The Future of Manufacturing Global Economic Outlook

The Future of Manufacturing Global Economic Outlook Craig Giffi Vice Chairman and U.S. Leader, Consumer and Industrial Products Deloitte LLP Copyright 2012 Rockwell Automation, Inc. All rights reserved.

The Manufacturing Competitiveness Imperative 1. Our Research Background to Discuss Manufacturing Competitiveness 2. Does Manufacturing Still Matter? 3. Where Are We and How Did We Get Here? 4. What Trends Are Shaping Competitiveness In The Future? 5. What Capabilities Are Defining High Performing Manufacturers? - 2 -

Recent Deloitte Manufacturing Competitiveness Research So what does all this research tell us? Manufacturing for Growth Strategies Manufacturing for driving growth for and Growth employment Dra ft Strategies for driving growth and employment - 4 -

Does Manufacturing Still Matter? The Answer: YES! Economic Complexity and the Future of Manufacturing Does manufacturing still matter?? Ricardo Hausmann s Thailand: Product Space Maps (Harvard) and César Hidalgo s (MIT Media Lab) research seems to 1988 convincingly answer the question: Yes! Their work has numerous implications in the context of manufacturing and the linkage to economic growth: The advancement of manufacturing capabilities is the most important link to increasing the economic prosperity of a nation: advanced manufacturing capabilities directly determines the ability to accelerate economic development. Many emerging economies are primed for rapid growth, enabled by the complex economic infrastructures they have developed and the manufacturing knowledge and capabilities accumulated. 2008 Competition for high value jobs will intensify as nations and companies build more and more advanced manufacturing capabilities, leading to more and more competition for talent The proverbial bar will continue to be set higher and higher. Developed nations must also continue to advance their manufacturing capabilities, knowledge and skills in order to innovate, create more robust economies and to stay competitive. 6 Source: The Atlas of Economic Complexity; Hausmann and Hidalgo, 2011 6

Case Study: Thailand from 1968-2008 1968 1988 2008 1968 1988 2008 Metric ECI Index -0.61 GDP / Capita $175 Metric ECI Index 0.09 GDP / Capita $1,114 Metric ECI Index 0.81 GDP / Capita $3,993 Source: The Atlas of Economic Complexity Mapping Paths to Prosperity; Hausmann, Hidalgo, et al., 10/23/11; World Bank - 7 -

Products (Advanced) Advanced Manufacturing as a Driver of Economic Prosperity Economic prosperity -and global competitiveness- will be defined by the relationship between advanced manufacturing capabilities and products competitively exported Emerging market nations recognize the economic benefits derived from manufacturing and have enjoyed economic growth as the products they produce have become more advanced Thailand, 2010 China, 2010 Thailand, 1995 Brazil, 2010 China, 1995 Brazil, 1995 Economic Growth - 8 -

China s Steady Movement to Advanced Manufacturing The Chinese are developing strength in advanced equipment 9-9 -

As Goes Manufacturing..So Goes the Nation - 10 -

Manufacturing s Globalization Over the past 20 years, rapid globalization has occurred and the global manufacturing eco-system has experienced more change, impacting the prosperity of more companies, nations and people than at any time since the Industrial Revolution. Free Trade Proliferation Digital Technology Infrastructures The Rise of a New Global Middle Class Global Disaggregation of Manufacturing Supply Chains Rapid globalization has changed the economic fabric of the world, and manufacturing supply chains, in profound and significant ways 12

Before 1980, very few regional trade agreements existed Snapshots in Time: Regional trade agreements for six target countries, as of 1980 Note: This chart excludes connections for focus countries' accession to GATT membership (1948) and WTO membership (1995) - 13 -

By the 1980s, the existing trade system needed an overhaul, which led to the Uruguay Round and ultimately the WTO RTAs began to proliferate. Snapshots in Time: Regional trade agreements for six target countries, as of 2000 Note: This chart excludes connections for focus countries' accession to GATT membership (1948) and WTO membership (1995) - 14 -

Recently, RTAs have dramatically increased resulting in strong linkages between countries economies.and facilitating the disaggregation of supply chains Snapshots in Time: Regional trade agreements for six target countries, as of 2011 Note: This chart excludes connections for focus countries' accession to GATT membership (1948) and WTO membership (1995) - 15 -

Digitization has expanded rapidly over the past several decades.. Million USD 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010..enabling broader access to digital modeling and advanced manufacturing technology for both large and small companies 2500 Historical Revenue for Leaders in Digital Modeling Industry 1 Growth in Digital Modeling Market 2000 1500 1000 500 0 Dassault Systemes Autodesk Synopsys PTC Cadence Mentor Graphics National Instruments Ansys Total revenues of all companies involved in CAD/CAM Revenues of companies selling digital modeling products and have continued to increase over time A growing number of firms have entered the digital modeling market Predicted growth in digital modeling product sales is strong despite economic uncertainty Number of users has drastically increased. Market leader Autodesk reported AutoCAD sales of: 500,000 copies by 1990 1 MM copies by 1994 3 MM copies by 1995 2006 2007 2008 2009 2010 2011 2012* 2013* 2014* CAD Global Market Size (in billion USD) 4.3 5.2 6.7 5.2 5.4 5.9 6.2 6.7 7.5 *Projected revenues Source: 1 Bloomberg (data is presented from the year each of the companies became public). Deloitte research. Jon Peddie Research. - 16 -

And the rapid expansion of computer-aided technology has become increasingly global Million USD As the overall market for digital modeling products and services expands, Asia-Pacific has overtaken the Americas as the fastest growing segment 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Total Revenues of Companies in Digital Modeling Market 1 Global Revenue Sources of Top Digital Modeling Companies 40% 28% 32% 38% 33% 29% 2004 2010 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 Total Revenue across Global Markets for Top Digital Modeling Companies Revenue share from APAC has outgrown revenue from Americas 2004 2005 2006 2007 2008 2009 2010 Americas EMEA APAC Americas EMEA APAC 1 Graphs are based on data for 8 of the top 10 players in the CAD industry which together accounted for more than 60% of revenues in the industry for 2010. Total revenues of all companies involved in CAD/CAM, which includes revenues from non CAD operations Source: Annual Reports. Deloitte Research - 17 -

Digitization has enabled companies to replicate advanced technology and capabilities and facilities anywhere Increasing access to and application of advanced technology enables near identical production capabilities in any location that has skilled talent, supporting infrastructure and favorable policy Intel develops copy exactly! strategy Driven by competitive necessity In the 1990s, as Japanese and Korean companies flooded the market with high-quality memory chips that cost less than Intel's, Intel needed to improve efficiency to compete Intel introduced copy exactly to minimize time for technology transfer and ensure product quality and yields are not compromised Enabled by digitization Matches manufacturing site to development site at all levels, from equipment to process Data is collected at four levels (input, process step output, module, and end product) and compared to the R&D site to get an exact match Companies adopt copy exact mindset A123 Systems credits copy exact A123 is the first company in the US to manufacture lithium-ion batteries on a large scale; until recently, the company produced in Korea and China Jason Forcier, head of A123 automotive division described the repatriation to the US: We bought a company in Korea that had the technology around this type of battery and had developed the manufacturing process there. We basically brought that here, copied it exactly and scaled it up. A123 also brought a team of six Korean engineers to help transfer the technology to the U.S. and sent a team of Americans to Korea to learn Jon Gertner, Does America Need Manufacturing? The New York Times, August 24, 2011 Sources: Chris J. McDonald. The Evolution of Intel s Copy EXACTLY! Technology Transfer Method, 1998. Intel photo from Kevin Kelly s Rapid Manufacturing @ Intel, Time Compression. 11/4/2009. Don Clark. Intel Shares Copy Strategy with Solar Startup. The WSJ. April 25, 2011. - 18 -

Global Disaggregation of Manufacturing Supply Chains No longer is a product designed, produced and sold in a single country or even single region Boeing 787 Source: Image Copyright of the Boeing Company. Source: http://bintang.site11.com/boeing_787/boeing787_files/ass embly.html 19

Manufacturing GDP, billion USD, 2000 Manufacturing s Globalization 1990 to 2000 $ 2000 1500 1000 Japan US Manufacturing as % of GDP in 2000 >30% Manufacturing as % of GDP in 2000 = 16-30% Manufacturing as % of GDP in 2000 <16% Russia 500 0 China Germany Turkey France Korea Mexico Spain Italy UK Canada Indonesia Brazil India Malaysia S Africa Greece Philippines Thailand -500-10% 0% 10% 20% Manufacturing GDP CAGR over 1990-2000 Size of the bubbles represent Manufacturing as % of GDP in 2000 Key: 20% 40% Source: UNCTAD STAT data accessed on December 7, 2011; World Bank - 20 -

Manufacturing GDP, billion USD, 2009 Manufacturing s Globalization 2000 to 2009 While the decade of the 90s revealed something significant was underway, by 2009 manufacturing s globalization, and its ability to be an engine for growth for emerging economies, was undeniable. 2500 $ 2000 China US 1500 1000 500 0 Japan UK Canada Turkey Germany Malaysia France Italy Brazil India Spain Mexico Korea Thailand Greece Philippines S Africa Russia Indonesia Manufacturing as % of GDP in 2009 >30% Manufacturing as % of GDP in 2009 = 16-30% Manufacturing as % of GDP in 2009 <16% -500-10% 0% 10% 20% Manufacturing GDP CAGR over 2000-09 Source: UNCTAD STAT data accessed on December 7, 2011; World Bank Size of the bubbles represent Manufacturing as % of GDP in 2009 Key: 20% 40% - 21 -

The global middle class shift that follows precipitates a dramatic shift in consumption Shares of Global Middle Class Consumption 2000-2050 Globally, middle class demand may grow from US$ 21 trillion to US$ 56 trillion by 2030, with 80% of growth from Asia presenting potential for significant changes in supply chains around the world Source: OECD Working Paper Emerging Middle Class in Developing Countries, Homi Kharas - 22 -

And GDP projections also demonstrate the Big Shift in process New demand centers are emerging as populations of middle class consumers grow around the world World GDP by Region, 1990-2030 Expressed in Purchasing Power Parity China OECD Europe United States South Korea India Source: mongabay.com using EIA 2009 data - 23 -

Shanghai 1990-24 -

Shanghai 2010 2010-25 -

Beijing 1990 2 Footer - 26 -

Beijing 2010-27 -

Beijing 2010 2 Footer - 28 -

But global supply chains leave companies increasingly exposed Rising protectionist politics Exposure to currency volatility Fading labor rate arbitrage. And is giving rise to the new calculus of manufacturing 30

The Future of Manufacturing: Competition for resources, capabilities; and on public policy As we look to the future, there are a number of key areas where both companies and countries will effectively share in the intensifying competition : The infrastructure necessary to enable manufacturing to flourish and contribute to job growth will grow in importance Competition to attract FDI will increase dramatically, raising the stakes for countries and complicating the decision processes for companies Growing materials resources competition will serve as a catalyst to significant materials sciences breakthroughs Affordable clean energy strategies and effective energy policies will be an important differentiator of highly competitive countries and companies More innovative companies will earn better market share and improve profitability and countries more successful at fostering innovation will have greater GDP growth Companies are struggling to fill manufacturing jobs with the right talent and access to human capital will become more important The strategic use of public policy as an enabler of economic development will place a premium on collaboration between policymakers and business leaders 31

2013 Global Manufacturing Competitiveness Index Report Council on Competitiveness and Deloitte 2013 Report Release Date November 15, 2012 Over 500 CEO Respondents Around the World!! Sneak Peak at the Results - 32 -

2013 Global Manufacturing Competitiveness Index Report Council on Competitiveness and Deloitte 2013 Report Release Date November 15, 2012 Rank Drivers Index Score 1 Talent Driven Innovation 10.00 2 Economic, trade financial and tax system 8.42 3 Cost and Availability of labor and materials 8.07 4 Supplier Network 7.76 5 Legal and Regulatory system 7.60 6 Physical Infrastructure 6.47 7 Energy cost and policies 6.25 8 Local business dynamics 3.99 9 Healthcare system 2.48 Govt. investments in manufacturing & 10 innovation 1.00-33 -

2013 Global Manufacturing Competitiveness Index Report Rank 1 2 15 28 40 Council on Competitiveness and Deloitte 2013 Report Release Date November 15, 2012 Over 500 CEO Respondents Around the World!! Talent Driven Innovation Quality & availability of researchers, scientists, engineers Overall quality and availability of skilled labor Quality of primary & secondary schools to produce sufficient student populations proficient in science, technology and math Quality of colleges & universities and their partnerships with business in research and innovation Effective & efficient immigration policies - 34 -

2009 Program for International Student Assessment (PISA) Math Science Reading 2009 Ranking for 74 countries, including all 34 OECD nations U.S. is ranked 31 st in Math, 23 rd in Science, and 17 th in Reading Note: OECD members as of the time of the study in boldface - 35 -

The Future of Manufacturing: Competition to innovate and foster innovation Innovative companies outperform their peers in key performance indicators across all sectors including manufacturing Innovative manufacturers underperform in revenue growth but far outpace the global peer group in net income growth Analysis Overview Aligned the 100 Most Innovative* and Global 100 companies to peer groups by sector Analysis showed that the innovative groups outperform their global 100 peers in all but one metric For purposes of this analysis, innovative companies are defined as Forbes 2011 Most Innovative Companies list. The ability to innovate, at an accelerated pace, will be the most important capability differentiating the success of countries and companies Source: Deloitte. CAP IQ; Deloitte Analysis; The World s Most Innovative Companies. Forbes. Retrieved December 6, 2011 http://www.for bes.com 36

5 Year Growth % (CAGR 2006-2010) And at a company level, R&D spend is not an effective measure of innovation The Top 10 innovators in Manufacturing significantly outperformed the top R&D spenders (as % of revenue) on all key financial performance measures 10 Manufacturing: Top 10 Innovators vs. Top 10 R&D Spenders 8 6 4 2 0-2 Revenue Net Income Market Cap Top 10 Innovative - Mfg Top 10 R&D Spenders - Mfg As a group, the top 10 innovators spent 3.1% of 2010 revenues on R&D, the group average for the top 10 spenders was 9.6% * For purposes of this analysis, innovative companies are defined as Forbes 2011 Most Innovative Companies list. Source: CAP IQ, Deloitte Analysis - 37 -

Manufacturing Institute U.S. Skill s Gap Report A survey of US-based manufacturers reveals a significant talent shortage across sectors; 600,000 US manufacturing jobs remain unfilled because employers can t find people with the right skills Shortage of U.S. workers by job type Low Shortage No Shortage Moderate Shortage Serious Shortage Percent of responses serious shortage 42% Greatest shortages associated with skilled production workers, technologists, scientists and design engineers 7% 26% 30% -55% -12% Overall -22% -6% Unskilled production 5% 12% 14% -38% -40% -45% Skilled production 27% 26% 23% -20% Engineering technologist -33% -17% Scientists and design engineers Source: Deloitte and the Manufacturing Institute - 38 -

Across all sectors, US manufacturers are facing talent & skill shortages in areas most critical to driving innovation - 39 -

And the aging global population and retiring skilled workers will increase talent shortages The most rapid increases in the 65-and-older population are occurring in developing countries, which will see a jump of 140% by 2030 Female 1950 95-99 Male Female 2010 95-99 Male Female 2025E* 95 Male 65+ 85-89 80+ 65+ 85-89 80+ 65+ 85 80+ 5% 70-74 8.9% 70-74 12.3% 70 5-64 82% 60-64 50-54 40-44 5-64 82% 60-64 50-54 40-44 5-64 79.9% 60 50 40 30-34 30-34 30 20-24 20-24 20 10-14 10-14 10 Under 5 0-4 Under 5 0-4 Under 5 0-4 13% Total Population = 9.1% Total Population = 7.9% *Estimate based on UN medium variant Total Population = 2.5 Billion 7 Billion 8.2 Billion By 2025, those over 65 years old worldwide are expected to outnumber the young * for the first time in history Implications As countries reach higher levels of population aging, the proportion of workers tends to decline; some countries, including France, Germany, Greece, Italy, Russia, and the Ukraine, already have seen an absolute decline in the size of their workforce The impact on a country s gross domestic product will depend on increases in labor productivity and that country s ability to substitute capital for labor Source: Why Population Aging Matters; NIA, NIH (2007), McKinsey Global Institute (2006); World Population Prospects, the 2010 Revision; United Nations, Population Division, Deloitte Analysis * Young is defined as under five years old - 40 -

Comparison of Key Manufacturing Related Macroeconomic Indicators Input Indicators Output Indicators Best Labor Costs ($/hr) 2011 0.9 2.8 Labor Productivity 2010 (GDP per person employed in '000 $) 68.1 Highest Corporate Tax Rate 2012 17.0 17.0 Researchers Per Million Population (INSEAD 2012) 7,038 6,992 Mfg GDP 5-Yr CAGR % Change Mfg as % of GDP 2005-10 2010 11.9 33.5 Mfg Exports as % of Total Exports 2011 93.2 88.2 Innovation Index Score (out of 100) (2012) 63.5 Manufacturing Job Created Per 100 Persons (2001-2010) 3.1 Quality of Life (2011 Score out of 100) 86 9.2 12.0 48.9 44.8 6,286 5,305 4,663 8.5 7.9 88.0 85.3 82.7 57.7 56.9 56.2 2.1 1.6 74 74 Average* Worst 17.7 21.9 21.9 35.4 35.4 38.3 46.4 44.5 44.3 43.1 32.2 13.4 12.6 8.4 24.2 25.0 26.2 31.0 32.4 33.0 34.0 38.0 39.1 4,260 2,980 1,100 1,071 136 7.1 6.0 2.9 1.9 0.5-0.2-0.5-3.6 20.9 18.1 17.1 15.0 14.1 13.5 13.1 10.6 10.5 9.6 68.1 64.3 60.1 53.7 44.9 32.9 53.9 51.7 45.9 45.4 36.6 35.7 0.0-0.8-1.3-1.8-3.0-3.1-4.5 71 70 66 66 66 57 57 50 Brazil Canada China Germany India Japan Singapore S. Korea Taiwan U.S. Relative positions of flags. Not to scale Please refer to the notes Copyright section below 2012 for sources Deloitte and Development other details LLC. All rights reserved. Countries above average Countries below average 41

Competition for resources, capabilities, and on public policy will intensify as both companies and countries compete for success Infrastructure Foreign Direct Investment Materials Resources Clean Energy Innovation Human Capital Public Policy 42 42

Future importance Assets and Capabilities Map for High Performers 100 90 80 70 60 50 40 30 20 Penetrate and grow in new markets Global sales Capabilities Global distribution and logistics Capabilities Global marketing Capabilities Procurement resources and processes Product engineering capabilities Productivity of workforce Innovation culture R&D Capabilities Availability of skilled workforce Cost and availability of materials Overall cost structure Collaboration with suppliers Business information technology resources and processes Data analytics resources and processes Energy management and efficiency 10 Overall energy costs Labor cost structure 0 Business tax structure 0 10 20 30 40 50 60 70 80 90 100 Current competitiveness Overall quality of human resources Overall manufacturing processes and capabilities Business Strategy Employee engagement Capabilities Quality management resources and processes Strength of supplier network Sustainability efforts Source: Deloitte and U.S. Council on Competitiveness Global Manufacturing Competitiveness CEO Survey; Deloitte Touche Tohmatsu, 2012. Brand Image Leadership and management Finance and accounting resources and processes Risk management profile and capabilities Strength of balance sheet

Competing for Customers and Revenue Map for High Performers Future importance 100 Overall customer perceived value 90 80 Overall product quality as perceived by customer Responsiveness of customer service and support Delivery speed Reputation and experience of company 70 Perceived quality of customer sales experience 60 50 Innovative product design and features Speed of getting products to market 40 30 Total delivered price of products Competitiveness of product pricing Breadth of products 20 10 Effectiveness of global marketing programs 0 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 Current competitiveness Source: Deloitte and U.S. Council on Competitiveness Global Manufacturing Competitiveness CEO Survey; Deloitte Touche Tohmatsu, 2012.

Capabilities which differentiate high performers - present and future: Global reach- global sales, marketing and distribution capabilities, ability to penetrate and grow in new markets Overall manufacturing process and capabilities - Application of advanced process technologies (Smart MFG) Talent driven innovation- R&D capabilities, availability of skilled workers, overall quality of human resources, innovation culture Business processes- finance and accounting, data analytics and procurement Financial prudence- strength of balance sheet, risk management capabilities Business Strategy Brand image High performers are also able to differentiate in terms of: Delivery speed (backed by advanced mfg process technology, global sales and distribution capabilities), Perceived quality of overall sales experience. These companies are also going to improve effectiveness of global marketing programs

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