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our guest today is Hal Sirkin senior
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partner at the boston consulting group
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and we're going to talk about his
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research with his colleagues on the
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revival of manufacturing in the United
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States hell thank you so much for
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joining us today great to be here with
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Michael so in a last interview for
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knowledge at Wharton which was in
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February 2012 we had discussed the fact
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that you know although the conventional
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wisdom was that manufacturing in the
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u.s. is in long-term decline that this
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was increasingly no longer true and that
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manufacturing had actually begun to
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return to the US and we also talked
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about some of the factors that were
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driving that change has the trend
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continued in the past two years and what
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are some of your most recent findings so
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in 2011-2012 we said that it wouldn't
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happen till 2015 I'm glad to say that we
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were wrong in our projection that in
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fact shortly thereafter we started
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seeing company after company after
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company now we can identify three four
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hundred different companies that had
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brought back manufacturing to the US not
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for patriotic reasons but because it's
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just good business explain that in some
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detail why is it does it make better
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good business sense to bring
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manufacturing back well if you go back
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to the late 1990s you'd see that the
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labor costs in China were very low but
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when China entered the WTO in 2001
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average labor costs were somewhere
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around 58 cents an hour and the u.s. is
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a very fluid environment for labor we
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have the ability to hire and fire unlike
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a lot of other developed world countries
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and what happened was companies saw that
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labor was so cheap they sent the the
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labor out basically the manufactured
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goods were sent to China they were made
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in China and then sent back to the US
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and that of course caused a bunch of
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hardship in the country but what was
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goes on in the u.s. is something that is
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always amazing we are a truly free
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market and we have the ability to make
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changes and therefore the economy
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adjusts and as Americans we don't have
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massive social safety nets for better or
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for worse we just don't have them and
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that forces the American
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me to adjust and we adjust and we adapt
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in many ways we survive some companies
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went out of business other companies
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figured out how to stay in business in
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the u.s. others outsource partially and
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got some of the benefits that way but
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what happened is that wages in China
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with all the demand for this cheap cheap
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cheap labor started going up and you
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know when they're 58 cents an hour you
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don't think about it when it becomes a
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dollar but over time the magic of
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compounding of fifteen to twenty percent
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labor rates a year and you end up in a
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position where the cost differentials
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are getting lower now China has always
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been sort of the magnet for
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manufacturing but in looking at some of
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your recent research Mexico seems to be
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merging also as a matter of fact global
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manufacturing destination what
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implications does that have for China in
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2012 my colleagues and I were quite
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confused because we were looking at the
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data and we start to notice that it
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actually became cheaper to manufacture
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in Mexico for the kinds of goods that
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mexico makes today than it is in China
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not even counting the transportation
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costs when the transportation costs
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there's a big big difference and what
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we've watched now is the maquiladora all
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in many ways from the 1990s in Mexico
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packed up in essence and they became
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Chinese manufacturing now they're coming
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back and they are very economic in terms
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of serving the US as I like to say it's
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a four day trip to Chicago from Mexico
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but it's a four month trip from China to
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Chicago and therefore there's a lot of
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other costs that it's added in there and
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so we watched Mexico becoming a very
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important manufacturing sector one
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interesting fact is that there is four
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times as much u.s. content in Mexican
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made Goods than in chinese-made goods so
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there's actually a lot of reshoring to
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the US because if you switch a
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chinese-made good for Mexican make good
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you actually get a fair amount of us
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content I was well I'm glad you
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mentioned that because I was wondering
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what the emergence of Mexico as a global
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manufacturing destination means for us
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manufacturers is this something that
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benefits American manufacturers or
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should the US manufacturers be worried
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about having one more low-cost
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competitor but this time closer to their
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own Shores rather than China well I
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think it actually makes it better for us
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manufacturers because they can use the
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low-cost labor to do this things that
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you would do with low-cost labor in
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Mexico today and therefore the cost of
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the total product is lower and therefore
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the US can be more competitive with
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China people often worry about crime and
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safety and issues like that in Mexico
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how our American company is mitigating
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those risks well crime and safety are
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clearly issues and I think everybody
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needs to be aware of them it's probably
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one of the main reasons that the peso is
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not increased in value over time because
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of concerns about this but what we've
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seen companies do is they've been able
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to put into security systems to do other
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things that allow them to produce in
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Mexico with reasonable levels of safety
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obviously you have to watch what you're
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doing it is it is not like being in a
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major US city but it is a an issue for
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companies and some companies find ways
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to do what others say that the cost
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differential isn't enough to really do
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that and it depends on the product and
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how companies are looking at the
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manufacturing situation now in addition
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to a to rise of Mexico some of your
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other recent research also is about
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pricing of products that are made in
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America do you find that American
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consumers are willing to pay a price
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premium for products that are made in
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the US well one thing for certain that
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we know is that American consumers shown
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a chinese-made product and a us-made
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product even if they're the same exact
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product and they're really both made in
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the US but if they're labeled that way
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they will almost always go after the
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made us a product and then we're also
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seeing is for a lot of goods anything
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that might be health related baby care
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products many different things things
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that you want to keep for a long period
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of time there is a very strong value of
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made in America vs. made in China and in
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fact we did the research in China as
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well and sixty percent of the P
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in China are looking for made-in-america
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products / made in china products so it
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is it is clearly there and we know the
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stories we know the stories of melamine
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we know the stories of flights from
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Australia being loaded up with baby
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formula and diapers because there's
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concerns in China you know over time
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China will work through these concerns
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as you know economies do but it for the
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time being there are real concerns with
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the Chinese consumer and there are real
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concerns with the US consumer and you
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got also remember that we are all people
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who live with our neighbors and our
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friends and our families and the reality
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is if i buy a made in USA product i'm
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actually helping my neighbors and that's
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another factor in there and of course
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there's also patriotism that we are
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strong country and we have strong
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patriotic views so are there some
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product categories that benefit from a
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medium in america premium and others
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that don't well categories that involve
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children clearly there so you want to
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make sure that the teething blocks and
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the teething plastics are the kinds of
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things that you want and so people look
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very much on those kinds of products for
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made in America things that they want to
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have durable you want to have you know
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hammers and tools and things like that
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those are things that you know there is
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a differential in cost and a lot of
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consumers have chosen to pay the higher
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price for maiden at this point in time
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although that cost differential is now
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getting a lot lower now you your
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researchers have found that Chinese
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consumers are willing to pay more as you
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said for made-in-america products but
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Europeans are not and what are the
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reasons I think the difference with the
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Europeans is that it also has a set of
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safety standards Europe is is got very
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similar we can debate how different they
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are but for the most part they're 99%
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overlapping the government's argue on
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the on the one percent so there's really
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not a real reason for them to do that
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and of course if you're German or French
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then you'd be patriotic to that and
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you'd be more likely to use that and of
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course if it's made there in many ways
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it could be cheaper and if you look at
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other asian consumers are they more like
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the Europeans or like the Chinese well
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it depends on a a she is a big continent
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right and it very much depends on what
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where you are if you're in some of the
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lower
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wage countries then there are some real
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issues and and the population that can
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afford the american-made goods will buy
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the american-made goods or the durban
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baked goods or the French make goods for
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the ones in the lower-income countries
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of course that's a different issue they
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end up having to basically you know buy
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a cheaper cell phone or a cheaper baby
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product because that's all they can
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afford I'd like to admit a few questions
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about what is sometimes called the
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skills gap crisis so as manufacturing
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returns to the US is that truly a crisis
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of manufacturing related job skills are
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do you think that problem has been
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overstated well right now we really
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don't have a skills gap or a major
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skills gap people working in the natural
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gas field that that is clearly one where
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we have it so things like welders and
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plumbers are clearly in shortage in the
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u.s. we've been able to get a lot that
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shortage by having imports of people
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from other countries but what the big
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concern is for example welder the
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average age of a welder is 58 years old
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right now it was basically 57 years a
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year ago and 56 years old two years ago
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so we have a fundamental problem coming
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up here there are two ways we can solve
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this problem one of which is to get
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better vocational schools and get better
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training either from a school or from an
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employer and as the this skills shortage
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for welders are going to get tougher and
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tougher the employers will figure out
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how to do some of that the other thing
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to do is of course America is a great
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place to come people want to come to
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this country whether it's you know
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Disneyland or New York City or
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Philadelphia all the great cities that
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we have and the freedoms that we enjoy
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here in the luxuries that we have there
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are a lot of people who want to come to
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this country and we can do it the
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old-fashioned way as well which is
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import people and we're doing some of
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that now but the educational system
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particularly for the trade schools is
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very important and you know I think we
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need to think about education in a very
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different way in a country as you know I
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went to the word business school and in
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many ways that was a trade school I
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learned a trade and that trade is
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business but at the same time i went to
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the university n sylvania
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and I got a liberal arts degree at the
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same time and I think that made me a
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more well-rounded person I don't see why
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our welders or our plumbers or any other
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tradesmen wouldn't want to get or
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couldn't get a two-year degree in
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essence in Liberal Arts and a two-year
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degree in their trade I think that would
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give them much better job skills and I
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think a much more satisfying career
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unfortunately today our education system
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doesn't allow that I parts of the
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country where this problem is more acute
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than others and and what can be done
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about that well it's really where the
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net oil and natural gas is that it is
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really the places where this is a cute
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we look at you know North Dakota where
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housing prices are higher than
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apartments in New York City at this
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point in time and that's because it's
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cold up there and it's hard work but
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they can make a lot of money and so you
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know we see problems there the problems
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will get worse if we don't do something
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the natural course will be that we will
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then start importing people to do this
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kind of work how do you think companies
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can be more proactive about future skill
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gaps I think it's training I think it's
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it's simple we know what happened in the
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last recession was a lot of companies
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took out their skills training in order
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to make quarterly earnings and that may
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have been going on for several
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recessions in the past because what's
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going on as the US workers become more
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efficient and therefore we need to hire
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fewer of them for the same level of
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output and as I think you know that in
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the last four years basically we've now
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got two and a half times as much
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manufacturing value-added and we do with
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thirty percent less labor and that's the
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the skills of the US worker and
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automation and lean manufacturing all
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taking effect making the u.s. more
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productive in all the research that you
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have done over the years over the
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American manufacturing Renaissance what
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would you say has surprised you the most
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the speed at which it's taking place we
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we were thinking it wouldn't take to
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really even start that it would be
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noticeable till 2015 and we
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underestimated the
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the resilience and the understanding of
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the business community when they started
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to look at what they were doing making
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things in China a lot of them looked at
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it said the economics don't work and
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decided to start bringing things back
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they for a long time China was the
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default manufacturing position and
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basically you were crazy if you didn't
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make everything in China one major
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automaker didn't even have a quota for
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things made in China they just asked
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they're there the procurement people to
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buy just about as much as they could in
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China because it was going to be cheaper
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and they didn't have to do the analysis
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because it just had to be that way and
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of course it might have been the
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cheapest if you look at the list price
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but you'd need to look at the whole
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package and if the product doesn't have
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the same quality or if the product has
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fundamentally different characteristics
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and can't be as durable of course then
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it's not going to be the same product
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and you're probably paying more money
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than you should be paying what are some
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of the future questions that you plan to
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research in this area well we have
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something coming out very shortly which
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is we're now looking at the whole global
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competitiveness and so we've we will be
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coming out on April 26th with our global
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competitiveness research it looks at the
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top 25 countries and and will give
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people a perspective on how competitive
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each one of those countries are and we
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look at key factors like labor
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productivity worker pay electricity
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costs and and exchange rates and we have
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an index that we can now share which
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will be out very shortly and we're
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working on some other things on
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automation as well which are very
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interesting they may be very
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controversial so we'll we'll talk about
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that at another time at this point I'm
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we're not exactly sure but we're still
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doing the research and but if the
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research turns out the way it looks like
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it's going to be another very
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interesting story that i'd love to share
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with you nicole and look forward to
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discussing competitiveness as well as
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automation with you in the future now
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thanks so much for joining us today
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knowledge it weren't always a pleasure a
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pleasure Michael
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you
