The future of US Manufacturing

0:24Thank you.

0:30with technology and why empowering the workforce with skills and capabilities is key to success. Over the past several years, supply chain disruptions have exposed just how interconnected and sometimes fragile the global manufacturing system can be. In the United States, trillions of dollars of manufactured goods are imported each year, raising a fundamental question. Should the country be better equipped to produce more of these goods domestically, especially those critical to economic competitiveness and national resilience. An equally important question is whether the U.S. has the industrial capacity, workforce, supplier networks, infrastructure and investment needed to manufacture those goods.

1:11These questions have become increasingly urgent as companies navigate supply chain disruptions, shifting trade dynamics, rising geopolitical uncertainty and growing demand in areas such as semiconductors, advanced technologies, pharmaceuticals, and energy-related industries. New research from McKinsey Global Institute explores America's manufacturing vulnerabilities, the investments and the capabilities needed to address them, and what it will all mean for business leaders. Joining us today, I'm delighted to have two of the authors of this research, Rebecca J. Anderson, a senior fellow with the McKinsey Global Institute, and Mike Conway, a McKinsey partner who advises companies across the industrial sector.

1:54Rebecca and Mike, welcome. Thanks for having us. Thank you, Daphne. Thrilled to be here. So Rebecca, I wanted to start off with you. Why does this topic matter now? So many people assume the conversation about manufacturing is really about jobs or bringing production back to the United States, but your research suggests that stakes are much broader than that. Why is this topic so important right now? Thank you, Daphne. And indeed, of course, things like manufacturing jobs are not to be taken lightly. And in many ways, the U.S. economy over the last 50 years is really dealing with the consequences of a decline of manufacturing that we see throughout the population today, see throughout geographic inequalities and so on.

2:38But what I want to make clear is in this precise moment in time, we're in a special place. This isn't just about correcting for the past. It's about really setting the economy up for the greatest success to be competitive in the future. Right now, we're fundamentally at the dawn of a new era for the global economy, one that's really defined in large part by shifting geopolitics. So fragmenting trade, for example, but also things like rapidly advancing AI and other critical technologies. And with those two factors in particular, now we need to think about how does the U.S. economy position itself to be competitive going forward.

3:26And one really important dimension to this is the idea of resilience. And how does the U.S. really build up a resilient economy and especially have access to critical materials, have functioning supply chains, and so on? So there's this big resiliency element to future competitiveness. There's also increasingly a realization that a lot of important innovation takes place at the production level. And so by not having the production side of critical technologies domestically, that we're actually missing out on a lot of important innovation that also takes place. And Rebecca, one of the things that stands out in the research is that the issue isn't simply how much the United States imports.

4:11It's which products we depend on and how exposed we are if those supply chains are disrupted. Can you explain that distinction? The U.S. last year imported$3 trillion worth of manufactured goods. And it's not to say that the U.S. needs to produce literally all of those$3 trillion of imports domestically. But when we look across those imports and we see effectively which ones are most critical to national security, which ones are from geopolitically distant trading partners, and which ones are from concentrated suppliers, which these are basically three different forms of trade dependency, as we call them, 25 % of those imports face at least two of those three dependencies.

5:01policies. So fundamentally, when we're talking about resilience and positioning the economy for future competitiveness, we're really focusing especially on those 25 % of goods that face multiple potential choke points. Yeah, very helpful. And Mike, let me bring you in here. So when Rebecca talks about these manufacturing vulnerabilities, what does it mean from a business perspective? You know, why should a CEO or an operations leader care about this? It's an excellent question, Daphne. And basically, as Rebecca described, these vulnerabilities are manifesting by effectively preventing businesses from reliably delivering what customers need.

5:43And operationally, this can be driven by several things. This can be driven by constrained capacity, dependence on a single supplier or geography, limited visibility, labor shortages. But ultimately, a CEO or an operations leader should care about this because these vulnerabilities show up directly in business performance. And this can look like a variety of things. This can look like missed revenue, when demand spikes and that capacity is not internally available. Margin pressure, when the company has to expedite materials or start carrying excess inventory to buffer risk. Perhaps most importantly, customer attrition, if those service levels fail.

6:18And in some sectors, this could even mean a matter of national security. But I think the opportunity is equally important. Companies that can understand their vulnerabilities can turn that resilience into a competitive advantage. And what we see is that the industry leaders are the ones who can respond the fastest. And the way they do that is they proactively invest in flexible capacity, think differently about how they can diversify the supply base, increase the visibility across the full end-to-end value stream, and think more broadly about how to build a deeper and broader bench of suppliers.

6:49So really the question becomes not so much how do we avoid disruption, but how do we build both the internal capability and the network that can withstand shocks while also positioning for growth? So Rebecca, the report identified a number of manufacturing what we called Achilles heels. What are some of the areas where the United States is most exposed today? When we talk about Achilles heels, we're fundamentally referring to products that face at least two of those three trade dependencies that I outlined earlier. in that they're critical to national security or the basic daily functioning of the economy, that they're from a geopolitically distant trading partner, or they're from a concentrated set of suppliers.

7:30So 25 % of these products are what we call Achilles heels. And if we look across perhaps a little more concretely of examples of these, at the level of two of these three trade dependencies include things like semiconductors. So those are both critical, and they're from a concentrated set of exporting countries. Things like GLP-1 drugs are also on that list. Also things like toughened glass, you know, input to many different types of manufactured goods, as well as solar panels. Those are also facing two of these three trade dependencies. At the level of all three of these trade dependencies, that bullseye center of all three of them are things like laptops, smartphones, as well as rare earth magnets, which of course have attracted a lot of attention recently.

8:21And so what would it take to ramp up domestic manufacturing in those areas? What we did in our recent report was we calculated a ramp up factor. So we compared domestic production to the amount of imports for these goods. If we look across all imports, The average ramp-up factor is about 1.3. In other words, on average, domestic production or domestic productive capacity would need to grow by about 30 % in order to offset all imports. But if we look at the 25 % of imports that are Achilles heels, production would, on average, need to double. and for about half of the products, including many electronics products, production would need to more than quintuple in terms of domestic productive capacity.

9:13So we're looking at a very significant increase if the U.S. were to try to ramp up production to offset these specific imports. Wow, very clear. Mike, let me bring that then, that perspective back to you to say, Obviously, you know, different sectors are going to be impacted differently here. Can you give an example of some of the sectors that are going to be really affected by this and what should they be doing in your conversations with them? Absolutely, Daphne. And just as Rebecca mentioned, the ramp up factor is such an excellent indicator of the scale to which some sectors will need to ramp.

9:50I think the general theme when we look at which sectors are most critical to ramp tends to have three things that overlap. It's where's the product most critical? Is the supply chain concentrated? And could those suppliers become less reliable should a disruption occur? So when we think about kind of that overlay with the ramp-up factor, I think there's a couple sectors that stand out. But perhaps the clearest example is electronics. Electronics is a very large import category. And I think what's unique here is beyond the big categories like semiconductors, smart loans, what we see is the electronic components are spread across sectors and their inputs into a variety of products, medical devices, defense systems, power infrastructure.

10:32So when the electronic supply chain becomes constrained, that impact tends to ripple across many parts of the economy. You know, conversely, pharmaceuticals are another important example. For pharmaceuticals, the story is a bit different, though. If there's a disruption, that impact is not just will the product become more expensive. But here, a degraded service level can also affect patient care, patient access to care, and in some instances, broader public health. Rebecca also mentioned rare earth magnets. What's interesting about rare earth magnets is that although it's not necessarily large in terms of dollars, the criticality of rare earth magnets into broader sectors, other products, things like electric vehicles, industrial equipment, defense, means that their small bottleneck in further upstream can create a very large trickle-down effect and put significant portions of the downstream value stream at risk.

11:25So the way this affects the sectors is quite a bit different. If we think about electronics, the challenge is scale. So to be able to ramp electronics to meet the demand requirements is going to require a very large ramp up in production capacity. Just to make the counterpoint to electronics, I think in pharmaceuticals, what we see is as opposed to just investment in capacity, it's an important distinction to know that it's critical to think about resilience and the access to critical inputs. So really, when we think about this in context, it's both where is the production capacity available? What will it take to get there?

11:59And where is the risk manifesting? And how can I get ahead of thinking about where that risk will occur? Well, actually, Rebecca, I wanted to come back to one of the key findings in the report, which was that ramping up domestic productions for the Achilles heels and the upstream manufacturing supply chains would require an estimated$2 trillion in capital investment. And yet funding could be the easiest part. Can you explain that point a little bit further? Historically, the United States has had the deepest capital market in the world. And really funding both a business case and something as a national priority, funding has not really been where we've faced challenges in the past.

12:41In fact, that$2 trillion is roughly equal to all of the cumulative investment in shale gas and upstream industries for shale gas from 2005 to 2025. So we've mobilized this scale of investment before. Interestingly, about$2 trillion is also equal to about eight years worth of the average announced greenfield FDI inflows to the U.S. between 2022 and 2025. So it's a pretty big number. It's about a 50 % increase in the current industrial capacity base in the U.S., but it's not this insurmountable challenge at the same time. as long as there is a clear business case and if something is a stated national priority.

13:32So beyond funding then, what are some of the capabilities and ecosystems that would need to be developed alongside manufacturing capacity? The biggest one is skills and having a workforce that actually knows how to do the work and that's able to do the work is geographically present where the work takes place. So having specialized skills and a labor force that is able to scale with that investment is probably one of the largest challenges. But in addition to just the workforce, things like energy and infrastructure, those investments are not included in that$2 trillion. And, of course, this is a really big time for energy landscape right now with everything related to AI data centers.

14:22By one estimate, there could be a potential 60 % increase in power demand through 2040 in the U.S., and that's primarily driven by data centers. And this is coming off of a couple decades of relatively flat power demand in the U.S. So we're already looking at a pretty significant overhaul in our energy and energy infrastructure system in the U.S. And so when we're adding in on top of that, ramping up a lot of domestic industry on top of that, that's going to only basically create more demands on energy and associated infrastructure. So energy and infrastructure are another big part of the equation.

15:02Of course, there has to be the ecosystem of suppliers as well for all of these industries. That$2 trillion number encompasses the upstream industries for those critical Achilles heel products. But typically, what we've seen over the last several decades is that manufacturing and industrial production really tend to take place where there are clear ecosystems and networks of suppliers. So that's another big part of the challenge is that it's really a systemic ecosystem shift. So, you know, Mike, coming back to you then, so Rebecca's just described this challenge, which is way broader, much wider ecosystem kind of requirements.

15:47So how do companies think about the business case? And as we do that, I was just reminded of some of the sectors that you were describing as being particularly impacted by this. What are some of the questions that business leaders should be asking themselves right now? I think ultimately, you know, for business leaders, it ultimately starts with answering one question. And that's, where could a disruption really affect my performance? And I think it's important to note, you know, for companies, this isn't necessarily about reshoring everything or building redundancy everywhere. It's just not feasible.

16:18This would be way too expensive, unnecessary, etc. I think the real task is to identify the few places where there's either significant supply chain exposure or manufacturing capacity gaps that could put the revenue margin or strategic growth at risk. Typically, what I advise leaders to do is to start with three things. First, map your true exposure. Look beyond the tier one suppliers and understand where the critical components truly are coming from. Often we find that beyond tier one, it can be a black box. Second, quantify the business impact. Think about how a disruption in the supply chain could impact production and whether that's going to translate to either a cost increase or more critically, is that going to impact and lead to missed deliveries?

17:05And third, think about where resiliency actually could create an advantage. And that could look like either thinking about dual sourcing, holding more inventory, or in some instances that could even look like reimagining the product design, reshoring or building and investing in additional capacity. So I guess to bring it back, Daphne, I think I would answer your question and I would frame this to a business leader around a couple core operational questions. It's basically, where are we most exposed? What would it cost us if that exposure became real? And where would the targeted investment in resilience help us protect the downside while also positioning us for growth?

17:43Yeah, very clear. Actually, in that, Mike, then I wanted to come back to a point that Rebecca made earlier, which is the important role that talent will play as manufacturing ramp-ups, you know, move towards a successful journey. So manufacturing has long experienced labor shortages in the U.S., but it seems there's a bright opportunity here for the labor market. Can you say a little bit more about that, Mike? Absolutely. I mean, I think ultimately talent is going to be critical to this. And, you know, as much as companies invest in new facilities, broaden the supply base, if you don't have the people to run those operations, then, you know, frankly, the ramp-up's unlikely to happen.

18:18And unfortunately, labor might really be the limiting factor. As part of our research, we looked at decade-high utilization rates. And what we found was that if we were to turn utilization across all sectors up to decade-high performance, we would create 1.4 million new jobs. But that's only about 10 % more than the current workforce. So the implications of that is that hiring likely will not solve this alone. Instead, manufacturers are going to need to think differently about talent. And the question now becomes not just who do I hire, but it's more how do we redesign an operating model so that each worker can both be more productive, more skilled, but then maybe more importantly, better supported.

19:01This is where we start looking into automation, digital tools. I think one of the major points is that the factory of the future is likely going to require a smaller and more highly skilled team to manage complexity while also generating more output. Yeah, thanks, Mike. So, Rebecca, what are the broader implications for the labor market? One important thing we need to keep in mind is that this is a really critical juncture point for the labor market. In addition to any type of push for reindustrialization, which of course will have greater demand for labor, in addition to that, there's also two other important macro forces at play here.

19:42One important force underway that really looks poised to disrupt the labor market is AI. Some recent McKinsey Global Institute research found that 57 % of current work hours could technically be automated based off of today's technologies. And that doesn't mean that in all likelihood in the future of 57 % fewer jobs, but it does mean that businesses as they adopt AI and reconfigure their operating models are also going to have to think through what the roles of the future are. so that there's people working with AI or AI agents and robots in the future. And of course, to make business cases work in the future, in all likelihood, we're going to have to see a greater extent of automation and robotics.

20:29So we're going to have to think about end-to-end training and skills development from K-12 education standpoint all the way to lifelong learning programs and the way companies themselves think about their training to make sure that they're really giving their workforces what they need. So that's one really significant shift underway right now in the labor market. I think that's such an excellent point, Rebecca. And if I could, I think we so often get the question of, is an automation strategy going to replace my talent strategy? Or is by utilizing more robots in my factory going to reduce the need for frontline labor?

21:16And I think quite frankly, the answer is no. That given the capacity gap and given the need to ramp, what we're seeing and what we're recommending is that frontline workers increasingly need to operate alongside robots. that the increased data visibility and the digital performance that is unlocked through robotics and through AI is changing the paradigm for frontline workers. But it's increasingly important that talent strategy has to be part of the ramp up strategy. And as exactly as you mentioned, this can look like both upskilling frontline roles, but also partnering with technical schools to build apprenticeships and really embedding a talent strategy as part of a broader plan to meet the capacity gap.

22:00Thanks, Mike. And the second big trend or force underway that I would say that we have to think about is demographic shifts. We have an aging population in the United States and also around the world. And that's going to basically put greater onus on automation and on making sure that the workforce of the future is able to not just fill, replace certain roles, but also do even more just because we're going to have a different balance of retired individuals as well as full-time prime age workers. Just to give some numbers to it, if we look at the production workforce in the United States, in 2024, 24 % of the production workforce was over the age of 55.

22:52And that was up from about 20 % of the workforce in the early 2010s. So there's a very clear trend here, and so we have to think about, you know, who's going to be filling those roles as more and a greater share of the workforce essentially retires. So overall, there's these major forces at play of AI and demographic shifts that are going to be taking place in addition to the reindustrialization. So all of these things together mean that there's going to be these pushes and pulls on jobs and skills that are needed and what exactly the future workforce might look like. Yeah, really interesting.

23:31A true transformation then, for sure, Rebecca. Mike, when you look across the work that you're doing with clients, what separates companies that are proactively building this resilience from those that are still kind of in a space where they're just reacting to what's coming at them? You know, I would say the difference tends to be pretty simple. I would say proactive companies kind of know where they are exposed before the disruption happens. The reactive companies find out after something breaks. And reactive companies tend to spend a lot of time in firefighting mode. If the supplier misses a shipment or a plant goes down, it creates an organizational scramble.

24:11And what that looks like is often expedited materials, rushing to find an alternate supplier, starting to add inventory and starting to consume working capital. It's expensive and more often than not, it happens too late. I think the difference is the proactive companies tend to do the work earlier. They know which suppliers, which components, which sites are truly critical and focus their attention there. On the supply side, they tend to go beyond the tier one suppliers and look deeper into the sub-tier supply chain to know what the pacing component might be in the event of a global shock. The other thing that leading companies do is they tend to quantify the business impact.

24:50They know, should there be a disruption, what revenue, what margin could be at risk, and what customers could potentially be disrupted should I not be able to meet my committed service levels. Maybe one more point, Daphne, is I think leading companies tend to have very strong leadership. In these companies, resilience doesn't just become a procurement topic. It's on the CEO agenda because it affects growth, cost, and customers. So maybe I put it this way. Reactive companies tend to respond to the shocks, but the proactive companies tend to build a muscle to predict when and where it will manifest.

25:27Yeah, I love that. And I'm going to just kind of close out the conversation because I know we could all talk about this for many more hours. And I know that when you dig deeper, there is much more to say here, but we only have a few minutes now. So as you were talking about the muscle, Mike, I love that. I'm going to come back to you first, which with the question of as you look at the challenge ahead and as you say, the need for companies to really build that resilience muscle. What gives you confidence that the U.S. is going to successfully expand and going to be able to respond to these vulnerabilities?

26:04I'd say one thing that gives me confidence is the fact that the United States has demonstrated that it can already do this, that it has mobilized when the business case, policy and demand effectively line up. And we can rely on several deep advantages. We have a large domestic market. We have deep R &D and innovation capabilities, energy. And I think maybe most importantly and cross-cuttingly is that there's a growing recognition that resilience really matters. Particularly over the last decade, we're seeing much more focus and much more investment to prioritize resilience. I'd say, you know, definitely that doesn't mean the ramp up is going to be easy.

26:46I think there's very real constraints around talent, permitting, infrastructure. But there's confidence in that the opportunity is now clear. And it's not just about reducing risk, but it's about growth, competitiveness, and creating long-term competitive jobs to serve competitors reliably. And Rebecca, as you've been deep into this research, what are some of the elements that give you confidence? I would say a few things. I would echo everything that Mike just said. But if we think about the force of the U.S. economy, the U.S. is fundamentally the world's largest market, largest consumer base, second largest manufacturer today, second largest exporter today.

27:26So just the sheer scale of the U.S. market cannot be underestimated. But what really also shines for the U.S. is the fact that we have some of the world's deepest capital markets. So in terms of funding, in terms of just the venture capital, all of the potential financing for investment is deeper in the United States than anywhere else in the world. The other thing I would point to for the U.S. is our entrepreneurial culture. I think we have people across the country that, you know, all levels of education across all industries that are extremely innovative, extremely entrepreneurial. And I think this is, in order to do this and successfully build resilience and ramp up manufacturing in these critical areas, this is really an all-of-the-above approach that needs all hands on deck.

28:21The last thing I would say is just thinking about the fact that this is the U.S.'s 250th anniversary. And if we think about the long arc of U.S. history in terms of the last 250 years, one ever-present theme across U.S. economic history has been this idea of reinvention. So we've completely reinvented our economy at multiple moments of history, especially moments where there is this fusion of shifting geopolitics, shifting world order, but also really important technological advancements. The most recent major transition was in the time of the 1980s to the 1990s, where we really did make that pivot from a manufacturing-based economy to a services economy for important reasons, because we were facing important competitiveness challenges as a country.

29:16And we were coming off of a decade or so of stagflation, energy crises, and so on. So the last big reinvention point reinvented for good reasons. And then we got a new era of growth coming out of that. Now, this is the next moment of reinvention. And if we look at the challenges that we've overcome as a country in the past, I'm only optimistic that we will be able to overcome this one as well. That's a great way to close this, Rebecca. A real moment for reinvention. But we believe that the U.S. can absolutely do it. I love that. Today's discussion highlights that the future of manufacturing in America will be shaped by more than factories alone.

29:55It will depend on the talent, the infrastructure, the supply networks and investment needed to build resilient industrial ecosystems. And on the decisions leaders make today about where to focus their efforts. For companies, the question is no longer whether manufacturing strategy matters. it's how to position themselves for a future where resilience and competitiveness increasingly go hand in hand. Rebecca and Mike thank you so much for joining me this has been a really rich discussion on a topic that seems to be top of mind of business leaders policymakers and the public the moment for reinvention has indeed come.

30:34Thanks so much for being with me thanks Mike. Thank you Daphne. And thanks Rebecca. Thank you Daphne. you've been listening to McKinsey Talks Operations with me Daphne Luchtenberg if you like what you've heard subscribe and stay tuned another great episode starts now