Cover story№ 3 December 2017

Not so long ago, the main trend in the manufacturing industries of developed countries was offshoring, or outsourcing, production. While the brains of the companies remained in their homeland, business owners sourced labouring hands in more affordable countries. As is well known, Asia, and China in particular, benefited from this trend. Since the 1960s, in places like the USA and Western Europe the percentage of GDP accounted for by manufacturing has declined significantly – in some cases, it halved or more. However, after the 2008 crash, which only highlighted the imbalance of power in the leading world economies, Western governments began to look for new recipes for their economic wellbeing.

Time To Move

Nobody believed that the process of reindustrialisation would be easy, but it already seems to be on a steady course. “Interest is fuelled by the complex growing role of global value chains, and higher competition amongst developing countries in those industries and sub-sectors of the global market, which, until recently, were dominated by developed countries,” writes Vladimir Kondratiev, Head of the Primakov National Research Institute of World Economy and International Relations, Russian Academy of Sciences (IMEMO) in his article for World Economy and International Relations.

In these conditions, governments play a key role in relation to domestic business with production facilities abroad. The administration of the current US President, Donald Trump, who rose to power with the simple slogan ‘Make America Great Again’, is often used as an example. However, his predecessor, Barack Obama, also commented that it was necessary “to stop encouraging entrepreneurs who move jobs abroad.” During the Obama administration, tax rebates were introduced for businesses investing in domestic industry. Trump is continuing this theme, but he also introduced a tax on companies that keep their manufacturing abroad, but sell their products domestically.

In 2013, Boston Consulting Group (BCG) found that the executives of every second American corporation with a turnover of $1 billion were planning to relocate their production facilities from China or were looking into doing so.

According to the Reshoring Initiative, since 2010, America has brought more than 300,000 jobs 'back home'; and already 940,000 new industrial jobs have been created.

Not so long ago, the main trend in the manufacturing industries of developed countries was offshoring, or outsourcing, production. While the brains of the companies remained in their homeland, business owners sourced labouring hands in more affordable countries. As is well known, Asia, and China in particular, benefited from this trend.


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Since the 1960s, in places like the USA and Western Europe the percentage of GDP accounted for by manufacturing has declined significantly – in some cases, it halved or more. However, after the 2008 crash, which only highlighted the imbalance of power in the leading world economies, Western governments began to look for new recipes for their economic wellbeing.

Time To Move

Nobody believed that the process of reindustrialisation would be easy, but it already seems to be on a steady course. “Interest is fuelled by the complex growing role of global value chains, and higher competition amongst developing countries in those industries and sub-sectors of the global market, which, until recently, were dominated by developed countries,” writes Vladimir Kondratiev, Head of the Primakov National Research Institute of World Economy and International Relations, Russian Academy of Sciences (IMEMO) in his article for World Economy and International Relations.

In these conditions, governments play a key role in relation to domestic business with production facilities abroad. The administration of the current US President, Donald Trump, who rose to power with the simple slogan ‘Make America Great Again’, is often used as an example. However, his predecessor, Barack Obama, also commented that it was necessary “to stop encouraging entrepreneurs who move jobs abroad.” During the Obama administration, tax rebates were introduced for businesses investing in domestic industry. Trump is continuing this theme, but he also introduced a tax on companies that keep their manufacturing abroad, but sell their products domestically.

Protectionism is not a new idea. Leading European states have relied on it since the 18th century, while America has used protectionist policies since the end of the Civil War (i.e. the second half of the 19th century). In modern history, the US Smoot-Hawley Tariff Act of 1930, increasing tariffs on over 20,000 imported goods, marked a turning point for protectionist policies. It triggered a wave of similar tariff restrictions that rippled around the world. Only after the Second World War did the picture begin to change.

The results of any protectionist policy are often ambiguous. On the one hand, these measures stimulate the growth of national industries and help create employment opportunities. Supporters of protectionism argue that it enabled the industrialisation of Europe and North America. But on the other hand, protectionism infringes the freedom of entrepreneurship and consumer rights. And we should not forget that any severe restriction of external competition could lead to monopolisation.

But despite these disadvantages, more and more countries are reinstating their protectionist policies. At every economic forum, we hear about the importance of free trade, but in fact the impact of protectionist measures implemented after the financial crisis if the late 2000s is growing. And, if earlier protectionism mainly tightened customs policies, now the emphasis has shifted to non-tariff restrictions – i.e. towards a more elegant, yet effective strategy. However, the time-tested practice of trade barriers is alive and well: according to the WTO, since 2008, over 2,000 trade barriers have been introduced.

And here is the paradox. At every summit, the G20 member states mention the importance of developing free trade, while in fact they have been continuously dismantling it. And if in 1985-2007, the growth rate of international trade significantly outstripped the dynamics of global GDP, then last year its figures became much more modest for the first time.

 

Robots Are Coming

One of the conditions for the large-scale industrial remigration of industry was the shale revolution, which reduced energy costs and lowered the cost price. In the case of America, the weakened dollar also needs to be considered.

On the other hand, the rapid economic development of Asia (for reasons including Western offshoring), is leading to an increase in labour costs. As early as the 1950s, the Nobel laureate in economics Arthur Lewis conducted a study on how the situation could develop further. He used the idea that developing countries are formed of two main sectors: 1) low productivity and surplus labour (subsistence economy); 2) high productivity (industry). By using the excess labour of the former, the latter increases profitability. The growth in labour productivity outstrips wages, so it is possible to get more profit than in economies without such distortions between sectors. However, as the number of surplus workers decreases, salaries increase. As a result, the economy reaches the Lewis Turning Point, when high profits become distant memories. IMF experts Mitali Das and Papa N’Diaye believe that this will 'almost undoubtedly' happen in China by 2025. This situation is aggravated by the demographic problem: a decreasing working-age population.

The digital revolution can help with this issue. At the end of last year, the United Nations Conference on Trade and Development (UNCTAD) presented a report on the role of automation in the modern world, according to which robots will take 2/3 of the jobs in developing countries. This again brought the focus to China, which since 2013 has purchased more industrial robots than any other country in the world. So, for its long-term economic development strategy, Beijing is betting on strengthening domestic demand. But this is hardly possible without increasing the incomes of the population through higher wages. The outcome for China remains unclear.

But digital technologies are becoming commonplace not only in the East, but also in the West. This area also is being led by pioneers. According to BCG, in countries that are introducing industrial robots on a greater scale, production costs could be reduced by 18-33% by 2025. This explains, for instance, why Adidas opened manufacturing facilities in the Bavarian city of Ansbach in 2016, staffed mainly with robots. Humans are only required to oversee the work of the machines, demonstrating that new technologies are benefitting the reshoring trend.

Alongside robotics, additive manufacturing also offers a number of excellent solutions for returning production 'back home' or bringing it closer to the consumer. Boeing is a pioneer in this area. At first, the company used 3D printing for prototyping, and then it began to produce aircraft components using this technology. Boeing uses 3D printing not only for plastic components, but also for metal parts, having signed a contract with Norsk Titanium for the production of parts for its Dreamliner.

 

Historical Reference

At one time, protectionism was synonymous with mercantilism. The Scottish economist Adam Smith coined this terminology. Throughout Europe, various mercantilist ideas reigned supreme between the 18th and the 18th centuries. 'In the spirit of the era, William Petty, whom Karl Marx called “the father of political economy” and the founder of the Labour Theory of Value, was also a mercantilist,’ notes economist Leonid Tsedilin. Today, the concept of mercantilism is much broader, referring to governmental policy for accumulating funds domestically. At the same time, protectionism, aimed at protecting a country from international competition, is considered part of mercantilism.

 

Today’s clients prefer custom-made products to mass-produced items. This goes not only for the design of the goods, which usually is not that difficult to amend, but their functional elements, which often come with a heftier price tag due to the need to reconfigure equipment. Producing customised goods in close proximity to the shipment destination eases this process, as it allows some room for implementing the necessary amendments. In such cases, digital technology, including 3D printing, provides a significant degree of flexibility. It is much easier to readjust its production lines for any customisation required, as well as produce smaller batches.

Digital technology has recently been high on the agenda of many governments around the world. Germany launched its High-Tech Strategy before the financial crisis. In 2012, the country adopted the Industrie 4.0 initiative, an economic development plan with a focus on new technologies. One of the key objectives of this plan is to encourage' smart' services, which the government supports, both directly and indirectly. This includes such measures as establishing innovation clusters.

Mind the Gap

For Russia, offshoring has never been a big issue. But it would be problematic to overlook the new global trend towards reshoring, as consequences may be challenging.

'Import substitution' has recently become a major economic trend in Russia. In its objectives, this concept resembles reshoring, although its content is completely different. 2014 saw the approval of the revised version of the Development of Industry and Enhancing Competitiveness initiative. Its main new objective was to reduce the quantity of goods imported into Russia. The same year, the government adopted a new Industrial Policy. According to the Acting Minister of Industry and Trade Denis Manturov, the policy is set to create “conditions for a new round of industrial development in the country”.


3D-printing fr om titanium can save Boeing up to $3 million on the production of each Dreamliner, according to Norsk Titanium

Most importantly, the document outlines new special investment contracts that guarantee long-term stable business conditions, as well as tax rebates for new integrated investment initiatives. At the First National Import Substitution Forum in September 2017, the Deputy Head of the Ministry of Industry and Trade, Georgy Kalamanov, also mentioned subsidies for industrial R&D needs and lower interest rates on loans for new integrated investment projects. In accordance with the new Industrial Policy, the government established its Industrial Development Fund, which since 2016 has sponsored about 130 ventures, worth over 34 billion roubles (approximately $578 million), which will help to create about 12,500 jobs.

Businesses are hopeful that such measures will prove effective. According to the Head of the Russian Union of Industrialists and Entrepreneurs, Alexander Shokhin, special interest ventures have already become one of the most effective tools for supporting domestic industry. However, the process is not straightforward, and it will, most likely, take some industries a while before they can reap the fruits of these initiatives. This goes for the most R&D-driven sectors, like the chemical industry and pharmaceuticals, wh ere import substitution is taking a long time to have an effect.

However, there are some industries that managed to preserve their existing skills, while also developing new knowledge. Take the heavy goods vehicle industry, for instance. The leading Russian player is KAMAZ. In 2016, its sales rose by 15%, increasing the company’s domestic market share to 56%. In comparison, in 2012-13 its share was 30-35%, which was the highest it had ever been at that point. This year, the market share is still trending upwards: in January-October KAMAZ’s sales in Russia grew by 22%.

The vehicle manufacturing giant’s growth has had a positive knock-on effect for its partners. KAMAZ is one of the key clients of OEMK (part of Metalloinvest). Since 2009, KAMAZ has purchased over 400,000 tonnes of high-quality rolled steel products from the enterprise. In November, KAMAZ and Metalloinvest signed a new three-year contract, according to which, KAMAZ intends to cover up to 80% of its bar requirements with purchases from OEMK.


KAMAZ was able to increase its share of sales in the Russian market to 56%. As suppliers, the company also often chooses domestic enterprises. One of them is the Oskol Electrometallurgical Plant, part of Metalloinvest

However, 'import substitution' cannot be a means to an end. Instead, it is one of many incentives for industrial development. Global product demand is another driving force behind the process. According to Petr Fradkov, Head of the Russian Export Center, in January-June this year, Russia’s non-primary exports grew by almost 19%, while exports of engineering products are powering through at the same speed as exports of agricultural products.

One of the main stumbling blocks is the development and international sales of domestic digital productions solutions. In terms of its importance, Vladimir Putin once likened Russia’s current need for digitalisation to the electrification of the country in the past. In October, speaking at a meeting of the Security Council, the president said that it is important to develop the production of not only hardware, but also software in Russia. He stressed the importance of “minimising the risks of depending on foreign software and telecommunications”.


To confirm the absurdity of accusations of espionage, Kaspersky Lab decided to take a painful step – disclose the code of its software products

This will not be easy to implement, as Russian companies are up against very powerful global competitors. For example, a massive campaign against Kaspersky Lab, launched in the United States of America, has almost brought suspicions in espionage against the company. To prove its innocence, the company is now going to open its software code to investigative experts.

In conclusion, since the 2008 financial crisis, which resulted in reshoring and re-industrialisation, global economies have undergone major restructuring. Consequently, in today’s world, there is hardly a country that does not rely on protectionist policies to a certain degree. The particular shape or form this type of policy will take depends on each individual government. However, the key is to not to cross the line as doing so could destroy the existing system of international relations. “While protectionist policies are becoming the norm, one-sided, politically motivated sanctions on trade and investment are becoming a hidden weapon,” wrote Vladimir Putin in an article for the German newspaper Handelsblatt, in July, ahead of the 2017 G20 Summit in Hamburg. In his opinion, “only open trade relations based on uniform norms and standards stimulate the growth of the global economy and contribute to the progressive development of international relations.”


 

Printing Press

The development of 3D metal production technology has brought this type of printing to a completely new level, serving the needs of real industrial clients very well. It comes as no surprise that more and more corporations are becoming interested in this technology. For instance, General Electric has launched a specialised unit working on introducing such innovations. One of their key projects is developing the parts for the Cessna Denali jet engine.

Naturally, we are also seeing a rise in the variety of printing offered, in terms of metal composition. One of the champions of 3D printing, Desktop Metal, has developed a mixed-media powder for the production of injection-moulded metal items. Many manufacturers agree that 3D printing is the future for many industries. According to Don Jones, Global Aftermarket Parts Strategy and Transformation Director at Caterpillar, 3D printing could soon replace metal structures in construction equipment.

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