New McKinsey Global Institute Study Finds Growth Opportunities For US Manufacturing Sector
(6 months ago)
WASHINGTON: The McKinsey Global Institute (MGI) today released new research that outlines opportunities to boost manufacturing by up to USD 530 billion, or 20 percent, over current trends by 2025. The report, Making it in America: Revitalizing US manufacturing, also provides fresh details on why the US manufacturing sector has suffered steep declines.
The research found that the largest US firms have successfully navigated the challenges of the past two decades, even out performing their counterparts around the globe. By contrast, while the largest US firms have seen their domestic revenues grow more than twice as fast as the sector average even in the domestic market, their smaller suppliers - the firms that provide them the materials and equipment they depend on -- have lost considerable ground. Some tier-one suppliers to major manufacturers are performing well, but tier-two and -three suppliers in many industries are struggling.
The report notes that the US manufacturing output growth has been concentrated in a few standout areas such as pharmaceuticals, electronics, and aerospace, while most other manufacturing industries have seen slower growth or real declines in value added.
"The largest US manufacturers have managed to thrive in spite of these headwinds, while the small and midsize firms that make up the majority of the sector have been hit hard," says Katy George, report coauthor and managing partner of McKinsey's Mid-Atlantic office. "The hollowing out of the supplier base now leaves larger manufacturers vulnerable to global supply chain risk and lacking a healthy domestic ecosystem that could provide resilience and opportunities for innovation. More broadly, the decline of manufacturing has diminished prospects for the US middle class. Our analysis finds that it contributed two-thirds of the recent fall in labor's share of US GDP."
However, the study cites opportunities to turn things around.
"Demand is rising both at home and abroad—and there is enormous room to grow exports, since less than 1 percent of US firms sell into international markets, a far lower share than in any other large advanced economy," says Sree Ramaswamy. "Value chains are evolving to US advantage, particularly for firms in advanced industries and their suppliers. New business models are becoming possible as value shifts from production to R&D, design, and services. Favorable changes in relative labor and energy costs provide a tailwind."
Still, the report concludes that capitalizing on demand growth will not be easy as markets become more fragmented and harder to navigate. Manufacturers 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, faster life cycles. Customers are beginning to demand more choice and customization. If US firms are adept at figuring out what resonates with consumers and handling greater complexity, they can bring a bigger product portfolio to market profitably. But poorly managed complexity can erode profit, increase inventory, and bog down operations.
Industry 4.0 technologies could provide the key to ramping up productivity growth and agility. New design tools can improve speed to market, creating rapid prototypes and simulations to validate processes before build-out. Internet of things sensors can combine with analytics and advanced robots to run flexible, autonomous factory operations. Digital threads can connect firms with suppliers and customers, improving coordination and revealing data-driven insights that could lead to new sources of revenue. These technologies can help turn around slowing productivity growth in the overall sector, and help manufacturing firms that have already maximized what they can do with cost-cutting approaches.
Translating these trends into opportunities, the research outlines scenarios for the sector's future through 2025, combining projections for demand growth with industry-by-industry analysis that considers the probability and potential impact of technology adoption, export growth, favorable input costs, and a higher share of domestic content in finished goods.
It compares a baseline scenario of continuing decline to a "stretch" scenario in which the United States maximizes the available opportunities. In the optimal case, US manufacturing GDP would climb to $3 trillion in real terms by 2025—a boost of some $530 billion, or 20 percent, above the current trend. The biggest upside potential is found in the advanced manufacturing industries where the United States should have a competitive advantage but currently runs a large trade deficit.
"Capturing these opportunities will not be easy," says Sree Ramaswamy. "The manufacturing sector needs new capabilities and investment, and more firms need to participate in exports in order to bring the benefits of global trade to more US workers. Aging plants and equipment, especially in the supply chains of advanced industries, will have to be upgraded for digital readiness. The sector needs new digital and technical skills from its workforce, and US-based manufacturers need to be as attractive to high-caliber talent as their foreign competitors."
The study adds that turning around two decades of negative trend lines will take coordinated action and long-term investment on a much bigger scale.
It estimates that a national apprenticeship program serving 1 million workers could cost $40 billion annually, while upgrading the sector's capital base would take an additional $115 billion annually over the next decade. The report also emphasizes the importance of both public- and private-sector efforts to revitalize struggling small and mid-sized manufacturing firms by improving their access to capital, technologies, and networking opportunities. Today the productivity gap between large and small firms is as high as 40 percent. Building a stronger ecosystem of innovative, digital-ready small and midsize manufacturers would give the entire sector a shot in the arm.
"Revitalizing the entire sector will require dramatically scaling up what works—and the task is too big for any single entity," says Katy George. "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.
The McKinsey Global Institute The McKinsey Global Institute (MGI), the business and economics research arm of McKinsey & Company, was established in 1990 to develop a deeper understanding of the evolving global economy. Our goal is to provide leaders in the commercial, public, and social sectors with the facts and insights on which to base management and policy decisions. The partners of McKinsey & Company fund MGI's research; it is never commissioned by any business, government, or other institution. The Lauder Institute at the University of Pennsylvania ranked MGI the Number 1 private sector think tank in the world in its 2015 Global Go To Think Tank Index.