How Supply Chain Disruptions Are Accelerating Robotics Adoption

Over the past few decades, many corporations in advanced economies took advantage of low trade barriers and globally integrated supply chains to outsource manual tasks to workers in countries with lower labor costs. But recently, exogenous risks such as trade conflicts, geopolitical tensions and, more recently, the COVID-19 crisis have companies rethinking their supply chain strategies. Reshoring manufacturing to their home countries and diversifying supply chains are now priorities as firms look to maintain greater control and avoid costly interruptions. While some may expect these efforts to increase labor costs, we believe companies will rely heavily on the latest robotics and automaton technologies to help control expenses.

Offshoring Transformed Supply Chains

Historically, offshoring manufacturing offered companies an attractive alternative to domestic production. Featuring lower labor costs, attractive exchange rates, relaxed regulatory environments and strong support from local governments, many firms outsourced or offshored much of their manufacturing operations to developing economies. China in particular became the world’s factory, accounting for approximately 13% of total global exports and 11% of total global imports in 2019.1 Other emerging markets followed suit, with countries like India, Vietnam and Thailand courting companies to establish factories within their borders.

Today, the world trades approximately US$20 trillion worth of physical merchandise.2 Emerging economies represent almost half of that volume, totaling US$8.2 trillion in exports, as much of these goods are assembled in emerging markets and consumed by richer countries.3 Since China entered the World Trade Organization (WTO) in 2001, the US lost over 4 million manufacturing jobs.4

Yet, we may be on the cusp of a paradigm shift as companies realise the unintended consequences of offshoring. The US-China trade conflict raised concerns about the fragility of global supply chains. Brexit and the United States-Mexico-Canada Agreement (USMCA) further damaged confidence in international trade agreements. In addition to these policy-driven concerns, the COVID-19 crisis and its impact on Chinese factories highlighted the risks associated with concentrating manufacturing efforts within specific geographies.

In other words, companies must prioritise supply chain integrity over the cost savings associated with offshoring. While utilising low cost labour overseas may improve profit margins, a supply chain can break down due to a changing geopolitical landscape, health risks, or other tail risks.

In the wake of the COVID-19 crisis, companies are becoming increasingly aware of negative consequences caused by disruption in global supply chains. Approximately one month after the COVID-19 arose in Wuhan, 31% of factories remained shut down in China and 32% had people working from home.5 Restarting production after an extended shutdown can take weeks for the supply chain to fully recover. Major corporations have warned that the extended supply chain disruption could result in lost sales. Apple, for example, announced that they do not expect to meet the revenue guidance provided for the second quarter of 2020 given supply-side disruptions.6 Auto companies around the world also halted some of their production as a result of shortages of parts supply from China. Nissan, Fiat Chrysler, Hyundai, Honda, and a few others among the group of car manufacturers that have announced supply disruptions.

Securing Operations Through Reshoring

Labour costs in developed economies are undoubtedly much higher than in emerging economies. While manufacturing wages in China average CNY 72,000 per year, which equates to about US$10,000, the US average of US$46,000 is more than four times higher.7 Such dramatic cost differences historically accelerated the trend of offshoring. But manufacturing locally has non-monetary advantages that ought to be considered as well, such as bringing operations closer to company management, research and development, and customers. Onshore manufacturing also operates within domestic regulatory regimes, which are more familiar to local firms and often more stable than international agreements.

Robotics Can Accelerate Reshoring Efforts

As companies consider the tradeoffs between onshore and offshore manufacturing, robotics and artificial intelligence are likely to propel onshoring. Automation allows companies to offset some of the costs of reshoring by enlisting robots to complete certain tasks rather than human workers. Robots work continuously and can complete certain tasks faster and more accurately than humans, at a lower cost.

Some studies show that robotics adoption is correlated with declines in offshoring. In developed economies, a 10% increase in robotics applications results in -0.54% growth in offshoring.8 In South Korea, the Ministry of Small to Mid-size Enterprise (SME) and Startups, recently announced that efforts will be center towards reshoring manufacturing aided by smart factories.9  In the US, the Reshoring Institute published its 2019 annual survey results, showing that more than half of executives reported that they were planning or considering reshoring activities in the next five years.10 The survey also found that over 80% of respondents are looking into new software systems. And 70% are considering investing in robotics.11

Lower costs are a major factor. Despite an estimated cost of US$250,000 for a sophisticated industrial robotic arm, a company can potentially reach a breakeven point with traditional labor costs in less than two years.12

Over time, this economics are likely to only become more attractive as the cost of robotics falls. Over the last 30 years, the average robot price has fallen by more than 50% in real terms while labour costs have increased over 100%.13

Falling costs, however, are just one reason for the increasing adoption of robotics. Another consideration is ease of acquisition of robots. New manufacturing technologies, the proliferation of data and computing power, and customer preferences for on-demand manufacturing are driving significant changes in the way goods are produced. Companies can now look to robotics-as-a-service (RaaS) subscriptions to scale robotics into their manufacturing processes, leasing units to reduce upfront costs and entry barriers to technological acquisition.

Finally, improving robotics and AI technologies are further driving adoption. Robot dexterity continues to improve due to advanced 3D vision capabilities and end-of-arm tooling. They can now carry pods of inventory alongside humans in warehouses and adroitly pick and place fragile items. A robot can carry out these tasks with little to no downtime, or even use network-connected sensors to predict and avoid failures ahead of time.

As a result of these trends, industrial robot sales continue to grow. From 2013 to 2019, sales grew at a compound annual growth rate (CAGR) of 15%, reaching approximately 420,000 installments in 2019.14  The International Federation of Robotics estimates that annual installations will increase to 584,000 by 2022.xvi This estimate could prove to be on the lower side if reshoring efforts accelerate in this new global paradigm.

Robot density, which measures the number of robots per 10,000 workers, shows the potential for robotics adoption to grow over the longer run. Currently, there are just 99 industrial robots per 10,000 manufacturing jobs around the world, implying a robot density of about 1%.15 But robot density for manufacturing hubs like Singapore and South Korea stands 8 times higher at 8.3% and 7.7%, respectively, and continues to rise.16 Large countries like the US, Germany, and China remain much lower than these levels, but could converge over time as robotics adoption accelerates.

Conclusion

We expect the multi-decade trend of offshoring to reverse as companies become increasingly concerned about supply chain integrity. Disruptive macro events like trade conflicts and global health emergencies bring uncertainty to companies’ operational capabilities and supply chains. As robotics and automation becomes more capable, cheaper, and easier to implement, it is likely to accelerate reshoring even further as firms realise the benefits of localised manufacturing outweigh the risks of producing goods abroad.

This document is not intended to be, and does not constitute, investment research as defined by the Financial Conduct Authority