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I'd like to welcome Maris Cohen who is a
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professor of operations information and
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decisions here at Wharton and his
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colleague John qu who is a professor at
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Georgetown University to talk about the
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latest update on some very interesting
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research they're doing on Supply Chains
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It's especially interesting I think
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because it's coming up with a lot of
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counterintuitive um results things that
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people wouldn't have predicted U which
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is always interesting when research does
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that um so it turns out that a lot of
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the conventional wisdom is wrong what
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they're thinking about today and I'm
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going to just turn it over to you to
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talk about uh we have talked in the past
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about the phase one part of the study
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now you have phase two which is even
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bigger in the sense that your
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questionnaires and so forth have you've
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cast The Wider net you have more people
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involved so a bigger a bigger uh result
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uh so why don't you tell us about it
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okay so let me briefly just remind you
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of what the study was all about if I may
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so this is a benchmarking study that is
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dealing with the issue of the sourcing
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of manufacturing in a global supply
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chain Network and as you know most
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companies large companies today operate
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globally they have factories positioned
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all over the world and uh in recent
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years last 10 15 years there have been
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major shifts in the location of where
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companies have sort
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their production and in particular
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there's been a major shift out of the
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developed economies the US in particular
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to Asia China in particular and this has
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of course led to a loss of actually
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millions of manufacturing jobs and a lot
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of consternation amongst the political
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classes and the commentators and you
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know commentary as to how can we bring
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these jobs back how can we Revitalize
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our manufacturing sector
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and so on and this uh political season
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uh these issues have not gone away and
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in fact they probably the discussion has
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become even more heated and so the
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original purpose of the Benchmark study
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was to gather objectively some
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empirically based information based on
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what companies were actually doing not
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on stated intentions or not on
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predictions but on actual decisions that
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were made and last time I was here I
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discussed the first phas
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which dealt with a benchmark study of
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about 50 companies uh that were
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operating in China these were global
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companies and we talked about the
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results we saw and since that time we
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did a second phase with about as it 75
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companies I think it
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was uh to which were much more globally
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dispersed also global companies uh same
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questions to see what was their current
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set of decisions what were the drivers
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of those decisions what was the expected
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impact of those
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decisions phase one I know when we spoke
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uh one of the things that had been in
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the news leading up to that for probably
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a couple years was this idea that oh
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American companies are starting to
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resure bring production back from Asia
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China in particular um as labor costs in
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China rise and as there's I guess
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increased Robotics and and and
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Automation in the US that it suddenly
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becomes more viable to manufacture in
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the US again but you found that that
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wasn't necessarily the case at all well
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in phase one that is true uh we did not
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observe too much of this reshoring or
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shifting of production into North
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America into the US in particular phase
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two a bigger sample uh much more diverse
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set of companies we actually saw a
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significant amount of Shifting of
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production back well I shouldn't use I
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have to be care not back but into the US
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what was surprising was where this was
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coming from this was not coming from
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us-based companies this was coming from
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european-based and asian-based companies
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so they are shifting production into the
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US and American companies not so much I
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don't know if you want to add to that
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John or um yeah I think the statement
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that Morris just gave was is entirely
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correct and part of the reason that we
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did not observe um similar results in
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phase one was because the respondence
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that we had in phase one with Chinese
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divisions of the global companies so
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they may not have the um um the complete
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picture of um the company's movement but
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when we get to phase two which involves
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a lot of um us and global companies
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headquarters and we were're able to
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identify this unique shift from non us
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companies entering the US so a lot of
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people hearing this will be scratching
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their head and say saying wait a second
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you're telling me that Europeans and
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others can come in here and manufacture
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profitably but um but us companies are
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still
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struggling how can they do it and US
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companies are not as successful or or is
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that well that's actually not the case
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no that's a very good question and of
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course as part of our study we ask
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companies why are you making these
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decisions you know what are the drivers
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of those decisions and the drivers that
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are driving companies particularly non-
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us companies to come to North America
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for manufacturing are Market access and
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access to Innovation not for low labor
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costs obviously uh you know and uh what
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the market this is one of the biggest if
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not the biggest Market in the world
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still but I should also say that those
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are the same reasons that a lot of
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companies continue to go to China not
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for low labor costs but for access to
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their huge and growing market so the and
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that raises another point that what we
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saw was there was no dominant pattern in
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what we saw we saw a very complex set of
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flows of manufacturing from one location
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to another uh you could call that or we
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call that rebalancing of of production
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we also saw what we called reloading of
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production where some companies would
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increase their capacity in their
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domestic country but not necessarily
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shift to another market so um to answer
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your question you know it's it's an
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interesting qu I'm not I don't know if
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we have a definitive answer as to why we
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saw that but clearly they claim Market
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access and Innovation are what's driving
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them to this country and you might argue
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that the US companies already have that
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access to the market and therefore the
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incremental benefit to them is not as
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great know if you want to add yeah I
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totally agree and um um we we we thought
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that that could explain why the US
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company do not um benefit as much as
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foreign companies entering the market
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and also um I agree moris that cost is
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no longer the single dominant factor
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that firms consider when they're making
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those reshoring decisions it used to be
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um dictating their decisions but these
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days that we observe much more
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complexity in their decision making and
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in terms of the outcomes that we
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observe yeah no doubt you'll have all
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these answers after phase three there is
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a phase three there'll always be of
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course be or maybe phase four but we we
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never stop phas and in in another
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conversation we had um quite a while
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back but it was in in the context of
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Japan right moving manufacturing out of
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Japan and one of the things you said at
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that time with was I thought was very
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interesting is that um emerging markets
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in general uh you know for a company to
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come in and start selling their products
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they want to get from them some kind of
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guarantee that we want you to bring your
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technology and and and create jobs here
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and and build things here that you can
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sell here we're much happier if you do
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that than if you just export things to
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us um and that that's a that's another
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Trend so it's kind of related right
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everyone in order to sell someplace it
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seems like companies are realizing
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you're going to have more success if
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you're actually in those countries
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Manufacturing in general well and that's
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that's actually not a new development
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that's that's been around for a long
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time and and governments have imposed
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local content and import quotas and
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various incentives which by the way we
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also saw as being uh important reasons
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in some cases for for shifting
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production um but you're absolutely
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right that uh countries not companies
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but countries want companies to locate
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in their jurisdiction to create jobs to
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create wealth create opportunities for
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their citizens and they want to have
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access to technology now of course that
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often times raises questions about
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intellectual property and things of that
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sort so sometimes there are risks
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attendant with that as
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well and presumably gets you closer to
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the markets you understand definitely
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get you closer to the market yes
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um so were there other conclusions from
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the study that surprised
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you um I think that uh you know there
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are a couple of things we saw in the
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second phase which reinforced what we
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saw in the first phase I think I had
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already mentioned that there was no one
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dominant reason there was not one
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dominant flow uh that there seems to be
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a complex trade-off analysis that
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companies are undergoing and what's
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really interesting to to us is that the
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this is pervasive that there we are in
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the midst of a major restructuring of
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Global Supply chains in region after
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region company after company companies
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are asking the question do we have the
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right structure do we have the right
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sourcing locations are we bringing our
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product to Market in the most effective
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way and they're often times shifting
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capacity changing the way in which they
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produce products adding technology this
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we saw like for example technology and
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R&D across the board everybody's
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investing in this so I think that we're
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in the midst of a period of Flux Of
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change which is redefining the way the
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world produces its
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products do we know where it's going to
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end up no I don't think we do that's why
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we need more phases need more Fae of
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course um well I that's interesting and
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one of the things that you mentioned
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last time about phase one which I
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thought was particularly intriguing was
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that within the same company they might
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be Outsourcing something from a
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particular country while at the same
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time being the outsourcer for that for
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that that other country um so it's you
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talked about a Cris Crossing of these
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Supply chains that didn't use to happen
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there were more steady Flows In One
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Direction or another it it had been
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perceived as you know at a one way flow
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your loss is my gain type of thing but
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now we see two Street we see direct you
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know movement in both directions and
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that's why we call it a rebalancing
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which is one of the dominant
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modes uh and so a lot of companies are
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making multiple decisions sometimes
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offsetting decisions for the reasons you
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said to gain access to developing
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economies and their markets um to gain
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access to their labor to their suppliers
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so um there is no one one way to go but
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there is a lot of Shifting back and
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forth and that's so we we saw that as
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one of the dominant trends of this
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rebalancing if you want to add to that
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or um no I think that was a that was
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accident answer I wanted to ask if you
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it was what was the most interesting
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thing that came out of uh phase two in
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your opinion um to me um I'm a Chinese
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which is quite obvious to you so I would
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just like to add a few things that we
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observed um concering China in phase two
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study which is very consistent of uh we
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will we found in phase one so we found
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that um companies European companies or
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non China nonch Chinese companies are
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moving into China for Market reasons so
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China is growing to be the largest um
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Market of the world um but then at the
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same time we also observe companies
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moving out of China but not for Market
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reasons this time for cost reasons so
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those are the company for example in the
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apparo industry we observe lot of
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companies moving out of China they go
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into um South Asia countries like
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Vietnam Bangladesh those countries that
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have even lower cost than China so I
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just find it amazing that companies
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going in and CH or going out of China
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for different
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reasons but let me add that what we saw
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in phase two consistent with phase one
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is the biggest flow was still into China
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even now in spite of the Rising labor
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costs in spite of the fact that some
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companies in China are moving out of
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China if we asked where are you going
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what are you doing the biggest observed
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flow was companies moving into China
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often times Chinese companies expanding
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within China we call that reloading or
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foreign companies moving into China but
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that was still the most popular decision
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to and we're talking about manufacturing
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here so that's interesting also for
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because of Market access we hear a lot
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about China needing to shift from an
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export Le economy right to a consumer
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based one so they're preparing for that
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which is uh I guess already underway to
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some well you know everybody knows the
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statistic I don't know how many hundreds
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of millions will be in the Chinese
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middle class 400 million 600 million to
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and this is a huge huge market and to
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have access to that market well cannot
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you cannot ignore that if you're a
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global player and and so that's one of
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the reasons another thing that we saw in
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in very pronounced in phase two was that
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quality was a positive reason to go into
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China not a negative also
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counterintuitive right because well you
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know it depends on your perspective you
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know at some stage years back one might
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have said oh if you leave the US and go
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to Asia you may have quality problems
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but certainly that's not true in Japan
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for a long time and it seems to no
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longer not be a problem in China that
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high quality
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complex you know uh products labor not
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necessarily you know labor intensive but
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you know complicated products are being
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produced in China in very high quality
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so um sounds like the decisions been
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made you have to be in the US you have
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to be in China what about Europe now
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Europe is a very interesting qu point in
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both studies and I think even more in
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the second study Western Europe was the
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one place that we saw negative
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decline shifting production in North
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America there was actually stuff coming
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in not from the North America as I said
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but from other places if we add it up
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all over the world we're gaining not at
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great amount not at a great speed but we
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are gaining ground or recovery the US
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has a net gain yes but Europe is a net
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loss except of course for Eastern Europe
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and Russia which is perceived to be a
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nearshoring location just as Mexico is
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to the US so their in but Western Europe
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is
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declining so um what would you say to
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just sum this
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up well I'd say
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that the the the global economy is not
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flat that there are many possibilities
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and many
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opportunities and I think one thing in
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particular that we should bear in mind
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is that there are opportunities in this
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country to grow our manufacturing and to
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grow our economy and that it may be
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based on Innovation it may be based on
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different types of of
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Technology uh but I think we should uh
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we should recognize that the world will
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come to our door you know as long as we
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we manage that process correctly thanks
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very much to both of you for joining us
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today thank you much appreciate it
00:17:01
[Music]
