Companies around the world are increasing their use of robots. According to the International Federation of Robotics (IFR), the global average for industrial robots per 10,000 manufacturing workers grew from 66 in 2015 to 85 in 2017. With integration of artificial intelligence and other improvements in robotics (e.g., better machine vision, better sensors, etc.), robotics promises to see significantly improved pricing and performance over the next decade. As a potentially new general-purpose technology, a central question is whether and how robotics will impact production processes, particularly in such globally traded sectors as manufacturing. The last major technology wave, driven by information technology, was largely decentralizing in nature, enabling the geographic distribution of far-flung supply chains to the periphery in search of cheap labor. Will the next wave of technology innovation based on robotics have the opposite effect, enabling a reshoring of manufacturing to the core? 

Long payback time slows progress in lower-wage nations

There is both considerable excitement and trepidation about the so-called “fourth industrial revolution” and its ability to power growth around the world. However, rather than the term “fourth industrial revolution,” a more accurate term is the “next production system.”

While there are many important questions about the next production system, including the timing of impacts, the nature of the technologies involved, and the effects on industries, labor markets, and productivity, one critical question is how its impacts will likely differ between developed and developing economies. The short answer is that while both developed and developing economies will benefit from the next production system, developing economies will likely benefit less, in part because their lower labor costs provide less incentive to replace it with technology, and because the new production systems appear to enable shorter production runs, smaller factories, and higher productivity—all of which should enable reshoring to higher-wage nations.

As the next wave of technological innovation emerges, interest in technology’s role in international affairs appears to be growing. But much of that focus is on product technology (e.g., smartphones, commercial jets, automobiles, solar panels, etc.) rather than on process technology (“machines” to improve how a good or service is produced) that enables automation.

While both developed and developing economies will benefit from the next production system, developing economies will likely benefit less. A major reason is that the relative price of robotics compared with labor costs will be significantly higher in developing nations than in higher-wage nations. As such, the payback time for the investments in terms of labor savings will be considerably longer in lower-wage nations.

Robotics can prevent the offshoring of local manufacturing

This could mean long-standing centrifugal forces, in which commoditized production has spun out of rich nations to low-cost nations, could slow—or even reverse—thereby generating centripetal forces wherein at least some work comes back to serve local markets. In other words, current manufacturing systems largely enable either high-volume, low-mix output (e.g., producing large quantities of the same unit; mass production) or low-volume, high-mix output (e.g., producing smaller quantities of different units; batch production). The latter are often located in lower-wage countries. But convergence of digital technologies and manufacturing increasingly leads to a new production paradigm: a high-volume, high-mix approach that enables cost-efficient production in smaller factories more evenly distributed around the globe to serve local markets.

For example, assuming a $250,000 initial investment in a robot that replaces two workers (one on each shift) in the United States, where annual total compensation for the average manufacturing worker is $72,000, the payback period (the time it takes for savings to exceed costs) would be less than one year. But in Mexico, where the average compensation is $14,000, the payback is much longer: eight years and four months. And in the Philippines, where average compensation is just $4,200, payback is longer than 30 years. Given that most firms require paybacks of less than four or five years, this suggests a very slow rate of robot penetration in low-wage developing nations.

In a survey of 238 Citigroup clients, 70 percent believed automation would encourage companies to consolidate production and move their manufacturing closer to home. Krenz, Prettner, and Strulik estimated that, within manufacturing sectors, an increase by 1 robot per 1,000 workers is associated with a 3.5 percent increase in reshoring activities. And an OECD report finds that, to date, robotics slows down—and in some cases, stops—offshoring and is thus a key to helping keep manufacturing in developed economies.

Job loss predictions not grounded in evidence

What about job loss? There has been considerable ink spilled warning of the coming job-destruction tsunami from the next production system. A widely cited study by Oxford University researchers Carl Benedikt Frey and Michael A. Osborne set the tone in 2013 when it claimed that 47 percent of U.S. employment was at risk of job loss from new technology. Yet, these and similar studies warning the next production system will lead to massive job loss and potentially high levels of structural unemployment suffer from a number of mistakes, including not being grounded in evidence and completely unbounded from historical analysis. Historically periods of high productivity are associated with lower, not higher, unemployment.  Moreover, many studies show that robot adoption increases jobs. One study by Jungmittag and Pesoleof industrial robot adoption across 41 countries between 2000 and 2014 finds that robot adoption has increased employment and real value added annually by 0.32 and 0.78 percent, manufacturing capturing approximately 53 percent of the gains in employment and 71 percent of the gains in real value added. 

Robots are key tools for boosting productivity. To date, most robot adoption has occurred in manufacturing, wherein they perform a wide variety of manual tasks more efficiently and consistently than humans. But with continued innovation, robot use is spreading to other sectors, from agriculture to logistics to hospitality. Robots are getting cheaper, more flexible, and more autonomous, in part by incorporating artificial intelligence. Some robots substitute for human workers; others—collaborative robots, or “cobots,” which work alongside workers—complement them. As this trend continues, robot adoption will likely be a key determinant of productivity growth and will potentially reshape global supply chains.

Conclusion 

In summary, the next production system will be a welcome development for a global economy that is experiencing lagging investment and productivity growth. This next technology wave holds the potential to lead to a virtuous cycle of increased investment, faster rates of productivity and wage growth, and more spending. It appears likely that developed nations will benefit more, both from higher rates of investment and productivity growth, and from production systems that are more conducive to localized production. Moreover, notwithstanding some studies that suggest the next production system will lead to higher structural unemployment and reduced labor incomes, the evidence and logic suggest structural unemployment will not increase, and labor will receive a significant share of the benefits (akin to historical shares). Policymakers should therefore support—not resist—the development of the next production system.

Sources: 

Citi and Oxford Martin School 2016, “Technology at Work v2.0,” Citi GPS: Global Perspectives & Solutions (January 2016), https://www.oxfordmartin.ox.ac.uk/downloads/reports/Citi_GPS_Technology_Work_2.pdf

Astrid Krenz, “Robots, Reshoring, and the Lot of Low-Skilled Workers” (working paper, University of Göttingen, Center for European, Governance and Economic Development Research, 2018), https://www.econstor.eu/bitstream/10419/180197/1/1026007828.pdf.

Timothy DeStefano Koen de Backer et al., “Industrial Robotics and the Global Organisation of Production” (working paper, OECD, February 2018), https://www.oecd-ilibrary.org/docserver/dd98ff58-en.pdf.

Carl Benedikt Frey and Michael A. Osborne, “The Future of Employment: How Susceptible are Jobs to Computerisation?” Oxford University, http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Emplo….

Andre Jungmittag and Annarosa Pesole, “The impact of robots on labour productivity,” 2019, JRC Working Papers Series on Labour, Education and Technology 2019/08.

This post is a summary of a longer ITIF report that can be found at:  https://itif.org/publications/2019/10/15/robotics-and-future-production…