Part One: Grins & Gains

Robot Blast Off: China Spends Its Way to Victory

Tremors in Tokyo, and it’s not an earthquake

Grins and gains
The first seismic tremors that something very different and very new was afoot in China’s manufacturing scene began early in 2017 when the needle spiked upwards in the form of machine tool orders. 

“The bustle in China is lifting the whole market,” enthused Yoji Ishimaru, president of the Japan Machine Tool Builders’ Association, at a news conference. He reckoned that all the action began to take off in February.

According to the trade group, by April machine tool orders from China increased 2.4 times on the year to $278 million. Total orders in April exceeded the same period last year by 34.7 percent to $1.17 billion.

By May, orders rose again, this time by 24.4 percent.

“As Chinese manufacturers produce more advanced products, demand is rising for high-performance Japanese machine tools,” said Katsushi Saito, head of equity research at Nomura Securities.

Japan’s robot exports to China had also taken off: $410 million in new shipments rolled out in the first three months of 2017, reported the Japan Robot Association.

Such a level has not been seen since the third quarter of 2010, when China committed to a $580 billion stimulus package to address the effects of the global financial crisis.

“Labor-saving tech companies thriving off Chinese demand,” is how the Nikkei Asia Review described the reason for the big grins from Japanese robot and machine tool manufacturers.

By June, even orders for building and construction equipment were in the mix. “Japanese shipments of building equipment to China skyrocketed 270 percent.”

“Everything is booming,” gushed Yoshiharu Inaba, CEO of FANUC.

Yaskawa Electric’s president Hiroshi Ogasawara added that his sales have been growing by 10 to 15 percent, forecasting that “factory automation will accelerate further in China.”

Both companies are now also the darlings of the Nikkei Stock Exchange where their share prices have advanced more than 10 percent since December.

As Ogasawara remarked in a recent interview: “If an economy of such a scale continues to grow at 5-6 percent, resulting demand will be huge. Just like Japan in the past, China’s manufacturing will quickly become more sophisticated.”

Bingo! That’s the gambit being played out in China: the pursuit of sophisticated manufacturing. The world’s factory that for decades has annually produced 25 percent of all manufactured goods on the planet wants now to add world-class quality to the Made in China brand.

China doesn’t intend replacing humans with robots just to reproduce the same old goods; that won’t pull the nation away from the “middle-income trap”. Rather, China needs to see the world’s driveways covet its Great Wall crossover as readily as Honda and Toyota crossovers.

Chairman of Everything
The plan on how that stratagem will successfully play out is the story that President Xi Jinping will bring this fall to a packed house at the 19th Party Congress (CPC) in Beijing.

Having spent the years since the 18th Congress consolidating power and authority, Xi, tabbed the Chairman of Everything by the Economist, now has twelve posts that give him control and oversight over most areas of government, the economy and the military. Going forward, he’ll need them all.

This fall is an important moment for Xi: it’s a fifth anniversary, the all-important halfway point in his ten-year term in office. His story needs to be a good one and well told. Confidence and lack of it are contagious; Xi needs to account for himself and his actions in order to earn the confidence of his fellow citizens.

He’ll need their backing. Over the next five years, he’s taking China and its billion-plus citizens in a direction that no previous civilization has ever travelled. On such a journey, trust is going to be very important.

He’ll tell his audience as well about the rewards to be realized. As Gerald Van Hoy, senior Gartner analyst points out: “If they can automate enough of their lines, China’s production and revenues could expand another 25 percent by 2025.” 25 percent! That’s quantity in addition to quality wrought from sophisticated manufacturing.

The story that the Chairman of Everything will relate from the podium at the 19th Congress he began to craft at Davos in January, or maybe even further back, while honing his skills as the head man running the province of Fujian. 

His speech at Davos was remarkable and masterful, and earned him a new title, global statesman. Since then he’s had a chance to refine it with a trip to Mar-a-Lago in April, his One Belt Conference in May, and the Meeting of the G20 in July.

One remarkable sentence from his speech at Davos tells the tale of why orders for machine tools, robots, and dump trucks have skyrocketed in the 1H2017. In the middle of a long paragraph, the Chairman of Everything said: “In the coming five years, China is expected to import $8 trillion of goods, attract $600 billion of foreign investment and make $750 billion of outbound investment.” The first part of it bears repeating: “In the coming five years, China is expected to import $8 trillion of goods.” That’s $1.6 trillion per year for five years, culminating with the 20th Congress in 2022. Coincidentally, that’s the year Xi’s term of office officially ends.

Xi Jinping is ready to rock n’ roll! And the rock’n and roll’n for factory automation, robots, and sophisticated manufacturing is well underway well in advance of the 19th Congress.

The Chairman of Everything is ripping a page right out of the U.S. playbook on how to birth and sustain technology: he’s going to spend his way to victory. Now that there is a semblance of readiness and preparedness on the part of China and its people; and now that momentum is carrying the country forward after recovering from the Crash of 2015, the timing is right to kick out the restraining pins and let things fly.

The U.S. after WW-II spent its way to dominance in computing, and never looked back. It spent its way again to dominance in spaceflight; and then spent again to dominate the Internet. It was the Reagan Administration and its Congress that spent and spent until the Berlin Wall cracked and crumbled. It’s exactly what the U.S. does not do today!

Guess what? Xi is going to spend his way to victory, and he announced it to the world at Davos.

The scary job ahead
What’s ahead for China on this journey is going to be formidable to say the least. The transformation ahead for Guangdong is a good example.

First off, the province of Guangdong sports a GDP of $1.1 trillion ($615 billion of it in exports). That’s the 14th largest GDP in the world. With a population of 104 million (30 million of whom are migrant workers), a land area slightly greater than that of the United Kingdom, as well as some 66,000 factories, automating the province is well beyond a mere herculean challenge.

How will Guangdong maintain its GDP of over a trillion dollars annually—especially the billions in exports—yet transform its factories for sophisticated manufacturing?

The aforementioned spending is not only a big help; it’s the only way. The province got $156 billion to automate itself; the first 2,000 factories are slated to come online in 2018. Next year!

As Ben Bland put it in a Financial Times piece: “Across the manufacturing belt that hugs China’s southern coastline, thousands of factories…are turning to automation in a government-backed, robot-driven industrial revolution the likes of which the world has never seen.”

“The likes of which the world has never seen,” is what Xi will roll out to the mass assembly at the 19th Congress.

Billions of dollars are now and will continue to be exchanged with Japan for access to the latter’s automation tech, especially robots.  Masayuki Kubota, chief strategist at Rakuten Securities Economic Research Institute, says bluntly: “The Chinese manufacturing industry can’t even talk about automation or labor-saving without technology from Japanese companies.”

We have ignition!
It’s basically an easy decision for China to spend its way to victory. “It has no choice,” concludes Jing Bing Zhang, the Singapore-based research director of IDC Worldwide Robotics.

Since 2012, when China’s workforce began to contract, it’s needed an ever-increasing supply of robots to maintain productivity and keep costs competitive. For example, 70 percent of the world’s computers, communications equipment, and consumer electronics are made in China. How long could that share be maintained if productivity tanked?

Zhang points out that the speed at which China needs to replace workers with robots is likely to be faster than its ability to manage their redeployment. If China does not automate production fast enough, it could jeopardize that 70 percent share in electronics. For manufacturers, says Zhang, “there is a lot of attractiveness to staying in China. It’s a huge market, the consumers are there, but automated manufacturing in the US and Europe is eroding China’s cost advantages.”

“China is prioritizing industrial robots because it has no choice. If it does not take action, the supply chain will leave.”