There has been significant decline in many sectors of US manufacturing over the past three decades, and the impact has been significant - and in some cases hidden.
For example, a new report from the McKinsey Global Institute says that the erosion of manufacturing has contributed two-thirds of the fall in labor's share of US GDP in recent times.
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| "The opportunities outlined above are real and substantial, but the United States will have to make up lost ground," McKinsey says. "No one should underestimate the effort it will take to turn things around." |
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As SCDigest has reported many times as well, McKinsey also notes that In the past two decades, output growth in US manufacturing has been concentrated in only a few industries, such as pharmaceuticals, electronics, and aerospace. Most other manufacturing industries have experienced slower growth or real declines in value-added.
At the same time, the largest US manufacturers have generally managed to thrive despite growing headwinds, while small and midsize firms have been hit hard. But this is a problem for large manufacturers too, as a declining ecosystem of domestic suppliers presents risks and makes it difficult for many to maintain domestic production.
There is much debate, McKinsey notes, on whether there can be a resurgence in US manufacturing, despite hopes for "reshoring" and a general revival through automation. But McKinsey is optimistic, saying that "continued [US manufacturing] losses are not a foregone conclusion."
If played smartly, in fact, McKinsey says the United States could boost annual manufacturing value added by up to $530 billion (20%) over current trends by 2025 – a huge sum.
"Given the importance of manufacturing to the broader economy, capturing these opportunities should be a national priority," McKinsey says. "Rather than attempting to re-create the past or preserve the status quo, the United States will need to focus on positioning its manufacturing sector to compete in the future."
Some Manufacturers Rethinking Strategies
McKinsey notes that the gap between labor costs in the United States and those available overseas has narrowed, while the cost of industrial robots continues to fall. As a result of these trends, some manufacturers have returned some production to the United States, though in a more automated form that requires far fewer workers.
Another positive trend is the dramatic increase in US shale-energy production, which provides ongoing assurance of low natural-gas costs for US-based plants, and it has made cost-effective raw inputs available to US producers of refined petroleum products, petrochemicals, and fertilizers leading to a number of new plants US plants being built or under construction.
And while labor costs will continue to be paramount for low-margin and tradable products, McKinsey says companies in many industries are reassessing the downsides of offshoring and lengthy supply chains. It says more firms are making footprint decisions using a "total factor performance" approach that considers logistics, lead time, productivity, and risk - as well as proximity to suppliers, other company operations, and final demand.
McKinsey says there are three scenarios for US manufacturing's future:
• The share of domestically produced content continues its trajectory of decline across most industries
• A "new normal" scenario in which the United States maintains the current level of domestic content in finished goods in most industries, arresting the decline.
• A "stretch" scenario in which GDP in some industries returns to a recent peak
The $530 billion in increased US manufacturing value-add comes from the combination of the last two scenarios, as shown in the graphic below.
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And such a rise in U manufacturing activity would have a major impact on jobs, even with automation, creating as many as 2.4 million new jobs in manufacturing and 3.3 million total net new jobs.
"The opportunities outlined above are real and substantial, but the United States will have to make up lost ground," McKinsey says. "No one should underestimate the effort it will take to turn things around."
Key actions to turn US manufacturing around include:
Strengthen the US supplier base: Large companies need to work more collaboratively with smaller suppliers, both to reduce costs and generate more innovative ideas. Government programs and incentives can also play a key role.
Pursue growth through deeper global engagement: Less than 1% of US companies sell abroad, a far lower share than in other large advanced economies. McKinsey says small and midsize US manufacturers need more mentorship and strategic guidance to understand the market opportunities at stake, and they need more of the networking opportunities that their counterparts enjoy in many other advanced economies.
The United States is already the largest recipient of foreign direct investment (FDI) globally, but it can attract more greenfield FDI, particularly from China and India, McKinsey says, through government action.
Improve digital adoption to boost productivity: McKinsey says the US manufacturing sector's relatively slow pace of digital adoption has been a drag on its productivity performance. The intensity of industrial robot usage remains lower in the United States than in countries such as Germany, Japan, and South Korea.
It adds that "To capitalize on technology, companies have to start by capturing, integrating, and analyzing data flows from across their operations and ecosystems."
Develop the manufacturing workforce of the future: Manufacturers are having a hard time finding workers, and an aging workforce is seeing many skilled employees retiring. Workforce apprenticeships are gaining traction in the United States, but now these efforts need to happen on a much larger scale and with a system of established, transferable credentials, McKinsey says.
Think—and invest—for the long term: For a variety of reasons, US manufacturers have deferred investment and focused on cutting costs. The average US factory was 16 years old in 1980, but today it is 25 years old. Inside the plant, the average piece of equipment was seven years old in 1980 but is nine years old today.
There are government programs to encourage investment at small and mid-size manufacturers, but McKinsey says these programs generally have smaller budgets, less certainty of ongoing funding, and more constraints on their mandates than comparable programs in other countries. Policy makers should examine which existing initiatives are producing the most promising results, then scale up those efforts and commit to them for the long term.
"It is not hard to find industry success stories and promising initiatives in US manufacturing, but isolated examples have not created broad momentum," McKinsey concludes. "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."
Any reaction to McKinsey's analysis? What would you add or change to what McKinsey says needs to happen to drive US manufacturing growth? Let us know your thoughts at the Feedback section below.
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