How will global supply chain disruption drive robot adoption?

​ Diversifying supply chains has become a priority as companies look to maintain greater control and avoid costly disruptions, moving manufacturing onshore. While some may expect these efforts to increase labor costs, companies can help control and reduce costs by embracing robotics and automation.

Outsourcing Transformed Supply Chain

Historically, offshore manufacturing has provided companies with an alternative to domestic production. Attractive alternatives. With low labor costs, attractive exchange rates, a loose regulatory environment and strong support from local governments, many companies outsource or offshor much of their manufacturing operations to developing economies. In particular, China has become the world's factory, accounting for approximately 13% of global exports and 11% of global imports. Other emerging markets have followed suit, with countries such as India, Vietnam and Thailand approaching the company to build factories within their borders.

Today, approximately $20 trillion worth of physical goods are traded globally. Emerging economies account for almost half of this amount, with exports totaling $8.2 trillion, as most of these goods are manufactured and assembled in emerging markets and consumed by wealthier countries.

The Consequences of Offshoring

However, as companies realize the unintended consequences of offshoring, they may be in the midst of a paradigm shift on the cusp of. The U.S.-China trade conflict has sounded the alarm about the fragility of global supply chains. Brexit and the United States-Mexico-Canada Agreement (USMCA) have further undermined confidence in international trade agreements. In addition to these policy-driven concerns, the COVID-19 crisis and its impact on production plants has highlighted the risks associated with concentrating manufacturing jobs in one specific region.

In short, companies must prioritize supply chain integrity over the cost savings associated with offshoring. While leveraging low-cost labor overseas may improve profit margins, if the supply chain is disrupted due to changes in the geopolitical landscape, health risks, or other black swan events, revenue will be lost, resulting in no product to sell.

After the COVID-19 crisis, many companies have become increasingly aware of this truth. After the outbreak, about 31% of China's factories were closed and 32% of people worked remotely from home. Given that many factories implement just-in-time production, restarting production after a long shutdown may take weeks for the supply chain to fully recover.

Some businesses have warned that continued supply chain disruptions could lead to more lost sales. Car companies around the world have also halted some production due to shortages of parts from China. Nissan, Fiat Chrysler, Hyundai, Honda and a number of other automakers have announced supply disruptions.

Ensure operations through reshoring

Labor costs in developed economies are undoubtedly much higher than in emerging economies. While the average wage in China's manufacturing industry is about $10,000 per year, the average wage in the United States is $46,000, more than four times higher. This huge cost differential has historically accelerated the trend toward offshoring. But local manufacturing has non-monetary advantages that should also be considered, such as bringing operations closer to corporate management, R&D teams and customers. Local manufacturing also operates within domestic regulatory regimes, which are more familiar to local businesses and often more stable than international agreements.

Robotics could speed up reshoring efforts

Robotics and artificial intelligence as companies consider trade-offs between onshore and offshore manufacturing It is likely that there are unknown factors that tilt the scale in favor of onshore production. Automation allows companies to offset some of the reshoring costs by recruiting robots instead of workers to complete certain tasks. Robots can work tirelessly around the clock and complete certain tasks faster and more accurately than humans, all while requiring no pay raises or benefits.

Some studies have shown that the adoption of robotics is associated with a decrease in offshoring. In advanced economies, a 10% increase in robot adoption leads to a 0.54% decrease in offshoring. South Korea’s Small and Medium Enterprises (SME) and Startup Administration recently announced that it will work to help the manufacturing industry return to the market through smart factories. The American Reshoring Institute has released the results of its 2019 annual survey, showing that more than half of business executives said they are planning or considering reshoring activities within the next five years. The survey also found that more than 80% of respondents are considering adopting new software systems. 70% are considering investing in robotics.

Lower cost is a major factor. Although a complex industrial robotic arm costs approximately $250,000, companies may reach a break-even point on traditional labor costs in less than two years.

Total Robot Cost vs. Current Operating Cost

Over time, as robot costs decline and labor costs continue to rise, Adopting robots may only become more attractive. Over the past 30 years, average robot prices have actually fallen by more than 50%, while labor costs have increased by more than 100%.

Robot Cost vs. Labor Cost

However, falling costs are only one reason for the increasing adoption of robotics. Another consideration is the easy availability of robots. New manufacturing technologies, a surge in data and computing power, and customer preferences for on-demand manufacturing are driving significant changes in how goods are produced. Enterprises can now seek Robotics-as-a-Service (RaaS) subscriptions to extend robotics into their manufacturing processes to reduce upfront costs and barriers to entry for technology acquisition.

Finally, improved robotics and artificial intelligence technology are further driving adoption. Robot dexterity continues to improve thanks to advanced 3D vision capabilities and end-of-arm tooling. They can now work alongside workers in warehouses to transport goods and have the flexibility to pick and place fragile items. Robots can perform these tasks with virtually no downtime and can even use networked sensors to predict and avoid failures in advance.

Due to these trends, sales of industrial robots continue to grow. From 2013 to 2019, sales grew at a compound annual growth rate of 15%, reaching approximately 420,000 units in 2019. The International Federation of Robotics estimates that adoption will increase to 584,000 units by 2022. If reshoring accelerates in this new global paradigm, this estimate may be on the low side.

Robot density can be measured by the number of robots per 10,000 workers, which shows the potential for long-term growth in robot adoption. Currently, there are only 99 industrial robots per 10,000 jobs in the global manufacturing industry, which means that the robot density is about 1%. But manufacturing hubs such as Singapore and South Korea have robot densities that are eight times higher, at 8.3% and 7.7% respectively, and continue to rise. Large countries such as the United States, Germany, and China are still well below these levels, but they may converge over time as robotics adoption accelerates.

Conclusion

The decades-old offshoring trend is expected to reverse as businesses increasingly focus on supply chain integrity . Macro-disruptive events such as trade conflicts and the COVID-19 pandemic have brought uncertainty to companies’ operational capabilities and supply chains. This is likely to further accelerate reshoring as robotics and automation become more capable, cheaper and easier to implement, and as companies realize the benefits of local manufacturing outweigh the risks of producing goods abroad.

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