Changes in Technology Spending and Production Efficiency in the “Big 4” Manufacturing Economies

The manufacturing sector is the second largest global economy with more than US$16 trillion of economic value added in 2021, according to ABI Research’s Manufacturing Market Data. The “Big 4” manufacturing countries—China, the United States, Japan, and Germany—cumulatively represent over half (58%) of this figure, with notable differences in industry makeup and spending.

For example, process manufacturing is largest in both China and the United States, while discrete manufacturing is dominant in Japan and Germany. Automotive manufacturing is the largest industry overall, accounting for 11.5% (US$2.7 trillion) of total manufacturing output across the Big 4 countries, and 9 out of the 10 largest factories in the world belong to the automotive sector, including the Hyundai Ulsan Factory, Kia’s Hwaseong plant, and Volkswagen’s 6.5 million square meter Wolfsburg plant. Interestingly, Kia owns 5 of the top 10 largest factories, making it a notable target for any digital transformation project.

China:

• China represents 28% of global manufacturing value added and is a primary target for digital transformation. The primary metal manufacturing market holds the largest revenue at 14% of the total, with large market players including Baowu, the HBIS Group, and the Ansteel Group. Despite this, however, the sector only consists of 3.5% of enterprises and 5.4% of employees. Computer and electronics manufacturing is the largest manufacturing employer with 13% of the total and major employers that include DJI, BOE Technology, and Changhong.

United States:

• Chemical manufacturing is the third largest industry in terms of revenue in the United States, but it has the largest Capital Expenditure (CAPEX) for professional services, computers and data processing equipment, and machinery. However, from 2019 to 2020, the U.S. petroleum and coal product manufacturing market took a massive hit in revenue, falling by US$233 billion in a single year. While the market has seen reasonable recovery and windfalls following the Russian/Ukraine conflict, budgets for technology investment may still be slim in the coming years, as uncertainty in the energy market continues. The largest players in the U.S. chemical market are Dow, Exxon Chemical, and Dupont.

Japan:

• Automotive manufacturing is the largest market in Japan, representing 19% of total revenue, around double that of the next largest (chemical and allied products). The largest Japanese automotive manufacturers are Toyota Motor Corporation, Honda Motor Company, and Nissan. Comprehensive automation solutions and systems developed over decades position Japan ahead in its disposition toward technology. However, like other markets, Japan also has a long tail of machinery manufacturers, representing 17% of total enterprises and 5.7% of total revenue. Many of these enterprises are small operations with high potential upside for digitalization, but little budget to invest in blue sky projects in favor of solutions that deliver immediate value on the nearest term horizon.

Germany:

• The largest manufacturing industry in Germany is automotive, the same as Japan, with it accounting for 20% of total manufacturing revenue, with Volkswagen AG, Daimler AG, and BMW AG being the largest manufacturers. Despite this, the industry represents only 1% of enterprises. They are large operations, employing an average of 1,754 employees per company, so spending for digital transformation is likely to be available.

The largest manufacturing companies globally remain a mix of petroleum refining, mining, electronics, and automotive companies. While the automotive industry might have the largest factories, it doesn’t completely dominate digital transformation expenditure. In the United States, the transportation industry is only top of half of the tracked expenditures, expensed purchases of software, data processing and other purchased computer services, and communication services. The chemical industry has the largest CAPEX in the other half. Transportation manufacturing’s spending on data processing and other purchased computer services, however, completely dwarfs the spending of other manufacturing verticals. It is 481% higher than the second closest industry’s spending and worth more than transportation manufacturing’s purchases of software and communication services combined. Overall, it is important for technology vendors to identify that the two biggest spenders of equipment and digital transformation in the United States are transportation and chemical manufacturing firms.

When assessing the data in the Big 4 manufacturing markets, size does not equate to efficiency. While China remains 2.5X larger than the United States in terms of manufacturing revenue, it employs 6X as many individuals. Similarly, while Japan has 20,142 fewer enterprises than Germany, its manufacturing revenue is 1.7X higher. This would serve to indicate that, compared to their closest national competitor, both the United States and Japan are likely to be deploying their labor in a far more efficient way. The same trend follows down into individual market verticals, with the Chinese automotive market, while being double the size of the United States, employs 4X the number of individuals. Similarly, the Chinese pharmaceutical and medicinal manufacturing market is only around 3X the size of Japan’s, yet it has 13X the number of employees. Countries with this combination of high revenue and large workforce are likely incredibly viable and ripe for digital transformation, with significant scope for quick wins and Return on Investment (ROI) gains. This is due to the fact that a large amount of labor is likely engaged in tasks that can be easily automated and have labor reassigned to more complex tasks.