The Case for U.S. Manufacturing
Even makers of high-value electronics may decide it makes sense to relocate from China.
By Vivek Wadhwa
Foxconn’s announcement in 2011 that it would replace a million Chinese workers with robots never came to fruition because the machines at that time were not capable of doing such fine tasks as circuit-board assembly. During the 2015 Robotics Challenge Finals, put on by the Defense Advanced Research Projects Agency, robots couldn’t stay upright and kept falling over.
Robots have evolved significantly since then. Watch the videos that Boston Dynamics is releasing and you will see humanoid robots running and doing back flips, and dog-like machines opening doors and climbing stairs. Industrial robots can now thread needles and work hand-in-hand with humans; they can do practically every assembly job as well as pack the shipping boxes.
When Western companies moved manufacturing to China, it was all about minimizing costs. China offered cheap labor and massive subsidies and turned a blind eye to labor abuse and environmental degradation.
Today, China is the world’s second-largest economy and has labor, real estate, and energy costs comparable to those in some parts of the United States. In 2014, Deloitte estimated that China’s manufacturing-cost advantage over the U.S. had shrunk to less than 5 percent. Manufacturing for the American market may now be more costly in China than in the United States, when you factor in shipping and delays.
With U.S. robots now capable of tasks performed by cheap overseas labor, some types of manufacturing—consumer goods, for instance—can relatively easily return to the United States. Moving high-value electronics manufacturing to this country poses serious challenges. But an argument can be made that even there, a switch to U.S. manufacturing would be advantageous.
One challenge is the complex web of supply chains that have developed in China. Products such as the iPhone have hundreds of components, including the display, integrated circuits, optical modules, sensors, and internal memory. Over the past three decades, production of these technologies started moving to China, and many of the key suppliers became closely interconnected. It is not easy to disentangle operations from China’s high-density integrated-circuit ecosystem.
However, this hurdle becomes easier to overcome when you realize that Chinese-made components actually depend on suppliers all over the world. In 2015, according to Seamus Grimes of National University of Ireland and Yutao Sun of Dalian University of China, the supply chain for Apple products consisted of 198 global companies, with 759 subsidiaries, located in 16 different countries. Of these, 32.7 percent were Japanese, 28.5 percent American, 19.0 percent Taiwanese, 6.5 percent European, and only 3.95 percent Chinese. Of the 391 subsidiaries providing highest-value “core components,” 40.4 percent were American, 26.8 percent Japanese, 10.7 percent Taiwanese, 9.2 percent South Korean, and only 2.2 percent Chinese.
More than half of the components of Apple’s products are imported into China, and practically none of the important core technologies are made by Chinese companies. Nearly all of the intellectual property in Apple’s products originates outside China. The researchers found that the few subsidiaries in China that were producing core components were largely sending them to other countries for final assembly.
Using robots, Apple and other companies could manufacture finished products here without a significant increase in production costs. They would still incur high costs in retooling factories. However, there are reasons for firms to bite the bullet and make such an investment. One is the danger of intellectual property theft and Chinese policies that, as Reuters explains, “effectively force U.S. companies to give up their technology secrets in exchange for being allowed to operate in the country.” Another is uncertainty surrounding the tariff war initiated by President Trump.
I expect that the trickle of manufacturing returning to the U.S. will within four or five years become a flood. We are talking about a trillion-dollar industry. This means there are incredible opportunities for engineers and entrepreneurs to help U.S. businesses retool manufacturing. New types of robots need to be built and programmed, America-based value chains and robotic factories need to be designed, and software and hardware need to be created to monitor manufacturing operations in the same way that large data centers are remotely managed.
If done right, American manufacturing could become great again.
Vivek Wadhwa is a Distinguished Fellow and adjunct professor at Carnegie Mellon University College of Engineering’s Silicon Valley campus.