China Manufacturing and Robots

Most companies that have their products made in China do so because because labor is cheaper in China than in the US and Europe, and labor is a significant portion of the production cost. But over the past several years, wages have been steadily rising in China, making Chinese factories progressively less competitive on labor costs.

Even as wages keep rising in China, China has maintained its competitive advantage in manufacturing in a number of ways. It has made enormous investments in infrastructure: raw materials, components, and finished goods travel rapidly and consistently to and from and within China via a vast web of ports, railways, and highways. None of its competitors come close on this front. China’s status as factory of the world means its factories (and many of its cities) have developed tremendous expertise and specialization. They may have been the cheapest before, but now they’re the most experienced – and sometimes even the most efficient.

A couple weeks ago, Sheelah Kolhatkar wrote an article in The New Yorker about advances in robotics which will put a number of factory workers out of a job – no matter where the factories are located. The Chinese factory owners interviewed in the story were almost stereotypically dismissive of concerns about workers rights, and perhaps necessarily so. For them, vast automation is the only way China will remain competitive as a manufacturing base for the rest of the world, and workers be damned.

My colleague, Arlo Kipfer writes frequently about the challenges companies face in navigating China’s employoment laws. Regardless of Chinese factory owners’ attitudes, you’d think they would have a tough time replacing workers with robots. But one of the factory executives quoted in Kolhatkar’s article made a keen insight: up to 80% of Chinese factory workers do not return to work after going home for Chinese New Year. You couldn’t draw it up any better time for making a massive and sudden reduction in force.

Of course, US companies that re-shore manufacturing with largely automated factories won’t have to contend with disgruntled factory workers, because those workers were laid off years ago. And the better robots get at doing assembly line work, the more it will make sense for goods consumed in the United States to be manufactured in the United States. As Kolhatkar notes, “China was never a particularly convenient place for Western companies to have their sneakers and T-shirts and widgets made.”

But for now, China remains the factory of the world. And the increased shift to automation means there will be an ever-widening divide in China between manufacturers with an eye to the future and manufacturers stuck in the past who can compete only on price, but not quality — and likely won’t be able to compete on price for long. This means selecting the right manufacturer is more important than ever and It also means a well-written Manufacturing Agreement with your factory is more important than ever.