The innovation gamble: Manufacturing vs digital output

The phenomenal growth of technology companies, and in particular web startups, over the last 15 years has caused a shift in the makeup of the world’s most powerful companies and a wildly different economy from  the one before. While envious investors wish they had seen these opportunities coming and frantically look to find the next big thing, governments desperately hope they are able to foster the sort of technology-fuelled growth that has seen economies transformed on the back of a few successful companies.

After the tech bubble burst at the beginning of the millennium, it was assumed investors – both public and private – would act more cautiously in approaching companies that might seem innovative one day and be dismissed as old hat the next.

As a consequence of the second wave of internet-based success stories – especially Facebook and Twitter – and a crushing economic downturn, investors and governments are gambling on catching the next technology wave, while students are eager to emulate the likes of Facebook founder Mark Zuckerberg. The stakes, unfortunately, are colossally high.

Gambling on tech
Developed countries are pumping money into growing tech zones to encourage startups, offering tax breaks to entrepreneurs and special visas to attract overseas talent, as well as investing in the high-speed internet infrastructure required for many of these ventures.

The UK government in particular has diverted a great deal of attention towards an area in East London known as Tech City, where many online startups have emerged over the last few years. The area around London’s Old Street Roundabout – which has come to be known as ‘Silicon Roundabout’ due to the number of hi-tech startups in the area – has been renamed with the aim of turning it into an internationally recognised and officially supported tech hub.

Revolutionary inventor James Dyson says a gamble on such a volatile industry is an unwise risk for governments to take. He said: “The hardware trade around the world is growing at a much faster rate than social media or anything that’s going on in Silicon Roundabout. Hardware creates jobs, it creates exports, it creates wealth. I’m not sure that Google and Facebook do that.”

The aim of Dyson’s new design centre is to help train the next generation of engineers. He said: “We’re producing far too few engineering graduates: there’s a 50,000 shortage now, in a few years time we’ll be 200,000 short. Britain produces fewer engineers out of our universities than the Philippines.”

A recent study by the Royal Academy of Engineering concluded the UK needed to invest more in training engineering graduates. This would counteract the current shortfall and help boost the economy. The report said: “There is good econometric evidence that the demand for graduate engineers is pervasive across the economy. The evidence can be seen in a persistent, sizeable wage premium for people holding engineering degrees and this premium has grown in the last 20 years.”

President of the RAE Sir John Parker’s own experiences support the findings. He said: “I have travelled around in business and seen how other nations organise themselves and tilt policy in favour of their industrial base. At the highest level, an industrial strategy in my view is about giving the right signals to society that industrial activity is very important.”

First world problem
The problem is apparent in a number of developed countries where governments are eager to promote web innovation over a dwindling engineering industry. Australia has been desperate to create a thriving tech industry in Sydney with little success.

The US has seen a sharp decline in its manufacturing industry over the last decade. During the last decade, the US lost around 5.7 million manufacturing jobs – 33 percent of total jobs in the sector – and at a rate worse than during the Great Depression.

A report by the Information Technology and Innovation Foundation said: “Some go so far as to assert that manufacturing industries are ‘old economy’ and that it is a reflection of failure, not success, if a country has a manufacturing sector that is either stable or growing. “Perhaps they are thinking of the kind of factory represented in old movies, television shows or news clips: dirty, clunky, mechanical havens filled with low and moderate-skilled workers producing commodity products. They would be well-advised to visit the clean, streamlined, IT-driven manufacturing facilities operating in the US today.”

Emerging innovation
In contrast to developed nations, many emerging markets have seen considerable growth fuelled by a healthy and productive manufacturing industry, especially through the designing and building of hardware.

Foxconn, the Taiwanese electrical manufacturer that produces many of the world’s most recognisable consumer electronic goods, has operations in China, Brazil, Malaysia and Mexico.

Neither are emerging economies hooked on the idea of abandoning manufacturing as soon as they reach a certain level of development: they have been keen to lay the foundations for the future of their engineering and design sectors. In China, South Korea and India, a huge amount of investment has been made in training up highly skilled engineers it is hoped will develop new technologies and create homemade, world-class industries.

Although tech companies have the potential to create enormous wealth for a few lucky founders, they don’t employ the numbers of staff manufacturing companies do. According to Dyson, General Motors, bailed out by the US government in 2009, employs four times as many people as Google.

Dyson said: “Talented young minds want to be the next Mark Zuckerberg or Larry Page. But with the world abuzz with digital, we are losing sight of real engineering. Hardware is profitable. Don’t be fooled, Apple’s success as a technology company is built on hardware. The current fixation with digital is misplaced. Long-term it is unlikely to generate jobs, growth and exports. Instead, we need to encourage more young engineers to commercialise their technologies…

“The world needs the next generation of engineers to solve the problems of energy supply, food shortages and infrastructure building. We need to do more to inspire them.”