Reshoring. Convergence of Technological Innovations that Support a Business Case for Repatriating Offshored Electronics Production

Research Paper (postgraduate), 2017

39 Pages, Grade: Pass


Table of Contents

Executive Summary

1. Introduction and Background
1.1 Research Question
1.2 Background/Literature Review

2. Research Project Description
2.1 Methodology
2.2 Analysis
2.2.1 Automation and Adaptive Robotics
2.2.2 Additive Manufacturing
2.2.3 Mass-Customization
2.2.4 Distributed Manufacturing
2.2.5 Big Data, Artificial Intelligence and Technological Convergence
2.3 Conclusion and Future Research Direction


Executive Summary

The following report presents a justification for repatriating electronics manufacturing from China to the United States, by recommending a technological framework that serves to neutralize the benefits, namely lower labour costs, that lead to its original transition and expansion. This justification is specifically based on the premise that due to the expansion of global communications channels that have greatly improved the diffusion of new technological concepts, China’s access to technological innovation is not unique, and that its competitive factors of production are increasingly capable of being neutralized through the deployment of modern technological advances, including automation, artificial intelligence, 3D printing/adaptive manufacturing and others, and through a reduced level of human labour input. Further enhancing the desirability of this model are advantages that would be gained in operational efficiency, reduced energy usage, stability and time-to-market, through their deployment.

1. Introduction and Background

One of the fundamental tenets of economic theory is that of comparative advantage, the core premise of which suggests that nations (among other groups) possess specific strengths in “factor endowments or technological progress” (Ricardo, 1821) associated with their individual manufacture of particular goods and services, relative to others. This advantage typically manifests in a resulting difference in cost, quality or capability of their unique output, when compared to others’. This concept forms the fundamental basis of international trade, given that two nations may channel their unique strengths into production of unique products, and exchange their surplus, with each benefitting incrementally as a result of the exchange. When calculating the strength of one nation’s advantage over another, factor endowments, in the form of land, labour, capital and entrepreneurship, as well as technological progress, supported by access to the latest technologies that enable the maximization of output, efficiency and quality, are key variables (Ricardo, 1821).

Through the rapid dissemination of new innovations through modern networks, technological concepts are swiftly diffused throughout the world on an increasingly equal basis, neutralizing individual strengths in technological progress. The resulting application of such technological innovations may further neutralize the importance of a nation’s factor endowments, by reducing the amount of land, labour, and capital required, through their resulting efficiencies, and by also reducing the importance of entrepreneurship through the broader access to information that is gained. The result of this dynamic is an incremental leveling of the playing field in all manner of production, and thus rationalizing the progressive repatriation of foreign-produced goods and services.

1.1 Research Question

In this vein, our research question seeks to inspire the formulation of an enablement framework, through which specific technological innovations may be deployed such to neutralize the importance of the factor endowments that have thus far justified the concentration of electronics manufacturing in China, relative to the United States:

“Are there current or emerging technologies or concepts in the realms of automation, robotics, Artificial Intelligence, information management and/or logistics practices or processes, that may converge to facilitate the transition of domestically-consumed electronics manufacturing production capacity from China, back to the United States, or accelerate those transitions already in progress?”

While the concepts and premises presented in this paper concern the dynamic of China-US trade in electronics goods, its supporting technological mechanisms could also be extended to many nations. The sectors to which these mechanisms are applied may also be progressively broadened over time, relative to their capacity to be influenced by such technological enhancements.

Significant manufacturing capacity has progressively shifted from the developed to the developing world in recent decades. This has resulted in the dramatic reduction of opportunities for workers with modest or mismatched levels of education or skill, and pressure on the residual labour force to achieve ever-higher levels of specialized training to adapt to the needs of the more sophisticated knowledge economy. Loss of complete control over product constituents and quality presents risks to consumer health and safety. Ever-lengthening supply lines often traverse territory vulnerable to geopolitical instability, and also consume disproportionately high ratios of energy. All other tangible or intangible benefits of a robust international trade network notwithstanding, should it be possible to negate the primary differentiating factors that originally justified the offshoring of electronic goods production, it is in the interest of self-sufficiency, sovereignty, energy conservation, and environmental protection, that steps should be taken to transition the production of electronic goods to as close as possible to their point of consumption.

1.2 Background/Literature Review

Since the 1980’s, significant manufacturing capability in the electronics sector has transitioned away from North America, to China. After peaking at approximately 21 million, total private sector manufacturing employment in the United States declined 35% in absolute numbers, between 1989 and 2010 (Bureau of Labor Statistics, 2016). During this period, the world experienced a significant degree of technological change, particularly associated with the swift communication processes facilitated by the growth of the Internet. Where many of the original decisions to outsource production to China predominantly considered basic tax and logistics issues (Lee, 2014) along with then-lower Chinese labour costs (The Economist, 2013), over time, manufacturers have encountered numerous, incremental challenges when offshoring, including issues with quality control, exposure of trade secrets and intellectual property (Gray, 2017), and increasing operational costs, (The Economist, 2007) presenting them with an opportunity to reconsider their original logic. Coupled with the technological advancements that may rationalize the reshoring of production, there is presently significant political will in the United States in particular to encourage this exercise.

While his rhetoric has since pivoted to other themes, while on the campaign trail in 2016, Donald Trump advocated for the imposition of a 45 percent tariff on Chinese goods, in a dramatic bid to restore employment to America’s manufacturing sector (Haberman, 2016) by nullifying China’s key competitive advantage. He also advocated for the branding of China as a currency manipulator, and to “reclaim millions of American jobs and revive American manufacturing by putting an end to China’s illegal export subsidies and lax labor and environmental standards.” (Curran, 2016). Advocating for such an approach, however, is highly problematic.

China’s position as an export subsidizer is quite supportable, given the correlation that has been proven between increases in Chinese export tax rebate rates and a corresponding acceleration in export performance (Chen, 2005). Its designation as a currency manipulator can also be fairly easily substantiated, given the Chinese currency’s lack of capacity to ‘float’ on the open market like those of other free market economies. Adjustments in its fixed rate of exchange ‘peg’ relative to a basket of global currencies, including the U.S. Dollar, are brought about exclusively through the intervention of the People’s Bank of China (Adinolfi, 2015). Although supported by its aggressive purchase of foreign reserves, (Staiger, 2010) especially U.S. Dollar-denominated securities, until recently, where the Yuan has steadily appreciated in relation to the USD (Worstall, 2017), China’s central bank in the recent past was often accused of providing insufficient support, relative to its trading rate. Were China indeed to be holding its currency, the Yuan, artificially below its intrinsic value, this too would serve as an export subsidy, by reducing the effective cost of exported goods. Unfortunately, the discussion of retaliatory measures, as proposed by Trump, often fails to convey that the ultimate cost of such a strategy will be borne by American consumers, in the form of higher prices on a broad array of goods.

While Trump’s pronouncements of a forthcoming restoration of employment under the auspices a “Made in America” mantra may be initially accepted enthusiastically by a wide cross-section of the electorate, the overarching tendencies and motivations of consumers suggest that pervasive support may wane once the true cost becomes apparent. In a nation and generation acclimatized to the “Every Day Low Prices” of Wal-Mart and Target, the question is whether the critical mass exists to subsidize the significant costs that would accompany a protectionist trade strategy. In a survey conducted by The Boston Consulting Group in 2012, 93% of U.S. consumers said they were willing to pay more for US-made goods (Sirkin, 2013), conveying that this theme indeed resonates with the populous. Among the same sample, however, only 20 to 25% stated that they were willing to pay a premium of more than 10% (Sirkin, 2013) to buttress such a strategy, with 37% stating more recently that they would refuse to pay any premium for goods ‘Made in the USA’ (Reuters, 2017), falling short of what it would take to offset protectionist measures. Based upon the fact that American consumers are reluctant to support the financial cost of repatriating manufacturing capacity through punitive measures, or patriotic altruism, other cost-neutral options must be pursued.

Retaliatory efforts notwithstanding, China’s competitive position has nonetheless progressively eroded in recent years, most notably due to the dilution of their longstanding labour-cost advantage. Boston Consulting Group, recently calculated that Chinese wage inflation had progressed to such a degree that direct manufacturing costs (excluding raw material inputs and equipment depreciation) had escalated to the point that by 2014, China offered only a 3% overall cost advantage, down from 15% ten years earlier (Sirkin et al, 2014).

A major reason why some companies are currently pursuing a strategy of repatriating their manufacturing facilities, is also that the low-labour cost advantage that previously existed in China, has been progressively negated by an increasing level of automation (Tate, 2013), substantially reducing the ratio of labour as a production input required to manufacture many goods. In 2012, for instance, Apple’s primary manufacturing subcontractor Foxconn revealed that it intended to replace its entire human-operated assembly line with a million robots (Harris, 2014). By mid-2016, 60,000 of the original factory workforce of 110,000 involved in iPhone production had indeed been replaced (BBC, 2016). Neutralizing the labour cost advantage, and considering that each day of air transit time (Apple’s method of choice) also adds the equivalent of 0.6% to 2.1% to the cost of manufactured goods (Hummels, 2013), should logically contribute towards the progressive transition of manufacturing facilities, for those goods destined to be sold in North America, back to North America.

Erosion of the low labour cost advantage is only one of many factors considered by companies contemplating the repatriation of production capability, however. As reported by Kinkel and Zanker (2013), upon surveying German manufacturers to determine their reasons for “backshoring” (another term used to describe the evolving concept of reshoring), flexibility, quality, capacity utilization and transport costs were all cited as the primary motivations. Indeed, these capabilities may be achieved through the deployment of focused technological enhancements.

A central theme in industrial development has been the prominence of the linear and continuous assembly line, most famously popularized by the Ford Motor Company in 1913, and credited with ushering in the era of mass production. Much of the manufacturing originally outsourced from North America to China continued to follow this practice, however recent developments have increasingly suggested that the advent of 3D printing, also known as additive manufacturing, may trigger a new Third Industrial Revolution (The Economist, 2012). Additive manufacturing allows a high degree of customization, and by extension would allow a variety of different products to be produced using the same machinery and facility, supporting a more flexible, distributed manufacturing capability. In this vein, we also consider the plausibility not merely of transitioning individual factories from China to the United States, but the possibility that the present massive, centralized factories could be replicated by several smaller, regional facilities, significantly reducing the length of presently-overstretched supply chains. According to Matt (2015), the ongoing trends away from global standardization, toward mass customization and individualization, coupled with rising logistics and energy costs, results in the necessity for manufacturing systems to become capable of producing small quantities of goods in a highly flexible way, close to their ultimate market. Matt (2015) hypothesizes that “Only raw materials and data will be transported over long distances in the future”.

Also contributing to the efficiency of supply chains, and therefore potentially to the advancement of reshoring, is the application of Artificial Intelligence. According to Gunasekaran (2014), “A supply chain network design needs to consider the future probability of reconfiguration due to some problems of disaster or price changes.” Based upon a typical current model, whereby a modest series of large factories feed into a cross-oceanic shipping network, ultimately supporting a rather centralized distribution network within the US market, Artificial Intelligence (the application of human-like decision making processes within machine processes), in the present context, would seek to predict and map around faults or perceived faults in the chain. Maximizing the efficiency of a future distributed manufacturing network, with its series of smaller but more numerous manufacturing sites, would rely even more heavily on Artificial Intelligence to manage the incremental variables, and to ensure for the optimization of the otherwise more highly fragmented network. We will seek to investigate other highly specific applications of Artificial Intelligence towards the advancement of reshoring and distributed manufacturing.

This paper is organized into a number of sections. Section 2.1, governing Methodology, defines the effective scope of our investigation, specifically defining the research tools that will be used. The Analysis section 2.2, including sub-sections 2.2.1 through 2.2.5 (Figure 1), presents data from the specific subjects of research, comprising Automation and Adaptive Robotics (2.2.1), Additive Manufacturing (2.2.2), Mass-Customization (2.2.3), Distributed Manufacturing (2.2.4) as well as Big Data, Artificial Intelligence and Technological Convergence (2.2.5). Sections 2.2.1 through 2.2.4 present unique processes or technologies that support the reshoring concept, while section 2.2.5 introduces additional innovations that also serve to tie all of the aforementioned technologies together into one system. Our Conclusion, section 2.3, summarizes our findings, and compares the benefits derived through the collective application of the technologies presented in our analysis, against the competitive advantage that China has historically possessed, to substantiate our claim that such application might rationalize the repatriation of offshored electronics manufacturing production.

illustration not visible in this excerpt

Figure 1. Research Project Dimensions


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Reshoring. Convergence of Technological Innovations that Support a Business Case for Repatriating Offshored Electronics Production
Ryerson University  (Ted Rogers School of Management)
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reshoring, convergence, technological, innovations, support, business, case, repatriating, offshored, electronics, production
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Jason Belsey (Author), 2017, Reshoring. Convergence of Technological Innovations that Support a Business Case for Repatriating Offshored Electronics Production, Munich, GRIN Verlag,


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