00:00So your report identifies roughly a quarter of U.S. manufactured imports as potential, quote, a keyless heel.
00:06What makes these products particularly vulnerable?
00:11Yeah, so first of all, just thank you for having me.
00:13I'd love to go back and talk more about the Knicks if we have time, but I'm going to get
00:16that.
00:17Are you a Knicks fan? I know you're there in D.C., but are you a Knicks fan?
00:20I am born and raised in New York, and so yes, I have to be a Knicks fan, but it
00:25has been hard to be a Knicks fan for this long.
00:26So this is the moment, and I am super excited to watch the Knicks.
00:29Well, you know what? You just earned yourself three extra minutes in this interview.
00:34We'll let you talk manufacturing, Eric. Go ahead.
00:36Yeah, so let's talk manufacturing.
00:39We set out to really try to understand what it would take to produce more of what we're consuming,
00:43and the reality is we have $3 trillion of manufactured goods that we import every year and consume in the
00:50U.S.
00:51The thing that we really uncovered is this is much less a story about manufacturing and much more a story
00:55about resilience,
00:56and you hit the point, the Achilles heel. So what do we mean by that?
01:00There's about 25 percent, just shy of $800 billion worth of goods every year,
01:06that suffer from at least two of the following three concerns.
01:13It's either that they're critical. We can't imagine that our economy can sustain if we don't have them.
01:18Think of smartphones, PCs, servers, things of that nature, materials for pharmaceutical goods.
01:26Concentration. We have a high degree of concentration in a relatively small number of countries for which we import from.
01:36And then lastly is geopolitical distance, i.e., how aligned or not are we with those countries' ideologies and as
01:43trade partners going forward.
01:45Said differently, 25 percent have a real risk of disruption that could have an impact on the economy.
01:51And for that 25 percent, we have very little manufacturing today.
01:55It is not about can we actually get factories, idle factories to produce.
02:00It's the fact that we don't have those factories and we don't have that many of the skills required to
02:06operate them.
02:07Let's talk about where the U.S. might be most vulnerable, Eric.
02:11We do get to your point, some products, just from a very few suppliers around the world,
02:18and these are not things that we supply in great amounts here in the U.S.
02:22And you say in this report that electronics appear to be the biggest vulnerability.
02:26I'd have to imagine that has something to do with China.
02:29Yeah, if you look at where we import from, it is disproportionately Asia.
02:35It's just where an awful lot of the manufacturing of these critical items are.
02:39As I said, we're talking about electronics like cell phones, like servers, like PCs, like semiconductors.
02:44It's not all China, but it is disproportionately out of Asia.
02:48And the reality is that is where we have either two or three of these risk factors, right?
02:54Obviously critical. We have relative concentration and we're not always aligned.
02:58And so we do have to think about what does it mean from a resilience of our economy and our
03:03country, national security,
03:05as we think about where we invest those dollars.
03:08And when people hear the word reshoring, they often think it's just a matter of building more factories.
03:12But your report suggests it's a little bit more complicated than that.
03:15Why?
03:17Yeah, first of all, we're talking about real capital dollars.
03:20If you said, let's take that, those items that are the Achilles heel, the 25%, it would take about $2
03:26trillion to build the manufacturing.
03:29That doesn't include energy. That doesn't include infrastructure.
03:31That is the manufacturing capacity.
03:34That's already a real number.
03:36It is not an unfounded number, meaning we have seen that before in places like shale.
03:40We're seeing it right now in places like data center.
03:43So it is quite doable.
03:44And one of the beauties of this is we do tend to have generational changeover with some of the technology
03:49that provides an opportunity.
03:51The other problem is skills.
03:52It's labor in and of itself, but it's particular skills.
03:55We have seen such a decline in manufacturing and particularly of these areas over such a rapid period.
04:00The question is, do we actually have the skills back on soil to be able to produce these items as
04:07effectively and as efficiently?
04:09So that leads me to my next question, which is opportunity.
04:12So if there's a gap here and we need to sort of fill the need, where can investors, but just
04:19regular folks, even looking for jobs, find opportunity given the state of manufacturing in our country right now?
04:26Yeah, so I talked about $3 trillion.
04:28What is really nice is about 20-ish percent of that $3 trillion.
04:32We actually have the capacity to manufacture more here without a lot of new capital.
04:38Think of things like transportation, which includes trucks, which includes automobiles, which includes airplanes.
04:45We have a lot of the capacity to do that here if we run those factories a bit more.
04:50That does provide already a basis, although that's not the crux of the problem.
04:54The crux of the problem is there are areas where we do have to decide whether or not we're willing
04:59to make that investment for resilience as much as anything else.
05:03And with that will come some level of jobs, but maybe not the level of jobs that folks hope for.
05:07One of the most surprising findings in the report also is that running existing factories at full capacity would do
05:13little to solve the biggest supply chain crisis.
05:15So what does that tell us about the nature of the problem?
05:20Yeah, so one of the things that we have really focused on is this ramp-up factor for what is
05:24some 5,000 different items that we import today.
05:27And as I said a moment ago, about 20 percent of that is actually fixable.
05:32So if you take the $3 trillion, a little, so $600 billion or so, is something we actually have the
05:37capacity.
05:38We could debate whether the mix is exactly right.
05:41One of the examples you might look at is we import some flavors of wine or some types of grapes.
05:45That may or may not be something that you can change consumer behavior.
05:48But you would identify that $600 is something that is manageable.
05:53The problem is there is an awful lot and an awful lot of those Achilles heel or those areas which
05:57open us to resilience that we do have to think about whether or not we can build the skills and
06:02make the capital investment to be able to ensure that in a moment of crisis, we have what we need.
06:08And I think a lot of that is going to come down to how do we think about electronics manufacturing,
06:12particularly semiconductors?
06:13How do we think about rare earths and where do those actually get refined?
06:17And then obviously materials for the development and the production of pharmaceuticals, which keep us healthy.
06:25We're speaking with Eric Kutcher, a senior partner in North America, chair of McKinsey, talking about manufacturing.
06:32And Eric, President Trump sort of ran on the platform of bringing manufacturing back to the U.S.
06:38And a number of high profile companies have pledged millions and billions of dollars to do that.
06:43But yet, since he's taken office, we really haven't seen the job growth in manufacturing.
06:49In fact, we've actually lost, I think it is, 100,000 jobs in manufacturing since Trump took office again.
06:54So why is that not hitting the way I'm sure the Trump administration had hoped and the way maybe voters
07:00had hoped it would?
07:02I can't speak to what is related to policy and the implications of policy and how that has evolved.
07:08What I think you can say is these things take time.
07:10If you decide to build a new factory, it can take years until that factory actually creates real jobs.
07:15Look at some of the semiconductor manufacturing that was promised and built.
07:19It took four years until we actually got to a reasonable place of production out of that factory.
07:24And the reality is some of these areas that we're talking about are not full of jobs.
07:28They may be full of construction jobs, but they may not always have the jobs associated with them as they
07:33have a lot of automation within them.
07:36And so I think what you're seeing is these things take time.
07:40They don't happen overnight.
07:41What to you is the single most important takeaway for business leaders thinking about supply chain resilience over the next
07:48decade?
07:48Because I feel like it's just becoming gnarlier over time.
07:52I borrow that word from a co-worker, but I think it accurately describes the situation.
07:56I think this idea of it is not about the manufacturing, it is about the resilience, is actually super important.
08:04And it's true if you're a politician and it's true if you're a business leader.
08:07Thinking about how you manage your business or manage your supply chain so that it is resilient,
08:12so that you have fewer of these overall constraints, I think is actually super important.
08:19And you need to think about what are those things that you do from a supply chain point of view
08:23to shift away to have fewer of those constraints that put you at risk
08:27should we end up in some form of crisis, which we have seen already.
08:30We saw it during COVID, and you can imagine with the geopolitical landscape, things happen again.
08:36All right, Eric Kutcher, senior partner and North America chair over at McKinsey.
08:41Are you in the Bay Area today or are you in Washington, D.C.?
08:44Where are you, Eric?
08:44I am in the Bay Area today.
08:46Rarely here, but I am here today.
08:47Okay, I thought maybe, oh, he's in D.C.
08:50But nevertheless, we know that Eric Kutcher is a New York Knicks fan, and for that, we approve.
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