Maryland's manufacturing sector is relatively small compared to the rest of the US, accounting for only 4% of employment and 5.8% of GDP. While Maryland has gained some jobs recently, they are not in traditional manufacturing industries. Manufacturing is important not just for jobs but for driving broader competitiveness through productivity gains, technology innovation, exports, and R&D spending. New disruptive technologies could transform manufacturing by changing economies of scale and democratizing innovation beyond just large firms. Policies to link small and medium firms to large firms and education, attract foreign investment, support exports, and provide access to technology could help revitalize US manufacturing ecosystems.

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
US MD
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
1980 1990 2000 2010
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
1980 85 90 95 2000 05 2010
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
102 96
45
52
54
156
204
239
693
Net
gains
Electr- Other
onics
Printing,
textiles
Gross
gains
853
Rubber Other
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
1998 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
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
-133 207 -645
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
1980 85 90 95 05 10 2012
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)