Global Navigator from KPMG Economics

1. Manufacturing under pressure. Manufacturing is a competitive industry squeezed by trade policy changes, labor shortages, energy price volatility and structurally higher interest rates. The model of the past is shifting.
2. The new geography of production. North America and Europe have been the biggest losers over the past few decades, ceding manufacturing to Asia. China is still the world’s biggest producer, but new competition from Southeast Asia followed by Central Asia and the Middle East is siphoning market share.
3. The evolution of the industrial sector. The lowest cost producer is no longer the winner. Resilient supply chains are taking precedence as firms grapple with many uncertainties and industrial policies.

Manufacturing under pressure

Manufacturing is historically the key for countries to climb the development ladder, rising from agrarian economies toward services, or consumption-based, economies. Over time, supply chains became more complex, incorporating larger shares of international input in search of low-cost manufacturers. Only a few countries including Indonesia and Israel have more domestic content in their goods exports today than in 1995.

Traditionally, the lowest cost manufacturers produced goods for the rest of the world until they were replaced by an even lower cost manufacturer. One example is furniture production that moved from the United States to China and is now migrating to Vietnam. 

Even before the latest tariffs, a 2024 KPMG survey found that 80% of US executives were reconfiguring supply chains to be closer to the US. This trend started when the pandemic exposed gaps in supply chains, such as single-source suppliers.

Trade policy shifts require a more complex set of sourcing criteria no longer focused on costs. Geopolitical relations, government stability and strength of the judicial system, or rule of law, are among the factors accounting for a larger share of the decision-making process. The recent announcements of trade deals offer some clarity, though uncertainty remains high as tariffs are still being levied. Court cases regarding the legality of tariffs continue, while the US-Mexico-Canada Agreement is up for renegotiations in 2026.

Amid the rise in global economic policy uncertainty, purchasing managers’ indexes (PMIs) are flashing yellow. Manufacturers are proceeding with caution amid shifts in the global trading order. Both former manufacturing giants and new competitors are wavering between expanding and contracting activity until they see policy stability.

Beyond trade, global firms face a common set of challenges. Labor shortages due to aging demographics are a growing trend. Energy price volatility triggered by hot wars, supply and demand imbalances, speedbumps in energy transition and technology and infrastructure constraints are challenging manufacturers. Changes in trade policies and structurally higher interest rates are squeezing margins, which limit capital expenditure. Protectionism is causing nations and firms to look inward for suppliers and buyers, resulting in more costly supply chains.

The manufacturing model of the past—built on lowest cost sourcing—is being replaced by one that prioritizes resilience. Firms are investing in automation, virtual manufacturing models and AI-backed forecasting to decrease exposure to labor shortages and supply chain shocks. Smart factories, which integrate cutting-edge technologies, are transforming manufacturing to anticipate maintenance needs, improve visibility and support dynamic production workflows.

A Rockwell Automation survey found that 95% of manufacturers are investing in or plan to invest in automation in the next five years. These investments are not just about cost savings; they are strategic. Modular and regional supply chains build resilience against shocks like the 2020 pandemic. Critical input, sourcing redundancies and near-shoring bolster value chain resilience. Low complexity product manufacturing can be up and running in four to six months—that’s agility.

A manufacturing boom will not be accompanied by the same job creation as in the past. These new technologies are aimed at improving production speed, quality control, waste, safety and energy. The share of the US labor force employed in manufacturing fell below 8% earlier this year, down from a high of 38% in 1943. While workers will need higher level skills to interact with production systems, fewer of them will be required.

Public investments

Industrial policies, which are strategic government programs aimed at promoting and developing specific industries, are no longer popular in only a few centrally planned economies. In the US, the Inflation Reduction Act and CHIPS and Science Act, the European Union’s Green Deal Industrial Plan, China’s Made in China 2025, India’s Make in India and Japan’s Resilience Strategy are supporting the build-out of additional domestic manufacturing capacity.

These structures develop national interests but risk splintering finely tuned supply chains developed over years or decades in high-tech industries, built to lower costs. Shifting trade and energy policy, geopolitical uncertainty and regulatory changes relating to ESG, AI, industrial policies and FDI screening, are forcing firms to juggle more priorities. 

Manufacturing is facing a pivotal moment. Everything from shifts in trade and industrial policy to aging demographics are eroding and even severing global supply chains. The traditional model is becoming obsolete as companies move away from prioritizing the lowest cost bidder. Countries that offer stability, incentives, favorable trade terms and a skilled workforce will capture market share, while those that do not adapt will be left behind.