Will robotics lead to radical insourcing?
Recently some large companies have shifted parts of their production from low wage countries to their home countries. In this post will be explained why robots cause this phenomenon. Will radical insourcing happen in the future?
According to Cowen (2016) robots and 3D printers could create a world of “radical insourcing”. He states that the increasing use of machines, smart software, robots and 3D printing would mean that wage differentials will no longer be a major reason to look abroad or to lower wage countries. Similar goods could be produced at home instead of buying from an exporter and incurring labour and transportation costs. Besides cost benefits, insourcing is also beneficial for companies because it is a less polluting way of producing. Moreover, customers do not have to worry that products are made in sweatshops. Also, companies can become more responsive to demand because products are produced (closer to) home (Financial Times 2016).
There are some companies who started insourcing activities after a long period of outsourcing. For example, Adidas has been outsourcing activities for over three decades. Last year, the former chief executive of Adidas announced that some shoe production would be brought back home for the first time, thanks to the highly automated factory, the “Speedfactory” to be built in Germany. Adidas wants to speed up delivery times to fashion-conscious customers and reduce freight costs (Reuters, 2014). Adidas has already unveiled a 3D printed running shoe sole that can be tailored to a person’s foot.
Other examples of reshoring companies where previously internationalized activities are being returned to inside national borders are Whirlpool Corporation, Caterpillar Inc. and Ford Motor. As more and more companies are insourcing, it may become a trend, especially with the fast technology advances fast. Radical insourcing will have big impact on developing economies. What would be the consequences for developing economies?
Cowen, T. (2016). Economic Development in an “Average is Over” World. Available at: https://www.gmu.edu/centers/publicchoice/faculty%20pages/Tyler/Manila.pdf [accessed 27 September 2017].
Dalder, M. (2014) Adidas aimes to open automated shoe factory in Germany in 2016. [online] Reuters. Available at: https://www.reuters.com/article/us-adidas-robots/adidas-aims-to-open-automated-shoe-factory-in-germany-in-2016-idUSKCN0SE1RL20151020 [accessed 27 September 2017].
O Connor, S. (2016) Robots may cut off the path to prosperity in the developing world. [online] The Financial Times. Available at: https://www.ft.com/content/5d0b1206-36f2-11e6-a780-b48ed7b6126f?mhq5j=e5
Hi Anneline, thank you for your interesting blog post about insourcing productions. I would like to add some points to your blog about Adidas, which is willing to speed up delivery times to fashion conscious consumers. I think the main reason behind this move is to compete with other companies such as Nike. What we mostly see in the sports industry is that these big brands like Adidas and Nike kind of offer the same products, but only with a different design. Therefore, if a competitor comes up with a new shoe, Adidas also needs to come up with a new shoe model (Ratner, 2017). In case the designers (bedoel je niet de tekentafel: HQ/..) and the factory are in the same country, it is way faster for Adidas to produce shoes, which will lead to a faster supply chain.
Coming back to your question about the consequences for developing economies, personally I do not think that all of the companies located in developing economies are willing to insource their production, because of the high switching costs for them and the high amount of investments needed. The large companies would then have to change many things such as their business model canvas and business set-up. I also think that the developing economies will be prepared for these kind of threats (radical insourcing) and that their governments have alternatives to make sure that they will earn money, and that money stays within their economy.
Ratner, J. (2017, April 21) Nike vs. Adidas: The three stripes is making gains on the swoosh – but that doesn’t tell the whole story, retrieved from Financial Post:
http://business.financialpost.com/investing/trading-desk/nike-vs-adidas-the-three-stripes-is-making-gains-on-the-swoosh-but-that-doesnt-tell-the-whole-story
Hi Anneline,
Very interesting post! I think you bring up a very interesting question here which leaves a lot room to think about. I have another interesting example supporting your post. From my time working for a data consultancy company, I know that a large metal processor is investigating ways to insource their activities of seperating metal. As of today, freight containers including large bulks of metal are sent to low wage countries like India where all of it is seperated by hand. By combining artificial intelligence, robotics, and machine learning they are trying to develop a machine that is able to automatically recognize and sort the often very similar looking metal parts.
If we look at such new developments from an environmental perspective, they’re definitely a lot more sustainable. However, from an economic perspective – especially that of the developing countries – it can turn out in two ways. Either the diminishing jobs will create a big ‘gap’ in their economies which is hard to fill, or it will enable the countries to focus more on enhancing their internal affairs.