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posted on 07 June 2016

The Rise Of Manufacturing Marks The Fall Of Globalization

from STRATFOR

-- this post authored by Rebecca Keller

Whether you're reading this article on a smartphone, tablet or laptop, chances are the device in front of you contains components from at least six countries spanning three or more continents. Its sleek exterior belies the complicated and intricate set of internal parts that only a global supply chain can provide. Over the past century, finished products made in a single country have become increasingly hard to find as globalization - weighted a term as it is - has stretched supply chains to the ends of the Earth.

Now, anything from planes, trains and automobiles to computers, cellphones and appliances can trace its hundreds of pieces to nearly as many companies around the world. And its assembly might take place in a different country still.

Opportunities for producing and assembling products and their components have spread worldwide, making it is easier for countries to climb the production value ladder. States at the bottom, extracting raw materials, can gradually move up, first making low-value components and then progressing to higher-value ones or basic assembly. But just as technology spurred globalization and the shifts in international trade that followed, so, too, will it revolutionize how countries again do business with one another. Compounded by the economic and demographic changes taking place today, automation, advanced robotics and software-driven technologies are ushering in a new era - one of shorter supply chains that will provide fewer opportunities for the developing world. Regions once labeled "emerging economies" may instead stagnate, and the divide between the haves and have-nots within and among nations could widen further.

The Dawn of Globalization and Trade

Globalization in its current form may be only a few decades old, but international trade is not a new concept. From antiquity, technology has driven and enabled transformations in the global order.Caravel ships and the compass, for instance, brought about the age of European exploration, the journeys of which were only sped up by steam power. Even so, few would have guessed that something as simple as a box would form the cornerstone of the latest era.

Sixty years ago, Malcom McLean, an American businessman and entrepreneur, launched the first container ship from a New Jersey port, forever changing how goods move around the world. By using a standard-sized container that could be transported from ship to rail or truck, McLean made shipping goods between two points far more efficient. Rather than taking days or weeks to unload a ship, it now took hours. Though another decade passed before McLean's methods were used on an intercontinental voyage, and several years more before the technology reached Europe, his experiment altered the way the world worked. The first container ship, Ideal X, set sail carrying just 58 trailer units in spring 1956; today, ships have become so large that the biggest can carry nearly 20,000 units.

The explosion of container shipping meant that goods and parts no longer had to be made in proximity to their users. As location became less of a factor in production, the importance of other considerations such as labor costs rose. Not only did low-end manufacturing increase, first in China and then in other parts of Southeast Asia, but supply chains also became longer and more complex. The creation of the World Trade Organization only accelerated globalization by regulating the new economic environment and helping to link producers with their buyers. A number of industries, including the automobile and electronics sectors, were able to take full advantage of the sweeping changes the container ship had wrought.

Now, the raw materials used to create a typical laptop may come from as many as six continents. Those materials could then be further processed in Germany, the United States or Japan before being used to make an LCD screen in South Korea or a computer chip in Malaysia, Vietnam or the Philippines, all before being put into a final product in China. A similar story can be told for the iPhone, whose components come from South Korea, Germany, France, Japan and several other Asian countries before they are assembled in China. Nor is it unique to electronics; the Boeing 787, for example, is pieced together by nine different countries in North America, Europe and Asia. The center console of a Honda Accord alone involves some two dozen suppliers.

All these moving parts might seem to unnecessarily complicate things, but in reality they minimize costs and enable companies to take advantage of factors such as inexpensive labor. As a result, goods and parts are manufactured in the most cost-effective locations instead of the nearest ones. This change, coupled with a strong pro-commerce environment, caused global trade to increase tenfold between 1980 and 2007, propelling economic growth in China, South Korea, Taiwan, Hong Kong and Singapore in the process. Now, many countries in Southeast Asia and other parts of the world are trying to replicate that success, but doing so will become increasingly difficult.

The Sun Sets on Globalization

The era of globalization is coming to an end, though its effects will not disappear entirely. Certainly, globalization has had its moment and could already be in decline, steadily replaced by its successor: a new age driven by advanced robotics, artificial intelligence and additive manufacturing. These technologies stand to dramatically lower the costs of production as they become more prevalent throughout the manufacturing process.

Just as international trade was a familiar concept when globalization emerged, robotics is a field that has been around for some years. Recent and impending advances in robotics, however, will expand its uses far beyond the few industries it currently dominates. Robots' dexterity and the complexity of their programming is increasing, allowing them to assemble more intricate products, such as those with complicated wiring and circuitry. By automating the assembly process, which is largely manual for many industries, robots could someday cause assembly lines to move away from cheap labor pools, undoing one of the biggest shifts underpinning globalization and eliminating many of the benefits that came with longer supply chains.

Progress in additive manufacturing, more commonly known as 3-D printing, will only further degrade the effects of globalization. Traditional manufacturing methods require separate molds to be made (incurring additional capital costs) for each product. But 3-D printers, which produce multiple designs on the same machine, do not. Because of this, economies of scale do not carry the same advantages with 3-D printing as they do in a world of traditional manufacturing. As 3-D printing improves and is used more widely, it could reverse some of the specialization and standardization of supply chains that has taken place over the past few decades, allowing more parts to be made in fewer locations.

The shortening of supply chains in both distance and number of nodes will, in turn, reduce the volume of global trade as fewer countries and factories are involved in the production process. Returning to the example of the hypothetical laptop, companies may need to buy parts from only two countries as opposed to six since more components can be made at the same time, in the same place.

Of course, it would be dishonest not to acknowledge the constraints still facing these emerging technologies. For instance, 3-D printing will reach its full potential only when a single machine can make products comprising multiple materials, something that could take years if not decades to achieve. Moreover, printing metal parts is still too expensive, slow and inconsistent to be widely applicable. Robots, meanwhile, need to have greater dexterity and more capable and quick programming to have the greatest impact on manufacturing. The energy costs of operating a factory largely made up of robots are also significantly higher, and because industrial equipment lasts a long time, its replacement with robotic alternatives will be slow. Together, these factors suggest that the coming transition will be gradual, not abrupt.

A New Day Begins

As the next industrial revolution unfolds, the model for economic growth that arose alongside globalization will offer a less certain path toward development. Though new technologies will not completely erase the benefit of cheap labor, they will reduce the number of opportunities countries have to industrialize, diversify and grow their economies.

Meanwhile, trade will become more regionalized as production migrates back toward consumer countries. Nations with high education levels but comparatively cheap wages, such as Mexico, will replace their low-wage peers as the hubs of new industrial manufacturing. If technology improves enough to bring costs so low that it does not make sense to ship goods from distant places - admittedly a difficult benchmark to reach - trade blocs such as NAFTA could become virtually self-sufficient.

For some middle-income countries, such as Mexico, the gradual regionalization of trade has clear benefits. But many of their poorer counterparts that previously stood to gain from globalization could find themselves in an increasingly difficult position. Countries in East and Central Africa as well as parts of Southeast Asia that were once poised to replace China as the world's next low-end manufacturing base now may see only limited economic growth, if not stagnation. As advanced, industrialized countries no longer have to rely on low-wage labor in far-off places, they will take advantage of new technologies and start producing low-end goods closer to home. States that have not yet begun to industrialize will have the hardest time; the longer it takes them to develop over the next few decades, the more difficult it will be for them to do so as the growth of advanced manufacturing elsewhere shrinks the opportunities available for emerging manufacturers. Developing an advanced industrial base takes additional capital, skills and time, essentially increasing the number of rungs separating low-end and high-end manufacturers on the production value ladder.

Of course, if there are losers in this game then there must also be some winners. Pioneers of the advanced technologies themselves - namely the United States, Northern Europe and parts of Asia, including Japan and South Korea - are best positioned to exploit robotics and 3-D printing. China, too, will probably be able to use new technologies to its advantage. In fact, its solid engineering base, strong central government and policy of promoting domestic technological development - not to mention its aggressive acquisitions of foreign technology companies - could put it at the forefront of the next industrial age.

Though China is still making the move from low-end to high-end manufacturing, it has made enough progress to avoid the negative side effects of globalization's decline, and it will not be as constrained as some other developed regions with established, traditional manufacturing bases. Much like its previous economic growth spurt, however, the gains of its newest industrialization will not be equally distributed throughout the country. Instead, advances in technology will likely increase the gap between China's coastal and interior provinces. If Beijing cannot control the political tension and unrest that is sure to follow, its economy's future success could be put in jeopardy.

Technology is a part of geopolitics that is often overlooked, and yet it fundamentally changes the way countries interact with one another and cope with their inherent constraints. As we move into a brave new world of automated manufacturing, 3-D printing and artificial intelligence, such changes are inevitable. And just as we look back and mark the invention of the cotton gin or the assembly line as turning points in history, so, too, will our descendants look back on today's inventions as the start of a new era.

"The Rise of Manufacturing Marks the Fall of Globalization" is republished with permission of Stratfor.

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