China’s factories automate as employee scarcity looms

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The workers assemble vehicles mainly for the domestic market at a plant operated by the Daimler-BAIC Motor joint venture, Beijing Benz Automotive (BBAC).

Evelyn Cheng | CNBC

BEIJING factories in China are turning to technology to address the impending labor shortage.

According to official figures, the country’s working-age population has shrunk by more than 5 million people in the past decade as births declined – despite a backlash from controversial one-child policy.

And for the factories that have driven much of the growth of modern China, labor is already scarce and driving wages soaring. This is forcing companies to relocate or increase their automation, especially as the labor shortage only seems to get worse.

If an older employee can learn, a job in the auto industry no longer requires a lot of physical strength.

Junsong Peng

Vice President and Chief Digital Officer of SAP China

Young people today are unwilling to work in factories, said Shirley Zhou, IT director at Midea, a home appliance giant based in southern China. The company had operating revenue of 77.69 billion yuan ($ 11.95 billion) for the quarter ended September, up more than 15% year over year.

While Midea can find enough labor for the time being, the company has launched a three-year plan to incorporate more technology into its 34 factories, starting with seven this year, Zhou said. The goal is to double that number over the next year and cover 25 factories in 2023, she said.

The company’s modeling predicts that automating manufacturing with sensors and robots will increase assembly efficiency in its plants by 15% to 20%. For two factories that have already integrated such technologies, efficiency has increased by almost 30%, said Zhou.

Midea’s strategy is just one of many technology improvements that analysts say factories around the world are increasingly pursuing. Sometimes referred to as “smart” or “smart” manufacturing, the widespread use of new hardware and software in manufacturing is expected to ultimately increase efficiency as much as the industrial revolution of the 18th and 19th centuries.

From an economic perspective, technology is the key to growth today as countries like China work to keep local manufacturing cheap enough that businesses can stay.

“Any company, or even a third party manufacturer, with manufacturing facilities in China is under pressure to invest in smart manufacturing,” said Rodrigo Cambiaghi, Greater China Supply Chain and Operations Leader at EY.

He found that such investments reduce China’s labor dependency and improve the country’s ability to produce more and better quality goods.

“This is fundamental to keeping the volume of these labor-intensive products in China,” he said. “This is not something that can be solved in a very short time. But the momentum is there and China is concentrating much of the resources, much of the country’s technical capabilities, to advance truly intelligent manufacturing capabilities.”

Attention to factory digitization has increased since the coronavirus pandemic.

According to early investor Yunqi Partners, Chinese industrial internet company Deltaphone completed two rounds of funding in half a year to raise nearly 300 million yuan.

The joint venture between BMW and Brilliance Auto says it has used almost 4,000 robots in three factories and plans to equip 2,000 robots for the opening of new factories next year.

Overall, artificial intelligence company Megvii, which sells warehouse automation software, expects 2020 to be the first year of real-world application of artificial intelligence in logistics, and significant integration will begin this year.

Falling tech costs

One reason the factory digitization trend is accelerating is that the cost of sensors to collect data about the operation of machines has dropped significantly over the past 10 years, said Leo Li, partner at consulting firm Oliver Wyman and head of automotive , Manufacturing and industrial products for Greater China.

This enables a factory to identify and solve production problems faster – with fewer employees.

“Today’s factories are completely different from the past,” Li said, according to a CNBC translation of his Mandarin-language remarks. “The number of so-called workers has fallen dramatically – there are more” knowledge workers “. Efficiency is increasing more and more.”

One of the main areas of application is automobile construction. The German software company SAP started its business activities in China in 1995 with the local joint venture of Volkswagen, said Junsong Peng, Vice President and Chief Digital Officer of SAP China.

He said company analysis of such tech upgrades shows that production efficiency and delivery time improve by about 20% to 30%. That’s just a start to how much technology can contribute, Peng said.

The challenge to factory efficiency in the future, according to a CNBC translation of its Mandarin-language remarks, is a problem of digital tool management training, not age. “If an older employee can learn, a job in the auto industry no longer requires a lot of physical strength.”

Impact on the supply chain

The effects of factory digitization also extend to global supply chains.

Companies are particularly keen to use technology to track and analyze their global production to ensure goods can be delivered to customers, said Jeremy Deutsch, president of data center operator Equinix in the Asia-Pacific region. He said the increasing digitization of factories is driving new demand for data centers, the initial growth of which came from social media and financial services.

China’s rapid recovery from the coronavirus pandemic has kept factories in the country – and very busy – as other countries are still struggling to control the disease.

This boost to China’s factories is unlikely to continue for another year, said Yipin Ng, founding partner of Shanghai-based Yunqi Partners.

Companies will continue to want to diversify part of their supply chain to other countries over the next five years, he said. While technology is a consideration, Ng said there is still a long way to go as many of the factories he has visited in China are not even connected to the internet and companies in other countries can develop similar technical tools.

In China, however, pressures to address labor productivity will only increase.

“My personal concern is not that we have excessive manpower or employment (problems),” said Victor Du, managing director of the consulting firm Alvarez & Marsal Asia in Shanghai. “As a society, the concern (should be) to achieve the same level of production output, or even higher quality and higher production with a smaller population, after twenty, thirty years. If you look at this point, the digitization or modernization of technology is going on to do this.” be very necessary. “

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