China’s Robot Army for World Domination

The first industrial revolution began in the 18th century, a time when education was only for the wealthy, and marriage was about strengthening family empires. During the first industrial revolution, spanning from 1760 to 1840, the steam engine became a driver of economic growth, and the concept of interchangeable parts was born.

Later in the 19th century, interchangeable parts were broadened, and developed economies were gifted with ‘mass production’. History refers to this period as the second industrial revolution.

However, the third industrial revolution was about growing the middle class. Its roots can be found in a post-Second World War United States. As the Swinging Sixties kicked into gear, the third industrial revolution brought us mainframe computing and semiconductors.

Historians will decide exactly when the fourth industrial revolution began. Nonetheless, the impact of this technological revolution we are at the beginning of will have wide-ranging repercussions on economic growth around the world.

Since the computing revolution, developing countries have relied on utilising their labour force to modernise their economies and create employment.

China’s rise from a provincial communist country to the manufacturing hub of the world is a key example. Riding on the back of Japan’s electronic-manufacturing revolution in the 1960s, Chinese authorities were able to grow their economy from one simple concept: taking their unmatched population size and turning the country into one massive assembly line.

Yet the well-trodden path of poverty to prosperity, by producing goods en masse on the cheap, could be about to end as we enter the fourth industrial age.

And China — the same country that became the poster child for cheap labour — is the leader of this new technological age.

Set out two years ago, the ‘Made in China 2025’ plan is an ambitious goal to ensure the country maintains its status as a global manufacturing hub — all while dealing with a declining population.

At the heart of the plan is the desire to automate China’s production sector.

China has been laying the groundwork for their robot-manufacturing army for the past 13 years. The number of operational industrial robots in China has increased 48-fold, jumping from 7,000 robots in 2004 to a whopping 340,000 as of last year.

Industrial Robots Stock Chart 24-08-17

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As at the end of 2013, China became the largest buyer of industrial robots. China beat out other high-tech manufacturers, such as Japan, South Korea and Germany. Four short years later, the Middle Kingdom is now the biggest operator of industrial robots, according to the International Federation of Robotics (IFR).

At the heart of this technological disruption is Guangdong Province. In 2015, this sprawling area in China’s southeast produced US$615 billion in exports. Meaning the output of this single province, with 108 million people, accounted for a quarter of China’s total exports. Yet, in this city, nine robots do the job of 140 full-time employees.

While China is buying up robots at a greater rate than any other country worldwide, there are still only 36 robots per 10,000 manufacturing employees. Lagging behind 292 in Germany, 314 in Japan and 478 in South Korea.

China’s rise to maintain its industrial edge begs the question as to how the government plans to lift the rest of the population out of poverty and into the lower middle class — the very class China is relying on to shift the country from a manufacturing power to a Western-style consumption behemoth.

‘Robot Revolution’

Part of the push to lead the ‘robot revolution’, as President Xi Jinping calls it, is the same problem that faces developed Western economies. Too many seniors and not enough young workers coming up through the ranks. The multi-decade one child policy — formally ended in 2015 — means that not enough people are being born to replace the numbers leaving the workforce now and in the future. The number of workers is tipped to drastically fall from one billion people in 2015 to 960 million in 2030. By 2050, current birth rate forecasts suggest there will only be 800 million people of working age.

This reduction in workers means that, if China doesn’t innovate its production methods, the country will lose this advantage to other nations. Making it even more difficult to shift to a consumption-based economy.

Our nearest Asian neighbour, Indonesia, is an example of a country that had to adapt or perish. In spite of 15 years of rapid economic growth, the archipelago country reached its peak share of global manufacturing in 2002. Poor trade planning from the Indonesian government is partly to blame, enabling China to take the lead as a manufacturing powerhouse.

Compounding the Chinese drive towards automation is rapid wage growth. Over the past 16 years, hourly manufacturing wages have risen at an average of 12% per year.

Wage growth is vital for turning China into a fully-fledged consumption-based economy. Yet rising costs of labour means that China loses its competitive edge. Leaving the door open for other emerging markets with a younger workforce willing to manufacture goods at cheaper prices.

The Middle Kingdom wants to maintain its dominance as a developed global superpower. It also wants to keep its growing middle class happy, ensuring that it’s spending money.

That leaves the centrally-planned economy with only one choice. China only has a couple of decades to manage an ageing workforce that has become accustomed to a more affluent lifestyle.

China — not the Western world — is at the forefront of this fourth industrial revolution.

Kind regards,

Shae Russell
Editor, Markets & Money

PS: Did you know that both Saudi Arabia and Russia are currently arm-wrestling over which nation can export the most oil to China? In June this year, the Saudi energy minister Khalid Al Falih said ‘We are hoping for many more refineries Chinese soil. It is very strategic and at the highest degree. We have a lot of room to grow and our Chinese partners know this.

China is on the path to dominate global trade, and oil-rich Saudi Arabia know this.

My colleague Greg Canavan has spent several weeks investigating what he believes is the biggest opportunity in the oil market, and Saudi Arabia’s intentions for 2018 are at the heart of it. Greg isn’t one for fanfare. If he says the biggest upheaval to the oil market is coming, you can be sure something’s afoot. Get your hands on his latest report here.

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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