How Robots Determine Who Makes America's Clothes

At the turn of the century, virtually all cheaply-made, imported US clothes and shoes were made in China. Since then, however, things have changed drastically, and as Chinese labor costs have rise, China's market share of US imports of apparel and footwear slumped, replaced by Vietnam, Indonesia and Bangladesh, and is declining at an accelerating pace.

What happened?

Well, as Deutsche Bank writes in its latest Konzept magazine, when future economic historians look back at China, they might see the years 2014-2015 as a turning point. This was the time when the total working age population peaked...

... sending China into a new phase in which its pool of workers will likely shrink by between two and three million people each year. This shrinking labor force is one of the biggest long-term challenges for China, according to Deutsche Bank.

How things change.

Not long ago, China was still seen as an economy with an abundant supply of cheap labor, similar to Korea and Japan in their early stages of development. Over the past four decades, China’s large pool of working-age labour, combined with its relatively small share of young and old non-working population enabled the economy to rapidly grow. This has now changed: the dependency ratio bottomed out in 2010 and is expected to rise rapidly, as the population ages.

A cross comparison shows that China's demographic dividend period, that is, the period when the dependency ratio continued to decline, lasted for a shorter time than its East Asian peers. As a result, China reached the demographic turning point at a relatively low per capita income level of $9,400 in terms of purchasing power parity. That is just one-third the income level in Japan and Korea when their dependency ratios were at the lowest point.

On top of population ageing, workers are moving away from labor-intensive jobs in the manufacturing sector as part of the evolution of the economy towards services. Employment in the secondary sector (mining, manufacturing and
construction) is declining at a rate of two to three million jobs per year.
In contrast, the services sector adds between ten and fifteen million jobs each year. To be sure, manufacturing job pay is increasing: in the textile industry, hourly wages doubled between 2006 and 2010, and doubled again over the next five years. At $3.30 per hour in 2015,  wages are much higher than in Vietnam at $1.90 per hour. Yet some two million workers have moved away from the textile industry over the past decade. A restaurant or delivery job may pay just as well, if not better, and does not require working night shifts.

Not surprisingly, China is losing competitiveness in labour-intensive goods. The country’s market share for footwear and apparel in the US was 48 per cent in 2010. It has now declined to 39 per cent. In contrast, Vietnam’s market share doubled to 16 per cent over the same period.

To cope with rising labour costs, Chinese manufacturers must either invest in machinery and equipment that reduces the dependence upon labour, or move outright away from labour-intensive industries into more capital-intensive ones. Both approaches require a significant investment in industrial automation.

That push towards automation is already happening. Some key details from Konzept:

The Chinese government has made automation a top priority. The 'Made in China 2025' plan, issued in 2015, envisages the value added/output ratio in the manufacturing sector will increase by four percentage points by 2025, and labour productivity will grow at an annual rate of seven per cent in the coming decade.

To achieve this, the government has stepped up efforts to promote investment in areas such as intelligent manufacturing and industrial robots. Some 200 pilot projects in intelligent manufacturing were singled out in the two years to 2017. This year, the government has committed to raising tax benefits for machinery and equipment investment, and building pilot industrial zones for intelligent manufacturing. At the Communist Party’s Congress last year, President Xi’s speech suggested that supply side reform priority has shifted from reducing capacity to promoting advanced manufacturing. He also emphasised the promotion of “disruptive innovation”, which suggests the government may support innovations even if they cause disruptions to existing players.

Needless to say, the scope for investment in industrial automation is enormous in China. Manufacturers in the country are still far away from the production frontier. Production efficiency, measured by output per manufacturing worker, is only one-fifth of the frontier occupied by Japan and is comparable to Korea's productivity level in 1990. The use of industrial robots in China is still at a very early stage. Robot density, measured by the number of industrial robots per 10,000 manufacturing workers, is only 68, compared with over 300 in Japan and Germany and over 600 in Korea.

Even so, that is a huge improvement compared to just 7 years earlier, in 2009 when automation barely had a foothold in China.

A simple calculation highlights the market potential for Chinese automation:

Take the 300,000 industrial robots that were sold globally in 2016, of which 30 per cent were sold in China. Assuming China’s market share increases further to 40 per cent, it will still take more than a decade for China to reach a robot density of 200. That is still far behind today’s levels in Japan and Korea. And this does not even account for the need to retire and replace old robots.

This suggests two things.

  • First, that China’s automation will take many years and,
  • second, that the market for industrial robots, as well as other advanced manufacturing equipment, will have to expand to accommodate China’s demand.

While there is limited research on the systemic impact of automation in China. But the anecdotal evidence shows great potential. For instance, Foxconn, the world’s biggest contract electronics maker, has been developing and deploying industrial robots as it targets 30% automation at its Chinese factories by 2020. It reportedly cut the number of workers by more than half, from 110,000 to 50,000, by deploying robots in an Apple factory. The factory was located in Kunshan, a coastal city one hour’s drive away from Shanghai, where labour costs appear to be rising.

Separately, Midea, a top appliance manufacturer in China, is also increasing the use of robots in its factories. By deploying over 200 robots in its Wuhan factory, it increased production capacity by a quarter while reducing the number of workers by more than half. Midea recently announced it will set up a joint venture with German industrial robotics manufacturer Kuka to expand its automation business in China.

China's fast-track adoption of automation is only set to accelerate:

In Foshan, a satellite city of Guangzhou, a recent government survey of 200 firms suggested that almost half of them now use industrial robots. This has improved productivity by between 10 and 30%, thereby reducing labour demand. One report noted that a toy factory halved its employment while maintaining the same production level. Against this disruptive backdrop, Foshan's average wage level almost tripled in the decade to 2015.

What will be the macro impact of all of this? For one thing, automation will help China avoid a sharp decline in potential growth beyond 2020, unless of course the associated plunge in employment results in social unrest and the dreaded by the Politburo middle-class revolt.

DB concedes that "employment in the manufacturing sector will likely drop, but it will be more than offset by an increase in productivity. The increase in labour productivity will also support continued wage growth in the manufacturing sector. The spillover effects will hit the services sector which will see a continued increase in employment."

Ultimately, the rise in automation will delay the decay of competitiveness in labor-intensive industries. Or that is the upside case in Deutsche Bank's thesis.

We doubt it, but even is DB is correct, it admits that this pervasive spread of robots will have a major deflationary impact. This is important as the high level of corporate leverage is a major concern. As for why we are skeptical, the reason is simple: whereas Deutsche Bank tried to put a favorable spin on its "robotics take"...

... moments ago the FT reported that Citi is making quite clear what the true impact of pervasive robots everywhere will be:

  • AUTOMATION COULD CUT 10K JOBS IN CITI'S INVESTMENT BANK: FT

And if banker are no longer safe, nobody is.

Comments

JimmyJones Tue, 06/12/2018 - 10:58 Permalink

Clothing manufacturing is pretty basic, so this makes sense that China can't compete price wise with those other countries.  Demographically China is screwed more than most other nations from the one child policy now catching up to them.  All those empty apartments/condos with no children to grow up and occupy them, ever. Now if Spain, France and Italy send their "Migrants" to China they might have a chance, whats that you say?  China doesn't really allow for people to immigrate there, they protect their boarders??  Japan even more so?  Who knew they were racist.

Endgame Napoleon JimmyJones Tue, 06/12/2018 - 12:37 Permalink

....And American-owned companies, singing the gospel of diversity at home, prefer employing the homegenous workforce in Asia, not only in China, but in other countries where they have offshored millions of jobs and potential SS contributions.

It is true that clothing manufacturing pays less than other types of manufacturing, primarily because it is female-dominated. Other than the single, childless females, women in low-paying, female-dominated industries have streams of unearned income for womb productivity—from spousal income income to monthly welfare and refundable child tax credits up to $6,431—and employers adjust wages downward accordingly because they can get away with it when the overwhelming majority of employees are mommas who “have somethin’ comin in.”

It is another type of awe-inspiring diversity story. 

Since robotics makes manufacturing wages higher for a few, while decreasing the overall number of manufacturing jobs, seems like it is a disadvantage to have more people due to higher birth rates.

If you think service sector jobs fill the wage gap when manufacturing jobs dissipate, think again. Service sector jobs are low paying and often part time or gig jobs that do not cover the cost of rent and a full range of household bills, not in the USA, where just a handful of managers in the service industries make a living from earned-only income.

In most service sector industries, all of the other employees—the vast majority—are only able to cover major bills due to pay for sex and reproduction from government, spousal income, child support that covers rent or by living with their parents in adulthood.

Rent is inaccessible when it sucks up more than half of monthly, earned-only income.

It is not just the misery for individuals who cannot cover basic bills by working these Fake Jobs in the service sector, but the lack of overall tax revenue coming in.

It starts trickling up to Big Governent, when so many citizens work only part time / temp / contract-gig and churn jobs in the service sector. Not too good for deficits, nor is it good for retail, but the US government solves this consumption issue by paying some womb-productive citizens and noncitizens more & more when they work part-time jobs that keep them below the income limits for monthly welfare.

Big government pays them through the welfare programs and the progressive tax code. Only problem: Work becomes less & less rewarding for service workers that government is not paying to have womb-productive sex, leading to a massive, out-of-the-workforce citizenry and a dwindling tax base to support the pay-for-sex-and-birthing freebies for the womb-productive citizens and noncitizens. 

China definitely needs to prove that it is not racist by taking refugees, though.

Come to think of it, the USA, which is such a boring subject for the US media, is running over with homeless citizens. Maybe, since so many Americans were displaced by shifting over 2 million manufacturing jobs to China, Americans living in tent cities can inhabit the ghost-town buildings in China that bored-with-America / American investors helped make possible.

In reply to by JimmyJones

itstippy Cardinal Fang Tue, 06/12/2018 - 12:21 Permalink

First-world consumers don't want quality, they want the latest fashions at low prices.  Clothing is "out of style" within a year, so what's the point of paying top dollar for high quality?

Tradesmen and outdoorsmen will still pay for quality gear that lasts a while, and the Asian manufacturers produce some excellent stuff.  They're perfectly capable of working with leather and thick denim.    

Made In Amerca quality is high because the only way to manufacture things profitably is to manufacture high-end items that sell for high prices.  Tee shirts and stretch pants don't have enough margin to cover the higher wages.  

Snap-On Tools are made in U.S.A. and are of the finest quality anywhere.  They also cost $30 for a wrench.  If Snap-On Tools tried to introduce a bargain line of hand tools made in U.S.A. to compete on price point with the imports from Asia they would quickly go broke.  So they focus on brand recognition, super high quality, and exceptional customer service and are able to sell their hard line tools at a much higher price point and turn a profit.

In reply to by Cardinal Fang

Blankenstein itstippy Tue, 06/12/2018 - 13:12 Permalink

Not everyone wants shit quality clothing that falls apart after a couple of years.  And less trendy styles don't go out of fashion in a year.  

  These same people who don't give a crap about quality in clothing don't care about quality in furniture, linens, lighting, appliances, fixtures, tools, etc.  They fill their shittily built over-priced Mcmansions with cheap third-word crap.  

Can't spend on quality when you are spending most of your money on a house you can't afford and taking trips all the time so you can post pictures on FB to show how exciting your life is.  

In reply to by itstippy

Endgame Napoleon itstippy Tue, 06/12/2018 - 13:12 Permalink

That is the throw-away mentality of the “environmentalists” in America’s dual-high-earner households, where two parents take a job with benefits that could support two households out of the economy, letting $9-per-hour daycare workers, under-the-table and poorly paid babysitters with NannyCams or elderly grandparents raise their kids for them. 

Throw it away and buy new and fashionable products, keeping up with the Jones, even when mom just dominates one of the part-time jobs in safer, posher areas of the city to make money for more luxury goods.

Their part in saving the environment is easy and requires no economic or lifestyle sacrifices on the part of the dual-earner parents other than the virtue-signaling activity of separating their trash for recycling.

The only people who need to make real sacrifices in quality of life are people like the coal miners who have few routes to anything like a middle-class lifestyle, but through jobs like coal mining. 

Keep on making two, environment-crushing daily commutes of one hour or more each day, dual-earner parents, hanging onto those two jobs that could support two separate households in a nation with 95 million out-of-the-workforce citizens, 78 million gig workers and 42 million employed-in-name-only womb-productive citizens and noncitizens who stay under the income limits for free EBT food, free rent and up to $6,431 in refundable child tax credits by working part time. 

Keep on having the grandparents contribute to the emissions by meeting you young, energetic, working parents halfway between your homes and theirs, picking up the grandkids that they, in truth, raise, although you get the thousands in non-refundable child tax credits. 

Keep spending those child tax credits and the extra money you have, not to mention all of the absenteeism privileges in your crony-parent jobs, on trips far away—abroad and otherwise—taking two-week trips every two months while retaining your jobs, although any childless person would be fired for 5 minutes of that absenteeism, even when coming to work every day, staying all day and meeting the quotas every month. 

Keep on jetting overseas, casually, using God knows how much fuel to solidify your status as world travelers. When you have a wedding, make sure to hold the ceremony in a castle in Europe, getting all of your friends, too, to cross the ocean, wasting all of that energy as the eroding coral reefs “gently weep.”

Or, you could take instruction from those sexist, racist and xenophobic savages of yesteryear: our ancestors, not too far back in the past, either—back in the era when America’s middle class was FAR more widespread. 

Like those “working families” of yore, you could have a single-earner household, sacrificing a few luxuries that all use massive amounts of energy to produce.

Bored-with-their-kids mothers could resuscitate their sewing skills if they returned to raising their own kids. They could plant gardens.

Freed up from the emissions-belching commutes, they would have plenty of time for planning, cooking and budgeting. They would have plenty of time for all of the things that make conserving resources possible.

Meanwhile, vast swathes of underemployed America—lacking secondary income from spouses or unearned income from government—would not be so underemployed. The tax base would expand, strengthening our nation’s solvency as the environment was spared of excess wear & tear. 

In reply to by itstippy

To Hell In A H… Tue, 06/12/2018 - 11:12 Permalink

I've been talking to the deaf Trumptards on ZH, for 3 years regarding the automation of jobs etc. But many of these idiots regurgitate the mantra that "work is available to anybody that wants one" God help our great grand-kids.

The meaning and usefulness of a human being will change in the next 40 years. With a job for all, no longer possible, what are people to do and how will they earn a living?

Wild Bill Steamcock JibjeResearch Tue, 06/12/2018 - 14:39 Permalink

My humble advice: take advantage of any training opportunity that comes your way, be it military or civilian.  Make a list of skills you think you might need in a SHTF scenario, and identify your strengths and weaknesses.  Practice.  Don't get locked into the mentality that there is "only ONE right way."  Instead look at many ways of doing something; think of it as a buffet, take what works best for you

Just thinking about this kind of thing puts you ahead of the curve.  Good luck!

In reply to by JibjeResearch

Tamam Shud To Hell In A H… Tue, 06/12/2018 - 11:24 Permalink

As automation continues and picks up steam, more and more professions and industries get their human needs priced out.  What's left?  The medical industry?

By the end of the century, we'll have scores more people on welfare than present.  Currently, it's those who can't or won't work due to their motivations.  Soon, they won't be able to work because a robot has taken their job.  People will be paid to not work because the machines don't need to be coddled.  They sit at home and collect a paycheck to not work.

Dystopia is nigh.

In reply to by To Hell In A H…

Tamam Shud Balance-Sheet Tue, 06/12/2018 - 12:45 Permalink

People will be owned more and more by the state.  They have no vocation, no role.  The machines will run all the jobs.  What do people do with their days?  Do you think people will be able to afford housing other than run-down tenements?  Housing is already difficult to afford for many people, especially in large urban settings.  That will only get worse, and then the government steps in to provide more and more section 8 housing.

Does this sound like anything other than dystopia?

In reply to by Balance-Sheet

Balance-Sheet To Hell In A H… Tue, 06/12/2018 - 12:06 Permalink

Current entitlement programs are extended as needed. The economy is denominated at a total value for the production of goods and services and that amount of currency is created and distributed as it is today. Many people could work but refuse to and many people could have learned a skill but declined to. It may be that less than 1/2 of all adults will be meaningfully employed by 2050 perhaps a good deal sooner.

In reply to by To Hell In A H…

BandGap Tue, 06/12/2018 - 11:15 Permalink

I spend zero time worrying about this bullshit.

But I do wonder what do these 2-3 million people leaving the Chinese workforce every year will do. Retire? Die?

Quivering Lip Tue, 06/12/2018 - 11:21 Permalink

Look for the union label
when you are buying that coat, dress or blouse.

Remember somewhere our union's sewing,
our wages going to feed the kids, and run the house.

We work hard, but who's complaining?
Thanks to the I.L.G. we're paying our way!

So always look for the union label,
it says we're able to make it in the U.S.A.!

 

Only 35 years ago clothing used to be made in the USA, by people.

Don't see it happening in the future unless it's really high end stuff.

 

adr Tue, 06/12/2018 - 11:31 Permalink

Publicly traded garbage corporations selling product direct from China could absorb labor costs ten times what they are now and still make a huge profit. However, being the greedy SOBs they are and needing to fake gains, they move to ever cheaper factories to book every little bit extra that they can.

Generic store brand undershirts are now $12.99 for three. The three shirts together cost around $1 to make. DO they really need to sell for $12.99?

I went to a Duluth Trading store since I never really looked at the prices online. I figured since they were selling factory direct, they would be cheap. Nope, a simple short sleeve button down shirt made in Bangladesh retailed for $75. Cost on that shirt is around $2.35. WHY THE FUCK WOULD I PAY $75!!!!!! A similar shirt can be bought at Walmart for $13.

On the distributor side, you're just fucked as the stores want ever increasing margins and almost everywhere is too expensive to manufacture, even Africa. The big retailers know exactly what it costs to make your product and they want to pay what they pay for their own store labels. They have a prepackaged solution.

Actual brands will all disappear in the next ten years. What you will have is stores and Amazon selling you product that was designed, sourced, and produced by them with nothing but a licensed brand label that was applied in Mauritius.

The owner of the brand will be paid a royalty for the use of the label, but the company will no longer exist. Why have a few thousand employees to pay, management of inventory, etc etc. The directors of the company can just sit back and do nothing while collecting a 10% royalty on sales.

It has already been happening for years. Adidas Baseball product at Dick's Sporting Goods have nothing to do with Adidas. Dick's manufactures the products and distributes them. Adidas gets a royalty for the name and Dick's gets to keep the distributor margin. It is really hard to compete when you are going up against factory direct pricing.

AGuy adr Tue, 06/12/2018 - 12:25 Permalink

"Generic store brand undershirts are now $12.99 for three. The three shirts together cost around $1 to make. DO they really need to sell for $12.99?"

yup. Manufacturing cost is only a portion of the cost. The still have to import it into the US, package them. Get them on store shelfs. It also cost money to maintain\heat\cool a store\Factory\Distribution center\etc. There is also other overhead: employees, Debt, taxes, regulation. Nothing is cheap or free these days. Also I doubt the shirts cost a $1 to make. I am sure the costs is more than a $1.

In reply to by adr

Jack's Raging … AGuy Tue, 06/12/2018 - 13:13 Permalink

Not really. You'd be amazed how efficient manufacturing is today. It is sovereign risk that multiplies that cost basis. Companies are also trying to capitalize on currency arbitrage (primarily) as a source of profit. If they weren't, there would be no point in being so far from your market. For now, most can, so they do. Eventually the west will be brought lower and the east will rise up to meet them. It's already happened in many ways. Then the real competition begins--central bankers and sovereigns be damned. 

In reply to by AGuy

ali-ali-al-qomfri Tue, 06/12/2018 - 11:35 Permalink

Great news....the Germans have re-purposed Funny-Bot,

into Fatty-Bot.

XXXL is now the new L and clothes will be rated by

tensil strength rather than some fictitious numbering system.

 

cheech_wizard Tue, 06/12/2018 - 11:37 Permalink

One of the reasons I hate Chinese on-line clothing retailers is they simply can't get American sizes right. Best to order 2 or 3 sizes larger if you expect it to fit. Just speaking from experience and that of others.

 

Pollygotacracker cheech_wizard Tue, 06/12/2018 - 11:45 Permalink

Spot on. If there is any one factor, that brought about the collapse of U.S. apparel retail stores, it is the cheap, poorly constructed, ill fitting clothes imported from China. Even good retailers such as Orvis, Eddie Bauer and L.L. Bean are selling crap. Do what I do and shop the thrift stores. Sometimes you can find good, wearable, quality items...cheap. Just sayin'.

In reply to by cheech_wizard

NoWayJose Tue, 06/12/2018 - 11:50 Permalink

I need a robot to figure out what size to try on!

There used to be a waist and a length.  Now they compress length into Short, Medium and Tall to save money.  But then we now have Boot Cut, Regular Fit, Skinny Fit, Relaxed Fit, etc - all in the same ‘size’!

JibjeResearch Tue, 06/12/2018 - 12:22 Permalink

India and Africa are the next stops.

Also, we Americans must prepare for AIs, Robots, and Blockchain Tech to dominate the work place.

Humans need not apply for work!

moonmac Tue, 06/12/2018 - 12:26 Permalink

I was dirt poor 20 years ago but we had it made because clothing was produced with quality at affordable prices. Today material and workmanship is horrible and price is twice as much. Good thing I stocked up 10 years ago. I have an entire new wardrobe of Tommy Bahama with quality they can’t even come close to making anymore. It forces me to stay in shape too.

roddy6667 Tue, 06/12/2018 - 13:08 Permalink

The author saw that garment manufacturing is leaving China and leaped to a false conclusion. What doesn't realize is that the Chinese companies only moved their factories to a cheaper labor market. The capital investment, the machinery, the expertise, and the worldwide garment industry connections are still Chinese. The profits flow back to China.

When robots run the industry, it will still be better to be in a cheap labor environment. Buildings, taxes, utilities, regulations, will also be much better off for the industry. There is a lot more to a garment than the manufacturing. That is a small part of the price in the mall in America. Every step in the worldwide supply chain costs money and raises the price of the item. The robots will be making jeans and shirts in the dark in a Third World country.