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
Manufacturing
continues to matter –
but its nature and role
are changing

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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%

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1. Manufacturing matters
Manufacturing makes outsized contributions in key areas

Direct economic contributions Indirect contributions

Global
sample ▪ Productivity gains are
passed on to consumers as
Value added 16% 12%
lower prices
Value-added growth 20% 12%
▪ Technology innovation
Exports 70% 61% results in spillover
effects
Private sector R&D 77% 67%
▪ Provides solutions to
Productivity growth 37% 30%
societal challenges
Employment 14% 9% such as reducing energy and
Employment growth -24% -22% resource consumption

SOURCE: EU KLEMS; IHS Global Insight; OECD STAN, and ANBERD; Eurostat; World Bank; | 3
McKinsey Global Institute analysis
1. Manufacturing matters
Manufacturing value added continues to grow globally, but not equally
Real value added in manufacturing
Constant 2005 $ trillion Compound
annual
growth
10
rate 3%
9 World

6 High income

3 Middle income

1
Low income
0
1995 2000 2005 2010 2013e

SOURCE: World Bank; IHS Global Insight; McKinsey Global Institute analysis | 4
1. Manufacturing matters
Four related industries—only one-third of total employment in the sector—
explain 80 percent of job growth in US manufacturing in the recovery
Gross and net job gains in US manufacturing in the recovery,
January 2010 to peak (February 2013)
Thousand jobs
These 4 related industries
account for 35% of jobs and 80% 43 646 38
38 25 32
of job growth 50 551
50
129
162

174

Fabri- Autos, Machin- Pri- Food, Rubber, Other Gross Printing Textiles, Other Net gains
cated other ery mary bever- plastics gains furniture
metals transport metals age

Share of gross job growth in manufacturing, 2010–12

%

27 25 20 8 8 6 7

Share of manufacturing sector employment, 2010

%
11 12 9 3 15 5 21

SOURCE: McKinsey Global Institute analysis | 5

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!

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 Global innovation for Resource-intensive
local markets 35 commodities 27

Manufacturing
is diverse …

% of global manufacturing
value added

Regional Global technologies/ Labor-intensive

processing 23 innovators 8 tradables 7

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2. Manufacturing is diverse
Manufacturing segments emerge from an High Lower-middle
Upper-middle Low
examination of five characteristics
R&D Labor Capital Energy Trade
intensity intensity intensity intensity 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)

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2. Manufacturing is diverse
The five segments have different drivers of competitiveness and ILLUSTRATIVE

comparative advantage, which shape location requirements

Key attributes required
▪ Rapid innovation to meet market needs
Global innovation ▪ Access to supply chains
for local markets ▪ Proximity to demand
▪ Potential regulation reinforcing local needs

Regional
▪ Access to raw materials and suppliers
processing
▪ Transport costs and infrastructure
▪ Proximity to demand

Energy-/resource-
▪ Access to raw materials
intensive
▪ Low cost and availability of energy
commodities
▪ Reasonable transport costs and infrastructure
▪ Proximity to demand

Global ▪ R&D infused innovation skill/talent

technologies/ ▪ Low effective labor costs
innovators ▪ Access to supply chains

Labor-intensive ▪ Low absolute and effective labor costs

tradables ▪ Short lead times to market (inventory
proximity not manufacturing)

SOURCE: McKinsey Global Institute analysis | 9

2. Manufacturing is diverse
Some sectors will offer more potential than others … shale gas PRELIMINARY

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

Jobs impact (direct + indirect) Low estimate High estimate

Annual incremental GDP impact by 2020, US

$ billion
145 690

235 80
310
105

130
85
225 55
110 380

115

Oil and gas Manufacturing1 Services2 Other sectors3 Total GDP gain
production

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

SOURCE: McKinsey Global Institute | 10

… and Manufacturing’s
global nature is evolving

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TRUE OR FALSE? THE DECLINE OF MANUFACTURING’S EMPLOYMENT
AND VALUE-ADDED IMPACT IS INEVITABLE

| 12
3. Manufacturing is evolving
Manufacturing share of total employment follows an inverted U-shape
pattern as an economy becomes more prosperous

Manufacturing employment
% of total employment
40
Brazil
35 Canada
30 Germany
India
25
Japan
20
Mexico
15 South Korea
10 Similar shape for Taiwan
Manufacturing United Kingdom
5
Value Added data United States
0
0 5,000 10,000 15,000 20,000 25,000 30,000
GDP per capita
1990 PPP-adjusted dollars

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3. Manufacturing is evolving
In the United States, production jobs make up less than half of
total manufacturing-related employment

US manufacturing employment, 20101

Million
17.2

5.7
11.5

4.2
7.3

Total Service and Manufacturing Service-type Assembly jobs

manufacturing- other jobs linked employment3 jobs in
related employment to manufacturing2 manufacturing4

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

3. Manufacturing is evolving
US manufacturing job losses in the past decade were driven by ESTIMATES

productivity gains that were not matched by demand growth

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

Million FTEs

17.3 0.4
0.7
4.3
~0.62

3.7

0.3
11.5

2000 Domestic Net trade Productivity/ Other1 2010

employment final demand offshoring employment

SOURCE: BEA; Susan Houseman et al., “Offshoring bias in US manufacturing,” Journal of Economic Perspectives,
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volume 25, number 2, Spring 2011; McKinsey Global Institute analysis
3. Manufacturing is evolving
Developing economies are moving up in global manufacturing
Ranking by share of global nominal manufacturing gross value added
Rank 1990 2000 2010 2012
1 United States United States United States China
2 Japan Japan China United States
3 Germany Germany Japan Japan
4 Italy China Germany Germany
5 United Kingdom United Kingdom Italy South Korea
6 France Italy Brazil Italy
7 China France South Korea Russia
8 Brazil South Korea France United Kingdom
9 Spain Canada United Kingdom India
10 Canada Mexico India Brazil
11 South Korea1 Spain Russia2 France
12 Mexico Brazil Mexico Indonesia
13 Turkey Taiwan Indonesia2 Mexico
14 India India Spain Canada
15 Taiwan Turkey Canada Spain
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);
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McKinsey Global Institute analysis
3. Manufacturing is evolving
The developed world’s global manufacturing share has doubled in the last 30
years and it is expected to continue growing

Real value added in manufacturing

% of global manufacturing Developed countries excl. USA Developing countries excl. China
United States of America China

100% = 100 100 100 100 100 100

39 38 34
60 53
61
20
22 22

23 21
20 19 20 20

17 24
18 18 19 20
1 2 7

1980 1990 2000 2013 2015 2020

SOURCE: IHS Global Insight; McKinsey Global Institute analysis | 17

Global trends are driving
this change

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4. Trends reshaping manufacturing: Demand
Five disruptive trends and trend breaks are reshaping manufacturing
From…
▪ Demographic dividend driving
growth
1 Demand ▪ High growth but low volume in
emerging economies
To
▪ Aging and the productivity
imperative
▪ High absolute growth in
emerging economy cities

2 Factor inputs

3 Stability

4 Policy

5 Technology

SOURCE: McKinsey Global Institute McKinsey & Company | 19

4. Trends reshaping manufacturing: Demand …
Demand shift: By 2025, half of global consumption
will be in emerging markets

World population World consumption

Billion people $ trillion
7.9
Below consuming class Developing markets
Consuming class 6.8
Developed markets
3.7
5.3 64
4.4
3.7
2.5 4.0 30
2.8 4.2 38
2.2 2.4
0.9 1.2 12
0.3
1950 1970 1990 2010 2025
34
Population in 26
13 23 23 36 53
consuming
class
% 2010 2025

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4. Trends reshaping manufacturing: Demand … but also supply
Major value-volume disconnects are evident as emerging- market players
capture the growth in their home markets

Top five construction 32

equipment manufacturers
by revenue, 2008
$ billion 18

10
7 7

Caterpillar Komatsu Terex Liebherr Volvo

Top five volume producers 30 29

of high-selling construction 24
equipment SKU 20
Wheel loaders (thousand) 18

Lonking Liugong XGMC Caterpillar Lingong

| 21
4. Trends reshaping manufacturing: Factor inputs
Five disruptive trends and trend breaks are reshaping manufacturing
From…
▪ Demographic dividend driving
growth
1 Demand ▪ High growth but low volume in
emerging economies
To
▪ Aging and the productivity
imperative
▪ High absolute growth in
emerging economy cities

▪ Increasing scarcity of talent,

2 Factor inputs ▪ Decreasing global cost resources, and capital

3 Stability

4 Policy

5 Technology

SOURCE: McKinsey Global Institute | 22

4. Trends reshaping manufacturing: Factor inputs
The world is likely to have too few high-skill workers and not enough jobs
for low-skill workers
% of supply of skill cohort
Gap between demand and supply of workers by educational
attainment, 2020 estimates (Million workers) % of demand for skill cohort

Shortages Surpluses

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

Total 38– 13 Total 15 Total 89– 10

45
shortage 41 shortage surplus 94

In In
16– 10 In 10 32– 11
advanced 13 advanced
18 India 35
economies2 economies

In India and
In Young
16 19 Young 10
In China 23 Developing 31 58
Developing
economies3
economies

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. | 23
4. Trends reshaping manufacturing: Stability
Five disruptive trends and trend breaks are reshaping manufacturing
From…
▪ Demographic dividend driving
growth
1 Demand ▪ High growth but low volume in
emerging economies
To
▪ Aging and the productivity
imperative
▪ High absolute growth in
emerging economy cities

▪ Increasing scarcity of talent,

2 Factor inputs ▪ Decreasing global cost resources, and capital

▪ ‘Great Moderation’ ▪ ‘Great Uncertainty’

3 Stability

4 Policy

5 Technology

SOURCE: McKinsey Global Institute | 24

4. Trends reshaping manufacturing: Stability
Volatility and uncertainty are amplified in an increasingly globalized world

Probability of steel Prior to 2000

price change 2000 through 2005
After 2005
70

60

50

40

30

20

10

-10
<-20 -10 -5 -2 0 2 5 10 >20
Monthly price change
(Percent)

| 25
4. Trends reshaping manufacturing: Policy
Five disruptive trends and trend breaks are reshaping manufacturing
From…
▪ Demographic dividend driving
growth
1 Demand ▪ High growth but low volume in
emerging economies
2 Factor inputs ▪ Decreasing global cost
▪ ‘Great Moderation’
3 Stability
▪ Ultimate trust in market
efficiency; liberalization and
4 Policy
deregulation
5 Technology
SOURCE: McKinsey Global Institute
To
▪ Aging and the productivity
imperative
▪ High absolute growth in
emerging economy cities
▪ Increasing scarcity of talent,
resources, and capital
▪ ‘Great Uncertainty’
▪ Re-regulation, intervention…
in nation states
| 26
4. Trends reshaping manufacturing: Policy
Government policy actions vary widely across countries ILLUSTRATIVE

and industries

Low Degree of intervention High

Setting the ground Building Coordinating Playing the
rules and direction enablers interventions principal actor

Global
innovation for
Fuel economy standard Tax credits, loans, and Incentives to upgrade to Government loans and
local markets
for new automobiles subsidies for auto R&D fuel efficient models bailouts of carmakers

Global
technologies/
Safety certification for all R&D packages for Oulu mobile handset Early government
innovators
electronics sold in EU semiconductor firms cluster initiative investment in chip maker

Regional
processing Preventive food safety Raise food production via Coordinated food export Joint food production
and quality controls training, technology cluster support zone in northeast China
Energy-/
resource-
intensive Regulatory norm for very Power co-generation Integrated steel demand Assumption of pensions
commodities high-quality steel projects for steel plants strategy and plant closing costs

Labor-
intensive
Duty-free garment Government delegations Duty drawback policy for Restructuring and debt
tradables
imports from Bangladesh sent to new markets garment industry relief for garment makers

SOURCE: McKinsey Global Institute analysis | 27

4. Trends reshaping manufacturing: Technology
Five disruptive trends and trend breaks are reshaping manufacturing
From…
▪ Demographic dividend driving
growth
1 Demand ▪ High growth but low volume in
emerging economies
2 Factor inputs ▪ Decreasing global cost
▪ ‘Great Moderation’
3 Stability
▪ Ultimate trust in market
efficiency; liberalization and
4 Policy
deregulation
▪ Automation and efficiency in
production and transactions
5 Technology ▪ Several new technologies hyped
but in infancy
SOURCE: McKinsey Global Institute
To
▪ Aging and the productivity
imperative
▪ High absolute growth in
emerging economy cities
▪ Increasing scarcity of talent,
resources, and capital
▪ ‘Great Uncertainty’
▪ Re-regulation, intervention…
in nation states
▪ Big data and knowledge-
worker effectiveness
▪ Gaining scale in advanced
materials, robotics, nanotech
| 28
4. Trends reshaping manufacturing: Technology
New materials Product design
New ▪ Nanotech ▪ Internet of Things
▪ Composites ▪ Advanced analytics
technologies ▪ Biologics ▪ Social media
change
manufacturing
value chains
and processes

Production processes Information systems Business models

▪ Modeling and simulation ▪ Big Data ▪ Frugal innovation
▪ Advanced robotics ▪ Computer-aided design ▪ Circular economy
▪ Additive manufacturing ▪ New service models

| 29
4. Trends reshaping manufacturing: Technology in new materials
Automotive use of lightweight materials is expected to grow significantly –
~from 29% today to ~60+% by 2030
xx% Lightweight Glass fiber Magnesium Other light metals
share1
Carbon fiber Aluminum Steel (< 550 MPa)

Material split Plastics HSS2 Other nonlightweight3

Percent

Aviation Wind Automotive4

3 3 0.5
0 4 0.5 3.5 9 11.5
9 16 5 5
22 22
15 12
26% 26% 29%
49 42
38
64 64 52
11 16 67%
6 13
78% 8
13 85%
7 19 20
9 8 10 10
2010 2030 2010 2030 2010 2030

1 HSS, aluminum, magnesium, plastics (beyond current use), glass/carbon fiber In 2030 Automotive may consume
2 High-strength steel (> 550 MPa) up to 75% of CFRP production
3 Mainly other metals, glass, fluids, interior parts for automotive, etc.
4 European OEMs

SOURCE: Doc ID# 787153 | 30

4. Trends reshaping manufacturing: Technology in new products
Automation is becoming more affordable, more capable and simpler to use

“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

SOURCE: Rethink Robotics website; http://www.rethinkrobotics.com/ | 31

4. Trends reshaping manufacturing: Technology in new production processes
Additive manufactured products and services is going through its third and
strongest period of growth . . . now a ~$2bn market
Primary revenue from AM products and services
USD millions Products Services

+27% p.a.
1,714

1,325
+16% p.a. 834
1,142 1,184
1,067
984
652
809 611
706 611 530
+20% p.a.
601 533
539 538 485 529 444
421 453 474
243 404
880
295 176 195 207 238 238 236 272
673
198 573 537
125 359 365 452 531
79 245 258 266 302 300 248 257 302
120 170
1994 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 2011

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 | 32

4. Trends reshaping manufacturing: Technology in better information mastery
The “industrial internet” is emerging…
and creating opportunities across the value chain
Supply
Market- After-
R&D and chain Produc-
ing and sales
design manag-- tion
sales service
Example of applications ment

Build cross-functional R&D databases

to enable rapid experimentation
 
Aggregate customer data to improve
service and enable design-to-value
  
Implement advanced demand
forecasting and supply planning
   
Collect real-time after-sales data from
sensors and customers
   
Improve supply-chain visibility    
Advanced
Big Data
Analytics
| 33
4. Trends reshaping manufacturing: Technology
ILLUSTRATIVE
Technology and R&D are critically linked to, but need not follow
manufacturing locations … location choices are dependent on Innovation
Production
the phase of innovation

Related Technical and engineering services

industries

R&D services Machine tool suppliers Parts suppliers

Manufac- Production
Product/ Customer
Basic turing Lead support and
Value chain platform application
research process factory global
development development
development footprint

Key drivers ▪ Talent ▪ Talent ▪ Customer/ ▪ Lead factory ▪ Talent ▪ Market size
of location ▪ Universities ▪ Legacy/ market ▪ Machine tool ▪ Proximity to ▪ Factor cost
choice ▪ R&D funds headquarters proximity suppliers platform ▪ Regulation
▪ Industry- development and tariffs
standard ▪ Machine tool ▪ Supply
shaping suppliers chain
markets ▪ Scale
▪ In some
sectors: tax

SOURCE: E. Abele et al., eds., Global production: A handbook for strategy and implementation; McKinsey Global Institute analysis | 34
4. Trends reshaping manufacturing: Technology
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
Net exports1
Nominal $ billion, 2012

France Germany Japan USA UK EU-15

Primary resources -67 -153 -321 -276 -44 -499

Labor-intensive
manufacturing -26 -21 -69 -195 -40 -104

Capital-intensive
manufacturing -30 42 -27 -45 -46 98

Knowledge-intensive
manufacturing -1 366 306 -246 -43 425

Labor-intensive
services 8 -50 -25 72 -7 42

Capital-intensive 4 0 0 3 2 7
services
Knowledge-intensive
services 25 22 2 76 119 232

Health, education,
0 4 1 -34 -2 7
and public services
Total -87 210 -133 -645 -61 207

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 .
SOURCE: World Bank WITS database; International Trade Centre; US International Trade
| 35
Commission; McKinsey Global Institute analysis
4. Trends reshaping manufacturing: Technology
In particular, the US trade deficit in knowledge-intensive Overall trade
balance as a
manufacturing rose to $270 billion in 2012 share of GDP

Net exports, 1980–2012

$ billion, real (2005)
150
Other transport
equipment
100
Medical, precision,
and optical
50
Chemicals, including
0 pharmaceuticals
Electrical machinery
-50 Machinery, equipment,
and appliances
-100
Computers and office
machinery
-150
Semiconductors and
electronics
-200
Motor vehicles, trailers,
and parts
-250
All knowledge-intensive
-300 manufacturing
1980 85 90 95 2000 05 10 2012

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

SOURCE: IHS Global Insight May 2013; McKinsey Global Institute analysis | 36
Summary
As global manufacturing continues to evolve beyond re-shoring,
business and policy leaders must focus on “next-shoring”
Focus on winning the battle for next-gen products, not bringing old
1 Next products
products back.
Get granular in understanding how dramatically demand patterns
2 Next markets
are changing.
Consider how advances enable new production and service models,
3 Next technology
raise productivity, reduce scale, and change competition.
Design facilities around increased flexibility and volume, and markets of
4 Next factory
different sizes and development velocities.
Create new forms of collaboration and innovation, recognizing that control
5 Next networks
and integration is key, regardless of ownership.
Embrace uncertainty as a source of advantage; no longer making point
6 Next disruption
forecasts, but building flexible, agile networks.
Next sources of Build the next frontier of advantage using frugal innovation and tapping
7 competitive advantage into the circular economy.
Actively build the next pool of talent suited to your businesses, recognizing
8 Next talent
the need for investment in the entire skill pipeline.
Create a leadership mindset that understands that "one size does not fit
9 Next mindset
all" and focuses on competitiveness for the long term.
Pursue new forms of partnerships to develop technology and markets to
10 Next partnership help serve the numerous niches of the 21st century economy.

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