For years, conventional wisdom has maintained that manufacturing in the U.South. is in final decline. But the tide is now turning, according to Hal Sirkin, a senior partner and managing director at the Boston Consulting Group. Rising wages and currency rates, among other factors, have dramatically narrowed the gap betwixt manufacturing costs in Mainland china and the U.South., with the result that several U.S. companies are now "in-sourcing" manufacturing jobs back to America. Sirkin, who recently spoke at the White House well-nigh this enquiry, discusses the implications for U.Due south. jobs and competitiveness in an interview with Knowledge at Wharton.

An edited transcript of the conversation follows.

Noesis at Wharton: Hal, thank you and so much for joining us today.

Sirkin: A pleasure to be with you lot.

Knowledge at Wharton: I would love to talk to you near your research in the expanse of the renaissance of American manufacturing. But before nosotros get into that, I wanted to ask you lot almost the conventional view. The conventional view is that manufacturing in the U.S. is in a long-term decline and services are going up — what's wrong with that picture?

Sirkin: We have seen this prediction of U.Due south. manufacturing'south decease many, many times. If you go dorsum to the 1970s when I was hither at Wharton, nosotros were reading articles all the fourth dimension about how Nihon, Inc. was going to take over the world. They were going to bring over televisions, cars, radios and were going to industry simply nearly everything. At that betoken in fourth dimension, parents were literally sending their kids to school to larn Japanese because that was going to be the new linguistic communication of the world. Japan, which had lost the war in 1945, by 1975 was going to boss the world once more. And of course what we've seen is that didn't happen…. Nosotros saw it again in the 1980s and 1990s when the Asian Tigers were going to dominate the world. The low-toll production facilities in Korea, Taiwan, Hong Kong and Singapore were going to dominate manufacturing. There was going to exist a huge cost advantage, and U.S. manufacturing was going to go abroad. Simply of class everybody knows that didn't happen either.

In the current situation starting in 2001 with China's entry in the WTO, the conventional wisdom was the same — that Cathay was going to ringlet upwardly U.Due south. manufacturing, that we were basically going to become the farmers and bankers of the world and that was what was left. But of course in many ways equally we're starting to see now, that hasn't happened, and it's not going to happen. Information technology's because the U.South. economy responds tremendously well to threats. We accept a system where our people want to work and they discover ways to do this. Nosotros take a arrangement in which our companies are forced to become more productive because it's do or dice. There aren't state-endemic companies in this country. Nosotros don't subsidize companies in many ways in this country. And therefore, it's the free market at work. And it does some astonishing things.

So between 1972 and 2010, [production of manufactured goods increased 2.5 times]. We do that with 30% less labor, which is an amazing increase in productivity. Our society has gotten incredibly productive. We use our resource very efficiently, and that makes all the difference. That'southward what'southward going to cause the modify equally nosotros start to move from off shore into China to in-sourcing around the globe.

Noesis at Wharton: We'll come dorsum to the point near in-sourcing in a chip, simply permit'southward talk most your point almost productivity beginning. As yous said, as productivity goes up, we are able to produce more than with fewer people. But at the same fourth dimension, there are some recent reports that manufacturing jobs in the U.Southward. take really gone up — 300,000 new manufacturing jobs in the past two years. What'due south driving this trend?

Sirkin: It's basic economics. Information technology's at present becoming more than effective to produce in the U.S. than information technology is to produce in a lot of different countries. Between the shift in the dollar and the incredibly rapid rising in wages in Cathay, people are starting to exercise this. In a written report, nosotros predicted that this would not happen until 2015. We're surprised in a very good way because we're starting to meet it happen in 2010, 2011 and 2012. Now we call up this is just the tip of the iceberg that we're seeing — that we're going to see a whole lot more because the economic science continue to shift in favor of the U.Southward. The fundamentals are that the tide has turned, as it did with Japan, equally it did with the Asian Tigers. Nosotros're seeing a repeat of this with Communist china.

Knowledge at Wharton: What are the factors that have driven that turning of the tide?

Sirkin: Well, it's very simple economics. It'due south the things I learned in my Intro to Economic science class at Wharton, just applied for overall business organisation. It is that wages are ascent very quickly in China, somewhere on the order of 15% to 20% a year and maybe even higher. The Renminbi, of course, which is still a controlled currency, is rise at iv% a year. And many economists believe if information technology was left to float, it would be double its value. But fifty-fifty with the four% it makes a deviation. And China, while it's getting very productive and it's increasing productivity to 8% a year — that's being swamped past the wage increases and the shift in the Renminbi. In 2001, when China entered the WTO, y'all could get workers for 58 cents an hr. It was a very simple conclusion for most companies to off-shore to China. Wages have risen a lot. There'due south as well some other issues that people call "the intangibles" that go there — things similar y'all don't desire to just compare manufacturing cost to manufacturing cost because you take to transport it from Prc.

And in 2001, oil prices were in the $20/$30 a butt. At present it's around $100 a barrel. So transportation costs accept gone up. People are understanding the risks of intellectual property theft and valuing them in their equations. And so there are the fundamentals of being far away from the customer. It'south hard to manufacture when you're half-dozen,000 miles away and y'all have to interact with people who don't speak your native language. So companies are starting to realize that there are a whole agglomeration of costs. Our predictions are that past 2015, the manufactured costs in China will exist most 10% lower than the manufactured costs in the U.S. for a whole lot of goods. That doesn't mean all the appurtenances. Information technology'due south non for vesture and shoes. But it's for a wide range of goods — about 70% of the goods that we, the United States, imports from Cathay. And because of that, we're going to see a shift because that 10% is going to be eaten [away] by things like the transportation costs and the other risks. It will just make more than sense to produce in the U.S. Companies are starting to turn on to this.

Cognition at Wharton: Speaking about the wage cost increase in People's republic of china, at least a few years ago information technology was widely believed that even though in some urban centers or strong manufacturing centers the wage costs are going upwardly, that at that place was a big rural work force in China that would go on to migrate and that would ultimately bring wage costs downward in Red china. It was a common view. Practise y'all still see that happening? Or are there changes that have taken identify that takes that away?

Sirkin: Wages are rising very chop-chop. Prc actually was extremely smart in how it set upward its economy. It was brilliant. And, in fact, I would have to call information technology like the contrary perfect storm. Everything was washed right. They set up upwardly these clusters of companies and then that if you're making shoes, you lot would be located in one city, if yous're making electronics, yous may be located in a unlike metropolis. Then what they put in those clusters was everything the businesses needed to produce for consign. So there were universities that would produce engineers who were trained specifically in your kind of business. There are worker training centers where they train workers for product in your kind of business. They set up incredible ports — an amazing ability to produce high quality ports that they could consign from — and all the infrastructure necessary to go information technology from the ports in these clusters, which were of form designed for export and therefore all along the coast line. Wages rose a lot there. [Many] rural people moved into cities. Simply now it'southward getting pretty crowded.

When yous go further out into China, at that place are some disadvantages to production. The infrastructure isn't the same equally you lot meet on the coasts, which is one of the reasons that Cathay has been so productive. So the work force in the rural areas isn't as productive. And the transportation times get long. You're already starting with a long transportation time to export to the U.S. So that raises a lot of issues, [including] how long you desire your supply chain.

Knowledge at Wharton: What are some of the other factors that you think are making it possible for U.S. companies to become more competitive in manufacturing?

Sirkin: I think that we proceed to focus on productivity of our work force. We are growing productivity quite nicely — not at viii% a year, but at a substantial rate. U.S. companies are start to realize at that place are some bug with producing far abroad, that in that location are bodily costs to that. I remember 1 CEO, when he worked out the economic science, said the all-time thing for him was that his wife wouldn't bother him at two o'clock in the morning because he was on the phone. And he didn't accept to fly half-dozen,000 miles to get see his factory. That'south an intangible, but it's real, and it points out the value of existence shut. When wages were 58 cents an hour when China entered the WTO, it was a very simple decision to go to China considering [the wages] were then low. But those wages have gone up dramatically, and they go on to go up dramatically. Now it'south not such a elementary decision. Companies are commencement to rethink it. We wait over the next few years that there will be a lot of rethinking considering manufacturing in the U.S. is becoming very competitive.

Knowledge at Wharton: Could you give examples of companies that are driving this renaissance in manufacturing? And what are some of the kinds of jobs that are coming dorsum?

Sirkin: At that place are a lot of companies that are doing it. Again, I think we're even so in the early stages. You meet big companies like National Cash Register — NCR — that was manufacturing their ATMs in People's republic of china for the U.S. and is now manufacturing in Columbus, Georgia. You see Ford adding jobs into its plants. I think they committed to 12,000 jobs. And you meet companies similar General Electric adding capacity to produce water heaters in their Louisville, Kentucky, plant. Information technology's besides smaller companies. So Farouk Systems, which makes hair dryers, has moved I think 1,500 jobs back from People's republic of china to the U.S. You see Coleman, the manufacturer of h2o coolers, starting to build water coolers in the U.South. I tin can go on and on and on with the listing. Every day we seem to find more and more companies that have fabricated the decision.

They're realizing that the total costs of manufacturing in China — with the wages existence higher and all the other intangible issues — are starting to make information technology just far more economic, far more logical to do this. At present some people may think that means factories volition close in Communist china. That's not going to happen. That's not going to happen because of the way the Chinese economy is structured. Red china'southward growing 8%, 10%, 12% a year. Prc actually needs to build more factories simply to back up the domestic need. So it's not virtually companies making decisions to close a institute in Red china. Ironically, information technology'south the fact that the Chinese economy is growing so rapidly that makes it possible for U.Due south. companies to very chop-chop build plants in the U.S. because they need to put some other institute in their arrangement. They can just convert the stuff they used to ship from Prc to the U.S. to domestic consumption in Mainland china, then just build the plant in the United states. So ironically, Red china'southward success is what's causing this manufacturing renaissance.

Noesis at Wharton: That's very, very interesting. Now as we know, the Imf predicted some time agone that by 2016, China volition overtake the U.S. equally the earth's largest economic system. Do y'all come across that having a significant impact on this trend? Or exercise you think the rising of manufacturing will continue, regardless of which economy is larger?

Sirkin: The U.South. is yet a very big economy. Even if Red china is bigger in purchasing power, in absolute terms the U.Due south. will exist bigger for an even longer menstruation of fourth dimension. Simply I don't think it matters whether the U.S. is bigger or Communist china is bigger. They're both huge economies and both significant portions of the full globe GDP. And so they both will accept calibration and the power to produce. I think that'south what's really required.

Cognition at Wharton: These are very counter intuitive kind of ideas. How did you figure this all out?

Sirkin: This came to me from a wide set of areas. The first affair that I figured out — and in discussions with some of my colleagues in China — was they were talking about the wage increases in Mainland china being xv% to 20% a yr. That made no sense to me. Information technology didn't feel correct. Just we looked into it, and of course they were right. Wages are rising at 15% to xx% a yr. It came to me when my wife said, the U.South. doesn't manufacture annihilation anymore. My wife also has a degree from the Academy of Pennsylvania and a PhD in molecular genetics, and so she'due south a very smart adult female. Just she looked at the conventional wisdom. It's easy to believe that if y'all await at things similar clothing and shoes. But the U.S. manufactures 75% of everything that information technology consumes. That'south a pretty high number, considering what the conventional wisdom is — that nosotros don't make anything any more. It came to me sitting in a board coming together of one of my clients which has effectually 80% of their manufacturing in China and needs to build a new plant. So they decided they would [have] 85% of their manufacturing in China. I just raised the question: Do you really want to accept all that manufacturing in China? Aren't at that place alternatives?

So we looked at lots of other countries. We looked at Vietnam. Nosotros looked at Indonesia. We looked at many unlike countries. For a lark, I put in a plant in the southern part of the United states of america but to meet if it would work. Nosotros did the math in 2010. Of course, information technology didn't work because the wages haven't sort of reached their full potential in Communist china of rising. But we then did the math and said, "What does it look like in 2015?" — because plants are going to last for 20, xxx, 40, fifty years. So deciding now on today'southward economics doesn't make a lot of sense. So we only said, "Permit's pick 2015. What does it look similar?" We did the math, and the difference was less than 10% at the manufacturing gates of a U.Southward. plant or of a Chinese plant. And then the decision was to say, "Let's understand the transportation costs and all the intangibles." When they looked at I,t they said, "You know, it does make more sense to produce in the United States."

Cognition at Wharton: That's really interesting. Now coming back to your earlier point nearly trying to be shut to where your customers are, it's likewise a reality that consumption is growing very speedily in the emerging markets. From that perspective, do you recall that information technology makes sense for companies not just to set manufacturing in the U.South, but also in places where those emerging customers are? And have manufacturing in dissimilar parts of the world?

Sirkin: Yes, I think what nosotros're talking almost is more than localized manufacturing. If you're going to eat the product or you're going to sell the production in the U.S., you lot want to produce more of it in the U.S. If you lot're going to sell the product in Red china or an emerging market, you probably want to produce there, because some of the factors that make the difference are the transportation costs. If yous're selling in Red china, it'due south probably better to have your plant in Communist china considering you're closer to the customer, for the same reason the U.S. would exist the example or Europe would be the case to practise that. It's just that the economics of China and the U.S. are getting a lot closer, while that hasn't happened in Europe yet.

Cognition at Wharton: Which industries practise you think are best positioned to benefit from the manufacturing renaissance?

Sirkin: It's things like computers and electronics. It's piece of furniture — obviously a lot of wood is produced in the U.S. then it's a great thing. It's things like plastics and rubber and machinery. It's appliances and electronic equipment. In that location'due south about 70% of what nosotros import from Red china that is in the area we call the "tipping zone" — the kinds of products that you need to think advisedly about where you put your adjacent establish because the U.S. might exist a very good place to put information technology for U.S. consumption.

Knowledge at Wharton: I wonder if you lot could speak a little chip about the public policy implications. What can the regime do to accelerate this tendency of manufacturing jobs coming back?

Sirkin: Sure. The government can play an important part. Hopefully, we can go the Democrats and the Republicans in Congress to actually unite effectually creating more than jobs for Americans, because it volition require legislation to do this. If they make up one's mind to proceed to fight a war among themselves and not look afterwards the American people, that's going to be a problem. But assuming that happens, we can accelerate the trend that we predicted by several years, which means a whole lot more jobs sooner and a whole lot more than strength for the American economy.

It'south going to take several things. Obviously, there are tax policy implications. We might desire to look at all those funds that U.S. companies are repatriating to the U.S. and in essence bring them back in a non-taxable or low tax form, if they create new jobs in manufacturing plants to tide them over until that bespeak in 2015 where the numbers start to cross over. We can look at trying to make sure the playing field is leveled for U.S. manufacturing. It isn't right now. And at that place are clearly predatory practices that accept place. We're seeing a step up in the government on anti-dumping and other sorts of things which are there.

There are a lot of things that can exist done, including increases in preparation. We tin retrieve about subsidization of training for new workers, considering if yous build a new manufacturing plant you have to train the workers. That goes on in China. Nosotros could practice that in the U.Due south. And we could think about really expanding our educational system. We all tell our children — and it'south the right thing to do — that yous should get a college educational activity. But yous can also acquire a merchandise in a college education. I believe at Wharton I not only got a great liberal arts teaching, just I too learned a very important merchandise that stood me well in life. But we can recollect almost a vocational version of that in which y'all have a iv-twelvemonth college — equally I did at Wharton — where [ane can] basically do 2 years of liberal arts and 2 years of business. That was the fashion the plan works. We tin can do the aforementioned matter simply it could be two years of liberal arts and two years of plumbing or welding or other skills that would be appropriate for the new manufacturing area that we're entering.

Knowledge at Wharton: Does the U.S. need a new industrial policy?

Sirkin: I think what the U.S. needs is a chore policy. We can talk about industrial policy, and that'south something that we may want to focus on. But there's a jobs policy and we should exist thinking near where we want to place our bets in terms of jobs. The kinds of things that we want to practise, the industries that nosotros desire to brand sure are industries for the future — to make sure that the U.S. is non locked out of those. Clearly, green energy is an issue. Information technology has its ups and downs. But fundamentally at some point in time, the globe's got to move to light-green energy because we're going to run out of fossil fuels. We've continued to observe more, but it gets more and more expensive. And that means green free energy volition be important, whether it's in two years or five years or 10 years or 20 years. Nosotros don't want to be left out of industries like that.

Noesis at Wharton: I remember from a past conversation that y'all've done a great deal of piece of work on globalization. Tin can you help situate what's going on within the broader trend of where you meet the global economic system itself evolving to? And what are some of the long-term implications of the manufacturing renaissance we're seeing in the U.S?

Sirkin: I've spent a lot of time thinking about globalization and how the world'southward evolving. I think this is merely some other slice in the puzzle that roughshod on my doorstep. So the initial moving ridge of globalization was in Western companies looking at the low price markets, setting up manufacturing or out sourcing manufacturing somewhen to companies in those markets to produce and to sell the product back into the Western markets or the developed world markets. The second moving ridge was this growth of what we telephone call "the challengers" — companies that were proverb, "Hey, I can industry this stuff, but I don't want to exist just doing it and putting your name on it. I want to manufacture information technology and accept my proper noun on it. I want to be the big player. I don't want to exist just a supplier. I want to go the big margins, and I want to accept my own brand."

That was the 2d moving ridge. We saw many global challengers emerge and do incredibly well. Merely what'southward taking place is the next step in economics, because economics I learned here at Wharton is all almost the evolution of them. They're never permanent. They change all the time.

What's taking place is with the wages rise in China and all the other costs that are ascent overall in Red china, the economic science are now shifting back towards the logic of U.S production. That's the tertiary moving ridge of globalization. Nosotros're reaching a new equilibrium, at least with Cathay. It has non happened still with a lot of the other countries, and it may over time. Nosotros'll see how it plays out. Merely we're seeing a new equilibrium of globalization, which would be more of a steady state until in that location'southward some perturbation that would change that. But we're seeing the fundamentals of the economics [equalizing] between the U.S. and China. Now equally that happens, we're seeing some 2nd order effects likewise, because the system that nosotros have here in the U.S. is very different than the European organization. The European system, for most of the countries, have very loftier leave barriers. And, of course, high get out barriers mean that you're more reluctant to build a new plant because one time you have a plant there, the costs to get out are very depression. In the U.S., nosotros can debate which social organization is better, but in the U.South., the facts are just dissimilar. It's a lot easier to get out of being in a plant if you lot don't need it.

And and so the fundamentals are starting to shift. What nosotros come across are European companies, not just U.S. companies, looking at producing in the U.S., first for domestic consumption. Machine companies have been doing this for a long time. Simply other companies are thinking about information technology, as well equally Japanese companies who are doing the same affair, [and] thinking virtually the U.S. as an export platform. One company ready upwards a ability turbine establish in — I believe information technology's Georgia — where they make power turbines. And they've just signed an order with Saudi Arabia to transport from Georgia six major power turbines — quite an interesting thing that we run across.

We come across announcements by some of the Japanese automakers that they're thinking near the U.S. as an export platform. At present that's why jobs are going to be rising in the U.Southward. And that'south the real sign that what we're talking about in the shift in economics is really happening. Because people are putting their coin downwards, making some very important decisions and realizing that the U.S. has a very highly productive work force, a very flexible work force and the power to be a very depression-price manufacturing platform for some very important industries.

Noesis at Wharton: Which areas in the U.Southward. practise yous think will benefit most from this?

Sirkin: We used to recollect it would be the southern part of the U.Southward. for the well-nigh part. But actually our thinking has evolved on that. As nosotros brainstorm to sympathize that the wage differential is a lot lower than we might take thought considering the averages are misleading, we've got to expect at the wages for the startup of new plants, not for existing plants. And so our new thinking is that it'south going to happen in most states. Interestingly enough, we're seeing things in places that nosotros never had thought nosotros'd see. We're seeing plants of this nature open in places similar Ohio. We're seeing it in California. We're seeing it in the residue of the Pacific Northwest. Information technology'southward very interesting. Information technology isn't an issue of right to work states. Information technology'south actually an issue of where it makes sense to produce.

Cognition at Wharton: Hal, cheers and so much for speaking with usa today.

Sirkin: Y'all're welcome.