Robots may cut off path to prosperity in developing world

Sarah O’Connor

June 27, 2016

TODAY


There is a gloomy view you hear in the developed world that goes something like this: First the factories went overseas, now the robots are coming for the jobs that are left. In other words, automation will sweep up the crumbs that globalisation left behind.

But the relationship between globalisation and automation is more interesting than that. Rich countries are beginning to see factories return to their shores — and they have the robots to thank.

Take Adidas. When chief executive Herbert Hainer joined the German sportswear company in 1987, factories were beginning to close in Germany and move to China. This month, he announced Adidas would bring some shoe production back to Germany for the first time in three decades, thanks to a highly-automated factory in Bavaria. “I find it almost uncanny how things have come full circle,” he said.

It is important to keep some perspective. Adidas made 301 million shoes last year; the two new factories (the other will be in the United States) will produce about one million. Still, you can see how this trend could take off. Ditch the complex global supply chains and you save transport and storage costs. You are less polluting and your customers do not have to worry that your products were made in sweatshops. You are also more nimble and responsive to demand.

Spanish retailer Inditex, owner of the Zara chain of stores, owes much of its success to its “nearshoring” strategy: It can adapt to fluctuating fashions because more than 60 per cent of its clothes are made in Spain, Portugal and other nearby countries such as Morocco and Turkey. Only wardrobe perennials, such as shirts and chinos, are made in low-cost factories in Asia. Adidas says it is moving closer to a future in which customers can have shoes made on demand, perhaps even by a robot in the corner of the shop.

Mr Tyler Cowen, an economics professor at George Mason University in the US, believes robots and 3D printers could create a world of “radical insourcing” where developed countries no longer need to outsource production to countries where wages are low.

“Why should a wealthy nation buy from a poorer exporter when it can automate and produce similar goods at home without incurring high labour costs?” he asked in a recent paper.

Smashing the glass floor is politically incendiary, but may be necessary in the absence of growth

This would not do much for jobs in developed countries, admittedly. The new Adidas factory will have about 160 staff, a fraction of the number required to make the same number of shoes in Asia.

But set aside the rich world for a moment. What would “radical insourcing” mean for all the developing countries that saw manufacturing exports as their path to prosperity?

Industrialisation was the West’s route to riches. There are strong links between manufacturing jobs and the development of a secure middle class. Exporting manufactured goods powers “catch-up growth” and technological convergence with advanced economies, so the theory goes.

But developing countries are displaying signs of what Harvard professor Dani Rodrik calls “premature deindustrialisation”. While manufacturing jobs peaked at about 25 per cent of the US workforce and 40 per cent of Germany’s, they already seem to have peaked in Brazil, India and China at less than 15 per cent.

A world of “radical insourcing” would accelerate this trend, cutting off one well-worn path to development. Poor countries with natural resources could still sell raw materials but economies that rely on commodity exports tend to be highly unequal, unless they have strong democratic institutions.

[WTF does the last phrase mean? Cheap shot for Democracy/democratic institutions?]
It is not all gloom. Technology may threaten the old development model but it brings cheaper renewable energy, medicines, Internet and smartphones to people in poor countries. Prof Cowen foresees a developing world where phones, software, films, drugs and ideas are plentiful but many basic goods are expensive.

Technology can also create opportunities for developing countries to sell to the world. It is already delivering microfinance loans to entrepreneurs and online education to bright young people. And there is still time to find a new path: All those factory jobs making things for domestic and export markets will not disappear overnight. But neither will they be there forever. Last month, a company called Kuka, which makes industrial robots, became the target of a €4.5billion (S$8.3 billion) takeover bid. The owner? German. The bidder? Chinese. 

FINANCIAL TIMES



ABOUT THE AUTHOR:

Sarah O’Connor is the Financial Times’ employment correspondent.