A message from robots: it's our turn

An upsurge of workers who are replaced by robots is now a hot topic in the Pearl River Delta region, with Foxconn being one of the most prominent examples. Foxconn, one of the largest OEM (original equipment manufacture) companies in the electronic assembling industry in China, has been heavily hit by labor issues over the past few years. To improve productivity and product quality it has declared it will introduce 1 million robots over the next three years to replace some of its workers.

That target, confirmed by the Foxconn Chairman, Terry Gou, seems highly unrealistic given that it equals the number of operational robots worldwide.

As the image of being a "sweat shop" is becoming more and more of a problem, Foxconn, which employs 1 million workers in China, is looking for solutions to solve its labor issues. Several other leaders from the labor-intensive manufacturing industry in China have already begun to consider using robots to replace humans.

Booz & Company has done a study of the top 10 global trends over the next 20 years. In this research we identified increasing productivity to be one of the key trends. Achieving this by making the most of existing technologies and higher automation will greatly shake up the market in manufacturing. The root cause is evident: labor-intensive companies that deploy robots are driven to do so predominantly because of a shortage of labor. In China that shift is expected to continue because the shortage of labor is expected to worsen.

The supply of labor in China will be unable to keep up with the growth of manufacturing. Many industries are expanding at a rate of over 10 percent a year, and new labor will lag far behind. The National Bureau of Statistics reported an increase of a mere 1.9 percent in the number of Chinese migrant workers in 2009. The growth is expected to be even lower in the future.

At the same time, better education adds to the problem. With the expansion of enrolment for both senior high schools and colleges over the past decade, fewer educated young people are seeking employment in low-skilled jobs in manufacturing. They are opting to work in the services industry instead. Those still taking up jobs in factories will often resign after a few days or months. As a result, training new workers becomes an increasingly taxing task whose results are mixed at best as levels of product quality fluctuate highly.

Furthermore, workers born in the late 80s and 90s have different expectations to work compared with previous generations. They are looking for a better environment, variety in the work and future prospects. The days of working mainly to making a living seem to be over.

All these factors are changing China's job market as a whole. But for the more developed regions, especially the Pearl River Delta, some very challenging problems are being presented. Inland regions are becoming more attractive for workers in terms of rising wages, still significantly lower living cost and the proximity to their families. Many workers who were laid off during the financial crisis in 2008 and returned to their hometowns looking for new jobs will not return to the Pearl River Delta region.

Companies have spent a lot of effort trying to mitigate these issues, but it seems as if these are only temporary measures. A common practice is to attract new workers through higher wages and other financial incentives if they stay for a longer time.

Working conditions in factories have also gradually improved, driving up overheads. Referral programs and hiring teams that scour inland provinces in search of low-cost workers are some of the measures that factories in the Pearl River Delta region are using.

In some cases employers simply have to accept current labor market conditions and lower hiring criteria. One possible solution for some factories is to relocate from coastal areas to more inland provinces that offer a larger supply of low-cost labor but that results in higher logistics costs.

Demographic trends in China, including urbanization, have contributed to a vast supply of labor over the past several decades. Urbanization has enabled a significant portion of the population to move from the agricultural sector to the industrial sector, and the demographic dividend has continuously been fresh labor to fuel the growth.

China has reaped great benefits in being the factory of the world, but now the country is at the crossroads. Guangzhou Honda raised its workers' wages 24 percent last year, and Foxconn increased wages 30 percent as a result of a shortage of labor and of social conflicts among its workforce. For China there is no chance to grow by relying on cheap labor solely.

Once the cost of labor exceeds the cost of deploying robots, it is clear what a company will have as its workforce. Robots can work 24 hours a day, need no incentives to stay or payments to social security, but instead provide better output for routine work with higher efficiency and accuracy. Although the upfront investment is significant, established Chinese companies can afford it.

Taking the molding industry as an example, the average salary of a worker is 1,500-1,800 yuan ($230-280; 180-220 euros) a month. Adding the cost for food and accommodation, the total cost for a worker is at least 2,000 yuan a month. As a robot can only execute certain tasks, 20 percent of the work remains to be done by a human worker. With the price for robots ranging between 20,000 and 30,000 yuan, the investment can be usually recovered within one to two years. Robots have an average life span of 12-15 years, so the economics for a decision in favor of machines is compelling.

The countries with the highest rate of automation in the world are Japan, South Korea and Germany, with robot densities of 306, 287 and 253 units per 10,000 workers respectively. Robots in these countries have entire ecosystems that are well suited for their introduction into the manufacturing environment. A shortage of qualified labor and rising salaries were fundamental drivers for the huge growth in using robots over the past decades. At the same time, prices for robots fell as a result of technological improvements and the beginning of mass production.

Improvements in industry standards and increased government subsidies also played an important role. The automotive and electrical/electronics industries are where robots are most used, accounting for 28 percent and 26 percent of new units sold last year respectively.

Booz & Company has conducted in-depth research on the global robotic market. Between now and 2025 the annual value of the industrial robotic market will double, to more than $31 billion. The Asia-Pacific will constitute half of this future market. Expansion of industrial automation, the shift of production volumes to emerging markets, environmental awareness and aging of the population will drive the growth of robotic penetration in Asia, particularly in China. In addition, technical innovation, better human-robot interfaces and improved software will broaden the areas where robots can be used, and thus increase the overall penetration as well.

China is still behind in production automation but it is catching up quickly. It is estimated that in 2014 China will be the country with the highest number of new robots being deployed, making it the country with the fifth highest population of robots.

Edward Tse is chairman of the management consultant Booz & Co in China and Matthias Hendrichs is Booz & Co's senior associate.