13.03.2025

Tariffs, Labour Shortages and Automation: How Manufacturing Must Adapt

With the prospect of new U.S. tariffs on China, Europe, Mexico, and Canada, global manufacturers are facing a period of heightened uncertainty. The factory automation sector, long driven by efficiency gains and labour shortages, is now caught in the middle of shifting trade policies and economic pressures.

For industrial leaders in Japan and Europe, the stakes are high. These regions have long been at the forefront of automation, with companies such as Mitsubishi Electric, FANUC, Yaskawa, Siemens, ABB, and Schneider Electric leading the way in robotics, smart manufacturing, and AI-driven production systems. However, with the combined effects of trade tensions, supply chain realignments, and demographic shifts, automation strategies must evolve to maintain competitiveness.

This article explores how US Governments proposed tariff war could accelerate changes in factory automation, influence investment decisions, and reshape manufacturing strategies in the years ahead.

The Acceleration of Supply Chain Diversification

White House trade policies have already prompted many manufacturers to rethink their dependence on China. If new tariffs take effect, companies may need to accelerate shifts in their production footprint.

Increased reshoring to Japan and Europe is likely. With China facing trade barriers, some production may move to high-tech facilities in Japan and Europe, where advanced automation can offset higher labour costs. This could strengthen demand for robotics, AI-driven manufacturing, and industrial networking solutions.

Mexico and Southeast Asia are also becoming more attractive as manufacturing hubs. With USMCA agreements keeping Mexico tariff-free, Japanese and European automation firms are well-positioned to expand their presence in North American supply chains. Meanwhile, manufacturers looking for alternatives to China are increasingly turning to Vietnam, Thailand, and Indonesia, creating new demand for automation solutions in these regions.

For companies like Mitsubishi Electric and Siemens, this shift presents both opportunities and risks. While automation demand is likely to grow in emerging manufacturing hubs, the risk of losing access to China’s massive market remains a major concern.

Rising Costs of Factory Automation Equipment

One of the immediate effects of a tariff war would be an increase in automation hardware and component costs. The factory automation sector relies heavily on semiconductors, industrial sensors, AI chips, and network hardware, many of which are produced in China or other tariff-affected regions.

Higher costs for automation providers could become a major challenge. If tariffs drive up input costs, Japanese and European automation companies may need to raise prices, making adoption more expensive for manufacturers, particularly in cost-sensitive industries.

Supply chain disruptions could also slow innovation. Companies may be forced to find alternative sources for critical automation components, delaying production timelines and increasing overall project costs.

For manufacturers weighing automation investments, these rising costs could slow factory modernisation efforts in the short term. However, the long-term necessity of automation, driven by labour shortages, means that adoption will likely continue despite cost pressures.

Demographics and Labour Shortages Are a Bigger Issue Than Tariffs

While trade wars create short-term volatility, the most fundamental challenge facing Japanese and European manufacturers is demographic decline.

Japan’s working-age population is shrinking rapidly. By 2050, nearly 40 percent of Japan’s population will be over 65, severely limiting the availability of factory workers. Many manufacturers are already struggling to fill skilled production roles.

Europe is experiencing similar challenges, with countries such as Germany and Italy reporting record-low birth rates and growing skill shortages in industrial sectors. Germany, in particular, has seen its industrial automation sector struggle with weak demand, supply chain disruptions, and higher borrowing costs, which have delayed investment in new technologies.

Regardless of trade policies, automation is no longer optional for these economies, it is essential. Manufacturers must continue investing in AI-driven robotics, autonomous systems, and connected production lines to remain viable in the years ahead.

While tariffs may cause short-term uncertainty, the long-term trajectory for factory automation remains clear. The need to offset declining labour availability with intelligent, data-driven manufacturing systems will drive sustained demand.

Who Stands to Benefit or Lose?

Winners

• Japanese and European automation firms that adapt. Demand for robotics, AI-driven automation, and smart factories will increase, particularly in Mexico and Southeast Asia. However, companies that fail to reposition themselves in emerging growth markets may struggle.
• U.S. manufacturers investing in automation. With tariffs pushing up labour costs, American companies may accelerate automation adoption to maintain competitiveness.
• Countries with strong automation infrastructure outside of Europe. While Germany and other European automation hubs are facing headwinds, Japan and select Asian economies could strengthen their position as industrial technology leaders.

Losers

• Small manufacturers unable to afford automation. Higher costs may slow adoption among mid-sized and small manufacturers, delaying modernisation.
• China’s role as the global factory. If these tariffs persist, China’s manufacturing dominance may erode faster than expected.
• European automation companies struggling with weak demand. German automation firms, in particular, are already facing a downturn due to reduced investment, slow economic growth, and higher financing costs. A prolonged trade war could deepen these challenges.

Strategic Considerations for Industrial Leaders

As manufacturers navigate the evolving trade and automation landscape, key strategic actions include:

• Reevaluating production footprints. Manufacturers must assess how geopolitical shifts impact their long-term cost structures, particularly in China. Diversification into Southeast Asia, Mexico, and automation-heavy locations will be essential.
• Investing in resilient supply chains. With rising input costs and tariff risks, industrial leaders should focus on securing alternative suppliers for critical automation components. This includes building regional supply networks to mitigate disruptions.
• Prioritising workforce transformation. Automation alone is not enough. Companies must invest in reskilling programs, AI-driven workforce augmentation, and smart factory integration to create a sustainable long-term strategy.
• Strengthening financial resilience. European automation firms, particularly in Germany, must find ways to counteract weak domestic demand. This could include seeking new international markets, forming strategic alliances, or leveraging government incentives for digitalisation and industrial AI adoption.
• Leveraging AI and data-driven automation. The future of manufacturing belongs to companies that integrate AI, machine learning, and predictive analytics into their operations. This shift will be key to maintaining cost-efficiency and adaptability in an unpredictable global economy.

A Divided Future for Automation in Japan and Europe

While this trade war adds uncertainty to global supply chains, it does not change the long-term need for factory automation. The real driving force behind automation in Japan and Europe is not tariffs but labour shortages and demographic decline.

However, not all automation firms will benefit equally. Japanese companies are well-positioned to take advantage of rising demand in emerging markets, particularly in South America and Asia. In contrast, European automation firms, especially in Germany, face a tougher road ahead due to weak industrial demand, high financing costs, and slower investment cycles.

For industrial leaders, the key challenge is balancing short-term disruptions from trade policy shifts with long-term investments in automation, AI, and resilient supply chains. Companies that adapt quickly to shifting global conditions and seek new growth markets will emerge stronger in the next decade of manufacturing. Those that fail to adjust risk being left behind.

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