Perspectives on

manufacturing, disruptive
technologies, and Industry 4.0

Eric Labaye
McKinsey Global Institute

Consultative Commission on Industrial Change (CCMI)

Brussels, November 14, 2014

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited
Key messages

Manufacturing matters. Innovation, exports, and productivity are

key.

The boundaries of industry and services are blurring. Business

services (but also other services like retail) are increasingly important
components of global value chains, justifying policy attention.

Technologies like digital manufacturing, the internet of things, big

data, but also other innovations like crowd-sourcing, circular
economy will significantly impact manufacturing and associated
services and reshape competitiveness in manufacturing.

Europe should double-down on its support for those technologies,

incl. a completion of the single digital and service market, as well
as support for talent and innovation

McKinsey & Company | 1

1. The importance of manufacturing
Manufacturing makes outsized contributions

Direct economic contributions

2011; percent Indirect contributions

Productivity gains are passed

on to consumers as lower
Value added 16 12 prices
Employment 14 9
Technology innovation results
Exports1 72 61
in spillover effects
Private sector R&D2 74-89 67
Providing solutions to
Productivity growth3 37 30 societal challenges such
Value-added growth4 13 12 as reducing energy and
Employment growth5 -43 -62 resource consumption

1 US: 2010.
2 2008; Germany (89%); UK (39% plus 35% contracted by manufacturers).
3 1995-2005.
4 2000-2011 (EU-27), 2000-2010 (US), 2001-2011 (UK) 5 2000-2011 (EU-27), 2000-2007 (US), 2001-2011 (UK).

SOURCE: EU KLEMS; IHS Global Insight; OECD STAN, ANBERD; Eurostat; World Bank, WIOD;
McKinsey & Company | 2
McKinsey Global Institute analysis
1. The importance of manufacturing
Manufacturing share of total employment follows an inverted U-shape
pattern as an economy becomes more prosperous
Germany Mexico United Kingdom
Manufacturing employment India South Korea United States
% of total employment Japan Taiwan Sweden

40
35
30
25
20
15
10
5
0
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000
GDP per capita
2012 PPP-adjusted EKS dollars

SOURCE: Total Economy Database, The Conference Board McKinsey & Company | 3
2. The role of services in industry and global value chains
Assembly accounts for less than half of manufacturing-related
employment
US manufacturing employment, 20101
Normalized; manufacturing employment=100

149%

49%
100%

37%
63%

Total Service and Manufacturing Service-type Assembly jobs

manufacturing- other jobs linked employment3 jobs in
related employment to manufacturing2 manufacturing4

1 Employment is total FTEs plus self-employed.

2 4.7 million jobs in services and 1 million jobs in primary resource industries that are directly and indirectly linked to manufacturing. Employment
multipliers were applied to import-adjusted final demand for manufacturing. Employment multipliers were calculated applying employment to
output ratios to the output multiplier table. Output multipliers were advanced using an import-adjusted input-output table.
3 Manufacturing employment as reported by the US Bureau of Economic Analysis.
4 Non-production jobs in manufacturing sectors, such as product R&D, marketing and sales, customer care and service, back-office functions,
and facilities management.

SOURCE: BEA; BLS; McKinsey Global Institute analysis McKinsey & Company | 4
2. The role of services in industry and global value chains
Boundaries of manufacturing and services are blurring
when looking at the full value chain
Share of value added of exports, 2009
% of GDP

Share of value
added in exports 40 32

Manufacturing
37% 15 14
value added

Service 71
value added 34%
13 0
Primary resource
1% 0 102
value added 7
0
Import content 28% 11 6
0 1
1

Total exports Manufacturing Service Primary resource

exports exports exports

Share of exports 100% 81% 18% 1%

1 Includes third-party logistics, IT, legal, management consulting, and other business services.
2 Imported components such as electronic parts from Asia or auto engines from Eastern Europe.
NOTE: Numbers may not sum due to rounding.

SOURCE: OECD; McKinsey Global Institute analysis McKinsey & Company | 5

2. The role of services in industry and global value chains
Europe generates an increasing trade surplus in knowledge intensive
(business and financial) services
Net exports EU-15
Percent of GDP
Knowledge-intensive
2.5
manufacturing
2.0
1.5 Knowledge-intensive services
1.0 Capital-intensive manufacturing
Labor-intensive services
0.5
Health, education, public services3
0
Capital-intensive services2
-0.5
Labor-intensive manufacturing
-1.0
-1.5
-2.0
-2.5 Primary resources

-3.0
-3.5
1994 2000 2005 2009
1 Services exports do not include Belgium and Denmark due to a lack of historical data.
2 Capital-intensive services exclude trade in utilities for Japan.
3 Majority of health and education services trade is accounted for as “travel” and hence shown within labor-intensive services.

SOURCE: OECD; McKinsey Global Institute analysis McKinsey & Company | 6

3. Industry going digital
Twelve potentially disruptive technologies in the coming decade –
half of them digital and related to Industry 4.0

Increasingly inexpensive and capable mobile computing devices and Internet

Mobile Internet
connectivity
Automation of Intelligent software systems that can perform knowledge work tasks involving
knowledge work unstructured commands and subtle judgments
Networks of low-cost sensors and actuators for data collection, monitoring, decision
The Internet of things
making, and process optimization
Use of computer hardware and software resources delivered over a network or the
Cloud technology
Internet, often as a service
Increasingly capable robots with enhanced senses, dexterity, and intelligence used
Advanced robotics
to automate tasks or augment humans
Autonomous and near-
Vehicles that can navigate and operate with reduced or no human intervention
autonomous vehicles
Next-generation Fast, low-cost gene sequencing, advanced big data analytics, and synthetic biology
genomics (“writing” DNA)

Energy storage Devices or systems that store energy for later use, including batteries

Additive manufacturing techniques to create objects by printing layers of material

3D printing
based on digital models
Materials designed to have superior characteristics (e.g., strength, weight, conductivity)
Advanced materials
or functionality
Advanced oil and gas Exploration and recovery techniques that make extraction
exploration and recovery of unconventional oil and gas economical

Renewable energy Generation of electricity from renewable sources with reduced harmful climate impact

McKinsey & Company | 7

3. Industry going digital
Range of sized
Disruptive technologies have the potential to drive direct potential
economic impacts
economic impact of USD 14-33 trillion Low High

$ trillion, annual

Mobile Internet 3.7–10.8

Automation of
5.2–6.7
knowledge work

Internet of Things 2.7–6.2

Cloud technology 1.7–6.2

Advanced robotics 1.7–4.5

Autonomous and near-

0.2–1.9
autonomous vehicles
Next-generation
0.7–1.6
genomics

Energy storage 0.1–0.6

3D printing 0.2–0.6

Advanced materials 0.2–0.5

Advanced oil and gas

0.1–0.5
exploration and recovery

Renewable energy 0.2–0.3

McKinsey & Company | 8

3. Industry going digital
New technologies change manufacturing value chains and processes

NEW MATERIALS PRODUCT DESIGN PRODUCTION PROCESSES

▪ Nanotech ▪ Collaboration, co-creation ▪ Advanced robotics

▪ Composites ▪ Rapid prototyping ▪ Additive manufacturing
▪ Biologics ▪ Crowd sourcing ▪ Modeling and simulation

INFORMATION TECHNOLOGY BUSINESS MODELS VALUE AND SUPPLY CHAINS

▪ Big Data and analytics ▪ Frugal innovation ▪ Agile supply chains
▪ Computer-aided design ▪ Circular economy ▪ Integration and visibility
▪ Internet of things ▪ New service models ▪ New ecosystems

SOURCE: McKinsey Global Institute McKinsey & Company | 9

3. Industry going digital
Internet of Things will touch major sectors of the global economy beyond
industry
Relevant
sectors Key use cases / applications
▪ Energy management
Energy ▪ Smart meters
▪ Grid control
▪ Discrete manufacturing
Industrials ▪ Process manufacturing
▪ Transportation
▪ Building / real estate mgmt.
Cities &
IoT ecosystem ▪ Intelligent transport systems
Communities
▪ Public administration
▪ Video surveillance
Safety &
Observing Changing ▪ Access control
Security
1 Internet 5
▪ Environmental monitoring
Networked 3
data sources 4 Visualization ▪ Payment solutions
Aggregation
Consumer ▪ In-store experience
Analysis
2 6
Sensors
Closed-loop ▪ Smart devices/appliances
actuation
Discovery and ID

Together, 30+ use cases represent

~$3.7T in value creation potential by 2016

McKinsey & Company | 10

4. Need for policy support – talent
Jobs will continue to move toward complex interactions,
not routine production or transaction work
New jobs created in the United States, 2001–09
Million employees

Interactions
Exchanges involving complex
problem solving, experience,
4.8
context (e.g., lawyer, nurse)

Transactions
Exchanges that can be
scripted, routinized, automated
-0.7
(e.g., bank teller, retail cashier)

Production
Process of converting physical
materials into finished goods
-2.7
(e.g., factory worker, farmer)

SOURCE: US Bureau of Labor Statistics; McKinsey Global Institute analysis McKinsey & Company | 11
4. Need for policy support – talent
Talent will become even scarcer than today
Gap between demand and supply of workers by educational % of supply of skill cohort
attainment, 2020E Million workers % of demand for skill cohort

Shortages Surpluses

High-skill workers Medium-skill workers Low-skill workers1

Total 38– Total Total 89–

13 45 15 10
shortage 41 shortage surplus 94

In In
16– In 32–
advanced 10 13 10 advanced 11
18 India 35
economies2 economies

In India and
In Young
Young
In China 23 16 Developing 31 19 58 10
Developing
economies3
economies

1 Low-skill defined in advanced economies as no post-secondary education; in developing, low skill is primary education or less.
2 25 countries from the analyzed set of 70 countries, that have GDP per capita greater than US$ 20,000 at 2005 purchasing power parity (PPP) levels in 2010.
3 11 countries from the analyzed set of 70 countries, from South Asia and sub-Saharan Africa, with GDP per capita less than $3,000 at 2005 PPP levels in 2010.

McKinsey & Company | 12

4. Need for policy support – talent
Example France: Skills mismatches will increase, leading to a shortage of
2.2 million high-skilled workers and 2.3 million low-skilled jobs by 2020
Labour supply and demand, 2020 Deficit supply
Million Excess supply
29.7 29.8
28.1
6.3 5.7 0.7
Baccalaureate + >2 years 6.0

5.7 0.2 2.2

6.0
Baccalaureate + 2 years 5.6

6.0 1.3
Baccalaureate 6.9 7.3

7.3 1.7
CAP/BEP1 5.3 5.6
2.3

Primary, BEPC1 4.3 4.5 5.1 0.5

Employment Workforce needed Projected

needed in 2020 at 5.5% workforce at
unemployment 72.7% participation

1 CAP: “Certificat d’Aptitude Professionnelle”; BEP: “Brevet d’Etudes Professionnelles”; BEPC: “Brevet d’Etudes du Premier Cycle”.
NOTE: Numbers may not sum due to rounding.
SOURCE: Global Insight; National Institute of Statistics and Economic Studies, France; International Institute
McKinsey & Company | 13
for Applied Systems Analysis; McKinsey Global Institute analysis
4. Need for policy support – talent
Three types of talent needed to exploit big data: deep analytical,
big data savvy, and supporting technology
Deep analytical Big data savvy Supporting technology
Definitions

People who have advanced People who have basic People who service as
training in statistics and/or knowledge of statistics and/ or database administrators and
machine learning and conduct machine learning and define programmers
data analysis key questions data can answer

▪ Actuaries ▪ Business and functional ▪ Computer and information

▪ Mathematicians managers scientists
▪ Operations research ▪ Budget, credit and financial ▪ Computer programmers
Occupations1

analysts analysts ▪ Computer software

▪ Statisticians ▪ Engineers engineers for applications
▪ Mathematical technicians ▪ Life scientists ▪ Computer software
▪ Mathematical scientists ▪ Market research analysts engineers for system
▪ Industrial engineers ▪ Survey researchers software
▪ Epidemiologist ▪ Industrial-organizational ▪ Computer system analysts
▪ Economists psychologists ▪ Database administrators
▪ Sociologist
gap by 2018
Potential

~150K ~1.5M ~300K

1 Occupations are defined by the Standard Occupational Code (SOC) of the US Bureau of Labor Statistics and used as the proxy for types of talent in
labor force.

SOURCE: US Bureau of Labor Statistics; McKinsey Global Institute analysis McKinsey & Company | 14
4. Need for policy support – single market
Europe would benefit to further focus on integrating its single market in
services and digital

Trade integration Productivity growth

Trade intensity1,1992-2012, Contribution to labor productivity3
in % increase, 1995-2007, in %-points
-5.4 p.p.

Services5 18.3
6% 12.9
3%2

-0.8 p.p.
Goods6 22%
12% 9.7 8.9

4
1992 2012 USA EU-25

1 Intra-EU exports in % GDP.

2 Intra-EU exports for 1992 not available; earliest available data: 1999 (3.1% for average imports and exports in % of GDP).
3 Value added (at constant prices) per hour worked; sector weightings on the basis of 1995 levels.
4 EU-25.
5 Private and public services; NACE L-Q
6 Resources and manufactured goods; NACE A-D.
SOURCE: EU KLEMS Growth and Productivity Accounts EU-25 and United States, March 2011 Update;
OECD; McKinsey Global Institute analysis McKinsey & Company | 15
4. Need for policy support – innovation
Standards and regulations, too, could help Europe become the most fertile
environment for the adoption of ground-breaking technologies
Potential policy support to facilitate
Mobile Internet adoption
Cloud technology
EU-wide technology standards to enable
Internet of Things interoperability between sensors,
Automation of computers, and actuators
knowledge work
Advanced robotics Legislative and regulatory framework for

12
disruptive
Autonomous and near-
autonomous vehicles
3D printing
autonomous vehicles to travel on public
roads

technologies Energy storage Capacity market in European power

Advanced oil and gas sector in which utility-scale batteries
exploration and recovery
receive preferential support
Renewable energy
Next-generation
genomics
Advanced materials

SOURCE: McKinsey Global Institute analysis McKinsey & Company | 16