The Great Equalizer has arrived.
The German government said today that it won’t get in the way of the $5-billion
acquisition by Chinese appliance maker Midea of Germany’s
high-tech-industrial darling, Kuka Robotics Corporation. Midea, which
promised up and down that Kuka would remain independent, has secured 95% of
Kuka’s shares. Kuka executives have backed the deal. The German government’s
efforts to find a more palatable – that is, European – acquirer have flopped.
So this deal, the largest Chinese acquisition in Germany, is going to fly.
With €3 billion in revenues in 2015, Kuka is a significant player in
“articulated robots” that can perform different tasks, such as arc welding or
assembling. They’re used widely, from automakers to big bakeries. The
deal gives the Chinese cutting-edge technologies and is
another step forward in China’s efforts to modernize its manufacturing
industry.
Chinese companies have been on a buying spree of robot makers, including
so far this year:
- In June, Agic Capital, the Chinese-European private
equity firm, announced it would acquire Gimatic, an Italian supplier of
robotic end-of-arm tools such as pneumatic and electric grippers.
- In January, China National Chemical Corp,
the Chinese state fund Guoxin International Investment Corp, and
Agic Capital purchased KraussMaffei, another German player in industrial
robots (among other things), for $1 billion.
- In the US this year, China robotics manufacturer
Zhejiang Wanfeng Technology Development Co. acquired Michigan-based
Paslin Co, an assembly-line robotics manufacturer.
China is also developing and manufacturing its own robots. Production and
use of robots made it into the most recent five-year plan. Local governments
have jumped in with support measures, such as real estate or tax incentives.
And Chinese funds are investing in robotics firms around the world.
This is a huge and rapidly growing business – no matter how troubled the
global economy may be.
China, coming out of nowhere a few years ago, accounted for 27% of the
$32-billion global market for industrial robots, by 2014, the most recent data
available, according to the International Federation of Robotics, cited by
the Wall
Street Journal. China’s vast manufacturing base is the world’s largest
and fastest-growing market for industrial robots: In 2015, sales soared 16%,
against 9% in Europe and 11% in the US.
Chinese companies are going through enormous efforts and invest large
amounts of capital to automate their production and shed the dependence on
“cheap labor,” which is getting increasingly expensive and uncompetitive with
other “cheap labor” economies.
For example, a year ago, a survey conducted
by the commission of economy and information of the city of Kunshan, Jiangsu
province, found that 600 major industrial enterprises would replace human
labor with robots within five years. At the time, according to the SCMP,
the government predicted that the city’s automation and robotics market would
reach 80 billion yuan ($12 billion) by 2020. The city is supporting these
efforts with 2 billion yuan ($300 million) in annual subsidies. And that’s
just one city.
But unlike human labor, robots cost the same everywhere!
The shock waves of this fact are far reaching. By switching to robots,
China no longer has a cost advantage over automated manufacturing in the US
or Europe. When Chinese companies use robots to manufacture their products,
the content of labor becomes minimal, and the difference in the cost of labor
becomes insignificant.
Robots are the great equalizer.
Other differences remain, such as subsidies, taxes, environmental rules,
the cost and availability of funding, the strength of the currency, etc. But
by automating, China is losing the strategic strength that has helped it
become the manufacturer of the world. And yet, if it didn’t automate,
the manufacturing sector, beset with soaring labor costs, would get
hit even harder.
With cost of labor being minimized, the cost of transportation moves
further to the foreground. This is an advantage when the Chinese product is
sold in China, but a disadvantage when it is sold in other parts of the
world, particularly in distant markets such as Europe or the US.
Robots – and automation in general – systematically replace human labor,
which is their purpose, a problem that has been dogging the US economy for
decades. Even as manufacturing output has increased sharply before the
Financial Crisis, manufacturing employment has plunged. Since the Financial
Crisis, manufacturing output, while up sharply from the trough, has not
returned to its 2008 peak. Manufacturing employment has edged up only slightly
and, at 12.3 million, is where it had been in 1946.
The chart shows US manufacturing output (index, blue line, right
scale) versus manufacturing employment (in millions, red line, left scale)
from 1972 through July 2016:
There has been another factor in the collapse of manufacturing employment
in the US: outsourcing to other countries with “cheap labor,” such as China.
But automation is the great equalizer. As China automates its
manufacturing plants, replacing humans with computers and robots, its cost
structure will approach that of similar plants in the US or anywhere. This
effectively kills a big incentive for companies to transfer manufacturing to
China except for products sold in or near China.
It’s already happening. Hence the lackluster manufacturing numbers coming
out of China. Growth has stopped as China’s manufacturing base is being
“equalized.” This isn’t temporary. It’s structural. Any hopes, for example,
that the manufacturing PMI surveys will show lasting growth will be
disappointed. And the bitter irony: it will get worse as automation
progresses.
China will do in a few years with automation what the US has done in three
decades. It will be very successful at it. It will automate faster than any
country has ever done before. Governments at all levels will provide the
fuel. Nothing will be allowed to get in the way.
But these newly automated plants in China have to compete with automated
plants in the rest of the world – and the costs are nearly the same. Thus,
manufacturing for exports will deteriorate further. Manufacturing for Chinese
consumption will grow. Employment in manufacturing will collapse. And a
devaluation of the yuan, though tempting as a solution, is going to change
the manufacturing equation only at the margins. Hence the astonishingly
sudden end of the Chinese multi-decade manufacturing miracle.
In the US, a peculiar economic phenomenon has
set in. Read… This
is When the Jobs “Recovery” Goes KABOOM
