McKinsey: How to compete and grow: a guide to manufacturing priorities
Posted by Bert Maes on August 18, 2010
The McKinsey Global Institute has analyzed the performance of more than 20 countries and nearly 30 sectors, including the African continent, on what the best government manufacturing policies are to make those economies compete and grow during and after the current recession.
According to those studies, the best manufacturing policies first of all depend on two criteria
(1) Whether you live in a low-income, middle-income or high-income country;
(2) Whether you operate in an innovative start-up industry or in a mature sector.
(1.a.) The manufacturing situation in HIGH-INCOME economies
(in total 54 countries including Australia, Canada, Hong Kong, Japan, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, the Netherlands, Portugal, Spain, Sweden, the UK, Norway, Singapore, Switzerland and the US):
- Between 1995 and 2005 services generated ALL job growth in high-income countries, and between 75%-87% of the economic growth. Only 13-25% came from goods-producing industries. Between 1985 and 2005 manufacturing contributed 0,3% to growth, services accounted for 2,2%. The employment powerhouses and growth sources were retail trade, restaurants, construction and those services that bring process innovations. Some predict a substantial employment growth in IT & telecom, private equity, construction and environmental services by 2014, as well as car & automotive manufacturing and mining, oil & gas machinery manufacturing.
- These are of course statistics from 2005. Since then the situation changed drastically. The oversized financial industry did hurt the broader economy the past years. At this moment “making goods is — with exceptions — more productive than providing services, and rising productivity is the fundamental source of prosperity… a major nation must be able to maintain a balanced current and trade account over time, and goods are far more tradable than services. Without something to export, a nation will either become over-indebted or forced to reduce its standard of living,” says economist and author Jeff Madrick. Since there is no economy that would have sustained rapid growth without substantial contribution from its industrial sector, at this moment, increased growth depends on the performance of manufacturing! “Today manufacturing is doing more to lead us out of the recession than any other industry.“
(1.b.) Manufacturing situation in MID-INCOME countries
(In total 93 countries including Argentina, Bulgaria, China, Colombia, Costa Rica, Egypt, Hungary, Jordan, Peru, Philippines, Poland, Romania, Slovakia, Sri Lanka, Thailand, Russia and Turkey)
- 85% of net new jobs comes from service sectors, including utilities, broadband telecommunications, supermarkets, hotels and restaurants, finance and insurance, construction, IT and software activities, R&D, digital media etcetera.
- But the manufacturing industry (including pharmaceuticals, radio-TV-communication equipment, motor vehicles, cloth and apparel, food, drinks, tobacco, oil, coal, basic material, agriculture and forestry) contributes 46% of all growth (Russia for example 39%, China 55%). So in these countries the performance of expanding industrial sectors is critical to the economy.
(1.c.) Manufacturing in LOW-INCOME countries (61 countries including the African continent, Pakistan, Uzbekistan, Vietnam, Afghanistan, India and Nepal)
- Educating has to be one of the highest priorities for public policy, to deliver the necessary trained business and scientific talent. Truly competing and winning in the long term will require local know-how and talent. Local capacity-building programs, attractive career paths, and apprenticeship opportunities will be critical to achieve sustained growth.
- The other highest priorities include infrastructure development (transport, fuel, water, energy, port, airport, roads) and regulation, including a strong stable government, upholding the rule of law, creating a more predictable business environment. The current poor performance in these fields complicates the importation of equipment and materials, and makes the overall manufacturing costs very high.
- Expanding manufacturing, however, increases exports and reduces the need the need for imports, easing these countries’ current-account deficits. So precisely manufacturing is essential to make continued investments in infrastructure and education.
(2.a.) Best government actions in MATURE manufacturing sectors
- After being highly dynamic and generating growth to other sectors, the semiconductor industry today employs only 0.5% of the workforce. The last 15 years semiconductors didn’t generate sustained growth – public investments have led to very low returns.
- There is a similar situation in the cleantech solar/wind power and biomass industry. The global markets in this area are already subject to heavy competition and as a result this market will not bring enormous job creation. The sector will remain too small to make a serious difference to economy-wide growth. New jobs in this green technology production is more likely to come from improving building insulation and replacing obsolete heating and cooling equipment.
- Mature manufacturing markets best benefit from expanded infrastructure construction (roads, ports, high speed telecommunication, research labs, parks and training centers), improved access to capital, support in R&D through universities or other research funds, reduced trade protections, export assistance, faster and streamlined government regulations, enhanced access to raw materials and logistical effectiveness, focus on quality of education and technology-driven retraining to acquire a skilled workforce – at the right cost – that can continuously deliver new products for new generation of technology, in low-cost production.
(2.b.) Best government actions in INNOVATIVE START-UP industries
- Protecting local producers has helped create local industries in a sector’s early development phase, but it led to low productivity and higher costs to consumers, with limited growth. Removing trade and investment barriers at the right time, with exposure to global competition, significantly improves performance and productivity.
- Innovative high-quality ‘original technology’ industry start-ups should get government contracts, low-cost loans for investment, reduced raw materials/energy/logistics costs, long term large government investing in channeled R&D funding and expanding necessary education, support from private companies and university research to develop new technologies together, and attracting smaller companies to form clusters, which help create a sustainable pool of talent and expertise. But remember, this only works in brand-new industries.
Conclusion: designing and implementing manufacturing policies to improve growth and competitiveness are not easy. Taking into consideration the maturity of the country and the maturity of the industry will boost the odds of policy changes having a positive impact.