TOKYO (Reuters) — Confronted with rising wages and a shortage of labor, a supplier of car body frames to Honda Motor Co. last month earmarked the equivalent of a half year’s profit to triple the number of robots at its three Chinese plants.
The $22 million investment by Japan-based H-One is part of a push to automate factories across China that is expected to gather pace in the wake of the recent burst of strikes and expected appreciation of the yuan.
“The automation equipment industry is growing very, very fast. Sensors, frequency converters, conveyor belts, pneumatic systems, power tools — you name it,” said Raymond Tsang, head of consultancy Bain & Co.’s Greater China industrial practice.
“We’re seeing anywhere between 20 to 30 percent growth in those sectors year over year.”
The series of high-profile strikes in recent months has affected mostly Japanese-owned auto and parts factories including Honda and Toyota Motor Co. in southern China. It has put a spotlight on growing unrest among China’s massive migrant worker population wanting a greater share of the country’s growing wealth.
Although labor remains a small portion of overall Chinese manufacturing costs, some see the worker unrest as further spurring a move to mechanization.
With China now accounting for 15.6 percent of the world’s manufactured goods — having last year surpassed Japan to become the second largest after the United States — the automation trend holds the promise of big profits for equipment suppliers such as Japan’s Fanuc Ltd., Germany’s Siemens AG, and U.S.-based Rockwell Automation.
Investors have taken notice. Shares of Fanuc, the world’s top maker of equipment that numerically controls machine tools, have jumped 16 percent over the past month as the strikes began getting wide media coverage. Sensor maker Omron Corp. has shot up 13 percent.
But analysts argue the growth potential of this trend is far from factored into share prices. The prospect for rapid automation is likely as wages rise and manufacturers look to move up the value chain and produce higher quality goods.
According to Nomura Securities, the ratio of machine tools in China that use numerical controls, a good measure of the level of automation, climbed to 27 percent in the quarter to May, up from 22 percent in 2009 and 19 percent in 2008.
This brings China to the level of Japan in the 1980s when it was in still in a phase of strong economic growth. Japan’s numerical control ratio has since risen to a world-leading 82 percent, offering a glimpse of where China may be headed as its economy develops.
Yaskawa Electric says China demand helped it log record orders overseas for its industrial robots in May, and it reckons the prospect for further growth is strong with the ratio of China plants using robots at just one-fourth the level of Japan.
“The pace of automation in Chinese factories is faster than Japan in the 1980s,” said Wenjie Ge, an analyst at Nomura Securities, which forecasts wages to double in China in five years.
“Rising labor costs would not only lead to an automation of Chinese factories but also increase personal incomes, which is spurring the spread of cars and electronics, and this is again favourable for machinery demand.”
The surge in wages and impending revaluation of the yuan will undoubtedly prompt some companies to move factories to countries with lower labor costs such as Vietnam.
One example is the retail industry. Nitori, which owns a chain of interior goods stores in Japan and imports about 60 percent of its products from Chinese factories, said last week it would consider shifting some production outside China.
Bain’s Tsang says not all production will go the way of automation given that wages, while rising, are still in most cases a fraction of what they are in the West. It also makes little sense to automate when a manufacturer’s business model is based on being flexible to deliver volumes based on demand.
“Further automating their factories is something that most of them are thinking about doing. But they may not do it in same way as we see in Germany or in the U.S. where production lines are 100 percent automated with robotics,” Tsang said.
But the overall momentum behind automation is strong and there is little chance that manufacturures will ditch China as a production base. Among other things, producing in China keeps a maker close to the massive and fast-growing market there.
Shin-Etsu Chemical, which had been reluctant to place a factory in China due to the difficulty of procuring a stable supply of raw materials, said today it would build a silicon plant in Jiangsu Province in response to rising demand.
The Japanese chemical firm plans to invest about $95 million, its first major investment in China, to boost its annual silicon output by about 30 percent.
Electronics parts maker TDK Corp. is also planning to add new machinery at its Chinese factories.
THK Co., which makes linear motion guides for machine tools, received orders of 274 million yuan ($40.35 million) in the quarter to March in China, a record high for a second straight quarter.
Records for robots
Fanuc, which is also a top maker of industrial robots, plans to lift its monthly output of robots to a record high by this fall to meet surging demand in China and India.
“Japanese automation-related makers such as Fanuc have been in a better position than European rivals to benefit from the trend as their products are generally cheaper,” said Mitsushige Akino of Ichiyoshi Investment Management.
“But the recent weak euro is supporting European makers such as Siemens to gain momentum. Japanese and European makers are even in their product quality, and thus the real game is going to start now.”