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We’ve reached the era of reindustrialization

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“After a golden age of ultra-globalization, the new buzzword is reindustrialization. In this new era, the ability to manufacture locally will be crucial to a country’s competitiveness.”

Stéphane Garelli, IMD Professor and World Competitiveness Center Director, thinks it’s easy to see one of the key trends in business throughout the coming years. As the world is changing, the value chain is becoming longer and outsourcing is becoming more expensive, companies want increased control over their supply chains. The answer is going back to “made in Britain”: the benefits of domestic manufacturing are being rediscovered.

“What individual countries’ success stories of today have in common is that they do manufacture, they do export and they have very competitive layer of medium-sized enterprises,” Garelli told Real Business.

“Take the German Mittelstand: medium-sized enterprises that are technologically advanced and export-oriented. In France, by contrast, the vast majority of medium-sized companies are local. Or take Switzerland. Swiss firms in pharmaceuticals, watches and precision engineering are exporting not only to the EU, but to China, Latin America and Russia.”

At the end of the day, a country is what it made, says Garelli. “The made-in concept is very important to define a country, and it creates jobs. The problem with extreme outsourcing is you suddenly don’t create many jobs at home.”

When we started to outsource as much as we do now, the cost of transportation, and of labour, was a lot cheaper. Now that the world has changed significantly, the cost has gone up, environmental concerns have risen and the complexity to manage is much bigger.

In countries such as the UK that have largely lost their manufacturing, Garelli thinks, people are starting to realize that maybe things have gone too far. “Look at what the UK makes today that is typically British, and there are very few things left.”

Governments are starting to see domestic manufacturing as a way of tackling high unemployment. Politicians and CEOs alike fear that losing control over manufacturing means losing access to innovation and technology, encouraging competitors to evolve in exactly those areas.

“China is a formidable competitor, of course. The genius of China was to move from being a supplier to being a competitor, and to go up the value chain very quickly. This is the case in mobile phones, PCs, white goods and so on.”

The struggling membersof the Eurozone such as Portugal, Greece and Spain stayed low-cost and relied too much on tourism instead of diversifying into industry. Part of their current struggle is that, along the way, they didn’t move up the value chain quick enough, Garelli says. Others are more prepared.

“Italy has problems, for sure. But don’t forget that it has industry, it has brands and it can export. This makes a big difference in the present situation in Europe.”

“Watch out for Iceland and Ireland too. These countries have been badly hurt and they want to show they can become competitive again, and they have made good progress in the last 12 months. They are really on their way and they are doing everything right.”

The big danger is that business decisions to reindustrialize will clash with governments’ protectionist instincts.

“The world will hopefully not slip back into protectionism. Instead, countries will rediscover that their competitiveness is intimately linked to industry, exports and innovation.”

Stéphane Garelli considers reindustrialization to be one of the key trends affecting the IMD’s World Competitiveness Yearbook (WCY) rankings, will be released and covered on Real Business on May 31st.

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