Making it in America: Revitalizing US
manufacturing
The
erosion of US manufacturing isn’t a foregone conclusion. The decade ahead—with
increased demand, new technology, and value chain optimization—will give the
sector a chance to turn around.
US manufacturing is
not what it was a generation ago. Its contraction has been felt by firms,
suppliers, workers, and entire communities. In fact, the erosion of
manufacturing has contributed two-thirds of the fall in labor’s share of US GDP.
But the decline has played out unevenly. In the past two
decades, output growth in US manufacturing has been concentrated in only a few
industries, including pharmaceuticals, electronics, and aerospace. Most other
manufacturing industries have experienced slower growth or real declines in
value added. The largest US manufacturers have managed to thrive despite
growing headwinds, while small and midsize firms have been hit hard. Large
firms have a stake in addressing this issue, since they face more risk without
a healthy ecosystem of domestic suppliers to provide more agility and
opportunities for collaboration.
Today the prevailing narrative says that nothing can be
done to stop the ongoing decline of US manufacturing at the hands of
globalization and technology. But continued losses are not a foregone
conclusion.
The decade ahead will reshape global manufacturing as
demand grows, technology unlocks productivity gains, and companies find growth
in new parts of the value chain—all of which creates an opening for US
manufacturing to turn things around. After combining demand projections with an
analysis of specific industry trends and historic performance, the McKinsey
Global Institute finds that the United States could boost annual manufacturing
value added by up to $530 billion (20 percent) over current trends by 2025.
Given the importance of manufacturing to the broader economy, capturing these
opportunities should be a national priority. Rather than attempting to
re-create the past or preserve the status quo, the United States will need to
focus on positioning its manufacturing sector to compete in the future.
1. A wave of
change presents manufacturers with new opportunities and imperatives
2. The United
States has an opportunity to boost manufacturing GDP by up to $530 billion over
current trends
3. US
manufacturing needs to scale up efforts on multiple fronts to compete in the
future
1. A wave of change
presents manufacturers with new opportunities and imperatives
Manufacturing is being reshaped by three major trends:
rising demand, the convergence of multiple new technologies, and shifting
global value chains.
Demand
is rising—and fragmenting
One fundamental advantage for US manufacturing remains
unchanged: the United States is still one of the most lucrative markets in the
world. While consumer demand may be muted by lackluster income growth,
access to the US market remains a powerful lure for domestic and foreign
manufacturers alike. US demand for heavy machinery, equipment, and building
materials could also increase if public investment revives from its 50-year
lows.
But the US market is not the same familiar ground it was
in the past. The uneven nature of regional income growth translates into wide
market variations. US consumers are more diverse and tech-savvy than in the
past—and they have high expectations for quality, low prices, and variety. One
global food manufacturer reports that the SKU count of its North American
business unit rose by 66 percent in just three years.
Beyond the domestic market, demand is soaring in
emerging economies around the world. Over the next decade, another one billion
urban residentswill begin earning enough discretionary income to make
significant purchases of goods and services. By 2025, according to McKinsey
estimations, consumption in emerging markets will hit $30 trillion.
But tapping into demand growth in emerging economies requires knowing exactly
where and how to compete. Markets such as Africa, Brazil, China, and India
represent an enormous prize, but they have dizzying regional, ethnic,
linguistic, and income diversity.
All of this means that manufacturers must navigate
greater complexity than ever before. They are being challenged to produce a
wider range of product models with differing features, price points, and
marketing approaches. From fast fashion to
new car models, products now have shorter life cycles, and customers are
beginning to demand more choice and customization.
Industry
4.0 technologies are beginning to transform manufacturing
The US manufacturing sector needs an injection of
productivity, and companies cannot capture the demand opportunities described
above unless they step up their game. New technologies will play a large role
in determining whether they can compete.
Today multiple technology advances are converging.
This new wave,
referred to as Industry 4.0, is driven by an explosion in the volume of
available data, developments in analytics and
machine learning, new forms of human–machine interaction (such as touch
interfaces and augmented-reality systems), and the ability to transmit digital
instructions to the physical world. Such complementary technologies can run
smart, cost-efficient, and automated plants that produce large volumes—or,
conversely, plants that turn out highly customized products.
These technologies touch on every aspect of manufacturing
(see the interactive). New design and simulation tools can create “digital
twins” of physical products and production processes, validating product
designs and using virtual simulations to iron out the production process before
it goes live. One aircraft manufacturer that implemented a rapid-simulation
platform has reduced design time, cut design rework by 20 percent, and boosted
engineering productivity. Internet of
Things sensors can feed real-time data into analytics
systems, which can adjust machinery remotely to minimize defects, improve
yield, and reduce downtime and waste. Collaborative robots can handle dangerous
tasks and eliminate safety risks, while 3-D printing can now produce intricate,
multimaterial components and final goods. Beyond the factory floor, new
applications for coordinating distributed supplier networks improve the flow
and tracking of raw materials and manufactured parts.
Manufacturing involves market research, demand
forecasting, product development, distribution, and services—activities that
may take place in multiple locations or involve outside providers. Companies
will soon be able to connect their entire value chain, including customers,
with a seamless flow of data. This “digital thread”
may lead to new sources of productivity and revenue.
Value
is shifting, leading companies to rethink their business models, footprint, and
sourcing
Manufacturers are finding ways to capture value beyond
traditional production activities—whether upstream in design and product
development or downstream in services. Some aerospace firms, for instance,
provide leased aviation services, including pilots, aerial refueling, and
“power by the hour.” John Deere has added sensors to the farm machinery it
sells. The data it captures enable the company to offer farmers new types of
user-sourced, real-time information on planting, soil health, and other best
practices. Nvidia, a maker of graphics-processing units and chips, has
established a developer platform, increasing the sales and reach of its core
products.
Input costs are also changing. The gap between labor
costs in the United States and those available overseas has narrowed, while the
cost of industrial robots continues to fall. These trends have led some
manufacturers to return production to the United States, albeit in more
automated form. Finally, the dramatic increase in US shale-energy production
provides ongoing assurance of low natural-gas costs for US-based plants, and it
has made cost-effective raw inputs available to US producers of refined petroleum
products, petrochemicals, and fertilizers.
Labor costs will continue to be paramount for low-margin
and tradable products, but companies in many industries are reassessing the
downsides of offshoring and lengthy supply chains. More firms are making footprint
decisions using a “total factor performance” approach that considers logistics,
lead time, productivity, and risk—as well as proximity to
suppliers, other company operations, and final demand.
2. The United States
has an opportunity to boost manufacturing GDP by up to $530 billion over
current trends
Translating the trends described above into
opportunities, MGI has created three scenarios for 2025. They combine
consumption forecasts with industry-by-industry analysis that considers the
probability and potential impact of higher technology adoption, export growth,
and share of domestic content in finished goods.
Real value added in US manufacturing stood at $2.2
trillion in 2015. In the “current trend” scenario, we assume that the share of
domestically produced content continues its trajectory of decline across most
industries. Even in this case, manufacturing GDP would increase over the next
decade by $350 billion in real terms. This can be attributed to rising demand
that lifts output across all industries, plus new output from petrochemical,
fertilizer, and energy-processing plants coming online in the next decade.
We also consider a “new normal” scenario in which the
United States maintains the current level of domestic content in finished goods
in most industries, arresting the decline. In this case, value added across the
manufacturing sector would hit $2.8 trillion by 2025, an increase of some $300
billion over the current trend.
Finally, we consider a “stretch” scenario in which GDP
in some industries returns to a recent peak . It is based on an analysis of
global trends and each industry’s health in the United States; it also assumes
greater technology diffusion and incorporates the higher-end projection for
energy-intensive production output. By maximizing all of the opportunities, US
manufacturing GDP would climb to $3 trillion in 2025—a boost of $530 billion,
or 20 percent, above the current trend.
The biggest upside potential is found in advanced
manufacturing industries—areas in which the United States should have a
competitive advantage but instead runs a large trade deficit. With Asian,
European, and luxury carmakers gaining market share and domestic OEMs sourcing
more heavily from Mexico for SUVs and pickup trucks sold in the United States,
imports have risen in recent years. But foreign carmakers are expanding some US
production of both parts and finished cars—and since car production is already
starting from a large base, even a small percentage increase adds significant
value. Aerospace is another industry with significant potential. Its domestic
production remains strong, global market growth is expected to be robust, and
import competition remains relatively weak. Computer and electronics industries
could also make a contribution, given that domestic content has stabilized
recently and demand is expected to stay strong. By contrast, we find limited
prospects for growth in industries such as basic consumer goods, where domestic
production has already been hollowed out.
In addition to boosting its value added by $530 billion,
the manufacturing sector could add 2.4 million jobs on top of current trends by
realizing the stretch scenario. Furthermore, the positive effects would ripple
into services and other industries, potentially creating another $170 billion
of direct value added and almost one million jobs in industries that provide
inputs to manufacturing. Adding together the manufacturing and upstream
effects, the total potential benefit to the economy could be $700 billion in
additional annual value added and 3.3 million net new jobs.
3. US manufacturing
needs to scale up efforts on multiple fronts to compete in the future
The opportunities outlined above are real and
substantial, but the United States will have to make up lost ground. No one
should underestimate the effort it will take to turn things around.
Strengthen
the US supplier base
In contrast to the institutional support enjoyed by
Germany’s Mittelstand(medium-size firms), small and midsize US
manufacturers typically lack financial, technical, and business-development
help. The German approach may not translate into the US context, but there are
ideas to extract from it about the value of greater coordination.
Keeping suppliers at arm’s length affects the bottom
line of large manufacturers. Inefficiencies in OEM–supplier interactions can
add up to 5 percent of development, tooling, and product costs in the auto
industry. These costs are significantly higher for US carmakers than for their
Asian counterparts. Similar inefficiencies affect other industries, and they
are likely to multiply as manufacturers seek to expand product portfolios and
reduce turnaround times. Firms that work closely with their tier-one suppliers
may have little visibility into their tier-two and tier-three suppliers,
especially if they are overseas.
Over time, seeking out ever-lower bids from suppliers
produces diminishing returns. Procurement can be a source of value rather than
simply a place to cut costs, but this mind-set requires large firms to change
incentive structures among their own purchasing teams. Large firms can benefit
from identifying which of their suppliers provide critical, high-value
components; these may not be the largest suppliers. Instead of just monitoring
them, large firms could solicit their ideas, invest in their capabilities, and
build trust to create a preferred relationship. Beyond their current suppliers,
large companies also need to be engaged in strengthening the entire base of
smaller manufacturers.
Policy can play a role in modernizing smaller
manufacturers through financing programs, business accelerators, or tax
incentives. The US federal government has established the Manufacturing
Extension Partnership for small and medium-size firms, but it does not have the
scale for maximum impact. Smaller firms need expanded access to advanced
technology, whether at federal labs, universities, or public–private hubs.
Pursue
growth through deeper global engagement
Emerging
markets present crucial opportunities to win brand loyalty
from huge new
customer bases. But less than 1 percent of US companies sell abroad, a
far lower share than in other large advanced economies. Small and midsize US
manufacturers need more mentorship and strategic guidance to understand the
market opportunities at stake, and they need more of the networking
opportunities that their counterparts enjoy in many other advanced economies.
They also need access to capital in order to handle the additional costs
associated with exporting. But trade finance remains a major barrier for them;
in fact, access to capital has generally been tighter for small firms in the
United States than in other countries of the Organisation for Economic
Cooperation and Development since the Great Recession.
The United States is already the largest recipient of
foreign direct investment (FDI) globally, but it can attract more greenfield
FDI, particularly from China and India. The federal government can play a
bigger role in facilitating these matches and directing investment where it is
most needed, as investment promotion agencies do in other countries around the
world.
Improve
digital adoption to boost productivity
The US manufacturing sector’s relatively slow pace of digital
adoption has been a drag on its productivity performance.
The intensity of industrial robot usage remains lower in the United States than
in countries such as Germany, Japan, and South Korea. While US plants turning
out vehicles and electronics are generally highly automated, robots have
relatively little penetration in large US industries such as metals and food
processing.
To capitalize on
technology, companies have to start by capturing, integrating, and
analyzing data flows from across their operations and ecosystems. Building the
right structures for exchanging and safeguarding information is critical. Some
machinery will have to be upgraded or replaced. More fundamentally,
manufacturers will need to identify strategic use cases, link their digital
initiatives to their broader business strategy, and consider how to begin
working alongside machines in a more automated and data-driven environment.
Develop
the manufacturing workforce of the future
Many manufacturers, particularly in advanced industries,
report difficulties filling open positions. Over the longer term, these issues
seem likely to worsen. The manufacturing workforce is aging, and highly
specialized skills will be lost to retirement. The median age of a US worker in
the aerospace supply chain, for instance, is 50 years old.
Tomorrow’s manufacturing jobs may have very different
and more digital skill requirements. Education systems alone cannot be expected
to solve all the potential mismatches beyond providing basic math and digital
skills. Workforce apprenticeships are gaining traction in the United States,
but now these efforts need to happen on a much larger scale and with a system
of established, transferable credentials. MGI estimates that ramping up a
program to apprentice roughly one million workers annually might cost $40
billion a year.
Think—and
invest—for the long term
Faced with competitive headwinds, financial constraints,
or shareholders driven by short-term expectations, US manufacturers have
deferred investment and focused on cutting costs. The average US factory was 16
years old in 1980, but today it is 25 years old. Inside the plant, the average
piece of equipment was seven years old in 1980 but is nine years old today.
Production assets are even older in metals, machinery, and equipment
manufacturing. MGI estimates that upgrading the capital base would require $115
billion in annual investment—and companies that put off investing will not be
positioned to capitalize when growth picks up.
The federal government has multiple programs already in
existence, such as the Manufacturing Extension Partnership for small and
medium-size firms and SelectUSA for attracting FDI. But these and other efforts
generally have smaller budgets, less certainty of ongoing funding, and more
constraints on their mandates than comparable programs in other countries.
Policy makers should examine which existing initiatives are producing the most
promising results, then scale up those efforts and commit to them for the long
term.
Local policy makers, too, can fall into a short-term
mind-set. Announcing a brand-new manufacturing plant to their constituents is a
political win, but it is too often accomplished by awarding poorly designed
subsidies to individual companies without ensuring a sufficient return.
Incentives are most effective as part of a solid and more holistic
economic-development plan targeting growth industries that complement a
region’s legacy strengths. Most subsidies are geared to greenfield investment,
but incentives for brownfield investment could help existing firms upgrade and
stay productive. Local regions have to sustain investment in workforce skills,
infrastructure, institutions, and quality of life over the long haul.
It is not hard to find industry success stories and
promising initiatives in US manufacturing, but isolated examples have not
created broad momentum. Revitalizing the entire sector will require
dramatically scaling up what works—and the task is too big for any single
entity. Manufacturing needs supportive government programs and policies with
long-term certainty and funding. It also needs regional coalitions with
everyone at the table: large and small manufacturers, workers, technology
experts, educators, public officials, and investors.
By
Sree Ramaswamy, James Manyika, Gary Pinkus, Katy George, Jonathan Law, Tony
Gambell, and Andrea Serafino McKinsey Global Institute November 2017
https://www.mckinsey.com/mgi/overview
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