A sector view on

competitiveness

McKinsey Global Institute

Dr. Jan Mischke

OECD
Workshop “Understanding productivity growth”
October 23, 2013

CONFIDENTIAL AND PROPRIETARY

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Contents

▪ The (non-) importance of sector mix

▪ A sector view on competitiveness

McKinsey & Company | 1

Sector performance, rather than sector mix, is the main Within contribution2

reason for differences in productivity growth Mix effect2

Productivity level Productivity growth

Labor productivity gap vis-à-vis the United States1 Labor productivity growth
PPP 2005 $/worked hour % per year, 1995–2005

11 1.6
-5 1.2
2 1.0
5 2.1
7 1.7
5 1.6
22 2.8
1 4.1
14 0.4
-18 0.8
1 1.6
24 1.5
13 0.4
-2 2.3
9 1.9
1 Excluding mining, real estate, education, health and other public goods.
2 Calculated on the highest level of available sector granularity.

SOURCE: EU KLEMS; McKinsey Global Institute analysis McKinsey & Company | 2

Contents

▪ The (non-) importance of sector mix

▪ A sector view on competitiveness

– Manufacturing
– Tradable services
– Domestic services
– Public sector

McKinsey & Company | 4

Manufacturing employment is not a meaningful indicator for
competitiveness, as it follows an inverted-U pattern
Germany Mexico United Kingdom
India South Korea United States

Manufacturing employment Japan Taiwan Sweden

% of total employment
40
35
30
25
20
15
10
5
0
0 10,000 20,000 30,000 40,000 50,000
GDP per capita
2012 PPP-adjusted EKS dollars

SOURCE: Total Economy Database, The Conference Board McKinsey & Company | 5
Among advanced economies, Germany and Sweden maintained
a comparatively high share of manufacturing
Manufacturing share of GDP
%
24 Germany

22

20 Sweden

18

16

14 USA
France
12
UK

10

8
1995 2000 2005 2007

SOURCE: OECD; Eurostat (for Latvia and Lithuania); McKinsey Global Institute analysis McKinsey & Company | 6
 Attribute in economy

Attributes of Germany’s and Sweden’s competitiveness reflect Yes

To some extent
policy but also company decisions
Attribute Germany Sweden
Strong vocational training and high skilled
engineers
Productivity

R&D, innovation, premium positioning

Strong supply chains and clusters, good

infrastructure

Tailwind from weak currency; wage

Costs

restraint and favorable employer-union

relationship
Exposure to high-growth segments with
demand from EMs
Globalization

Focus on high value activities in global

supply chains

Internationalization on the back of strong

MNCs

SOURCE: McKinsey Global Institute McKinsey & Company | 7

 % of global manufacturing value added High Lower-middle
Five manufacturing
Upper-middle Low
segments
R&D Labor Capital Energy Trade Value
Group Industry intensity intensity intensity intensity intensity density

34 Chemicals
Global Motor vehicles, trailers, parts
innovation
Other transport equipment
for local
markets Electrical machinery
Machinery, equipment, appliances
28 Rubber and plastics products
Regional Fabricated metal products
processing Food, beverage, and tobacco
Printing and publishing

22 Wood products
Energy-/ Refined petroleum, coke, nuclear
resource-
Paper and pulp
intensive
commodities Mineral-based products
Basic metals
9
Computers and office machinery
Global
technologies/ Semiconductors and electronics
innovators
Medical, precision, and optical
7
Labor- Textiles, apparel, leather
intensive
tradables Furniture, jewelry, toys, other

SOURCE: McKinsey Global Institute McKinsey & Company | 8

Different trade regional patterns exemplified by Southern European
strength in labor-intensive tradables vs. Continental European strength in
Global innovation for local markets
Net exports, 2011
EUR billion

Nordics1 Southern2 Continental3 UK & Ireland 12 NMS4

Global innovation
for local markets
15 5 280 30 19

Regional processing -4 -9 59 -24 -5

Energy- and resource-

intensive commodities
22 -10 28 -20 -5

Global technologies/
innovators
-3 -13 -2 -8 -4

Labor-intensive
-1 22 -36 -34 3
tradables

1 Sweden, Finland, Denmark;

2 Greece, Spain, Italy, Portugal,
3 Germany, Austria, Luxemburg, Belgium, France, Netherlands; 4 Poland, Czech Republic, Cyprus, Latvia, Lithuania, Slovenia, Slovakia, Estonia,
Hungary, Malta, Bulgaria, Romania

SOURCE: Eurostat McKinsey & Company | 9

Contents

▪ The (non-) importance of sector mix

▪ A sector view on competitiveness

– Manufacturing
– Tradable services
– Domestic services
– Public sector

McKinsey & Company | 10

Mature economies run large and increasing trade surpluses in business
and financial services
Service net exports of mature economies
% of GDP; nominal
0.40 Business services
0.35
0.30
0.25
0.20 Financial services
0.15 Royalties and
license fees1
0.10
Travel
0.05
Other services
0
Transportation
-0.05
-0.10
-0.15
1994 97 2000 04 2008

1 Significantly influenced by tax optimization strategies.

SOURCE: OECD; McKinsey Global Institute analysis McKinsey & Company | 11

Five policy lessons emerge on how countries promote service trade
Examples Potential action
Leverage ▪ German technical services exports in ▪ Helping smaller technical services firms gain export
strength of automotive or merchanting related to energy market access (e.g., chambers of commerce etc.)
1 manu- and material inputs of the chemical industry
facturers
▪ Self-reinforcing hubbing to benefit from ▪ Attracting and developing top talent (e.g., low personal
Reinforce access to the best employers and employees income tax rate and high quality of living around Geneva)
2 existing and proximity to information and contacts: ▪ Land-planning and development (e.g., Canary Wharf in
service – Trading activities along the lake Geneva London)
hubs – Investment banking in London ▪ Note that low regulation and taxation often play a strong
role – but we cannot recommend a race to the bottom
▪ UK legal services exports ▪ Continuous innovation of law system for international
Develop and ▪ US accounting services exports commercial and financial transactions, paired with
3 proliferate language advantage (UK legal)
standards ▪ Access to courts for foreigners (US legal)
▪ Broad application of US GAAP standards
▪ In several service categories, more than half ▪ Boosting country competitiveness (education,
of trade occurs among affiliates, with export infrastructure etc.) and marketing the efforts via strong
strength of both HQs and subsidiaries FDI agencies (e.g., Irish advanced technologies program)
4 Attract ▪ Example: Irish IT services ▪ Providing incentives for business (e.g., low corporate
MNCs taxes in Ireland, or flexible financial services regulation in
Luxemburg and in the UK) – whereby mature Economies
should avoid zero-sum competition and rather converge
on a business friendly environment overall
▪ City of London effort to solve pollution and ▪ University – government – industry collaboration to tackle
Invest in congestion issue as a template for service crucial challenges
5 service exports to megacities globally
innovation

SOURCE: McKinsey Global Institute McKinsey & Company | 12

Contents

▪ The (non-) importance of sector mix

▪ A sector view on competitiveness

– Manufacturing
– Tradable services
– Domestic services
– Public sector

McKinsey & Company | 13

Competitiveness and productivity of domestic service sectors EXAMPLES

often constrained by regulatory barriers

Sector Key barriers for productivity, innovation and growth

Professional ▪ Price fixes for lawyers, accountants, notaries

services

Network ▪ Postal services monopolies or dominant incumbents

industries ▪ Passenger rail monopolies or dominant incumbents

▪ Product market regulation like restrictions on assortment,

Retail opening hours
▪ Advertising restrictions and price fixes for pharmacies
▪ Land market regulation
▪ Labour regulation
▪ Setup of (public) (pre-)procurement hindering innovation
Construction ▪ Informalities and fragmentation
▪ Lack of standardization and pre-fabrication

SOURCE: McKinsey Global Institute McKinsey & Company | 14

RETAIL EXAMPLE
Sweden achieved high productivity growth in retail after
comprehensive reforms
Key changes Impact

Factors explaining productivity development Productivity growth

Eased ▪ Influence of municipalities on store type CAGR 1995-2005 (%)
zoning laws decisions was reduced Productivity level
Shifting ▪ Growth of large-scale store formats and Index: 100 = US 2005
industry shopping centers, triggered by zoning changes 5
structure ▪ Trend to integrated chains like IKEA or H&M,
creating scale advantages in purchasing, supply
chain, store management, and marketing
▪ Growth of private label products has increased
margins as retailers capture larger part of the 3
value chain
Increased ▪ Continued growth of ‘category killers’
2
competition (specialized chains) who put scale pressures
on existing stores
▪ Increased share of highly productive formats,
e.g., discounters
▪ New market entrants, e.g., discounters
US EU Sweden
▪ New channels like internet shopping
Advanced ▪ Use of ICT has significantly improved supply 100 75 114
IT usage chain and allowed for improved assortment
and inventory management

SOURCE: EU KLEMS, McKinsey Global Institute; team analysis McKinsey & Company | 15
Contents

▪ The (non-) importance of sector mix

▪ A sector view on competitiveness

– Manufacturing
– Tradable services
– Domestic services
– Public sector

McKinsey & Company | 16

The productivity of funds invested in education varies widely Average

Average PISA score in science1

2006
570
Finland
560

550

540
Canada
530 New Zealand
Japan Netherlands
520
Germany United Kingdom
510 Switzerland
Ireland
Austria
Sweden
500
France Denmark
490 Spain United States
Iceland Norway
480 Luxembourg
Portugal Italy

0
0 6.000 6.500 7.000 7.500 8.000 8.500 9.000 9.500 10.000 10.500 15.500
Cost per student2
In equivalent $ converted using PPP for GDP, 2006

1 International research on 15-year-olds in OECD countries.

2 Annual expenditure on educational institutions per student for all services, primary, secondary, and postsecondary
nontertiary education.

SOURCE: OECD Education at Glance 2009; McKinsey analysis McKinsey & Company | 17
The $1 trillion-a-year infrastructure productivity opportunity
Global infrastructure investment need and how it could be reduced
Yearly average, 2013–30
$ trillion

0.61

0.2
0.4
0.2
0.1 1.7
0.1

2.7 Demand management

Operations and
reduction of
transmission and
distribution losses
Optimized
maintenance

Infrastructure Improving project Streamlining Making the most Optimized

need selection/optimizing delivery of existing need
infrastructure infrastructure
portfolios
1 Telecom investment need beyond the scope of this paper.

SOURCE: McKinsey Global Institute analysis McKinsey & Company | 18