AI is reshaping the economics of manufacturing faster than many leaders realize. CEOs must act quickly or they risk falling behind those who grasp the new logic of competition. Across sectors, AI-enabled production setups are changing conversion costs and unlocking productivity savings of up to 60%. And the stakes extend beyond the factory floor: roughly $1.03 trillion of manufacturing value is at risk of relocation out of Western Europe and the Nordics, with another $440 billion at risk in the United States. Against this backdrop, CEOs may be tempted to upgrade their existing factories immediately. That decision, however, isn’t always that straightforward—and a key question looms.

The results of our proprietary quantitative analysis, combined with a global survey of 1,000 manufacturers, reveal the tension. In some sectors, upgrading to Factory of the Future (FoF) capabilities in a high-cost country can be a more competitive option than offshoring, even if lower-cost countries also upgrade. But for other sectors, relocation remains the best strategy. To assess these choices, we developed a Manufacturing Competitiveness Index—a composite tool integrating 42 cost and qualitative factors.

Applying this index reveals highly differentiated outcomes: competitive advantage, parity, or a lingering gap. A food manufacturer based in Western Europe adopting FoF to serve its domestic market, for example, would be more competitive than relocating to China, securing a 14 percentage point cost advantage. Meanwhile, an engineered components manufacturer can reach competitiveness parity by upgrading its factories. And in electronics, relocation to China generally remains the better choice under pure cost considerations: a FoF-upgraded factory still faces a 15 percentage point cost gap.

• Strategic importance of localization
• Degree to which FoF can alter the cost position
• Ability to ultimately realize productivity gains
• Impact of sector-specific tariffs
• Local readiness, particularly in areas such as digital infrastructure and workforce capabilities
• Broader business context, especially whether it is a brownfield or a greenfield project

CEOs must determine not only where to produce in existing cost structures, but where the Factory of the Future can be deployed in ways that fundamentally shift cost structures and performance outcomes.