What’s going on in China? Firstly the growth rate plummets from its multi-decadal average of more than 8 percent, and then its factories say that they’ve had enough of low prices and want to start pushing prices back up again.
According to Bloomberg, China is on the cusp of delivering a shock to the world’s financial market. For years it’s been undercutting its rivals by offering unparalleled low costs and cheap labor. But now, according to analysts, things are starting to change quite dramatically. Whereas once there was a seemingly relentless supply of cheap labor coming from Chinese rural migrants moving to the cities, this supply is finally drying up. Companies are actually having to compete on wages to attract Chinese migrants to fill the positions that they have to offer, thanks to increasing scarcity in the labor market.
The ramifications for the global economy could be enormous. For the past two decades, China has meant that Western countries can consume just about as many cheap products they like, without having to pay inflated prices. But with this hike in wage rates, prices for Western consumers are going to go up.
Many media outlets are suggesting that this could be dangerous news for countries that rely heavily on Chinese imports, like Japan and the US. But should we take the threat seriously?
It seems likely that prices will go up slightly in the short term, but over the long haul, manufacturing prices are still coming down, dramatically.
Robots Replacing People
One of the things that we see already is the mass replacing of human factory workers with robotic surrogates. This isn’t the future: it’s already happening on a massive scale. Foxconn announced back in May that it had automated over 60,000 jobs in one of its factories and had cut the hourly wage rate in half by doing so. The move meant that despite rising wage rates in the rest of China, automation means that manufacturers in the region are actually saving money. In fact, rising wage rates could accelerate the process of automation in factories, as robots become less expensive than people to perform basic operational tasks.
According to the company, it’s far cheaper to buy a robotic arm that costs $35,000 than it is to hire an inefficient human employee. Economists have issued dire warnings over the growth of automation in the economy. They say that it will lead to mass layoffs in a very short period of time. But most economists are only looking at one side of the equation: the jobs side. There is another side to what’s happening in factories like Foxconn.
The Foxconn decision is important for western consumers. Foxconn makes iPads, iPhones, Samsung Galaxy phone line as well as the Sony Playstation 4. In other words, it’s a major contributor to consumer markets in countries like the US where people are very price-sensitive. Continued automation in the sector will push the prices of these good closer and closer to zero as the cost of human labor in removed. For everybody else in the global economy, this will make accessing digital products ever cheaper.
The Robot Internet
With the rise of the robots we’re also seeing the rise of the so-called robot internet. The idea of the robot internet is similar to the regular internet in the sense that robots will be connected with one another, but with the difference that it will be a learning platform for robots. What makes robots such a compelling proposition for manufacturers is the fact that once one robot has learned to perform a task, they all have. Right now, connecting robots together is clunky and required specialists to share information over the regular internet. But in the future, robots will be able to learn how to respond to individual situations and then instantly share what they have learned with each other.
You can immediately imagine how helpful this sort of thing will be for factory owners. One plant in the fleet could serve as the nursery for robots, teaching them new tricks, and then whatever the robots learned in this factory could be immediately transmitted to robots in other facilities.
Essentially what this means is a vastly reduced cost of training for businesses. Companies will no longer have to spend their time and effort teaching every human that they work with about their protocols. Instead, they’ll get one robot, equipped with deep learning algorithms, to learn a specific task and then immediately share its knowledge with all of their other robots. These cost savings will then be passed onto consumers, reducing price still further.
The On-Demand, Granular Economy.
The whole global infrastructure of business has changed almost beyond recognition since the rise of the first internet. Whereas once companies had to be highly vertically and horizontally integrated to perform their functions, now they can rely on ancillary businesses to carry out those functions for them. This is true of manufacturing firms, just as it is true of software companies.
One of the innovations that has come to the market is the idea that companies should only have to pay for the quantity of services that they use. The canonical example is the data center. Companies pay a data center provider only for the space that they actually use on their server. They can increase or decrease the amount that they pay for, based on their weekly, monthly or even daily needs.
A similarly granular system is now being trialed in the manufacturing sector. Manufacturers are being given the opportunity to specify the size of the machinery they need, thanks to modular design, according to Reliant Finishing Systems information. The company says that modular design allows manufacturers to reconfigure and fine-tune their systems, without having to spend extra money.
The greater the extent of modular design, the more manufacturers will be able to scale up their physical machinery in line with increased demand. This granularity will ultimately meant that high fixed costs will become a thing of the past and companies will be able to install units that are appropriate at every scale of production. For these reasons, price hikes in China probably aren’t worth taking all that seriously.