Ok its a great idea and it works cool atm, but it's very bland.
Upgrading items should have different effects per rank, not just add 1 damage each time. Makes doing it essentially useless.
You should be able to upgrade heat damage, resistance drain, electric drain, even range by cannibalizing other items to upgrade them. Torsos and Legs should get special abilities too, like if you cannibalize something with resistance that resistance could be transferred over to increase your total on that piece of your mech.
The Upgrade system could be awesome, with some work...

you basically just described mythic gear

I made the same suggestion last month...

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