Once automation takes over, companies will care less about the cost of human labour—and how it varies from country to country. This could encourage some of them to stay putby Finbarr Livesey / July 10, 2017 / Leave a comment
For many years it has been blindly accepted that countries like the UK and the USA are post-industrial, done with the dirty business of making things and moving into a so-called “weightless economy.” So why are there still factories in Wales making computers, in Germany making running shoes and in the US making planes, trains and automobiles? Why has Walmart committed to spending an extra $250bn on US-made goods over the next decade?
Our understanding of how companies are organising themselves to make the physical things we buy, our tables, iPads and SUVs, is woefully out of date. Many believe that hyper-globalisation has won out and that all things are made on the other side of the world now. But this is less and less true as time goes on. The regionalisation of trade is deepening.
Why are companies like Adidas and Raspberry Pi making their products in what we think of as very high-cost locations? Well, a mixture of different trends and forces have changed the economics of making over the past decade. Time has become an increasingly important factor, with consumers expecting delivery in a day or two. You can’t easily have things on a slow boat from China and meet those kinds of expectations. While shipping costs have fallen, uncertainty around oil prices and potential increases in emissions regulation mean that shipping will not be the answer for many companies in the future.
Another crucial change concerns automation. The use of intelligent robotics to do what used to require many hands is highly significant. Each of us has automated to some extent our homes, probably without thinking of it in that way, with dishwashers and hoovers taking over what were once repetitive, time-consuming tasks. In the world of business, automation has meant some companies replacing 90 per cent of their workforces with robots, who need nothing more than a power source and materials to work on.
“We are left with a more complicated world where different pieces of globalisation are moving in different directions”
High levels of automation will mean labour cost differentials between countries decrease (they won’t disappear from the equation but they will have less and less influence). If you think about the different costs to a company of making and selling a product to you, how much it costs to employ workers is key. But if there are fewer and fewer workers needed to man the line, then that is no longer a deciding factor for businesses working out whether to stay at home or go abroad. To use slightly more technical language, does this mean an end to offshoring, the movement of production out of the home market of a company to a distant location?
Well, as ever it is more complicated than that. Companies do not face a simple binary decision between being in the UK or being abroad. Most products depend on a complex supply chain, with many suppliers making bits and pieces of the final product, before it is assembled and ready to be sold. This is why many manufacturers are thinking regionally, blending together inputs from different suppliers in as effective a way as possible. So offshoring will still happen, but more and more to locations within a particular region, within Europe or within Asia. The percentage of trade that starts and finishes on the same continent is already high, at 50 per cent for North America and Asia, and over 70 per cent for Europe. It looks like this will only increase.
The straight economics of how companies structure their production networks has to be placed within the political context. Since the global financial crisis there has been a wave of nationalist sentiment, expressed in the Trump administration and in the Brexit vote in the UK. Whether this results in actual protectionism remains to be seen, but it creates a climate where companies are under pressure to be seen to be acting in the national interest—whether that is in their own best interests or not.
Are we seeing the beginning of the end of globalisation? In terms of the movement of physical products that may be the case. While countries will continue to trade with one another, levels of trade between them may stop increasing. Other elements of globalisation, such as the transfer of ideas and culture, will continue to increase based on digital connectivity.
We are left with a more complicated world where different pieces of globalisation are moving in different directions, where the future of work is uncertain and the state of international relations is changing as the structure and volume of trade changes. Each company, each country needs to have this complex and confusing debate as soon as possible, as these changes are not going to stop any time soon.
Finbarr Livesey is a senior lecturer in public policy at the University of Cambridge, and the author of From Global To Local: The Making Of Things And The End Of Globalisation (Profile)