This document was created before Parthenon joined Ernst & Young LLP on August 29, 2014, and has not been updated to reflect the combination. U.S. Manufacturing Renaissance T HE P ARTHENON G ROUP Myths and Realities Presented by: Nigel Gault Partner and Co-Chief Economist The Parthenon Group March 2014
Agenda T HE P ARTHENON G ROUP Introduction to The Parthenon Group Myths and Realities 2
The Parthenon Group is a Global Boutique Strategic Advisory Firm Delivering Actionable Insights that Help Our Clients Discover and Achieve Their Full Potential™ T HE P ARTHENON G ROUP London (1998) San Francisco Boston (2000) Shanghai (1991) (2012) Bombay (2008) Singapore (2014) Parthenon Offices Projects Completed by Parthenon 3
Agenda T HE P ARTHENON G ROUP Introduction to The Parthenon Group Myths and Realities 4
Some headlines talk of a manufacturing renaissance; in reality, we are making a slow recovery T HE P ARTHENON G ROUP U.S. Industrial Production in the Manufacturing Sector, Compared with Previous Business Cycle Peak 30% '90 Recession 20 '74 Recession '01 Recession 10 '80 Double Dip Recession 0 '08 Recession -10 -20 1 = 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Peak 2008 2009 2010 2011 2012 2013 2014 5 Source: IHS Global Insight, Parthenon Analysis
If there is a manufacturing renaissance, it’s a very uneven one T HE P ARTHENON G ROUP U.S. Manufacturing Production, (2007=100) 120 110 Durables Manufacturing 100 Nondurables Manufacturing 90 80 70 Jan. 2000 Jun. 2000 Nov. 2000 Apr. 2001 Sep. 2001 Feb. 2002 July. 2002 Dec. 2002 May. 2003 Oct. 2003 Mar. 2004 Aug. 2004 Jan. 2005 Jun. 2005 Nov. 2005 Apr. 2006 Sep. 2006 Feb. 2007 July. 2007 Dec. 2007 May. 2008 Oct. 2008 Mar. 2009 Aug. 2009 Jan. 2010 Jun. 2010 Nov. 2010 Apr. 2011 Sep. 2011 Feb. 2012 July. 2012 Dec. 2012 May. 2013 Oct. 2013 Feb. 2014 6 Source: IHS Global Insight
And the employment needle has barely moved T HE P ARTHENON G ROUP Employment in Manufacturing Sector, 1960-2014 20M 15 Employment in Manufacturing 10 Employment in Durable Manufacturing 5 Employment in Nondurable Manufacturing 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2014 7 Source: IHS Global Insight
The current account deficit has shrunk thanks to increased surpluses on services & investment income, not a smaller goods deficit T HE P ARTHENON G ROUP U.S. Current Account Balance 2002-2013Q4 $500B Current Account Balance, Services, Investment Income and Other 0 Current Account Balance -500 Current Account Balance, Goods -1,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 Q4 8 Source: IHS Global Insight, Parthenon analysis
The manufacturing trade deficit has widened; the energy deficit has narrowed T HE P ARTHENON G ROUP U.S. Trade Balance in Manufacturing, Oil and Gas 3-Month Moving Average 2002-2014 $0B Petroleum Refining, -200 Oil and Gas -400 Manufacturing less Petroleum Refining -600 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 9 Source: Parthenon calculations based on U.S. Census Bureau and U.S. Energy Information Administration Figures
Non-petroleum manufactured exports have barely changed over the last twelve months T HE P ARTHENON G ROUP Year-on-Year Percent Change in Manufacturing Exports and Imports, excluding Petroleum Refining, 2002-2014 40% Manufacturing Imports, except petroleum refining Manufacturing Exports, except petroleum refining 20 0 -20 -40 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 10 Source: Parthenon calculations based on U.S. Census figures
The vaunted low energy-cost boost has not come through to energy-intensive production…yet T HE P ARTHENON G ROUP U.S. Manufacturing Production, (2007=100) 120 110 100 Total Manufacturing 90 Energy Intensive Manufacturing Aggregate 80 70 Jan. 2000 Jun. 2000 Nov. 2000 Apr. 2001 Sep. 2001 Feb. 2002 July. 2002 Dec. 2002 May. 2003 Oct. 2003 Mar. 2004 Aug. 2004 Jan. 2005 Jun. 2005 Nov. 2005 Apr. 2006 Sep. 2006 Feb. 2007 July. 2007 Dec. 2007 May. 2008 Oct. 2008 Mar. 2009 Aug. 2009 Jan. 2010 Jun. 2010 Nov. 2010 Apr. 2011 Sep. 2011 Feb. 2012 July. 2012 Dec. 2012 May. 2013 Oct. 2013 Feb. 2014 Note: Energy-intensive includes bulk chemicals, pulp & paper, cement & concrete, iron & steel, aluminum, petroleum refineries 11 Source: IHS Global Insight, Parthenon Analysis
The U.S. energy cost advantage is huge T HE P ARTHENON G ROUP Industrial Electricity Prices by Region, 2005-2013 Industrial Natural Gas Prices by Region, 2005-2013 ($/ton of oil equivalent) ($/ton of oil equivalent) 3,000 1,000 Japan 800 2,000 Japan OECD 600 Europe OECD Europe 400 1,000 United States United 200 States 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2005 2006 2007 2008 2009 2010 2011 2012 2013 Note: 2013 figure is second quarter only 12 Source: International Energy Agency
A few energy intensive sectors benefit greatly; most sectors are little affected T HE P ARTHENON G ROUP Energy Intensity Rankings Within Manufacturing, 2010 (Purchased Energy as a Percent of U.S. Dollar Shipments) Chemicals (excl. Pharmaceuticals ) 9.1% Primary Metals 6.2% Nonmetallic Minerals (Clay, Glass, Cement) 5.9% Paper and Pulp 4.9% Textiles and Products 2.9% Woods Products 2.9% Manufacturing Average 2.7% Plastics and Rubber 2.3% Printing and Related 1.8% Fabricated Metals 1.5% Food, Beverage, and Tobacco 1.4% Electrical Equipment 1.2% Furniture and Related 1.0% Apparel 0.9% Computer and Electronics 0.8% Leather and Allied Products 0.7% Machinery 0.7% Miscellaneous 0.6% Transportation Equipment 0.6% Pharmaceuticals 0.6% 0 2 4 6 8 10% Note: Excludes petroleum refining 13 Source: Parthenon calculations based on U.S. Census Bureau and U.S. Energy Information Administration Figures
Energy cost advantages won’t be realized until capacity comes online; it is on the way in the chemicals sector T HE P ARTHENON G ROUP Manufacturing Construction, 2000-2014 $80B Manufacturing Construction except Chemicals Manufacturing Construction Manufacturing Construction 60 in Chemical Sector 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 14 Source: IHS Global Insight, Parthenon calculations
The U.S. also has been gaining competitiveness on labor costs – helped by outperformance on productivity growth T HE P ARTHENON G ROUP Productivity and Unit Labor Cost Growth, 2002-2012, CAGR 7% Korea 6 5 Productivity Growth ('02-'12) U.S. 4 Japan Germany 3 U.K. France 2 Canada Australia Italy 1 0 -2 0 2 4 6 8 10% Unit Labor Cost Growth ('02-'12) 15 Source: The Conference Board International Labor Comparisons Program
Key durable goods sectors will continue to lead growth T HE P ARTHENON G ROUP U.S. Manufacturing Production, Indexed at Peak of Business Cycle, 2007 60% Historical Forecast Aerospace Products and Parts 40 20 Machinery Motor Vehicles and Parts 0 -20 -40 -60 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 16 Source: IHS Global Insight; Parthenon Analysis
The computer sector is in a class of its own T HE P ARTHENON G ROUP U.S. Manufacturing Production, Indexed at Peak of Business Cycle, 2007 80% Computers and Electronic Historical Forecast Products 60 40 20 0 -20 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 17 Source: IHS Global Insight; Parthenon Analysis
As construction revives, the cyclical manufacturing recovery will broaden… T HE P ARTHENON G ROUP U.S. Manufacturing Production, Indexed at Peak of Business Cycle, 2007 20% Historical Forecast Paints and Misc. Products Fabricated Metal Products 10 Wood Products 0 -10 -20 -30 -40 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 18 Source: IHS Global Insight; Parthenon Analysis
…while energy-intensive sectors will accelerate T HE P ARTHENON G ROUP U.S. Manufacturing Production, Indexed at Peak of Business Cycle, 2007 40% Historical Forecast Agricultural Chemicals 20 Iron and Steel Plastics Resin and Synthetic Rubber Basic Chemicals 0 Other Rubber Products -20 -40 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 19 Source: IHS Global Insight; Parthenon Analysis
Even in a more favorable environment, some sectors will remain in long-term decline T HE P ARTHENON G ROUP U.S. Manufacturing Production, Indexed at Peak of Business Cycle, 2007 0% Historical Forecast -20 Textile Products Textile Mills Printing Support Activities -40 Apparel -60 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20 Source: IHS Global Insight; Parthenon Analysis
Conclusions T HE P ARTHENON G ROUP No broad-based U.S. manufacturing renaissance – performance varies widely across sub-sectors But energy and labor costs trends are favorable Cyclical recovery and structural change won’t raise all boats, but it will raise some 21
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