A focus on global textile manufacturing and its prospects
According to a study of McKinsey Global Institute (belonging to McKinsey international consulting group), around 1.8 billion people will enter the global consuming class and worldwide consumption will double to USD 64 trillion. At the same, developing economies will continue to drive global growth in demand for manufactured goods – among textiles and apparel –becoming just as important markets as they have been as contributors to the supply chain.
A strong pipeline of innovations in materials, information technology, production processes and manufacturing operations will bring manufacturers the opportunity to design and build new kinds of products, reinvent existing ones, and bring renewed dynamism to manufacturing. TextileFuture will give you details of an extensive study lately delivered by McKinsey Global Institute with a focus on textiles and apparel and the future aspects of the manufacture of these goods. We thus continue the promised series of all aspects of today’s and future manufacturing
The authors from McKinsey Global Institute and McKinsey Operations Practise (James Manyika, Jeff Sinclair, Richard Dobbs, Gernot Strube, Louis Rassey, Jan Mischke, Jaana Remes, Charles Roxburgh, Katy George) have been establishing the Study “Manufacturing the future: The next era of global growth and innovation” (184 pages) and with a focus to research and analysis to establish a clearer understanding of the role of manufacturing in advanced and developing economies, and the choices that companies in different manufacturing industries, such as textiles and apparel, will have in the future, including how they organise and operate. The authors’ findings conclude that in advanced economies, manufacturing will continue to drive innovation, exports, and productivity growth. In developing economies, manufacturing will continue to provide a pathway to higher living standards. And they add, as long as companies and countries understand the evolving nature of manufacturing, and act on the powerful trends shaping the global competitive environment, they will thrive in this promising future.
From Table 1, you can have the major facts
The authors declare that its findings reveal that manufacturing is a diverse sector, not subject to simple, one-size-fits-all approaches, and evolving to include more service activities and to use more service inputs. They are further convinced that the role of manufacturing in job creation changes as economies mature. Future manufacturing is unfolding in an environment of far greater risk and uncertainty than before the Great Recession. In the near term, the lingering effects of that recession present additional challenges. To win this environment, companies as well as governments need new analytical rigor and foresight, new capabilities, and the conviction to act!
For three centuries manufacturing industries have helped to drive economic growth and rising living standards, and they continue to do so in developing economies. Building a manufacturing sector is still a necessary step in national development, raising incomes and providing the machinery, tools and materials to build modern infrastructure and housing. Even India continues to build up its manufacturing sector to raise living standards, aiming to raise the share of manufacturing in its economy from today’s 16 % to 25 % by 2022.
The significance of manufacturing – today and in the future – for countries and economies can be had from Table 2
It should be noted from the table, that global manufacturing output (measured by gross value added) grows around 2.7 % annually in advanced economies and 7.4 % in large developing economies (between 2000-07) . Economies such as China, India, and Indonesia have risen to the top ranks of global manufacturing, and in the world’s 15 largest manufacturing economies, the sector contributes from 10 percent to 33 percent of value added.
How manufacturing matters
Manufacturing contributes disproportionately to exports, innovation, and productivity growth as Table 3 presents.
The role of manufacturing and the economy change over time. Empirical evidence shows that as economies become wealthier and reach middle income status, manufacturing’s share of GDP Gross Domestic Product peaks at around 20 to 35 %. Beyond this mark, consumption shifts toward services, hiring in services outpaces job creation in manufacturing, and manufacturing’s share of GDP begins to fall along an inverted U-curve. Employment declined from 25 % in 1950 to nine percent in 2008. In Germany, manufacturing jobs fell from 35 % of employment in 1970 to 18 % in 2008, and South Korean manufacturing went from 28 % of employment in 1989 to 17 % in 2008.
As economies mature, manufacturing becomes more important for other attributes, such as its ability to drive productivity growth, innovation, and trade. On top, manufacturing plays a critical role in tackling societal challenges, such as reducing energy and resource consumption and limiting greenhouse gas emissions.
Economies recovering from the great recession created by financial institutions will show an uptrend in manufacturing hiring. The most competitive manufacturing nations may even increase their share of net exports. If such a trend can be sustained depends on how well countries perform on a range of fundamental factors important to manufacturing industries: access to low cost or high skill labour, or both, proximity to demand, efficient transportation and logistics infrastructure, availability of inputs, such as natural resources or inexpensive energy, and proximity to centres of innovation.
There are also hiring differences. Manufacturers in advanced economies will continue to hire workers, both in production and non-production roles, such as design and after sales services. On the long run, manufacturing’s share of employment will continue to be under pressure in advanced economies due to ongoing productivity improvements, and the continued growth of services, as a share of the economy, and the force of global competition, which pushes advanced economies to specialise in more high-skill activities. Thus, manufacturing cannot be expected to create mass employment in advanced economies on the scale it did decades ago!
Necessity to classify manufacturing into broad segments
McKinsey has chosen to classify manufacturing into five broad segments, varying significantly in their sources of competitive advantage and how different factors of production influence where companies build factories, carry out R&D, and go to market. Depending on the industry, factors such as energy and labour costs or proximity to talent, markets, and partners such as suppliers and researchers have greater weight. Indeed, many manufacturing companies, including industries such as automotive and aerospace, the textile manufacturing industries and the textile industry are already concerned about a skill shortage.
The factors of influence in the five categories, including textiles, apparel and leather sectors, can be had from Table 4
The segmentation helps companies to explain the evolution of different parts of their operations, from individual business units to various stages of their supply chains. The segmentation clarifies also the differences between segments of the same industry and helps to explain why the needs and factors of success vary even within the same industry.
The largest group of the five is global innovation for local markets – where we find machinery, also textile machinery – and it accounted for 34 % of the USD 10.5 trillion (nominal) in global manufacturing value added in 2010. This group is moderately to highly R&D intensive, depending on a steady stream of innovations and new models to compete. Please refer also to the Newsletter of July 9, 2013 covering the significance of innovation! In addition, the nature of the group’s products is such that production facilities are distributed close to customers to minimise transportation costs. The footprints of these industries might be influenced by regulatory effects (for example safety standards) and trade agreements.
The second largest manufacturing group are regional processing industries, their share is 28 % of value added, and the group represents the largest employer in advanced economies. Their products are not heavily traded and not highly dependent on R&D, but they are in turn highly automated.
Energy and resource intensive commodities, such as basic metals, make up the the largest manufacturing group. For these companies, energy prices are important and they are tied to markets in which they sell, due to high capital and transportation costs.
Global technology industries classified next depend on global %&D and production networks. The high value density of products (computers, phones), make them economically transportable from production sites to customers around the globe.
The fifth manufacturing group are labour intensive traded goods, such as textile and apparel manufacturing, as well as leather and they represent just seven percent of value added. Thje goods are highly tradable and companies require low cost labour. Production is globally traded and migrates wherever labour rates are low and transportation is reliable.
From this classification it becomes clear that the segments make very different contributions to the global manufacturing sector, and they have evolved in dramatically different ways. Just two of the five segments, namely regional processing and global innovation for local markets make up nearly two third of manufacturing value added, and more than half of manufacturing employment, both in advanced and emerging economies. Two other industry groups, global technologies and labour intensive tradables – are both highly traded globally, but exist at opposite ends of the skill spectrum, together they have only a share of 16 % of value added in both advanced and emerging economies.
The overview of these effects can be had from Table 5
The evolution of these categories: In 2010, advanced economies ran a USD 726 billion surplus in goods such as automobiles, chemicals, pharmaceuticals, and machinery. The trade deficit resulting from labour intensive tradables, including textiles, apparel and leather, amounted to USD 342 million.
The labour intensive tradables group, textiles, apparel and leather goods leads in both value added and employment as can be had from Table 6
Impressive is also the shedding of jobs, in labour intensive industries in advanced economies, the lost jobs since 1995 was 37 %, whereas regional processing industries have lost only five percent of their employment. At the forefront of these job losses were textiles and apparel, for instance in the US, as can be taken from Table 7
An interesting fact reveals the multiplier effects of additional jobs in services, being typically higher than in manufacturing, this is also true for textile, see Table 8
On the other hand, services drive demand for manufactured goods and vice versa, this can be had from Table 9
Other findings relating to textiles and clothing
Competition among industries in the labour intensive tradables segment has given rise to fruent international interventions as well as regulations, such as the 1995 WTO Agreement on textiles and clothing and the 1974-2004 Multi Fibre Arrangement (MFA), which imposed quotas and preferential tariffs on textiles and apparel imported by Canada, the EU, and the USA from countries outside that group. The dissolution of the MFA and the WTO’s Agreement on Textiles and Clothing at the end of 2004, altered the industry landscape, accelerating the shift of production to low cost locations,k with China attracting the bulk of the activity. China’s share of global apparel exports rose from 18 % in 2000 to 33 % in 2009. Other nations also benefited, including Bangladesh, whose sthare of global apparel exports rose from 2.6 % in 2000 to 3.0 % in 2009, and Vietnam, whose share went from 1.7 % in 2005 to 2.5 % in 2009. Cambodia, Egypt, and Pakistan have also expanded their textile and apparel sectors. After the phasing out of quotas and the following recession, these sectors have declined sharply in Mexico, Morocco, Thailand, and Tunisia, as well as in Canada and several European countries.
Assuming a continuation of liberalised trade policies, the production of apparel, textiles leather and footwear (and others of this category such as furniture and toys, will continue to follow tjh path of lower labour costs. Despite rising wages in some regions, China is likely to continue to be a major producer, thanks to still relatively low average labour costs, good transportation, large labour pool, and increasingly affluent domestic market. The sheer size of China’s labour force gives it advantages. In 2008, roughly 24 million Chinese were employed in labour intensive tradables industries, including 18 million in textiles, apparel and leather industries. Nevertheless, escalating costs in coastal China, and a desire by manufacturers to diversify locations to mitigate political and supply chain risk are pushing companies to look for new locations. Low end clothing manufacturing is already moving to Cambodia and Vietnam and other low cost locations. Meanwhile, Japan has explicitly declared its interest in reducing its reliance on China in textiles and apparel. Guess, an American fashion brand, announced already in 2011, that within 18 months, it planned to reduce the Asian goods it sources in China from one half to one third!
For some sectors within the group other than cost can factor into location choices. For example, in fashion sensitive products, the ability to meet short lead times is a key criterion. For high end, tailored clothing, technical skills factor heavily influence the location decision. Also innovation with materials plays a role in the location decision. While the value density of products in the labour intensive tradable group usually makes transportation costs a secondary factor, when global freight routes are close to full capacity and charges rise, companies look for alternative locations to maintain their deliveries. These include Eastern Europe (Hungary and Poland, and more recently Bulgaria, Romania, and Ukraine, as well as Italy and Portugal.
Companies can protect or extend their advantages bys understanding how proximity requirements or sensitivities to changes in factor inputs affect their competitive positions. Clearly identifying the forces that determine where companies choose to locate (or withdraw) will enable policy makers to adapt their manufacturing policies to have greater impact. Of course also recent events such as in Bangladesh and Cambodia are forcing dislocation to other manufacturing locations. A textile expert recently explained to TextileFuture that apparel made in Bangladesh is not acceptable for the time being by consumers around the globe.
We at TextileFuture believe that this part of our series of a changing landscape in manufacturing reflects very well that it is an ongoing process leading to many more changes. We will continue this series with other and new aspects in the next TextileFuture’s Newsletters to let you have also the picture of future manufacturing of textiles and apparels, as well as textile machinery, based upon new manufacturing technologies.