of over 6% of total value of production, although this varies significantly from one segment to another, with peaks of higher than 15% in electronic equipment and heavy transport vehicles.
If we look closely at how manufacturing has changed, we clearly see that it is at the heart of a sort of web that unites the factory to business and logistics services, to telecommunications, transport and utilities, to finance and construction, to agriculture and to extraction activities in a complex series of mutually beneficial relationships that involve both the strengths of the districts that feature high levels of specialisation and the capabilities of the value chains and of the so-called “meta-districts”.  Indeed, the main strategic role of manufacturing is that of connecting the various nodes of the economy’s production network.
So we need to get back to manufacturing in Italy and to strengthen those manufacturing skills that we fortunately still possess, to rediscover our “industrial pride” and to again see manufacturing as a means of “redemption” or “liberation” (to use terms from Italian journalism, including a recent work by Filippo Astone about manufacturing, Europe and how to revive the Italian economy).  In its recent study, Confindustria confirms the factual bases of the knowledge economy and reiterates the vital interconnections between product manufacturing and the services that both precede and follow the making of the product and that require a certain geographic continuity for the entire process to even take place. In other words, without manufacturing, demand for such services would simply not exist, and without a constant interaction with manufacturing, these services would not advance or improve and knowledge and know-how would not progress.
Hence the sense of urgency for governments to establish industrial policy that goes beyond out-dated and pointless “industry plans” and the current plethora of incentives to focus, instead, on the fundamentals of (high-value) production and of Italy’s competitiveness as a whole, bringing together manufacturing and business services. As Confindustria notes, public action is justified in theory in that it focuses on promoting a progressive aggregation of industrial activities around innovative projects and with a more systemic view – i.e. that involves multiple parties in segments that go beyond just manufacturing – and complementary specialisations. It’s a good start and a road to be followed quickly and effectively and with an emphasis on both the regions of industry and the various European strategies.