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Manufacturing in the U.S. has often been assumed to be in long-term decline, with the competitive advantage moving to low-cost countries such as Mexico and China. However, with advanced technologies likely to automate as much as 60% of factory tasks, in the future low-cost countries may no longer enjoy a competitive advantage, and the U.S. could well regain lost ground.
Still, the U.S. needs to be more aggressive in developing and adopting robotic technologies, according to Justin Rose, a partner and managing director in the Boston Consulting Group’s Chicago office. “If we want to remain a manufacturing powerhouse, I truly see this as the only choice. And the U.S. needs to lead here. It’s not enough to just let it happen naturally over time,” says Rose.
In a conversation with Knowledge@Wharton, Rose, who leads the operations and digital clients practice for BCG’s industrial clients globally, talks about the future of U.S. manufacturing and other related issues.
An edited transcript of the conversation follows.
Knowledge@Wharton: Could we start by talking about your own background? How did you get interested in American manufacturing and its future?
Justin Rose: Growing up, I was always interested in big issues like geopolitics, energy, environment and so on. During my time at BCG, I was lucky enough to work with a meter solar panel manufacturer, which was my dream assignment. I was blown away at the intricacy and sophistication of manufacturing assets. A lot of people think about manufacturing as hard, dirty labor — but what I saw was intricate, sophisticated operations. And I realized that for many things in the world that I wanted to happen, products needed to be made to enable it. That really intrigued me.
Knowledge@Wharton: The conventional view is that manufacturing in the U.S. has been in long-term decline, and that competitive advantage in this industry has moved to countries like Mexico and China. Do you think that perspective is still valid or is it out of date, and why?
Rose: It is both valid and outdated. It is valid in the sense that many basic and low value-add products have moved out of the U.S. It is outdated in the sense that the U.S. still has an incredibly thriving manufacturing sector with more than $4 trillion in annual output. In aggregate, we produce the vast majority of what we consume in the country.
What’s changed in the U.S. is that our focus now is different. We have moved on to innovative products that require engineering and sophistication. While that transition has been painful in many parts of the country, it is not necessarily a bad thing. We just need to make sure that we support our workers so they can continue to support their families and communities.
Knowledge@Wharton: Since you look at what is happening in manufacturing from a global lens, how have changing cost structures altered the map of global manufacturing?
Rose: For the last 30 years, people have talked about the globalization of supply chains. My belief is that in the next 30 years we are going to see that unwind. There are three main reasons. First, costs are evening out globally. In 2004, in say, China, they were about 15% cheaper on average from a manufacturing cost standpoint than the United States. The average wage for a manufacturing labor was less than a dollar an hour. There weren’t any safety or environmental standards to speak of. But that has changed. Now China is only about 5% cheaper, and that doesn’t include the extra cost of shipping goods across the Pacific to U.S. consumers.
Second, there are clearly trade tensions, and intentional reordering from “free trade” to something that we refer to as managed trade. So, you see things like Brexit having an impact, the Trans-Pacific Partnership, USMCA [United States – Mexico-Canada Agreement], and so on. All of these are creating frictions in the global supply chain in the immediate term.
And probably most interesting is the forward-looking perspective, and that is all about technology. Industry 4.0 or advanced manufacturing is mostly a set of technologies that allow labor to get removed from manufacturing processes. So, if a country, and let’s use China again, has labor that is 50% cheaper, and a product where 20% of the cost is labor, that means it would have a 10% cost advantage overall. But, if that percentage of labor falls from 20% to 10% because of automation and other advanced manufacturing technologies, then that advantage is cut in half.
Our view at BCG is that 60% or more of the tasks in a factory can be potentially automated. Therefore, over the long term, the advantage from being a low-cost country starts to go away. If I take a step back, what does that all mean? It means we move from global supply chains to regional ones.
“What’s changed in the U.S. is that our focus now is different. We have moved on to innovative products that require engineering and sophistication.”
There is still a role for lower cost manufacturing, but that would be served more by near shore countries. Mexico for the United States, Eastern Europe or North Africa for Europe. As you can imagine, that is a pretty dramatic shift, a real unwinding of the last 30 years of international order.
Knowledge@Wharton: What are the implications of these changing cost structures for U.S. manufacturers?
Rose: In general, it’s good news. The western hemisphere in general and North America in particular, is an enormous trading block. U.S. manufacturers should have an opportunity to win more business there while continuing to compete on the global stage for high-tech and highly engineered products. But it is important to remember it is not a given. Just because of these longer-term trends, U.S. manufacturers can’t lose focus on deploying and integrating technology, and reengineering processes to drive productivity gains. That is a place where we have seen a lot of slippage in the United States in the last 10 years that needs to really be re-energized.
Knowledge@Wharton: One thing we keep hearing, especially when people talk about manufacturing in China becoming more expensive, is that the competitive advantage may not necessarily shift back to the U.S., but elsewhere in Asia like Vietnam, or India. As you know, Prime Minister Narendra Modi had launched this program called Make in India. Do you think initiatives like Make in India and the ascent of manufacturing in other parts of Asia have a chance of succeeding?
Rose: A lot of people say China is becoming relatively more expensive, and therefore manufacturing is going to shrink there. I don’t believe that is at all true. The fact that they are getting more expensive does not spell doom for them. The Chinese consumer market is mushrooming. In a world of regionalizing supply chains, I see Chinese manufacturing simply reorienting to make more of what they would have historically exported, for their own Chinese consumers.
In terms of other countries like India, Vietnam and Thailand, there is absolutely a great deal of opportunity for them. I see real progress in all those countries. My clients are increasingly considering sourcing from them for basic parts. But there are real structural issues there. Several years back, I looked at Vietnam, and it turns out they only had one-twentieth of the port capacity of China. So realistically, how much manufacturing could overnight, or even in the short term, pick up and move from China to Vietnam?
In India, there are documented cases where it has taken longer for goods to get from the center of the country to the port in Mumbai than it has for that ship to sail from the Mumbai port to the United States. They are working on those things. There is a big infrastructure push across Southeast Asia and South Asia. But it will take a long time and a lot of investment for them to become a plausible replacement for the volume of manufacturing that happens in China.
Knowledge@Wharton: Coming back to the U.S., you say that the U.S. needs a more aggressive approach to developing and adopting robotic technologies. Why do you think this is important for U.S. manufacturers?
“Sixty percent or more of the tasks in a factory can be potentially automated. Therefore, over the long term, the advantage from being a low cost country starts to go away.”
Rose: I don’t just think it is important, I think it is critical. It can be intimidating to drive technology into the workplace. Jobs go away, or change, and humans feel left behind. But if we want to keep up as a manufacturing powerhouse, I truly see this as the only choice. And the U.S. needs to lead here. It’s not enough to just let it happen naturally over time. Look at what other countries are doing — Germany, Japan, and of course China — they are actively driving advanced manufacturing technologies into their supply bases, into their OEMs. The U.S. needs to actively promote this as well.
Knowledge@Wharton: Does the U.S. have enough skilled workers who know how to work with these innovative manufacturing technologies? How serious is the skills gap and what should be done about it?
Rose: We researched this several years ago. As part of this research, we pulled headlines from Germany, from China, from Japan. We looked at newspapers and blogs and magazines. And they all say there is a crisis, we don’t have enough skilled workers. And yes, there is a skills gap in the United States, and this will be a huge challenge and a growing challenge going forward.
The more interesting question is whether it is a relative disadvantage to others. I am less sure on this. Nevertheless, we need action here too, especially as we think about the impact of technology that is staring us in the face. Government and academic institutions have a role, and they need to lean into that. But I think more than ever, companies need to do that as well.
For a long time, companies have treated the manufacturing workers as disposable, in a sense. They come out of a training program, they stay for a bit, and they move on. This has got to change. Workers, especially in a highly skilled manufacturing world, are a true competitive asset for a company. What does that mean? Companies need to own the problem, and they need to start to build tools to grow their own experts, rotate them as they would executive teams to keep them engaged, retrain them when their job changes, and not rely on federal or local government assistance or community college programs and so on. The companies that do this well and really lean in there are going to have a huge advantage because they are going to have a work force that is energized, loyal, and capable. And everyone else is going to be struggling around trying to pick up people on the margins.
Knowledge@Wharton: Is that what you mean by a relative disadvantage of the other countries?
Knowledge@Wharton: Could give us some examples of companies in the U.S. that are well positioned for the future in terms of manufacturing? What have they done differently, and what can other manufacturers learn from their experience?
Rose: Let me give you three examples. Two are manufacturers and one is a retailer. The first manufacturer is John Deere. They are making impressive efforts to integrate technology both into their products and also into their processes. They are building their work force in a lot of rural areas where people would typically say it’s been hollowed out by past economic downturns, and perhaps the skills don’t exist. And they are deploying technology into their plants that is really cutting edge. They are taking a long-term view, and they are making smart investments. It is not that they are reengineering every factory wholesale today, but they know what the roadmap is, and what the game plan is, for the next five and 10 years.
“Workers, especially in a highly skilled manufacturing world, are a true competitive asset for a company.”
Another example is Ford. In addition to some of the things that Deere is doing, Ford has an entrepreneurial culture at the plant level. They have plant managers and supervisors who by themselves, are experimenting with new things like 3D printing or additive manufacturing for different parts or components, or for tooling. And then they have a coordination overlay staffed by a very senior gentlemen who is in charge of testing many of the cutting-edge technologies, sorting out what the roadmap for deployment looks like, and managing the innovation campus and activities that they have dedicated to this.
The retailer example is Walmart. Walmart has been very public over the last several years about increasingly sourcing product from the United States. They are not manufacturing themselves, but with their size and scale what they are doing is going through their supply chain and understanding in detail things like what would the relative cost be for many different potential sourcing locations. And beyond that, where are the gaps in the supply chain. So, if I want to manufacture bikes in the United States, do I have tire manufacturing capabilities? Can I make the gearbox? Can I make the pedals? And where ever they find gaps — because one gap can keep the whole supply chain from moving in some cases — they are encouraging suppliers to come back. They are promising them volume commitments to start to move entire supply chains back. I find that very thoughtful and very disciplined. It is something that I think others could learn from, and something that would benefit U.S. manufacturing broadly.
Knowledge@Wharton: Historically, America’s lead in manufacturing was driven by its lead in innovation and R&D. Do you think the U.S. still leads the world in research and emerging technologies, or has that competitive advantage moved to other countries like China, for example?
Rose: The U.S. still leads the world in R&D by some distance. But you must unpack it to really see what is going on, and to see where there is risk involved. The way I think about it is breaking it into three categories. One, there is basic research. This is things like studying how the universe was formed. The purpose of basic research is to build the foundational scientific knowledge without any real focus on a product or a process. The U.S. has always led there and continues to lead there by a wide margin. This is hugely valuable work because it sets the foundation for almost everything that comes after it.
The second step is applied research. This is science that is more focused on addressing a particular need. It is about trying to solve a practical problem. For instance, finding a cure for a disease, boosting agricultural production, and improving energy efficiency. The U.S. continues to do well there as well.
But the real gap, or the emerging gap, is on the third category, which is developmental research. That is about taking the knowledge that was established in the first two steps and turning it into materials, devices, systems, or processes or methods specifically. For example, how do I increase processing speed on a chip, and so on. Compared to the U.S., China has invested very heavily on downstream developmental research. And that downstream developmental research links very closely to creating products, to reengineering manufacturing processes, and ultimately to selling goods. The U.S. needs to consider how to balance the R&D overall between those three buckets, and ramp up some of the developmental research to help support U.S. manufacturers and U.S. manufacturing interests.
Knowledge@Wharton: Does that mean that the U.S. needs to become better at execution along the third dimension that you mention? And how can the U.S. do that?
“The U.S. needs to … ramp up some of the developmental research to help support U.S. manufacturers and U.S. manufacturing interests.”
Rose: That’s right. There is a huge lack of coordination. It is almost startling. Many times you will find there is upstream research in basic and applied areas that downstream companies that might monetize it have no idea about or access to. There is no process to systematically focus on the important topics and move it through that funnel, if you will, down to things that we can use to sell or integrate into our processes. There is a real lack of coordination there, and there is a real need to continue to drive that more effectively.
Knowledge@Wharton: What do you think are some of the most promising areas of basic research that could lead to manufacturing breakthroughs in the future?
Rose: I am not a scientist or a researcher, so it is dangerous for me to hazard guesses on these things. But I would suggest a starting point might be to look at a group of people that have examined this very closely. And again, that is our friends in China. The good news is that they make their intent very clear in their five- year-plans. I would encourage people to read the current one and look back at the last few. China is focusing on areas like green energy, biotech, and AI and how that will drive and transform supply chains and manufacturing processes. These areas feel like pretty good calls to me.
Knowledge@Wharton: If you were to look at American manufacturing five or 10 years from now, what do you think it would look like, and what should be the top priorities for U.S. manufacturers to get ready for that future?
Rose: I have a lot of hope for American manufacturing. There are some real tailwinds that we have laid out around the long-term evening out of costs and the future technologies to help us stay competitive. There is a lot of hope, not just for large companies but for small and medium sized enterprises as well.
Where I think we need to focus is the following: The U.S. has always been reluctant to create a coordinated industrial policy. We are very reluctant to “pick winners.” That is something that is going to increasingly hamper us as you have to invest at a greater scale to find the breakthroughs and drive them to completion.
“We need to continue to train our people aggressively, to build new programs and reconsider what it means to have a lifetime learning process.”
Does that mean that we need a command and control economy? Absolutely not. That’s not what I am saying. But is there a way that we can organize our scientific research community to be a bit more directed, and a bit more thoughtful about advancing the knowledge we are building from basic to applied to developmental research? Is there a bit more emphasis that we want to give on areas that we think are strategically critical, like artificial intelligence, or like new energy technology? How do we do that, and how do we drive that forward as a society?
Another area that I think is critical for us to continue to push is around our workers. At the end of the day, technology has the potential to rip us apart in that it will displace jobs and create haves and have-nots. But it also has the potential to move us forward as a society and create a great deal of wealth that many different segments of our society should be able participate in and benefit from. We need to continue to train our people aggressively, to build new programs and reconsider what it means to have a lifetime learning process. Ultimately, we must equip workers with the skills that they need to succeed and win as we move forward through the rest of the century.