Posted By David Brousell, January 07, 2013 at 12:46 PM, in Category: Global Value Networks
For a number of years now, I’ve been a subscriber to various reports and publications from McKinsey & Co., the respected, 87-year-old management consultancy that offers perspectives on business trends and management and organizational issues that affect many industries, including manufacturing.
I have found many of McKinsey’s articles to be insightful and stimulating. But a few weeks ago, I received a report about the future of manufacturing from the McKinsey Global Institute that, quite frankly, broke little new ground.
At first, I was disappointed in the report, which is entitled, “Manufacturing the Future: The Next Era of Global Growth and Innovation,” because I had expected to have my thinking about manufacturing and its future both expanded and challenged. Instead, much of the report states what we already know: manufacturing companies have to become more agile in a global market, technology-oriented disciplines and skill sets are becoming more important, and manufacturing’s role in developed economies changes over time, to note just a few examples.
Conventional wisdom? To be sure, but on further reflection, my disappointment eased when I began to realize that in confirming much of what I already knew and what the team here at Manufacturing Executive has been writing about for years, the McKinsey study actually did the industry a service. It has underscored that the globalization of manufacturing will not only continue strongly into the future but will vary in its effect by sector of manufacturing, therefore requiring different strategies for growth and success. Moreover, the McKinsey report, while it does not reveal trends heretofore unseen, does focus rightly on the subtleties and nuances of known trends that, if not clearly appreciated, can wreak havoc on strategy. The devil truly is in the details.
“The factors we describe point to an era of truly global manufacturing opportunities and a strong long-term future for manufacturing in both advanced and developing economies,” the report says.
One of the nuances that McKinsey spends considerable time discussing involves the similarities and differences among various manufacturing industry sectors, and how the growing global demand picture will shape competitive strategy formulation. The McKinsey study, which combines broad economic analyses with a look at a select group of manufacturing sectors, including automotive, aerospace, pharmaceuticals, food, steel, and electronics, constructs five industry sector groupings, each of which have different competitive characteristics:
- Global innovation for local markets: Including chemicals, motor vehicles and other transport equipment, machinery, equipment, and appliances
- Regional processing: Including rubber and plastics; fabricated metal products; food, beverage, and tobacco; and printing and publishing
- Energy-resource-intensive commodities: Including wood,petroleum, paper, mineral-based products, and basic metals
- Global technologies/innovators: Including computers, semiconductors and electronics, and medical equipment
- Labor-intensive tradables: Including textiles, apparel, leather, furniture, and toys
The global innovation group, the largest of the five in terms of its contribution to what McKinsey calls global manufacturing value added (accounting for 34% of $10.5 trillion in 2010), competes, for example, on the basis of R&D and frequent innovation and product introductions. Production facilities in this group are distributed close to customers to minimize transportation costs.
By contrast, the regional processing group, the second largest of the five, and the largest employer in advanced economies, is not highly dependent on R&D as a competitive factor, McKinsey says, but is highly automated.
Understanding differences in sector value drivers and competitive factors will be critical for companies hoping to compete effectively in an increasingly global manufacturing market, McKinsey says in a somewhat predictable statement. But the point is that differences are sometimes missed or not fully appreciated by leadership teams, which can complicate the development and implementation of strategy.
There will be a premium on this kind of understanding as the globalization trend proceeds in the years ahead. McKinsey says that over the next 15 years, 1.8 billion more people will enter the “global consuming class,” nearly doubling worldwide consumption to $64 trillion. And as had been discussed at the Manufacturing Leadership Summit last year, most of these people will be in urban areas.
“The shift in global demand for manufactured goods is happening at an accelerating pace, driven by the momentum of emerging economies,” the report says. “In China, per capita income for more than one billion citizens has doubled in just 12 years, an achievement that took the United Kingdom 150 years with just nine million inhabitants as it industrialized.”
The McKinsey report also makes the following points:
- As national economies become wealthier and a significant middle class emerges, manufacturing’s share of GDP peaks and then falls, following what McKinsey calls an “inverted U curve.”
- Employment in manufacturing follows a similar pattern. In what will be a disappointment to those hoping for a resurgence in manufacturing employment, partly on the back of a hoped-for reshoring trend, McKinsey says that manufacturing’s share of employment will be “under pressure” over the long term due to continued technology-fueled productivity gains, the growth of services, and global competition. “If current trends persist, manufacturing employment in advanced economies could fall from 45 million jobs today to fewer than 40 million by 2030.”
- McKinsey estimates that 4.7 million service sector jobs depend upon manufacturing in the U.S. Total manufacturing-related employment is at 17.2 million. Within that population, service-related jobs in U.S.manufacturing employment, at about 8.9 million, now exceed the 7.3 million jobs in production.
- New technologies such as carbon fiber, advanced robotics, 3D printing, so-called big data and analytics, and sensors will not only drive greater productivity gains, but will also stimulate additional demand in the global market (a number of these subjects will be discussed at the (Manufacturing Leadership Summit in May).
McKinsey concludes its report by saying what many of us have been saying for some time: that manufacturing is at a critical juncture in its long and storied history, one that requires new thinking in how we envision, organize, and manage the business of manufacturing today and in the future.
“To take advantage of emerging opportunities and navigate in a more challenging environment, manufacturing companies need to develop new muscles,” the report says. “They will be challenged to organize and operate in fundamentally different ways to create a new kind of global manufacturing company—an organization that more seamlessly collaborates around the world to design, build, and sell products and services to increasingly diverse customer bases. These organizations will be intelligent and agile enterprises that harness big data and analytics, and collaborate in ecosystems of partners along the value chain, to drive decision making, enhance performance, and manage complexity. They will have the vision and commitment to place the big bets needed to exploit long-term trends such as rising demand in emerging markets, but will also use new tools to manage the attendant risks and near-term uncertainties.”
What’s your view of how manufacturing will evolve? Do you agree that globalization will continue to the extent that McKinsey envisions?
David Brousell is vice president and editorial director of Manufacturing Executive and the Manufacturing Leadership Council.
Written by David Brousell
Global Vice President, General Manager and Editorial Director of the Manufacturing Leadership Council