MANUFACTURING INDUSTRY PROFILE

On June 26, 2009, Jeff Immelt, the CEO of General Electric, called for the United States to increase its manufacturing base employment to 20% of the workforce, commenting that the U.S. has outsourced too much in some areas and can no longer rely on the financial sector and consumer spending to drive demand. Further, while U.S. manufacturing performs well compared to the rest of the U.S. economy, research shows that it performs poorly compared to manufacturing in other high-wage countries. A total of 3.2 million – one in six U.S. manufacturing jobs – have disappeared between 2000 and 2007. In the UK, EEF the manufacturers organization has led calls for the UK economy to be rebalanced to rely less on financial services and has actively promoted the manufacturing agenda.

Given the technological revolution under way and the arrival of sophisticated new forms of automation, it is inevitable that manufacturers will face new pressures to secure talent with the necessary skills and competencies to succeed. More than a third of survey respondents acknowledge that they are struggling with recruiting and retaining talent, making it their most frequently cited pressure behind competition in product markets. Similarly, a closer look at manufacturers who cite implementing new automation technologies as a top challenge reveals concerns over the next three years in training employees to use new technologies (39%) and recruiting specialized talent (32%).

Perhaps inevitably, this has led nearly half of manufacturers in the survey to cite reskilling current employees as the most effective strategy to develop talent for a successful transformation. Other methods include collaborating with industry partners, supporting job rotation and collaborating with educational institutions.

Still, among the executives who are struggling to find the right people, 42% worry that over the next three years they will not be able to recruit new workers with the necessary prerequisites for on-the-job training. A similar proportion (38%) are also concerned there will be a lack of candidates interested in manufacturing work.

What are the skills manufacturers need most to successfully navigate transformation and prosper in this new industrial era? Approximately one in three respondents cite the ability to work across organizational boundaries, followed closely by interacting effectively with complex networks and systems, working in multidisciplinary teams and problem solving.

While much of the conversation on manufacturing’s future revolves around technology, skills will remain critical in driving the sector’s prosperity. For example, 66% of respondents expect difficulties competing with foreign firms in advanced countries that have stronger training and educational systems. Moreover, 71% of respondents believe that workers will lack the basic skills needed for retraining.

Beyond building skills, willingness to learn is also important. However, 65% of respondents anticipate a substantial proportion of manufacturing and assembly workers will not be willing to undergo retraining in the next three years.

Organizational and institutional constraints also stand in the way of manufacturers’ efforts to reskill their existing workforce.

According to some economists, manufacturing is a wealth-producing sector of an economy, whereas a service sector tends to be wealth-consuming. Emerging technologies have provided some new growth in advanced manufacturing employment opportunities in the Manufacturing Belt in the United States. Manufacturing provides important material support for national infrastructureand for national defense.

On the other hand, most manufacturing may involve significant social and environmental costs. The clean-up costs of hazardous waste, for example, may outweigh the benefits of a product that creates it. Hazardous materials may expose workers to health risks. These costs are now well known and there is effort to address them by improving efficiency, reducing waste, using industrial symbiosis, and eliminating harmful chemicals. The increased use of technologies such as 3D printing also offer the potential to reduce the environmental impact of producing finished goods through distributed manufacturing.

The negative costs of manufacturing can also be addressed legally. Developed countries regulate manufacturing activity with labor laws and environmental laws. Across the globe, manufacturers can be subject to regulations and pollution taxes to offset the environmental costs of manufacturing activities. Labor Unions and craft guilds have played a historic role in the negotiation of worker rights and wages. Environment laws and labor protections that are available in developed nations may not be available in the third world. Tort law and product liability impose additional costs on manufacturing. These are significant dynamics in the on-going process, occurring over the last few decades, of manufacture-based industries relocating operations to “developing-world” economies where the costs of production are significantly lower than in “developed-world” economies.

Manufacturing may require huge amounts of fossil fuels. Automobile construction requires, on average, 20 barrels of oil.

2018 was marred by tariff activity and negotiations between two heavyweights in the global industrial manufacturing industry: China and the United States. The story began with the United States’ announcement to impose tariffs on imported steel and aluminum and led to a volley of additional trade restrictions between the two nations.9 The impending situation creates a number of potential risks for manufacturers and poses multiple questions around the impact on margins due to uncertainty around increasing raw materials prices.

The current trade uncertainties, however, create an opportunity for industrial manufacturers to reevaluate their supply and distribution networks. Performing a risk analysis of existing supplier portfolios and identifying potential bottlenecks might be a starting point for discussing broader supply network strategies. Manufacturing firms can consider the best methods for building resilience into their supplier network to accommodate for the coming year’s unknowns, which may include identifying new suppliers in certain regions, remapping the distribution networks, working on new pricing models, or moving production based on customer proximity and prevailing trade policies.

Aiming for operational efficiency through technology can help mitigate some of the inherent risk in the supply chain, especially by using it to increase visibility and connectivity to create a digital supply network (DSN). In addition, 2019 presents an opportunity to consider investments in advanced materials and applications, such as additive printing, as an alternative supply source should specific component or parts pricing rise precipitously.

In light of the positive performance on many fronts in the industry, talent is becoming a top issue among executives. Job openings have been growing at double-digit rates since mid-2017 and are nearing the historical peak recorded in 2001.10 The manufacturing industry faces a talent shortage in the coming decade that could seriously hamper the positive growth and regeneration much of the industry has experienced in the United States since the Great Recession. The 2018 Deloitte and The Manufacturing Institute skills gap and future of work study shows a growing shortage of skilled workers over the next decade—up to as many as 2.4 million unfilled jobs by 2028, which could put $2.5 trillion of US GDP at risk.

Not filling job openings and not having the right skill set in the workforce can negatively impact manufacturers in various ways, including not being able to meet growing customer demand, the inability to respond to new market opportunities, and failing to innovate. To maintain output levels in the coming years, manufacturers should consider innovative approaches to attract, recruit, and retain talent. Engaging with the open talent ecosystem, tapping the resources of retirement-age experienced workers, and developing in-house training programs are all part of a holistic, long-term approach that companies may need to adopt.

Today, winning the talent war typically also includes projecting a positive “brand” for your company out to the market, one that reflects the advanced technologies that define manufacturing in the fourth industrial revolution. Additionally, sourcing talent through apprenticeship programs and technical schools can identify prospective employees with the right skills. And considering the rise of digital, it is also important to understand how skills are changing and then design a talent management strategy that reflects this.

Regional & International Issues

Every company leader knows that to succeed, innovation must be at the core of their business. But reimagining the way products and services are made—at scale—is easier said than done.
Take a global sportswear manufacturer: with ever-growing demand for hyper-personalization, executives were facing a major challenge—how to create customized sneakers that were both comfortable and durable, with fast turnarounds on a global scale. To meet the challenge, the company opened a manufacturing facility that relied on automation through robotics, machine learning and 3D printing.
But implementing emerging technologies wasn’t enough. The fully automated production line couldn’t ramp up fast enough. The manufacturing facility couldn’t adapt operations to support its automation system. With financial losses that befuddled shareholders, production was terminated three years into the project. An otherwise successful brand couldn’t scale design and innovation profitably.

Today, large industrial companies need to deploy digital technologies for wide-ranging aims. To stand out among competitors, they must apply innovation not only to existing and new operations but also to the products and services they develop.
But only a select few industrial companies manage to get the return they expect on digital investments.
To find out why, we zeroed in on a critical transitional phase for large, innovative organizations: when and how they move from a successful digital proof of concept (PoC ) to scaling that pilot for growth and profit.
Our survey of 1,350 global senior executives in key industrial sectors found that few companies win, most struggle and some completely fail, especially as they attempt to shift from improving the efficiency of their operations to generating new value for customers.
Between 2016 and 2018, the industrial companies in our survey spent a little over $100 billion on scaling digital innovations to drive new experiences and efficiencies. Yet 78 percent of industrial companies didn’t reach expected earnings.
Only 22 percent of industrial companies we looked at achieved a return on their digital investments (RODI) that exceeded their expectations. This small group of industrial companies, which we call “Champions,” are nailing digital transformation and rising above the rest.
Our findings show that these companies approach the organizational challenges associated with innovation very differently to their peers. They are more strategic, identifying the value they want to achieve and recognizing how their innovation efforts will affect their organization. For high-performing Champions, it’s not about scaling more pilots (even though they do). It’s about earning more by scaling better.
Champions are achieving greater value than their industry peers and are consistently exceeding higher performance expectations.
Champions expect to achieve RODI—and they earn RODI higher than industry average for returns on overall invested capital (ROIC) and industry RODI. They also scale more than 50 percent of their digital pilots.
The other 78 percent of companies? Up against common challenges, they’re struggling.
The companies trailing Champions—the second group (“Contenders”)—earn RODI lower than industry ROIC and lower than industry RODI despite scaling more than 50 percent of their digital PoCs.
The companies in the third and last group (“Cadets”) earn RODI lower than industry ROIC and lower than industry RODI and scale less than 50 percent of their digital PoCs.
What’s at stake for industrial companies that fall into these three groups? We collected data on 23 different organizational challenges across six categories. With an econometric model, we estimated the correlation between critical levels of the organizational challenges and the RODI.

Our analysis reveals how much incremental value, by percentage, could be achieved by overcoming these challenges, across industries. Then we compared the effect on discrete industries, where companies produce and assemble products made of distinct parts, and process industries that formulate complete offerings.
By overcoming alignment challenges and infrastructure inadequacies, companies can unlock the most value—with a chance of almost doubling their RODI.
The incremental value associated with overcoming challenges of digital skills and partnerships is marginally lower. And there is a measurable value associated with improving organizational culture.
Though Champions and the rest face common challenges, the size of the prize varies. Champions have overcome some of these critical challenges—as evidenced by the high RODI they earn. And yet, they can still unlock an additional 3.5 percent RODI. For others, the value at stake is much higher—almost three times as much—9.9 percent.

The four biggest challenges
“Innovation is known to impact much more than the direct bottom line of the product in which it is implemented,” Jorge Guzman, Assistant Professor of Business at Columbia Business School, told us. “Besides net income for a specific product or service, innovative work also changes the capabilities of a company to tackle the future and helps them try new ideas that could be risky, but potentially highly profitable.”

New innovations require companies to reimagine how they work, to digitally transform their operations and to exceed their customers’ ever-evolving needs. Each of these tasks comes with a unique set of challenges.
Executives of discrete producers and process industries repeatedly ranked four issues as the top barriers to scaling proof-of-concept projects:
1. Defining digital value, from the top down
Whether it’s improving the customer experience or innovating a new product, adding digital value can mean different things to different people. But if top leaders disagree on the customer experience they want to deliver, the cascading effect of such conflict can be deeply problematic.

2. Aligning with middle management
Top management needs a vision for how middle management should build, execute and scale pilots and innovate efficiently. If there’s friction among middle managers and between middle and top managers—amid time and budget pressures—the company will fall short of its goals.

3. Syncing talent pools with IT assets
Many mechanized products manufacturers are burdened with legacy IT tools and solutions. Rising digital experts find these cumbersome and ill-suited to designing, developing and scaling digital offerings for the company and customers, while middle and senior managers can’t always leverage new IT and digital technologies.
“New information systems have always upset business processes, requiring investments in both organizational change and technology,” said Nicolas van Zeebroeck, Professor of Innovation & Digital Business, Solvay Brussels School of Economics & Management, Université libre de Bruxelles. Digital technology today not only imposes new work structures but also requires new business models and rapid adjustments to accelerating innovation.

“The new work, delivery and business models require a new mix of skills, culture and governance that will deeply change existing organizations,” he tells us. “Without those complementary investments in organizational change, the technology simply cannot deliver tangible results.”

4. Positioning in-house innovations to win in the digital ecosystem
Finally, manufacturers have to align innovations designed in-house with the agile, digital ecosystems on the outside. Otherwise, mid-level managers and employees—fearing their ability to support the innovation—may wonder if engineers and innovators from the ecosystem will replace them.

“Many large businesses in the EU are going after agility, sometimes obsessively so, to prepare their organizations for an ever more digital future,” van Zeebroeck said. “The first step is often to set up some agile team or digital office that springs new ideas or solutions. But most of them have a very hard time scaling these initiatives internally and externally. In many firms, agility remains an abstract concept that should apply to teams, but it’s not entirely integrated and applied by the top management itself, where it should start.”
“New work, delivery and business models require a new mix of skills, culture and governance that will deeply change existing organizations”.
What sets Champions apart? To maximize their scaling efforts, they’ve developed a muscle memory reflected and supported by their structure and organization.

Action #1: Define the value that will guide innovation efforts
Champions know that if their goal is not clearly defined, they are more likely to try to scale digital pilots that don’t have the organizational backbone to succeed. They assess the opportunities before them, and, at the senior-most levels, narrow in on the market problems they want to pursue. Then they direct their innovation efforts to secure expected returns.

Action #2: Focus on internal organizational change and external digital value
Too often, there is a divide between what a company is trying to scale for customers and the technologies supporting the efforts. This gap can cause delays or unexpected bursts of internal change.
Champions across discrete and process industries blend organizational change and digital transformation initiatives, creating what we call an ambidextrous organization. Managers and employees never fall into a learning curve that is too steep. Instead, they become accustomed to the climb, and to the collaboration and flexibility it demands.

In fact, 62.2 percent of Champion discrete manufacturers are keen to embrace this ambidextrous approach at an enterprise level, while 52.9 percent of other discrete manufacturers are. Meanwhile, 63.5 percent of Champion process industry leaders are keen to embrace an ambidextrous approach at an enterprise level, while 54.8 percent of other process industries leaders are.

For Champions, ambidexterity enables an organization that continuously uses rapidly maturing digital technologies to grow its core and taps emerging technologies to develop and scale new endeavors.
62.2% of discrete manufacturing Champions want to blend organizational change and digital transformation initiatives ambidextrously
52.9% of discrete manufacturing non-Champions want to achieve the same
63.5% of process manufacturing Champions want to blend organizational change and digital transformation initiatives ambidextrously
54.8% of process manufacturing non-Champions want to achieve the same

Action #3: Build in-house innovation factories with targeted influence
When it’s time to scale a successful pilot that’s been developed by an autonomous entity, Champions recognize the enormity of integrating rapidly advancing technologies, along with talent and assets, back into the larger organization. They seed and grow new digital innovations organically within organizational boundaries.
They bring in new talent, but also integrate and develop existing talent as they go. They keep the new group linked to, and accountable to, the company’s profit and losses so they can preview the effect of scaling a proof of concept on the larger organization.

Action #4: Find out what enables innovation in each business function
In the end, how do you make innovation work? In short, companies can put “enablers” to work— from software applications for supporting operations to platforms for capturing and analyzing data. We found some from the second group (Contenders) —and even the third (Cadets)—select the same types of enablers as their Champion peers to facilitate innovation. However, Champions alone are masters at matching the support to the function that needs it most and will use it best.
For example, Champions have redefined their ecosystem partnerships (by adding new partners or rewiring existing relationships) to ensure that they have access to the digital talent they need from product design to scaling. Many Chinese organizations are adept this kind of “iterative innovation,” Zhu Hengyuan, Associate Professor and Vice Chair at Department of Innovation, Entrepreneurship and Strategy, School of Economics & Management, Tsinghua University, tells us.

Champions have redefined their ecosystem partnerships to ensure that they have access to the digital talent they need from product design to scaling.

“To begin with, they introduce a minimum viable product or service into smaller markets,” Zhu says. “They gather feedback from customers and partners in the innovation value chain. Based on this feedback they initiate the next round of product innovation—many times with stakeholders in the ecosystem. In this way, they evolve the product or service very quickly and sustainably.” Companies in China keep a sharp eye on the context in which their products and services are to be sold, Zhu says.

“They focus on innovating at a speed that can help them roll out products and services relevant to that context,” Zhu says, whether it’s internal to the company, such as the manufacturing context or supply chain context, or external, such as the emergence of new markets.
Haier calls its operating model “rendanheyi”—ren, in Chinese, refers to the employees, dan means user value, and heyi indicates unity and an awareness of the whole system.
In the era of tech-driven innovation, many industrial companies are still grappling with transitioning to digital. To survive and thrive, they must catch up—quickly. They’ll need the right tools and teams to get up to speed at all levels throughout their organizations, from the top down.

The good news? While most of the Champions in our research made decisions years ago that positioned them where they are today, other companies can get on track. They can immediately identify and articulate the value spaces they want to capture, instead of launching shotgun-style innovation or scaling efforts.

And senior managers can identify a team, under the leadership of a C-suite executive, to assess how well the company is equipped with appropriate platforms, technologies, skills and ecosystem partners to support scaling successful pilots. Like the global sportswear manufacturer that couldn’t ramp up production fast enough, companies can’t afford to wait to bridge the digital gaps before innovating at scale. They must unify around testing and scaling across the board. To succeed, they’ll have to be as innovative internally as they aspire to be for their customers.

Competitive Landscape

Globalization has opened new markets and opportunities for manufacturers but has also created new challenges, including how to manage far-flung supply chains and distribution channels. Manufacturers have turned to digitalization to improve efficiency across every area of operations, including product development, design, production, distribution, and marketing. However, implementing a successful digital transformation strategy — including the leveraging of internet of things (IoT) technology and big data — requires careful planning and significant investment.
a significant portion of new sales growth for industrial equipment manufacturers in the immediate future will come from connected equipment with sensors, actuators, and analytical insights that can exchange critical data with other machines and computer networks in real time via the cloud. Indeed, 72 percent of manufacturing companies surveyed by PwC said they are dramatically increasing their level of digitization and expect to be able to be ranked as digitally advanced by 2020, compared with just 33 percent today. These companies are committing US$907 billion per year — about 5 percent of revenues — toward greater connectivity and smarter factories.

Also additive manufacturing, incorporating 3D printing, is rapidly catching on and transforming business models in the industrial world. This less wasteful and more efficient new production approach potentially rewrites the book on minimum product runs, the need for warehousing, plant location and design, and maintaining spare parts. Yet, despite aggressive and optimistic projections for advances like the Internet of Things (IoT) and additive printing and their impact on customers, industrial equipment manufacturers have barely dipped their toes in the waters of these aspects of Industry 4.0.

Even those industrial equipment makers that have embraced IoT technology and are taking proactive steps to prepare for this new industrial digital ecosystem face barriers. Lack of standardization in this relatively new arena makes research and development efforts arduous and expensive, especially since this equipment will be implemented in complex operating environments requiring coordination among multiple facilities, users, and networks. Moreover, customers, fearing technological obsolescence of freshly purchased equipment, are reluctant to take a chance on products that require long testing periods and learning curves. That goes against the grain of industrial manufacturers, whose traditional business models called for developing products with elongated life cycles.

Sales & Marketing

US industrial manufacturing deals activity experienced a healthy 2018, recording more than $65 billion in year-to-date M&A deal values, an increase of more than 30 percent compared to the same period in 2017. The average deal volumes also registered a gain of more than 50 percent during the same period, with twelve $1 billion plus deals, despite a decline in cross-border M&A activity due to sustained political and trade uncertainty throughout the year.
Mergers and acquisitions seem positioned for a strong 2019, primarily driven by continued business confidence and an increasing focus of US firms to enhance their geographic presence and strengthen their product portfolios. The Tax Cuts and Job Act signed in December 2017 is likely to lead to enhanced M&A activity in 2019 as manufacturers accrue cash and look for ways to invest. Further, manufacturing firms are also expected to repatriate cash from foreign countries and look to expand their production capacity and resources in the United States, driving reshoring initiatives. This could lead to new factories, as well as smaller players and suppliers being acquired. Additionally, US manufacturing firms are also turning to M&A and divestitures to clean up their product portfolio and focus on core business segments. Case in point, during the last few years, the industry observed as many as thirty $500 million divestiture deals.

Technology is also driving both M&A and alliances in the industrial ecosystem. With the proliferation of connected service offerings, advanced digital technologies, and the emergence of a data-driven world, manufacturing companies are likely to continue to exhibit an eagerness to invest in technology and innovation. And that means that more manufacturers are expected to form ventures and alliances to complement their expertise and work together to develop future products. Doing so would allow the companies to expand their digital expertise, potentially leapfrogging the competition in the digital transformation race. There should be a strategy for approaching any activity in this space to ensure that acquisitions, divestitures, or ventures deliver the intended value.