The cover story for the latest issue of the McKinsey Quarterly, the international journal published by the advisory firm McKinsey & Company, is entitled “Shaping the future of manufacturing”. On the pages within, we find a documented study of the strategies and efforts to do just that, thereby restructuring and relaunching the manufacturing economy by taking advantage of the sophisticated, revolutionary technologies of 3D printing and seeking new ways to unite manufacturing and services, ICT and logistics, energy provision and finance. With the era of finance dominating over manufacturing coming to an end, we are now seeing a return to the real economy, and so to manufacturing. The McKinsey Global Institute was already talking about “manufacturing the future” back in November 2013, and, also last year, Gary P. Pisano and Willy C. Shih, both professors at Harvard Business School, wrote about the “manufacturing renaissance” in their book Producing Prosperity, which talks about strategies for developing wealth and economic power in America.
This is the new direction for the economy, a quest for lasting social, environmental and economic sustainability, whether it be in Obama’s America (which has long been insisting on the key importance of its auto industry) and in Cameron’s Great Britain, in Holland’s France and, of course, in Merkel’s Germany—Europe’s leading manufacturer—or even (and why not?) in Italy, which is still in second place in manufacturing in the EU and can take pride in the dynamism of some excellent businesses, but which, thus far, lacks a true manufacturing strategy centred around innovation, research, and efforts to increase productivity and international competitiveness. As the reader will be aware, the EU has set a challenging goal of making manufacturing account for 20% of European GDP by 2020 (up from the current average of 16%), so there is still much to be done, and quickly.
But exactly what and how? The McKinsey Quarterly talks about “next-shoring” and emphasises the importance of greater “proximity to demand” (in both developed nations and emerging markets) while also focusing on “innovative supply ecosystems”, as this proximity can help to make a decisive leap forward in competitiveness.
Next-shoring, therefore, is a new strategy in manufacturing, something of a hybrid of offshoring, whereby manufacturing is decentralised to areas where labour costs were lower, and the more recent phenomenon of “reshoring”, which saw manufacturing return to its more traditional origins, such as in the US, in an effort to increase product quality and compete in the premium segments of the market that feature greater value added.
Next-shoring is not about the US or the EU trying to compete with the Far East or Latin America based on labour costs (a competition which has been lost even as the cost of labour is on the rise in these areas, such as in Brazil and in the more industrially advanced areas of China), but rather about focusing on quality, where labour costs have little impact (although they are still to be lowered, such as by drastically cutting the tax wedge in Italy), and on other factors, such as design, efficiency, safety, performance, cutting-edge technology, symbolic value, and so on.
In practical terms, one example of next-shoring would be producing cars or tyres in Brazil (or increasing production there) because demand in this growing economy is shifting towards greater value added and higher levels of performance and because there is already an efficient, high-quality supply chain there, as well as because the skill and capabilities of the human resources in the country continue to improve. In short, “proximity to demand and proximity to innovation”, in the words of the McKinsey Quarterly, and innovation in its broadest sense, encompassing digital technologies such as 3D printing, but also the biotechnologies and the nanotechnologies that are key in creating the new materials and all of the components of the knowledge economy, which are crucial in improving the quality and efficiency of manufacturing, while also making it more aesthetically pleasing and technically functional (hence design, an area in which China and Brazil are investing heavily along with the best Italian and European schools, including Italy’s polytechnic institutes in Milan and Turin) through new ways of uniting research, development, manufacturing and distribution.
The road to the future, from Europe out to the rest of the world, is an exciting one, and next-shoring is the next challenge to be overcome.