N° PC 23
ELECTRONIC MAIL
Brussels, 30 April 2010
Circulation :
ESF – Policy Committee
Subject
Studies on the importance of Services for manufacturing companies
:
Dear Madam, dear Sir,
In September 2009, when ESF visited the Swedish Presidency, we had a meeting with
representatives from the “National Board of Trade” (Kommerzcollegium - www.kommers.se) which
is the Swedish governmental agency responsible for issues relating to foreign trade and trade
policy. They informed us that they were working on studies that would look at the link between the
manufacturing industries and the services that they are providing and consuming.
1) “At Your Service”
The first study is now completed and the National Board of Trade forwarded it to ESF. The study
is entitled: “At Your Service: The Importance of Services for Manufacturing Companies and
Possible Trade Policy Implications” (enclosure 1).
Services are needed in all aspects of manufacturing, from product development, through
production to sales. The amount of services required in manufacturing, and sold by manufacturing
companies, is increasing.
The study is quite short but to the point. It takes the practical example of one company (Sandvik
Tooling) and examines into the detail the services they need on a daily basis, and services they
sale to their clients. The company focuses mainly on producing tools used in mining and civil
engineering and tooling systems for metal working applications. It develops products made of
stainless steel, special alloys and other material technology. It is therefore a typical case of what is
usually defined as a company from the “manufacturing industry”. Sandvik is a high-technology
engineering group. Sandvik operates in 130 countries, employs over 50,000 people and had sales
of approximately SEK 93 billion (€ 9.65 billion - 2008).
This case study of Sandvik Tooling (a part of the Swedish manufacturer, Sandvik Group) shows
that the company needs over 40 different services to establish and uphold their supply chain (see
page 5). This is almost half of the services covered in the General Agreement on Trade in Services
(GATS).
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Additionally, Sandvik Tooling supply about 15 different services themselves.
Since manufacturers use and sell an increasing amount of services, any restriction on services will
mean increased costs and possible loss of competitiveness. Manufacturing services are therefore
also directly concerned by the negotiations on trade in services and investments.
Measures that facilitate the availability of cheap, reliable high-quality services will improve the
business of manufacturing companies. Important measures in this regard are the liberalisation of
services and improved regulatory frameworks.
From a trade policy perspective, it would be valuable to seek the perspective of manufacturing
companies when discussing services, liberalisation and regulatory improvements. Additionally, in
trade negotiations, negotiators should focus on how services and goods liberalisation can support
each other and help facilitate every day trade.
2) Servicification of the Manufacturing Industry
The Swedish National Board of Trade has also recently published a second study, which is
continuing the analysis of the relation between the manufacturing and services industries and
implications for trade policy. It is entitled “Servicification of Swedish manufacturing” (Enclosure 2)
But there is few doubts that facts found out in Sweden cannot be extended to all modern countries,
including in the European Union. Below are some excerpts of the Executive Summary:
“Servicification of Swedish manufacturing: Servicification means that manufacturing both buys and
produces more services in-house than before, but also that it sells and exports more services. One
illustrative example of the increased importance of services for manufacturing firms is Sandvik
Tooling” (see above and the precious study). “Servicification is particularly strong when we
consider the fact that firms increasingly are parts of enterprise groups. The reason is that
manufacturing enterprise groups place a great number of activities in firms that mainly produce
services. Volvo is one example. The Volvo Group has several firms that mainly provide services,
for example Volvo Logistics and Volvo Information Technology. “
“Manufacturing uses more services: Firms in manufacturing are buying more and more services.
Our analysis shows that the costs for bought-in services have more than doubled between 1975
and 2005 as a share of the production value. Imports are also increasingly important, and
especially imports of services. This might be interpreted as manufacturing firms focusing on
production, while outsourcing other activities to services firms. However, this is not the case.
Instead, costs are increasingly dominated by services being produced in-house, especially by
qualified services production. This is confirmed by the fact that more and more employees in
manufacturing are in services-related occupations. In 2006, almost half of manufacturing
employees worked in services-related occupations, if employees in the industry’s subsidiaries are
included.”
“Manufacturing sells more services: Moreover, manufacturing firms sell and export much more
services than a decade ago. The share of services sales in total turnover has risen by 25
percent when subsidiaries are included. This means that the industry’s sales have broadened
(diversified). Furthermore, we find that sales of services – as a share of total turnover – are almost
60 percent higher than indicated in official statistics, when all manufacturing subsidiaries are
included.
“Manufacturing’s share of the Swedish economy falls slightly: In addition, the study shows that
manufacturing’s share of the Swedish economy continues to diminish. However, the decline is not
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as large if all of the industry’s subsidiaries are included. Part of the decline may also be due to
manufacturing firms outsourcing activities to non-affiliated firms and offshoring to firms overseas.
At the same time, this is expected. Firstly, manufacturing has become increasingly efficient
historically - productivity has risen - in comparison with the services industry. Secondly, demand for
services usually rises as a country’s income grows. Thirdly, countries specialise in activities where
they have comparative advantages. Sweden’s advantage is currently in more advanced
manufacturing and qualified services. Therefore, it is natural that for Swedish manufacturing to
specialise in these elements of the value chain and leave the remainder to others. Part of the
industry’s business will then be classified as services in official statistics.”
Servicification and trade and trade policy: Servicification implies that liberalising trade in services is
becoming increasingly more important for the manufacturing industry. Trade in services and
merchandise are much more interdependent than they were a few decades ago. Manufacturing
buys more services from its own or non-affiliated firms abroad and the industry imports more
intermediates, even if merchandise imports do not increase as much as imports of services.
Moreover, manufacturing is selling more services overseas.
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Considering the increased level of “servicification”, it is becoming more and more important for
companies to understand the connection between services and manufacturing. Nevertheless, it is
striking how seldom manufacturing companies realize this connection. On the basis of the findings
in this study, further thoughts should also be given on the possibility to recruit new ESF members
among “manufacturing” companies, like Siemens, which is already a member. Any suggestions
and support in that direction is welcome.
Interested members are invited to circulate this study within their company and membership. Your
comments on these studies are obviously more than welcome as usual.
Yours faithfully,
Pascal KERNEIS
Managing Director