The Future of Manufacturing

Opportunities to drive economic growth

A World Economic Forum Report in collaboration with Deloitte Touche Tohmatsu Limited, Published April 2012.

Executive Summary

Over the past several decades, the globalization of the manufacturing ecosystem has driven more change and impacted the prosperity of more companies, nations and people than at any time since the dawn of the Industrial Revolution. Nations around the world have taken part in and benefited from the rapid globalization of industry and expansion of manufacturing. Globalization of manufacturing has been a key driver of higher-value job creation and a rising standard of living for the growing middle class in emerging nation economies. This has dramatically changed the nature of competition between emerging and developed nations as well as between companies. Recent research confirms manufacturing has been immensely important to the prosperity of nations, with over 70% of the income variations of 128 nations explained by differences in manufactured product export data alone.

A number of factors have enabled this rapid globalization, including a significant change in geopolitical relations between East and West, the widespread growth of digital information, physical and financial infrastructure, computerized manufacturing technologies, and the proliferation of bilateral and multilateral trade agreements. These factors, along with others, have permitted the disaggregation of supply chains into complex global networks allowing a company to interact in the design, sourcing of materials and components, and manufacturing of products from virtually anywhere – while satisfying customers almost anywhere.

While digital technology and free trade proliferation will continue to enable the flattening of the world and the globalization of manufacturing supply chains, the dominant factors that shaped the disaggregated supply chains we find today will not be the same as those that carry us through the next several decades. The global environment is changing. Many emerging economies used by multinationals as locations of low-cost labour, have developed significant manufacturing and innovation capabilities permitting them to produce increasingly advanced manufactured products. At the same time, these economies have begun to experience a corresponding escalation in wages and costs, following in the footsteps of their developed nation counterparts. Greater prosperity and higher wages are helping drive an increased ability, and desire, to consume by these growing middle classes, making them much more an exciting market of new consumers and much less a source for low-cost labour.

With the seeds planted by these multinationals, and the opportunity to serve these new markets, powerful new competitors are growing every day. This will profoundly reshape manufacturing supply chains over the coming several decades. But this reshaping will also be influenced by complex macroeconomic and geopolitical challenges, including exposure to currency volatility, sovereign debt pressures and emerging protectionist policies of many countries to gain access to emerging and prosperous new markets. All of these factors are driving more localized manufacturing supply chains.

While we expect the forces that initiated this rapid globalization to continue, we also see some clear and important new trends emerging that will define manufacturing and competition over the next 20 years. These trends will require the attention and collaboration of policy-makers, civil society and business leaders:

The infrastructure necessary to enable manufacturing to flourish and contribute to job growth will grow in importance and sophistication and be challenging for countries to develop and maintain.

Investing in effective infrastructure has been essential for emerging nations to be included as a potential location by multinationals and thus participate in the benefits derived from the globalization of manufacturing. This trend will intensify in the future. Reinvestment in maintaining competitive infrastructure will become critical for developed nations to keep pace. Public funding support for infrastructure development will be a challenge for developed nations given the expected long tail on sovereign debt issues. Effective public-private partnerships will be essential to address this. While infrastructure alone will not lead directly to best-in-class manufacturing, a serious lack of infrastructure or a steadily decaying infrastructure will negatively impact a nation’s manufacturing competitiveness and create serious obstacles for the supply chain networks of global multinationals.

Competition between nations to attract foreign direct investment will increase dramatically raising the stakes for countries and complicating the decision processes for companies.

Annual foreign direct investment (FDI) inflows for manufacturing more than doubled to average US$ 350 billion from 2006 through 2009, and manufacturing accounted for 26% of global FDI projects in 2010, generating 1.1 million jobs. FDI is a means to bring manufacturing and research facilities to a country, building infrastructure in public-private partnerships and leveraging the multiplier effect of manufacturing on service jobs across the nation. As public funding challenges mount, the competition between nations for FDI will increase dramatically. Membership in the World Association of Investment Promotion Associations has increased by 2.5 times since 2001. For companies, the myriad of potential investment options will be increasingly hard to differentiate and navigate. But investments in the wrong location and not contributing enough to truly advance a company’s global competitive capabilities will have long lasting negative consequences and be increasingly hard to unwind.

Growing materials resources competition and scarcity will fundamentally alter country and company resources strategies and competition, and serve as a catalyst to significant materials sciences breakthroughs.

Demand for rare earth elements increased sixfold from 2009 to 2010, with China supplying 95% of global demand. In the short term, countries and companies react to rising scarcity and prices of materials, such as rare earth elements, by stockpiling or hedging. In the longer term, success will be marked by discoveries of alternative elements, investing in latent supply access, breakthroughs in materials sciences and more efficient practices governing the use of materials.

Affordable clean energy strategies and effective energy policies will be top priorities for manufacturers and policy-makers, and serve as important differentiators of highly competitive countries and companies.

By 2035 the US Energy Information Administration expects world energy consumption will more than double, from a 1990 baseline, to roughly 770 quadrillion Btu, and outpace the increase in population over the same time period. Demand for and cost of energy will only increase with future population growth and industrialization. Environmental and sustainability concerns will demand that nations respond effectively and responsibly to the future energy challenge. All nations will be seeking competitive energy policies that ensure affordable and reliable energy supply. All manufacturing sectors will be forced to seek new ways of manufacturing, from energy efficient product designs to energy efficient operations and logistics. Collaboration between company leaders and policy-makers will become an imperative to solve the energy puzzle.

The ability to innovate, at an accelerated pace, will be the most important capability differentiating the success of countries and companies.

Companies regarded as more innovative grew net income over two times faster and their market capitalization nearly two times faster from 2006 to 2010 compared to their non-innovative counterparts. Countries that are more successful at fostering innovation perform better, whether looking at GDP or GDP per capita. Companies must innovate to stay ahead of competition, and must be enabled by infrastructure and a policy environment that better supports university/research lab breakthroughs in science and technology and investment budgets that permit dedicated pursuits. In the 21st century manufacturing environment, being able to develop creative ideas, addressing new and complex problems and delivering innovative products and services to global markets will be the capabilities most coveted by both countries and companies. But even more essential for innovation to flourish will be access to a workforce capable of driving it.

Talented human capital will be the most critical resource differentiating the prosperity of countries and companies.

An estimated 10 million jobs with manufacturing organizations cannot be filled today due to a growing skills gap. Despite the high unemployment rate in many developed economies, companies are struggling to fill manufacturing jobs with the right talent. And emerging economies cannot fuel their growth without more talent. Access to talent will become more important and more competitive. Today’s skills gap will not close in the near future. Companies and countries that can attract, develop and retain the highest skilled talent – from scientists, researchers and engineers to technicians and skilled production workers – will come out on top. In the race to future prosperity, nothing will matter more than talent.

The strategic use of public policy as an enabler of economic development will intensify resulting in a competition between nations for policy effectiveness and placing a premium on collaboration between policy-makers and business leaders to create win-win outcomes.

With competition increasing for so many resources and capabilities, and with the prosperity of nations hanging in the balance, policy-makers will be actively looking for the right combination of trade, tax, labour, energy, education, science, technology and industrial policy levers to generate the best possible future for their citizens. Despite many instances of failed industrial policies in history, policy-makers are increasingly turning to intervention in an attempt to influence outcomes and accelerate manufacturing sector development with several G20 countries, including China, India and Brazil, recently coming out with industrial policies. This means that policy-makers, in a complex global network of interdependencies, will need to carefully pull the right levers, at the right time in a balanced approach and mindful of unintended consequences. Companies will need to be more sophisticated and engaged in their interactions with policy-makers to help strike the balanced approach necessary to enable success for all.

In the future, nations will increasingly compete with each other to drive high-value job creation and harness the advantages of a globally leading manufacturing innovation ecosystem. Manufacturing companies – current powers and new entrants – will engage in an intensifying, talent-driven innovation competition to dominate profitable markets for new and existing customers. As this unfolds, both government policy agendas and manufacturing company strategies will be shaped by growing competition around common resources and capabilities. The involvement of policymakers in shaping outcomes will steadily grow and require stronger collaboration with business leaders to achieve success.

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NewsCourtney Healy