COVID-19 has accelerated deglobalization in manufacturing, but that shift was already underway before the pandemic. Between 1990 and 2016, global trade had been growing at average annual rate of 4.9 percent, according to the World Trade Organization. It’s been waning ever since. Global trade grew just 3 percent in 2018, and it actually declined 0.1 percent in 2019.

New automation technologies that offset higher wages are driving deglobalization by increasing efficiency. As labor becomes a smaller share of the total cost of manufacturing, companies that once offshored due to cheap labor are beginning to favor production in closer proximity to the markets they serve. In other words, they are reshoring. Reshoring is also empowering risk mitigation, resiliency, agility, responsiveness and faster time to market.

Automation enables reshoring motivated by COVID-19. At the same time, COVID-19 drives automation, since machines cannot get sick. Companies are having problems attracting workers back from quarantines, and they are finding automation to be the only alternative.

This is a decisive moment for U.S. manufacturing. Implementation of automation technologies will transform U.S. manufacturing competitiveness and accelerate reshoring.

For example, Stitches USA, an Ohio-based flag-maker, and Buckeye Mask, a startup formed by three Cleveland-based manufacturing entrepreneurs, turned to automation technology to produce 1.5 million cotton masks needed for the COVID-19 pandemic. With a $3.5 million investment and an entrepreneurial spirit, the two companies partnered to install 15 automated sewing machines that could profitably make up to 100,000 masks per day. The investment in automation enabled them to compete globally on quality and price.

Industrial automation and reshoring are closely connected. Reshoring increases capacity utilization, which drives capital investment in the newest automation technologies. The new systems increase competitiveness and enable recruitment of a smarter, tech-oriented workforce—thus enabling more reshoring. The U.S. must improve the terms of trade (for example, by lowering the value of the dollar compared to other global currencies), so that U.S. manufacturing capacity utilization exceeds 80 percent. That would incentivize more U.S. manufacturers to invest and automate.

Electrical and automation-equipment company Schneider Electric is a good example. Pandemic-related logistics problems prompted the company to consider localizing more manufacturing for both itself and its customers. Pre-existing investments in automation and software enabled them to shift more work away from China without significantly increasing operating costs. The Schneider “smart factory” in Lexington, KY, now makes 70 to 80 percent of the parts needed for its products in-house. The Lexington plant is so productive that it now ships some parts to Schneider’s Mexico facilities instead of the other way around.

Automation will most certainly transform jobs in the manufacturing sector. However, the U.S. is not the only country in the world that is adopting automation. Other countries, especially China, are investing heavily in these technologies. The market research firm International Data Corp. reports that China’s spending on robotics will reach $59.4 billion in 2020 and account for 30 percent of worldwide robotics spending.

China also spends three times as much as the U.S. on CNC machine tools. Korea has three times as many robots per thousand manufacturing workers as does the U.S. With its higher wages and workforce shortages, the U.S. should be investing much more than either country. Yet, in U.S. shops, machine tools are, on average two or three years older than those in German shops.

The choice is clear. Either we automate or we lose more jobs to offshore automation than we would to domestic automation. Automation will continue to eliminate some low- and mid-skill jobs. However, it decreases cost and restores competitive advantage, making more reshoring possible. More reshoring and less offshoring means more manufacturing jobs.

In part 2, we will discuss using total cost of ownership and automation to enable reshoring.