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The World’s Industrial Transformation

August 8, 2013

Chatham House recently published a study, sponsored by the Toshiba Foundation, seeking to answer the question “Which industries will change the industrial landscape in the future and drive growth?” Two of the major contributors to this report are SAMI Chairman, Michael Owen, and SAMI Associate, Andrew Black. Four case studies were examined to see the extent to which they will drive growth in the future: aircraft; autos; pharmaceuticals; retailing.

The aircraft industry has benefitted from the great strength of travel and tourism demand; and air passenger growth is expected to exceed GDP growth for the next 10-15 years, with Asia as the fastest growing regional market.  As a result, aircraft production is seen as doubling over the next 15-20 years – dominated by Boeing and Airbus, but with regional players – Brazil, Canada and China – also increasing their shares. In terms of policy implications, the industry is very global and very centralised, with very complex supply chains. As well as ensuring freedom of opportunity for air travel to grow, emphasis should also be on production efficiencies, where there are economies of linked processes in hub centres. So governments should focus on training and research infrastructure and avoid interventions that prevent location decisions being taken on efficiency principles.

Autos is an iconic sector in C20 industrial development – significant in contributing to GDP and economic cycles. With the western market approaching saturation, growth will come in the LDCs. In last 10 years China’s output has increased 9-fold, to become the world’s largest producer with more than twice that of Japan. With rapidly rising incomes per head among the developing country middle classes, car ownership could soar. The policy implications relate to the restructuring challenge of overcapacity in established markets, without international trade friction; and the need to find more creative mix of cross-country collaborations without provoking national protectionism. On the broader societal front, technological advances on safety and propulsion systems will help to counter some negative public attitudes that the sector is environmentally unfriendly.

Pharma is another C20 success story: epidemiology, rising patient expectations created the demand to which public expenditure responded; and the scientific success supplied the new medicines. But public funding resistance in the DCs to the costs of new therapies has created challenges for the industry. More rapid growth is now being seen in the developing world. There are huge potential opportunities for continuing medical advances from new technologies, but there is an uncertain interaction between science and economics in the years ahead. The central outlook is for world markets to continue to grow above GDP, but much more so in the developing world, which increases markedly its global share – especially Asia Pacific. Nevertheless, North America, Europe and Japan still dominate the global pharma market. In policy terms, governments and society as a whole need to be willing to pay the price of this innovation process, and to support the IPR of innovators.. In addition, there needs to be a better dialogue with authorities to ensure that investment in innovation meets health priorities. Issues of differential access to medicines between DCs and LDCs (especially the poorest LDCs) need to be addressed globally. It is not a problem solvable by the pharma industry alone.

Finally, the retailing sector, which is very ubiquitous and very diverse. It is approaching saturation in the west, in physical terms, despite the ‘yet another supermarket’ syndrome; but in channel terms, E-commerce is out-pacing physical shops. The action is all in the developing world – especially India and China – where consumer spending has grown much faster than in industrialised countries over the past 25 years and this is expected to continue in the medium term. This reflects the demographics, with the large increase in the LDC middle classes, as higher incomes, urbanisation and car ownership drive the changes in retailing. The main policy messages are to encourage retail diversity, to avoid controls and black markets; encourage convenience stores in poor and rural areas; focus on consumer standards, such as building safety; encourage modern retail formats, in terms of food hygiene, refrigeration, giving diversity of choice. There is also scope for successful modern retailers to franchise their brands to developing countries.

In addition to the specific policy implications developed for the 4 sectors, we were also tasked to stand back and construct some broader policy implications, arising from the totality of the industries. This was no easy task, not only given the technical and geographical diversity of the sectors; but also because there is no supranational authority to whom one can appeal or interact. There are lots of governments and lots of companies. Nevertheless, this is the distillation of 5 key global policy themes from the work:

All industries benefit from a liberal global trading environment. Despite the Doha setbacks, governments should abide by the letter and spirit of the WTO rules. Further liberalisation moves – such as Trans Pacific and Transatlantic – should be supported.

Several of the sectors depend materially on robust IP protection. In the past some LDCs have been less than diligent in this area; but as more countries become involved in creative technology, it will be in everyone’s interest to have a sound global IP framework.

We have seen in such industries as Aero and Auto a knee-jerk reaction by governments to defend the past structures. Ultimately, government intervention should be directed at more visionary goals to create platforms for future success, rather than distort efficient investment decisions and prolong overcapacity.

In terms of the role of government regulation, centralised interventions have not always had a happy history, in trying to push back the tide of market inevitability. Yet the financial free-for-all has ended badly. Some more thoughtful middle way needs to be found whereby the creativity of market operators needs to be back-stopped by measures to protect citizens when the outcomes go awry.

Finally, we have seen in all sectors how globalisation has driven expansion. But the prosperity has not been evenly shared. There have been losers – and will continue to be. The benefits of globalisation could be threatened by backlash from the losers, the rise of protectionism, and disaffection with external interactions. This antagonism needs to be addressed, in terms of international co-operation on industrial restructuring; and reform of the global corporate tax regime.


(written by Michal Owen)


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