The Future of U.S. Manufacturing: A Change Manifesto

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Several factors are conspiring to create potentially ideal conditions for a mini-renaissance of domestic manufacturing, including the emergence of additive manufacturing, the forces of social, mobile, analytics and cloud, and ever-rising energy costs.

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The Future of U.S. Manufacturing: A Change Manifesto

  1. 1. The Future ofU.S. Manufacturing:A Change ManifestoSeveral factors are conspiring to create potentially ideal conditions for amini-renaissance of domestic manufacturing, including the emergence ofadditive manufacturing, the forces of social, mobile, analytics and cloud,and ever-rising energy costs.| FUTURE OF WORK
  2. 2. 2 FUTURE OF WORK May 2013Executive SummaryU.S. manufacturing is better positioned today for revival thananytime since its slow and painful decline some 30 years ago.A big reason for its new-found strength stems from changes inChina. Rising wages, concerns over IP protection and increasesin digital automation globally have conspired to undermine theeconomic advantages that China has enjoyed for years.We believe the following additional factors will contributeto positioning the U.S. manufacturing industry for renewal: The U.S. is best positioned to lead manufacturing into thedigital age because of its significant scale, consistently highproductivity levels, unparalleled ability to innovate andreceding unit labor cost. It also offers some of the lowestwages in the developed world. Fast-rising wages and variable quality has dulled the sheenof China’s low-cost manufacturing. Total cost of manufacturing is the most important metricguiding manufacturing sourcing decisions. With elevatedChinese wages and volatile commodity prices spiking inputand shipping cost, the cost differential between Chinaand other markets is rapidly narrowing and has reachedor is projected to reach a tipping point in many industrieswhere economics do not favor a low-cost factory model.Amplifying the problem is the weak IP regime in China andregional geo-political uncertainty, resulting in supply chaindelays and disruptions. Therefore, production for domesticmarkets may relocate to home shores or shores nearby. Manufacturers are questioning the current wisdom of divorc-ing R&D from production and locating it in a cost-effectivegeography thousands of miles away. Early experiencesindicate that production and research feed off each other,resulting in a virtuous cycle of innovation.
  3. 3. THE FUTURE OF U.S. MANUFACTURING: A CHANGE MANIFESTO 3The future of manufacturing will be underpinned bydigital-age social and mobile technologies, as well as analytics.Winning manufacturing companies must get the basics right,and policy makers must create an enabling environment tousher in the digital manufacturing age.Companies must: Rein in costs, get access to the right skills and boost produc-tivity and innovation to create an enabling environment forthe switch to the digital age. Streamline processes to fix the wide variation in productivityacross companies within each of manufacturing’s 28 sectors:» Higher productivity generates higher net income marginsand drives greater return on equity.» Manufacturing sectors with high net income margins andreturn on equity are growing and adding jobs. Growingsectors with high return on equity alone will get capitalfor future investments; it is, therefore, imperative thatmanufacturers invest in digital-age technologies to fuelthe next phase of growth. Invest in supply chain analytics to optimize their globalsourcing strategy. Drive productivity and return on equity to attract capitalinvestments for social and mobile technologies, as well asanalytics.Policy makers must: Help remove the structural rigidities – corporate tax rates,regulatory compliance costs, tort laws and employeebenefits – that are blunting the competitive edge of U.S.manufacturers. Address the skills gaps that are holding back the manufac-turing revival.
  4. 4. 4 FUTURE OF WORK May 2013U.S. Manufacturing: All the Right IngredientsThe U.S. manufacturing industry is well positioned for the digital age, with itssize, relentless drive for productivity, competitive unit labor cost and superiorinnovation track record.SizeToday, U.S. manufacturing supports more than one in seven private sector jobs.The sector employs an estimated 17.5 million people domestically – 11.7 millionin direct manufacturing jobs and 5.8 million in the services sector.1To put this incontext,fromapeakof19.5milliondirectmanufacturingjobsin1979,manufacturing’scurrent share represents a 40% loss. This reflects the changed character andcomposition of the broader services-led U.S. economy (see Figure 1). Despite thecontraction, if U.S. manufacturing were an economy, its 2012 output (in absoluteterms) of $2 trillion would make it the tenth largest economy in the world.2Figure 1 shows total U.S. employment in the manufacturing and private servicessectors. While employment in services has more or less risen (with periods ofcontraction mostly coinciding with recessionary trends in the economy), manufac-turing employment showed an upward trend through the late 1970s before begin-ning to shrink. The largest decline was recorded in the 2000-2010 period, whenemployment in manufacturing fell by almost 4% annually and by 33% over thedecade. However, in the past two years, manufacturing employment has witnesseda resurgence. One possible explanation is that the eroding competitiveness ofChina as a manufacturing hub is leading to “reshoring” of manufacturing to the U.S.Productivity JuggernautThe relentless productivity march of the post-war U.S. economy can be directlyattributed to the manufacturing sector. Manufacturing productivity has led allother sectors of the domestic economy throughout the past 65 years (see Figure2, next page). Between 1997-2007, overall manufacturing productivity recorded anaverage annual growth of 5.4%.3Manufacturing’s real productivity grew 2.3%compared with the 1.8% growth for all other private businesses, adjusting forthree key new sources of this productivity spike: a strong positive bias exerted bycomputers and the electronics industry, whose productivity grew at 26.8% in thisTotal Employment in Manufacturing and Private ServicesFigure 1Source: U.S. Bureau of Labor Statistics, The National Bureau of Economic ResearchEmployment(inthousands):PrivateServicesEmployment(inthousands):ManufacturingYear05,00010,00015,00020,00025,000020,00040,00060,00080,000100,0001939 1947 1955 1963 1971 1979 1987 1995 2003 2011Recession Years Private Service-Providing Manufacturing
  5. 5. THE FUTURE OF U.S. MANUFACTURING: A CHANGE MANIFESTO 5period;4the offshoring bias in manufacturing productivity;5and increased use oftemporary staff employed by manufacturers.6As Figure 2 shows, other than 1960-65, labor productivity in manufacturing hasexceeded that in the nonfarm sector. Overall, from 1950 to 2010, manufacturingproductivity mostly grew at an increasing rate (the trend line primarily ascends),while the private nonfarm business sector’s productivity increased at a marginallyconstant or declining rate over time.Falling Unit Labor CostsIn the third quarter of 2012, U.S. manufacturing workers were paid an average$33.30 per hour in wages and benefits. This represents an 8% premium overworkers in other sectors, who were paid an average $30.80 per hour.7The reasonfor the wage differential is that manufacturers tend to pay for benefits such asfamily insurance and vacations. Between 2000-2012, while real wages and salarycost increased at a rate of 0.96% per year, the unit labor cost (the real cost toproduce one unit of good) decreased at an average annual rate of 2%due to risingproductivity8(see Figure 3, next page). This is because the rise in real productivityoutpaced the increase in wages, making U.S. manufacturing more cost-competitive.As Figure 3 shows, real output per hour (or labor productivity) rose continuouslyduring 1987-2011, while real unit labor costs fell during the same period.Pursuit of InnovationWhen measured in terms of R&D intensity – R&D spend as a percentage of salesand number of patents — domestic manufacturing outstrips other sectors by a widemargin. Manufacturing accounts for just 12% of U.S. GDP, but manufacturers’ R&Doutlays account for 69% of total domestic R&D spend. While total U.S. industrydomestic R&D spend was 3.7% of net sales in 2009, the ratio for manufacturing was4.4% of revenue, well above the 2.8% average for nonmanufacturing industries.9According to the National Science Foundation, U.S. manufacturers accounted for69% of the total patents filed and 72% of the total patents granted in 2008, thelatest year for which data is available.Growth of Labor Productivity: Manufacturing and Private Nonfarm BusinessManufacturing Sector Private Nonfarm Business Sector0%1%2%3%4%5%6%1950-19551955-19601960-19651965-19701970-19751975-19801980-19851985-19901990-19951995-20002000-20052005-2010LaborproductivitygrowthFigure 2Note: CAGRSource: U.S. Bureau of Labor Statistics
  6. 6. 6 FUTURE OF WORK May 2013Still a Major Contributor to Overall TradeBetween 2000 and 2012, the share of products manufactured in the U.S. shrankfrom 58% to 47%, ending the U.S.’s number-one exporter rank to China. Howeverwith a 47% weight in the overall trade, manufacturing remains a critical componentto managing the soaring trade deficit.10China Losing its SheenChina’s status as the leader of low-cost offshore manufacturing, built so carefullyover the past 25 years, seems to be in peril.Even as late as 2001, China’s labor cost, at 58 cents per hour, was a fraction of theU.S.’s cost, and that was when the price of oil was below $10 per barrel. The eco-nomics were compelling enough to locate production in China to address the needsof U.S. consumers. However, between 2005 and 2010, hourly manufacturing wagesin China rose 19% per year and are projected to reach $6 per hour by 2015. In 2000,China’s labor cost was just 3% of U.S. rates, but by 2010, it was 9% and is projectedto reach 17% by 2015. Although 17% may still look inexpensive, labor cost is just afraction (one-fourth) of total manufacturing costs. In less labor-intensive industries,it can be less than 10%.11Compounding the wage rise is China’s subpar manufacturing productivitycompared with that of the U.S. As of 2010, Chinese manufacturing productivity wasjust 30% of U.S. levels.The commodity boom of the past decade has caused the prices of oil, gas and otherindustrial commodities to spike, materially raising the key input costs for manufac-turing. In light of higher shipping costs, inventory carry costs and various taxes, theeconomics of manufacturing in China and shipping it overseas have become lessattractive. Other factors have additionally contributed to elongated product deliv-ery cycles, such as intellectual property risks, poor quality, sudden and protractedsupply chain disruptions due to socio-political activities and labor unrest.The cost shield that masked the structural handicaps of the Chinese system isdeveloping cracks. Therefore, when it comes to China, we expect sourcing decisionsto be tempered with a balanced assessment of risks and returns.Productivity Outpaces Labor CostsReal Output Per Hour Real Unit Labor Cost0408012016018019871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012Index(2005=100)Figure 3Source: U.S. Bureau of Labor Statistics
  7. 7. THE FUTURE OF U.S. MANUFACTURING: A CHANGE MANIFESTO 7As China loses its cost advantage, the trend of “reshoring” manufacturing fordomestic consumption (production shifted back home or closer to home) seemshere to stay. However, we expect more U.S. companies to focus manufacturing inChina and other fast-growing emerging economies to serve soaring demand inoverseas markets.Innovation and Production: Conjoined Twins?Emerging evidence is upending the hypothetical business benefit of sep-arating production from R&D. Manufacturers are beginning to ques-tion the wisdom of basing production lines in low-costlocations thousands of miles away from R&D labs.Growing evidence shows that co-locating production and R&D cre-ates a positive feedback loop, as scientists and engineers gain directexposure to and first-hand knowledge of production processes andassembly line practices. Such exposure helps improve processes,rewire underlying technologies and rejuvenate innovative practices,resulting in a virtuous cycle of continuous improvement.Take the case of batteries. U.S. companies offshored theirproduction to Japan over 30 years ago. Today, Japan, Korea andChina are the leaders in designing electric batteries that canreplace oil to power clean cars.12Similarly, when semiconductorproduction moved to Asia, the production of thin film deposi-tion (used in semiconductors) declined in the U.S. Today, thin-filmdeposition is a critical component for manufacturing solar panels,and the lack of skills in the U.S. has caused the country to lag behindin the solar power race.Similarly, U.S. manufacturers capture just one-third of the value ofAmazon’s Kindle e-reader, while Asian manufacturers claim the bulkof value, even though Kindle’s key innovation, electronic ink, wasinvented in the U.S. The main concern: the U.S. will permanently lose its e-paperdisplay technology edge for driving related innovations.13Clearly, manufacturing and innovation are tightly intertwined, and decouplingthe two can sap the ability to capture higher economic value. We believe that asmore evidence emerges across industries, the trend of co-locating production andR&D for sustained competitive advantage will gain ground.Reshoring: Lessons to be LearnedOver the past two to three years, hundreds if not thousands of manufacturing jobshave returned to the U.S. This is only a trickle compared with the 28% of totalmanufacturing jobs lost during 2000 through 2010.14However, this small uptick inU.S. manufacturing employment, combined with the reshoring trend, has generatedsignificant interest in the potential revival of domestic manufacturing. While theseearly green shoots are encouraging, a closer look at U.S. manufacturing offersimportant lessons.Our analysis of 500 U.S. manufacturing companies spanning 28 sectors clearlyshows a positive correlation among high productivity, job growth, net incomemargins and return on equity. To succeed in the long term, manufacturers mustadopt innovative technologies to rewire manufacturing and accelerate productiv-ity and, more importantly, fix the wide variation in productivity levels within U.S.manufacturing sectors.Growing evidenceshows that co-locatingproduction and R&Dcreates a positivefeedback loop, asscientists and engineersgain direct exposure toand first-hand knowledgeof production processesand assembly linepractices.
  8. 8. 8 FUTURE OF WORK May 2013We are seeing the following trends unfold: Economics will continue to drive global sourcing decisions. A 2012 study15confirms that when it comes to global sourcing decisions, the only metric thatmatters to manufacturers is “total landed cost,” which includes raw materialcost, manufacturing cost, transportation cost, inventory carry cost and othertaxes. In fact, 85% of respondents across manufacturing industries rated this asa very important criterion, above product quality, intellectual property risk andsupply chain risk. Volatile global commodity prices, buoyant Chinese wages and fast-changinggeo-political risks have injected a new level of dynamism into sourcing strategies.With too many macro- and micro-economic, financial and risk variables toanalyze and monitor, it is imperative that manufacturers develop sophisticatedanalytical models and systems to sharpen their manufacturing sourcing decisionmethods. Highly productive sectors with higher wages are growing. While all manufac-turing sectors experienced job losses from 2000 through 2009, an analysis ofthe decline reveals an interesting relationship among productivity, high wagesand job growth. During the downturn, low-wage industries with lower productivity, such aswood products, primary metals and plastics, experienced the heaviest joblosses. Meanwhile, higher wage industries with greater productivity, such aschemicals and pharmaceuticals, machinery and motor vehicles, lost fewer jobs(see Figure 4).Manufacturing Sectors with Higher Productivity and Weekly Wages Lost Fewer JobsMotorVehicles:-29.7%Apparel:-55.7%Beverages:-9.7%Electrical Equipment& Appliances:-32.70%Food:-6.7%Machinery:-24.9%Petroleum& Coal Products:-5.3% Chemicals:-16%Plastics:-30.1%PrimaryMetals:-36.2%Publishing& Printing:-31.8%Textiles:-50.25%$3$5$7HourlyWagesProductivity$9$11$13$15-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%WoodProducts:-37.1%Source: Cognizant Research Center analysis. Productivity and wage data sourced from “Why Does Manufacturing Matter?Which Manufacturing Matters? A Policy Framework,” February 2012 (see footnotes for full citation).Figure 4Note: Bubble size indicates job losses. Smaller bubble size correlates with lower job losses.Note: Timeframe measured: 1997 - 2007
  9. 9. THE FUTURE OF U.S. MANUFACTURING: A CHANGE MANIFESTO 9Again during the 2009 to 2011 revival, high-wage and highly productive industriesadded more jobs compared with low-wage industries, which also struggled with lowproductivity (see Figure 5). Material variation in productivity exists across manufacturing sectors.While overall average manufacturing productivity leads services and farmproductivity, material variation exists across manufacturing sectors (seeFigure 6, next page). Clearly, there is plenty of room for improvement. Manufacturers with higher productivity and high net income report higherreturn on equity. Our analysis shows that across manufacturing, sectors withhigher productivity and higher net income margins tend to have higher returnon equity. Also, manufacturing sectors with higher productivity and return onequity tend to lose fewer jobs or add more positions than sectors with lowerproductivity and return on equity. Thus, productivity becomes the commonfactor that differentiates winning manufacturing sectors and companies (seeFigure 7, page 11). Across U.S. manufacturers, there is tremendous scope to boost productivity,raise net income and increase return on equity. While inter- and intra-sectorvariation in productivity is understandable, our 2012 return on equity analysis of500 U.S.-based manufacturing companies across 28 sectors shows significantvariation in profit margin within each of the 28 sectors (see Figure 8, page 12), acritical driver of return on equity. Clearly, there is significant scope for individualfirms to improve productivity and consequently close the net income marginvariation gaps, which, in turn, will drive better return on equity and enhancegrowth prospects.Manufacturing Sectors with Higher Productivity and Wages Added More JobsDuring Economic RecoveryAerospace& Defense:5.50%Apparel:2.75%Beverages:3.20%Chemicals:-1.1%Electrical Equipment& Appliances:4.70%Food:-0.70%Machinery:8.40%Petroleum &Coal Products:0.70%Plastics:3.50%Primary Metals:12.50%Publishing& Printing:-6.70%Textiles:-2.60%WoodProducts:-3.80%-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%$3$5$7HourlyWagesProductivity$9$11$13$15Note: Bubble size indicates job losses. Smaller bubble size correlates with lower job losses.Note: Timeframe measured: 2009 – 2011Source: Cognizant Research Center analysis. Productivity and wage data sourced from “Why Does Manufacturing Matter?Which Manufacturing Matters? A Policy Framework,” February 2012 (see footnotes for full citation).Figure 5
  10. 10. 10 FUTURE OF WORK May 2013The Digital, Social, Mobile, Analytics RevolutionManufacturing Goes Additive and DigitalIndustrial-age “subtractive” manufacturing processes are not unlike Michaelange-lo’s postulate that the sculptor’s task is simply to chip away at the stone so as toreveal the ideal form. Just as the sculptor cuts stone, the dominantapproach for machining processes is to remove material through cut-ting and drilling. However, subtractive industrial-age processes willsoon be complemented by additive digital-age manufacturing pro-cesses, possibly ushering in a manufacturing renaissance.Additive manufacturing is the process of making a three-dimensionalsolid object of virtually any shape directly from a computer model.Three-dimensional printing uses an additive process, in which succes-sive layers of material are laid down in different shapes vs. subtractivemachining techniques of cutting and drilling. While the application of3-D printing in industrial manufacturing and design is well known, itsapplication in areas where traditional manufacturing methods havenot gone, or cannot go, has caught the imagination of the world.Examples include Cornell University, where researchers in Februarydemonstrated how to create a replacement ear using a 3-D printerand living cells, and surgeon Anthony Atala, who last year created atransplantable kidney using a 3-D printer.Manufacturing Sectors with Higher Productivity and Net Income Margins HaveHigher Return on EquityAerospace & Defense:6.91%Apparel:6.24%Beverages:12.23%Chemicals:6.32%ElectricalEquipment& Appliances:5.51%Food:5.15%Machinery:6.48%Petroleum& Coal Products:6.75% Pharmaceuticals:11.67%Plastics:4.33%PrimaryMetals:4.30%Publishing& Printing:8.70%Textiles:0.85%WoodProducts:4.67%(20%)(10%)0%10%20%30%40%50%-2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%Note: Bubble size indicates net income margin. Smaller bubble size correlates with higher net income margin.Note: Timeframe measured: 2012Source: Cognizant Research Center analysis. Return on equity and net income margins data based on the 2012 IndustryWeek U.S. 500 ranking ofAmericas largest public manufacturers. Productivity data sourced from “Why Does Manufacturing Matter? Which Manufacturing Matters?A Policy Framework,” February 2012 (see footnotes for full citation).Figure 6Additive manufacturinghas the potential torewire traditionalmanufacturing, as itenables connectivity andimparts exceptionalagility to themanufacturing anddesign process.
  11. 11. THE FUTURE OF U.S. MANUFACTURING: A CHANGE MANIFESTO 11The ability to design and modify designs online to create a kidney or an ear withoutwasteful casting demonstrates the efficiency of additive manufacturing. Whetherfor a single item or small batches (and in the future, mass-customized items), addi-tive manufacturing has the potential to rewire traditional manufacturing. Its poten-tial to accelerate innovation stems from its digital moorings, which enable con-nectivity and impart exceptional agility to the manufacturing and design process.Social, Mobile and Advanced Analytics Unleash a NewProductivity WaveNew technologies – including social and mobile technologies, as well as advancedanalytics – are leading the manufacturing sector into the digital age.In the analogous manufacturing world, industrial assets and the people andprocesses involved with them are isolated from each other and operate in silos.Exponential benefits can result if these machines are connected with advancedsensors and software, as well as the people working with these assets. Outcomesinclude better design, operations, quality and safety, and a better understanding ofman/machine interaction, leading to more predictable outcomes.Manufacturing Productivity Growth Rates Adjusted for Increased OffshoringIndustryAnnual productivitygrowth rate (%)Computer and electronic products 24.24Motor vehicles and parts 5.49All manufacturing 4.82Miscellaneous manufacturing 4.77Apparel and leather and allied products 4.72Textile mills and textile product mills 4.20Chemicals* 4.20Machinery 4.00Electrical equipment/appliances/components 3.94Other transportation equipment** 3.32Printing and related support activities 3.09All manufacturing without computer and electronic products 2.80Wood products 2.48Furniture and related products 2.20Primary metals 2.09Fabricated metal products 1.51Paper 1.29Plastics and rubber products 1.25Food, beverage, and tobacco products 0.82Nonmetallic mineral products 0.53Petroleum and coal products -0.29*Includes pharmaceuticals and medicines.**Includes aerospace products and parts.Note: It is not possible to adjust productivity growth rates in individual manufacturing industries for the increased use of temporaryhelp services.Note: Timeframe measured: 1997 - 2007Source: “Why Does Manufacturing Matter? Which Manufacturing Matters? A Policy Framework,” February 2012 (see footnotes forfull citation).Figure 7
  12. 12. 12 FUTURE OF WORK May 2013An example of this kind of connection is Ford’s new hybrid car, which canautomatically connect to the service center and seek necessary maintenance. TheMyFord Mobile application equips the owner with instant information pertaining tothe vehicle; monitors the battery’s charge level and sends alerts on charge status;virtually sets or changes the program setting; and downloads vehicle data foranalysis.16Additionally, GE’s next-generation turbines are embedded with sensorsthat can gather information to assess the servicing required before the aircraftlands. As these connected devices become more mainstream, their ability to gene-rate data will grow exponentially, necessitating investments in advanced analyticaltools to derive additional business value.The Coefficient of Variation of Net Income Margin (%), 2008-2012<0% 0-100% 100-1,000% >1,000%Industry 2008 2009 2010 2011 2012Communications equipment 5,320 1,874 154 166 181Primary metals 737 464 174 138 188Electrical equipment & appliances -3,037 123 114 164 116Petroleum & coal products 319 -1,651 141 111 266Furniture & fixtures -1,507 -2,118 695 299 136Computers & other electronic products 663 2,050 86 116 155Fabricated metal products 705 482 100 86 115Motor vehicles -369 534 742 60 473Stone, clay, glass & concrete products -354 -381 941 -272 3,286Medical instruments & equipment 100 124 68 65 190Miscellaneous 150 947 81 96 132Plastics 273 54 20 32 2,445Paper -1,253 144 201 121 79Publishing & printing -878 327 148 630 93Wood products -343 316 91 213 84Food 150 74 62 146 72Apparel 190 167 106 100 79Rubber products 888 141 121 44 46Instruments 2,759 -610 320 77 81Motor vehicle parts -261 -151 108 73 89Chemicals 221 133 97 80 72Machinery 74 556 80 68 54Railcars, ships, other transportation equipment -1,299 273 62 83 79Textiles -133 116 19 32 9Aerospace & defense 102 75 59 42 59Beverages 167 75 63 41 24Pharmaceuticals -1,688 51 57 43 53Tobacco 61 61 56 67 69Note: Coefficient of variation has been calculated as the ratio of standard deviation to mean (i.e., Cv= σ/µ). Distributions with a coefficient ofvariation to be less than 100 are considered to be low-variance, whereas those with a CV higher than 100 are considered to be high variance.Source: Cognizant Research Center analysis. Data sourced from 2012 IndustryWeek U.S. 500 ranking of America’s largest publicmanufacturers, based on revenue data sets.Figure 8
  13. 13. THE FUTURE OF U.S. MANUFACTURING: A CHANGE MANIFESTO 13Applying social and mobile technologies, as well as advanced analytics,to industrial-age manufacturing is expected to transform global industries, fromaviation to power generation to healthcare delivery. With better healthcare atlower cost and material savings in energy cost, the global efficiency gains will beenormous. If efficiency gains translate to a modest 1% productivity boost, it wouldadd $10 trillion to $15 trillion to the global economy over the next 15 years.17Policy and Strategic Imperatives Key toManufacturing’s Mini-RenaissanceThe policy choices that the government, manufacturers and suppliers make todaywill determine U.S. manufacturing’s trajectory. It is crucial to get the basics rightand for all stakeholders to seize the emerging opportunities to thrive in the digitalmanufacturing age.In our assessment, successful companies and policy makers will do the following: Fix the structural rigidity plaguing U.S. manufacturers. A study by theManufacturing Institute and The Manufacturers Alliance For Productivity andInnovation found that structural rigidity and bottlenecks add at least 20%additional costs to domestic manufacturing.18When compared with its top ninetrading partners, the U.S. lags behind on all parameters except energy costs,including corporate tax rates, employee benefits, tort litigation and regulatorycompliance. These drags on U.S. manufacturing’s productivity gains limit thecountry’s competitive advantage. Arrest the hemorrhage caused by deep skills gaps. Roughly 5% of manufac-turing jobs – 600,000 jobs – go unfilled because of a lack of skilled personnel.Manufacturers struggle to find employees with skills that enhance a plant’seffectiveness and efficiency and fuel innovation and future growth. In economicterms, the opportunity loss equals an additional 400,000-odd direct jobs in thelarger economy and potential GDP growth loss of at least 1%.19 Focus on productivity to boost net income margin and return on equity.U.S. manufacturing must focus on closing the wide variation in productiv-ity levels across sectors and become a dominant productivity leader. Withoutsuperior productivity, higher net income margin and return on equity, it will beimpossible to attract capital for future investments. With higher productivity andbetter cash flow, manufacturers will gain confidence to make investment betsin additive manufacturing and the new technologies, such as social, mobile andadvanced analytics, that underpin it. Optimize global sourcing strategy. U.S. manufacturers must gain a thoroughunderstanding of global sourcing strategy in the context of the changingeconomic, financial and risk variables underpinning such decisions. They mustinvest in and develop supply chain analytics capabilities to enable a systematic,forward-looking process for sourcing decisions. The transition from a supply ori-entation to a demand-driven forward planning strategy will be fueled by connec-tivity and analytics. Invest in social and mobile technologies, as well as advanced analytics, forlong-term competitive advantage. As smart devices proliferate, greater con-nectivity between devices and people working with those devices can enablemanufacturers to harness the benefits of big data and analytics. Winning manu-facturers must invest in social and mobile technologies, as well as analytics, togenerate tangible business value.
  14. 14. 14 FUTURE OF WORK May 2013Footnotes1 Estimate from The Manufacturing Institute’s “U.S. Benchmark Input-OutputAccounts,” U.S. Bureau of Economic Analysis.2 The Manufacturing Institute; estimates based on International Monetary Fund,U.S. Bureau of Economic Analysis and MAPI.3 Susan Helper, Timothy Krueger and Howard Wial, “Why Does Manufacturing Mat-ter? Which Manufacturing Matters? A Policy Framework,” Metropolitan PolicyProgram at Brookings, February 2012.4 Ibid5 Susan Houseman, Christopher Kurz, Paul Lengermann and Benjamin Mandel,“Offshoring Bias in U.S. Manufacturing,” Journal of Economic Perspectives, Vol.25, No. 2, Spring 2011, pp 111–132.6 Matthew Dey, Susan Houseman and Anne Polivka, “Manufacturers’ Outsourcingto Employment Services,” Upjohn Institute, Working Paper No. 07-132, 2006.7 The Manufacturing Institute; estimates based on U.S. Bureau of Labor Statistics,U.S. Bureau of Economic Analysis.8 The Manufacturing Institute; estimates based on U.S. Bureau of Labor Statistics.9 Susan Helper, Timothy Krueger and Howard Wial, “Why Does Manufacturing Mat-ter? Which Manufacturing Matters? A Policy Framework,” Metropolitan PolicyProgram at Brookings, February 2012.10 The Manufacturing Institute; based on Manufacturers Association for Productiv-ity and Innovation calculations.11 Susan Helper, Timothy Krueger and Howard Wial, “Why Does Manufacturing Mat-ter? Which Manufacturing Matters? A Policy Framework,” Metropolitan PolicyProgram at Brookings, February 2012.12 Steve Levine, “The Great Battery Race,” Foreign Policy, November 2010.13 Willy C. Shih, “The U.S. Can’t Manufacture the Kindle and That’s a Problem,” HBRBlog Network, Oct. 13, 2009.14 Susan Helper, Timothy Krueger and Howard Wial, “Why Does ManufacturingMatter? Which Manufacturing Matters? A Policy Framework,” Metropolitan Pol-icy Program at Brookings, February 2012.15 “Reshoring Global Manufacturing: Myths and Realities,” The Hackett Group,2012.16 “New MyFord Mobile App Keeps Focus Electric Owner Engaged and In Control ofElectric Car Experience,” Ford.17 Peter C. Evans and Marco Annunziata, “Industrial Internet: Pushing the Boundar-ies of Minds and Machines,” GE, Nov. 26, 2012.18 “2011 Report on the Structural Cost of U.S. Manufacturing,” The Manufac-turing Institute and Manufacturers Alliance for Productivity and Innovation,October 2011.19 “2011 Skill Gaps Report,” Deloitte and The Manufacturing Institute, Oct. 17, 2011.
  15. 15. About CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out­sourcing services, dedicated tohelping the world’s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passionfor client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodiesthe future of work. With over 50 delivery centers worldwide and approximately 162,700 employees as of March 31, 2013, Cognizant is a memberof the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growingcompanies in the world.Visit us online at www.cognizant.com or follow us on Twitter: @Cognizant.CreditsAuthorAnand Chandramouli, Director, Cognizant Research CenterAnalystsKoyal Roy, Cognizant Research CenterNeha Gupta, Cognizant Research CenterPushpanjali Mikkilineni, Cognizant Research CenterAndal Vedanarayanan, Cognizant Research CenterSubject Matter ExpertDeepak Mavatoor, Cognizant Business ConsultingDesignHarleen Bhatia, Creative DirectorSuresh Sambandhan, DesignerReferencesMichael Ettlinger and Kate Gordon, “The Importance and Promise of AmericanManufacturing,” Center for American Progress, April 2011.Susan Helper, “The U.S. Auto Supply Chain at a Crossroads,” Case Western ReserveUniversity.Stephen J. Ezell and Robert D. Atkinson, “The Case for a National ManufacturingStrategy,” ITIF, April 2011.Robert E. Scott, “Costly Trade with China,” Economic Policy Institute, Oct. 9, 2007.
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