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Acta Polytechnica Hungarica Vol.21,No.3,2024 267 Industry 5.0:Generalized Definition,Key Applications,Opportunities and Threats Attila Kovari Institute of Digital Technology,Faculty of Informatics,Eszterhzy Kroly Catholic University,Eszterhzy tr 1,3300 Eger,Hungary kovari.attilauni-eszterhazy.hu Kand Klmn Faculty of Electrical Engineering,buda University,Bcsi t 96/B,1034 Budapest,Hungary,kovari.attilauni-obuda.hu Department of Natural Sciences,Institute of Engineering,University of Dunaujvros,Tncsics M.u.1/A,2400 Dunaujvros,Hungary,kovariuniduna.hu GAMF Faculty of Engineering and Computer Science,John von Neumann University,Izski u.10,6000 Kecskemt,Hungary kovari.attilanje.hu Abstract:Collaboration between humans and machines is the main focus of the latest industrial revolution dubbed Industry 5.0.This piece aims to highlight the overall concept,as well as the key applications,opportunities and threats of Industry 5.0.Various definitions of Industry 5.0 are presented,with a focus on the significance of human-robot cooperation and the priority placed on people and eco-friendliness in industrial processes.This article showcases the distinct and inventive customer experiences that Industry 5.0 provides,while also generating value for industrial companies.Additionally,a SWOT analysis delves into the strengths,weaknesses,opportunities and threats brought about by Industry 5.0.Achieving sustainable development goals and gaining a competitive edge are both possible for companies embracing Industry 5.0.Despite the benefits,however,obstacles abound.Issues like integrating human resources into production processes and tackling safety and ethical concerns require attention.Keywords:Industry 5.0;Industry 4.0;human-machine cooperation;sustainability;SWOT analysis;sustainable development goals;safety issues;ethical issues;human resources 1 Introduction A series of industrial revolutions have brought major changes in manufacturing and production.The term Industry 4.0 was publicly introduced at the Hannover Fair in 2011 1,which developed the concept of Cyber-Physical Systems(CPS)into A.Kovari Industry 5.0:Generalized Concept,Key Applications,Opportunities and Threats 268 Cyber-Physical Production Systems(CPPS)2.One of the key initiatives of Industry 4.0 is SmartFactory 3.In the era of Industry 4.0,production systems,in the form of CPPS,can make intelligent decisions through real-time communication and collaboration between manufacturing things 4,enabling flexible manufacturing of high-quality personalised products with mass efficiency 5.In Industry 4.0,the main priority is to automate processes,thereby reducing human intervention in the manufacturing process 6.Industry 4.0 focuses on improving mass production and performance by digitalisation and AI-driven technologies to increase the efficiency and flexibility of production,but with less focus on social and sustainability principles.The fifth industrial revolution,Industry 5.0,is an advancement of its predecessor,Industry 4.0,which was centered around automation and digitization.Industry 5.0 is a revolution that recognises industrys ability to achieve social goals alongside growth,putting people at the centre of the production process 6.Industry 5.0 will place more emphasis on the human factor,customisation,environmental awareness,and the integration of new technologies than previous industrial revolutions.The introduction of Industry 5.0 is based on the fact that Industry 4.0 focuses less on social and sustainability principles and more on increasing the efficiency and flexibility of production 7.Figure 1 summarizes the industrial revolutions.Industry 5.0 Industry 4.0 Human-Machine Co-operation&Cognitive Systems&Customization and Personalization Industry 3.0 Internet&Cyber-physical systems(CPS)&Machine Learning Industry 2.0 Computers&Automation&Electronics Industry 1.0 Mass Production&Assembly Line&Electricity Machinery&Water and Steam Powers 1765 1870 1970 2000 2020 Figure 1 Industrial revolutions Acta Polytechnica Hungarica Vol.21,No.3,2024 269 Industry 5.0s focus lies in enhancing the collaboration between humans and machines.Its goal is to improve workplace safety,reduce errors,and boost productivity by optimizing human-machine interaction 8.The combination of creative human input and smart technology defines the Industry 5.0 model.It allows for workers to not only participate in the production process,but also make important decisions and adapt to shifting circumstances in real-time.Working in conjunction with each other instead of being replaced,Industry 5.0 and Industry 4.0 harmoniously bring forth optimal results for manufacturing and industry.Human-machine collaboration,sustainability and cybersecurity will be key elements of the new industrial revolution.This paper summarizes the definitions of Industry 5.0 and give a generalized concept for Industry 5.0 applications.Based on a synthesized analysis,it reflects the key applications of Industry 5.0 with the help of a detailed SWOT analysis and highlights the main opportunities and threats of the fifth industrial revolution.2 Generalized Definition of Industry 5.0 Industry 5.0 is still constantly developing,so experts and researchers from different perspectives have given different definitions for the discussion of this industrial revolution.Since the concept of Industry 5.0 has not yet fully matured,so some general and more specific definitions are summarized below:-Def1:“The revolution of industry 5.0 means that humans and machines are working together,improving the efficiency of industrial production.Human workers and universal robots are boosting the productivity of the manufacturing industry.”by Amr Adel 9-Def2:“Industry 5.0 can be considered the era of the socially intelligent factory,in which cobots converse with people.Enterprise social networks will be used by Social Smart Factory for enabling seamless communication between human and CPPS components.The overall current understanding of Industry 5.0 brings the human touch back to the industry.It also entails the incorporation of AI into human operations to enhance mans capacity.The core of Industry 5.0 is the harmony of machines,humans,values,tasks,and finally,knowledge and skills which results in personalized/individualized products as well as services.”by Leng et al.10.-Def3:“The Age of Augmentation(Industry 5.0)will be focused on the cooperation between human intelligence and cognitive computing and on treating automation as a further enhancement of the humans physical,sensorial,and cognitive capabilities.By putting humans back into the loop,Industry 5.0 profoundly restructures human tasks in the realm of A.Kovari Industry 5.0:Generalized Concept,Key Applications,Opportunities and Threats 270 manufacturing in ways that benefit the workers.They will be upskilled to shift from manual to cognitive labor,to provide value-added tasks in production and to workwith peace of mindalongside an autonomous workforce,i.e.,collaborative robots that will be perceptive and informed about human intention and desire”by Francesco Longo,Antonio Padovano and Steven Umbrello 8.-Def4:“This approach provides a vison of industry that aims beyond efficiency and productivity as the sole goals,and reinforces the role and the contribution of industry to society.It places the wellbeing of the worker at the centre of the production process and uses new technologies to provide prosperity beyond jobs and growth while respecting the production limits of the planet.It complements the existing Industry 4.0 approach by specifically putting research and innovation at the service of the transition to a sustainable,human-centric and resilient European industry.”by European Commission 11.-Def5:“INDUSTRY 5.0 is future,but already penetrating trend,of change processes directing towards closer cooperation between man and machine,and systematic prevention of waste and wasting including INDUSTRIAL UPCYCLING.INDUSTRY 5.0 priority is to utilize efficiently workforce of machines and people,in synergy environment.It goes back from virtual environment to real one.”by Michael Rada 12.-Def6:“Bringing back human workers to the factory floors,the Fifth Industrial Revolution will pair human and machine to further utilize human brainpower and creativity to increase process efficiency by combining workflows with intelligent systems.While the main concern in Industry 4.0 is about automation,Industry 5.0 will be a synergy between humans and autonomous machines.”by Saeid Nahavandi 13.-Def7:“In other words,at its heart,Industry 5.0 reflects a shift from a focus on economic value to a focus on societal value,and a shift in focus from welfare to wellbeing.”by Jeroen Kraaijenbrink 14.-Def8:“The 5th Industrial Revolution,which still is emerging,is bent on fostering cooperation between humans,machines,and technology to ensure the stability the workforce and an understanding of worker empowerment.”by MOMENTA 15-Def9:“The previous tier,Industry 4.0,emerged with the arrival of automation technologies,IoT and the smart factory.Industry 5.0 takes the next step,which involves leveraging the collaboration between increasingly powerful and accurate machinery and the unique creative potential of the human being.”by Nexus Integra 16.-Def10:“The term Industry 5.0 refers to people working alongside robots and smart machines.Its about robots helping humans work better and faster by leveraging advanced technologies like the Internet of Things(IoT)and big Acta Polytechnica Hungarica Vol.21,No.3,2024 271 data.It adds a personal human touch to the Industry 4.0 pillars of automation and efficiency.”“The pairing of human and machine workers opens the door to countless opportunities in manufacturing.And since the use cases of Industry 5.0 are still in their relative infancy,manufacturers should be actively strategizing ways to integrate human and machine workers in order to maximize the unique benefits that can be reaped as the movement continues to evolve.”by James Jardine 17.-Def11:“The Fifth Industrial Revolution,also known as Industry 5.0,is a new phase of industrialisation,whereby humans work alongside advanced technologies and AI-powered robots to enhance processes within the workplace.”by Marina Ruggieri 18.-Def12:“Industry 5.0,also known as the Fifth Industrial Revolution,is a new and emerging phase of industrialisation that sees humans working alongside advanced technology and A.I.-powered robots to enhance workplace processes.This is coupled with a more human-centric focus as well as increased resilience and an improved focus on sustainability.”by TWI 19 Based on the previous definitions,a synthesized generalized definition for Industry 5.0:Industry 5.0 focuses on effective human co-work with machines to increase flexibility and sustainability by relying on smart machines.Industry 5.0 builds on the achievements of Industry 4.0,but rather than replacing humans,it aims to exploit the potential of human intelligence in human-machine interaction more than ever before.This will allow people to use their cognitive abilities and rapid adaptability to improve without sacrificing the accuracy and consistency offered by intelligent machines.In this way,Industry 5.0 focuses on economic,environmental and social impact to make sustainable choices.Figure 2 Industry 5.0 from the perspective of human-centric sustainability 15 A.Kovari Industry 5.0:Generalized Concept,Key Applications,Opportunities and Threats 272 3 Key Application Areas of Industry 5.0 The following key application areas can be identified for Industry 5.0,the latest industrial revolution that focusing on collaborating with smart technologies to boost production efficiency and improve the workplace environment by combining human creativity with machines.Industry 5.0 has brought a number of innovations and differences compared to previous industrial revolutions,including:-Human-Machine Collaboration:at the heart of Industry 5.0 is human-machine collaboration.While Industry 4.0 focused on full automation and autonomous systems,Industry 5.0 aims to combine human creativity with machine efficiency.-Tailored Production:Industry 5.0 will allow manufacturing processes to be customised to individual needs.This means that companies will be able to produce unique products in high volumes without losing efficiency.-Environmentally conscious:The new industrial revolution places a strong emphasis on sustainability and environmental protection.Companies need to operate not only more efficiently,but also in a more environmentally friendly way.-Digital Twins and Augmented Reality.These technologies enable virtual modelling and optimisation of production processes.-Intelligent Systems.This means that systems can anticipate problems and solve them before they become serious problems.-Cybersecurity.As systems become more complex and interconnected,security risks will increase and companies will need to focus more on cybersecurity.Putting human creativity and intelligent technology together,Industry 5.0 is the next industrial revolution focusing on man-machine partnership.This revolution aims to amalgam production efficiency and workplace environment.Taking into account these development trends,the following key application areas can be identified with regard to Industry 5.0:-Collaborative robots(Cobots):These robots work alongside humans on the production line and are able to learn from their human co-workers.Cobots are able to identify and adapt to the activities of their human colleagues,creating a safer and more efficient work environment.-Cognitive robotics:Cognitive robots are able to learn and adapt to their environment by the intelligent behavior of robots.These robots are able to make decisions independently and collaborate with humans in production processes.Acta Polytechnica Hungarica Vol.21,No.3,2024 273 -Digital Twins:Digital twins are virtual copies of physical devices that collect real-time data and perform analytics.These twins help companies to develop and optimize production processes and predict maintenance needs.-Augmented Reality(AR)and Virtual Reality(VR):AR and VR technologies allow workers to interactively connect with production processes,increasing productivity and efficiency.In addition,these technologies can be used for training and educational purposes.-Intelligent manufacturing systems:The goal of Industry 5.0 is to create intelligent manufacturing systems that can identify and solve manufacturing problems and achieve maximum efficiency and flexibility by combining human cognitive abilities with machine precision.-Intelligent healthcare:It can individually monitor the patients condition and provide personalized treatment with the help of doctors.With the help of cobots,doctors can perform surgeries in cooperation with robots.Routine medical tasks can also be performed by cobots,so doctors can focus on more complex tasks.-Customized production:Industry 5.0 enables companies to produce customized products according to customer needs by combining the power of humans and smart manufacturing.This includes customizing products and modifying manufacturing processes to customer specifications.It allows companies to produce uniquely customized products instead of mass production.With this method,companies will be able to respond quickly to market changes and customer needs.-Data-driven decision making:The concept of Industry 5.0 also includes data-based decision making.With the help of smart sensors and IoT devices and humans,companies are able to collect and analyze data to make better decisions about manufacturing processes.-Education:The combination of smart machines and better trained professionals results in efficient,sustainable and safe production.Industry 5.0 introduces the role of Lead Robotics.This person specializes in machine-operator interaction and has experience in areas such as robotics and AI.Education must reflect this when training future specialists and engineers.Innovation in Industry 5.0 is bridging human involvement and technology during production.Exciting new applications resulting from technological advancements have the potential to revolutionize the industrial sector.The sparse examples of potential applications shown here are just a taste of the possibilities Industry 5.0 offers.A.Kovari Industry 5.0:Generalized Concept,Key Applications,Opportunities and Threats 274 4 Examination of Opportunities and Threats using SWOT Analysis The examination of Industry 5.0 opportunities and threats is carried out with the help of a SWOT analysis.For the analysis,it was summarized on the basis of the authors characterizations related to industrial applications,based on a synthetic overview of many Industry 4.0 and Industry 5.0 papers.The papers used for the analysis can be classified into the following groups:-general overviews 2,10,19,20-industrial and medical applications and research 21,22,23,24-management,innovation,economy 25,26,27-socio and human centric perspectives 6,8,9,28,29,30 Table 1 shows the summarized results of a SWOT analysis based on a synthesis of the literature reviewed.Table 1 SWOT analysis of Industry 5.0 technologies SWOT Content Strengths 1.Human and Machine Collaboration:Emphasizes the interaction between humans and machines,promoting a collaborative environment.Combines human creativity with machine efficiency to enhance productivity and improve workplace safety.2.Human-Centric Approach:Puts human needs and interests at the center of the production process.Industry 5.0 prioritizes the well-being of industrial workers,emphasizing their importance in the production process.3.Customized Production:Enables tailoring of manufacturing processes to individual needs.4.Organizational Resilience:Industry 5.0 focuses on resilience,allowing industries to adapt and thrive in changing conditions.5.Environmentally Conscious:Places a strong emphasis on sustainability and environmental protection.6.Digital Twins and Augmented Reality:Introduces digital twin and augmented reality technologies into manufacturing processes.7.Technological Advancements:The integration of advanced technologies such as IoT,AI,and robotics to create flexible and efficient production systems.8.Sustainable Manufacturing:Manufacturing must respect planetary boundaries and be sustainable.The industry meets societal demands while respecting planetary boundaries.Weaknesses 1.Complex Technologies:Introduction and integration of new technologies can pose complex challenges for companies.Acta Polytechnica Hungarica Vol.21,No.3,2024 275 2.Training Requirement:Workers need to acquire new skills for the effective use of new technologies.3.Social Heterogeneity:There can be societal differences in values and acceptance.4.Transition Challenges:Moving from Industry 4.0 to 5.0 might pose challenges,especially for industries heavily invested in the former.5.Data Security and Interoperability:Concerns related to ensuring data security and interoperability between systems.6.Potential Resistance:Traditional industries might resist the change due to the costs and complexities involved in the transition.7.Lack of Clear Definition:Being a topic in development,theres no precise consensus on its definition,which can lead to confusion and misinterpretation.Opportunities 1.Competitive Advantage:Companies that successfully implement Industry 5.0 technologies can gain a competitive edge in the market.2.Sustainable Growth:Environmentally conscious manufacturing processes allow companies to achieve sustainable growth in the long run.3.Resilience:Manufacturing must be capable of defending against disruptions and ensuring critical infrastructure during crises.4.Meeting Societal Demands:Industry 5.0 offers the chance to realign industries with societal needs,potentially opening new markets and avenues for growth.5.Innovation and Entrepreneurship:The emphasis on creating an environment conducive to innovation can lead to the birth of new ideas,products,and services.6.Strengthening Partnerships:Theres an opportunity to strengthen collaborations between the public and private sectors,leading to shared growth and development.7.Addressing Global Challenges:The ability to address significant global challenges such as climate change,rapid consumption of non-renewable resources,environmental pollution,and social injustice.Threats 1.Cybersecurity Risks:As systems become more complex and interconnected,security risks increase.2.High Initial Investment:Introduction of Industry 5.0 technologies may require significant initial investment.3.Productivity Challenges:Significant investments are needed while also expecting an increase in productivity.4.Rapid Technological Changes:The pace of technological advancement might outstrip the industrys ability to adapt,leading to potential inefficiencies.5.Environmental and Social Challenges:Issues like climate change,environmental pollution,and social injustice can pose significant challenges to the successful implementation of Industry 5.0.A.Kovari Industry 5.0:Generalized Concept,Key Applications,Opportunities and Threats 276 6.Potential Overshadowing by Industry 4.0:The existing prominence and momentum of Industry 4.0 might overshadow the newer paradigm,slowing down its adoption.7.Global Conflicts:Events like the Russia-Ukraine conflict can elevate complexities in the global industrial context.5 Insights into Practical Applications and Future Directions of Industry 5.0 At the brink of the new industrial revolution,we witness an amalgamation of cutting-edge technologies and human-centered methods that will bring some significant changes to several industries.Industry 5.0 signifies not only a technological advancement but also a paradigm shift in the operation and growth of businesses.Our scrutiny will explore Industry 5.0s practicability and future prospects,scrutinizing its effect on agriculture,healthcare,and manufacturing while examining future technology progressions,workforce dynamics,and expertise demands.Our investigation targets a comprehensive perception of the opportunities and obstacles Industry 5.0 will present in this impending industrial era.Industry 5.0 is set to revolutionize various sectors by bringing in more efficient,sustainable,and customized approaches.The future will see advancements in AI,robotics,IoT,and data analytics enhancing human-machine collaboration.This evolution will fundamentally alter the job landscape,necessitating a shift in education and skills development.Embracing these changes is crucial for industries to remain competitive and sustainable in the rapidly evolving technological world.5.1 Manufacturing Introducing a paradigm shift in the manufacturing sector,Industry 5.0 is transforming production processes into something more efficient,sustainable,and customized.This envelopment is characterized by the integration of advanced technologies such as AI,robotics,and IoT,allowing machines to support human creativity and decision making rather than just automating tasks.The main focus is to enhance human-machine collaboration,resulting in an agile production line that meets individualized customer needs,reduces waste,and improves resource efficiency.Consequently,this synergy leads to a manufacturing landscape that is more responsive and responsible,in line with the rising demand for sustainability.Acta Polytechnica Hungarica Vol.21,No.3,2024 277 5.2 Healthcare In healthcare,Industry 5.0s potential is transformative.The use of collaborative robots(cobots)and AI in surgeries and patient care marks a significant advancement.Cobots,designed to work alongside human professionals,can assist in complex surgical procedures,offering precision and consistency beyond human capabilities.AI algorithms can process vast amounts of patient data,aiding in diagnosis and personalized treatment plans.These technologies not only enhance the quality of care but also promise to make healthcare more accessible,as they can assist in overcoming human resource constraints in underserved areas.5.3 Agriculture In agriculture,Industry 5.0 technologies play a pivotal role in ushering in an era of precision farming.This approach leverages IoT sensors,AI,and big data analytics to make farming practices more informed and precise.From soil moisture sensors guiding irrigation to AI-driven pest control solutions,these technologies enable better resource management,higher crop yields,and reduced environmental impact.Precision farming epitomizes the Industry 5.0 ethos of harmonizing efficiency with sustainability.5.4 AI and Robotics Looking ahead,further advancements in AI and robotics promise to deepen human-machine collaboration.Next-generation AI could offer more intuitive and adaptive learning capabilities,aligning closely with human needs and thought processes.Robotics might evolve to be even more flexible and capable of complex,creative tasks,blurring the lines between tasks traditionally thought to be exclusively human or machine domain.5.5 IoT and Data Analytics The advancements in IoT and data analytics herald a future where industrial processes are not only more efficient but also more sustainable.Enhanced IoT connectivity will lead to smarter factories,where real-time data analytics can optimize energy use,reduce downtime,and predict maintenance needs.This level of operational intelligence paves the way for industries to not only increase their productivity but also significantly lower their environmental footprint.A.Kovari Industry 5.0:Generalized Concept,Key Applications,Opportunities and Threats 278 6 Discussion Industry 5.0,this novel concept highlights the significance of prioritizing people and sustainability in industrial processes.More importantly,this new paradigm emphasizes the crucial role of industrial workers in the production process,nurturing collaboration and coordination between human and smart systems.This integration gives rise to the possibility of individualizing products and services on a massive scale,providing unparalleled and innovative customer experiences.Consequently,this creates value and establishes a competitive edge for industrial enterprises.Blending technology with innovative tactics and organizational frameworks is key.The structure,functioning,human resources,and operations of corporations must harmonize with societal demands and stakeholders.To inaugurate a culture of creativity and business,establishing a favorable environment is imperative.Crafting a skilled workforce,investing in R&D,and strengthening public-private sector collaboration must be prioritized.Achievement of sustainable development goals is possible only if industries make themselves resilient,integrate human values with technology and ensure sustainability.Competition and productivity must be weighed against said goals also considering the technological advancements that accompany the new industrial revolution.People-centeredness and sustainability are the key priorities of Industry 5.0,prompting a paradigm shift in the industrial sector.By placing human needs and interests at the core of the production process,a human-centered approach emphasizes the significance of the human touch over technological advancement.Additionally,this approach brings about fresh roles for industrial workers,as the value perception shifts from viewing them as costs to recognizing them as investments.In Industry 5.0,the focus is on people and societies,rather than mere technology.To adapt to the diverse needs of industrial workers,the manufacturing industry uses technology that caters to them.The goal is to create a work environment that prioritizes employee well-being,including their physical and mental health.This approach puts emphasis on protecting workers fundamental rights,such as autonomy,human dignity,and data protection.For a more balanced work-life and improved career options,industrial employees must constantly train and develop themselves 31 32.Additionally,Industry 5.0 prioritizes sustainable manufacturing and encourages industries to be sustainable and respectful of the planets limitations.One way to achieve this is by creating circular processes that repurpose,recycle and reuse natural resources,ultimately leading to an efficient and sustainable circular economy with less waste and environmental impact.Industrial production in Industry 5.0 is required to display resilience as a critical strength.This resilience is necessary to combat disruptions and protect crucial Acta Polytechnica Hungarica Vol.21,No.3,2024 279 infrastructure.The industry of the future must be agile enough to adapt efficiently to(geo-)political transformations and unforeseen natural emergencies.The COVID-19 crisis has,in particular,made apparent the fragility of global supply chains and reinforced the necessity for better preparation for the future.Utilizing a host of cutting-edge technologies like the Internet of Things,blockchain,and the latest 6G networks,Industry 5.0 has emerged as a game-changer.By leveraging the power of digital twins,collaborative robots,and edge computing,the entire production process can be monitored and controlled for optimal efficiency and superior quality.Thanks to 3D modeling and simulation,product designs can be perfected and stored digitally before being manufactured on demand,making the storage of large quantities of finished products a thing of the past,and bringing down the costs of inventory management.Industry 5.0 allows for mass customization,which means that personalized products can be created based on customers preferences and requirements.This innovation enhances production efficiency and facilitates an interactive and continuous monitoring process between humans and machines.Responsibility for these activities is shared,resulting in increased flexibility.Identifying alternate routes in the face of disturbances remains paramount in Industry 5.0.Such resiliency can only be achieved with the help of digital tools and methods-think simulations and advanced AI models-that can weigh diverse factors like quality,cost,logistics,and substitution.The application of Industry 5.0 is not without its share of difficulties and drawbacks.Despite its numerous benefits,one primary issue is social heterogeneity.There exists a vast diversity of values and social norms;thus,people tend to differ in their acceptance of new technologies and methods.Consequently,such diversity poses a considerable challenge in the adoption of Industry 5.0 since individuals come from different backgrounds and hold distinct viewpoints that can influence their perspectives.In Industry 5.0,the integration hurdle poses a challenge to its stakeholders,customers to SMEs.Coping with technology advancements can also make research and development more complex,given the interdisciplinary research fields and intricate systems in play.Incorporating innovation policies that prioritize the ecosystem poses its own set of difficulties.The industrys rapidly shifting climate necessitates agile and results-driven approaches,which presents yet another challenge.The adoption of adaptable and flexible Industry 5.0 innovation methodologies is,therefore,imperative.To thrive in Industry 5.0,businesses must boost productivity through significant capital investments.However,this presents challenges for those with limited resources.Before taking the plunge,companies must thoroughly weigh the rewards and hazards of embracing these technologies.The connection between Industry 5.0 and eye tracking systems lies in the fact that both areas aim at human-artificial intelligence cooperation and improving the A.Kovari Industry 5.0:Generalized Concept,Key Applications,Opportunities and Threats 280 efficiency of work processes and can be fundamental elements of the future manufacturing and technological environment.Eye movement tracking systems can also be used during the examination of complex cognitive processes such as programming 31-33,with the support of which the efficiency of the process can be improved and expanded using artificial intelligence.Immersive VR 34 is,therefore,compatible with the principles of Industry 5.0 and enables effective collaboration between people and intelligent systems,increasing flexibility and innovation in production and work processes.Digitalization and IoT devices pose a major problem for Industry 5.0-security.The use of heterogeneous data management and cloud services exacerbates the issue as the number of vulnerabilities rises with them.Data security is a crucial aspect of Industry 5.0,where mutual trust among various stakeholders like IoT nodes,machines,and communication nodes is established through authentication.Data integrity is also vital as control commands and monitoring data pass through third-party networks.System performance must not be harmed while ensuring integrity enforcement.Privacy and data protection are key considerations in Industry 5.0.The advanced cognitive capabilities of manufacturing processes give rise to the potential for highly customized services,but this also brings ethical issues and challenges in safeguarding privacy during data collection.In order to reintegrate human resources into the production line,effective training is required for both humans and machines to successfully cooperate.The challenge lies in scaling users and production processes,particularly in the realm of human-robot collaboration.This can prove to be a hurdle for the seamless partnership between human intelligence and machines.AIs ethical concerns shouldnt be disregarded.Every application of AI calls on us to scrutinize the advantages and social implications.Ethical repercussions also take a critical place for success.Finally,ethical matters are the last piece of the puzzle.The measurement of environmental and social value remains an unreliable quest for Industry 5.0,despite its goal of creating such values.For organizations seeking to evaluate the efficacy of their sustainability initiatives,this presents a challenge.Industry 5.0 requires more skilled jobs and these are mainly focused on product customisation,with a strong emphasis on increasing customer satisfaction.In Industry 5.0,the majority of the production process will still be automated,but the real-time processed data from machines will provide the opportunity to collaborate with highly skilled professionals 37 38.Another key benefit of Industry 5.0 could be the use of greener solutions through people working together to achieve pollution-free manufacturing processes,as opposed to purely manufacturing-centric solutions.Conclusions Industry 5.0 relies on smart machines that maximise flexibility and sustainability,while leveraging human-machine collaboration.While Industry 4.0 focuses on technologies such as the Internet of Things or big data,Industry 5.0 focuses on human,environmental and social aspects.In this respect,Industry 5.0 complements Acta Polytechnica Hungarica Vol.21,No.3,2024 281 the achievements of Industry 4.0 and does not necessarily replace humans but promotes human-machine collaboration.This will allow humans to focus primarily not on performing parts of the control,but to incorporate human critical thinking and adaptability,while still taking advantage of the accuracy and repeatability of machines.Technological development is no longer the sole focus of Industry 5.0,which now prioritizes social values and human involvement.Through human-machine collaboration,the production processes can be customized to provide personalized customer experiences.With an emphasis on environmental responsibility and social improvement,Industry 5.0 pioneers a paradigm shift.Industry 5.0s application of technology and innovation allows companies to meet customers distinctive demands while adjusting to an environment that is quickly evolving.Transforming the work atmosphere is accomplished through focusing on individuals and their growth.Ongoing learning and training play a significant role in workforce development and culture.Industry 5.0 harnesses the unique creativity of human experts to work efficiently,smartly and accurately with machines.Many tech professionals believe that Industry 5.0 will bring back human intervention and combine high-speed and accurate machines with the critical,cognitive thinking of humans.Industry 5.0 can improve the quality of production by assigning repetitive and monotonous tasks to robots/machines and critical thinking tasks to humans.Industry 5.0 poses many obstacles,including the incorporation of modern technology,managing moral dilemmas,and maintaining a symbiotic relationship between man and machine.To overcome these hurdles,it is crucial for industries to collaborate more closely and funnel resources into further research and development.The future of industry is set to 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Industry 5.0:Generalized Concept,Key Applications,Opportunities and Threats 284 30 Y.Lu et al:Outlook on human-centric manufacturing towards Industry 5.0,Journal of Manufacturing Systems,Vol.62,2022,pp.612-627 31.Karl et al:ICT-enhanced STEM skills development opportunities for students,Proceedings of the XXXVIII.Kand Conference 2022,buda University,Kand Klmn Faculty of Electrical Engineering,2022,pp 144-155 32 Gy.Molnr,A.Fodor:The impact of digitalisation on modern methodological pedagogical practice,Proceedings of the XXXVIII.Kand Konferencia,budai Egyetem,pp.125-143 33 J.Katona:An Eye Movement Study in Unconventional Usage of Different Software Tools,Vol.23,No.3,2023,3823 34 J.Katona:Examination of the advantage of the clean code technique by analyzing eye movement parameters.In Proceedings of ISER International Conference,Vol.25,2022,p.26 35 J.Katona:Analyse the readability of LINQ code using an eye-tracking-based evaluation.Acta Polytechnica Hungarica,Vol.18,2021,pp.193-215 36 A.Dhlen:Towards Developing an Immersive Virtual Reality Applications for Supporting Vision Screening A User Study,Journal of Applied Technical and Educational Sciences,Vol.12,No.4,Art No:330 37 Gy.Molnr:Pedagogy,innovation,technology,digital culture-new directions for digitalisation,Typotex,2022,p 126 38 H.Ildik et al:Teachers Digital Skills and Methodological Characteristics of Online Education,International Journal of Engineering Pedagogy,Vol.13,No.4,2023,pp.50-65
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IATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESNitya Aggarwal,Matthew Piotrowski,and George FramptonDecarbonizing the Aluminum Market:Challenges and OpportunitiesIIATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESThis report was written and published in accordance with the Atlantic Council policy on intellectual independence.The authors are solely responsible for its analysis and recommendations.The Atlantic Council and its donors do not determine,nor do they necessarily endorse or advocate for,any of this reports conclusions.ISBN-13:978-1-61977-312-7January 2024 2024 The Atlantic Council of the United States.All rights reserved.No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Atlantic Council,except in the case of brief quotations in news articles,critical articles,or reviews.Please direct inquiries to:Atlantic Council,1030 15th Street NW,12th Floor,Washington,DC 20005COVER:Molten metal is poured into carbon anodes at Century Aluminum Company at a Kentucky plant.May 2019.Source:REUTERS/Bryan WoolstonAcknowledgmentsThe Atlantic Council would like to thank the ClimateWorks Foundation for supporting our work on this project.IIIATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESDecarbonizing the Aluminum Market:Challenges and OpportunitiesNitya Aggarwal,Matthew Piotrowski,and George FramptonIVATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESTable of ContentsFOREWORD 1EXECUTIVE SUMMARY 2INTRODUCTION 3CURRENT PROCESSES FOR PRODUCING ALUMINUM 4POTENTIAL DECARBONIZATION PATHWAYS 5CLEAN ENERGY 5RECYCLING 5ELECTRODE TECHNOLOGY6GREEN HYDROGEN AND CARBON CAPTURE,UTILIZATION,AND STORAGE 7TRADE OF LOW-EMISSIONS MATERIALS 8CARBON BORDER ADJUSTMENT MECHANISM8GLOBAL ARRANGEMENT ON SUSTAINABLE STEEL AND ALUMINUM(GASSA)9INTERNATIONAL PROGRESSAND OBSTACLESTOWARD GREEN ALUMINUM 11 UNITED ARAB EMIRATES(UAE)11CHINA 11CANADA 12RUSSIA 12INDIA 12UNITED STATES 13AUSTRALIA AND BRAZIL 13MULTILATERAL EFFORTS TO PROMOTE DECARBONIZATION 14DEVELOPING STANDARDS FOR MEASURING EMBEDDED CARBON EMISSIONS 15RECOMMENDATIONS 16CONCLUSION 18ABOUT THE AUTHORS 191ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESAs we head into a new phase of Paris Agreement im-plementation,industry decarbonization has moved up the international policy agenda Heavy-industry sectorssteel,aluminum,cement,and chemicals currently account for 20 percent of global greenhouse gas emissions and have,to date,largely been on the backburner for policymakers,exempt from the most serious climate change efforts However,these industries are coming under increasing pressure to rapidly decarbonize and approach net-zero emis-sions by 2050 Meeting this goal requires overcoming the“trade-trapped”na-ture of these sectors Steel,cement,aluminum,and chemicals are traded across borders and face international price com-petition This makes it harder for producers to pass through additional costs of investing in more expensive,cleaner tech-nologies without impacting competitiveness Policymakers have been wary of introducing policies that could affect the competitiveness of their domestic industrial sectors and risk carbon leakage Trade policy and a complementary diplomacy strategy are,therefore,key to successfully decarbonizing these sectors There is a large body of academic literature pointing to the need for well-coordinated international efforts in this space,but few studies diving into the specific case of aluminum This report fills this gap,describing the current efforts on this front and what actions will enable greater progress Several of the key industrial decarbonization policies being explored by countriessuch as public procurement targets,product requirements,green industrial subsidies,and carbon border measuresrun into challenging trade-law territory and risk provoking tensions if not carefully designed,coordinated,and justified Countries and industry groups should collaborate on research,development,and deployment to ensure the effective use of resources and prevent funding gaps This would help reduce technology costs and ensure technologies are globally accessible International alignment on standards and methodologies for low-carbon products and emissions intensity would facilitate knowledge sharing and data collection,ultimately decarbonizing international industrial supply chains While the potential for international coordination on industrial decarbonization has historically been underexploited,there has been a recent proliferation of platforms and initiatives pro-viding opportunities for cooperation in this space These initia-tives have focused on cooperation on roadmaps for industrial decarbonization,procurement,innovation,and trade policy,among other things Thus,the upcoming year presents a pivotal opportunity to see accelerated momentum on industrial decarbonization internationally Foreword2ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESAluminum is one of the most energy-intensive and greenhouse gas-emitting commodities in the world,accounting for approximately 3 percent of all global emissions Global demand for the metal is expected to increase,and aluminum is central to overall decarboniza-tion efforts in transportation,packaging,building,and the en-ergy transition While decarbonization pathways for steel and cement have received increased attention recently from pol-icymakers,nongovernmental organizations(NGOs),and indus-tryand are somewhat analogous to aluminum in that they also involve moving away from coal power and toward new emis-sions-reduction technologiespolicymakers have paid less at-tention to aluminum The aluminum industry has begun to take leading steps to decarbonize,but new policy measures will be needed to make significant progress in this hard-to-abate sec-tor National and international bodies must partner on these measures as aluminum,like steel,is heavily traded Global pro-duction of primary aluminum almost tripled from 2000 to 2021,reaching 68 million metric tons1 Countries with greater climate ambition that are now beginning to produce higher-cost clean aluminum will inevitably seek to protect domestic competition and prevent carbon leakage,through trade measures if they perceive them as necessary Actions to decarbonize the indus-try must take this into account and stimulate international coop-eration rather than trade battles This report examines the reasons why the aluminum sector is so difficult to decarbonize,various pathways to decarbonization,and current approaches undertaken by countries with market relevance The report also provides recommendations for fur-ther action by governments,international organizations,and industry to advance progress toward deep decarbonization1“US Aluminum Manufacturing:Industry Trends and Sustainability,”Congressional Research Service,October 26,2022,https:/crsreportscongressgov/product/pdf/R/R47294Governments should take the following actions:Commit to decarbonization goals for heavy sectors,such as aluminum,that are in line with the Paris Agreement Commit to,embrace,accelerate,and centralize current separate initiatives and coalitions working on decarbon-izing heavy industries,including aluminum Acknowledge the importance of climate-related trade instruments and utilize them to reduce emissions in heavy industries,including aluminumGovernments and international organizations should work together on the following steps:Focus on the“emissions intensity”of facilities and products;Develop protocols for determining carbon intensity(embedded emissions,ie,those generated during the manufacturing and production of the metal)in aluminum production facilities and products Ensure that embedded-emissions measurement focuses on lifecycle emissions Consolidate ongoing separate initiatives that are working on setting standards for measuring embedded emissions in key commodities into a single venue and forumIndustry should play a role in the key areas below:Increase collaboration with international forums on data and standard setting Partner with governments to increase the use of scrap aluminum and renewable energy for refining and smelting processesExecutive Summary 3ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESThe aluminum sector is expected to become increas-ingly important to the global economy,with total global demand growing from 862 million tons(Mt)in 2020 to 1195 Mt in 20302 These demand pressures arise from the transportation,construction,packaging,and electri-cal sectors,and aluminum plays a crucial role in several tech-nologies needed for a sustainable energy transition,such as electric vehicles and energy-efficient materials3 Requirements for new electric vehicles alone are predicted to drive up more than a third of this increase in demand for aluminum,from 199 Mt in 2020 to 317 Mt in 20304 Aluminum is similarly vital to the production of solar panels and copper cabling for power production Demand for environmentally friendly packaging in canned drinks is also expected to motivate increased demand for aluminum packaging Aluminum can be recycled indefi-nitely without loss of qualityapproximately 75 percent of all aluminum ever produced is still in usebut the size of the alu-minum market and the demand pressures it faces necessitate increased production The sheer size and expected continual growth of the aluminum industry complicate the challenge of decarbonizing the aluminum sector,which currently produces about 3 percent of all global emissionsCurrently,the production of aluminum is energy intensive and emits large quantities of greenhouse-gas(GHG)emissions Pure aluminum must be extracted from bauxite ore by crushing,2“Report Reveals Global Aluminium Demand to Reach New Highs After Covid,”International Aluminum Association,March 23,2022,https:/international-aluminiumorg/report-reveals-global-aluminium-demand-to-reach-new-highs-after-covid/3 Pedro Assuno,et al,“Aluminum Decarbonization at a Cost that Makes Sense,”McKinsey&Company,April 20,2023,https:/wwwmckinseycom/industries/metals-and-mining/our-insights/aluminum-decarbonization-at-a-cost-that-makes-sense#/4“Report Reveals Global Aluminum Demand to Reach New Highs After Covid”5 William Alan Reinsch and Emily Benson,“Decarbonizing Aluminum:Rolling Out a More Sustainable Sector,”Center for Strategic and International Studies,February 25,2022,https:/wwwcsisorg/analysis/decarbonizing-aluminum-rolling-out-more-sustainable-sector6 Assuno,et al,“Aluminum Decarbonization at a Cost that Makes Sense”7“Making Net-Zero Aluminum Possible,”Mission Possible Partnership,April 2023,https:/missionpossiblepartnershiporg/wp-content/uploads/2023/04/AluminiumTSExecutiveSummarypdf8 Assuno,et al,“Aluminum Decarbonization at a Cost that Makes Sense”grinding,and then refining to produce“alumina”(aluminum ox-ide),which is then smeltedprocesses that necessitate a signifi-cant,constant energy load during both the refining and smelting stages5 Many countries rely on coal to generate the required electricity,with about 55 percent of the energy needed to smelt aluminum coming from coal-powered power plants6 Global reliance on aluminum makes it increasingly important to decarbonize its production processes so that the world can meet its long-term climate goals Currently,producing one metric ton of aluminum emits,on average,159 metric tons of carbon dioxide(CO2)7 To stay consistent with the 15-degrees Celsius target outlined in the Paris Agreement,the aluminum industry must lower its carbon intensity to less than 05 metric tons of CO28 The challenge of doing so lies in decarbonizing the refining and smelting processes,due to their high energy intensity Successfully greening these production processes will require innovative solutions,combining renewable ener-gies with new technologies Understanding the difficulties and opportunities for decarbon-izing the aluminum sector requires first exploring how alumi-num production functions and what measures are currently in place to decarbonize the industry With these factors and existing remedies outlined,the path for deep decarbonization becomes clearIntroduction4ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESProducing aluminum requires significant amounts of en-ergy on a continuous basis,a demand currently met largely by carbon-intensive fossil fuels Additionally,carbon dioxide is emitted during the smelting process as a byproduct Decarbonization pathways must address the carbon intensity of both the energy demands of aluminum pro-duction and the release of carbon dioxide during the metals manufacturing The primary industrial process for aluminum smelting is the HallHroult process,in which alumina is dissolved in the min-eral cryolite9 Pure aluminum can then be extracted from the alumina through electrolytic reduction Electrolysis requires an anode and a cathode:in aluminum production,the anode is made of carbon Carbon is often used in electrolysis because it is an efficient conductor and has free electrons,which are necessary in electrolysis10 In this reaction,positively charged aluminum ions gain electrons from the cathode,forming pure,molten aluminum11 Negatively charged oxide ions lose elec-9 Reinsch and Benson,“Decarbonizing Aluminum”10“Why Are Carbon Electrodes Used In Electrolysis?”M Brashem,Inc,last visited November 12,2023,https:/wwwmbrashemcom/why-are-carbon-electrodes-used-in-electrolysis/11 Assuno,et al,“Aluminum Decarbonization at a Cost that Makes Sense”12 Ibid13“Aluminum,”International Aluminum Association,last visited November 12,2023,https:/wwwieaorg/energy-system/industry/aluminiumtrons at the anode,which generates oxygen Because the an-ode is carbon,when oxygen is generated at the anode,CO2 is produced The process is energy intensive,continuously re-quiring high amounts of powerAluminum production through electrolytic reduction with a carbon anode,therefore,presents two challenges for decar-bonization Using a carbon anode is currently the standard way to produce aluminum because of its conductivity and free electrons but,as a result,the smelting process itself emits sub-stantial amounts of CO2 In addition,electrolysis requires sig-nificant continuous energy,a demand that in most producing countries is met by using coal The smelting process as a whole is responsible for about 80 percent of the greenhouse gases emitted during aluminum production12 Of the emissions aris-ing from smelting,about 81 percent are from the coal-powered generation of electricity for electrolysis Power generation ac-counts for 70 percent of total direct and indirect CO2 emissions from the entire aluminum production process13 Current Processes for Producing Aluminum5ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESDecarbonizing primary aluminum production from ore through smelting requires reconsidering various emis-sions-intensive aspects of the HallHroult process The sector can address the carbon intensity of the process by substituting greener energy for coal or by reducing the carbon production of electrolysis The former is the clear-est pathway to address the energy intensity of the process,as renewable energy technologies are already well developed To cut carbon emissions from smelting,the industry could also substitute a newer technology metal or inert anode in place of the carbon anode Additionally,capturing and storing carbon and replacing fossil fuels with nuclear power or green hydro-gen both offer potential alternative long-range solutions,but not in the immediate future CLEAN ENERGYThe energy intensity of smelting could be largely addressed by using clean energy sources instead of coal Transitioning to clean energy would mitigate up to two-thirds of the emissions caused by aluminum production14 Using solar or wind energy to power the production process has enormous potential to green the aluminum process However,because smelting re-quires a continuous,high-intensity energy source,the intermit-tency of these renewables renders them currently unable to reliably power smelting,barring significant battery-efficiency technologies or other improvements to energy storage15 Hydropower and nuclear energy are also clean options,but come with their own challenges:hydropower is geographically limited and,therefore,not always available to new aluminum production,while nuclear energy has to contend with high costs,long lag times from approval to operation,and the need to maintain waste sites Directly sourcing clean energy to meet aluminum-plant energy demand can be challenging,but sleeved or virtual power-pur-chase agreements have the potential to address this hurdle16 These agreements ensure that substantial supplies of clean power would be sourced from the grid to meet most of a pro-ducers energy demands throughout the year However,in peri-ods when renewable energy is not available,producers would 14 Ramon Arratia and Nancy Gillis,“Purifying the Miracle Metal:How to Decarbonize Aluminum,”GreenBiz,February 3,2023,https:/wwwgreenbizcom/article/purifying-miracle-metal-how-decarbonize-aluminum15 Assuno,et al,“Aluminum Decarbonization at a Cost that Makes Sense”16 Julia Attwood,“Green Aluminum is Competitive Today Its Time to Start Transforming,”BloombergNEF,June 16,2021,https:/aboutbnefcom/blog/green-aluminum-is-competitive-today-its-time-to-start-transforming/17 Ibid18“Aluminium for Climate,”World Economic Forum,November 2020,https:/www3weforumorg/docs/WEF_Aluminium_for_Climate_2020pdfstill be able to use fossil fuel-generated energy to fill the sup-ply gaps The reduced costs of renewable energy make this a relatively low-cost option for decarbonization It would also address the inconsistency of renewables,as producers could fund renewable energy while having fossil fuel generated en-ergy as a backup With power-purchase agreements in the United States providing electricity as cheaply as$15 per mega-watt hour,renewables are becoming cost competitive with coal power in most of the world While these agreements can move the industry toward renewables,they would not entirely remove reliance on fossil fuels from the production processBecause producing aluminum requires so much reliable,con-sistent electric power,many aluminum producers today own or control their own power sources This pattern suggests that in considering pathways to zero carbon for the industry,acquiring dedicated renewable power,conjoined with improved battery storage,would be an important strategy for producersRECYCLINGRecycling is another key option available for aluminum decar-bonization Aluminum has high recycling potential,as it can be recycled several times without losing quality or integrity,un-like many other materials17 Recycling of scrap aluminum can reduce total facility emissions by up to 90 percent,because of the reduced power required to recycle the metal versus producing it anew and the absence of process emissions from the smelting conversion Thus,when available,the use of re-cycled material is extremely effective in emissions reduction However,today,recycling aluminum is associated with less than 5 percent of the carbon footprint of producing aluminum on an overall global basis Expanding aluminum recycling re-quires increased collection and recovery of scrap aluminum,which could reduce the need for primary aluminum by up to 15 percent18 New“circular economy”planning for reuse of alu-minum products and improved sorting technology could both contribute to increased use of scrap While recycling of industrial equipment(vehicles,machine parts,building material)is significant,at rates higher than 90 Potential Decarbonization Pathways6ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESpercent,consumer recycling also presents a significant oppor-tunity to reduce the need for primary aluminum19 Consumer aluminum recycling rates vary significantly from country to country:while Germany recycles 99 percent of its aluminum cans,Brazil 97 percent,and the European Union(EU)about 75 percent,the United States recycles less than half20 In the United States,the problem is twofold:a lack of consumer awareness,and inadequate recycling infrastructure and tech-nology Outdated sorting technology,for example,mistakenly categorizes aluminum cans as plastics,sending them to land-fills This outdated technology is becoming increasingly limiting as more aluminum alloys are developed for industry-specific purposes21 Technology that can differentiate alloys would en-able recyclers to process recycled aluminum more accurately and specifically,further closing the loop of aluminum produc-tion While technology that can pinpoint the differences in cer-tain alloys exists,it is significantly more expensive As demand for aluminum and its alloys increases,governments must pro-mote and fund updated recycling technologies Thus,to more effectively implement recycling as a decarbonization tool by increasing consumer recycling rates,investments in infrastruc-ture and education are required ELECTRODE TECHNOLOGYThe secondary aspect of the decarbonization challenge in pri-mary aluminum production is CO2 emissions caused by using a carbon anode during electrolysis Successfully decarbonizing this process would address another 2530 percent of emis-sions caused by aluminum production22 The main alternative to using a carbon anode,as used by the HallHroult process,is an inert anode23 Inert anodes are constructed of non-con-sumable materials like metal or ceramic Like carbon,they are 19“Infinitely Recyclable,”Aluminum Association,last visited November 12,2023,https:/wwwaluminumorg/Recycling20 Janice Lee,et al,“Whats Holding Back Aluminum Recycling in the US?”Boston Consulting Group,May 10,2022,https:/wwwbcgcom/publications/2022/whats-holding-back-aluminum-recycling-in-the-us21 Brian Taylor,“Sorting Technology Can Turn Aluminum Green,”Recycling Today,September 14,2021,https:/wwwrecyclingtodaycom/news/steinert-hoffmann-aluminum-sorting-technology-recycling/22“Aluminium for Climate”23 Assuno,et al,“Aluminum Decarbonization at a Cost that Makes Sense”24 Ibid25 Ibid26“Aluminium for Climate”27 Assuno,et al,“Aluminum Decarbonization at a Cost that Makes Sense”conductive and carry free electrons During the electrolysis of aluminum oxide,oxygen attaches to the anode;with a carbon anode,this results in the production and release of carbon di-oxide When using an inert anode,pure oxygen,rather than carbon dioxide,is released as a byproduct This provides a well-established alternative to carbon anodes that could pre-vent the release of CO2 during electrolysis Developments in inert-anode technology have increased the efficiency of electrolysis One promising approach is the use of wetted cathodes,which are cathodes treated with titanium di-boride24 This renders the cathode inert,which allows produc-ers to reduce the distance between the anode and the cathode during electrolysis Because the electrons have less distance to traverse,the voltage can be lower,reducing the energy de-mands of electrolysis Combining wetted cathodes with inert anodes would eliminate CO2 emissions arising from electroly-sis,while simultaneously increasing energy efficiency Inert-anode technology is considered the aluminum-decarbon-ization pathway most likely to become commercially viable in the short term25 Elysis,a joint project from Alcoa,Apple,Rio Tinto,and the Canadian government,is currently running a pilot project in Canada with inert-anode technology to verify its performance and determine when it can be adopted on an industrial scale Elysis is expected to host a demonstration of its technology and develop a commercial package in the next few years The World Economic Forum projects the capital costs of inert anodes to be 1030 percent less than carbon-based anodes26 However,ini-tial research shows that electrolysis with an inert anode could be more energy intensive than with a carbon-based anode,reiterat-ing the importance of renewable energy pathways Government grants or incentives can help encourage the use of this technol-ogy once it is commercially available27 7ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESGREEN HYDROGEN AND CARBON CAPTURE,UTILIZATION,AND STORAGEThe need for a consistent energy source throughout alumi-num production complicates a transition to renewable en-ergy,making hydrogen-based production a possible option Hydrogen and hydrogen-based fuels are increasingly seen as crucial to the decarbonization of heavy industry sec-tors28 Hydrogen produced using renewable energy,known as green hydrogen,is a clean,low-carbon energy source,re-leasing only water when burned as fuel For hydrogen to be-come a truly viable decarbonization solution,innovation and action are needed to reduce the cost of its production and to increase demand for it Moreover,green hydrogen will likely be in short supply for some time given its high current cost,and there may be much more efficient uses for it elsewhere in industrial decarbonization of steel,for aviation and mari-time fuel,and for fuel cells Nonetheless,aluminum compa-nies are already exploring green hydrogen as an option for decarbonization Norsk Hydro,a Norwegian aluminum and re-newable energy company,recently produced the worlds first aluminum made using green hydrogen29 This fall,Hydro will release a report on its efforts to demonstrate the potential of hydrogen in aluminum production As progress toward reducing the cost of green hydrogen at scale continues,carbon capture,utilization,and storage(CCUS)technologies could fill some gaps by capturing emissions aris-28 Abhinav Chugh and Emanuele Taibi,“What Is Green Hydrogen and Why Do We Need It?An Expert Explains,”World Economic Forum,December 21,2021,https:/wwwweforumorg/agenda/2021/12/what-is-green-hydrogen-expert-explains-benefits/29 Jonas Cho Walsgard and Mark Burton,“Norway Firm Produces Worlds First Aluminum Using Green Hydrogen,”Bloomberg,June 15,2023,https:/wwwbloombergcom/news/articles/2023-06-15/hydro-produces-world-s-first-aluminum-using-green-hydrogen30“Carbon Capture,Utilisation and Storage,”International Energy Agency,last visited November 12,2023,https:/wwwieaorg/energy-system/carbon-capture-utilisation-and-storage31“Developing Carbon Capture and Storage Technology for Aluminium Smelters,”Hydro,January 19,2022,https:/wwwhydrocom/en-US/media/on-the-agenda/hydros-roadmap-to-zero-emission-aluminium-production/developing-carbon-capture-and-storage-technology-for-aluminium-smelters/32“Hydro Invests in Carbon Capture to Eliminate Emissions from Aluminum Production,”Light Metal Edge,March 21,2022,https:/wwwlightmetalagecom/news/industry-news/smelting/hydro-invests-in-carbon-capture-to-eliminate-emissions-from-aluminum-production/ing from the current aluminum production process CCUS en-tails capturing carbon,either for use in the production process or for storage in deep geological formations30 It is often sug-gested as a solution in hard-to-abate sectors,such as steel However,for aluminum,the off-gas,or the byproduct emitted by aluminum smelters,has a low concentration of CO2 relative to other industries,at about 1 percent CO231 By comparison,carbon capture technologies have previously worked with off-gas at a concentration of CO2 above 4 percent or much higher,as is the case with ethanol refineries Moreover,aluminum pro-duction also releases perfluorochemicals(PFCs),which are not captured by existing carbon capture technologies PFCs are greenhouse gases that,although they are released in small amounts,have a far higher Global Warming Potential than CO2,and remain in the atmosphere for thousands of years To overcome these challenges,Oslo-based Hydro is currently working to develop capture technology that could be retrofit-ted to its existing aluminum plants32 Early results show that off-gas capture could remove most of the CO2 released during aluminum smelting,while direct air capture technology could remove other emissionsEach of the solutions mentioned above provides significant po-tential to help decarbonize the aluminum market Moving for-ward,a combination of them allrenewable energy,recycling,inert-anode technologies,and,eventually,perhaps nuclear,CCUS,and hydrogenwill likely be key to mitigating emissions in the aluminum production process 8ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESWhile there are promising pathways for aluminum decarbonization,trade policies play a significant role in determining whether the industry pursues those paths Emerging agreements in the EU and the United States have shown potential to capitalize on this op-portunity and encourage decarbonizationCARBON BORDER ADJUSTMENT MECHANISMThe EUs Carbon Border Adjustment Mechanism(CBAM)is a policy measure responding to the concern that EU industries attempting to decarbonize emissions-intensive products,like aluminum,could be priced out of the market33 Higher costs created by the EUs carbon prices and industry standards could make EU products less competitive,allowing for carbon leak-age,in which greener products are priced out of the market by cheaper carbon-intensive alternatives,or producers respond to climate policies by relocating to countries with less ambi-tious green standards The CBAM responds to carbon leakage by implementing a fee on carbon for carbon-intensive goods entering EU borders34 This is intended to create a level playing field among domestic and foreign goods as EU industries work toward decarbonization The CBAM,part of the EUs overall Fit for Fifty-Five green deal,considers aluminumalongside cement,iron and steel,fertiliz-ers,electricity,and hydrogento be one of the carbon-inten-sive sectors most subject to competitive disadvantage from increasing carbon prices imposed by the EU Emissions Trading System,and at risk of carbon leakage from companies offshor-ing to lower-cost countries35 As such,when the EU CBAM en-tered into force in October 2023,it began a transition process requiring filing of reports on the embedded carbon emissions contained in a series of designated imported aluminum prod-33“Carbon Border Adjustment Mechanism(CBAM)Starts to Apply in Its Transitional Phase,”European Commission,September 29,2023,https:/eceuropaeu/commission/presscorner/detail/en/ip_23_468534“Carbon Border Adjustment Mechanism,”European Commission,last visited November 12,2023,https:/taxation-customseceuropaeu/carbon-border-adjustment-mechanism_en35 Ibid.36 Silvia Weko,“The Future for Global Trade in a Changing Climate,”Chatham House,December 5,2022,https:/wwwchathamhouseorg/2022/12/future-global-trade-changing-climate37 Bart Le Blanc,“Potential Conflicts between the European CBAM and the WTO Rules,”Norton Rose Fulbright,February 2023,https:/wwwnortonrosefulbrightcom/en/knowledge/publications/9c5d9ec6/potential-conflicts-between-the-european-cbam-and-the-wto-rules38“Japanese Industry Groups Resist EU Carbon Border Rules,”Argus Media,August 1,2023,https:/wwwargusmediacom/en/news/2474953-japanese-industry-groups-resist-eu-carbon-border-rules39 Yuka Obayashi and Katya Golubkova,“Explainer:Japans Carbon Pricing Scheme being Launched in April,”Reuters,March 30,2023,https:/wwwreuterscom/markets/carbon/japans-carbon-pricing-scheme-being-launched-april-2023-03-30/40 John Milko,“How a Carbon Border Adjustment Mechanism Can Strengthen US Competitiveness,Workers,and Climate Efforts,”Third Way,February 2,2023,https:/wwwthirdwayorg/memo/how-a-carbon-border-adjustment-mechanism-can-strengthen-us-competitiveness-workers-and-climate-effortsucts,leading in 2026 to phasing in of fees on each import keyed to its reported emissions This is intended to protect EU producers working toward sustainability versus imports from competitors that produce goods that are high in carbon,while incentivizing global producers to similarly prioritize decarbon-ization These intentions are panning out among some EU trade partners,such as Turkey and Bosnia and Herzegovina,which have indicated their willingness to fast track their decarboniza-tion efforts in response to CBAM36 However,India and China,as well as many other countries from the Global South,argue that CBAM is an unfair violation of the World Trade Organization(WTO)rules on free trade,particularly the most favored nation(MFN)rule,which prohibits discriminating among similar prod-ucts from different trading partners37 For example,developing countries have fewer resources to counteract emissions inten-sity,leading to higher carbon prices at the EU border and dis-advantaging them EU officials,however,argue that the CBAM will follow all WTO rules on international trade In light of the EU CBAM,the United States and the United Kingdom(UK)have also begun to consider similar policies,as have Canada(consultations completed),Australia(consulta-tions announced),and Taiwan(Climate Change Response Act enacted)Japan appears to oppose the EU CBAM over con-cerns that its disclosure requirements could violate the confi-dentiality of price and cost data38 In partial response,Japan is planning to launch its own domestic carbon levy and trad-ing system39 In the United States,legislators from both po-litical parties have publicly expressed support for some kind of charges taxing imports of steel and aluminum more emis-sions-intensive than US-average products,although support for any carbon charge on domestic production of the same product for which the import charges would compensate is much less wide-spread40 Similarly the UK launched consulta-tions on the possibility of enacting a CBAM to support domes-Trade of Low-Emissions Materials9ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIEStic decarbonization efforts41 Together,the EU,Canada,the United States,and the UK represent a significant share of the aluminum market If all four enact and harmonize CBAM-like policies,they could have a widespread impact on embedded emissions in traded aluminum products,prompting a global race to the top in all heavy industries GLOBAL ARRANGEMENT ON SUSTAINABLE STEEL AND ALUMINUM(GASSA)In the fall of 2021,in recognition of this opportunity in sev-eral heavy-emitting sectors,the United States and the EU an-nounced their intention to work together on an arrangement that would incentivize countries and industry actors toward reducing the carbon intensity of their traded goods,including aluminum The initiative,the Global Arrangement on Sustainable Steel and Aluminum(GASSA),aims to bring states together to limit market access for carbon-intensive steel and aluminum42 This proposal was negotiated as part of a temporary US-EU trade“time out,”in which the United States suspended tariffs imposed during the Donald Trump administration on steel and aluminum imported from the EU and agreed to seek a long-term solution that com-bined a new trade approach with increased cooperation to pro-mote decarbonization of these industries43 The time out was later extended to Japan and the UK In return,the EU suspended its retaliatory tariffs on US products The proposed arrangement also created a technical working group with the goal of combin-ing innovative trade approaches and decarbonization efforts An essential proposed component of the arrangement is the development of a methodology to measure embedded carbon emissions in traded steel and aluminum imports into the EU to guide trade instruments that would advantage trade in cleaner,41“UK Government Launches Consultation on a Carbon Border Adjustment Mechanism and Other Measures,”EY Global,March 30,2023,https:/wwweycom/en_gl/tax-alerts/uk-government-launches-consultation-on-a-carbon-border-adjustmen42 Ana Swanson,“US Proposes Green Steel Club that Would Levy Tariffs on Outliers,”New York Times,December 7,2022,https:/wwwnytimescom/2022/12/07/business/economy/steel-tariffs-climate-changehtml43 Timothy Meyer and Todd N Tucker,“How the US and EU Can Rewrite Trade Rules to Fight the Climate Crisis,”Roosevelt Institute,March 15,2023,https:/rooseveltinstituteorg/2023/03/15/how-the-us-and-eu-can-rewrite-trade-rules-to-fight-the-climate-crisis/44“G7 Establishes Climate Club,”BMWK,December 12,2022,https:/wwwbmwkde/Redaktion/EN/Pressemitteilungen/2022/12/20221212-g7-establishes-climate-clubhtml45 Swanson,“US Proposes Green Steel Club that Would Levy Tariffs on Outliers”lower-emissions products Measuring carbon emissions inten-sity will be important for countries and companies to determine progress in their efforts to reduce carbon emissions and develop markets for climate-friendly goods and services Improvements in the quality and transparency of data to measure carbon emis-sions can help increase coordination among major economies and develop trade policies that reduce emissions The GASSA initiative runs parallel to the Group of Seven(G7)Climate Club,an inclusive alliance with the goal of uniting ambitious countries toward the trade of low-carbon commodities44 The Joe Biden administration announced a proposal in December 2022 that outlined its version of what a trade agree-ment under GASSA could look like45 This proposal detailed an international consortium of ambitious states encouraging trade in low-carbon steel and aluminum To join the coalition,countries would have to meet emissions standards and com-mit to avoiding overproduction of steel or aluminum At the same time,member states would enforce tariffs on countries with high emissions intensities that did not join,such as China Member countries would have more favorable trade terms among themselves Finalization of this arrangement was origi-nally promised for October 2023However,the US proposal was fundamentally inconsistent with the EU CBAM which,by the fall of 2023,had been finally ap-proved as EU law and in October 2023 went into effect With the parties of the US-proposed consortium so far apart,they announced at the EU-US Leaders Summit in October that while some progress had been made,discussions would continue with a new deadline of Earth Day 2024 There is some expecta-tion that no agreement other than continued suspension of the tariffs will eventually emerge from these discussions While the 10ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESUnited States and the European Union are under some pressure to harmonize their trade approaches for steel and aluminum to both address global overcapacity and encourage decarbon-ization,the EUs CBAM and the Biden administrations position differ fundamentally because of their divergent climate strate-gies The EUs CBAM is predicated on progressive increases in the price of carbon,which are intended to make emissions unprofitable By contrast,the United States uses government expenditures to incentivize decarbonization,rather than using carbon pricing to disincentivize emissions The United States is unlikely to implement a carbon pricing scheme in the near future,complicating the potential for a homogenized strategy going forward Alongside GASSAs plans,major industry actors are partnering to set decarbonization goals,creating coalitions,such as Carbon Offsetting and Reduction Scheme for International Aviation(CORSIA),Global Cement and Construction Association,and Decarbonizing Transport Initiative46 These coalitions have 46“Aluminium for Climate”set ambitious decarbonization targets for their respective in-dustries For example,the Global Cement and Construction Associations objective is to achieve carbon-neutral concrete by 2050,and CORSIA aims to make all new growth in interna-tional flights carbon neutral Since its inception,many discussions about GASSA have fo-cused primarily on steel,but the trade policy and geopolitical implications for aluminum are similar For both commodities,China produces roughly half of global output,while India is second and increasing production rapidly In the case of steel,India has the highest emissions intensity of any major country from production of primary steel;China is seventh For alumi-num,China has the highest average emissions intensity of any country;India is second With respect to both commodities,while it appears that the EU and US positions may be signifi-cantly at odds due to the EUs newly adopted regulations to implement its CBAM,discussed below,either approach will heavily disadvantage imports from China and India11ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESBeyond efforts through GASSA and the EU CBAM to in-centivize the decarbonization of aluminum,states are in-dividually taking significant actions to achieve the same goal Key aluminum producers are instituting pathways to reduce carbon in the production and trade of aluminum UNITED ARAB EMIRATES(UAE)As both the fifth-largest producer of aluminum,with 34 per-cent of the global market,and the next host of the United Nations(UN)Climate Change Conference(known as COP),the UAEs actions and priorities on green aluminum could have sub-stantial influence on global action toward decarbonization The UAEs largest aluminum producer,Emirates Global Aluminum(EGA),is the countrys biggest industrial conglomerate outside the oil and gas sectors47 EGA recently announced plans to de-carbonize,developing its own technologies to do so,in order to access the market for green aluminum EGA has already begun taking steps to achieving decarbonization through expanding its use of renewable energies For instance,in 2021,EGA be-came the first company to produce commercial aluminum using solar power,and has now announced plans to shift completely to nuclear and solar energy to produce aluminum48 EGA has also helped launch the UAEs Aluminum Recycling Coalition to promote aluminum recycling among consumers49 This coalition plans to finance a study by the International Aluminum Institute on recycling rates and behaviors among consumers in the UAE,in order to assess the type of interven-tion needed to motivate more recycling Following this study,47 Fareed Rahman,“EGA Aims to Decarbonise Its Operations as Demand for Green Aluminum Spikes,”National News,November 25,2021,https:/wwwthenationalnewscom/business/economy/2021/11/25/ega-aims-to-decarbonise-its-operations-as-demand-for-green-aluminium-spikes/48 Aarti Nagraj,“EGA Plans Shift to Nuclear and Solar for Aluminum Production as Demand Soars,”National News,April 14,2022,https:/wwwthenationalnewscom/business/energy/2022/04/15/ega-plans-shift-to-nuclear-and-solar-for-aluminium-production-as-demand-soars/49 Liz Nastu,“United Arab Emirates Launches Aluminum Recycling Coalition,”Environment and Energy Leader,January 16,2023,https:/wwwenvironmentalleadercom/2023/01/united-arab-emirates-launches-aluminum-recycling-coalition/50 Attwood,“Green Aluminum is Competitive Today”51 Phil McKenna and Lili Pike,“Why Chinese Aluminum Producers Emit So Much of Some of the Worlds Most Damaging Greenhouse Gases,”Inside Climate News,December 23,2022,https:/insideclimatenewsorg/news/23122022/china-aluminum-immortals/52“How China Is Decarbonizing the Electricity Supply for Aluminium,”World Economic Forum,April 21,2022,https:/wwwweforumorg/agenda/2022/04/how-china-is-decarbonizing-the-electricity-supply-for-aluminium/53“Rusal Sees Chinas Recycled Aluminium Output Almost Tripling by 2030,”Reuters,June 16,2021,https:/wwwreuterscom/article/us-metals-aluminium-rusal-china/rusal-sees-chinas-recycled-aluminium-output-almost-tripling-by-2030-idUSKCN2DS0ZB54 Brian Taylor,“ISRI2023:China Opens Door Wider for Nonferrous Scrap,”Recycling Today,April 25,2023,https:/wwwrecyclingtodaycom/news/china-aluminum-copper-scrap-recycling-2023-isri-cmra-alter/55“Rusal Sees Chinas Recycled Aluminium Output Almost Tripling by 2030”the coalition intends to support the government in using the results to develop aluminum recycling regulations and infra-structure The UAEs simultaneous reliance on fossil fuels and deepening decarbonization priorities suggest that it could in-centivize similar action from other fossil fuel-reliant countries through its upcoming COP leadership CHINAAs the worlds largest producer of aluminum,responsible for more than 55 percent of global aluminum production and de-mand,Chinas aluminum industry holds significant potential for decarbonization50 However,it is also the worlds highest-emit-ting aluminum industry due to its reliance on coal-powered electricity,and also accounts for 81 percent of the global indus-trys PFC emissions51 In recognition of this emissions intensity,the Chinese govern-ment has begun exploring pathways to decarbonization by ex-panding the production of recycled aluminum and increasing access to renewable energy to lower aluminum emissions52 China has announced several recycling projects,bolstered by significant regulatory support53 Currently,China uses alumi-num scrap to make about 21 percent of its aluminum54 If its recycling efforts materialize,its production of secondary alu-minum could nearly triple,from 76 million tons in 2020 to 20 million tons by 203055 The viability of expanding new aluminum production to areas where renewable energy is produced in China is complicated International Progressand ObstaclesToward Green Aluminum12ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESby geographic constraints,intermittency in available renew-ables,and the high cost of grid power56 In provinces rich with hydropower capacity,aluminum production has become less carbon intensive In the southern province of Yunnan,the regions 70 percent mix of hydroelectric power and cheap energy rates drewmillions of tonsof new aluminum production over the past few years,though a drought then led to an un-precedented hydropower shortage,forcing provincial authorities to order a30 percentreduction in aluminum production until the end of 2021 The fragility of the situ-ation in Yunnan has led the central governments NDRC to issue adirectiveto aluminum companies to diversify future plants away from hydroelectric power and toward wind and solar,which could complicate Chinas attempts to reach peak aluminum emissions by 202557 Chinas carbon emissions trading system is expected to ex-pand to industry,including aluminum,by 2025,which could help incentivize transition from high-to lower-emitting produc-tion58 Moreover,the government has plans to create a carbon price to raise coal prices as well as the cost of coal-fired power by 2025,increasing the carbon-price incentives process59CANADACanada stands in contrast to China,which has a long way to go to cut aluminum emissions Also one of the top five alumi-num producers globally,Canada is home to what is sometimes called the worlds“most sustainable aluminum industry”be-cause of its use of hydropower and high percentage of scrap60 Quebec produces 90 percent of Canadian aluminum;its geo-graphic position and existing capacity enable production to be powered almost entirely by hydroelectricity In response,global leaders in the aluminum sector are launching projects in Canada Rio Tinto recently announced new plans to invest in 56“How China Is Decarbonizing the Electricity Supply for Aluminium”57 Reinsch and Benson,“Decarbonizing Aluminum”58 Ivy Yin,“Chinas Compliance Emission Trading System to Accelerate Coverage of CBAM-Eligible Sectors,”S&P Global,May 9,2023,https:/wwwspglobalcom/commodityinsights/en/market-insights/latest-news/energy-transition/050923-chinas-compliance-emission-trading-system-to-accelerate-coverage-of-cbam-eligible-sectors59“How China Is Decarbonizing the Electricity Supply for Aluminium”60 Attwood,“Green Aluminum is Competitive Today”61“Rio Tinto to Expand Aluminum Smelter with$14B Investment Using Greener Technology,”Global News,June 12,2023,https:/globalnewsca/news/9763017/rio-tinto-quebec-aluminum-smelter-green-technology/62“Rio Tinto and Alcoa announce worlds first carbon-free aluminum smelting process,”Rio Tinto,press release,May 10,2018,https:/wwwriotintocom/fr-CA/can/news/releases/First-carbon-free-aluminium-smelting63 Jael Holzman and Corbin Hiar,“War Threatens Supply of Green Aluminum for Cars,Beer Cans,”E&E News,March 3,2022,https:/wwweenewsnet/articles/war-threatens-supply-of-green-aluminum-for-cars-beer-cans/64 Ibid65“Russian Aluminium Stocks at LME Grow,Boosting Demand for Indian Alternative,”Reuters,June 12,2023,https:/wwwreuterscom/markets/commodities/share-russian-aluminium-london-metal-exchange-warehouses-jumps-2023-06-12/low-carbon smelting technology in Quebec61 Moreover,Alcoa and Rio Tinto have announced a joint project based in Canada to develop the worlds first carbon-free aluminum-smelting fa-cility62 The companies say that this project,called Elysis,will revolutionize the process of making aluminum by using anodes made of nonreactive materials instead of carbon,thus produc-ing oxygen in place of greenhouse gas emissions The compa-nies plan to expand and commercialize their process and begin selling the technology in 2024 Quebecs case demonstrates the green potential of producing aluminum in locations with ac-cess to consistent,reliable renewable energies RUSSIAA Russian aluminum producer,En Group IPJSC,was one of the worlds largest producers of low-carbon aluminum,through its extensive use of available hydropower63 The countrys green aluminum efforts have been derailed,however,by the international response to its invasion of Ukraine Due to trade restrictions,Russian aluminum companies have faced diffi-culty in acquiring the alumina needed to produce aluminum Additionally,tariffs on Russian products following Russias inva-sion of Ukraine have caused demand for its low-carbon alumi-num to drop significantly as companies turn to other producers,including those with higher emissions intensities For example,prior to the war,Budweiser had announced plans to partner with En to produce low-carbon cans as part of the companys net-zero goals These plans are now on hold64 As demand for Russian aluminum has fallen,Indian aluminum,which produces more GHG emissions,has taken its place65 INDIAIndia,the worlds second-largest producer of aluminum,has seen increasing demand following Russias invasion of Ukraine and subsequent trade restrictions,but the country is expected 13ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESto soon face significant trade repercussions from the EUs CBAM66 Indias aluminum industry has a higher emissions intensity than average,meaning that the EU CBAM will likely impose tariffs on Indian aluminum when fees enter into force in 2026 The Global Trade Research Initiative in Delhi predicts that the effects of the EUs CBAM on the Indian aluminum in-dustry will be significant,with a projected 6 percent tariff India has challenged the EU on the legality of its CBAM,on the basis that it poses the type of trade barrier banned by the WTO67 The country is seeking exemptions for its small and medium-sized manufacturers,arguing that that they need more time and re-sources to meet the guidelines laid out by the EU68 Although much of Indias growing demand for more aluminum is domes-tic,it also has a significant export flow of fabricated aluminum products Reports conflict on whether India will raise this as an official complaint at the WTOs next meeting or continue dis-cussing this privately with EU officials Regardless,the passage of CBAM likely motivated the Indian government to develop its own national carbon market,which may lead domestic carbon pricing to similarly incentivize de-carbonization Leaders in Indias aluminum industry have al-ready begun to respond to these incentives In 2022,Vedanta Aluminum,Indias largest aluminum producer,launched“Restora,”Indias first low-carbon aluminum69 UNITED STATES The US aluminum industry has made significant strides toward decarbonization by increasing its recycling efficiency70 Since 1991,the sector has reduced its carbon intensity by 43 percent President Bidens administration has demonstrated ambition in supporting global decarbonization and additional national efforts to lower emissions At COP26,Biden,in collaboration with the World Economic Forum,launched the First Movers 66 Peter Jarka-Sellers and Shayak Sengupta,“Canceling Carbon:The Global Context of Indias New National Carbon Market,”Observer Research Foundation America,July 18,2023,https:/orfamericaorg/newresearch/cancelling-carbon-global-india67 Manoj Kumar and Neha Arora,“India Plans to Challenge EU Carbon Tax at WTO,”Reuters,May 16,2023,https:/wwwreuterscom/world/india/india-plans-challenge-eu-carbon-tax-wto-sources-2023-05-16/68 Adrija Chatterjee,Vrishti Beniwal,and Swansy Afonso,“India Prefers Negotiating With EU on Carbon Tax to WTO Complaint,”Bloomberg,June 5,2023,https:/wwwbloombergcom/news/articles/2023-06-06/india-prefers-negotiating-with-eu-on-carbon-tax-to-wto-complaint#xj4y7vzkg69“Vedanta Aluminium Launches Restora,Indias First Low-Carbon Aluminium,”Economic Times,February 25,2022,https:/energyeconomictimesindiatimescom/news/renewable/vedanta-aluminium-launches-restora-indias-first-low-carbon-green-aluminium/8982968170 Attwood,“Green Aluminum is Competitive Today”71“First Movers Coalition:Sectors,”World Economic Forum,last visited November 12,2023,https:/wwwweforumorg/first-movers-coalition/sectors72“Carbon Removal in the Bipartisan Infrastructure Law and Inflation Reduction Act,”World Resources Institute,December 22,2022,https:/wwwwriorg/update/carbon-removal-BIL-IRA 73 Alan Krupnick and Aaron Bergman,“Incentives for Clean Hydrogen Production in the Inflation Reduction Act,”Resources for the Future,November 9,2022,https:/wwwrfforg/publications/reports/incentives-for-clean-hydrogen-production-in-the-inflation-reduction-act/74“Aluminum,”International Energy Agency,last visited November 12,2023,wwwieaorg/energy-system/industry/aluminium#tracking75 Elena Brito Pantoja,“Alunorte Alumina Plant Fires Up First Electric Boiler,”Hydro,March 10,2022,https:/wwwhydrocom/en/media/news/2022/alunorte-alumina-plant-fires-up-first-electric-boiler/76“Mechanical Vapour Recompression for Low Carbon Alumina Refining,”ARENA,September 15,2023,https:/arenagovau/projects/mechanical-vapour-recompression-for-low-carbon-alumina-refining/Coalition71 This initiative seeks to bring together companies using their purchasing power to create early markets for clean technology through corporate pledges to use low-embedded carbon commodities Aluminum is one of its key sectors,mean-ing that members must invest in low-intensity aluminum This program has the potential to be an important leadership ini-tiative stimulating the financial capital necessary to drive both production and demand for sustainable aluminum Domestic policies such as the Infrastructure Investment and Jobs Act(IIJA)and the Inflation Reduction Act(IRA)have fa-cilitated financial opportunities for investment and innovation in CCUS and green hydrogen The IIJA contains$12 billion in funding for carbon capture investments and infrastructure72 It also created$95 billion in funding for hydrogen,with$8 billion dedicated to“hydrogen hubs”supporting research and devel-opment73 The IRA built upon these funding opportunities,cre-ating two tax credits:one for carbon capture technologies and one wherein the value of the credit is dependent on lifecycle emissions These policies support the development of decar-bonization technologies applicable not only to aluminum,but also to other hard-to-abate industries AUSTRALIA AND BRAZIL Australia and Brazil are both tackling emissions in the refining stage of aluminum production74 For example,a Norsk Hydro facility in Brazil implemented electric boilers at one of its refin-eries,replacing its previous coal-fired machinery75 In Australia,the Australia Renewable Energy Agency is exploring the poten-tial of mechanical vapor recompression,which would similarly electrify the production of steam76 Both countries are also con-ducting feasibility studies on hydrogen as an alternate power source,demonstrating their commitment to exploring varied pathways toward decarbonization 14ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESAdvancing a sector-wide transition toward decarbon-ization requires insights and participation from all lev-els of stakeholders and investors Toward this goal,a global alliance of climate leaders,including the We Mean Business Coalition and the World Economic Forum,created the Mission Possible Partnership(MPP),focused on supporting and unlocking decarbonization across several in-dustries77 The MPP has released sectoral transition strategies for seven of the worlds most energy-intensive,hard-to-abate industries,including aluminum The MPPs strategy for aluminum describes power decar-bonization and recycling as the biggest pieces in this puzzle The strategy would require multiple elements:government investment in renewable energy,particularly as it relates to access and reliability;policies that incentivize companies to invest in renewables;and expanded electric grids with ca-pacity for more renewables,improvements in storage,and 77“Making Net-Zero Aluminum Possible”78“First Movers Coalition”allowances for cross-border electricity flows The MPP strat-egy has been endorsed by the leading global trade associa-tion,the International Aluminum Institute The G7s Industrial Decarbonization Agenda also covers aluminum The First Movers Coalition(FMC)similarly commits to action on industrial decarbonization The FMC,started by the United States at COP26 and now supported by the World Economic Forum,is a coalition of thirteen government partners and doz-ens of leading companies,including Ford,GM,Volvo,Apple,and PepsiCo78 This coalition commits to leverage its purchas-ing power to create and support markets for green technology in eight high-intensity sectors These sectors collectively ac-count for 30 percent of global emissions and are projected to contribute to more than 50 percent of emissions in the com-ing years The coalitions initial launch at COP26 committed to action on aviation,shipping,steel,and trucking In 2022,the collation further committed to aluminum and carbon removal Multilateral Efforts to Promote Decarbonization15ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESDeveloping commonly accepted measurement pro-tocols for determining embedded GHG emissions in aluminum production facilities and products is a key threshold objective and a prerequisite not only to fashioning effective trade instruments to incentivize trade of cleaner aluminum,but for design of other policies such as public purchase programs,subsidies,mandates,and con-sumer labelling In the cases of steel and cement,meaningful progress has been made over the past three years on standard setting for embedded carbon and greenhouse gases by several partner-ships and multilateral coalitions working in parallel These in-clude the Industrial Deep Decarbonization Initiative(IDDI),a project of the Clean Energy Ministerial hosted by the United Nations Industrial Development Organization(UNIDO)but lo-cated at the International Energy Institute(IEA)in Paris work-ing with the Steel Committee of the Organization for Economic Development(OECD),the SteelZero/Responsible Steel part-nership,and the MPP,FMC,and others mentioned above79 Urgency to coordinate and centralize these initiatives for offi-cial governmental endorsement and adoption,however,has been lacking A decision by leading governments to select a single venue to coordinate the development of measurement methodology,and to help organize a data facility for steel and cement facilities that would allow credible application of these standards to be applied in a transparent manner,is probably essential to further progress in those sectors A similar initiative 79 The Clean Energy Ministerial Industrial Deep Decarbonization Initiative(IDDI)is a coalition of public and private organizations that aims to grow demand forlow-carbon industrial materials Working with national governments,IDDI is working to establish ambitious public and private-sector procurement targets,incentivize investment inlow-carbonproduct development,and design industry guidelinesand selection of a venue and responsible parties with a mission to do the same for aluminum could part a significant part of the decision-making process for steel and cement Similar to,and in parallel with,the current direction of work on steel and cement methodologies,measurement standards for embedded emissions in aluminum should also focus on lifecy-cle emissions,including appropriate upstream emissions This goal may be somewhat complicated by the EU CBAM entering its two-year transition phase this year As the only official oper-ating“compliance”system for trade purposes for measurement of embedded emissions in aluminum,the CBAM methodology is not a“lifecycle”measurement but instead designed to mir-ror only direct emissions(scope one)from aluminum produc-tion,since it is only those emissions that European aluminum companies report and are covered by the EU ETS While the transition phase of the CBAM will also require reporting by importers of aluminum products of the amount of electricity used and corresponding emissions,these indirect emissions will not be included in the tariffs that will go into effect in 2026 according to current guidance Moreover,during the transition reporting period,default use of the importing(producing)coun-trys overall average grid emissions intensity is permitted This approach may well result in inaccurate reporting of actual life-cycle embedded emissions in many aluminum products As the CBAM program develops in parallel with efforts to set lifecy-cle measurement standards for steel,cement,aluminum,and other such products,resolving anomalies in measurement of emissions will require focused attentionDeveloping Standards for Measuring Embedded Carbon Emissions16ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESThe decarbonization of heavy industries like aluminum will be vital to reaching long-term climate goals With aluminum both a major commodity in global trade and an important input into green goods that are essential for a cleaner economy,it is urgent for policymakers and compa-nies to accelerate the sectors decarbonization Governments should elevate the need to decarbonize the industry at both the domestic and international levels,and work together with the private sector to continue making progress in solutions for reducing emissions in both the production and trade of alumi-num Because the aluminum market is tightly linked to interna-tional trade,data quality,data transparency,and trade policies that are aligned with climate goals are necessary for deep de-carbonization and a quicker transition This section provides recommendations on decarbonizing aluminum and similar in-dustries,building on those already put forth by the Consortium for Climate-Aligned Trade(CCAT)and the IEA To advance decarbonization of aluminum and similar indus-tries,we recommend the followingRECOMMENDATION 1:Governments should commit to decarbonization goals for heavy sectors,such as aluminum,that are in line with the Paris Agreement.The G7 and major producing countries of the most emissions-in-tensive industrial commodities should commit to specific de-carbonization goals on a sector-by-sector basis,beginning with steel,aluminum,and cement,then moving to fertilizer and chemicals These goals should be compatible with the Paris Agreement RECOMMENDATION 2:Governments should acknowledge the importance of climate-related trade instruments and utilize them to reduce emissions in heavy industries like aluminum.Both producing and consuming country governments should acknowledge that climate-related trade instruments tied to emissions intensity of traded products are appropriate mea-sures to use in the overall effort to incentivize mutual and global efforts to advance industrial decarbonization in sectors such as aluminum Climate-aligned trade rules are needed to promote innovation,reduce costs,and stimulate demand for cleaner goods Smart climate and trade policies are also needed to minimize carbon leakage and increase overall climate ambition RECOMMENDATION 3:Governments and international organizations should craft policies that target the“emissions intensity”of facilities and products.In these hard-to-abate sectors,embedded GHG emissions,or“emissions intensity,”of the facilities and products should be the primary focus of overall efforts,including market-creation policies(public purchase,subsidies,corporate customer vol-untary commitments),mandates,consumer commitments,and trade instrumentsRECOMMENDATION 4:Governments and international organizations should develop protocols for determining carbon intensity in aluminum production facilities and products,as they are doing for steel and cement.Developing commonly accepted measurement protocols for determining embedded GHG emissions in aluminum produc-tion facilities and products is a key threshold objective and a prerequisite to moving forward with any and all policies,including trade instruments Meaningful progress has been made over the past three years on standard setting for steel and cement by several different partnerships and coalitions working in parallel,but urgency to combine and coordinate these initiatives for official governmental adoption has been lacking A similar initiative,more centralized,should be under-taken for aluminumRECOMMENDATION 5:Major producer countries should work with international organizations to consolidate and centralize ongoing separate initiatives and partnerships currently working on setting standards for measuring embedded emissions in key commoditiesincluding aluminuminto a single venue and forum.Given the plethora of coalitions and entities now working on setting standards for measuring embedded carbon in steel and cement,consolidating this effort within the OECD/IEAtogether with the IDDI,a project of the Clean Energy Recommendations17ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESMinisterial hosted by the UNIDO but located at the IEA in Pariswould provide a productive venue to develop a com-mon standard for lifecycle embedded GHG emissions in the aluminum industry,as well as the steel and cement industries An aluminum forum at this same venue could be a part of the Climate Club or separate from it,but should be an official fo-rum open to all producing and consuming countries to join as members,and would be charged with structuring a global data facility adding aluminum data to steel and cement data Key aluminum producers to recruit to any new initiative are the United States,China,India,Canada,the UAE,Bahrain,Norway,Iceland,and Australia RECOMMENDATION 6:Industry associations and international forums should increase collaboration on data and standard setting.The Organisation for Economic Co-opeartion and Development(OECD)team on aluminum standards should also work with major aluminum trade associationsinclud-ing the International Aluminum Institute,the Aluminum Association(United States),the Aluminum Association of Canada(AAC),Norsk Hydro,and Emirates Global Aluminumas well as representatives from industry in China and India The G7 and aluminum-producing countries also should com-mit to working together,directly and via international institu-tions,to improve data transparency,availability,and quality Creating a global data facility for aluminumjust as will be necessary for the steel sectorwould initially rely on existing industry databases Thus,they must create an open venue where steel-producing member countries join to construct such a data facility for steel,and could also serve as the venue for a similar facility for data on aluminum manufacture to verify measurements of emissions attributable to aluminum manufacturing plants and their products RECOMMENDATION 7:Governments and international organizations should ensure that embedded emissions measurement focus on lifecycle emissions.Standards for measurement of embedded emissions in alu-minum should also focus on lifecycle emissions,including appropriate upstream emissions Resolving differences in measurement of emissions adopted in the CBAM program as it develops in parallel with separate efforts to set lifecycle mea-surement standards for steel,cement,and aluminum for other policy purposes will require increased attentionRECOMMENDATION 8:As their highest priorities in aluminum decarbonization,governments and industry should adopt increased use of scrap aluminum and renewable energy for the refining and smelting processes involved in primary production.Policymakers and industry should aim for the greater use of scrap aluminum,and for increased renewable energy for the refining and smelting processes used in primary productionThe use of scrap can cut 9095 percent of the power used to produce aluminum and reduce other unhealthy emissions;it also eliminates emissions from mining and transportation of ore and is less expensive Scrap will not,however,be available in equal measures across producing countries Current esti-mates are that,by 2050,a substantial amount of aluminum will still need to be produced by primary processes The use of renewable energy rather than coal-based power in the primary refining/smelting process could reduce emissions by as much as 70 percent While progress has been made in many countries on recycling of aluminum cans(though,in the United States,the percentage has fallen),policies to implement a more circular economy that captures other post-use alumi-num can be important The possibility of international coop-eration to encourage construction of new primary aluminum smelters could be explored in countries where nearly 100 per-cent renewable energy is used 18ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESWith aluminum as one of the most energy-intensive and greenhouse gas-emitting commodities in the world,and demand expected to continue to grow sharply in the coming decades,decarbonization of the aluminum sector,along with all heavy industries,will be vi-tal to reaching global long-term climate goals Policymakers,in-dustry officials,and NGOs have the opportunity to collaborate to grow the green aluminum market,keeping up momentum seen in recent yearsThe pathways to decarbonization of aluminum production are relatively clear and straightforward,if challenging:increase use of recycled scrap material(because relatively pure aluminum can be recycled indefinitely,cutting emissions by close to 90 percent,as well as reducing mining and transportation);supply-ing more clean renewable energy to new production facilities;increasing efficiency through new technology,primarily the use of non-carbon anodes In the long run,nuclear power may provide another important pathway,while hydrogen and CCUS are less likely to do so Moving along these pathways will re-quire mandates and commitments including further regulations and carbon pricing,financing incentives,and market creation through required public and private purchase commitments and labelling/public education Trade policies are another important tool to decarbonize the alu-minum market Trade policies initiated among the dozen largest producing and importing/customer nations can enhance and incentivize these steps,but may leave trade competitiveness as a possible drag on international cooperation Currently,the EU and United States have taken the lead in beginning to resolve these issues,which will require not only greater G7 approval but outreach to China and India as the largest producers and major future markets It is vital that major economies put aside trade differences and increase coordination,including collabo-ration on decarbonizing key industries such as aluminum Conclusion19ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESMatt Piotrowski is senior director of policy and research at Climate Advisers,focusing on indus-trial decarbonization,trade policy,US climate policy,financial regulations,carbon markets,and climate diplomacy Before joining Climate Advisers,Piotrowski worked as senior editor of Securing Americas Future Energy(SAFE)news service,where he focused on financialmarkets,clean transportation,and state and federal energy policy Before SAFE,Piotrowski worked at Energy Intelligence,where he edited multiple publications and served as Washington bureau chiefGeorge Frampton is a distinguished senior fellow and the director of the Transatlantic Climate Policy Project at the Atlantic Council Global Energy Center He was a former chair of the White House Council on Environmental Quality(CEQ)and is the co-founder and chief executive officer of the Partnership for Responsible Growth He has also served as assistant secretary of the interior for fish,wildlife,and parks,and the president of The Wilderness Society He has been senior of counsel at Covington&Burling LLP,working in the firms climate and clean energy practice,and a partner at Boies,Schiller&Flexner LP He served as deputy director and chief of staff for the Nuclear Regulatory Commissions investigation into the Three Mile Island nuclear accident From 1973 to 1975,Frampton served as an assistant special prosecutor with the US Department of Justice on the Watergate Special Prosecution Force where he worked on the grand jury investigation and trial of President Nixons top aides in the Watergate cover-upNitya Aggarwal is a policy associate at Climate Advisers where she works closely with both the policy&research and communications teams Aggarwal recently graduated from American University pursuing a double major in interna-tional studies and environmental science She brings previous research and policy experience in food sys-tems and environmental healthAbout the Authors20ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESCHAIRMAN*John FW RogersEXECUTIVE CHAIRMAN EMERITUS*James L JonesPRESIDENT AND CEO*Frederick KempeEXECUTIVE VICE CHAIRS*Adrienne Arsht*Stephen J HadleyVICE CHAIRS*Robert J Abernethy*Alexander V MirtchevTREASURER*George LundDIRECTORSStephen AchillesElliot Ackerman*Gina F AdamsTimothy D Adams*Michael AnderssonAlain BejjaniColleen BellSarah E BesharStephen BiegunLinden P BlueBrad BondiJohn BonsellPhilip M BreedloveDavid L CaplanSamantha A Carl-Yoder*Teresa Carlson*James E CartwrightJohn E ChapotonAhmed CharaiMelanie ChenMichael Chertoff*George ChopivskyWesley K Clark*Helima CroftAnkit N DesaiDario DesteLawrence Di Rita*Paula J DobrianskyJoseph F Dunford,JrRichard EdelmanStuart E EizenstatMark T EsperChristopher WK Fetzer*Michael FischAlan H FleischmannJendayi E Frazer*Meg GentleThomas H GlocerJohn B GoodmanSherri W GoodmanMarcel GrisnigtJarosaw GrzesiakMurathan GnalMichael V HaydenTim Holt*Karl V HopkinsKay Bailey HutchisonIan IhnatowyczMark IsakowitzWolfgang F IschingerDeborah Lee James*Joia M Johnson*Safi KaloAndre KellenersBrian L KellyJohn E Klein*C Jeffrey KnittelJoseph KonzelmannKeith J KrachFranklin D KramerLaura LaneAlmar LatourYann Le PallecJan M LodalDouglas LuteJane Holl LuteWilliam J LynnMark MachinMarco MargheriMichael MargolisChris MarlinWilliam MarronGerardo MatoErin McGrainJohn M McHugh*Judith A MillerDariusz Mioduski*Richard MorningstarGeorgette MosbacherMajida MouradVirginia A MulbergerMary Claire MurphyJulia NesheiwatEdward J NewberryFranco NuscheseJoseph S Nye*Ahmet M renAna I Palacio*Kostas PantazopoulosAlan PellegriniDavid H Petraeus*Lisa PollinaDaniel B Poneman*Dina H Powell McCormickMichael PunkeAshraf QaziThomas J RidgeGary RieschelCharles O RossottiHarry SachinisC Michael ScaparrottiIvan A SchlagerRajiv ShahWendy R ShermanGregg SherrillJeff ShockeyAli Jehangir SiddiquiKris SinghVarun SivaramWalter SlocombeChristopher SmithClifford M SobelMichael S SteeleRichard JA SteeleMary Streett Nader Tavakoli*Gil Tenzer*Frances F TownsendClyde C TuggleFrancesco G ValenteMelanne VerveerTyson VoelkelMichael F WalshRonald Weiser*Al WilliamsBen WilsonMaciej WituckiNeal S WolinTod D Wolters*Jenny WoodGuang YangMary C YatesDov S ZakheimHONORARY DIRECTORSJames A Baker,IIIRobert M GatesJames N MattisMichael G MullenLeon E PanettaWilliam J PerryCondoleezza RiceHorst TeltschikWilliam H Webster*Executive Committee MembersList as of January 1,2024Board of Directors21ATLANTIC COUNCILDECARBONIZING THE ALUMINUM MARKET:CHALLENGES AND OPPORTUNITIESThe Atlantic Council is a nonpartisan organization that promotes constructive US leadership and engagement in international affairs based on the central role of the Atlantic community in meeting todays global challenges 2024 The Atlantic Council of the United States All rights reserved No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Atlantic Council,except in the case of brief quotations in news articles,critical articles,or reviews Please direct inquiries to:Atlantic Council 1030 15th Street,NW,12th Floor Washington,DC 20005(202)463-7226,wwwAtlanticCouncilorg
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itif.org How Innovative Is China in the Chemicals Industry?ROBERT D.ATKINSON|APRIL 2024 China is leading in chemical production,especially basic chemicals.And while it is currently lagging behind on innovationespecially in more complex fine chemicalsall signs suggest it will catch up with the global leaders within the next decade or two.KEY TAKEAWAYS The chemicals industry is enormous and underpins most economic activity,potentially creating key vulnerabilities if production is dominated by allied adversaries.China seeks to initially become self-sufficient in chemicals and to then lead the industry globally.China is already the largest chemicals market in the world,giving Chinese producers a key advantage in their home market.In 2022,China accounted for 44 percent of global chemical production and 46 percent of capital investment.Chinese chemical firms are strong in basic chemicals where innovation plays a lesser role,but are focusing on gaining global market share in fine chemicals and consumer chemicals.Indicators of chemical innovation,including patents,R&D spending,and most highly cited scholarly articles all show rapid progress by Chinese chemical firms.Given past developments in China in other industries,it is likely that the country will be on par with foreign chemical producers in terms of innovation in the moderate term at the latest,while enjoying a significant cost advantage.Absent coherent policy responses by Western nations,Western company shares of chemical production will likely fall significantly.INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 2 CONTENTS Key Takeaways.1 Introduction.2 Background and Methodology.2 Chinas Chemicals Industry.3 Assessing Chinese Chemicals Industry Innovation.5 Innovation Data.7 Company Case Studies.10 Wanhua Chemical Group.10 Rongsheng Petrochemical Co.,Ltd.12 Chinas Chemical Industry Strategy.14 What Should the United States Do?.14 Endnotes.15 INTRODUCTION The global chemicals industry had sales of$4.7 trillion in 2022.1 While encompassing a wide array of products,the industry can be classified by four segments:basic chemicals,agricultural chemicals,specialty chemicals,and consumer products(e.g.,soaps).This report focuses on basic and specialty chemicals.The latter are generally harder to make and see more product innovation.China leads the world in terms of chemicals industry sales,accounting for over 40 percent of the global market,with much of this in basic chemicals.The United States is still strong in chemicals,especially with companies such as Dow Chemical and Dupont.Chinese companies,however,are making intense efforts to not only gain competitive advantage in fine chemicals(and consumer chemicals),but also invest more in research and development(R&D)and become more innovative,with the government providing significant support.And as with so many technologies,China has significant cost advantages in chemicals.But can Chinese chemical firms innovate and reach the quality levels of the world leaders?This report assesses this question.BACKGROUND AND METHODOLOGY The common narrative is that China is a copier and the United States the innovator.That narrative often supports a lackadaisical attitude toward technology and industrial policy:After all,we lead in innovation,so there is little to worry about,with the exception of perhaps making sure we get more STEM(science,technology,engineering,and math)immigration.First,this assumption is misguided because it is possible for innovators to lose leadership to copiers with lower cost structures,as we have seen in many U.S.industries,including consumer electronics,semiconductors,solar panels,telecom equipment,and machine tools.As Clayton Christenson has shown,followers often attack at the lower end of the market through copying and significant INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 3 cost advantages and work their up toward higher value-added and more innovative segments,all the while weakening the leaders.Second,its not clear that China is merely a sluggish copier and always destined to be a follower.To assess how innovative Chinese industries are,the Smith Richardson Foundation asked the Information Technology and Innovation Foundation(ITIF)conduct research on the question.As part of this research,we are examining specific sectors,including chemicals.To be sure,it is difficult to assess the innovation capabilities of any countrys industries,and it is especially difficult for Chinese industries.In part,this is because,under President Xi,China discloses much less information to the world than it used to,especially about its industrial and technological capabilities.Notwithstanding this,ITIF relied on three methods to assess Chinese innovation in chemicals:First,we conducted in-depth case study evaluation of two Chinese chemical companies randomly selected from companies listed on the“EU R&D 2000”list.Second,we held a focus group roundtable with global experts on the Chinese chemicals industry,as well as reviewed the industry and academic literature on the issue.Finally,we assessed global data on chemical innovation,including scientific articles,patents,and innovation awards.CHINAS CHEMICALS INDUSTRY Globally,the chemicals sector has grown more slowly than world gross domestic product(GDP):149 percent from 1995 to 2020 in nominal U.S.dollars,compared with 174 percent for global GDP.About 49 percent of the sectors value added was concentrated in Organization for Economic Cooperation and Development(OECD)countries in 2020,down dramatically from 82 percent in 1995.According to OECD,China led the world in 2020 with 29.1 percent of chemicals industry value-added outputup from 3.8 percent in 1995.The next highest-ranking nations were the United States(18.3 percent in 2020,down from 23.2 percent in 1995),Japan(5.6 percent,down from 17 percent),and Germany(5 percent,down from 11.1 percent).Figure 1:Global value-added output in chemicals by the top 10 producers and rest of world in 2020 INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 4 Figure 2:Top 10 producers historical shares of global value-added output in chemicals China saw the most growth in its global share of the industry from 1995 to 2020(up 25.3 percentage points).However,some studies place Chinas share of global market sales in 2023 at above 40 percent.One study states that China“accounts for about 55%of the global capacity for acetic acid,about 50%of the global carbon black capacity and about 45%of the global capacity for titanium dioxide.For many such commodity chemicals,China started out as a net importer,then built up domestic capacity and ended up being a major exporter.”2 One study examining global chemical sales estimates that Chinas share in 2022 was 44 percent.3 However,much of its production is in“chemicals which only require a limited level of technology and innovation.”4 Nonetheless,companies are investing significantly in China.In 2022,46 percent of global chemical industry capital investment was located in China,with just 10 percent in the USMCA(United States-Mexico-Canada Agreement)region.5 Moreover,China had the highest share of capital investment intensity as a share of value added of any nation,2.8 times more than the United States.6 China is not only the worlds largest producer of chemicals,but also the worlds market,something that is expected to increase as Chinese production of cars,batteries,and other chemical-intensive products continues to expand.7 Like the robotics industry,world-leading demand can ultimately lead to world-leading supply.However,China still runs a trade deficit in chemicals,suggesting that it is less innovative.In 2018,its chemical trade deficit accounted for 16 percent of the total foreign trade deficit,an increase of about twice that in 2015.8 As one study from 2021 notes,“Chinas chemical 0%5 %059520002005201020152020ChinaRest of the WorldUnited StatesJapanGermanyIndiaKoreaFranceSaudi ArabiaBrazilItalyINFORMATION TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 5 industry as a whole presents the characteristics of high import dependence and fierce international competition.”9 It goes on to note that:China still has the problem of low investment structure and redundant construction,lack of high added value,and have high technical content of chemicals and related products,at the same time full of overproduction of low value-added products market,make domestic demand by the high value-added chemicals mostly rely on foreign imports.10 But the Chinese government and industry understand that vulnerability and are seeking to change it,in large part with a push toward more innovative fine chemicals.Assessing Chinese Chemicals Industry Innovation For a long time,China was content to produce commodity chemicals with little focus on either process or product innovation.However,after Made in China 2025,China has focused more on new chemicals for new applications,including in batteries,semiconductors,and solar panels,with strong government support.As professor Seamus Grimes wrote,Chinas rapid growth in its chemical industry“has increased Chinas ambition to become a world leader in the chemical industry through innovation and trade and through growing its market share internationally.”11 Foreign companies still dominate many key areas,but their intellectual property has been eroded over time.Multinationals continue to dominate key parts of the value chain,especially related to high tech and more specialty chemicals.However,the consensus among experts ITIF spoke with is that Chinese companies are beginning to erode the market share of large foreign companies.Part of this has stemmed from Western company complacency and assumptions that the Chinese companies cannot challenge them,and also because of strong Chinese government incentives and support for Chinese chemical companies.And relatively lax chemical industry production regulations provide China with a competitive advantage.Moreover,unlike biotechnology or software,chemicals is a relatively mature industry with overall rates of innovation lower than that of more advanced,innovation-based industries.There are approximately 300,000 chemicals available but only around 2,000 or so new chemicals developed each year,a rate of around just 6 percent.12 This means that as a slow-innovation industry,it should be easier for China to catch up to the leaders.In basic chemicals,China is increasing its position as a net exporter.In very few commodity chemical products is China a net importer.For example,China has overcapacity for polypropylene.However,it runs a trade deficit in specialty chemicals.As a result,Chinas Ministry of Industry and Information Technology(MIIT)is focused on boosting Chinas capabilities in specialty chemicals,because this will determine global chemical industry leadership.In contrast,the EU-27 runs a trade deficit in basic inorganics and petrochemicals,but a trade surplus in specialty chemicals and consumer chemicals.13 One advantage for China is that the chemical sector is connected to specific sectors,such as automobiles,electronics,renewable energy,etc.Because Chinese production of many of these products is so large and growing so fast,local chemical companies have an advantage by being close to their customer.As Seamus Grimes notes,“a number of R&D managers acknowledged that more recently their innovation in China was being driven by innovative Chinese INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 6 customers.”14 In addition,because of Chinas significant coal reserves and a willingness to keep burning coal,China is leading on coal-derived chemicals.China also leads in polysilicon,a relatively high-end chemical.However,China is highly dependent on other countries for high-quality chemical products,high-end equipment in the chemicals industry,and leading technology.For example,MIIT stated in 2018 that 32 percent of 130 basic chemicals could not yet be produced in China at all,and more than half of all fine chemical products would still have to be imported.15 One way China has closed the gap with world leaders,especially in commodity chemicals,is by relying on foreign producers investing in Chinaa model it has used in multiple industries.For example,of the top 10 coatings companies in China,4 are local and 6 foreign.Moreover,by one estimate,about one-third to half of the top executives at Chinese chemical companies have had significant experience at multinationals.This skill base clearly helps Chinese companies to catch up.Experts also pointed to the fact that domestic companies usually have significant price advantages,in part because some are state-owned and dont have to earn as high a profit as the foreign companies and because multinationals have higher global overhead costs.And many Chinese-owned chemical companies receive government subsidies.Experts also argued that Western companies are more goal oriented and short term in their orientation.They have specific procedures and slower decision-making models.Chinese companies,in part because they are trying so hard to catch up and because of the encouragement of the state,are more aggressive.For example,if a European chemical company is doing well in China,it may eventually decide to increase capacity by 20 percent.In contrast,a corresponding Chinese company is likely to quickly agree to double its capacity in order to gain market share.Even when times are not good,many Chinese firms will increase capacity,just as they have done in other industries such as solar and steel.And as in steel and solar,this creates overcapacity.Once this happens,some foreign firms divest to private equity because they see it as a cash-draining business that no longer clears their financial hurdles.Indeed,China has killed or shrunk a number of overseas companies by a superior cost position and economies of scale.Chinese companies are not as deterred by short-to medium-term earnings setbacks.For foreign companies that stay in the business,they are doing more R&D in China,which spills over to domestic Chinese companies.Originally,multinational chemical companies did not perform a lot of R&D in China.But now,with some of their most important customers located in China,more are expanding their R&D spending there.One reason is that,of the top 10 metropolitan areas in the world to locate chemicals industry R&D facilities ranked in terms of quality of the research,three were Chinese(Guangzhou#1,Shanghai#3,and Beijing#6).16 Strikingly,no Chinese metropolitan areas made the top 10 in terms of cost of operating an R&D facility.China is also investing significant amounts in chemical research capabilities in universities,which has already paid off in terms of the number of academic papers they have produced.In fact,China has overtaken the United States as the main source of academic papers in the field.However,experts argue that limits on the number of skilled domestic Chinese R&D leadership personnel holds back innovation.INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 7 There was a consensus among experts ITIF spoke with:that China will,over time,eventually come to dominate the global chemicals industry and,absent significant market closures by Western nations,there is little that can be done about it.In many areas,such as lithium battery chemistry,initial advances were made in the United States.But U.S.companies didnt follow up on them and instead Chinese firms have innovated in ways to manufacturer these batteries and materials at scale and lower cost.And,as in solar panels,China has shown effectiveness at process innovation.China may be able to make significant strides for innovation,as the industry is facing a global inflection point as it goes through a“greening”process.The Chinese government is focused on helping firms develop chemicals that meet green requirements and are more environmentally friendly.This includes coating materials for transportation equipment,biodegradable materials,and materials in batteries.Finally,China historically has been a copier of process technology.However,as one article states,“For the past two decades,China has invested heavily in R&D.The research was initially aimed at developing new products,but process development has more recently turned into a major focus.”17 The article goes on to state that“foreign chemical companies start to see China as a source of manufacturing expertise.”18 A good summary of the Chinese position and trends is from Chinese chemical industry expert Kai Pflug,who wrote:In the past,Chinese pressure on the Western chemical industry came from belowChina captured more and more of the market segments with limited innovation and complexity.What is new about the current wave of Chinese domestic investments in chemicals is that these now target precisely the chemical segments that are the most innovative,which tend to also be the fastest growing ones.So far,Western chemical companies survived by out-innovating the Chinesethe latest developments show that this approach is far from certain to work in the future.In a worst-case scenario,this would only leave Western companies with smaller-volume chemicals,in which the scale-oriented Chinese players typically are less interested.19 Innovation Data Various data and metrics on chemicals industry innovation tell the same story:Chinas chemical industry is not at the leading edge,but is rapidly catching up.Chemicals industry R&D performed in China(by domestic or foreign firms)went from 22 percent of the global total in 2012 to 34 percent in 2022.20 Over the same period,Chinese R&D went from 8 percent greater than U.S.to 72 percent greater.However,its specialization in R&D is still less than the leaders.In terms of global shares,Chinas share of research and innovation to industry sales was 0.77,up from 0.70 in 2022.In 2022,the EUs R&D specialization ratio was 1.2,Americas was 1.79,and Japans 3.3.And an increasing amount of R&D spending in China is by Chinese companies(in China or elsewhere).Using data from the EU 2,500 R&D spenders list,in 2013,the U.S.share of global chemicals industry R&D spending was 29.8 percent,while Chinas was a miniscule 0.8 INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 8 percent.21 However,by 2022,Chinese chemical companies grew to 16.8 percent of global industry R&D,with the U.S.share falling to 18.6 percent.And China was ahead of Germany by 2.2 percentage points.However,at the current rate of Chinese firm growth and American decline in chemical firm R&D,it is expected that the 2023 data will show China ahead of the United States in total R&D,and by 2024 or 2025,to move ahead of global leader Japan.Moreover,when controlling for the size of the two nations economies,by 2022,China was 27 percent more specialized in Chinese chemical firm R&D as a share of GDP than the United States was.In addition,Chinas R&D is more diversified from a firm perspective,with just 28 percent of its chemicals industry R&D represented by the top four Chinese firms,in contrast to 61 percent in the United States.Yet,this R&D has not translated into significant performance in innovation awards.Of the finalists in the ICIS 2023 chemical innovation awards,50 percent of the winners were American companies,and just 8 percent went to Chinese companies(Wanhua Chemical Group Co.,Ltd(WC)won two awards).22 In 2022 and 2021,China did not win in any category:0/6 in 2022;0/5 in 2021.23 However,this spending has had impacts on patents.The share of U.S.firm patents granted in chemistry in the U.S.Patent Office(USPTO)fell from 54 percent in 2000 to 45 percent in 2022.Over the same period,Chinese patents increased from almost nothing to 7 percent.(See figure 3.)Figure 3:USPTO utility patents granted in chemistry,by selected region,country,or economy:2000202224 0 0P 00 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022United StatesChinaINFORMATION TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 9 Chinas progress in patent cooperation treaty applications(more countries than just the United States)was stronger,increasing from around 0 percent in 2000 to 17 percent in 2020,while the U.S.share fell from 44 percent to 27 percent.25(See figure 4.)Figure 4:Patent Coopearation Treaty applications in chemistry,by region,country,or economy26 When it comes to scholarly articles in chemistry,Chinas performance is quite strong.In the most cited continuous flow chemical synthesis papers,China outperformed the United States by 60 percent.(See figure 5.)Figure 5:Research papers on continuous flow chemical synthesis27 0%5 %05EP 00 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022United StatesChina02004006008001,0001,2001,400ChinaUnited StatesINFORMATION TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 10 In coatings research,the Chinese advantage over the United States was even greater,at 83 percent.(See figure 6.)Figure 6:Research papers on chemical coatings28 Company Case Studies ITIF randomly selected two Chinese chemical companies on the EU 2,500 R&D list for in-depth case study analysis:WC and Rongsheng Petrochemical.Wanhua Chemical Group WC was established as the state-owned Yantai Synthetic Leather Factory in 1978.Initially,to support its synthetic leather production line,the company imported a 10,000-ton/year MDI(Methylene diphenyl diisocyanate)production unit,designed in 1950 by a Japanese company.However,due to a lack of knowledge in how to operate the lines hardware and software and core MDI production technology,this line remained mostly inoperative for nearly 15 years.In 1988,WC developed its own MDI production technology,establishing a research department and collaborating with domestic universities.In 1993,the company launched its first self-developed MDI production line.By 1996,WCs MDI production capacity reached 15,000 tons.The company underwent corporate and shareholding reforms in 1996 and 1998,respectively,and was listed on the Shanghai Stock Exchange in 2001.In 2003,with an MDI capacity of 160,000 tons,the company expanded its product line to include thermoplastic polyurethane(TPU)and methylenebis(MDBA)production.In 2006,WC expanded internationally,establishing branches and research centers in the United States,Japan,the Netherlands,and other countries.In 2011,it fully acquired Hungarys BorsodChem,gaining patents and technical support and entering the field of fine chemicals and new materials.The company continued to expand its capital expenditure in 2014,venturing into C2,C3,and C4 petrochemical businesses,thereby diversifying its products and becoming a global platform chemical enterprise.In 2019,WC acquired 100 percent of the shares of Swedens International Chemicals from Cornell and Europa-Energy.05001,0001,5002,0002,5003,0003,5004,0004,500ChinaUnited StatesINFORMATION TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 11 The same year,it established an R&D center in Yantai,integrating the research operations of several subsidiaries.Currently,the company has 3 integrated chemical industrial parks,6 production bases,3 R&D centers,and 10 sales organizations worldwide.As of November 2023,its annual MDI and TDI production capacities reached 3.1 million tons and 1.03 million tons,respectively,leading globally with a market share exceeding 30 percent.WC,still a partially state-owned company,actively develops various high-value specialty chemicals,with a presence in aliphatic diisocyanates(ADI)polyurethane materials,engineering plastics,superabsorbent polymer(SAP)resins,semiconductors,and new energy materials.Its Functional Chemicals Division offers a range of products,including aliphatic isocyanates,special amines,flavors,and special chemicals.The New Materials Divisions main products include TPU elastomers,polymethyl methacrylate(PMMA),water treatment membrane materials,modified polypropylene(PP),and polyolefin elastomers(POE).These products are widely used in clothing and shoes,automotive,home appliances,photovoltaics,optical displays,consumer electronics,etc.The Surface Materials Division focuses on eco-friendly surface materials,SAP,and silicone adhesives.The High-Performance Polymers Divisions business includes polycarbonate,special nylon(PA12),biodegradable materials,other high-end polymers,and related chemicals.These products are widely used in automotive,5G communications,health care,electronics,high-end optics,green packaging,polymer products,and professional technical services.Its battery technology business mainly includes ternary cathode materials,lithium-ion phosphate cathode materials,anode materials,electrolyte solvents,etc.Finally,its electronic materials business produces chemicals related to the semiconductor,electronic,and electrical fields.The company has also expanded its product line into high-end medical and optical fields.In 2022,WC signed strategic cooperation agreements with Peking University,East China University of Science and Technology,and Beijing University of Chemical Technology.These partnerships leveraged both parties talents and technological platforms,fostering collaboration in new energy and functional materials.Prior to 2005,WC frequently imported production lines from Japan,South Korea,Germany,and the United States.Wanhuas primary goal was not to acquire technology but to rapidly increase production capacity.After 2006,WC firmly established its monopoly in the MDI market in China and entered the first tier in the global market.With the revenue from its MDI business,WC was able to maintain high capital expenditures over the following years,including the acquisition of overseas enterprises in upstream and downstream fields and the introduction of production lines.In 2011,the company made a significant acquisition of Hungarys BorsodChem.In 2014,WC completed the full acquisition of a domestic petrochemical enterprise and independently developed C2 and C3 petrochemical production processes,officially entering the petrochemical sector.WC is generally considered to have joined the worlds first tier of chemical enterprises by 2017.In 2022,WC received government subsidies totaling 610 million renminbi(RMB),or$91.5 million.The companys accounts still hold a balance of 1.68 billion RMB($252 million)from government subsidies accumulated over previous years.29 INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 12 WC has implemented a three-tiered R&D organizational structure comprising headquarters,regional centers,and production bases,creating an innovative R&D system that integrates basic research,process development,engineering development,and product application R&D.The Technical Development Center at Wanhuas Beijing Research Institute conducts basic research.The Technical Development Center and the Pilot Plant Center at the Yantai Research Institute are responsible for process development.Engineering research is carried out by the Process Development Center at the Research Institute in Hungary,in collaboration with the Chemical Design Institute at the Yantai Research Institute.The technical departments at the production bases conduct industrialization and device optimization research.The Surface Materials Research Center and the High-Performance Materials Research Center at the Beijing Research Institute are engaged in product application R&D.Additionally,WC collaborates with universities and scientific research institutions in industry-education-research partnerships and has established Wanhua Magnetic Mountain University in the Cishan district of Yantai to directly supply the enterprise with professional talent.WC employs over 4,000 research personnel,accounting for 16.4 percent of its workforce.Among these,more than 210 hold doctoral degrees and over 2,300 possess masters degrees.Its main R&D institutions include the Wanhua Chemical Global R&D Center,Institute of High-Performance Materials,Polyurethane Application Research Institute,Chemical Design Institute,North American Technical Center,and the Goodrich Technology Center in Europe.Additionally,WC has established multiple high-level innovation platforms,including the National Polyurethane Engineering Technology Research Center,the National Engineering Laboratory for Polymer Surface Material Preparation Technology,the National Enterprise Technology Center,postdoctoral workstations,five nationally accredited analytical laboratories,and seven provincial and industry engineering(technology)centers and key laboratories.It is also diversifying,planning to invest 3.34 billion RMB($461 million)in battery material projects.It also developed production capacity for beta ionone,a fragrance ingredient,and for polyamide 12(PA,nylon),a high-end engineering plastic with a variety of industrial applications.30 While the company lists innovation prizes it has won in China,we could find no mention of foreign awards.31 WC has filed 4,718 patents within China and 399 patents overseas.In 2022,R&D expenditures were 3.42 billion yuan($472 million),a 55 percent increase year over year,with a cumulative five-year scientific research investment totaling 11.94 billion yuan($1.65 billion).The companys R&D-to-sales ratio has been maintained at around 2.5 percent since 2016.Following a substantial increase in operating income after 2021,the R&D expense ratio decreased to 2.17 percent in 2022.In comparison,global leader BASF(headquartered in Germany)had an R&D-to-sales ratio of 2.6 percent.However,because of the lower cost of R&D personnel in China,WC has a higher ratio of R&D personnel to total employees(16.5 percent vs.8.9 percent).In 2011,Wanhuas revenue was 13.7 billion yuan,about$2.05 billion,which was only 2.2 percent of BASFs;by 2022,WCs revenue had risen to 165.5 billion yuan,approximately$24.83 billion,reaching 24.2 percent of BASFs.Rongsheng Petrochemical Co.,Ltd.Established in 1989,Rongsheng Petrochemical Co.is the largest privately owned petrochemical corporation in China.It has established a comprehensive industry chain that spans refining and chemical integration to the production of downstream products such as purified terephthalic acid INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 13(PTA),monoethylene glycol(MEG),polyester(PET),and polyester filament(POY,FDY,DTY).In 2022,Rongsheng had revenue of 289.1 billion RMB($43.4 billion),with a net profit attributable to the parent company of 33.4 billion RMB,or around$5.01 billion.32 In 2023,Saudi Aramco,through its subsidiary AOC,acquired a 10 percent stake in Rongsheng Petrochemical and agreed to engage in collaborations encompassing raw materials,technology,and chemicals.The Technology Sharing Framework Agreement facilitates the exchange of relevant information and technology(including but not limited to refining and petrochemical technologies)between Rongsheng and Saudi Aramco.This technology complementarity aims to jointly develop new technologies,processes,and equipment that meet market demands.Rongsheng has extensively utilized foreign technology and products in the construction of its refining and chemical facilities.Notably,Honeywell UOP and Honeywell Process Solutions have provided a range of process technologies,engineering designs,equipment,and advanced automation control for its newly built 40 million tons/year integrated refining and petrochemical complex in Zhejiang Province.This collaboration includes the provision of technologies for two series of aromatics complexes,a residue fluid catalytic cracking(RFCC)complex,a propane dehydrogenation unit,and a pressure swing adsorption(PSA)unit.DuPont Clean Technologies has been responsible for designing the Sulfuric Acid Regeneration(SAR)unit.Rongsheng received governmental subsidies of around 2.36 billion RMB($330 million)in 2022.Moreover,Zhoushan Green Petrochemical Base Management Committee and Xiaoshan District Headquarters Economy Special Class contributed to Rongshengs fiscal incentives through granted financial rewards throughout 2022.Rongsheng says it has established many world-class R&D platforms,including a high-tech R&D center,a workstation for academics and experts,an enterprise technology center,and a post-doctoral science and research workstation.Moreover,it engages in technology exchanges and discussions promoting industry-university research collaboration to benefit resource sharing between universities and the community.Rongshengs main manufacturing subsidiaries are all national high-tech enterprises with strong R&D strength and rich process operation experience accumulated during long-term production management.For example,it has selected a new technical route for Zhongjins petrochemical project,using fuel oil(cheaper than naphtha)to produce certain aromatic products.Rongsheng says it has finalized the application of large-scale melt direct spinning polyester and spinning technology in the early projects for further development and improvement in the later projects.33 Rongsheng invested around 4.4 billion RMB($600 million)in its R&D activities in 2022,which accounted for 1.5 percent of operating income,a relatively low level.Rongshengs R&D team consists of 2,731 employees,which accounts for 14 percent of its personnel.Among the R&D personnel,almost half(1,377)have bachelors degrees,98 have masters degrees,and just 5 possesses doctorates.34 Rongsheng has filed 30 patents with the World Intellectual Property Organization(WIPO).35 As of 2023,Rongsheng had a total of 479 patents globally.According to Insights by GreyB,a market analysis company,from 2002 to 2023,473 of Rongshengs patents were filed in China,while only 4 patents were filed in the United States,Japan,Canada,and the United Kingdom.36 This suggests the company is still a copier,not an innovator.37 INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 14 Chinas Chemical Industry Strategy China has long and successfully sought to grow its chemical industry.That success has been mostly in basic,commodity chemicals.However,it is now seeking to achieve the same success in more innovation-based specialty chemicals.One way it is attempting to do this is by encouraging industry consolidation.The Chinese government knows that without its firms having more scale it will be harder for them to marshal the necessary resources for the needed R&D and to be able to provide the breadth of product catalogs the global leaders have.One way to achieve this is to use stricter regulatory requirements to weed out the smaller and weaker firms.However,according to experts,while there is some consolidation,the pace is still slow.In addition,the government is making a push to move chemical refineries inland to the heartland where land is cheaper and population densities less.For example,a number of chemical factories have moved from Jansui province to inner Mongolia and Xingang,where there are large supplies of coal.This is a reason for the coal-chemical push in coal regions.The central government has targeted chemical innovation.The 2023“Guiding Catalog for Industrial Structure Adjustment”advocates for the development of a number of new materials related to the chemical industry,including low-VOC(volatile organic compound)adhesives,water treatment agents,catalysts,electronic chemicals,silicone materials,and fluorine materials.38 Chinese governments provide significant direct and indirect subsidies to chemical firms.39 In addition,Chinese governments are also upgrading chemical parks.Under this plan,10 or so leading companies are to be“cultivated”as“national champions.”In addition,as noted,Chinese governments provide a range of financial incentives,including low-interest loans.The government has also set a goal for the share of fine chemicals in total chemical production in China to be at least 50 percent.China also continues to use foreign investment as a means of technology transfer.As Grimes wrote:As China become increasingly independent of importing various chemicals,it becomes increasingly selective about encouraging foreign investment only in those segments where it continues to require transfer of technology,and in which international companies can become trusted partners for Chinas indigenous innovation.40 WHAT SHOULD THE UNITED STATES DO?While the United States continues to lose global market share in chemicals,it retains significant strengths elsewhere,including in innovation.To ensure that we dont lose that leadership,Congress should expand funding for chemistry and chemical engineering research through the National Science Foundation,particularly through the establishment of new Engineering Research Centers.41 Congress should also significantly expand the R&D credit and restore first-year expensing of capital equipment investments.Finally,while environmental regulations are important in the chemical industry,legislators and regulators should ensure that regulations are designed and implemented in ways that limit compliance costs while still achieving legislative goals.INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 15 Acknowledgment ITIF wishes to thank the Smith Richardson Foundation for supporting research on the question,“Can China Innovate?”Future reports in this series will cover artificial intelligence,quantum computing,semiconductors,biopharmaceuticals,consumer electronics,nuclear power,and motor vehicles.(Search#ChinaInnovationSeries on itif.org.)Any errors or omissions are the authors responsibility alone.About the Author Dr.Robert D.Atkinson(RobAtkinsonITIF)is the founder and president of ITIF.His books include Technology Fears and Scapegoats:40 Myths About Privacy,Jobs,AI and Todays Innovation Economy(Palgrave McMillian,2024),Big Is Beautiful:Debunking the Myth of Small Business(MIT,2018),Innovation Economics:The Race for Global Advantage(Yale,2012),Supply-Side Follies:Why Conservative Economics Fails,Liberal Economics Falters,and Innovation Economics Is the Answer(Rowman Littlefield,2007),and The Past and Future of Americas Economy:Long Waves of Innovation That Power Cycles of Growth(Edward Elgar,2005).He holds a Ph.D.in city and regional planning from the University of North Carolina,Chapel Hill.About ITIF The Information Technology and Innovation Foundation(ITIF)is an independent 501(c)(3)nonprofit,nonpartisan research and educational institute that has been recognized repeatedly as the worlds leading think tank for science and technology policy.Its mission is to formulate,evaluate,and promote policy solutions that accelerate innovation and boost productivity to spur growth,opportunity,and progress.For more information,visit itif.org/about.ENDNOTES 1.Statista Research Department,“Chemical industry worldwide-statistics&facts,”Statista,February2024,https:/ Pflung,“Rising Chinese Investments in New Chemical Segments”(Chemanager,August 2023),https:/www.chemanager- Spending”(CEFIC),https:/cefic.org/a-pillar-of-the-european-economy/facts-and-figures-of-the-european-chemical-industry/capital-ri-spending/.4.Ibid.5.Ibid.6.Ibid.7.Jean-Francois Tremblay,“Made in China now extends to chemical process technology,”Chemical&Engineering News(October 2017),https:/cen.acs.org/articles/95/i42/Made-Chinaextends-chemical-process-technology.html.8.Yufeng Yuan,Weifguang Pan,and Di Sha,“Analysis on Export Competitiveness of Chinese ChemicalProducts”(Open Journal of Social Sciences,Vol 9,No 12),https:/www.scirp.org/journal/paperinformation?paperid=113736.INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 16 9.Ibid.10.Ibid.11.Seamus Grimes,“Chinas Evolving Role in the Chemical Global Value Chain,”The Chinese Economy(May 2023),https:/ Naidu,et al.,“Chemical pollution:A growing peril and potential catastrophic risk to humanity”(Environment International,Vol 156,November 2021),https:/ Spending”(CEFIC)https:/cefic.org/a-pillar-of-the-european-economy/facts-and-figures-of-the-european-chemical-industry/capital-ri-spending/.14.Ibid 15.Ibid.16.Alex Irwin-Hunt,“Asian megacities stand out as best locations for chemical labs”(FDI Intelligence,August 2022),https:/ Tremblay,“Made in China now extends to chemical process technology,”Chemical&Engineering News(October 2017),https:/cen.acs.org/articles/95/i42/Made-Chinaextends-chemical-process-technology.html.18.Ibid.19.Pflung,“Rising Chinese Investments in New Chemical Segments.”20.“Capital&R&I Spending”(CEFIC),https:/cefic.org/a-pillar-of-the-european-economy/facts-and-figures-of-the-european-chemical-industry/capital-ri-spending/.21.Trelysa Long and Robert D.Atkinson,“Innovation Wars:How China Is Gaining on the United States in Corporate R&D”(ITIF,July 2023),https:/itif.org/publications/2023/07/24/innovation-wars-how-china-is-gaining-on-the-united-states-in-corporate-rd/.22.“ICIS Innovation Awards 2023,”Independent Commodity Intelligence Services,https:/ Innovation Awards 2022,”Independent Commodity Intelligence Services,https:/ Innovation Awards 2021,”Independent Commodity Intelligence Services,https:/ Science Board,Science&Engineering Indicators 2024:Invention,Knowledge Transfer,and Innovation,NSB-2024-1,Table SINV-5,“USPTO utility patents granted in chemistry,by selected region,country,or economy:200022,”February 29,2024,https:/ncses.nsf.gov/pubs/nsb20241/table/SINV-5.25.It is important to note that these are applications,and not grants,and that the Chinese government provides incentives to its firms to file patents outside of China.26.National Science Board,Science&Engineering Indicators 2024:Invention,Knowledge Transfer,and Innovation,NSB-2024-1,Table SINV-12,“Patent Cooperation Treaty applications in chemistry,by region,country,or economy:200022,”February 29,2024,https:/ncses.nsf.gov/pubs/nsb20241/table/SINV-12.27.“Continuous flow chemical synthesis research”(Australian Strategic Policy Institute:Critical Technolgy Tracker),https:/techtracker.aspi.org.au/tech/continuous-flow-chemical-synthesis/?colours=true.INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 17 28.“Who produces the most research within Coatings?”(Australian Strategic Policy Institute:Critical Technolgy Tracker),https:/techtracker.aspi.org.au/tech/coatings/?colours=true.29.These government subsidies include various specific purposes and amounts:Purpose Amount$USD Equivalent Industrial Support Subsidy 680 million RMB$102 million Industrial Upgrade Subsidy 480 million RMB$72 million Special Funds for Supporting Key Advantageous Industries 107 million RMB$16.05 million Subsidies for Industrial Revitalization and Technological Transformation 103 million RMB$15.45 million Special Funds for Supporting Enterprise Development 91 million RMB$13.65 million Special Funds to Enhance the Core Competitiveness of Manufacturing 73 million RMB$10.95 million Environmental Protection Special Subsidy 35 million RMB$5.25 million Subsidy for Upgrading and Transforming Industrial Parks 33 million RMB$4.95 million Special Funds for Optimizing Industrial Structure 21 million RMB$3.15 million Interest Subsidy for Key Industry Technological Transformation Projects 14 million RMB$2.1 million Special Funds for Construction of Two Areas 11 million RMB$1.65 million 30.Pflung,“Rising Chinese Investments in New Chemical Segments.”31.Wanhua Chemicals achievements in 2022 also include receiving the Shandong Province Science and Technology Progress Special Prize for the complete technology of hydrochloric acid catalytic oxidation for chlorine production and its industrial application.Additionally,Wanhua Chemical has won six national scientific and technological awards,including the National Science and Technology Progress First-Class Award and the National Technological Invention Second-Class Award.In terms of innovation rankings:In 2012,it ranked third on Chinas Top 100 Innovative Enterprises list.In 2016,it was selected as one of the first batch of nine enterprises for the National Top 100 Innovative Enterprises Pilot Project.In 2018,it topped the Shandong Province High-Tech Enterprise Innovation Capability ranking.In 2020 and 2021,it led the Shandong Province Science and Technology Enterprise Leadership ranking for two consecutive years.In 2023,it was awarded the 7th China Industrial Award,a testament to its continuous innovation and leadership in the industrial sector.32.Rongsheng Petrochemical,“2022 Annual Report”,April 2023,21,https:/ TECHNOLOGY&INNOVATION FOUNDATION|APRIL 2024 PAGE 18 35.Ibid.36.Insights by GreyB,“Rongsheng Petrochemical PatentsKey Insights and Stats,”2023,https:/ Chinese Investments in New Chemical Segments.”39.Capital Trade Incorporated,“An Assesment of Chinas Subsidies to Strategic and Heavyweight Industries”(submitted to the US-China Economic and Security Review Commission),https:/www.uscc.gov/sites/default/files/Research/AnAssessmentofChinasSubsidiestoStrategicandHeavyweightIndustries.pdf.40.Grimes,“Chinas Evolving Role in the Chemical Global Value Chain.”41.“Centers for Chemical Innovation(CCI)Active Awards”(U.S.National Science Foundation),https:/www.nsf.gov/awards/award_visualization.jsp?org=NSF&pims_id=13635&ProgEleCode=035Y,1995&from=fund#region=US-CO&instId=0013508000.
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Indias Private Power MarketExpanding Private Sector Electricity DistributionAUTHORSRichard RossowAkshat SinghJANUARY 2024A Report of the CSIS Chair in U.S.-India Policy StudiesIndias Private Power MarketExpanding Private Sector Electricity DistributionAUTHORSRichard RossowAkshat SinghJANUARY 2024A Report of the CSIS Chair in U.S.-India Policy StudiesIndias Private Power Market|IIAbout CSIS The Center for Strategic and International Studies(CSIS)is a bipartisan,nonprofit policy research organization dedicated to advancing practical ideas to address the worlds greatest challenges.Thomas J.Pritzker was named chairman of the CSIS Board of Trustees in 2015,succeeding former U.S.senator Sam Nunn(D-GA).Founded in 1962,CSIS is led by John J.Hamre,who has served as president and chief executive officer since 2000.CSISs purpose is to define the future of national security.We are guided by a distinct set of valuesnonpartisanship,independent thought,innovative thinking,cross-disciplinary scholarship,integrity and professionalism,and talent development.CSISs values work in concert toward the goal of making real-world impact.CSIS scholars bring their policy expertise,judgment,and robust networks to their research,analysis,and recommendations.We organize conferences,publish,lecture,and make media appearances that aim to increase the knowledge,awareness,and salience of policy issues with relevant stakeholders and the interested public.CSIS has impact when our research helps to inform the decisionmaking of key policymakers and the thinking of key influencers.We work toward a vision of a safer and more prosperous world.CSIS does not take specific policy positions;accordingly,all views expressed herein should be understood to be solely those of the author(s).2024 by the Center for Strategic and International Studies.All rights reserved.Center for Strategic&International Studies1616 Rhode Island Avenue,NWWashington,DC 20036202-887-0200|www.csis.orgRichard Rossow and Akshat Singh|IIIAcknowledgmentsThe authors would like to thank the survey participants from industry and government for speaking with them.The authors would also like to thank Oorvi Budhwar for assisting with the data analysis.The authors are grateful to Neelima Jain,Shashwat Kumar,Vibhuti Garg,Saloni Sachdeva,Shanay Shah,and Palaniappan Meyyappan for their valuable feedback.This report greatly benefited from the inputs and support of Jeeah Lee,Rayna Salam,Katherine Stark and the rest of the CSIS iDeas Lab.This report was made possible through the generous support of the MacArthur Foundation.Indias Private Power Market|IVContentsExecutive Summary 1Introduction 31|Why Are Discoms Important?62|Indias History with Electricity Distribution Reform 113|Current Status 134|Indias Tryst with Private Electricity Distribution 155|Politics of Discoms 216|Road Map 27About the Authors 39Appendix 1:Indias History with Discom Reforms 41Appendix 2:Annual Integrated Rankings and Ratings of Discoms:Discom Operational and Financial Performance 45Endnotes 47Richard Rossow and Akshat Singh|1Executive SummaryImproving access to electric power is critical for India to meet human development and economic growth priorities.Persistent underperformance by most state-run electric power utilities has been a significant obstacle to meeting these goals,and it has also been slowing Indias interest in decarbonizing the economy.Given the failure of government reforms,private sector distribution has proven to be a promising solution to improve the operational and financial performance of electricity distribution companies(discoms).This report provides a road map for energy officials looking to introduce private participation in the distribution sector.A June 2022 Reserve Bank of India Bulletin put discom health as a significant financial risk to state finances.1 States such as Punjab and Rajasthan have a staggering total debt-to-GDP ratio of 51 percent and 39 percent,respectively.Discom debt inhibits the states ability to spend on other key areas such as health and education.While accruing massive losses,discoms are unable to provide reasonably priced and reliable electricity to meet growing industrial demands.Industrial consumers in India often pay tariffs that are 50 percent higher than residential consumers,due to the provision of cross subsidies,where commercial and industrial(C&I)consumers pay higher tariffs to subsidize residential and agricultural consumers.Prices are also not competitive when compared with other countriesIndian C&I electricity tariffs are respectively 30 percent and 37.5 percent higher than in the United States,when adjusted on a purchasing power basis.Cognizant that welfare redistribution policies(such as the provision of free electricity)and a complex regulatory environment have affected discom health,the government has attempted Richard Rossow and Akshat Singh|2to reform the sector,but this has had limited impact.Even in 2022,states like Uttar Pradesh had a massive aggregate technical and commercial(AT&C)loss rate of 30 percent.As per the annual ratings of discom performance released by the Power Finance Corporation(PFC),most public sector discoms rank low.As underlined by the consistent high performance of private discoms in India,private sector participation is a promising solution for reforming the distribution space.However,state governments often promise free or low-cost electric power as a political toolwhich limits the effective operation of public sector discoms.The political economy considerations during tariff setting often overshadows the actual economics.Given how politicized the electricity sector is,privatization has its challenges.But newer experiments with private electricity distribution continue to improve the model and present new opportunities for states that are otherwise unable to make significant,enduring improvements to their state-owned utilities.This report proposes a road map for state governments interested in undertaking discom privatization.The authors interviewed various government and private sector officials to identify challenges and opportunities based on their experiences.Discom privatization is also politically sensitive,since there is an underlying belief that it has a negative impact on electoral performance.The authors analyzed election data to test this,finding that contrary to popular belief,privatization has no effect on average voting patterns:the average percentage of incumbents voted out of power remains largely consistent in constituencies with private distribution when compared to the state average.Indian states have been called“laboratories for reform.”2 With discom privatization,models are adapting,improving,and succeeding on a range of critical measures,such as reduced AT&C losses and improved billing and collection.These lessons need to be shared and further improved to ensure that every Indian citizen and business has access to reliable,clean,and reasonably priced electric power.Richard Rossow and Akshat Singh|3IntroductionIndias path to a$5 trillion economy will be paved with significant developments in its ability to expand manufacturing and accommodate continued urbanization.3 Additionally,Indias leadership in climate change mitigation will be important for ensuring a low-carbon future for the world.To promote equitable growth,India will also need to pay attention to social development.Indias power distribution sector is the common thread combining all three of these key priorities.However,the power distribution sector is rife with challengesincluding political interference,unreliable supply,fiscal mismanagement,and lack of capital expenditure.Despite various government attempts,accumulated discom deficit grew from$45.8 billion in 2016 to$74.4 billion in FY 2022.4 However,government efforts have led to positive momentum.The total amount that discoms owe to power generation companies has gone down from$12 billion in May 2022 to$2.7 billion in October 2023.5 Despite progress,there is still a long way to go.Private sector discoms have shown merit and could be part of a state governments tool kit to bring sustainable reforms to the distribution sector.Through this report,the authors present a road map for state officials interested in pursuing discom privatization.The road map is compiled through interviews with private and government stakeholders and is meant to guide officials at various stages of discom privatization,including the pre-bidding,bidding,and post-bidding phases.Learning from the experiences of stakeholders who have been involved in the privatization process can be beneficial to other state governments.Indias Private Power Market|4OverviewIndia is the third-largest electricity producer in the world,producing 1.6 million gigawatt hours(GWh)of electricity in 2022.6 However,this is modest compared to Chinas 8.8 million GWh and the United States 4.5 million GWh.7 Indias per capita consumption conveys a more dire scenario.In 20212022,Indias per capita consumption of 1,255 kilowatt hours(kWh)was a third of the global average,just 11 percent of the United States 11,756 kWh.8India ranks low even among peer developing nations.For instance,Brazils per capita consumption is 2,524 kWh,South Africas per capita consumption is 3,406 kWh,and Mexicos per capita consumption is 2,110 kWh.9 Tariffs for commercial and industrial(C&I)users are highIndian C&I users are charged 30 and 37.5 percent higher tariffs than their counterparts in the United States,when adjusted for purchasing power parity.10 Industrial consumers also pay 12.5 percent higher than the global average.Transmission and distribution(T&D)losses in India stand at 19.2 percent as of 2022four times higher than the United States.11 Despite challenges,Indias generation capacity has grown from 160 GW in 2006 to 425.4 GW as of September 2023,with renewable energy generation being a significant component of this growth.12 To continue along this pathway,the sector must become more financially viable.ChallengesDiscom health in the country has been a hindrance to Indias growth story.Rather than providing a much-needed enabling infrastructure,the sector has stressed Indian states finances and caused problems for large-scale manufacturing development.A Reserve Bank of India bulletin from June 2022 put discom health as a major financial risk to state finances.13 Practices such as providing free and low-cost electricity to agricultural consumers are theoretically funded by the cross-subsidization of industrial consumers,thereby increasing the latters electricity rateswhich sometimes reach as high as 15 times the price of agricultural tariffs.Industrial consumers also pay 12.5 percent higher than the global average,which jumps to a striking 37.5 percent higher when contrasted to consumers in the United States.14 Despite this,cross-subsidization is a half measure,and most state discoms lose moneyreducing fiscal space for capital investments and resulting in intermittent power losses and reduced investment in modernizing generation capacity.Even after multiple rounds of government subsidy and debt restructuring,discoms need to rely on fresh tranches of borrowing from the state and central governments to cover operational and debt servicing expenses.The central government has introduced several initiatives to help state discoms improve operations and commercial performance.These include the Accelerated Power Development&Reforms Programme(APDRP),the Revamped Accelerated Power Development&Reforms Programme(R-APDRP),and the Ujjwal DISCOM Assurance Yojana(UDAY).15 The results of these programs have been mixed.A 2019 report from NITI Aayog and CRISIL notes that even as UDAY directed states to assume 75 percent of discom debt,discoms did not improve their operational efficiency substantially.16 In a 2018 assessment of the UDAY scheme conducted by the National Institute of Richard Rossow and Akshat Singh|5Public Finance and Policy(NIPFP),authors further noted that the scheme failed to bring down the AT&C rates or the ACS-ARR gaps to the desired levels.17 The AT&C rates for state-owned discoms covered under the UDAY scheme have gone down from 26 percent in 2015 to 20.8 percent in 2023.18 The scheme envisaged to reduce AT&C losses to 15 percent by 2019.19 Additionally,the ACS-ARR gap in UDAY states has increased from 0.54($0.0065)in 2015 to 1($0.012)in 2023.20 The scheme aimed to bring it down to 0 by 2019.21Discom PrivatizationOpening up the sector to private players has shown merit and should be seriously considered by a larger number of state governments.This report looks at Indias experience with private distribution of electricity,compiling findings from surveys of existing stakeholders to assess the privatization model and provide a road map for states wishing to open their distribution sectors.Significant state-level reforms must be viewed through a political lens,as well as through their impact on socioeconomic development.The authors consequently looked at voting trends in the states,cities,and districts that have shifted toward private electricity distribution to scan for patterns that may be related to this reform.Indias Private Power Market|61Why Are Discoms Important?Access to reliable,reasonably priced electric power is critical for Indias national economic development.This is underlined by the stark differences in energy consumption between developed and developing countries.For instance,in 2019,North Americas per capita energy consumption was 5.6 tons of oil equivalent(toe),as opposed to 1.5 toe per capita for the Asia-Pacific region,1.4 toe per capita for South and Central America,and 1.3 toe per capita for Africa.22 Consumption of countries in the Organization for Economic Cooperation and Development(OECD)is 4.1 toe per capita as opposed to non-OECD countries 1.6 toe per capita.Additionally,the energy consumption in developed countries is 2.6 times higher than in developing countries.For reference,Indias energy consumption in 2021 was 0.7 toe per capita.23Figure 1:Regional Energy Consumption per Capita(Tons of oil equivalent)Source:Authors research based on multiple sources.0123456North AmericaOECDNon-OECDAsia PacificSouth&Central AmericaAfricaIndia5.64.11.61.51.41.30.7Richard Rossow and Akshat Singh|7Energy consumption and electrification are causally proven to have a direct impact on several economic and social development metrics.Growth is led by an increase in productivity,profitability,job creation,and macroeconomic growth.24For instance,a study published by the University of Mannheim in 2018 ascertained that increased electrification led to industrial growth in Indonesia between 1990 and 2000.25 Additionally,an extension of grid networks to new locations attracted new firms to that location,thereby stimulating local economies and promoting job growth.Research from the World Bank shows that electricity outages also reduce the likelihood of a skilled individual gaining employment by 35 to 41 percent and being self-employed by 32 to 47 percent.26 Evidence also indicates that the increased cost of electricity hurts the profit margins of small and medium-sized businesses.27Electricity access has a direct,positive impact on human development.A study published by the American Economic Association looked at the impact of electrification on employment in South Africa.The study found that electrification leads to the development of microenterprises by releasing women from home production.This leads to higher female employment within five years.28 A case study conducted in northwestern Madagascar further noted that electrification allows students to complete their schoolwork in the evenings and thereby perform better.29 This leads to improved educational outcomes.A review of low-and middle-income countries(LMIC)found that household electrification significantly improves health outcomes,as residents can replace biomass fuels for cooking with electricity.30 A study of 750,000 households in Ecuador that replaced gas with electric stoves found that electric stoves led to a decline in hospitalization due to respiratory illnesses.31 Given that currently 2.5 billion people do not have access to clean cooking fuels around the world,electrification for cooking can have substantial health and environmental effects.32India OverviewDespite a significant expansion of electricity generation in India,distribution poses significant challenges.Electricity consumption in India has grown threefold since 1991 and is expected to triple again by 2050.33 Yet,studies from the World Economic Forum(WEF)indicate that per capita electricity consumption in the country remains lower than in Africa.34 Additionally,estimates show that despite massive gains in the number of households with access to grid electricity,consistent and reliable supply remains a challenge.35 A research study conducted by the Council on Energy,Environment and Water(CEEW)in 2020 indicated that 76 percent of households in India faced unanticipated power supply interruptions,and up to 66 percent of rural households and 40 percent of urban households faced outages at least once a day.36 Improving reliable electricity access requires investments aimed at improving the technical capabilities of the distribution network.Therefore,it is crucial to invest in a healthy distribution network to ensure reliable electricity access.Indias Private Power Market|8Improved electricity distribution and access in India would positively affect three areas:industrial growth,renewable energy adoption,and social development.Industrial GrowthEasy access to reliable,reasonably priced electricity is important for industrialization.The price and access to power for industrial consumers remain a challenge in India,with Indian business consumers paying 50 percent higher tariffs than residential consumers on average due to the practice of cross-subsidization.37 According to a report by the International Energy Agency,the annual average wholesale electricity prices in India are comparable to those in the United States,despite the stark difference in the size of the economies and the per capita GDP.38 This hinders the competitiveness of Indian firms,as well as Indias ability to attract international companies to set up manufacturing units.High price,however,is just one piece of the puzzle.Other factors such as outages,low voltage,and lack of access also pose challenges to industrial growth.Research indicates that power outages lead to lower productivity,cost competitiveness,and investment decisions for small and medium-sized enterprises(SMEs).39 Given that SMEs form a significant chunk of Indian firms,this has dire impacts.Additional research also indicates that electricity consumption leads to growth in manufacturing in the short run and ultimately leads to GDP growth.40Renewable Energy AdoptionA report from the International Energy Agency titled India Energy Outlook 2021 shows that between 2019 and 2040,India could account for a quarter of global energy demand growth.41 This,combined with the fact that Indias carbon emissions have grown faster than its energy demand since 2000,underlines the importance of green energy growth.The government has made several reforms to promote renewable energy and has announced a target of adopting 450 GW of renewable energy by 2030,not counting additional generation required for the National Green Hydrogen Mission.India has also announced a commitment to reach“net zero”carbon emissions by 2070.However,renewable energy adoption does not solely rely on installed generation capacity.Reliable storage infrastructure,as well as distribution and transmission mechanisms,are fundamental to the deployment of the renewable energy generated.Renewable energy adoption requires the integration of renewables into the national grid,which in turn can only be achieved through substantial capital investments.Given the poor financial health of discoms,this is a challenge.A report by the Energy and Resources Institute(TERI)posits that India failing to integrate renewables into the grid could lead to a situation like in Germanywhere,despite hefty renewable production investment,the cost of electricity for residents grew and 78 percent of total primary energy demand was still being met by fossil fuels as of 2020.42 The TERI report underlines three major challenges to grid integration:the seasonal nature of renewables,storage systems,and variability in energy generation.Richard Rossow and Akshat Singh|9At the root of it,Indias current infrastructure is not equipped to deal with frequent mismatches between energy supply and demand.Discoms need to be financially viable to be able to adopt better technology,assess demand and supply,and plan power purchases in advance.Social DevelopmentEnergy access and efficient distribution is shown to affect various development parameters in India.For instance,the Economic Survey 2020 released by the Ministry of Finance noted that increased access to electricity positively impacts literacy rates in the country,which in turn increases household GDP.43 Another report by the Parliamentary Standing Committee on Human Resource Development for 20202021 noted that despite a significant increase in household access to electricity,only 56.5 percent of government schools had access.44 The lack of reliable electricity distribution is a deterrent to access in government schools.Electricity access is also important for the provision of healthcare services.A systematic review of studies from African countries,Fiji,and India found that electrification has a positive impact on health outcomes in LMICs.45 The review found that electrification is associated with improvements in antenatal care,vaccination rates,emergency services,and primary health services.Additionally,better refrigeration also leads to improved pharmaceutical supply chains.A World Bank and World Health Organization report from January 2023 notes the importance of electricity access for universal health coverage.46 Additionally,the report underlines that electricity access is necessary for vaccine storage,provision of pediatric care,and emergency services.A June 2022 report by EY and the SED Fund states that as per the Rural Health Statistics,26.3 percent of rural sub-centers and 4.8 percent of primary health centers(PHCs)in India do not have access to electricity supply as of 2019.47A 2021 survey conducted by the Council for Environment and Energy Development and the Shakti Sustainable Energy Foundation found that 64.5 percent of health sub-centers in Bihar do not have proper access to electric supply.48 Moreover,44 percent of health sub-centers suffer from problems with fluctuation,and 55 percent need to rely on backup power(through generator sets)for more than five hours daily.This adversely impacts health outcomes at the facilities.In line with this,a study conducted by the CEEW and Oxfam on the adoption of solar energy for primary healthcare centers in Chhattisgarh indicated that using solar energy significantly improved outcomes by providing health centers uninhibited access to electricity.49 The study reported that facilities with solar energy treated 50 percent more outpatients monthly and had 50 percent higher deliveries than those without it.Uninterrupted power supply also has a positive impact on improving irrigation.50 Currently,several states in India offer free electricity for irrigation.However,the timing of electricity supply is sporadic,and it is dependent on off-peak hour availability.This results in farmers employing flood irrigation techniques,which are both energy-and water-intensive.Studies in Tamil Nadu and Maharashtra have shown that using drip irrigation can result in saving 45 percent of the Indias Private Power Market|10electricity used for agriculture.51 Drip irrigation,in turn,is most effective with an uninterrupted electricity supply.A systematic review of studies conducted by the Asian Development Bank in August 2020 also stated that improved access to electricity led to marginal improvements in decisionmaking powers and better individual agency for females in a household.52 Cognizant of the positive socioeconomic impacts of electricity access,the central government launched the“Saubhagya”scheme in 2017,aiming to achieve universal household electrification.As of 2023,over 28 million households have been electrified under the scheme.53 Richard Rossow and Akshat Singh|112Indias History with Electricity Distribution ReformThe government recognizes the importance of a strong electricity sector and discom health for Indias development.Therefore,there have been multiple attempts to reform the sector.These attempts have had mixed success at best(see Appendix 1 for details).In 1995,in the face of consistently poor sectoral performance,the Odisha government introduced the Odisha Electricity Reforms Act.54 The act unbundled the State Electricity Board,aiming to promote corporatization and attract private investment.Soon after,in 1996,a meeting of all state chief ministers was convened.55 At the meeting,the group released the Common Minimum National Action Plan for Power,which sought to address the lack of transparency in tariff setting.In this context,the 1998 Electricity Regulatory Commission Act was introduced to create the State Electricity Regulatory Commission with the power to set tariffs.56The poor performance of state power utilities persisted,however,and in response the central government launched the Accelerated Power Development Programme Scheme(APDP)in 2001.57 Despite the schemes momentum,discom performance remained poor,leading to the government intervening and bailing out State Electricity Boards by infusing$7.4 billion.In 2003,the Electricity Act established central as well as state-level regulatory bodies for the rationalization of tariffs and subsidies.58 The act also introduced the concept of distribution franchising,leading to several states introducing the model.The same year,the government introduced the Accelerated Power Development Reforms Programme to tie subsidy disbursal with reform progressin vain.59 This was followed by the Restructured Accelerated Power Development Reforms Program(R-APDP),which focused on urban areas.This also had limited success.60Indias Private Power Market|12Prime Minister Modi took office in May 2014.His governments first scheme addressing power sector reforms was the Ujwal Discom Assurance Yojana(UDAY)2015,which aimed to reduce AT&C losses to 15 percent and the ACS-ARR gap to 0.61 The scheme had limited success:the AT&C losses did go down but only to 20 percent,and the ACS-ARR gap reduced to 0.3 paise by 2019.In 2022,the government launched the Revamped Distribution Sector Scheme(RDSS)with a total outlay of$37 billion.The scheme aims to bring down the AT&C losses to 1215 percent,and it sets a new target for bringing the ACS-ARR gap to 0 by 2027.62Richard Rossow and Akshat Singh|133Current StatusDespite government measures,poor discom performance in India has remained a major hindrance to growth.According to a recent report,over 15 years(through 2021),public discoms in India suffered a cash-basis loss of approximately$120 billion.63 As noted above,dismal discom performance stresses state finances and affects economic and social development.While there has been some improvement in the past few years,this remains marginal.Notable reforms brought in by the Modi government include the aforementioned UDAY and RDSS programs and the more recent Late Payment Surcharge Rules.64 Additionally,the government has introduced the Draft Electricity Amendment Bill,2022,which seeks to ease the entry of private players in the distribution sector and rationalize energy tariffs to reflect actual incurred costs.65 The bill has not passed the houses yet.The government has also made several efforts to promote corporate governance through guidelines for management and energy accounting.Dashboards such as Payment Ratification and Analyzing Power Procurement for Bringing Transparency in Invoicing of Generators(PRAAPTI)and UDAY have made data on discom performance accessible for stakeholders.66 This has yielded positive yet limited results.The current performance of the distribution companies can be assessed through the Annual Integrated Rankings and Ratings of Discoms published by the Power Finance Corporation.The 11th edition of the report highlights discom performance during FY 2022.67 According to the report,AT&C losses have come down from 25.48 percent in 2012 to 16.5 percent in 2022,and 25 Indian states improved their AT&C rates between 2020 and 2022(see Appendix 2 for details).Specifically,the AT&C rates for state-owned discoms have gone down from 26 percent in 2015 to 20.8 percent in Indias Private Power Market|142023.68 Additionally,the ACS-ARR gap has come down from$0.01 per unit in 2012 to$0.0049 per unit in 2022 for all discoms.State-owned discoms have an ACS-ARR gap of$0.012,which is holding steady through 2023.69 Indias total power generation capacity grew from 156 GW in 2010 to 425.4 GW as of September 2023.70 During this time,the total power deficit went down from-10.1 percent to-0.4 percent.Out of this,169 GW came from renewable energy sources as of March 2023.Notably,access to electricity in India grew to 97 percent by 2023,comprising 95 percent access for rural households and 99 percent access for urban households,according to the National Family Health Survey 5.71 In comparison,as of 2018,in the United States and China 100 percent of households have access to electricity;99.6 percent of households in Brazil have access to electricity;and for neighboring Bangladesh and Sri Lanka,household electrification stands at 76.5 percent and 100 percent respectively.Richard Rossow and Akshat Singh|154Indias Tryst with Private Electricity DistributionOverviewThere are 70 power distribution companies in India.Of these,54 are public sector units and 16 are privately owned and are given private licenses for operations.Additionally,there are eight operational power distribution“franchises”that are technically owned by the public sector units but are operationally run by private sector companies on contract.The licensed private distribution companies are spread across eight states and union territories including Dadra and Nagar Haveli,Daman and Diu,Delhi,Gujarat,Maharashtra,Odisha,Uttar Pradesh,and West Bengal.Out of this,six utilities are run by Tata Power,four utilities are run by Torrent Power,two are run by Reliance Infrastructure,two are run by the RP Sanjiv Goenka group-owned Calcutta Electrical Supply Corporation Limited(CESC),and one each is run by Adani Electricity and India Power Corporation Limited.Pockets in Mumbai and Kolkata have had private sector distribution predating state electricity boards.Several companies operate distribution utilities on behalf of public sector distribution companies on a contractual basis,as“franchises.”Three states have franchises:Maharashtra,Rajasthan,and Uttar Pradesh.There are eight existing franchises,out of which three are run by Torrent Power,four by CESC,and one by Tata Power.Additionally,Torrent Power has applied to get distribution licenses in Nagpur,Pune,and Thane in Maharashtra,whereas CESC has a pending contract to operate the distribution utility in Chandigarh.Indias Private Power Market|16Altogether,private sector companies serve a total of approximately 28 million customers across the country.Out of these,licensed operators serve about 26 million customers,whereas franchised providers serve the remaining 2 million customers.Table 1:Private Distribution Companies with Ongoing OperationsCompanyState/Union Territory(UT)CommencementCustomersLicense or Franchise Torrent PowerDadra and Nagar Haveli;Daman and Diu2022150,000LBSES YamunaDelhi20011,829,901LBSES RajdhaniDelhi20012,868,391LTata Power DelhiDelhi20011,885,578LTorrent PowerGujarat20101,000,000LTorrent PowerGujarat20101,600,000LTorrent PowerGujarat2022160,000LTorrent PowerMaharashtra2007760,000FTorrent PowerMaharashtra2020215,000FCESC Maharashtra2020112,000F AdaniMaharashtra20183,072,704LTata Power MumbaiMaharashtra2014742,099LTata Power WestOdisha20212,088,825LTata Power SouthOdisha20212,391,570LTata Power NorthernOdisha20212,089,083LTata Power CentralOdisha20202,757,804LCESCRajasthan2016176,000FCESCRajasthan201652,000FCESCRajasthan2017147,000FTata PowerRajasthan2017150,000FCESC(NPCL)Uttar Pradesh1993117,755LTorrent PowerUttar Pradesh2010470,000FIndia Power Corporation Limited West Bengal19326,121LCESCWest Bengal19783,000,000LSource:Authors research based on multiple sources.Richard Rossow and Akshat Singh|17History and Current StatusPrivate sector distribution is not entirely new for India.Indias first power distribution company,CESC,was established in 1897 as an electric light provider for Kolkata(then Calcutta).72 The company received a distribution license from the government of West Bengal in 1978.However,the real impetus toward privatization came in 1995 through the Odisha Electricity Reforms Act.The act was ushered in due to mounting pressure from the World Bank in the face of consistently poor performance by the State Electricity Board.It initiated the corporatization and unbundling of the public sector utility,ultimately carving the distribution network into four zones that were licensed to two private distribution companies:Applied Energy Services(AES)and Bombay Suburban Electric Supply Limited(BSES).73Unfortunately,Odishas initial experiment with private discoms was short-lived.Firms reported higher losses after privatization.This was accredited to poor baseline accounting and weak operational data provided by the government.74 Notably,reform attempts such as curbing electricity theft,reforming agricultural tariff,and managing labor unions were contentious.A catastrophic cyclone in Odisha in 1999 proved to be the final straw in the deteriorating situation of the states newly privatized central discoms.The cyclone caused massive infrastructural damage.75 World Bank funds earmarked for demand-side management and meter acquisition could not be repurposed for construction work.This ultimately led to the exiting of private firms from Odisha by early 2000.Delhi decided to open the door to distribution privatization around the same time.By 2001,Delhi had divided its power distribution into three sectoral zones;two of these zones were awarded to BSES,with the third awarded to Tata Power.In 2003,Reliance Industries increased their 20 percent minority stake in BSES-held utilities to 58 percent to take full control of the company.Delhi decided to introduce privatization through a public-private partnership(PPP)model where the government would retain a minority stake.The three utilities still operate in Delhi and have considerably improved operational and financial efficiency.76Despite positive signs from privatized utilities,electoral considerations stemming from potentially higher power tariffs evoked a lukewarm response from the state governments.This changed after the introduction of the Electricity Act,2003.The Electricity Act paved the way for opening the power distribution sector to private players.Sensitive to the political considerations of state governments,it offered a third way wherein the governments could pass off the operations of running a distribution company to the private sector while still retaining ownership,thereby creating the franchising model.In 2007,when giving a franchise for managing power distribution for Bhiwandi to Torrent Power,Maharashtra became the first state in the country to experiment with the franchise model.Torrent was able to dramatically reduce the AT&C losses in Bhiwandi from 58 percent in 2007 to 22.36 percent in 2014,and this was further reduced to 9.8 percent in 2022.77 The franchise is still operational.Indias Private Power Market|18Odishas experiment with franchising started in 2013,when the government gave franchising of five select zones to Shyam Indus,Feedback Energy Distribution Company(FEDCO),and Enzen Global.78 The experiment,however,was less successful.Since then,17 other regions have opened power distribution operations to the franchising model.As of April 2023,out of the 23 cases total,15 had ceased operations;mismatch between government expectations and outcomes,as well as labor unions,have been cited as the cause.States have experimented with different models of franchises such as input-based,investment-based,and input-based with incremental revenue(IBF-IRS);however,experiences have been widely varied.Table 2:Private Distribution Companies That Ceased OperationsCompanyState/UTAreas ServedCommencementLicense or FranchiseApplied Energy Services(AES)OdishaCentral1999LBombay Suburban Electric Supply Limited(BSES)(later R-Infra)OdishaWest,North,South1999LIndia Power CorporationBiharGaya2014FEssel Vidyut VitaranBiharMuzaffarpur2013FSPML InfraBiharBhagalpur2011FTata PowerJharkhandJamshedpur2012FCESC LimitedJharkhandRanchi2012FSMART WirelessMadhya PradeshGwalior2012FSMART WirelessMadhya PradeshUjjain2012FTorrent PowerMadhya PradeshSagar2012FCrompton GreavesMaharashtraAurangabad2011FGlobal Telesystems LimitedMaharashtraJalgaon2011FFEDCOOdishaPuri,Khordha,Balugaon,Nayagarh2013FShyam IndustriesOdishaCuttack2013FShyam IndustriesOdishaDhenkanal2013FShyam IndustriesOdishaNimapada2013FEnzen GlobalOdishaParadeep2013FSource:Authors research based on multiple sources.Richard Rossow and Akshat Singh|19Private Sector Distribution PerformanceBarring a few exceptions,private sector companies have consistently been able to improve operational efficiency as noted by decreasing AT&C losses.The list below compiles the AT&C losses of private sector distribution companies.The first year(Y1)is the base year and indicates the losses when the utility was taken over by the private sector distribution company.For comparison,the authors have provided the AT&C losses after five years of the company taking over operations(Y5).In places where applicable,they have also listed the latest data on AT&C losses for FY 2022.Additionally,in relevant cases,the table presents the state average AT&C losses to provide a baseline comparison.Table 3:AT&C Rates of Private Distribution ProvidersAT&CCompanyState/UTCommencementLicense or FranchiseY1Y5AT&C(2022)State AverageTorrent PowerDadra and Nagar Haveli;Daman and Diu2022L3.5N/AN/AN/ABSES YamunaDelhi2001L60.645.68.9N/ABSES RajdhaniDelhi2001L49.637.88.3Tata Power DelhiDelhi2001L46.426.58.1Torrent Power SuratGujarat2010L9.73.65.611.1Torrent Power AhmedabadGujarat2010L14.36.36.7Torrent Power DholeraGujarat2022LN/AN/AN/ATorrent Power BhiwandiMaharashtra2007F5819.39.818.4AdaniMaharashtra2018L116.7Tata Power MumbaiMaharashtra2014L2.10.7CESCMaharashtra2020L56N/AN/ATorrent Power SMKMaharashtra2020F73.9N/AN/ATata Power WestOdisha2020L28.5N/A18.318.1Tata Power SouthOdisha2020L36.3N/A22.8Tata Power NorthernOdisha2021L25N/A11.4Tata Power CentralOdisha2020L30.4N/A20.4CESCRajasthan2016F29.720.4N/A20.2CESCRajasthan2016F27.416N/ACESCRajasthan2017F24.517N/ATata PowerRajasthan2017F9N/AIndias Private Power Market|20India Power CorporationWest Bengal1932L3.216.7CESCWest Bengal1978L11.37.9CESC(NPCL)Uttar Pradesh1993L5610.227.5TorrentUttar Pradesh2010F58.743.513.3Clearly,licensed private distribution companies have been able to dramatically reduce AT&C losses.For instance,BSES Yamuna has reduced AT&C losses from 60.6 percent in 2001 to 7.06 percent in 2022.BSES Rajdhani reduced losses from 49.6 percent at the time of takeover in 2001 to 7.7 percent in 2022.The most impressive loss reduction,however,has been led by Tata Power Delhi,which went from 48.1 percent in 2001 to merely 6 percent in 2022.Additionally,all franchised operations have also been able to reduce AT&C losses.The most impressive performance was by Torrent Power in their Shil-Mumbra Kalwa franchise in Maharashtra.Over three years of operation,AT&C losses have reduced at an average rate of 17.5 percent per annum.Torrent Powers Bhiwandi franchise follows closely,as it was able to reduce losses by 9.7 percent per annum over the first five years of operations.Source:Authors research based on multiple sources.Richard Rossow and Akshat Singh|215Politics of DiscomsIn India,politics and electricity are deeply intertwined.In the early 1970s,then prime minister Indira Gandhi created a power tariff that provided virtually free electricity to farmers.79 In the 1977 Andhra Pradesh state elections,Congress introduced flat tariffs and electricity subsidies for farmers.80 The All-India Anna Dravida Munnetra Kazhagam(AIADMK),which had just come to power in a highly contested election in Tamil Nadu,followed suit.81 In 1989,Dravida Munnetra Kazhagam(DMK)a competing party in Tamil Nadupromised free electricity to farmers in its election manifesto.82 After coming to power,the DMK issued an order to provide free electricity for agricultural pumps.This was followed by a series of power subsidies to different categories by both parties.Thereafter,the promise of free or cheap electricity gained momentum as a political platform.With the emergence of the farming classes as a voter bloc in the country,Maharashtra and Punjab soon adopted the strategy,precipitating a nationwide cascade.83 In 2004,Andhra Pradesh announced free electricity to farmers.84 Additionally,research from the University of Michigan has shown that electricity is used as a political plank to influence voters in Uttar Pradesh.85 There was a resurgence of using free electricity as an electoral tool in 2015,when the Aam Aadmi Party(AAP)slashed power tariffs by 50 percent for consumers using up to 400 units per month in Delhi.In 2019,electricity was made free for users utilizing up to 200 units per month.AAP swept the 2020 Delhi state election polls.In the 2019 Lok Sabha election,the Bharatiya Janata Party in Haryana used electricity price as a tool to appease votersprices were slashed in the year leading up to the elections.86 In 2022,AAP came to power in Punjab on the promise of free electricity up to 300 units per month.Even as recently as 2023,Congress promised free electricity up to 200 units per household in Karnataka.87 The party won a remarkable majority.Karnataka has now introduced the“Gruha Indias Private Power Market|22Jyothi”scheme to implement the promise.Congress has promised free electricity in the run-up to the upcoming state elections in Rajasthan in 2023.88 AAP has also promised free electricity up to 300 units in Chhattisgarh in the lead-up to the 2023 state elections.89 Several past experiences such as in Andhra Pradesh and Delhi have shown that if governments increase the price of electricity,they face voter repercussions in the following election.90 Given that licensed distribution gives private companies more control than the government,distribution privatization becomes politically unfeasible.Even franchised private players attempt to increase collection and billing efficiency,thereby potentially creating a cost for voters when there might have previously existed none.On the other hand,allowing private players to enter the market has consistently shown to improve the performance of distribution companies.A 2018 survey conducted by the Association for Democratic Reforms(ADR)showed that electricity remains one of the top concerns for rural voters.91 Similarly,a 2017 survey in Uttar Pradesh indicated that electricity supply was one of the leading political issues during the elections.92It is feasible that improved electric supply has appeal to votersafter all,not facing multiple outages is valuable to residential as well as industrial consumers.Therefore,it is important to explore whether voting behavior is affected by distribution privatization.MethodologyTo assess whether discom privatization leads to political parties being voted out,the authors looked at all instances where currently operational private companies(both license and franchise operators)were brought in.They then checked whether the incumbent candidate won in their constituencies in the election immediately after the private companies entry.The authors calculated the percentage of candidates who did not retain their seats after the introduction of the private companies.Since private companies have a limited geography,the assessment is limited to the“Vidhan Sabha”(state assembly)seats of the concerned areas;the focus is on state rather than national seats since discomsas well as most electricity sector governancecome under the ambit of state governments.Therefore,their electoral fortunes are assumed to be closely tied with the electricity sector in general and with electricity tariffs specifically.To prove that distribution privatization leads to being elected out of office,the average percentage of candidates being voted out in areas with recent discom privatization should be higher than the state average.Therefore,the total average percentage of incumbents retaining their seats for all states for the specific election cycles was compared with the average percentage of specific areas with private distribution.The authors further compiled all their findings from various election cycles,calculated the percentage that an incumbent candidate lost elections,and compared this with the percentage for entire states(party in power is replaced by a contender).Additionally,they ascertained if the findings were different for private licensed distributors as opposed to franchised companies.Richard Rossow and Akshat Singh|23Since all the data is qualitative,the assessment relies on indicator variables.A change in incumbents is denoted with“1,”while instances where the incumbents retain power are denoted by“0.”DataIn all,the report assesses 3,600 data points.This comprises data from 218 Vidhan Sabha elections from constituencies that were served by private distribution companies.Additionally,data from 3,364 state-level elections across six states is analyzed to provide a comparative analysis.LimitationsElection results can be affected by multiple factors,and the authors do not claim causality.However,for the initial hypothesisthat privatization leads to incumbents being voted out of powerto be true,it must be proven that areas are more likely to replace the incumbent once a private distribution company enters.The report has excluded six utilities that started operations in 2020 or later and therefore do not have instances of pre-and post-election scenarios to compare.The authors have also excluded one utility since it took over the license of a pre-independence utility.Table 4:Private Distribution Providers with Year of Commencement and Years of Prior and Subsequent State ElectionsStateUtilityLicense or FranchiseCommencementPrevious ElectionNext ElectionDelhiBSES YamunaL200119982003BSES RajdhaniLTata Power DelhiLGujaratTorrent Power AhmedabadL201020072012Torrent Power SuratLTorrent Power GandhinagarLMaharashtraTorrent Power BhiwandiF200720042009RajasthanCESC KotaF201620132018CESC BharatpurFCESC BikanerFTata Power AjmerF2017West BengalCESCL197819771982Uttar PradeshTorrent Power AgraF201020072012CESC Noida(NPCL)L199319911996Source:Authors research based on multiple sources.Indias Private Power Market|24ObservationsPrivate sector(licensed and franchised):Out of all 109 Vidhan Sabha constituencies served by private sector distribution companies,across states and time,41 saw the incumbent being removed from power after a private distribution company commenced operationsan average of 37.6 percent.For corresponding elections at the state level,the incumbent government was replaced three out of seven timesan average of 42.8 percent.There was a modest positive correlation between distribution reform and electoral success when comparing the constituency and state percentages.Private sector(licensed only):Out of 73 Vidhan Sabha elections in constituencies served by private sector licensed distribution companies,across states and time,19 saw the incumbent being removed from power after the private distribution company commenced operationsan average of 26 percent.For corresponding elections at the state level,the incumbent government was replaced one out of four timesan average of 25 percent.There was no significant difference between the constituency and state percentages.Private sector(franchised only):Out of 36 Vidhan Sabha elections in constituencies served by private sector franchised distribution companies,across states and time,22 saw the incumbent being removed from power after the private distribution company commenced operationsan average of 61.1 percent.For corresponding elections at the state level,the incumbent government was replaced two out of three timesan average of 66.7 percent.There was no significant difference between the constituency and state percentages.There is therefore no notable difference in the percentage of incumbents being voted out of power between state averages and for areas with licensed distribution and franchised distribution.Figure 2:Rates of Incumbent Candidates Losing Reelections after Entry of Private Distribution Companies vs.Statewide Government Losing ReelectionsSource:Authors research and analysis.0 0Pp%TotalLicenseFranchiseSeatStatewide37.642.826.025.061.166.7Richard Rossow and Akshat Singh|25Delhi:Out of the 38 elections in constituencies served by private distribution companies,the incumbent was removed from power 9 timesan average of 23.6 percent.The statewide average among all constituencies was 24.2 percent in 2003.There was no considerable difference in the percentages.93Gujarat:Out of the 14 elections in constituencies served by private distribution companies,the incumbent was removed from power 2 timesan average of 14.2 percent.The statewide average among all constituencies was 35 percent in 2012.Incumbent candidates contesting elections from constituencies served by private power distribution companies were re-elected more than the state average.Maharashtra:In the one election in a constituency served by private distribution companies,the incumbent was removed from power.The statewide average among all constituencies was 63.6 percent in 2009.The authors excluded Adani Power from the calculation since they took over an existing private license,rather than commencing private operations.Given the limited number of elections,the data is inconclusive.Rajasthan:Out of the 27 elections in constituencies served by private distribution companies,the incumbent was removed from power 16 timesan average of 59.2 percent.The statewide average among all constituencies was 60.3 percent in 2018.There was no significant difference in the averages.Uttar Pradesh:Out of the 9 elections in constituencies served by private distribution companies,the incumbent was removed from power 6 timesan average of 66.7 percent.The statewide average among all constituencies was 69 percent in 1993 and 62 percent in 2012.There was no significant difference in the averages.West Bengal:Out of the 20 elections in constituencies served by private distribution companies,the incumbent was removed from power 7 timesan average of 35 percent.The statewide average among all constituencies was 26 percent in 1982.There was a 9 percent difference in the averages indicating a higher probability of being voted out of power if the candidate was an incumbent when a private distribution utility commenced operations.Therefore,all in all,in three states(Delhi,Rajasthan,and Uttar Pradesh)it does not seem like switching to a private sector distribution company has any impact on the probability of an incumbent being reelected.In Gujarat,the probability of incumbents being voted out of power after distribution privatization is lower than the state average;in West Bengal,the probability of the incumbent being voted out of power after distribution privatization is higher than the state average.The data from Maharashtra is inconclusive.Indias Private Power Market|26Figure 3:Average Rates of Candidates Losing Reelection in Constituencies Served by Private Distribution Source:Authors research and analysis.010 0PplhiGujaratMaharashtraRajasthanUttar PradeshWest BengalAverage rates in areas with private distributionAverage statewide rates in Election 1Average statewide rates in Election 1Average statewide rates in Election 2(if applicable)23.724.314.335.130.063.759.360.366.769.335.026.262.2Richard Rossow and Akshat Singh|276Road MapDespite promising performance in improving operational and financial efficiency,private sector companies face persisting challenges in terms of acquiring and operating utilities.While the report has already covered the major challenges vis-vis acquisition(i.e.,political and electoral),this section looks at the experiences of various stakeholders involved in the privatization process.For a holistic review,the authors interviewed multiple stakeholders representing private sector utilities,government organizations,and independent regulators.After examining perspectives on the profitability of private companies,this section presents a road map for achieving operational and financial efficiency.On ProfitabilityOfficials interviewed from private sector companies agreed that it takes between two and six years to turn around a distribution utility company.However,there are some caveats.First,the time necessary for licensed distribution operators to financially turn around a utility company is less than what is needed for franchised operators.An official from BSES stated that it takes between three to five years to turn around a licensed distribution company,and Mr.Sanjay Banga,president for transmission and distribution of Tata Power,similarly put the number at two to five years.This is supported by Odishas example,as the ACS-ARR gap came down from 0.6/kWh($0.0072/kWh)in 2018(before Tata Power took over)to an average of 0.27/kWh($0.0032/kWh)by 2022.94 On the other hand,Mr.Rajib Das,former senior official and currently consultant at CESC,Indias Private Power Market|28stated that it takes between five and six years to turn a franchised utility around.A major reason causing this difference in duration is the licensed companies greater participation in tariff setting.Second,Mr.Banga stated that in PPP models,where the majority stake is held by the private partner,the partner is obligated to turn the utility around.And third,the share of rural consumers affects the time taken for a private firm to turn the firm around as well.This is because implementing technological changes such as metering can prove more challenging in rural areas.Road Map for Introducing Private Sector Participation in the Distribution SphereThe road map is designed to assist government officials looking to introduce private sector players in the state electricity distribution ecosystem.Drawing from interviews with various private sector stakeholders and government officials with experience in discom privatization,the authors have compiled the key areas that should be considered to ensure that privatization is successful.The road map is meant to act as a step-by-step guide for officials.It is broken down into three subsections:planning phase,post-takeover changes,and challenges to consider.1.PlanningA.Choosing Areas of OperationIt is important for state governments to decide which areas in the state to open to privatization.In Maharashtra and Gujarat,privatizing predominantly industrial areas has meant improved electrical access for firms.This has also protected farmers and rural consumersboth important voter blocsfrom increased tariffs.From private companies perspective,serving industrial customers can be comparatively easier than serving rural consumers,since the operational costs vis-vis collection and billing are lower for industrial consumers.Similarly,as Delhi and Mumbais successful experiment with privatization has shown,private companies can perform well in urban areas.However,from the governments perspective,if the objective is to improve electricity access in rural areas,then privatization should be considered a priority in those zones.Specifically,the licensing model that incentivizes companies to make long-term investments in the served areas can be beneficial for improving electricity access in rural areas.Mr.Gagan Swain,director of finance and corporate affairs at GRIDCO Ltd.Odisha,stated that power distribution in Odisha is operating under a licensee model where 51 percent share is with the private player and the remaining 49 percent is still with the state government.Odisha has been able to provide an average of 23.22 hours of electricity access in rural areas.He added that the Union Ministry of Power is impressed by this feat and that this model can be further explored for other state-owned discoms,which also have rural consumers.That said,Mr.V.P.Raja,former chairman of the Maharashtra Electricity Regulatory Commission(MERC),stated that it will be difficult to find private companies willing to take over rural areas.Private companies would want to retain industrial and urban areas with high-paying consumers.It might thus be fruitful for the government to mandate private companies to take over certain rural areas along with potentially Richard Rossow and Akshat Singh|29profitable areas.He gave the example of the privatization of the aviation sector in India,wherein the government mandated airlines to take over some loss-making air routes along with profitable routes.Additionally,he added that state governments must assess the consumer mix for an area before deciding whether it should be privatized.An assessment of whether the consumers in an area are industrial,commercial,residential,or agricultural can be made using available district census handbooks.A senior official with Adani Power highlighted that for all special economic zones(SEZ),distribution companies can avail a“deemed distribution license”which allows them install alternate distribution infrastructure,thereby ensuring reliable electric supply to industrial consumers.Easing the license procurement process in SEZs allows for greater competition and improved supply.This foresight from the government has certainly helped industrial electricity access.A senior official from the Gujarat Electricity Regulatory Commission(GERC)added that it had historically been difficult to get existing utilities to take on the task of building infrastructure from the ground up in SEZs.Therefore,the decision to allow private players was driven by necessity.He added that there has been a renewed interest within the government to develop public-private models,which currently do not have access to electric networks.GRIDCOs Mr.Swain added that the size of the geography to be served with reference to the consumer mix under that geographical area should be considered while deciding between licenses or franchises.He gave the example of Rajasthan,where franchising is the prevalent model.He suggested that in places where the operational area is smaller,franchises can operate successfully.However,for larger areas,licensing allows for more holistic development and business ownership.B.Choosing Models of OperationThe prevailing opinion among private sector stakeholders is that the licensed distribution model is superior to the franchised model.This is due to private companies increased operational,financial,and managerial control in the former.Mr.Banga of Tata Power underlined this by stating that the raison dtre of the franchised model was so that the government could maintain ownership of distribution while leaving the improvement of operations to the private sector.He added that this is reflected by the fact that since franchised operators are contractors,their incentive to invest in operational and capital expenditure is very low.This in turn means that the private players do not make long-term investments in creating assets or improving technology.To this end,Tata Power advocated to the Ministry of Power to modify minimum investment for franchisee models so that companies would not just come in,squeeze existing assets,and leave them in a worse-off state.Mr.Das from CESC added that franchises disinterest in making capital expenditure investments leads to a situation where franchise companies focus on following government incentives for reducing AT&C.Since reducing transmission and distribution losses requires capital investment,they tend to focus on billing and collection efficiency.He stated that the core of the problem behind franchised companies not making capital expenditure is the tariff model that the companies need to follow.Franchised operators are not included in the tariff setting and are instead“given”a tariff.Therefore,franchised companies cannot pass on expenditure as“passthrough costs,”and Indias Private Power Market|30consequently minimize it.The official from Adani Power added that since franchise operators are interested in improving billing and collection,they do not focus on network capabilities.Another senior official from CESC adds that the sense of“ownership”differs between franchised and licensed operators.He adds that a franchised unit is just a contract,and therefore the private company doesnt have an incentive to make long-term operational changes.C.Evaluating Existing PerformanceBefore a private company bids on and takes over a public distribution company,it evaluates the data provided by the company to measure the takeovers financial feasibility.The companies financial projections are based on expected performance stemming from the initial data provided.However,often this data tends to be faulty,thereby putting the companies plans at risk.If a company doesnt have a precise understanding of where it stands,then it becomes difficult for it to ascertain how it should proceed.Mr.Banga added that not having good baseline data also causes frictions with private investors,thereby adding problems for the company.However,the experience varies across different states.The official from Adani Power stated that MERC has a very sophisticated and robust system to ensure that companies are undertaking assessment and due diligence prior to acquisition.Mr.Raja stressed the importance of companies conducting independent data collection prior to takeover.A senior official from GERC stated that it has instituted specific regulations to ensure that the existing company is sharing larger regulatory information pertaining to its utility,once a new player is trying to take over.This allows the new company to have a clear picture of the operations and finances of the utility before they make their final decision vis-vis the takeover.D.Assessing Sociopolitical FactorsIt is important to assess the sociopolitical factors involved in this debate in order to understand the public sentiment vis-vis privatization.Overwhelming negative sentiment can be detrimental to company operations,and private companies have had a mixed experience interacting with labor unions and customers.Torrent Power,for instance,has had various bad experiences dealing with both.In 2012,massive blackouts in Agra precipitated widespread protests and the kidnapping of company employees;in 2013,tariff increases in Bhiwandi caused massive protests.95 In 2015,Samajwadi Party(SP)leaders accused the company of harassing customers and forced it to shut down one of its offices in the city.96 The same year,after widespread protests by the Kanpur Electricity Supply Corporation(KESCO)staff,Torrents agreement to work in Kanpur was canceled by the Uttar Pradesh government.In 2021,Maharashtra Navnirman Sena(MNS)workers vandalized company offices in Bhiwandi,and in 2022,company offices in Agra saw widespread agitation.97 Adani Power also faced agitation from power sector workers in 2022.98 The official from CESC stated that the company had a negative experience in its attempt to begin operations in Chandigarh due to resistance from existing employees.On the other hand,their transition in Rajasthan was very smoothwhich he credited to customers previous experience Richard Rossow and Akshat Singh|31interacting with private power distribution companies.Another source from CESC stated that the company has past experiences where customers have removed smart meters,thereby posting additional costs for the company.Mr.Banga from Tata Power mentioned that the response from customers and labor unions also depends on the reputation of the company.He stated that during Odishas first experience with privatization in 1999,the companies faced pushbacks from both labor unions and customers.However,when Tata Power started operations in 2020,there was virtually no pushback.He based this response on the companys reputation.He added that customers often dont care about where their electricity comes from if they have reliable supply and good customer service.E.Contract NegotiationSetting clear terms of operations between the government and private sector companies is crucial for the healthy operation of the firms.Certain pain points that exist include investment burdens of each party,tariff setting,performance assessment,and government incentives.Mr.Raghav Kanoria,managing director of IPCL,stated that the companys experience taking over franchised operations in Bihar wasnt fruitful since there was a misalignment of expectations vis-vis investments between the government and the company.Specifically,IPCL expected government support in terms of capital expenditure investments to supplement their own,per their agreement.However,the government did not provide the assured investments.Prior agreement on the repercussions of non-adherence of clauses could hence be beneficial.Mr.Swain stated that deciding which areas each party needs to invest in is also crucial for a good government-company relationship.He stated that there are multiple“social investments”that might not be feasible for the private sector to make unless they are mandatory.Here,the government may consider assisting PPP licensees in some non-remunerative areas.For instance,in Odisha,distribution infrastructure passing through forest areas was causing the electrocution of animals.The government spent roughly 600 crores($70 million)to raise the height of electricity poles,insulate conductors,add spikes on poles,and take other measures to improve animal safety.The government also invested in shifting lines and transformers from the premises of schools and anganwadis for safety purposes.Since this was not a commercially oriented investment,the government did not expect the private sector to undertake it.Other areas that the government has made investments in include rural household electrification,cyclone-resilient infrastructure,and support in the energy transition process.Setting clear expectations on the areas of investments,thus,can inspire confidence.Interactions with regulators are rife with friction caused during tariff setting.Prior discussions can help in managing expectations and ease some friction among stakeholders.The regulators are responsible for setting the energy tariffs that all other stakeholderssuch as generators,distribution companies,and transmission companiesmust abide by.The official from BSES stated that the Electricity Regulatory Commissions(ERC)practice of setting tariffs for the entire segmentincluding generation,transmission,and distribution companiesand not providing a revenue-sharing breakdown for different stakeholders can be problematic.Distribution companies,as the last link in the chain of electricity provision,are at a disadvantage in securing part of the revenue for themselves.Power purchase comprises approximately Indias Private Power Market|3280 percent of the total costs.Cross-subsidy charges also tend to be unreasonable.99 For franchises,this problem gets further aggravated since they do not have any say in this process.In 2022,Torrent Power had pending undisputed claims worth 1,344 crores(about$160 million)and disputed claims worth 604 crores(about$72 million).On tariff setting,Mr.Banga added that in some cases,well-performing private sector companies are pushed to the verge of poor performance due to government interference.He gives the example of Tatas Delhi distribution network.He stated that since the chief minister won the elections on the plank of free electricity,he is averse to raising power tariffs.Due to this,the company hasnt been able to raise the tariffs,despite petitioning for the past eight to nine months.Governments should therefore attempt to address private sector fears over tariff setting.Additionally,there are tensions vis-vis proper auditing and performance assessment.Mr.Banga mentioned that the center and state regulators emphasize getting data auditing done properly.However,often data recording simply doesnt exist at the level of various public sector as well as private utilities.Often,companies dont report the data and regulators dont ask for it.The lack of proper auditing and assessment is underlined by Mr.Kanoria of IPCL.He stated that despite a contractual obligation,regulators did not seek an independent performance assessment from them and the public sector distribution company,thereby making it impossible for his firm to be able to benchmark their performance and mark it against their initial agreement.The respondent from BSES stated that private discoms are exempted from receiving benefits from government programs and schemes for discom improvement.This means that private sector companies do not receive government-allocated funds for improving the distribution sector.While this is acceptable in principle,Electricity Regulatory Commissions need to consider that this impacts costs and tariffs.The problem is more acute for franchise operators.Mr.Banga stated that whenever new funds come for modernization,discoms do not pass on the funds for areas being served by franchises.The companies wish to spend the money on the areas they directly serve.This is incongruent since,as per the franchise model,the government ultimately owns the utilities being run by the private companies as well.2.Post-takeoverImmediate ChangesA.Initial AssessmentAs stated in the section above,having access to good baseline data is crucial to creating realistic projections about a companys operational and financial performance.Mr.Rajib Das from CESC underlined the importance of having good baseline data and stated that companies should not only rely on government sources but also undertake a survey themselves soon after taking over the utility.This allows companies to have their own verified baseline data on which to formulate their projections.It could be beneficial for the government to mandate private companies to undertake a baseline data assessment soon after they take over;several regulators already do this.Government incentives such as financial support for the assessment can go a long way.Richard Rossow and Akshat Singh|33B.Human Resources and ManagementDue to political and employment considerations,most private sector takeovers of distribution companies in India include an employee retention clause.This is done to provide safeguards or employment options for existing government employees,but it can be challenging for a private firm trying to bring in a new institutional culture in the organization.Therefore,it becomes important to set a vision for the company and ensure that all employeesnew and oldare in sync with the company agenda.A senior official from CESC noted that even though there is an option for previous employees to stay on at the new company,several choose not to do so.Giving the example of an operation takeover in Maharashtra,he stated that the inability to seek rents once the private companies take over disincentivizes middle-and senior-level managers to remain.On the other hand,in Rajasthan several managers stayed but workers left.The official added that there is a dearth of talented power sector employees in the country,and therefore the company must aim to create a conducive environment to attract this talent.The official from Adani Power stated that the company took a different approach in Mumbai and retained as much talent as it could.He stated that rather than bringing new employees,the company focused on providing better key performance indicators(KPIs)for existing employees and helping them achieve their productivity.The company only hired new talent in areas where there was no existing capability.Additionally,the company also must ensure that there is no friction between the new management and employees,as well as between the company and government stakeholders.Mr.Banga from Tata Power stated that when the company took over utilities in Odisha,the Odisha Electricity Regulatory Commission(OERC)set up a four-member board and made a government secretary its chairman.This allowed better coordination between the government and private stakeholders.The official from GERC mentioned that the success of a utility ultimately depends on cost recovery.To ensure that companies are maintaining their financial hygiene,GERC has instituted a quarterly mechanism for reviewing retail tariffs.This eases the way for private sector companies.C.Managing Existing CustomersWhen there is a change in the management of a distribution company from public to private,there can be consumer anxiety over potential tariff increases,or fears about private sector apathy to operational issues.The private companies must address these as soon as possible.Mr.Banga from Tata Power stated that in his experience consumers dont care whether their electricity is being provided by government or private sector players.They do,however,care about tariffs.Assuring consumers that the private company will not raise tariffs for five years helps assuage these concerns.In the meantime,the private company gets an opportunity to improve the supply.Consumers also get accustomed to improved delivery,and hence they have a propensity to accept higher tariffs.He added that Tatas brand image as a trusted 100-year-old firm does certainly help.Indias Private Power Market|34Another way to ensure that customer anxieties are being addressed is through opening call centers and advertising them heavily.An official from CESC stated that this is a low-cost,high-visibility measure.Torrent Power launched its fully digitalized trademark“Plugpoint”call centers since 2016.Adani Power has been able to improve customer service by leveraging two technologies.First,they have introduced an AI chatbot,which can help customers with basic services.Second,they also developed a video contact center,through which concerned customers can speak to an agent over video call.Speaking to a person helps assuage customer anxieties.On the other hand,the customer agent has access to a dashboard with information on the customers,which they can use to provide better customer service.D.Quick FixesThe rationale behind implementing fast,highly visible operational improvements is twofold.First,it allows the private company to build a positive image that it can leverage to improve customer relationships.Secondand more importantlymaking low-cost operational improvements allows the private company to improve its cashflows and develop a corpus of capital that it can then utilize for making large capital investments.The immediate operational improvements that were most frequently mentioned during interviews surround billing and metering.Often,when private companies take over,they realize that the previously operating public sector utility was underbilling consumers or not billing them at all.While sometimes this is due to faulty billing,often it is due to consumer firms securing unapproved preferential pricing due to a lack of proper oversight and transparency.Mr.Banga from Tata Power stated that the company must ensure that it is regularly billing consumers,sending them the bills,and providing them with electricity access 24/7.Only then,if a consumer refuses to pay,it is fair to cut their connections.Giving the example of areas where the company has been able to increase its collection efficiency from under 50 percent to 99 percent,he added that consumer education,and creating a mindset that electricity is a service that people need to pay for,goes a long way.The official from Adani Power concurred on the importance of consumer education.However,he argued that companies cannot take a“one size fits all”approach,and for certain areas better enforcement and coordination with local authorities can help.He added that building small customer care kiosks in multiple areas,where employees can assist customers with adopting digital tools,combined with rapid digitization,can help ease the way.The respondent from CESC stated that they once found that large industrial consumers were being underbilled by a factor of 15 to 20.This was presumably due to collusion between the consumers and previous officials.While effective metering offers a solution for this,it can be very expensive to adopt cutting-edge smart meters.There has also been some level of consumer pushback against smart meters.He stated that the company has been able to move to a new,low-cost technology for meter reading which consists of a$0.80 port that can be installed on any smartphone.Using a mobile app,the port can provide meter readings within seconds.Richard Rossow and Akshat Singh|35Long-Term ChangesA.Operational Improvement through Capital Expenditure Once a private company has been able to make the discom profitable,it can start making long-term capital expenditures.Long-term capital expenditure is critical to the sustainability of long-term plans for the firm to remain profitable and ensure that the distribution technology is keeping pace with industry requirements.The optimization of capital expenditure takes time and firms cannot expect to seek quick returns from this.Apart from moving away from regulatory assets,the emphasis of capital expenditure needs to be on technology adoption.Two areas were highlighted during conversations:improving cyber infrastructure,including data and security,and modernizing physical infrastructure.Mr.Banga from Tata Power stated that there are two reliable data points that the private firms have access to:input cost of energy and money entering the companies bank accounts.Metrics such as billing and collection efficiency,as well as AT&C,can be manipulated using accounting techniques.However,better data can allow for improved collection,management,and analysis of the data.Mr.Raghav Kanoria from IPCL added that the company has benefited from making advances in smart metering and billing.Torrent Power has made strides in tech adoption for data management,and as of 2022,it has digitized all its documents and customer details and implemented Geographical Information System(GIS)technology for mapping consumers.Additionally,it has achieved 60 percent digital payments from its consumers.Torrent has also been able to develop advanced National Accreditation Board for Testing and Calibration Laboratories(NABL)for improving meter testing and billing.The company has also focused on strengthening cybersecurity measures,including developing multi-factor authentication at its facilities,privileged access mechanisms,endpoint detection and response,cyber crisis management plans,and a dedicated cybersecurity cell.The official from Adani Power stated that the company has benefited from adopting artificial intelligence and machine learning to better forecast energy demands.Additionally,creating digital payment mechanisms for payments has increased digital payment from 30 to 75 percent in the past five years.The company has also improved data collection and management infrastructure.Mr.Swain from GRIDCO added that technology adoption in the private sector is usually quicker.This is because the private sector tends to be more agile in comparison to public companies,and it often doesnt need to operate through the same processes as the government does.Modernizing physical infrastructure includes improving transmission and distribution networks.This includes investment in improving load centers as well as the cable networks.For instance,Torrent Power in Ahmedabad was able to bring down the transformer failure rate to 0.3 percent as of 2022compared to the national average of 15 percentby installing 12,000 distribution transformers in the service region.Additionally,it has modernized the cable infrastructure by replacing the old and obsolete networksincluding paper-insulated lead-covered(PILC)cablewith cross-linked polyethylene(XLPE)cable networks in the city.Indias Private Power Market|36B.Cost OptimizationWhile improving operational performance is beneficial for the financial health of a firm,interviewees from private discoms report that approximately 80 percent of their total operational cost is the price of procuring electric power.Given that private companies have little to no control on setting power prices,they must try to reduce all other redundant expenditure.One way of doing that and remaining lean is to outsource all“non-core”operations.The respondent from BSES mentioned that outsourcing tasks such as technology adoption and non-core manpower allows the company to leverage existing expertise without having to build its verticals.This ensures that management remains focused on the core tasks of the firm.3.Opportunities and ChallengesA.Renewable EnergyFrom the interviews,there is consensus among private sector stakeholders that renewable energy adoption is a significant opportunity.On the supply side,there is impetus from the government to incentivize renewable energy procurement through mechanisms such as renewable purchase obligations(RPOs).The respondent from BSES estimated that the organization should be able to move to 20 or 30 percent renewable energy generation over the next few years.One of the respondents from CESC stated that at the root of it,renewable energy procurement is a financial decision for firms.The good news is that after taking multiple factors into account,such as aging thermal plants and the penalties for not including renewable energy in the mix,procuring renewable energy is cost-effective for firms.This is also reflected in several firms expansion of renewable energy assets.For instance,as of 2022,Torrent Powers renewable energy generation mix has reached 25.6 percent,and it is currently in the process of acquiring 1.1 GW capacity from ReNew Power.100 The official from Adani Power stated that the company has increased renewable energy penetration,from 3 percent at the time of takeover to 30 percent in 2023;they further intend to increase it to 60 percent by 2027.On the supply side,Maharashtra Electricity Regulatory Commission(MERC)has provided its consumers with the ability to choose where their energy comes from.For instance,in Mumbai,companies have offered consumers the ability to pay a premium tariff to ensure that their electricity is being procured from green energy sources.Odisha Electricity Regulatory Commission(OERC)has also offered a green tariff in Odisha.It must be noted that the first company to offer green tariffs in India was a public sector companythe Bengaluru Electric Supply Company(BESC),in Karnataka.Distribution companies sit at a unique intersection where they both demand and supply renewable energy.Allowing them to gain freedom from legacy power purchase agreements(PPAs)could further incentivize them to procure renewable energy.In 2019,Tata Power advocated to MERC for consumers right to choose a green tariff,albeit at different prices.MERC agreed and allowed all electricity utilities in the state to raise the price by 0.66(about$0.008)per unit for electricity sourced from renewable energy plants.MERC has reported an enthusiastic response from domestic and corporate consumers alike.Currently,Tata Power has 20,000 green customers consuming approximately 200 million units a month,with about 1,000 consumers being added each month.Adani Power in Mumbai has over 50,000 green tariff consumers.However,even as the central government has introduced the Richard Rossow and Akshat Singh|37Electricity(Promoting Renewable Energy Through Green Energy Open Access)Rules,2022,several states have not accommodated for these regulations.101 Mr.Raja stated that promoting open access is crucial for discom reforms.He added that promoting open access,while progressively reducing cross subsidies,can go a long way in the development of retail electricity markets.The respondent from GERC stated that there is increasing interest in allowing franchisee companies to develop renewable energy microgrids in rural areas.Additionally,he added that private companies can be incentivized to install renewable energy by allowing for price differentiation between different consumers.Mr.Swain from GRIDCO provided the perspective of government-owned generation companies.He stated that there has been progress in expanding renewable energy generation capacity,due to support from both the central and state government.For instance,due to a low available solar/wind gradient,the cost of solar and wind production in Odisha is high.The government has been offering incentives in the form of waiving off wheeling charges,electricity duty,and transmission charge concessions to keep the price low.However,grid stability remains a challenge,and the state wishes to have investments in renewable energy storage technologies,especially pumped hydro storage.B.Institutional ChallengesSeveral institutional challenges can be addressed through effective policy interventions.These include land acquisition,limited institutional capacity,and regulatory awareness.The official from BSES stated that the type of city and land availability for infrastructure improvements is a key consideration when companies are deciding to bid for areas,since the cost of building infrastructure is difficult in certain places due to differences in population density and land availability.The government can ease the process of land acquisition to incentivize companies to work in such areas.Corporate disputes between regulatory bodies and companies often lead to a capital crunch for the firms.These are accentuated by limited institutional capacity and the existing regulatory model.For instance,in 2016,Torrent Power filed a case before the Appellate Tribunal for Electricity(APTEL)challenging GERCs order for revising the regulatory charge down by roughly 60 percent.APTEL in turn referred the case back to GERC,which maintained its original position.While Torrent Power reserves the right to appeal to the Supreme Court,an expansion of institutional capacity would allow quicker reprieve to potential private sector partners.Another example of limited institutional capacity is the delay by state regulators in implementing the“Automatic Pass-Through Model.”Torrent Power states in its 2022 annual report that even as the Ministry of Power came up with the Automatic Pass-Through Model to enable distribution companies to pass on the increase in fuel prices through tariffs,the Gujarat Electricity Regulatory Commission(GERC)had yet to come up with guidelines to implement it.Mr.Kanoria added that the central government was taking steps in the right direction.For instance,he mentioned that the 2022 Draft Electricity(Amendment)Rules require utilities to revise tariffs monthly to reflect a change in power purchase costs.102 However,it remains to be seen whether the bill will pass and,if so,how states will respond to it.Indias Private Power Market|38The official from Adani Power stated that both the government and companies should focus on increasing competition in the sector.He argued that it is imperative for customer centricity that different companies be allowed to set up their own infrastructure and allow customers to chooseakin to airlines and telecom providers.He highlighted that there is increased interest from the central government in increasing competition in the sector.The respondent from GERC concurred,adding that the commission values competition over efficiency.He added that the government tries to bring in private players in areas where there might be a natural government monopoly,such as infrastructure development.Ultimately,the goal is to increase competition and create supply-based tariffs.Finally,the respondent from BSES claimed that there is a lack of regulatory awareness.The government in Delhi makes promises such as 24/7 power and consumer protection;however,discoms are often left out of the loop,and this can be a problem.More interaction between the government and private providers can thus be beneficial.Table 5:Checklist for Discom PrivatizationPhaseItemPre-bidding considerationsChoosing area of operationsChoosing models of operationsEvaluating existing performanceAssessing sociopolitical factors such as labor unionsBidding considerationsManaging potential government bailouts/incentivesEnforcing proper financial/operational data auditingSetting corporate governance standardsLaying clear operational expectations during contract negotiationsPost-bidding considerationsRunning mandatory performance assessments of utilitySupporting easy transition with employee unionsManaging existing customers through confidence buildingSupporting collection and billing efforts through help in enforcementProviding incentives for long-term capital expenditure investmentsSupporting renewable energy integration through green tariff approvals and other meansRichard Rossow and Akshat Singh|39About the AuthorsRichard Rossow is a senior adviser and holds the Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies(CSIS).In this role,he helps frame and shape policies to promote greater business and economic engagement between the two countries,with a unique focus on tracking and engaging Indian states.He has been working on U.S.-India relations for over 25 years.He joined CSIS in 2014 after a long career in a range of private sector roles focused on India.Prior to CSIS,he served as director for South Asia at McLarty Associates,leading the firms work for clients in India and the neighboring region,and he retains his affiliation with the firm.From 2008 to 2012,Mr.Rossow was with New York Life Insurance company,most recently as head of international governmental affairs,where he developed strategic plans for the companys public policy and global mergers and acquisitions work and helped manage the firms policy issues in India.From 1998 to 2008,Mr.Rossow served as deputy director of the U.S.-India Business Council(USIBC),the worlds leading advocacy group on behalf of strengthening economic ties between the United States and India.While at USIBC,he managed the councils policy groups in the energy,information technology,insurance,media and entertainment,and telecommunications sectors.Mr.Rossow received his BA from Grand Valley State University in Michigan.Akshat Singh is a research associate with the Chair in U.S.-India Policy Studies at CSIS.In this role,he works on promoting U.S.-India commercial and economic engagement.In addition to handling publications and external relations for the program,Akshat provides support on projects relating to micro,small,and medium enterprises(MSMEs),clean energy,and defense.Akshat previously interned with the Chair.Prior to joining CSIS,Akshat served as the policy&communications associate at the Governance Lab(GOV/LAB)of the Massachusetts Institute of Technology(MIT),Indias Private Power Market|40where he supported the labs work on promoting innovative governance policies in the Global South.Akshat has also served as an expansion consultant for a New York-based fintech startup,where he worked on improving financial literacy and access to financial institutions for women and other underrepresented groups in South Asia.He also served as a media consultant for a New Delhi-based think tank.Additionally,Akshat has worked on health policy at the Cato Institute and on U.S.-India commercial relations at McLarty Associates.Akshat graduated with a dual BA degree from Columbia University in New York,where he specialized in economics,and Sciences Po in Paris,where he specialized in politics and government.Akshat has native proficiency in Hindi and working proficiency in French.Richard Rossow and Akshat Singh|41Appendix 1Indias History with Discom Reforms1995:ODISHA ELECTRICITY REFORMS ACTThe Odisha Electricity Reforms Act in 1995 marks the first significant structural reform undertaken by a government in India.The reforms were initiated against the backdrop of consistently poor performance by the Orissa State Electricity Board(OSEB).103 AT&C rates hovered around 50 percent in the state between 1991 and 1992,and the board required regular capital infusions by the state government.When subsidy disbursals were delayed,the gap between peak demand and supply grew to 45 percent.Due to the poor performance of the OSEB,the World Bank withdrew support from a pending hydropower project in 1991,contingent on significant power reforms.104The government of Odisha responded to this by introducing the Electricity Reforms Act,which unbundled and corporatized OSEB.105 The objective of the reforms was threefold:first,removing government control from electricity boards;second,introducing competition in the sector;and third,attracting private sector investment.The assets,liabilities,staff,and statutory obligations of OSEB were transferred to successor companies as per OER Act,1995.The verticals of generation,transmission,and distribution were separated.Hydropower generation stations were transferred to Odisha Hydro Power Corporation(OHPC).Transmission and distribution businesses were transferred to GRIDCO.OHPC and GRIDCO began operations on April 1,1996,as government-owned entities.In 1998,the distribution business was broken down into four zones and given to two private distribution companies:Applied Energy Services(AES)and Bombay Suburban Electric Supply Limited(BSES).Indias Private Power Market|421998:ELECTRICITY REGULATORY COMMISSION ACTThe Odisha reforms were followed by the 1998 Electricity Regulatory Commissions Act.106 A joint conference of all state chief ministers identified political interference as a major hindrance to the growth of the energy sector.To this end,the act sanctioned the creation of State Electricity Regulatory Commissions(SERC)with the power to set tariffs.Much before that,in August 1996,the Orissa Electricity Regulatory Commission(OERC)(later changed to Odisha Electricity Regulatory Commission)was established as the first Electricity Regulatory Commission in India.2001:ACCELERATED POWER DEVELOPMENT PROGRAMME SCHEME(APDP)Worried about the cumbersome performance by state utilities,the central government launched the APDP in 2001.107 The scheme had a corpus of 1000 crore($121 million)which was to be disbursed as additional Central Plan Assistance to State Governments under the 2001 annual budget.Even after disbursing three times the original intended amount,however,the plan was seen as a failure.High commercial losses,too many involved procedures,and a focus on input-based instead of performance-based disbursals were seen as challenges.1082001:STATE ELECTRICITY BOARDS(SEB)BAILOUTIn 2001,the central government decided to provide a bailout of roughly$7.4 billion to SEBs,with the presumption that a one-time package would allow the boards to start with a“clean slate.”109 The bailout converted 50 percent of the outstanding debt into state government bonds and waived off the remaining debt altogether.However,even as SEBs started the next financial year,the debt quickly accumulated again.2003:ELECTRICITY ACTThe objective of the 2003 Electricity Act was threefold:first,to establish national and state-level regulatory bodies for the rationalization of tariffs and subsidies;second,to streamline the transmission and sale of power;and third,to introduce the concept of distribution“franchising.”110 While many of the intended reforms had mixed success,the concept of discom franchisees struck a chord with several governments.111 This opened the floodgate of governments implementing the franchising model,with Bhiwandi in Maharashtra taking the lead.1122003:ACCELERATED POWER DEVELOPMENT REFORMS PROGRAMME(APDRP)The APDRP was initiated to overcome the challenges of the APDP scheme.113 The idea was to streamline the disbursal process and ensure that grants were strictly tied to reforms.It was noted that access to grants should only be provided to states once they clear past dues pending with the respective State Electricity Boards,thereby creating an incentive structure for reforms.However,the APDRP scheme did not yield substantial results either.114Richard Rossow and Akshat Singh|432008:RESTRUCTURED ACCELERATED POWER DEVELOPMENT REFORMS PROGRAM(R-APDRP)The R-APDRP took the APDRP further and aimed to focus on select urban areas with a population of 30,000 people or more.115 The primary objective of the program was to reduce AT&C losses in the selected areas,with road maps for reducing the losses by 3 percent per annum for utilities with losses higher than 30 percent and by 1.5 percent for utilities with losses lower than 30 percent.R-APDRP did have an impact on improving the operational efficiency of discoms.However,it was limited.2012:FINANCIAL RESTRUCTURING PACKAGE(FRP)By 2012,the total short-term exposure of the banking sector to discoms attained an unprecedented level of approximately$18.6 billion.This was primarily being used by discoms to fund losses,and payment default seemed imminent.116 Defaults could have cascaded into a huge non-performing asset crisis for banks,and to avoid that,the government announced the Financial Restructuring Package(FRP).117Under the FRP,states took over 50 percent of pending short-term loans and converted them into government guarantee-backed bonds with a three-to five-year moratorium period and repayment over 10 years.The other 50 percent was restructured into long-term loans,with lenient repayment terms and waiver of penal interest.2015:UJWAL DISCOM ASSURANCE YOJANA(UDAY)Launched by the Ministry of Power in 2015,UDAY was the first major power reform undertaken by the Modi government after coming to power in May 2014.118 The scheme has five core objectives:financial turnaround,operational improvement,reduction in the cost of generating power,development of renewable energy,and energy efficiency and conservation.The objective was to reduce AT&C losses to 15 percent and the ACS-ARR gap to 0.The scheme aimed to address the large-scale legacy debts of discoms,which had accumulated to approximately$52.4 billion by 2014.Under the scheme,states were expected to take over 75 percent of pending discom debt and reduce the interest cost from 1415 percent to 89 percent.The remaining debt was converted by banks and financial institutions into loans with an interest rate of the banks base rate plus 0.1 percent.Sixteen states signed a comprehensive memorandum of understanding(MOU),whereas ten states and one union territory signed an operational MOU.119 The program had mixed success.By January 2019,AT&C losses had decreased to 20 percent.The ACS-ARR gap came down to 0.3 per unit by January 2019.Other areas of work such as rural feeder metering,DT metering,smart metering,feeder segregation,and electricity access to unconnected households also showed limited success and missed original targets.12020202021:STIMULUS PACKAGESIn the face of the Covid-19 pandemic,discom health worsened.The backlog of payments owed to power generators reached$18 billion.121 To address this,the government announced$13 billion to provide increased liquidity to discoms.122 In 2021,the government announced the Revamped Indias Private Power
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NIST Advanced Manufacturing Series NIST AMS 600-13 Annual Report on the U.S.Manufacturing Economy:2023 Douglas Thomas This publication is available free of charge from:https:/doi.org/10.6028/NIST.AMS.600-13 NIST Advanced Manufacturing Series NIST AMS 600-13 Annual Report on the U.S.Manufacturing Economy:2023 Douglas Thomas Applied Economics Office Engineering Laboratory This publication is available free of charge from:https:/doi.org/10.6028/NIST.AMS.600-13 November 2023 U.S.Department of Commerce Gina M.Raimondo,Secretary National Institute of Standards and Technology Laurie E.Locascio,NIST Director and Under Secretary of Commerce for Standards and Technology NIST AMS 600-13 November 2023 Certain commercial equipment,instruments,software,or materials,commercial or non-commercial,are identified in this paper in order to specify the experimental procedure adequately.Such identification does not imply recommendation or endorsement of any product or service by NIST,nor does it imply that the materials or equipment identified are necessarily the best available for the purpose.NIST Technical Series Policies Copyright,Use,and Licensing Statements NIST Technical Series Publication Identifier Syntax Publication History Approved by the NIST Editorial Review Board on October 25,2023 How to Cite this NIST Technical Series Publication Thomas,Douglas(2023)Annual Report on the U.S.Manufacturing Economy:2023.(National Institute of Standards and Technology,Gaithersburg,MD),NIST Advanced Manufacturing Series 600-13.https:/doi.org/10.6028/NIST.AMS.600-13 NIST Author ORCID iDs Douglas Thomas:0000-0002-8600-4795 NIST AMS 600-13 November 2023 i Abstract This report provides a statistical review of the U.S.manufacturing industry.There are three aspects of U.S.manufacturing that are considered:(1)how the U.S.industry compares to other countries,(2)the trends in the domestic industry,and(3)the industry trends compared to those in other countries.Keywords manufacturing;economy;supply chain;value added;statistics NIST AMS 600-13 November 2023 ii Table of Contents Preface.iv Executive Summary.v Introduction.1 Value Added.7 US Manufacturing Supply Chain.21 Employment,Compensation,Profits,and Productivity.2 Research,Innovation,and Factors for Doing Business.12 Discussion.21 References.22 Appendix A.U.S.Semiconductor Manufacturing.26 Appendix B.Additive Manufacturing.30 List of Tables Table 3.1:Supply Chain Entities and Contributions,Annual Survey of Manufactures,2021.21 Table 3.2:Direct and Indirect Manufacturing Value Added.23 Table 3.3:Imported Intermediate Manufacturing($millions).24 Table 3.4:Percent of U.S.Manufacturing Industry Supply Chain,by Country of Origin(2014).25 Table 3.5:Depreciable Assets and the Rate of Change,2017($million 2017).26 Table 3.6:Top 20%of Domestic Supply Chain Entities,Value Added.27 Table 3.7:Total Domestic Compensation for Manufacturing and its Supply Chain,by Occupation.1 Table 4.1:Employment,Annual Survey of Manufactures.2 Table 4.2:Employment by Industry(Thousands):Current Population Survey.3 Table 4.3:Manufacturing Employment(Thousands):Current Employment Statistics.3 Table 4.4:Fatal Occupational Injuries by Event or Exposure.5 Table 4.5:Total Recordable Cases of Nonfatal Injuries and Illnesses.5 Table 5.1:World Economic Forum Competitiveness Index Indicators Selection of those Relevant to Standards,Technology,and Information Dissemination Solutions,Rankings Out of 141 Countries(Lower is Better).18 Table 5.2:Rankings from the Competitive Industrial Performance Index 2021,150 Total Countries.19 Table B.1:Approximation of U.S.Shipments and Value Added of Goods Produced using Additive Manufacturing.30 NIST AMS 600-13 November 2023 iii List of Figures Figure 1.1:Illustration of Objectives Drive Inputs and Negative Externalities Down while Increasing Production Output and Product Function.2 Figure 1.2:Data Categorization for Examining the Economics of Manufacturing.3 Figure 1.3:Illustration of the Feasibility of Data Collection and Availability.6 Figure 2.1:National 25-Year Compound Annual Growth,by Country(1996 to 2021):Higher is Better.8 Figure 2.2:National 5-Year Compound Annual Growth,by Country(2016 to 2021):Higher is Better.8 Figure 2.3:Manufacturing Value Added,Top 10 Manufacturing Countries(1970 to 2021).9 Figure 2.4:Manufacturings Share of National GDP.10 Figure 2.5:Manufacturing Value Added Per Capita,Top 10 Largest Manufacturing Countries(1970 to 2021):Higher is Better.10 Figure 2.6:Manufacturing Per Capita Ranking,1970-2021:Lower is Better.11 Figure 2.7:Global Manufacturing Value Added by Industry,Top Five Producers and Rest of World(ROW)(2015)64 Countries.12 Figure 2.8:Value Added by Major Sectors,Top 10 Largest Manufacturing Countries,2020.13 Figure 2.9:Cumulative Percent Change in Value Added(2012 Chained Dollars).14 Figure 2.10:Value Added for Durable Goods by Type(billions of chained dollars),2008-2022 15 Figure 2.11:Value Added for Nondurable Goods by Type(billions of chained dollars),2008-2022:Higher is Better.15 Figure 2.12:Manufacturing Value Added by Subsector(billions of chained dollars),2005-2022.16 Figure 2.13:Current-Cost Net Stock:Private Equipment,Manufacturing(2005-2021).17 Figure 2.14:Current-Cost Net Stock:Private Structures,Manufacturing(2005-2021).18 Figure 2.15:Current-Cost Net Stock:Intellectual Property Products,Manufacturing(2005-2021).19 Figure 2.16:Current-Cost Net Stock in Manufacturing,by Type(2005-2021).20 Figure 3.1:Manufacturing Supply Chain,2021.22 Figure 4.1:Cumulative Change in Percent in Manufacturing Employment(Seasonally Adjusted)and Number of Job Openings(seasonally Adjusted),2005-2023.4 Figure 4.2:Manufacturing Fatalities and Injuries.5 Figure 4.3:Average Weekly Hours for All Employees(Seasonally Adjusted).6 Figure 4.4:Average Hourly Wages for Manufacturing and Private Industry(Seasonally Adjusted).7 Figure 4.5:Employee Compensation(Hourly).7 Figure 4.6:Inflation-Cumulative Percent Change in the Producer Price Index(Selling Price Received),2005-2023.8 Figure 4.7:Profits for Corporations.9 Figure 4.8:Nonfarm Proprietors Income.9 Figure 4.9:Manufacturing Labor Productivity Index(2012 Base Year=100).10 Figure 4.10:Manufacturing Total Factor Productivity Index.10 Figure 4.11:Output per Labor Hour(Top Ten Countries Out of 133).11 Figure 5.1:Patent Applications(Residents)per Million People,Top Ten(1990-2020).12 Figure 5.2:Research and Development Expenditures as a Percent of GDP,Top Ten.13 Figure 5.3:Manufacturing Enterprise Research and Development Expenditures.13 Figure 5.4:Researchers per Million People,Ranking.14 NIST AMS 600-13 November 2023 iv Figure 5.5:Journal Articles,Top 10 Countries.15 Figure 5.6:Merchandise Exports,Top Ten Exporters.15 Figure 5.7:IMD World Competitiveness Rankings for the US:Lower is Better(i.e.,a Rank of 1 is Better than a Rank of 64)64 countries ranked.16 Figure 5.8:World Economic Forum 2019 Global Competitiveness Index:U.S.Pillar Rankings:Lower is Better.17 Figure 5.9:Factors Impacting U.S.Business(Annual Survey of Entrepreneurs),2016.19 Figure 5.10:Made-in-Country Index,2017.20 Figure 5.11:Ipsos National Brands Index,2021.20 Preface This study was conducted by the Applied Economics Office(AEO)in the Engineering Laboratory(EL)at the National Institute of Standards and Technology(NIST).The study provides aggregate manufacturing industry data and industry subsector data to develop a quantitative depiction of the U.S.manufacturing industry.NIST AMS 600-13 November 2023 v Executive Summary This report provides a statistical review of the U.S.manufacturing industry.There are three aspects of U.S.manufacturing that are considered:(1)how the U.S.industry compares to other countries,(2)the trends in the domestic industry,and(3)the industry trends compared to those in other countries.The U.S.remains a major manufacturing nation;however,other countries are rising rapidly.Although U.S.manufacturing performs well in many respects,there are opportunities for advancing competitiveness.This will require strategic placement of resources to ensure that U.S.investments have the highest return possible.Competitiveness Manufacturing Industry Size:In 2021,there was$14.5 trillion of value added(i.e.,GDP)in global manufacturing in constant 2015 dollars.The U.S.accounted for$2.4 trillion(16.3%)in manufacturing valued added while China accounted for$4.5 trillion(30.9%).Direct and indirect(i.e.,purchases from other industries)manufacturing accounts for 24.1%of GDP.Among the ten largest manufacturing countries,the U.S.is the 4th largest manufacturing value added per capita(see Figure 2.5)and out of all countries the most recent U.S.rank is 14th,as illustrated in Figure 2.6.In 2020,China outranked the U.S.in all of 6 major subsectors(see Figure 2.8)Competitiveness Manufacturing Growth:Compound real(i.e.,controlling for inflation)annual growth in the U.S.between 1996 and 2021(i.e.,25-year growth)was 2.1%,which places the U.S.below the 50th percentile.The compound annual growth for the U.S.between 2016 and 2021(i.e.,5-year growth)was 2.2%.This puts the U.S.just above the 50th percentile,above Canada and Germany among others.Competitiveness Productivity:Labor productivity for manufacturing decreased by 1.0tween the second quarter of 2022 and the second quarter of 2023,as illustrated in Figure 4.9.The five-year compound annual growth is-0.6%.For U.S.manufacturing,total factor productivity increased 3.6%from 2020 to 2021 and has a 5-year compound annual growth rate of 0.7%,as illustrated in Figure 4.10.Productivity in the U.S.is relatively high compared to other countries.As illustrated in Figure 4.11,the U.S.is ranked ninth in output per hour among 142 countries using data from the Conference Board.In recent years,productivity growth has been negative or has come to a plateau in many countries and the U.S.seems to be following this pattern of slow growth.There are competing explanations for why productivity has slowed,such as an aging population,inequality,or other factors.A number of the explanations equate to low levels of capital investment.It is also important to note that productivity is difficult to measure and even more difficult to compare across countries.Moreover,the evidence does not seem to support any particular explanation over another as to why productivity appears to have stalled.Competitiveness Economic Environment:There is no agreed upon measure for research,innovation,and other factors for doing business,but there are a number of NIST AMS 600-13 November 2023 vi common measures that are used.The ranking of the U.S.in these measures has mixed results,ranking high in some and lower in others.For instance,the U.S.ranks 4th in patent applications per million people but ranks 17th in researchers per capita and 24th in journal article publications per capita.The IMD World Competitiveness Index,which measures competitiveness for conducting business,ranked the U.S.9th in competitiveness for conducting business and the World Economic Forum,which assesses the competitiveness in determining productivity,ranked the U.S.2nd.Note that neither of these are specific to manufacturing,though.A third index specific to manufacturing,the Deloitte Global Manufacturing Index,ranks China 1st and the U.S.2nd.The Competitive Industrial Performance Index,which measures capacity to produce and export manufactured goods;technological deepening and upgrading;and world impact,ranked the U.S.as 5th.Domestic Specifics Types of Goods Produced:The largest manufacturing subsector in the U.S.is computer and electronic products followed by chemical manufacturing and food,beverage,and tobacco products,as seen in Figure 2.12.Discrete technology products accounted for 37%of U.S.manufacturing.Domestic Specifics Economic Disruptions:From the pre-recession peak in the 4th quarter of 2007 to the 1st quarter of 2009 manufacturing declined 17 percentage points.Manufacturing didnt return to its pre-recession level until 2017.During the recent pandemic,manufacturing value added declined 17 percentage points between the third quarter of 2019 and second quarter of 2020,but returned to similar levels within a year.As of July 2023,employment was still 8.9low its 2005 level.As a result of the pandemic,between January 2005 and January 2010,manufacturing employment declined by 19.6%,as seen in Figure 4.1.Domestic Specifics Manufacturing Supply Chain Costs:High-cost supply chain industries/activities,which might pose as opportunities for advancing competitiveness,include various forms of energy production and/or transmission,various forms of transportation,the management of companies and enterprises among other items listed in Table 3.6.Domestic Specifics Manufacturing Safety,Compensation,and Profits:As illustrated in Figure 4.5,employee compensation in manufacturing,which includes benefits,has had a five-year compound annual growth of-1.0%,but remains 6.3ove total private industry compensation.In May of 2018 the average hourly wages for the total private sector exceeded that of manufacturing,which was not the case before that time.Compensation in manufacturing,which includes benefits,still exceeds that of the total private industry;however,the difference has narrowed significantly.In terms of safety in manufacturing,fatalities,injuries,and the injury rate have generally trended downward since 2002,as seen in Figure 4.2.However,there has been a slight uptick.Between 2020 and 2021,fatal occupational injuries increased 12.6%and nonfatal injuries/illnesses increased 3.2%.NIST AMS 600-13 November 2023 vii For those that invest in manufacturing,corporate profits have had a five-year compound annual growth of 10.4%,as illustrated Figure 4.7,and nonfarm proprietors income for manufacturing has had a five-year compound annual growth rate of-8.4%,as illustrated in Figure 4.8.NIST AMS 600-13 November 2023 1 Introduction Background Public entities have a significant role in the U.S.innovation process.1 The federal government has had a substantial impact in developing,supporting,and nurturing numerous innovations and industries,including the Internet,telecommunications,aerospace,semiconductors,computers,pharmaceuticals,and nuclear power among others,many of which may not have come to fruition without public support.2 Although the Defense Advanced Research Projects Agency(DARPA),Small Business Innovation Research Program(SBIR),and Advanced Technology Program(ATP)have received attention in the scholarly community,there is generally limited awareness of the governments role in U.S.innovation.The vastness and diversity of U.S.federal research and development programs along with their changing nature make them difficult to categorize and evaluate,3 but their impact is often significant.For instance,the origins of Google are rooted in a public grant through the National Science Foundation.4,5 One objective of public innovation is to enhance economic security and improve our quality of life6,which is achieved in part by advancing efficiency in which resources are consumed or impacted by production.This includes decreasing inputs,which amount to costs,and negative externalities(e.g.,environmental impacts)while increasing output,(i.e.,the products produced),and the function of the product(e.g.,the usefulness or quality of the product),as seen in Figure 1.1.In pursuit of this goal,the National Institute of Standards and Technology(NIST)has expended resources on a number of projects,such as support for the development of the International Standard for the Exchange of Product Model Data(STEP),7 which reduces the need for duplicative efforts such as re-entering design data.1 Block,Fred L and Matthew R.Keller.State of Innovation:The U.S.Governments Role in Technology Development.New York,NY;Taylor&Francis;2016.2 Wessner CW and Wolff AW.Rising to the Challenge:U.S.Innovation Policy for the Global Economy.National Research Council(US)Committee on Comparative National Innovation Policies:Best Practice for the 21st Century.Washington(DC):National Academies Press(US).2012.http:/www.ncbi.nlm.nih.gov/books/NBK100307/3 Block,Fred L and Matthew R.Keller.State of Innovation:The U.S.Governments Role in Technology Development.New York,NY;Taylor&Francis;2016.27.4 National Science Foundation.(2004).“On the Origins of Google.”https:/www.nsf.gov/discoveries/disc_summ.jsp?cntn_id=100660 5 Block,Fred L and Matthew R.Keller.State of Innovation:The U.S.Governments Role in Technology Development.New York,NY;Taylor&Francis;2016:23.6 National Institute of Standards and Technology.(2018).“NIST General Information.”http:/www.nist.gov/public_affairs/general_information.cfm 7 Robert D.Niehaus,Inc.(2014).Reassessing the Economic Impacts of the International Standard for the Exchange of Product Model Data(STEP)on the U.S.Transportation Equipment Manufacturing Industry.November 26,2014.Contract SB1341-12-CN-0084.NIST AMS 600-13 November 2023 2 Figure 1.1:Illustration of Objectives Drive Inputs and Negative Externalities Down while Increasing Production Output and Product Function Purpose of this Report The purpose of this report is to characterize U.S.innovation and industrial competitiveness in manufacturing,as it relates to the objectives illustrated in Figure 1.1.It includes tracking domestic manufacturing activity and its supply chain in order to develop a quantitative depiction of U.S.manufacturing in the context of the domestic economy and global industry.There are five aspects that encapsulate the information discussed in this report:Growth and Size:The size of the U.S.manufacturing industry and its growth rate as compared to other countries reveals the relative competitiveness of the industry.o Metrics:Value added,value added per capita,assets,and compound annual growth Productivity:It is necessary to use resources efficiently to have a competitive manufacturing industry.Productivity is a major driver of the growth and size of the industry.o Metrics:Labor productivity index,total factor productivity index,output per hour Economic Environment:A number of factors,including research,policies,and societal trends,can affect the productivity and size of the industry.NIST AMS 600-13 November 2023 3 o Metrics:Research and development expenditures as a percent of GDP,journal articles per capita,researchers per capita,competitiveness indices,inflation,patents Stakeholder Impact:Owners,employees,and other stakeholders invest their resources into manufacturing with the purpose of receiving some benefit.The costs and return that they receive can drive industry productivity and growth.However,data is limited on this topic area.o Metrics:Number of employees,compensation,safety incidents,profits,exports,hours worked Areas for Advancement:It is important to identify areas of investment that have the potential to have a high return,which can facilitate productivity and growth in manufacturing.o Metrics:High-cost supply chain components,country comparison indices Currently,this annual report discusses items related to inputs for production and outputs from production.It does not discuss negative externalities,the inputs that are used in the function of a product(e.g.,gasoline for an automobile),or the function of the product;however,these items might be included in future reports.Manufacturing metrics can be categorized by stakeholder,scale,and metric type(see Figure 1.2).Stakeholders include the individuals that have an interest in manufacturing.All the metrics in this report relate directly or indirectly to all or a selection of stakeholders.The benefits for some stakeholders are costs for other stakeholders.For Figure 1.2:Data Categorization for Examining the Economics of Manufacturing Stakeholders Owners Employees Consumers Citizens Scale Indirect Measure Direct Measure Nominal Normalized Context:Compared over time and/or between countries/industries NIST AMS 600-13 November 2023 4 instance,the price of a product is a cost to the consumer but represents compensation and profit for the producers.The scale indicates whether the metric is nominal(e.g.,the total U.S.manufacturing revenue)or is adjusted to a notionally common scale(e.g.,revenue per capita).The metric type distinguishes whether the metric measures manufacturing activities directly(e.g.,total employment)or measures those things that affect manufacturing(e.g.,research and development).These metrics are then compared over time and/or between industries to provide context to U.S.manufacturing activities.Scope and Approach There are numerous aspects one could examine in manufacturing.This report discusses a subset of stakeholders and focuses on U.S.manufacturing.Among the many datasets available,it utilizes those that are prominent and are consistent with economic standards.These criteria are further discussed below.Stakeholders:This report focuses on the employees and the owners/investors,as the data available facilitates examining these entities.Future work may move toward examining other stakeholders in manufacturing,such as the consumers and general public.Geographic Scope:Many change agents are concerned with a certain group of people or organizations.Since NIST is concerned with U.S.innovation and competitiveness,this report focuses on activities within national borders.In a world of globalization,this effort is challenging,as some of the parts and materials being used in U.S.-based manufacturing activities are imported.The imported values are a relatively small percentage of total activity,but they are important in regard to a firms production.NIST,however,promotes U.S.innovation and industrial competitiveness;therefore,consideration of these imported goods and services are outside of the scope of this report.Standard Data Categorization:Domestic data in the U.S.tends to be organized using NAICS codes,which are the standard used by federal statistical agencies classifying business establishments in the United States.NAICS was jointly developed by the U.S.Economic Classification Policy Committee,Statistics Canada,and Mexicos Instituto Nacional de Estadstica y Geografa,and was adopted in 1997.NAICS has several major categories each with subcategories.Historic data and some organizations continue to use the predecessor of NAICS,which is the Standard Industrial Classification system(SIC).NAICS codes are categorized at varying levels of detail.The broadest level of detail is the two-digit NAICS code,which has 20 categories.More detailed data is reported as the number of digits increase;thus,three-digit NAICS provide more detail than the two-digit and the four-digit provides more detail than the three-digit.The maximum is six digits.Sometimes a two,three,four,or five-digit code is followed by zeros,which do not represent categories.They are null or place holders.For example,the code 336000 represents NAICS 336.International data tends to be in the International Standard Industrial Classification(ISIC)version 3.1,a revised United Nations system for classifying economic data.Manufacturing is broken into 23 major categories(ISIC 15 through 37),with additional subcategorization.This data categorization works similar to NAICS in that additional digits represent additional detail.NIST AMS 600-13 November 2023 5 Data Sources:Thomas(2012)explores a number of data sources for examining U.S.manufacturing activity.8 This report selects from sources that are the most prominent and reveal the most information about the U.S.manufacturing industry.These data include the United Nations Statistics Divisions National Accounts Main Aggregates Database and the U.S.Census Bureaus Annual Survey of Manufactures,among others.Because the data sources are scattered across several resources,there are differences in what yearly data is available for a particular category or topic.In each case,the most-up-to-date and available information is provided for the relevant category.Data Limitations:Like all collections of information,the data on manufacturing has limitations.In general,there are 3 aspects to economic data of this type:1)breadth of the data,2)depth of the data,and 3)the timeliness of the data.The breadth of the data refers to the span of items covered,such as the number of countries and years.The depth of the data refers to the number of detailed breakouts,such as value added,expenditures,and industries.In general,breadth and depth are such that when the number of items in each are multiplied together it equals the number of observations in the dataset for a particular time period.For instance,if you have value added data on 5 industries for 20 countries for a single year,then you would have 100 observations(i.e.,5 x 20=100).The timeliness of the data refers to how recently the data was released.For instance,is the data 1 year old or 5 years old at release.In general,data can perform well in 2 of these 3 criteria,but it is less common to perform well on all 3 due to feasibility of data collection(see Figure 1.3).Moreover,in this report there is data that is very recent(timeliness)and spans numerous subsectors(depth),but it only represents the United States.On the other hand,there is data that spans multiple countries(breadth)and subsectors of manufacturing(depth);however,this data is from several years ago.Fortunately,industry level trends change slowly;thus,the data may not be from the most recent years,but it is still representative.8 Thomas,Douglas S.(2012).The Current State and Recent Trends of the U.S.Manufacturing Industry.NIST Special Publication 1142.http:/nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.1142.pdf NIST AMS 600-13 November 2023 6 Figure 1.3:Illustration of the Feasibility of Data Collection and Availability Timeliness Older Newer Breadth Deep Shallow Narrow Broad More Feasible Less feasible NIST AMS 600-13 November 2023 7 Value Added Value added is the primary metric used to measure economic activity.It is defined as the increase in the value of output at a given stage of production;that is,it is the value of output minus the cost of inputs from other establishments.9 The primary elements that remain after subtracting inputs is taxes,compensation to employees,and gross operating surplus;thus,the sum of these also equal value added.Gross operating surplus is used to calculate profit,which is gross operating surplus less the depreciation of capital such as buildings and machinery.The sum of all value added for a country is that nations Gross Domestic Product(GDP).International Comparison There are a number of sources of international estimates of value added for manufacturing.The United Nations Statistics Division National Accounts Main Aggregates Database has a wide-ranging dataset that covers a large number of countries over a significant period of time.In 2021,there was$14.5 trillion of value added(i.e.,GDP)in global manufacturing in constant 2015 dollars,which is 17.5%of the value added by all industries($82.7 trillion),according to the United Nations Statistics Division.Since 1970,manufacturing ranged between 13.7%and 17.5%of global GDP.The top 10 manufacturing countries accounted for$10.4 trillion or 71.7%of global manufacturing value added:China(30.9%),United States(16.3%),Japan(6.1%),Germany(4.9%),South Korea(3.2%),India(3.0%),United Kingdom(2.2%),Italy(1.9%),France(1.7%),and Indonesia(1.5%).10 As seen in Figure 2.1,U.S.compound real(i.e.,controlling for inflation)annual growth between 1996 and 2021 was 2.1%,which places the U.S.below the 50th percentile.This growth exceeded that of Germany,France,Canada,Japan,and Australia;however,it is slower than that for the world(3.8%)and that of many emerging economies.It is important to note that emerging economies can employ idle or underutilized resources and adopt technologies that are already proven in other nations to achieve high growth rates.Developed countries are already utilizing resources and are employing advanced technologies;thus,comparing U.S.growth to the high growth rates in China or India has limited meaning.As seen in Figure 2.2,the compound annual growth for the U.S.between 2016 and 2021 was 2.2%.This puts the U.S.just above the 50th percentile above Canada and Germany among others but still below the world growth of 2.9%.As seen in Figure 2.3,among the 10 largest manufacturing nations,U.S.manufacturing value added,as measured in constant 2015 dollars,is the second largest.In current 9 Dornbusch,Rudiger,Stanley Fischer,and Richard Startz.(2000).Macroeconomics.8th ed.London,UK:McGraw-Hill.10 United Nations Statistics Division.(2021).“National Accounts Main Aggregates Database.”http:/unstats.un.org/unsd/snaama/Introduction.asp NIST AMS 600-13 November 2023 8 Figure 2.1:National 25-Year Compound Annual Growth,by Country(1996 to 2021):Higher is Better Data Source:United Nations Statistics Division.(2023).“National Accounts Main Aggregates Database.”http:/unstats.un.org/unsd/snaama/Introduction.asp Figure 2.2:National 5-Year Compound Annual Growth,by Country(2016 to 2021):Higher is Better Data Source:United Nations Statistics Division.(2023).“National Accounts Main Aggregates Database.”http:/unstats.un.org/unsd/snaama/Introduction.asp Italy,0.1%Australia,0.5%Japan,0.6nada,0.6%France,1.1%Germany,1.6%Mexico,1.9%United Kingdom,2.0%United States,2.1%World,3.8%India,6.3%Ireland,8.2%-10.0%-5.0%0.0%5.0.0.0%th Percentile50th Percentile75th Percentile100th PercentileFrance,-0.5%Japan,-0.5nada,-0.1%Germany,-0.1%Italy,0.5%Mexico,0.6%Australia,0.8%United States,2.2%World,2.9%United Kingdom,3.3%India,3.8%China(mainland),5.7%Ireland,12.2%-40.0%-30.0%-20.0%-10.0%0.0.0 .00.0%th Percentile50th Percentile75th Percentile100th PercentileNIST AMS 600-13 November 2023 9 Figure 2.3:Manufacturing Value Added,Top 10 Manufacturing Countries(1970 to 2021)dollars,the U.S.produced$2.4 trillion in manufacturing valued added while China produced$4.5 trillion.As illustrated in Figure 2.4,U.S.manufacturing value added was 11.5%of national GDP in 2021.In comparison,Germanys manufacturing industry was 22.2%,China was 28.4%,and Japan was 20.6%with the world average being 17.5%.Although the U.S.is below average,this can be somewhat deceiving,as 2021 U.S.GDP per capita($61 103)is significantly higher than both Japan($34 603)and Germany($38 217)along with most other countries,which makes the denominator disproportionally larger when calculating the proportion of the economy that manufacturing represents.Thus,a more meaningful measure might be manufacturing GDP(i.e.,value added)per capita.Among the ten largest manufacturing countries,the U.S.has the 4th largest manufacturing value added per capita,as seen in Figure 2.5.Out of all countries the U.S.ranks 14th,as seen in Figure 2.6.Since 1970,the U.S.ranking has ranged between 11th and 16th.It is important to note that there are varying means for adjusting data that can change the rankings slightly.The UNSD data uses market exchange rates while others might use purchasing power parity(PPP)exchange rates.PPP is the rate that a currency in one country would have to be converted to purchase the same goods and services in another country.The drawback of PPP is that it is difficult to measure and methodological questions have been raised about some surveys that collect IndonesiaFranceItalyUnited KingdomIndiaSouth KoreaGermanyJapanUnited StatesChina(mainland)05001000150020002500300035004000450019701973197619791982198519881991199419972000200320062009201220152018$Billions 2015Data Source:United Nations Statistics Division.(2023).“National Accounts Main Aggregates Database.”http:/unstats.un.org/unsd/snaama/Introduction.asp NIST AMS 600-13 November 2023 10 Figure 2.4:Manufacturings Share of National GDP Data Source:United Nations Statistics Division.(2023).“National Accounts Main Aggregates Database.”http:/unstats.un.org/unsd/snaama/Introduction.asp Figure 2.5:Manufacturing Value Added Per Capita,Top 10 Largest Manufacturing Countries(1970 to 2021):Higher is Better 0.0%5.0.0.0 .0%.00.05.07019731976197919821985198819911994199720002003200620092012201520182021Manufacturing Share of National GDPWorldUnited StatesGermanyJapanChinaIndiaMexicoChina(mainland)FranceUnited KingdomItalyUnited StatesJapanGermanySouth Korea01000200030004000500060007000800090001970197419781982198619901994199820022006201020142018$2015 per CapitaData Source:United Nations Statistics Division.(2023).“National Accounts Main Aggregates Database.”http:/unstats.un.org/unsd/snaama/Introduction.asp NIST AMS 600-13 November 2023 11 data for these calculations.11 Market based rates tend to be relevant for internationally traded goods;12 therefore,this report often utilizes these rates.In terms of subsectors of manufacturing,the U.S.ranks 1st in 7 industries out of 16 total,as seen in Figure 2.7 while China was the largest for the other industries.Since this data covers multiple industries for multiple years(i.e.,it has breadth and depth),it is a few years old(i.e.,2015).Nonetheless,it likely provides a close representation,as national activity generally moves slowly.A more recent estimate of manufacturing value added by subsector and country is provided in Figure 2.8,which provides estimates for 2020;however,the subsectors are broader than those in Figure 2.7.Data for some countries was not available,however,76 countries have data for all six subsectors.These countries represent 91.3%of global manufacturing.The data in Figure 2.8 shows the U.S.being the second largest country in terms of valued added for every subsector except textiles and clothing,where it is the fourth largest.China is the largest for all subsectors.Figure 2.6:Manufacturing Per Capita Ranking,1970-2021:Lower is Better Data Source:United Nations Statistics Division.(2023).“National Accounts Main Aggregates Database.”http:/unstats.un.org/unsd/snaama/Introduction.asp 11 Callen,Tim.March.(2007).PPP Versus the Market:Which Weight Matters?Finance and Development.Vol 44 number 1.http:/www.imf.org/external/pubs/ft/fandd/2007/03/basics.htm 12 Ibid.051015202519701972197419761978198019821984198619881990199219941996199820002002200420062008201020122014201620182020Manufacturing GDP per Capita Ranking(Lower is Better)GermanyJapanUnited StatesNIST AMS 600-13 November 2023 12 Figure 2.7:Global Manufacturing Value Added by Industry,Top Five Producers and Rest of World(ROW)(2015)64 Countries Source:OECD.(2020)STAN Input-Output Tables.https:/stats.oecd.org/02004006008001000120014001600Food,beverages and tobacco-US Rank:2Chemicals and pharmaceuticals-US Rank:1Computer,electronic and optical products-US Rank:1Machinery and equipment,nec-US Rank:2Motor vehicles,trailers and semi-trailers-US Rank:1Basic metals-US Rank:3Fabricated metal products-US Rank:1Other;repair and installation -US Rank:2Textiles,apparel,and leather -US Rank:4Coke and refined petroleum products-US Rank:1Electrical equipment-US Rank:3Rubber and plastic products-US Rank:2Other non-metallic mineral products-US Rank:2Paper products and printing-US Rank:1Other transport equipment-US Rank:1Wood and products of wood -US Rank:2$BillionsROWCAN:CanadaTUR:TurkeyFRA:FranceMEX:MexicoIDN:IndonesiaRUS:Russian FederationTWN:Chinese TaipeiITA:ItalyGBR:United KingdomIND:IndiaKOR:KoreaDEU:GermanyJPN:JapanCHN:China(Peoples Republic of)USA:United StatesNIST AMS 600-13 November 2023 13 Figure 2.8:Value Added by Major Sectors,Top 10 Largest Manufacturing Countries,2020 Note:These values were estimated using the total manufacturing valued added from the United Nations Statistics Division multiplied by the percent of manufacturing value added that each sector represents from the World Bank.Note:Data for all six categories were available for 76 countries;thus,the estimates do not reflect total global production.The countries with all six categories available represent 91.3%of global manufacturing.Note:China and U.S.percentages are the percent of the total of the countries with data available.Sources:World Bank.2023.World Development Indicators.https:/data.worldbank.org/products/wdi.United Nations Statistics Division.(2023).“National Accounts Main Aggregates Database.”http:/unstats.un.org/unsd/snaama/Introduction.asp Domestic Details There are two primary methods for adjusting value added for inflation.The first is using chained dollars,which uses a changing selection of goods to adjust for inflation.The second uses an unchanging selection of goods to adjust for inflation.13 There has been some dispute about the accuracy of each for some goods.This report presents value added in chained dollars.Previous reports included both;however,the differences are often minor.13 Dornbusch,Rudiger,Stanley Fischer,and Richard Startz.(2000).Macroeconomics.8th ed.London,UK:McGraw-Hill.32.0100020003000400050006000Textiles and clothingChemicalsFood,beverages and tobaccoMachinery and transport equipmentMedium and high-tech manufacturingOther manufacturing$Billion OtherIndonesiaMexicoFranceItalyUnited KingdomIndiaGermanyJapanUnited StatesChinaChinaU.S.60.1%4.1&.6$.3%.8.7).7.5).5.14.6.8%NIST AMS 600-13 November 2023 14 Figure 2.9 shows the cumulative change in manufacturing,durable goods,and nondurable goods manufacturing from 2005 forward.From the pre-recession peak in the 4th quarter of 2007 to the 1st quarter of 2009 manufacturing declined 17 percentage points.Manufacturing didnt return to its pre-recession level until 2017.During the recent pandemic,manufacturing value added declined 17 percentage points between the third quarter of 2019 and second quarter of 2020,but returned to similar levels within a year.Manufacturing value added in the U.S.in 2022 was$2.3 trillion in chained 2012 dollars or 11.4%of GDP.14 Using chained dollars from the BEA shows that manufacturing increased by 0.2tween 2021 and 2022.Figure 2.10 and Figure 2.11 provide more detailed data on durable and nondurable goods within the manufacturing industry.As seen in Figure 2.10,long term growth in durable goods is largely driven by computer and electronic products,which should be viewed with some caution,as there has been some dispute regarding the price adjustments for this sector,which affects the measured growth.Recall that,as of 2015,the U.S.was also the largest producer of computer and electronic products.As seen in Figure 2.11,in 2022 only two of eight non-durable sectors were above their 2008 value.The largest manufacturing subsector in the U.S.is computer and electronic products followed by chemical manufacturing;food,beverage,and tobacco products;and motor vehicles,trailers,and parts,as seen in Figure 2.12.Note that this is based on chained dollars.Adjustments using other methods or the nominal value can have slightly different results.Figure 2.9:Cumulative Percent Change in Value Added(2012 Chained Dollars)Bureau of Economic Analysis.(2023a).“Industry Economic Accounts Data.”http:/www.bea.gov/iTable/index_industry_gdpIndy.cfm 14 Bureau of Economic Analysis.(2021)“Industry Economic Accounts Data.”http:/www.bea.gov/iTable/index_industry_gdpIndy.cfm-20.0%-10.0%0.0.0 .00.0.0P.0.0 05200620072008200920102011201220132014201520162017201820192020202120222023Percent Change in Value AddedGross domestic productManufacturingDurable goodsNondurable goodsNIST AMS 600-13 November 2023 15 Figure 2.10:Value Added for Durable Goods by Type(billions of chained dollars),2008-2022 Data Source:Bureau of Economic Analysis.(2023a)“Industry Economic Accounts Data.”http:/www.bea.gov/iTable/index_industry_gdpIndy.cfm Figure 2.11:Value Added for Nondurable Goods by Type(billions of chained dollars),2008-2022:Higher is Better Data Source:Bureau of Economic Analysis.(2023a)“Industry Economic Accounts Data.”http:/www.bea.gov/iTable/index_industry_gdpIndy.cfm 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Miscellaneous manufacturing7981848281798178838690898495100 Furniture and related products312323232224262728282928262826 Other transportation equipment124121124130127130133139137141146151132143157 Motor vehicles,trailers,and parts1004387110116121125123129134140141128170206 Elect.Equip.,appliances,components615153515257546157606258556357 Computer and electronic products196200227233241248261282291306337343350371360 Machinery147118132151153152150135124134142141130148150 Fabricated metal products151114126134138137140135131138142141127139140 Primary metals545051576670687579707077857680 Nonmetallic mineral products473839414345464646494949485048 Wood products25222325262724272829282930302802004006008001000120014001600Billions of Chained 2012 Dollars2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Plastics and rubber products656468666867677475767978747770 Chemical products338326348325305314313302315312317331336335329 Petroleum and coal products272253213176159177196199171205229226146147136 Printing and related activities433738393839393838383938323432 Paper products586156545354545553495253575749 Apparel and leather products1210111110101099988688 Textile mills,textile product mills221717151617181718171616151616 Food,beverage,tobacco products242247234227220225225235228238242254254275285020040060080010001200Billions of Chained 2012 DollarsNIST AMS 600-13 November 2023 16 Figure 2.12:Manufacturing Value Added by Subsector(billions of chained dollars),2005-2022 Data Source:Bureau of Economic Analysis.(2023a)“Industry Economic Accounts Data.”http:/www.bea.gov/iTable/index_industry_gdpIndy.cfm In addition to examining manufacturing value added,it is useful to examine the capital stock in manufacturing,as it reflects the investment in machinery,buildings,and intellectual property in the industry(see Figure 2.13,Figure 2.14,Figure 2.15,and Figure 2.16).Discrete technology manufacturing(i.e.,computer manufacturing,transportation equipment manufacturing,machinery manufacturing,and electronics manufacturing)accounts for 30%of all manufacturing equipment and 33%of structures.The 5-year compound annual growth in computer and electronic manufacturing equipment is negative;however,structures is growing at a rate of 2.4%.Recall that in 2015,the U.S.was the largest producer of these goods and,as of 2022,it is the largest subsector of U.S.manufacturing.Apparel and leather and allied products:CAG5-1%Textile mills and textile product mills:CAG5-2.1%Wood products:CAG5-0.8%Furniture and related products:CAG5-1.4%Printing and related support activities:CAG5-3.5%Nonmetallic mineral products:CAG5-0.4%Paper products:CAG5 0.2%Electrical equipment,appliances,and components:Primary metals:CAG5 2.6%Plastics and rubber products:CAG5-1.5%Miscellaneous manufacturing:CAG5 2.9%Motor vehicles,bodies and trailers,and parts:CAG5Fabricated metal products:CAG5 0.2%Machinery:CAG5 2.3%Other transportation equipment:CAG5 2.3%Petroleum and coal products:CAG5-7.9%Food and beverage and tobacco products:CAG5 3.7%Chemical products:CAG5 1.1%Computer and electronic products:CAG5 3.30100150200250300350400200520082011201420172020NOTE:CAG5=5-year compound annual growth rate(Calculated using BEA data)NOTE:Colors in each figure correspond.For instance,food/beverage is colored purple in both figures Food and Beverage12%Process24%Discrete 23%Discrete Tech41 22NIST AMS 600-13 November 2023 17 Figure 2.13:Current-Cost Net Stock:Private Equipment,Manufacturing(2005-2021)NOTE:CAG5=5-year compound annual growth rate(Calculated using BEA data)NOTE:Colors in each figure correspond.For instance,food/beverage is colored purple in both figures Adjusted using the Consumer Price Index from the Bureau of Labor Statistics Data Source:Bureau of Economic Analysis.(2023b)“Fixed Assets Accounts Tables.”https:/apps.bea.gov/iTable/iTable.cfm?ReqID=10&step=2 Apparel and leather and allied products:CAG5-5%Furniture and related products:CAG5 3.5%Textile mills and textile product mills:CAG5-2%Printing and related support activities:CAG5-2.9%Wood products:CAG5 2.1%Electrical equipment,appliances,and components:CAG5 0.5%Miscellaneous manufacturing:CAG5-1.2%Nonmetallic mineral products:CAG5-0.4%Other transportation equipment:CAG5 4.6%Plastics and rubber products:CAG5 2%Paper products:CAG5-0.1%Primary metals:CAG5 1.1%Machinery:CAG5-0.1%Petroleum and coal products:CAG5-0.5bricated metal products:CAG5 0.8%Motor vehicles,bodies and trailers,and parts:CAG5-1%Computer and electronic products:CAG5-1.9%Food and beverage and tobacco products:CAG5 2%Chemical products:CAG5 10100150200250200520082011201420172020$Billion 2021Food and Beverage13%Discrete28%Discrete Tech30%Process29 21NIST AMS 600-13 November 2023 18 Figure 2.14:Current-Cost Net Stock:Private Structures,Manufacturing(2005-2021)NOTE:CAG5=5-year compound annual growth rate(Calculated using BEA data)NOTE:Colors in each figure correspond.For instance,food/beverage is colored purple in both figures Adjusted using the Consumer Price Index from the Bureau of Labor Statistics Data Source:Bureau of Economic Analysis.(2023b)“Fixed Assets Accounts Tables.”https:/apps.bea.gov/iTable/iTable.cfm?ReqID=10&step=2 Apparel and leather and allied products:CAG5 1%Furniture and related products:CAG5 3.2%Printing and related support activities:CAG5 2.2%Textile mills and textile product mills:CAG5 1.4%Wood products:CAG5 3.7%Electrical equipment,appliances,and components:CAG5 2.2%Miscellaneous manufacturing:CAG5 3.2%Nonmetallic mineral products:CAG5 3%Plastics and rubber products:CAG5 4.8%Paper products:CAG5 3.2%Other transportation equipment:CAG5 3.5bricated metal products:CAG5 3.9%Primary metals:CAG5 3.2%Motor vehicles,bodies and trailers,and parts:CAG5 4.5%Machinery:CAG5 3.4%Petroleum and coal products:CAG5 3.1%Food and beverage and tobacco products:CAG5 4.2%Computer and electronic products:CAG5 2.4%Chemical products:CAG5 4.50100150200250Food and Beverage13%Discrete26%Discrete Tech33%Process28 21NIST AMS 600-13 November 2023 19 Figure 2.15:Current-Cost Net Stock:Intellectual Property Products,Manufacturing(2005-2021)NOTE:CAG5=5-year compound annual growth rate(Calculated using BEA data)NOTE:Colors in each figure correspond.For instance,food/beverage is colored blue in both figures Adjusted using the Consumer Price Index from the Bureau of Labor Statistics Data Source:Bureau of Economic Analysis.(2023b)“Fixed Assets Accounts Tables.”https:/apps.bea.gov/iTable/iTable.cfm?ReqID=10&step=2 Wood products:CAG5 2.6%Apparel and leather and allied products:CAG5 3%Textile mills and textile product mills:CAG5 2.9%Furniture and related products:CAG5 5.1%Printing and related support activities:CAG5 0.2%Paper products:CAG5 3.9%Plastics and rubber products:CAG5 3.4%Primary metals:CAG5 3.8%Nonmetallic mineral products:CAG5 3.8bricated metal products:CAG5 3.6%Electrical equipment,appliances,and components:CAG5 3.5%Food and beverage and tobacco products:CAG5 3.5%Miscellaneous manufacturing:CAG5 3.5%Petroleum and coal products:CAG5 3.4%Motor vehicles,bodies and trailers,and parts:CAG5 3.8%Other transportation equipment:CAG5 0.2%Machinery:CAG5 3.6%Computer and electronic products:CAG5 2.2%Chemical products:CAG5 5.300200300400500600700800900200520082011201420172020Food and Beverage2%Discrete9%Discrete Tech34%Process55 21NIST AMS 600-13 November 2023 20 Figure 2.16:Current-Cost Net Stock in Manufacturing,by Type(2005-2021)Adjusted using the Consumer Price Index from the Bureau of Labor Statistics Data Source:Bureau of Economic Analysis.(2023b)“Fixed Assets Accounts Tables.”https:/apps.bea.gov/iTable/iTable.cfm?ReqID=10&step=2 0100020003000400050006000$Billion 2021Intellectual PropertyStructuresEquipmentNIST AMS 600-13 November 2023 21 US Manufacturing Supply Chain There are many suppliers of goods and services that have a stake in manufacturing;these include resellers,providers of transportation and warehousing,raw material suppliers,suppliers of intermediate goods,and suppliers of professional services.Using data from the Annual Survey of Manufactures,15 Table 3.1 presents and Figure 3.1 maps the purchases that the manufacturing industry made for production,which is disaggregated into five Table 3.1:Supply Chain Entities and Contributions,Annual Survey of Manufactures,2021 2021 ($Billions 2021)I.Services,Computer Hardware,Software,and Other Expenditures a.Communication Services 5.5 b.Computer Hardware,Software,and Other Equipment 12.3 c.Professional,Technical,and Data Services 42.7 d.Other Expenditures 282.9 e.TOTAL 343.4 II.Refuse Removal Expenditures 15.6 III.Machinery,Structures,and Compensation Expenditures a.Payroll,Benefits,and Employment 945.3 b.Capital Expenditures:Structures(including rental)67.9 c.Capital Expenditures:Machinery/Equipment(including rental)149.2 d.TOTAL 1162.4 IV.Suppliers of Materials Expenditures a.Materials,Parts,Containers,Packaging,etc Used 3073.6 b.Contract Work and Resales 178.3 c.Purchased Fuels and Electricity 89.2 d.TOTAL 3341.2 V.Maintenance and Repair Expenditures 58.6 VI.Shipments a.Expenditures 4921.2 b.Net Inventories Shipped-71.8 c.Depreciation 194.1 d.Net Income 1036.1 E.TOTAL 6079.6 VII.Value Added estimates a.Value added calculated VI.E-VI.b-VI.A III.a 2175.6 b.ASM Value added 2789.5 c.BEA value added 2496.8 Note:Colors correspond with those in Figure 3.1 Source:U.S.Census Bureau.(2023).15 U.S.Census Bureau.(2022).“Annual Survey of Manufactures.”https:/www.census.gov/programs-surveys/asm/data/tables.html NIST AMS 600-13 November 2023 22 Figure 3.1:Manufacturing Supply Chain,2021 Data Source:U.S.Census Bureau.(2023).“Annual Survey of Manufactures.”https:/www.census.gov/programs-surveys/asm/data/tables.htmll NIST AMS 600-13 November 2023 23 categories:suppliers of services,computer hardware,software,and other costs(blue);refuse removal(gold);machinery,structures,and compensation(orange);repair of the machinery and structures(red);and suppliers of materials(green).These items all feed into the design and production of manufactured goods which are inventoried and/or shipped(gray).The depreciation of capital and net income is also included in Figure 3.1,which affects the market value of shipments.In addition to the stakeholders,there are also public vested interests,the end users,and financial service providers to be considered.Direct and Indirect Manufacturing:As previously mentioned,to achieve economy-wide efficiency improvements,researchers have suggested that“the supply chain must become the focus of policy management,in contrast to the traditional emphasis on single technologies/industries.”16 As seen in Table 3.2,there is an estimated$1939 billion in manufacturing value added with an additional$2339 billion in indirect value added from other industries for manufacturing,as calculated using input-output analysis.17 Direct and indirect manufacturing accounts for 24.1%of total GDP.In 2021,the U.S.imported approximately 20.4%of its intermediate goods,as seen in Table 3.3.As a proportion of output and imports(i.e.,a proportion of the total inputs),intermediate imports represented 12.4%.As can be seen in Table 3.3,these proportions have not changed dramatically in recent years.As seen in Table 3.4,Canada is the primary source of imported supply chain items for the U.S.with China being second.Many of the direct costs are caused by losses due to waste or defects.Unfortunately,there is limited data and information on these losses.The research that does exist is often case studies within various industries and countries,which provide only limited insight to Table 3.2:Direct and Indirect Manufacturing Value Added Value Added($Billion 2019)NAICS Description Direct Indirect Total TOTAL U.S.GDP 17 775 31-33 Total Manufacturing*1 939 2 339 4 278 333-336 Discrete Technology Products 676 680 1 356 313-323,327-332,337-339 Discrete Products 489 581 1 070 324-326 Process Products 534 1 077 1 611 311-312 Food,Beverage,and Tabaco 240 629 869*The sum of the 3 digit NAICS does not equal total manufacturing due to overlap in supply chains.Source:Thomas,Douglas.(2020).Manufacturing Cost Guide.https:/www.nist.gov/services-resources/software/manufacturing-cost-guide Note:These values are calculated by taking 2012 data and adjusting it to 2019;thus,they may not match other estimates in this report.16 Tassey Gregory.(2010)“Rationales and Mechanisms for Revitalizing U.S.Manufacturing R&D Strategies.”Journal of Technology Transfer.35.283-333.17 This analysis uses the Manufacturing Cost Guide.https:/www.nist.gov/services-resources/software/manufacturing-cost-guide NIST AMS 600-13 November 2023 24 Table 3.3:Imported Intermediate Manufacturing($millions)Year Intermediate Manufacturing*Intermediate Imports for Manufacturing*Total Manufacturing Output Intermediate Imports as a Percent of Intermediates Intermediate imports as a Percent of Total Industry Output 2006 3 299 062 697 789 5 073 606 21.2.8 07 3 557 606 729 968 5 384 729 20.5.6 08 3 690 928 841 311 5 473 777 22.8.4 09 2 809 726 538 090 4 484 832 19.2.0 10 3 219 052 673 484 4 991 727 20.9.5 11 3 721 021 841 681 5 564 423 22.6.1 12 3 838 013 839 127 5 742 330 21.9.6 13 3 942 929 818 937 5 906 561 20.8.9 14 3 972 514 827 537 5 992 760 20.8.8 15 3 572 474 694 664 5 670 789 19.4.2 16 3 440 157 641 801 5 513 136 18.7.6 17 3 533 815 681 409 5 701 973 19.3.0 18 3 782 706 748 939 6 086 825 19.8.3 19 3 686 526 695 876 6 025 842 18.9.5 20 3 259 481 593 649 5 473 588 18.2.8 21 3 821 920 778 621 6 289 922 20.4.4%Source Data:Bureau of Economic Analysis.(2023c).Input-Output Accounts Data.https:/www.bea.gov/industry/input-output-accounts-data*Commodities used by industries*From the import matrix U.S.national trends.Tabikh estimates from survey data in Sweden that the percent of planned production time that is downtime amounts to 13.3%.18 According to NISTs Manufacturing Cost Guide,downtime amounts to 8.3%of planned production time and amounts to$245 billion for discrete manufacturing(i.e.,NAICS 321-339 excluding NAICS 324 and 325).19 In addition to downtime,defects result in additional losses.The Manufacturing Cost Guide estimates that defects amount to between$32.0 billion and$58.6 billion for discrete manufacturing(i.e.,NAICS 321-339 excluding NAICS 324 and 325),depending on the method used for estimation.20 The USGS estimates that 15%of steel mill products end up as scrap in the manufacturing process.21 Other sources cite that at least 25%of liquid steel and 40%of liquid aluminum does not make it into a finished product due primarily to metal quality 18 Tabikh,Mohamad.(2014).Downtime Cost and Reduction Analysis:Survey Results.Master Thesis.KPP321.Mlardalen University.http:/www.diva-portal.org/smash/get/diva2:757534/FULLTEXT01.pdf 19 Thomas,Douglas.(2020).Manufacturing Cost Guide.https:/www.nist.gov/services-resources/software/manufacturing-cost-guide 20 Thomas,Douglas.(2020).Manufacturing Cost Guide.https:/www.nist.gov/services-resources/software/manufacturing-cost-guide 21 Fenton,M.D.(2001)“Iron and Steel Recycling in the United States in 1998.”Report 01-224.U.S.Geological Survey:3.https:/pubs.usgs.gov/of/2001/of01-224/NIST AMS 600-13 November 2023 25 Table 3.4:Percent of U.S.Manufacturing Industry Supply Chain,by Country of Origin(2014)Country US Manufacturing Supply Chain(percent)USA 83.0 CAN 3.1 CHN 1.8 MEX 1.5 DEU 0.8 JPN 0.8 GBR 0.5 KOR 0.5 RUS 0.4 ROW 7.6 Source:Thomas,Douglas.(2020).Manufacturing Cost Guide.https:/www.nist.gov/services-resources/software/manufacturing-cost-guide (25%of steel loss and 40%of aluminum loss),the shape produced22(10%to 15%of loss),and defects in the manufacturing processes(5%of loss).23 Material losses mean there is the possibility of producing the same goods using less material,which could have rippling effects up and down the supply chain.There would be reductions in the burden of transportation,material handling,machinery,inventory costs,and energy use along with many other activities associated with handling and altering materials.Another source of losses can be found in cybercrime where criminals can disrupt production and/or steal intellectual property.The Manufacturing Cost Guide estimates that manufacturers lost between$8.9 billion and$38.6 billion due to cybercrime.Manufacturing costs also accumulate in assets such as buildings,machinery,and inventory.In addition to the estimates provided in Figure 2.13,Figure 2.14,Figure 2.15,and Figure 2.16,data on assets is published periodically in the Economic Census.As seen in Table 3.5,total depreciable assets amount to$3.4 trillion with$2.7 trillion being machinery and equipment.22 The steel and aluminum industry often produce standard shapes rather than customized shapes tailored to specific products.This results in needing to cut away some portion of material,which ends up as scrap.23 Allwood,J.M.&Cullen,J.M.(2012).Sustainable Materials with Both Eyes Open.Cambridge Ltd.185.http:/ AMS 600-13 November 2023 26 Table 3.5:Depreciable Assets and the Rate of Change,2017($million 2017)Buildings and Structures Machinery and Equipment Total Gross value of depreciable assets(acquisition costs),beginning of year 661 841*2 645 636*3 307 476 Capital Expenditures(added to assets)33 705 134 733 168 438 Retirements(subtracted from assets)11 597*46 358*57 955 Gross value of depreciable assets(acquisition costs,end of year)683 949 2 734 011 3 417 960 Percent of depreciable assets that are new(end of year)4.9%*Assumes that the proportions of buildings and structures or machinery and equipment are the same as that for capital expenditures.Source:U.S.Census Bureau.(2020)2017 Economic Census.https:/www.census.gov/data/tables/2017/econ/economic-census/naics-sector-31-33.html A frequently invoked axiom suggests that roughly 80%of a problem is due to 20%of the cause,a phenomenon referred to as the Pareto principle.24 That is,a small portion of the cause accounts for a large portion of the problem.Joseph Juran proposed that the Pareto principle could be applied to an organizations operations.25 For instance,80%of defects would be the result of 20%of the causes.Identifying that small portion of the cause(i.e.,the 20%)can facilitate making large efficiency improvements in operations.Manufacturing industry NAICS codes are categories of production activities.A larger industry(i.e.,one in the top 20%)suggests that there is more of a particular type of activity and/or the activities are more costly;thus,an increase in productivity in a larger industry would either reduce a costly activity or reduce an activity that occurs at high frequency.The result is a greater impact than might otherwise be achieved.Additionally,statistical evidence suggests that a dollar of research and development in a large cost supply chain entity has a higher return on investment than a small cost one.26 Table 3.6 provides a list of the top 20%of domestic supply chain industries for U.S.manufacturing by value added.Various forms of energy production and/or transmission appear in the top 20%.Various forms of transportation are also present along with the management of companies and enterprises.Table 3.7 provides compensation by occupation and management occupations is the 2nd largest.24 Hopp,Wallace J.and Mark L.Spearman.(2008).Factory Physics.Third Edition.(Waveland Press,Long Grove,IL.25 Six Sigma Daily.“Remembering Joseph Juran And His Lasting Impact on Quality Improvement.”https:/ Thomas,Douglas.(2018).The Effect of Flow Time on Productivity and Production.National Institute of Standards and Technology.Advanced Manufacturing Series 100-25.https:/nvlpubs.nist.gov/nistpubs/ams/NIST.AMS.100-25.pdf NIST AMS 600-13 November 2023 27 Table 3.6:Top 20%of Domestic Supply Chain Entities,Value Added Code Industry Description$Billion 2019 Code Industry Description$Billion 2019 324110 Petroleum refineries 596.1 482000 Rail transportation 26.6 211000 Oil and gas extraction 516.1 325180 Other Basic Inorganic Chemical Manufacturing 26.0 550000 Management of companies and enterprises 128.5 112A00 Animal production,except cattle and poultry and eggs 26.0 325412 Pharmaceutical preparation manufacturing 83.0 336390 Other Motor Vehicle Parts Manufacturing 25.8 336112 Light truck and utility vehicle manufacturing 78.5 339112 Surgical and medical instrument manufacturing 25.7 424A00 Other nondurable goods merchant wholesalers 77.5 533000 Lessors of nonfinancial intangible assets 25.3 336411 Aircraft manufacturing 76.6 334510 Electromedical and electrotherapeutic apparatus manufacturing 24.7 423A00 Other durable goods merchant wholesalers 68.9 522A00 Nondepository credit intermediation and related activities 24.7 221100 Electric power generation,transmission,and distribution 63.4 322120 Paper mills 24.6 331110 Iron and steel mills and ferroalloy manufacturing 59.8 3259A0 All other chemical product and preparation manufacturing 24.4 325110 Petrochemical manufacturing 57.2 5241XX Insurance carriers,except direct life 24.1 484000 Truck transportation 56.7 1111A0 Oilseed farming 24.0 531ORE Other real estate 55.3 486000 Pipeline transportation 23.9 325190 Other basic organic chemical manufacturing 54.9 541200 Accounting,tax preparation,bookkeeping,and payroll services 23.7 312200 Tobacco product manufacturing 48.7 21311A Other support activities for mining 23.3 336412 Aircraft engine and engine parts manufacturing 48.6 311810 Bread and bakery product manufacturing 22.5 334413 Semiconductor and related device manufacturing 48.1 333120 Construction machinery manufacturing 22.4 334511 Search,detection,and navigation instruments manufacturing 42.7 561700 Services to buildings and dwellings 22.1 326190 Other plastics product manufacturing 42.6 230301 Nonresidential maintenance and repair 21.4 323110 Printing 41.8 322210 Paperboard container manufacturing 21.4 52A000 Monetary authorities and depository credit intermediation 38.7 339113 Surgical appliance and supplies manufacturing 21.3 424700 Petroleum and petroleum products 37.5 332310 Plate work and fabricated structural product manufacturing 21.2 325211 Plastics material and resin manufacturing 36.9 33291A Valve and fittings other than plumbing 20.8 1111B0 Grain farming 36.3 423600 Household appliances and electrical and electronic goods 20.3 1121A0 Cattle ranching and farming 34.4 333415 Air conditioning,refrigeration,and warm air heating equipment 20.1 423800 Machinery,equipment,and supplies 33.1 331200 Steel product manufacturing from purchased steel 19.6 334220 Broadcast and wireless communications equipment 31.1 325620 Toilet preparation manufacturing 19.6 561300 Employment services 31.0 333130 Mining and oil and gas field machinery manufacturing 19.4 336111 Automobile manufacturing 30.1 524200 Insurance agencies,brokerages,and related activities 19.2 541300 Architectural,engineering,and related services 29.4 332320 Ornamental and architectural metal products manufacturing 19.1 325610 Soap and cleaning compound manufacturing 29.0 333111 Farm machinery and equipment manufacturing 19.1 424400 Grocery and related product wholesalers 28.6 33441A Other electronic component manufacturing 19.0 336413 Other aircraft parts and auxiliary equipment manufacturing 28.5 326110 Plastics packaging materials and unlaminated film and sheet manufacturing 18.9 325310 Fertilizer manufacturing 28.5 332800 Coating,engraving,heat treating and allied activities 18.5 325414 Biological product(except diagnostic)manufacturing 28.4 331490 Nonferrous metal(except copper and aluminum)18.1 541100 Legal services 28.4 423100 Motor vehicle and motor vehicle parts and supplies 18.1 332710 Machine shops 28.1 541610 Management consulting services 17.8 31161A Animal(except poultry)slaughtering,rendering,and processing 28.1 5419A0 All other miscellaneous professional,scientific,and technical services 17.7 Note:Calculated using the NIST Manufacturing Cost Guide.https:/www.nist.gov/services-resources/software/manufacturing-cost-guide.NIST AMS 600-13 November 2023 1 Table 3.7:Total Domestic Compensation for Manufacturing and its Supply Chain,by Occupation SOC Code Description$2019 Billion 000000 All Occupations 1822.7 510000 Production Occupations 433.2 110000 Management Occupations 277.2 430000 Office and Administrative Support Occupations 180.7 530000 Transportation and Material Moving Occupations 144.9 130000 Business and Financial Operations Occupations 144.3 170000 Architecture and Engineering Occupations 141.8 410000 Sales and Related Occupations 117.9 150000 Computer and Mathematical Occupations 103.7 490000 Installation,Maintenance,and Repair Occupations 101.3 470000 Construction and Extraction Occupations 43.6 190000 Life,Physical,and Social Science Occupations 24.9 270000 Arts,Design,Entertainment,Sports,and Media Occupations 18.9 230000 Legal Occupations 18.7 450000 Farming,Fishing,and Forestry Occupations 16.6 370000 Building and Grounds Cleaning and Maintenance Occupations 16.2 290000 Healthcare Practitioners and Technical Occupations 11.3 350000 Food Preparation and Serving Related Occupations 11.1 330000 Protective Service Occupations 6.8 390000 Personal Care and Service Occupations 2.5 250000 Education,Training,and Library Occupations 1.6 310000 Healthcare Support Occupations 1.3 210000 Community and Social Service Occupations 1 TOTAL 3642.3 Source:Thomas,Douglas.(2020).Manufacturing Cost Guide.https:/www.nist.gov/services-resources/software/manufacturing-cost-guide NIST AMS 600-13 November 2023 2 Employment,Compensation,Profits,and Productivity The Annual Survey of Manufactures estimates that there were 11.2 million employees in the manufacturing industry in 2021,which is the most recent data available(see Table 4.1).The Current Population Survey estimates that there were 15.2 million manufacturing employees in 2022 and the Current Employment Statistics estimates 12.8 million employees in 2022,the most recent data available(see Table 4.2 and Table 4.3).According to data in Table 4.2,manufacturing accounted for 9.6%of total employment.Each of these estimates has its own method for how the data was acquired and its own definition of employment.The Current Population Survey considers an employed person to be any individual who did any work for pay or profit during the survey reference week or were absent from their job because they were ill,on vacation,or taking leave for some other reason.It also includes individuals who completed at least 15 hours of unpaid work in a family-owned enterprise operated by someone in their household.In contrast,the Current Employment Statistics specifically exclude proprietors,self-employed,and unpaid family or volunteer workers.Therefore,the estimates from the Current Employment Statistics are lower than the Current Population Survey estimates.Additionally,the Current Employment Statistics include temporary and intermittent employees.The Annual Survey of Manufactures considers an employee to include all Table 4.1:Employment,Annual Survey of Manufactures NAICS Description 2020 2021 311 Food manufacturing 1 509 076 1 509 329 312 Beverage and tobacco product manufacturing 214 712 224 136 313 Textile mills 78 736 77 854 314 Textile product mills 97 569 96 965 315 Apparel manufacturing 65 696 62 491 316 Leather and allied product manufacturing 25 213 25 055 321 Wood product manufacturing 395 339 398 867 322 Paper manufacturing 328 945 330 425 323 Printing and related support activities 372 745 351 849 324 Petroleum and coal products manufacturing 105 383 100 428 325 Chemical manufacturing 758 902 778 136 326 Plastics and rubber products manufacturing 768 225 773 438 327 Nonmetallic mineral product manufacturing 386 482 384 716 331 Primary metal manufacturing 346 423 317 946 332 Fabricated metal product manufacturing 1 339 334 1 296 417 333 Machinery manufacturing 1 008 247 996 694 334 Computer and electronic product manufacturing 776 220 758 833 335 Electrical equipment,appliance,and component manufacturing 334 391 341 237 336 Transportation equipment manufacturing 1 535 704 1 534 161 337 Furniture and related product manufacturing 347 017 333 078 339 Miscellaneous manufacturing 510 868 513 924 TOTAL 11 305 227 11 205 979 Data Source:U.S.Census Bureau.(2023).“Annual Survey of Manufactures.”https:/www.census.gov/programs-surveys/asm/data/tables.html NIST AMS 600-13 November 2023 3 Table 4.2:Employment by Industry(Thousands):Current Population Survey Total Employed 2021 2022 Percent Change Agriculture and related 2 291 2 290 0.0%Mining,quarrying,and oil and gas extraction 603 601-0.3%Construction 11 271 11 790 4.6%Manufacturing 14 718 15 231 3.5%Wholesale and retail trade 19 623 19 462-0.8%Transportation and utilities 9 377 10 079 7.5%Information 2 721 2 867 5.4%Financial activities 10 725 11 033 2.9%Professional and business services 19 295 20 628 6.9ucation and health services 34 725 35 377 1.9%Leisure and hospitality 12 635 13 728 8.7%Other services 7 186 7 530 4.8%Public administration 7 410 7 674 3.6%Total*152 580 158 290 3.7%*The sum may not match the total due to rounding of annual averages Source:Bureau of Labor Statistics.(2023a)Current Population Survey.Table 17:Employed Persons by Industry,Sex,Race,and Occupation.Table 4.3:Manufacturing Employment(Thousands):Current Employment Statistics 2021 2022 Total Private 124 311 130 404 Manufacturing 12 354 12 825 Durable Goods 7 681 7 975 Nondurable Goods 4 673 4 850 Source:Bureau of Labor Statistics.(2023b)Current Employment Statistics.http:/www.bls.gov/ces/home.htm full-time and part-time employees on the payrolls of operating establishments during any part of the pay period being surveyed excluding temporary staffing obtained through a staffing service.It also excludes proprietors along with partners of unincorporated businesses.Between January 2005 and January 2010,manufacturing employment declined by 19.6%,as seen in Figure 4.1.As of July 2023,employment was still 8.9low its 2005 level.In times of financial difficulty,large purchases are often delayed or determined to be unnecessary.Thus,as would be expected,during the late 2000s recession durable goods declined more than nondurable goods.The other major decline in manufacturing employment was during the pandemic.Between January 2019 and April of 2020,manufacturing employment declined 10 percentage points to be 19.9low its 2005 level.By September 2021,manufacturing employment had risen to 12.8low its 2005 level.However,at that time there were a substantial number of job openings in manufacturing as seen in Figure 4.1.NIST AMS 600-13 November 2023 4 The employees that work in manufacturing offer their time and,in some cases,risk their personal safety in return for compensation.In terms of safety,the number of fatal injuries increased 12.6tween 2020 and 2021(see Table 4.4).Nonfatal injuries increased as did the injury rate(see Table 4.5).The incident rate for nonfatal injuries in manufacturing remains higher than that for all private industry.As illustrated in Figure 4.2,fatalities,injuries,and the injury rate have a five-year compound growth rate of-3.8%,-3.1%,and-1.7%respectively.Figure 4.1:Cumulative Change in Percent in Manufacturing Employment(Seasonally Adjusted)and Number of Job Openings(seasonally Adjusted),2005-2023 Source:Bureau of Labor Statistics.(2023b)Current Employment Statistics.http:/www.bls.gov/ces/and Bureau of Labor Statistics.(2023c)Job Openings and Labor Turnover Survey.https:/www.bls.gov/jlt/Source:Bureau of Labor Statistics.(2023c).Job Openings and Labor Turnover Survey.https:/www.bls.gov/jlt/020040060080010001200-25.0%-20.0%-15.0%-10.0%-5.0%0.0%5.0 05200620072008200920102011201220132014201520162017201820192020202120222023Thousands of Job OpeningsCumulative Percent Change(Base year=2005)Manufacturing(Left Axis)Nondurable Goods(Left Axis)Durable Goods(Left Axis)Job openings(Right Axis)NIST AMS 600-13 November 2023 5 Table 4.4:Fatal Occupational Injuries by Event or Exposure Total Violence and other injuries by persons or animals Transportation Incidents fires and explosions Falls,slips,trips exposure to harmful sub-stances or environments Contact with objects and equipment 2020 Total 4764 705 1778 71 805 672 716 Manufacturing 340 42 76 10 55 50 106 2021 Total 5190 761 1982 76 850 798 705 Manufacturing 383 36 84 10 55 82 115 Percent Change Total 8.9%7.9.5%7.0%5.6.8%-1.5%Manufacturing 12.6%-14.3.5%0.0%0.0d.0%8.5%Source:Bureau of Labor Statistics.(2022a)Census of Fatal Occupational Injuries.“Industry by Event or Exposure.”Table 4.5:Total Recordable Cases of Nonfatal Injuries and Illnesses 2020 2021 Percent Change Manu-facturing Incident Rate per 100 full time workers*3.1 3.3 6.5%Total Recordable Cases(thousands)373.3 385.1 3.2%Private Industry Incident Rate per 100 full time workers 2.7 2.7 0.0%Total Recordable Cases(thousands)2654.7 2607.9-1.8%Source:Bureau of Labor Statistics(2022b).Injuries,Illness,and Fatalities Program.http:/www.bls.gov/iif/*The incidence rates represent the number of injuries and illnesses per 100 full-time workers and were calculated as:(N/EH)x 200,000,where N=number of injuries and illnesses EH=total hours worked by all employees during the calendar year 200,000=base for 100 equivalent full-time workers(working 40 hours per week,50 weeks per year)Figure 4.2:Manufacturing Fatalities and Injuries Source:Bureau of Labor Statistics.(2022b).Injuries,Illness,and Fatalities Program.http:/www.bls.gov/iif/Source:Bureau of Labor Statistics.(2022a)Census of Fatal Occupational Injuries.“Industry by Event or Exposure.”0.01.02.03.04.05.06.07.08.0020040060080010001200140020022003200420052006200720082009201020112012201320142015201620172018201920202021Nonfatal Injuries per 100 Full-time WorkersFatalities(count)and Injuries(thousands)Fatalities(Left Axis)Injuries(Left Axis)Injury Rate(Right Axis)NIST AMS 600-13 November 2023 6 During the late 2000s recession,the average number of hours worked per week declined,as seen in Figure 4.3.Unlike employment,however,the number of hours worked per week returned to its pre-recession levels or slightly higher.Average wages increased significantly during the late 2000s recession and 2020 decline of GDP,as can be seen in Figure 4.4.This is likely because low wage earners are disproportionately impacted by employment reductions,which suggests that high wage earners not only receive more pay,but also have more job security.Average hours also dropped during the pandemic and has largely returned to pre-recession levels.Like the late 2000s recession,during the pandemic wages increased while hours and employment decreased.Figure 4.3:Average Weekly Hours for All Employees(Seasonally Adjusted)Source:Bureau of Labor Statistics.(2023b)Current Employment Statistics.http:/www.bls.gov/ces/home.htm The compound annual growth rate in real dollars for private sector wages was 0.6tween July 2018 and July 2023 and compensation was-0.1%for manufacturing.As illustrated in Figure 4.5,employee compensation in manufacturing,which includes benefits,has had a five-year compound annual growth of-1.0%,but remains 6.3ove total private industry compensation.In May of 2018 the average hourly wages for the total private sector exceeded that of manufacturing,which was not the case before that time.Hourly compensation in manufacturing,which includes benefits,still exceeds that of the total private industry;however,the difference has narrowed significantly.In the first quarter of 2007,hourly compensation in manufacturing was 17.2%higher than the private sector.By the first quarter of 2023,this difference narrowed to 6.3%.As illustrated in Figure 4.6,the prices received by producers for all manufacturing between July 2020 and July 2022 has increased 33.4%while in the fifteen years prior to that(i.e.,June 2005 to June 2020)it only increased 27.1%total.For those that invest in manufacturing,corporate profits have had a five-year compound annual growth of 10.4%,as illustrated Figure 4.7,and nonfarm proprietors income for manufacturing has had a five-year compound annual growth rate of-8.4%,as illustrated in Figure 4.8.32.034.036.038.040.042.044.0200620072008200920102011201220132014201520162017201820192020202120222023Hours Per WeekTotal PrivateManufacturingDurable GoodsNondurable GoodsNIST AMS 600-13 November 2023 7 Figure 4.4:Average Hourly Wages for Manufacturing and Private Industry(Seasonally Adjusted)Source:Bureau of Labor Statistics.(2023b)Current Employment Statistics.http:/www.bls.gov/ces/home.htm Adjusted using the CPI for all consumers.Bureau of Labor Statistics.(2022d).Consumer Price Index.https:/www.bls.gov/cpi/data.htm Figure 4.5:Employee Compensation(Hourly)Source:Bureau of Labor Statistics.(2023e)National Compensation Survey.http:/www.bls.gov/ncs/Adjusted using the Consumer Price Index for all consumers from the Bureau of Labor Statistics.2527293133353739200620072008200920102011201220132014201520162017201820192020202120222023Constant 2023 Dollars per HourTotal PrivateManufacturingDurable GoodsNondurable Goods253545556575859520072008200920102011201220132014201520162017201820192020202120222023$2022 Per HourPrivate IndustryManufacturingManufacturing-Management,Business,and Financial OccupationsManufacturing-Professional and Related OccupationsManufacturing-Production OccupationsManufacturing-Transportation and Material Moving OccupationsNIST AMS 600-13 November 2023 8 Figure 4.6:Inflation-Cumulative Percent Change in the Producer Price Index(Selling Price Received),2005-2023 Source:Bureau of Labor Statistics.(2023).Producer Price Index.https:/stats.bls.gov/ppi/databases/An important aspect of manufacturing is the efficiency and productivity with which resources are used.The Bureau of Labor Statistics provides an index of labor productivity and total factor productivity.Labor productivity for manufacturing decreased by 1.0tween the second quarter of 2022 and the second quarter of 2023,as illustrated in Figure 4.9.The five-year compound annual growth is-0.6%.The Bureau of Labor Statistics total factor productivity measures“the efficiency at which combined inputs are used to produce output of goods and services”(Bureau of Labor Statistics 2023g).For U.S.manufacturing,total factor productivity increased 3.6%from 2020 to 2021 and has a 5-year compound annual growth rate of 0.7%,as illustrated in Figure 4.10.Productivity in the U.S.is relatively high compared to other countries.As illustrated in Figure 4.11,the U.S.is ranked ninth in output per hour among 142 countries using data from the Conference Board.27 27 Conference Board.(2022)Total Economy Database:Output,Labor and Labor Productivity.https:/www.conference-board.org/data/economydatabase/index.cfm?id=27762-20.0%0.0 .0.0.0.00.0 05200620072008200920102011201220132014201520162017201820192020202120222023Cumulative Percent Change(Base Year=2005)NAICS 336:Transportation EquipmentNAICS 335:Electrical Equipment and AppliancesNAICS 334:Computers and ElectronicsNAICS 333:MachineryTotal ManufacturingNIST AMS 600-13 November 2023 9 Figure 4.7:Profits for Corporations Source:Bureau of Economic Analysis.(2023d)Income and Employment by Industry.Table 6.16D.Corporate Profits by Industry.https:/apps.bea.gov/iTable/index_nipa.cfm.Figure 4.8:Nonfarm Proprietors Income Source:Bureau of Economic Analysis.(2023d)Income and Employment by Industry.Table 6.12D.Nonfarm Proprietors Income.https:/apps.bea.gov/iTable/index_nipa.cfm.Elect equip,appliances,and componentsMotor vehicles,bodies and trailers,and partsOther nondurable goods4Petroleum and coal productsFabricated metal productsMachineryFood and beverage and tobacco productsChemical productsComputer and electronic productsOther durable goods3-80.0-60.0-40.0-20.00.020.040.060.080.0100.0120.0200520072009201120132015201720192021$2022 Billion-500005000100001500020000250003000035000400004500020052006200720082009201020112012201320142015201620172018201920202021$Billion 2022ManufacturingDurable goodsNondurable goodsManufacturing Profits 0.0100.0200.0300.0400.0500.0600.0700.0200520072009201120132015201720192021$Billion 2022NIST AMS 600-13 November 2023 10 Figure 4.9:Manufacturing Labor Productivity Index(2012 Base Year=100)Source:Bureau of Labor Statistics.(2023f)Productivity.https:/www.bls.gov/mfp/Figure 4.10:Manufacturing Total Factor Productivity Index Source:Bureau of Labor Statistics.(2023f)Productivity.https:/www.bls.gov/mfp/-5.0%0.0%5.0.0.0 .0%.00.05.0 05200620072008200920102011201220132014201520162017201820192020202120222023Cumulative Percent ChangeNonfarm BusinessManufacturingDurable GoodsNondurable Goods-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0.0.0 052006200720082009201020112012201320142015201620172018201920202021Cumulative Percent Change(Base year=2005)Private BusinessManufacturingNondurable ManufacturingDurable ManufacturingNIST AMS 600-13 November 2023 11 Figure 4.11:Output per Labor Hour(Top Ten Countries Out of 133)Source:Conference Board.(2023)Total Economy Database:Output,Labor and Labor Productivity.https:/www.conference-board.org/data/economydatabase/index.cfm?id=27762 NetherlandsUnited StatesGermanyAustriaBelgiumSwedenSwitzerlandDenmarkNorwayLuxembourg0204060801001201402022 international dollars,converted using Purchasing Power ParitiesNIST AMS 600-13 November 2023 12 Research,Innovation,and Factors for Doing Business Manufacturing goods involves not only physical production,but also design and innovation.Measuring and comparing innovation between countries is problematic,however,as there is no standard metric for measuring this activity.Four measures are often discussed regarding innovation:number of patent applications,research and development expenditures,number of researchers,and number of published journal articles.As seen in Figure 5.1,the U.S.ranked 4th in 2020 in resident patent applications per million people,which puts it above the 95th percentile among 138 countries.Using patent applications as a metric can be problematic though,as not all innovations are patented and some patents might not be considered innovation.The U.S.ranked 5th in research and development expenditures as a percent of GDP in 2020,which puts it above the 90th percentile(see Figure 5.2)among 84 nations.As seen in Figure 5.3,U.S.enterprise research and development expenditures in manufacturing increased 1.8tween 2018 and 2019 and has a 5-year compound annual growth rate of 2.9%(not shown).In terms of researchers per million people,the U.S.ranked 17th in 2019,putting it just above the 80th percentile(see Figure 5.4).In journal articles per million people it ranked 24th in 2020,and China had more articles than the U.S.(see Figure 5.5).28 Exports are also frequently seen as a measure of competitiveness.The U.S.was the second largest exporter in 2022,as seen in Figure 5.6.Figure 5.1:Patent Applications(Residents)per Million People,Top Ten(1990-2020)World Bank.2023.World Development Indicators.https:/data.worldbank.org/products/wdi 28 World Bank.2022.World Development Indicators.http:/data.worldbank.org/data-catalog/world-development-indicators AustriaSan MarinoNorth KoreaFinlandSingaporeGermanyUnited StatesChinaJapanSouth Korea05001000150020002500300035001990199319961999200220052008201120142017Resident Patent Applications per Million People024681019901993199619992002200520082011201420172020U.S.Rank of Resident Patent App.per Capita(lower is better)NIST AMS 600-13 November 2023 13 Figure 5.2:Research and Development Expenditures as a Percent of GDP,Top Ten Source:World Bank.2023.World Development Indicators.https:/data.worldbank.org/products/wdi*Missing data was interpolated Figure 5.3:Manufacturing Enterprise Research and Development Expenditures Source:OECD.(2022)Business Enterprise R-D Expenditure by Industry(ISIC 4).http:/stats.oecd.org/#United Nations Statistics Division.(2023).“National Accounts Main Aggregates Database.”http:/unstats.un.org/unsd/snaama/Introduction.asp*Missing values were interpolated Finland FINDenmark DNKGermany DEUAustria AUTJapan JPNUnited States USABelgium BELSweden SWEKorea,Rep.KORIsrael ISR0.01.02.03.04.05.06.019961999200220052008201120142017Research and Development Expenditures as a percent of GDPSwitzerland*TrkiyeUnited KingdomItalyChinese TaipeiKoreaGermanyJapanUnited StatesChina050100150200250300350200820102012201420162018$Billion 2015 PPP10.0.5.0.5.0 0820102012201420162018Business Enterprise R&D Expenditure as a Percent of GDP0510151996200020042008201220162020U.S.Rank(lower is better)U.S.Rank NIST AMS 600-13 November 2023 14 In addition to some of the previously mentioned metrics,a number of indices have been developed to assess national competitiveness.The IMD World Competitiveness Index provides insight into the U.S.innovation landscape.Figure 5.7 provides the U.S.ranking for 20 measures of competitiveness.This provides some indicators to identify opportunities for improvement in U.S.economic activity.In 2023,the U.S.ranked low in prices,public finance,societal framework,and international trade among other things.Overall,the U.S.ranked 9th in competitiveness for conducting business.29 The 2016 Deloitte Global Manufacturing Competitiveness Index uses a survey of CEOs to rank countries based on their perception.The U.S.was ranked 2nd out 40 nations with China being ranked 1st.High-cost labor,high corporate tax rates,and increasing investments outside of the U.S.were identified as challenges to the U.S.industry.Manufacturers indicated that companies were building high-tech factories in the U.S.due to rising labor costs in China,shipping costs,and low-cost shale gas.30 According to Figure 5.4:Researchers per Million People,Ranking World Bank.2023.World Development Indicators.https:/data.worldbank.org/products/wdi 29 IMD.(2021).IMD World Competitiveness Country Profile:U.S.https:/worldcompetitiveness.imd.org/countryprofile/US 30 Deloitte.(2016).2016 Global Manufacturing Competitiveness Index.http:/ 051015202530199619971998199920002001200220032004200520062007200820092010201120122013201420152016201720182019Rank of Researchers per Million People(lower is better)Korea,Rep.GermanyJapanUnited StatesUnited Kingdom30003500400045005000199619982000200220042006200820102012201420162018U.S.Researchers per Million PeopleNIST AMS 600-13 November 2023 15 Figure 5.5:Journal Articles,Top 10 Countries World Bank.2023.World Development Indicators.https:/data.worldbank.org/products/wdi Figure 5.6:Merchandise Exports,Top Ten Exporters World Bank.2023.World Development Indicators.https:/data.worldbank.org/products/wdi NOTE:Adjusted using the Consumer Price Index for all consumers from the Bureau of Labor Statistics.BrazilKorea,Rep.ItalyRussian FederationJapanUnited KingdomGermanyIndiaUnited StatesChina010020030040050060070020002002200420062008201020122014201620182020Journal Articles(thousands)United Arab EmiratesHong KongFranceBelgiumItalySouth KoreaJapanNetherlandsGermanyUnited StatesChina05001000150020002500300035004000200520072009201120132015201720192021$Billion 202205101520253020002002200420062008201020122014201620182020Rank of Journal Articles per Capita(lower is better)NIST AMS 600-13 November 2023 16 Figure 5.7:IMD World Competitiveness Rankings for the US:Lower is Better(i.e.,a Rank of 1 is Better than a Rank of 64)64 countries ranked Source:IMD.(2023).IMD World Competitiveness Country Profile:U.S.https:/worldcompetitiveness.imd.org/countryprofile/US the Deloitte Global Manufacturing Competitiveness Index,advantages to U.S.manufacturers included its technological prowess and size,productivity,and research support.China was ranked 1st with advantages in raw material supply,advanced electronics,and increased research and development spending.China has challenges in innovation,slowing economic growth,productivity,and regulatory inefficiency.The World Economic Forums 2019 Global Competitiveness Report uses 12 items to assess the competitiveness of 141 economies,which includes the set of“institutions,policies and factors that determine a countrys level of productivity.”The U.S.was ranked 2nd overall with various rankings in the 12“pillars”that underly the ranking,as illustrated in Figure 5.8.Within the 12“pillars,”there were lower rankings in health,macroeconomic stability,and information/communication technology adoption.31 The index uses a set of 90 factors to produce the 12 items in Figure 5.8.A selection of those that are relevant to standards,technology,and information dissemination are presented in Table 5.1.Those that have poorer rankings might be opportunities for improvement.31 World Economic Forum.(2019).The Global Competitiveness Report 2019.http:/www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf 0204060Scientific InfrastructureInternational InvestmentFinanceDomestic EconomyProductivity and EfficiencyTechnological InfrastructureEducationManagement PracticesEmploymentTax/Fiscal PolicyHealth and EnvironmentLabor MarketBasic InfrastructureInstitutional FrameworkBusiness LegislationAttitudes and ValuesInternational TradeSocietal FrameworkPublic FinancePrices20222023NIST AMS 600-13 November 2023 17 Figure 5.8:World Economic Forum 2019 Global Competitiveness Index:U.S.Pillar Rankings:Lower is Better Source:World Economic Forum.(2019).The Global Competitiveness Report 2018.http:/www3.weforum.org/docs/GCR2018/05FullReport/TheGlobalCompetitivenessReport2018.pdf Among those selected in Table 5.1,the U.S.ranks below the 90th percentile in both of the crime items,2 of the 8 transport items,6 of the 9 utility items,labor-health,2 of the 9 human capital items,both barrier to entry items,and 2 of the 10 innovation items.The Competitive Industrial Performance Index,published by the United Nations Industrial Development Organization,ranks countries based on 3 dimensions:1)capacity to produce and export manufactured goods;2)technological deepening and upgrading;and 3)world impact.32 The U.S.ranked 5th overall,as seen in Table 5.2.The Annual Survey of Entrepreneurs makes inquiries on U.S.entrepreneurs concerning the negative impacts of eight items:Access to financial capital Cost of financial capital Finding qualified labor Taxes Slow business or lost sales Late or nonpayment from customers Unpredictability of business conditions Changes or updates in technology Other 32 United Nations Industrial Development Organization.(2020).Competitive Industrial Performance Report 2020.https:/stat.unido.org/content/publications/competitive-industrial-performance-report-2020 020406080100120OverallLabor MarketFinancial SystemBusiness DynamismInnovation CapabilityMarket SizeSkillsProduct MarketInfrastructureInstitutionsInformation/CommunicationMacroeconomic StabilityHealth20182019NIST AMS 600-13 November 2023 18 Table 5.1:World Economic Forum Competitiveness Index Indicators Selection of those Relevant to Standards,Technology,and Information Dissemination Solutions,Rankings Out of 141 Countries(Lower is Better)Pillar ComponentUS RankApplication1Organized crime69Crime1Terrorism incidence83.3Crime1Intellectual property protection12IP Protection2Road connectivity index1Transport2Quality of roads17Transport2Railroad density(km of roads/square km)48Transport2Efficiency of train service12Transport2Airport connectivity1Transport2Efficiency of air transport services10Transport2Liner shipping connectivity index8Transport2Efficiency of seaport services10Transport2Electrification rate(%of population)2Utilities2Electric power transmission and distribution losses(%output)23Utilities2Exposure to unsafe drinking water(%of population)14Utilities2Reliability of water supply30Utilities3Mobile-cellular telephone subscriptions(per 100 people)54Utilities3Mobile-broadband subscriptions(per 100 people)7Utilities3Fixed-broadband internet subscriptions(per 100 people)18Utilities3Fibre internet subscriptions(per 100 people)45Utilities3Internet users(%of population)26Utilities5Healthy life expectancy54Labor-Health6Mean years of schooling7Human Capital6Extent of staff training6Human Capital6Quality of vocational training8Human Capital6Skillset of graduates5Human Capital6Digital skills among population12Human Capital6Ease of finding skilled employees1Human Capital6School life expectancy(expected years of schooling)30Human Capital6Critical thinking in teaching9Human Capital6Pupil-to-teacher ratio in primary education 45Human Capital11Cost of starting a business(%GNI per capita)24Barriers to Entry11Time to start a business(days)31Barriers to Entry11Companies embracing disruptive ideas2Innovation12State of cluster development2Innovation12International co-inventions(applications/million people)19Innovation12Multi-stakeholder collaboration2Innovation12Scientific publications(H index)1Innovation12Patent applications(per million people)13Innovation12R&D expenditures(%of GDP)11Innovation12Quality of research institutions 1Innovation12Buyer sophistication4Innovation12Trademark applications(per million people)32Innovation Pillars:1)Institutions,2)Infrastructure,3)Information and communication technology adoption,4)macroeconomic policy,5)Health,6)Skills,7)Product market,8)Labor market,9)Financial system,10)Market size,11)Business dynamism,and 12)Innovation capability.Applications:The application categories were developed for this report in order to identify items that might be relevant to manufacturing NIST AMS 600-13 November 2023 19 As seen in Figure 5.9,there are five items where more than a third of the firms indicated negative impacts,including taxes,slow business or lost sales,unpredictability of business conditions,finding qualified labor,and government regulations.33 Countries are sometimes compared to or alluded to as brands.According to a survey on country reputation of products published by Statista(see Figure 5.10),the U.S.ranks 10th among 49 total countries.Another ranking from Ipsos(see Figure 5.11),the U.S.ranks 8th.The high ranking of the U.S.supports the idea that manufacturers in the U.S.tend to compete based on differentiation rather than cost competition.Table 5.2:Rankings from the Competitive Industrial Performance Index 2021,150 Total Countries Country Rank Germany 1 China 2 Ireland 3 South Korea 4 United States 5 Source:United Nations Industrial Development Organization.(2021).Competitive Industrial Performance Report 2021.https:/stat.unido.org/Figure 5.9:Factors Impacting U.S.Business(Annual Survey of Entrepreneurs),2016 Source:U.S.Census Bureau.(2019).Annual Survey of Entrepreneurs.https:/www.census.gov/programs-surveys/ase.html 33 U.S.Census Bureau.(2019)Annual Survey of Entrepreneurs.https:/www.census.gov/programs-surveys/ase.html 0102030405060Negative impact fromaccess to financial capitalNegative impact fromcost of financial capitalNegative impact fromchanges or updates intechnologyNegative impact fromlate or nonpayment fromcustomersNegative impact fromgovernment regulationsNegative impact fromfinding qualified laborNegative impact fromunpredictability ofbusiness conditionsNegative impact fromslow business or lostsalesNegative impact fromtaxesPercent of RespondentsNIST AMS 600-13 November 2023 20 Figure 5.10:Made-in-Country Index,2017 Source:Loose,Nicolas.(2017).“Made-in-Country Index 2017.”https:/ Figure 5.11:Ipsos National Brands Index,2021 Source:Ipsos.(2022).“Nation Brands Index 2022.”https:/ 020406080100120Germany(Rank:1)Switzerland(Rank:2)European Union(Rank:3)United Kingdom(Rank:4)Sweden(Rank:5)Canada(Rank:6)Italy(Rank:7)Japan(Rank:8)France(Rank:9)USA(Rank:10)India(Rank:36)China(Rank:49)6767.56868.56969.570Germany(Rank:1)Japan(Rank:2)Canada(Rank:3)Italy(Rank:4)France(Rank:5)United Kingdom(Rank:6)Switzerland(Rank:7)United States(Rank:8)Sweden(Rank:9)Australia(Rank:10)NIST AMS 600-13 November 2023 21 Discussion This report provides an overview of the U.S.manufacturing industry.There are 3 aspects of U.S.manufacturing that are considered:(1)how the U.S.industry compares to other countries,(2)the trends in the domestic industry,and(3)the industry trends compared to those in other countries.The U.S.remains a major manufacturing nation;however,other countries are rising rapidly.Manufacturing in the U.S.was significantly impacted by the 2000s recession and the 2020 economy.The U.S.accounts for 16.3%of global manufacturing,according to the United Nations Statistics Division National Accounts Main Aggregates Database,making it the second largest.Compound real(i.e.,controlling for inflation)annual growth in the U.S.between 1996 and 2021 was 2.1%,which places the U.S.below the 50th percentile.The compound annual growth for the U.S.between 2016 and 2021 was 2.2%.This puts the U.S.just above the 50th percentile but above Canada and Germany among others.In terms of subsectors of manufacturing,the U.S.ranks 1st in 7 industries out of 16 total while China was the largest for the other industries,as reported in OECD data.In 2022,there was an estimated$2.3 trillion in manufacturing value added in chained 2012 dollars.Using 2012 input-output data adjusted to 2019 dollars,there is an estimated$4278 billion,including direct and indirect value added,associated with U.S.manufacturing.In 2019,the U.S.imported approximately 20.4%of its intermediate goods,according to BEA data.Discrete technology products account for 41%of manufacturing value added,according to BEA data.From the pre-recession peak in the 4th quarter of 2007 to the 1st quarter of 2009 manufacturing declined 17 percentage points.Manufacturing didnt return to its pre-recession level until 2017.During the recent pandemic,manufacturing value added declined 17 percentage points between the third quarter of 2019 and second quarter of 2020,but returned to similar levels within a year.Between January 2005 and January 2010,manufacturing employment declined by 19.6%.As of July 2023,employment was still 8.9low its 2005 level.Between January 2019 and April of 2020,manufacturing employment declined 10 percentage points to be 19.9low its 2005 level.By September 2021,manufacturing employment had risen to 12.8low its 2005 level.NIST AMS 600-13 November 2023 22 References Allwood,J.M.&Cullen,J.M.(2012).Sustainable Materials with Both Eyes Open.Cambridge Ltd.185.http:/ L and Matthew R.Keller.State of Innovation:The U.S.Governments Role in Technology Development.New York,NY;Taylor&Francis;2016.Bureau of Economic Analysis.(2023a).Industry Economic Accounts Data.http:/www.bea.gov/iTable/index_industry_gdpIndy.cfm Bureau of Economic Analysis.(2023b)“Fixed Assets Accounts Tables.”https:/apps.bea.gov/iTable/iTable.cfm?ReqID=10&step=2 Bureau of Economic Analysis.(2023c).Input-Output Accounts Data.https:/www.bea.gov/industry/input-output-accounts-data Bureau of Economic Analysis.(2023d).Income and Employment by Industry.Table 6.16D.Corporate Profits by Industry and Table 6.12D.Nonfarm Proprietors Income.https:/apps.bea.gov/iTable/index_nipa.cfm.Bureau of Labor Statistics.(2022a).Census of Fatal Occupational Injuries.Industry by Event or Exposure.http:/stats.bls.gov/iif/oshcfoi1.htm Bureau of Labor Statistics.(2022b).Injuries,Illness,and Fatalities Program.http:/www.bls.gov/iif/Bureau of Labor Statistics.(2023a).Current Population Survey.Table 17:Employed Persons by Industry,Sex,Race,and Occupation.http:/www.bls.gov/cps Bureau of Labor Statistics.(2023b).Current Employment Statistics.http:/www.bls.gov/ces/home.htm Bureau of Labor Statistics.(2023c).Job Openings and Labor Turnover Survey.https:/www.bls.gov/jlt/Bureau of Labor Statistics.(2022d).Consumer Price Index.https:/www.bls.gov/cpi/data.htm Bureau of Labor Statistics.(2023e).National Compensation Survey.http:/www.bls.gov/ncs/Bureau of Labor Statistics.(2023f).Productivity.https:/www.bls.gov/productivity/Bureau of Labor Statistics.(2023g).Productivity Glossary.https:/www.bls.gov/productivity/glossary.htm#T Callen,Tim.(2007).PPP Versus the Market:Which Weight Matters?Finance and Development.Vol 44 number 1.http:/www.imf.org/external/pubs/ft/fandd/2007/03/basics.htm NIST AMS 600-13 November 2023 23 Conference Board.(2023).Total Economy Database:Output,Labor and Labor Productivity.https:/www.conference-board.org/data/economydatabase/index.cfm?id=277
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NIST Advanced Manufacturing Series 600-16Annual Report on the U.S.Manufacturing Economy:2024 Douglas Thomas This publication is available free of charge from:https:/doi.org/10.6028/NIST.AMS.600-16 NIST Advanced Manufacturing Series 600-16 Annual Report on the U.S.Manufacturing Economy:2024 Douglas Thomas Applied Economics Office Engineering Laboratory This publication is available free of charge from:https:/doi.org/10.6028/NIST.AMS.600-16 October 2024 U.S.Department of Commerce Gina M.Raimondo,Secretary National Institute of Standards and Technology Laurie E.Locascio,NIST Director and Under Secretary of Commerce for Standards and Technology AMS 600-16 October 2024 Certain commercial equipment,instruments,software,or materials,commercial or non-commercial,are identified in this paper in order to specify the experimental procedure adequately.Such identification does not imply recommendation or endorsement of any product or service by NIST,nor does it imply that the materials or equipment identified are necessarily the best available for the purpose.NIST Technical Series Policies Copyright,Use,and Licensing Statements NIST Technical Series Publication Identifier Syntax Publication History Approved by the NIST Editorial Review Board on October 23,2024 How to Cite this NIST Technical Series Publication Thomas,Douglas.2024.Annual Report on the U.S.Manufacturing Economy:2024.(National Institute of Standards and Technology,Gaithersburg,MD),NIST Advanced Manufacturing Series 600-16.https:/doi.org/10.6028/NIST.AMS.600-16 NIST Author ORCID iDs Douglas Thomas:0000-0002-8600-4795 AMS 600-16 October 2024 i Abstract This report provides a statistical review of the U.S.manufacturing industry.There are three aspects of U.S.manufacturing that are considered:(1)how the U.S.industry compares to other countries,(2)the trends in the domestic industry,and(3)the industry trends compared to those in other countries.Keywords manufacturing;economy;supply chain;value added;statistics AMS 600-16 October 2024 ii Table of Contents Preface.iv Acronyms.iv Executive Summary.1 Introduction.3 Value Added.9 US Manufacturing Supply Chain.22 Employment,Compensation,Profits,and Productivity.30 Research,Innovation,and Factors for Doing Business.40 Discussion.51 References.53 Appendix A.U.S.Semiconductor Manufacturing.57 Appendix B.Additive Manufacturing.61 List of Tables Table 3.1:Supply Chain Entities and Contributions,Annual Survey of Manufactures,2021.22 Table 3.2:Direct and Indirect Manufacturing Value Added,2022($Billion).24 Table 3.3:Imported Intermediate Manufacturing($millions).25 Table 3.4:Percent of U.S.Manufacturing Industry Supply Chain,by Country of Origin(2014).26 Table 3.5:Depreciable Assets and the Rate of Change,2017($million 2017).26 Table 3.6:Domestic U.S.Manufacturing Supply Chain,2022 Value Added.27 Table 3.7:2022 Domestic Supply Chain Entities for Discrete High-Tech Manufacturing(NAICS 333-336),Value Added(VA)($Billion).28 Table 3.8:2022 Domestic Supply Chain Entities for Process Manufacturing(NAICS 331,324-325),Value Added(VA)($Billion).29 Table 4.1:Employment,Annual Survey of Manufactures.30 Table 4.2:Employment by Industry,by Occupation(2023):Current Population Survey.31 Table 4.3:Manufacturing Employment(Thousands):Current Employment Statistics.32 Table 4.4:Fatal Occupational Injuries by Event or Exposure.33 Table 4.5:Total Recordable Cases of Nonfatal Injuries and Illnesses.33 Table 5.1:World Economic Forum Competitiveness Index Indicators Selection of those Relevant to Standards,Technology,and Information Dissemination Solutions,Rankings Out of 141 Countries(Lower is Better).47 Table 6.1:Rankings for a Selection of Metrics and Countries(Lower is Better).52 Table B.6.2:Approximation of U.S.Shipments and Value Added of Goods Produced using Additive Manufacturing.61 AMS 600-16 October 2024 iii List of Figures Figure 1.1:Illustration of Objectives Drive Inputs and Negative Externalities Down while Increasing Production Output and Product Function.4 Figure 1.2:Data Categorization for Examining the Economics of Manufacturing.5 Figure 1.3:Illustration of the Feasibility of Data Collection and Availability.8 Figure 2.1:National 25-Year Compound Annual Growth,by Country(1997 to 2022):Higher is Better.10 Figure 2.2:National 5-Year Compound Annual Growth,by Country(2017 to 2022):Higher is Better.10 Figure 2.3:Manufacturing Value Added,Top 10 Manufacturing Countries(1970 to 2022).11 Figure 2.4:Manufacturings Share of National GDP(Constant 2015 Dollars).12 Figure 2.5:Manufacturing Value Added Per Capita,Top 10 Largest Manufacturing Countries(1970 to 2022):Higher is Better.12 Figure 2.6:Manufacturing Per Capita Ranking,1970-2022:Lower is Better.13 Figure 2.7:Global Manufacturing Value Added by Industry,by Country/Region(2020).14 Figure 2.8:Cumulative Percent Change in Value Added(2017 Chained Dollars).15 Figure 2.9:Value Added for Durable Goods by Type(billions of chained dollars),2009-2023.16 Figure 2.10:Value Added for Nondurable Goods by Type(billions of chained dollars),2009-2023.16 Figure 2.11:Manufacturing Value Added by Subsector(billions of chained dollars),2005-2022.17 Figure 2.12:Current-Cost Net Stock:Private Equipment,Manufacturing(2005-2022).18 Figure 2.13:Current-Cost Net Stock:Private Structures,Manufacturing(2005-2022).19 Figure 2.14:Current-Cost Net Stock:Intellectual Property Products,Manufacturing(2005-2022).20 Figure 2.15:Current-Cost Net Stock in Manufacturing,by Type(2005-2022).21 Figure 3.1:Manufacturing Supply Chain,2021.23 Figure 4.1:Cumulative Change in Percent in Manufacturing Employment(Seasonally Adjusted)and Number of Job Openings(seasonally Adjusted),2005-2023.32 Figure 4.2:Manufacturing Fatalities and Injuries.34 Figure 4.3:Average Weekly Hours for All Employees(Seasonally Adjusted).34 Figure 4.4:Average Hourly Wages for Manufacturing and Private Industry(Seasonally Adjusted).35 Figure 4.5:Employee Compensation(Hourly).36 Figure 4.6:Inflation-Cumulative Percent Change in the Producer Price Index(Selling Price Received),2005-2024.36 Figure 4.7:Profits for Corporations.37 Figure 4.8:Nonfarm Proprietors Income.38 Figure 4.9:Manufacturing Labor Productivity Index(2017 Base Year=100).38 Figure 4.10:Manufacturing Total Factor Productivity Index.39 Figure 4.11:Output per Labor Hour(Top Ten Largest Manufacturing Countries from Figure 2.3).39 Figure 5.1:Patent Applications(Residents)per Million People,Top Ten Largest Manufacturing Countries(1990-2020).40 Figure 5.2:Research and Development Expenditures as a Percent of GDP,Top Ten Largest Manufacturing Countries.41 Figure 5.3:Manufacturing Enterprise Research and Development Expenditures(PPP Converted$Billion 2015),Top 10 Largest Manufacturing Countries.42 Figure 5.4:Researchers per Million People,Ranking.43 Figure 5.5:Journal Articles,Top 10 Countries.44 AMS 600-16 October 2024 iv Figure 5.6:Merchandise Exports,Top Ten Exporters.45 Figure 5.7:IMD World Competitiveness Rankings for the US:Lower is Better(i.e.,a Rank of 1 is Better than a Rank of 67)67 countries ranked.45 Figure 5.8:World Economic Forum 2019 Global Competitiveness Index:U.S.Pillar Rankings:Lower is Better.46 Figure 5.9:Rankings from the Competitive Industrial Performance Index 2024,150 Total Countries.48 Figure 5.10:Factors Impacting U.S.Business(Annual Survey of Entrepreneurs),2022.49 Figure 5.11:Made-in-Country Index,2017.49 Figure 5.12:Ipsos National Brands Index,2023.50 Preface This study was conducted by the Applied Economics Office(AEO)in the Engineering Laboratory(EL)at the National Institute of Standards and Technology(NIST).The study provides aggregate manufacturing industry data and industry subsector data to develop a quantitative depiction of the U.S.manufacturing industry.Acronyms AM:Additive Manufacturing ASM:Annual Survey of Manufactures ATP:Advanced Technology Program BEA:Bureau of Economic Analysis BLS:Bureau of Labor Statistics CAG:Compound Annual Growth CEO:Chief Executive Officer DARPA:Defense Advanced Research Projects Agency GDP:Gross Domestic Product ISIC:International Standard Industrial Classification NAICS:North American Industry Classification System NIST:National Institute of Standards and Technology OECD:Organization for Economic Cooperation and Development PPP:Purchasing Power Parity R&D:Research and Development SBIR:Small Business Innovation Research Program SIC:Standard Industrial Classification STEP:Standard for the Exchange of Product Model Data USGS:United States Geological Survey VA:Value Added AMS 600-16 October 2024 1 Executive Summary This report provides a statistical review of the U.S.manufacturing industry.There are three aspects of U.S.manufacturing that are considered:(1)how the U.S.industry compares to other countries,(2)the trends in the domestic industry,and(3)the industry trends compared to those in other countries.The U.S.remains a major manufacturing nation;however,other countries are rising rapidly.Although U.S.manufacturing performs well in many respects,there are opportunities for advancing competitiveness.This will require strategic placement of resources to ensure that U.S.investments have the highest return possible.Competitiveness Manufacturing Industry Size:In 2022,there was$15.0 trillion of value added(i.e.,GDP)in global manufacturing in constant 2015 dollars,which is 17.5%of the value added by all industries($86.1 trillion),according to the United Nations Statistics Division.The U.S.accounted for$2.6 trillion(15.1%)in manufacturing valued added while China accounted for$5.1 trillion(31.0%).Direct and indirect(i.e.,purchases from other industries)manufacturing accounts for 17.1%of GDP.Among the ten largest manufacturing countries,the U.S.is the 2nd largest manufacturing value added per capita(see Figure 2.5)and out of all countries the most recent U.S.rank is 16th,as illustrated in Figure 2.6.In 2020,China produced more than the U.S.in 9 of the 11 subsectors shown in Figure 2.7.Competitiveness Manufacturing Growth:Compound real(i.e.,controlling for inflation)annual growth in the U.S.between 1997 and 2022(i.e.,25-year growth)was 1.7%,which places the U.S.below the 50th percentile.The compound annual growth for the U.S.between 2017 and 2022(i.e.,5-year growth)was 1.5%.This puts the U.S.just below the 50th percentile,above Canada and Germany among others.Competitiveness Productivity:Labor productivity for manufacturing increased by 0.4tween the second quarter of 2023 and the second quarter of 2024,as illustrated in Figure 4.9.The five-year compound annual growth is 0.4%.For U.S.manufacturing,total factor productivity decreased 1.3%from 2021 to 2022 and has a 5-year compound annual growth rate of 0.1%,as illustrated in Figure 4.10.Productivity in the U.S.is relatively high compared to other countries.As illustrated in Figure 4.11,the U.S.is ranked ninth in output per hour among 142 countries using data from the Conference Board.In recent years,productivity growth has been negative or has come to a plateau in many countries and the U.S.seems to be following this pattern of slow growth.There are competing explanations for why productivity has slowed,such as an aging population,inequality,or other factors.A number of the explanations equate to low levels of capital investment.It is also important to note that productivity is difficult to measure and even more difficult to compare across countries.Moreover,the evidence does not seem to support any particular explanation over another as to why productivity appears to have stalled.AMS 600-16 October 2024 2 Competitiveness Economic Environment:There is no agreed upon measure for research,innovation,and other factors for doing business,but there are a number of common measures that are used.The ranking of the U.S.in these measures has mixed results,ranking high in some and lower in others.For instance,the U.S.ranks 4th in patent applications per million people but ranks 18th in researchers per capita and 24th in journal article publications per capita.The IMD World Competitiveness Index,which measures competitiveness for conducting business,ranked the U.S.12th in competitiveness for conducting business and the World Economic Forum,which assesses the competitiveness in determining productivity,ranked the U.S.5th.Note that neither of these are specific to manufacturing,though.The Competitive Industrial Performance Index,which measures capacity to produce and export manufactured goods;technological deepening and upgrading;and world impact,ranked the U.S.as 6th.Domestic Specifics Types of Goods Produced:The largest manufacturing subsector in the U.S.is chemical manufacturing followed by food,beverage,and tobacco products and then computer and electronic products,as seen in Figure 2.11.Discrete technology products accounted for 39%of U.S.manufacturing.Domestic Specifics Manufacturing Supply Chain Costs:High-cost supply chain industries/activities might pose as opportunities for advancing competitiveness.For discrete technology products,the largest supply chain items,based on NAICS code,include wholesale trade,primary metals,fabricated metals,management of companies and enterprises,and chemical products.For process manufacturing,the largest items were oil and gas extraction;wholesale trade;management of companies and enterprises;and miscellaneous professional,scientific,and technical services.Domestic Specifics Manufacturing Safety,Compensation,and Profits:As illustrated in Figure 4.5,employee compensation in manufacturing,which includes benefits,has had a five-year compound annual growth of-1.9%.In recent years,manufacturing compensation has had a negative trend while that of private industry has had a positive trend.Compensation in manufacturing,which includes benefits,still slightly exceeds that of the total private industry;however,the difference has narrowed significantly.In terms of safety in manufacturing,injuries and the injury rate have generally trended downward since 2002,as seen in Figure 4.2 while fatalities has plateaued or even increased slightly in recent years.For those that invest in manufacturing,corporate profits have had a five-year compound annual growth of 11.1%,as illustrated Figure 4.7,and nonfarm proprietors income for manufacturing has had a five-year compound annual growth rate of 14.9%,as illustrated in Figure 4.8.AMS 600-16 October 2024 3 Introduction Background Public entities have a significant role in the U.S.innovation process(Block and Keller 2016).The federal government has had a substantial impact in developing,supporting,and nurturing numerous innovations and industries,including the Internet,telecommunications,aerospace,semiconductors,computers,pharmaceuticals,and nuclear power among others,many of which may not have come to fruition without public support(Wessner and Wolff 2012).Although the Defense Advanced Research Projects Agency(DARPA),Small Business Innovation Research Program(SBIR),and Advanced Technology Program(ATP)have received attention in the scholarly community,there is generally limited awareness of the governments role in U.S.innovation.The vastness and diversity of U.S.federal research and development programs along with their changing nature make them difficult to categorize and evaluate(Block and Keller 2016),but their impact is often significant.For instance,the origins of Google are rooted in a public grant through the National Science Foundation(National Science Foundation 2004;Block and Keller 2016).One objective of public innovation is to enhance economic security and improve our quality of life(National Institute of Standards and Technology 2018),which is achieved in part by advancing efficiency in which resources are consumed or impacted by production.This includes decreasing inputs,which amount to costs,and negative externalities(e.g.,environmental impacts)while increasing output,(i.e.,the products produced),and the function of the product(e.g.,the usefulness or quality of the product),as seen in Figure 1.1.In pursuit of this goal,the National Institute of Standards and Technology(NIST)has expended resources on a number of projects,such as support for the development of the International Standard for the Exchange of Product Model Data(STEP)(Robert D.Niehaus,Inc 2014),which reduces the need for duplicative efforts such as re-entering design data.AMS 600-16 October 2024 4 Figure 1.1:Illustration of Objectives Drive Inputs and Negative Externalities Down while Increasing Production Output and Product Function Purpose of this Report The purpose of this report is to characterize U.S.innovation and industrial competitiveness in manufacturing,as it relates to the objectives illustrated in Figure 1.1.It includes tracking domestic manufacturing activity and its supply chain in order to develop a quantitative depiction of U.S.manufacturing in the context of the domestic economy and global industry.There are five aspects that encapsulate the information discussed in this report:Growth and Size:The size of the U.S.manufacturing industry and its growth rate as compared to other countries reveals the relative competitiveness of the industry.o Metrics:Value added,value added per capita,assets,and compound annual growth Productivity:It is necessary to use resources efficiently to have a competitive manufacturing industry.Productivity is a major driver of the growth and size of the industry.o Metrics:Labor productivity index,total factor productivity index,output per hour Economic Environment:A number of factors,including research,policies,and societal trends,can affect the productivity and size of the industry.AMS 600-16 October 2024 5 o Metrics:Research and development expenditures as a percent of GDP,journal articles per capita,researchers per capita,competitiveness indices,inflation,patents Stakeholder Impact:Owners,employees,and other stakeholders invest their resources into manufacturing with the purpose of receiving some benefit.The costs and return that they receive can drive industry productivity and growth.However,data is limited on this topic area.o Metrics:Number of employees,compensation,safety incidents,profits,exports,hours worked Areas for Advancement:It is important to identify areas of investment that have the potential to have a high return,which can facilitate productivity and growth in manufacturing.o Metrics:High-cost supply chain components,country comparison indices Currently,this annual report discusses items related to inputs for production and outputs from production.It does not discuss negative externalities,the inputs that are used in the function of a product(e.g.,gasoline for an automobile),or the function of the product;however,these items might be included in future reports.Manufacturing metrics can be categorized by stakeholder,scale,and metric type(see Figure 1.2).Stakeholders include the individuals that have an interest in manufacturing.All the metrics in this report relate directly or indirectly to all or a selection of stakeholders.The benefits for some stakeholders are costs for other stakeholders.For Figure 1.2:Data Categorization for Examining the Economics of Manufacturing Stakeholders Owners Employees Consumers Citizens Scale Indirect Measure Direct Measure Nominal Normalized Context:Compared over time and/or between countries/industries AMS 600-16 October 2024 6 instance,the price of a product is a cost to the consumer but represents compensation and profit for the producers.The scale indicates whether the metric is nominal(e.g.,the total U.S.manufacturing revenue)or is adjusted to a notionally common scale(e.g.,revenue per capita).The metric type distinguishes whether the metric measures manufacturing activities directly(e.g.,total employment)or measures those things that affect manufacturing(e.g.,research and development).These metrics are then compared over time and/or between industries to provide context to U.S.manufacturing activities.Scope and Approach There are numerous aspects one could examine in manufacturing.This report discusses a subset of stakeholders and focuses on U.S.manufacturing.Among the many datasets available,it utilizes those that are prominent and are consistent with economic standards.These criteria are further discussed below.Stakeholders:This report focuses on the employees and the owners/investors,as the data available facilitates examining these entities.Future work may move toward examining other stakeholders in manufacturing,such as the consumers and general public.Geographic Scope:Many change agents are concerned with a certain group of people or organizations.Since NIST is concerned with U.S.innovation and competitiveness,this report focuses on activities within national borders.In a world of globalization,this effort is challenging,as some of the parts and materials being used in U.S.-based manufacturing activities are imported.The imported values are a relatively small percentage of total activity,but they are important in regard to a firms production.NIST,however,promotes U.S.innovation and industrial competitiveness;therefore,consideration of these imported goods and services are outside of the scope of this report.Standard Data Categorization:Domestic data in the U.S.tends to be organized using NAICS codes,which are the standard used by federal statistical agencies classifying business establishments in the United States.NAICS was jointly developed by the U.S.Economic Classification Policy Committee,Statistics Canada,and Mexicos Instituto Nacional de Estadstica y Geografa,and was adopted in 1997.NAICS has several major categories each with subcategories.Historic data and some organizations continue to use the predecessor of NAICS,which is the Standard Industrial Classification system(SIC).NAICS codes are categorized at varying levels of detail.The broadest level of detail is the two-digit NAICS code,which has 20 categories.More detailed data is reported as the number of digits increase;thus,three-digit NAICS provide more detail than the two-digit and the four-digit provides more detail than the three-digit.The maximum is six digits.Sometimes a two,three,four,or five-digit code is followed by zeros,which do not represent categories.They are null or place holders.For example,the code 336000 represents NAICS 336.International data tends to be in the International Standard Industrial Classification(ISIC)version 3.1,a revised United Nations system for classifying economic data.Manufacturing is broken into 23 major categories(ISIC 15 through 37),with additional subcategorization.This data categorization works similar to NAICS in that additional digits represent additional detail.AMS 600-16 October 2024 7 Data Sources:Thomas(2012)explores a number of data sources for examining U.S.manufacturing activity(Thomas 2012).This report selects from sources that are the most prominent and reveal the most information about the U.S.manufacturing industry.These data include the United Nations Statistics Divisions National Accounts Main Aggregates Database and the U.S.Census Bureaus Annual Survey of Manufactures,among others.Because the data sources are scattered across several resources,there are differences in what yearly data is available for a particular category or topic.In each case,the most-up-to-date and available information is provided for the relevant category.Data Limitations:Like all collections of information,the data on manufacturing has limitations.In general,there are 3 aspects to economic data of this type:1)breadth of the data,2)depth of the data,and 3)the timeliness of the data.The breadth of the data refers to the span of items covered,such as the number of countries and years.The depth of the data refers to the number of detailed breakouts,such as value added,expenditures,and industries.In general,breadth and depth are such that when the number of items in each are multiplied together it equals the number of observations in the dataset for a particular time period.For instance,if you have value added data on 5 industries for 20 countries for a single year,then you would have 100 observations(i.e.,5 x 20=100).The timeliness of the data refers to how recently the data was released.For instance,is the data 1 year old or 5 years old at release.In general,data can perform well in 2 of these 3 criteria,but it is less common to perform well on all 3 due to feasibility of data collection(see Figure 1.3).Moreover,in this report there is data that is very recent(timeliness)and spans numerous subsectors(depth),but it only represents the United States.On the other hand,there is data that spans multiple countries(breadth)and subsectors of manufacturing(depth);however,this data is from several years ago.Fortunately,industry level trends change slowly;thus,the data may not be from the most recent years,but it is still representative.AMS 600-16 October 2024 8 Figure 1.3:Illustration of the Feasibility of Data Collection and Availability Timeliness Older Newer Breadth Deep Shallow Narrow Broad More Feasible Less feasible AMS 600-16 October 2024 9 Value Added Value added is the primary metric used to measure economic activity.It is defined as the increase in the value of output at a given stage of production;that is,it is the value of output minus the cost of inputs from other establishments(Dornbusch 2000).The primary elements that remain after subtracting inputs is taxes,compensation to employees,and gross operating surplus;thus,the sum of these also equal value added.Gross operating surplus is used to calculate profit,which is gross operating surplus less the depreciation of capital such as buildings and machinery.The sum of all value added for a country is that nations Gross Domestic Product(GDP).International Comparison There are a number of sources of international estimates of value added for manufacturing.The United Nations Statistics Division National Accounts Main Aggregates Database has a wide-ranging dataset that covers a large number of countries over a significant period of time.In 2022,there was$15.0 trillion of value added(i.e.,GDP)in global manufacturing in constant 2015 dollars,which is 17.5%of the value added by all industries($86.1 trillion),according to the United Nations Statistics Division.Since 1970,manufacturing ranged between 13.8%and 17.5%of global GDP.The top 10 manufacturing countries accounted for$10.7 trillion or 71.0%of global manufacturing value added:China(31.0%),United States(15.1%),Japan(6.6%),Germany(4.9%),South Korea(3.1%),India(3.1%),United Kingdom(1.9%),Italy(1.9%),Mexico(1.8%),and France(1.7%)(United Nations Statistics Division 2024).As seen in Figure 2.1,U.S.compound real(i.e.,controlling for inflation)annual growth between 1997 and 2022 was 1.7%,which places the U.S.below the 50th percentile.This growth exceeded that of Germany,France,Canada,Japan,and Australia;however,it is slower than that for the world(3.8%)and that of many emerging economies.It is important to note that emerging economies can employ idle or underutilized resources and adopt technologies that are already proven in other nations to achieve high growth rates.Developed countries are already utilizing resources and are employing advanced technologies;thus,comparing U.S.growth to the high growth rates in China or India has limited meaning.As seen in Figure 2.2,the compound annual growth for the U.S.between 2017 and 2022 was 1.5%.This puts the U.S.just below the 50th percentile above Canada and Germany among others but still below the world growth of 2.9%.As seen in Figure 2.3,among the 10 largest manufacturing nations,U.S.manufacturing value added,as measured in constant 2015 dollars,is the second largest.In current AMS 600-16 October 2024 10 Figure 2.1:National 25-Year Compound Annual Growth,by Country(1997 to 2022):Higher is Better Data Source:United Nations Statistics Division.(2024).“National Accounts Main Aggregates Database.”http:/unstats.un.org/unsd/snaama/Introduction.asp Figure 2.2:National 5-Year Compound Annual Growth,by Country(2017 to 2022):Higher is Better Data Source:United Nations Statistics Division.(2024).“National Accounts Main Aggregates Database.”http:/unstats.un.org/unsd/snaama/Introduction.asp)Italy,0.1%Australia,0.3nada,0.5%Japan,0.9%France,1.0%Germany,1.6%United States,1.7%Mexico,1.7%World,3.8%India,6.4%Ireland,8.3%-10.0%-5.0%0.0%5.0.0.0%th Percentile50th Percentile75th Percentile100th PercentileFrance,-0.6%Australia,0.0%Germany,0.0%Italy,0.1nada,0.3%Japan,0.8%Mexico,1.4%United States,1.5%World,2.9%India,3.4%Ireland,15.8%-40.0%-30.0%-20.0%-10.0%0.0.0 .0%th Percentile50th Percentile75th Percentile100th PercentileAMS 600-16 October 2024 11 FranceMexicoItalyUnited KingdomIndiaRepublic of KoreaGermanyJapanUnited StatesChina010002000300040005000197019731976197919821985198819911994199720002003200620092012201520182021$Billion 2015 Figure 2.3:Manufacturing Value Added,Top 10 Manufacturing Countries(1970 to 2022)dollars,the U.S.produced$2.6 trillion in manufacturing valued added while China produced$5.1 trillion.As illustrated in Figure 2.4,U.S.manufacturing value added was 10.7%of national GDP in 2022.In comparison,Germanys manufacturing industry was 22.6%,China was 28.6%,and Japan was 22.1%with the world average being 17.5%.Although the U.S.is below average,this can be somewhat deceiving,as 2022 U.S.GDP per capita is significantly higher than both Japan and Germany along with most other countries,which makes the denominator disproportionally larger when calculating the proportion of the economy that manufacturing represents.Thus,a more meaningful measure might be manufacturing GDP(i.e.,value added)per capita.Among the ten largest manufacturing countries,the U.S.has the 2nd largest manufacturing value added per capita,as seen in Figure 2.5.Out of all countries the U.S.ranks 16th,as seen in Figure 2.6.Since 1970,the U.S.ranking has ranged between 12th and 17th.It is important to note that there are varying means for adjusting data that can change the rankings slightly.The UNSD data uses market exchange rates while others might use purchasing power parity(PPP)exchange rates.PPP is the rate that a currency in one country would have to be converted to purchase the same goods and services in another country.The drawback of PPP is that it is difficult to measure and methodological questions have been raised about some surveys that collect Data Source:United Nations Statistics Division.(2024).“National Accounts Main Aggregates Database.”http:/unstats.un.org/unsd/snaama/Introduction.asp AMS 600-16 October 2024 12 IndiaFranceUnited KingdomItalyMexicoChinaJapanGermanyUnited StatesRepublic of Korea0200040006000800010000120001400016000197019731976197919821985198819911994199720002003200620092012201520182021$2015 per Capita Figure 2.4:Manufacturings Share of National GDP(Constant 2015 Dollars)Data Source:United Nations Statistics Division.(2024).“National Accounts Main Aggregates Database.”http:/unstats.un.org/unsd/snaama/Introduction.asp Figure 2.5:Manufacturing Value Added Per Capita,Top 10 Largest Manufacturing Countries(1970 to 2022):Higher is Better 00.050.10.150.20.250.30.35197019731976197919821985198819911994199720002003200620092012201520182021Manufacturing Share of National GDPChinaGermanyJapanUnited StatesWorldData Source:United Nations Statistics Division.(2024).“National Accounts Main Aggregates Database.”http:/unstats.un.org/unsd/snaama/Introduction.asp AMS 600-16 October 2024 13 data for these calculations(Callen 2007).Market based rates tend to be relevant for internationally traded goods(Callen 2007);therefore,this report often utilizes these rates.In terms of subsectors of manufacturing,China produces more than the U.S.in 9 of the 11 subsectors shown in Figure 2.7.When aggregated together,U.S.and European manufacturing value added exceeds that of Eastern and South-eastern Asia(excluding Japan)for 7 of the 11 subsectors.Computer,electronic,and optical products is among those that Asia produces more value added.Figure 2.6:Manufacturing Per Capita Ranking,1970-2022:Lower is Better Data Source:United Nations Statistics Division.(2024).“National Accounts Main Aggregates Database.”http:/unstats.un.org/unsd/snaama/Introduction.asp 051015202530197019731976197919821985198819911994199720002003200620092012201520182021Manufacturing GDP per Capita Ranking(Rank 1=Highest Man GDP per Capita)United StatesJapanGermany02040608010012019701975198019851990199520002005201020152020Man.Per Capita GDP RankingSouth KoreaIrelandChinaAMS 600-16 October 2024 14 Figure 2.7:Global Manufacturing Value Added by Industry,by Country/Region(2020)Data Source:OECD.(2024b).Trade in Value Added(TiVA).https:/www.oecd.org/en/tiva.html Domestic Details There are two primary methods for adjusting value added for inflation.The first is using chained dollars,which uses a changing selection of goods to adjust for inflation.The second uses an unchanging selection of goods to adjust for inflation(Dornbusch 2000).There has been some dispute about the accuracy of each for some goods.The values in this section uses chained dollars.Previous versions of this report included both;however,the differences are often minor.Figure 2.8 shows the cumulative change in manufacturing,durable goods,and nondurable goods manufacturing from 2005 forward.As seen in the figure,U.S.2883844052233021341652414814683621009085159271118523335354220375291209157180831991339546961046163229148735039393191141109125103117118731301212749492013651301119810167844346524901582872852243221112331411418705001000150020002500FOOD,BEVERAGES,TOBACCOCOMPUTER,ELECTRONIC AND OPTICAL PRODUCTS/EQUIP.CHEMICALS AND PHARMACEUTICALSBASIC/FABRICATED METAL AND PRODUCTS,EXCEPTMACHINERY/EQUIPMOTOR VEHICLES,TRAILERS,OTHER TRANSPORTEQUIPMENTOTHER NON-METALLIC MINERAL PRODUCTS,COKE,ANDREFINED PETROLEUMMACHINERY AND EQUIPMENT N.E.C.TEXTILES,WEARING APPAREL,LEATHER AND RELATEDFURNITURE;JEWELLERY,TOYS,ETC.;EQUIPMENTREPAIR/INSTALLATIONWOOD,PAPER,PRINTING,MEDIA PRODUCTS AND CORK,EXCEPT FURNITURERUBBER AND PLASTICS PRODUCTS$Billion Rest of WorldEastern and South-eastern Asia(excl China and Japan)JapanChinaEurope(excl Germany)GermanyUnited StatesAMS 600-16 October 2024 15 manufacturing value added dips during the financial crisis in the late 2000s and during the recent pandemic.During the 2005 to 2023 period,durable goods,which was 45.4%higher than its 2005 value,has had more robust growth than nondurables,which is 0.7low its 2005 value.Manufacturing value added in the U.S.in 2023 was$2.3 trillion in chained 2017 dollars or 10.2%of GDP(Bureau of Economic Analysis 2024a).Using chained dollars from the BEA shows that manufacturing increased by 0.6tween 2022 and 2023.Figure 2.9 and Figure 2.10 provide more detailed data on durable and nondurable goods within the manufacturing industry.As seen in Figure 2.9,computer and electronic products along with motor vehicles,bodies and trailers,and parts has grown 42.8%and 61.0%,respectively between 2013 and 2023.Primary metals also saw significant growth(59.8%).Five of the eleven durable goods subsectors decreased in size between 2013 and 2023.As seen in Figure 2.10,in 2022 only two of eight non-durable sectors were above their 2008 value:Chemical products along with food,beverage,and tobacco products.The largest manufacturing subsector in the U.S.is chemical products followed by food,beverage,and tobacco products,as seen in Figure 2.11.Computer and electronic products is third.Note that this is based on chained dollars.Adjustments using other methods or the nominal value can have slightly different results.Figure 2.8:Cumulative Percent Change in Value Added(2017 Chained Dollars)Data Source:Bureau of Economic Analysis.(2024a).“Industry Economic Accounts Data.”http:/www.bea.gov/iTable/index_industry_gdpIndy.cfm-20.0%-10.0%0.0.0 .00.0.0P.0 05200620072008200920102011201220132014201520162017201820192020202120222023Cumulative Percent Change in Value AddedGross domestic productManufacturingDurable goodsNondurable goodsAMS 600-16 October 2024 16 Figure 2.9:Value Added for Durable Goods by Type(billions of chained dollars),2009-2023 Data Source:Bureau of Economic Analysis.(2024a)“Industry Economic Accounts Data.”http:/www.bea.gov/iTable/index_industry_gdpIndy.cfm Figure 2.10:Value Added for Nondurable Goods by Type(billions of chained dollars),2009-2023 Data Source:Bureau of Economic Analysis.(2024a)“Industry Economic Accounts Data.”http:/www.bea.gov/iTable/index_industry_gdpIndy.cfm 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023Furniture and related products242424242627292929302927282723Wood products283033343431343536343537363437Electrical equip,appliances,and components515351525753605558585553535051Nonmetallic mineral products474851535657575559586159616054Primary metals404145545857636760606772668193Miscellaneous manufacturing84888585828380848792898898103103Fabricated metal products121134142147147148142137145151149135137126122Machinery131149171173172168150136148156154139154162152Other transportation equipment133137142140144146151148151159162138150168187Motor vehicles,bodies and trailers,and parts4797123130139145145153159166167148170201223Computer and electronic products17419320020520921823223824926527327930330329902004006008001000120014001600Billions of Chaned 2017 Dollars2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023Apparel and leather and allied products1011111111101010991010101111Textile mills and textile product mills161615161718181817161615161514Printing and related support activities383839394040404141424135373532Paper products666159596061626156606368646056Plastics and rubber products646867696969767777808277756661Petroleum and coal products1491271079810711511397111116133881068284Food and beverage and tobacco products262250243239252255266259275274267268286307301Chemical products368390366346357351340352345388368387399413424020040060080010001200Billions of Chained 2017 DollarsAMS 600-16 October 2024 17 Figure 2.11:Manufacturing Value Added by Subsector(billions of chained dollars),2005-2022 Data Source:Bureau of Economic Analysis.(2024a)“Industry Economic Accounts Data.”http:/www.bea.gov/iTable/index_industry_gdpIndy.cfm In addition to examining manufacturing value added,it is useful to examine the capital stock in manufacturing,as it reflects the investment in machinery,buildings,and intellectual property in the industry(see Figure 2.12,Figure 2.13,Figure 2.14,and Figure 2.15).Discrete technology manufacturing(i.e.,computer manufacturing,transportation equipment manufacturing,machinery manufacturing,and electronics manufacturing)accounts for 29%of all manufacturing equipment and 33%of structures.The 5-year compound annual growth in computer and electronic manufacturing equipment is 0.5%while structures is growing at a rate of 4.5%.Recall that computer and electronic product manufacturing is the largest Food and Beverage13%Process26%Discrete22%Discrete Tech39 23Apparel and leather and allied products(CAG5:2.2%)Textile mills and textile product mills(CAG5:-3%)Furniture and related products(CAG5:-5.8%)Printing and related support activities(CAG5:-5.1%)Wood products(CAG5:1.7%)Electrical equipment,appliances,and components(CAG5:-2.4%)Nonmetallic mineral products(CAG5:-1.4%)Paper products(CAG5:-1.1%)Plastics and rubber products(CAG5:-5.3%)Petroleum and coal products(CAG5:-6.3%)Primary metals(CAG5:9%)Miscellaneous manufacturing(CAG5:2.2%)Fabricated metal products(CAG5:-4.2%)Machinery(CAG5:-0.6%)Other transportation equipment(CAG5:3.3%)Motor vehicles,bodies and trailers,and parts(CAG5:6.1%)Computer and electronic products(CAG5:2.4%)Food and beverage and tobacco products(CAG5:1.9%)Chemical products(CAG5:1.8%)050100150200250300350400450200520062007200820092010201120122013201420152016201720182019202020212022$Chained 2017 DollarsNOTE:CAG5=5-year compound annual growth rate(Calculated using BEA data)NOTE:Colors in each figure correspond.For instance,food/beverage is colored purple in both figures AMS 600-16 October 2024 18 Apparel and leather and allied products(CAG5:0%)Furniture and related products(CAG5:7.4%)Textile mills and textile product mills(CAG5:1.5%)Printing and related support activities(CAG5:-0.6%)Wood products(CAG5:7.1%)Electrical equipment,appliances,and components(CAG5:5%)Miscellaneous manufacturing(CAG5:6.1%)Nonmetallic mineral products(CAG5:4.3%)Other transportation equipment(CAG5:4.6%)Plastics and rubber products(CAG5:5.5%)Paper products(CAG5:2.9%)Primary metals(CAG5:4.6%)Machinery(CAG5:3.1%)Petroleum and coal products(CAG5:3.3%)Fabricated metal products(CAG5:5.4%)Motor vehicles,bodies and trailers,and parts(CAG5:3%)Computer and electronic products(CAG5:0.5%)Food and beverage and tobacco products(CAG5:5.5%)Chemical products(CAG5:4.1%)050100150200250200520082011201420172020$Billion 2023 durable goods manufacturing sector in the U.S.,as shown in Figure 2.9.Note that for many subsectors,structures are growing at a five-year compound rate as high as 7.9%,as seen in Figure 2.13.In terms of intellectual property,chemical products have the highest value,as seen in Figure 2.14.As of 2022,manufacturing net stock is split between intellectual property(33.3%),structures(34.9%),and equipment(31.8%)somewhat evenly.Figure 2.12:Current-Cost Net Stock:Private Equipment,Manufacturing(2005-2022)NOTE:CAG5=5-year compound annual growth rate(Calculated using BEA data)NOTE:Colors in each figure correspond.For instance,food/beverage is colored purple in both figures Adjusted using the Consumer Price Index from the Bureau of Labor Statistics Data Source:Bureau of Economic Analysis.(2024b)“Fixed Assets Accounts Tables.”https:/apps.bea.gov/iTable/iTable.cfm?ReqID=10&step=2 Food and Beverage13%Process29%Discrete29%Discrete Tech29 22AMS 600-16 October 2024 19 Figure 2.13:Current-Cost Net Stock:Private Structures,Manufacturing(2005-2022)NOTE:CAG5=5-year compound annual growth rate(Calculated using BEA data)NOTE:Colors in each figure correspond.For instance,food/beverage is colored purple in both figures Adjusted using the Consumer Price Index from the Bureau of Labor Statistics Data Source:Bureau of Economic Analysis.(2024b)“Fixed Assets Accounts Tables.”https:/apps.bea.gov/iTable/iTable.cfm?ReqID=10&step=2 Apparel and leather and allied products(CAG5:2.7%)Furniture and related products(CAG5:6.7%)Printing and related support activities(CAG5:4.5%)Textile mills and textile product mills(CAG5:3.2%)Wood products(CAG5:6.1%)Electrical equipment,appliances,and components(CAG5:4.3%)Miscellaneous manufacturing(CAG5:5.8%)Nonmetallic mineral products(CAG5:5.1%)Plastics and rubber products(CAG5:7.7%)Paper products(CAG5:5.4%)Other transportation equipment(CAG5:5.5%)Fabricated metal products(CAG5:6.7%)Primary metals(CAG5:5.4%)Motor vehicles,bodies and trailers,and parts(CAG5:7.9%)Machinery(CAG5:6.1%)Petroleum and coal products(CAG5:4.4%)Computer and electronic products(CAG5:4.5%)Food and beverage and tobacco products(CAG5:7%)Chemical products(CAG5:7.7%)050100150200250300350200520082011201420172020$Billion 2023Food and Beverage13%Process29%Discrete25%Discrete Tech33 22AMS 600-16 October 2024 20 Wood products(CAG5:5.4%)Textile mills and textile product mills(CAG5:2.4%)Apparel and leather and allied products(CAG5:2.4%)Furniture and related products(CAG5:3.8%)Printing and related support activities(CAG5:-0.1%)Paper products(CAG5:2.9%)Plastics and rubber products(CAG5:2.5%)Primary metals(CAG5:2.5%)Nonmetallic mineral products(CAG5:2.4%)Fabricated metal products(CAG5:2.5%)Electrical equipment,appliances,and components(CAG5:2.4%)Food and beverage and tobacco products(CAG5:2.6%)Miscellaneous manufacturing(CAG5:2.6%)Petroleum and coal products(CAG5:2%)Other transportation equipment(CAG5:-3.2%)Machinery(CAG5:2.2%)Motor vehicles,bodies and trailers,and parts(CAG5:2.5%)Computer and electronic products(CAG5:1.3%)Chemical products(CAG5:4.4%)01002003004005006007008009001000$Billion 2023 Figure 2.14:Current-Cost Net Stock:Intellectual Property Products,Manufacturing(2005-2022)NOTE:CAG5=5-year compound annual growth rate(Calculated using BEA data)NOTE:Colors in each figure correspond.For instance,food/beverage is colored blue in both figures Adjusted using the Consumer Price Index from the Bureau of Labor Statistics Data Source:Bureau of Economic Analysis.(2024b)“Fixed Assets Accounts Tables.”https:/apps.bea.gov/iTable/iTable.cfm?ReqID=10&step=2 Food and Beverage2%Process56%Discrete9%Discrete Tech33 22AMS 600-16 October 2024 21 Figure 2.15:Current-Cost Net Stock in Manufacturing,by Type(2005-2022)Adjusted using the Consumer Price Index from the Bureau of Labor Statistics Data Source:Bureau of Economic Analysis.(2024b)“Fixed Assets Accounts Tables.”https:/apps.bea.gov/iTable/iTable.cfm?ReqID=10&step=2 0100020003000400050006000200520062007200820092010201120122013201420152016201720182019202020212022$Billion 2023EquipmentStructuresIntellectual PropertyAMS 600-16 October 2024 22 US Manufacturing Supply Chain There are many suppliers of goods and services that have a stake in manufacturing;these include resellers,providers of transportation and warehousing,raw material suppliers,suppliers of intermediate goods,and suppliers of professional services.Using data from the Annual Survey of Manufactures(U.S.Census Bureau 2023),Table 3.1 presents and Figure 3.1 maps the purchases that the manufacturing industry made for production,which is Table 3.1:Supply Chain Entities and Contributions,Annual Survey of Manufactures,2021 2021 ($Billions 2021)I.Services,Computer Hardware,Software,and Other Expenditures a.Communication Services 5.5 b.Computer Hardware,Software,and Other Equipment 12.3 c.Professional,Technical,and Data Services 42.7 d.Other Expenditures 282.9 e.TOTAL 343.4 II.Refuse Removal Expenditures 15.6 III.Machinery,Structures,and Compensation Expenditures a.Payroll,Benefits,and Employment 945.3 b.Capital Expenditures:Structures(including rental)67.9 c.Capital Expenditures:Machinery/Equipment(including rental)149.2 d.TOTAL 1162.4 IV.Suppliers of Materials Expenditures a.Materials,Parts,Containers,Packaging,etc Used 3073.6 b.Contract Work and Resales 178.3 c.Purchased Fuels and Electricity 89.2 d.TOTAL 3341.2 V.Maintenance and Repair Expenditures 58.6 VI.Shipments a.Expenditures 4921.2 b.Net Inventories Shipped-71.8 c.Depreciation 194.1 d.Net Income 1036.1 E.TOTAL 6079.6 VII.Value Added estimates a.Value added calculated VI.E-VI.b-VI.A III.a 2175.6 b.ASM Value added 2789.5 c.BEA value added 2496.8 Note:Colors correspond with those in Figure 3.1 Source:U.S.Census Bureau.(2023).“Annual Survey of Manufactures.”https:/www.census.gov/programs-surveys/asm.htmlAMS 600-16 October 2024 23 Figure 3.1:Manufacturing Supply Chain,2021 Data Source:U.S.Census Bureau.(2023).“Annual Survey of Manufactures.”https:/www.census.gov/programs-surveys/asm/data/tables.htmll AMS 600-16 October 2024 24 disaggregated into five categories:suppliers of services,computer hardware,software,and other costs(blue);refuse removal(gold);machinery,structures,and compensation(orange);repair of the machinery and structures(red);and suppliers of materials(green).These items all feed into the design and production of manufactured goods which are inventoried and/or shipped(gray).The depreciation of capital and net income is also included in Figure 3.1,which affects the market value of shipments.In addition to the stakeholders,there are also public vested interests,the end users,and financial service providers to be considered.Direct and Indirect Manufacturing:As previously mentioned,to achieve economy-wide efficiency improvements,researchers have suggested that“the supply chain must become the focus of policy management,in contrast to the traditional emphasis on single technologies/industries”(Tassey 2010).As seen in Table 3.2,there is an estimated$2425 billion in manufacturing value added with an additional$1975 billion in indirect value added from other industries for manufacturing,as calculated using input-output analysis.1 Direct and indirect manufacturing accounts for 17.1%of total GDP.In 2022,the U.S.imported approximately 20.6%of its intermediate goods,as seen in Table 3.3.As a proportion of output and imports(i.e.,a proportion of the total inputs),intermediate imports represented 13.4%.As can be seen in Table 3.3,these proportions Table 3.2:Direct and Indirect Manufacturing Value Added,2022($Billion)Value Added Description NAICS Direct Indirect Total Indirect as%of Total GDP Total U.S.GDP -25 744.1-Total Manufacturing*31-33 2 424.5 1 975.2 4 399.7 17.1%Discrete Technology Products 333-336 307.4 639.7 947.1 3.7%Discrete Products 313-323,327-332,337-339 714.5 972.1 1 686.6 6.6%Process Products 324-326 631.5 735.4 1 366.8 5.3%Food,Beverage,and Tabaco 311-312 771.1 659.8 1 431.0 5.6%*The sum of the 3 digit NAICS does not equal total manufacturing due to overlap in supply chains.Data Source:BEA.(2024c).Input-Output Accounts Data.https:/www.bea.gov/industry/input-output-accounts-data Note:These values are calculated by using the Excel solver to estimate final demand for each set of NAICS codes such that the total requirements table multiplied by the final demand estimate equals the industry output.All other industries are set to zero in the final demand.1 These values are calculated by using the Excel solver to estimate final demand for each set of NAICS codes such that the total requirements table multiplied by the final demand estimate equals the industry output.All other industries are set to zero in the final demand.AMS 600-16 October 2024 25 Table 3.3:Imported Intermediate Manufacturing($millions)Year Intermediate Manufacturing*Intermediate Imports for Manufacturing*Total Manufacturing Output Intermediate Imports as a Percent of Intermediates Intermediate imports as a Percent of Total Industry Output 2007 3 511 210 732 632 5 217 713 20.9.0 12 3 812 996 838 198 5 577 343 22.0.0 17 3 523 048 680 102 5 456 958 19.3.5 22 4 485 746 926 053 6 910 279 20.6.4%Source Data:Bureau of Economic Analysis.(2024c).Input-Output Accounts Data.https:/www.bea.gov/industry/input-output-accounts-data*Commodities used by industries*From the import matrix have not changed dramatically in recent years.As seen in Table 3.4,Canada is the primary source of imported supply chain items for the U.S.with China being second.Some of the costs of production are caused by losses due to waste or defects.Unfortunately,there is limited data and information on these losses.The research that does exist is often case studies within various industries and countries,which provide only limited insight to U.S.national trends.Tabikh estimates from survey data in Sweden that the percent of planned production time that is downtime amounts to 13.3%(Tabikh 2014).According to NISTs Manufacturing Cost Guide,downtime amounts to 8.3%of planned production time and amounts to$245 billion for discrete manufacturing(i.e.,NAICS 321-339 excluding NAICS 324 and 325)(Thomas 2020).In addition to downtime,defects result in additional losses.The Manufacturing Cost Guide estimates that defects amount to between$32.0 billion and$58.6 billion for discrete manufacturing(i.e.,NAICS 321-339 excluding NAICS 324 and 325),depending on the method used for estimation(Thomas 2020).The USGS estimates that 15%of steel mill products end up as scrap in the manufacturing process(Fenton 2001).Other sources cite that at least 25%of liquid steel and 40%of liquid aluminum does not make it into a finished product due primarily to metal quality(25%of steel loss and 40%of aluminum loss),the shape produced2(10%to 15%of loss),and defects in the manufacturing processes(5%of loss)(Allwood 2012).Material losses mean there is the possibility of producing the same goods using less material,which could have rippling effects up and down the supply chain.There would be reductions in the burden of transportation,material handling,machinery,inventory costs,and energy use along with many other activities associated with handling and altering materials.Another source of losses can be found in cybercrime where criminals can disrupt production and/or steal intellectual property.The Manufacturing Cost Guide estimates that manufacturers lost between$8.9 billion and$38.6 billion due to cybercrime.2 The steel and aluminum industry often produce standard shapes rather than customized shapes tailored to specific products.This results in needing to cut away some portion of material,which ends up as scrap.AMS 600-16 October 2024 26 Table 3.4:Percent of U.S.Manufacturing Industry Supply Chain,by Country of Origin(2014)Country US Manufacturing Supply Chain(percent)USA 83.0 CAN 3.1 CHN 1.8 MEX 1.5 DEU 0.8 JPN 0.8 GBR 0.5 KOR 0.5 RUS 0.4 ROW 7.6 Data Source:Thomas,Douglas.(2020).Manufacturing Cost Guide.https:/www.nist.gov/services-resources/software/manufacturing-cost-guide Manufacturing costs also accumulate in assets such as buildings,machinery,and inventory.In addition to the estimates provided in Figure 2.12,Figure 2.13,Figure 2.14,and Figure 2.15,data on assets is published periodically in the Economic Census.As seen in Table 3.5,total depreciable assets amount to$3.4 trillion with$2.7 trillion being machinery and equipment.The adoption of new technologies often requires new assets(e.g.,machinery).During the 2017 year,4.9%of depreciable assets were new with an overall growth of 3.2ter accounting for retirements.This rate provides some insight into the rate of change for assets.Table 3.5:Depreciable Assets and the Rate of Change,2017($million 2017)Buildings and Structures Machinery and Equipment Total A Gross value of depreciable assets(acquisition costs),beginning of year 661 841*2 645 636*3 307 476 B Capital Expenditures(added to assets)33 705 134 733 168 438 C Retirements(subtracted from assets)11 597*46 358*57 955 D Gross value of depreciable assets(acquisition costs,end of year)A B-C 683 949 2 734 011 3 417 960 E Percent of depreciable assets that are new(end of year)B/D 4.9%*Assumes that the proportions of buildings and structures or machinery and equipment are the same as that for capital expenditures.Data Source:U.S.Census Bureau.(2020)2017 Economic Census.EC1731BASIC:Manufacturing Summary Statistics.https:/www.census.gov/data/tables/2017/econ/economic-census/naics-sector-31-33.html A frequently invoked axiom suggests that roughly 80%of a problem is due to 20%of the cause,a phenomenon referred to as the Pareto principle(Hopp and Spearman 2008).That is,a small portion of the cause accounts for a large portion of the problem.Joseph Juran proposed that the Pareto principle could be applied to an organizations operations(Six Sigma Daily 2018).For instance,80%of defects would be the result of 20%of the AMS 600-16 October 2024 27 causes.Identifying that small portion of the cause(i.e.,the 20%)can facilitate making large efficiency improvements in operations.Manufacturing industry NAICS codes are categories of production activities.A larger industry(i.e.,one in the top 20%)suggests that there is more of a particular type of activity and/or the activities are more costly;thus,an increase in productivity in a larger industry would either reduce a costly activity or reduce an activity that occurs at high frequency.The result is a greater impact than might otherwise be achieved.Additionally,statistical evidence suggests that a dollar of research and development in a large cost supply chain entity has a higher return on investment than a small cost one(Thomas 2018).Table 3.6,Table 3.7,and Table 3.8 provide the supply chain items for all of U.S.manufacturing,U.S.high tech manufacturing,and U.S.process manufacturing,respectively.For all of manufacturing,professional and business services is the largest contributor to manufacturing,excluding manufacturing itself.Mining is the second largest and wholesale trade is third.The high-tech manufacturing industries are greyed out in Table 3.7 while the process industries are greyed out in Table 3.8.Excluding the greyed-out items,wholesale trade is the largest supply chain item for high tech manufacturing while oil and gas extraction is that for process manufacturing.Table 3.6:Domestic U.S.Manufacturing Supply Chain,2022 Value Added Description$Billion%of Total Manufacturing 2424.5 55.1%Professional and business services 356.9 8.1%Mining 355.4 8.1%Wholesale trade 337.4 7.7%Finance,insurance,real estate,rental,and leasing 264.3 6.0%Agriculture,forestry,fishing,and hunting 207.5 4.7%Transportation and warehousing 173.0 3.9%Utilities 69.2 1.6%Government 62.8 1.4%Information 61.2 1.4%Other services,except government 24.1 0.5%Construction 23.4 0.5%Arts,entertainment,recreation,accommodation,and food services 21.1 0.5%Retail trade 18.3 0.4ucational services,health care,and social assistance 0.5 0.0%TOTAL 4399.7 100.0ta Source:Bureau of Economic Analysis.(2024c).Input-Output Accounts Data.https:/www.bea.gov/industry/input-output-accounts-data Note:Calculated using methods described in Table 3.2;however,the BEA industry-by-commodity after redefinitions input-output data with 15 total industries was used.AMS 600-16 October 2024 28 Table 3.7:2022 Domestic Supply Chain Entities for Discrete High-Tech Manufacturing(NAICS 333-336),Value Added(VA)($Billion)NAICS Description VA%of Total VA%of Total 334 Computer and electronic products 246.2 17.2H2 Rail transportation 4.6 0.333 Machinery 167.2 11.739 Miscellaneous manufacturing 4.1 0.3364OT Other transportation equipment 155.7 10.9%GSLE State and local government enterprises 3.8 0.3361MV Motor vehicles,bodies and trailers,and parts 143.6 10.024 Petroleum and coal products 3.5 0.2B Wholesale trade 122.0 8.5r2 Food services and drinking places 3.5 0.231 Primary metals 73.7 5.2%GFE Federal government enterprises 2.9 0.235 Electrical equipment,appliances,and components 58.5 4.113TT Textile mills and textile product mills 2.8 0.232 Fabricated metal products 46.6 3.3J0 Other retail 2.6 0.2U Management of companies and enterprises 34.5 2.4V2 Waste management and remediation services 2.4 0.225 Chemical products 33.7 2.4Q1 Publishing,except internet(includes software)2.3 0.2T12OP Misc.professional,scientific,and technical services 32.3 2.3H1 Air transportation 2.2 0.2V1 Administrative and support services 27.7 1.93FF Forestry,fishing,and related activities 1.9 0.1R1CI Federal Reserve banks,credit intermediation,and related 19.6 1.4r1 Accommodation 1.7 0.1R4 Insurance carriers and related activities 17.9 1.3q1AS Performing arts,sports,museums,and related 1.6 0.1H4 Truck transportation 17.5 1.21CA Farms 1.5 0.126 Plastics and rubber products 17.0 1.223 Printing and related support activities 1.3 0.1 Utilities 16.9 1.2H6 Pipeline transportation 0.9 0.1S2RL Rental/leasing services and lessors of intangible assets 15.8 1.115AL Apparel and leather and allied products 0.9 0.1%ORE Other real estate 15.4 1.111FT Food and beverage and tobacco products 0.8 0.1Q4 Data processing and other information services 9.4 0.7!3 Support activities for mining 0.8 0.1H7OS Other transportation and support activities 9.3 0.6H5 Transit and ground passenger transportation 0.8 0.1T15 Computer systems design and related services 8.9 0.6Q2 Motion picture and sound recording industries 0.6 0.027 Nonmetallic mineral products 8.3 0.6H3 Water transportation 0.4 0.0 Other services,except government 8.3 0.637 Furniture and related products 0.4 0.0T11 Legal services 8.0 0.6q3 Amusements,gambling,and recreation industries 0.4 0.022 Paper products 7.6 0.5E2 General merchandise stores 0.3 0.0!2 Mining,except oil and gas 7.4 0.5a Educational services 0.1 0.0!1 Oil and gas extraction 7.0 0.5b3 Nursing and residential care facilities 0.0 0.0R3 Securities,commodity contracts,and investments 6.5 0.5D5 Food and beverage stores 0.0 0.0# Construction 6.2 0.4b1 Ambulatory health care services 0.0 0.0%GFGN Federal general government(nondefense)5.9 0.4R5 Funds,trusts,and other financial vehicles 0.0 0.0Q3 Broadcasting and telecommunications 5.7 0.4b4 Social assistance 0.0 0.0I3 Warehousing and storage 5.4 0.4b2 Hospitals 0.0 0.021 Wood products 5.4 0.4%HS Housing 0.0 0.0%GSLG State and local general government 5.3 0.4%GFGD Federal general government(defense)0.0 0.0D1 Motor vehicle and parts dealers 4.8 0.3%Note:Calculated using methods described in Table 3.2.Data Source:Bureau of Economic Analysis.(2024c).Input-Output Accounts Data.https:/www.bea.gov/industry/input-output-accounts-data AMS 600-16 October 2024 29 Table 3.8:2022 Domestic Supply Chain Entities for Process Manufacturing(NAICS 331,324-325),Value Added(VA)($Billion)NAICS Description VA%of Total VA%of Total 325 Chemical products 439.5 26.127 Nonmetallic mineral products 5.7 0.3!1 Oil and gas extraction 305.3 18.111FT Food and beverage and tobacco products 4.9 0.324 Petroleum and coal products 185.2 11.0r2 Food services and drinking places 4.0 0.2B Wholesale trade 103.2 6.1J0 Other retail 3.9 0.231 Primary metals 89.8 5.3V2 Waste management and remediation services 3.9 0.2U Management of companies and enterprises 64.9 3.935 Electrical equipment,appliances,and components 3.6 0.2T12OP Misc professional,scientific,and technical services 37.7 2.2%GFE Federal government enterprises 3.5 0.2 Utilities 35.6 2.1361MV Motor vehicles,bodies and trailers,and parts 2.8 0.2V1 Administrative and support services 28.1 1.73FF Forestry,fishing,and related activities 2.4 0.1R1CI Federal Reserve banks,credit intermediation,and related 27.7 1.621 Wood products 2.4 0.1H6 Pipeline transportation 23.9 1.4Q1 Publishing,except internet(includes software)2.2 0.132 Fabricated metal products 21.6 1.3H1 Air transportation 2.0 0.1S2RL Rental and leasing services and lessors of intangible assets 19.9 1.2q1AS Performing arts,sports,museums,and related 1.9 0.1R4 Insurance carriers and related activities 19.4 1.2r1 Accommodation 1.8 0.1H4 Truck transportation 18.5 1.113TT Textile mills and textile product mills 1.7 0.1%ORE Other real estate 18.0 1.123 Printing and related support activities 1.3 0.1!3 Support activities for mining 15.8 0.9D1 Motor vehicle and parts dealers 1.2 0.1!2 Mining,except oil and gas 14.4 0.9H3 Water transportation 1.0 0.1T15 Computer systems design and related services 13.7 0.839 Miscellaneous manufacturing 0.9 0.134 Computer and electronic products 13.3 0.8H5 Transit and ground passenger transportation 0.8 0.01CA Farms 13.1 0.8Q2 Motion picture and sound recording industries 0.7 0.033 Machinery 12.0 0.7364OT Other transportation equipment 0.5 0.0# Construction 11.0 0.7q3 Amusements,gambling,and recreation industries 0.4 0.0H7OS Other transportation and support activities 10.4 0.615AL Apparel and leather and allied products 0.3 0.0%GFGN Federal general government(nondefense)10.1 0.637 Furniture and related products 0.2 0.0T11 Legal services 9.1 0.5E2 General merchandise stores 0.2 0.0 Other services,except government 9.0 0.5a Educational services 0.1 0.0Q4 Data processing,internet,and other information services 8.4 0.5b3 Nursing and residential care facilities 0.1 0.0H2 Rail transportation 8.0 0.5D5 Food and beverage stores 0.1 0.026 Plastics and rubber products 7.1 0.4b1 Ambulatory health care services 0.1 0.0%GSLE State and local government enterprises 7.0 0.4R5 Funds,trusts,and other financial vehicles 0.0 0.0%GSLG State and local general government 6.7 0.4b4 Social assistance 0.0 0.0R3 Securities,commodity contracts,and investments 6.5 0.4b2 Hospitals 0.0 0.0Q3 Broadcasting and telecommunications 6.2 0.4%HS Housing 0.0 0.0I3 Warehousing and storage 6.1 0.4%GFGD Federal general government(defense)0.0 0.022 Paper products 5.7 0.3%Note:Calculated using methods described in Table 3.2.Data Source:Bureau of Economic Analysis.(2024c).Input-Output Accounts Data.https:/www.bea.gov/industry/input-output-accounts-data AMS 600-16 October 2024 30 Employment,Compensation,Profits,and Productivity The Annual Survey of Manufactures estimates that there were 11.2 million employees in the manufacturing industry in 2021,which is the most recent data available(see Table 4.1).The Current Population Survey estimates that there were 15.6 million manufacturing employees in 2023 and the Current Employment Statistics estimates 12.9 million employees in 2023,the most recent data available(see Table 4.2 and Table 4.3).According to data in Table 4.2,manufacturing accounted for 9.7%of total employment.36.6%of manufacturing employment was production workers with an addition 20.0ing management,business,and financial operations occupations along with 16.6ing professional and related occupations.As seen in Table 4.3,manufacturing employment has a 5-year compound annual growth rate of 0.8%,which is less than that for total private employment.The source data for the estimates from Table 4.2 and Table 4.3 each have their own method for how the data was acquired and its own definition of employment.The Current Population Survey considers an employed person to be any individual who did any work for pay or profit during the survey reference week or were absent from their job because they were ill,on vacation,or taking leave for some other reason.It also includes individuals who completed at least 15 hours of unpaid work in a family-owned enterprise operated by someone in their household.In contrast,the Current Employment Statistics specifically exclude proprietors,self-employed,and unpaid family or volunteer workers.Therefore,the estimates from the Current Employment Statistics are lower than the Table 4.1:Employment,Annual Survey of Manufactures NAICS Description 2020 2021 311 Food manufacturing 1 509 076 1 509 329 312 Beverage and tobacco product manufacturing 214 712 224 136 313 Textile mills 78 736 77 854 314 Textile product mills 97 569 96 965 315 Apparel manufacturing 65 696 62 491 316 Leather and allied product manufacturing 25 213 25 055 321 Wood product manufacturing 395 339 398 867 322 Paper manufacturing 328 945 330 425 323 Printing and related support activities 372 745 351 849 324 Petroleum and coal products manufacturing 105 383 100 428 325 Chemical manufacturing 758 902 778 136 326 Plastics and rubber products manufacturing 768 225 773 438 327 Nonmetallic mineral product manufacturing 386 482 384 716 331 Primary metal manufacturing 346 423 317 946 332 Fabricated metal product manufacturing 1 339 334 1 296 417 333 Machinery manufacturing 1 008 247 996 694 334 Computer and electronic product manufacturing 776 220 758 833 335 Electrical equipment,appliance,and component manufacturing 334 391 341 237 336 Transportation equipment manufacturing 1 535 704 1 534 161 337 Furniture and related product manufacturing 347 017 333 078 339 Miscellaneous manufacturing 510 868 513 924 TOTAL 11 305 227 11 205 979 Data Source:U.S.Census Bureau.(2023).“Annual Survey of Manufactures.”https:/www.census.gov/programs-surveys/asm/data/tables.html AMS 600-16 October 2024 31 Table 4.2:Employment by Industry,by Occupation(2023):Current Population Survey Percent of Total Industry Employment Total employed Management,professional,and related occupations Service occupations Sales and office occupations Natural resources construction,and maintenance occupations Production,transportation,and material,moving occupations Management,business,and financial operations occupations Professional and related occupations Protective service occupations Service occupations,except protective Sales and related occupations Office and administrative suppor occupations Farming,fishing,and forestry occupations Construction and extraction occupations Installation,maintenance,and repair occupations Production occupations Transportation and material moving occupations Agriculture and related 2 264 42.1%3.1%0.7%4.6%1.5%3.36.9%0.4%1.7%1.0%4.6%Mining,quarrying,and oil and gas extraction 590 19.3.9%0.2%2.0%2.7%7.5%0.01.9%5.9%6.3.4%Construction 11 896 21.1%3.2%0.1%0.3%1.3%4.3%0.1Y.6%5.6%1.7%2.8%Manufacturing 15 570 20.0.6%0.3%1.4%3.8%6.8%0.1%2.1%4.46.6%7.8%Wholesale and retail trade 19 787 9.3%6.6%0.5%3.4D.4.3%0.3%0.6%3.5%3.6.5%Transportation and utilities 9 949 11.4%5.3%0.6%1.5%1.3.3%0.0%2.3%5.3%3.9E.9%Information 2 971 26.3C.9%0.1%1.9%6.1.6%0.0%0.5%7.0%1.3%1.2%Financial activities 11 018 45.4.2%0.5%2.3!.2.0%0.0%0.3%1.6%0.5%1.0%Professional and business services 20 735 28.04.8%3.1.4%3.1.0%0.1%0.8%1.5%1.4%2.8ucation and health services 36 378 11.8V.9%0.6.1%0.4%8.9%0.0%0.2%0.6%0.4%1.2%Leisure and hospitality 14 288 16.6%7.7%1.3X.0%6.1%5.7%0.0%0.2%0.9%1.0%2.4%Other services 7 605 11.6.0%0.27.5%5.0%7.6%0.1%0.5.3%5.9%4.3%Public administration 7 984 21.6(.2.1%5.9%0.6.1%0.4%1.6%1.7%1.1%1.7%TOTAL 161 037 Note:Shading aids in identifying high/low percentages where green is high and red is low.Source:Bureau of Labor Statistics.(2024a)Current Population Survey.Table 17:Employed Persons by Industry,Sex,Race,and Occupation.Current Population Survey estimates.Additionally,the Current Employment Statistics include temporary and intermittent employees.The Annual Survey of Manufactures considers an employee to include all full-time and part-time employees on the payrolls of operating establishments during any part of the pay period being surveyed excluding temporary staffing obtained through a staffing service.It also excludes proprietors along with partners of unincorporated businesses.Between January 2005 and January 2010,manufacturing employment declined by 19.6%,as seen in Figure 4.1.As of August 2024,employment was still 9.3low its 2005 level.In times of financial difficulty,large purchases are often delayed or determined to be unnecessary.Thus,AMS 600-16 October 2024 32 as would be expected,during the late 2000s recession durable goods declined more than nondurable goods.The other major decline in manufacturing employment was during the pandemic.Between January 2019 and April of 2020,manufacturing employment declined 10 percentage points to be 19.9low its 2005 level.By September 2021,manufacturing employment had risen to 12.8low its 2005 level.However,at that time there were a substantial number of job openings in manufacturing as seen in Figure 4.1.The employees that work in manufacturing offer their time and,in some cases,risk their personal safety in return for compensation.In terms of safety,the number of fatal injuries increased 5.5tween 2021 and 2022(see Table 4.4).Nonfatal injuries increased;however,the injury rate decreased(see Table 4.5).The incident rate for nonfatal injuries in manufacturing remains higher than that for all private industry.As illustrated in Figure 4.2,fatalities,injuries,and the injury rate have a five-year compound growth rate of 5.9%,-1.5%,and-1.8%respectively.Table 4.3:Manufacturing Employment(Thousands):Current Employment Statistics Total Private Manufacturing Durable Goods Nondurable Goods 2017 124 257 12 439 7 741 4 699 2018 126 454 12 688 7 946 4 742 2019 128 291 12 817 8 039 4 778 2020 120 200 12 167 7 573 4 594 2021 124 311 12 354 7 681 4 673 2022 130 329 12 812 7 968 4 844 2023 133 269 12 940 8 102 4 838 5-Year Compound Annual Growth 1.4%0.8%0.9%0.6%Source:Bureau of Labor Statistics.(2024b)Current Employment Statistics.http:/www.bls.gov/ces/home.htm Figure 4.1:Cumulative Change in Percent in Manufacturing Employment(Seasonally Adjusted)and Number of Job Openings(seasonally Adjusted),2005-2023 Source:Bureau of Labor Statistics.(2024b)Current Employment Statistics.http:/www.bls.gov/ces/and Bureau of Labor Statistics.(2023c)Job Openings and Labor Turnover Survey.https:/www.bls.gov/jlt/Source:Bureau of Labor Statistics.(2024c).Job Openings and Labor Turnover Survey.https:/www.bls.gov/jlt/020040060080010001200-25.0%-20.0%-15.0%-10.0%-5.0%0.0%5.0 052006200720082009201020112012201320142015201620172018201920202021202220232024Thousands of Job OpeningsCumulative Percent Change(Base year=2005)ManufacturingDurable GoodsNondurable GoodsJob OpeningsAMS 600-16 October 2024 33 Table 4.4:Fatal Occupational Injuries by Event or Exposure Total Violence and other injuries by persons or animals Transportation Incidents fires and explosions Falls,slips,trips exposure to harmful substances or environments Contact with objects and equipment 2021 Total 5190 761 1982 76 850 798 705 Manufacturing 383 36 84 10 55 82 115 2022 Total 5486 849 2066 107 865 839 738 Manufacturing 404 44 98 19 45 79 118 Percent Change Total 5.7.6%4.2.8%1.8%5.1%4.7%Manufacturing 5.5.2.7.0%-18.2%-3.7%2.6%Source:Bureau of Labor Statistics.Census of Fatal Occupational Injuries.Industry by Event or Exposure.Table 4.5:Total Recordable Cases of Nonfatal Injuries and Illnesses 2021 2022 Percent Change Manu-facturing Incident Rate per 100 full time workers*3.3 3.2-3.0%Total Recordable Cases(thousands)385.1 396.8 3.0%Private Industry Incident Rate per 100 full time workers 2.7 2.7 0.0%Total Recordable Cases(thousands)2607.9 2804.2 7.5%Source:Bureau of Labor Statistics.(2024e).Injuries,Illness,and Fatalities Program.http:/www.bls.gov/iif/*The incidence rates represent the number of injuries and illnesses per 100 full-time workers and were calculated as:(N/EH)x 200,000,where N=number of injuries and illnesses EH=total hours worked by all employees during the calendar year 200,000=base for 100 equivalent full-time workers(working 40 hours per week,50 weeks per year)During the late 2000s recession,the average number of hours worked per week declined,as seen in Figure 4.3.Unlike employment,however,the number of hours worked per week returned to its pre-recession levels or slightly higher.Average wages increased significantly during the late 2000s recession and 2020 decline of GDP,as can be seen in Figure 4.4.This is likely because low wage earners are disproportionately impacted by employment reductions,which suggests that high wage earners not only receive more pay,but also have more job security.Average hours also dropped during the pandemic and has largely returned to pre-recession levels.Like the late 2000s recession,during the pandemic wages increased while hours and employment decreased.AMS 600-16 October 2024 34 Figure 4.2:Manufacturing Fatalities and Injuries Source:Bureau of Labor Statistics.(2024e).Injuries,Illness,and Fatalities Program.http:/www.bls.gov/iif/Source:Bureau of Labor Statistics.(2024d)Census of Fatal Occupational Injuries.“Industry by Event or Exposure.”Figure 4.3:Average Weekly Hours for All Employees(Seasonally Adjusted)Source:Bureau of Labor Statistics.(2024b)Current Employment Statistics.http:/www.bls.gov/ces/home.htm 0.01.02.03.04.05.06.07.08.00200400600800100012001400200220032004200520062007200820092010201120122013201420152016201720182019202020212022Nonfatal Injuries per 100 Full-time WorkersFatalities(count)and Injuries(thousands)Fatalities(Left Axis)Injuries(Left Axis)Injury Rate(Right Axis)32.034.036.038.040.042.044.020062007200820092010201120122013201420152016201720182019202020212022Hours per WeekTotal PrivateManufacturingDurable GoodsNondurable GoodsAMS 600-16 October 2024 35 The compound annual growth rate in real dollars for private sector wages was 0.4tween July 2019 and July 2024 and was 0.1%for manufacturing.As illustrated in Figure 4.5,employee compensation in manufacturing,which includes benefits,has had a five-year compound annual growth of-1.9%.In recent years,manufacturing compensation has had a negative trend while that of private industry has had a positive trend.The result is that compensation for manufacturing is only slightly higher than that of total private industry.Hourly compensation in manufacturing,which includes benefits,still exceeds that of the total private industry;however,the difference has narrowed significantly.In the first quarter of 2007,hourly compensation in manufacturing was 17.2%higher than the private sector;however,in the second quarter of 2024 it was only 0.5%higher.As illustrated in Figure 4.6,the prices received by producers for all manufacturing between July 2020 and July 2022 has increased 33.4%while in the fifteen years prior to that(i.e.,June 2005 to June 2020)it only increased 27.1%total.The 5-year compound annual growth in manufacturing prices is 4.8%.For those that invest in manufacturing,corporate profits have had a five-year compound annual growth of 11.1%,as illustrated Figure 4.7,and nonfarm proprietors income for manufacturing has had a five-year compound annual growth rate of 14.9%,as illustrated in Figure 4.8.Figure 4.4:Average Hourly Wages for Manufacturing and Private Industry(Seasonally Adjusted)Source:Bureau of Labor Statistics.(2024b)Current Employment Statistics.http:/www.bls.gov/ces/home.htm Adjusted using the CPI for all consumers.Bureau of Labor Statistics.(2024i).Consumer Price Index.https:/www.bls.gov/cpi/data.htm 25272931333537392006200720082009201020112012201320142015201620172018201920202021202220232024Constant 2023 Dollars per HourTotal PrivateManufacturingDurable GoodsAMS 600-16 October 2024 36 Figure 4.5:Employee Compensation(Hourly)Source:Bureau of Labor Statistics.(2024f)National Compensation Survey.http:/www.bls.gov/ncs/Adjusted using the Consumer Price Index for all consumers from the Bureau of Labor Statistics.Figure 4.6:Inflation-Cumulative Percent Change in the Producer Price Index(Selling Price Received),2005-2024 Source:Bureau of Labor Statistics.(2024h).Producer Price Index.https:/stats.bls.gov/ppi/databases/2535455565758595200720082009201020112012201320142015201620172018201920202021202220232024$2024 Per HourPrivate IndustryManufacturingManufacturing-Management,Business,and Financial OccupationsManufacturing-Professional and Related OccupationsManufacturing-Production OccupationsManufacturing-Transportation and Material Moving Occupations-20.0%0.0 .0.0.0.00.0 052006200720082009201020112012201320142015201620172018201920202021202220232024Cumulative Percent Change(Base Year=2005)NAICS 336:Transportation EquipmentNAICS 335:Electrical Equipment and AppliancesNAICS 334:Computers and ElectronicsNAICS 333:MachineryTotal ManufacturingAMS 600-16 October 2024 37 An important aspect of manufacturing is the efficiency and productivity with which resources are used.The Bureau of Labor Statistics provides an index of labor productivity and total factor productivity.Labor productivity for manufacturing increased by 0.4tween the second quarter of 2023 and the second quarter of 2024,as illustrated in Figure 4.9.The five-year compound annual growth is 0.4%.The Bureau of Labor Statistics total factor productivity metric measures“the efficiency at which combined inputs are used to produce output of goods and services”(Bureau of Labor Statistics 2023).For U.S.manufacturing,total factor productivity decreased 1.3%from 2021 to 2022 and has a 5-year compound annual growth rate of less than 0.1%,as illustrated in Figure 4.10.In general,productivity in the U.S.is relatively high compared to other countries.As illustrated in Figure 4.11,the U.S.is ranked ninth in output per hour for all goods and services among 142 countries using data from the Conference Board(2023).Figure 4.7:Profits for Corporations Source:Bureau of Economic Analysis.(2024d)Income and Employment by Industry.Table 6.16D.Corporate Profits by Industry.https:/apps.bea.gov/iTable/index_nipa.cfm.Elect equip,appliances,and componentsMotor vehicles,bodies and trailers,andOther nondurable goods4Petroleum and coal productsFabricated metal productsMachineryFood and beverage and tobacco productsChemical productsComputer and electronic productsOther durable goods3-100.0-50.00.050.0100.0150.0200.02005200820112014201720202023$2023 BillionU.S.Manufacturing Profits 0.0100.0200.0300.0400.0500.0600.0700.0800.02005200720092011201320152017201920212023$Billion 2023AMS 600-16 October 2024 38 Figure 4.8:Nonfarm Proprietors Income Source:Bureau of Economic Analysis.(2023d)Income and Employment by Industry.Table 6.12D.Nonfarm Proprietors Income.https:/apps.bea.gov/iTable/index_nipa.cfm.Figure 4.9:Manufacturing Labor Productivity Index(2017 Base Year=100)Source:Bureau of Labor Statistics.(2024g)Productivity.https:/www.bls.gov/mfp/-10010203040506070200520062007200820092010201120122013201420152016201720182019202020212022$Billion 2022ManufacturingDurable goodsNondurable goods-5.0%0.0%5.0.0.0 .0%.00.05.0.0 05200620072008200920102011201220132014201520162017201820192020202120222023Cumulative Percent ChangeNonfarm BusinessManufacturingDurable GoodsNondurable GoodsAMS 600-16 October 2024 39 Figure 4.10:Manufacturing Total Factor Productivity Index Source:Bureau of Labor Statistics.(2024g)Productivity.https:/www.bls.gov/mfp/Figure 4.11:Output per Labor Hour(Top Ten Largest Manufacturing Countries from Figure 2.3)Source:Conference Board.(2023)Total Economy Database:Output,Labor and Labor Productivity.https:/www.conference-board.org/data/economydatabase/index.cfm?id=27762 -8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0.0.0 0520062007200820092010201120122013201420152016201720182019202020212022Cumulative Percent Change(Base year=2005)Private BusinessManufacturingNondurable ManufacturingDurable ManufacturingIndiaChinaMexicoSouth KoreaJapanItalyUnited KingdomUnited StatesFranceGermany0204060801002022 international dollars,converted using Purchasing Power ParitiesAMS 600-16 October 2024 40 Research,Innovation,and Factors for Doing Business Manufacturing goods involves not only physical production,but also design and innovation.Measuring and comparing innovation between countries is problematic,as there is no standard metric for measuring this activity.Four measures are often discussed regarding innovation:number of patent applications,research and development expenditures,number of researchers,and number of published journal articles.As seen in Figure 5.1,the U.S.ranked 4th in 2021 in resident patent applications per million people,which puts it above the 95th percentile among 113 countries.Using patent applications as a metric can be problematic though,as not all innovations are patented and some patents might not be considered innovation.The U.S.ranked 3rd in research and development expenditures as a percent of GDP in 2021,which puts it above the 95th percentile(see Figure 5.2)among 79 nations.As seen in Figure 5.3,U.S.enterprise research and development expenditures in manufacturing increased 3.9tween 2020 and 2021,has a 5-year compound annual growth rate of 3.9%(not shown),and the 2021 value amounts to 13.4%of manufacturing value added.Despite an increasing trend in researchers per million people,the U.S.rank decreased to 18th in 2020,putting it just above the 75th percentile(see Figure 5.4)out of 76 countries.In journal articles per million people it ranked 24th in 2020 out of 197 countries,and China had more articles than the U.S.(see Figure 5.5)(World Bank 2024).Germany,Japan,Figure 5.1:Patent Applications(Residents)per Million People,Top Ten Largest Manufacturing Countries(1990-2020)World Bank.2024.World Development Indicators.https:/data.worldbank.org/products/wdi MexicoIndiaUnited KingdomItalyFranceGermanyUnited StatesChinaJapanKorea,Rep.0500100015002000250030003500400019901993199619992002200520082011201420172020Resident Patent Applicationsper Million People012345678919901993199619992002200520082011201420172020U.S.Rank of Resident Patent App.Per Capita(lower is better)AMS 600-16 October 2024 41 Figure 5.2:Research and Development Expenditures as a Percent of GDP,Top Ten Largest Manufacturing Countries Source:World Bank.2024.World Development Indicators.https:/data.worldbank.org/products/wdi*Missing data was interpolated South Korea,and China ranked 26th,38th,22nd,and 54th,respectively(not shown).Exports are also frequently seen as a measure of competitiveness.The U.S.was the second largest exporter in 2023,as illustrated in Figure 5.6.In addition to some of the previously mentioned metrics,a number of indices have been developed to assess national competitiveness.The IMD World Competitiveness Index provides insight into the U.S.innovation landscape.Figure 5.7 provides the U.S.ranking for 20 measures of competitiveness.This provides some indicators to identify opportunities for improvement in U.S.economic activity.In 2023,the U.S.ranked low in prices,public finance,societal framework,and international trade among other things.Overall,the U.S.ranked 12th in competitiveness for conducting business while Germany,Japan,and China ranked 24th,38th,and 14th,respectively(IMD 2024).Between 2016 and 2024,80%or 16 of the 20 rankings went down for the U.S.IndiaMexicoItalyFranceChinaUnited KingdomGermanyJapanUnited StatesKorea,Rep.0.00.51.01.52.02.53.03.54.04.55.01996199820002002200420062008201020122014201620182020Research and Development Expenditures as a Percent of GDPU.S.Rank 024681012199619992002200520082011201420172020U.S.Rank(Lower is Better)AMS 600-16 October 2024 42 Figure 5.3:Manufacturing Enterprise Research and Development Expenditures(PPP Converted$Billion 2015),Top 10 Largest Manufacturing Countries Source:OECD.(2024a)Business Enterprise R-D Expenditure by Industry(ISIC 4).http:/stats.oecd.org/#Bureau of Economic Analysis.(2024a)“Industry Economic Accounts Data.”http:/www.bea.gov/iTable/index_industry_gdpIndy.cfm *Missing values were interpolated The 2016 Deloitte Global Manufacturing Competitiveness Index uses a survey of CEOs to rank countries based on their perception.The U.S.was ranked 2nd out 40 nations with China being ranked 1st.High-cost labor,high corporate tax rates,and increasing investments outside of the U.S.were identified as challenges to the U.S.industry.Manufacturers indicated that companies were building high-tech factories in the U.S.due to rising labor costs in China,shipping costs,and low-cost shale gas(Deloitte 2016).According to the Deloitte Global Manufacturing Competitiveness Index,advantages to U.S.manufacturers included its technological prowess and size,productivity,and research support.China was ranked 1st with advantages in raw material supply,advanced electronics,and increased research and development spending.China has challenges in innovation,slowing economic growth,productivity,and regulatory inefficiency.MexicoItalyUnited Kingdom*France*KoreaGermanyJapanUnited StatesChina(Peoples Republic of)0.050.0100.0150.0200.0250.0300.0350.0400.02008201020122014201620182020$Billion 2015 PPP10 082009201020112012201320142015201620172018201920202021Business Enterprise R&D as a Percent of GDPAMS 600-16 October 2024 43 Figure 5.4:Researchers per Million People,Ranking World Bank.2024.World Development Indicators.https:/data.worldbank.org/products/wdi The World Economic Forums Global Competitiveness Report uses 12 items to assess the competitiveness of a number of economies,which includes the set of“institutions,policies and factors that determine a countrys level of productivity.”The U.S.was ranked 5th overall with various rankings in the 12“pillars”that underly the ranking.The U.S.rankings for each of the pillars was not readily available;however,the 2019 rankings are illustrated in Figure 5.8.Within the 12“pillars,”there were lower rankings in health,macroeconomic stability,and information/communication technology adoption(World Economic Forum 2020).The index uses a set of 90 factors to produce the 12 items in Figure 5.8.A selection of those that are relevant to standards,technology,and information dissemination are presented in Table 5.1.Those that have poorer rankings might be opportunities for improvement.051015202530354045501996199719981999200020012002200320042005200620072008200920102011201220132014201520162017201820192020Rank of Researchers per Million People(Lower is Better)Korea,Rep.JapanGermanyUnited StatesChina30003500400045005000199619992002200520082011201420172020U.S.Researchers per Million PeopleAMS 600-16 October 2024 44 Figure 5.5:Journal Articles,Top 10 Countries World Bank.2024.World Development Indicators.https:/data.worldbank.org/products/wdi Among those selected in Table 5.1,the U.S.ranks below the 90th percentile in both of the crime items,2 of the 8 transport items,6 of the 9 utility items,labor-health,2 of the 9 human capital items,both barrier to entry items,and 2 of the 10 innovation items.The Competitive Industrial Performance Index,published by the United Nations Industrial Development Organization,ranks countries based on 3 dimensions:1)capacity to produce and BrazilKorea,Rep.ItalyRussian FederationJapanUnited KingdomGermanyIndiaUnited StatesChina0100 000200 000300 000400 000500 000600 000700 0001996199820002002200420062008201020122014201620182020Journal Articles051015202530199619992002200520082011201420172020Rank of Journal Articles per Capita(Lower is Better)AMS 600-16 October 2024 45 Figure 5.6:Merchandise Exports,Top Ten Exporters World Bank.2024.World Development Indicators.https:/data.worldbank.org/products/wdi NOTE:Adjusted using the Consumer Price Index for all consumers from the Bureau of Labor Statistics.Figure 5.7:IMD World Competitiveness Rankings for the US:Lower is Better(i.e.,a Rank of 1 is Better than a Rank of 67)67 countries ranked Source:IMD.(2024).IMD World Competitiveness Country Profile:U.S.https:/worldcompetitiveness.imd.org/countryprofile/US Hong KongMexicoKorea,Rep.FranceItalyJapanNetherlandsGermanyUnited StatesChina010002000300040001995199820012004200720102013201620192022$Billions 20230204060International InvestmentFinanceDomestic EconomyScientific InfrastructureProductivity and EfficiencyTechnological InfrastructureEmploymentEducationTax/Fiscal PolicyBasic InfrastructureHealth and EnvironmentBusiness LegislationManagement PracticesInstitutional FrameworkLabor MarketAttitudes and ValuesInternational TradeSocietal FrameworkPricesPublic Finance20242016AMS 600-16 October 2024 46 Figure 5.8:World Economic Forum 2019 Global Competitiveness Index:U.S.Pillar Rankings:Lower is Better Source:World Economic Forum.(2020).The Global Competitiveness Report 2019.https:/www.weforum.org/publications/the-global-competitiveness-report-2020/export manufactured goods;2)technological deepening and upgrading;and 3)world impact(United Nations Industrial Development Organization.2020).The U.S.ranked 6th overall,as seen in Figure 5.9.Germany ranked first followed by China.The Annual Survey of Entrepreneurs makes inquiries on U.S.entrepreneurs concerning the negative impacts of eight items:Access to financial capital Cost of financial capital Finding qualified labor Taxes Slow business or lost sales Late or nonpayment from customers Unpredictability of business conditions Changes or updates in technology Other 020406080100120OverallLabor MarketFinancial SystemBusiness DynamismInnovation CapabilityMarket SizeSkillsProduct MarketInfrastructureInstitutionsInformation/CommunicationTech.(ICT)AdoptionMacroeconomic StabilityHealth20182019AMS 600-16 October 2024 47 Table 5.1:World Economic Forum Competitiveness Index Indicators Selection of those Relevant to Standards,Technology,and Information Dissemination Solutions,Rankings Out of 141 Countries(Lower is Better)Pillar ComponentUS RankApplication1Organized crime69Crime1Terrorism incidence83.3Crime1Intellectual property protection12IP Protection2Road connectivity index1Transport2Quality of roads17Transport2Railroad density(km of roads/square km)48Transport2Efficiency of train service12Transport2Airport connectivity1Transport2Efficiency of air transport services10Transport2Liner shipping connectivity index8Transport2Efficiency of seaport services10Transport2Electrification rate(%of population)2Utilities2Electric power transmission and distribution losses(%output)23Utilities2Exposure to unsafe drinking water(%of population)14Utilities2Reliability of water supply30Utilities3Mobile-cellular telephone subscriptions(per 100 people)54Utilities3Mobile-broadband subscriptions(per 100 people)7Utilities3Fixed-broadband internet subscriptions(per 100 people)18Utilities3Fibre internet subscriptions(per 100 people)45Utilities3Internet users(%of population)26Utilities5Healthy life expectancy54Labor-Health6Mean years of schooling7Human Capital6Extent of staff training6Human Capital6Quality of vocational training8Human Capital6Skillset of graduates5Human Capital6Digital skills among population12Human Capital6Ease of finding skilled employees1Human Capital6School life expectancy(expected years of schooling)30Human Capital6Critical thinking in teaching9Human Capital6Pupil-to-teacher ratio in primary education 45Human Capital11Cost of starting a business(%GNI per capita)24Barriers to Entry11Time to start a business(days)31Barriers to Entry11Companies embracing disruptive ideas2Innovation12State of cluster development2Innovation12International co-inventions(applications/million people)19Innovation12Multi-stakeholder collaboration2Innovation12Scientific publications(H index)1Innovation12Patent applications(per million people)13Innovation12R&D expenditures(%of GDP)11Innovation12Quality of research institutions 1Innovation12Buyer sophistication4Innovation12Trademark applications(per million people)32Innovation Pillars:1)Institutions,2)Infrastructure,3)Information and communication technology adoption,4)macroeconomic policy,5)Health,6)Skills,7)Product market,8)Labor market,9)Financial system,10)Market size,11)Business dynamism,and 12)Innovation capability.Applications:The application categories were developed for this report in order to identify items that might be relevant to manufacturing AMS 600-16 October 2024 48 As seen in Figure 5.10,there are four items where more than a 25%of the firms indicated negative impacts,including taxes,slow business or lost sales,unpredictability of business conditions,and finding qualified labor(:U.S.Census Bureau and National Center for Science and Engineering Statistics 2023).Countries are sometimes compared to or alluded to as brands.According to a survey on country reputation of products published by Statista(see Figure 5.11),the U.S.ranks 10th among 49 total countries.Another ranking from Ipsos(see Figure 5.12),the U.S.ranks 6th.The high ranking of the U.S.supports the idea that manufacturers in the U.S.tend to compete based on differentiation rather than cost competition.Figure 5.9:Rankings from the Competitive Industrial Performance Index 2024,150 Total Countries Source:United Nations Industrial Development Organization.(2024).Competitive Industrial Performance Index.https:/stat.unido.org/analytical-tools/country-analytics?country=840&codes=IND_,HI_IND 024681012142013201420152016201720182019202020212022Competitive Industrial Performance Index Ranking(Lower is Better)GermanyChinaIrelandRepublic of KoreaJapanUnited States of AmericaAMS 600-16 October 2024 49 Figure 5.10:Factors Impacting U.S.Business(Annual Survey of Entrepreneurs),2022 Source:U.S.Census Bureau and National Center for Science and Engineering Statistics,2023 Annual Business Survey.https:/www.test.census.gov/programs-surveys/abs/data/tables.html Figure 5.11:Made-in-Country Index,2017 Source:Loose,Nicolas.(2017).“Made-in-Country Index 2017.”https:/ 0.05.010.015.020.025.030.035.0Access to financial capitalCost of financial capitalFinding qualified laborTaxesGovernment regulations(e.g.,U.S.federal,state and/or local)Slow business or lost salesCustomers or clients not makingpayments or paying lateUnpredictability of businessconditionsChanges or updates in technologyNone of the abovePercent of Respondents020406080100120Germany(Rank:1)Switzerland(Rank:2)European Union(Rank:3)United Kingdom(Rank:4)Sweden(Rank:5)Canada(Rank:6)Italy(Rank:7)Japan(Rank:8)France(Rank:9)USA(Rank:10)India(Rank:36)China(Rank:49)AMS 600-16 October 2024 50 Figure 5.12:Ipsos National Brands Index,2023 Source:Ipsos.(2023).“Nation Brands Index 2023.”https:/ 5860626466687072Japan(Rank:1)Germany(Rank:2)Canada(Rank:3)United Kingdom(Rank:4)Italy(Rank:5)United States(Rank:6)Switzerland(Rank:7)France(Rank:8)Australia(Rank:9)Sweden(Rank:10)South Korea(Rank:24)China(Rank:31)ScoreAMS 600-16 October 2024 51 Discussion This report provides an overview of the U.S.manufacturing industry.There are 3 aspects of U.S.manufacturing that are considered:(1)how the U.S.industry compares to other countries,(2)the trends in the domestic industry,and(3)the industry trends compared to those in other countries.The U.S.remains a major manufacturing nation;however,other countries are rising rapidly.Manufacturing in the U.S.was significantly impacted by the 2000s recession and the 2020 economy.The U.S.is a major contributor to global manufacturing,accounting for 15.1%,making it the second largest,according to the United Nations Statistics Division National Accounts Main Aggregates Database,as seen in Table 6.1.U.S.compound real(i.e.,controlling for inflation)annual growth between 1997 and 2022 was 1.7%,which places the U.S.below the 50th percentile.This growth exceeded that of Germany,France,Canada,Japan,and Australia;however,it is slower than that for the world(3.8%)and that of many emerging economies.It should be expected that the growth in emerging economies will continue to outpace those in developed economies,as they can use underutilized resources to achieve high growth rates.The largest subsectors of U.S.manufacturing are chemical products;food and beverage,and tobacco products;computer and electronic products;and motor vehicles,bodies/trailers,and parts.China produces more of all of these except for the category that includes motor vehicles.China produces more than the U.S.in 9 of 11 subsectors for manufacturing.Chinas manufacturing value added is on an upward trajectory with little signs of slowing.On a per person basis,the U.S.significantly outperforms China;however,Chinas populations is more than four times that of the U.S.When aggregated together,U.S.and European manufacturing value added exceeds that of Eastern and South-eastern Asia(excluding Japan)for 7 of the 11 subsectors.Computer,electronic,and optical products is among those that Asia produces more value added.For a country such as the U.S.to maintain significant influence in manufacturing,it would likely need to rely in part on allying with other nations.As suggested by the types of products produced,ranking as a national brand,and research activities(see Table 6.1),the U.S.tends to have strength as a differentiator rather than a cost competitor;that is,evidence suggests the U.S.tends to produce products that require more advanced technology that perform at higher levels,which is probably driven in part by higher education levels.As shown in Table 6.1,Germany,Japan,and to some extent South Korea tend to be differentiators as well;however,South Korea ranks lower as a national brand.There might be some concern regarding U.S.rankings in some measures of research and innovation.Although the U.S.ranks 3rd in research and development expenditures as a percent of GDP,it ranks 18th in researchers per million people,24th in journal articles per capita,and does not rank first in any item.It is important to note that other countries in Table 6.1,which rank high in various metrics,also rank lower in journal articles per capita.Moreover,journal articles per capita may not be a strong measure of manufacturing innovation and/or competitiveness.The ranking of U.S.researchers per million might be more concerning.An estimated 26.4%of businesses indicated that finding qualified labor was having a negative impact on their business.In the World Economic Forums Competitiveness Index,the U.S.AMS 600-16 October 2024 52 ranked low in the expected years of schooling(30th)and pupil-to-teacher ratio in primary education(45th).Moreover,some indicators raise concern regarding human capital.Between 2016 and 2024,80%or 16 of the 20 ranked items from the IMD World Competitiveness Country rankings went down for the U.S.Additi
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