Industries

What It Means

The term industry refers to the production of goods (for instance, automobiles, rugs, and computers) and the sale of services (the transportation of goods, bug extermination, and housecleaning, to name a few). It is often used loosely in conversations about the economy, describing either the sector (subdivision or segment) of the business world to which a company belongs (for instance, General Motors is part of the manufacturing industry) or the primary activity of a business (McDonald’s and Burger King are part of what is often called the fast-food industry). In other words, at times economists and others classify businesses broadly; at other times they draw more specific distinctions between industries.

Most economists agree that there are four main sectors of industry. The first is called the primary sector and involves extracting materials from (or drawing resources out of) their natural locations so that they can be transformed into finished products and sold. Agriculture (farming and ranching), mining (digging into the earth to retrieve such materials as coal, iron ore, and silver), and clear-cutting (felling large tracts of trees in forests) are examples of activities in the primary sector of industry. In each case natural resources are used to fashion a product that is later sold. For example, in the agriculture industry cows are milked and the milk is then pasteurized (cleaned of its contaminants) and sold in supermarkets. In the mining industry iron ore is transformed into steel to build machines, and in the lumber industry wood is made into such items as furniture and paper.

The secondary sector of industry consists of businesses that manufacture goods. This sector takes the resources obtained from businesses in the primary sector and makes products for consumers. The automobile and clothing industries are in the secondary sector. The tertiary (third) sector of industry consists of businesses that provide services for consumers. Manufactured goods are sold by companies in the tertiary sector. For example, cars are produced in factories (secondary sector) but sold in auto dealerships (tertiary sector). The auto dealership is providing a service to both the consumer (by displaying and selling cars) and the manufacturer (by offering a location where buyers can purchase the manufacturer’s products). The fourth, or quaternary, sector of industry involves research into how companies in the other sectors can improve their methods. For instance, a timber business (primary sector) might employ a team of geologists (quaternary sector) to research the best way to preserve the nutrients in the soil when cutting down trees.

Industries are further broken down by the U.S. government into the Standard Industrial Classification (SIC) and the North American Industry Classification System (NAICS). These two systems place all U.S. and North American businesses into one of many categories and subcategories. For example, using SIC methods, firms producing bagels are SIC major group 20 (food and kindred products), industry group 205 (bakery products), and subgroup 2051 (bread and other bakery products, except cookies and crackers).

When Did It Begin

Agriculture, which first appeared in southwestern Asia in what is today Syria and Iraq, dates back to approximately 9500 bc It was at this time that the founder crops (the primary domesticated crops) were first cultivated. The founder crops included wheat, barley, peas, bitter vetch (an ancient legume), lentils, chickpeas, and flax. By 7000 bc agricultural production had spread to Egypt, and by 6000 bc it was developed independently in the Far East, where rice was the staple crop instead of wheat. The Sumerians made significant contributions to the agricultural industry after 3000 bc , creating irrigation systems and domesticating aurochs and mouflon (wild species of cattle and sheep) for meat, hides, and wool. Further developments, such as crop rotation (harvesting different crops in successive seasons on a stretch of land to keep soil fertile and reduce the number of pests), did not appear until the Middle Ages (which lasted from about 500 to about 1500).

The Industrial Revolution in the 1780s brought with it factories, assembly lines, and the large-scale production of goods. Three innovations in the late eighteenth century caused the revolution to gain the strongest foothold in Great Britain. The first, patented by Sir Richard Arkwright (1732–92) in 1769, was the spinning frame (also called a water frame), a water-powered cotton mill that allowed for increased production of textiles (bags, clothing, rugs, and so forth). That same year James Watt (1736–1819) improved the steam engine, making it significantly more fuel efficient and therefore more widely used in factories. Third, in the 1780s new techniques were developed to extract metals from ore, which allowed for greater production of steel.

More Detailed Information

The four different sectors of industry tend be located in distinct areas of the world. Activities in the primary sector of industry are often conducted in developing countries in Latin America, Africa, and Southeast Asia or in the less economically prosperous areas of developed countries (such as the United States, nations in the European Union, and Japan). For example, the lumber industry extracts large amounts of wood from the Amazon rain forest in Brazil. Within the United States mining businesses were established in West Virginia and Montana, states containing large deposits of natural resources where manufacturing did not flourish. Goods from these areas were transported to the northeastern United States, which had the greatest percentage of the factories. Generally speaking there is more individual wealth (the upper and middle classes are larger) in the manufacturing centers of a country.

During the Industrial Revolution and for much more than a century thereafter, manufacturing (businesses in the secondary sector of industry) was conducted in the developed nations of the world. England, for example, used coal extracted from mines in Wales and other resources obtained from places as far away as India and China to operate its factories. In the United States at the turn of the twentieth century, automobile manufacturers such as the Ford Motor Company and General Motors built factories in Michigan, and steel manufactures ran operations in Pennsylvania. Manufacturing, however, has since shifted to the developing nations of the world. This has occurred because manufacturers can pay workers substantially lower wages to produce goods in developing countries than they can in places such as the United States, England, and Germany. Computers, stereos, automobiles, and clothes are often produced in places such as China, India, and Thailand because factory workers in those areas can be paid a fraction of what those in the United States earn. The practice of relocating businesses to other parts of the world, called offshoring, is the subject of considerable ethical debate. Those opposed to offshoring argue that manufacturers are taking advantage of the labor force in developing countries (paying them badly and subjecting them to harsh working conditions) because those countries do not have institutions, such as labor unions, to protect workers from mistreatment. Defenders of the practice claim that the cost of production is too high in the developed nations of the world and that therefore manufacturers cannot earn profits by building factories in places like the United States.

Businesses in the service industry (the tertiary, or service, sector) are more likely to flourish in fully developed countries and in the major metropolitan centers of the developing world (for instance, in Rio de Janeiro, Brazil; Shanghai, China; and Mumbai [Bombay], India). Most finished products are sold by tertiary sector companies, and fully developed countries have the greatest number of consumers who can afford to buy these products. For example, a large section of the German population can afford automobiles, so there are a significant number of car dealerships there. A smaller percentage of people who live in India can afford cars, so many areas of India lack auto dealerships. In Mumbai, India’s most densely populated city, however, a significant number of people can afford cars, and the city therefore has a considerable number of dealerships.

The quaternary sector of industry, the area that consists of research and education, also flourishes in the world’s developed countries. As is the case with service industries, research and educational activities require capital (money), which is more plentiful in the developed nations of the world. Though people in developed countries are not more intelligent than people in less developed areas of the world, the developed world has more and often better schools. Consequently students from developing countries often study in the United States and Europe and later seek high-paying jobs in these countries instead of returning home. This trend has been changing in recent years. When manufacturing shifted to places like India and China, those countries acquired more wealth and were therefore able to build more educational institutions. Such places have fast-growing middle classes that are rapidly becoming more self-sufficient. More citizens of these countries are able to purchase the goods that are produced in the United States. Because of this trend, some economists argue that the balance of economic power is shifting from the United States to India and China.

Recent Trends

The most common recent trend in American industry is offshoring: the practice of setting up factories in or sending work and jobs to less wealthy countries in Latin America and Southeast Asia. American companies have had textiles (such articles as clothing, bags, and baskets) and hard goods (durable articles that wear out slowly, such as kitchen and laundry appliances, home furnishings, and sporting equipment) produced overseas for more than 50 years. The technology industry now offshores telephone-based technical support (help fixing problems with computers) to India, where consultants are paid anywhere from 50 to 80 percent less than they would be in the United States. Other corporations, such as banks and airlines, have also set up call centers in India to save money on labor. This means that when a customer in a place like Ohio calls an airline to book a flight to Los Angeles, the customer may secure flight reservations with the help of someone sitting at a desk in Mumbai.

Large corporations are also forming alliances to increase profits. Industry insiders call this partnering. With the continued growth of technology and the expansion of business into global markets, partnering has become a common practice among multinational firms. For example, in June 2005 the company SEVEN, a provider of software for mobile phone operators, partnered with Yahoo! in an agreement that enables Yahoo! clients to access their e-mail accounts from their mobile phones. The telecommunications industry has also grown in China, and large equipment vendors from the United States, France, and Germany, among other places, now seek to partner with local Chinese vendors to reduce operating costs. In the past these large companies would simply have bought out the smaller local companies, but the multinational corporations have since discovered that collaboration is more profitable.