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Robots Expose the Hidden Costs of Offshoring in China
Chinese_trouble
Chinese character for "Trouble"
And why the Chinese don’t care if it all goes home—but not just yet
By Tom Green



It has taken almost twenty-five years for what goes around to come back around again, namely US manufacturing. 

It’s hardly a torrent of jobs returning to America—best estimates are 10,000 jobs—but that is still 10,000 breadwinners earning their bread again here on U.S. soil. Offshoring, like Rome, wasn’t built in a day, and it’s opposite, reshoring, won’t arrive tomorrow.

The Robot Effect

“By 2015, Chinese wages will be high enough that it will be just as cheap to manufacture goods for the US market in America. Some US manufacturers aren’t waiting.” —Christian Science Monitor

A & E Custom Manufacturing in Kansas City, Kansas is what every offshoring haven fears the most: the sound of America’s manufacturers cranking back into action and doing well.

As A&E’s owner Steve Hasty put it recently to the Christian Science Monitor: “We’re doing the work we used to do. We’ve become more competitive in what we’re doing and the type of equipment that we’re using.”

Behind him, his “plant hums with the sound of robotic presses and welders, automated laser cutters, and other state-of the-art equipment that bend and cut metal into precise shapes. More than 900 sheet-metal components for the New York City subway come from this shop, as do aluminum parts for an electric sports car in Finland.”

Sheet metal fabrication robot

A & E also once made parts for a popular commercial cooking appliance that was offshored to China several years ago. “When quality and delivery problems in China couldn’t be resolved, the customer brought the work back and A & E is once again making the parts.”

For a growing number of companies like A & E, robots and robotic automation lines are exposing the offshore exodus as not making good business sense any longer, not only because of rising Chinese wages (which are doubling every two years) but also for a raft of issues ranging from quality control to the rigors of shipping anything from 12,000 miles and 12 time zones away.

Harry Moser, president of the Reshoring Initiative, easily ticks off the lengthy exposure list of hidden costs and risks: intellectual property and regulatory compliance risks, pipeline and surge inventory impacts on just-in-time operations, the weakening of a company’s ability to respond quickly to customer demands, burdensome communications, unauthorized substitution of materials, managerial travel, transition expenses, unfavorable credit terms and product warranty problems. It’s a long list of unseen costs for what Moser tabs as the offshore burden, Total Cost of Ownership, a/k/a the real cost of offshoring (see InfoGraphic)

As other SMBs like A & E Custom Manufacturing re-experience manufacturing through robotics and automation, the eventual and inevitable demise of offshoring gets easier to see. Off course, there will always be collateral damage: permanent offshoring victims that will never return such as the manufacturing of shoes, socks, shirts, blouses, underwear and the like.

The Chinese see it as well

Through it all, the Chinese have played the dutiful servant and produced whatever has been asked of them.  In the bargain, China’s coffers got flushed with cash. Unimaginable wealth that China will need all of which to make the final, great leap to their own global industries—after which they will no longer have a need to be an offshoring haven ever again. But when is that day coming?

As the Monitor reported, “China has its sights set on something beyond manufacturing – building Chinese-owned global brands. Although Chinese brands don’t currently have a stellar international reputation, history shows they could soon.”

For example, there is Geely Holding Group’s sleak, new SUV, the Geely Gleagle GX7, which is building a brand in its own country while exporting to the likes of Australia where it’s quite popular.

Geely GX7

The Chinese want their own SONY, Toyota, LG, Samsung, GE, Caterpillar and yes, Apple. The full retail price of the Chinese-manufactured Apple iPhone 4s is more than $600, out of which the Chinese manufacturer gets only $8.

The Chinese people are aware of the disparities and don’t like the situation. They feel their countrymen are justified in demanding higher wages, even if higher wages fuel inflation.

The obvious question looming for the Chinese: will Chinese brands, global industries, independence from Western consumers and the rise of its own consumer class arrive before the great reshoring juggernaut takes hold? Probably not. Robots will enter U.S. and European industries, including those of Japan and Korea, in quantity and quality faster than China’s consumers or global brands will take hold.

Thus exposes the larger problem: people

The larger problem is that an astonishing 50% of China’s GDP is driven by investment in factories, housing and infrastructure (In the U.S. the figure is about 15%). With not enough indigenous consumer activity, dependence on American and European consumers is still the driver of wealth and will continue that way for some time.

Arthur Kroeber, managing director of GK Dragonomics in Beijing, is blunt about China’s prospects: “It’s quite clear we have a pretty rotten industrial cycle coming on. I don’t see it getting a whole lot worse… but I don’t expect them to get back for a long, long time.”

All of which translates into fewer jobs. Meanwhile, there are 253 million migrant workers in China—that’s a migrant population greater than the combined populations of the UK, Germany, Italy, Spain, France and Poland—half of who were born in the 1980s and 1990s. Behind this mass of migrants is another influx of yet another 243 million migrants by 2025—all needing factories in which to work, apartments in which to live in, and lots more infrastructure.

All of that migrant activity and lack of consumer base will take place at the same time (2015-2025) that robots and automation will be taking charge of remaking industry and manufacturing, healthcare and education in the U.S., Europe, Korea and Japan; all of it may happen at a time when there may not be a need to manufacture anything in China other than the aforementioned shoes, socks and shirts.

For U.S. manufacturing, it’s just a matter of time. For China and its people, well, that’s another matter that time won’t easily remedy. Meanwhile, until its own consumer base and global brands come online, the Chinese will have to manufacture something for someone. Who will that someone be?  Probably Brazil, Russia or India or all three?


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