U.S. Manufacturing Today Podcast

Episode #2: The End of Labor Arbitrage - Rebuilding U.S. MFG Strength With Veryable CEO Mike Kinder

In the second episode of U.S. Manufacturing Today, host Matt Horine from Veryable discusses the downfall of the 40-year labor arbitrage strategy in the U.S. manufacturing sector. Joined by Mike Kinder, CEO of Veryable, the episode delves into the recent shift highlighted at the American Dynamism Summit, where the need to rebuild domestic industry strength was emphasized. They explore the negative impacts of relying on cheap foreign labor, the exposure of operational inefficiencies, and how companies can now seize the opportunity for operational transformation. The discussion covers the pitfalls of labor arbitrage, the hidden inefficiencies it creates, and strategic advice for companies to move away from outdated models and embrace local sourcing and operational agility.

Links

Timestamps

  • 00:16 The End of Labor Arbitrage
  • 01:03 Interview with Mike Kinder
  • 01:39 Defining Labor Arbitrage
  • 04:39 Globalization and Operational Shortcuts
  • 08:20 The Hidden Costs of Outsourcing
  • 10:08 The Real Opportunity In Reshoring
  • 12:41 Advice for Companies on Operational Transformation
  • 15:10 Conclusion and Final Thoughts

Episode Transcript

Matt Horine: Hey guys, hello and welcome to the second episode of U. S. Manufacturing Today, sponsored by Veryable. I am your host, Matt Horine, head of reindustrialization at Veryable. We are excited to bring up to date information and be your go to hub for U. S. manufacturing and distribution industry news. With that, we're tackling a hot and long overdue topic today, why the 40 year labor arbitrage grift is finally coming to an end.

Just this week at the American Dynamism Summit, the Vice President called out the fragility of U. S. industry and the urgent need to rebuild domestic strength. And it's no surprise why. After 40 years of relying on cheap foreign labor and offshoring, the cracks are finally starting to show. We're seeing a wave of panic ripple through boardrooms as H2B visa restrictions tighten and tariffs rise.

But here's the real story. This panic isn't about lost cost savings. It's about decades of operational laziness being exposed. The companies that have relied on labor arbitrage shortcuts are now facing a reckoning, but for those willing to do the hard work of operational transformation, this is the biggest opportunity of a lifetime  to break it all down.

I'm joined by Mike Kinder, CEO of Veryable, whose recent blog post on this topic has been making waves today. We'll dive into why labor arbitrage was always a losing game and how companies can finally embrace operational sophistication.

Mike, welcome to the show.

Mike Kinder: Thanks for having me.

Matt Horine: I think this is a really big topic that a lot of people hear soundbites about and try to form early opinions on, but it goes back a lot further.

And so your recent blog post, the take on labor arbitrage, always being a losing game before we get into details on it. Can you talk a little bit about what's happening right now? What's causing the panic and kind of what's formed your viewpoint on this?

Mike Kinder: I think the first thing to do is define what we mean by labor arbitrage, because this has been probably the number one question that's come out of the blog and had people wondering what specifically we're saying is wrong here.

Cost out is usually a good thing. Productivity is usually a good thing. But the difference is an arbitrage is when you find something that should be the same, like a replacement. And you find the cheaper source for it. That isn't the same thing as finding a better way to do something. Like a faster way, a more productive way, that would be productivity.

So take materials for instance, most people have an easier time with materials. If you're buying steel for a dollar and there's another supplier that comes along for 90 cents that has the same quality steel, maybe better, that's an arbitrage. Okay, I can buy this for 90. Back in the day, we would call that deflation.

But when you do that around labor, what you're likely going to end up with is a series of low maturity tactics. And so you're always looking for the lower cost source of the same thing. And that being, like, your productive person on the shop floor. That same energy could be reapplied to how to do something faster or better.

And I think that's the point J. D. Vance was raising the other day as it relates to why this causes a stagnation with innovation. That's what we're seeing now is those muscles around innovation, those muscles around doing something faster, better, et cetera, have been atrophying because of this very tempting side of the equation of finding something that's just cheaper. Whether that's importing it or whether that's you export it.

Matt Horine: Right. It's fascinating. It's honestly shocking that so many companies and you've been in the operation space for a long time, but so many companies have built their entire profitability model around this cost out mentality or looking for the easy way or the easier path. And you said in your piece, it's not about just today's policies. It's about maybe 40 years of bad decision making, or at least the last couple of decades. You don't really hold back in that, and rewinding for a second, taking us back to when this really started, how did we get here in your view?

Mike Kinder: I used to say back in 2020, and you're a military man, so you know this better than I, you can't fight an enemy that you can't define. So who is the enemy here? And I think there's a few. One is call it the global banking system, or those behind currencies and currency values, bargaining power, you can create a geopolitical scenario where it makes sense to have buyers and it makes sense to have sellers that's been achieved through currency debasement, it's been achieved through interest rates, it's been achieved in a lot of kind of macro ways.

That creates a really enticing proposition for the buyer to stay a buyer and for the seller, the maker, to just double down on the making. What seemed to happen with globalization is a lot of that was behind it, but then you have a very tactical decision at the local level of, it's easier for me to run an arbitrage play where I can just take a piece of my operation here in, say, Detroit, and move that over to China or Eastern Europe or Vietnam, Mexico, and achieve this arbitrage play that's really easy to explain.

All I have to do is calculate the difference in labor wages, hopefully add back in freight, tariffs, customs, holding costs, inventory costs, all those things. And then come with a nice clean value prop. That's easier to explain than saying I'm going to dive into the shop floor and I'm going to figure out a way to cut our cycle time down by 50%. Because what that entails is about a thousand little improvements that I've got to make to shave 50 percent of the cycle time down. That's a really hard business case to write to a CFO who might be looking for the very tangible savings you're going to get on this tomorrow. That might not pay off for six months, but the latter would be the right thing to do.

Matt Horine: Seems like it's been the default playbook for a very long time for people to take these, what we would consider, shortcuts and Maybe there's entire industries that have never really developed a strong operational strategy around it. Would you consider it an addiction, something to that effect of being able to do those quick labor cost cuts and trying to do back of the napkin math on trying to look at cost cuts and those measures instead of achieving some type of operational excellence?

Mike Kinder: Really, I think the rationale is that operations has been looked at as a second class citizen, where the folks that actually know the truth aren't listened to. When the guy on the shop floor says, hey, this is complicated. He's not saying that to be difficult, he's saying that because it's true. The reasons behind these things are complicated.

And then some of the things that don't even sound complicated are complicated. If I were to tell you inertia is a reason why cycle times are way higher than they should be. That's real. That happens, right? People pace themselves to an expectation. It's very hard to change that expectation without changing something physically or creating something disrupted.

But you have to create it on the shop floor in order to recalibrate expectations. The hidden waste in the system, it's hidden from some people, but it's not hidden from maybe the supervisor on the shop floor or the plant manager. They know full, full well that half the time spent on the shop floor is not value add, right? So you're already starting with, for every dollar of labor cost you have in your plant, you're only getting probably at best 50 cents on the dollar in value add activity, right?

Like it's an open secret, everybody knows that.  The idea that it's an open secret, and now it's becoming a little bit more in the main discourse and more conversational, and you see the trends shifting on a national level, it takes people a step back toe to look at their actual situation and say, it's a pretty weak return that we've destroyed jobs or what were historically jobs and weakens operational capability.

Matt Horine: I think in your blog, you mentioned that nearly 25 percent of outsourcing plays actually end up losing money. Is this shift maybe back to this people picking up the banner of reshoring and bringing these types of things back or using mechanisms like tariffs to bring domestic production back up? Do you see a pretty good opportunity there to actually get rid of some inefficiencies or have people focus on the real problem?

Mike Kinder: I think it's actually going to give air cover for a lot of folks to unwind some very bad decisions and things that they should have done anyway, but now they can say they're doing it because of tariffs, but it's really because they were losing money on it from the beginning. So it, it, it happens due to a lot of the time due to the compartmentalization of metrics.

So if I'm a procurement manager and I am measured on deflation, and so if I have a million dollars steel buy and I can get that 10 percent cost out by moving it to China. So now I'm saving 10 percent on the new buy from China. That's going to look great on my metrics. But then who owns the freight? Who owns the customs costs? Who owns the duties? Who owns the inventory? Who owns the holding costs? All of that. Probably not the same person. So the one person claiming the 10 percent cost down is not also claiming the 20 percent cost in. That's hitting somebody else. That's hitting maybe the person that owns freight. Or it might be hitting the person on the shop floor who's now having to do a bunch of secondary rework and that's impacting productivity.

Now that my cost just went up because now I have all this rework, now I've got to do some more labor arbitrage to make up for that. Right? So it's like a snake eating its tail. So if you impose the tariff and, and everybody groans about that, but then you reshore this and you go, Wow, look, I'm actually coming out way ahead.

Yeah, you're not coming out way ahead because of this specific decision, it's because you're unwinding a bunch of bad decisions, like all those costs that you've got hidden throughout the organization and attached to freight, attached to productivity, attached here, those all leave the equation and the business performs better, right?

So I, I suspect that's going to happen in a lot of places and then folks are going to claim that as something that they've just done. No, it's just erasing bad guns.

Matt Horine: It's a pretty amazing read of the situation and how hidden expenses, not to mention quality issues from mass amount of imports and things that have been shifted overseas. The real opportunity, and you talk about this in your blog, but also in your work and you've been in operations for a long time, is fixing this the right way and the real opportunity around it. I think it's, like you said, pretty common knowledge at this point. That labor arbitrage has been and is a weak strategy. But the real question is what's the better alternative. And if a company wants to become truly competitive, where do they start? How do they start in this environment?

Mike Kinder: Maybe let me attack the thing you said there in the middle. And in the lead is this idea that importing a product out of China is going to be of inferior quality. Something like that gets hijacked a lot because what it doesn't mean is like you're getting a counterfeit material. No, that's stuff out of cartoons or fake news.

What it is more is like the knowledge around the part itself, and the very specific and a secondary processes that might not be defined, that can usually happen when you have a good kind of working relationship with a supplier or a customer.

Let me say this differently. So, if you're buying a cam from India, that cam might arrive per spec, but it's not greased, or it's not shaved in one spot, like all these things that have to happen to the cam for it to work in your assembly. That is much easier done when you have somebody nearby that you can talk to, that you can show, that you can actually partner with and bring the supplier into your site and say, Hey, here's how I use your cam. How can we collaborate on a way to get the costs down for you and for me and create more value out of this when you have a supplier way across the world, you got a language barrier, you've got a lot of structural barriers in between the relationship. You have to rely on the quality of the spec, let's say, both the spec that you design and their interpretation of it, and then if there's anything off, you've got to eat those kind of secondary processes.

That's where a lot of the waste in the system is, just on, call it communication. So if you've got a supplier in your industrial park that you can bring in your site every day that makes site visits and sees how their product interacts with your product, You can collaborate on efficiency solutions across the system that you couldn't otherwise, when you're very fragmented across the globe.

It goes back to our foundational thesis. And what we know to be true is that there's truly not a labor shortage in the U. S. And, you know, that's where a lot of these companies tend to believe that there's some type of labor shortage. And that's the reason for this arbitrage that's taken place. And it's more like a massive productivity gap.

Matt Horine: What's the one piece of advice you'd give to companies right now, if they found themselves with a lot of overseas suppliers or in cases where maybe they're still trying to play old models or staff to averages or do those types of things that are from the old playbook, what should they turn to and what's their next, what's their next move?

Mike Kinder: Move fast. You're not going to break anything. I promise you. The infrastructure exists. I think about it like an old highway where there's still eight lanes, but nobody's driving on it. There's weeds, there's overgrown brush, like that highway is still valid and it's still built for four lanes of traffic on either side.

So, jump back in it, and start driving on it, clear out the weeds, that's how you're going to reinvigorate the local supply chains, like all the infrastructure is there. And to your point about the labor shortage, this is something that like, fake news will talk about a lot because it's an attractive thing, it gives a reason for population replacement, it's a super handy political cudgel, but it's not real.

Cause there's so much waste in the system. So for example, we talk about this as it relates to welders, as it relates to CDL drivers and anything that is typically categorized under hard to find, or there's not enough.

Now, granted, there aren't enough welders, but any specific example of somebody saying they don't have enough welders, I guarantee you their welders are only welding 10 percent of the time.

So you have 10 welders in one if you rethought your operation strategically. And the same applies for assembly. Every single plant I ever ran, I had 70 percent excess capacity in every single assembly person I had.

Why? Because the other 70 percent of the time when they're not doing assembly work, they're looking for parts, they're looking for tools, they're interpreting drawings, they're doing rework, adapting to scheduling changes.

These are all controllable things that a savvy operation can work out of the system. So if you think you need twice as many assemblers, I got news for you. You have plenty of assemblers. Get rid of that piece of waste that is keeping your assemblers from doing assembly work.

But again, back to the first point, that's hard. It's not easy because what's keeping your workers from doing value at work is a thousand little things that you got to get on the shop floor and address.

Matt Horine: Right. Back to first principles on that. I think it's been a really insightful conversation, Mike. The fundamental foundation of all of this is that labor arbitrage and the model that has been doesn't work and it's a dead end. And so we appreciate you taking the time and coming on the show.

Mike Kinder: My pleasure. Thanks for having me. I like that dead end. I think that's exactly what it is, or at least diminishing returns and. Now's about the time to reboot the franchise started over where you do actually have a meaty set of priorities versus kind of milking that arbitrage play.

Matt Horine: Absolutely. If you're ready to transform your operations, check out Veryable and other innovative solutions that we'll highlight here on this show. Thank you for joining us for our second episode and following along in this rapidly evolving environment and learning more about how you can make your way.