The Evolution and Future of Manufacturing …Valley of Death Zones Valley of Death Zones U.S. Advantage China Advantage Illustrative and signals bulk of investment focus. Exceptions

© 2014 blutre strategies, all rights reserved

The Evolution and Future of Manufacturing Competitiveness

2014 Manufacturing Summit: The Road Ahead

Franklin Furniture Institute Mississippi State University

Jack McDougle President & Founder

Blutre Strategies, Inc.

1


2

change is constant and faster than ever


time to reach 50 million users

3

38 years

75 years

13 years

4 years

3 years

50 days


4

only 35 days for the Angry Birds app

when President Lincoln was assassinated, it took 21 days for the news to reach England


if you graduated college in 2004

5

these companies didn’t exist


6

0 200 400 600 800 1000 1200 1400

China

India

Facebook

United States

Indonesia

Brazil

Facebook

facebook boasts the 3rd largest population


facebook’s market cap - surrounded by some impressive companies

7

Rank Company Market Cap 22 Coca-Cola $177 B 23 Anheuser-Busch InBev SA/NV $174 B 24 Bank of America $173 B 25 Merck $165 B 26 Total $154 B 27 Facebook $151 B 28 BP $148 B 29 Citigroup $147 B 30 Amazon.com $145 B 31 Sanofi $136 B 32 Disney $136 B

2222222222222227777777777 Facebook $1511111 BBBBBBBBBBBBBB 28 BP $148 B


information flows more freely than ever

•  4 billion email accounts in 2014

•  more than 300 billion emails per day

•  more than 50 billion instant messages per day

•  U.S. Post Office handles ~600 million pieces of mail per day

8

Source: The Radicati Group, Inc.


data is exploding •  90% of the world’s data created in the last 2 years •  if you stacked a pile of CD-ROMs on top of one another

until you’d reached the current global storage capacity, it would stretch 50,000 miles beyond the moon

•  every hour, enough information is consumed by internet traffic to fill 7 million DVDs. Side by side, they’d scale Mount Everest 95 times

•  there are 30 billion pieces of content shared on Facebook every day

9


10

1 week of the New York Times

contains as much information

as a lifetime in the 18th century


stunning and rapid transformation of global business

11

© 2014 blutre strategies, all rights reserved 12

unprecedented appetite for resources


8.5 billion people by 2030 7 billion in 2014


95% of consumers will live outside of the U.S.


Source: World Bank

growing global middle class creates huge opportunities & challenges

15


we need to produce as

much food in the next 40 years as we have in the

last 500

16

Source: Commonwealth Scientific and Industrial Research Organization


Georges Seurat interpreted by Chris Jordan

17




106,000 aluminum cans

the number used in the U.S. every 30 seconds

20





2 million plastic beverage bottles

the number used in the U.S. every 5 minutes

24


at current consumption rates, we will need 2 planets by 2030

Source: 2012 World Wildlife Fund's "Living Planet Report"


manufacturing is the greatest innovation in

history

26


Population 7 billion 6 billion 5 billion 4 billion 3 billion 2 billion 1 billion

0 500 1000 1500 2000

27

massive impact of the industrial revolution

Source: Angus Maddison's "World Population, GDP and Per Capita GDP, 1-2003

$17,356

GDP per capita


the 20th century was the American century

28


unmatched economic prosperity


the world’s arsenal of democracy


the great ages of economic development have resulted in higher living standards

Hunting and fishing

Agriculture

Industrial

Information

31

The developed world

The developing world


divergence between “thinking” and “making”

32

Basic R&D On-going operations

Applied R&D

Tech Transfer and Commercial-

ization

Scale-up Start-up

Innovation process Production process

Significant national focus Innovation clusters and government support Multiple collaborative efforts Government and private sector investment

Limited national focus Lack of coordinated efforts Barriers to production at scale Few government investments and incentives Regulatory and tax policy hurdles


Start-up Scale-up On-goingoperations

Basic R&D Applied R&D Tech transfer andcommercialization

Government

Universities

Angels

Venture capital

Private equity

M&A

Private equity

Debt financing

Foreign sovereign wealth funds

Valley of DeathZones

Valley of DeathZones

U.S. Advantage China Advantage

Illustrative and signals bulk of investment focus. Exceptions can always be found.

scaling production is difficult in the U.S.

33


manufacturing is changing rapidly

34


wrong public image of manufacturing


36

Advanced Materials/Composites

Additive Manufacturing

Bio Manufacturing & Bioinformatics

Flexible Electronics Manufacturing

Industrial Robotics

Nano Manufacturing

Advanced Forming/Joining/Welding

Advanced Sensing, Measurement, & Process Control

Visualization, Informatics and Digital Manufacturing

Advanced Manufacturing & Testing Equipment

Chemical Processing


research

development

engineering

production

sales distribution

logistics

customer service

marketing

support

de

p

g

Manufacturing Enterprise

a more comprehensive view of the manufacturing enterprise

For example:

GE’s Big Room


innovation is thinking and making

38

Basic R&D

On-going operations

Applied R&D

Tech Transfer and

Commercial-ization

Scale-up Start-up

Government and private sector support and collaboration

-A C


manufacturing is knowledge-intensive

39


new uses for emerging technologies: additive manufacturing / 3D printing

40


"DNA origami" to make nanobots

41

robots that can respond to chemical cues and operate inside a living animal


Retain product weight Lower operating costs Increase productivity Extend shelf life 2-3 times Increase nutritional value Improve hygiene

North Atlantic cod 14 days on flake ice and 14 days on nano-ice


manufacturing is more important than

ever

43


highest multiplier effect

44

0 0.2 0.4 0.6 0.8 1 1.2 1.4

manufactuirng

agriculture

transportation

construction

arts and entertainment

information

education and health

retail trade

other services

business services Source: U.S. Bureau of Economic Analysis


manufacturing drives productivity growth

Source: U.S. Bureau of Economic Analysis

90

100

110

120

130

140

150

160

170

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Pro

duct

ivity

Gro

wth

Inde

x (1

998=

100)

45

manufacturing

services


manufactured goods account

for nearly 60% of exports

46


manufacturing drives R&D and innovation


manufacturing dominates U.S. domestic private sector R&D investment

Source: National Science Foundation

3.2

3.9

2.3

0

1

2

3

4

5

All Industries Manufacturing Nonmanufacturing

U.S

. Dom

estic

R&

D a

s a

Per

cent

of

Dom

estic

Net

Sal

es, 2

011

48


Source: U.S. Bureau of Labor Statistics and U.S. Bureau of Economic Analysis

manufacturing pays higher average compensation

$22.29 $21.44

$11.55 $9.56

0

5

10

15

20

25

30

35

Manufacturing Workers All Workers

Com

pens

atio

n in

Dol

lars

pe

r Hou

r Wor

ked,

201

3

Wages and Salaries Benefits

49


0

2

4

6

8

10

12

14

16

18

GD

P Tr

illio

ns o

f dol

lars

201

2

U.S. manufacturing is the world’s 7th largest economy

Source: International Monetary Fund and U.S. Bureau of Economic Analysis


U.S. faces many challenges & opportunities

51


stubborn long-term unemployment

52

60.0

61.0

62.0

63.0

64.0

65.0

66.0

67.0

68.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1990

19

91

1992

19

93

1994

19

95

1996

19

97

1998

19

99

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

Unemployment

Participation rate

Source: U.S. Bureau of Labor Statistics


tension between productivity and employment

53

0

500

1000

1500

2000

2500

3000

3500

4000

0

5000

10000

15000

20000

25000

Productivity

Manufacturing employment

Source: U.S. Bureau of Labor Statistics and U.S. Bureau of Economic Analysis


11,000

11,200

11,400

11,600

11,800

12,000

12,200

12,400

U.S. manufacturing jobs are growing N

umbe

r of e

mpl

oyee

s in

thou

sand

s

Source: U.S. Bureau of Labor Statistics


growing inability to fund strategic priorities

55

federal debt at $17.5 tillion or $151K per taxpayer

debt to gdp ration ~108%


-5

0

5

10

15

20

25

2008 2011

Perc

enta

ge C

ontr

ibut

ion

to

U.S

. Str

uctu

ral C

ost B

urde

n

Corporate Taxes Employee Benefits Torts Regulatory Energy

structural cost disadvantage

Source: MAPI (Updated June 2011)

56


last quarter of 2012: 68 regulation per day

$1 billion for manufacturing institutes


national network for manufacturing innovation

58


0

20

40

60

80

100

120 Fr

ance

Uni

ted

Stat

es

Japa

n

Ger

man

y

Uni

ted

Kin

gdom

Can

ada

Aver

age

of 9

pa

rtne

rs

Kor

ea

Mex

ico

Chi

na

Taiw

an

Stru

ctur

al C

osts

of M

anuf

actu

ring

as

a Pe

rcen

tage

of U

.S. C

osts

only France has higher structural costs

Source: MAPI (Updated June 2011)


Statutory (1997)

Statutory (2012)

Effective (2011)

United States 40.0 40.0 34.6 Japan 57.1 38.0 29.5 France 36.6 33.3 34.1 Mexico 34.0 30.0 17.5 Germany 57.4 29.4 23.8 Canada 44.6 28.0 20.5 China 33.0 25.0 16.6 Korea 30.8 24.2 29.5 United Kingdom 31.0 24.0 27.9 Taiwan 25.0 17.0 10.9

corporate tax rates remain high

Source: OECD


the U.S. is competitive but not dominant in total R&D investment

Source: OECD

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0 19

99

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Gro

ss E

xpen

ditu

res

on R

&D

as

a P

erce

nt o

f GD

P

U.S. Germany United Kingdom Japan China

61


0

10

20

30

40

50

60

70

80

90

100

Australia Canada Germany Japan Korea United Kingdom

United States

Low-technology Medium-low technology Medium-high technology High-technology

manufacturing sector composition by technological intensity

U.S. manufacturing lags Germany, Japan and Korea in technological intensity

Source: OECD


80

85

90

95

100

105

110

OECD Average

U.S. Canada Japan Germany U.K. Czech Republic

Poland Mexico

Aver

age

Sco

res

of 1

5-Ye

ar-O

ld S

tude

nts

(Sca

led

to O

EC

D A

vera

ge),

2009

Science Literacy Math Literacy

U.S. students are not competitive in math and science skills

Source: U.S. National Center for Education Statistics

63


U.S. lags significantly in graduating engineers

Source: National Science Foundation

4.4 6.1 7.5

12.4

17.1

24.5

31.2

0

10

20

30

40

Per

cent

of F

irst U

nive

rsity

Deg

rees

in

Eng

inee

ring,

200

8 (o

r Mos

t Rec

ent Y

ear)

64


manufacturing competitiveness

tilting towards the U.S.

65


how do manufacturing CEOs view competitiveness?


drivers of global manufacturing competitiveness

67

Talent Driven Innovation

Physical Infrastructure

Economic, trade, financial, tax systems

Labor and material costs and availability y

Energy costs and policies

Supply networks

Local market conditions

Legal and regulatory system

Healthcare system

Government investment in manufacturing and innovation

Market Forces

Manufacturing Competitiveness

Government Forces

Source: Deloitte and Council on Competitiveness


Rank Drivers Index Score 1 Talent Driven Innovation 10.00 2 Economic, trade, financial, tax systems 8.42 3 Labor and material costs and availability 8.07 4 Supply networks 7.76 5 Legal and regulatory system 7.60 6 Physical Infrastructure 6.47 7 Energy costs and policies 6.25 8 Local market conditions 3.99 9 Healthcare system 2.48

10 Government investment in manufacturing and innovation

1.00

how do the key drivers stack up?



what is talent driven innovation?

quality and availability of a country’s skilled workforce,

including researchers, scientists, and engineers, and the resulting

ability to drive innovation

69



where do countries rank?

70

Rank Country Index Score

1 China 10.00 2 Germany 7.96 3 United States 7.84 4 India 7.65 5 South Korea 7.59 6 Taiwan 7.57 7 Canada 7.24 8 Brazil 7.13 9 Singapore 6.64

10 Japan 6.60

Rank Country Index Score

1 China 10.00 2 India 8.49 3 Brazil 7.89 4 Germany 7.82 5 United States 7.69 6 South Korea 7.63 7 Taiwan 7.18 8 Canada 6.99 9 Singapore 6.64

10 Vietnam 6.50

2013 2018

2 Germanyyyyyy 7.96 3 United States 7.84 4 India 7 65 4 Germanyyyyyy 7.82

5 United States 7.699999 6 SSSoutttttthhhhhh KKKKKKorreeaa 7 63



U.S. manufacturing slipped to #2

Source: United Nations

0

5

10

15

20

25

30

35 19

80

1981

19

82

1983

19

84

1985

19

86

1987

19

88

1989

19

90

1991

19

92

1993

19

94

1995

19

96

1997

19

98

1999

20

00

2001

20

02

2003

20

04

2005

20

06

2007

20

08

2009

20

10

2011

Per

cent

of V

alue

-Add

ed in

G

loba

l Man

ufac

turin

g

United States China Germany Japan Brazil

71


advantages and challenges of manufacturing in the U.S.

Advantages •  Technological prowess and size •  Research support for national laboratories and universities •  High productivity •  Certain policy actions •  Market size and sophistication Challenges •  Historical high-cost labor (starting to change) •  High corporate tax rates and other structural costs •  Slowing growth Areas to watch out •  Policy uncertainty •  Shale gas availability •  Reshoring •  Skills

72



advantages and challenges of manufacturing in China

Advantages to manufacturers •  Favorable policy actions •  Growing middle class •  Increasing R&D •  Advanced electronics manufacturing •  Robust raw material supply base •  Physical infrastructure Challenges •  Innovation & IP protection •  Tax burden •  Lower productivity •  Regulatory inefficiency •  Transport costs to U.S.

73

Areas to watch out •  Investment in strategic industries •  Slowing domestic growth •  Greater emphasis on energy and

environment •  Improving education •  Rising labor costs



the U.S. is the #1 destination for foreign direct investment

Source: UNCTAD World Investment Report

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0 19

90

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

FDI S

tock

, $Tr

illio

ns

France Germany United Kingdom United States China* Russia Netherlands

74


foreign investment in the U.S. grows

Source: U.S. Bureau of Economic Analysis

0

200

400

600

800

1,000 19

85

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

$Bill

ions

U.S. Direct Investment Position Abroad Foreign Direct Investment Position in the U.S.

75


•  rising wages in China

•  decreasing availability of both low & high skill labor in China

•  reduced energy costs in U.S.

•  IP and piracy/counterfeiting losses in China

•  high rate of technology advancement is shortening the time-interval of new product demand

•  increases total cost of transportation (longer distances, etc)

•  ability to efficiently integrate suppliers

cost advantages (real & perceived) of offshoring production are diminishing

76


manufacturing labor costs in the U.S.

Source: Report on The Structural Cost Of U.S. Manufacturing. October, 2011

$48.93 $44.08

$41.36

$35.94 $32.42

$29.83

$24.71

$18.53 $15.80

$10.70

0.00

10.00

20.00

30.00

40.00

50.00

60.00

77


US labor market is the most attractive of all major developed world manufacturers

0

20

40

60

80

100

120

140

160

180

Germany France Italy U.K. Japan 0

1

2

3

4

5

6

7

8

9

10

Germany France Italy U.K. Japan

Labor costs higher in other major manufacturing economies

Productivity adjusted wages (indexed)

U.S.

Source: International Labor Organization, Economist Intelligence Unit, Fraser Institute for Economic Freedom, BCG

U.S. benefits from a relatively flexible labor market

Overall labor market regulation

World Rank 112 94 72 15 14

U.S. 3


0

5

10

15

20

25

30

35

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Fully

load

ed fa

ctor

y-w

orke

r wag

es ($

/hou

r)

Source: Economist Intelligence Unit, U.S. Bureau of Labor Statistics, BCG

China’s wages are growing rapidly

Ratio of average Chinese wages to U.S. wages

17% 9%

4% 3%

U.S. wages

2014 2015

Chinese wages


abundant natural gas provides a huge cost advantage for U.S. based manufacturers

0

50

100

150

200

250

300

350

400


Natural gas prices in other major manufacturing economies (indexed)

U.S.

Source: International Energy Agency, BCG

0

50

100

150

200

250

300

350

400

450


Industrial electricity prices are lower in the U.S. (indexed)

0 U.S.


0

20

40

60

80

100

120

140

U.S Germany France Italy U.K. Japan China

Other Electricity Natural Gas Labor Productivity

U.S. becoming one of the developed world’s lowest cost economies

Average projected manufacturing costs of the major exporting countries compared to the U.S. 2015

Source: U.S Census Bureau, U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, International Labor Organization, BCG


U.S. manufactures nearly 75% of what it consumes

Food & beverages

Petroleum& chemicals

Wood Products

Paper products

Glass, stone,

minerals

Plastics, rubber

Chemicals

Furniture Primary metal manufacturing

Manufactured goods consumed in the U.S. by sector, 2010 (%)

Transportation Goods

Textiles, fabrics

Machinery Appliances, electrical

equipment

Computers, electronics

Apparel, footwear,

accessories

Fabricated metals

GlGl Misc.

Source: U.S. Census Bureau, U.S. Bureau of Economic Analyses, BCG


7 industry clusters are becoming more attractive in the U.S.

Logistics costs as a share of product price

Source: U.S. Department of Transportation, U.S. Census Bureau, U.S. Bureau of Economic Analysis, BCG

Labo

r cos

ts a

s a

shar

e of

tota

l pro

duct

cos

ts

High

High

Low


attractive industries account for nearly $2 trillion of U.S. consumption and nearly $200 billion in imports from China

Industry Value of goods consumed

Imports from China

Transportation goods

$582 B $6 B

Computers & electronics

$467 B $122 B

Fabricated metals $262 B $10 B

Machinery $251 B $16 B

Plastics and rubber $170 B $9 B

Appliances and electrical equipment

$134 B $25 B

Furniture $75B $13 B

Source: U.S. Census Bureau, U.S. Bureau of Economic Analysis, BCG

electrical eqqquippppppppmentFurniture $75B $13 B


recent news of interest

Ikea awarded Sauder Woodworking Co. of Archbold, Ohio, a 5 year contract. The partnership will create at

least 150 new jobs and involve an equipment investment of over $13 million by Sauder.


86

key take-aways •  change is constant and faster than ever •  unprecedented appetite for resources •  manufacturing is the greatest innovation in history •  manufacturing will continue to change rapidly •  U.S. faces challenges & opportunities while manufacturing

more important than ever •  manufacturing competitiveness tilting towards the U.S.

-  innovation -  labor and productivity -  energy

if we play it smart, we’re look at another century of American manufacturing excellence and leadership


Thank you

JJack McDougle President & Founder

Blutre Strategies, Inc.

Documents

The Evolution and Future of Manufacturing …Valley of Death Zones Valley of Death Zones U.S. Advantage China Advantage Illustrative and signals bulk of investment focus. Exceptions