Rosemary Coates: The expansion of Manufacturing worldwide in the late nineties and early two thousands, you know, shifting a lot to Asia. That happened sort of gradually, I would say. I mean, at the time we thought it was fast, but nothing like compared to today. Uh, and so it isn't that we haven't seen this before, it's just that there's very concentrated effort now, which makes it sort of a different time to live through.

Narrator: You are listening to Augmented ops where Manufacturing meets innovation. We highlight the transformative ideas and technologies shaping the front lines of operations. Helping you stay ahead of the curve in the rapidly evolving world of industrial tech. 

Madilynn Castillo: Welcome back to Augmented ops. I'm your host, Madeline Castillo, CMO, here at Tulip, and today I'm joined by Rosemary Coates, executive director of the Reshoring Institute, and one of the country's leading experts on global supply chains and Manufacturing strategy.

Madilynn Castillo: Rosemary, why don't you introduce yourself? 

Rosemary Coates: Yes. Hi everybody. Rosemary Coates. I'm the executive director of the Reshoring Institute, as Madeline said, and I'm here today to talk about what's happening in the world. 

Madilynn Castillo: And it probably couldn't be more timely. I'm a a big fan of the Wall Street Journal, the journal podcast.

Madilynn Castillo: Yeah. And every other episode is about Manufacturing. And if it's not about Manufacturing, it's about AI or AI in Manufacturing. So there's tariffs, there's supply and chain bottlenecks, there's a lot going on globally. And each of these external things really impacts, uh, Manufacturing and operations. I'd love to hear how you're, you're making sense of, of the moment or, or maybe for our listeners you can give an overview of your perspective on how global supply chain is being rewired today.

Rosemary Coates: Boy, there's a, there's a lot going on for sure, is, I think the, the major thing that's happening is a lot of companies, manufacturers are interested in moving out of China or at least reducing their footprint in China, and that's been going on for quite a while. So we. Established the Resharing Institute in 2014.

Rosemary Coates: So we've been around 11 years and have been working with companies that are interested in changing their global Manufacturing footprint for a long time. But I think, you know, after the 3 0 1 tariffs were imposed and Trump. 1.0 and then again this year, um, most companies are rethinking the strategy of sourcing and Manufacturing in China and at least trying to diversify.

Rosemary Coates: So that's caused a lot of, in some cases chaos, but certainly a lot of movement and global supply chains. Not necessarily back to the US but a lot of movement worldwide. So we've been, we've been working with that. And then of course, the Supreme Court decision on Friday mm-hmm. Has made a lot of companies, again, pause and rethink what they're doing.

Madilynn Castillo: So there have been other global supply chain shifts over time. Like I guess that's part of this like segment and, and industry. What's different about what's happening now? 

Rosemary Coates: Yeah. I think shifts in the past have been more likely related to, uh, disaster or, or, uh, some kind of. Policy or another, and they've been relatively slow.

Rosemary Coates: Mm-hmm. Uh, have moved over time, the expansion of Manufacturing worldwide in the late nineties and early two thousands, you know, shifting a lot to Asia. That happened sort of gradually, I would say. I mean, at the time we thought it was fast, but nothing like compared. To today. Uh, and so it isn't that we haven't seen this before, it's just that there's very concentrated effort now, which makes it sort of a different time to live through.

Madilynn Castillo: You talk about the, the speed and it's, it's changing the way manufacturers need to respond. What are some of the biggest shifts you are seeing in how manufacturers are thinking about global production, particularly when it comes to their labor strategy and the way they think about their supply chain more broadly?

Rosemary Coates: Yeah. Well first of all, I think with the imposition of the I EPA tariffs, um, by the Trump administration and the quote Liberation day, um, the intention, I believe, was to draw Manufacturing back to the us. But we haven't really seen that happen. I mean, unfortunately, and you know, we're the reassuring Institute.

Rosemary Coates: We would love to see Manufacturing rebuilt here in the us but the job growth in the US and the Manufacturing has been relatively flat the entire year. So about three or four months ago, we did a study for the State of New York to ask manufacturers all across America, not just in New York. How they were responding to the tariffs.

Rosemary Coates: And this was, uh, before the IEPA decision last Friday, but we interviewed 18 C-level executives, so CEOs, CFOs, chief supply chain officers, COOs. A variety of industries. I think 16 industries, so 18 executives, 16 industries. And we asked them, what are you doing with respect to the tariffs? And that was kind of the main question.

Rosemary Coates: And to a person, they told us absolutely nothing. So these were all sort of medium sized businesses. What they told us was the economy and the tariffs were too unstable to make a decision. So they were making no decision. They were taking a wait and see attitude. They weren't hiring and they were making no capital investments.

Rosemary Coates: And I think that was reflected in the lackluster economic performance of the Manufacturing sector over the last year. Just there was hesitation and you know, one thing that businesses hate is instability. When they can't make a decision 'cause they're unsure of what's gonna happen on the way forward.

Rosemary Coates: That puts a, a damper on any kind of growth or movement. The other thing that we're seeing that's a fairly big trend is, uh, companies moving out of China and into Mexico. Some of them have taken steps to move in other locations in Asia, uh, other low cost countries. By the way, China would not be considered a low cost country anymore, okay?

Rosemary Coates: Their labor rates are smack in the middle of the world, average labor rates, and there are other lower cost countries in Asia, as well as Mexico as very cheap labor. So if you have a lot of labor involved in the production of your equipment, then you look for a low cost country alternative. And so what we're seeing is that movement out of China is going to places, but not necessarily the US because of our labor rates, because of our, there's all sorts of issues with respect to reshoring.

Madilynn Castillo: I see. And so separate from an adjustment in the pace of, of policy that's creating some of this uncertainty that you heard as feedback in this survey, what are some other things that the US could be doing or, or governments could be doing if they aim to, to bring back or attract manufacturers to hire folks locally or kind of overcome or navigate the competition with, uh, lower cost labor countries?

Rosemary Coates: Well, you know, in the US is very attractive for a number of reasons. I mean, obviously it's the largest consumer market in the world. The government is stable. Uh, we think there's some question right now, but the, but by and large, you know, it's a stable environment. It's a decent place to manufacture.

Rosemary Coates: There's, you know, it's English speaking so forth. There's all kinds of reasons. But there are all kinds of issues as well. So the number one issue I think is labor. In the US the labor rates are, you know, can be as much as 10 times more than other countries. For example, we did a cross border study just recently, which is published on our website, but, uh, we looked at.

Rosemary Coates: All the border cities in the US and Mexico and looked at the labor rates. So for example, in San Diego, the labor rate is 1765 per hour now, and right across the border in Mexico it's $2 and 59 cents. So if you have a lot of labor content in your production and you know that's an important component of your overall cost structure, your cost to bill of materials, then looking to Mexico or another low cost labor country is really important.

Rosemary Coates: Uh, the US just simply can't compete. Our labor rates are too. However, if you don't have that much labor involved, you potentially could look at some lower cost areas in the US such as the the South. A lot of rural areas across the country have lower labor rates, which makes it somewhat more competitive.

Rosemary Coates: Or you can make a capital investment and take extract the labor overall. And that's kind of what we're seeing is that the Manufacturing that is coming back is usually capital intensive and has a small component that's labor. So semiconductors, for example, there's semiconductor manufacturer. During sites being built in Arizona, New Mexico, in Texas, Idaho, Ohio, New York.

Rosemary Coates: But if you've ever seen the inside of a semiconductor Manufacturing plant, there aren't any people there. It's all a machinery. It's very highly automated. So if you have a profile like that with very little labor and it's all capital investment, you have, uh, more opportunities. And those are the ones that are landing back in the US both for that reason as well as the miscellaneous funding.

Rosemary Coates: One of the other issues is, uh, the electrical grid. So as I'm sure everyone's heard, the building of new data centers is taking so much electricity and other energy sources off the grid that it's really hard to build additional new plants and new operations. That's one thing and. Gonna barely sustain the population.

Rosemary Coates: And so electricity is a big problem and our infrastructure for electrical production is aging. And it's not that it can't be fixed and will be fixed, but it might take 10 or 15 years to get there. So that means you can build a Manufacturing site, but if you have no electricity, um, for the site, then you know it'll be idle.

Rosemary Coates: You can't, you can't manufacture there. So that's, you know, another issue looking at a longer term and the results of tariffs and other policies may have an effect, but it won't be immediate. It might be five years or 10 years down the road. That's another thing you had asked about labor shortages also.

Rosemary Coates: Uh, 

Madilynn Castillo: yeah, I, um, just to, I guess, disclose, you know, I work at Tulip and a lot of our customers and definitely our end users are, uh, various types of engineers across industries. Usually there are people, there's operators, which I think are often the, the types of folks where companies often focus on outsourcing or trying to optimize labor costs.

Madilynn Castillo: But increasingly, especially in plants that are looking to adopt more advanced or, or modern Manufacturing techniques, there's like a maybe a middle, middle layer or an evolving category of worker that knows how to use tools like Tulip is more aware of things like robotics and, and coordinating technical infrastructure.

Madilynn Castillo: And, uh, there are maybe not enough of those folks for more advanced facilities. Thinking of like the re industrialized movement focused on like aerospace and defense facilities. That's picking up in the, in the states a bit now. So I'm curious for more, you know, highly skilled sectors like pharmaceutical, biotech, which we're in Boston, so big industry here, aerospace and defense.

Madilynn Castillo: Like what type of policy, investments or organizational investments are needed for that type of, uh, reshoring or scale up. 

Rosemary Coates: Yes. Well, you know, Manufacturing has certainly changed over the last 20 or 30 years. Uh, significantly more automated, the use of all kinds of technologies and so forth. You know, my grandfather worked at Zy Taylor in Warren, Ohio, and they're, uh, they make drinking fountains and, uh, he was a metal worker.

Rosemary Coates: So this was back in the 1960s. You know, I can remember he came home from work every day and he was smelly and. He had grease under his fingernails and you know, it was icky. Right. It was dirty and gross and he was, 

Madilynn Castillo: yeah. Tough job. 

Rosemary Coates: Yeah. He was a manufacturer. Right. That was my idea of Manufacturing. Well. So I live in Silicon Valley, and if you look at a Manufacturing site around here, it's people in bunny suits and you know, it's all right engineered and so forth.

Rosemary Coates: Manufacturing has changed, but also the kind of skills that are needed, as you pointed out, have changed. So, you know, we don't need people who are gonna put. Pegs and holes here, we need people who run the robots that put the pegs and holes, and those are different skills. They're higher paid jobs. They require more training.

Rosemary Coates: And the the other thing that I think is very important is that people need to know how to operate computers. If you look at a Manufacturing shop floor, there are computers everywhere. People are using computers to move inventory along, to test for quality, to manage a roller line. All these things are computerized, and those are the skills that you need.

Rosemary Coates: So. My grandfather could not operate in today's environment. It's just completely different these days. So we need to pay attention. I, I like to say we don't have a job shortage. We have a skill shortage. So even though people are out of work, you know, around the country, our unemployment rate is very low.

Rosemary Coates: But even with that, there's still people looking for jobs and they don't have the right skills. So we need to pay attention to that to emphasize more on training, particularly at the community college level, and apprenticeships as well. 

Madilynn Castillo: And for the combination of, of factors that you talked through, right?

Madilynn Castillo: Like the need to reinforce and, and scale, mature the electrical grid training through community college programs for different industries with more modern digital Manufacturing skills. What is kind of your perspective on a way forward that will help accomplish kind of reshoring and navigation goals, both for manufacturers and for communities?

Rosemary Coates: Yeah. Well, there's, there's no silver bullet. I mean, yeah, it's not all one thing. It's a combination of things. So we need more training. We definitely need more engineers. You know, instead of focusing on alternate areas of study, I think we really need to encourage our kids and our grandkids to study math and engineering in particular.

Rosemary Coates: That's where we're going to have the greatest needs. In a Manufacturing environment. I mean, if you think about Manufacturing, there's a lot of mathematics in Manufacturing. Yeah. Everything is a plane or an angle or, you know, a dimension or, you know, all, all kinds of things that require math skills. So emphasizing that starting at the elementary school level is, is really, really important for our future.

Rosemary Coates: So, you know, we need to move in that direction. We need to rethink what. The workforce should look like and make available money to invest to make those capital investments. So, you know, we started doing that a little bit with the Chips and Science Act and with the Infrastructure Act and the Inflation Reduction Act, all of them had money for Manufacturing.

Rosemary Coates: And there was some starts with that funding. Some of it's been rolled back now, so under the Trump administration, they diluted some of that funding going into those Manufacturing sites. But it was a good start and there certainly has generated interest and funding to help. These massive capital investments.

Rosemary Coates: So it's not just one thing, it's looking at the labor force and making sure they're prepared. We're looking at education to be able to prepare those workers. It's the electrical grid, it's the infrastructure, not just electricity, but roads and bridges. All of that needs to, needs attention in the us. And then funding, you know, encouraging the US government to invest in critical industries, I think is, you know, the other leg of the stool, if you will.

Madilynn Castillo: If we were to look for like a, a case study or example of an economy or a country that's doing this well, uh, who comes to mind? 

Rosemary Coates: Oh, that's a very good question. I think Germany certainly is a, a Manufacturing powerhouse. You know, it's funny too because the attitudes in Germany are so different. You know, children in school think of Manufacturing as a good pathway.

Rosemary Coates: To their future. So, you know, lots of school children wanna go to work at BMW or Mercedes or you know, some of these huge Manufacturing lepar. Um, that's a great job and it's a destination and a goal for a lot of kids. So the mindset is very different. Germany comes to mind, certainly China, China has invested so heavily in Manufacturing.

Rosemary Coates: China's now shedding, its sort of low cost labor production, um, that's moving off to India and to other places where the labor is lower cost, particularly countries in Asia. But you know, they put a goal out there of made in China 2025. This was yes, a goal in 2020, I think, or just before that, to increase Manufacturing in China.

Rosemary Coates: Moving up the scale. So the Manufacturing is more sophisticated and they've achieved that goal. So, you know, the sophistication is pretty significant. I've spent a lot of time in China over my career. Um, I helped a lot of companies establish Manufacturing there and sourcing in China. And you know, there are lots of factories where you walk in and there's thousands of young girls sitting on plastic stools for 12 hours a day making stuff.

Rosemary Coates: And that kind of Manufacturing, first of all, it's never coming back to the US because it was never here and we don't have those kind of workers here. So China is actually shedding some of that to, as I said, to other low cost countries and they have moved up the sophistication curve for sure. Um, so those are two examples.

Rosemary Coates: I would say Germany, Switzerland, also some in France. You know, there, there are spots where there's a significant effort being made to improve or to expand Manufacturing around the world. 

Madilynn Castillo: In a lot of ways those types of jobs, I guess like a, a 12 hour seated job, we, we don't necessarily want to come back.

Madilynn Castillo: Right? That's where good advanced Manufacturing, robotics, and automation can be a net good, I think for, for most communities. But you pointed out that even within. China, which I think is people's go-to model if they're less familiar with, with Manufacturing for lower cost labor, that the adjustment has been to focus on more advanced and complex types of Manufacturing and Manufacturing skills, which we just talked about a little bit as like a, an area of growth opportunity for the states, for manufacturers themselves, right?

Madilynn Castillo: Like, uh, there's a lot that external folks can do or, or a change when it comes to policy and community and education, but what should operations leaders. Be thinking about in order to keep themselves competitive and kind of navigate this, uh, era of change. 

Rosemary Coates: Yeah, I think, you know, businesses is, are always changing, so it's a very dynamic kind of situation as well as in Manufacturing for sure.

Rosemary Coates: Um, and I think a, a consistent focus on technology. Not only improving machine tools and automation and so forth, but the use of AI tools mm-hmm. To help improve productivity over time. There's got to be a constant focus there. That's the way we evolve. You're right about, uh, the Manufacturing of, you know.

Rosemary Coates: Thousands of young girls putting parts together. I mean, like I said, that that has never been the model in the US We don't have that kind of concentration of workers nor to pay somebody 23 cents an hour to produce t-shirts. I mean, that's just not the model here. Because it doesn't pay a living wage, we would have to supplement income with welfare.

Rosemary Coates: So we don't wanna create a welfare state by bringing a bunch of low cost Manufacturing back. What we want to do is bring back higher skilled Manufacturing, those that pay better, and to rebuild the middle class in America, we need to pay those workers between about 75 and $85,000 a year. That's squarely middle class.

Rosemary Coates: And what we know about Manufacturing is it has a magnifier effect on communities. So people that earn a middle class wage, particularly in the Midwest and south, I mean, it wouldn't work in Silicon Valley for sure, but in the Midwest and south, paying, uh, 75 or $85,000 a year allows people to buy houses.

Rosemary Coates: And cars. And you know, they shop at the local grocery store and they have their hair done and they send their kids to college. That's what we wanna build. That's what we wanna aim for. And in order to accomplish that, we need to have the right kind of Manufacturing coming back. That's more skillful, pays better wages.

Rosemary Coates: It's more automated, there's more capital investment. 

Madilynn Castillo: So you've mentioned location a couple times as one of the key considerations for manufacturers when they're thinking about where they may build out facilities or invest, what are some other principles or considerations that are, are helpful for operations teams or our Manufacturing leaders?

Rosemary Coates: You know, we get asked to help companies with location, um, from time to time and have done some location studies. And what we've found is there are clearly some lower cost areas that are more suited to Manufacturing. Unless you're fully automated. But you know, there most Manufacturing sites have a combination of labor and, and machines and there are certainly better places in terms of costs than others.

Rosemary Coates: And as I mentioned, the the South Texas, some other places like Utah sort of rings all the bells, okay, in terms of labor and costs and so forth. So, you know, that's really important. But one of the things that if you were just doing a study to figure out where's the cheapest place in America to manufacture, you probably would end up with the rural south.

Rosemary Coates: Problem with that is there aren't any workers there. You know, you're not gonna find enough workers to manage your plant in a rural area. So what we normally do is help guide these companies to locate in the suburban area near. A Manufacturing site, so maybe within 20 miles of a city. Then, you know, choosing a site where people can commute, where there's a bigger labor pool, where there's better infrastructure and in terms of being able to move your products.

Rosemary Coates: So, you know, looking at it just strictly from a cost perspective is probably not the right approach. There are many, many other variables including access to labor and so forth. 

Madilynn Castillo: I see, and we kind of kicked off this discussion on like signs of uncertainty, kind of making it difficult for manufacturers to feel comfortable making decisions, really like the business risk is, is too high and, and all of this volatility.

Madilynn Castillo: What are some signs or indicators that you would encourage companies to look for as reassurance for making these types of investments? 

Rosemary Coates: Well, in the early two thousands, uh, you know, I was in management consulting. I was helping all these companies make these kind of decisions, and it was really based on one thing they'd say, get me to China.

Rosemary Coates: I know it's cheaper and not only in terms of labor, but in the overall cost structure, cheaper factories and so forth. Today's decision is very different. So today when I work with an executive, not only are we looking at the cost structure, that may be square one where you look at total landed cost or something like that, but on top of that, then you have to evaluate the deal politics.

Rosemary Coates: So what's happening, not just China, but there's all kinds of things that are happening in Venezuela and you know, south America, all, you know, these are all considerations that go into that decision. Then you wanna look at proximity to marketplaces. So if you're selling most of your product in the US than proximity to the us.

Rosemary Coates: Makes sense. So you might look for Mexico, for example. 

Madilynn Castillo: I see. 

Rosemary Coates: Although in the last, uh, week or so, there's kind of crazy stuff going on in Mexico on 

Madilynn Castillo: the note of watching geopolitics. Yes. 

Rosemary Coates: Yeah. So, you know, there are constantly things to be considered and I would say, you know, executives now have to deal with a lot more variables than they did in the past.

Rosemary Coates: So it's not only the world profile, but also. Can you afford to invest in machinery? You know, can you make that capital investment? Is it subject to weather? You know, climate change has made a big difference. So, for example, there are places in the Caribbean that are really very attractive in terms of skilled labor and the government, the Dominican Republic, for example, the government is very focused on improving Manufacturing, but is subject to hurricanes.

Rosemary Coates: So, yeah. You have to take that into consideration too. The other thing that, that we're seeing a lot of is that companies are now finding or selecting multiple locations. Okay. So instead of just, you know, we manufacture here or there, now it's, we manufacture in four different locations. Okay. So potentially if there's a problem, you have a fire or a flood or, um, you know, some kind of.

Rosemary Coates: Coup or you know, something happening in one location. Potentially you could move Manufacturing to an alternate site. That's a pretty common strategy these days for companies to have what we call a a China plus one, so Manufacturing in China plus one other place, or China plus two, or China plus three. So it might be.

Rosemary Coates: China plus Vietnam, plus Mexico, or China plus the US plus Canada, something like that. Some combination. So that mitigates the risk in supply chain management. 

Madilynn Castillo: Interesting. So encouraging, uh, manufacturers to, to stay flexible and plan for this, this type of volatility. Yeah. Which we've talked so much about, uh, we've talked a little bit about the challenges and the disruptions and kind of the maybe more dire or negative side of, of what folks are facing, but there's also positives, right?

Madilynn Castillo: There's innovation and there's opportunity with technology and there's some real momentum in some sectors for that. What gives you like hope and and confidence about the future of American Manufacturing, even given all the things we've been discussing? 

Rosemary Coates: Oh yeah. I'm very optimistic. While manufacturing's been relatively flat recently, you can see on the horizon that there's growth.

Rosemary Coates: Part of that also is due to. Funding availability and also the recognition that we need some kind of policy. You know, the US has no industrial policy, which is, when I found that out, I was really surprised. I had no idea that we had not focused on any kind of Manufacturing policy, but we haven't in the past.

Rosemary Coates: We've let the market, um, determine what to be manufactured and where. We're in a different kind of place now, and I think it's really important for our government to lead and identify critical industries and help to fund those industries, which we sort of did under the Biden administration. One of the first things they did was develop a study on supply chain vulnerability.

Rosemary Coates: And they came back with a list of, I don't know, 25 or so industries that were really important. Mm-hmm. And the top four were semiconductors, EV, batteries, rare earth elements and pharmaceuticals. And those were the, the sectors that got funding as a result of that. And so there's background that we need to focus on those few areas, and you can see there's growth there.

Rosemary Coates: So. Certainly semiconductors are coming back, although I don't think we'll ever have enough capacity to meet our needs. We're still going to have to import chips from, you know, other locations around the world. But we're now building infrastructure to help address that, and, and those factories will come online within the next five to 10 years.

Rosemary Coates: So it takes a while. 

Madilynn Castillo: Okay. 

Rosemary Coates: So I'm optimistic about the future. Pharmaceuticals are coming back, for sure. Mm-hmm. I just spoke with a expert in that industry in supply chain pharmaceuticals last week, and she told me, yeah, that most of the pharmaceutical companies are considering expanding or are already expanding their Manufacturing in the US and we're, we're very vulnerable in that area.

Rosemary Coates: As you, as you probably know, we don't make antibiotics in the US. Uh, which after the pandemic that was exposed to mean. Can you imagine? What would we do without antibiotics? And if some country cuts it off, you know, most of them are made in China and India. China decided to cut off our, our, uh, supply of raw materials for antibiotics.

Rosemary Coates: We'd be in terrible shape. The same is true for semiconductors and rare earth elements. So rare earth elements are found everywhere in the world. They're in your backyard, but in big quantities. There's some mines in the west. That have a, a big supply. The problem is rare earths are difficult to process and they're usually, they pollute a lot and there's all kinds of issues with it.

Rosemary Coates: So we had a rare earth Manufacturing in the US in the sixties and seventies, and we pretty much shut down all of those plants. And all of that was done in China, actually in rural China because of the pollution. So most of it's done up along the Mongolian border. But you know, they control 95% of the world's processed, rare earth elements.

Rosemary Coates: Just think how vulnerable we are because of that. I mean, shoot, you know, what would we do? You have to have rare earths to, to develop electronics and they're used throughout the Manufacturing processes and particularly magnets. And then semiconductors is the last, last sector. Well, ev batteries also. So there's a.

Rosemary Coates: I think a forward-looking emphasis on electrical vehicles and going forward, you know, that's an area for a big investment. And then semiconductor, of course, we talked about there's already funding and, and an emphasis to go in that direction. 

Madilynn Castillo: So ton of complexity and kind of nuance across all these industries, but also so much opportunity for yeah, us to get better and, and, and innovate.

Madilynn Castillo: Thank you again for joining us today. This is a wonderful conversation. 

Rosemary Coates: Yeah, it is. My pleasure. Thank you. 

Narrator: Thank you for listening to the Augmented ops podcast from Tulip Interfaces. We hope you found this week's episode informative and inspiring. You can find the show on LinkedIn and YouTube or at Tulip dot co slash podcast.

Narrator: If you enjoyed this episode, please leave us a rating or review on iTunes or wherever you listen to your podcasts. Until next time.