Study: AI could make high-cost manufacturing competitive again

TALLINN – AI-based manufacturing systems could provide a new competitive advantage to industries in countries with high labor costs, and their adoption may also be crucial for Estonia's engineering and metal industries, according to a recent study by the Boston Consulting Group (BCG), as reported by the Federation of Estonian Engineering Industries.

According to BCG, so-called factories of the future could change the economics of manufacturing, as artificial intelligence, automation, digital twins, predictive maintenance, and data-driven production management enable a complete transformation of manufacturing systems. The analysis indicates that such solutions could yield productivity improvements of up to 60 percent.

This could be particularly important for countries with high labor costs. The labor cost savings from automation are greater in absolute terms in more expensive countries, and therefore the payback period for investing in a new production system may be shorter there.

For example, in Germany's food industry, modernizing an existing factory could provide up to a 14 percentage-point cost advantage compared to manufacturing in China. In the production of industrial components, a German factory could reach cost parity with China. In electronics, however, Germany would still lag behind China by about 15 percentage points even after a full modernization.

Thus, new technology does not mean that high-cost manufacturing countries will automatically become more competitive than low-cost ones. The impact depends, among other things, on the potential for automation in a specific industry, the extent to which logistics costs affect competitiveness, and the readiness of the local workforce and digital infrastructure.

BCG estimates that in Western Europe and the Nordic countries, about $1.03 trillion worth of manufacturing is at risk of relocation if factories are not modernized. In the US, the corresponding figure is $440 billion.

For Estonia, this raises the question of whether, as a small manufacturing country with relatively high labor costs, it is possible to maintain competitiveness not through cheaper labor, but through greater automation and productivity in manufacturing.

In highlighting the study, the Federation of Estonian Engineering Industries raised the question of whether Estonia's engineering and metal industry is investing enough in AI-based manufacturing systems to maintain its competitiveness in the next decade.