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1. McKinsey Global Institute
MEDA 2014 Fall Conference
October 2014
Advancing manufacturing
in Maryland: What matters

2. 1
Maryland’s manufacturing base is diverse–but
relatively small compared to the rest of the US
SOURCE: US Census; Brookings Institution; McKinsey Global Institute analysis
8.2
12.4
4.0
5.8
Share of
employment
Share of
GDP
MDUS
Manufacturing in the US
versus in Maryland
Percent
692.0
-14.4
Ongoing recovery in
the US vs. Maryland
Thousands of jobs in
manufacturing sector
Salisbury
High tech
 Aerospace
 Electrical goods
 Appliances
Baltimore
Diversified mfg
 Computers and
electronic
products
Cumberland
Resource-intensive
 Furniture
 Apparel
 Wood products
Hagerstown
Resource-intensive
 Leather goods
 Textile mills
 Beverages
Washington DC
Diversified mfg
 Biotech and life
sciences
 Computers and
electronic
products
Major manufacturing clusters in the state

3. 2
Maryland’s employment gains are not in
traditional manufacturing industries
SOURCE: US Cluster Mapping Project, Institute for Strategy and Competitiveness, HBS; McKinsey Global Institute analysis
0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
-0.8 -0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4
Change in employment since 1995
Percent
Share of US employment
Percent
IT services
Insurance
Logistics
Publishing
Electrical equipment
Biopharmaceuticals
Apparel
Fabricated metals
Furniture
Paper products
Chemical products
Automotive
Upstream metals
Plastics
Construction products
Food processing
Aerospace
Capital goods
Communication equipment and services
Hospitality
Finance
Education
Business services
Employment size in MD

4. 3
Manufacturing
matters—but not
just for jobs

5. 4
Manufacturing matters—but as a driver of competitiveness
SOURCE: McKinsey Global Institute analysis of various US state, federal and European data sources
Direct economic contributions
 Productivity gains are
passed on to
consumers as lower
prices
 Technology innovation
results in spillover
effects
 Provides solutions
to societal
challenges such as
reducing energy and
resource consumption
Indirect contributions
Exports 70% 61%
R&D spending 77% 67%
Productivity growth 37% 30%
90%
N/A
24%
Value added 16% 12% 6%
Employment 14% 8% 4%
Value-added growth 20% 12%
Employment growth -24% -22%
6%
-16%

6. 5
0
5
10
15
20
25
30
35
40
0 5,000 10,000 15,000 20,000 25,000 30,000
Manufacturing employment
% of total employment
GDP per capita
1990 PPP-adjusted dollars
United States
United Kingdom
Taiwan
South Korea
Mexico
Japan
India
Germany
Canada
Brazil
Employment follows inverted U-shape as an economy prospers
SOURCE: McKinsey Global Institute analysis

7. 6
Local and regional
demand matters

8. 7
US manufacturing employment trends
SOURCE: US Bureau of Labor Statistics; McKinsey Global Institute analysis
US manufacturing employment
Million
12
11
15
13
9
14
16
17
10
18
20
19
2014
Sept
2010200019901980
January
-1.5
-0.5
-5.8
+0.7

9. 8
-3
-2
-1
0
1
2
3
4
5
6
7
Productivity
Real value added
20100520009590851980
US manufacturing value added and productivity growth
5-year moving average of annual growth, 1980–2010
Demand growth did not match productivity in the last decade
SOURCE: US Bureau of Economic Analysis; US Bureau of Labor Statistics; McKinsey Global Institute analysis

10. 9
Four demand-driven industries are driving recent US job growth
SOURCE: US Bureau of Labor Statistics; McKinsey Global Institute analysis
Gross and net job gains in US manufacturing in the recovery
Thousand jobs, Jan 2010 to Sep 2014
26
38
96102
45
52
54
156
204
239
693
Net
gains
OtherElectr-
onics
Printing,
textiles
Gross
gains
853
OtherRubber
and
plastics
Food,
bever-
age
Primary
metals
Mach-
inery
Fabri-
cated
metals
Autos,
other
transport
35% of 2010 employment
80% of new jobs since 2010

11. 10
105
100
95
90
85
80
75
70
65
60
55
50
0
14
51
58
63
68
73
80
121110 1309080706050403020100991998
Diverse industries with very different employment trajectories
SOURCE: US Bureau of Labor Statistics; McKinsey Global Institute analysis
Manufacturing employment by industry group in the United States, 1998–2013
Index: 100 = January 1998
Energy-/resource-
intensive commodities
Labor-intensive
tradables
Global technologies
Manufacturing
overall
Global innovation
for local markets
Regional processing

12. 11
Suppliers matter–
not just large firms

13. 12
Net exports, 2012
Nominal $ billion
-34
151
-246
-45
-195
-276
Total
1
-23
306
-27
-69
Health, education,
and public services
Services
Knowledge-intensive
manufacturing
Capital-intensive
manufacturing
Labor-intensive
manufacturing
Primary resources -321
7
98
-104
-499
280
425
-645-133 207
Advanced economies run a large trade surplus
in knowledge-intensive manufacturing
but the United States is an exception
SOURCE: IHS Global Insight; McKinsey Global Institute analysis

14. 13
The US trade deficit in knowledge-intensive
manufacturing has grown since the mid-1990s
Net exports, 1980–2012
$ billion, real (2005)
-150
-200
-250
-300
0
-100
150
-50
100
50
2000
Chemicals, including pharmaceuticals
Medical, precision, and optical
Non-automotive transport equipment
201210059590851980
All knowledge-intensive manufacturing
Motor vehicles, trailers, and parts
Semiconductors and electronics
Computers and office machinery
Machinery, equipment, and appliances
Electrical machinery
-0.2 -0.6 -0.1 -0.7
Overall trade balance
as a share of GDP
-1.3 -2.0 -2.0
SOURCE: IHS Global Insight; McKinsey Global Institute analysis

15. 14
What’s coming
next matters

16. 15
Innovation used to be (and still is) dominated by large firms
SOURCE: Bureau of Economic Analysis; US Department of Commerce; NSF Science Resource Statistics, 2009;
McKinsey Global Institute analysis
All other
16
Govern-
ment 10
Multinationals
74
Aggregate US R&D spend in manufacturing
100% = approximately $300 billion
 Larger capital requirements for
manufacturing R&D than for
software or Internet innovation
 Longer cycle times in hardware
 Limited access to advanced
technology platforms
 Low VC activity in hardware vs.
software and Internet solutions
 Small manufacturers embedded
in supply chains of large firms
Disadvantages for small firms
in manufacturing innovation
But new technologies
disrupt the status quo

17. 16
Disruptive technologies can transform manufacturing
SOURCE: McKinsey Global Institute
Smarter, cheaper
robots
 More flexibility in
labor vs.
automation
 Less scope for
labor arbitrage
Internet of Things
 New source of
value—from
“intelligence”
 Importance of
software, services,
solutions
Additive
manufacturing
 Faster to
prototype,
customize, go to
market
 Shorter innovation
cycles
Advanced materials
 Opportunity to
optimize design to
value
 Ability to customize
performance and
products

18. 17
Transformative impact of technology in manufacturing
 Change in economies of
scale—variety of scale options
 New source of value from
information-driven intelligence
 Proliferation of product
variants, faster response
times, efficiency, and tailoring
BOTTOM LINE:
Democratization of innovation—
not just large firms any more

19. 18
A new perspective on manufacturing: Next-shoring
 Proximity to demand
 Proximity to innovation
SOURCE: McKinsey Global Institute
Long-term
competitiveness
Healthy supplier
ecosystem
Local and
regional demand
Technology and
innovation

20. 19
Five examples to revitalize manufacturing ecosystems
SOURCE: “5 things the U.S. could do to revitalize manufacturing”, WSJ, June 6 2014; McKinsey Global Institute
Productivity and Innovation Credit provides tax credits or payouts
for investments in IP, automation and IT, R&D, workforce training
Follow Singapore’s lead
Link up SMEs with large firms and education providers to support
workforce development, especially where firms don’t have scale
Model Germany’s business links
Help firms attract FDI, esp. from emerging economies looking to
invest but that need help navigating the manufacturing landscape
Tap new investors from China
Support direct exports through online platforms, aggregation, and
assistance with supply logistics, customs and market rules, etc.
Consider the eBay and Alibaba model
Create “technology access centers” to allow access to advanced
technology platforms for R&D, prototyping and even basic learning
Adopt Canada’s technology approach
ILLUSTRATIVE

21. 20
@mckinsey_mgi
Download these and our other
reports at
www.mckinsey.com/mgi
Sree_Ramaswamy@mckinsey.com
An economy that works: Job
creation and America's future
(June 2011)
Disruptive technologies: Advances
that will transform life, business,
and the global economy
(May 2013)
Manufacturing the future: The next
era of global growth and innovation
(November 2012)
Next-shoring: A CEO’s guide
(January 2014)