The decline in the secondary sector (manufacturing) and the growth in importance of the tertiary sector is called de-industrialization.
Over the last couple of decades, the world has seen a tremendous increase in tertiary services at the expense of secondary production. More people these days use banking services, fly around the world on regular basis or purchase after-class extracurricular lessons for their children. Services have grown and are becoming standardized around the world as multinationals are not only producing and selling physical goods, but also providing intangible services.
Examples of de-industrialization
As de-industrialization means the growing importance of the tertiary sector and the reduced importance of the secondary sector, the modern societies in the UK and USA are very good examples of this type of economic activity – service industries now account for over 70% of the UK’s Gross Domestic Product (GDP). The UK is a major provider of educational services around the world while the football industry was also raised significantly in importance in recent years. The Premier League matches have been in high demand and commercial activities have begun to flourish.
In many developed economies, it is a very common situation that most of the people work in services, such as in Singapore or Hong Kong. To show clearly the changing patterns of business activity, we should look at the employment figures rather than just identifying trends from output in different sectors of the economy.
More economically developed countries are now exploiting tertiary and quaternary sectors, and these two economic sectors are the main contributors to national outputs and employment in highly-developed countries. It happens because there is more added value in tertiary sector. Rather than just receiving a one-time payment from selling a manufactured product, companies can receive a steady flow of predictable revenue from offering subscription services, after-sales services or maintenance and support services. Apple and Disney offer their customers not only products, but also services in the form of Apple TV (that lets you watch movies and shows) or Disney+ (a subscription video-on-demand streaming service).
Reasons for de-industrialization
The changing importance of business classification is due to the following.
1. A change in consumer behavior as a result of both industrialization and de-industrialization:
– Higher household incomes. As a result of both industrialization and de-industrialization, consumers have a higher income and they demand better quality products and a wider choice of goods and services. So, there are shifts in the type of consumer demand. The demand for quality services is positively correlated with the changes in income levels. As a country develops, consumers demand more services such as eating out at fancy restaurants, visiting SPAs, nail salons and hairdressers, or seeking advice on wealth management and financial planning. There has been substantial growth in the tourism sector, hotels and restaurant services fueled by international travels. Growing incomes associated with higher living standards have led many consumers to spend much more of their extra income on services and unique experiences rather than on goods.
– Better education. Better-educated consumers expect better products produced sustainably in environmentally friendly ways. Knowledge of different shopping platforms and abilities to use the Internet and e-commerce, have enabled modern customers in abilities to buy better goods from better suppliers in a different region or even from a different country.
– More leisure time. Because consumers work fewer hours and their work in services is less tiring, the demand for leisure activities, such as cinemas or golf lessons, has increased. With an increase in standards of living, the increase in leisure time follows. People tend to have more time for leisure and recreation as countries develop.
2. A change in business behavior resulting from:
– Need for finance. The need for finance to fund business growth so that businesses can compete globally in the international market fueled the increase in banking and financial services.
– Need for communication. The need to be able to communicate internally and externally quickly and as cheaply as possible to take advantage of the opportunities of wider markets increased business demand for the goods and services of other businesses, such as telecom or broadband Internet providers.
– Greater focus on customer services. More and more businesses have realized that good customer service can be a very important aspect of building competitive advantage.
– Increasing reliance on support services. Businesses need ever more sophisticated support services as firms increasingly rely on the services of other businesses such as advertising agencies, market research analysts, technicians, security companies, management consultants or cleaning services to run their core operations. As businesses grow internationally, they also increasingly rely on the services of international banks, accountants and lawyers.
– Better services for employees. The need to provide better services for their international employees who are more demanding, for example canteens with healthy food or gym memberships, and this in turn increases business demand for the goods and services of other businesses such as food-delivery services or gyms and swimming pools.
3. A change in market environment resulting from:
– A lack of competitiveness amongst manufacturers. This may be caused by the lack of overall investment in manufacturing in a given country or trade union restrictive practices.
– Increasing competition from overseas manufacturers. As the rest of the world’s industrialization, so manufacturing businesses in developed countries face much more competition (their rivals tend to be more efficient and use cheaper labor). Therefore, rising imports of cheaper goods are taking the market away from the domestic secondary-sector firms which need to look for new products in order to remain competitive, or even remain in business.
– Unhelpful government policy. The government may stop supporting manufacturing industries that produce high pollution levels in order to clean up the natural environment in the country.
Consequences of de-industrialization
The overall trend in business activity suggests a growth in services at the expense of primary and secondary production. The sectoral change has been due to changes in several factors. These changes have created huge opportunities for tertiary and quaternary sectors.
The process of de-industrialization results in the decline of some once prosperous heavy industries, such as shipbuilding, oil refineries, textile production, steel production and civil engineering such as construction of roads, railways, buildings and bridges.
Financial services, personal-care services, household services and the leisure industry are the growth areas during the process of de-industrialization.
Also, many producers that had operated in the secondary manufacturing industry of the economy go out of business due to lack of demand for their products. Other manufacturers that transformed their business from producing products to providing services will now operate in the tertiary industry, for example a car producer will offer car-fixing services, logistics services or car rentals.
