manufacturing the future: the next era of global growth ......manufacturing the future: the next era...

Manufacturing the Future:

The Next Era of Global

Growth and Innovation

Capital Works’ Fall Capital Connection meeting

David O’Halloran

Jeff Sinclair

November 5, 2013

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited

| 1

Manufacturing

continues to matter –

but its nature and role

are changing

| 2

MANUFACTURING MATTERS

QUESTION: While manufacturing represents ~14% of total employment

and ~16% of value-added, what is its share of private sector R&D and

export?

a) More than 30%

b) More than 50%

c) More than 70%

| 3

Manufacturing makes outsized contributions in key areas

Direct economic contributions

Global

sample

Value added 16% 12%

Employment 14% 9%

Exports 70% 61%

Private sector R&D 77% 67%

Productivity growth 37% 30%

Value-added growth 20% 12%

Employment growth -24% -22%

Indirect contributions

▪ Productivity gains are

passed on to consumers as

lower prices

▪ Technology innovation

results in spillover effects

▪ Provides solutions to societal challenges

such as reducing energy and

resource consumption

1. Manufacturing matters

SOURCE: EU KLEMS; IHS Global Insight; OECD STAN, and ANBERD; Eurostat; World Bank;

McKinsey Global Institute analysis

| 4

0

1

2

3

4

5

6

7

8

9

10

World

Middle income

Low income

High income

2013e 2010 2005 2000 1995

Manufacturing value added continues to grow globally, but not equally

Real value added in manufacturing

Constant 2005 $ trillion Compound

annual

growth

rate 3%

SOURCE: World Bank; IHS Global Insight; McKinsey Global Institute analysis


| 5

32253843

3850

50129

162

174

551

646

Net gains Other Textiles,

furniture

Printing Gross

gains

Other Rubber,

plastics

Food,

bever-

age

Pri-

mary

metals

Machin-

ery

Autos,

other

transport

Fabri-

cated

metals

Share of gross job growth in manufacturing, 2010–12

%

Share of manufacturing sector employment, 2010

%

Four related industries—only one-third of total employment in the sector—

explain 80 percent of job growth in US manufacturing in the recovery

These 4 related industries

account for 35% of jobs and 80%

of job growth

SOURCE: McKinsey Global Institute analysis

Gross and net job gains in US manufacturing in the recovery,

January 2010 to peak (February 2013)

Thousand jobs

27 25 20 8 8 6

11 12 9 3 15 5

7

21


| 6

SEGMENTATION IS IMPERFECT, BUT HOW MANY SEGMENTS OF THE

GLOBAL MANUFACTURING ECONOMY ARE NEEDED TO FRAME THE

SECTOR’S DYNAMICS FOR COMPANY AND POLICY LEADERS?

A) 5 SEGMENTS

B) 8 SEGMENTS

C) 12 SEGMENTS

D) IMPOSSIBLE!

| 7 7 7 7

Manufacturing

is diverse …

Global innovation for

local markets

Regional

processing

Resource-intensive

commodities

% of global manufacturing

value added

Global technologies/

innovators

Labor-intensive

tradables 7 8 23

27 35

| 8

Manufacturing segments emerge from an

examination of five characteristics

High

Upper-middle

Lower-middle

Low

Trade intensity

Energy intensity

Capital intensity

Labor intensity

R&D intensity

Global innovation for local markets (e.g. chemicals, automobiles, machinery)

Regional processing (e.g. food processing, rubber and plastics, fabricated metals)

Resource-intensive commodities (e.g. primary metals, paper, pulp)

Global technologies/ innovators (e.g. computers, electronics, semiconductors)

Labor-intensive tradables (e.g. apparel, leather, toys)

2. Manufacturing is diverse

| 9

The five segments have different drivers of competitiveness and

comparative advantage, which shape location requirements


Key attributes required

Global innovation

for local markets

▪ Rapid innovation to meet market needs

▪ Access to supply chains

▪ Proximity to demand

▪ Potential regulation reinforcing local needs

Regional

processing

▪ Access to raw materials and suppliers

▪ Transport costs and infrastructure


Energy-/resource-

intensive

commodities

▪ Access to raw materials

▪ Low cost and availability of energy

▪ Reasonable transport costs and infrastructure


Global

technologies/

innovators

▪ R&D infused innovation skill/talent

▪ Low effective labor costs

▪ Access to supply chains

Labor-intensive

tradables

▪ Low absolute and effective labor costs

▪ Short lead times to market (inventory

proximity not manufacturing)

ILLUSTRATIVE


| 10

Annual incremental GDP impact by 2020, US

$ billion

115

55

130

80

380110

105310

Total GDP gain

690

Other sectors3

145

Services2

235

Manufacturing1

85

Oil and gas

production

225

Some sectors will offer more potential than others … shale gas

in U.S. offers strong GDP and overall jobs potential

Low estimate High estimate Jobs impact (direct + indirect)

110-215K 165-270K 250-450K 385-725K 1.0-1.7M

SOURCE: McKinsey Global Institute

PRELIMINARY


| 11

… and Manufacturing’s

global nature is evolving

| 12

TRUE OR FALSE? THE DECLINE OF MANUFACTURING’S EMPLOYMENT

AND VALUE-ADDED IMPACT IS INEVITABLE

| 13

0

5

10

15

20

25

30

35

40

0 5,000 10,000 15,000 20,000 25,000 30,000

Manufacturing employment % of total employment

GDP per capita 1990 PPP-adjusted dollars

Manufacturing share of total employment follows an inverted U-shape

pattern as an economy becomes more prosperous

United States

United Kingdom

Taiwan

South Korea

Mexico

Japan

India

Germany

Canada

Brazil

3. Manufacturing is evolving

Similar shape for

Manufacturing

Value Added data

| 14 SOURCE: BEA; BLS; McKinsey Global Institute analysis

5.7

4.27.3

11.5

17.2

Assembly jobs Service-type

jobs in

manufacturing4

Manufacturing

employment3

Service and

other jobs linked

to manufacturing2

Total

manufacturing-

related employment

In the United States, production jobs make up less than half of

total manufacturing-related employment

US manufacturing employment, 20101

Million


| 15

US manufacturing job losses in the past decade were driven by

productivity gains that were not matched by demand growth

SOURCE: BEA; Susan Houseman et al., “Offshoring bias in US manufacturing,” Journal of Economic Perspectives,

volume 25, number 2, Spring 2011; McKinsey Global Institute analysis

3.7

0.3

0.70.4

Productivity/

offshoring

4.3

~0.62

Net trade Domestic

final demand

2000

employment

17.3

11.5

2010

employment

Other1

ESTIMATES

Contribution of various factors to US manufacturing job losses, 2000-10

Million FTEs


| 16

Developing economies are moving up in global manufacturing

1 South Korea ranked 25 in 1980

2 In 2000, Indonesia ranked 20 and Russia ranked 21.

SOURCE: HIS Global Insight database sample of 28 developed and 47 developing economies (May 2012 Forecast);

McKinsey Global Institute analysis

Rank

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

2010

United States

China

Japan

Germany

Italy

Brazil

South Korea

France

United Kingdom

India

Russia2

Mexico

Indonesia2

Spain

Canada

1990

United States

Japan

Germany

Italy

United Kingdom

France

China

Brazil

Spain

Canada

South Korea1

Mexico

Turkey

India

Taiwan

2000

United States

Japan

Germany

China

United Kingdom

Italy

France

South Korea

Canada

Mexico

Spain

Brazil

Taiwan

India

Turkey

2012

United States

China

Japan

Germany

Italy

Brazil

South Korea

France

United Kingdom

India

Russia

Mexico

Indonesia

Spain

Canada

Ranking by share of global nominal manufacturing gross value added


| 17

The developed world’s global manufacturing share has doubled in the last 30

years and it is expected to continue growing

19 20 2418 1817

20 2021

100

19

60

1980 2020

100 100% =

20

2000

100

7

23

53

1990

100

2

34

2015

100

22

38

2013

100

22

39

1

20

61

SOURCE: IHS Global Insight; McKinsey Global Institute analysis

China United States of America

Developed countries excl. USA Developing countries excl. China

Real value added in manufacturing

% of global manufacturing


| 18

Global trends are driving

this change

McKinsey & Company | 19

Five disruptive trends and trend breaks are reshaping manufacturing


From… To

Factor inputs

Policy

Demand 1

2

4

Technology

Stability 3

5

▪ Demographic dividend driving

growth

▪ High growth but low volume in

emerging economies

▪ Aging and the productivity

imperative

▪ High absolute growth in

emerging economy cities

4. Trends reshaping manufacturing: Demand

| 20

Demand shift: By 2025, half of global consumption

will be in emerging markets

2025

7.9

4.2

3.7

2010

6.8

2.4

4.4

1990

5.3

1.2

4.0

1970

3.7

0.9

2.8

1950

2.5

0.3

2.2

13 23 23 36 53 Population in

consuming

class

%

Consuming class

Below consuming class

World population

Billion people

World consumption

$ trillion

2025

34

30

64

38

12

26

2010

Developed markets

Developing markets

4. Trends reshaping manufacturing: Demand …

| 21

7 7

Komatsu Terex

10

Liebherr

18

Volvo

32

Caterpillar

Major value-volume disconnects are evident as emerging- market players

capture the growth in their home markets

Top five construction

equipment manufacturers

by revenue, 2008

$ billion

20

XGMC

24

Liugong Lingong

29 30

Lonking Caterpillar

18

Top five volume producers

of high-selling construction

equipment SKU

Wheel loaders (thousand)

4. Trends reshaping manufacturing: Demand … but also supply

| 22



From… To


growth


emerging economies


imperative



Factor inputs

Policy

Demand 1

2

4

Technology

Stability 3

5

4. Trends reshaping manufacturing: Factor inputs

▪ Decreasing global cost ▪ Increasing scarcity of talent,

resources, and capital

| 23

The world is likely to have too few high-skill workers and not enough jobs

for low-skill workers

In China 23

In

advanced

economies2

16–

18

Total

shortage

38–

41

1 Low-skill defined in advanced economies as no post-secondary education; in developing, low skill is primary education or less.

2 25 countries from the analyzed set of 70 countries, that have GDP per capita greater than US$ 20,000 at 2005 purchasing power parity (PPP) levels in 2010.

3 11 countries from the analyzed set of 70 countries, from South Asia and sub-Saharan Africa, with GDP per capita less than $3,000 at 2005 PPP levels in 2010.

13

10

16

Gap between demand and supply of workers by educational

attainment, 2020 estimates (Million workers)

31

13

45

In Young

Developing

economies3

In

India

Total

shortage 15

10

19

In India and

Young

Developing

economies

58

In

advanced

economies

32–

35

Total

surplus

89–

94 10

11

10

% of supply of skill cohort

% of demand for skill cohort

High-skill workers Medium-skill workers Low-skill workers1

Surpluses Shortages

4. Trends reshaping manufacturing: Factor inputs

| 24



From… To


growth


emerging economies


imperative



Factor inputs

Policy

Demand 1

2

4

Technology

Stability 3

5



4. Trends reshaping manufacturing: Stability

▪ ‘Great Moderation’ ▪ ‘Great Uncertainty’

| 25

-10

0

10

20

30

40

50

60

70

-5 -10 <-20 >20 10 5 2 0 -2

Probability of steel

price change

Volatility and uncertainty are amplified in an increasingly globalized world

Monthly price change

(Percent)

After 2005

2000 through 2005

Prior to 2000

4. Trends reshaping manufacturing: Stability

| 26



From… To


growth


emerging economies


imperative



Factor inputs

Policy

Demand 1

2

4

Technology

Stability 3

5



▪ Ultimate trust in market

efficiency; liberalization and

deregulation

▪ Re-regulation, intervention…

in nation states

4. Trends reshaping manufacturing: Policy


| 27

Setting the ground

rules and direction

Building

enablers

Coordinating

interventions

Playing the

principal actor

Global

innovation for

local markets Fuel economy standard

for new automobiles

Tax credits, loans, and

subsidies for auto R&D

Incentives to upgrade to

fuel efficient models

Government loans and

bailouts of carmakers

Global

technologies/

innovators Safety certification for all

electronics sold in EU

R&D packages for

semiconductor firms

Oulu mobile handset

cluster initiative

Early government

investment in chip maker

Regional

processing Preventive food safety

and quality controls

Raise food production via

training, technology

Coordinated food export

cluster support

Joint food production

zone in northeast China

Energy-/

resource-

intensive

commodities Regulatory norm for very

high-quality steel

Power co-generation

projects for steel plants

Integrated steel demand

strategy

Assumption of pensions

and plant closing costs

Labor-

intensive

tradables Duty-free garment

imports from Bangladesh

Government delegations

sent to new markets

Duty drawback policy for

garment industry

Restructuring and debt

relief for garment makers


Government policy actions vary widely across countries

and industries

ILLUSTRATIVE

Degree of intervention High Low

4. Trends reshaping manufacturing: Policy

| 28



From… To


growth


emerging economies


imperative



Factor inputs

Policy

Demand 1

2

4

Technology

Stability 3

5



▪ Ultimate trust in market

efficiency; liberalization and

deregulation

▪ Re-regulation, intervention…

in nation states

▪ Automation and efficiency in

production and transactions

▪ Several new technologies hyped

but in infancy

▪ Big data and knowledge-

worker effectiveness

▪ Gaining scale in advanced

materials, robotics, nanotech

4. Trends reshaping manufacturing: Technology


| 29 29 29 29

New technologies

change manufacturing

value chains and processes

New materials ▪ Nanotech

▪ Composites

▪ Biologics

Product design ▪ Internet of Things

▪ Advanced analytics

▪ Social media

Production processes ▪ Modeling and simulation

▪ Advanced robotics

▪ Additive manufacturing

Information systems ▪ Big Data

▪ Computer-aided design

Business models ▪ Frugal innovation

▪ Circular economy

▪ New service models


| 30

Automotive use of lightweight materials is expected to grow significantly –

~from 29% today to ~60+% by 2030

Material split

Percent

137

16

8

9

2030

8

16

42

3

2010

9

6

11

49

3

64 64

2030

10

22

0.5 3.5

2010

10

22

0 4

52

13

9

2030

20

38

12

5

11.5 0.5

2010

19

15

5

SOURCE: Doc ID# 787153

1 HSS, aluminum, magnesium, plastics (beyond current use), glass/carbon fiber

2 High-strength steel (> 550 MPa)

3 Mainly other metals, glass, fluids, interior parts for automotive, etc.

4 European OEMs

Aviation Wind Automotive4

78% 85%

xx% Lightweight

share1

Other nonlightweight3

Steel (< 550 MPa)

Other light metals

HSS2

Aluminum

Magnesium

Plastics

Carbon fiber

Glass fiber

67%

29% 26% 26%

In 2030 Automotive may consume

up to 75% of CFRP production

4. Trends reshaping manufacturing: Technology in new materials

| 31

Automation is becoming more affordable, more capable and simpler to use

SOURCE: Rethink Robotics website; http://www.rethinkrobotics.com/

“Robots should be our collaborators … We should be concerned about too few rather than too

many.” Rodney Brooks, Chairman/CTO; founder of iRobot and former director of MIT SAIL

4. Trends reshaping manufacturing: Technology in new products

| 32

Primary revenue from AM products and services

Note: Primary market consists of all products and services associated with AM worldwide, excluding tooling produced from AM patterns, tooling

produced directly using AM systems, and molded parts and castings produced from these tools

SOURCE: Wohlers 2012

245 258 266 302 359 300 248 257 302 365 452 531 573 537673

880

170

176

95

295

125

1994

198

120 79

533

05

809

444

04

706

404

03

529

1,325

652

09

1,067

530

08

1,184

611

07 10

834 1,142

611

06

984

+20% p.a.

+27% p.a.

+16% p.a.

1,714

2011

195

96

421 243

99

539

238

98

207

97

453

272

02

474

236

01

538

238

2000

601 485

Additive manufactured products and services is going through its third and

strongest period of growth . . . now a ~$2bn market

USD millions Products Services

4. Trends reshaping manufacturing: Technology in new production processes

| 33

The “industrial internet” is emerging…

and creating opportunities across the value chain

R&D and design

Supply chain manag--ment

Produc-tion

Market-ing and sales

After-sales service

Improve supply-chain visibility

Collect real-time after-sales data from

sensors and customers

Implement advanced demand

forecasting and supply planning

Build cross-functional R&D databases

to enable rapid experimentation

Aggregate customer data to improve

service and enable design-to-value

Example of applications

4. Trends reshaping manufacturing: Technology in better information mastery

Big Data Advanced

Analytics

| 34

Technology and R&D are critically linked to, but need not follow

manufacturing locations … location choices are dependent on

the phase of innovation

SOURCE: E. Abele et al., eds., Global production: A handbook for strategy and implementation; McKinsey Global Institute analysis

Innovation

Production

Basic

research

Product/

platform

development

Customer

application

development

Manufac-

turing

process

development

Lead

factory

Production

support and

global

footprint

▪ Talent

▪ Universities

▪ R&D funds

R&D services

Technical and engineering services

Machine tool suppliers Parts suppliers

Related

industries

Value chain

Key drivers

of location

choice

▪ Talent

▪ Legacy/

headquarters

▪ Industry-

standard

shaping

markets

▪ In some

sectors: tax

▪ Customer/

market

proximity

▪ Lead factory

▪ Machine tool

suppliers

▪ Talent

▪ Proximity to

platform

development

▪ Machine tool

suppliers

▪ Scale

▪ Market size

▪ Factor cost

▪ Regulation

and tariffs

▪ Supply

chain

ILLUSTRATIVE


| 35

0

4

8

-1

25

-30

-26

-67

1 Data for net exports of services is 2011; 2012 is not available.

NOTE: Analysis excludes trade in products that are non-categorized or confidential .

Japan USA UK EU-15

SOURCE: World Bank WITS database; International Trade Centre; US International Trade

Commission; McKinsey Global Institute analysis

Germany France

Net exports1

Nominal $ billion, 2012

4

0

22

-50

366

42

-21

-153

1

2

0

-25

306

-27

-69

-321

3

-34

76

72

-246

-45

-195

-276

2

-2

-7

119

-43

-46

-40

-44

7

7

232

42

425

98

-104

-499

Total -133 -645 207 -61 210 -87

Primary resources

Knowledge-intensive manufacturing

Knowledge-intensive services

Health, education, and public services

Capital-intensive manufacturing

Labor-intensive manufacturing

Labor-intensive services

Capital-intensive services

But we have to work at it … the US and UK are the only major advanced

economies to run a trade deficit in knowledge-intensive manufacturing


| 36

In particular, the US trade deficit in knowledge-intensive

manufacturing rose to $270 billion in 2012

Net exports, 1980–2012

$ billion, real (2005)

05 2000 95 90 85 1980

-200

-50

-150

-100

-250

-300

2012 10

0

150

100

50

SOURCE: IHS Global Insight May 2013; McKinsey Global Institute analysis

-0.2 -0.6 -0.1 -0.7 -1.3 -2.0 -2.0

Motor vehicles, trailers,

and parts

Semiconductors and

electronics

Computers and office

machinery

All knowledge-intensive

manufacturing

Machinery, equipment,

and appliances

Electrical machinery

Chemicals, including

pharmaceuticals

Medical, precision,

and optical

Other transport

equipment

Overall trade

balance as a

share of GDP


| 37

As global manufacturing continues to evolve beyond re-shoring,

business and policy leaders must focus on “next-shoring”

1 Next products

2 Next markets

3 Next technology

4 Next factory

5 Next networks

6 Next disruption

7 Next sources of

competitive advantage

8 Next talent

9 Next mindset

10 Next partnership

Focus on winning the battle for next-gen products, not bringing old

products back.

Get granular in understanding how dramatically demand patterns

are changing.

Consider how advances enable new production and service models,

raise productivity, reduce scale, and change competition.

Design facilities around increased flexibility and volume, and markets of

different sizes and development velocities.

Create new forms of collaboration and innovation, recognizing that control

and integration is key, regardless of ownership.

Embrace uncertainty as a source of advantage; no longer making point

forecasts, but building flexible, agile networks.

Build the next frontier of advantage using frugal innovation and tapping

into the circular economy.

Actively build the next pool of talent suited to your businesses, recognizing

the need for investment in the entire skill pipeline.

Create a leadership mindset that understands that "one size does not fit

all" and focuses on competitiveness for the long term.

Pursue new forms of partnerships to develop technology and markets to

help serve the numerous niches of the 21st century economy.

Summary

manufacturing the future: the next era of global growth ......manufacturing the future: the next era...

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