China’s Demographic Perfect Storm And Robots

Why Foxconn is so unlucky is unclear to us.

Riots, strikes, serial suicides, you name it. In the past year or so, we have heard these for a number of times from their factories. How the company actually treats their employees is not our concern. In fact, Foxconn has already raised wages and improved welfare for the workers as far as we understand, and as David Pilling at FT wrote, “Foxconn is probably a better employer than many of its peers”.

But David Pilling raised an issue which we have been saying with regard to China. Demographics.

On one hand, China probably has already passed the Lewisian turning point, which means that the pool of surplus labour from rural area is already drying up. We have also been pointing out that Chinese working-age population will start to shrink within a few years time (from 2015 onwards, to be precise), and total population will start to shrink in 2025 according to UN Population Division’s projections. In other words, China has probably been set-up for a demographic perfect storm.

In the past many years, the export-driven growth model based on artificially undervalued currency and large labour pool means that manufacturers are able to accumulate savings (retained earnings) at a very rapid rate, as the massive surplus labour keeps labour costs low. Or as Michael Pettis has pointed out, wages have not gone up as fast as the gain in productivity.

With the demographic (and external demand, for that matter) turning against manufacturers, employees now get a bigger share of the surplus. Manufacturers, as a result, are getting squeezed by increasing labour costs. As a result of lower margins, it is obviously much better to be a shareholder of Apple rather than Foxconn for the past few years. As Paul Donovan and team at UBS touched very briefly in their note on Japan (which is also facing serious demographic problem):

China needs to contemplate what it will mean to have a declining population, and the loss of the plentiful, cheap, young labour that has been so important to its economic model in recent years. It takes time to change a corporate culture, and to lose inbuilt prejudice (about women in the workforce, or about older workers)

Some obvious answers to increasing difficulties to find enough workers include relocating production lines, like quite a few companies have already done, e.g. Adidas. Some of choices of places to open new factories are not those you would expect. Lenovo, for instance, is going to build a factory in the US (via FT Beyond Brics):

On Wednesday, the Hong Kong-listed Chinese computer manufacturer – the world’s number two by sales – announced that it will build a factory in Whitsett, NC, where it will produce laptop and desktop computer for its Think line.

This from the press release:

“Lenovo is establishing a US manufacturing base because we believe in the long-term strength of the American PC market and our own growth opportunities here,” said Yuanqing Yang, chairman and CEO, Lenovo.

Meanwhile, we also learned that Foxconn, the very company which often gives us nasty surprise, is actually trying to use more robots to produce. How many robots? 1 Million. According to FT last year:

Foxconn, China’s biggest employer, produce Apple’s iPad and other electronic gadgets. The group currently employs 1m workers but has just 10,000 robots on its production lines.

Mr Gou outlined the company’s ambitious automation plans at a Foxconn gathering late last week in Shenzhen, a coastal manufacturing centre in southern China. According to people who attended the function, the chief executive said the group would have up to 300,000 robots next year and 1m by 2013, highlighting the drastic changes China-based manufacturers are making as competition for labour increases.

And then, of course, you have this rather bizarre scene…


… which we enthusiastically call a important technological break-through of noodle making, whatever…

This article originally appeared here: China’s demographic perfect storm and robots
Also sprach Analyst – World & China Economy, Global Finance, Real Estate

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