The current COVID-19 pandemic has disrupted and fully exposed the vulnerabilities of global value chains (GVCs) which are synonymous with globalization and characterized by high interdependencies between global lead firms and suppliers located across several continents. Many countries are currently facing supply shortages of critical medical equipment in the fight against the virus. Firms and nations are also facing risks associated with protectionist national trade policies: high import tariffs may have caused shortages of critical medical products and equipment from China in the United States, while export restrictions on medical supplies may have exacerbated supply shortages.
Long before the COVID-19 pandemic, in an effort to mitigate supply chain risks, increase flexibility and improve product standards, global lead firms have relied on Industry 4.0 technologies and occasionally reshored parts of their production. Even in developing countries like Bangladesh, for instance, contract manufacturers in the apparel industry have started replacing workers with robots to adapt to increasing wages. In view of those pertinent changes, this article aims to examine two interrelated and policy relevant questions, namely: could the current crisis further spur automation and reshoring in GVCs? And, thus, could a subsequent reversal of globalization lower the prospects for development through increased GVC participation?
Many countries are currently facing supply shortages of critical medical equipment, including its parts and components. Global demand for ventilators and personal protective equipment (PPE), such as medical masks, plastic shields and gloves, has increased exponentially as the number of COVID-19 cases has skyrocketed. The shortages have been one of the defining features of the crisis and may be better understood by taking a closer look at how some of the crucial equipment is being produced.
One of the main bottlenecks in the current production of ventilators, for instance, is the timely supply of components due to dependence on inputs produced by global suppliers. Instead of producing the entire product from scratch, countries specialize in different tasks in the GVC resulting in high interdependencies. While the Dutch company Royal Philips, one of the leading manufacturers of ventilators, declared that it would double its output by mid-May, it relies on its wide network of closely integrated global suppliers for continuing its operations, including timely production of electrical components such as circuit boards or sensors.
Based on analysis of the average export unit values (US$ per kilogram exported), suppliers in China, Lithuania, Thailand, Turkey and Viet Nam, among other countries, seem to specialize in lower value added ventilator components (low unit values). On the other hand, countries that headquarter leading ventilator manufacturers such as Draegerwerk (Germany), Fisher and Paykel Healthcare (Netherlands), Hamilton Medical (Switzerland), Medtronic (Ireland), and Royal Philips (Netherlands) tend to focus on higher value added components or final assembly of ventilators (high unit values).
Could Industry 4.0 technologies, including 3D printing and artificial intelligence, fill some of these supply shortages currently observed in the markets for ventilators and PPE? The U.S. Food and Drug Administration, for instance, is collaborating with government and public-private partners, including America Makes, the National Additive Manufacturing Innovation Institute, to respond to the shortages in medical supplies using 3D printing to produce ventilator valves and other ventilator parts, as well as face masks and plastic shields, despite some well-known limitations to additive manufacturing, such as lengthy certification requirements, especially of life-saving medical equipment.
The Republic of Korea is using Industry 4.0 technology to test far more people for COVID-19 than has been possible in many other countries, and has thereby successfully limited the number of deaths linked to the virus. The Korean company Seegene, which carries out multiplex molecular diagnostics, relied on its artificial intelligence-based big data system to develop a test for COVID-19 within a few weeks, a procedure that usually takes several months to complete. Quick approval by the Korea Centers for Disease Control and Prevention within less than one week ensured that testing for COVID-19 was up and running. Moreover, Seegene’s system uses automatic testing, i.e. samples are analysed by a diagnostic machine rather than by humans, which speeds up the process and reduces risk of error and contamination.
From a lead firm perspective, Industry 4.0 unlocks new labour-saving technologies which could potentially reduce reliance on low-skilled, low-cost labour in manufacturing. This has implications for the global geography of production, as value chains can be expected to become more regional in nature, moving closer to key final consumer markets in China, the European Union, Japan and the United States. Industry 4.0 is also likely to have an impact on the length of value chains, as automation could consolidate various steps of the value chain.
What are the implications of Industry 4.0 for development through GVC participation? By diminishing the significance of low-skill labour, Industry 4.0 impacts countries’ participation in GVCs as it changes the patterns of their comparative advantage. This could lead to a reduction in developing countries’ gains from GVC participation, namely in terms of job creation and productivity spillovers. Anecdotal evidence from Bangladesh suggests that rising wages and social unrest following the Rana Plaza disaster of 2013 led to increased automation in the apparel industry – an industry that has long been sheltered from automation. Robots are now able to manipulate fabrics, stitch pockets and attach belt loops to pants. As a result, the apparel industry witnessed strong export growth of nearly 20 per cent between 2013 and 2016, while job growth lagged behind at only 4.5 per cent. This also does not bode well for female manufacturing industry workers in Bangladesh and around the globe, who are more likely to be employed by firms participating in GVCs.
Industry 4.0 could also influence the reshoring decisions of lead firms in light of the growing importance of supportive and flexible business ecosystems, although evidence of reshoring as a consequence of Industry 4.0 is still limited. These emerging business ecosystems require a pool of skilled workers and supplier firms, as well as high-quality services that are embodied and embedded in goods. In addition, the relevance of high-quality technological infrastructure, a strong regulatory framework and contract enforcement mechanisms for business ecosystems can be expected to rise.
A firm-level survey involving a sample of around 2,500 manufacturing firms from eight European countries confirms that flexibility and product quality were the two main drivers for their reshoring activities in 2015. Nevertheless, less than 6 per cent of the firms surveyed had reshored, while nearly 17 per cent had offshored activities over the same period, suggesting that reshoring is less widespread than generally perceived.
On the other hand, Industry 4.0 may facilitate GVC participation, at least in certain sectors. Digitization can lower the barriers to GVC entry by making it easier to manage GVCs and access markets, while e-commerce reduces the importance of physical infrastructure and connectivity. Furthermore, a recent study finds that robotization in industrialized countries has promoted South-North trade of parts and components across various industries. The automation-induced export growth in parts and components from developing to industrialized countries over the period 1995-2015 was highest in the automotive industry, followed by rubber and plastics, metals, electronics and machinery.
Several factors seem to support the argument that automation and possibly reshoring will accelerate following the COVID-19 pandemic. The case of testing in the Republic of Korea exemplifies that automation facilitates supply-side adjustments (e.g., through on-demand ordering), mitigating firms’ risks in case of a pandemic or other shock, as it allows for more flexible adjustment to increasing demand. In an effort to reduce countries’ dependence on global supply, industrial policies to secure the supply of goods deemed critical to the healthcare sector and national security could be implemented. This possibility has recently been voiced by politicians and economic advisers in the United States and elsewhere.
There are also, however, reasons to be unconcerned about a full reversal of globalization. Ensuring the supply of critical goods does not necessarily require reshoring of production. Countries can prepare for a pandemic by stockpiling ventilators and critical medical equipment, even if these have been produced abroad, as well as by implementing health sector reforms that have been long overdue. While firms may rethink their strategies and consider automation or reshoring to mitigate future risks, it is unlikely that entire supply chains will be automated in the short term. The automation of certain sub-components may not be feasible or even desirable, for example, due to a shortage of skilled workers who are able to operate the machines or for products with low value-to-weight ratios.
The global stock of industrial robots is still concentrated in specific countries and manufacturing industries. As of 2016, around one million industrial robots in the manufacturing sector were being used in countries specialized in innovative GVC tasks. These countries are characterized by high GVC participation in manufacturing, a high share of manufacturing and business services in their exports, and a high engagement in innovation, and include many European countries, Canada, the United States, Israel and some Asian countries (Japan, Singapore and the Republic of Korea). While China alone used over 260,000 robots in its manufacturing production, the other countries used only 150,000 robots. Nearly half of the robots were used in motor vehicle production (664,000), followed by computers and electronics (close to 400,000). Robots were used to a lesser extent to produce rubber and plastics, fabricated metals, machinery and equipment, and food and beverages.
Furthermore, the data do not unanimously support a negative association between automation and GVC participation. Although backward GVC participation in the manufacturing sector fell in most countries between 2011 and 2016, while the industrial robot stock increased, their relationship varies by type of country. The scatterplots present the correlation of countries specialized in innovative GVC tasks compared to China and other countries. While the analysis does not reveal any causality, the differences between country types are striking. Higher robotization in countries specialized in innovative GVC tasks (top panel)—which use the bulk of industrial robots—appears to be associated with a weaker decline in GVC participation. The scatterplot for China and other countries (bottom panel), by contrast, shows a negative correlation. Higher robot use is associated with a stronger decline in backward GVC participation. The implications for development depend on types of foreign inputs sourced from a given country (labour-intensive or not) as well as on the relationship between robots and labour in the relevant industries.
Other developments—including GVC entry of lower-cost countries and growing demand for mid-range consumer goods in emerging markets—could actually slow down the trend towards automation and reshoring. Ethiopia, for instance, has successfully entered GVCs and created many jobs for apparel workers, especially women, but currently has no regulated minimum wage, making the country an attractive investment location for global apparel lead firms. Moreover, appetite for inexpensive consumer products like electronics and apparel is growing in emerging markets. Original equipment manufacturers such as Tecno (Hong Kong Special Administrative Region), Torque (the Philippines) and Viettel (Viet Nam), for example, have been penetrating the smart phone markets in Asia and Africa. Automation and reshoring seem to be less likely in labour-intensive GVCs that target consumers in emerging markets, at least in the short- to medium-term.
The coronavirus pandemic has already taught us several lessons. From a trade perspective, free flows of crucial medical goods and services ranging from masks and ventilator components exported from China, to doctors being flown in to Italy from Cuba, the automation of critical tasks such as testing, and the absence of trade protectionism and red tape all jointly play a role in overcoming the current crisis. These lessons will hopefully be remembered when we shape the post-COVID-19 world.
This opinion piece is part of a series of articles by UNIDO's Department of Policy Research and Statistics and was originally published on the UNIDO page.
The opinions expressed herein are solely those of the authors and do not necessarily reflect the official views of the GGKP or its Partners.