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China's Lights Out Plan Casts Dark Cloud Over Global Economy

Aug. 24, 2017
China's goal of fully automated factories will be great for the Chinese economy, and potentially cause havoc for the rest of the world.

Speak to China experts these days and you typically get one of two contrasting views on its outlook. The prevailing wisdom is that an unreformed state-industrial sector and rising debt mean it is on an unsustainable path, with a financial crisis on the not-too-distant horizon. The optimists acknowledge that debt is too high, but hold out hope that a growing services sector will fuel stronger consumption, reducing the need for credit-fueled investment and putting the economy on a sustainable path for the medium-term.

What if they're both wrong?

That's the possibility suggested by the rapid automation of China's factories. In 2016, China installed 87,000 industrial robots, up 27% from the year before and a record for any country. Annual growth could continue at a 20% pace to 2020, according to the International Federation of Robotics. And that's likely just the beginning: President Xi Jinping has called for a "robot revolution," as China overtakes the manufacturing capacity of other countries. "We will make robots until there's no more people in factories," says Max Chu, general manager of E-Deodar, a robotics startup

What might that mean for the economy?

At home, the news is mixed. One benefit is that automation should increase productivity. In South Korea, which has the highest robot density of any major economy, profit per worker at auto firms was $152,000 in 2016. In China, it was just $48,000. Along with aggressive efforts to boost technology in other fields, automation has the potential to bolster China's competitiveness and sustain rapid growth. As its workforce ages and starts to shrink, factories staffed with robots won't feel the pinch.

For workers, though, the news might not be so good. In China, as everywhere else, automation will likely erode incomes for those with fewer skills. China already ranks alongside some African and Latin American countries in terms of inequality. Based on data from the China Household Finance Survey, the richest 10% of households account for 50% of income, at the expense of a smaller share for everyone else.

Higher inequality, in turn, could impede China's transition toward a consumer-driven economy. China's rich do almost all of its saving, while poor and some middle-class households save little or nothing. By skewing income distribution even more toward the rich, automation risks further increasing China's very high savings rate, and further eroding its very low consumption. If that happens, the two other sources of demand -- investment and exports -- will become all the more important.

For China, that might work out OK. On the export side, by boosting competitiveness, automation could allow China's factories to maintain their hold on low value-added parts of the production chain, while moving further into higher-value areas now dominated by Japan, South Korea and Taiwan. As for investment, high saving by rich households will mean that banks stay amply funded. Weak consumption will keep a lid on inflation, allowing the central bank to keep interest rates low and credit flowing.

For the rest of the world, however, the picture looks less positive. China's industrial strategy will chip away at the remaining competitive advantages enjoyed by American, German, Japanese and Korean companies, putting high-skill jobs at risk. As inequality dents the spending power of China's middle class, the expected surge in Chinese demand for foreign goods -- and hence foreign labor -- might never arrive. In a pessimistic scenario, robots would sustain China's growth, but deal a larger blow to employment in the West than sweatshop labor ever did. After all, one of America's main exports to China is food. If Max Chu has his way, there will be no more workers left to buy it.

German robot maker KukaAG was acquired by China late last year, and could lead the way in the "Made in China 2025" Initiative.

It's still possible that the benefits (and costs) of automation are overstated, and that robots are far less likely to replace humans than techno-visionaries assume. It's also possible that China's government will ease the drawbacks of automation with farsighted policies -- such as a universal income guarantee -- to prop up wages and consumption. Japan's early experience of automation offers a hopeful example: Rising productivity and wages for low-skilled workers actually reduced inequality through the 1960s and '70s.

Absent a Chinese Arnold Schwarzenegger (Chow Yun-fat?) teleporting back from the future to tell us what's going on, we'll have to wait and see. But the rise of the robots could well mean that the optimists and pessimists are both wrong -- and that China's future looks very different than anyone imagined.