How Dark Factories Are Changing Manufacturing (and How to Profit)

Matthew Carr
by Matthew Carr, Emerging Trends Strategist, The Oxford Club
dark factories

There’s an unstoppable trend underway.

In December, I pointed out my top tech trends for 2017. And at the top of that list was artificial intelligence and the rise of the robots.

Automation has been replacing factory jobs for years. But now it’s picking up speed. Many manufacturers are eyeing the possibility of “dark factories,” factories without any human workers. You can simply turn off the lights and close the door, leaving the robots to furiously work nonstop.

And if you think that’s a far-off future built on science fiction, you’re wrong. In reality, it’s much closer than you think.

Turn Out the Lights When You Leave

Changying Precision Technology Company might be the model for the future of manufacturing. Its mobile phone factory used to employ 650 workers.

Now it needs just 60.

The company eliminated 90% of its human workforce and replaced it with 60 robot arms.

The results are mind-blowing. Productivity increased 250%, while product defects decreased 80%.

The robots run 10 production lines that are going 24/7. The only human workers left are there simply to ensure everything runs smoothly.

But Changying Precision Technologies believes the number of humans can be reduced to as few as 20.

And it isn’t the only Chinese manufacturer heading down this path.

Another company, Cambridge Industries Group (CIG), is exploring replacing two-thirds of its 3,000 human workers with machines this year. It has to keep pace with competitors in Germany, Japan and the United States.

At the same time, wages in Shanghai have doubled in the past seven years. And since 2001, wages in China have grown an average of 12% annually. Humans have priced themselves out of the market.

So companies like CIG and Changying Precision could see the vast majority of their workforces replaced by machines in the next several years.

The country is taking the same route the U.S. did. The scale is just exponentially larger.

There are approximately 100 million manufacturing employees in China. For comparison, there are roughly 12 million manufacturing workers in the U.S. Of course, back in World War II, almost one-third of U.S. jobs were in manufacturing. In 2015, it was 8.7%.

Robots and automation are the reason for that.

But that doesn’t mean U.S. manufacturing is struggling...

Doing More With Less

In 1990, China accounted for roughly 3% of global manufacturing output. Today, it’s closer to 25%.

More than 60% of the world’s air conditioners, mobile phones and tennis shoes are manufactured in China.

But China is lagging in the robot revolution...

Which is why the investments of the next few years will be in automation.

Once again, using the U.S. as a benchmark, there are 164 robots for every 10,000 workers. This is nowhere near the high-water mark. The highest robot-to-worker ratios in the world are in South Korea (478) and Germany (292).

In China, it’s just 36. So its number of manufacturing workers is 10 times that of the U.S. - but it uses a quarter of the number of robots. That’s the potential.

Now, U.S. manufacturing output has doubled since 1984.

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But the number of manufacturing jobs declined by 30% during the last two decades.

We’re producing more goods. But we don’t need anywhere as much in terms of manpower.

Over the next two decades, according to a study by Oxford University and the Oxford Martin School, 47% of jobs in the U.S. are at risk of being automated.

Just last year, Amazon’s (Nasdaq: AMZN) robot workforce increased 50% to 45,000 across 20 order-fulfillment centers. Amazon’s robot army is now larger than the Netherlands’ actual army.

But Amazon still currently employs 200,000 full-time and seasonal human workers.

The robots are so much more cost effective and efficient. A study by Deutsche Bank estimates that Amazon’s Kiva robots reduce expense by 20% - or $22 million - per warehouse. And, at the same time, the robots increase inventory capacity by 50%.

In 2010, China surpassed the U.S. as the largest manufacturing economy in the world.

But this is just the beginning. The country wants to have the most sophisticated manufacturing industry by 2049 (the 100-year anniversary of the People’s Republic of China’s founding).

That means it must adopt robots by the millions.

And the government is helping to make that happen. The government of the Guangdong province is spending $150 billion to equip factories with robots and is creating two new centers dedicated to advanced automation.

Just in 2015, 35 Taiwanese companies spent $610 million on artificial intelligences as part of a move to reduce the human head count in manufacturing.

From 2012 to 2015, the deployment of robots in Asia increased 70%.

And China is the leading cause of this.

China is the biggest market for industrial robots, accounting for 43% of all sales. In fact, 89% of all robots sold in Asia and Australia went to three countries: China, South Korea and Japan.

But it’s projected that by 2019, 40% of global industrial robot supply will be installed in China.

We’ve already seen great runs in share prices for ABB (NYSE: ABB), Rockwell Automation (NYSE: ROK) and Cognex (Nasdaq: CGNX) over the past year.

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Investors shouldn’t fear the robot revolution. It’s coming. In fact, the first waves are already here.

Instead, you should embrace and welcome (and profit from) our new robot overlords.

Good investing,

Matthew

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