Making a future for manufacturing in advanced economies | McKinsey Global Institute | McKinsey & Company

Making a future for manufacturing in advanced economies | McKinsey Global Institute | McKinsey & Company:

After years of despair about the decline of manufacturing, policymakers in advanced economies now are talking about a rosier future. Wages have risen quickly in coastal China and other offshore locations, and have stagnated or fallen in advanced economies. Severe weather events, such as the Japanese tsunami and Bangkok floods, have exposed the fragility of global supply chains. And news that some US companies will build computers and washing machines once again in North America is offered as proof that the tide has turned (Henion and Schoenherr 2012).

While manufacturing has a bright future, our research suggests that the future of manufacturing in advanced economies will unfold in a different way than many think (Manyika et al. 2012). While value added will continue to rise, the impact on jobs, particularly for the unskilled, will be muted.

The rise and fall of manufacturing as an economy develops

Across the world and across the decades, manufacturing output and employment grow rapidly as economies urbanise: farmers become factory workers and as their productivity increases, so do wages. This gives workers more to spend on healthcare, education or leisure activities, which accelerates growth of the service economy. However, rising wages also give manufacturers the incentive to invest in labour-saving equipment, specialise in higher value-added goods, or, in the case of very labour-intensive industries, to move production to lower-wage geographies. Because of faster growth in services and slower hiring in manufacturing, the share of employment and the share of GDP generated by manufacturing usually peaks at 25 to 35%. China – the manufacturing sector of which contributes 33% of GDP – would appear to be approaching this peak.

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