The Future of U.S. Manufacturing: A Change Manifesto

The Future of
U.S. Manufacturing:
A Change Manifesto
Several factors are conspiring to create potentially ideal conditions for a
mini-renaissance of domestic manufacturing, including the emergence of
additive manufacturing, the forces of social, mobile, analytics and cloud,
and ever-rising energy costs.
| FUTURE OF WORK

2 FUTURE OF WORK May 2013
Executive Summary
U.S. manufacturing is better positioned today for revival than
anytime since its slow and painful decline some 30 years ago.
A big reason for its new-found strength stems from changes in
China. Rising wages, concerns over IP protection and increases
in digital automation globally have conspired to undermine the
economic advantages that China has enjoyed for years.
We believe the following additional factors will contribute
to positioning the U.S. manufacturing industry for renewal:
The U.S. is best positioned to lead manufacturing into the
digital age because of its significant scale, consistently high
productivity levels, unparalleled ability to innovate and
receding unit labor cost. It also offers some of the lowest
wages in the developed world.
Fast-rising wages and variable quality has dulled the sheen
of China’s low-cost manufacturing.
Total cost of manufacturing is the most important metric
guiding manufacturing sourcing decisions. With elevated
Chinese wages and volatile commodity prices spiking input
and shipping cost, the cost differential between China
and other markets is rapidly narrowing and has reached
or is projected to reach a tipping point in many industries
where economics do not favor a low-cost factory model.
Amplifying the problem is the weak IP regime in China and
regional geo-political uncertainty, resulting in supply chain
delays and disruptions. Therefore, production for domestic
markets may relocate to home shores or shores nearby.
Manufacturers are questioning the current wisdom of divorc-
ing R&D from production and locating it in a cost-effective
geography thousands of miles away. Early experiences
indicate that production and research feed off each other,
resulting in a virtuous cycle of innovation.

THE FUTURE OF U.S. MANUFACTURING: A CHANGE MANIFESTO 3
The future of manufacturing will be underpinned by
digital-age social and mobile technologies, as well as analytics.
Winning manufacturing companies must get the basics right,
and policy makers must create an enabling environment to
usher in the digital manufacturing age.
Companies must:
Rein in costs, get access to the right skills and boost produc-
tivity and innovation to create an enabling environment for
the switch to the digital age.
Streamline processes to fix the wide variation in productivity
across companies within each of manufacturing’s 28 sectors:
» Higher productivity generates higher net income margins
and drives greater return on equity.
» Manufacturing sectors with high net income margins and
return on equity are growing and adding jobs. Growing
sectors with high return on equity alone will get capital
for future investments; it is, therefore, imperative that
manufacturers invest in digital-age technologies to fuel
the next phase of growth.
Invest in supply chain analytics to optimize their global
sourcing strategy.
Drive productivity and return on equity to attract capital
investments for social and mobile technologies, as well as
analytics.
Policy makers must:
Help remove the structural rigidities – corporate tax rates,
regulatory compliance costs, tort laws and employee
benefits – that are blunting the competitive edge of U.S.
manufacturers.
Address the skills gaps that are holding back the manufac-
turing revival.

U.S. Manufacturing: All the Right Ingredients
The U.S. manufacturing industry is well positioned for the digital age, with its
size, relentless drive for productivity, competitive unit labor cost and superior
innovation track record.
Size
Today, U.S. manufacturing supports more than one in seven private sector jobs.
The sector employs an estimated 17.5 million people domestically – 11.7 million
in direct manufacturing jobs and 5.8 million in the services sector.1
To put this in
context,fromapeakof19.5milliondirectmanufacturingjobsin1979,manufacturing’s
current share represents a 40% loss. This reflects the changed character and
composition of the broader services-led U.S. economy (see Figure 1). Despite the
contraction, if U.S. manufacturing were an economy, its 2012 output (in absolute
terms) of $2 trillion would make it the tenth largest economy in the world.2
Figure 1 shows total U.S. employment in the manufacturing and private services
sectors. While employment in services has more or less risen (with periods of
contraction mostly coinciding with recessionary trends in the economy), manufac-
turing employment showed an upward trend through the late 1970s before begin-
ning to shrink. The largest decline was recorded in the 2000-2010 period, when
employment in manufacturing fell by almost 4% annually and by 33% over the
decade. However, in the past two years, manufacturing employment has witnessed
a resurgence. One possible explanation is that the eroding competitiveness of
China as a manufacturing hub is leading to “reshoring” of manufacturing to the U.S.
Productivity Juggernaut
The relentless productivity march of the post-war U.S. economy can be directly
attributed to the manufacturing sector. Manufacturing productivity has led all
other sectors of the domestic economy throughout the past 65 years (see Figure
2, next page). Between 1997-2007, overall manufacturing productivity recorded an
average annual growth of 5.4%.3
Manufacturing’s real productivity grew 2.3%
compared with the 1.8% growth for all other private businesses, adjusting for
three key new sources of this productivity spike: a strong positive bias exerted by
computers and the electronics industry, whose productivity grew at 26.8% in this
Total Employment in Manufacturing and Private Services
Figure 1
Source: U.S. Bureau of Labor Statistics, The National Bureau of Economic Research
Employment(inthousands):
PrivateServices
Employment(inthousands):
Manufacturing
Year
0
5,000
10,000
15,000
20,000
25,000
0
20,000
40,000
60,000
80,000
100,000
1939 1947 1955 1963 1971 1979 1987 1995 2003 2011
Recession Years Private Service-Providing Manufacturing

period;4
the offshoring bias in manufacturing productivity;5
and increased use of
temporary staff employed by manufacturers.6
As Figure 2 shows, other than 1960-65, labor productivity in manufacturing has
exceeded that in the nonfarm sector. Overall, from 1950 to 2010, manufacturing
productivity mostly grew at an increasing rate (the trend line primarily ascends),
while the private nonfarm business sector’s productivity increased at a marginally
constant or declining rate over time.
Falling Unit Labor Costs
In the third quarter of 2012, U.S. manufacturing workers were paid an average
$33.30 per hour in wages and benefits. This represents an 8% premium over
workers in other sectors, who were paid an average $30.80 per hour.7
The reason
for the wage differential is that manufacturers tend to pay for benefits such as
family insurance and vacations. Between 2000-2012, while real wages and salary
cost increased at a rate of 0.96% per year, the unit labor cost (the real cost to
produce one unit of good) decreased at an average annual rate of 2%due to rising
productivity8
(see Figure 3, next page). This is because the rise in real productivity
outpaced the increase in wages, making U.S. manufacturing more cost-competitive.
As Figure 3 shows, real output per hour (or labor productivity) rose continuously
during 1987-2011, while real unit labor costs fell during the same period.
Pursuit of Innovation
When measured in terms of R&D intensity – R&D spend as a percentage of sales
and number of patents — domestic manufacturing outstrips other sectors by a wide
margin. Manufacturing accounts for just 12% of U.S. GDP, but manufacturers’ R&D
outlays account for 69% of total domestic R&D spend. While total U.S. industry
domestic R&D spend was 3.7% of net sales in 2009, the ratio for manufacturing was
4.4% of revenue, well above the 2.8% average for nonmanufacturing industries.9
According to the National Science Foundation, U.S. manufacturers accounted for
69% of the total patents filed and 72% of the total patents granted in 2008, the
latest year for which data is available.
Growth of Labor Productivity: Manufacturing and Private Nonfarm Business
Manufacturing Sector Private Nonfarm Business Sector
0%
1%
2%
3%
4%
5%
6%
1950-1955
1955-1960
1960-1965
1965-1970
1970-1975
1975-1980
1980-1985
1985-1990
1990-1995
1995-2000
2000-2005
2005-2010
Laborproductivitygrowth
Figure 2
Note: CAGR
Source: U.S. Bureau of Labor Statistics

Still a Major Contributor to Overall Trade
Between 2000 and 2012, the share of products manufactured in the U.S. shrank
from 58% to 47%, ending the U.S.’s number-one exporter rank to China. However
with a 47% weight in the overall trade, manufacturing remains a critical component
to managing the soaring trade deficit.10
China Losing its Sheen
China’s status as the leader of low-cost offshore manufacturing, built so carefully
over the past 25 years, seems to be in peril.
Even as late as 2001, China’s labor cost, at 58 cents per hour, was a fraction of the
U.S.’s cost, and that was when the price of oil was below $10 per barrel. The eco-
nomics were compelling enough to locate production in China to address the needs
of U.S. consumers. However, between 2005 and 2010, hourly manufacturing wages
in China rose 19% per year and are projected to reach $6 per hour by 2015. In 2000,
China’s labor cost was just 3% of U.S. rates, but by 2010, it was 9% and is projected
to reach 17% by 2015. Although 17% may still look inexpensive, labor cost is just a
fraction (one-fourth) of total manufacturing costs. In less labor-intensive industries,
it can be less than 10%.11
Compounding the wage rise is China’s subpar manufacturing productivity
compared with that of the U.S. As of 2010, Chinese manufacturing productivity was
just 30% of U.S. levels.
The commodity boom of the past decade has caused the prices of oil, gas and other
industrial commodities to spike, materially raising the key input costs for manufac-
turing. In light of higher shipping costs, inventory carry costs and various taxes, the
economics of manufacturing in China and shipping it overseas have become less
attractive. Other factors have additionally contributed to elongated product deliv-
ery cycles, such as intellectual property risks, poor quality, sudden and protracted
supply chain disruptions due to socio-political activities and labor unrest.
The cost shield that masked the structural handicaps of the Chinese system is
developing cracks. Therefore, when it comes to China, we expect sourcing decisions
to be tempered with a balanced assessment of risks and returns.
Productivity Outpaces Labor Costs
Real Output Per Hour Real Unit Labor Cost
0
40
80
120
160
180
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Index(2005=100)
Figure 3
Source: U.S. Bureau of Labor Statistics

As China loses its cost advantage, the trend of “reshoring” manufacturing for
domestic consumption (production shifted back home or closer to home) seems
here to stay. However, we expect more U.S. companies to focus manufacturing in
China and other fast-growing emerging economies to serve soaring demand in
overseas markets.
Innovation and Production: Conjoined Twins?
Emerging evidence is upending the hypothetical business benefit of sep-
arating production from R&D. Manufacturers are beginning to ques-
tion the wisdom of basing production lines in low-cost
locations thousands of miles away from R&D labs.
Growing evidence shows that co-locating production and R&D cre-
ates a positive feedback loop, as scientists and engineers gain direct
exposure to and first-hand knowledge of production processes and
assembly line practices. Such exposure helps improve processes,
rewire underlying technologies and rejuvenate innovative practices,
resulting in a virtuous cycle of continuous improvement.
Take the case of batteries. U.S. companies offshored their
production to Japan over 30 years ago. Today, Japan, Korea and
China are the leaders in designing electric batteries that can
replace oil to power clean cars.12
Similarly, when semiconductor
production moved to Asia, the production of thin film deposi-
tion (used in semiconductors) declined in the U.S. Today, thin-film
deposition is a critical component for manufacturing solar panels,
and the lack of skills in the U.S. has caused the country to lag behind
in the solar power race.
Similarly, U.S. manufacturers capture just one-third of the value of
Amazon’s Kindle e-reader, while Asian manufacturers claim the bulk
of value, even though Kindle’s key innovation, electronic ink, was
invented in the U.S. The main concern: the U.S. will permanently lose its e-paper
display technology edge for driving related innovations.13
Clearly, manufacturing and innovation are tightly intertwined, and decoupling
the two can sap the ability to capture higher economic value. We believe that as
more evidence emerges across industries, the trend of co-locating production and
R&D for sustained competitive advantage will gain ground.
Reshoring: Lessons to be Learned
Over the past two to three years, hundreds if not thousands of manufacturing jobs
have returned to the U.S. This is only a trickle compared with the 28% of total
manufacturing jobs lost during 2000 through 2010.14
However, this small uptick in
U.S. manufacturing employment, combined with the reshoring trend, has generated
significant interest in the potential revival of domestic manufacturing. While these
early green shoots are encouraging, a closer look at U.S. manufacturing offers
important lessons.
Our analysis of 500 U.S. manufacturing companies spanning 28 sectors clearly
shows a positive correlation among high productivity, job growth, net income
margins and return on equity. To succeed in the long term, manufacturers must
adopt innovative technologies to rewire manufacturing and accelerate productiv-
ity and, more importantly, fix the wide variation in productivity levels within U.S.
manufacturing sectors.
Growing evidence
shows that co-locating
production and R&D
creates a positive
feedback loop, as
scientists and engineers
gain direct exposure to
and first-hand knowledge
of production processes
and assembly line
practices.

We are seeing the following trends unfold:
Economics will continue to drive global sourcing decisions. A 2012 study15
confirms that when it comes to global sourcing decisions, the only metric that
matters to manufacturers is “total landed cost,” which includes raw material
cost, manufacturing cost, transportation cost, inventory carry cost and other
taxes. In fact, 85% of respondents across manufacturing industries rated this as
a very important criterion, above product quality, intellectual property risk and
supply chain risk.
Volatile global commodity prices, buoyant Chinese wages and fast-changing
geo-political risks have injected a new level of dynamism into sourcing strategies.
With too many macro- and micro-economic, financial and risk variables to
analyze and monitor, it is imperative that manufacturers develop sophisticated
analytical models and systems to sharpen their manufacturing sourcing decision
methods.
Highly productive sectors with higher wages are growing. While all manufac-
turing sectors experienced job losses from 2000 through 2009, an analysis of
the decline reveals an interesting relationship among productivity, high wages
and job growth.
During the downturn, low-wage industries with lower productivity, such as
wood products, primary metals and plastics, experienced the heaviest job
losses. Meanwhile, higher wage industries with greater productivity, such as
chemicals and pharmaceuticals, machinery and motor vehicles, lost fewer jobs
(see Figure 4).
Manufacturing Sectors with Higher Productivity and Weekly Wages Lost Fewer Jobs
Motor
Vehicles:
-29.7%
Apparel:
-55.7%
Beverages:
-9.7%
Electrical Equipment
& Appliances:
-32.70%
Food:
-6.7%
Machinery:
-24.9%
Petroleum
& Coal Products:
-5.3% Chemicals:
-16%
Plastics:
-30.1%
Primary
Metals:
-36.2%
Publishing
& Printing:
-31.8%
Textiles:
-50.25%
$3
$5
$7
HourlyWages
Productivity
$9
$11
$13
$15
-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
Wood
Products:
-37.1%
Source: Cognizant Research Center analysis. Productivity and wage data sourced from “Why Does Manufacturing Matter?
Which Manufacturing Matters? A Policy Framework,” February 2012 (see footnotes for full citation).
Figure 4
Note: Bubble size indicates job losses. Smaller bubble size correlates with lower job losses.
Note: Timeframe measured: 1997 - 2007

Again during the 2009 to 2011 revival, high-wage and highly productive industries
added more jobs compared with low-wage industries, which also struggled with low
productivity (see Figure 5).
Material variation in productivity exists across manufacturing sectors.
While overall average manufacturing productivity leads services and farm
productivity, material variation exists across manufacturing sectors (see
Figure 6, next page). Clearly, there is plenty of room for improvement.
Manufacturers with higher productivity and high net income report higher
return on equity. Our analysis shows that across manufacturing, sectors with
higher productivity and higher net income margins tend to have higher return
on equity. Also, manufacturing sectors with higher productivity and return on
equity tend to lose fewer jobs or add more positions than sectors with lower
productivity and return on equity. Thus, productivity becomes the common
factor that differentiates winning manufacturing sectors and companies (see
Figure 7, page 11).
Across U.S. manufacturers, there is tremendous scope to boost productivity,
raise net income and increase return on equity. While inter- and intra-sector
variation in productivity is understandable, our 2012 return on equity analysis of
500 U.S.-based manufacturing companies across 28 sectors shows significant
variation in profit margin within each of the 28 sectors (see Figure 8, page 12), a
critical driver of return on equity. Clearly, there is significant scope for individual
firms to improve productivity and consequently close the net income margin
variation gaps, which, in turn, will drive better return on equity and enhance
growth prospects.
Manufacturing Sectors with Higher Productivity and Wages Added More Jobs
During Economic Recovery
Aerospace
& Defense:
5.50%
Apparel:
2.75%
Beverages:
3.20%
Chemicals:
-1.1%
Electrical Equipment
& Appliances:
4.70%
Food:
-0.70%
Machinery:
8.40%
Petroleum &
Coal Products:
0.70%
Plastics:
3.50%
Primary Metals:
12.50%
Publishing
& Printing:
-6.70%
Textiles:
-2.60%
Wood
Products:
-3.80%
-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
$3
$5
$7
HourlyWages
Productivity
$9
$11
$13
$15
Note: Bubble size indicates job losses. Smaller bubble size correlates with lower job losses.
Note: Timeframe measured: 2009 – 2011
Source: Cognizant Research Center analysis. Productivity and wage data sourced from “Why Does Manufacturing Matter?
Which Manufacturing Matters? A Policy Framework,” February 2012 (see footnotes for full citation).
Figure 5

The Digital, Social, Mobile, Analytics Revolution
Manufacturing Goes Additive and Digital
Industrial-age “subtractive” manufacturing processes are not unlike Michaelange-
lo’s postulate that the sculptor’s task is simply to chip away at the stone so as to
reveal the ideal form. Just as the sculptor cuts stone, the dominant
approach for machining processes is to remove material through cut-
ting and drilling. However, subtractive industrial-age processes will
soon be complemented by additive digital-age manufacturing pro-
cesses, possibly ushering in a manufacturing renaissance.
Additive manufacturing is the process of making a three-dimensional
solid object of virtually any shape directly from a computer model.
Three-dimensional printing uses an additive process, in which succes-
sive layers of material are laid down in different shapes vs. subtractive
machining techniques of cutting and drilling. While the application of
3-D printing in industrial manufacturing and design is well known, its
application in areas where traditional manufacturing methods have
not gone, or cannot go, has caught the imagination of the world.
Examples include Cornell University, where researchers in February
demonstrated how to create a replacement ear using a 3-D printer
and living cells, and surgeon Anthony Atala, who last year created a
transplantable kidney using a 3-D printer.
Manufacturing Sectors with Higher Productivity and Net Income Margins Have
Higher Return on Equity
Aerospace & Defense:
6.91%
Apparel:
6.24%
Beverages:
12.23%
Chemicals:
6.32%
Electrical
Equipment
& Appliances:
5.51%
Food:
5.15%
Machinery:
6.48%
Petroleum
& Coal Products:
6.75% Pharmaceuticals:
11.67%
Plastics:
4.33%
Primary
Metals:
4.30%
Publishing
& Printing:
8.70%
Textiles:
0.85%
Wood
Products:
4.67%
(20%)
(10%)
0%
10%
20%
30%
40%
50%
-2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
Note: Bubble size indicates net income margin. Smaller bubble size correlates with higher net income margin.
Note: Timeframe measured: 2012
Source: Cognizant Research Center analysis. Return on equity and net income margins data based on the 2012 IndustryWeek U.S. 500 ranking of
America's largest public manufacturers. Productivity data sourced from “Why Does Manufacturing Matter? Which Manufacturing Matters?
A Policy Framework,” February 2012 (see footnotes for full citation).
Figure 6
Additive manufacturing
has the potential to
rewire traditional
manufacturing, as it
enables connectivity and
imparts exceptional
agility to the
manufacturing and
design process.

The ability to design and modify designs online to create a kidney or an ear without
wasteful casting demonstrates the efficiency of additive manufacturing. Whether
for a single item or small batches (and in the future, mass-customized items), addi-
tive manufacturing has the potential to rewire traditional manufacturing. Its poten-
tial to accelerate innovation stems from its digital moorings, which enable con-
nectivity and impart exceptional agility to the manufacturing and design process.
Social, Mobile and Advanced Analytics Unleash a New
Productivity Wave
New technologies – including social and mobile technologies, as well as advanced
analytics – are leading the manufacturing sector into the digital age.
In the analogous manufacturing world, industrial assets and the people and
processes involved with them are isolated from each other and operate in silos.
Exponential benefits can result if these machines are connected with advanced
sensors and software, as well as the people working with these assets. Outcomes
include better design, operations, quality and safety, and a better understanding of
man/machine interaction, leading to more predictable outcomes.
Manufacturing Productivity Growth Rates Adjusted for Increased Offshoring
Industry
Annual productivity
growth rate (%)
Computer and electronic products 24.24
Motor vehicles and parts 5.49
All manufacturing 4.82
Miscellaneous manufacturing 4.77
Apparel and leather and allied products 4.72
Textile mills and textile product mills 4.20
Chemicals* 4.20
Machinery 4.00
Electrical equipment/appliances/components 3.94
Other transportation equipment** 3.32
Printing and related support activities 3.09
All manufacturing without computer and electronic products 2.80
Wood products 2.48
Furniture and related products 2.20
Primary metals 2.09
Fabricated metal products 1.51
Paper 1.29
Plastics and rubber products 1.25
Food, beverage, and tobacco products 0.82
Nonmetallic mineral products 0.53
Petroleum and coal products -0.29
*Includes pharmaceuticals and medicines.
**Includes aerospace products and parts.
Note: It is not possible to adjust productivity growth rates in individual manufacturing industries for the increased use of temporary
help services.
Note: Timeframe measured: 1997 - 2007
Source: “Why Does Manufacturing Matter? Which Manufacturing Matters? A Policy Framework,” February 2012 (see footnotes for
full citation).
Figure 7

An example of this kind of connection is Ford’s new hybrid car, which can
automatically connect to the service center and seek necessary maintenance. The
MyFord Mobile application equips the owner with instant information pertaining to
the vehicle; monitors the battery’s charge level and sends alerts on charge status;
virtually sets or changes the program setting; and downloads vehicle data for
analysis.16
Additionally, GE’s next-generation turbines are embedded with sensors
that can gather information to assess the servicing required before the aircraft
lands. As these connected devices become more mainstream, their ability to gene-
rate data will grow exponentially, necessitating investments in advanced analytical
tools to derive additional business value.
The Coefficient of Variation of Net Income Margin (%), 2008-2012
<0% 0-100% 100-1,000% >1,000%
Industry 2008 2009 2010 2011 2012
Communications equipment 5,320 1,874 154 166 181
Primary metals 737 464 174 138 188
Electrical equipment & appliances -3,037 123 114 164 116
Petroleum & coal products 319 -1,651 141 111 266
Furniture & fixtures -1,507 -2,118 695 299 136
Computers & other electronic products 663 2,050 86 116 155
Fabricated metal products 705 482 100 86 115
Motor vehicles -369 534 742 60 473
Stone, clay, glass & concrete products -354 -381 941 -272 3,286
Medical instruments & equipment 100 124 68 65 190
Miscellaneous 150 947 81 96 132
Plastics 273 54 20 32 2,445
Paper -1,253 144 201 121 79
Publishing & printing -878 327 148 630 93
Wood products -343 316 91 213 84
Food 150 74 62 146 72
Apparel 190 167 106 100 79
Rubber products 888 141 121 44 46
Instruments 2,759 -610 320 77 81
Motor vehicle parts -261 -151 108 73 89
Chemicals 221 133 97 80 72
Machinery 74 556 80 68 54
Railcars, ships, other transportation equipment -1,299 273 62 83 79
Textiles -133 116 19 32 9
Aerospace & defense 102 75 59 42 59
Beverages 167 75 63 41 24
Pharmaceuticals -1,688 51 57 43 53
Tobacco 61 61 56 67 69
Note: Coefficient of variation has been calculated as the ratio of standard deviation to mean (i.e., Cv
= σ/µ). Distributions with a coefficient of
variation to be less than 100 are considered to be low-variance, whereas those with a CV higher than 100 are considered to be high variance.
Source: Cognizant Research Center analysis. Data sourced from 2012 IndustryWeek U.S. 500 ranking of America’s largest public
manufacturers, based on revenue data sets.
Figure 8

Applying social and mobile technologies, as well as advanced analytics,
to industrial-age manufacturing is expected to transform global industries, from
aviation to power generation to healthcare delivery. With better healthcare at
lower cost and material savings in energy cost, the global efficiency gains will be
enormous. If efficiency gains translate to a modest 1% productivity boost, it would
add $10 trillion to $15 trillion to the global economy over the next 15 years.17
Policy and Strategic Imperatives Key to
Manufacturing’s Mini-Renaissance
The policy choices that the government, manufacturers and suppliers make today
will determine U.S. manufacturing’s trajectory. It is crucial to get the basics right
and for all stakeholders to seize the emerging opportunities to thrive in the digital
manufacturing age.
In our assessment, successful companies and policy makers will do the following:
Fix the structural rigidity plaguing U.S. manufacturers. A study by the
Manufacturing Institute and The Manufacturers Alliance For Productivity and
Innovation found that structural rigidity and bottlenecks add at least 20%
additional costs to domestic manufacturing.18
When compared with its top nine
trading partners, the U.S. lags behind on all parameters except energy costs,
including corporate tax rates, employee benefits, tort litigation and regulatory
compliance. These drags on U.S. manufacturing’s productivity gains limit the
country’s competitive advantage.
Arrest the hemorrhage caused by deep skills gaps. Roughly 5% of manufac-
turing jobs – 600,000 jobs – go unfilled because of a lack of skilled personnel.
Manufacturers struggle to find employees with skills that enhance a plant’s
effectiveness and efficiency and fuel innovation and future growth. In economic
terms, the opportunity loss equals an additional 400,000-odd direct jobs in the
larger economy and potential GDP growth loss of at least 1%.19
Focus on productivity to boost net income margin and return on equity.
U.S. manufacturing must focus on closing the wide variation in productiv-
ity levels across sectors and become a dominant productivity leader. Without
superior productivity, higher net income margin and return on equity, it will be
impossible to attract capital for future investments. With higher productivity and
better cash flow, manufacturers will gain confidence to make investment bets
in additive manufacturing and the new technologies, such as social, mobile and
advanced analytics, that underpin it.
Optimize global sourcing strategy. U.S. manufacturers must gain a thorough
understanding of global sourcing strategy in the context of the changing
economic, financial and risk variables underpinning such decisions. They must
invest in and develop supply chain analytics capabilities to enable a systematic,
forward-looking process for sourcing decisions. The transition from a supply ori-
entation to a demand-driven forward planning strategy will be fueled by connec-
tivity and analytics.
Invest in social and mobile technologies, as well as advanced analytics, for
long-term competitive advantage. As smart devices proliferate, greater con-
nectivity between devices and people working with those devices can enable
manufacturers to harness the benefits of big data and analytics. Winning manu-
facturers must invest in social and mobile technologies, as well as analytics, to
generate tangible business value.

Footnotes
1
Estimate from The Manufacturing Institute’s “U.S. Benchmark Input-Output
Accounts,” U.S. Bureau of Economic Analysis.
2
The Manufacturing Institute; estimates based on International Monetary Fund,
U.S. Bureau of Economic Analysis and MAPI.
3
Susan Helper, Timothy Krueger and Howard Wial, “Why Does Manufacturing Mat-
ter? Which Manufacturing Matters? A Policy Framework,” Metropolitan Policy
Program at Brookings, February 2012.
4
Ibid
5
Susan Houseman, Christopher Kurz, Paul Lengermann and Benjamin Mandel,
“Offshoring Bias in U.S. Manufacturing,” Journal of Economic Perspectives, Vol.
25, No. 2, Spring 2011, pp 111–132.
6
Matthew Dey, Susan Houseman and Anne Polivka, “Manufacturers’ Outsourcing
to Employment Services,” Upjohn Institute, Working Paper No. 07-132, 2006.
7
The Manufacturing Institute; estimates based on U.S. Bureau of Labor Statistics,
U.S. Bureau of Economic Analysis.
8
The Manufacturing Institute; estimates based on U.S. Bureau of Labor Statistics.
9
10
The Manufacturing Institute; based on Manufacturers Association for Productiv-
ity and Innovation calculations.
11
12
Steve Levine, “The Great Battery Race,” Foreign Policy, November 2010.
13
Willy C. Shih, “The U.S. Can’t Manufacture the Kindle and That’s a Problem,” HBR
Blog Network, Oct. 13, 2009.
14
Susan Helper, Timothy Krueger and Howard Wial, “Why Does Manufacturing
Matter? Which Manufacturing Matters? A Policy Framework,” Metropolitan Pol-
icy Program at Brookings, February 2012.
15
“Reshoring Global Manufacturing: Myths and Realities,” The Hackett Group,
2012.
16
“New MyFord Mobile App Keeps Focus Electric Owner Engaged and In Control of
Electric Car Experience,” Ford.
17
Peter C. Evans and Marco Annunziata, “Industrial Internet: Pushing the Boundar-
ies of Minds and Machines,” GE, Nov. 26, 2012.
18
“2011 Report on the Structural Cost of U.S. Manufacturing,” The Manufac-
turing Institute and Manufacturers Alliance for Productivity and Innovation,
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19
“2011 Skill Gaps Report,” Deloitte and The Manufacturing Institute, Oct. 17, 2011.

About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to
helping the world’s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion
for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies
the future of work. With over 50 delivery centers worldwide and approximately 162,700 employees as of March 31, 2013, Cognizant is a member
of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing
companies in the world.
Visit us online at www.cognizant.com or follow us on Twitter: @Cognizant.
Credits
Author
Anand Chandramouli, Director, Cognizant Research Center
Analysts
Koyal Roy, Cognizant Research Center
Neha Gupta, Cognizant Research Center
Pushpanjali Mikkilineni, Cognizant Research Center
Andal Vedanarayanan, Cognizant Research Center
Subject Matter Expert
Deepak Mavatoor, Cognizant Business Consulting
Design
Harleen Bhatia, Creative Director
Suresh Sambandhan, Designer
References
Michael Ettlinger and Kate Gordon, “The Importance and Promise of American
Manufacturing,” Center for American Progress, April 2011.
Susan Helper, “The U.S. Auto Supply Chain at a Crossroads,” Case Western Reserve
University.
Stephen J. Ezell and Robert D. Atkinson, “The Case for a National Manufacturing
Strategy,” ITIF, April 2011.
Robert E. Scott, “Costly Trade with China,” Economic Policy Institute, Oct. 9, 2007.

© Copyright 2013, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means,
electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to
change without notice. All other trademarks mentioned herein are the property of their respective owners.
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