There are changes happening in manufacturing economies that are having ripple-through effects to everyone participating in the supply chain, from consumer goods manufacturers to chemical, metals and mining companies.
There has been much speculation on the demise of manufacturing in advanced economies (or “developed regions”, such as the US, Europe, Japan, etc.). Their aging populations are related to falling birth rates and longer life spans, translating to declining workforces. Countries like Germany, Japan and Italy have populations with average ages of 43 years, while countries like India, the Philippines and South Africa have average population ages of 27 years. Also, workforce growth has been feeble in most developed countries, with Japan’s being one of the extremes, its workforce declining by about 1% between 1993 and 2013. Among advanced economies, the drop in manufacturing employment has been even more pronounced, sinking by 27%1, on average, during the same time period.
With these significant differences, there is concern that advanced countries have no hope of sustaining a manufacturing sector and that the idea of it should be abandoned in favor of purely service economies. Quite to the contrary, manufacturing will survive and thrive, provided that companies leverage the latest technologies across their value chains.
Competitive immune response
Far from dying, manufacturing as a share of GDP in advanced economies only declined from a level of 45% in 1993 to a level 40% in 2010, while maintaining a stable share from 2010 to 2013. The disparity versus employment is due to productivity improvement from the implementation of new methods and technologies. These regions continue to lead in terms of manufacturing innovation and new product development. Our research indicates that, across a broad number of industries, the number of original patents cited by other patents (an indication of commercial significance) are highest in the US and Europe. These regions are also sources of industrial investment globally.
So how is this accomplished? What must producers do to participate and continue benefiting from this? What can producers from across regions, including emerging markets, learn from this?
The fact is manufacturing has been able to survive and thrive by continually innovating and adopting new technologies. This has been observable since the industrial revolution (and arguably, back to ancient times), where scale-production and new technologies enabled continual cost savings. In the past century or so, manufacturing was impacted by breakthroughs in materials technology and vastly improved infrastructure and communications.Finally, the information technology age (post 1940) enabled greater leaps in cost reduction and shortened time to market. The opening of emerging markets since the 1980s and 1990s had changed the focus for a number of years to globalization and exploitation of low cost labor in emerging regions for so-called “competitive advantage,” with innovation taking a lesser role for a period.
Now, a new gameboard is being set, as competitive levers change. The largest pool of workers in the world, China, is experiencing rising labor costs relative to the rest of the world. China’s manufacturing sector has been naturally up-scaling to new areas, matching the higher costs and skills of its labor pool, as is evident by the rising share of value-added durable goods manufacturing in that country. See our past blog post on the issue here. In addition, automation and robotics technologies have been quietly developing in capability and affordability, reducing the importance of labor costs across various industries, particularly in those considered “labor intensive” (such as automobile and plastic product manufacturing), as they attracted the most innovation focus.
With these changes, manufacturing companies can now more freely choose where to site new facilities and many are choosing to be closer to end consumers. Site selection will tend to depend on the combination of product attributes and geographic target-market (aside from other factors, such as legal environment). Therefore, companies around the world must come to grips with the fact that the era of locating in lower labor cost regions as the only strategy for cost reduction is passing (see past blog on this topic).
Figure 12 shows that countries with aging populations have also been the most active in adopting technology (measured here as robotics), as well as maintaining high GDP per capita levels. This demonstrates how these countries stayed competitive. Indeed, countries like Germany, Japan and South Korea excel in quality automotive manufacturing, the benchmark of industrial production.
Robotics are progressing rapidly augmented by improved sensing, connectivity, gripping, 3D visioning, machine-to-machine and machine-to-human interaction, allowing them to handle multiple tasks, with high accuracy and speed. Robotics prices have also been dropping, making them more affordable to smaller manufacturers. Rather being dehumanizing, robots are also improving worker well-being as they are increasingly used to handle mundane, repetitive and potentially hazardous duties on shop floors. Automated systems are superior in spotting and rejecting defects which can pose hazards to end consumers, a particular concern in the food processing industry. The resulting benefits go straight to the bottom line: lower costs, higher quality, greater throughput and reduced waste.
One of the most significant benefits of the use of robotics/automation is the avalanche of digitized data concomitant with their use. This includes material properties, line speeds, part tolerances, input material qualities, equipment wear, energy usage, material waste, temperatures and many other process variables. This opens the door for greater analytical decision making and faster responsiveness across the materials supply chain, from finished goods back to raw material inputs. For instance, in a consumer goods company, the harnessing of social media and big data allows for advanced analytics to determine the most relevant product features/assortments and packaging. Automation and digitalization allow market-responsiveness and flexibility in operations/procurement, accelerating time-to-market, while reducing unneeded inventory. The same data can improve R&D and supply chain decisions as well.
What it means for chemicals, metals and mining companies
As this trend becomes entrenched and is leveraged for value, automated industries will demand their materials suppliers to conform to this new, digitalized environment. For instance, design for automation (DFA) trends, including product manufacture and packaging, are also becoming more prevalent in downstream manufacturing and can directly impact materials selection, where designs/parts/materials allowing the least amount of assembly steps/intervals are favored.
Manufacturers will require more precision, customization and flexibility from their raw material (e.g., chemicals, metals, paper, etc.) suppliers, as well as improved quality, recipes, delivery (including packaging method and timing) and innovation. For instance, one manufacturer required foam packaging inserts to be modified and delivered in a particular arrangement in order to robotize the packaging of its products. Materials companies that do not conform to this new mode will be deselected as suppliers.
Digitalized processes also offer tangible, bottom line benefits to materials companies. For example, in agricultural chemicals mobile applications for farm diagnostics are being used to provide added value to farmers. Paint companies can use social media to determine future paint preferences and formulations.
In the minerals industry, leading mining companies are employing more automation, robotics and remote control centers that reduce the human effort and break the constraints of resources having to be in physical, often remote, locations.
Meeting the challenge
It is clear that manufacturing investment and trade patterns are changing as the factors of production change in emphasis globally, most notably with the importance of labor costs decreasing3. With this trend is the growth of automation and digitalization, which will demand more from raw materials providers. Digitalization enables new ways of interacting with customers, suppliers, employees and partners. With a clear vision of what is happening in the materials value chain, all the way down to consumers, materials companies can leverage technology to survive and thrive.
1 Special thanks to Derek Black, Vice President at ARM Automation, Inc. for his insights on robotics trends.
2 Figure 1 is based on Accenture Research analysis of data from Oxford Economics, The CIA World Factbook; “World Robotics, 2013,” International Federation of Robots.
3 It is important to note that any additional available labor caused by the use of robotics would likely be used for future new products and services, as is evident in industrial history. Also, increased population growth would add economic strength to countries employing proven effective technologies.