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Globalization in transitionThe future of trade and value chains

Peterson Institute for International Economics April 11, 2019

Six trends are reshapingglobal value chains

2McKinsey & Company

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Six trends are reshaping global value chains

A smaller share of goods is traded across borders

Trade is becoming more regional and less long-haul

R&D and innovation are becoming increasingly important

Low labor costs have become less important

Services trade is growing faster than goods trade

Technology is reshaping global value chains

SOURCE: McKinsey Global Institute, Globalization in transition: The future of trade and value chains, January 2019

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Global goods trade intensity declined after 2007

Global goods trade$ Trillions

17.316.114.810.16.24.8

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Global goods trade to gross outputPercent

20

25

30

201520001995 2005 2010 2017

24.6

28.1

27.8

25.9

24.3

22.5

5.6 p.p.

A SMALLER SHARE OF GOODS IS TRADED ACROSS BORDERS

1


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Declining trade intensity reflects rise of consumers in China and other developing countries

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Developing economies’ share of global consumption by region, %


1

SOURCE: McKinsey Global Institute

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China is consuming more of what it produces and exporting less

China’s exports as a share of gross output, 2007 vs. 2017

China’s trade surplus has fallen from 7.4% of GDP in 2007 to 1.3% in 2017

55

37

29

21

9

28

17 15 14

5

AutoMachinery andequipment

Computers andelectronics

Textiles andapparel

Furniture

2007 2017


1


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Services trade is growing 60 percent faster than goods trade

Service sectors CAGR, 2007–17Percent

7.8

5.3 5.2

3.73.2

1.7

TransportIPcharges

Telecom and IT

Business services

Travelservices

3.9%Services

Financeand

insurance

2.4% Goods

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SERVICES TRADE IS GROWING FASTER THAN GOODS TRADE

2


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“As a service” business models are becoming more widespread

Global recorded music revenues$ Billions, %

100

719

38

97 9381

62

15

0 3

2005

20

1210 15 2017

15 15 17

20 2131

80 7969

344

2007 10 2016

463 594

US vehicle sales $ Billion, %

Global cloud revenues1

$ billion Other Streaming Cash or loan Leasing

18

61

93

113

2010 14 16 20171 PaaS, SaaS, IasS

SERVICES TRADE IS GROWING FASTER THAN GOODS TRADE

2


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Global trade in labor-intensive goods was based on labor-cost

arbitrage in 2005

Trade based on labor-cost arbitrage has declined across many value chains

Global trade is fromlow-wage to high-wage

country in 2017

18%

LOW LABOR COSTS HAVE BECOME LESS IMPORTANT

3


10McKinsey & CompanySOURCE: McKinsey Global Institute, Globalization in transition: The future of trade and value chains, January 2019

LOW LABOR COSTS HAVE BECOME LESS IMPORTANT

Nike Flyknit Automated Manufacturing Process

Adidas Speedfactory

Futurecraft 4D shoe ▪ 95%+ fewer employees▪ 3x faster time to market ▪ 100,000 pairs sold in 2017-2018▪ Goal to produce 1M Futurecraft 4D athletic shoes

in the coming years ▪ Location in Ansbach, Germany and Atlanta, U.S.

Flyknit running shoe ▪ 19x less sewn pieces – from 37 to just 2 ▪ Shoe weight down by 45% – from 290g to 160g▪ $1B sales of Flyknit shoes 2012-2017 ▪ Lower labor costs, reduced waste and cycle time▪ Embedded customization features ▪ Factory in Mexico (other Nike shoes mainly

produced in Asia)

Speed to market and proximity to consumers are becoming increasingly important 3

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10.68

12.04

10.57

14.05

Rethink your global footprint: Nearshoring could decrease costs while increasing speed to market

Bangladesh

China

USA

/ 30

/ 30

/ 2

0

/ 30

/ 30

/ 3–6

0

9.94

12.46

12.08

30.36

FreightMode/days

Landed cost price, 2016$ per pair of jeans

Mexico

Jeans production, US company Jeans production, German company

Turkey

Germany

FreightMode/days

Landed cost price, 2017$ per pair of jeans

Offshore Nearshore Onshore

Bangladesh

China

3



All global value chains are becoming more knowledge-intensive

Intangible assets as a share of revenue, 2000 vs 2016, Percent

2000

2016

5Auto 12

7

8

Machinery and equipment

Computers and electronics

36

25

14

7

8

Chemicals

Textiles and apparel

15

175.4%

200013.1%

2016

Global intangible assetsas a share of revenue:

R&D AND INNOVATION ARE BECOMING INCREASINGLY IMPORTANT

4



Intangible assets, such as software, design, and R&D, are an increasingly important part of thevalue of physical goods

Value of an iPhoneAverage value of vehicle contentPercent

R&D, software, retail margin

62%Manufacturing

cost

38%

68

7 10

26 27Other

Software

2010

Mechanical 63

2016

41

30

29

2030E

R&D AND INNOVATION ARE BECOMING INCREASINGLY IMPORTANT

4



More than half of goods trade is intraregional in EU-28 and Asia-Pacific Share of intraregional goods trade by region, 2017

Why are companies tradingmore within regions?

To build closer relationships with suppliers

To increase speedto market

To increase proximity to customers

TRADE IS BECOMING MORE REGIONAL AND LESS LONG-HAUL

5


NAFTA

EU28

LACAsia-Pacific

MENA

Sub-Saharan

Africa

3963

2012 2017

40 41

2012 2017

11 22

20172012

7 19

2012 2017

40 52

2012 2017

5 16

2012 2017


Technology is reshaping value chains in three ways TECHNOLOGY IS RESHAPING GLOBAL VALUE CHAINS

6Reduce transaction costs

Change production processes

New goods

▪ AI ▪ Automation ▪ 3D printing

▪ Internet of Things▪ E-commerce ▪ Blockchain▪ Automated document processing

▪ Electric vehicles▪ Renewables ▪ Digital goods

Up to -$4T reduction in goods trade by 2030 as production moves closer to consumers

Up to -$310B less goods trade by 2030 through changes in composition and tradability of goods

Up to +$4.7T increase in goods trade by 2030 as transaction costs are reduced



Digital platforms connect the world: By 2020, cross-border B2C e-commerce is projected to grow to $1.0 trillion

2.3

4.10.3

2015

1.5

20F

0.4

2.8

1.8

0.8

16

0.5

17E

0.7

18F

1.93.5

19F

1.0

3.5

2.2

2.8

4.3

5.1

155

261

289

128

06042000 1002 202080

120

160

200

240

280

320

08 12 14 16 18

163

193

Global B2C e-commerce transaction volume$ Trillions

Number of parcels sent by postal services1

%, annual growth rate, indexed to 2000

International delivery

Domestic deliveryDomestic

Cross-border

TECHNOLOGY IS RESHAPING GLOBAL VALUE CHAINS


6

Implications for companies and countries



Companies we surveyed are changing their global strategies

Expect to change strategy due to trade

tensions and uncertainty

75%

Change geography of their operations

49%

Invest more in local supply chains

24% 33%

Consider trade uncertainly to be

top concern

Global executive survey, September 2018, n=1,021



Globalization in transition: Looking ahead


Growth in goods trade slower than the past, in line with GDP growth 1Continued shift in trade towards services anddata flows2Continued growth of regional trade corridors3

Focus on speed to market and proximity to customers drives near-shoring

4Trade policies (and uncertainty)accelerate value chain shifts

5Digitization and environmental sustainability drive closer supplier relationships

6SOURCE: McKinsey Global Institute

Competitive service sectors are increasingly important in all countries

2Shifts in global value chains favor production in advanced economies with highly skilled talent, innovation ecosystems, and large consumer markets

1Near-shoring countries stand to gain as companies prioritize speed to market and closer integration with suppliers (e.g., Mexico, Morocco, Turkey)

3Developing countries with service exports may gain --but need to move up the value chain as basic BPOservices are automated (e.g., Costa Rica, India, Philippines)

4Low-income countries face higher hurdles as labor-intensive manufacturing declines: must build soft infrastructure as well as hard infrastructure

5

Different countries will benefit in the next era of globalization


Thank youTHIS REPORT AND OTHER MGIRESEARCH ARE AVAILABLE AT:

WWW.MCKINSEY.COM/MGI

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