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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
1. Manufacturing matters
| 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
1. Manufacturing matters
| 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
SOURCE: McKinsey Global Institute analysis
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
▪ Proximity to demand
Energy-/resource-
intensive
commodities
▪ Access to raw materials
▪ Low cost and availability of energy
▪ Reasonable transport costs and infrastructure
▪ Proximity to demand
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
2. Manufacturing is diverse
| 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
2. Manufacturing is diverse
| 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
3. Manufacturing is evolving
| 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
3. Manufacturing is evolving
| 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
3. Manufacturing is evolving
| 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
3. Manufacturing is evolving
| 18
Global trends are driving
this change
McKinsey & Company | 19
Five disruptive trends and trend breaks are reshaping manufacturing
SOURCE: McKinsey Global Institute
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
Five disruptive trends and trend breaks are reshaping manufacturing
SOURCE: McKinsey Global Institute
From… To
▪ Demographic dividend driving
growth
▪ High growth but low volume in
emerging economies
▪ Aging and the productivity
imperative
▪ High absolute growth in
emerging economy cities
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
Five disruptive trends and trend breaks are reshaping manufacturing
SOURCE: McKinsey Global Institute
From… To
▪ Demographic dividend driving
growth
▪ High growth but low volume in
emerging economies
▪ Aging and the productivity
imperative
▪ High absolute growth in
emerging economy cities
Factor inputs
Policy
Demand 1
2
4
Technology
Stability 3
5
▪ Decreasing global cost ▪ Increasing scarcity of talent,
resources, and capital
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
Five disruptive trends and trend breaks are reshaping manufacturing
SOURCE: McKinsey Global Institute
From… To
▪ Demographic dividend driving
growth
▪ High growth but low volume in
emerging economies
▪ Aging and the productivity
imperative
▪ High absolute growth in
emerging economy cities
Factor inputs
Policy
Demand 1
2
4
Technology
Stability 3
5
▪ Decreasing global cost ▪ Increasing scarcity of talent,
resources, and capital
▪ Ultimate trust in market
efficiency; liberalization and
deregulation
▪ Re-regulation, intervention…
in nation states
4. Trends reshaping manufacturing: Policy
▪ ‘Great Moderation’ ▪ ‘Great Uncertainty’
| 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
SOURCE: McKinsey Global Institute analysis
Government policy actions vary widely across countries
and industries
ILLUSTRATIVE
Degree of intervention High Low
4. Trends reshaping manufacturing: Policy
| 28
Five disruptive trends and trend breaks are reshaping manufacturing
SOURCE: McKinsey Global Institute
From… To
▪ Demographic dividend driving
growth
▪ High growth but low volume in
emerging economies
▪ Aging and the productivity
imperative
▪ High absolute growth in
emerging economy cities
Factor inputs
Policy
Demand 1
2
4
Technology
Stability 3
5
▪ Decreasing global cost ▪ Increasing scarcity of talent,
resources, and capital
▪ 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
▪ ‘Great Moderation’ ▪ ‘Great Uncertainty’
| 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
4. Trends reshaping manufacturing: Technology
| 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
4. Trends reshaping manufacturing: Technology
| 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
4. Trends reshaping manufacturing: Technology
| 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
4. Trends reshaping manufacturing: Technology
| 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
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