Chinese manufacturing seeks a major upgrade - through the use of robots

Thomas Roemer says there are good reasons for China's robotics push, not least its vision for the future

PUBLISHED : Thursday, 25 June, 2015, 5:58pm
UPDATED : Thursday, 25 June, 2015, 5:58pm

When Chinese officials recently announced plans to support investment in robots in China's manufacturing industries, the reaction in some US circles was one of astonishment, if not incredulity. Much of China's attraction as a manufacturing powerhouse, after all, has been low labour costs, so turning towards robots would seem like relinquishing a key competitive advantage. In fact, several key drivers explain why this is a very intentional and strategic move.

One key factor is that while China's labour costs still lag behind those in other key economies, Chinese labour has become relatively expensive compared to nations such as Vietnam and Indonesia. Moreover, Chinese labour costs are increasing at a much faster rate than in the US and, while the gap is still considerable, it is narrowing at a relentless pace. China also faces a labour scarcity in its economic boom centres.

The nation's one-child policy has had an impact, especially on the pool of available young factory workers and there are limitations on increasing the number of workers moving eastward from the western provinces. The competition for skilled labour is fierce, with attrition rates of 30 per cent or more per year not uncommon. Many companies report that fewer than 70 per cent of their employees return to work after the Lunar New Year. One US manufacturer estimates that 120,000 employees enter and exit its Chinese supply chain every week.

Allegations of inhumane working conditions are another reason to embrace robots. Robots cause no such concerns. They come to work every day, they don't unionise, they don't care about the Lunar New Year and, if needed, they work 24-hour days.

As collaborative robots can work next to and hand in hand with humans, they also eliminate the need for expensive safety cages or other safety measures. This helps explain why Foxconn plans to replace part of its 1.3 million workers with "foxbots".

Even better, robots get more skilled and cheaper year after year. Indeed, costs have been decreasing at an astonishing pace. According to a recent study by the Boston Consulting Group, costs for robots have decreased by more than 20 per cent in the past decade, a trend that is expected to continue during the next decade. Rethink Robotics' collaborative robots Baxter and Sawyer now cost well below US$50,000, which is frequently considered the threshold for a one-year payback time.

At the same time, functional performance increases by about 5 per cent each year, essentially doubling robotic capabilities roughly every 14 years. These two trends are driven by falling prices for microprocessors and advances in software, sensing and actuation technology.

Not surprisingly, robot sales have surged; according to the International Federation of Robotics, record sales in 2013 grew by another 27 per cent last year.

With labour and robot costs diverging, even low-cost countries will eventually have to shift towards increased robotics. But why does China already buy more robots than any other country in the world, and why is it increasing the adoption of additional robots at a faster pace than any other country, with the possible exception of South Korea?

After all, just a decade ago, companies such as BYD, one of the largest battery manufacturers in the world and a leading Chinese auto manufacturer, centred their strategies on replacing robots with unskilled labour performing very simple manual tasks.

Ironically, that initial replacement of robots by manual labour is one reason why robots are now so popular in China. Robots have proven to be very good at performing very simple tasks, exactly the kind of tasks that were outsourced to China because of its lower costs in the first place.

Moreover, the cost difference for relatively high-skilled labour required to maintain and install robots is much larger between China and the US or Western Europe, giving cost advantages to China in a different labour segment.

With more students in China graduating with interests in manufacturing than in many of its Western competitors, the availability of such skills is larger too.

Initially, many Chinese companies simply lacked the capital required to invest in advanced technologies. But years of economic success have changed their cash positions and calculus.

Indeed, the reasons for China to invest in robots are now so compelling that the Boston Consulting Group report estimates that only South Korea, Germany and Canada will be able to reap more benefits from increased robotisation.

While these market drivers help explain China's emphasis on robots, a more important factor may be China's vision for its future. If it wants to become a leading world power, it cannot resign itself to compete on low labour costs. It must instead make sure that the manufacturing boom of the last decade is lasting and does not move to lower-cost countries.

Even more importantly, China needs to control the technologies of the future and robotics and automation will both be a key enabler and a key industry itself. Rather than simply standing by and ignoring this thread, China is turning it into an opportunity.

Thomas Roemer is a senior lecturer and executive director of the Leaders for Global Operations programme at the MIT Sloan School of Management