As the services sector becomes all-powerful, intangibles are consigning old-fashioned manufactured goods to the scrap heap, says Kevin Brown

The story of this century has been the replacement of manufacturing by services as the main generator of jobs and wealth, mirroring the replacement of agriculture by industry in the previous two centuries.

The story of the next 100 years will be the blurring, perhaps the disappearance, of the divisions between manufacturing and services as digital communications become ubiquitous.

Governments everywhere worry that the extraordinary growth of the internet will divide societies by creating a new class division between the knowledge-rich and the information-poor. But the net is much more than just a social phenomenon.

As the British government's Future Unit - its official star gazer - has pointed out, digital communications challenges the very structure of industries, their supply chains, and the way in which governments regulate them.

This is not hype. It is true that for most people, internet-centred commerce means little more than buying books or groceries on screen. But business to business communications are already triggering massive unseen changes.

For example, a contract manufacturing sector is growing up on the back of digital communications, making everything from computer parts to deodorants for big name companies which prefer to concentrate their efforts on marketing or research.

Contract manufacturing is in its infancy, but is already huge. In electronics alone, the global market is estimated to be worth at least $85bn, with steady growth of more than 20 per cent a year.

ost observers think this is an unstoppable phenomenon. But outsourcing is just the beginning. Look ahead just 10 years, let alone 100, and it is clear that digital communications represent an abrupt discontinuity in the evolution of both business and society.

Put simply, the internet and its specialised cousins - the intranet (for communications within companies) and the extranet (for industry groups and suppliers) - mean that making the best product is no longer the key to success.

Already it is becoming clear that the internet is raising the importance of online customer service, logistics management, design and marketing above the mundane business of actually making things.

There is a clear trend away from vertical integration - companies that design, make and market their own products - towards horizontal relationships where different functions are contracted out, with only the core knowledge retained centrally.

This will lead to much greater shipments of sub-assemblies than of finished products - for example many of the separate manufacturing jobs involved in building complex products such as cars will be contracted out.

These developments pose challenges for established economies and companies. Indeed, being big may well be a liability rather than an asset, says Professor Nicholas Negroponte, director of the Massachusetts Institute of Technology's media lab.

Digital information flows will cut margins and widen the scope of possible manufacturing areas to such a degree that small manufacturers will have much the same access to customers as big ones, says Professor Negroponte.

That will wipe out the advantage that size currently gives to companies and countries, triggering a fresh burst of global competition as small companies and countries use digital communications to challenge the established order.

"It will be possible to buy things from parts of the world that in the past could not even make these things," he says. "I think the implications are severe for companies that are already big."

Where might these new manufacturing centres be? Asia continues to provide obvious opportunities, in spite of the 1997 economic crisis. But central and eastern Europe are catching up fast.

Skoda Auto in the Czech republic, Mol, the Hungarian oil and gas group, and Era GSM, the Polish telecommunications operator, all signal what eastern Europe can achieve as economies liberalise, says Vernon Ellis, a managing director at Andersen Consulting in London.

In the longer term, just about anywhere could turn itself into a manufacturing centre as the advanced economies concentrate increasingly on high value added knowledge-based activities.

Not many people forecast the rise of Korea and Taiwan after world war two. Digital communications combined with cheap labour could trigger the same kind of development in other areas. Perhaps even Africa, the world's poorest region, could one day emerge as a manufacturing centre.

Gary Hamel, research fellow at the Harvard Business School and a visiting professor at the London Business School, says that there is no escape from these changes, which will overwhelm existing companies and countries unless they face up to the speed and the scope of change.

Forecasting the future is a notoriously tricky art. But the broad outlines of the next century seem fairly clear. As for the rest of the millennium, you might as well make it up for yourself. Your guess is as good as anyone else's.

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