Thursday, October 9, 2014

What are the Implications of the Rise of Chinese Industrial Robotics Industry?

A large fraction of the world’s manufacturing takes place in China. Historically, the manufacturing moved to China because of low wages and lenient environmental regulations. However, things are beginning to change in China. Wages are increasingly rising. Due to the one-child policy, age demographics are rapidly shifting. The ratio of the available labor force to the total population is expected to decrease. The percentage of people who are above 60 is expected to increase from 15 percent to 25 percent over the next fifteen years. These factors are expected to create a shortage of labor in the future.      

China has emerged as a dominant player in the low-cost manufacturing sector. China would like to become a significant player in the advanced manufacturing sector to maintain growth and offer high-value products. Advanced manufacturing requires precision, consistency, and high quality. Automation and robotics are considered an important ingredient to become a serious player in the advanced manufacturing arena.

China is aggressively pushing deployment of robots as a solution to the anticipated shortage of labor and its desire to move into the high-value added advanced manufacturing sector. China deployed almost 38,000 new industrial robots in 2013. Robot deployment in China has been growing at nearly 30 percent per year over the last few years. In 2013, approximately 168,000 industrial robots (excluding electronic packaging robots) were sold worldwide.  China bought more than 20 percent of the industrial robots sold worldwide. Clearly, China has emerged as a serious market for selling industrial robots.

Korea is currently the world leader in terms of the number robots deployed per worker basis.  It uses 396 robots per 10,000 workers. China currently only uses 23 robots per 10,000 workers. The same figures for Japan and Germany are 332 and 273.  China has a lot of catching up to do. There is no reason to believe that robot numbers in China will not approach 200 per 10,000 workers over the next few years. This should generate demand of approximately 400,000 robots per year in China alone. This is clearly great news for the industrial robotics companies.

China has been developing its own industrial robots. China’s domestic manufacturers sold nearly 10,000 robots in 2013. I believe that the Chinese manufacturers will ultimately utilize a large number of domestically produced robots. Hence, it is likely that Chinese domestic industrial robotics industry would have lion’s share of 400,000 robots sold annually in China. If they achieve even 75 percent of the market share in China, they will be bigger than US, European, Japanese, and Korean industrial robotics companies combined together.

Some people disagree with this assessment and use the following argument to defend their position. Even though a large volume of manufacturing takes place in China, the equipment used in the manufacturing is produced in other countries and imported to China.  Representative examples include optical fiber manufacturing equipment, IC manufacturing equipment, and CNC machines.

Some people cite China’s inability to create a strong domestic manufacturing equipment industry as a reason for why China is unlikely to emerge as a significant player in the industrial robotics industry. In my opinion, this comparison is flawed.

There are fundamental differences between industrial robots and other manufacturing equipment such as CNC machines. When a part is produced on a CNC machine, it carries the signature of the machine on which it was made. The accuracy and precision of the machine get reflected in the quality of the part produced. By examining the part, one can make inferences about the quality of the machine on which the part is made.  Hence, it often makes sense to buy high quality machines to add new capability and gain competitive advantage. In most situations, the robot just needs to be able to move the part from one place to another. Once the part leaves the robot’s hand, there is no residual impression of the robot hand on the part. You cannot examine the part and figure out which robot moved it. Hence, you just need to get a robot that will get the job done. There is no point in paying for a higher performance. I believe that there are many tasks where high performance is not needed and hence one can get away with simple robots. I don’t see any reason why Chinese manufacturers will not be able to create useful robots to serve market needs in simple pick-and-place tasks.                      

If Chinese robot manufacturers have a sufficient large volume, they should be able to drive the cost of domestically produced robots significantly. If an Indian automotive company can sell a car for less than $3,000 (e.g., Tata Nano), Chinese manufacturers should certainly be able to sell a robot for less than $5,000. Doing this will require significant support from the Chinese government, but there is no fundamental reason why this cannot be done.

Here are some interesting questions related to the rise of Chinese industrial robot industry:

  • If the Chinese were to be successful in producing lost-cost robots, would they export them to the rest of the world? How will it impact the market share of the other leading industrial robotics companies? 
  • If the rest of the world had access to really cheap robots, would Chinese manufacturers have any inherent advantage? Would the rise of Chinese robotics industry deliver low-cost robots to help the rest of the world successfully compete with Chinese manufacturers?      
  • Many business leaders in the developed world believe that the cost advantages held by Chinese manufacturers can be neutralized by using automation and robots. This is with the assumption that everyone will have to pay the same price for their robots. What if the Chinese robot manufacturers simply decide not to export their robots? In this case, the Chinese will have access to $5,000 robots, the rest of the world will need to pay at least $25,000 (based on current pricing) to get their robots. The world won’t be flat in this case.                    
  • If Chinese manufacturers mainly focus on the advanced manufacturing, who would be the world’s manufacturer for low-cost mundane parts?      
Unfortunately, I don’t know the answers to the above questions. I would love to hear your thoughts.