The Future of Manufacturing Tom Mayor
Today we kick off with the future of U.S. manufacturing How critical is the manufacturing sector for the U.S.? How is the U.S. manufacturing sector really performing? Where is U.S. manufacturing competitive and where is it not? What should the agenda be for U.S. manufacturing and supply chain leaders? Booz & Company 12 02 28 Future of
Manufacturing will remain critical to the U.S. economy Size Linkages Productivity Size of Economic Regions in Comparison to U.S. Manufacturing 2009 Nominal GDP, $ B U.S. Mfg. Sector Brazil Spain Canada $1,336 India $1,287 $1,585 $1,572 $1,464 Linkages between the Manufacturing, Services & Other Goods Producing Sectors Mfg. Direct mfg. linkages w/ other sectors Indirect & 2nd-order linkages Private Business and Manufacturing Multifactor Productivity Index (1987 = 100) 150 140 130 120 Manufacturing Total of Private Business Sector CAGR 1987-2008 1.6% 1.0% Russia Australia $1,231 $1,014 110 Mexico Korea $872 $833 Rest of the Economy 100 86 88 90 92 94 96 98 00 02 04 06 08 Source: UN National Accounts Main Aggregates, Bureau of Labor Statistics, Database, Booz & Company analysis Booz & Company 12 02 28 Future of 2
While U.S. share of global production has fallen, U.S. manufacturing continues to grow and outperforms Europe and Japan Global Manufacturing Value Add Real Terms, $ Billion Source: UN National Accounts Main Aggregates Database, Booz & Company analysis Booz & Company 12 02 28 Future of 3
Our analysis identifies four distinct groups of U.S. manufacturers Global leaders Sectors where U.S. manufacturing is globally advantaged not primarily due to conversion costs, but due to investment scale, embedded intellectual property, uniquely skilled workforces, and strong linkages to product and process development Domestic powers Sectors that are strongly advantaged to serve the U.S. domestic market from U.S. plants Sectors on the bubble Sectors which are roughly at parity with BRIC imports in serving the U.S. domestic market from U.S. plants Niche players Sectors in which U.S. production is generally and significantly costdisadvantaged for the North American market relative to low cost country imports 4
Very few sectors are positioned to serve the world from U.S. plants Competitiveness of U.S. Manufacturing: China Export Source: U.S. Census Bureau, U.S. Census Bureau, Bureau of Labor Statistics, UBS Research, CapitalIQ, Energy Information Administration, World Bank, Eurostat, World Trade Organization, IRS Statistics, Tauber Institute for Global Operations and Booz & Company Analysis Booz & Company 12 02 28 Future of 5
However, for most sectors U.S. manufacturing is advantaged for domestic demand Competitiveness of U.S. Manufacturing: Domestic Markets Source: please see previous page; Note: Furniture and Printing still have a significant number of jobs in the U.S.. This is driven by clear bifurcations in these segments: Flat pack furniture is very likely to be made in China for the U.S. market, whereas pre-assembled furniture is more likely to be made in the U.S. In Printing, longer-lead materials such as books are likely to be produced in China, whereas time sensitive materials (e.g. magazines, newspapers, presentations) are very likely to be produced in the U.S. Booz & Company 12 02 28 Future of 6
Approximately half of U.S. manufacturing jobs and value add come from on-the-bubble or niche sectors Manufacturing Value Add Outlook $B (2009) $1,585 53% 100% Manufacturing Employment Outlook Millions (2009) 11.9 45% 100% Discussion Sectors On The Bubble are advantaged for U.S. production, but require sharp-penciled management; ongoing re-investment; and enhanced coordination with academia, government and the workforce in order to thrive 47% 6% Global Leaders and Domestic Powers Sectors on the Bubble Niche Players 11% 55% Niche Players U.S. plants are truly at risk -- likely surviving only in focused roles where proximity to market or to U.S. based R&D can overcome a significant conversion cost disadvantage 2009 2009 Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Annual Survey of Manufacturers-U.S. Census Bureau, Booz & Company Analysis 7
We recommend four primary actions, directed at both policymakers and companies Attract the best workers: Increase the supply of technical, professional, and skilled labor. Invest in high impact clusters: Don t invest everywhere focus dollars around nascent clusters and skill sets. Build a future with Mexico: Strengthen the U.S.-Mexico partnership and infrastructure capabilities Simplify and streamline the tax & regulatory structure: Simplify corporate tax codes, permitting and regulatory processes to reduce the cost, uncertainty and timing risk of investment in the U.S. 8
Attract the best workers: Increase the supply of technical, professional, and skilled labor What s the issue? The technical/vocational education system is not consistently delivering the STEM (1) skills needed for today s U.S. factory floor U.S. factory management and technical wages are disadvantaged vis-à-vis Germany and others Traditional manufacturing lacks strong appeal to many millennials constraining access to the best-andbrightest Recommended Actions 1) STEM Science, Technology, Engineering and Mathematics Structure collaboration between manufacturers and local technical colleges to improve workforce readiness Team with leading colleges to increase STEM (1) student s exposure to manufacturing Relax immigration policies to attract educated foreign U.S. graduates to work in the mfg. sector (e.g. H1B visas) 9
Invest in high impact clusters: focus your dollars around nascent clusters and skill sets How do clusters help? Clusters enable multiple advantages: Higher innovation levels: clusters provide an eco-system for the emergence of new business models Higher employment growth and productivity: clusters help to attract, retain, and train labor with specific skills, driving selfsustained job growth Investments to promote cluster development yield better returns than individual economic growth initiatives Recommended Actions State and local governments should: Invest in shared infrastructure for nascent centers of interrelated businesses Fund research institutes and university programs linked to high-growth, innovative industry sectors Private sector should: Reinvest to take advantage of existing cluster strengths Review operating models to maximize realization of productivity and innovation potential from U.S. workforce 10
Build a future with Mexico: Strengthen the U.S.-Mexico partnership What s the issue? Many manufacturers have shifted production to Asia for lower labor costs but are still faced with a high logistics burden Additionally, as production has moved over to Asia, high-paying knowledge worker jobs have also followed Partnering with Mexico would help U.S. companies Overcome logistics costs and instabilities Gain and retain knowledge worker jobs in the U.S. Customize production strategies by making lowvalue, high-labor content in Mexico while producing high-value products in the U.S. Recommended Actions Partner with Mexico to: Develop / invest in rail, road and raw material supply infrastructure to ensure manufacturers can efficiently transport goods and have access to inexpensive commodities Develop worker education programs Improve border security by better coordinating with Mexico 11
Simplify and streamline the tax & regulatory structure What s the issue? U.S. compliance and enforcement approaches create excessive costs, timing delays and regulatory risks for U.S. infrastructure and manufacturing investments Complex U.S. tax codes drive investment in high-cost overhead to develop and execute tax minimization strategies and may create negative bias in planning decisions causing many to conservatively evaluate investments based on statutory rather than lower effective rates Recommended Actions Review and simplify regulatory compliance mechanisms to shorten permitting lead times, reduce costs of documenting compliance and increase certainty of outcomes Simplify the tax code by aligning the statutory tax rate with the effective tax rate and reducing tailored credits 12
Corporations need to adapt core capabilities while policymakers must move us toward a more competitive environment Manufacturing Capabilities Framework Resources Availability, quality, quality, proximity, and and development of the of the right right human human and and infrastructure natural resources capabilities Inherent Structural Systemic Realized Market-back design of products, processes, and technology Footprint, scale, and customer requirements Systems, processes, and policies, aligned to enable business requirements Execution and performance management, tailored to product / customer and workforce characteristics Business Environment Regulations, taxation, infrastructure, macroeconomic outlook, and ease of doing business Areas for Policymakers to focus on Company core capabilities 13
The future of American manufacturing can be extremely bright, if we can learn to grow effectively and realistically Have a deliberate plan: Determine who and where your customers are, what kinds of products they make, how they envision their future and the capabilities they have and need Create your own distinctive direction: Focus your investments to fortify your manufacturing capabilities that match your strategic goals Don t go it alone: Industrial clusters, universities, researchers, policymakers and others are essential the development of manufacturing innovative joint efforts, collaboration and government cooperation will be required 14
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