WEF MOB FutureManufacturing Report 2012

7/27/2019 WEF MOB FutureManufacturing Report 2012

1/84

The Future o ManuacturingOpportunities to drive

economic growth

A World Economic Forum Reportin collaboration with Deloitte Touche Tohmatsu Limited

April 2012


2/84

Project Consultative Group

The Project Consultative Group comprises members o the projectTask Force (senior executives rom Forum Partner companies) as wellas members o the Forums Global Agenda Council on Advanced

Manuacturing, who served an advisory role to this project, providingtheir input through conerence calls, individual interviews and a projectworkshop in London. The World Economic Forum would like to expressits gratitude to all the members o the Project Consultative Group.

Task Force

Peter BoschHead o Strategy, Production and LogisticsVolkswagen AG

Mairead LaveryVice-President, Strategy, Business Development andStructured FinanceBombardier

Trevor Mann

Senior Vice-President, Manuacturing, Purchasing, and SupplyChain Management, Nissan Europe

Jock-Mendoza WilsonDirector, International and Investor RelationsSystem Capital Management

Fernando Musa

Vice-President, Strategy and ProductivityBraskem SA

Edward Rogers

Global Strategy Manager, Corporate StrategyUPS

Rodolo Sabonge

Vice-President, Market Research & AnalysisPanama Canal Authority

Lisa Schroeter

Director, International PolicyThe Dow Chemical Company

Hemant Sikka

Senior Vice-President, Operations - Head o Manuacturing,AutomotiveMahindra & Mahindra Ltd

Francisco Soares-NetoVice-President, Manuacturing and EngineeringEmbraer SA

Subodh TandaleExecutive Director, Head o International BusinessBharat Forge Ltd

Andrew Weinberg

Chairman, StrategyBrightstar Corp.

Je Wilcox

Vice-President, Engineering, Corporate Engineering andTechnology

Lockheed Martin Corporation

Mike YonkerVice-President, Product Engine InnovationNike Inc.

Global Agenda Council on Advanced Manuacturing

Odile DesorgesExecutive Vice-President, Engineering and Quality

Renault-SAS

Fadi FarraHead, Eurasia Competitiveness ProgrammeOrganisation or Economic Co-operation and Development(OECD)

Joo Carlos FerrazVice-PresidentBrazilian Development Bank (BNDES)

Bernd HuserHead, Corporate Department or Manuacturing Coordination,Production System Development and Investment PlanningRobert Bosch GmbH

Arun MairaMember, Manuacturing & TourismIndia Planning CommissionGlobal Agenda Council on Advanced Manuacturing Chair

Min MuDirector, Integrated Supply ChainHoneywell

Jun NiDirector, Manuacturing Research Center, Proessor,Manuacturing Science, Shien-Ming Wu Collegiate Proessor oManuacturing Science and Dean, University o Michigan,Shanghai Jiao Tong University Joint Institute; Global AgendaCouncil on Advanced Manuacturing Vice-Chair

Aloke PaliskarGlobal Head, ManuacturingMahindra Satyam Limited

Jean-Paul RodrigueProessor, Global Studies and GeographyHostra University

Gerry P. SmithSenior Vice-President, Global Supply ChainLenovo

Daniel Viederman

Chie Executive OcerVerit


3/84

3The Future of Manufacturing

John Moavenzadeh

Senior DirectorHead o Mobility

Industries - WorldEconomic Forum

Ronald Philip

Senior ManagerWorld EconomicForum

Craig A. Gi

Vice-ChairmanUS Leader,Consumer &Industrial Products

Deloitte UnitedStates (Deloitte LLP)

Amish Thakker

Project ManagerDeloitte UnitedStates (DeloitteConsulting LLP)

Over the past several decades, the globalization o themanuacturing ecosystem has driven more change and impactedthe prosperity o more companies, nations and people than at anytime since the dawn o the Industrial Revolution. Nations around theworld have taken part in and beneted rom the rapid globalization oindustry and expansion o manuacturing. Globalization omanuacturing has been a key driver o higher-value job creation anda rising standard o living or the growing middle class in emergingnation economies. This has dramatically changed the nature ocompetition between emerging and developed nations as well asbetween companies. Recent research conrms manuacturing hasbeen immensely important to the prosperity o nations, with over70% o the income variations o 128 nations explained by dierencesin manuactured product export data alone.

A number o actors have enabled this rapid globalization, including asignicant change in geopolitical relations between East and West,

the widespread growth o digital inormation, physical and nancialinrastructure, computerized manuacturing technologies, and theprolieration o bilateral and multilateral trade agreements. Theseactors, along with others, have permitted the disaggregation osupply chains into complex global networks allowing a company tointeract in the design, sourcing o materials and components, andmanuacturing o products rom virtually anywhere while satisyingcustomers almost anywhere.

While digital technology and ree trade prolieration will continue toenable the fattening o the world and the globalization omanuacturing supply chains, the dominant actors that shaped thedisaggregated supply chains we nd today will not be the same asthose that carry us through the next several decades. The global

environment is changing. Many emerging economies used bymultinationals as locations o low-cost labour, have developedsignicant manuacturing and innovation capabilities permitting themto produce increasingly advanced manuactured products. At thesame time, these economies have begun to experience acorresponding escalation in wages and costs, ollowing in theootsteps o their developed nation counterparts. Greater prosperityand higher wages are helping drive an increased ability, and desire,to consume by these growing middle classes, making them muchmore an exciting market o new consumers and much less a sourceor low-cost labour.

With the seeds planted by these multinationals, and the opportunityto serve these new markets, powerul new competitors are growing

every day. This will prooundly reshape manuacturing supply chainsover the coming several decades. But this reshaping will also beinfuenced by complex macroeconomic and geopolitical challenges,including exposure to currency volatility, sovereign debt pressuresand emerging protectionist policies o many countries to gain accessto emerging and prosperous new markets. All o these actors aredriving more localized manuacturing supply chains.

Contents Executive Summary

3 Executive Summary

6 Introduction

9 Section 1: ManuacturingsGlobalization

33 Section 2: The New Calculus oManuacturing

43 Section 3: Future Competition:Resources, Capabilities and PublicPolicy

78 Acknowledgements

80 End Notes


4/84

4 The Future of Manufacturing

Aordable clean energy strategies and eective energy policieswill be top priorities or manuacturers and policy-makers, andserve as important dierentiators o highly competitive countries

and companies.By 2035 the US Energy Inormation Administration expects worldenergy consumption will more than double, rom a 1990 baseline,to roughly 770 quadrillion Btu, and outpace the increase inpopulation over the same time period. Demand or and cost oenergy will only increase with uture population growth andindustrialization. Environmental and sustainability concerns willdemand that nations respond eectively and responsibly to theuture energy challenge. All nations will be seeking competitiveenergy policies that ensure aordable and reliable energy supply.All manuacturing sectors will be orced to seek new ways omanuacturing, rom energy ecient product designs to energyecient operations and logistics. Collaboration between

company leaders and policy-makers will become an imperative tosolve the energy puzzle.

The ability to innovate, at an accelerated pace, will be the mostimportant capability dierentiating the success o countries andcompanies.

Companies regarded as more innovative grew net income overtwo times aster and their market capitalization nearly two timesaster rom 2006 to 2010 compared to their non-innovativecounterparts. Countries that are more successul at osteringinnovation perorm better, whether looking at GDP or GDP percapita. Companies must innovate to stay ahead o competition,and must be enabled by inrastructure and a policy environmentthat better supports university/research lab breakthroughs in

science and technology and investment budgets that permitdedicated pursuits. In the 21st century manuacturingenvironment, being able to develop creative ideas, addressingnew and complex problems and delivering innovative productsand services to global markets will be the capabilities mostcoveted by both countries and companies. But even moreessential or innovation to fourish will be access to a workorcecapable o driving it.

Talented human capital will be the most critical resourcedierentiating the prosperity o countries and companies.

An estimated 10 million jobs with manuacturing organizationscannot be lled today due to a growing skills gap. Despite the

high unemployment rate in many developed economies,companies are struggling to ll manuacturing jobs with the righttalent. And emerging economies cannot uel their growth withoutmore talent. Access to talent will become more important andmore competitive. Todays skills gap will not close in the nearuture. Companies and countries that can attract, develop andretain the highest skilled talent rom scientists, researchers andengineers to technicians and skilled production workers willcome out on top. In the race to uture prosperity, nothing willmatter more than talent.

While we expect the orces that initiated this rapid globalization tocontinue, we also see some clear and important new trendsemerging that will dene manuacturing and competition over the

next 20 years. These trends will require the attention andcollaboration o policy-makers, civil society and business leaders:

The inrastructure necessary to enable manuacturing to fourishand contribute to job growth will grow in importance andsophistication and be challenging or countries to develop andmaintain.

Investing in eective inrastructure has been essential oremerging nations to be included as a potential location bymultinationals and thus participate in the benets derived rom theglobalization o manuacturing. This trend will intensiy in theuture. Reinvestment in maintaining competitive inrastructure willbecome critical or developed nations to keep pace. Publicunding support or inrastructure development will be a challenge

or developed nations given the expected long tail on sovereigndebt issues. Eective public-private partnerships will be essentialto address this. While inrastructure alone will not lead directly tobest-in-class manuacturing, a serious lack o inrastructure or asteadily decaying inrastructure will negatively impact a nationsmanuacturing competitiveness and create serious obstacles orthe supply chain networks o global multinationals.

Competition between nations to attract oreign direct investmentwill increase dramatically raising the stakes or countries andcomplicating the decision processes or companies.

Annual oreign direct investment (FDI) infows or manuacturingmore than doubled to average US$ 350 billion rom 2006 through

2009, and manuacturing accounted or 26% o global FDIprojects in 2010, generating 1.1 million jobs. FDI is a means tobring manuacturing and research acilities to a country, buildinginrastructure in public-private partnerships and leveraging themultiplier eect o manuacturing on service jobs across thenation. As public unding challenges mount, the competitionbetween nations or FDI will increase dramatically. Membership inthe World Association o Investment Promotion Associations hasincreased by 2.5 times since 2001. For companies, the myriad opotential investment options will be increasingly hard todierentiate and navigate. But investments in the wrong locationand not contributing enough to truly advance a companys globalcompetitive capabilities will have long lasting negativeconsequences and be increasingly hard to unwind.

Growing materials resources competition and scarcity willundamentally alter country and company resources strategiesand competition, and serve as a catalyst to signicant materialssciences breakthroughs.

Demand or rare earth elements increased sixold rom 2009 to2010, with China supplying 95% o global demand. In the shortterm, countries and companies react to rising scarcity and priceso materials, such as rare earth elements, by stockpiling orhedging. In the longer term, success will be marked bydiscoveries o alternative elements, investing in latent supplyaccess, breakthroughs in materials sciences and more ecientpractices governing the use o materials.

Executive Summary


5/84


The strategic use o public policy as an enabler o economicdevelopment will intensiy resulting in a competition between

nations or policy eectiveness and placing a premium oncollaboration between policy-makers and business leaders tocreate win-win outcomes.

With competition increasing or so many resources andcapabilities, and with the prosperity o nations hanging in thebalance, policy-makers will be actively looking or the rightcombination o trade, tax, labour, energy, education, science,technology and industrial policy levers to generate the bestpossible uture or their citizens. Despite many instances o ailedindustrial policies in history, policy-makers are increasingly turningto intervention in an attempt to infuence outcomes andaccelerate manuacturing sector development with several G20countries, including China, India and Brazil, recently coming out

with industrial policies. This means that policy-makers, in acomplex global network o interdependencies, will need tocareully pull the right levers, at the right time in a balancedapproach and mindul o unintended consequences. Companieswill need to be more sophisticated and engaged in theirinteractions with policy-makers to help strike the balancedapproach necessary to enable success or all.

In the uture, nations will increasingly compete with each other todrive high-value job creation and harness the advantages o aglobally leading manuacturing innovation ecosystem.Manuacturing companies current powers and new entrants will engage in an intensiying, talent-driven innovation competitionto dominate protable markets or new and existing customers. As

this unolds, both government policy agendas and manuacturingcompany strategies will be shaped by growing competition aroundcommon resources and capabilities. The involvement o policy-makers in shaping outcomes will steadily grow and requirestronger collaboration with business leaders to achieve success.

Andreas Renschler, Member o the Board oManagement, Daimler and Chie ExecutiveOcer, Daimler Trucks and Daimler Buses,Daimler AG and Robert Z. Lawrence,AlbertL. Williams Proessor o Trade and

Investment, Harvard Kennedy School,Harvard University share comments inDavos-Klosters

Executive Summary


6/84


Rob Davies, Minister o Trade and Industry o South Arica, Ricardo

Hausmann, Director, Center or International Development, HarvardKennedy School, Harvard University, and Siegried Russwurm,Member o the Managing Board and Chie Executive Ocer,Industry, Siemens share comments in Davos-Klosters

Project Methodology

With a call to action rom stakeholders at the 2011 Annual Meeting,

in January 2011 the World Economic Forums Mobility Industriesteam initiated the Future o Manuacturing project to address howthe global manuacturing ecosystem is evolving. The projectexplored the pivotal drivers o change, today and in the uture, togenerate insights and a platorm or inormed dialogue betweensenior business leaders and policy-makers.

For this rst phase o the project, the objective was to create adata-driven narrative regarding the state o the globalmanuacturing ecosystem and the actors that would be most likelyto shape the uture o competition or both countries and companies.The nal report provides the oundation and launching point or morespecic, recommendations oriented research eorts in a secondproject phase. The report was developed using an iterative process

with the relentless support o global project stakeholders.

The project team, made up o manuacturing industry experts romthe World Economic Forum and Deloitte LLP, used a combination oprimary and secondary research including an extensive review okey academic and industry literature, select interviews with morethan 30 manuacturing business, academia, and policy leaders, andnumerous virtual Task Force calls. This eort also beneted romgaining invaluable eedback rom other concurrent World EconomicForum project teams, including the Forums Global Agenda Councilon Advanced Manuacturing. Industry, policy, and academicstakeholders also interacted during seven ace-to-ace globalworkshops in the ollowing locations:

New York, USA: 7 April 2011

Rio de Janeiro, Brazil: 27 April 2011

Dalian, China: 15 September 2011

Abu Dhabi, UAE: 11 October 2011

Mumbai, India: 12 November, 2011

London, UK: 1 December 2011

Davos, Switzerland: 27 January 2012

These workshops allowed or more substantive dialogue andexchange o expert perspectives, and included critical region andcountry specic manuacturing industry challenges and

opportunities, which helped shape this report.


7/84


Over the past several decades, manuacturing has experiencedsignicant change as rapid globalization shited a signicantproportion o manuacturing capacity rom developed to emerging

economies and substantial new markets and new competitorsemerged. The globalization o manuacturing was enabled by acombination o orces coming together simultaneously, including asignicant change in geopolitical relations between east and west,the widespread growth o digital inormation, physical and nancialinrastructure, computerized manuacturing technologies, and theprolieration o bilateral and multilateral trade agreements.

These actors, along with others, have permitted the disaggregationo supply chains into complex global networks allowing a companyto interact in the design, sourcing o materials and components, andmanuacturing o products rom virtually anywhere while satisyingcustomers almost anywhere.

The manuacturing industry is o great interest to investors andbusiness leaders hoping to take advantage o the opportunitiespresented by rapid globalization and the signicant growth o themiddle class in emerging markets, as well as serving high-valuecustomers in developed markets with innovative new products andservices.

Policy-makers, still coping with the atermath o the nancial crisisand hoping to stimulate high-value job growth and create sustainedeconomic recovery, are keenly interested in the benets o having aglobally competitive manuacturing industry. While the changes thathave occurred in the recent past are important to understand, it isthe uture o competition in the manuacturing industry that has themost interest to both business leaders and policy-makers.

The Future o Manuacturing project represents a nearly 12-monthcollaboration among senior manuacturing executives, policy-makers, and subject matter experts. It is intended to provide aoundation upon which more detailed research will take place. Ourresearch delved into how the global manuacturing ecosystem isevolving and the trends most impacting global manuacturingcompetitiveness in the uture, as depicted in the ramework shown inFigure 1, including market orces, such as macroeconomic anddemographic orces, as well as the key resources and capabilitieswhere competition will occur or both companies and countries inthe uture. Finally, we conclude with a brie look at the role o publicpolicy and its impact on the manuacturing competitiveness onations and businesses. The research is complemented by insightsrom seven project workshops at various global locations.

This report comprises three sections:

Section 1: Manuacturings Globalization identies the key drivers

o the change that have occurred over the past 20 years and theimpact and implications or manuacturers that have resulted. Inaddition, we explore whether manuacturing still matters, lookingat some compelling new research, and conclude withoutquestion that yes, manuacturing does indeed matter.

Section 2: The New Calculus o Manuacturing explores some othe most important recent trends that will alter the nature omanuacturings globalization over the next ew decades andhow this will again change manuacturing supply chains.

Section 3: Future Competition: Resources, Capabilities andPublic Policy examines the key areas where both countries andcompanies will ace the most intense competition in the uture,and where both policy-makers and business leaders will need to

collaborate in the development o the solutions necessary tobenet both private enterprises and the well-being o nations.

Introduction

Introduction

Government Forces

Market Forces

Resources CapabilitiesManufacturing

Competitiveness

Human

Materials

Energy

Financial

Innovation

Technology

Demographic Macroeconomic

EnergyPolicies

Economic, Trade,Labour, Financial

& Tax Policies

Science &Technology

Policies

EducationPolicies

Manufacturing& Infrastructure

Policies

Infrastructure

Process

Figure 1: Global Manuacturing Competitiveness Framework

Source: Adapted rom Deloitte and Council on Competitiveness: What separates the best rom therest? Deloitte Touche Tohmatsu 2011


8/84


9/84


Section 1:ManuacturingsGlobalization

In this section, we explore a number o the key actors that havehelped shape the current global manuacturing ecosystem, includingthe widespread growth o digital inormation inrastructures andcomputerized manuacturing technologies, and the prolieration o

bilateral and multilateral trade agreements, providing a betterunderstanding o globalization rom a manuacturing perspective aswell as dening our launching point or considering the uture omanuacturing. But rst, we seek to understand whether.manuacturing still matters to the economic development andprosperity o nations beore exploring signicant recent changes andcontemplating the uture o manuacturing.

Does Manuacturing Still Matter?

Manuacturings share o global value added has declined steadilyover the past nearly 30 years as the global value added o serviceshas grown. In 1985, manuacturings share o global value addedwas 35%. By 2008, it had declined to 27%. Services grew rom 59%to 70% over the same period. This trend has largely been driven bydeveloped country economies with typically higher wages.According to a recent United Nations Industrial DevelopmentOrganization (UNIDO) report, this can be explained by the decreasein relative prices o consumption goods, in conjunction with thesimultaneous growth o the demand or services.

An added explanation is the oten-cited multiplier eect omanuacturing on services jobs. The US Department o Commerce,Bureau o Economic Analysis indicates that manuacturing has ahigher multiplier eect on the US economy than any other sectorwith US$ 1.40 in additional value added in other sectors or everyUS$ 1.00 in manuacturing value added. I manuacturing is having amultiplier eect on services while simultaneously reducing the prices

o manuactured goods, services should indeed be growing morerapidly, assuming manuacturing is also growing.

Since the dawn o the Industrial Revolution, manuacturing has beentransormative or countries and companies. Those who couldharness its power have achieved great prosperity and protability.High paying middle-class job creation, driven by manuacturing

ollowing World War II, established major industrial powers in NorthAmerica, Western Europe and Asia, with the United States, Germanyand Japan emerging as the major global manuacturing leaders andreaping the rewards: steady GDP growth, a prosperous middleclass, and a rapidly growing services sector uelled in large part bythe multiplier eect o the manuacturing innovation ecosystem.

More recently, however, over the past several decades, a rapidglobalization has occurred in the global manuacturing ecosystemdriving more change and impacting the prosperity o morecompanies, nations and people than at any time in the last 100years. A signicant amount o manuacturing has moved romdeveloped nations to emerging economies and this rapid globalexpansion o manuacturing has dramatically changed the

competitive landscape or manuacturers. Nations around the worldhave taken part in and beneted rom the rapid globalization oindustry and expansion o manuacturing. Recent research conrmsmanuacturing has been immensely important to the prosperity onations, with over 70% o the income variations o 128 nationsexplained by dierences in manuactured product export dataalone.1

Globalization o manuacturing has been a key driver o higher-valuejob creation and a rising standard o living or the growing middleclass in emerging economies, including China, India, South Korea,Mexico and Brazil. Developed nations have beneted rom lower-cost products driven by the lower wages used or production inemerging markets. But this has also dramatically changed the

relationship between emerging and developed nations, creatingcompetition as well as co-dependency.


10/84


Economic Complexity and Manuacturing

The debate has carried on over the past 30 years regarding therelative importance o manuacturing versus services. The great

recession o 2008-2009 caused many policy-makers and businessleaders to careully examine the real value added o making thingsand the impact o manuacturing and manuacturing innovation oneconomic growth and job creation. Recent research rom Harvardand MIT by Ricardo Hausmann and Csar Hidalgo provides acompelling case that manuacturing does indeed matter. Usingexport trade data or only manuactured goods rom 128 countriesover the past 60 years, they can explain a signicant portion (over70%) o the income variations in countries using their denition oEconomic Complexity.2

For a more detailed discussion o Hausmanns and Hidalgosresearch, please see their essay Economic Complexity and The

Future o Manuacturing on the ollowing pages. In their research,economic complexity is directly related to manuacturing knowledgeand capabilities and they demonstrate that once a country begins tomanuacture goods, thus building knowledge and capabilities, itspath to prosperity becomes much easier. Furthermore, they showthat the more complex the goods and the more advanced themanuacturing process, the greater the prosperity.

This research looks at both the composition and quantity o anations manuacturing. Hausmann and Hidalgo have created ameasure o the sophistication o an economy based on how manyproducts a country exports successully and how many othercountries also export those products. They argue that sophisticatedeconomies export a large variety o exclusive products that ew

other countries can make. To do this, these economies haveaccumulated productive knowledge and developed manuacturingcapabilities that others do not have. Manuacturing capabilities canbe combined in dierent ways to produce dierent products andcreate dierent networks, some more sophisticated or complex thanothers.

While complexity is normally something manuacturing organizationstry to avoid, complex economies based on sophisticated networkso manuacturing knowledge, capabilities, and product sets are agood thing.

Hausmann and Hidalgo not only show that income or prosperity andsophistication or economic complexity rise in tandem, but also thatthe linkage between manuacturing, economic complexity andprosperity is highly predictive, with economic complexity beingmuch better at explaining the variation in incomes across nationscompared to any other leading indices (Figure 2). Economiccomplexity, and thereore manuacturing, is closely related to acountrys level o prosperity: the more advanced manuacturingcapabilities and more advanced product sets, the higher theprosperity.

Importantly, they demonstrate that economies nd it easier to master

new products that are similar to ones they already make. It is easierto graduate rom assembling toys to assembling televisions than tojump rom textiles to aerospace. They call the easibility o thesejumps adjacent possibilities. In their maps o the industriallandscape o a nation, similar products using similar knowledge andcapabilities are more closely related than others and cluster tightlytogether while unrelated products stand apart. Using their maps youcan see that an economy that already exports a ew products in thetightest clusters can diversiy quickly, hopping rom one closelyrelated product to the next. Manuacturing knowledge andcapabilities can breed new knowledge and capabilities and thusnew, more advanced products when the right jumps are made.

Economic Complexity Index controlling for initial income and proportion of natural resource exports percapita in logs [2008]

Incomepercapitacontrollingforinitialincomeandproportionof

naturalresourceexportspercapitainlogs[2008]

Shows the relationship between economic complexity and income per capitaobtained after controlling for each countrys natural resource exports. After

including this control, through the inclusion of the l og of natural resource

exports per capita, economic complexity and natural resources explain 73% of

the variance in per capita income across countries.

Figure 2: Economic Complexity Index Contribution to R3

Source: Hausmann, R., Hidalgo, C.A. et al. (2011) The Atlas o Economic Complexity: Mapping Paths to Prosperity.Available at: http://www.cid.harvard.edu/documents/complexityatlas.pd

Section 1: Manuacturings Globalization


11/84


Product Space Network

Reading Tree Maps and Product Space Maps

Tree Maps (rectangles) represent the composition o the countryseconomy with each colour rectangle depicting a separate productbeing exported and with the size o the rectangle representing thepercentage that product constitutes o total country exports.Product Space Maps on the other hand appear as complex networknodes. Products requiring ewer and less complex capabilities areon the periphery o the map and are smaller and typically lessconnected to other nodes. The centre or core o the Product SpaceMap contains products requiring more advanced capabilities, suchas complex machinery and automobiles. At the core, the nodes arelarger and typically more connected, indicative o the highercomplexity level o such products. In the Product Space Map, onlythe nodes with dark/black rings around them represent the products

that country is exporting. The Product Space Map is the same orevery country, much like a map o the world. Only the nodes circledin black change, depicting that countrys unique combination oproducts being manuactured or export.

Finally, their product maps, displayed in colourul detail or 128countries showing development over time, in The Atlas o EconomicComplexity, Mapping Paths to Prosperity, illustrate that a very largenumber o economies are growing their manuacturing capabilitiesand the sophistication o their product sets and thus advancing thecomplexity o their economies. It is possible to slide backwards,particularly or developed nations that do not keep developing theirmanuacturing knowledge, capabilities and product sets. However,almost all nations are moving orward (albeit at dierent rates),

suggesting not only that manuacturing matters, but that a very largenumber o nations are becoming competitors or manuacturingproducts and advancing their manuacturing knowledge andcapabilities. Based on their research, one conclusion seems veryclear: a great competition is underway between most nations bothemerging and developed or the benets that their economies canderive rom manuacturing.

Source: Hausmann, R., Hidalgo, C.A. et al. (2011) The Atlas o Economic Complex ity: MappingPaths to Prosperity. Available at: http://www.cid.harvard.edu/documents/complexityatlas.pd


Product Space Network


12/84


1968

1988

2008

Source: Hausmann, R., Hidalgo, C.A. et al. (2011) The Atlas o Economic Complexity: Mapping Pathsto Prosperity. Available at: http://www.cid.harvard.edu/documents/complexityatlas.pd


Figure 3: Thailand Product Space and Tree Map

Economic Complexity in Action: Thailand as a Case Example

Using Thailand as an example, representing one o the astestgrowing economies since 1968, Hausmanns and Hildalgos very

visual Product Space Maps and Tree Maps show the state o thateconomy in 1968, 1988 and 2008 (Figure 3) and clearly demonstrategrowing economic prosperity, increasing economic complexity,more advanced manuacturing capabilities, and more advancedproducts or export.

In 1968, competitive exports refected lower complexity andclustered around the periphery o the Product Space Map.Competitive positioning, while ocused on agricultural economy,did include the capabilities that would ultimately drive theeconomy toward more advanced products.

By 1988, competitive exports refected an increased complexityand entry into key high-complexity product communities (e.g.electronics, machinery, construction material and equipment,and aircrat). Positioning in 1988 enabled entry into increasinglyvaluable industries and prepared Thailand or an improved role inproducing and exporting more complex, higher-value productsand participating in higher value chains.

In 2008, competitive exports refected considerably highercomplexity as evidenced by dozens o products being exportedrom the core o the Product Space Map. Knowledgeaccumulation and capability development have allowed Thailandto develop an increasingly complex economy now competitivelymanuacturing and exporting complex machines andelectronics.


13/84


A laissez-aire disregard o the government-provided requirementsor competitive manuacturing, justied under the oten repeatedprohibition against picking winners, is bound to guarantee that a

country will end up losing the march towards prosperity by makingpublic-private cooperation impossible in constructing the productiveecosystem.

The Atlas o Economic Complexity places each country in theproduct space. It presents what it is currently able to do and whichactivities lay in the adjacent possible. We measure how ar is eachnon-existent activity rom the current knowledge set o the country,which should aect how challenging it would be to move in thatdirection. We also measure how potentially protable each o theseactivities are, relative to the current set o successul exports andhow strategic each move would be, in terms o how many otheroptions would a successul move open up.

Ultimately, we view economic development as a social learningprocess, but one that is rie with pitalls and dangers. Countriesaccumulate productive knowledge by developing the capacity tomake a larger variety o products o increasing complexity. Thisprocess involves trial and error. It is a risky journey in search o thepossible. Entrepreneurs, investors and policy-makers play aundamental role in this economic exploration. Manuacturing,however, provides a ladder in which the rungs are more convenientlyplaced, making progress potentially easier.

Today, the improvement o transportation and telecommunicationservices has allowed production chains to be split up geographically.This means that to get going, locations need to have ewerpersonbytes in place than in the past. Design, procurement,

marketing, distribution and manuacturing need not be done in thesame place, meaning that places with ew personbytes can moreeasily get their oot through the door and then add unctions moregradually. This has made much more o the manuacturing spaceaccessible to more countries, with the concomitant reduction omanuacturing jobs in the advanced countries.

Our guess is that this process is bound to continue at an acceleratedpace, as more and more middle-income countries get into a positionwhere they can occupy more o the product space, as China,Thailand and Turkey have done. For the advanced countries,inventing new products at an accelerated pace, and controlling theinternational networks that help put together these products, is whatwill allow them to maintain their currently high level o income, albeit

with a potential increase in inequality

By providing maps, we do not pretend to tell potential explorerswhere to go, but to pinpoint what is out there and what routes maybe shorter or more secure. We hope this will empower theseexplorers with valuable inormation that will encourage them to takeon the challenge and thus speed up the process o economicdevelopment. Maps are available at atlas.media.mit.edu.

Ricardo Hausmann is Director o Harvards Center or International

Development and Proessor o the Practice o Economic

Development at the Kennedy School o Government.

Csar A. Hidalgo is Assistant Proessor at the Massachusetts

Institute o Technology (MIT) Media Laboratory, the Asahi BroadcastCorporation Career Development Proessor, and a aculty associate

at Harvards University Center or International Development.

Essay Economic Complexity and TheFuture o Manuacturing

by Ricardo Hausmann and Csar A. Hidalgo

The product space can be used to predict the evolution o aneconomy because countries are more likely to start exportingproducts that are connected in the product space to the ones thatthey already export. We care about the structure o the productspace because it aects the ability o countries to move into newproducts. Products that are tightly connected share most o therequisite personbytes (the amount o knowledge a person canknow), and it is easier or countries to diversiy ollowing the links inthe product space. A highly connected product space, thereore,makes the problem o growing the complexity o an economy easier.Conversely, a sparsely connected product space makes it harder.

In our analysis we nd that most manuactured goods are networkhubs, meaning that they tend to be connected to many other goods.This is a strong dierence between manuacturing and otheractivities like mining, oil and gas, and agriculture. At the lower end omanuacturing, garments constitute a highly connected cluster in theproduct space. A country that is successul at making a ew kinds ogarments will nd it relatively straightorward to diversiy into others.A similar pattern is observed or higher-end products such asmachinery, electronics, chemicals and pharmaceuticals. This is sobecause the productive knowledge required to make some o theseproducts is relatively similar, making them adjacent in the productspace. Manuacturing creates a set o stepping-stones, or a stairwayto development, that provides a more continuous progression orungs than other economic activities.

This is one o the reasons why most o the sustained growthmiracles o the past 60 years have been manuacturing miracles.Think o Japan, Korea, China, Thailand or Turkey. This is also thereason why so many resource-rich countries have had troubletransorming their natural wealth into a sel-sustaining growthprocess. The personbytes required to successully extract mineralsdo not lend themselves as easily or alternative use. It is also thereason why so many developing countries are not catching up: theirproductive knowledge is in very peripheral, poorly-connectedproducts, making it hard or them to advance.

This is not to say that manuacturing is easy. Quite the contrary. It ishard to get started because ecient manuacturing requires a large

network o connected activities, and their personbytes. Materialsneed to be able to get in and out, through ports, airports and roads.People with a diverse set o skills need to be able to go to work andback, a act that requires good urban transportation and anexperienced, capable and intellectually diverse population. Powerneeds to be generated and made available. Water and watertreatment needs to be provided. Worker and environmental saetymust be assured. Security needs to be adequate. Appropriatesections o a city need to be authorized to host dierent activitiesand inrastructure.

The list goes on: nance, labour training, custom services,telecommunications, day-care acilities, etc. This manmadeecosystem cannot pre-exist the development o manuacturing. It

needs to co-evolve with it. Moreover, while many o the inputs that amanuacturing plant needs can be purchased rom other privaterms, many elements o the ecosystem are either provided by orunder the control o governments.



14/84


Implications For and o Economic Complexity Research

Hausmanns and Hidalgos work has numerous implications in thecontext o manuacturing and the linkage to economic growth. For

countries:

The advancement o manuacturing capabilities is directly linkedto increasing economic prosperity or a nation and its citizens.Proper positioning and movement within the product spacedetermines the ability to accelerate economic development.

Many emerging economies are primed or rapid growth, enabledby the complex economic inrastructures they have developedand the manuacturing knowledge and capabilities accumulated.Emerging nations should ocus on directing policy and investingresources in building capabilities and in product groups that arethe adjacent possibilities.

Developed nations must also continue to advance their

manuacturing capabilities and knowledge in order to innovate,create ever more sophisticated economies, and to staycompetitive.

For companies, this research also has signicant implications.

As globalization and economic development make an increasingarray o locations appear attractive, better understanding theability o a country to make the next adjacent possible step toongoing competitiveness, including the critical development ohuman capital and inrastructure among other actors, will beneeded.

As more countries develop advanced manuacturing capabilities,more competitors are being created that will someday rise up

and challenge todays market leaders, requiring ongoinginvestments in innovation and new products and new markets tomaintain and improve competitiveness.

While the growth o advanced research and manuacturing hubsin emerging markets creates new sources or both talent andcustomers, the higher costs typically seen in developedcountries will surely ollow into these new complex economies.

For both countries and companies, there are broader implications.

Viewing existing capability sets through the economic complexitylens can create a competitive advantage or companies andcountries that understand how to use the inormation andnavigate through the product space.

As nations and companies build increasingly advancedmanuacturing capabilities, strategic decisions will become morecomplex and carry more risk or both countries, rom a policyperspective, and companies regarding everything rom locationdecisions to joint venture partners and sourcing and supplychain networks.

The proverbial bar will continue to be set higher and higher asadvanced manuacturing capabilities disseminate globally.

The Globalization o Manuacturing and the Rise o a NewGlobal Middle Class

A growing population is creating the oundation or new demand

centres in emerging economies

During the second hal o 2011, the global population surpassed the7 billion mark, representing considerable growth rom 1950, whenthe population stood at 2.5 billion. Should current rates o growthcontinue, the United Nations projects, on a medium ertility variant,that world population could exceed 8.9 billion inhabitants by 2050.2

Much o the growth is expected to take place in the developing world

Currently, 82% o the global population lives in the developing world,and through 2020 will account or 96% o the projected 766 millionincrease.4Asia and Arica, which account or 75% o the globalpopulation today, are orecast to make up 78% o the total by 2050.5

As the population grows, it will also get older and increasinglyurban.6

Manuacturing is helping drive signicant GDP growth in thedeveloping world

Economic growth, as represented by GDP, has been due in part to thegrowth o manuacturing in emerging countries. With the exception oGermany, manuacturing growth in developed nations, including theUnited States, Japan, the United Kingdom and Canada slowedconsiderably between 2000 and 2009 compared to the 1990 to 2000period, while manuacturing growth accelerated in most other nations inthe world, particularly in China. While Japans manuacturing GDP heldsteady in absolute terms, and the United States actually increased,

China passed all other nations in the world to become the worldslargest manuacturer in terms o GDP (Figures 4 and 5).

Donald Hepburn at Chatham House has recently authored a study,Mapping the Worlds Changing Industrial Landscape.7 whichhighlights the global shit in manuacturing over the past 20 plusyears, including the ollowing.

The dramatic shit o manuacturing to developing countries duein part to the rise o domestic industries as well as the relocationo industries rom the developed world as multinationals soughtlow cost labour rates to provide them with a cost advantage inglobal markets. On the whole, shares o world manuacturingvalue added have moved towards developing countries, at theexpense o industrialized countries (Figure 6).

The very rapid growth in value added in developing countriesrom 20002007 across all sub-sectors o manuacturing asopposed to developed nations (Figure 7).



15/84


BrazilCanada

ChinaFrance

Germany

Greece

India

Indonesia

Italy

Japan

Malaysia

Mexico

Philippines

Korea

Russia S Africa

Spain

Thailand

Turkey

UK

US

0

500

1000

1500

2000

2500

-10% 0% 10% 20%

Manufacturing GDP CAGR over 1990-2000

ManufacturingGDP,billionUSD,2

000

Manufacturing as % of

GDP in 2009 >30%

Manufacturing as % ofGDP in 2009 = 16-30%

Manufacturing as % of

GDP in 2009 30%Manufacturing as % ofGDP in 2009 = 16-30%

Manufacturing as % ofGDP in 2009


16/84


Figure 8: Share o World Manuacturing Value Added, by Sector (%)

Source: Hepburn, D. (2011) Mapping the Worlds Changing Industrial Landscape. Chatham House, Brieng Paper. Available at: http://www.chathamhouse.org/sites/deault/les/0711bp_hepburn.pd. Pg. 4

Share o world manuacturing value added by sectordemonstrates developing countries increased their share omanuacturing value added in 22 International Standard Industrial

Classication (ISIC) categories (Figure 8). Particularly rapid growth(more than 10% a year) occurred in base metals (e.g. steel), othertransport (e.g. railway rolling stock, ships, aircrat), TVs, machinery(both oce and actory), urniture and medical equipment.

The dominance o Asia during this period, which grew our to vetimes aster than Latin America Asia and Latin Americaaccount or most o developing-country manuacturing.

The signicant growth in Fortune Global 500 represented byBRIC companies since 1995, when there were only six, to 2000,when there were 18, nally to 2010, when there were 67 BRICcompanies on the list o 500.


Industrialized Countries Developing Countries

ISC Industry 2000 2007 2000 2007

15 Food & Bevs 70.0 62.1 30.0 37.9

16 Tobacco 40.4 27.2 59.6 72.8

17 Textiles 54.0 35.5 46.0 64.5

18 Apparel 63.9 40.8 36.1 59.2

19 Leather & ootwear 54.2 32.8 45.8 67.2

20 Wood products 84.3 78.9 15.7 21.1

21 Paper products 83.0 74.2 17.0 25.8

22 Printing & publishing 90.9 86.4 9.1 13.6

23 Petroleum 58.8 48.5 41.2 51.5

24 Chemicals 75.9 68.8 24.1 31.2

25 Rubber & plastics 74.7 63.9 25.3 36.1

26 Non-metallics 70.9 61.0 29.1 39.0

27 Basic metal 72.6 50.0 27.4 50.0

28 Fabricated metal 85.0 78.8 15.0 21.2

29 Machinery nec 85.9 75.8 14.1 24.2

30 Oce machinery 91.4 87.8 8.6 12.2

31 Elec machinery 77.8 58.9 22.2 41.1

32 Radio, TV etc 89.4 87.2 10.6 12.8

33 Medical 91.1 87.7 8.9 12.3

34 Motor vehicles 70.0 62.1 30.0 37.9

35 Other transport 40.4 27.2 59.6 72.8

36 Furniture 54.0 35.5 46.0 64.5


17/84


Prosperity is leading to the growth o a new middle class inemerging economies.

By 2030, China will account or a greater portion o the global GDP,

expressed in purchasing power parity, than both the United Statesand Organisation or Economic Co-operation and Development(OECD) Europe (Figure 9). India and South America will also see theirshares grow during that period.8 Indeed, a World Bank reportsuggests that by 2025, six emerging economies Brazil, China,India, Indonesia, South Korea and Russia will account or morethan hal o all global growth.9

Accompanying this shit in GDP will be the development o a newmiddle class in emerging economies. This is especially true in Chinaand India, where manuacturing has played a key role in increasinglevels o prosperity. Today, India and China account or a mere 5% oglobal middle class consumption, while Japan, the United States,and the European Union cover ully 60%.10 By 2025, those numbersare expected to equalize; by 2050, they will be fipped11 (Figure 10).Middle-class demand is expected to grow rom US$ 21 trillion in2009 to US$ 56 trillion by 2030, with 80% o that growth comingrom Asia.12

0

5000

10000

15000

20000

25000

30000

Billions2005USD

United States

United States

Canada

Canada

Mexico/Chile

Mexico/Chile

Japan

Japan

South Korea

South Korea

Australia/New Zealand

Australia/New Zealand

Russia

Russia

China

China

India

India

Middle East

Middle East

Africa

Africa

Central and South America

Central and South America

Brazil

Brazil

OECD Europe

OECD Europe

Figure 9: GDP by Region, 1990-2030, Expressed in Purchasing Power Parity, Reerence Case

Source: United States Energy Inormation Administration. (2011) Annual Energy Outlook 2011. Available at: www.eia.gov/orecasts/archive/aeo11/



18/84


As noted in the Chatham House report, growing populations andincomes in developing countries will account or most o the risingglobal consumer spending. Larger workorces will also keep uellingthe developing worlds emergence, while rapid innovation may helpthe developed world move up the value chain even as its pre-eminence is being challenged.

The geographical shit o the middle class has implications orsupply chains

The rise o demand centres in Asia, along with the typical costs thataccompany more developed nations, will likely increase localizationo production. Increasingly expensive logistics are leading somecompanies, such as Caterpillar in China, to turn to more localizedproduction.14 The erosion o labour-cost advantages is leading tomore capital-centric production. One company, Foxconn, hasannounced plans to use more robots to cope with rising labourcosts.15 The implication o these rapidly growing middle-classpopulation projections is that supply chains will need to respond togrowing demand and rising costs in the developing world

especially as those population centres mature and hundreds omillions o their citizens begin to enter the higher-consumptionmiddle class and become a driving orce behind the fow omanuactured goods around the world.16

According to a recent World Bank report, Global DevelopmentHorizons 2011 Multipolarity: The New Global Economy, thechanges will be elt everywhere: In many big, emerging economies,the growing role o domestic demand is already apparent andoutsourcing is already under way, said Hans Timmer, the WorldBanks director o development prospects. This is important or the

least developed countries, which are oten reliant on oreigninvestors and external demand or their growt.13 The report alsonoted the ollowing.

The growth o the new global middle class is underway andstarted with multinational corporations (MNCs) buildingoverseas, which ultimately sparked wage growth, and createdan environment conducive to developing the manuacturingcapabilities that will enable countries to continue to develop theireconomies.

The report also highlights the diversity o potential emergingeconomy growth poles, some o which have relied heavily onexports, such as China and South Korea, and others that putmore weight on domestic consumption, such as Brazil and

Mexico. With the development o a substantial middle class inemerging countries and demographic transitions underway inseveral major East Asian economies, stronger consumptiontrends are likely to prevail, which in turn can serve as a source osustained global growth.

Figure 10: Shares o Global Middle-Class Consumption 2000-2050

Source: Kharas, H. (2010) The Emerging Middle Class in Developing Countries. OECD Development Centre, Working Paper.Available at: http://www.oecd.org/dataoecd/12/52/44457738.pd Pg. 28-9


100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Others

E.U.

United States

Japan

Other Asia

India

China

2000

2003

2006

2009

2012

2015

2018

2021

2024

2027

2030

2033

2036

2039

2042

2045

2048

2050


19/84


Free Trade Prolieration Helps Open the Door to RapidManuacturing Globalization

Bilateral ree trade agreements serve as substitutes or a new global

accord

In order to enable complex economies to grow, access to globalmarkets and the ree movement o products are essential to driveprosperity or countries. Businesses depend on open access tomarkets to leverage their product innovations, serve new customersand grow. Most countries, however, have been better at recognizingthe benets o agreements than putting them into action. In act,beore 1980 very ew regional trade agreements (RTAs) existed.

Beginning in 1948, the General Agreement on Taris and Trade(GATT) provided the rules or much o the worlds trade and oralmost hal a century the basic principles remained untouched.During this time, very ew ree trade agreements (FTAs) werenecessary. The GATT later became the World Trade Organization(WTO). The WTOs Uruguay Round o the 1980s and 1990s involved123 countries and covered nearly all aspects o trade, in a single,simple system providing much needed updates to the increasinglydated rules under GATT.17

As trade growth became more important and sophisticated, theUruguay Round began to show its deciencies leading to the currentround o WTO negotiations, the Doha Development Round.Unortunately, or a variety o reasons, this round o negotiationslargely stalled and led countries to take other measures to continuethe pursuit o increasing trade, which became so important to theireconomic growth. Bilateral and regional ree trade agreements

became the substitutes or an eective global accord.Bilateral and regional agreements have taken precedence andprolierated

Frustrated with the slow pace o multilateral talks and the ormationo a global accord, many countries have turned increasingly tosmaller bilateral or regional agreements to boost trade. Looking at aew historical snapshots in time, the prolieration is most evident post2000 (Figure 11).

What started as a trickle has become a near explosion in FTAs andRTAs. The benets, especially in absence o a multilateralagreement, are clear. Signatories gain access to each othersmarkets, which has demonstrably improved trade in many casesand been an important driver o GDP growth or many nations. AsFTAs have grown dramatically since 1980, both imports and exportshave grown in near lock step as shown or Brazil, China, Germany,India, Japan and the US (Figure 12).

Figure 11: Snapshots in Time Regional Trade Agreements orSix Target Countries

Sources: Participation in Regional Trade Agreements, WTO; Foreign Trade Inormation System,SICE; Department o Commerce, India; Ministry o Economy, Trade & Industry, Japan; Oce o theUnited States Trade Representative; China FTA Network, Ministry o Commerce, PRC

Note: This chart excludes connections or ocus countries accession to GATT membership (1948)

Note: This chart excludes connections or ocus countries accession to GATT membership (1948)and WTO membership (1995)

Note: This chart excludes connections or ocus countries accession to GATT membership (1948)and WTO membership (1995)

1980

2000

2010


RTAs in pipeline

RTAs concluded


20/84


0

2

4

6

8

10

12

14

16

18

0

50

100

150

200

250

1980 1990 2000 2010

TotalRTAsconcluded

TradewithRoW(

US$billion)

0

2

4

6

8

10

12

14

0

200

400

600

800

1000

1200

1400

1600

1800

1980 1990 2000 2010

TotalRTAsconcluded

TradewithRoW(

US$billion)

0

5

10

15

20

25

30

35

40

0

200

400

600

800

1000

1200

1400

1600

1980 1990 2000 2010

TotalRTAsconcluded

TradewithRoW(

US$billion)

0

2

4

6

8

10

12

14

16

18

0

50

100

150

200

250

300

350

1980 1990 2000 2010

TotalRTAsconcluded

TradewithRoW(

US$billion)

0

2

4

6

8

10

12

14

0

100

200

300

400

500

600

700

800

900

1980 1990 2000 2010

TotalRTAsconcluded

TradewithRoW(

US$billion)

0

2

4

6

8

10

12

14

16

18

0

500

1000

1500

2000

2500

1980 1990 2000 2010

TotalRTAsconcluded

TradewithRoW(

US$billion)

Despite rapid growth, bilateral FTAs and RTAs are less desirablethan a single, global accord

The most obvious drawback to bilateral and regional agreements isthat exporters must deal with regulatory divergence andragmentation with multiple sets o rules and administrativerequirements and will never enjoy the predictability and marketintegration and harmonization promised by multilateralism.Furthermore, regional agreements are sometimes signed or political

rather than economic reasons; some nations will try to infuence themarket or will themselves be infuenced by powerul domesticcompanies or political interests. One sector may be avoured overanother, or companies rom one country may enjoy benets notavailable to more competitive counterparts rom other countries,allowing inecient rms to become entrenched. Economies toosmall to extract concessions rom their bigger bilateral negotiatingpartners are particularly badly. Whats more, some agreements oerree trade in name only. Certain countries have a number oagreements that, on merit, do not qualiy as ree trade. Though theycan provide their own unique benets and potential justications,bilateral and regional FTAs have not served as stepping-stones to acomprehensive, global agreement. In act, some eel they distractgovernments rom the multilateral agenda and serve as a convenient

excuse or its ailure.

An agreement between Singapore and the United States, orexample, is the principal reason why Singapore is now the tenthlargest export market or the United States with exports exceedingUS$ 29 billion and registering a year-on-year growth o 31% in2010.18 Another example: trade between Guangxi (Chinas southregion) and ASEAN countries ballooned to US$ 3.99 billion in 2008up rom US$ 630 million in 2002, when the initial China-ASEANramework agreement was signed.19

Trade agreements and growth in manuacturings contribution toGDP are closely linked

The overall trend though, or both developed and emergingeconomies, is an increase in RTAs with a rise in manuacturingcontribution to GDP (Figure 13). Although trade is an importantaspect o economic activity, and has clear linkages to bothmanuacturing exports and manuacturing GDP, trade agreementsare less o a guaranteed driver o economic expansion and more anenabler or countries and companies that strategically use them.However, ormal agreements alone do not guarantee trade growth.For example, in 1980, China and India had similar manuacturingexports. At the time, India had the greater number o regional tradeagreements. Yet, by 2010, Chinese manuacturing exports were

signicantly higher than Indias, although it still lags in the number oregional FTAs enacted.

Figure 12: Growth in Import/Export Closely Follows Growth in RTAs

Sources: Statistics database, WTO; Participation in Regional Trade Agreements, WTO; Foreign Trade Inormation System, SICE; Department o Commerce, India; Ministryo Economy, Trade & Industry, Japan; O ce o the United States Trade Representative; China FTA Network, Ministry o Commerce, PRC


Exports Imports Total number o TRAs

Brazil

India

China

Japan

Germany

US


21/84


Companies want a air and ecient system o trade that levels theplaying elds and reduces barriers to trade

Both policy-makers and business leaders recognize that lowerbarriers are vital to the competitiveness and viability o exports.Because o its important linkage to and eect on a countryseconomy, trade policy will continue to be o critical importance and

scrutiny.As global competition increases, and the ocus on manuacturingscontribution to jobs and GDP grows, there will be increasing tensionbetween opening and protecting markets. Chie executive ocers aswell as government ocials have an increasingly vested interest ingetting involved in the negotiations. Countries are taking dierentstrategic approaches and there are decisive solutions. Most aretrying to balance the approach between ree, open, market-basedeconomies and measures that enable their domestic companies tofourish.

Thereore, let to their own devices, some nations may try toinfuence the market too much or be too infuenced by domestic

companies and politics hence the need or a global standard andenorcement o the agreements. But in the absence o a Doha-likeagreement, RTAs are likely to continue to grow in the uture. Despitevarious approaches, most agree that we need to have and enorce aglobal air trade agreement that eases and streamlines the processand ability to move goods globally. Participants in the projectworkshop in Davos in January 2012 stressed that in this age odisaggregated supply chains, it was critical to reduce barriers totrade, to enable fuidity o fows along global supply chains.

!

!!

!

0

500

1000

1500

2000

2500

0 5 10 15 20 25 30 35 40 45

ManufacturingGDP(billionUS$)

Cumulative Number of RTAs

Germany!China!

Japan!

India!Brazil!

US!

0

500

1000

1500

2000

2500

0 5 10 15 20 25 30 35 40 45

ManufacturingGDP(billionUS$)


IndiaBrazil

China!

Japan!

Germany!

US!

!!!

!!

!

!

!!

!

!

!

! ! !

!

Y-axis represents manufacturing contribution to country GDP inbillion USD at current prices

!!!

!!

!

US$100 Billion! US$400 Billion! US$700 Billion!

Key: Size of the bubble represents manufacturing exports in US$!

!

!!

!

0

500

1000

1500

2000

2500

0 5 10 15 20 25 30 35 40 45

Ma

nufacturingGDP(billionUS$)


Germany!

Japan!

China!India! Brazil!

US!

!!!

!!

!

! ! !

!

Figure 13: Manuacturing Contribution to GDP has GrownAlongside Trade Agreements

Source: UNCTAD, Participation in Regional Trade Agreements, WTO; Foreign Trade InormationSystem, SICE; Department o Commerce, India; Ministry o Economy, Trade & Industry, Japan; O ceo the United States Trade Representative; China FTA Network, Ministry o Commerce, PRC


1990

2000

2009


22/84


0

00

,000

0,000

00,000

992993 994 995 996 997 998 999 2000 200 2002 2003 2004 2005 2006 2007 20082009 200

IndexedPerformance/US$

Compu1ng Bandwidth

Bandwidth

DigitalStorage

DigitalStorage

Compu1ng

Compu1ng

Exponential growth o the digital inrastructure is expandingopportunities or new entrants and increasing pressure or existingrms

The ast moving, relentless evolution o a new digital inrastructure isreducing barriers to entry and movement o new competition. Theexponentially advancing price/perormance capability o computing,storage, and bandwidth is contributing to an adoption rate or thedigital inrastructure that is two to ve times aster than previousinrastructures, such as electricity and telephone networks. The costo 1 million transistors has steadily dropped rom over US$ 222 in1992 to US$ 0.13 in 2010, levelling the playing eld by reducing theimportance o scale and thus increasing opportunities or innovation.

Similarly, the cost o 1 gigabyte (GB) o storage has been decreasingat an exponential rate rom US$ 569 in 1992 to US$ 0.06 in 2010,and the cost o 1,000 megabits per second (mbps), which reers to

data transer speed, dropped 10 times rom over US$ 1,197 in 1999to US$ 47 in 2010, allowing or cheaper and more reliable datatranser (Figure 14). The exponential drop in price/perormance oelements o the digital inrastructure have allowed or smaller, lesswell capitalized manuacturing rms to compete in arenas previouslynot attainable to them.

Exponential growth o digital inrastructure is expandingopportunities or new entrants and increasing pressure orexisting rms

Digital inormation technologies have allowed decoupling oresearch, engineering and manuacturing capabilities

Over the past several decades, digital technology has becomeubiquitous, transorming manuacturing processes in large and smallcompanies across the world. Broadly dened, digital manuacturingis the use o advanced computing technologies to employmodelling and simulation techniques or engineering, testing, ordesign purposes.20 The dramatic increase in computing power andcapabilities has allowed widespread application o computer-aideddesign, engineering, and manuacturing (CAD, CAE, and CAM), andhas urther allowed or a physical decoupling o research romengineering, and engineering rom manuacturing. That is, research

can be conducted in one place, engineering in another, andmanuacturing in a third, with many suppliers collaborating in thedesign, engineering and manuacturing processes, all in dierentglobal locations, and with all participants linked by digital technologyinrastructures.

Figure 14: Price Perormance Curves or Elements o Digital Inrastructure

Source: Deloitte analysis



23/84


0!500!1000!1500!2000!2500!3000!3500!4000!4500!5000!

2004! 2005! 2006! 2007! 2008! 2009! 2010!

MillionUS$

Americas! EMEA! APAC!

Revenue share fromAPAC has outgrownrevenue from Americas!

28%

40%33%

29%

32%38%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2010

Americas EMEA APAC

Digital inormation and computerized manuacturing technologyallows or easy, exact replication o manuacturing processes

Increased access to technology means that a company can

replicate its production capabilities in practically any location withskilled talent, supporting inrastructure, and avourable policy.Twenty years ago, this sort o capability and process replication wasnot possible without major obstacles and barriers. These computer-controlled processes are not vulnerable to the same vagaries as theartisanal skills o machine operators a generation ago. With theexplosion o digitization, literally everything can be identical.Manuacturing acilities can be relocated to emerging or developednations as needed, allowing manuacturers to disaggregate supplychains.

The rapid spread o digital inormation technologies has enabledbroader access to advanced manuacturing technology around theworld

Early computer-aided manuacturing was proprietary technologycreated by aerospace and automotive companies in a small handulo developed countries in the 1960s and 1970s.21 By the 1980s, withthe introduction o the PC and computers aster and more aordablethan ever, a number o digital modelling companies emerged to tapinto the growing commercial demand across a variety o industries.22One early and current market leader, Autodesk, was ounded in1982 to develop a CAD programme at a price tag o US$ 1,000 thatwould run on a PC. AutoCAD was born, and by 1985, Autodesksales were over US$ 27 million.23 The overall market or the digital-modelling industry has shown similar strong growth over time, and isprojected to continue steady growth despite the global nancialcrisis according to the 2012 Worldwide CAD Market Report by Jon

Peddie Research.24

During its early years, a small handul o countries in the developedworld made and used digital modelling technology or manuacturingwith the US, Germany, France, and Japan being leaders. Today, thistechnology is no longer the exclusive property o large multinationalsor developed countries: the number o countries using thistechnology has expanded rom a small handul to a truly globalscale. Asia-Pacic has overtaken the Americas as the astest-growing market or digital modelling products (Figure 15). Revenueswithin the sector in the Americas grew by over US$ 800 millionbetween 2004 and 2010. During the same period, revenues in theAsia-Pacic market grew by nearly US$ 2 billion (Figure 16).25Worldwide trade in machinery and transport equipment has also

grown, complementing the spread o digital technology.26

Figure 15: Total Revenue Across Global Markets or Top DigitalModelling Companies

Figure 16: Global Revenue Sources o Top Digital ModellingCompanies

Note: Graphs are based on data or eight o the top 10 companies in the CAD industry which together account or more than 60% o revenues in the industry or 2010. Data includes total revenue o allcompanies involved in CAD/CAM, which includes revenues rom non-CAD operations.

Source: Deloitte analysis based on annual reports o top digital modelling companies



24/84


Companies are developing increasingly sophisticated ways toleverage digital technology

New technologies and innovative processes will continue to be

embedded in manuacturing. Model-based denition (MBD) andadditive manuacturing (such as 3-D printing) are two examples ocutting edge applications o digitization that are urther transormingsupply chains and processes. Such technologies can be disruptiveorces that propel companies or countries outside a conventionalprogression up the value chain because the barriers tomanuacturing (requiring investment in inrastructure) are eectivelyremoved. For example, ollowing the basic steps in Figure 17, a smallmom-and-pop shop in Anytown, United States, can create a 3-Dcomputerized model o a toy and then send it to a 3-D printer locallyor even around the world to China or production.29 MBD andadditive manuacturing change the concept o economies o scaleby providing the ability to customize at no incremental cost and

produce ewer items at lower cost than with assembly-lineproduction.30

MBD uses a ully annotated 3-D digital model as the master,providing a seamless fow o the digital thread through the productlie cycle.

Case Studies: Copy Exact

Intels Copy Exactly! Strategy27

In the 1990s, Intel aced growing competition rom Japanese andSouth Korean chipmakers that had fooded the market with cheap,high-quality memory chips. Intels response was a Copy Exactly!strategy that minimized the time or technology transer and ensuredthat quality and product yields were not compromised. Digitizationallowed the company to match its manuacturing site to itsdevelopment site at all levels, rom equipment to process, and datacollected at a number o levels was compared with data rom R&Dsites to get an exact match.

A123 Mimics Copy Exactly! Strategy to Import Capabilities28

A123, a US company that makes lithium-ion batteries, has recently

repatriated its manuacturing operations ater years o producing inSouth Korea and China. To acilitate the move, the company alsoused a copy exactly strategy. South Korean operations werereplicated on a larger scale in the United States with the help o ateam o South Korean engineers who were extremely amiliar withthe production process.

Figure 17: Additive Manuacturing Technologies

CAD MODEL 3D Object

Sources: Campbell, T., Williams, C., Ivanova, O. & Garrett, B. (2011) Could 3D printing change the world? Atlantic Council, Strategic Foresight Repor t. Available at: http://www.acus.org/les/publication_pds/403/101711_ACUS_3DPrinting.PDF



25/84


The Shit Index

In the midst o economic uncertainty, when it is all too easy to xateon cyclical events, there is real danger o losing sight o deeper

trends. Short-term cyclical thinking risks discounting or evenignoring powerul orces o longer-term change. The Shit Index34 isan attempt to express a clear and comprehensive view o the deepdynamics associated with globalization.

The Shit Index, developed by John Hagel and John Seely Brown atDeloittes Center or the Edge, consists o three indices and 25metrics designed to make longer-term perormance trends morevisible and actionable. The Shit Index ramework embodies thethree waves o transormation in the competitive landscape:oundations or major change; fows o resources, such asknowledge, that allow rms to enhance productivity; and the impactso the oundations and fows on companies and the economy.

While the current Shit Index analysis is limited to the United States,given that it is the largest world economy, and the largestmanuacturing economy in the developed world, we believe it to be aleading indicator or other developed economies around the globe.Long-term data trends o some metrics included in the Shit Index,such as Return on Assets, Firm Perormance Gap, and Topple Rateon the US manuacturing sectors may provide insights to similartrends maniesting in other developed economies today.

The Big Shit is driving declining perormance in mostmanuacturing sectors in the US

Globalization, as driven by the dual orces o the exponential growtho digital inrastructures, and increasing public policy liberalization isat the core o the Big Shi (See the essay by John Hagel and JohnSeely Brown). These orces are increasing pressure on mostmanuacturing sectors in developed economies and especially so inthe US. Looking at the long-term trends in Asset Protability rom1965 to 2010 (see Figure 19), all but two sectors have seen dramaticrates o perormance erosion. With the exception o the ConsumerProducts sector, the rate o decline is highest or those sectors thatinitially had high asset protability. The Metals and Mining, Chemical,Paper and Wood, and Automotive sectors saw a trended decline oROA on 30%, 49%, 75% and 92%, respectively. The ROA trend orthe Consumer Products sector, and Aerospace and Deenseincreased slightly by 6.7% and 25%, respectively. Lower investmentsand rationalization o assets, layos, and sticky price increases in

recent times have led to an increase in ROA in the ConsumerProducts sector in the last ew years and levelling the trend overtime. The relative high-barriers to entry due to capital requirementsand the infuence o government contracts have allowed theAerospace & Deense sector to increase its ROA trend over time.

Additive manuacturing (AM) is another example o the waycompanies are leveraging digital modelling to achieve economies oscope as well as scale. AM builds products layer by layer additively rather than by subtracting material rom a larger piece o material.31

Its use is aggressively and consistently growing; over its 23-yearhistory, AM revenues and services have a compound annual growthrate (CAGR) o 26.2% (Figure 18).32

The technology has proven to have a variety o applications across anumber o industries. While the technology is still in its inancy,innovators have proven how versatile it can be, such as using 3-Dprinters to make bicycles out o nylon, concrete, chocolate, and eventransplantable organs that will one day save human lives.33

Digital technology will continue to be a signicant driver otransormation or manuacturing organizations in the uture. Smartproduct with embedded sotware on advanced computer chips

integral to the products unction and capabilities will becomeincreasingly commonplace. And smart processe urther enabledby advanced sotware and digital technologies will continue to alterthe productivity and quality o production processes or manydecades to come. The implications or the type o human capitalrequired, nancial capital required, innovation capabilities possible,and the very nature o competition will be proound.

Figure 18: Estimated Annual Revenues (in millions o US$) romAdditive Manuacturing Products and Services

Sources: Wohlers Associates. (2011) New Industry Report on Additive Manuacturing and 3D PrintingUnveiled. Press Release, May 16. Available at: http://www.wohlersassociates.com/press54.htm


$1,200

$1,000

$800

$600

$400

$200

$0

Products

Services

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011


26/84


-2%

0%

2%

4%

6%

8%

10%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Return

onAssets

Linear (Chemicals)

Chemicals

Linear (Metals and Mining)

Metals and Mining

Linear (Paper and Wood)

Paper and Wood

Linear (A&D)

A&D

Linear (Automotive)

Automotive

Linear (Consumer Products)

Consumer Products

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

ReturnonAssets

Linear (Chemicals) Linear (Metals and Mining) Linear (Paper and Wood) Linear (A&D) Linear (Automotive) Linear (Consumer Products)

Chemicals

Metals and Mining

Paper and Wood

A&D

Automotive

Consumer Products

4%

6%

8%

10%

12%

14%

16%

18%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

ReturnonAssets

l l

Chemicals

Metals and Mining

Paper and Wood

A&D

Automotive

Consumer Products

In US Manuacturing, winning companies are barely holding on, while losers experience rapidly deterioratingperormance

The ROA Perormance Gap or US manuacturing rms shows a biurcation o winners and losers. This nding is byno means new. What is surprising, however, is how little winners have gained during the past 45 years. Technologyhas enabled rms to leverage talent in new and innovative ways and cut costs rom operations on an unprecedentedscale. However, even top quartile perormers have ailed to convert these advances into ROA gains. Only two o thesectors (Aerospace & Deense and Consumer Products) had their top perorming rms maintain or grow theirperormance; all other sectors showed declining perormance or the even their top quartile (Figure 20). As expected,these same trends were amplied in the lower quartiles o each o these sectors driving an increasing distancebetween the winners and losers in each sector.

Figure 19: Long-Term Asset Protability Trends by US Manuacturing Sector (1965-2010)

Figure 20: ROA Perormance Trends or Top and Bottom Quartiles o US Manuacturing Sectors (1965-2010)Top Quartile

Bottom Quartile





27/84


0

0,5

1

1,5

2

2,5

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

FirmT

oppleRate

Linear (Chemicals) Linear (Metals and Mining) Linear (Paper and Wood)

Linear (A&D) Linear (Automotive) Linear (Consumer Products)

Chemicals

Metals and Mining

Paper and Wood

A&D

Automotive

Consumer Products

Large manuacturing rms are losing their leadership positions at an increasing rate

The Topple Rate metric tracks the rate at which big companies (with more than US$ 100 million in net sales) changeranks, dened in terms o their ROA perormance. This metric is a proxy or the ability to sustain a competitive

advantage in the world o the Big Shi. Not only have most manuacturing sectors demonstrated declining ROAover the past our decades, the large rms within these sectors have been losing their leadership positions anincreasingly aster rate (Figure 21). Between 1965 and 2010, the topple rate or large rms in the manuacturingsectors increased, with the chemicals sector increasing rom 0.32 to 0.52 (62% increase) and the metals and miningsector increasing rom 0.08 to 1.47 (1,700% increase), as competition exposed low perormers and ate away at theirreturns.

The Shit Index and its key components with a ocus on ROA perormance over time and Topple Rates, suggeststhat the rapid globalization o manuacturing, while opening up emerging market economies and leveragingresources in low cost wage locations, has also made it dicult to sustain an operating competitive advantage or thelarge multinational manuacturing organizations coming out o developed economies. In the uture, we see this trendgaining increasing attention rom business leaders and investors.

Figure 21: Long-term Topple Rate Trends by US Manuacturing Sector (1965-2010)




28/84


When we look more narrowly at US companies involved in variousorms o manuacturing, we see a similar pattern o perormanceerosion. Depending on the specic manuacturing sector involved,

we see declines in ROA ranging rom 34% to 96% between 1965and 2010. The rates o decline were astest in sectors that initiallyhad the highest ROA while the declines were more modest insectors that had lower protability at the outset. Only one sector,Aerospace and Deense, saw a modest improvement in ROA overthis time period.

Even i we ocus only on US companies in the top quartile o ROAperormance in their respective manuacturing sectors, we nd thatthese winners generally experienced erosion in protability over themore than our decades covered by the Shit Index, albeit a moremodest erosion than the overall average o all companies in thesector.

Not only did protability erode or these winners, but topple ratesincreased signicantly. Topple rates are a measure o sustainability oROA perormance, ocusing on the rate at which companies shitranks in ROA perormance. Over this same period topple rates morethan doubled in most o the manuacturing sectors, suggesting thatthe companies that achieved higher levels o protability had muchgreater diculty in sustaining this perormance.

One way to describe the challenge or companies is that they arecaught in a pincer movement. On one side, they ace more and morepowerul customers armed with greater inormation about productsand vendors than ever beore. These customers nd it easier andeasier to access vendors wherever they are and to switch rom onevendor to another whenever one vendor disappoints. On the other

side, companies ace knowledge workers who are increasinglyessential or competitive success. These knowledge workers havemuch greater bargaining power to extract more cash compensationor their services, given greater visibility on other employmentoptions in an increasingly competitive labor marketplace.

While our data only covers US companies (including their globaloperations), we suspect that these broad patterns o mountingpressure and erosion in perormance will be refected throughoutmost countries. The two orces driving the Big Shit digitaltechnology inrastructures and economic liberalization are playingout on a global scale, with ew companies immune rom their eects.

So ar, the evidence suggests that companies have experienced the

Big Shit as a source o mounting pressure, leading to erodingprotability.

Documents

WEF MOB FutureManufacturing Report 2012