Making it in America

"Made in America” week at the White House seems like an opportune moment to confront two critical questions: Can the United States still compete in manufacturing? And can workers still make it in America?

These issues clearly strike a nerve for millions of Americans who are anxious about how the economy is evolving. The future of manufacturing and the need for more inclusive growth are both at the top of our research agenda at the McKinsey Global Institute. We recently shared some of our preliminary findings and held a standing-room-only discussion that touched on both issues at the Aspen Ideas Festival featuring New York Times columnist Tom Friedman; Sen. Mark Warner; Allstate chairman and CEO Tom Wilson, who also chairs the US Chamber of Commerce; Zoe Baird, CEO and president of the Markle Foundation; and Don Baer, chairman and CEO of Burson-Marsteller. Here are the findings I presented--this event was only the start of what we hope will be an ongoing dialogue about where we go from here.

The manufacturing sector is not the only US sector under pressure by any means, but its fortunes have an outsized impact on the overall health of the economy—and on public confidence. We often hear that America doesn’t make things anymore, which is a pretty striking misperception for a country that still ranks second in the world for manufacturing output. This gap between myth and reality underscores just how deeply Americans have felt the contraction of a sector that was once the nation’s primary ladder into the middle class.

There’s no denying that the United States has let its manufacturing base erode. Today there are about 30 percent fewer US manufacturing firms and plants than there were in 1997, and one-third of the sector’s jobs were lost in the decade from 2000 to 2010.

But manufacturing still punches far above its weight in other ways. It drives 30 percent of the nation’s productivity growth, 60 percent of its exports, and 70 percent of its private-sector R&D spending. It remains the primary industry in more than 500 counties. In short, manufacturing still matters a great deal to the health and competitiveness of the US economy.

We believe that the United States now has an opening to revitalize its manufacturing sector—if companies and policy makers work together and act decisively. After two decades of headwinds, trends in demand, input costs, and technology are shifting in ways that can benefit US-based producers.

First of all, consumption is booming in emerging economies, creating new export opportunities. Second, companies are reconsidering their location decisions as rising wages in emerging economies, the availability of new automation technologies, and lower energy costs in the US change the cost equation. While the previous era of manufacturing was about chasing low-cost labor, companies are now giving more weight to factors such as proximity to markets, suppliers, and innovation partners. Third, new technologies such as the Internet of Things, analytics, advanced robotics, and 3?D printing are transforming the sector worldwide—and the US can stake out a place in the forefront of these changes. Manufacturers will soon be able to connect their entire value chain with a seamless flow of data, unlocking efficiencies and new service offerings. If US firms embrace this new world of digital manufacturing, they can transform their productivity performance and gain the kind of agility they need in a world of fast-changing, fragmenting demand. Fourth, we see an opportunity to narrow the trade deficit in the advanced manufacturing industries such as automobiles and other transportation, equipment and machinery, pharmaceuticals and chemicals, and high-tech devices where the United States should have a natural comparative advantage. Other advanced economies, including Germany, Japan, and Korea, have maintained trade surpluses in these industries.

The United States can capitalize on the shifts to increase output, regain global market share, and boost productivity performance. But no one should underestimate how hard it will be to reverse two decades of negative trend lines in manufacturing. This effort will take a wave of investment (both domestic and FDI) and a major push to shore up and modernize the base of small domestic suppliers, which has been hollowed out in the past few decades. Workforce training will be critical, since the jobs at stake in 21st-century manufacturing may be service roles or positions requiring digital skills. Finally, the United States needs a comprehensive export strategy that encourages more small firms to participate, bringing the benefits of globalization to more workers.

US manufacturing can achieve a turnaround, which would have a positive economic spillover effect. But it’s important to recognize that while this would create some jobs, the sector is no longer as labor-intensive as it used to be. Revitalizing manufacturing is a national priority for many reasons, but at the same time, we need to think more broadly about how to restore pathways to prosperity for the millions of workers who haven’t been advancing in recent decades. There is urgent work to do, and in the months ahead, the McKinsey Global Institute plans to continue digging into these questions and bringing together public- and private-sector leaders to look for fresh solutions.