From Procurement to Profit

McKinsey Sees Global Opportunities for US Manufacturers

The economics research arm of McKinsey & Co. released new research that outlines opportunities to boost manufacturing by up to $530 billion or 20% by 2025.

The report from McKinsey Global Institute (MGI), Making it in America: Revitalizing US manufacturing, also provides insights 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.

Revenues for the largest US firms have grown more than twice as fast as the sector average, even in the domestic market,

By contrast, smaller suppliers 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 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, George said.

“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, with a lot of room to grow exports, since less than 1% of US firms sell into international markets, a far lower share than in any other large advanced economy, McKinsey notes.

Value chains are evolving to the advantage of US companies as value shifts from production to R&D, design, and services.

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, and customers are demanding more choice and customization.

US firms that are adept at figuring out what resonates with consumers and at handling greater complexity can bring a bigger product portfolio to market profitably.

But poorly managed complexity can erode profit, increase inventory, and bog down operations, McKinsey noted.

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 links can connect firms with suppliers and customers, improving coordination and supporting data-driven insights that can lead to new sources of revenue.

These technologies can help offset slowing productivity growth in the sector, and help manufacturing firms that have already maximized the benefits of cost-cutting.

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%, above the current trend.

The biggest upside potential is found in 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, McKinsey acknowledges. Manufacturers will need to add capabilities and increase investment.

Aging plants and equipment, especially in the supply chains of advanced industries, will have to be upgraded for digital connectivity.

The sector needs new digital and technical skills from its workforce, and US-based manufacturers need to attract high-caliber talent, as their foreign competitors already do.

The study acknowledges that turning around two decades of negative trend lines will take coordinated action and long-term investment on a greatly increased scale.

A national apprenticeship program serving 1 million workers could cost $40 billion annually, for example while upgrading the sector’s capital base would take an $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%. Building a stronger ecosystem of innovative, digital-ready small and midsize manufacturers would give significantly benefit the entire sector.

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 (MGI), the business and economics research arm of McKinsey & Company, was established in 1990 to provide leaders in the commercial, public, and social sectors with a deeper understanding of the global economy. www.mckinsey.com/mgi

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