Is EU manufacturing in decline? Let’s servitize!

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Manufacturing in Europe has been declining over the last three decades. Its share of GDP is clearly decreasing, reaching 16% in 2012. This is not only due to the quest for higher productivity that in turn implies higher wages and smaller demand in this specific labour market, but also to globalisation, allowing businesses to shift their production to lower-cost countries, and to a drop in relative demand for manufactured products.

This context drove the European Commission in 2012 to seek to “reverse the declining role of industry in Europe from its current level of 16% of GDP to as much as 20% by 2020”. This is a key aspect of a so-called communication (COM (2012) 582 final) that was promoted during a period in which the financial sector was collapsing. Politicians wanted to kickstart the real economy in order to raise their reputation among citizens and defend their national firms.

However, the European Commission’s strategy does not seem to take into account an important global phenomenon of our economy, which is the increasing inter-linkages between manufacturing and services. The recovery of manufacturing is not possible if policies are only focused on this sector, because its growth depends on services’ growth and vice versa. This new phenomenon is called servitization: manufacturing firms are moving towards services by selling an integrated combination of products and services. In this way, firms can enter more profitable sectors, such as business services, differentiate their products and respond to customers’ needs more efficiently.

Moreover, the activities that are highly value-added intensive are also characterized by a strong inter-linkage between services and manufacturing. Research and Development (R&D), for example, involves engineers, scientists and researchers. At this stage, the use of innovative technology is required if a firm wants to stay in the market. Today, a lot of firms can save on labour costs and increase their competitiveness by delocalizing their assembly phase, but this is not sufficient. Modern consumers want to buy personalized products, not standardized goods. In this context, differentiation is a key aspect for entrepreneurs. Servitization allows firms to focus on pre- and post-production phases such as design and marketing.

The complementary relationship between services and manufacturing can be supported considering the fact that in Europe around 40% of the jobs in manufacturing involve service-related occupations, a phenomenon characterized by growth of about 4.5% between 2008 and 2013 . Despite the heterogeneous events leading to this increase, it is important to stress that the share of service-related jobs in manufacturing has increased in all countries with only a few exceptions.

Hence, servitization has increased the link between manufacturing and services, a sector that has grown over the last few years, in contrast with manufacturing, allowing firms to take advantage of the hidden potential of the services sector. If we compare the share of employment with respect to total employment in 1980 and in 2009, we can see the diminishing proportion of manufacturing in the economy, whereas the share of services increased over the same period.

Moreover, the decline in manufacturing is reflected in the decrease in manufacturing share of value added with respect to the overall value added produced in the economy. On the other hand, services share of value added has increased over the last three decades in all countries. Note that the share of employment in manufacturing was in general lower than the share of value added for each of the countries, meaning that manufacturing was characterised by higher productivity or that countries specialised in high-value-added intensive sectors.

Thanks to studies conducted by Bruegel and High Level Group on Business Services, which emphasize the importance of an industrial policy less focused only on manufacturing and more oriented towards an improvement of the services sector, European policy could change its direction. An important question remains though: will the EU reconsider its approach to encourage the recovery of the economy?

Featured image credit:Roman581

Further readings:

  • Bruegel (2013), Manufacturing Europe’s future, Bruegel Blueprint 21, Veugelers R.,
  • BrusseHigh-Level Group on Business Services (2014), Final Report-April 2014, European Commission, Brussels
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