Six themes for the future of manufacturing

Manufacturers are in an age of accelerated change, and the ongoing turbulence can cloud their long-term plans.

To achieve clarity and success, many companies need to modernize their businesses. Yet, their modernization priorities can shift as their challenges keep changing. To prioritize and plan for your business, it’s important to understand the drivers behind the ongoing change. Consider six important themes that economist Dr. Shawn DuBravac said are forming the future of manufacturing.

Six themes for the future

1. Inflation

“Forget the buzz around low inflation rates,” DuBravac said. Prices remain elevated, and there is pressure in key areas like gas prices, which remain 20% above their pre-pandemic levels. Manufacturers are experiencing these higher costs across the board, in the form of wages and material costs. As a result, there are pockets of the economy in recession, like real estate, and manufacturing is arguably contracting across the board.

Even with aggressive cuts, the fed funds rate could still be 3% at the end of 2025 — as opposed to the last decade’s average rates of 1.8%. A 30-year mortgage is still over 6%. Home mortgage rates are not an obvious influence on manufacturing costs. However, this can pose a challenge for large manufacturers negotiating wages, as the median sales price of houses has risen 50% over the last decade — and even more in some areas — while some unions are increasing their negotiating power.

2. Labor challenges

DuBravac noted the labor market dynamics that drove wages up remain firm. Wage increases for hourly, non-supervisory workers have stayed around 4% year over year, and workers — especially older workers — will continue to bargain aggressively because they feel this moment is their best shot. This enthusiasm for tough negotiation is being compounded by a fear that automation will take jobs. Depending on how it’s implemented, automation can save jobs and pensions by boosting efficiency, production and revenue — but, getting to that consensus will take some very honest and difficult conversations. 

Manufacturers need new training and technology to increase productivity because their workforce is aging — the average age is 44 — and earning increasingly high wages. While manufacturers are retaining employees, they also struggle to attract new employees. Those who leave a manufacturing job often leave the industry completely, for service or retail jobs. New recruits are reluctant to enter the industry. Many prefer work-at-home jobs with flexible hours, or they are attracted to high-tech jobs and more entrepreneurial opportunities. Plus, a historically high percentage of men between 25 and 54 — about 11% — are not looking and are out of the workforce altogether.   

Manufacturers might not be able to offer flexible locations and hours, but they can be flexible in other ways. Companies can speak to the social and moral values of younger workers, add incentives or gamification to the workplace, foster workforce development and even create more entrepreneurial roles. Automation can help convince younger workers that a manufacturing job is more modern than they envisioned. But these shifts can take time, and manufacturers are used to a long-term horizon. Decisions about locations are a 50-year commitment.

Now, manufacturers need to structure work in new ways that reflect the younger generation’s way of working. Plants need to refine the interactions of humans, machines and process flows that are key to efficiency and data gathering.

3. Concentration in the U.S. 

Manufacturers seem to be betting on the U.S. in the long run, DuBravac said. Construction spending by manufacturers is twice what it was pre-pandemic. It’s at about 13% of total construction, with even higher numbers in some southern states. Electronic manufacturing constitutes about 60% of this spending — much of that is semiconductors. This shift to electronics manufacturing could change the nature and quantity of manufacturing in the U.S. When new construction comes online, employers need workers to fill their positions, and the labor headwinds will continue to pose challenges.   

Some American manufacturers will maintain a presence in China. While Chinese economic growth is slowing, exacerbated by aging capital stock, it still offers very low labor costs. It's also a large consumer market that companies want to access. 

Some manufacturers will look at countries other than the U.S. and China. India has been expanding its manufacturing sector by introducing incentives, improving infrastructure, and developing Special Economic Zones to attract both foreign and domestic investment. Mexico’s proximity to the U.S., competitive labor costs and established industrial base make it well-suited for companies that favor local partners. More manufacturing could also go to Africa, which is the world’s fastest-growing labor market and has many high-demand critical metals, like cobalt.

4. Supply chain shifts

Ongoing tariffs on Chinese exports have prompted some U.S. manufacturers to shift away from Chinese partners, in favor of partners in the U.S., Mexico and Canada. At the same time, as the Chinese economic growth has slowed, Chinese producers have looked to foreign markets. For example, Chinese steel exports have risen sharply, increasing more than 30% last year, and exports could see a similar rise again this year.

Approaches to inventory management are also in flux, and vary by manufacturing sector. Non-durable goods manufacturers are holding less inventory than they were pre-pandemic, while durable goods manufacturers are holding higher levels of inventory. However, this could shift in the coming year.   

Adopting a just-in-case approach over just-in-time may not be viable if Wall Street is wary of high inventory levels. Conversely, low inventories in sectors like the auto industry drove prices higher. Manufacturers must balance the reassurance of just-in-case with the cost savings and pricing benefits of just-in-time.

5. Deceptive consumer realities

Consumer savings, boosted during the pandemic, are being spent down as consumer spending continues. The U.S. personal savings rate is now under 3%, failing below pre-pandemic levels. Moreover, rising delinquency rates suggest consumers may be facing increasing financial strain. For the moment, wage growth and stock gains are mitigating the effect of reduced savings. This feeds consumer confidence and eases resistance to spending.

However, even with the mitigating influences, consumers are starting to show hesitance about larger consumer goods. If wage growth decreases, that hesitance will intensify. 

6. Beyond digitalization

In 2000, we were still a largely analog society. Only about 40% of homes had computers, and just 3% had broadband. That has all changed.

The next iteration is what DuBravac calls “data-fication,” and AI will drive much of that change. Humanoid robots with AI technology can already learn tasks, observe their environments, and decide what to do next. The implications for manufacturing are profound. We could see automated factories with little or no human presence. Between advanced robotics and increasingly sophisticated products, U.S. manufacturing could achieve the most efficient use of capital in the world.