China and many other locales in Asia have grown dramatically over the past three decades by providing the manufacturing platform for the western technology boom. Economies have grown, incomes have increased and the global commercial playing field has leveled more than a bit.
But as so often happens, the forces that unleashed this wondrous growth spasm could also be its undoing.
The Chinese are running out of people. As hard as that may be to believe, the increase in incomes across their economy decreases the incentives to move to the huge factories in coastal cities where much of the manufacturing takes place. Reports have already surfaced that Foxconn, chief supplier to Apple, Samsung and other tech companies, has been unable to hire enough workers so has pressed Chinese students to work in its factories involuntarily in order to meet demand for the debut of the latest iPhone.
What this means is that the Asian labor cost advantage is disappearing. Among the solutions is the replacement of workers with robots. Foxconn has stated it plans to install 1 million of them over the next few years.
In addition, as the following article points out, there is a cultural impediment to the sort of innovation that sparked the Silicon Valley/Route 128 revolution of the past few decades. Incremental change is valued more highly than radical change of the sort that sparked the internet era. Though China leads the world in patent applications, many of those are not globally protected, meaning that they are derivative or less impactful than those coming out of western countries. The solution of strong-arming western companies into surrendering intellectual property rights in return for access to the Chinese market is causing disquiet. In the meantime, businesses in the west have used this period to figure out how to prevail using technology to offset their labor cost disadvantage.
Ironically then, the very technological revolution that drove Asian growth may now be sapping its future prospects. JL
Izabella Kaminska comments in FT.com/Alphaville :
We’ve noted on more than one occasion that economists may be missing a trick when it comes to how technology is changing the global economy. More so, that developments like 3D printing, could even pose a black-swan risk for Asia in their own right.
It’s refreshing then that someone of UBS'George Magnus’ economic standing– who usually prefers to focus on demographic shifts — is now taking a closer look at how technological changes are impacting the economic landscape.
Indeed, as he notes, their effects could be more immediate than those of demographics:
More immediate than demographics, though, is something that causes Van Agtmael [who coined the term Emerging Markets] to think that the US and parts of Europe and Japan are, slowly but surely, fighting back as they exploit cheaper energy and the keys to successful, advanced manufacturing.
The US technological lead, for example, in the exploitation of cheap energy from shale gas and oil deposits, is already starting to shift the economic pendulum back in its direction again. While US companies should enjoy lower energy costs, and chemicals and energy infrastructure suppliers in particular should prosper, the US stands to benefit in other ways, from greater energy independence, and from becoming an energy exporter.
The Energy Information Agency estimates that US exports of gas could double by 2020, with gas trade in surplus by 2025. Cheap energy development will lower America’s trade deficit and attract a lot of foreign direct investment in energy.
While cheap shale gas extraction is certainly one of the most notable technological developments of the decade — especially in light of its direct influence on energy prices — Magnus notes it might not end up being the most important one.
What could prove a much more influential technology-driven trend is the changing picture of global logistics and manufacturing:
Second, as Van Agtamel says, the US technological lead in advanced, top-end manufacturing, smartphones and smartpads, and its capacity to create smart companies, is already starting to pay off. Whether these particular products – lifestyle changing as they are – will accelerate US growth is a moot point.
But they may be the cutting edge of the coming global manufacturing revolution provided by additive manufacturing technology, or so-called 3D printing. This revolution is expected to tilt economic advantage back towards the US, and to other Western companies.
Localised and customised manufacturing won’t employ much labour, though in ageing societies, labour supply will fall, or stagnate anyway. It will, however, increase the importance of being close to one’s market, resources, and centres of technological excellence, and diminish the significance of long global manufacturing supply chains, and large-scale process manufacturing, both of which characterise Asia’s and China’s functions in the global economy.
What’s more, it’s a trend that will only accelerate as labour costs in places like China rise, says Magnus:
China’s huge attraction to Western companies hasn’t worn off totally, but it is already being undermined by rising labour costs, reservations about the policy of indigenous innovation, concerns about intellectual property rights, and complaints about corporate discrimination.
Reflecting some of these, the Taiwanese technology hardware company, Foxconn, which assembles for Apple, Sony and Nokia, for example, announced last year that it planned to introduce 1 million robots over the next 3 years.
As the company employs 1.2 million workers, we shall see how far this automation goes, but it certainly seems as though the programme will displace large if unspecified numbers of jobs.
But this could all be the tip of an iceberg, even if China were to match the US, Japan, Germany, Taiwan and so on at the frontiers of new manufacturing technologies. There would be no reason any more for foreign companies to assemble products in China, and ship raw materials and components in, and products out over long distances.
As to whether China can compete and innovate on this front in its own right… Magnus, for one, is sceptical:
Chinese research and development spending has been growing rapidly, as one would expect, and it is now the second biggest spender in the world, with an estimated 13.2% share in 2011. But its R&D spending was half that of the EU’s combined $330 billion, and a little more than a third of US spending.
It is good at incremental process innovation, patent registrations and so on, but it lags behind key advanced economies when it comes to the ‘know-how’ embedded in product innovation, management organisation, and the fusion of new information, biological, and materials technologies.
Well-publicised patent filings and scientific publications, hailed by many as proof of China’s growing prowess in scientific and technological innovation, are perhaps misleading. According to Thomson Reuters, China is indeed already the world leader in patent application volume, and second only to the US in published scientific papers, which it could overtake in 2013. According to the US Patent and Trademark Office, China registered 1655 patents in the US in 2009, compared with just 90 in 1999.
But this is a bit like saying that the loudest growls on the Formula One starting grid belong to the fastest racing cars. In reality, China lags a long way behind the US and many European countries, when it comes to cited patents, and to the filing of patents globally. Less than 6% of Chinese patents are protected by global patents, compared to 49% for the US, and nearly 40% for Japan, and China scores far less well than the US or Europe in terms of the number of publications per head published in top scientific journals, according to Thomson Reuters’ Essential Science Indicators20.
Further, China produces 0.54 papers per head, compared to 10 or more in the US, Germany and much of Western Europe, and Chinese scientific papers received less than 6 citations per paper, compared to 10-15 in the US, Europe and Japan. Chinese scientists and engineers are reportedly given lucrative incentives to publish, but this results in a surfeit of quantity over quality, and alleged widespread plagiarism, and data duplication and possible falsification21.
The problem, according to Magnus, lies in the fact that China’s innovation and technology shortcomings are rooted in a socio-cultural system and an incentive system that emphasizes incremental over radical change, and quantity over quality and uniqueness.
This, understandably, puts other parts of the world — where quality, innovation and uniqueness are fully appreciated — well ahead of the game.
Indeed, as Magnus concludes:
No one can say that these problems will retard Chinese innovation and technological competitiveness forever. But in our view they emphasise that in the absence of on-going political reform, and the creation of robust institutions, China’s technological cutting edge may forever lag behind that of its western competitors and rivals.
Which, we would say, is a lag that has the potential to change the face of global trade and manufacturing almost entirely in the next few years or so.
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