Capital Productivity
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Capital Productivity McKinsey Global Institute with assistance from Axel Borsch-Supan and our Advisory Committee Bob Solow, Chairman Ben Friedman Zvi Griliches Ted Hall Washington, D.C. June 1996 Thisreportis copyrightedby McKinsey& Company,Inc.; no part ofit maybe circulated,quoted,or reproducedfor distribution withoutpriorwrittenapprovalfromMcKinsey& Company,Inc.. Preface This reportis an end productof a year-longprojectby theMcKinseyGlobalhstitute (MGI)on capitalproductivityin the threeleadingeconomiesof theworld,Germany,Japan andtheUnited States. Withthis projectwehavecompletedour malysis of themostfmdamentalcomponentsof economicperformanceamongtheleadingeconomies. GDPpercapitais the Singlebest indicator of the overallperformanceof m economy. That outcome,ofcourse,is determinedas theresultof totalfactorproductivitymd the percapitainputsof laborandcapital. PreviousMGI stidies fmsed on laborproductivitylandemploymen~(laborinputs). Thisstidy focuseson capital inputs,capitalproductivityand thecontributionof capitalproductivityto totalfactor productivity. We also wantedto studycapitalproductivitybecauseof the relationbetweencapitalmd saving. Savingis settingasidea partof incomefromcurrentproductionto be usedfor future consumption.Thestoragedeviceis capital. Thus,capitalproductivityis an important determinantof the futurevalueof savings. Savingswerem importanttopicin the MGI projecton capitalmarkets.3Therewe addressedthe increasingsocidburden comingfromthe agingof the industrialcomtries’ populations.h responseto thisburden,retirementbenefitsmustincreasinglybe providedby tided pension schemes. The abilityof theseschemesto meetretirementneedsdependson the level of savings md the ret-urnfromthe investmentof savings. Sincecapitalproductivityplays a importantrole in determiningthe returntosavings,capitalproductivityaffectsthe sizeof the retirement burden. Theabovediscussionsuggeststhatcapitalproductivitys relatedto thebroaderquestionof wealthgenerationandtheseemingparadoxof how theU.S.couldcreateso muchnewwealth and at the sametimesaveso little. Wehopedthatourworkwouldserveto resolvethisparadox. h the courseof ourwork,we alsoaddressedtwo’puzziingquestionsaboutJapan and Germany, Thefirst washowmaterialstandardsof livingin Japancodd be substantidy lowerthanin the U.S. whenJapaneseworkersworklongerhoursmd Japaninvestsmore. Thesecondquestion waswhy laborproductivityin Germanyhas not risenabovethelevelin the U.S., giventhatthe capitalstockof plmt andequipmentperworkeris muchhigherthanin the U.S. Thisreportconsistsof six chaptersandan executives-ary. Chapter1 describesour objectivesand approachfor theproject. Chapter2 describestheanalysisandconclusionsat the ag~egate 1evel.~is chapterprOvidesOurconchrsionsaboutwhatcanbelearnedfrom agwegatelevelmalysismdwhatquestionsc~ot beansweredatthatlevelandhavetobe addressedat the industrycasestudylevel. Chapter3 includesOUIfive industrycasestudies: auto,foodprocessing,retail,teiecommtications, and electricutilities. Eachcase givesthe resultsof ourcapitalproductivitycalculationsand discussesthereasonsfor the differenceswe fowd acrosscormtries.Eachcaseis precededby a one-pages-ary of the resultsof thecase. 1 SewiceSec~orPrOdllctivit, McKinsE.yGlobalImtitute,Washington,D.C.,October1992;~nlfacfl~~ng ProdLtctivity,McKimey8 lobalInstitute,Washington,D.C.,October1993. 2 E~ploy~c~tPeflortnanc,rMcKinseyGlobalInstitute,Washington,D.C.,November1994. 3 G/ObalCapitalMar~ct,ivtcKinseyFinancialhrstitutiomGroupandMcKinseyGlobalInstitute, Washington,D,C.,November1994. 1 r Readersmoreinterestedin ourgeneralresdts andless interestedin the specificsofsomeor aflof thecasesmaychooseto readthe sumary rathertharrthe endrecase. Chapter4 presentsthe synthesisof ourfindingsincludingourover~ conclusionsaboutcapitalproductivity.Chapter5 discussesour findingson the relationshipbetweencapitalproductivityandfinancial performance.Chapter6 givesimplication forpublicpolicyand for corporations. Theworkingteamfor this projectconsistedof a coregroupof six McKinseyconsultants transferredfromtheti home officesto theGlobalInstituteand oneGlobalInstitutespecialist. The Globalhstitute consultantsconductingcasestudieswere: RajAgrawai(Washington)- food processing;ThomasBiittgenbach(Cologne)-telecornrnticatfom;SteveFindley(NewYork)- auto;AlyJeddy(SsnFrancisco)–retailing;MarkusPetry(Frankfurt)- eiectricudfities.In addition,JamesKondo(Tokyo)andGuh~SubrarnanianNewYork)weremembersofthe workingteamin the initialphaseof theproject. Axel B6rsch-Supan,Chairmanof theEconomics Departmentat the Universityof Marudreirnon frdl-tirnesabbaticalleaveas anMGIFellow,and KathrynHuang,aMcKirtseyGlobalInstituteeconomicsresearchspecialist,conductedthe aggregatelevel ~alysis. Axel B6rsch-Supanwasresponsiblefor the workon relatingcapital productivityto financialperfomance. SeanGreene,a seniorMcKinseyconaultarrtfromNew York,wasresponsiblefor the day-to-dayprojectmanagement.Administrativesupportwas providedby RormiBrownlee,RebeccaPogneand RebeccaWright. Theprojectwasconducted mder my direction,withassistancefromAxel Borsch-Supan. Wewerefortiate to have arroutsideAdvisoryCotitteefor thiaproject. TheAdvisory Committeewaschairedby BobSolow,MIT,andalso includedBen Friedrnsn,Harvard Universi~; Zvi Griliches,HarvardUniversity;andTedHall,Mc~sey. Theworwgteamhad fouraR-daymeetingswith theAdvisoWConrrnitteeto reviewprogressdr.rringthecourseof the projectandbenefitedfrommanywrittencommentsandtidividual discussions. A groupof McKinseypartnersassistedtheworkingteamand contributedto theAdviso~ Committeemeetings. TheseMcKinseypartnersand theirareasof specialcontributionswere: ErrniusBergsma(NewYork)– projectscopeand synthesis;Tom Copeland(NewYork)–finance; HeinoFassbender(Frankfurt)-capital markets;LennyMendonca(SarrFmncisco)- capital markets;Glem Mercer(Cleveland)- automotive;AndrewParsons(NewYork)- foodprocessing md retailing;JiirgenSchrader(Dusseldor~- telecormntications; andSomuSubramaniamNew York)-operations, technologyandfimmce. Theundertakingof this projectis partof thefulfilhnentof the McKinseyGlobalInstitute’s missiontohelpbusinessleaders: (1)mderstand globaleconomicdevelopments,(2)improvethe performanceof theirorganizations,and (3) workfor betternationalandinternationalpolicies. Throughoutthe conductof tfi projectwebenefitedfromthe uniqueworldwideperspectiveand knowledgeof McKinseyconsultantson theindustriesinvestigatedin ourcasestudies. ~ kowledgehasbeen developedthroughclientworkand investmentinunderstsndingindustry structureandbehaviorto supportourworkwithclients. McKinseysectorleadersprovidedinput to ourcase studiesand reviewedourresults. Theu namesare givenfollowingthispreface. Wewotid alsolike to recognizethecontributionsof McKinseyconsultingteamsworldwidewho providedus withinvaluableinformationon the performanceof alI theindustrieswestudied, whiieat the sametime,presemingtheconfidentialityof informationaboutspecificMcKinsey clients. McKinsey’sresearchandinformationdepartmentsprovidedinvaluableinformationand insightundervery tighttimeconstraints.Finally,we appreciatethe warmwelcomeanduseti informationwe receivedin our interviewswithcorporations,industryassociationsand govement officials. Bill Lewis Directorof the McKinseyGlobalktitite June 1996 2 McKINSEY CONTRIBUTORS TO CASE STUDIES Automotive Telecom TamotsuAdachi- Tokyo EnniusBergsma– NewYork CorneliusBaur- Munich DieterDiisedau-Munich FelixBriick-Mtich MasaoHirano-Tokyo LanceEaley-Clevelmd JiirgenMeffert-Atlmta GiinterFuhry- Vienna TornokoNamba-Tokyo Mph Heck- ~sseldorf JurgenSchrader-Diisseldorf Rolf-DieterKempis– Msseldorf MargotSinger-New York JiirgenKluge-Diisseldorf StephenStuut-Atkmta Glem Mercer-Clevekind MatthiasPohl-Shrttg~t Jeff Sinclair-Clevelmd Utilities BarbaraCholewa- ~sseidorf GaryFarha- Washington Food PaulJansen- SanFranciaco BenikoKaya- Tokyo SallyLindsay- Washington NancyKillefer- Washington Dirk*eider– Frankfurt BirgitKonieczny- Hamburg LesSilverman- Washington TatsuoOhbora-Tokyo FraukeWeyrather- Diisseldorf AndrewParsons- NewYork WalterWintersteller-Munich Jem Raucent-Brussels ShinichiYokohama-Tokyo HajoRiesenbeck- ~sseidorf WalterSW-Tokyo KeikoUmesato-Tokyo Yumi.koYamaguchi-Tokyo Acrosscasesfor critical datahelp HirokazuYamanashi-Tokyo SarahNichols- SanFrancisco YoshinoriYokoyama- Tokyo Eva Timmennm - Diisseldorf YoshieUeno- Tokyo PeterWeigang- Diisseldorf Research& InformationServices- Washington Retailing Jfian Allen-London RudolphBarajas– Chicago PeterBarrenstein-Munich RebeccaDavies- NewYork HermanDe Bode- Brussels DerekDean-San Francisco BobDvorak–Sm Francisco J.Iie Hayes–Chicago Nmcy Karch- Chicago LennyMendonca– Sm Francisco TatsuoOhbora- Tokyo KanokoOishi- Tokyo HajoRiesenbeck- Diisseldorf Christian SmithShi - LosAngeles MarcSinger- SanFrancisco KeikoUmesato–Tokyo HirokazuYamanashi-Tokyo MaritaZom - Cologne MG1-ZXE871/980429Contributora Contents EXECUTIVESUMMARY CHAPTER1: OBJECTIVESANDAPPROACH CHAPTER2: AGGREGATECAPITALPRODUC~lTY CHAPTER3: CASESTUDIES - AUTOMOTIVE - PROCESSEDFOOD - GENERALMERCHANDISERETAILING - TELECOMMUNICATIONS - ELECTRICUTILITIES CHAPTER4: SYNTHESIS CHAPTER5: CAPITALPRODUC~ITY ANDFINANCIALPERFORMANCE CHAPTER6: IMPLICATIONS Executivesummary Howwella countryusesits capitaloughtto be extremelyimportantto its citizensandpolicymakers.Whilelaborproductivityis a topicof constantdebate andwas thesubjectof earlierMcKinseyGlobalInstitutestudies,far less attention has beenpaidto questionsaboutthe productivityof a nation’scapitalstock. “Capital”actuallyhas two interrelatedmeanings: physicalcapital(machinery andbuildings)and financialcapital(stocksandbonds),whichlaysclaimon