In late March, Apple, the world’s largest company by market value, and Foxconn, the world’s largest contract manufacturer, signed an agreement to improve working hours, pay, union representation and health and safety conditions for the 1.2m workers at the Chinese assembly plants that crank out iPhones, iPads and other products.
Many observers were relieved to see Chinese manufacturers having to contend with a shorter working week and better labour standards, and were pleased that wages would increase. Others saw it as a good-news story about a big multinational company making significant concessions to workers. Critics, however, cast the deal as little more than a face-saving exercise in corporate social responsibility.
All of these interpretations fail to understand the broader importance of the announcement. We are witnessing a profound shift in China’s industrial strategy. To understand why, one needs to recall the more momentous Foxconn announcement in August to deploy about 1m industrial robots in its assembly factories over the next three years. (According to the International Federation of Robotics, the total number of industrial robots deployed in the world is a little less than 1.1m.)
Foxconn has good reason to pursue a robotic path. Replacing labour with capital allows the company to overcome one of its biggest problems – exposing workers to mind-numbingly repetitive work routines at a very high pace.
But given these robots will be replacing ordinary Chinese workers, why would the Chinese government consent to it? (One can assume that the Chinese government is party to any such deliberations about industrial strategy, not least because Foxconn is Taiwanese-owned.)
The answer lies in China’s demographics, which pose a great – and under-appreciated – challenge to western societies.
China’s economic planners know the number of annual entrants to its labour market is set to peak soon. Because of a longstanding cultural preference for the birth of boys over girls, which has been exacerbated by the country’s one-child policy, that peak point has already passed for young women, who up until now have been the primary source for staffing assembly operations in China’s coastal provinces.
China’s leadership and people are all keenly aware that the country’s population may get old before it gets rich. But laws of demographics are almost unalterable. What can be changed, though, are the levels of income generated in an economy and its overall growth path.
And it is precisely on this front that the Chinese government is making a determined bet. It wants to see wages go up, not just to strengthen domestic consumption but also because it would mean Chinese companies are producing more advanced goods for the world market. Chinese labour costs are estimated to account for only 1-3 per cent of the final sales price for the iPhone or iPad. Altering this very low level sharply upwards is China’s goal and, in all industrial sectors, the core of its ambitions. Running large-scale assembly operations is no longer seen as a viable path to securing China’s economic future. In order to realise its goal, the country needs well-trained, well-compensated and well-motivated workers. Using robots for menial work fits that strategy.
Remarkably, few in the western world have understood the depth of this ambition. While we worry about China’s low wages, the real challenge lies somewhere else entirely. China is determined to increase wages through advances in education and more reliance on capital-intensive production. The west has not begun to appreciate the consequences of this rapid embrace of automation.
What happens to developed countries when emerging market economies begin to produce more and more advanced products was debated in academic circles nearly a decade ago by economists such as Nobel laureate Paul Samuelson. But it was not expected to become a real-life issue for some decades.
The west’s complacency over its production of human capital must end. Measures to attract talent and strengthen education at schools and universities, and vocational training in companies, are desperately needed. For Europe this includes new policies to attract highly skilled immigrants and a revitalisation of universities. Responses are becoming more pressing with each robot added to the Foxconn assembly line.
The writer is director of IZA (Institute for the Study of Labor)