The future of US manufacturing is hiding in plain sight

| Podcast

Boring is beautiful when it drives economic prosperity. Cue industrial technology companies, whose under-the-radar successes are powering a resurgence in US manufacturing. Their proven promise is the basis of the new book The Titanium Economy, cowritten by McKinsey’s managing partner for North America, Asutosh Padhi. Asutosh joins partner Kim Borden and global editorial director Lucia Rahilly to discuss this overlooked bright spot in the US economy—and what’s necessary to power the next stage of manufacturing growth.

This transcript has been edited for clarity.

The McKinsey Podcast is cohosted by Roberta Fusaro and Lucia Rahilly.

A wondrous discovery

Lucia Rahilly: Over 20 years ago, a young Asutosh Padhi came to the United States by way of India and ultimately landed in Cleveland, Ohio. And he was amazed by what he saw.

Asutosh Padhi: At that point, I started to see industrial companies for the first time in the Midwest, and I saw hardworking, innovation-driven institutions that had been around for nearly one hundred years. And they were driving innovation on a day-to-day basis.

Lucia Rahilly: Asutosh was startled by an irony. These stalwart companies embraced cutting-edge technology, were profitable, hired lots of people—and nobody knew who they were; they were relatively unknown.

Asutosh Padhi: They don’t make the covers of the most important magazines that we read, or the newspapers we read, or the news channels that we watch.

Lucia Rahilly: To Asutosh, now a McKinsey senior partner, these unheralded organizations can rebuild America’s might as a high-tech manufacturing leader and restore the backbone of the US economy. And he’s shouting it from the rooftops in his new book, The Titanium Economy, which he cowrote with Gaurav Batra and Nick Santhanam. This is The McKinsey Podcast, where we help you make sense out of the world’s toughest business challenges. I’m your host for today, Lucia Rahilly.

Durable and sustainable

Lucia Rahilly: Let’s turn to the phrase titanium economy. What do we mean when we use that phrase?

Asutosh Padhi: By titanium, we wanted to signify companies that were durable, that were resistant and technology-driven. And deliberately strike a contrast with people’s view of manufacturing, which is seen as old, stodgy, unattractive, and difficult to work in.

Lucia Rahilly: In fact, they’re the opposite of stodgy. McKinsey partner Kim Borden says these companies are trailblazers.

Kim Borden: They’re leveraging advanced analytics, artificial intelligence, and automation in ways that a lot of people don’t realize.

Lucia Rahilly: And a lot of people don’t realize what exactly these industrial technology companies do. They provide raw materials and component parts to businesses that go on to create products or deliver services critical to our daily lives. Take, for example, a restaurant. If you’re a carnivore, you want the meat to be fresh and safe, right? So, the seal in which the meat is delivered . . .

Kim Borden: . . . needs to be quality and on time. Sealed Air is a leading industrial company that has pioneered new methods for the packaging and tracking of meat shipments. It sounds somewhat complicated, but they’ve leveraged blockchain labels to track chain of custody of meat and ensure that what ends up on your table is the highest quality.

Lucia Rahilly: And after you’ve grabbed a quick bite, in the name of sustainability, where do all the plates, napkins, and cups go?

Kim Borden: Casella Waste Systems is one of those companies that has developed solutions to be able to tell the difference between a truly recyclable material and one that is not and actually belongs in a landfill.

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Thousands employed; billions of sales

Lucia Rahilly: So how many industrial technology companies exist in the US? Get ready for some stellar stats. In the private sector? Over three thousand. Publicly-traded? About seven hundred. About 80 percent of those public companies have sales ranging from $1 billion to $10 billion. They employ 2,000 to 20,000 people. And here’s something else really remarkable: 90 percent of the firms are profitable.

Asutosh Padhi: This sector is massively important to the US economy in two ways. The companies themselves drive about $250 billion of GDP, of annual revenue growth. The second part, which is equally important, is what we call the amplification cycle.

Lucia Rahilly: The amplification cycle is a virtuous economic cycle. Theoretically, when people have good jobs, they buy homes and spend money within the community. The communities then thrive, develop desirable reputations, and people start moving in. This diversifies the talent pool. One example of a town that boomed thanks to the titanium economy is Simpsonville, South Carolina.

Asutosh Padhi: It’s a great example of a town where one titanium economy company moved in, and then a number of other companies moved into that area. So there’s roughly about five companies now in that area. The community’s not big. It has probably 40,000 people. But the impact it has had is just profound. You look at the average per capita income. You look at the high levels of employment. You look at other economic indicators as well around economic inclusion, around safety and everything.

Resilient, reliable, and steady revenue

Lucia Rahilly: Across the board, Kim and Asutosh agree these companies are also resilient: they were not hit hard by the Great Resignation. And their financial performance . . .

Asutosh Padhi: . . . has been strong and steady. They’ve not had the mega revenue growth, of what you would associate with tech companies. But what you see is you see strong, stable, and steady performance. In other words, consistent and reliable, but potentially boring. (Laughs)

Lucia Rahilly: What’s not boring is the kind of wages workers are earning in these types of companies.

Asutosh Padhi: Typically $60,000 a year versus $30,000 in the service sector. But then, they also are much more oriented toward employing folks for the longer term. So if you look at the benefits package and others, eventually you can retire with a comfortable income from these companies.

Lucia Rahilly: Not only are they paying attractive salaries, but they also prioritize improving the natural environment.

Mission-driven manufacturing

Asutosh Padhi: I think all of them have a clear purpose. And the purpose of them starts by saying, how can they help the world decarbonize? How can they help to move products and services cheaper? How do they keep the economy going better, faster, cleaner than has happened in the past?

Kim Borden: Trex is an excellent example of a company that’s done this. They transform waste into building materials by salvaging plastic and wood from landfills to make various materials for buildings, for benches. And what’s really come of it is that they have created, frankly, superior products in a lot of cases, withstanding weather elements, etcetera. Each year, Trex saves 500 million pounds of wooden plastic from landfills, recycling 1.5 billion plastic bags annually. And so their entire business model is anchored in environmental stewardship.

Lucia Rahilly: Not only are these industrial manufacturing companies caring for the environment, but they also defy the stereotype of a typical factory.

Asutosh Padhi: You walk into a traditional manufacturing company, and you get to large halls that have typically not been refurbished in decades. The place usually looks dark and dingy, not well lit. And it’s very hard to actually be doing anything other than working by yourself as an individual. That’s kind of what traditional manufacturing is.

Lucia Rahilly: Contrast that picture with an industrial technology company.

Asutosh Padhi: The machines are new. The people are working together in teams. The place is inviting. And you get the sense that there is something that is much more modern, much more oriented around precision manufacturing, whether it’s using new materials, new technologies, different types of equipment.

Wise, not old

Lucia Rahilly: Lots of newness in many companies that are old, small, and family run. Do you find these businesses tend to be open to disrupting themselves digitally?

Kim Borden: I do actually think a lot of these family-owned businesses are open to disruption because it’s do or die, honestly. It is survival. And if your family has built this business, you have a heck of a lot of passion to make that work.

They are very focused, therefore, around the trends in the industry. What is it that the customers really care about? What is it that’s happening within the supply chains?

I do actually think a lot of these family-owned businesses are open to disruption because it’s do or die, honestly. It is survival.

Kim Borden

Lucia Rahilly: OK, so suppose I’m a small, family-owned industrials company. What’s the playbook for taking my company to the next level and achieving scale?

Asutosh Padhi: So the playbook is, you first get very focused around an area that you want to compete in and do well in. We call this micro-verticals. That’s a first thing. Second is to have prudent acquisitions in these verticals to continue to build up a leading position as you go through this.

The third one is a continued, relentless focus on operational performance. All aspects of operational performance, from manufacturing through supply chain.

So the playbook is, you first get very focused around an area that you want to compete in and do well in. We call this micro-verticals. That’s a first thing.

Asutosh Padhi

Lucia Rahilly: Beyond innovating their operations, these companies are starting to innovate their search and development of talent. Like hiring people that have skills but not college degrees.

Creative and inclusive hiring practices

Asutosh Padhi: There are millions of people in the United States today who don’t have four-year college degrees, but can be highly qualified in terms of doing the basic activities and tasks. They can design products. They can run the machines. They can become a line supervisor.

From there, they might become a shift supervisor. From that, they might become a plant manager. And all of this is because they actually started by knowing, for example, what machining is, what heat treatment is, what welding is, what process forming is, what precision engineering and different types of technologies are.

So the ability to teach people these things that really drive these titanium economy companies—that’s a skill-based hiring approach and I think that’s where the companies will need to go.

Lucia Rahilly: In addition to skill-based hiring, Kim says companies can partner with educational institutions to improve the talent pipeline. For example, Graco.

Kim Borden: Graco has built relationships with educational institutions in five states, where the company donates capital equipment, offers scholarships, partners on education programs, and helps the folks in the community in those states basically upskill. In 2021, the funding exceeded $1.3 million. These partnerships can really benefit both the company and the community around it.

Too busy to brag

Lucia Rahilly: Building partnerships requires that people know these organizations exist. But titanium economy companies tend to not invest in their own storytelling.

Kim Borden: Many of these companies are so busy getting the job done that PR and marketing is not necessarily front and center for them.

Asutosh Padhi: It’s quiet, they’re quiet.

Lucia Rahilly: Exactly, it’s understated.

Asutosh Padhi: They’re understated.

Lucia Rahilly: Understated, hardworking, and financially thriving. Yet, US support of these industrial manufacturing companies pales in comparison to other countries.

Does the US have a chance to catch up?

Lucia Rahilly: What might we learn from other countries that do this better?

Kim Borden: I do think in the United States we need to significantly increase the investment into this sector versus other countries. For example, China has, I think, 200 times more investment. Their government and their businesses are constantly reinvesting in technology to lift up the entire manufacturing sector and learn new skills.

Germany is another great example where the government invests incredibly heavily into these areas.

Lucia Rahilly: And it’s vital to increase investment now or risk being left behind.

Kim Borden: We have probably less than five years to drive a meaningful lift for manufacturing in America.

Lucia Rahilly: And it will take cooperation.

Kim Borden: From a range of stakeholders including business, both private and public government, academia, and communities in general, to really rally together to make this change happen.

Lucia Rahilly: Because there’s a lot at stake.

Kim Borden: So if we don’t support them or continue to support them to grow and prosper, I think it will really impact many communities throughout North America.

Lucia Rahilly: And there’s so much potential.

Kim Borden: If we are able to upskill our workforce and become a really competitive manufacturing country, for sure it would help us competitively because it would bring our manufacturing costs and our overhead costs down dramatically, as well as position us as a leader in certain technologies and on sustainability issues.

Lucia Rahilly: And those are very good issues to have.

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