US manufacturing: The next frontier for sustainable, inclusive growth

US manufacturing has an outsize impact on the nation’s economy. How can business leaders harness innovation to revitalize the manufacturing sector and drive inclusive economic growth?

In the third episode of McKinsey’s new Future of America podcast, McKinsey’s André Dua and Eric Chewning explore the surprising ways that revitalizing US manufacturing could accelerate economic equality for more Americans. An edited version of the conversation follows.

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US manufacturing: The next frontier for sustainable, inclusive growth

André Dua: Welcome to the third episode of McKinsey’s Future of America podcast, where we’ll explore how we can build a future that drives sustainable and inclusive growth. This isn’t about trade-offs. We reject the “or” and embrace the “and.” Join us in conversation with leaders who are accelerating progress to grow, broaden, and sustain prosperity for more Americans.

I’m your host for today, André Dua. I’m a senior partner with McKinsey, the managing partner of our Miami office, and a member of our McKinsey Global Institute Council. I regularly publish insights regarding inclusive growth and economic opportunity, including about McKinsey’s semiannual American Opportunity Survey, which explores Americans’ perceptions of who is and who isn’t served by our economy.

Today, I’m joined by my colleague Eric Chewning, a partner in our Washington, DC, office and the coleader of McKinsey’s Aerospace & Defense Practice in the Americas. Eric has two decades of experience advising decision makers in national security, and he has deep expertise in improving US manufacturing and helping companies drive sustainable and inclusive growth.

Eric, welcome, and thanks for being here today.

Eric Chewning: Thanks for the invitation to join the podcast.

André Dua: Of course. Let’s start by having you tell our listeners about your background, because you’ve really had a very interesting and varied career.

Eric Chewning: Yes, it’s definitely allowed me to see the US manufacturing ecosystem from a couple different perspectives. To start off, I was an investment banker, where I covered industrial companies. Then I enlisted in the army after September 11th, and so I served for four years, did a deployment to Iraq in 2004–05, and then came out of the army, went to business school, and found my way into consulting, and ultimately here at the firm with McKinsey.

I ended up, in 2017, going over to the Department of Defense [DOD], where I was the deputy assistant secretary for Industrial Base Policy. In that role at DoD, I managed the industrial base, as well as manufacturing portfolios, and then went on to be the chief of staff for two of our US defense secretaries. Then I came back to the firm in April of 2020, where I now colead McKinsey’s Aerospace & Defense Practice in the Americas.

André Dua: Before we jump into it, I want to ask one thing about your career, because it’s a pretty interesting move. When you came out of the army, what made you decide to go to business school at that stage? That’s quite a left turn.

Eric Chewning: Yeah, in a lot of ways, I sort of did the reverse. Most folks were in the military first and then found their way into consulting or banking, and I started off in banking and then went into the army. I always knew service to our country was important, and when I had the opportunity to serve, I did. But I knew it was something that I wanted to do as part of a career, not make a career. Going to business school was the opportunity to sort of reinsert myself back into the business ecosystem and refamiliarize myself with what corporate America was like.

André Dua: Right, but it really seems like the different strands of your career have come together, which is understanding financial systems, understanding the military, then business, then working at DOD, and so forth. It’s really interesting how those things have been integrated.

Today, we’re here to discuss inclusive growth, and specifically we’re going to talk about sustainable, inclusive growth in the context of US manufacturing. But before we dive into that, I want to just zoom out a little bit. Let’s talk about manufacturing more broadly, because I think many of our listeners are probably paying more attention to manufacturing than they normally do, partly because they see the impact of supply chain disruptions on their own experience as consumers. There are shortages of goods, goods take longer to get to them, and so forth. Can you talk about the current state of US manufacturing and how important US manufacturing is for our economy?

Eric Chewning: I’d be happy to. At the headline level, US manufacturing accounts for about $2.3 trillion of GDP. It employs about 12 million people and supports hundreds of local economies across the country. Now, those headline numbers don’t really capture the outsize impact of manufacturing. Although it only accounts for about 11 percent of our GDP and 8 percent of direct employment, it drives 20 percent of our nation’s capital investment, 30 percent of our productivity growth, 60 percent of our exports, and over 70 percent of business R&D. And it also generates important spillover effects that help impact the broader economic activity in related sectors.

I saw this firsthand when I was at DOD: the impact of US manufacturing but then also, candidly, the decline of US manufacturing in some ways. We’ve lost about 25 percent of manufacturing firms since 1997. That reflects closures as well as fewer manufacturing start-ups, and over that period we lost about 4.5 million manufacturing jobs.

André Dua: You mentioned a lot of statistics, which, overall, I take to mean that, relative to its contribution to GDP and to direct employment, there’s actually significantly more impact from the manufacturing sector. One statistic really caught my attention, which was that it contributes 30 percent of productivity growth. That may be a little counterintuitive for folks. I wonder if you could say a little bit more about why the manufacturing sector drives so much productivity growth?

Eric Chewning: Manufacturing is a critical enabler of what we would call technical innovation. So think about improvements to processes that underline how we make things. As we get more efficient in how we make certain activities, it not only creates additional jobs but it also drives overall productivity. But I think it’s important to note, despite those productivity growths, the overall decline of manufacturing in some sectors has created challenges. And you mentioned, André, in the beginning, the impact that folks have felt through COVID-19 and the microchip shortage now—if you wanted to go buy a car, for example. My wife was looking at new cars this week, and the wait times she was quoted were almost a year. When you think about it, that is something that I never experienced before.

When I was at DOD, we saw this in a couple ways. There was, for example, a sole-source dependency, meaning there’s just one single supplier for a component of some munitions and missiles. We’re down to four large domestic suppliers for complex alloy castings that you would use for fixed-wing aircraft or helicopters. Some of it even as simple as our large-caliber gun barrels. Tank tubes are all manufactured in a single factory. And you see those sorts of impacts not just in the broader economy but in the supply chains that we rely on for national security.

André Dua: Let’s maybe stick on that for a minute, because I think listeners are probably interested in some of the effects of that. On the one hand, we’ve got COVID-19. On the other hand, we’ve got what some people believe is a potential decoupling of the economy into one which is very US- and Europe-led and one which maybe had China at the center of it, particularly on the technology side. In addition to that, we’ve got some disruptions caused by the conflict in Ukraine. That has all sorts of implications for energy, and I think, at the same time, we do hear a lot of discussion about the supply chain and in particular the need to move from a focus on supply chain efficiency to supply chain resiliency, meaning one that can handle these sorts of disturbances and shocks.

Let me ask you: What do you think all of these different trends and disruptions mean for the geographic footprint of manufacturing? Because you just described that the geographic footprint in the US has declined, from a direct-job perspective, and that there are fewer suppliers of things, but do you think we might see a resurgence of US manufacturing? Say a little bit about what’s going to happen in manufacturing in light of all this.

Eric Chewning: When I think about manufacturing, it really hits at the intersection of economic and national security. And if we think about four core goals that, as we think about the future of America, I think manufacturing plays an important role.

Manufacturing has historically made outsize contributions to productivity and overall economic health for the country. If we’re going to continue to drive GDP expansion, manufacturing is going to have to play an important role.

Eric Chewning

The first is around boosting productivity and economic growth. As we talked about, manufacturing has historically made outsize contributions to productivity and overall economic health for the country. And if we’re going to continue to drive GDP expansion, manufacturing is going to have to play an important role.

The second thing, and this, André, is where you were headed: manufacturing is critically important for supporting jobs and incomes for workers and communities, particularly workers and communities not on the coasts. So while manufacturing may not provide the kind of mass employment it once did, no other sector plays the same role in supporting middle-income jobs across the country, especially outside of large cities.

As you think about the opportunity with manufacturing, manufacturing makes up the largest economic employer in 500 counties across the United States, so it’s a broad-based driver for economic growth. Another important thing, I think, is the role of manufacturing enhancing overall innovation and competitiveness. Those are the positive externalities we talked about in the beginning. And then there’s this idea that you’re touching on, which is: How do we think about the role of manufacturing in driving national security and resilience? An interesting statistic there from my prior life is that about 70 percent of value-added manufacturing consumed in the United States comes from North America. And when you compare that to other large pure economies, just to pick China as an example: 90 percent of China’s value-added manufacturing comes from within their region. If you think about that, this means that the US is potentially more susceptible to global supply chain disruption than other economies.

André Dua: I want to pick up on one of those, because I think it’s a nice segue. You mentioned that one of the benefits of manufacturing in the US is that it does support jobs for workers and communities that are not on the coasts, and a lot of middle-income jobs in particular. Let’s talk a little bit about the impact that US manufacturing has, or can have, on the twin topics of inclusion and sustainability.

Eric Chewning: Sure. There are a lot of ways to define inclusion, and if you just pick one, let’s talk about skill-based inequality in the United States. Nine out of ten American adults have a high school degree or a GED, and about 50 percent have bachelor’s degrees or higher. It’s important to remember that you’ve got to make sure our economy is generating those high-quality jobs for folks who don’t have bachelor’s degrees. And manufacturing plays a unique role in doing that, because often manufacturing jobs are skill based, not degree based. So you can get involved in them through apprenticeship programs or licensing programs, and they create great economic opportunity for folks who may not live in the coasts. They’re in the middle of the country, but then they also have access to high-paying, good jobs without the need for a college degree.

André Dua: Let me follow up a little bit. One of the questions that people have is related to the extent to which different industries are providing opportunity for people of different backgrounds. And you mentioned one, which is people of different educational backgrounds. What’s your sense of what’s going on in manufacturing as it relates to providing opportunities to people of different genders and racial backgrounds? How does manufacturing do relative to other sectors, and are there interesting things going on there that we should be aware of?

Eric Chewning: I do. When you think about the opportunity in manufacturing, because there’s a general recognition that job growth in the United States, driven through manufacturing, there is the opportunity to incorporate folks from diverse backgrounds. I know individual manufacturers are very focused on that. I think, too, this idea around manufacturing creating broad-based economic growth—and, again, I think it’s important to think about that broad-based economic growth not just through a lens around gender or race but to think about it more broadly in terms of what it can do for gender, what it can do for race—but then what it can do for different educational backgrounds and geographic backgrounds as well to really get that broad-based economic growth.

André Dua: One of the big issues that obviously has come to the fore again, partly because of the Russia–Ukraine conflict, are the set of issues around climate change and sustainability. Now, obviously these have been getting back on the agenda. There’s a real sense that time is running out in some ways, and there’s a lot of talk about how different industries get to net zero in terms of their contribution to emissions. How is manufacturing handling this, or how are companies that are in manufacturing handling this? How seriously are they taking this, and what opportunities or challenges do you think are presented by these sets of issues?

Eric Chewning: It’ll be interesting to see what the SEC [US Securities and Exchange Commission] ultimately does around its accounting for carbon within a supply chain, because if some of those rules do go forward, you could see an impact. A shortening of supply chains in a colocation, to reshore our supply chains to address some of the carbon footprint issues, might be a natural outcome for that.

You can’t bucket all manufacturers with one label. You have to think about different manufacturing archetypes, and as we research this, there are really four. There’s a set of manufacturing activities that are scale-based where competitiveness is driven by standardization and specialization for mass production. I think of a steel mill as an archetypal example there.

There are others where they’re driven by learning-curve effects, processing engineering, and exponential growth through learning. A semiconductor fab would fall into that category. And the last two manufacturing archetypes are one around R&D design and one around flexibility. An R&D-based one would be a fabless semiconductor design house. It’s this flexible archetype that I think potentially has the most value for the situation you’re describing, because manufacturing competitiveness revolves around the ability to do high-value, low-volume production using flexible capacity colocated near the sources of consumption. You could imagine that smaller-batch production, colocated near a city, would really begin to fit a type of manufacturing archetype that would be supportive of the type of environment you’re describing.

André Dua: Let’s look ahead into the future a little bit. Pull out your crystal ball. What’s next for US manufacturing? Where are we headed?

Eric Chewning: It’s a great question, because I think we are certainly in a position now where there’s a lot of discussion, to your earlier point, around “What role might reshoring have here in the United States?” or reshoring back to North America broadly. So whether it’s the rush through Mexico, and how that might occur, as I look at it, I really put the focus on: At a national level, what are the policies we want to be able to put in place to drive manufacturing competitiveness writ large? Recognizing that, because manufacturing remains one of the main economic engines and primary employer for over 500 counties here in the United States, what do we need to do to enhance competitiveness overall, and as a result, you have “lift all boats”? A lot of that’s going to come down to our ability to drive forward Industry 4.0 technologies to further increase productivity enhancements.

André Dua: Eric, I wanted to talk a little bit about economic opportunity in America. It does seem clear that the economy is recovering in a number of respects. Employment is up, wages are up, and they’re up particularly higher among lower-income Americans. GDP growth has recovered to some extent, and yet what’s interesting is that, at the same time, many Americans say they don’t feel like there is great economic opportunity available to them, their families, and in the country overall. A big piece of this is the ability to reskill and upskill to prepare yourself and your family for the future economy. Can you talk a little bit about what you’re seeing happening in reskilling and upskilling, both in manufacturing and across the economy?

Eric Chewning: This idea around a human-capital investment is increasingly important, purely as you look at some of the dislocation in jobs. So you’ve got a couple things going on. You’ve got a certain segment of the population that retired during the COVID-19 pandemic. And then you’ve got the creation of these new digital jobs where clearly there’s a human-capital need for us to fill. We’ll need to get those types of skills in place.

I’ll give you a really good example. A lot has been made about the need for reshoring certain semiconductor fabs back to the US. And the CHIPS Act [Creating Helpful Incentives for Producing Semiconductors for America Act] was a good example. The $52 billion investment is going through Congress, but also large chip manufacturers have announced large investments, hundreds of billions of dollars worth: Intel, TSMC, Samsung. Once we’ve sort of poured the concrete, then you get those facilities all in place, where are we going to find the engineers and the lab techs and all the workers to run those?

As we’ve looked at this, you’re talking about tens of thousands of jobs where we haven’t really created a pipeline for adjusting what those needs are. I think that’s part of this reskilling challenge—it’s not just giving folks sort of a sense of optimism, which it does, but it’s beyond that. It’s also, what are we doing to make sure we’re creating human capital to fit the jobs we need to have in the future?

André Dua: One of the things you and I have talked about in the past are some of the different sectors you’ve been involved in. One I’ve always found particularly interesting, because in a way it’s a microcosm of so many different issues in that sort of subindustry, and that’s shipbuilding. It’s a bit of a departure from the last question, but I would be interested to hear you describe what is going on in the shipbuilding industry in a particular geography in America, and what can we learn from that, and what are you seeing?

Eric Chewning: When I was at DOD, one of the areas where I spent a lot of time was on Industrial Base around shipbuilding. In part because we’re at a point now where we’re increasing the amount of investment that the country’s making in ships—as an example, we’re going to move to producing three submarines a year rather than two. Now, that doesn’t sound like a lot, but when you think about it, it’s a 50 percent production increase in submarines. So what does that really mean? The other thing that’s neat about shipbuilding, particularly when talking about submarines, is it’s this unique combination of old-school metal bending coupled with high-tech digital engineering and really high-tension skills, like nuclear propulsion.

How do you create a workforce that’s able to handle all of those things? And as we move to that production pace of three submarines a year, it’s creating a tremendous strain on the workforce and the supply chain. So one of the things that we worked on very aggressively was expansion of the necessary skills. Often you’re talking about trade skills: welders, fitters, plumbers, very, very important jobs. We talked about it before. They’re important jobs that don’t necessarily require a college degree. How are we generating that human capital, particularly in the areas where our shipyards are?

Within the United States, as it comes to submarines, we’ve got two producers: the Newport News business down in Hampton Roads, Virginia, and then the General Dynamics Electric Boat facility up in Groton, Connecticut. I’ll just focus on Virginia for a minute: the Hampton Road region where the shipping yards are colocated have some of the highest areas of average poverty rates in the commonwealth.

We’re in this situation where we’re going to need jobs. We’re going to need jobs that are skill-based, don’t necessarily require college degrees, and are colocated in communities where they could use the jobs. So that’s a natural-made opportunity, and folks are taking advantage of that. In this instance, Huntington Ingalls, which is the largest employer in Virginia—it’s the largest military shipbuilder—is working with the commonwealth of Virginia and DOD to try and get folks into apprentice schools and training programs for those jobs. I know Connecticut and Rhode Island are doing something similar for General Dynamics Electric Boat in Connecticut. I think that’s a really interesting example of how you get public and private actors together to really drive human-capital development for manufacturing jobs. Could’ve gone on to national security.

André Dua: Yeah, I think it’s also an example of the more sophisticated conversation we need to have about postsecondary education. We tend to think very simplistically of universities, maybe community colleges, but we’re not talking about all the different segments and types of institution that are needed often for jobs that don’t require traditional university degrees. We’re also not talking about more partnerships between government, the private sector, and these educational institutions to meet specific needs. So I think there’s an opportunity for a much more sophisticated discussion.

Let’s stick on the topic of defense for a minute, because there’s another big issue in the world which people are thinking about, which is inflation. The reason I want to bring these two issues together is we’re at a moment where, because of this conflict, countries—Germany being one of them—are rethinking their total commitment to defense spending. But, obviously, everyone is doing so in the context of a higher-inflation environment. I’ll be interested to hear your thoughts on what this means in terms of defense affordability and where we go from here in meeting defense needs in this kind of economic environment.

Eric Chewning: It’s a great question. We just published a piece on this, looking at—the president’s ’23 budget requests to Congress as it relates to defense and the impact, the difference—inflation rates would have on overall DOD buying power. The assumptions that were in the budget requests were sort of in an inflationary environment. Whenever you do defense forecasting, they do it over what’s called the FYDP, or the Future Years Defense Program. The shipbuilding plan ends up being a 30-year plan. And they try and create visibility so folks can kind of see what outlays are going to look like.

We’re going to need jobs that are skill-based, don’t necessarily require college degrees, and are colocated in communities where they could use the jobs. That’s a natural-made opportunity.

Eric Chewning

In this instance, the inflationary assumptions were around 2 to 3 percent, but we’re just coming off a quarter where inflationary assumptions were 7 percent. And when you look at the way DOD experiences inflation, it’s usually 20 basis points higher than the rest of the economy. They’re particularly susceptible to increases in fuel prices. So we just said, if you actually play out this delta in inflationary assumptions—and you could see during the ’70s the stagflation period extended periods of higher rates of inflation—you’re really, really going to be eroding the DOD’s buying power, as it comes to modernization of equipment. That then puts a new onus on industry as they think about how.

André Dua: I want to come back to a little bit of your career. Last year, you wrote about lessons that we can learn from the military to tackle the COVID-19 crisis. I’d like to see whether you think there are also lessons that we can learn from the military as leaders think about the issues of how to spur sustainable, inclusive growth in the economy and in their organizations. The military has a unique way of doing things, and presumably there are some interesting insights that we can all learn from that.

Eric Chewning: For me, my time in the US army was the most inclusive organization that I’ve ever been a part of. And I know for folks who haven’t served, that may sound a bit counterintuitive. But as I think about my own experience with my unit, particularly the one I served with when we were in Iraq, we had a Japanese American as our battalion commander. Our company commanders were a Native American, a Puerto Rican, and a White person, like myself.

All the soldiers came from every different conceivable walk of life. We had Ivy League students. We had West Point students. We had enlisted kids right out of high school. You had me, who just came from an investment-banking career. You had people with master’s degrees through GEDs, and it was a great group of folks who were united by a common mission. They had a shared sense of purpose. But each individual leader, from the commander on down, created a culture of trust. I think when corporate leaders talk about sustainable, inclusive growth, there’s the potential for the discussions to veer off in certain directions. It’s important that we maintain cultures of trust and a common sense of purpose, because I think when you’re able to do that within an organization, you’re going to get much better outcomes. I think that was certainly true for the teams I’ve worked with in the military.

André Dua: Let’s stick with this topic of sustainable, inclusive growth for a second. I’m curious for your thoughts on what actions you think leaders could take generally to build a more sustainable and inclusive future for all Americans. I think it’s maybe worth recapping why we think this matters. Without growth, there can’t be more opportunity for more people. Without sustainability, we don’t necessarily bequeath to future generations a world which continues to be prosperous and has many of its natural assets. And without inclusivity, not everyone has their opportunity to participate and make a better life for their family. So within that context, what do you think leaders should be doing to build a sustainable and inclusive future for Americans?

Eric Chewning: I always think the power of example is important, and this idea around, how can you create alignment on a vision and then make folks feel comfortable—that there’s a place for them in the future that you’re outlining? And in my mind, in any type of transformative change effort, that’s sort of the beginnings of the bare-minimum table stakes that, as a leader, you have got to be able to put in place. And I think that’s true with SIG [sustainable, inclusive growth].

The nice thing about sustainable, inclusive growth is that it’s amorphous enough where you can describe it in a way and describe the value proposition in a tailored context. But it’s real enough that people can kind of see the type of future you’re describing, one where there’s economic opportunity, one where that economic opportunity is broad based, and everyone has a chance to benefit from it, and it’s done in a way where you’re creating a healthier community. And it’s hard to find someone who’s going to disagree with that value proposition as you hit each of the specific points.

André Dua: Eric, thanks for sharing your insights with us today. I really appreciate it. I wanted to reflect on a couple things that I found really interesting. First, it just made me realize how differently we need to think about US manufacturing forward because it’s so important. But the reason we need to think about it differently is we are entering a world in which resilience is increasingly important. And then there are some really significant national-security implications of not having the right manufacturing footprint. So I think my first big takeaway is, it’s time to have an elevated dialogue about US manufacturing.

The second thing I take away from this discussion, Eric, is the absolute importance of talent. There resides in American citizens and residents an enormous amount of talent. As a nation, we’ll be well served to invest in that talent and to find ways to pull them into productive work, because it’s going to be a huge unlock for this country. I really think that’s an important thing that really ran through a lot of the conversation.

Eric, we like to wrap up these Future of America episodes with a few quick questions. We always ask the same three, so I’m going to hit them now. Is there a book or article that you’ve recently read that excites you about a more sustainable and inclusive future?

Eric Chewning: First of all, great summary. In line with that, the book I’ll reference was written by a friend of mine, Matt Kroenig at Georgetown [University]. And he wrote a book on The Return of Great Power Rivalry, and the book looks at historical competitions where relatively democratic versus more autocratic governments competed, going back to Athens and Sparta, all the way through the US–Soviet Cold War.

He makes this argument that countries with relatively more open government and inclusive societies sustain long-term advantage in the international system because they get economic growth, because diplomatically they’re able to be more inclusive when it comes to management of allies and coalitions, and that they’ve got better military strength, because the societies hang better together and they’re more innovative in their decision making. I like this idea around SIG as a national competitive advantage, not just for companies but for societies. That’s an interesting kind of thought experiment to explore.

André Dua: Second question: What makes you optimistic that we can achieve sustainable and inclusive growth?

Eric Chewning: If you ask everyday folks, “Do you want a future for America where your kids have opportunity? Do you want one where there’s broadbased economic growth for everyone? And do you want a healthier community?” They’re going to say yes to all three of those questions. Then you say, “OK, that’s great. We’ve sort of aligned on kind of the type of future we want to have. Now let’s take the next step and talk about how we get there.” Often, alignment around a vision is sometimes the hardest part, but it can be the most important. There’s real work to be done after that, but you’re part of the way there.

André Dua: Lastly, what’s the one thing that listeners can do to help promote sustainable and inclusive growth themselves?

Eric Chewning: In theme with our discussion, I’m going to say, just support domestic manufacturing.

André Dua: Thank you, Eric. That was Eric Chewning, a partner in our Washington, DC, office and the coleader of McKinsey’s Aerospace & Defense Practice in the Americas. And I’m André Dua. You’ve been listening to McKinsey’s Future of America podcast series. Thanks for joining us.

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