Winning the Future of Manufacturing

Welcome and greetings. I'm delighted to be here for this year's UPS Asia Technology Summit.

I visit this dynamic part of the world on a regular basis, and the pace of change I see on the ground here never fails to astonish me.

In many ways, Hong Kong is the nexus of Asia. And Asia is the center of global trade and the engine for the world economy. So it's fitting to discuss the power of technology here. 

At this conference, we'll discuss innovations that give businesses a competitive advantage like our new DIAD V, predictive analytics programs, Quantum View, and the latest with cold chain technology. The list goes on.

My speech will be a bit different. I want to talk about manufacturing, the point of production where all of the components in the global supply chain come together.

As a logistics partner to many manufacturing customers, I've identified 3 major trends that I'd like to discuss. They are: 1) the emergence of disruptive new technologies 2) the changing role of labor in manufacturing 3) shifting trade patterns and geopolitical dynamics.

To start the discussion, I'll give you a brief overview of the global manufacturing and economic situation. This year, world economic growth is expected to be 3.3 percent, down slightly from last year, according to the International Monetary Fund. With a risk of recession in Europe, growth in developed economies is projected to be just over 1 percent. By contrast, emerging economies are expected to grow about 6 percent. China, India, and other developing nations now account for more than half the world economy. These countries are the new engines of global commerce and growth.

Manufacturing reflects the broader economy and will probably ease a bit this year. In 2011, a terrible earthquake in Japan and flooding in Southeast Asia disrupted production. But companies have adjusted, and they've invested in making supply chains more resilient and flexible. 

Mega-trend #1: Disruptive new technologies

Just as technology powers logistics, it also powers manufacturing. And that brings me to the first trend I want to discuss today: the new technologies that are disrupting old patterns of production while also opening exciting new opportunities. What are the most impactful technologies in manufacturing? Here are three examples and what they mean to businesses in the future.

First, there's nanotechnology. For years, businesses have made things smaller and lighter. Remember that big cell phone you used to have? Or take a look at our old UPS DIADs. They were huge and clumsy compared to what our drivers use now. With nanotechnology, things get really small - down to the atomic level.

What does it mean to businesses? Some firms are using nanotech to solve manufacturing problems, to improve the quality of their products, or to make production more efficient.

The potential is enormous, and businesses are just starting to develop its potential. Those who figure out how to make things on this very small scale will win big in the future.

Second, robotics and artificial intelligence are improving at a rapid rate. Have you ever tried to beat a computer at chess? Good luck. Computers are much better than humans at processing data, and now they're good at analyzing it. Today's computers beat our smartest people at quiz shows. Next thing you know, they'll start asking for prize money!

What will tomorrow's computers do? They'll keep getting smarter, and artificial intelligence will have a major impact on business production.

As industries like automotive have proven, industrial robots are ideal for repetitive tasks. In the future, these machines will talk to each other more, and they'll adapt to specific purposes to improve manufacturing. For instance, they'll identify problems and fix them. Or they'll come up with new ways to improve product quality.

With this vast potential, businesses are ramping up spending on research and development. For instance, Foxconn, China's largest employer and one of the world's largest manufacturing companies, recently said they plan to add 1 million robots by 2013. The race is on to apply technology in factories and gain an edge on the competition.

A third technology to follow is 3D printing. Have you seen one of these devices? They actually print usable prototypes, just like we print documents.

What does 3D printing mean to factories? Designers are already using it. 3D printing is an effective way to refine prototypes for jewelry, footwear, machine tools, or other components. This technology lets businesses quickly test products before production, and it speeds time to market.

More and more companies use 3D printing to produce finished goods. With the ease of digital communications, you can email a design in one part of the world to a printer thousands of miles away. Just click print, and a finished product comes out of the printer.

Will everything in the future come from 3D printing? Probably not. The scale is limited. It's not for mass production. But 3D printing has the potential to alter global supply chains and production patterns.

I mentioned these three technologies, nanotech, robotics, and 3D printing, because they will have a major impact on the future of manufacturing. In each of these areas, the pace of innovation is getting faster, and businesses must adapt to stay relevant.

If you need to be convinced of the high stakes involved, just look at the list of once-mighty brands that have fallen. These casualties are widespread across industries - in digital photography, cell phones, brick and mortar retail, or print publishing. The news isn't all bad, however. New technologies open the door to opportunities and growth, often in fields we never knew even existed. Economist Joseph Schumpeter years ago called this process "creative destruction."

Better yet, companies aren't alone as they make their way through this uncertainty and turbulence. Successful manufacturers can rely on strong partners to help them manage their supply chains and stay ahead of the fast and furious pace of change.

Mega-trend #2: Increasing importance of labor skill

As we talk about manufacturing, it's hard not to mention jobs. The movement of jobs to other countries is a major concern, and it's easy to see why. Labor arbitrage causes friction and public anxiety, in developed countries as well as emerging markets. It's true that some low cost producers have an incentive to move factories to take advantage of lower wages. But that's not the whole story.

For one thing, labor costs are only a portion of manufacturing cost. Other factors are often much more important in determining final cost.

The secret to success in manufacturing today is not low wages but low unit labor costs. Let me explain. A skilled worker, who knows how to use and care for equipment and uses time efficiently, will beat less skilled competitors every time. By a wide margin. Why? That skilled worker makes goods at a far lower per unit cost.

Often, that advantage of having skilled and productive workers is the difference between profit and loss. And the higher the value of the product, the greater the importance of skill and knowledge.

So worker quality is paramount, not so much wage costs. And the quality of labor will become more important in the future.

A great example is Germany. Hourly compensation in Germany is 66 percent higher than in the United States. And wages in that country are far higher than in China. Sales of BMW or Mercedes Benz autos in Asia are booming. These Germany luxury car makers succeed globally with high profit margins because they invest in people, whether the cars are made in Germany or elsewhere. These workers have the education, skills, training, and equipment to make quality goods that command a premium price around the world.

In China, wage and benefit costs are up 15 to 20 percent a year. Those labor costs have increased because Chinese workers are more productive. The demand for their services is rising. And it will keep going up because Chinese workers are making higher quality goods that sell for a higher price point.

We see this trend in our business. The volume of express deliveries from Asia is up. That's how most high value goods are shipped, compared with sea shipping for goods with lower value.

With higher wages, the low cost advantage in manufacturing fades. As this happens, some of China's factory jobs move to markets with lower wages. 

Will China have manufacturing jobs in the future if wages keep going up? Absolutely. And the overall value of production in China will go up too. Why?

China's labor force is huge, and the workers are highly productive and increasingly skilled. Also, China is building a strong base in research and development as companies move these skilled jobs near production facilities already located in the country. China has an ample supply of young and talented engineers, and companies need these workers to sustain product quality and innovation.

The Chinese government is nurturing its manufacturing ecosystem for the long term. How? They are investing in transportation infrastructure and shifting production from the crowded southeast into the western part of the country. With good policies and other advantages, China will remain a manufacturing powerhouse for many years.

No longer do Asian factories make goods only for customers in developed economies. More and more, with the rise of the middle class, the customers are right here in Asia. And their influence is growing.

Remember what happened earlier this year when Apple Computer tried to launch its new iPhone at its store in Beijing? Crowds got out of control, and Apple had to close its store to prevent a riot.

As they gain disposable income, consumers in emerging markets have a thirst for manufactured goods, and they aspire to buy the world's hottest brands. They are a powerful force in the world economy today and will become more so tomorrow. 

As businesses compete to reach these new consumers, supply chains and production patterns will change. The trend of near-sourcing (making goods closer to consumers) will become more prevalent, especially if fuel costs remain high. Factory production and hiring last year was up in Mexico, which has a good labor market and offers low transportation costs into the world's largest market. Poland and Turkey are other strategically located nations also experiencing manufacturing growth.

Future prospects are excellent for these and other nations that have an ample supply of skilled manufacturing workers and favorable policies for trade and investment. The manufacturers that make the best use of labor and technology will win the hearts and minds of the emerging middle class and with them the future.

Mega-trend #3: Risk of protectionism

For the last decade, trade barriers have fallen, and that's good news for manufacturers around the world. Producers move goods across borders at lower cost and have more options to pursue their comparative advantage.

But there are risks ahead. The horizon is clouded by potential disputes over natural resources, threats of currency manipulation, debt problems, or social upheaval in the energy-rich Middle East and other parts of the world.

And there's protectionism. Trade bashing in the United States is getting louder with the weak economy and the presidential election this November.

Protectionism rears its ugly head in many parts of the world. For instance, Argentina has new rules that protect domestic production. Imports of phones, motorcycles, cars, wines, and many other products are restricted. Brazil passed similar policies to boost domestic production and restrict imports, both of which force consumers to pay higher prices and get lower quality products in return. In the long run, economic freedom is good for everyone, including manufacturers.

Asian nations are not immune to the temptations of protectionism. But this part of the world sets an example of openness.

Here in Asia, former political rivals have set aside differences to forge closer economic ties. The number of bi-lateral trading deals goes up every year. Trade within the Asia Pacific region has grown faster than trade with the rest of the world and already accounts for more than half of all exports. As a result of this leadership and vision of open trade, the developing Asian economies are now the fastest growing in the world.

And this region is poised for more growth with the emergence of pluri-lateral trade agreements. An example is the proposed Trans-Pacific Partnership, which involves nine nations. Pluri-lateral agreements are vital to the future of manufacturing, and ultimately the global economy.

Despite the risks and temptations of protectionism, there is good reason for optimism. Through 2025, global trade is forecast to increase 73 percent to more than $50 trillion. Much of that activity will take place intra-Asia, and globally positioned businesses will win this future.

Close:

In 2005, during the last UPS Asia Technology Summit, the world was a different place. Since that time, China has transformed into the world's second largest economy. New technologies have changed the way we live and work. A new Renaissance in trade has helped to lift hundreds of millions of people out of poverty and into the Middle Class.

What should we expect in the next seven years? More disruption is a sure bet. The future of manufacturing will be determined in large part by new technologies, the productivity and skill of labor, and the evolution of global trade. Fortunately, companies with strong partnerships and a willingness to adapt have excellent prospects for success.

Much depends on trade. If protectionism takes root and spreads, growth will slow. And manufacturing will wither on the vine. If nations launch trade wars and fight over natural resources, everyone loses. We went there in the 1930s, and that didn't turn out well. So let's learn from the mistakes of the past.

The trading nations of Asia offer a better way, an example for all of us as we build a globally connected economy for tomorrow. Join me in working toward a future of manufacturing progress, free trade, and economic opportunity for all citizens of the global village. And that includes you, me, and everyone else who strives for a better future.