Commentary

Economic model that Asia has used for decades is now broken

Published: 4:00 AM, June 28, 2017

Thirty minutes by car into the scrubby desert outside Korla, in China’s remote Xinjiang region, a textile manufacturer owned by the Jinsheng Group is building its latest factory complex.

Inside the 16 billion-yuan facility—a collection of stark white warehouses surrounded by an enormous expanse of pristine artificial grass — are rows of huge cotton spools, more than a million bright red and blue spindles, and almost no people.

A few German engineers wander around, making sure the equipment runs at peak efficiency.

This is the depopulated future of an industry that has lifted millions of Asians out of poverty.

Jinsheng’s factory covers almost 15 million sqf, more than five times the floor area of the Empire State Building, but it needs only a few hundred production workers for each shift.

“Textiles used to be a labour-intensive industry,” said Mr Pan Xueping, the chairman and chief executive officer, in a September speech in Urumqi, Xinjiang’s capital. “We are at a turning point.”

Instead of moving production to whatever nearby country that has the lowest wages, he added in an interview a day after the speech, “the industry can achieve a human-free factory”.

Mr Pan’s company is at the vanguard of a trend that could have devastating consequences for Asia’s poorest nations.

Low-cost manufacturing of clothes, shoes and the like was the first rung on the economic ladder that Japan, South Korea, China and other countries used to climb out of poverty after World War II.

For decades, that process followed a familiar pattern: As the economies of the early movers shifted into more sophisticated industries such as electronics, poorer countries took their place in textiles, offering the cheap labour that low-tech factories traditionally required.

Manufacturers got inexpensive goods to ship to Walmarts and Tescos around the world, and poor countries were able to provide mass industrial employment for the first time, giving citizens an alternative to toiling on farms.

Today, Bangladesh, Cambodia, and Myanmar are in the early stages of climbing that ladder — but automation threatens to block their ascent. Instead of opening well-staffed factories in these countries, Chinese companies that need to expand are building robot-heavy facilities at home.

“The window is closing on emerging nations,” says Mr Cai Fang, a demographer in Beijing who advises the Chinese government on labour policy. “They will not have the opportunity that China had in the past.” The transformation looks like it will happen fast.

The International Labour Organisation (ILO) estimates that mass replacement of less-skilled workers by robots could be only two years away.

Overall, more than 80 per cent of garment industry workers in South-east Asia face a high risk of losing their jobs to automation, according to Ms Chang Jaehee, an ILO researcher who studies advanced manufacturing.

Ms Chang recalls presenting her findings to a government official in a country in the region that she declines to name. The official’s response? If she is right, the result could be civil unrest.

Until recently, while robots took over much of the manufacturing of larger goods such as cars and jet engines, the prospect of applying automation to towel-weaving or dress-stitching looked like a long shot. Sewing clothes is a delicate undertaking.

Making a seemingly simple dress shirt with a breast pocket can require 78 separate steps, and machines that can match the dexterity of human fingers are still a costly rarity.

What is more, tech entrepreneurs had little incentive to design automated systems for a low-margin industry with ample access to cheap labour and little cash to spend on sophisticated gear.

These factors have led to complacency in parts of the textile industry.

“Today, there is no equipment that can make these handmade products,” says Mr Sahil Dhamija, whose Sahil International produces bath mats and bed linen for export at a factory in Panipat, India, that employs about 500 people.

He spoke at the Canton Fair, a trade conference in Guangzhou, China, in May. Mr Dhamija might want to visit Atlanta. A group of Georgia Tech engineering and robotics professors founded a start-up called SoftWear Automation there in 2007, with the goal of overcoming the difficulties machines have in picking up flexible fabric and pinpointing where to stitch and cut.

SoftWear’s first prototype took seven years to develop, sustained in part by a US$1.75 million (S$2.4 million) grant from the Defence Advanced Research Projects Agency, a Pentagon group that pushes bleeding-edge development.

In 2015, the company made the first sales of its invention, the Sewbot, to customers in the United States.

Revenue last year rose 1,000 per cent, and it is on track to achieve the same this year, according to CEO Palaniswamy “Raj” Rajan.

The breakthrough was as much about vision as touch; before SoftWear’s robots could make clothes accurately, they needed to learn to see garments as a collection of fine folds and details, rather than undifferentiated blobs of fabric.

For now, the Sewbot can handle products including towels, mattress covers and pillows, which require 10 steps or fewer to produce.

But the company is at work on upgraded machines that can create T-shirts and eventually more complicated garments such as jeans and dress shirts.

The ultimate goal, Mr Rajan says, is “full automation, from a roll of material to finished product”. He says he has preliminary interest from clients in China, South Korea, Japan and other countries across Asia.

LEVELLING THE PLAYING FIELD

As automation accelerates, it is not just Asia that could see its industrial trajectory affected.

If the cost of labour is no longer a major factor, there is no reason why manufacturers cannot relocate production to where the bulk of their customers are: North America and Europe, where wages for decades have been too high to support textile production.

Remove most of the workers from the equation, along with the costs and delays of round-the-world shipping, and making clothes or shoes in Dallas or Dusseldorf instead of Dhaka starts to look like a compelling idea.

German sportswear giant Adidas moved some shoe production to a highly automated “speedfactory” in its hometown of Ansbach that is scheduled to begin large-scale operations this year. The company plans to open a similar plant in the US.

In May, China’s Shandong Ruyi Technology Group, the owner of luxury brands such as Sandro and Maje, announced that it would invest US$410 million in a textile plant in Forrest City, Arkansas.

“Automation essentially levels the playing field,” says Mr Frederic Neumann, co-head of Asian economics research at HSBC in Hong Kong. “What emerges is a giant strategic game, in which individual governments will seek to attract industries to set up shop locally.”

POOR COUNTRIES TO LOSE OUT

The losers are likely to be poor countries that were counting on large-scale manufacturing employment to build prosperity. As wages rose in China, Transit Luggage, a suitcase maker based in the southern city of Dongguan, explored two options: Moving production to low-wage Vietnam or investing in automation at home. Executives chose the latter.

One robot now matches the output of about 30 workers making soft luggage, says sales manager Yang Yuanping.

As a result, she says, the company employs fewer workers than it did a decade ago, while producing three times as many items.

Even that pace of production is no guarantee of survival in a fast-innovating industry. Ms Yang has begun to worry about competition from Poland and the Czech Republic, as automation allows European countries to compete on price for the first time. “We have to think about how we can beat them,” she says. “We know they will get the machines.” BLOOMBERG

ABOUT THE AUTHORS:

Kevin Hamlin and Dexter Roberts are economics writer and China bureau chief for Bloomberg Businessweek respectively.