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1McKinsey & Company
Globalization in transitionThe future of trade and value chains
World Bank Group
July 10, 2019
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We analyze 23 global value chains and group them into 6 archetypes based on their inputs, trade
intensity, and country participation
Description Value chains included
Global innovations
▪ High trade intensity
▪ Capital-intensive production, with high R&D
▪ High advanced economy participation
▪ Highly complex value chains
▪ Autos
▪ Computers and electronics
▪ Electrical machinery
▪ Other machinery and
equipment
▪ Transportation equipment
▪ Chemicals and pharma
Labor-intensive
manufacturing
▪ High trade intensity
▪ Labor is key input
▪ Low regional trade; high EM participation
▪ Textiles and apparel
▪ Furniture and leather products
Regional processing
▪ Low trade intensity, due to weight or perishability of
goods
▪ Commodities are a key input
▪ High share of regional trade
▪ Food and beverage
▪ Fabricated metal products
▪ Paper and printing
▪ Glass, cement, and
ceramics
▪ Rubber and plastics
Resource-intensive
goods
▪ High trade intensity
▪ Widespread country participation
▪ Simple value chains
▪ Mining
▪ Agriculture
▪ Basic metals
▪ Energy
Knowledge-
intensive services
▪ Low trade intensity, but growing rapidly
▪ Highly skilled workforce
▪ Lowest share of regional trade
▪ Financial services
▪ Business services
▪ IT services
Labor-intensive
services
▪ Lowest trade intensity
▪ Labor is key input
▪ But largest gross output and employment
▪ Wholesale and retail
▪ Transportation and
storage
▪ Healthcare
Six trends are reshapingglobal value chains
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4McKinsey & Company
Six trends are reshaping global value chains
SOURCE: McKinsey Global Institute
A smaller share of goods is traded across borders
Services trade is growing faster than goods trade
Low labor costs have become less important
R&D and innovation are becoming increasingly important
Trade is becoming more regional and less long-haul
Technology is reshaping global value chains
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Global goods trade intensity declined after 2007
Global
goods
trade
$ Trillions
17.316.114.810.16.24.8
5McKinsey & Company
Global goods trade to gross output
Percent
30
20
25
2015201020051995 2000 2017
24.6
28.2
27.8
25.9
24.3
23.0
5.2 p.p.
A SMALLER SHARE OF GOODS IS TRADED ACROSS BORDERS
1
SOURCE: McKinsey Global Institute, Globalization in transition: The future of trade and value chains, January 2019
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Trade intensity has declined in all goods value chains since 2007
Change in trade intensity (trade / gross output)
2000–07 vs. 2007–17, p.p.
Change 2007-17, p.p.Change 2000-07, p.p.
Chemicals
Computers &
electronics
Textile &
apparel
Machinery &
equipmentAutomotive
Transport
equipment
Glass, cement,
ceramics
7.8
-5.5
13.0
-12.4
8.2
-10.3
7.3
-8.9
8.9
-7.9
11.0
-6.2
2.2
-3.2
1
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The value of goods trade continues to grow, but growth rates have fallen significantly over
the last 10 years
Chemicals (excl. pharma)
0.7
Capital equipment,
machinery and parts
Automotive
Consumer fashion goods
0.4
0.2
2.0
Medical equipment
Consumer electronics
Perishables
0.5
Furniture
Pharma
0.82.2
2.7
0.3
1.0
0.61.5
1.3
0.6
1.6
0.4
1.3
0.40.7
1.0
0.71.1
0.50.7
0.1
0.10.4
1995 2007 2017
World trade by value chain across time, trillion US$
SOURCE: McKinsey Global Institute, Globalization in transition: The future of trade and value chains, January 2019. MGI Bilateral Trade database
CAGR 2007-2017CAGR 1995-2007 CAGR 2012-2017
2.1%8.9% 0.8%
2.8%7.8% 2.1%
2.0%8.8% 2.2%
2.3%8.5% -0.6%
3.1%6.1% 2.0%
4.7%6.5% 1.6%
3.7%7.8% 1.8%
4.8%9.7% 1.6%
4.1%14.2% 1.9%
1
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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 7.6% of GDP in 2007 to 1.5% in 2017
AutoMachinery and
equipment
Computers and
electronics
Textiles and
apparel
2007 2017
A SMALLER SHARE OF GOODS IS TRADED ACROSS BORDERS
1
SOURCE: McKinsey Global Institute, Globalization in transition: The future of trade and value chains, January 2019
55
37
21
9
30
20
14
4
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Declining trade intensity also reflects growing domestic supply chains
in China and other developing countries
Share of imported intermediate inputs in developing countries
Percent
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25
1614
18
15
10
57
Global
innovations
Labor-intensive
goods
Regional
processing
Resource-
intensive goods
2007 2017
A SMALLER SHARE OF GOODS IS TRADED ACROSS BORDERS
1
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Why does this trend matter?
Lower goods trade
intensity is here to stay
Companies have new
opportunities in consumer
markets in developing
countries
10McKinsey & Company
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Services trade is growing 60 percent faster than goods trade
Service sectors CAGR, 2007–17
Percent
7.8
5.3 5.2
3.7
3.2
1.7
Travel
services
Business
services
2.4%
Goods
Telecom
and IT
IP
charges
Finance
and
insurance
Transport
3.9%
Services
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SERVICES TRADE IS GROWING FASTER THAN GOODS TRADE
2
SOURCE: McKinsey Global Institute
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The role of services in goods production has increased across all value chains
Foreign services
Domestic services
-2.0
-4.0
0
6.0
2.0
8.0
4.0
Auto ChemicalsComputers
and electronics
Fabricated
metal products
Machinery and
equipment
Food and
beverage
Basic metals
5.9 5.5
3.2 2.3
2.2
0.9
0.9
Change in share of value added from service inputs in gross exports, 1995–2014
Percent of gross exports
30% of value of exported goods comes from services
SERVICES TRADE IS GROWING FASTER THAN GOODS TRADE
2
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Although services directly make up only 23 percent of global trade, they contribute 45
percent of the total value added
Service exports as a share of world exports
in gross and value-added terms, 2014
%
1 Share based on WTO and IMF.
2 Share based on World Input-Output Database.
SOURCE: WTO; IMF; World Input-Output Database; McKinsey Global Institute analysis
23
77
Services Goods
Service exports as a share of
gross global exports1
55
45
Value added contributed by services as a
share of all value added in global exports2
SERVICES TRADE IS GROWING FASTER THAN GOODS TRADE
2
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Why does this trend matter?
Companies (and countries)
have growing opportunities
in services trade
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Trade based on labor-cost arbitrage has declined across many value chains
Global trade is from
low-wage to high-wage
country in 2017
Global trade in labor-
intensive goods was
based on labor-cost
arbitrage in 2005
18%
LOW LABOR COSTS HAVE BECOME LESS IMPORTANT
3
SOURCE: McKinsey Global Institute
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Robotics is expanding even to the most labor-intensive processes
SOURCE: McKinsey Global Institute, Globalization in transition: The future of trade and value chains, January 2019
Sewbot, fully automated sewing workline, developed by SoftWear,
Atlanta-based company
Replaces 10 full-time employees
2x more productive than a human sewing line
(1,142 t-shirts in 8 hours by sewbot vs. 669 by human sewing line)
11x faster manufacturing of a shoe upper
LOW LABOR COSTS HAVE BECOME LESS IMPORTANT
3
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Manufacturing process automation allows to locate production
closer to consumers - examples
SOURCE: McKinsey Global Institute, Globalization in transition: The future of trade and value chains, January 2019
3LOW 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)
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10.68
12.04
10.57
14.05
Nearshoring production can 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
Freight
Mode/days
Landed cost price, 2016
$ per pair of jeans
Mexico
Jeans production, US company Jeans production, German company
Turkey
Germany
Freight
Mode/days
Landed cost price, 2017
$ per pair of jeans
Offshore
Nearshore
Onshore
Bangladesh
China
3
SOURCE: McKinsey Global Institute
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Why does this trend matter?
Companies make location
decisions based on factors
other than wages, including
talent, infrastructure, and
proximity to customers
Production may shift closer to
advanced consumer markets
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5
7
4
5
7
7
8
5
8
0
All global value chains are becoming more knowledge-intensive
Machinery and
equipmentAuto
Chemicals Mining
Computers and
electronics
Professional
services
IT services Agriculture
Textiles and
apparel
Wholesale
and retail
Intangible assets as a share of revenue, 2000 vs 2016, Percent
2000
2016
29 736 12
8 15 5
17 425 10
14 19 9
8 4417 9
5
5.4%2000
13.1%2016
Global intangible assets
as a share of revenue:
R&D AND INNOVATION ARE BECOMING INCREASINGLY IMPORTANT
4
SOURCE: McKinsey Global Institute
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Intangible assets, such as software, design, and R&D, are an increasingly important part of the
value of physical goods
Value of an iPhoneAverage value of vehicle content
Percent
R&D, software,
retail margin
62%
Manufacturing
cost
38%
68
7 10
26 27Other
Mechanical
2010
63
2016
Software
41
30
29
2030E
R&D AND INNOVATION ARE BECOMING INCREASINGLY IMPORTANT
4
SOURCE: McKinsey Global Institute
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Why does this trend matter?
Companies should focus on
R&D and innovation to succeed
in the next era of globalization
Countries with strong innovation
ecosystems and highly skilled
workforces will gain
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Trade is becoming more regional rather than long-haul
199436
96 2000
40
98 10
42
52
20181206 14 1604
50
02
38
44
46
48
08
51
45
49
48
Share of intraregional goods trade in total trade (exports + imports)
%
2.7 pp
Intra-regional goods trade by value chain
Most regional value chains
56% glass, cement,
and ceramics
59% auto
55% food and
beverage
54% computers and
electronics
TRADE IS BECOMING MORE REGIONAL AND LESS LONG-HAUL
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More than half of goods trade is intraregional in EU-28 and Asia-Pacific Share of intraregional goods trade by region, 2017
NAFTA40.7%
EU2863%
LAC21.7%
Asia-Pacific52.4%
MENA
15.9%
Sub-Saharan
Africa18.8%
Why are companies trading
more within regions?
To build closer
relationships
with suppliers
To increase
speed
to market
To increase
proximity to
customers
TRADE IS BECOMING MORE REGIONAL AND LESS LONG-HAUL
5
SOURCE: McKinsey Global Institute
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Why does this trend matter?
Companies can develop closer
ties with regional suppliers and
increase speed to market
“Nearshoring countries” stand
to gain (e.g., Mexico, CEE)
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Technology is reshaping value chains in three ways
TECHNOLOGY IS RESHAPING GLOBAL VALUE CHAINS
6
SOURCE: McKinsey Global Institute
Reduce transaction
costs
▪ Internet of Things
▪ E-commerce
▪ Blockchain
▪ Automated document processing
Up to +$4.7T increase in
goods trade by 2030 as
transaction costs are reduced
Change production
processes
▪ AI
▪ Automation
▪ 3D printing
Up to -$4T reduction in
goods trade by 2030 as
production moves closer to
consumers
New goods ▪ Electric vehicles
▪ Renewables
▪ Digital goods
Up to -$310B less
goods trade by 2030
through changes in
composition and tradability
of goods
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Globalization is digital: Cross-border data flows have grown 148 times larger since 2005
Used cross-border bandwidth, global
Terabits per secondActual Forecast
2,228
11
122005 07 20F1606
149
22F08
7
1109 10 13
31170
14 18F15 17
6,808
19F 21F 23F2024F
5 19462
30 47 103 218704
1,030
1,516
3,260
4,724
9,729
14x
148x
Video
Search
Internet of
Things
VPNs of
companies
TECHNOLOGY IS RESHAPING GLOBAL VALUE CHAINS
6
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SMEs can also compete in global markets through Facebook, Alibaba, Amazon
SOURCE: Facebook; Amazon; WSJ; McKinsey Global Institute analysis
Number of SMEs on select platforms
80million
10million
2+million
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Multiple tech startups enable SME trade
TECHNOLOGY IS RESHAPING GLOBAL VALUE CHAINS
6
Implications for companies and countries
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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
SOURCE: McKinsey Global Institute
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Key messages for advanced economies
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Shifts in global value chains favor advanced
economies with highly skilled talent, innovation,
and large consumer markets
Service providers stand to gain
Countries that focus on global innovation value
chains will face greater competition from
developing countries like China
Countries that specialize in regional processing
goods may be more insulated from shifts in global
value chains
Resource producers, whether high-income or low-
income, face a growing imperative to diversify
their economies
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Key messages for developing economies
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Labor-intensive manufacturing still offers some
opportunities, but the window will not remain
open indefinitely
Countries near large consumer markets
may benefit from the growing importance of speed
to market
Service exporters stand to gain, provided they
can move up the value chain as automation
performs basic tasks
New engines of growth are needed, and may
include intra-regional trade, digital “leapfrogging”,
remote work, and others
33McKinsey & Company
Thank youTHIS REPORT AND OTHER MGI
RESEARCH ARE AVAILABLE AT:
WWW.MCKINSEY.COM/MGI
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