- April 19, 2021
The McKinsey Global Institute (MGI) argues that the United States has a now-or-never moment to revitalize its industrial base and regain capabilities and market share—an effort that would simultaneously give the US economy greater momentum over the long term. The research takes a micro, activity-level view and finds that revitalizing growth and competitiveness in 16 key manufacturing industries could boost annual GDP by more than 15%.
Shortages of critical products across over the past year have served as a wake-up call about the US manufacturing sector’s importance to national resilience. Manufacturing capabilities matter—not only to fuel the economy in good times but also to keep it functioning in moments of crisis. At the same time, new technologies, process innovations, input trends, and demand patterns are creating opportunities that did not exist even a decade ago.
In Building a more competitive US manufacturing sector, the McKinsey Global Institute (MGI) argues that the United States has a now-or-never moment to revitalize its industrial base and regain capabilities and market share—an effort that would simultaneously give the US economy greater momentum over the long term. The research takes a micro, activity-level view and finds that revitalizing growth and competitiveness in 16 key manufacturing industries could boost annual GDP by more than 15 percent, (as much as $460 billion) over baseline forecasts and add up to 1.5 million jobs both directly and indirectly.
To identify a way forward, MGI started from a list of 30 manufacturing industries and identified 16 that could meet at least one of four important goals: productivity and economic growth, jobs and incomes for workers and communities, innovation and competitiveness, and national resilience. In alphabetical order, they are: aircraft and defense equipment, autos and parts, basic metals, communications equipment, electrical equipment, electronics, fabricated metals, general machinery, medical devices, other transport equipment, petrochemicals, pharmaceuticals, precision tools, semiconductors, special-purpose machinery, and specialty chemicals.
The industries with the strongest contributions to each of the four goals listed above are as follows:
Productivity and economic growth: The industries with strong growth prospects include semiconductors, medical devices, communications equipment, and electronics, while industries that drive productivity include communications equipment, autos and parts, and precision tools.
Job creation and income growth: The industries with the greatest potential to support jobs and incomes for workers and communities are autos and parts, metals, and machinery; collectively, they employ 3.4 million workers and involve 75,000 suppliers.
Innovation and competitiveness: Pharmaceuticals, electronics, semiconductors, and medical devices have high intensities of R&D spending, which underpins innovation and competitiveness.
National resilience: All 16 industries and their supply chains are important to national security, resilience, or emergency preparedness.
“Manufacturing is uniquely positioned to boost economic recovery and inclusive growth both today and over the longer term,” said James Manyika, chairman of the McKinsey Global Institute. “It’s important to note that the multiplier effect of a revitalized manufacturing sector would be felt across a far wider and more diverse geographic area than an equivalent GDP gain in tech or finance. Investing in plants, equipment, and technologies could get billions of dollars of investment flowing into communities that sorely need it.”
MGI’s research offers a new lens into manufacturing, looking not only at the industry level but also across different types of activities, arguing that an effective manufacturing strategy needs to reflect the competitive realities for companies engaged in each of them, accounting for their different capital and talent needs and their growth prospects.
Over the past 25 years, the US share of global manufacturing GDP in R&D- and design-based activity has risen by four percentage points. However, the nation has lost six percentage points of its global share in standardized scale-based activity of the sort found in auto parts and metal foundries. This trend in particular has widened the trade deficit and hollowed out the supplier base in some domestic industries. Learning-curve-driven activities, a model seen in semiconductor fabs and the production of lithium-ion batteries, invest time, capital, and engineering to achieve exponential process improvements in each new product generation. The United States excels at conceiving these innovations but struggles to scale them up as broadly as some other countries; its share of global GDP in this segment has fallen by 11 percentage points. The US share of flexible and customizable activity (seen in aerospace parts and medical devices) is also down by four percentage points.
This is a critical new battleground for competitiveness involving the use of digital production technologies to produce smaller lot sizes profitably. This paves the way for new types of customization, production at the point of use or sale, and rapid order fulfillment.
Revitalizing manufacturing will require not only a major infusion of capital but new ways of delivering it that go beyond the current market approach. MGI’s analysis notes that part of the pressure on US manufacturing companies in recent decades stems from the fact that they are expected to produce higher returns on capital than their competitors in the OECD and China. The largest have managed to do so, but often through cost cutting that has depressed capital investment and wage growth, squeezed suppliers, or shifted production to lower-cost areas.
The sector’s need for investment will require responses tailored to specific challenges. In scale-based manufacturing, MGI estimates capital investment needs of $15 billion to $25 billion annually over the next decade to upgrade aging plants and equipment with Industry 4.0 technologies—and capital needs to flow to some 120,000 small and medium-size enterprises. By contrast, it can take $20 billion to build a single new large-scale five-nanometer semiconductor fab, with the cost doubling every two to four years across succeeding product generations and a very long investment horizon. Public spending, or other ways to aggregate investment, may be needed where returns are not attractive in the near term. Mechanisms to stimulate or guarantee demand are an option for jump-starting or scaling up activities.
As for talent, the R&D- and design-based activities that can boost future output growth and competitiveness require more scientists, product designers, and software developers. Learning-curve activities need specialized engineers, production technicians, and industrial operations managers, all continually building on their existing know-how and experience. Meanwhile, scale-based activity is becoming more digitized and automated, which calls for higher-level skills—and upgrading existing jobs to attract the next generation of workers, perhaps from other industrial sectors.
“An integrated plan with a long-term outlook can provide the certainty businesses require to invest. The United States can benefit from examining the range of active approaches to industrial support taken by peer countries and adapting some ideas to its own context,” said Eric Chewning a McKinsey partner and co-author of the research. “In addition to investment and specialized talent, it will take improved productivity and know-how for US companies to catch up with global leaders in technology adoption and process improvements. US industries also need healthy domestic supply chains to innovate with partners close at hand and reduce exposure to global risks.”
About the McKinsey Global Institute
The McKinsey Global Institute (MGI), the business and economics research arm of McKinsey & Company, was established in 1990 to develop a deeper understanding of the evolving global economy. Our goal is to provide leaders in the commercial, public, and social sectors with the facts and insights on which to base management and policy decisions. The partners of McKinsey & Company fund MGI’s research; it is never commissioned by any business, government, or other institution.
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