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