Do robotics, cheap energy & politics mean a supply chain change?

Availability of cheap labour, cost of energy and the availability of mature global transport networks have driven decisions on how and where supply chains were structured over the past two decades. It has amongst others caused the closing of factories in Western Europe and the US and shifting manufacturing capacity to Eastern Europe and Asia. It has had (and still has) a high impact on blue collar jobs in the West. And it has thickened transport flows from Asia to Europe and the US via sea and air.

Supply chain is a numbers game; costs determine how, where and when activities happen. A few things are brewing at the moment. The combination of three developments might see a continental supply chains shift again in the next years to come. Let’s look which mix of developments could cause this change.

1)      Robotics innovations

In the military, surgery and manufacturing robots are getting utilized in ever larger numbers. Universities open or expand specialist departments studying and educating on robotics. Across the world start-up companies jump on the bandwagon to develop the next ground breaking machine.  Robotics is seen by many investors as the next frontier in technological innovation. We’re not just talking about the home robot that mows your front lawn, but highly sophisticated robots that can take over more and more complex and detailed human tasks. Developments in robotics are evolving fast and serious investments start to poor in. Corporations are picking up on the trend too, last year Foxconn announced that it will implement 1 million robots to replace human workers in its Chinese factories. Such a robot cost between $ 20.000 and $ 25.000 to produce.  

If robotics developments result in robots being cheaper than factory workers in China, Vietnam or Malaysia, then the need for Western companies to use partners in Asia, Mexico or Eastern Europe because of cheap labour goes away. If robots also evolve in being able to take over detailed assembly tasks at a higher speed and quality level than human workers, what arguments can be made to stick with foreign factories to produce products for the Western world? Keep this point in mind we’ll come back to it later in the article.

 

"Robots - They even take over our rock music"

 

2)      Availability of uninterrupted cheap energy

British Petroleum’s CEO, Bob Dudley forecasted in January of this year that the United States may be close to self-sufficiency in energy by 2030 because of the shale gas revolution that is going on in North America. In its global energy outlook report BP announced that unconventional oil and natural gas reserves are expected to have major implications on the energy sector growth. Dudley said "We expect the shale revolution will help make the United States just short of self-sufficiency in energy by 2030, while China and India become increasingly import-dependent. In fact I think the shale revolution will turn out to be the greatest technology development in our industry in the last decade or two." BP’s claims are supported by the International Energy Agency, concluding  that, by 2020, the United States will displace Saudi Arabia — albeit temporarily — as the world’s largest oil producer.

This development means that the US will in the near future be having undisturbed access to relatively cheap energy and is no longer influenced by possible conflicts in the Middle East. For Western Europe the picture looks less good at the moment. Without a real central policy on energy, except for an unambitious “ambition” to draw 20% of its energy from renewable sources, and a lack of real investment in energy innovation, Europe will keep dependency on Russian gas and Middle East oil. If it is lucky it may piggy back on the US and import energy from them, which at least would give a more stable energy source for the future.

Now add this to the robotics development and see what we have so far; no dependence on foreign cheap labour and robotics innovation coupled with uninterrupted  energy supplies makes robotized domestic manufacturing attractive. Let’s take the next development into account and bring it all together.

 

3)      “Bring our jobs back”

The current on-going Western European political / financial crisis and the slumbering aftermath of the US banking crisis have led to high un-employment on both sides. Southern Europe is currently hit with mass un-employment, with figures over 25% of its population without work (youth un-employment – under 25 years - in some regions reaching a staggering 55%). In the US the middle class and blue collar working class are hit hardest by the last crisis and they are still suffering with a un-employment rate hovering around 8%.

The call to politicians to stimulate the economies and create jobs is getting louder and louder by the day. Especially jobs that left the continents and moved to Asia are badly required back. One of President Obama’s main campaign points in the last election round was about job creation. In recent elections in European countries (e.g. France), it was all about jobs, jobs and more jobs. Politicians feel the backlash of globalization on their country’s economies. Everybody wants cheap products, but without jobs to pay for mortgages and consumption, economies risk to come to a full standstill.

The cost of labour in the US and Western Europe have already been reduced over the past 7 years. High un-employment automatically means that people take pay cuts and do more work for less money. There is clearly political pressure on corporations to have them bring back manufacturing to the West. Apple and GE are amongst the first to bring back manufacturing to the US. It is still a drop in the ocean, but it could well mean the start of a larger movement.

 

1 + 2 + 3 = supply chain shift

So, let’s add up these three developments. Robotics innovations could rapidly lead for manufacturing location decisions to be less driven by availability of cheap labour. Couple this to the availability of un-interrupted cheap energy in the US and political willingness to “support or subsidise” the bringing back of factories to Western Europe and the US. As stated earlier, supply chain is a numbers game. The mix of ingredients that is brewing at the moment could make it easy for Western corporation boards to decide to make radical changes to their supply chain structures in the near term.  

As a result it is very likely that we will start seeing an increase in near consumer point manufacturing. No longer will a single factory produce for the world, but regional factories produce for targeted regions. For Western companies that deal with highly sensitive / innovative products and manufacturing processes an added benefit is that they are no longer depending on “partners” that see copyright as the right to copy in countries weak enforcement on laws in this area. Robots will be a big driver in bringing back manufacturing to the West, but further evolution is still needed. Not everything can be taken over by them (yet), but as they get more and more “sensitive” we see that complex assembly and manufacturing by robots becomes more and more reality.

If near consumer point manufacturing increases a demand for logistics real estate will most likely cause a boom in the US and Western Europe. This is also where politicians come in again in supporting the move by subsidising a decision to start a factory in this state or that country, hoping it will bring many jobs.  

It is also the question if Maersk and MSC-CGM are betting right on building their E-Type class (18000 + TEU) ships. Do they still need these if transport flows from Asia to Europe and the US become thinner? Near consumer point manufacturing will also lead to shorter cycle times and further development in the possibilities for consumers to customize and individualize their products. Rapid prototyping, 3D printing developments and regional manufacturing can lead to greater flexibility and more direct consumer influence on the manufacturing process.

 

What about the jobs?

Last but not least, will jobs be coming back to the West?  The prospects do look challenging in this respect. A factory that comes back to the US but is largely robotized will first of all require less human workers, but second it does not require blue collar workers. Robotized factories need highly skilled engineers that can keep a factory running. The corporate board members that bring back robotized factories supported by subsidising politicians who believe it will generate jobs need to understand that this move requires an investment in education. There is a great lack of skilled engineer is the West (both in US and Western Europe). Job creation can only take place if corporations can find skilled workers in the countries they move to. The world is so small these days that skilled workers are quickly brought in from India or China if the Western politics does not step up to the plate and start to seriously invest in education.

What do you think will happen?

Some people who read this article may think that it will be a long time before we see any of this happening. People always seem to underestimate the speed of technological development and the disruptive impact it may have. We all remember how quick the arrival of online music sharing and iTunes almost wiped out the music industry. The first iPad was introduced in April 2010 it already made us forget desktop PC’s.  The shale gas developments and robotics innovations may not be seen by us because it is outside our daily view, but it is happening. Supply chains are also an unseen force operating at the forefront of new developments. Keep an eye out for it and let us know what you think about these developments.

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