The global manufacturing sector is on the threshold of a dynamic new phase that will provide renewed opportunity for manufacturing firms — and a host of new challenges. Incumbents who can rise to the challenge — and upstarts who may find lower barriers to entry — could do very well, indeed.
What has changed to encourage such an upbeat view of manufacturing? We see two forces that will dominate global manufacturing in the coming decade. First we see major shifts in demand: developing economies such as China and India are morphing from the world’s source of low-cost manufacturing capacity to the world’s best market opportunities. In addition, customers everywhere are looking for more — including more services — from manufacturers. Second, we see a raft of innovations that will alter how products are designed, manufactured and sold — everything from nanotechnologies to 3D printing.
These forces will shift the dynamics of the global manufacturing sector. They will not, it must be noted, alter how the role of manufacturing evolves as economies develop. Manufacturing remains the driver of growth and employment when nations are developing — witness what’s happening in China — and becomes less important as economies become wealthier and their service sectors account for the bulk of growth and employment. Then, manufacturing’s most important role is as a driver of innovation, trade, and productivity. The new era will give manufacturing companies an opportunity to help their host economies in all of those areas; it will create high-skill jobs, particularly in design, big data, and other service roles, but not masses of production-line positions.
Demand is Shifting
Let’s take a look at the demand shifts that will define this new phase. Overall demand is fragmenting, both geographically and in terms of what customers require — more options, faster product cycles, more customization and after-sale service. Consumers want more variety, more frequent upgrades, and greater customization. Increasingly, customers demand more after-sale service; this is the norm now in business-to-business sales, but will spill over to consumer goods, too, thanks to some of the technology advances we’ll talk about below.
The megatrend in demand, of course, is the shift to developing economies. It is well known that China, India, and other developing economies in Asia and Latin America have been leading global growth. What is less well understood is how quickly demand is following that growth. According to recent McKinsey research (see “The $30 Trillion Decathlon“), consumption by developing economies could rise from $12 trillion annually in 2010 to $30 trillion in 2025, by which time these markets could account for nearly 70% of global demand for manufactured goods. Importantly, this emerging market demand is also highly fragmented; not only is there a huge difference between what the customer wants in Indonesia and India, but also within countries. McKinsey has identified more than 20 distinct submarkets in China, for example.
Innovations Are Changing The Way We Design Products
On the innovation front, the opportunities are more diverse, but equally powerful. We see advances in materials, processes, and information technology that will make possible entirely new kinds of products and can radically alter how manufacturers operate. Nanotechnologies will potentially create a new era in microelectronics. Materials such as lightweight steel and aluminum and carbon fiber are being introduced into auto manufacturing, helping to create new lightweight vehicles that will soon be seen on the streets of Asia’s megacities. All over the world, automakers are mastering new drive train technologies. Pharmaceutical companies are mastering bio-engineering techniques that will help develop personalized medicines.
Many of the most interesting advances are in new production processes and new information technologies. So-called additive manufacturing techniques such as 3D printing, which create objects by combining small particles rather than by casting or stamping, open up all sorts of possibilities. More than 6,500 3D printers were shipped in the United States last year. They are used mostly for assembling models and prototypes, but also have been used to make intricate aerospace components and even replacement human organs. Robots are gaining new capabilities at lower costs and are increasingly able to handle intricate work. And big data is being applied across the manufacturing value chain, starting with billions of bytes of data collected from social media sites to understand what products to build, guiding production machinery on the shop floor, and monitoring products that are in use. With sensors and transponders, products can constantly feed performance data back to the manufacturer, enabling all sorts of new after-sale services.
These opportunities arise in a far more uncertain environment than existed before the Great Recession. Commodity prices have risen, wiping out the declines that marked most of the 20th century and wages are rising rapidly in what have been regarded as low-wage locations such as coastal China. Increasingly frequent natural disasters such as the Japanese tsunami have made clear how risky complex global supply chains can be.
The Dynamics of Global Manufacturing Are Shifting
In this environment, manufacturing companies are rethinking their location strategies and not simply following the path of lowest wages. Rock-bottom wages matter a lot in some segments, such as garment manufacturing, but in most manufacturing industries, hourly labor is less than 20% of costs. A bigger challenge for many manufacturers is access to high-skill talent, both for the shop floor and for a growing number of service-like occupations within manufacturing.
It is important to remember that manufacturing is not monolithic and that there is a wide range of manufacturing industries — from the very labor-intensive and resource/energy-intensive to the very R&D intensive. We identify five major groups (see chart: “Manufacturing is Diverse”), in which the inputs that define success vary. Advanced economies, for example, depend more on high-skill talent to support what we call “global innovation for local markets” in industries such as pharmaceuticals and autos. Advanced economies run a $726 billion surplus in such goods, against a $342 billion deficit in labor-intensive goods. When we look at the needs of different manufacturing industries and the sources of growth in manufacturing demand, we see that while “re-shoring” — shifting some jobs back to wealthy nations — is a welcome development that may help restore some of the huge losses that manufacturing suffered in the past decade, it is unlikely to reverse the long-term trend in manufacturing employment.
To make sure location decisions line up with these input needs, we recommend a more nuanced “total factor performance” approach. This takes in not only all the variables that can affect the total landed cost of a product (transportation and labor costs, access to commodities, energy prices, talent availability, proximity to suppliers, customers, and research clusters, regulation etc.), but also the risks.
A nation that has low labor rates and energy prices, talent availability, proximity to suppliers, customers, and research clusters, and favorable regulation today may not have these things tomorrow. Manufacturers must ask: what is the risk of being trapped with unproductive capacity by locating here? Government policy is a powerful force in such consideration; it can remove barriers to expansion and help develop a nation’s talent and infrastructure, or it can sharply limit flexibility and market access — despite today’s webs of free-trade agreements. Supply chains and footprints must not only reach all the right places, but they also must be resilient.
The net of all these changes, we believe, will be a new kind of manufacturing company. To take advantage of the opportunities available to manufacturers — and to avoid falling behind — companies have to become agile, networked, analytical, and data-driven enterprises. Manufacturing leaders will need to manage not only across geographies, but across their own organizational silos and beyond to a virtual ecosystem of suppliers and partners. Many companies will need to build new capabilities. For example, in a world of rising and complex risk, they will need to adopt planning systems that don’t rely on point forecasts, but use scenario planning. Companies will need to develop skills in big data and to compete in a world where the supply of high-skill talent is tightening, manufacturers will have to become much better at attracting, developing, and retaining talent.
This new era of manufacturing will provide opportunities for global leaders in the sector to tap into new markets and new ways to innovate. It will also see the arrival of new players — upstarts and new global players from developing economies. This contest will continue to drive productivity and innovation around the world.
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