Smokestack Industry: Meaning, Economic Development, Investors

What Is a Smokestack Industry?

A smokestack industry is a traditional heavy manufacturing industry that produces large items or inputs into other industries. Examples include cars, shipbuilding, steel and other metals, chemicals, and heavy machinery.

In short, it refers to any heavy manufacturing industry that has been around for decades. Such industries tend to cause substantial pollution: The typical images of these industries are factories that have banks of chimney stacks emitting smoke into the atmosphere, hence the term "smokestack."

Smokestack industries have traditionally been seen as critical to the process of industrialization and the development process in emerging market economies.

Understanding a Smokestack Industry

Smokestack industries traditionally have also been capital-intensive producers, requiring investment in large facilities, heavy equipment, and machinery. Most (such as automobile manufacturers) have become significant users of technology in their production lines. Because of their high capital investment requirements, smokestack industries tend to exhibit large economies of scale.

The smokestack itself is a sign of these economies of scale, which involve concentrated operations large enough to require and support the use of one or more large-scale furnaces or power plants, as opposed to the small-scale cottage industry that predominated prior to the Industrial Revolution.

These economies of scale also often lead to significant agglomeration of related industries, large local employment multiplier effects, and market power or even monopsony in employment and factor markets. 

The notion of such industries as large employers is sometimes used as a justification for government or state policies to attract, protect, or otherwise support these industries in some countries or regions.

A well-known downside of smokestack industries is the pollution that they can create and their intensive demands on local environmental resources.

The heavy manufacturing processes involved often require large quantities of energy, the treatment and disposal of toxic waste products, and reliable local water supplies for cooling. Advances in efficiency, emissions control, and recycling technologies have helped curb this over time.

Smokestack Industries and Economic Development

The establishment and spread of smokestack industries is usually a key step in the process of economic development and industrialization. The Industrial Revolution among Western economies was essentially a process of moving the economy from an agricultural focus to a manufacturing focus centered on smokestack industries.

Many developing nations deliberately foster smokestack industries in hopes of modernizing their economies. Regional economic development promoters across large countries, such as the U.S., have also historically focused their efforts on attracting and retaining smokestack industries, though this trend has shifted in favor of the technology sector, high-value services, and the creative economy in recent decades.

However, this shift is also accompanied by a need to deal with the leftover fixed capital, old factories, and industrial waste products left behind by aging smokestack industries.

Smokestack Industries and Investors

A smokestack industry, while still vital to the economy, is usually viewed by investors as an "old economy" business, with limited potential for long-term growth. Such "old economy" companies tend to center around manufacturing, whereas "new economy" companies tend to focus on services. In the stock market, smokestack industries will generally be classified under the Basic Materials, Energy, and Industrials sectors.

Smokestack industries are generally perceived as having a high degree of cyclicality since their fortunes are usually dependent on the state of the broad economy. Due to their capital intensiveness, the time it takes to build new smokestack-industry plants, and the roundaboutness of their productive processes relative to the ultimate satisfaction of consumer desires, smokestack industries are more susceptible to the ups and downs of the economy and credit-driven business cycles.

For those producers of items that are exported, either as final products or as inputs into the global manufacturing supply chain, global economic growth is important.

During periods of economic expansion, smokestack industry stocks tend to perform well, delivering healthy levels of earnings and cash flow. However, as cyclical industries, they tend to underperform during recessionary times, due to declines in revenue, earnings, and cash flow.