For the past year, the World Economic Forum and Deloitte have collaborated on an initiative to understand how the global manufacturing ecosystem is evolving. The initiative has engaged senior manufacturing executives and policy-makers from around the world in a series of workshops in Brazil, China, India, the United States and the United Kingdom. The global production system is far more interconnected and complex than most people understand. Making even simple things, like clothing, involves multiple functions carried out by multiple firms spread across multiple nations, and supported by a sophisticated global logistics network operating within the international trade policy framework. This five minute video, which was used to frame a workshop on this topic at the Forum’s Annual Meeting in Davos, highlights some of the issues we explored.

This week we launch our Future of Manufacturing report in Tokyo. I would like to highlight just three observations from the report. First, the production of goods remains an important driver of economic growth, even for post-industrial nations. Second, the global manufacturing system has changed and will continue to change. Third, competition among nations and firms will only intensify, with talent, innovation and government policy emerging as key differentiating factors.

Japan is a fitting location to release this work. The concept of monozukuri – the culture of making things – has supported Japan’s rise as an economic power in the post-war years. Lean production, a methodology for making things faster, better and cheaper, was essentially invented by Toyota and replicated by other automakers and subsequently all sorts of companies. Yet some economists in Japan, as in the United States, question whether the nation suffers from a misguided an outdated emphasis on manufacturing. Last year Japan recorded its first annual trade deficit since 1980.

Our analysis indicates that manufacturing – particularly the high-end manufacturing of sophisticated products and components – remains an important driver of economic growth and development. Ricardo Hausmann of Harvard and Cesar Hidalgo of MIT have conducted compelling research that tracks the production history of nations as they develop. Their work demonstrates that what a nation is capable of making – the sophistication of its products and the diversity of that product mix – drives economic growth and prosperity.

Big shifts have occurred in the global production system. Things are no longer made in one place like Detroit for cars or Seattle for airplanes – they are made of multiple parts produced in multiple locations. Factors such as the rising consumption and production power of the BRIC nations, the proliferation of information technology and the digitization of manufacturing, and the proliferation of regional trade agreements have driven this disaggregation of global value chains. Recently, factors like increasing labour rates in “low-cost” countries, increasing exposure to currency volatility and protectionist backlashes in certain parts of the world are driving a re-aggregation of some supply chains.

Perhaps, the world is not as flat as we thought it was. If you think the big shift is driven by low-cost labour, consider the following: 1) manufacturing employment in the United States has increased over the past two years, and 2) sales of industrial robots – the expensive machines that replace workers on assembly lines – have significantly increased in China over the past two years.

Competition among nations to develop high-end production capabilities and among firms to innovate will only intensify. Making things doesn’t just require knowledge – information that can be read in a book or downloaded from the Internet. Making things requires know-how – the skills and capabilities that people acquire by actually doing tasks. All sorts of talent, from the scientists and engineers working on the most advanced forms of nanotechnology to the machinists and welders on the shop floor, are required to compete. Our analysis estimates that there are currently 10 million manufacturing jobs across the globe that are unfilled due to lack of skilled people. Moving forward, the Forum will continue to address this important topic by exploring the linkages among global value chains, employment and human capital through its Manufacturing for Growth initiative.

Author: John Moavenzadeh is Senior Director for Mobility Industries at the World Economic Forum and an Officer of the World Economic Forum USA.