Deloitte’s 2016 Global Manufacturing Competitive Index has some surprising revelations.
For the past decade, China has ruled the manufacturing industry. This year, China was again ranked the world’s top manufacturing nation. In fact, just 10 years ago, in 2006, China’s exports of machinery and transportation equipment reached $425 billion USD, a leap of almost 30% over the previous year. China’s cost-competitive policies have successfully increased productivity, contained costs, and attracted manufacturers from around the global stage. It’s a manufacturing powerhouse.
But for how long? Recent studies show that the entire manufacturing industry is undergoing a seismic shift. It’s being called the Fourth Industrial Revolution, and it’s blurring the lines between the physical and digital world. (Read our whitepaper: “Industry 4.0: How the Food Industry Must Adapt to Survive”)
Surveys show that more and more, global CEOs consider that a competitive manufacturing industry will make use of advanced technologies. These include the Internet-of-Things (IoT), smart products and smart factories. As the new manufacturing emerges, other countries have the opportunity to give China a run for its money—countries like the US, the United Kingdom, Germany and Japan.
In fact, Deloitte’s 2016 Global Manufacturing Competitive Index contains a surprising revelation. The study indicates that by 2020, the US will outpace China as the world’s most competitive manufacturing nation. The fourth industrial revolution is underway, and with it, the decline of China and the rise of the US.
It’s Not Just About Money
Before this latest industrial revolution, cost-competitiveness was the main determinant of whether or not a manufacturing industry would succeed. By this standard, China was the clear winner, owing to its traditional low-cost value proposition. However, in a recent global CEO survey, CEOs ranked talent as the top priority for competitive industries, placing cost-competitiveness second.
In this survey, talent was defined as “the quality and availability of highly skilled workers which facilitate a shift toward innovation and advanced manufacturing strategies.” Global CEOs ranked Germany as having the most talent, with 73% of respondents saying the country was “extremely competitive.” The US ranked second, with 66%, whereas China lagged far behind. Only 33% of CEOs said the country had competitive talent.
Education Is Key
In part, the lack of talent in China is due to differences in education. On average, adults in China have only 7.5 years of schooling, as opposed to 12.9 years in the US and Germany. Moreover, traditional powerhouses such as the US, Germany and the UK have globally ranked universities aided by government funding. They attract talent from all over the world.
This emphasis on education in manufacturing is due to the new manufacturing landscape, where the physical and digital worlds overlap. To compete, countries must invest in research and development (R&D), so they can produce innovative technologies on a global stage. In this regard, the US is a clear leader, investing up to $457 billion USD in R&D in 2013. Moreover, recent policy changes made R&D tax credits permanent in the US, fostering increased levels of investments in education, R&D, and talent.
Although China has the US beat on the price tag, the US been working on its long game: not price, but people. In the new manufacturing landscape, talent and research are becoming more important than money, and the US has both in spades.
The Long Game
A manufacturing industry centered on advanced and sophisticated technologies is a new playing field, and it requires new equipment. According to global CEOs, nations need a firm infrastructure to compete. This includes factors ranging from a stable legal and regulatory environment to a productive national workforce.
In fact, after talent and cost-competitiveness, Global CEOs ranked workforce productivity, supplier network, and legal and regulatory systems as the top determinants of manufacturing competitiveness. While not all of these drivers make a country’s manufacturing industry immediately competitive, they help ensure success in the long-run.
A strong, productive workforce is key to a successful manufacturing industry. Although China has the advantage in labor cost-competitiveness, nations such as the US and Germany have the advantage labor productivity. In 2011, the US workforce generated $111,083 (2011 international dollars) per employee on an annual basis. China’s generated around $20,000 per employee.
A supplier network indicates an overall well-established, qualified, integrated supplier base in the country’s manufacturing industry. Before the convergence of the physical and digital worlds, the relationship between company and supplier was a one-way street. This is no longer the case. The digital world has enabled the supplier’s involvement in the industry, creating a more collaborative approach. Global CEOs consistently ranked the US at least 1 point higher than China for having a “competitive supplier base,” again. In the long run, that base will help make US industry more competitive than China’s.
Legal and Regulatory Environments
In this new landscape, stable and clear legal regulations are essential to a country’s manufacturing success. Regulations can support growth, advancement, and favorable manufacturing conditions, or they can increase a manufacturer’s risk profile. In this regard, Global CEOs ranked Germany and the United States as the top countries, whereas China was ranked last. In the US, it takes (on average) only 8 days to start a foreign subsidiary. In China, it takes an average of 65 days. The legal difficulties of doing business in China will (and do) act as a serious drawback to their manufacturing competitiveness.
None of these factors directly influence the actual numbers of the manufacturing industry. They do, however, together determine a nation’s ability to stay competitive in the long run. Without these key features, a country’s manufacturing industry will not survive the current industrial revolution.
A New World
The landscape of manufacturing is changing: the digital and physical worlds have melded. In order to stay competitive, nations must embrace advanced manufacturing technologies. The industrial revolution of our time is underway.
With this new revolution, cost-competitiveness alone no longer cuts it. Instead, countries need to pursue long-term strategies, such as acquiring talent, investing in innovation, and collaborating with suppliers. This new set of criteria gives countries like the US, Germany and the United Kingdom a clear advantage over China. Since 2010, the US manufacturing industry has ranked more and more competitively—so much so, that by 2020, it is predicted to outrank China.
When it comes to focusing on the future and fostering long-term manufacturing competitiveness, the United States is a clear leader. The fourth industrial revolution has cleared the path for a new regime, and it may well be the United States.
2016 Global Manufacturing Competitiveness Index. Deloitte. 2016.