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Bots and the New Supply Chain

The current reality of COVID-19 is simultaneously unsettling and opportunistic.  Besides the heartbreaking human cost, from an economic and industrial perspective there will be winners and losers as we so often witnessed during past massive dislocations.

This medical crisis is accelerating trends and creating new paths as well.  In today’s Focus, we would like to review the emerging robotic trend.  A few years ago, we identified the Internet of Things as a nascent wave of increasingly connected devices that would have changed not only personal behaviors but industrial processes as well.  In that context, we see the disruptions created by COVID-19 as an accelerator of such trend especially when it comes to re-organization of global supply chains.

Over the last couple of decades, offshore manufacturing became a common solution for most companies dealing with rising labor costs. This trend was actively seized by China which effectively became the manufacturing hub of the world. China today accounts for 13% of total global exports according to the World Trade Organization.  Other countries such as India, Vietnam and Thailand have successfully followed the Chinese model.

This multi-year shift was justified by the increasingly large delta in labor cost between the Western world and emerging economies. According to Trading Economics, average yearly manufacturing wages in China are set at about $10,000 versus a US average of $46,000.

However, COVID-19 disruptions have highlighted how the comparison between local and offshore manufacturing cannot be based merely on relative labor costs.  Local manufacturing provides higher control, more efficiencies between different divisions such as R&D and factory floors and less regulatory divergencies.  Robotics and Artificial Intelligence have the power to invert the offshore historical trend and bring back manufacturing at a time when such topic has a strong political tailwind as well.

From a cost perspective, while labor costs have increased constantly everywhere (China included), the average robot price has fallen by more than 50% in the last 30 years (source: McKinsey).  This divergence has helped robotics become more widespread on factory floors but there is still massive room for increased adoption.  In fact, global robot density  (number of robots per 10,000 workers) is just 1% (or just about 99 robots per 10,000 workers). In Singapore and South Korea, robot density is already at around 8% while in the US and Germany, robot density is significantly lower, indicating superior room for growth.  To further quantify this trend, robot sales from 2013 to 2019 have been growing at a compounded rate of growth of 15% (source: International Federation of Robotics). 

In conclusion, the recurrent global disruptions we have been enduring in the last few years, from the trade wars to COVID-19, are stressing the need for manufacturing companies to re-think their supply chains and put the spotlight on bots to help us transition into a new paradigm.

Please feel free to contact THALASSA CAPITAL should you want to investigate this topic further.