As wages in China have gone up, ASEAN has emerged as the world’s new low-cost manufacturing hub. But will the increasing use of technology in manufacturing stop the region in its tracks?
Robotics is likely to be the biggest disruptor, with low-skill, repetitive jobs – the sort of jobs more likely to be moved to ASEAN – most at risk to be replaced by programmed machines and engineering advancements.
While ASEAN’s popularity as a manufacturing hub shows no signs of abating, its advantage over China and the West is not set in stone. Competing solely on cheap labour is not sustainable, in our view.
Survey shows China wages still on the rise
Our annual survey of close to 290 Pearl River Delta-based manufacturers found that wages continued to rise in China, with respondents reporting an average increase of 7.7 per cent this year.
In total, wages have risen 65 per cent in the Pearl River Delta during the seven years in which we have been conducting our survey. This, together with declining margins and weak order books, has continued to drive manufacturers still dependant on cheap labour to ASEAN, especially Vietnam.
Yet, even here, rapidly increasing wages, albeit from a low base, is a concern. Our clients in Vietnam estimate that wages are rising by 10-15 per cent a year – a rate which would lead to a doubling of wages within five to seven years.
"The exponential pace of innovation has sharply reduced the cost of robotics"
Meanwhile, technology has brought down the cost of manufacturing elsewhere. The exponential pace of innovation has sharply reduced the cost of robotics, removing a major hurdle for using capable robots in industrial manufacturing.
Progress in machine learning is freeing the need to comprehensively pre-programme robotics, allowing them to interact safely with people and be more involved on the shop floor.
Operations moving back to the West
The pace of adoption of newer technologies is increasing. It took nearly 100 years for the telephone to be used in 80 per cent of 156 countries; similar diffusion of mobile phone technology took only 16 years.
Technology-aided manufacturing also offers the added, and huge, advantage of increased accuracy of operations and quality of production, achieving levels of consistency and repeatability not achievable with manual labour.
Several firms have already started ‘re-shoring’ production – moving operations back to the West, as technology-enabled production becomes more commercially viable.
"A focus on building skills and technical competence, and creating a highly proficient labour force, is critical"
Adidas, which presently sources predominantly from ASEAN, has successfully tested a fully automated shoe factory in Germany. While the risk of a mass migration of manufacturing back to the West is not immediate, it is not far away either.
What does this mean for ASEAN?
We believe ASEAN needs to prepare now, to counter this challenge. A focus on building skills and technical competence, and creating a highly proficient labour force, is critical. In addition to investment in traditional infrastructure, investment in technology is essential.
Succeeding in robotics
Challenges exist. In emerging markets, the effectiveness of adopting robots is further complicated by infrastructure problems such as electricity blackouts, lack of technical skills and poor organisational design. Even among our clients in China already keen on moving operations out, 25 per cent cited ASEAN’s lack of well-developed infrastructure as a major hurdle.
A shift to technology-enabled manufacturing in the ASEAN requires both hard and soft infrastructure in order to succeed. A focus on building skills and technical competence, and creating a highly proficient labour force, is vital.
"Technology is the future of manufacturing"
Malaysia, Singapore and Vietnam all increased investment in the technology in 2014. However, the region is still well behind the leaders in adopting robotics – Thailand purchased less than 2 per cent of all robot sales globally in 2014.
Technology is the future of manufacturing; ASEAN should embrace this trend, rather than fight it. It should learn from China’s experience and prepare for life after low-wage manufacturing, sooner rather than later.
Find out more about the future of low-cost manufacturing in Asia in our latest survey.