Manufacturing the future: The next era of global growth and innovation

He global manufacturing sector has undergone a tumultuous decade: large developing economies leaped into the first tier of manufacturing nations, a severe recession choked off demand, and manufacturing employment fell at an accelerated rate in advanced economies. Still, manufacturing remains critically important to both the developing and the advanced world. In the former, it continues to provide a pathway from subsistence agriculture to rising incomes and living standards. In the latter, it remains a vital source of innovation and competitiveness, making outsized contributions to research and development, exports, and productivity growth. But the manufacturing sector has changed—bringing both opportunities and challenges—and neither business leaders nor policy makers can rely on old responses in the new manufacturing environment.

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Manufacturing the future: The next era of global growth and innovation, a major report from the McKinsey Global Institute, presents a clear view of how manufacturing contributes to the global economy today and how it will probably evolve over the coming decade. Our findings include the following points:

• Manufacturing's role is changing. The way it contributes to the economy shifts as nations mature: in today's advanced economies, manufacturing promotes innovation, productivity, and trade more than growth and employment. In these countries, manufacturing also has begun to consume more services and to rely more heavily on them to operate.
• Manufacturing is not monolithic. It is a diverse sector with five distinct groups of industries, each with specific drivers of success.
• Manufacturing is entering a dynamic new phase. As a new global consuming class emerges in developing nations, and innovations spark additional demand, global manufacturers will have substantial new opportunities—but in a much more uncertain environment.

Manufacturing's role is changing

Globally, manufacturing continues to grow. It now accounts for approximately 16 percent of global GDP and 14 percent of employment. But the manufacturing sector's relative size in an economy varies with its stage of development. We find that when economies industrialize, manufacturing employment and output both rise rapidly, but once manufacturing's share of GDP peaks—at 20 to 35 percent of GDP—it falls in an inverted U pattern, along with its share of employment. The reason is that as wages rise, consumers have more money to spend on services, and that sector's growth accelerates, making it more important than manufacturing as a source of growth and employment.

The sector is also evolving in ways that make the traditional view—that manufacturing and services are completely separate and fundamentally different sectors—outdated. Service inputs (everything from logistics to advertising) make up an increasing amount of manufacturing activity. In the United States, every dollar of manufacturing output requires 19 cents of services. And in some manufacturing industries, more than half of all employees work in service roles, such as R&D engineers and office-support staff.

Manufacturers and policy makers need new approaches and capabilities

Companies must develop a highly detailed understanding of specific emerging markets, as well as the needs of their existing customers. They will also require agile approaches to the development of strategy—using scenario planning rather than point forecasts, for example. And they will have to make big bets on long-range opportunities, such as tapping new markets in developing economies or switching to new materials, but must do so in ways that minimize risk.

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