The View

End of the line for China's low cost manufacturing model?

If low-end production can be done by robots, developing nations might have to skip China's export model and jump straight to a service economy

PUBLISHED : Tuesday, 22 July, 2014, 12:01am
UPDATED : Tuesday, 22 July, 2014, 12:01am

In retrospect, the big investment calls seem so easy. Like the commodities bubble: the economy of a hugely populated country (China) is accelerating; this same economy's money supply is growing in double digits annually; millions of farmers are moving to the cities every year. Of course demand for iron ore, nickel, etc, will take off.

For many, figuring out the next macro-trend on the horizon is the same as determining who the next China will be.

But what if history ends with China? What if, in a Francis Fukuyama sort of way, a particular history is set to end - that of the export-oriented growth model.

China's path to prosperity is one many countries have taken since the dawn of the industrial age: first, attract foreign investment by offering cheap land and ample labour; then plough export earnings into further industrialisation projects, raising productivity and thus wealth.

Eventually capital moves elsewhere, in search of the next low-cost manufacturing base. Perhaps India, with its billion-strong population, will be the successor "factory of the world". Or some country or region of Africa.

When China invests heavily in a sector, it can do so on a mindboggling scale

So far, however, there is no obvious successor to China. And some futurists argue that the game is up - that low-end manufacturing can be done by machine instead of man. In this line of thinking, China is not only the last in - it is helping to close the gate by contributing to an overinvestment bubble in robots.

When China invests heavily in a sector, it can do so on a mind-boggling scale, altering economies. An example is solar energy, where mass panel production by the Chinese drove down global prices to the point where it has helped make this once formidably costly alternative energy source feasible.

Like solar energy, robots have some appealing attributes for China. Automation is a hi-tech sector, and is said to be an "industry of the future", with exponential growth.

And there is also an emotional component. Robots seem increasingly to embody some sociological tool to slap back uppity workers. We saw that with Foxconn's threats to install one million robots on their assembly lines in three years, a plan hatched during a period of labour strife.

In January the city of Dongguan launched a programme called "Robots for Humans" that is explicitly aimed at thinning out the city's migrant population. That campaign was revved up in recent weeks amid strikes by shoe-factory workers at companies including Yue Yuen Industrial and Adidas.

According to a report earlier this month in the Nikkei Asian Review, Dongguan mayor Yuan Baocheng, after visiting a striking factory, said: "We will use real cash to support automation." (Raising the question of what the "un-real" cash is used for.)

Finally, there is a practical reason to invest heavily in robots - China's worker-aged population has peaked and is shrinking.

If there were no successors to China as the next great low-end manufacturing base, what would this mean for developing countries that have not yet industrialised on a sizeable scale? Many economists are pondering this question, and have been for some time.

In 2011, the economists Barry Eichengreen and Poonam Gupta wrote a paper exploring whether India could skip the manufacturing stage and just go straight to the services-based model most advanced countries employ.

The authors were not particularly optimistic that this is doable, in part because the skill sets need to work in a consumer economy are more demanding than in a manufacturing economy.

Getting people from farm to factory to bank teller is an easier transition than from farm to bank teller.

To be sure, the robot bogeyman has been around for a long time. And many of the recent claims have been empty; Foxconn's one million robot workers are not on the job - in fact, probably less than 50,000 are.

But the technology is advancing, and lots of investment dollars are flying into the sector. Which is why anyone investing in emerging markets - and commodities like iron ore and materials - should be watching the automation space very closely. We've had robots for quite some time, but we have not yet have had a "robot bubble".