The Third Industrial Revolution

Posted by on Apr 26, 2012 in Innovation, News | No Comments

The Economist recently published an interesting article about what they are calling the “Third Industrial Revolution”. Once again, I start a blog post with the words “The Economist recently published an interesting article on…”.

http://www.economist.com/node/21553017

We’ve actually been taking an interest in manufacturing and productivity recently, and Michael and I have both posted recently on the subject.

http://pracsys.com.au/time-to-rethink-our-comparative-advantage-in-manufacturing/

http://pracsys.com.au/manufacturing-clusters-and-wages-in-china/

The main inspiration for declaring this new industrial epoch is the development of 3D printers, allowing manufacturing to be de-centralised. The argument is that these new printers will essentially allow anyone to manufacture anything, anywhere, by downloading the relevant design and then printing off a copy.

As well as 3D printers, robots are becoming increasingly dextrous, software is getting smarter, many novel materials are emerging and a range of web-based services are emerging. Two consequences of these developments proposed in the article are:

  • Decentralisation of manufacturing, which implies reduced economies of scale.
  • More customisation. In the past (and still today), producing large numbers of similar products, according to a limited range of specifications, has been much cheaper than customising products for each buyer. Decentralised production and smaller batches will allow a much greater range of customised products to be created at a competitive cost.

While the Economist might have gone too far in describing the transformative powers of 3D printing (economies of scale will likely continue to be a feature of manufacturing for the foreseeable future), these new developments in production methods may bode well for Australian manufacturing.

Firstly, the use of labour in manufacturing has been decreasing for some time, decreasing the share of total cost due to the cost of labour. To quote the article: “some carmakers already produce twice as many vehicles per employee as they did only a decade ago”. An increasing number of the jobs are now in upstream design, engineering, IT, logistics and marketing. This is good news for a country with a lot of highly educated and innovative – but expensive – workers, like Australia. Australia has had an enduring competitive disadvantage in manufacturing in the high cost of our labour – a lot of us can simply earn more doing something else. However, as labour’s share of total cost in manufacturing decreases, and what labour is used is required to be more highly skilled, then our disadvantage is reduced. Design, engineering, IT, logistics and marketing are things that we can do, and do well.

Our other competitive disadvantage in manufacturing is our small and isolated market. More populous regions of the world have the proximity to enough customers to be able to scale up their manufacturing, giving them greater economies of scale. Being nearer to enough of their customers also means that this advantage isn’t then counter-balanced by high transport costs as these centrally-produced goods are then dispersed to their buyers. If, as the Economist believes, that new technologies will reduce or eliminate the advantage of scale in manufacturing, then an opportunity opens up for Australian manufacturers – producing competitively-priced products for the (still small) domestic market, and exporting uniquely Australian or custom products to the rest of the world. As well as finished goods, it also creates the possibilities for our manufacturers to become more integrated into global supply chain. It is also worth bearing in mind that products that have a higher knowledge component in their manufacture tend to sell at the highest margin. Producing at a high point in the value chain like this is what is required for high labour cost manufacturing.

Realistically, economies of scale in manufacturing are likely to still be with us for some time, however. 3D printers will more likely be employed as part of a longer chain of production, producing complex components more effectively than traditional methods. Still, these developments may help to level the playing field for our struggling manufacturers.