The COVID-19 outbreak is unfolding in Latin America and the Caribbean. Despite concerns of underreporting and insufficient testing for contagion, the virus has rapidly spread throughout the region. While overall mortality per 100,000 population remains below that of developed countries1, prospects of survival after contracting COVID-19 are concerning. Fatality in confirmed cases in several countries is higher than in the United States and not so distant from those of Italy or Spain. COVID-19 has only added to the ongoing fight against outbreaks of measles and dengue in the region.
Short-term policy priorities aim at containing societal and economic impacts by focusing on slowing down the contagion while managing the extraordinary demands on the healthcare system. Decisive action is required on several fronts simultaneously, otherwise the fight against the virus and subsequent recovery risk major setbacks, nurturing what López-Calva identifies as a “self-reinforcing cycle between coronavirus and inequality.”2
Economic impacts of the pandemic are visible
Despite differences in individual performances, the loss of economic activity for 2020 in the region ranges from a conservative -1.8 per cent to -4.0 per cent or lower, one of the worst records since World War II.3
COVID-19 is exacerbating the financial turmoil the region has experienced even before the outbreak. Disruptions on the real side of the economy follow closely. According to Economic Commission for Latin America and Caribbean (CEPAL), the global downturn arising from COVID-19 is likely to affect the region through four major channels. First, a significant loss in economic dynamism of its main trade partners, namely China, the United States and Europe; second, plummeting commodity prices; third, a significant drop in demand for tourism and transport services; and fourth, disruptions in global industrial activity and the functioning of global value chains.4
In the interest of space, let us focus on the issue of industry in particular.5 The emerging evidence indicates heterogeneity of disruption across industries and firms.In Argentina, for example, activities linked to leisure and sports or furniture, footwear and related industries shut down almost immediately following the adoption of preventive measures against COVID-19. By contrast, food processing, the production of basic healthcare products and related activities — packaging, logistics, and laboratories for food safety — continue operating, together with activities related to energy (oil extraction) and telecommunications.
In the Dominican Republic, industrial free zones, the country’s strongest export sector (accounting for around 3.2 per cent of GDP in 2019) reduced operations to around 10 per cent, although the manufacturing of medical devices continues. Domestic manufacturing, on the other hand, which accounts for 10 per cent of GDP, could be among the least impacted industries as its operating levels remain above 50 per cent. The halt in construction activities is also affecting non-metallic mining and quarrying activities (which account to around 1.8 per cent of GDP).
In Mexico, the world’s fourth largest car manufacturer, the automotive industry constitutes the most important source of foreign currency and is spearheading efforts in industrial modernization. The COVID-19 outbreak has halted assembly plant operations even though car manufacturers were already experiencing a downward trend in their business cycle, necessitating a partial suspension of operations, wage cuts, early retirement schemes, compulsory vacation and other job-saving measures. A different configuration of the automotive industry may emerge after COVID-19, with the global economic downturn delaying recovery in demand for automobiles.6
How to protect the economy and foster recovery in a rapidly evolving environment?
Fiscal policy should continue to be a priority with sufficient backing of resources to maximize impact. Economic emergency plans are in place throughout the region, however, their implementation and effectiveness remain subject to debate. In addition to limited fiscal space, perceived slow responsiveness, particularly in some of the largest economies including Brazil and Mexico, have delayed responses to COVID-19. Several Caribbean countries have yet to formulate precise policy responses, but fiscal stimuli are in place, including a reallocation of existing budgetary resources.7
Moving forward, governments in the region could consider the following set of actions in order to mitigate the risks stemming from the pandemic:
First, avoiding the false dichotomy between protecting people or the economy. Informality, inequality and poverty make measures to contain the virus even more problematic. Countries such as Bolivia, Chile and Ecuador have imposed severe fines and have even ordered public security forces to ensure compliance with social distancing and lockdown measures. Brazil, Nicaragua and Mexico have been slower, openly reluctant, or have only loosely adopted responses to COVID-19. Many livelihoods depend on the informal economy or on formal economic activities that provide daily wages. Sustaining and even extending direct cash transfers, expanding healthcare capacities and food distribution programmes such as those introduced in Bolivia, Brazil, the Dominican Republic, Mexico and Peru help ease the burden on the poor.
Second, this should not pre-empt measures to salvage the economy and maximize firm survival and employment. Support to liquidity and debt restructuring, deferral of payments on utility bills, sharing the wage bill and easing people’s and firms’ fiscal burden should contain negative impacts, particularly on the strong base of small- and medium-sized enterprises (SMEs), which operate often in informal markets and often cannot afford to halt their operations, even for short-term periods. Similar measures should help formal firms weather the immediate shocks and buy them time to undertake necessary organizational transformations. Otherwise, the resulting rise in unemployment and the loss in personal and corporate incomes could exacerbate poverty and hinder future productive investments. Whether intended to protect people or firms, the COVID-19 emergency support measures should be evaluated once the crisis ends in order to avoid the issues of capture, free riding and a mere return to the previous status quo.
Third, demand-driven policies, such as strategic public procurement, could help fight COVID-19 and reignite an inclusive and sustainable economic recovery. Several countries in the region have introduced regulatory flexibility to allow direct contracts and incentivize firms to repurpose production or to foster domestic manufacturing of basic health supplies. Similar initiatives would contribute to sustainable and equitable recovery, drawing from experiences in the region. For example, the joint procurement of essential medicines in Central America, regulatory reforms to foster the reorganization of markets for generic products in Brazil and Mexico, or the purchase of products from women-led businesses in the Dominican Republic.8
Fourth, mobilize national statistics offices to inform and monitor interventions during and post-COVID-19. CEPAL asserts that uncertainty is forcing governments to experiment and learn as they fight COVID-19.9 Learning should follow a minimum structure and account for the differentiated need for policy support across industries and firms. Manufacturers of products of immediate relevance to the fight against COVID-19 — medical instruments and supplies, pharmaceuticals and other industries — are struggling to cope with a sudden surge in demand and may capitalize on the outbreak. The situation will differ for other firms, depending on where the firms were in the business cycle before the outbreak of COVID-19, the severity of the short-term disruption of their activities and their prospects for recovery. Governments with limited planning capacities should explore partnerships with academic and private entities to produce such monitoring instruments and design policy interventions.
Fifth, strategically mobilize domestic scientific and technological capabilities to supplement health and productive capabilities. In Argentina, the Ministry of Science and Technology (MINCYT) and the Consejo Nacional de Investigaciones Científicas y Técnicas (CONICET) have created a special research unit, COVID-19 MINCYT-CONICET, to develop diagnostics and provide epidemiological and prospective advice. In Brazil, Finep-Fapesp, EMBRAPII, the Ministry of Health and other entities are pursuing similar goals, while in Uruguay, Universidad de la República, the National Agency for Research and Innovation (ANII) and the Ministries of Public Health and of Industry, Energy and Mining, respectively, are supporting diverse initiatives to mobilize local research to fight COVID-19. Argentina, Brazil, Mexico, Uruguay and other countries in the region have issued calls for research proposals directly relevant to fighting COVID-19. Initiatives at the regional scale should be explored, even building on open science initiatives such as ProCiencia in Mexico.
Lastly, there is an urgent need for strengthened leadership, coordination and decision-making power within the countries and across the region. Policymaking in times of crisis may compromise political capital since many of the necessary interventions can be perceived as harsh and unpopular. Heads of state can either lead the response or become a liability. To fight the COVID-19 pandemic, the region requires stronger political consensuses, decisive all-of-government approaches and multi-stakeholder participation. Policy effectiveness is diluted in absence of consensus and coordination between federal and regional governments, be it due to divergent perceptions of the severity of the COVID-19-related crises or the urgency of implementing measures to protect the health of both people and the economy. Governments should commit to developing truly collaborative mechanisms that allow public and private partners to explore joint policy responses according to short-term needs, and longer-term recovery strategies involving programmes for both enterprises and employees. This would require strengthened decision-making and implementation powers of existing high-level commissions, consultative bodies or task forces responsible for coordinating efforts against COVID-19.
The fight against COVID-19 underscores asymmetric global power relationships between countries as well as between countries and transnational corporations. Governments across the world are introducing partial or total bans on trade of COVID-19-related supplies, or are invoking special powers to lure companies into repurposing production and into increasing local supply. While multinational firms based in developing countries may benefit from such a surge in demand, many would end up contributing little to the fight against the outbreak in host countries. In Mexico, this situation has led a provincial government to close the operations of a ventilator manufacturer whose priority was export to the United States.10 Cuban healthcare services are providing relief to countries in the region11, but the countries in the region need to do more to strengthen inter-regional collaboration as a means of securing crucial resources to fight COVID-19 and facilitate an orderly recovery afterwards.
Focus on building resilience in the medium to long term
In the future, extreme events such as COVID-19 will continue to penalize the unprepared. Governments in the region need to address long overdue investments in health, innovation and productive capabilities that can contribute to the strengthening of social and economic resilience. UNIDO data on manufacturing value addition and industrial competitiveness document that manufacturing in Latin America is receding relative to other developing countries — mainly in Asia — increasing the risk of over reliance on single sources for critical medical supplies, among others.12 While market shocks can drive innovation, firms and countries need to invest in the required technological and productive capabilities. COVID-19 represents even bigger challenges for a region characterized by chronic underinvestment in science, technology and innovation, and structural gaps in research and industry collaboration. The pandemic is also challenging democratic governance and offers an opportunity for developing novel multi-stakeholder approaches to building consensus, informing policy design and implementation.
COVID-19 critical supplies: the manufacturing repurposing challenge
By Carlos López-Gómez, Lucia Corsini, David Leal-Ayala and Smeeta Fokeer
- Repurposing is a rapid response solution to address the global shortage of COVID-19 critical items that can save lives by using idle manufacturing capacity.
- Repurposing is in principle a temporary strategy, but one that can be expensive and fraught with challenges, explaining the limited results so far.
- Opportunities exist to leverage on proven designs and methods; starting from scratch or trying to ‘reinvent the wheel’ can lead to significant delays.
- Policy responses are essential to help manufacturers address repurposing challenges and facilitate the transition to the new “normal” after COVID-19.
- The development of a rapid repurposing roadmap, reflecting national priorities and context, could provide a coherent and holistic structure to support effective policy responses.
As the global COVID-19 emergency continues to unfold, one urgent problem is the shortage of critical supplies such as masks, ventilator and test kits for both the healthcare sector and the wider population. Policy makers are calling for firms across manufacturing sectors to temporarily repurpose their production in order to increase global production capacity. Building on a recent study, this article reviews some of the key manufacturing challenges involved in repurposing and discusses potential ways to mitigate them.
Repurposing is necessary to manufacture life-saving products
The World Health Organization (WHO) has published a list of COVID-19 critical items facing global shortage, grouped into three categories (Table 1). Ideally, manufacturers would address the spike in demand by simply speeding and scaling up production. Despite efforts by companies to expand their current capacity, governments utilizing accumulated stockpiles, and people switching to substitutes, there is still a gap between the supply and demand of these essential products. The gap is likely to continue to grow before a vaccine against COVID-19 is found, hindering efforts to effectively fight the pandemic around the world.
Note: List of critical items identified by WHO on 30 March 2020; examples of manufacturing facilities based on government communications and media reports.
Governments around the world are calling on manufacturers to temporarily repurpose their manufacturing lines to meet this shortfall. Japan is providing business subsidies to ramp up the production of masks; the UK has set up a “ventilator challenge” which aerospace, automotive and ICT firms have responded to; China is repurposing state-owned enterprises; and the US is issuing ventilator contracts to automotive firms. However, the repurposing journey is fraught with challenges.
Naturally, different levels of repurposing are required to manufacture COVID-19 critical items, depending on the items’ level of complexity. Repurposing to produce personal protective equipment (PPE) is less technically complex and can, in principle, be achieved quicker than the production, for example, of clinical care equipment such as complex ventilators.
In modern manufacturing, production processes are highly specialized and firms aim to maximize efficiency. Approaches such as lean manufacturing help manufacturers eliminate waste across the supply chain and continuously improve productivity. Whilst this can create highly efficient and profitable production, it also means that it is very difficult to switch to a new product line.
What challenges do manufacturers face when repurposing?
Despite widespread calls for a ‘wartime effort’ to tackle the current supply shortages, results so far have been limited. Goods from repurposed facilities have been rejected because they failed to meet required medical standards or were not sufficiently adapted for COVID-19 treatment. In the US, the state of New York announced that efforts by automotive manufacturers to produce ventilators would not arrive in time. In the UK, an order of ventilators produced in repurposed facilities by some of the most advanced automotive companies in the country has reportedly been cancelled by the government for not complying with the expected performance.
Why are these efforts falling short?
Under normal circumstances, firms follow well-established new product introduction (NPI) processes to develop an idea into a final product that can be manufactured at scale. NPI processes require substantial planning and resources to ensure compliance with industry standards, especially in highly regulated industries such as medical devices and pharmaceuticals. Repurposing, however, is not a conventional introduction of a new product but is intended as a temporary rapid response solution to meet a spike in demand by using idle manufacturing capacity. Hence, many of the NPI steps and processes need to be fast-tracked and, where possible, skipped. Manufacturers face significant challenges across the repurposing journey:
- Defining the business case. Assessing the risks of entering a new market is difficult when knowledge of the new manufacturing domain is incomplete and long-term demand is uncertain. Understandably, incumbent manufacturers may be reluctant to share their intellectual property out of fear of competition from new market entrants after the pandemic ends. Starting from scratch without proprietary information is a challenging prospect, particularly for the development of complex essential items such as ventilators. In addition, there may be concerns about overproduction if too many new entrants appear. Repurposing is expensive and firms are presently cash-poor.
- Determining feasibility. Firms must develop a preliminary design concept and assess its feasibility in light of their current knowledge and technological capabilities. Designing critical items, such as medical supplies, requires specialized skills that might not be readily available in entrant firms. Upskilling may be sufficient for low complexity products, however, partnerships must be formed to close the skills gap in the development of highly complex products. As well as designing new tooling for production, additional infrastructure is needed for handling and storing raw materials, as well as for packaging and outbound shipping.
- Developing a product. Concept level drawings and a bill of materials must be developed. Sourcing raw materials has proven to be a major challenge for manufacturers. New relationships need to be established with suppliers. Sudden spikes in demand for inputs have led to price increases. Since January, exports from China to all regions have declined, leading to shortages in essential parts . For example, the global supply of aluminium, pneumatic fitting and other important components for medical devices has been severely disrupted due to manufacturing shutdowns in China.
- Validating the repurposed product. Detailed production drawings need to be prepared prior to conducting failure mode analyses to identify any potential problems with product and process designs. Standards vary across regions; conformity assessments also vary depending on whether items are being produced for markets or government procurement/donation. Minimum specifications have been criticized by clinical experts for not providing adequate provisions and manufacturers have also expressed frustration at changes to these specifications. To verify the quality of the products, prototypes need to be produced and functional data validated. Once a design is finalized, creating the tooling and fixtures for complex products typically takes several weeks or even months.
- Implementing and scaling-up production. Production lines need to be built, calibrated, and sample production parts must be approved by various regulatory bodies. Manufacturers of medical devices need to be registered with the relevant regulators. Even if some regulations have been relaxed, complex medical devices such as ventilators must still comply with stringent standards. Meeting these standards requires a full clinical trial which is both lengthy and costly. Establishing a quality control system for mass production is another hurdle for scaling up production. Several new test runs may be required, and significant resources are needed to produce process documentation, establish safety controls, and verify the quality of supplies. It is clear that scaling-up production is not simply a technological challenge, but requires new organizational capabilities – from product design and manufacture to supply chain governance to regulation and testing. For this reason, repurposing remains challenging, even for technologically less complex items such as face masks.
Towards a rapid repurposing roadmap
With these manufacturing challenges in mind, Figure 1 proposes an indicative set of questions and activities to guide the development of a rapid repurposing roadmap. Roadmaps offer a coherent and holistic structure to support effective dialogue and communication between stakeholders. The approach is flexible and scalable, and can be customized by policymakers to suit many different strategic priorities and national contexts. While the structure presented in Figure 1 is by no means comprehensive, it illustrates how strategic planning tools might be employed to address manufacturing repurposing challenges.
*‘Critical supplies’ includes first-response items such as protective personal equipment, diagnostic equipment, and clinical care equipment.
- Why repurpose. Repurposing is associated with the need to address shortages of COVID-19 critical supplies. Firms must balance project objectives and scope with long-term strategy and available budget. Quantifying these shortages is a complex task which requires the integration, continuous review and expert analysis of demand and supply data – from the healthcare sector, the scientific community, manufacturing industries and public authorities. The WHO has developed a suite of ‘surge calculators’ that can assist with this task. Policymakers also need to ensure that appropriate incentives and assurances are in place to make the business case attractive and dispel any concerns about overproduction.
- What to repurpose. Recent international experiences provide useful examples of manufacturing facilities that can be repurposed (Table 1), but policymakers need to have an understanding of the possibilities in their countries. Analysis of the current manufacturing base and direct dialogue with industry associations can help elicit a better understanding of the potential scope for repurposing. For example, a study estimates that over 2,700 manufacturing facilities owned by large firms could be retooled to produce COVID-19 critical items in the US. Communities of small producers, makerspaces and demonstration facilities might also be able to contribute, but their efforts need to be coordinated. Instead of developing new production processes from scratch, manufacturers might be able to more efficiently contribute by becoming temporary turn-key providers to help existing producers increase their output.
- How to produce. Competing product designs may lead to significant delays. Governments including those of the UK and South Africa, have shared specifications of minimally clinically acceptable ventilators and have requested their manufacturers to coalesce around these. Policymakers need to ensure that these specifications are technically sound, sufficiently detailed, and validated by health sector experts and practitioners. Business guidance specifying relevant product safety specifications, standards, type approval, quality assurance procedures, and conformity assessment rules can be valuable single reference points for repurposing firms. Regulatory agencies need to be appropriately resourced to be able to fast-track applications, and test and certify new designs. Out-of-patent designs can also be leveraged and time-limited design licences sought from incumbent firms. Emerging international efforts suggest that opportunities exist for cross-industry and cross-country cooperation to share not only proven product designs and process engineering know-how but also to overcome IP and certifications barriers. For complex items, it is clear that starting from scratch can lead to significant delays.
- Who coordinates. Technical coordination is crucial to rapidly align needs with relevant manufacturing capabilities and efficiently share repurposing know-how. Policymakers leverage the public innovation infrastructure. In some countries, public centres of excellence or technology and innovation centres are emerging as key coordination actors. In the UK, for example, the High Value Manufacturing Catapult, a public research and technology organization, has had a leading role in coordinating firms from the automotive, aerospace and ICT industries to respond to the prime minister’s “ventilator challenge”. Meanwhile, the National Additive Manufacturing Innovation Institute in the US has created an online repository, gathering the needs of healthcare providers, 3D-printing capabilities and digital designs. Policymakers could give such actors in the national system of innovation (including universities and public laboratories) the mandate to coordinate dispersed efforts and ensure an efficient flow of know-how.
When this is all over
It remains to be seen how manufacturers will rise to the challenge of repurposing their production. Clearly, switching production is a costly endeavour and not something that can be achieved over night. Designing support measures requires a detailed understanding of the technical challenges alongside the repurposing journey. Given the urgency of the task, there is a need to leverage on proven designs and methods.
While addressing the global shortage of COVID-19 critical items is the current priority, repurposing is not a long-term strategy and policymakers need to support firms for the eventual transition to “normal” times. There are legitimate concerns from incumbent firms that the call for repurposing will increase competition in an artificially overcrowded market space for a very small selection of products. Similar legitimate concerns exist about overproduction or waste in the future if too many new entrants appear. Policymakers should address such concerns during and beyond the health crisis. Through bulk and coordinated public procurement policies, governments can provide visibility of orders and assurances that any excess items would be part of national stockpiles.
Countries that can call upon their industrial sector to rise to the challenges of repurposing to meet the shortfall in COVID-19 critical items, particularly for the more complex ones, are those with sufficient manufacturing and innovation capabilities and an experienced and agile industrial sector. Repurposing also benefits from established policy making and coordinating capacity. Long-term investments in these capacities pay off.
Managing COVID-19: Could the coronavirus spur automation and reverse globalization?
Automation and reshoring mitigate the risks firms face in the event of a pandemic or other shocks. Industrial policies that aim to strengthen a country’s healthcare sector and reduce its dependence on global supply chains could further accelerate this trend.
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 supplyshortages.1
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.2 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?
Supply shortages and the role of Industry 4.0 in the COVID-19 pandemic
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.3
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.4
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.5
How does Industry 4.0 affect GVC participation and the prospects for development?
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.6
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.7 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.8 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.9
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.10
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.1112
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.13
Could the process of automation and reshoring accelerate following the COVID-19 pandemic?
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.14
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).15 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.16 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.17 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 Cuba18, 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.