Skip to main content

Automation is the biggest challenge to the Belt and Road Initiative - Wake Up Call

Japanese scholars in the 1960s were the first to coin the term “flying geese” to describe patterns of industry transfer. The theory posits that “one economy, like the first goose in a V-shaped formation, can lead other economies toward industrialization, passing older technologies down to the followers as its own incomes rise and it moves into newer technologies.”

In essence, this theory implies that global investors will locate their manufacturing operations in countries which offer the lowest manufacturing wage costs. However, as the manufacturing sector grows in the selected countries and sucks in more labor, the wages would rise. Beyond a certain threshold, the country would lose its low cost wage competitive advantage and manufacturing operations would be transferred to the next country with lower manufacturing wages, while the country of origin would move up the value chain to higher skill industries.


How the world has grown

Over the last 70 years the most successful East Asian economies have adopted this strategy or a close variant of it. Japan, Korea, Singapore, Taiwan, Hong Kong and then Mainland China were all beneficiaries of the flying geese phenomenon. China’s 85 million people strong manufacturing powerhouse is the most striking example. In the 1980s and 1990s, the country kick-started development through leveraging low wages to develop light manufacturing sectors including: textiles, shoes and toys which have in turn propelled export-led growth.

However, attracting foreign investment into manufacturing is by no means a given. To do so requires a set of enabling conditions. The country must be politically stable and friendly towards foreign investors. The country must have reliable transport infrastructure – roads, rails and ports in particular – so that manufactured goods can be quickly moved around the world. The country, or at least the zones in the country where manufacturing is prioritized, must also have a reliable source of electricity given the energy-intensive nature of the industry.

All these conditions have to be met before investors can be convinced to move their manufacturing operations to a specific country. Ensuring that these necessary conditions are in place can require substantial sums of upfront investment, but ultimately they pay for themselves through driving returns from exports at the same time increasing employment.

Developing countries are betting big on  Belt and Road

The flying geese phenomenon has been the most successful developmental strategy since World War Two. It’s  then no surprise that many developing countries today are keen to engage with China’s Belt and Road Initiative (BRI) in the hope that BRI can help them finance the infrastructure necessary to attract FDI and develop their manufacturing capacity. Many of these countries are taking big loans, and making big bets on infrastructure, on the assumption that it will ultimately pay for itself by catalyzing the development of export-oriented manufacturing.

This strategy is based on an assumption that what has happened over the last 70 years is replicable today. Through promoting and engaging with BRI; developing countries and China  are implicitly indicating that they believe the model is repeatable. The arguments raised in favor of this assumption are focused on recent success stories in Vietnam, Bangladesh and Ethiopia, all of whom have captured some industry transfer from China.

This time it may be different - Automation is changing manufacturing

But using these early examples ignore the fact that the decision to relocate production is fundamentally different versus previous episodes of industry transfer. When manufacturing moved from Japan to Korea to Taiwan, Singapore, Hong Kong and eventually mainland China, wages were the key factor. However, today, while still important, wages are not as deterministic for the location of production, given the advance of automation and artificial intelligence technologies that are revolutionizing manufacturing.

There are a growing number of examples that suggest manufacturing is becoming less dependent on low cost labor. Adidas recently decided to produce trainers in Germany for the first time in two decades, as the country offers highly-efficient automated factories. Foxconn made 60,000 people redundant in its Zhengzhou factory and replaced them with automated processes.

These examples are also being supported by more comprehensive academic research; a survey undertaken by researchers at China’s Peking University found that. of over 600 manufacturing firms in China, only 6% of them preferred to relocate operations abroad in response to rising wages at home. Research by McKinsey shows that 87% of manufacturing production activities are automatable.

Of course that number is an average, and the likelihood of automation is different across sectors. Those with the lowest probabilities of being automated, for example leather shoe production, still stand a good chance of being transferred to countries with lower wage costs.

However, a general standpoint, it is becoming increasingly clear that manufacturing is becoming less dependent on labor. But it remains unclear as to what the potential ramifications are for BRI.


The biggest risk for Belt and Road

With automation advances, foreign investors in manufacturing have less incentives to move their production abroad. But, many countries are still investing in infrastructure and are engaging with BRI on the proviso that they can be beneficiaries of the flying geese phenomenon and attract manufacturing investors through a combination of good infrastructure and low wages. Therein lies a paradox and perhaps the biggest risk facing BRI that no one is talking about.

If foreign investors in the manufacturing space choose not to continue moving production operations – or do not move them to the extent they have done in previous waves of industry transfer - then BRI is unlikely to be able to stimulate the development of export-oriented manufacturing.

This scenario plays to concerns around debt that have come with the BRI. If industry transfer does not follow the infrastructure build-up because automation keeps manufacturing in China, BRI could instead lead to levels of debt that many countries will struggle to pay off. This would begin to look badly on China if the same fate happens across the board for countries receiving China’s financing and contractors.



Subscribe to our weekly newsletter.

We cannot ignore this

While there are some sub-sectors within manufacturing that will of course be harder to automate and some countries that will still present attractive investment offers above and beyond their low wages, we believe these trends in manufacturing are worthy of concern. The flying geese phenomenon is not dead, but it might slowly be dying. When we view that in the context of millions of manufacturing jobs that the developing countries are betting big on, but may never get, the size of the risk becomes clear.   

Ultimately it is in the interest of both China and the recipients of BRI infrastructure investments to fully understand the risks associated with the changing nature of the flying geese phenomenon. For China, these trends put BRI at risk. For recipients, it puts their economic development strategy at risk. Unless more is done to understand these trends by companies and governments alike, we risk sleepwalking into – what could potentially become – a source of macroeconomic instability.

A possible way forward

What’s required is for Chinese BRI loans to be used more selectively in key countries and industries that have the genuine potential to become scalable manufacturing hubs. Investing across the board spreads limited capital too thinly and increases the chances of failure. For their part, developing countries need to think more carefully about precisely which manufacturing sub-sectors they want to attract. Right now, many indiscriminately seek to bring in manufacturing FDI regardless of the type.

The reality is that different countries will have different strengths based on existing endowments. For example, it would make sense for Ethiopia to prioritise its leather sector given it has one of the world’s largest herd populations. Moreover, leather shoe production remains difficult to automate, increasing chances of the industry’s success. Here at Belt and Road Advisory, we stand ready to help you understand which Chinese sectors are most ripe for transfer abroad, and which ones, given advances in technology, are increasingly likely to stay in China.


Popular posts from this blog

SSG Commando Muddassir Iqbal of Pakistan Army

“ Commando Muddassir Iqbal was part of the team who conducted Army Public School operation on 16 December 2014. In this video he reveals that he along with other commandos was ordered to kill the innocent children inside school, when asked why should they kill children after killing all the terrorist he was told that it would be a chance to defame Taliban and get nation on the side. He and all other commandos killed children and later Taliban was blamed.
Muddassir Iqbal has deserted the military and now he is  with mujahedeen somewhere in AF PAK border area”
For authenticity of  this tape journalists can easy reach to his home town to interview his family members or   ISPR as he reveals his army service number”
Asalam o Alaikum: My name is Muddassir Iqbal. My father’s name is Naimat Ali. I belong to Sialkot divison (Punjab province), my village is Shamsher Poor and district, tehsil and post office  Narowal. Unfortunately I was working in Pakistan army. I feel embarrassed to tell you …

CPEC Jobs in Pakistan, salary details

JOBS...نوکریاں چائنہ کمپنی میںPlease help the deserving persons...Salary:Salary package in China–Pakistan Economic Corridor (CPEC) in these 300,000 jobs shall be on daily wages. The details of the daily wages are as follows;Welder: Rs. 1,700 dailyHeavy Duty Driver: Rs. 1,700 dailyMason: Rs. 1,500 dailyHelper: Rs. 850 dailyElectrician: Rs. 1,700 dailySurveyor: Rs. 2,500 dailySecurity Guard: Rs. 1,600 dailyBulldozer operator: Rs. 2,200 dailyConcrete mixer machine operator: Rs. 2,000 dailyRoller operator: Rs. 2,000 dailySteel fixer: Rs. 2,200 dailyIron Shuttering fixer: Rs. 1,800 dailyAccount clerk: Rs. 2,200 dailyCarpenter: Rs. 1,700 dailyLight duty driver: Rs. 1,700 dailyLabour: Rs. 900 dailyPara Engine mechanic: Rs. 1,700 dailyPipe fitter: Rs. 1,700 dailyStorekeeper: Rs. 1,700 dailyOffice boy: Rs. 1,200 dailyExcavator operator: Rs. 2,200 dailyShovel operator: Rs. 2,200 dailyComputer operator: Rs. 2,200 dailySecurity Supervisor: Rs. 2,200 dailyCook for Chinese food: Rs. 2,000 dailyCook…

Historical relationship between Kurd and Baloch.

The Kurds are the ethnical group living in a region known as Kurdistan which is divided into Iraq, Syria, Turkey and Iran. They  are struggling for an independent region since decades and they are famous for their female guerrilla fighters.        On 25 September 2017, the referendum for an independent Kurdish region  was held in Iraq with a turn out of 72 %.   On this important occasion, the historical relation between Kurd and Baloch people is worth discussing.       When it comes to history, every nation tends to find its roots and origin. Same goes with the Baloch people. The Baloch people are always curious  about  finding their roots in history. Even if you  talk to a shepherd in Balochistan, he will be curious to talk about his  tribal or ethnical roots.      The Balochs have always conveyed the history to the next generations in different mediums like poems etc. No Baloch before 20th century had written books on  history  or origin of the Baloch nation .