China surges ahead in the global automation and productivity race

The major challenge to reshoring manufacturing, says Moser, is being able to compete on costs. While China’s manufacturing labor costs used to be around 50 cents to a dollar an hour, it’s since shot up by around 10-15% per year to around $6-7 an hour now, he says. China has, however, adapted to the situation and invested accordingly to maintain the price gap with the US:

“China’s growing labor costs should have made them non-competitive, but they have done a great job at raising productivity through automation at the same time,” says Harry Moser.

Recent Chinese investments in robotics put things in perspective: In just five years, China has massively overtaken the US in terms of “robot density” – a comparative figure showing the number of robots relative to 10,000 workers in the manufacturing industry. In 2017, China had less than half of the robot density of the US. Through extensive investments in automation, China quickly overtook the US, now boasting a 38% higher robot density (2022), according to data from the International Federation of Robotics. Even before then, the effects of China’s automation efforts were tangible, with robot adoption leading to a 10% increase in manufacturing firm productivity between 2000-2013, according to a recent study. And since the recent acceleration in robot adoption, Chinese manufacturers have boosted productivity even further, says Moser:

“China continues to raise the productivity game. If we just automate twice as fast in the US as we are now, we will still barely be keeping up.”

The hidden costs of offshoring shift the business case

Closing a price gap of 35% with China may sound difficult, but it is not necessarily so, according to Moser.

One thing is comparing direct manufacturing costs (FOB price) between the US and China. There are, however, several ‘hidden costs and risks’ related to offshoring that manufacturers have not always accounted for, he says.

Those include everything from minor factors like duty, travel, delays, and currency fluctuations – to major supply chain disruptions like those caused by Covid and recent political conflicts. Especially the latter has changed the equation:

“The number one factor driving reshoring is geopolitical risk – companies are worried about major disruptions to their supply chains,” says Harry Moser, who is advocating for companies to look at the broader costs associated with offshoring when considering whether to manufacture domestically or abroad.

“We encourage companies to consider how much revenue and margin they would lose from being cut off from their suppliers and the probability of it happening. For China, we estimate the risk of such an incident at 3.5% per year,” says Harry Moser.

The Reshoring Initiative's analysis shows that the way companies measure costs can dramatically change whether it's more profitable to manufacture in the US or China. When companies look at the bigger picture of expenses, domestic production becomes more attractive for many products.

Specifically, the organization concludes that using a more comprehensive cost measure called Total Cost of Ownership (TCO) instead of just the basic product price (known as FOB price) significantly shifts the numbers in favor of US reshoring. With the TCO approach, the share of work that's more profitable to produce in the US rather than China jumps from just 8% to 32% (see graph below).

Using TCO also shows that automation may just be the factor tipping the scale further in favor of reshoring:

“If you just look at the FOB price gap and try to lower costs by 35% with automation, that’s rarely possible with a two-year payback on the investment”, says Harry Moser, continuing:

“But if, instead, the difference in the total cost of ownership is around 3%, it’s much more likely to achieve a competitive edge with automation at a sensible payback period. So, to justify automation, it’s critical to calculate all the costs associated with offshore and domestic manufacturing.”

Untapped potential for boosting US automation levels

Despite the competition from China, US manufacturers are well-positioned to advance their level of automation further and achieve the desired productivity gains according to Søren Peters, Co-CEO of HowToRobot.

HowToRobot’s ongoing assessments of automation opportunities at US-based manufacturing facilities reveal a widespread amount of manual work that can be feasibly automated, leading to higher productivity.

“There is still a lot of low-hanging fruit for US manufacturers to automate, opportunities which have either been overlooked or considered too difficult or costly in the past,” says Søren Peters, elaborating further:

“Robotics and automation technology have reached a maturity and price point today for certain applications that shift the business case considerably, making a significant number of investments relatively low-risk and with much better payback periods than previously.”

He points out that US manufacturers are currently finding many automation opportunities in end-of-line processes such as packaging, palletizing, and labeling, as well as in assembly and intralogistics – to name just a few.

“The productivity boost from automating these processes with low risk-high reward would be quite significant and provide an even stronger case for reshoring,” says Søren Peters.

“It’s simply a matter of mapping the opportunities out and getting started,” he concludes.