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The End of Factory Jobs
In the Developing World, Robots Are Short-Circuiting Economic Growth

Amidst all the fears that machines will lead to the unemployment of millions of Americans, the jobs robots are most eager to steal may in fact be in China. The FT reports:

After a six-month trial, the world’s second largest sportswear group has decided to start large-scale production next year at a custom-built, highly-automated facility near Ansbach. Here — and at another factory to be built in the US — Adidas plans to produce about 1m running shoes in developed markets within the next three to five years.

In the past 30 years, when western manufacturers were busy shifting production to emerging economies in an attempt to cut their labour costs, such a move would have been unimaginable. But, as wages rise in China, and advances in robotics allow more tasks to be automated, there are signs that the tide may be turning.

“When I started at Adidas in 1987, the process of closing factories in Germany and moving them to China was just beginning,” says Herbert Hainer, who steps down as chief executive of Adidas later this year. “Now, it’s coming back. I find it almost uncanny how things have come full circle.”

After all, automating factory work reduces the impact of labor costs, making it more attractive to keep production at home. That leads to fewer problems with global supply chains, faster response to consumer orders, fewer worries about intellectual property theft, and a more transparent legal and regulatory framework. In short, there are a lot of companies that will see upside in shifting production out of China—especially as the Chinese business environment becomes more hostile.

The return of manufacturing won’t mean a new wave of manufacturing jobs in the advanced countries, and given that a lot of the robots in the factories of the future will be immigrants, so to speak, from China and Japan, developed nations may not benefit as much as some hope.

Nonetheless, the biggest losers here are going to be the developing countries like India and Indonesia which had hoped low-skilled jobs would come to their countries as China transitioned to a high-skill manufacturing and services.

Thanks to robots, countries walking the well-worn road of economic development through industrialization may soon find themselves at a premature dead end.

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  • ojfl

    An excellent article that should be propagated widely.

  • Pete

    Sooner or later, the masters of the universe who run the show will figure out that overpopulation, especially in the backward countries, is a major problem.

    • Maddog

      I am not sure which “backward” countries you are thinking of, but the problem is China is not overpopulation, but of too few young people. Soon, the working age population will be too small to adequately care for the elderly, and China has not become sufficiently wealthy to weather this storm. Demographics will likely kill China and quite soon.

      • Observe&Report

        I think he meant countries in the Middle East and Africa.

  • Beauceron

    There was an article this morning in the BBC that this year China is buying an average of one German company a week– nearly all of them in the tech manufacturing/engineering space, namely robotics.
    I think in the next 20 years robots will take a lot of blue collar jobs and advances in AI algorithms will take a lot of white collar jobs as well.

    • f1b0nacc1

      It won’t take 20 years, especially if we (the developed world) keeps electing economic illiterates.

  • Maddog

    Hi Walter,

    We wrote about this also at our blog maddogslair.com. Perhaps my comments and additional links can shed some more light on this issue. Here is the recap, if the links don’t come through feel free to view them at the Lair.

    Jobs in China begin to jump ship, turn about is always fair play

    In the Developing World, Robots Are Short-Circuiting Economic Growth

    We began noticing this a few years ago about the time a large manufacture of tongue depressors, and ice cream sticks made the decision to move manufacturing from China to Canada.

    http://www.aei.org/publication/global-sticks-moves-from-china-to-thunder-bay/

    Back to the Mead article:

    “Amidst all the fears that machines will lead to the unemployment of millions of Americans, the jobs robots are most eager to steal may in fact be in China. The FT reports:

    After a six-month trial, the world’s second largest sportswear group has decided to start large-scale production next year at a custom-built, highly-automated facility near Ansbach. Here — and at another factory to be built in the US — Adidas plans to produce about 1m running shoes in developed markets within the next three to five years.

    In the past 30 years, when western manufacturers were busy shifting production to emerging economies in an attempt to cut their labour costs, such a move would have been unimaginable. But, as wages rise in China, and advances in robotics allow more tasks to be automated, there are signs that the tide may be turning.

    “When I started at Adidas in 1987, the process of closing factories in Germany and moving them to China was just beginning,” says Herbert Hainer, who steps down as chief executive of Adidas later this year. “Now, it’s coming back. I find it almost uncanny how things have come full circle.'”

    We noticed this in our most recent Flash Briefing.

    Flash Briefing

    As robots get cheaper, and more functional more jobs will leave these Asian manufacturing hubs. Mead is correct it is better and easier, and less fraught with problems to manufacture products at home, than in China. This change will only accelerate.

    The other place this problem will accelerate is in China, and the other low cost manufacturing hubs. By automating, these hubs may be able to continue manufacturing products even cheaper than they can be made by robots here. This will not, however, stabilize China’s current problems with unemployment.

    I do not know if this will create an anti-globalist backlash in the low wage countries, but it stands to reason it could be a problem.

    What this really means is that the “easy” model which China followed to build its industrial capacity is closing, and likely for good. We are barely beginning this automation phase, and we are already seeing some dramatic shifts. Interesting.

    Thanks for your hard work.

    Mark Sherman

  • Jacksonian_Libertarian

    This is a foolish article; it doesn’t talk at all about what kinds of resources companies look for when picking a location for a factory. Let’s start with energy reliability, abundance, and price, Advantage America. Labor (someone has to fix and maintain the robots) a highly skilled an under employed workforce, Advantage America. Infrastructure; Transportation: roads, railroads, airports, seaports, America has the best mature system in the world, Utilities: Gas, Electricity, Water, Sewer, Communications, America again has the best mature system in the world, already built and well maintained. The “Rule of Law” America has the best security in the world on private property, and the low level of corruption makes bribery costs non existent. Also the chances of having the investment “Nationalized” is the lowest in the world.
    All of these things make America the best place to invest in new factories. But the most important is probably something no one is considering. America has banked over $6 Trillion in US Treasuries with Foreign banks, as a result of the currency manipulations its thieving trading partners have done to give a price advantage to their exports to America. This currency manipulation is a double edged sword that now hangs over the heads of all the manipulators, in direct proportion to how crooked they have been. America can at anytime payoff this $6+ Trillion, devaluing the Dollar, and reversing 40+ years of currency manipulation against America, in an instant. Producers in America when this happens will gobble up world market share by the ___load. The American economy will experience an “Export Boom” just like so many developing countries have over recent decades, only it will be in a fully developed country that doesn’t need to spend anything on infrastructure to support the development.
    All of this means America is poised to enjoy the greatest boom in history, and any Company already invested here when it happens will go along for the ride. Other companies will of course see the boom and invest, which will only add capital to accelerate the boom. The momentum should last for decades even after the initial boost phase is spent.

  • FriendlyGoat

    So, dear voters, don’t be sucked into high-end tax cuts and deregulation of business practices for the wealthiest people in the country as a tool for “bringing back jobs”.

    • mgoodfel

      I don’t think tax increases and more regulation are going to bring back the jobs either.

      • FriendlyGoat

        As if the under-employment picture was not bad enough already in America, Europe and the Middle East, we now face a big on-coming new wave of automation fueled by artificial intelligence. Humans are going to remain as relevant to sharing the economic pie as they legislate themselves to be.
        If more high-end tax cuts, deregulation of business practices and corporate-leaning judges are given the already-wealthiest people and companies, you KNOW what that portends, don’t you?
        It’s “sorry, we don’t need you anymore” for millions and millions and millions of people. That is not working well now and it is not going to work better when the numbers of hurt and mad people are even greater.

        • mgoodfel

          As has been pointed out, if you decrease the cost of capital with government attempts to stimulate the economy, and you increase the cost of labor ($15 min wage, more overtime, parental leave, benefits for independent contractors), you create an incentive for more automation.

          I really don’t think companies like McDonalds or WalMart would be pushing automation as hard if labor weren’t looking so expensive. China and Japan are looking at falling birthrates and a collapse in the number of young people who want to do manufacturing. They don’t have a lot of choice.

          As for automation generally, pundits should take a lesson from the tech industry itself. in 1978, an Apple II cost $1200. Now a Raspberry Pi 3, which is thousands of times faster, is $35. If industry behaved like pundits think it does, they’d be selling $35 chips for $1200 and pocketing the profits. But competition insured that didn’t happen. Instead, although the companies did very well, most of the benefits went to the consumer.

          The same thing can happen in other industries. If robots were building houses, they could fire all the people and sell a house that cost $50,000 to make for $250,000 and pocket the money. But what will really happen is the price will come down to $50,000+profit, and the consumers will get the benefit. Or, like the more powerful computers for sale today, they could offer you a house three times the size for $100,000.

          Automation just increases the productivity of workers. The problem is a mismatch between the skills produced by our horrible educational system, and the skills that are valuable in the new, more automated economy.

          • FriendlyGoat

            Every company is going to automate everything it possibly can. Nothing stops that march. The question is whether you give those companies “the moon” on taxes and deregulation and corporate SCOTUS decisions at the same time and to the exclusion of everyone else’s needs to earn a living.

            Right now we have a deficit and a national debt. If we cut spending by government to address that AND address the gargantuan new tax cuts preferred by Republicans, we would eliminate millions of jobs. Nothing replaces them.

            When I hear the argument that we need tax cuts to create jobs—-I just know it’s baloney. High-end tax cuts have already had the effect of eliminating lots of jobs and more cuts will do the same to a greater degree. This is why Trump’s supporters exist believing the country needs to be “made great again”—-so they can have a decent job.
            What they don’t know is that their guy’s party screwed them over in the first place and intends to do it again on a greater scale.

          • mgoodfel

            This isn’t a reaction to what I wrote.

            Companies only automate when it makes sense to automate — when it cuts costs or improves the product. It’s not like they hate their employees.

            I agree the Trump fans are deluded, but they won’t get anything useful out of Hillary either. Government is just making the job situation worse by making labor more expensive and increasing regulation.

            Neither party is serious about the deficit.

          • FriendlyGoat

            Actually, public companies do disdain (not hate) the many hassles of having employees and would happily eliminate as many of them as possible. Admittedly, this is less true in smaller privately-held companies where on-site owners have personal relationships with employees, but public shareholders and eight-figure CEOs seriously have NO interest in “creating jobs” with new cash from a new tax cut.
            This is what nearly no one on the working-class end of the right has understood. The GOP argument in front of working-class voters is that if your company was not paying so darned much income tax, it would have more cash to pay you. The exact opposite is what occurs in practice——because—–wages are paid first and deducted from taxable income, not the other way around. If a hypothetical worker named Susan earns $40,000 at a profitable company with its net income taxed at 50%, the net cost of her job to the company’s after-tax bottom line is $20,000. When the taxes are decreased to 25%, Susan’s job suddenly has the appearance to the budget department of costing $30,000 and elimination of her job is more seriously considered. Nearly no one “gets” this.

          • mgoodfel

            I find this very confused. The purpose of running a company is to make a profit. Taxes reduce that profit, and so in no way benefit the company or the employee. Government services might help the company, but they are not contingent on whether the company pays taxes, i.e. they are not services the company optionally purchases.

            If the employee does not produce a profit for the company (cost more than they are worth), the company will not (and should not) hire the employee. Adding a machine is judged by the same criteria — if it improves profits, then do it. If not, then don’t.

            Reducing the cost of borrowing (low interest rates), reduces the cost of capital investments paid back over time. That makes automation more attractive. Increasing the benefits that must be paid to employees, or the difficulty in firing them, increases the cost of employees and makes them less attractive.

            In your example, $40,000 Susan brings in $60,000 income, or $20,000 profit, and $10,000 after tax profit at 50%. If taxes are reduced to 25%, Susan now brings in $15,000 after tax profit. It makes no sense to fire her.

          • FriendlyGoat

            There are several ways to look at these matters and several things to stipulate.
            1) Tax cuts are often portrayed as somehow helping small businesses which have trouble breaking even to begin with. Those may need a bigger market or a more-sensible business model but they don’t deserve our mistaken sympathy on tax rates when their taxes are already zero because their profits are zero or less.
            2) The purpose of running a company FOR THE OWNERS is to make a profit. There are other stakeholders who are typically the customers, the suppliers and the employees. Their interests matter too and they are only concerned that the company make enough profit to not go bankrupt and to meet its growth needs. The interests of the other stakeholders are all better served when there is taxation of profits to counter-balance any prices which are too high or tightwading of the purchases from suppliers and employees.
            There are more voters who are stakeholders than owners and they need to realize that their interests and those of the owners are not necessarily aligned together. Signing up to be terminated “at any time, for any reason or no reason” (as virtually all employees now do in the fine print) ought to be a “clue” how reality works.
            3) If all businesses could draw in $60,000 revenue from the work of each $40,000 employee, there would be no under-employment and everyone would have a $40,000 job. In many to most companies, the “good” jobs are those where the determinations of how much revenue the employee generates are quite imprecise. Susan may very well be working in accounting, purchasing, supervision, HR, advertising, information technology, logistics, maintenance or any number of other roles not measurable like commission sales or direct labor production. Those people need their jobs whether their owners are making a $20,000 margin on them or not. The more likely scenario in support roles is that the company is breaking even on their contributions vs. their costs—-NOT making $20,000 a head.
            4) The bulk of tax cuts as proposed by Republicans will go to CEO’s, entertainers, trial lawyers, and financial traders (including the large blocks of stock already owned by the wealthiest people in the country)—–that fourth category being BY FAR the largest. The amount “trickling down” to workers—–after considering the number of people to be laid off by cuts in government spending to balance the tax cuts—–will be less than zero. This is the lesson we are supposed to have learned between 1978 and now—-perhaps clouded by the deficit spending we did to avoid actually laying off in proportion to tax cuts already done.
            5) If you are arguing that interest rates have been too low too long, I agree, but we have to understand that it is not only the central banks which have caused this. There is a real world bond market and the yields are low in part because too much after-tax money is sloshing around looking for a decent place to be invested.

          • mgoodfel

            I’ll just quickly comment on this, because we have radically different views of economics and business. Not sure there is any common ground here.

            1) If government regulations increase the cost of doing business, they drive small businesses bankrupt. For example, if the government insists on licensing hair braiders and makes them pay $15,000 for a cosmetology degree, they go out of business (or off the books). Taxes can also reduce the income of the business to the point where you might as well work for someone else.

            2) I reject the whole notion that stakeholders control a business or have any role. If your job doesn’t suit you, quit and work somewhere else. Business owners do not have an obligation to provide people jobs. When they go out of business, no one steps up to help them! If you want employment regardless of results, work for the government.

            3) It may be hard to decide how much revenue a person brings in for the company, but it must be done. Any company that doesn’t put a value on their employees (in terms of revenue) could never come up with a budget. They fire people all the time (even whole groups) or contract out HR etc. based on that cost vs. revenue calculation. They also decide to automate based on that number.

            4) Companies pay employees no more than they must to get the people they want in a competitive job market. They also pay no more than they are worth (and minimum wages do not make people worth more!) Taxes reduce the profits of the company and thus make employees worth less. Since increasing taxes does not cut the cost of the employee, it just makes them more likely to be fired as not worth what they bring in after taxes. Though if taxes drive up the unemployment rate, employees may be cheaper. So taxes could just lower wages.

            5) Another way to say this is that the economy is so sick that investors would rather lend to governments at low interest rates by buying bonds than invest in the real economy.

          • FriendlyGoat

            1) I fully agree that hair-braiders need not be licensed at all. That’s a state matter and is not the GOP Congressional agenda for de-regulation. National Republicans would prefer, for instance, to repeal the entirety of Dodd-Frank which is not about hair.
            2) Sorry, I cannot agree that customers, suppliers and employees are not entitled to have any influence over free-enterprise businesses. The days when they did—-generally a period prior to 1980—-are the “great” times that Trump supporters are wishing for with nostalgia in “Make America Great Again”. The Trump supporters just don’t know what the heck went wrong.
            3) I was Controller for over two decades in a company that never had a “budget” at all because the two principal owners didn’t want one, thinking the process was generally silly. The place was privately held in specialty manufacturing, and they very well understood that not only did I not know what the sales mix would be next year—-but that they also did not know and were not interested in guessing and then accounting for variances from their guesses. They had 1,000 employees, treated them well and were very successful. Not everything lives and dies in budgeting. Where it does rule, “Susan” always has good reason to worry whether some half-witted accountant will kill her job in a fit of gross misjudgment.
            4) Taxes used (AS THEY ARE) to directly hire people into government and schools, and to pay contractors every kind of government purchase simply do not “drive up the employment rate”.
            Ask ANY local Republican (let alone Democrat) what a military base does for a local economy. Ask General Mills whether SNAP means anything to their food sales. Go to any really small town and ask whether the school is the most important employer in town. The private sector is not all there is in a good economy. It just isn’t. Much, if not most, of the best of our economy is directly traceable to government money—-collected in taxes. Taxes are far from evil.
            5) I have spent a long time gravitating from my conservative upbringing to other views. There is too much that just does not fit in the GOP platitudes.

          • mgoodfel

            As someone who worked in the tech industry before I retired, I think this is what’s happened to the economy: Tech and manufacturing and retail have enjoyed huge productivity gains over the last 40 years. Other sectors are dragging the economy down.

            1. K-12 education has doubled real spending per student without any gains in test scores (or other measures of education.)

            2. Colleges and universities, which have also increased their prices without improving their product.

            3. Health care, which has become steadily more expensive. High tech, end of life care dominates, when it’s cheap primary care that really improves life expectancy.

            4. Regulation has increased, with huge costs and very minor benefits.

            5. The legal system is a tar pit for anyone doing business in this country.

            All of these dysfunctional areas are enabled by government. They are sucking the life out of the rest of the economy. It started in the 1970s and has only picked up speed since then. These are the parts of the economy that leftists praise though, so I have no hope that any of it will be reversed short of economic collapse.

            Like many people, you look at the beneficiaries of government spending and never count the costs. Every dollar spent on a military base which produces nothing is taken from the productive portions of the economy. To the extent that a school costs more than it should or produces uneducated students despite the money poured into it, they are also stealing from the productive economy.

            Both political parties are a mess and I can’t endorse any of the candidates for President or any of their platforms. So many Americans supporting both Sanders and Trump seem to think prosperity happens because some Dear Leader waves his hand. They are wrong.

          • FriendlyGoat

            Okay. Thanks for a civil discussion. Liberals and conservatives indeed see things differently. I will happily concede for you that I do know that government is unwieldy and inefficient in many of its endeavors—-or even somewhat inefficient in all of its endeavors. My feeling, though, is that most of the money carelessly splashing out of Uncle Sam’s bucket somehow ends up in the hands of individuals. I’ll take it that PERHAPS you might concede that the private sector really can’t and doesn’t do everything we need. We can part with that and wait for another subject another day?

          • mgoodfel

            Yes, thanks for being polite. Rare on the net these days! Good night.

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