By James Manyika, Jeff Sinclair, Richard Dobbs, Gernot Strube, Louis Rassey, Jan Mischke, Jaana Remes, Charles Roxburgh, Katy George, David O’Halloran, and Sreenivas Ramaswamy.
The global manufacturing sector has undergone a tumultuous decade: large developing economies leaped into the first tier of manufacturing nations, a severe recession choked off demand, and manufacturing employment fell at an accelerated rate in advanced economies.
Still, manufacturing remains critically important to both the developing and the advanced world. In the former, it continues to provide a pathway from subsistence agriculture to rising incomes and living standards.
In the latter, it remains a vital source of innovation and competitiveness, making outsized contributions to research and development, exports, and productivity growth. But the manufacturing sector has changed—bringing both opportunities and challenges—and neither business leaders nor policy makers can rely on old responses in the new manufacturing environment.
• Manufacturing’s role is changing. The way it contributes to the economy shifts as nations mature: in today’s advanced economies, manufacturing promotes innovation, productivity, and trade more than growth and employment. In these countries, manufacturing also has begun to consume more services and to rely more heavily on them to operate.
• Manufacturing is not monolithic. It is a diverse sector with five distinct groups of industries, each with specific drivers of success.
• Manufacturing is entering a dynamic new phase. As a new global consuming class emerges in developing nations, and innovations spark additional demand, global manufacturers will have substantial new opportunities—but in a much more uncertain environment.
Manufacturing’s role is changing
Globally, manufacturing continues to grow. It now accounts for approximately 16 percent of global GDP and 14 percent of employment. But the manufacturing sector’s relative size in an economy varies with its stage of development. We find that when economies industrialize, manufacturing employment and output both rise rapidly, but once manufacturing’s share of GDP peaks—at 20 to 35 percent of GDP—it falls in an inverted U pattern, along with its share of employment.
The reason is that as wages rise, consumers have more money to spend on services, and that sector’s growth accelerates, making it more important than manufacturing as a source of growth and employment.
The sector is also evolving in ways that make the traditional view—that manufacturing and services are separate and fundamentally different sectors—outdated.
Service inputs (everything from logistics to advertising) make up an increasing amount of manufacturing activity. In the United States, every dollar of manufacturing output requires 19 cents of services. And in some manufacturing industries, more than half of all employees work in service roles, such as R&D engineers and office-support staff.
As advanced economies recover from the Great Recession, hiring in manufacturing may accelerate, and some nations may even raise net exports.
Manufacturers will continue to hire workers, both in production and nonproduction roles (such as design and after-sales service). But in the long run, manufacturing’s share of employment will remain under pressure as a result of ongoing productivity improvements, faster growth in services, and the force of global competition, which pushes advanced economies to specialize in activities requiring more skill.
Manufacturing is not monolithic
No two manufacturing industries are exactly alike; some are more labour- or more knowledge-intensive. Some rely heavily on transportation, while for others, proximity to customers is the critical issue. We have identified five broad manufacturing segments and analysed how different production factors influence where they build factories, carry out R&D, and go to market.
The largest segment by output (gross value added) includes industries such as autos, chemicals, and pharmaceuticals. These industries depend heavily on global innovation for local markets—they are highly R&D intensive—and require close proximity to markets.
The second-largest segment is regional processing, which includes industries such as printing and food and beverages. The smallest segment, with just 7 percent of global manufacturing value-added, produces labour-intensive tradables.
Manufacturing is entering a dynamic new phase
By 2025, a new global consuming class will have emerged, and most consumption will take place in developing economies. This will create rich new market opportunities.
Meanwhile, in established markets, demand is fragmenting as customers ask for greater variation and more types of after-sales service. A rich pipeline of innovations in materials and processes—from nanomaterials to 3-D printing to advanced robotics—also promises to create fresh demand and drive further productivity gains across manufacturing industries and geographies.
These opportunities arise in an extremely challenging environment. In some low-cost labour markets, wage rates are rising rapidly.
Volatile resource prices, a looming shortage of highly skilled talent, and heightened supply-chain and regulatory risks create an environment that is far more uncertain than it was before the Great Recession.
Manufacturers and policy makers need new approaches and capabilities
Companies must develop a highly detailed understanding of specific emerging markets, as well as the needs of their existing customers. They will also require agile approaches to the development of strategy—using scenario planning rather than point forecasts, for example.
And they will have to make big bets on long-range opportunities, such as tapping new markets in developing economies or switching to new materials, but must do so in ways that minimise risk.
A critical challenge for manufacturers will be to approach footprint decisions in a more nuanced way. Labour-intensive industries will almost always follow the path of low wages, but others, with more complex needs, must weigh factors such as access to low-cost transportation, to consumer insights, or to skilled employees.
The result could very well be a new kind of global manufacturing company—a networked enterprise that uses “big data” and analytics to respond quickly and decisively to changing conditions and can also pursue long-term opportunities.
For policy makers, supporting manufacturing industries and competing globally means that policy must be grounded in a comprehensive understanding of the diverse industry segments in a national or regional economy, as well as the wider trends affecting them.
For example, shapers of energy policy need to consider which segments will be affected by higher or lower energy costs, how great the impact is likely to be, and what magnitude of difference will trigger a location decision.
Policy makers should also recognise that their long-term goals for growth, innovation, and exports are best served by supporting critical enablers for manufacturers (such as investing in modern infrastructure) and by helping them forge the connections they will need to access rapidly growing emerging markets.
Two key priorities for both governments and businesses are education and the development of skills. Companies must build their R&D capabilities, as well as expertise in data analytics and product design.
They will need qualified, computer-savvy factory workers and agile managers for complex global supply chains. In addition to supporting ongoing efforts to improve public education—particularly the teaching of math and analytical skills—policy makers must work with industry and educational institutions to ensure that skills learned in school fit the needs of employers.