Is Chinese Cheap Labor a Myth?

[Walter Hay]

An old friend who owns two huge factories in China told me recently that he has managed to cut his labor force by nearly 50%. He has done it by introducing robotics into his system. He is delighted with the cost savings, but on checking his online published price lists I can see that he is pocketing the big savings and is not passing them on to his customers.

In recent years his workers have become more demanding, and government policies have been requiring employers to provide more benefits and better working conditions. Because of this, my friend is relieved to be able to reduce his labor requirements.

I asked how common is the use of robots in Chinese manufacturing, and his answer was very interesting. He said that there are thousands of factories that once had very big numbers of workers but now that they have changed to robotic production those numbers are very small.

He couldn't give me numbers, but he named some of the companies that he knew I was familiar with, and frankly, I was shocked. Some of them produce items that would seem to require skilled hands to produce, but robots have been successfully programmed to take over the role of humans.

Nearly 30 years ago I saw automated machines operating on production lines, and it is still commonplace today. Much of the tedious and physically demanding work was being done by machines 30 years ago, but the processes have been steadily improving. The few human workers are now only needed to program those machines, and in some case, to feed the supply line.

Not every process can be automated. On my many visits to factories in China I have also seen humans working like robots. Often the work they do is brain - numbingly repetitive, but sometimes it requires skill also. In one industry I know well, there have been many attempts to automate the process using robotics, and they have all been a total failure, mainly due to a huge reject rate. The robots can't seem to detect tiny faults in the work.

What I see happening now is that a lot Chinese companies are coasting along on the country's reputation as a low labor cost manufacturing center, and racking up bigger profits by getting rid of human labor as much as possible.

Walter

 

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[RazorCut]

It is a very interesting situation, and one that Western society has already been through.

This is what happens when labour costs increase above a threshold.

While China could rely on its cheap labour there was no need to invest in automation so they lagged behind a good portion of the Western world. Now the pain of investment is less than the pain of continued mass employment automation becomes the order of the day.

The UK went through it many decades ago. My brother used to work as a bridge builder. He is a highly skilled welder with a file of qualifications to his name but he basically ran a robot which could weld much faster than he could so probably replaced 5-6 people. He would load and operate the robot, check the work, and manually re-work anything the robot didn't get right. That was probably over 15 years ago. I imagine that there is little need to rework anything anymore and one man is now doing the work of 20.

There were some skills, like reading an x-ray, that couldn't be automated as the doctors skills were so nuanced even they didn't know exactly how they were coming up with the correct diagnosis. But by feeding an algorithm 10's of thousands of x-rays they are getting (or have got) to the point of replicating the skills of these seasoned doctors. Obviously the doctors are not being replaced but if they can roll this technology out it will mean people will get an accurate diagnose more quickly.

There is no stopping automation is there. This is how our groceries are picked for delivery in one of the UK's newest warehouses:

View: https://www.youtube.com/watch?v=4DKrcpa8Z_E


So what happens to the economy when 20% of the Chinese population are replaced by robots?

 

[Rawseed]

There's a great documentary on Netflix called American Factory.

A Chinese billionaire starts a glass making factory in Dayton, Ohio.

In the beginning they're trying to use American workers.

But, by the end, they're trying to figure out how to replace them with robots.

Very interesting.

 

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[Cyberdeth]

Interestingly enough, Tesla replaced some of it's robots with manual laborers in order to meet the manufacturing quota for the Model 3. Robots will always be better at doing some repetitive jobs. Car manufacturing plants used to use manual labor in the early 20th century, nowadays, you'd be hard pressed to find all that many people doing the heavy lifting.

 

[WJK]

We've been automating since the beginning of time. Ever heard of the wheel? How about a train? Or cars?

Now it's just going faster. The USA needs to spend more time and money on retraining and educating our youth.

 

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[Kevin88660]

There's a great documentary on Netflix called American Factory.

A Chinese billionaire starts a glass making factory in Dayton, Ohio.

In the beginning they're trying to use American workers.

But, by the end, they're trying to figure out how to replace them with robots.

Very interesting.

Excellent documentary. The union was a pain in the a$$ for the boss.

 

[Rawseed]

Second is suggested robot tax.

For me, most simple solution to unemployment caused by making robots.
Basically if you buy a robot instead of hiring someone you pay tax that's equivalent of fired worker pay.
This tax funds unemployment benefits.

How is this fair to the employer or corporation?
We're going to tax them for innovation?

 

[Walter Hay]

Chinese labor is the most “cost competitive” labor to date for one unit of manufacturing good produced despite rising wages.

Just to give an example when plants in China moved to Vietnam for “lower cost” which simply means Vietnamese workers draw a lower monthly salary. But in return the workers are less productive due to being less skilled (less experience). And Vietnamese workers are unwilling to work overtime for extra pay. This leads to idle capacity and high cost due to man hours wasted. In return a lot of factories find no significant benefit moving to Vietnam.

You have raised an interesting point about cultural differences. Yes, the typical Vietnamese factory worker has a very different attitude to those in China, where time with the family is less important than the extra pay for overtime.

Cultural change in Japan is also affecting productivity, with the younger generation of workers being less subservient, and consequently far less willing to work a huge amount of overtime. In Japan that overtime was as often as not unpaid.

As a matter of interest, at least one provincial government in China pays subsidies to industrialists to purchase robots.

Walter

 

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[Tourmaline]

I have zero worries for the blue collar workers that you are looking at. They will figure it out, and find some other trade in the blue collar world.

You remind me of Andrew Yang being all worried about truckers losing their jobs. You know what truckers are not worried about? Losing their jobs. Blue collar people in general are not nearly as, and I hope you know I don't mean this with any offense, weak spirited as many white collar people are. And it is those white collar people that are putting forth that the blue collared people will need help and will take to the streets otherwise. Blue collared people tend to be more down to earth and accepting of the harsh realities, and more often than not know that they will find a way no matter the circumstances that they are placed in.

I do not think comparing a developed western nation to an Africa nation holds any weight.

As long as the economy is doing well, people will have plenty of opportunity to change careers and find work to sustain their family. Which, the advent of higher levels of robotics and automation will accelerate the economy more than hurt it. More will be able to be done with less, which leads to greater economic output and thus opportunity overall.

 

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[WJK]

I just think that a wage deflation or a major currency depreciation must take place first.

There is still greater incentives to put new jobs in China than in Europe/Japan/USA.

How about an ongoing trade war? How about their plan to dominate the world? How about forced technology transfers? How about their leaning toward nationalizing businesses and business interests? How about their military build-up? How about a culture that thinks of us Westerners as cur-dog-upstarts. How about their re-education programs -- AKA -- concentration camps for people who practice any free-thinking and/or religions? How about their morals in which cheating is OK and to be expected? They're already playing the currency depreciation game big time and in their favor. Yes, they play the greed card well. I'm not sure that short term gain is worth the risks of dealing with a communist government that has NO moral or legal bumpers.

 

[WJK]

Thanks for sharing I enjoyed these stories.

Why did the Japanese sales stopped? My understanding was that after Plaza accord Yen basically more than doubled in value. So a lot of the manufacturing was moving into Indonesia, Thailand, Singapore, Taiwan. When I was a child (in Singapore) I still remember using things made in Thailand and Indonesia, the components of digital gadgets. After early 2000s China took over everything.

But I feel that in todays context there isn’t a replacement for China even if there is a major RMB appreciation. Chinese labor force has better quality. And there is a economy of production chain there that you cannot replicate elsewhere quickly. As Chinese are becoming consumers the proximity is a good thing.

Eventually RMB appreciation will be a major income redistribution within China, as profit margin for export business decline while workers get a larger share of the economic pie.

The way that I remember it, American all the sudden looked up and Japan was manufacturing everything. The had captured our TV market by undercutting our manufactures. Most of ours went out of business. They sold goods below costs to increase their market share and then made up the profits domestically. Their TVs were cheaper here and more expensive in Japan. They put in an inspection program for their cars that were relatively newer. We didn't. Many people there had to replace cars that weren't worn out. We had a glut of used Japanese engines and parts -- which they sold here. I bought a couple of engines for my vehicles. That when they started manufacturing some of their cars here. The business community and unions were on their ears against Japan and its business practices. There was a lot of press about their culture and their business systems, and it wasn't pretty. They had gone from making cheap party favors to making important items. It was the beginning of globalism. Then they started to use the money to buy our RE and they bragged about it with full-page ads. That was the final straw with a lot of people. I hope I've answered your question.

 

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[Kevin88660]

The word is “cheap” is misleading unless accurately defined.

Chinese labor is the most “cost competitive” labor to date for one unit of manufacturing good produced despite rising wages.

Just to give an example when plants in China moved to Vietnam for “lower cost” which simply means Vietnamese workers draw a lower monthly salary. But in return the workers are less productive due to being less skilled (less experience). And Vietnamese workers are unwilling to work overtime for extra pay. This leads to idle capacity and high cost due to man hours wasted. In return a lot of factories find no significant benefit moving to Vietnam.

The OP’s original question is about machines vs labor. I am not an expert on that. But I don’t see the cost competitiveness of Chinese labor to be taken over by any country any time soon. You have economies of scale in manufacturing there-easy to find spare parts to buy across the street in Shen Zhen. You have millions of engineering graduates. Even if you can lower the cost to have more machines replacing labor, I still see vision the future having the plants located in China and ran by the smaller labor force of Chinese work force.

 

[Kid]

How is this fair to the employer or corporation?
We're going to tax them for innovation?

It's not fair - it's safe.
Let's say you fire 100mln people because of automation.
What would, those 100mln people do?
They would first destroy your corporation's properties physically.
Then they would start robbing everything around just to survive.
I hope you see it now.

 

[DeletedUser0287]

An old friend who owns two huge factories in China told me recently that he has managed to cut his labor force by nearly 50%. He has done it by introducing robotics into his system. He is delighted with the cost savings, but on checking his online published price lists I can see that he is pocketing the big savings and is not passing them on to his customers.

In recent years his workers have become more demanding, and government policies have been requiring employers to provide more benefits and better working conditions. Because of this, my friend is relieved to be able to reduce his labor requirements.

I asked how common is the use of robots in Chinese manufacturing, and his answer was very interesting. He said that there are thousands of factories that once had very big numbers of workers but now that they have changed to robotic production those numbers are very small.

He couldn't give me numbers, but he named some of the companies that he knew I was familiar with, and frankly, I was shocked. Some of them produce items that would seem to require skilled hands to produce, but robots have been successfully programmed to take over the role of humans.

Nearly 30 years ago I saw automated machines operating on production lines, and it is still commonplace today. Much of the tedious and physically demanding work was being done by machines 30 years ago, but the processes have been steadily improving. The few human workers are now only needed to program those machines, and in some case, to feed the supply line.

Not every process can be automated. On my many visits to factories in China I have also seen humans working like robots. Often the work they do is brain - numbingly repetitive, but sometimes it requires skill also. In one industry I know well, there have been many attempts to automate the process using robotics, and they have all been a total failure, mainly due to a huge reject rate. The robots can't seem to detect tiny faults in the work.

What I see happening now is that a lot Chinese companies are coasting along on the country's reputation as a low labor cost manufacturing center, and racking up bigger profits by getting rid of human labor as much as possible.

Walter

Not surprised at all. I am actually surprised how more companies have not chosen robotics over human labor faster? It is what I am doing with my business. Automate as much as possible with robotics to keep it a one man show for as long as possible. Upfront cost is the issue, but we’ll worth it long term.

Jobs that require high intuition and creative jobs are things that robots can’t.

 

[WJK]

That would require a one world government run by an ultra left dictatorship.

The world would be more in balance if things balance towards the equilibrium, if north America, Western Europe and Japan half their real wages and Chinese double it to match the unit labor cost disparity.

Yuck!

 

[Kevin88660]

This is a very interesting perspective.

China's economic growth over the past 20 years has been extraordinary. They also took advantage of one resource they had lots of: People.

China can produce on a nearly unmatched level, and as such, their economy has taken off, and standards of living have risen dramatically.

Americans may have been able to take advantage of China's cheap labour force for a while, but in the near future it won't even be cost effective.

I have a more in depth perspective.

A lot of countries also have a lot more people but is unable to utilize the human resources as well. Take India for example, a large percentage of people still cannot write them names, while we have Indian expats taking ceo position in top companies abroad.

Development in human capital started much earlier. The communist government had massive public education program for women and children. People in rural/traditional/ tribal relationship was forced into modern citizenry in nuclear families. Since the 80s government focused and education in math, science and engineering. China has removed a lot of the traditional obstacles in non western societies that is delaying the process of modernization.

If you go to Chinese factories. A lot are run like quasi-military camps. People do not find it “unacceptable” because it is rather similar with the Leninist regimental education they received earlier.

Modern China has produced the ideal labor force that John D Rockerfeller dreamt he could have 100 years ago.

 

[Kevin88660]

This is true. I'm not suggesting China ONLY had a sizeable population. The government actually went through a lot of effort to modernize the country and have everyone work towards advancement. The emphasis on education also helps...

India on the other hand is heavily plagued by corruption and social inequality. They haven't had the competent leadership or unifying system to change that.

The Indian government does not the rights to intrude in a lot of areas. Even if they have the rights it is not politically favorable to enforce to piss off the locals in a democracy.

China today have higher female labor force participation rate than all developed nations. In India you can have a constitution and ruling government who genuinely believe liberal values and modernization, but you still have uncontrollable cases of honor killing in remote areas where the village chief and the local culture actively do the old ways of doing things. When you have police and reporters investigation everyone says “they don’t know” to cover up the perpetuators.

Indian is still struggling with things that the communist government in China wiped out decades ago.

 

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[WJK]

So it's a reciprocal deal... for now...

I'm not sure about that. It's more like a Mexican stand-off...

 

[Kevin88660]

So it's a reciprocal deal... for now...

The problem with the status quo us that while American MNNs have benefited from globalization and China, the trickle down effect didn’t happen. Apple is a good example, keeping its cash at tax heaven places in Ireland, getting its products manufactured by Chinese contractors and have its R and D centers in Singapore.

Trump needs to know what he wants from China. I see now he keeps flipping back and forth without a reasonable final goal and agenda.

If I am Trump I will let China do RMB internationalization and RMB appreciation. Allow the gulf countries to sell oil in Yuan.

In return I will demand this much richer China, infrastructure investment in U.S. and lend RMB debt to U.S. at below market interest to fund our universal basic income project. RMB capital market business has to be all given to New York, no share to rivals like London, Hong Kong, Tokyo or Singapore.

I will relax U.S. military presence in East Asia, in return China has to buy most of its food from U.S. I think the Chinese would be to do the deal. Right now they are forcing domestic food production even though its more costly for food security reason. I am sure they are likely to give up food security for geopolitical security.

In my opinion U.S. should hug China tightly so that both can gain dominating advantage over the rest of the world. But Trump is pushing everyone away whereas China is doing deal with everyone. If that goes on 15 years later U.S. will sink to be a better version of Latin America economy (a fusion of panama and Argentina). Abundant cheap food, devalued currency, world center for commerce and finance, but nothing much else.

 

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[WJK]

I like your experience.

I only read about these Japanese bubbles through reading online and listening to older folks who talk about it.

I even dig out Forbes articles that showed richest in the world in the 80s used to be occupied by Japanese property developers.

I started in 1976 as a RE salesman in my early 20s. That was 43 years ago. I started selling RE and doing equity purchases in the LA ghetto, now called flips. By the time the Japanese meltdown happened, I was brokering, buying, selling, appraising and playing the-good-wife to a powerful man.

Your right. Japanese investors were into Class A developing or investing. They were very sure of themselves. But, they were able to buy stock on margins within their national stock market. When the Japanese stock market collapsed, they had margin calls. It was more important to them to keep their stock positions in their home corporations rather than their properties located here.

At that time, in their culture, they went to work for one corporation out of college and they worked for them for their entire lives. There was no other career path. And it was all men. (Married Japanese women didn't work at that time.) Their stock positions were all tied up with their employment. If they lost or gave up their employment, they were socially ruined forever. There was a great deal of conflict between their investment interests here and employment duties there.

When the American public turned on Japanese goods, their sales here fell like a rock. It was cars, TVs and all kinds of electronic goods.

By the way, all of this took down the whole Savings and Loans industry. (Wall Street stepped into that lending vacuum.) I was hired a few times to be on the audit crew that went in for the Feds to close those banks or chains of Savings and Loans. I was hired to evaluate the major loan portfolios owned by those institutions. I've seen a lot of these deals I'm telling you about.

 

[Striver]

In one industry I know well, there have been many attempts to automate the process using robotics, and they have all been a total failure, mainly due to a huge reject rate. The robots can't seem to detect tiny faults in the work.

2 weeks ago, at the Las Vegas Convention Center, a robot poured and handed to me a draft beer. I was impressed!

Needless to say, there was a long line at this booth! haha

 

[Kid]

Interesting indeed.

The two interesting facts about the robots vs humans.
Tesla tried to make 100% automated assembly line.
They built it , yet faults in new cars ware present in about 90% of new cars.
They had to be repaired by human and whole idea of 100% automated assembly line went down the drain.

Second is suggested robot tax.

For me, most simple solution to unemployment caused by making robots.
Basically if you buy a robot instead of hiring someone you pay tax that's equivalent of fired worker pay.
This tax funds unemployment benefits.
I guess that such scheme would have to be present till population decrease by number of non-needed workers.

Its a pity that this way we won't reap benefits of lowered price of goods but i don't see safer way around this.

 

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[Tourmaline]

It's not fair - it's safe.
Let's say you fire 100mln people because of automation.
What would, those 100mln people do?
They would first destroy your corporation's properties physically.
Then they would start robbing everything around just to survive.
I hope you see it now.

They figure it out. It's not like they'd all lose their jobs at once overnight. The ones with more astuteness would already be in the process of retraining for a new job by the time they get laid off too.

I don't think most would resort to anarchy!

 

[Kid]

It's not like they'd all lose their jobs at once overnight. The ones with more astuteness would already be in the process of retraining for a new job by the time they get laid off too.

I guess that production line workers are mostly those that have less astuteness.
Their jobs mostly would by at risk.

I agree with you that people won't be fired on one day.
But acceleration of development of automation is the thing that is causing worries.

I don't have numbers at my hand but speed at which things evolved in past 10-15 years are above anything comparable in the past hundred or thousand years.

If not overnight, what would happen if people would be fired in a span of 10 years?
Less dramatic but still same problem would arise - feed those people.

I don't think most would resort to anarchy!

Actually, they would.

In very recent history, group of people in Africa started to destroy oil pipelines of Exxon, BP or others that are present there.

I don't remember if they killed workers of that companies but oil was spilled and equipment was being destroyed.

They did it because of one reason - they had no food and only alternative was to starve to death.

Government first didn't listen to them when they asked for help so they turned to violence.
Then government listened and gave them some monthly payout.

After that this group went back to their homes peacefully.

Now multiply that group by 100,000 add factor of each having access to internet 24x7 and you have civil war in the making.

 

[Kevin88660]

I have zero worries for the blue collar workers that you are looking at. They will figure it out, and find some other trade in the blue collar world.

You remind me of Andrew Yang being all worried about truckers losing their jobs. You know what truckers are not worried about? Losing their jobs. Blue collar people in general are not nearly as, and I hope you know I don't mean this with any offense, weak spirited as many white collar people are. And it is those white collar people that are putting forth that the blue collared people will need help and will take to the streets otherwise. Blue collared people tend to be more down to earth and accepting of the harsh realities, and more often than not know that they will find a way no matter the circumstances that they are placed in.

I do not think comparing a developed western nation to an Africa nation holds any weight.

As long as the economy is doing well, people will have plenty of opportunity to change careers and find work to sustain their family. Which, the advent of higher levels of robotics and automation will accelerate the economy more than hurt it. More will be able to be done with less, which leads to greater economic output and thus opportunity overall.

I doubt so. Didn't the blue collar workers chose to vote for Trump?

I don’t fully agree with Andrew Yang hyping up the issue on automation. I think the issue here is always about the wage/price/cost. If American workers can accept a Latin America standard of living many jobs will quickly come back. Many automation research projects will be unprofitable.

 

[LittleWolfie]

I doubt so. Didn't the blue collar workers chose to vote for Trump?

I don’t fully agree with Andrew Yang hyping up the issue on automation. I think the issue here is always about the wage/price/cost. If American workers can accept a Latin America standard of living many jobs will quickly come back. Many automation research projects will be unprofitable.

If Latin Americans and everyone else obtains a north American standard of living and thus is just as expensive,the jobs will come back just as quickly.

You can balance by increasing the one side or decreasing the other or both (both Americas on a belgian standard of living)

 

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[Kevin88660]

If Latin Americans and everyone else obtains a north American standard of living and thus is just as expensive,the jobs will come back just as quickly.

You can balance by increasing the one side or decreasing the other or both (both Americas on a belgian standard of living)

That would require a one world government run by an ultra left dictatorship.

The world would be more in balance if things balance towards the equilibrium, if north America, Western Europe and Japan half their real wages and Chinese double it to match the unit labor cost disparity.

 

[LittleWolfie]

That would require a one world government run by an ultra left dictatorship.

The world would be more in balance if things balance towards the equilibrium, if north America, Western Europe and Japan half their real wages and Chinese double it to match the unit labor cost disparity.

Which would require a one world government run by an ultra-right dictatorship

America is so far to the right comparatively balance would be a lot further left for them. (after all most people in the world live under an officially communist government)

 

[ed_ten_72]

Simply google: china median income. Numbers are quite interesting. Robotisation is inevitable like any other type of progress.

 

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[Kid]

Blue collar people in general are not nearly as, and I hope you know I don't mean this with any offense, weak spirited as many white collar people are.

You got a valid point.

So we will have a lot more of self employed when automation will arrive.

Thats bad! They will be our competitors!

[pls. read this with a little bit of sense of humor, nevertheless its valid point too ]