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As Low-Cost Labor Pools Shrink, Will Global Supply Chains Become a Thing of the Past?

The way products have been manufactured has evolved significantly over the past decades. Today, most are built in large factories in low-cost regions, primarily in Asia, but also increasingly in Eastern Europe and South America.

This has largely been good for consumers. Products manufactured overseas have powered our cars, connected our networks and furnished our lives. Lower manufacturing costs have made more products more affordable for more people.

However, there are signs that this approach has reached its limit. 

Low-cost labor pools in distant countries are being exhausted, and in manufacturing settings closer to consumers, the growing global middle class is less willing to do repetitive tasks, fueling high turnover. Not only is it getting harder to find labor in low-cost regions to build products, the growing impact in terms of local jobs, the environment and delays in product distribution around the world is becoming even more serious. 

The Rise of Personalized Products

In tandem, consumer demand for personalized products is a steadily growing trend. According to a report by YouGov, between 2015 and 2018, “the personalization economy has seen an increase in demand from 17% to 26%.” And 46% of those consumers are willing to pay more for a customized product or service.

This new consumer paradigm presents massive opportunities for large corporations to succeed in a localized economy — if they are set up to take advantage of them. The key to unlocking these opportunities lies in a distributed manufacturing operation, one that relies on a network of smaller, more nimble and flexible factories around the world located closer to customers.

Simply put, corporations must increasingly think globally in terms of emerging customer needs, but build locally in terms of executing those needs.

The Rise of Microfactories

The possibility of smaller, distributed factories with accompanying ecosystems that serve regional markets, compared to a large production center that ships product worldwide, may seem counter to how industry typically thinks of cost efficiency and scale. 

Automation is proving to be an important link between large companies and their localization strategies. It enables not only localization in manufacturing, but innovation — and at lower costs and higher efficiency.

Globalization, simply put, has run its course. A localized approach to manufacturing is imperative for companies to succeed.

This is where microfactories come into play. 

These smaller factories use automation instead of relying on expensive human labor, ensuring quality and consistency in product while enabling scale through efficient output. With their lower operating costs, microfactories effectively democratize innovation by making manufacturing more readily available to entrepreneurs, inventors and makers. 

For example, if someone today has an idea for a new product — even if they have the technical skills to create it — they cannot manufacture that product at scale without investing significant capital. In 10 years, we will see cost-effective microfactories drive a new wave of innovation across industries as manufacturing becomes accessible to all people.

Geographic Proximity

Closer geographic proximity to customers also means closer proximity to customer tastes and preferences. Not only can a company localize the actual product to best suit that particular market, it can focus its marketing efforts on locally designed and produced goods — and enjoy other benefits from those efforts. Geopolitical policies amplify this trend, as goods produced closer to consumers who buy them aren’t subject to the same threat of changing tariff structures. Further, smaller manufacturing footprints help companies reach their sustainability goals.

The obvious argument against adopting a more automated factory floor is the loss of jobs for human workers, but the benefits of automated microfactories far outweigh those losses. 

And the manufacturing industry would still be indirectly creating jobs for workers down the line. According to the Economic Policy Institute, “manufacturing provides a significant source of demand for goods and services in other sectors of the economy.”

Ultimately, job growth driven by local manufacturing is an important offset against globalization. There has been much pontificating on the idea that Industry 4.0 will eliminate manufacturing jobs, but a “think global, build local” approach bucks this trend. While globally, job loss from automation will outpace job creation from automation, locally automation could be a creator — not a destroyer.

Globalization, simply put, has run its course. Once heralded for its cost-effectiveness, a globalized approach loses all impact in a world where low-cost labor is rapidly diminishing and consumer demand for authenticity is steadily increasing. In this changing world, a localized approach to manufacturing is imperative for companies to succeed. 

Intelligent automation will enable large corporations to embrace localization and build closer to their customers than previously possible. In this world, product innovation trumps cost advantages, with no player too large or too small to reap the benefits.

This piece was previously published on the World Economic Forum blog

Amar Hanspal

CEO at Bright Machines

Amar Hanspal is the CEO at Bright Machines, a company that delivers intelligent, software-defined manufacturing.

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