- Young people today aren't willing to work on factory floors, said Shirley Zhou, IT director at Midea, a home appliance giant based in southern China.
- To prepare for a future in which an aging population will further limit the labor supply, Midea has embarked on a three-year plan to incorporate more technology into its 34 factories.
- The challenge for factory efficiency in the future is a problem of education on digital knowledge, not age, said Junsong Peng, vice president and chief digital officer of software company SAP China.
BEIJING — Factories in China are turning to technology to tackle a pending labor shortage.
Per official figures, the country's working age population has shrunk by more than 5 million people in the last decade as births have dropped – despite a rollback of the controversial one-child policy.
And for the factories that have driven much of modern China's growth, workers are already in short supply, pushing wages up. That's forcing companies to relocate or increase automation, especially as the labor shortage looks like it will only get worse.
Young people today aren't willing to work on factory floors, said Shirley Zhou, IT director at Midea, a home appliance giant based in southern China. The company raked in 77.69 billion yuan ($11.95 billion) in operating revenue for the quarter ended September, up more than 15% from a year ago.
While Midea can find enough workers for now, the company has embarked on a three-year plan to incorporate more technology into its 34 factories, beginning with seven this year, Zhou said. The goal is to double that number next year, and cover 25 factories in 2023, she said.
The company's modeling predicts that automating manufacturing with sensors and robots will increase assembly efficiency across its factories by 15% to 20%. For two factories that have already integrated such tech, efficiency has increased by nearly 30%, Zhou said.
Midea's strategy marks just one of many technology upgrades that analysts say factories around the world are increasingly pursuing. Sometimes called "smart" or "intelligent" manufacturing, widespread use of new hardware and software in production is expected to ultimately boost efficiency as much as the Industrial Revolution did in the 18th and 19th centuries.
From an economic perspective, technology is now key for growth as countries like China work to keep local production cheap enough for companies to stay.
"Every company, or even if it's a third-party manufacturer that has manufacturing facilities in China ... they are under pressure to invest in smart manufacturing," said Rodrigo Cambiaghi, Greater China supply chain and operations leader at EY.
He noted such investment reduces China's reliance on labor and increases the country's ability to produce more, and higher-quality, goods.
"That is fundamental to keep volumes within China for those labor-intensive products," he said. "This is not something that will be solved in a very short period of time. But the momentum is there and China is focusing a lot of the funds, a lot of the engineering capability of the country, to really drive smart manufacturing capabilities."
Attention on factory digitalization has increased since the coronavirus pandemic.
In half a year, Chinese industrial internet company Deltaphone completed two rounds of financing to raise of nearly 300 million yuan, according to early investor Yunqi Partners.
BMW's joint venture with Brilliance Auto said it uses nearly 4,000 robots across three factories, and plans initial installment of 2,000 robots for new factories opening next year.
Overall, artificial intelligence company Megvii, which sells software for automating warehouse operations, expects 2020 was the first year of real application of artificial intelligence to logistics, and this year will see the beginning of significant integration.
Part of the reason why the factory digitalization trend is set to pick up is that the cost of sensors for gathering data on how well machines are operating has dropped significantly over the last 10 years, said Leo Li, partner at consulting firm Oliver Wyman and head of automotive, manufacturing and industrial products for Greater China.
As a result, a factory can detect production problems more quickly and resolve them — with fewer workers.
"Today's factories are completely different from the past," Li said, according to a CNBC translation of his Mandarin-language remarks. "The number of so-called blue-collar (workers) has dropped dramatically — there are more 'knowledge' workers. Efficiency is rising more and more."
One of the major areas of application is in automobile manufacturing. German software company SAP began its operations in China by working with Volkswagen's local joint venture in 1995, according to Junsong Peng, vice president and chief digital officer of SAP China.
He said corporate analysis of such tech upgrades shows production efficiency and delivery time improves by about 20% to 30%. That's just a start for how much technology can contribute, Peng said.
The challenge for factory efficiency in the future is a problem of education on digital tool management, not age, he said, according to a CNBC translation of his Mandarin-language remarks. "If an older employee can learn, a job in the auto industry today is no longer one that requires a lot of physical strength."
The effects of factory digitalization also extends to global supply chains.
Companies are particularly interested in using technology to track and analyze their worldwide production, to ensure that goods can be delivered to customers, said Jeremy Deutsch, Asia-Pacific president for data center operator Equinix. He said increased digitalization of factories is driving new demand for data centers, whose initial growth came from social media and financial services.
China's rapid recovery from the coronavirus pandemic has kept factories in the country — and very busy — as other countries still struggle to control the disease.
This boost to China's factories will likely only continue for another year, said Yipin Ng, founding partner of Shanghai-based Yunqi Partners.
Businesses will still want to diversify some of their supply chain to other countries in the next five years, he said. Even if technology is a consideration, Ng said there's a long way to go as many factories he's visited in China are still not even connected to the internet, and businesses in other countries can develop similar tech tools.
But in China, the pressure to address labor productivity will only increase.
"My personal concern is not that we will have excess labor or employment (problems)," said Victor Du, Shanghai-based managing director at consulting firm Alvarez & Marsal Asia. "As a society, the concern should (be) achieving the same level of manufacturing output, or even higher quality, higher output, with a lower population after twenty, thirty years. If you look at this point, digitalization or upgrading of technology will be very necessary."