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Chinese Automation Impact on Global Supply Chain

It used to be that China was considered the ‘factory of the world’, with long lines of workers swiftly assembling low-cost goods through the manufacturing process for the consumption of foreign markets. This model sought to exploit its workers – with high staff turnover commonplace – as well as the environment. However, as John Pabon, a sustainability expert and China advisor states in his article “A New Era of Chinese Industry…”, this is no longer the case.

Smart logistic, industry 4.0 concept. Automation shipping robotics stow robot arm machine in smart warehouse factory.

According to Pabon, the Chinese industry has been forced into a rethink of how it uses resources and labor with a slowing economy and a rise in competition from neighbors such as Vietnam, India, and Indonesia having an impact on costs and China’s place in the international supply chain. For example, US Fashion Companies are Starting to Look Beyond China… China’s workers are being more handsomely rewarded for their endeavors than they were 15 to 20 years ago, to such an extent that once productivity is factored in, wages are just 4% lower than their United States equivalent.1

A new plan is therefore required, and it appears that automation is its driving force. In 2014, President Xi Jinping promised a ‘robot revolution’ to upgrade factories and technologies all over the country and this has already started being put into place.  One manufacturing process hub in Guangdong hopes to have full automation in its factories by 2020, while at sink manufacturer Ying Ao, 140 full-time workers have been replaced by 9 robots.

In this blog, we will look at how manufacturing process automation in China is already having an impact on the international supply chain, and what the future is going to look like.

 

Higher Efficiency, Lower Costs

The most obvious impact that artificial intelligence has on the manufacturing process, is that it is much more cost effective than the previous model of staffing factories with fatigued workers who, because of rising labor costs but longer hours, are effectively producing less for more. One example is Carl Zeiss Vision Technologies, a German company with a factory in China. Upon learning in 2012 that their China factory cost twice as much to run as the one in Mexico and four times as much as their base in India, Zeiss decided to implement ‘free form’ automation techniques to replace some of its workers. The machines now fulfill several jobs whether it’s cutting shapes, polishing glass, or producing packaging.

Although Zeiss currently has 70 fewer workers than in 2012 output has increased from four million to five million lenses. The result is lower production costs, as Zeng Zhiyong highlights: “The productivity improvement neutralized China’s rising labor costs. Now our cost per lens is the lowest of all the Zeiss factories in the world.” Read details- “Global Supply Chain News: Using Robots to Attack High Labor Costs – in China!”

Although automation in China is yet to reach full penetration – 36 robots per 1,000 manufacturing workers in 2015 – “China, the World’s Automated Factory”, and similar rises in productivity across the country could have a profound effect on the international supply chain. As Bloomberg highlights, automation may mean a higher number of products when it comes to exports, but the use of robots will inevitably put ordinary Chinese workers out of work, undermining consumption. This could then have a wider impact on the global economy.

View Video:  Robots are Taking Over China’s Factory Floors:

BI (Norwegian Business School) economists Tom Orlik and Fielding Chen wrote: “By turbocharging supply and depressing demand, automation risks exacerbating China’s reliance on export-driven growth, threatening hopes for a more balanced domestic and global economy.” See full article.

A Blow for Competitiveness?

As we’ve seen, automation in China has, so far, been good news for China. But, while the Chinese reap the rewards of increased productivity, developing countries that were able to undercut China’s factories just half a decade ago may see their exports hit. The likes of India and Indonesia followed the examples of all industrialized nations by enticing workers from the farms and provinces to urban manufacturing process centers to make goods to sell abroad, but automation and its knock-on effects, according to researchers from Citibank and the University of Oxford, mean that “today’s low-income countries will not have the same possibility of achieving rapid growth by shifting workers from farms to higher-paying factory jobs.”

As Harvard economist Dani Rodrik has labelled it, countries like Indonesia are going through what’s known as ‘premature de-industrialization’, with automation – among other factors, such as globalization – to blame. While China and other more advanced economies can invest in artificial intelligence and benefit from the resulting increased productivity, those like Indonesia will be left behind and gradually squeezed out of the market.

China Finds New Place in Global Supply Chain

According to a report from the financial data company IHS Market, China has gone from being seen as a low-cost supplier to being seen as occupying a place at the center of the global supply chain, and there can be no doubt that automation is central to this shift.

In 2012, prior to the advent of Xi Jinping’s ‘robot revolution’, 70% of respondents in an IHS Market survey considered China a ‘low-cost procurement destination’. When the same question was asked last year, less than 50% of those surveyed were of that opinion, shadowing Pabon’s claim about China no longer being the ‘world’s factory’.

What does this mean for countries which used to have all its goods manufactured in the Far East?

Some believe that China’s embrace of automation could lead to an element of ‘reshoring’, whereby manufacturing process jobs that have been previously outsourced could soon return to countries like the US. This is due to China finding itself in a stronger financial position, as well as generous land, energy and corporate tax rates, making the US a more attractive proposition for global companies- Manufacturing Jobs are Finally Returning to North America…

If reshoring does occur, the USA could look to China’s ‘robot revolution’ example and jump on board with what some are calling ‘the next industrial revolution’, which would effectively position itself as a direct rival at the center of the supply chain. However, Nick Statt highlights that a wary American public and a protectionist President could result in the US falling further behind in terms of automation, productivity and competitiveness: “It’s unclear if the Trump administration will take the necessary measures to make it easier for American industries to invest in automation, especially when it involves buying products from foreign countries in what is an increasingly nationalistic environment. The silver lining: perhaps Trump’s America-first language will result in more serious domestic investment in the industries typically dominated by Asian corporations.” Learn more

This movement in China’s position in the supply chain provides international businesses with an opportunity to rethink their supplier relationships and the way in which their workers operate. As Pabon concludes in his article, “With China squarely at the center of global supply chains, any changes there resonate throughout the world. As shifts in policy, labor, and use of automation occur, is your business ready for an inevitable future where China is no longer simply the world’s factory, but an optimized market of its own?”

In Conclusion

Whatever the human costs of automation in China, there can be no doubt that the increasing presence of robots in the country’s factories over the past half-decade has done wonders for companies like Zeiss Group, and for the export economy as a whole. But, with Chinese exports growing at a vastly higher rate than imports, developing third world countries like Indonesia, being pushed out of the market, and China rapidly catching up with the US when it comes to wages, by the time artificial intelligence has been fully implemented in China, we could be looking at a vastly different international supply chain and global economy.

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Reference:
  1. Pardon, J. (2017, March 3). “A New Era for Chinese Industry: Automation, Optimization, and Global Supply Chains”. Retrieved from: https://www.bsr.org/our-insights/blog-view/a-new-era-for-chinese-industry-automation-optimization-global-supply-chains.
By | 2017-11-21T16:04:44+00:00 November 21st, 2017|Chinese Manufacturing|

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