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December 15, 2012

6 things to know about the future of manufacturing

(Continued)

5. The future consumers are in the developing world

Manufacturing is entering a dynamic new phase. Over the next 15 years, McKinsey and Company projects that 1.8 billion people -- mainly in developing economies -- will join the global consuming class, bringing the total number of people with disposable income to around 4 billion and raising annual consumption to $64 trillion. By 2025, we project that emerging markets will account for fully half of global consumption. These new consumers will demand everything from mobile phones to soft drinks, expanding markets for established manufacturers that can figure out how to compete for these new customers.

At the same time, scientific innovation will undoubtedly produce new kinds of products, change how they are designed and made, and enable companies to meet the needs of consumers and business customers more quickly, with more tailored products, and with new forms of after-sale service. Innovations in production methods will also likely enable manufacturers to make new goods with less material or with recycled material, thereby reducing greenhouse gas emissions.

6. Old ways of thinking about manufacturing are increasingly risky

The manufacturing opportunities of the post-Great Recession world are considerable, but making the most of them will require changing old ways of thinking. Not only do manufacturers have to figure out how to serve billions of new consumers, they also need to meet the growing demand for variation, customization, and after-sales service. At the same time, manufacturers must navigate a minefield of new uncertainties -- including volatile resource costs, greater supply-chain risks, upward wage pressures, and the difficulty of locating high-skill labor.

In the coming era, following the path of low-cost labor -- as numerous multinationals did in the 1990s and 2000s -- is unlikely to pay off. Manufacturers will need to carry out nuanced, multi-factor analyses of all the issues that affect landed costs (what it costs to bring a product to market), including risk. Likewise, policymakers and business leaders will need to understand exactly how their industries respond to changes in factor inputs (like rising energy costs) in order to make effective strategy and policy decisions. A one-size-fits-all manufacturing policy will not suffice.

James Manyika is the San Francisco-based director of the McKinsey Global Institute, where Jaana Remes is a senior fellow. Louis Rassey is a principal in McKinsey's Operations practice. The full McKinsey Global Institute report is available at www.mckinsey.com/insights/mgi/research.

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