🚀 Faster, Please! — The Podcast #12

We’ve all heard the stories and statistics about the supposed death of American manufacturing. But America's industrial sector never truly went away. Many, many companies are thriving, and today's guest argues we're experiencing an outright renaissance. In this episode of Faster, Please! — The Podcast, I’m joined by Gaurav Batra, who previously co-led McKinsey & Company’s Advanced Electronics Practice in the Americas. Along with Asutosh Padhi and Nick Santhanam, he's the author of the new book, The Titanium Economy: How Industrial Technology Can Create a Better, Faster, Stronger America. This from the book:The Titanium Economy is the secret weapon of American industrial revival—the key to ensuring the country’s economic vitality as the Fourth Industrial Revolution progresses and we face steep competition from global rivals. The next few years will be critical, as the future growth of the Titanium Economy sector in the United States is far from assured. Investors, policy makers, and the public at large must appreciate the importance of providing more robust investment in these companies, as well as how their growth brings so many positive ripple effects for individuals and communities, providing more high-quality jobs and boosting the economic prosperity of communities and whole regions.So what is the Titanium Economy? Listen in to find out!In This Episode:* The US industrial renaissance (1:14)* The businesses of the Titanium Economy (7:48)* American industry and technology (12:29)* Workers in the US manufacturing sector (16:20)* Finding America’s next-generation industrial workers (21:26)Below is an edited transcript of our conversation.The US industrial renaissanceJames Pethokoukis: I think there's a caricature or perhaps a misperception about the US economy—I think you see it in the media—that the US economy is basically Wall Street, Silicon Valley, and big box stores. And that's basically your American economy, and it's certainly an economy that doesn't really make stuff in the physical world—with atoms—anymore. And the book, I think, is a corrective to that view. Why is that view wrong and, as you state, that the US is in the middle of an industrial renaissance?Gaurav Batra: Jim, you very accurately represented the perception of what's happened in the US economy over the last couple of decades. I think the story, whenever anybody tells it, is mostly about technology companies. It's mostly about financial services, mostly about Wall Street. As we started digging in, not just with the book but our work in the industrial sector, we realized that the reality is actually very disconnected with this perception. The reason we say that is, if you look at just pure numbers, still 20 percent of the US economy is completely dependent on US manufacturing. That number has not gone down. It may not have increased, but that number has sustained pretty well. If you look at employment, this sector still employs the bulk of the US economy's workers today. In terms of pure numbers, in terms of relevance, the sector never went away. It definitely slowed down because other sectors started growing, but manufacturing as a sector in the US still remained pretty staunch. That is at the sector level.As you unveil that a little bit and go under the hood, you realize that whenever we talk about Wall Street, we talk about the Facebooks, the Alphabets, the Apples of the world delivering incredible stock market growth. Everybody talks about how much of that you own in your portfolio. But the moment you start unraveling the industrial landscape, you actually see several—and the number is actually north of 20, 30—companies who have done actually fairly well over a much longer time period in terms of even delivering value to their shareholders. And these companies have done it not necessarily leveraging outsourcing, but they've done it by just strong, sensible business practices: how they run their companies internally, how they work with their customers, how they potentially create a niche for themselves in particular markets. For us, at least as we started (and I spent about a decade in this particular industry), as I looked at that perception, which was exactly what my idea was coming into the sector, versus what I took away from it after being a practitioner in the segment for about 10, 12 years: the perception and the reality don't match. I think the perception, as you rightly said, is all about Wall Street, all about technology, all about financial services. But the reality tells us that manufacturing has never gone away. Given what's happened over the last two years with the pandemic and the geopolitics of the globe around us, it is only telling us a flashing red [light] that this is actually going to get even more critical for all of us here in the US in the next couple of years.These are industrial companies. While they may not be classified as technology companies, they use technology. Consultants like talking about 5G and AI and cloud computing. But they're more than buzzwords. Those technologies are diffusing into the economy, and not just at places like Google or Amazon or Apple. Correct me if I'm wrong, I think what we're seeing in this industrial sector is these technologies are part of how they do what they do.Absolutely right. We think it's an essential ingredient to success going forward. To give you one example, there's a company called Bulk Handling Systems. It's based in Eugene, Oregon. They basically are recycling cardboard, cans, and plastic. Essentially stuff which has food in them. I think if you looked at them a decade earlier, they would tell you about all the manual processes, which is fairly unhygienic, about how somebody would have to pull that piece of food out of a cardboard can or a plastic can, and then put it in the recycling. Today, if you look at that company, it's using artificial intelligence, it's using latest-version technologies, it's using robots to find where these sediments are, getting them off the cardboard can and the plastics, and then essentially putting them through recycling. That's a very tangible example of how technology and the progress we've made there is really impacting the industrial landscape—and for the good. I think while this one might be on a production line—there are several others about how people are using similar techniques to ensure quality and efficiency on the production line—technology actually is also making these companies go to the next level of performance on pure, I would say, business processes.To give you another example, a place where I've seen technology help a lot of such companies is pricing. A lot of these companies create a lot of complicated engineering equipment. Equipment could be a boiler or a heat exchanger or a mixer for a food processing plant. It's not a standard thing you can buy off of Amazon. There's a lot of specifications going into it: temperature controls, material composition, process tolerances. People used to do all that work manually, in terms of negotiating with the customers, letting them design those kind of products. Today, they can go to a website. There's an electronic configurator, you can click and choose what kind of parameters it wants and it gives you a right outcome. And then similarly, it quickly tells you how much it's going to cost. A process which would have taken multiple weeks, in some cases months as well, is now getting compressed to a matter of days. I think technology will get pervasive. And the good part is, I think there's a very good fusion between what our industrial landscape does and what technology can provide to them to really make them go to the next level of performance, both in terms of meeting customer needs and satisfaction, and then, candidly, being much more robust [financially].The businesses of the Titanium EconomyIn those two examples, you've given two very different kinds of businesses. And in the book, you really give a sense of the span of the kinds of companies we're talking about. I wonder if you could give me a sense of the span of sectors that we're talking about.I think that's very relevant to discuss because I think a lot of times industrial is discussed as a monolith. It's very much discussed as a singular segment. But it's probably the worst articulation or the most inaccurate articulation of the segment we probably can come up with. Everybody has their own way of looking at it, the way we looked at it there are close to 90-plus what we call “micro-verticals.” And they essentially, as you rightly said, cover the whole spectrum.We wake up in the morning, we have a cup of tea or cup of coffee. The beans, which are being sent to us, have come from a food processing plant, which is either utilizing equipment or products which are being manufactured by companies, many of them here in the US. We pick up the phone in the morning to check our text messages, check our emails. The chips behind those phones—this has been obviously in the news of late quite a bit—come from semiconductor manufacturers. And the whole semiconductor industry, which is $400, 500 billion in size today, relies on innovations in precision manufacturing, which have been gaining over the last multiple decades. We get in our cars to go to work, automotive industries are now playing a big hand in it. We come to the office and we start writing on a piece of paper. The paper industry is there. Lunch is delivered to the office. It's packaged in specific packaging that's coming from companies like Sealed Air, where they're working on top-of-the-line packaging to keep the quality and the hygiene of the food high. And similarly, they're looking at packaging pallets of machinery and equipment, which is getting transported from one part of the country to the other part of the country.Anything I literally can touch is influenced by manufacturing in a meaningful way. So the spectrum is wide, and I think it's very important for us as members of society, as investors, as executives, to understand how complicated and how heterogeneous this segment is. Because once we start realizing that, not only do we see the importance of it in our daily lives, but then we also as executives, as colleagues, as workers, as investors in the segment, we are able to then understand the true value of these companies. A great example which always comes to my mind is a company called Graco. It’s based out of Minneapolis. What they specialize in is high propulsion of fluids. So they get spray painting fluids in a can. They figured out how to get peanut butter in a jar. If you look at their segment, I can call them industrials, but it’s nowhere related to tapping the automotive space or tapping the aerospace space, but they're looking at a particular niche in the market, and then having that change in mindset, having that change in how they view or how we view them then helps us appreciate that they're a market leader and they're a market leader in a need, which is not going to go away. We will be spray painting cars or spray painting something else. We will be eating peanut butter for a while.I think that's a great example because I don't think people think about flow control and fluid management very often. It's not a strict consumer name that people understand, nor is it manufacturing where you think of some sort of big factory, necessarily. But that is modern manufacturing that is essential to the modern American economy.Absolutely. I think there are countless examples like this, where companies are serving a very critical need. They're just not consumer brands, so we don't know their names. We can look them up if we wanted to. I think that's where they start suffering a little bit, in terms of both our mindset and our perception of these, and to the first question you asked: I think that's what then perpetuates at least our feeling that the whole economy is about the Facebook and Alphabet and Apples of the world, when actually there's a lot more innovation and value coming from the manufacturing sector as well.American industry and technologyTalking about technology and how these companies are using it. Again, I think there's a stereotype that this technology is employed by companies just to replace workers with some machine. I don't think that's probably the whole story.I think that's definitely not the full story, at least as well as my experience is concerned. Because I think there's definitely displacement. I think if anybody says that there is no displacement, then I think they're wrong. There is displacement in terms of what people are doing today. When technology comes in and makes it more efficient, then obviously as a responsible financial operator of a company, you would think about, “Hey, there is capacity opening up, so what should I do with it?” I think in the long term, there are definitely much more benefits, in my opinion. One is that the companies become much more healthier-going concerns, that they're able to invest in their own growth. And they can grow through investing in their own company’s expanding markets, they can go acquire somebody else. So there is, in the end, a greater good coming out of the fact that the company has not become healthier concerns.Then number two is, I think it does create a new job category. How many people would've been thinking about hiring data analysts or digital product managers in industrial companies 10 years earlier? Probably not many. But today, if you go on any job board, there are so many of these employment opportunities existing out there, which will create a new set of workers, a new set of employment opportunities for the economy. So my sense is, at least given what I've seen from my vantage point, there will be short-term displacement, which I think, again, with the companies getting to be more healthier concerns, we'll probably minimize the short-term displacement aspect of it. But in the longer term, there is a lot of value to be driven out of this. It will improve our productivity. It will make everything better. And then as that happens, what we have seen also, and we catalog in the book through what we call the Great Amplification Cycle, as companies become healthier concerns, the communities and the workers which work there become more prosperous. And with the workers becoming more prosperous, the local economies benefit. And we genuinely believe, just given how manufacturing is—it's not localized, it has to be dispersed, it has to be all over the country—that's one very effective level we have to bring down the inequality we are seeing today in our country. So going to the Midwest, going to some of the “rust belt” and re-invigorating manufacturing here, will really have great-second order effects to the communities there.That's a good point. So where are these companies? Where are they located?They are everywhere. Funny enough, when we started compiling the research for the book, our impression was they were in the “middle coast.” Not the east coast, not the west coast, mostly in the middle coast. But interestingly enough, they're actually on the east coast and the west coast as well. Tesla is a very good example of a manufacturing company running in Fremont, California, in the heart of Silicon Valley. But these companies are everywhere. I think HEICO, if you look at it, based out of Florida, their businesses are in 80 cities across the country. Simpsonville we've cataloged in the book as a great example on the east coast where it's benefited from the tire industry and Sealed Air being in that particular region. Obviously the Midwest has a bunch of these around Milwaukee, and a lot of clusters are coming up around the Texas area. So they literally are everywhere, and that's why I think they are actually a great vehicle for ensuring the economic prosperity of the country, because just the reach is so vast.Workers in the US manufacturing sectorDo we have a sense of sort of the employment numbers? How many companies are we talking about, and do we have a sense of the employment?If you look at the industrial structure itself, I think it employs, at least from my last count, close to 18 to 20 percent of our overall labor base. I think if you look at it purely from a perspective of the number of companies, there are nearly 4,000 companies in the US which are industrial or manufacturing something or the other. Now, the cool part about all this is, in my opinion, most of them—I think three out of four of those 4,000 companies—are actually private companies. So you'll not find them on the NASDAQ or the Dow Jones. They're not traded publicly. They're held by private and mostly are family-owned companies which gives them a sense of resoluteness, which is very unique.And then number two is, close to 80 percent of these folks are actually fairly small in size. So south of $5 billion of revenue. These are, in the end, in numbers, tremendous. We hear about all of the big ones, but more than 75 to 90 percent, depending on what metric you look at, are companies which are not being publicly traded, are much smaller companies, and they are all over the country. That gives them the reach and the numbers. As I mentioned, they are close to about 18, 20 percent of the employment base. I think the coolest part about these guys, as we think about their impact on employment, is the two factors about this industry, which are pretty different and unique. Number one: You don't necessarily need a college degree to be a participant in this industry. People with vocational training, welding, fabrication training, can go join this industry that has really healthy careers. That's one. The labor market they cater to is much broader than other sectors, like if you take service or technology for that matter. And then number two: Compared to several other sectors, the pay in this sector, given that it's a fairly stable sector, is, depending on what analysis, anywhere between 40 to 100 percent higher than the average. More people get the chance to get employed. Over time, they all learn more than what their potential alternatives might be, and their reach is pretty high. All these factors have contributed to a huge engine for employment. And then, in turn, economic growth.How big a challenge is finding all those workers for these companies? That seems to be a big one.That's a huge one. And I think as we looked at least for the book and looking down [at] the things we need to change, the things which executives need to change about how they talk about their companies, how they run their companies. But I think the biggest change we need is in the labor supply area. And I think this is where the government and the public agencies have to come in and play a more active role. We're seeing some of that happen now with the CHIPS Act recently where obviously the government is putting a lot more emphasis on the local manufacturing industry. But I think this is the biggest challenge. Even if you compare the US with some of the other countries like Germany or China for that matter, that's where I think there is a big scope of improvement for us to essentially enable some of these public agencies, through funding, through programs with community colleges, through programs with vocational institutes, to essentially get more and more of that supply up. I think if you look at COVID times certainly when demand for a lot of these products like PPE or some of the home equipment went up because everybody started staying at home, the biggest challenge actually was to get workers to get to the factory, to be able to run these factories on more than one shift, to be able to cater to the increased demand. So far what we've seen, the government is headed in the right direction. I'm assuming more will come, which I think will be really fantastic.In the meantime, what we've seen is just companies doing things by themselves. I think one [thing] I really enjoy and I feel is encouraging is if you look at a company called IDEAL Industries, they have what they call an IDEAL Olympics. That's the place where they basically bring in talent, which is like welding talent, which is like machinist talent, and really attract people to that job category and job family and try to increase supply locally for them, for labor. So you’re absolutely right, it’s a huge problem. I think a lot more needs to be done urgently, because this is not something which gets solved overnight. So any move we make today will give benefits in a few years’ time. But just given the importance of the sector and the fact that this is among the biggest bottlenecks today, I think requires immediate attention on fixing this problem.Finding America’s next-generation industrial workersHow much of that talent problem is just a cultural problem where kids think, “Boy, I'd love to work for Google,” or, “I'd like to be a social media manager. I don't want to be a welder,” even though that might be a more satisfying job over the long term than being a social media manager. And that's where the jobs are; those aren't just 1950s jobs. Those aren't just middle-20th-century jobs. Those are 21st-century jobs still.You're right. I think that mindset from our side, what we teach our kids and how we inform them about what their options and career trajectories might be, I think is critical. And I think that comes back to our homes and comes back to our societies. I remember, we were interviewing a CEO for the book, and the quote that stuck with me was, “I have a harder time getting people in my factories because they much rather would be baristas at a Starbucks than actually come work in my factory when they would literally earn at least two times that amount within a few months already.” I think that really points to the fact that there is an element of training people, but I think the first step starts at home and first step starts in our minds: how we can get to our kids and our families the value and the purpose a manufacturing job can provide them. I think this is where we should get ahead of it as industry executives to talk about how prosperous lives can be in this particular segment, and then also change the image of the segment. Even before I started working in the segment intensely, my picture of a factory was, you are greased up, you are dirty, it's high temperatures, it's not exciting.Loud. Very loud and hot.Very loud. In some specific areas that might be true, but if you go through, I would venture 90 percent of the factories, they are spick and span. There is automation everywhere. There is safety. Working conditions are much different than what our perceptions are. So I think there has to be an element of that teaching, which the executive needs to do, about what kind of careers would manufacturing be able to afford folks. And then there's teaching at home also, I think, which we need to at least give to our kids, that there are multiple options: social media and retail and whatever, but we should also then be making sure we are talking about manufacturing as a real alternative given what it can afford.We talked a little bit about training. Is there anything else you’d like to see the federal government do?I think one thing which has always been an interesting topic for me is, I think if you bring focus and we bring transparency and accountability to what we do, we typically make good progress. So I would love to see—I don't know how best you put it… We have the surgeon general for the US. Why is there no chief manufacturing officer for the US? Somebody whose job is to ensure that the sector is being done in as healthy a state as possible, somebody whose job is to make sure we're not surprised, for example, with what we saw at COVID. Suddenly we had shortages of critical things at home. Obviously dollars will help, funding will help, policy will help. But I think to make sure that we don't play catch up all the time, one thing I would love to see, and this is my personal opinion, is something like a CMO for the United States. It's his or her job to make sure that they are thinking about the sector, what the sector needs not just today and five years down the line, 10 years down the line, and to make sure we don't kind of fall back. We always are proactively ahead of the curve on that. So that's one idea at least as we were doing our research that kind of stuck with me. 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