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