After years of despair about the decline of manufacturing, policymakers in advanced economies now are talking about a rosier future. Wages have risen quickly in coastal China and other offshore locations, and have stagnated or fallen in advanced economies. Severe weather events, such as the Japanese tsunami and Bangkok floods, have exposed the fragility of global supply chains. And news that some US companies will build computers and washing machines once again in North America is offered as proof that the tide has turned (Henion and Schoenherr 2012).
While manufacturing has a bright future, our research suggests that the future of manufacturing in advanced economies will unfold in a different way than many think (Manyika et al. 2012). While value added will continue to rise, the impact on jobs, particularly for the unskilled, will be muted.
The rise and fall of manufacturing as an economy develops
Across the world and across the decades, manufacturing output and employment grow rapidly as economies urbanise: farmers become factory workers and as their productivity increases, so do wages. This gives workers more to spend on healthcare, education or leisure activities, which accelerates growth of the service economy. However, rising wages also give manufacturers the incentive to invest in labour-saving equipment, specialise in higher value-added goods, or, in the case of very labour-intensive industries, to move production to lower-wage geographies. Because of faster growth in services and slower hiring in manufacturing, the share of employment and the share of GDP generated by manufacturing usually peaks at 25 to 35%. China – the manufacturing sector of which contributes 33% of GDP – would appear to be approaching this peak.
In the US, manufacturing has fallen from 25% of US employment in 1950 to 9% today, even as output grew steadily; services grew faster, and manufacturers have consistently raised productivity through automation and innovation in products and processes. Indeed, in advanced economies, manufacturing has become the engine of productivity growth, providing about a third of productivity improvement in the US, or three times its contribution to employment. Manufacturing also leads in research and development, supplying up to 70% of private-sector research and development funding in advanced economies. Manufactured goods also remain the largest source of exports in most advanced economies.
Manufacturing is not monolithic
The manufacturing sector is made up of several distinct types of industries, which vary considerably in their prerequisites for success. Some industries, such as metals manufacturing, must have access to natural resources and low-cost energy and transportation. Some industries cannot succeed without access to highly skilled talent, whereas others rely on low-cost labour. And some are more energy- or capital-intensive than others. The low-cost labour group includes textiles, apparel, toys, and electronics assembly. Jobs in these businesses are the most globally tradeable; manufacturers in these businesses develop global supply chains to optimise access to the right low-wage capabilities.
Not surprisingly, advanced economies have experienced their greatest manufacturing job losses in labour-intensive segments and currently run a $342 billion trade deficit in labour-intensive goods. However, these economies also run a $726 billion surplus in what we call global innovation for local-market industries: autos, chemicals, pharmaceuticals, machinery, and other products that require continuous innovation and that, for economic and regulatory reasons, are often assembled in or near the markets in which they are consumed. If we understand what motivates companies to locate production capacity in certain places, we see that simple labour arbitrage – looking for the lowest wages – only matters most for some businesses. In businesses such as autos, proximity to demand is a heavily weighted factor and explains why North American and European manufacturers are more likely to add plants in Asia than in slower-growing economies in their home continents.
New opportunities in global manufacturing
Even as the global economy continues to struggle with the aftermath of the financial crisis, manufacturing continues to grow, but in a bifurcated way. Global manufacturing value added grew from $5.7 trillion annually to $7.5 trillion from 2000 to 2010, but demand in developing countries is growing at 2.5 times the rate of demand in advanced economies. This shift in demand has been under way for many years, but the speed and impact are not fully appreciated. By 2025, we project that more than half of global consumer demand will be in today’s developing economies (Atsmon et al. 2012). More than 1.8 billion people, most of them from developing nations, will join the global consuming class. Capturing this growth is critically important to global manufacturing companies.
A second set of opportunities arises from innovations that are finding their way into goods and manufacturing processes, or will do so in the next decade or so. These include a range of new materials such as carbon fibre and nanomaterials, which will change how cars, aircraft, and microchips are made. Additive manufacturing, better known as ‘3D printing’, is moving from a design tool to a means of production. Innovations in batteries and electronics will hasten the transition to new types of automotive power trains and even self-driving vehicles. The ‘internet of things’ – adding intelligent sensors and communications capabilities to products – opens up a whole world of possibilities for after-sale service and preventive maintenance. Across manufacturing, the ability to provide enhanced after-sale services will become an important competitive advantage.
An emerging field of green manufacturing will enable a ‘circular’ economy, in which products will be built with fewer resources and designed for refurbishment and recycling. Finally, big data is being applied across the manufacturing value chain, from gathering consumer insights from social media to define product requirements to tracking individual items across global supply chains in real time.
Seizing the future
Major manufacturing companies have a once-in-a-generation opportunity to build new platforms for growth in the next few years. They will need to develop better skills and strategies to tap new sources of demand and determine how to serve new customers who have a very different concept of value. They will need to get very adept at balancing the fundamental needs of their industries (e.g. access to talent, resources, markets, or low-cost energy) and the new patterns of demand. A steelmaker is unlikely to add much capacity in North America, even if the shale gas boom lowers energy costs because the rate of demand growth won’t justify the investment. Companies will also need to stay on the cutting edge in research and the adaptation of new discoveries that enable innovation. Almost without exception, companies will need to rethink how they develop insights, design products, select locations for facilities, and work with partners. Manufacturing companies will need to be agile, wired, data-driven enterprises that can respond quickly to change and also commit to long-term bets on geographies and technologies.
If they can do these things, global manufacturers will continue to contribute to the growth and prosperity of advanced economies. They will drive research and development investment, productivity, and exports. They will hire more high-skill employees to run increasingly high-tech factories and to fill a growing number of service-type roles – in design, logistics, and big data, for example. They will drive employment in service industries such as trucking. And many of the jobs that were lost when demand plunged in the past decade may eventually be restored. But because of technology, rising productivity, and levels of demand, overall manufacturing employment in advanced economies will continue to be under pressure.
Henion, Andy and Tobias Schoenherr (2012), U.S. manufacturers bringing work home from overseas, Michigan State University, October 1.
Manyika, James, Jeff Sinclair, Richard Dobbs, Gernot Strube, Louis Rassey, Jan Mischke, Jaana Remes, Charles Roxburgh, Katy George, David O'Halloran and Sreenivas Ramaswamy (2012), “Manufacturing the future: The next era of global growth and innovation”, McKinsey Global Institute, November.
Atsmon, Yuval, Peter Child, Richard Dobbs, and Laxman Narasimhan (2012), Winning the $30 trillion decathlon: Going for gold in emerging markets, August, available at www.mckinsey.com.