The Changing Landscape that is Manufacturing Worldwide

A newly released report from The McKinsey Global Institute sheds light on the changing landscape that is manufacturing worldwide. The MGI group undertook research and analysis to establish a clearer understanding of the role that manufacturing plays in both developed and developing economies and the choices that companies in different manufacturing industries make about how they organize and operate.

The findings are a bit of an eye opener.

Manufacturing matters, but its nature is changing – As it has been for over three hundred years manufacturing has driven economies, improved standards of living, raised incomes and materials have helped build the housing infrastructure. Manufacturing output has grown from 2.7% in the advanced world per year to 7.4% in the developing world. Manufacturing makes outsized contributions to trade, R and D, manufacturing share of productivity growth is twice the share of employment in the EU nations, and three times the share of US employment. But change can also be seen as significant; as nations become wealthier and reach middle class status (the report sites this is reached at 25% of GDP) consumption shifts to services and manufacturing employment drops. The US share of manufacturing employment has declined from 25% in 1950 to 9% in 2008. Germany and South Korea also saw similar declines. The conclusion – manufacturing cannot be expected to create mass employment in advanced economies.

Manufacturing in not monolithic – there is a fundamental difference in manufacturing sectors and their competitive advantages and production process have an influence on where they locate. Cost of land, proximity to talent, markets and suppliers and research and development all have an impact on the operating models of manufacturers. There is a need to recognize that the one size fits all solution may not be appropriate.

The distinction between manufacturing and services has blurred – Over time service like activities including R&D, marketing and sales, customer outreach and support have become a larger part of what manufacturers do. In the US, 34% of manufacturing employment lies in service occupations, up from 32% ten years ago. The need for travel agents, logistics providers, banks, and IT service has added about 4.7 million US jobs to the industry that does not show up in official numbers. For every dollar of output, 19 cents are generated creating $900 billion in demand for services.

Manufacturing’s role in job creation is changing – As hiring slows due to productivity improvements the pattern of hiring is also changing. Demand will continue to grow for highly skilled production jobs and both high and low skilled service jobs. More than 2/3 of job losses in manufacturing in the past 10 years can be attributed to productivity growth. Leading manufacturing countries like South Korea and Germany have seen employment declines of 9 and 11%, with the only real employment growth in more high skilled production positions.