Knowledge@Wharton: Could we start by talking about your own background? How did you get interested in American manufacturing and its future?
Justin Rose: Growing up, I was always interested in big issues like geopolitics, energy, environment and so on. During my time at BCG, I was lucky enough to work with a meter solar panel manufacturer, which was my dream assignment. I was blown away at the intricacy and sophistication of manufacturing assets. A lot of people think about manufacturing as hard, dirty labor — but what I saw was intricate, sophisticated operations. And I realized that for many things in the world that I wanted to happen, products needed to be made to enable it. That really intrigued me.
Knowledge@Wharton: The conventional view is that manufacturing in the U.S. has been in long-term decline, and that competitive advantage in this industry has moved to countries like Mexico and China. Do you think that perspective is still valid or is it out of date, and why?
Rose: It is both valid and outdated. It is valid in the sense that many basic and low value-add products have moved out of the U.S. It is outdated in the sense that the U.S. still has an incredibly thriving manufacturing sector with more than $4 trillion in annual output. In aggregate, we produce the vast majority of what we consume in the country.
What’s changed in the U.S. is that our focus now is different. We have moved on to innovative products that require engineering and sophistication. While that transition has been painful in many parts of the country, it is not necessarily a bad thing. We just need to make sure that we support our workers so they can continue to support their families and communities.
Knowledge@Wharton: Since you look at what is happening in manufacturing from a global lens, how have changing cost structures altered the map of global manufacturing?
Rose: For the last 30 years, people have talked about the globalization of supply chains. My belief is that in the next 30 years we are going to see that unwind. There are three main reasons. First, costs are evening out globally. In 2004, in say, China, they were about 15% cheaper on average from a manufacturing cost standpoint than the United States. The average wage for a manufacturing labor was less than a dollar an hour. There weren’t any safety or environmental standards to speak of. But that has changed. Now China is only about 5% cheaper, and that doesn’t include the extra cost of shipping goods across the Pacific to U.S. consumers.
Second, there are clearly trade tensions, and intentional reordering from “free trade” to something that we refer to as managed trade. So, you see things like Brexit having an impact, the Trans-Pacific Partnership, USMCA [United States – Mexico-Canada Agreement], and so on. All of these are creating frictions in the global supply chain in the immediate term.
And probably most interesting is the forward-looking perspective, and that is all about technology. Industry 4.0 or advanced manufacturing is mostly a set of technologies that allow labor to get removed from manufacturing processes. So, if a country, and let’s use China again, has labor that is 50% cheaper, and a product where 20% of the cost is labor, that means it would have a 10% cost advantage overall. But, if that percentage of labor falls from 20% to 10% because of automation and other advanced manufacturing technologies, then that advantage is cut in half.
Our view at BCG is that 60% or more of the tasks in a factory can be potentially automated. Therefore, over the long term, the advantage from being a low-cost country starts to go away. If I take a step back, what does that all mean? It means we move from global supply chains to regional ones.
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