April 8, 2013
Q&A: Dr. Daniel Mahler
Daniel Mahler answers questions about the economic shifts taking place today
Recently, when the giant retailer Walmart announced its commitment to source $50 billion worth of goods in the U.S. in the next 10 years, I was curious to find out what this initiative would mean to our economy, labor force, manufacturing capacity, and more. So I put some questions to Dr. Daniel Mahler, PhD in communications, partner and head of Americas for A. T. Kearney, a global management-consulting firm. As the firm’s lead senior advisor to several large global U.S. corporations with revenues of up to $80 billion, and with a reputation for a commitment to sustainability, I thought Dr. Mahler’s reasoned voice would help us understand what changes may be brewing as more of our products will bear the once familiar and proud label, “Made in the USA.” I tracked him down as he traveled between his New York office and Shanghai, to ask some questions about the economic shifts taking place today.
Susan S. Szenasy: With Walmart's commitment to source $50 billion worth of goods in the U.S. in the next 10 years, and considering our crumbling industrial base, is there any low hanging fruit left in American manufacturing? Which industry is most likely to spring into action in wake of the Walmart challenge? Dr. Daniel Mahler: My feeling is that if there’s any low hanging fruit to be found in U.S. manufacturing, little of it is going to be about further lowering the costs of manufacturing here. If you think about the economic period from which we’re only just emerging, not only those moving their manufacturing to China, but those who remained here had to do as much as possible to make sure they were competitive. Although there are always creative approaches to gaining new efficiencies, the most obvious efficiency plays have mostly run their course. Therefore, this is probably more about Walmart sensing that when you do the math and look not just at the cost of manufacturing, but at the total cost, the equation starts to shift in favor of the U.S. There’s the cost of bringing manufactured product to the U.S., the risk-cost of a product not getting here on time, the cost of product adulteration when bad things happen in the supply chain, which is huge in terms of risk, liability and reputation – these are all parts of the total cost picture. If you’re only looking at labor cost and the cost of manufacturing, there’s still quite a gap to cover. But Walmart is further ahead than most in that they are looking at their supply chain more broadly than just through the lens of the manufacturing cost. Essentially they’re undertaking a different way of looking at the cost picture. As far as low hanging fruit in the U.S., there’s not a lot more you can do to bring costs down further. Costs have come down, and labor rates have come down. Companies have already been under pressure to become extremely efficient – so there aren’t a lot of big moves companies can make to save more money. They can do small things, but these are a drop in the bucket, relatively speaking — every company can continue to work better at operational issues like maintenance and reducing down time, but these represent a tiny fraction of the whole. The mindset has been that in order to meet the $50 billion Walmart challenge, we have to be cheaper. But we can’t. You have to change the platform from which you look at the costs. In terms of which industry is most likely to respond to the Walmart challenge? Primarily the tipping point industries are electrical equipment, appliances, furniture, plastics and rubber products, machinery, fabricated metal products, and possibly, although I’m not convinced, electronics and computers. Definitely it’s not textiles or apparel.
SSS: You are considered an expert in manufacturing and sustainability, among other things. How can this move by Walmart support aspirations for a less toxic environment in building healthy industries that support vital American communities? DM: Walmart, as the world’s largest retailer, is sending a very important signal to its suppliers and customers — the economics around buying more “Made in the U.S.A.” products are becoming more and more favorable, and sourcing from China is no longer the default option. While this comes with a commitment to help the resurgence of the U.S. economy, what Walmart is really seeing is that U.S. companies are more likely to adhere to strict safety standards, care for their workers’ wellbeing and operate in a more sustainable way, environmentally speaking. This will have not only an economic but, more importantly, a psychological ripple effect through the Walmart’s value chain of suppliers and their respective suppliers.
SSS: The industries that we at Metropolis magazine watch more carefully than others are those that supply the architecture and interior design professions. Among these contract furniture and carpet manufacturers there have been some encouraging signs of finding ways to go global (establishing factories for those markets), and simultaneously retain local, skilled jobs. Would you consider this approach as a good model for American industry to follow? DM: The “comeback” of U.S. manufacturing will not mean the end of globalization, but the pendulum, which had previously swung to “outsource as much as you can,” has swung back toward a more centric, balanced approach. More labor intensive, less “engineered” products are easy to ship in, and transportation costs represent only a fraction of the total cost (as above) — thus these types of goods will continue to be manufactured elsewhere. Clothing and toys are two examples. For other industries, including contract furniture or carpet manufacture, the economics to stay local are becoming more favorable as labor cost differences get smaller and transportation costs rise. And if “Made in the U.S.A.” can, in addition, command a small price premium, then this can tip the local U.S. manufacturing decision in more and more product categories. Because of complex and shifting supply chains, it’s not as simple as going global and retaining a local workforce.
SSS: What has to happen for American manufacturing to return to vitality, in terms of converting mothballed facilities, building new ones, and training for 21st century skills in factory work? Is there an example elsewhere we can learn from? DM: If there’s one thing we need to get better at, it’s getting the state of our crumbling machine structure back into solid operating condition. It’s not about cutting our manufacturing costs to be competitive with China’s – we’re not going to be able to do that in the next five minutes. If China keeps raising its labor costs by 17 percent a year, in three years, the gap will have closed. It’s already getting difficult to find good managers and technical people in China. You can still find cheap, low-skilled labor everywhere you go. But as companies invest more capital in installing machines that are more difficult to operate, and more efficient, you need higher-skilled labor. The rise in labor costs for labor that’s needed is uniform across all industries. We’ll need to leapfrog current technology, infrastructure, and operations modes. A national commitment must be made to broadly upgrade the infrastructure of the U.S. (roads, buildings, railways, etc.). The approach has been for too long to do “just enough” to maintain critical infrastructure. The same is true for U.S. manufacturing facilities. If we only dust off the old equipment, our comeback story will be short lived. The timing for more step-change investments should be good — many companies that became cautious after the financial crisis are still sitting on a lot of cash. And money continues, for the time being, to be relatively cheap with the Fed’s continuous commitment to lower interest rates. But investment in infrastructure is only one part of the story. The investment in people is equally important, since a lot of knowledge has been lost through the years. Thus, for companies it will be important to recruit the right people, and then retrain and retain them to build up manufacturing knowledge.
SSS: We're always interested in how "design thinking," a creative approach to problem solving that has been embraced by many American businesses, can help in creating a 21st century industrial base. What should design thinkers be working on now, for the Walmart challenge to be achieved in 10 years? DM: By definition, design thinkers are about planning and preparing the way for a better future. Right now they should be thinking about best ways to improve productivity and efficiency, and new technologies that could give us higher output per employee, in order to maximize a return to U.S. manufacturing, whether through Walmart’s declaration or other incentives. This would circumvent the labor issue – it would be easier to catch up. The lack of skills wouldn’t hurt us as much. Neither is it about creating new products. In fact, design thinkers in the U.S. are too far removed from where all the demand is actually going to be coming from — it’s about what Chinese and Indian consumers are going to need, not about the next gadget we can develop for the American consumer. You can do that if you’re an Apple, but overall it’s not about coming up with new trinkets – it’s about finding more efficient ways of making the stuff. Grow the vision bigger, and it won’t only be Walmart getting the credit, or making the U.S. economy a better bet for manufacturing. Next to getting the economics right for manufacturing in the U.S., it’s critical to leverage the “soft” benefits to consumers. Walmart’s commitment to sourcing from the U.S. is not only economically prudent — it is also socially and environmentally smart. It is an invitation to its suppliers, and American companies more broadly, to leverage the brand benefits that can come from marketing a locally manufactured product.