The past few months have not been a happy time for manufacturers. As the world economy has slowed, manufacturers in many developed countries have been hit by a big fall-off in orders and have taken rapid steps to reduce their numbers of employees.

US companies have been particularly affected. Global giants including Caterpillar, the excavator maker, Deere, one of the world's biggest producers of tractors and other farm machines, and United Technologies, a conglomerate manufacturing goods from jet engines to lifts, have all announced weaker earnings and given few signs that they are expecting any meaningful recovery in 2002.

In Europe, among the worst affected companies has been Invensys, the UK engineering and controls group, which has announced three profits warnings this year.

ABB, the Swiss electrical engineer, GKN, the UK vehicle and aerospace com pany, and the French electronics company Alcatel, have all owned up to financial difficulties and announced redundancies.

The travails of these companies have made headline news and worried policymakers. While manufacturing is clearly less important in terms of its economic contribution than 50 years ago, it continues to generate about a fifth of world gross domestic product and employs about 350m people worldwide.

Moreover, the world could not function without manufactured goods. While manufacturing output in both Germany and the US has faltered in recent months, the sector is officially in recession in the UK, according to economic data released in July which showed that production had fallen in two successive quarters.

The downturn needs to be put into perspective. Much of manufacturing went through a purple patch in terms of output and profits during the latter half of the 1990s, driven by the economic boom in the US and low global inflation. Between 1995 and the end of 2000, manufacturing output in the US rose 30 per cent and in Europe (counting only those countries signed up for the euro) it expanded 20 per cent.

The picture has been a lot worse in the UK, where over the same period output rose a meagre 4 per cent, mainly on account of sterling's strength against the euro, which has sapped UK competitiveness. In Japan, manufacturing output at the end of 2000 was a mere 2 per cent higher than in 1995, a result of the long period of weakness of the Japanese economy as a whole.

Even given the current problems for manufacturing as a whole, not all parts of manufacturing are doing badly. The worst hit areas have been those producing goods for the information technology, computer and telecommunications industries. These segments have been hit by a sudden fall-off in demand in the past six months, compared with boom times last year.

Illustrating these problems, for instance, have been weak trading statements in recent months by leading makers of mobile telephones such as Nokia and Ericsson - companies that a year ago could do little wrong.

Outside the IT area, manufacturing companies are less likely to have seen huge weaknesses affecting their markets. For instance, Tyco International, the US diversified manufacturer that makes products from electric connectors to security systems, in June gave an upbeat view of the next few years.

The biggest concern for many manufacturers in the main industrialised countries is how to compete against rivals in lower-cost nations making similar types of products. Partly because of fiercer competition unleashed by globalisation, prices of many types of manufactured product have fallen by 30 per cent during the 1990s, forcing many companies in the developed world to go to huge lengths to reduce costs to survive.

Even though this background has caused difficulties for many western manufacturers, it has also forced the more entrepreneurial companies to follow new strategies that help them to maintain a competitive lead. One way they have been able to sharpen up their operations and remain in business is through offering specialised "just in time" manufacturing services to bigger businesses.

For instance, Griffin Manufacturing, a Massachusetts-based clothing supplier, has stayed profitable by concentrating on hard-to-make types of clothing, which it produces in short production runs and within a few days of gaining orders. These include special bras for the sports market, which contain zip fasteners that are difficult to sew.

Other manufacturers have realised that if they can become more innovative in product design they can often get ahead of competitors even if they are hampered by other costs.

For instance, Technetix, a UK electronics manufacturer, increased its sales more than threefold in the past two years by introducing a new type of low-cost set-top box to sell to the cable television industry. The company, which last year had revenues of £25m, bases its products on its own in-house designs, although it outsources much of its production to low-cost China.

Other companies in manufacturing have made themselves more valuable to their customers by introducing a range of services to go along with manufactured products. In the lead in this area have been big electrical goods producers such as General Electric of the US, Alstom of France and Germany's Siemens that are now big providers of services. These could include anything from maintaining railway rolling stock to helping a power station operator devise better ways to upgrade equipment.

It is imaginative strategies such as these that many manufacturers in the developed world will increasingly find they have to introduce if they are to survive in the straitened times that seem likely in the next 18 months.