U.S. Manufacturing has faced decline over the past 20+ years, yet is still central to American economic performance in the future Technological changes have been a driving force for disruption. Now, however, technology is creating avenues for U.S. manufacturers to boost their productivity, agility, and global competitiveness Capturing these opportunities will require new capabilities from firms as well as coherent government policies that focus on the future instead of trying to re-create the past

1. AftonChemical.com
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Afton Chemical’s
Key Driver Seminar
Wednesday, May 23, 2018
10:30 am - 11:30 am
Session 5B, Room 101I
Commercial Marketing Forum

2. WWW.CSIS.ORG
STRATEGIC INSIGHTS & BIPARTISAN POLICY SOLUTIONS
American
Made:
The Renaissance in
U.S. Manufacturing
Wednesday, May 23, 2018
10:30 am - 11:30 am
Session 5B, Room 101I
Commercial Marketing Forum
presented by:
Scott Miller - Senior Adviser,
Abshire-Inamori Leadership Academy,
Center for Strategic and International Studies (CSIS)
Introduction by:
Phil Rohrer - Marketing Manager - Industrial
Afton Chemical Corporation

3. Themes
• U.S. Manufacturing has faced
decline over the past 20+ years,
yet is still central to American
economic performance in the future
• Technological changes have been a driving force for disruption. Now,
however, technology is creating avenues for U.S. manufacturers to
boost their productivity, agility, and global competitiveness
• Capturing these opportunities will require new capabilities from firms
as well as coherent government policies that focus on the future
instead of trying to re-create the past

4. Real Value Added: a Lost Decade
Source: BEA, McKinsey
Global Institute

5. Manufacturing Still “Punches Above its Weight”
0 10 20 30 40 50 60 70 80
Employment
GDP
Net Capital Stock
Patents
Exports
R & D Spending
Manufacturing as a % of U.S. Total
Source: BEA, Federal
Reserve Bank of St. Louis

6. Today’s Baseline
• The information and communication technology (I/CT) revolution
radically reduced coordination costs. Supplier operations could now
be managed precisely at great distances. As barriers fell, inter-plant
transfers became international trade
• Production specialized on a global basis, leading to increased U.S.
value-added in high-technology manufacturing
• In traditional sectors, automation reduced labor share of value-
added in an environment of increasing global competition

7. Supplier Networks—Then and Now
Source: NPS.gov Source: Oracle, India Pvt. Ltd.

8. Sectoral Performance, 1990-2016
• Innovative products (e.g., computers, pharmaceuticals) increased
value-added while sector employment fell -37%
• Vehicles and heavy machinery experienced stable value-added while
employment declined -25% and establishments fell -15%
• Commodity production faced a -5% decline in value-added while
employment fell -36% and establishments fell -15%
• Locally-processed goods (e.g., food and beverage) faced value-added
declines averaging -11%, while employment declined -21%
• Basic consumer goods (e.g., apparel) value-added declined -29% and
employment fell -68%, mainly in import-competing lines
Source: BEA, BLS, U.S. Census Bureau, Moody’s

9. Geographic Impact: 500 Counties
Source: USDA, BLS, BEA, McKinsey Global Institute

10. Mainly, Large Firms Weathered the Storm
• Since 1990, U.S. manufacturers with
over $1 billion in assets have grown
domestic revenue modestly, while
small- and mid-sized firms posted
(on average) negative growth
• Large U.S. firms have global operations, which contribute
to higher growth, profit margins, and returns on capital
• For highly-traded sectors, domestic content has fallen 13-15
percentage points since 2000, driven by global value chains
Source: swmintl.com

11. Import Content Grows in Traded Sectors
Source: U.S. Department of Commerce, McKinsey Global Institute

12. Post-recession, Productivity Growth Stagnated
Source: BLS, BEA, Moody’s,
McKinsey Global Institute

13. The Next Wave: New Opportunities
• U.S. manufacturers have an edge in their home market. American
consumers are rich, diverse, and dynamic, and the market is large
enough for both mass-marketing and niche specialization
• New technologies open avenues for customization and consumer
choice, with faster cycle times and novel demand patterns
• Many manufactured goods now have embedded services, or function
best in a services ecosystem

14. The Next Wave: Embedded Services
Source: Boeing

15. Global Demand is Rising—and Fragmenting
• “Globalization” gave rise to a global middle class.
Over the next decade, an additional one billion
people will urbanize and begin earning enough for
discretionary spending
• McKinsey estimates that by 2025 consumption in
emerging markets will hit $30 trillion, up from $12 trillion in 2010
• Demand will expand for mass-market goods while “niche” products
will be sufficiently profitable to generate attractive returns

16. Technology: From Destruction to Creation
• U.S. manufacturing needs an injection of productivity, and the
convergence of multiple complementary technologies are now
beginning to create leverage
• Automation, big data, and process optimization is underway, with
new approaches applied to increased demand responsiveness
• This suite of related technologies allows for highly customized
products and low-capex operations

17. Nokia “Factory in a Box”
Source: Nokia

18. Digitization: “Industry 4.0”
Nine Technologies are
Transforming Industrial
Production
CybersecurityThe cloud
Horizontal and
vertical system
integration
Augmented
reality
Additive
manufacturing
The industrial
internet of Things
SimulationBig data and
analytics
Source: Boston Consulting Group
Autonomous
Robots

19. Additive Manufacturing
Image credit: Materialise
Image credit: Ralf Holleis

20. Leveraging New Technology
• Value chains are evolving, allowing
manufacturers to capture upstream
and downstream tasks
• Input costs are changing. Labor cost differentials are narrowing,
industrial robot costs are declining, and U.S. “unconventionals”
development has delivered plentiful, low-cost energy
• U.S. firms are gaining ground in total factor performance

21. Adjacencies
Source: John Deere

22. Investment in New Capabilities
• Many firms need greater investment in digital capabilities
• Technology and demand growth are supportive of more firms
participating in the global economy
• Shorter product cycles mean firms must “compete against time”
• Strategies to capture services “adjacencies” are required
• Supply networks (especially S/MEs) can boost innovation

23. Robotics: Behind the Curve
Source: International Federation of Robotics

24. Skilled Workers: a Scarce Ingredient
• Technology always changes work:
productivity gains come at the cost of
dislocation and demand for new skills
• U.S. advanced manufacturing operations
face a chronic shortage of skilled people,
especially outside of cities
• Industrial-age institutions are ill-suited for the pace of change
• Talent development and retention is strategic
Source: pwc.com

25. Public Policy: So Far, So Good
• Regulatory reform since 2017 has boosted business confidence and
reduced uncertainty. Following the President’s lead, Congress has re-
discovered the Congressional Review Act and is expanding reform
beyond energy and environment to employment regulation
• Corporate tax reform adds incentives for investment while simplifying and
rewarding rational decision-making instead of tax planning
• The President’s trade policy has increased uncertainty and raised costs for
some, but thus far has had limited downside

26. Tax Reform: Positive for Investment
• For 2018, the top Federal corporate tax rate
is 21%, at the OECD average and
down from 35% in 2017
• The move to territorial taxation and other provisions eliminates
incentives for moving headquarters out of the U.S. and creates
incentives for repatriating earnings held offshore
• Immediate expensing of capital investments should boost capex
Source: nicholsaccounting.com

27. Trade Policy: a “Mixed Bag”
Trump administration trade policies are a disconnect from the past.
• Focus on the “industrial base:” steel, aluminum, autos.
• Results-orientation, at the expense of the rules-based order.
• Ambivalence toward existing arrangements
NAFTA has driven regional value chains. Agenda adds uncertainty and
favors U.S. employment over global competitiveness.
U.S.-China relations need better balance. Will “going it alone” work?
Source: South China Morning Post

28. Macro Effects: Tariffs Versus Tax/Fiscal Policy

29. Coming Attractions: Infrastructure
President Trump’s February 2018 plan had four “pillars:”
1. $200B grants to incentivize $1.5T in public-private partnerships
2. Rural infrastructure
3. “Transformative” financing models
4. Reforms in permitting, credit guarantees, and asset management
Positive: an innovative break from the past
Negative: no money (yet), no action by Congress before midterms

30. Energy Innovation for “Factory America”
• “Unconventional” hydrocarbon production
has upended energy markets and given
North America an edge in energy security
• At current prices and production, U.S. manufacturers have an edge
versus Europe and Asia in transport and generation costs
• Markets are providing incentives for further exploration as well as
infrastructure development and downstream production

31. A Manufacturing Renaissance
• Technological change now favors
advanced, innovative, high-skill
economies, especially the U.S.
• Firms must act to catch the wave
• Public policy can help, as long as it looks
forward and (when appropriate) gets out
of the way

32. American
Made:
The Renaissance in
U.S. Manufacturing
Wednesday, May 23, 2018
10:30 am - 11:30 am
Session 5B, Room 101I
Commercial Marketing Forum
presented by:
Scott Miller - Senior Adviser,
Abshire-Inamori Leadership Academy,
Center for Strategic and International Studies (CSIS)
Introduction by:
Phil Rohrer - Marketing Manager - Industrial
Afton Chemical Corporation
WWW.CSIS.ORG
STRATEGIC INSIGHTS & BIPARTISAN POLICY SOLUTIONS

33. AftonChemical.com
2018 © Afton Chemical Corporation, All Rights Reserved. Not to be copied, shared, or reproduced in any media without the express written permission of Afton Chemical Corporation.
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