Manufacturing is rebounding in the US, says BCG's Harold Sirkin

The swagger is back and the 'Boss' is calling the shots again. As America reinvents the 'Made in the USA' tag in an emerging world order where China is losing out to higher wages than productivity, there is a clear and present danger of Prime Minister Narendra Modi's 'Make in India' credo being a nonstarter. "But India needs to start somewhere, at least to get the basics right," says Harold L Sirkin, Senior Partner and Managing Director of consulting firm BCG, at a thematic meeting on "Shifting cost dynamics: Rethinking Your International Manufacturing Strategy", at an upscale hotel in Gurgaon.
Sirkin, author of best selling books like Globality: Competing with Everyone from Everywhere for Everything and Payback: Reaping the Rewards of Innovation, is categorical about manufacturing rebounding in the US, thanks to an innate "aggressive capitalism" that the land of liberty possesses. "Owing to China, from 1990s to early 2000, there was a lot of pressure on US manufacturers and they had a choice of either keeping manufacturing in the US or ship it to China…a whole lot stayed," he says.

Tellingly, the US consumes 73% of the products that it manufactures, and that's a significant amount in the making. Sirkin implies that the US has actually taken advantage of the scale up, given such a phenomenal base. So it took on China by putting in place lean manufacturing with an eye on automation. "The companies that survived (in the US) were much stronger than those that went to China, and as wages started rising in China, the Chinese government started pushing for more and more exports and overall costs went up," says Sirkin.

As corporate America gets manufacturing back on track, 'insourcing' is the flavour of the season— jobs coming back to the US. For starters, Wal-Mart has $250 billion worth of purchase orders planned for the next 10 years in the US of the goods that used to be outsourced. And since Wal-Mart focuses on low prices, such a procurement model is worth a dekko.

Ultimately, it is all about handling costs and the US evolved a cost-minus outlook in order to compete with China. Apart from that, it historically possesses fluid labour laws. "In the US, a lot of companies laid off people and they figured out if they took 10% off, how they could produce the same or more output," says Sirkin, adding that data from 1970 to 2010 shows that the US added twoand-a-half times more in economic value in 2010 than it did in 1970, and it did so with a 30% reduction in labour force."Where the US was a very high cost country at one point of time, it is today one of the lowest developed countries cost-wise."

According to Sirkin, US-made products are actually playing very well in China owing to assured quality and built-in safety of American goods. At the same time, manufacturers across the world are vying to take costs out of the equation. As suggested earlier, this is where the US really scores. "Literally everybody who runs a plant thinks how to take costs out, or how to add a little value so that customers can be charged a bit more," says Sirkin.

Like Wal-Mart, GE too is gearing up to manufacture at home, and Sirkin says about 300 American companies are following suit, including hair dryer makers Farouk Systems and a host of lighting companies who couldn't get their lights working properly from Mainland plants. Given the dragon nation's gradual descent and the resurgence of the American dream, where does that leave 'Make in India'? "A country the size of India cannot build a manufacturing base solely on exports, though exports make you globally competitive and that feeds into the domestic competitiveness," says Arindam Bhattacharya, Managing Director of BCG India.

At the moment, size seems to be India's dilemma. Bhattacharya highlights how China is outsourcing a lot of its textiles to Bangladesh and Vietnam, but not to India despite the latter being the second largest producer of cotton with enough cheap labour to produce it. But India simply doesn't figure because of poor port infrastructure and pathetic linkages to the ports from factories. That's where smaller countries like Sri Lanka or Bangladesh offer vantage points.

Besides, the business enablement platform the US offers is much superior to what India provides. The fluid labour laws and very low restructuring costs, the speed of doing business makes the US a far more attractive manufacturing destination. At the moment, Bhattacharya claims restructuring costs in India can be compared to Europe, and of course, the speed is a worry too.

Moreover, Sirkin points out that with better automation, Americans have gone in for a direct distribution system, wherein companies are now able to ship things directly to the customer, or to a store to be sold. Earlier, it used to be a two or three step distribution process. In India, that chain to the retail or the OEM is rather serpentine.

Has India missed the bus? Sirkin contends that despite external factors, India's low-cost talent is a formidable booster, and if the current political will carries out its transformative agenda by at least rolling out the infra roadmap, the country can somehow look forward to the next stage of manufacturing—advanced robotics, that further reduces costs, like the US or even China. But given India's labour-intensive production, such automation could well go against the grain now.