Revisiting Competitive Advantage of Nations: The manufacturing angle

When Michael Porter wrote this magnum opus, Competitive Advantage of Nations, we had a different world, where China and India were minnows and all that mattered in the world was technology that drove manufacturing in the Western World. This was in 1994 and most of the research in the book was taken from the 1980s. The world has since then moved on.

The only Asian country that got a space in this book was Japan, Porter missed out to even mention China or India in the entire 800 pages.

Competitive advantage of Nations was the first glimpse of the elements that made up the retinue of competitive strengths, but it relied heavily on the economic success of western nations, which came from development of markets, competitive environs in the domestic market and innovation. Porter summarized them as factor conditions, firm strategies & structures, demand conditions and inter-relations in the industries, which had got to do with the structure of competition.

While this can explain the huge success of American firms or the German firms, but what we have seen in the celebration of Chinese manufacturing later is a mixture of many other things. However comparing Chinese firms, when they were fuelling a growth rate of 12% in the core sectors of the economy, with American firms were a different ball game altogether.

The world started to change just before the new millennium arrived and some of the heavy manufacturing industries like Steel, Aluminum or Cement, which were fledgling industries in China at that point of time started to grow at 12%-14% CAGR.  Today in two decades these industries have 50% of the world’s capacity in China alone.

This was quite dramatic given that no other country in the world had ever shown such rapid pace of growth over such a protracted period of time.

Yes, all that Porter wrote were important factors for competitive strength of China as well, what really stood out was the ability to make sweeping changes in the infrastructure space, leading to tenfold increase in road network, railroads, new cities and an increased pace of urbanization.

The ability to attract a huge bit of capital and turn that into economic output very consistently stood out. It had to do with a policy stance that stayed firm and deeply entrenched in the cause of nation building. We have seen in this period, some serious transfer of off-shoring as it made enormous sense to serve the Chinese market that was growing at an alarming pace from the manufacturing centers in China itself.

It also meant that Chinese firms became centers of production that could be exported out and most of electronics to start with from the hardware side to the downstream operations in assembly moved over to China. But what happened in heavy engineering and metals is a story worth emulating.

It started with the shifting of the old European equipment into China, Steel Mills and structures and then in no time the Chinese picked up almost every pieces of technology. What started with merely nuts and bolts, moved into entire manufacturing space and ended with the making of the most sophisticated equipment from Mills to entire casting, milling or Smelting Technology. In auto it meant production of the most sophisticated cars and ancillary parts that brought it huge bouts of employment opportunity.

The presence of strong institutional framework, coming from both central and provincial government, allowed the bedrock of financing arrangements to drive growth. With it came the educational and skill development of its people and the overall palette was complete.

We have seen such manufacturing growth also happening in Vietnam and now it is perhaps the turn for India to take over the mantle. The seeds have been sown and the policies and institutions are in place.

‘Competitive advantage of Nations’ tell us that nations are not competitive due to factor advantages alone, then there would have no reason for Switzerland to be the world’s most competitive nation year after year. We should have seen resource rich nations then doing far better than the others.

In fact resource sometimes is a curse than the source of sustainable value. Most of manufacturing growth, we have witnessed have happened in those nations that are not resource rich, for example Germany.

Manufacturing in Germany stands out as the example of rock solid standards of productivity that no other nation can emulate. The auto firms in Germany have far less hours of labor employed per unit of output than any other nation. This comes from extreme disciplines and culture that values productive hours and despises wastes. It also comes from a sharp focus on always relying on the best technology and not to make compromises on quality what-so-ever.

When India is taking off in this journey of manufacturing, we have lessons from all over the world; it is never too late to learn that we must celebrate discipline and reduction of waste as a means for further development. The institutions of learning and policy making must also embrace this very important area, where quality must precede quantity.

India has in fact far better reasons to succeed. It has the demographics on its side, something that most other nations do not enjoy.

With large number of young minds and hands India has no other way to go but succeed in manufacturing.