Process of Automation in China - Lab Report Example

Automation in China Table of Contents Table of Contents 2 Introduction 3 2.Background 3 3.History of China 5 4.Industrial automation 7 4.1 Factory automation 8 4.2 Process automation 8 4.3 Hybrid automation 9 4.4 Control systems 9 5.Automation investment 10 5.1 Labour costs 12 6.Trends in globalization and internationalization 13 6.1 Future trends 14 7.Reflection 14 8.Conclusion 15 1. Introduction According to Fox (2010), the global automation industry was heavily affected by the 2008 financial crisis, but it has since recovered. The recovery of the advanced economies and the increased demand for machinery and technology in the emerging economies means that this sector will continue to experience steady growth. The companies will also continue seeking energy-efficient, and improved wastewater solutions. The automation industry has vast opportunities in the renewable sector and it is expected that in future many firms will continue to adopt smart technologies such as cloud-computing solutions and mobile communication technologies to enhance communication between employees working in different units. Flexible manufacturing processes are also expected to become popular in the BRIC economies. This paper examines the automation industry in China and the factors influencing the adoption of the automation systems in the country. 2. Background For long, China has provided firms with cheap labour and adequate resources. The country is also the largest recipient of the FDI, and several factors make the country a suitable destination for investment capital. According to Fox (2012), these factors include well developed infrastructure, availability of labour, and adequate workforce skills. In addition, lower transaction costs mean that the investors are able to attain high returns on their investment. However, in the recent past, the workers in the country have been agitating for better wages, and in response firms have started automating their production processes. According to the available statistics, the labour costs in China have increased by 12.3%, while the cost of raw materials is already going up (Nolan, 2014). Automation of the industries is also being driven by the need to produce quality products. Companies want to compete with foreign countries, and ensure consistent production of goods. According to Sultan (2012), the automation of Chinese factories is happening at a very fast rate, and already companies such as Foxconn have adopted the new technology. Foxconn is one the largest producers of phone products in the country, and due to bad publicity it has decided to introduce over one million robots in its factories. The extent of the practice is well captured in an article titled, analysis: robots lift China’s factories to new heights. According to Christensen (2012), the Great Wall Company in china has also introduced giant orange robots. So far, the company has invested £96.5 million in mechanizing 4 plants with 1,200 robots. With the automation of some of its processes, the Great Wall Company has been able to control the operating costs. Another company, which had adopted the robotic technology, is Pegatron, which has invested more than £60 million to automate the production of harsh chemicals (Nolan, 2014). The adoption rate of industrial robots of China is growing, and in 2012 the country reached 22,577 units up 51% over 2011 (Nolan, 2014). Robots are mostly used in the automotive industry and Abetti and Haldar (2011) attribute the new trend to change in demographics. With the aging population, china will not be able to meet labour demands, hence the growing popularity of the robotic technology. The number of the people in the working-age group is already declining, and to just illustrate further here is a perfect example. In 2000, the number of the Chinese workers entering the market was 22 million, but this number declined to 15 million in 2012 (Nolan, 2014). Besides the declining number of workers, the young people no longer want to work in factories, instead preferring to work in the service industry. The number of the migrant workers is already reducing, and as a result, companies are forced to look for alternative measures. Due to the increasing demand for robotic technology, the suppliers including, Universal Robots and ABB are already, boosting their china’s investment. In 2015, the demand is projected to rise to 35,000 from 26,000 in 2012 (Nolan, 2014). Although adoption of robotic technology is currently underway in China, there are fears that the automation process will take years to achieve. This is due to the high price of advanced robots, and lack of adequate capacity. At the same time, some of the researchers observe that the robots are more expensive compared to the workers and the automation process could be affected by logistical problems. The sections below examine in details the prevalence of the automation in China. 3. History of China Prior to 1979, the Chinese economy was centrally planned and state controlled. However, in 1979, the government initiated a number of economic reforms and established special economic zones. Enterprises and state-owned organizations were subjected to free market principles while citizens were encouraged to engage in businesses. The establishment of economic zones attracted FDI into the country. The liberalization efforts in the country were also facilitated by the removal of trade barriers. The introduction of economic reforms saw the economy improve and the presence of foreign entities in the country increased. The economic growth in china can be attributed to many factors, one of which the large-scale investment. In 2010, there were approximately 445, 244 foreign-invested enterprises in the country and they contributed a major share of the country’s industrial output (Nolan, 2014). According to the available statistics, the FDI growth in the country has been very phenomenal, and just to prove this point here is a good example. At 1985, the FDI inflows were estimated to be £1.2 billion, but this number rose to £72.5 billion in 2013 (Nolan, 2014). Most of the country’s FDI inflows originate from the United States, Taiwan, Japan, British Virgin Islands, Hong Kong and Japan. One of the FDI determinants in the country is the market size. According to Christensen (2012), large markets are attractive to investors due to larger economies of scale and spillover effects. The large population in the country drives up domestic consumption, which means that companies can easily find a ready market for their goods and services. The second factor is the availability of cheap labour. Foreign investors, flock into the country to take advantage of cheaper labour and well educated workers. According to Greenfield (2010), the Chinese labourers are highly skilled and the government provides investors with favourable policies in taxation, land use and foreign currency exchange. China has been experiencing improvements in productivity as a result of reallocation of resources. In this regard, the resources were re-allocated to the agriculture, trade and services industries. The private enterprises have taken the place of centrally-controlled SOEs and China has become a centre for innovation and economic development. By pursing the fast-growth economic model, the country has transitioned to a developing economy, but the government hopes to adopt the ‘smart growth’ approach. In other words, the government is now focusing on achieving long-term and more balanced growth; in order address the environmental problems affecting the country. The country GDP is estimated to be £5.4 trillion, while the GDP per capita stands at £4,174 (Nolan, 2014). It is estimated that the country will soon overtake America as the world’s largest economy. Already, china is the world’s second largest merchandise importer and exporter. The country is renowned for supplying goods to developing and developed economies and its major exports include electrical goods, machinery, furniture, and clothing. To maintain high production levels, the country relies on fuel such as coal and petroleum. According to the International Energy Agency, the country is the largest energy consumer, and by 2035, China is projected to consume 70% more energy than the United States (Nolan, 2014). Despite the positive economic outlook, the country is faced with a number of challenges. Firstly, China has not fully adopted the market system. The State Owned Enterprises still dominate various sectors of the economy, hence limiting competition. Unlike the private entities, the SOEs receive preferential treatment in the access of credit facilities. The country’s economy is also negatively affected by the undervalued currency. Another key challenge facing the country is overdependence on fixed investment and exports. China has also failed to deal decisively with the problem of pollution in the country. Already, the high rate of pollution in the country has been a serious global concern, and the government has been forced to close down some factories and reduce the number of cars on the road. The high level of corruption and bureaucracy in the country, negatively affects the expansion efforts of the foreign companies operating in the country. This is a serious challenge and already some of the companies such as BP and Wal-Mart have moved away from China, due to lack of transparency and the high levels of bureaucracy. In addition, the efforts of companies such as MacDonald, to increase the number of stores and mega malls in the country had been hampered by lack of cooperation from the administration. In order to enhance the economic growth, it is apparent that the government should address the concerns raised by the foreign entities. To address, the problem of labour shortage in the country, the Chinese government has already relaxed the one-child policy. It is expected that this intervention will enable the country to meet its future labour demands. The next section examines the prevalence of the automation in China. 4. Industrial automation Paap and Katz (2004) define industrial automation as the adoption of control systems and software and it is classified into two: factory and process automation. Factory automation is normally associated with the automotive and packaging industries. On the other hand, process automation is adopted by plants dealing with chemical and liquid products. 4.1 Factory automation Factory automation entails using controlled systems to coordinate activities for efficient production of goods. A perfect example of factory automation can be found in car manufacturing plants, where risky activities are carried out by the robots. According to Christensen (2012), the current demand for the robotics in China stands at £0.72 billion, but this figure will rise to £3.93 billion by 2020. The country’s robot usage matches with a global average of the 55 robots per 10,000 workers. However, the country, robot usage is still low compared to Japan and South Korea, where the ratio stands at 343 robots per 10,000 workers (Sharma, 2011). Some of the challenges faced by firms adopting the robotics technology in the county include lack of effective robots to deal with delicate activities such as wiring. In China, the number of the robot makers has increased and with the anticipated increase in the demand, new entrants such as Kuka AG have emerged. Another main competitor in the industry is the Swiss based robot manufacturer Staubli Holding AG. Besides serving the automotive industry, robot manufacturers are helping mobile phone manufacturers. In this regard, Foxconn hopes to deploy 1million robots to carry out simple tasks such as spraying, welding, and assembling. 4.2 Process automation It refers to the automation of the systems involved in continuous production. The automation process employs the valves, sensors and regulators and it is characterized by the production of high-volume and uniform units. The process automation is normally used in the oil, pharmaceutical, power and food processing industries. The Chinese process automation has registered an exponential growth since 2002. The number of firms in the oil, gas and petrochemical, industries has increased and the demand for the control technologies that will allow advanced process controls is also growing. Frost and Sullivan (2012) estimates that the global market for automation systems was £18 billion in 2006, but this figure had increased to £28.19 billion in 2011. 4.3 Hybrid automation This type of technology is normally applied to the bottling plants and it combines both the factory and process automation concepts. The factory process allows the manufacturer to package bottles and move them along the conveyor belt while the process automation controls the liquid flow into the containers. The batch automation is perfect example of the hybrid automation as products are produced in batches rather that one continuous flow. 4.4 Control systems Automation is facilitated by computers and software to coordinate monitoring and operate both the mechanical and power products. Companies are also quickly adopting the enterprise-level systems and software such as the Product Lifecycle Management. The other common software includes the Enterprise resource planning which incorporates different components in a company. It allows seamless sharing of information between different functions in an organization, around the globe, including China, are also using the manufacturing execution system. This system employs IT capabilities to control the operations within the factory. Automation can also occur at the plant level, and there are a number of softwares that have been developed to monitor the manufacturing process. Within the Chinese factories, one can find the supervisory control and data acquisition software whose role is to monitor industrial and facility-based processes. Other commonly used softwares include the distributed control system and optimization software. Optimization softwares are effective in improving efficiency and reducing the production costs by allowing the manufacturers to measure and control the processes. Automation process within a manufacturing facility can also be operated using a programmed logic controller, human machine interface or computer numerical control. 5. Automation investment Graph 1: Adopted from Nolan (2014) From the above graph it is apparent that robot shipments to China are already rising. In 2001, the country accounted for 1% of global industrial demand, but this figure increased to 14% in 2011 (Lee, 2003). Due to the increased demand, the main robotics manufacturers have announced plans to expand their operations in the country. For instance, Yaskawa plans to double robot output from 6,000 to 12,000 by 2015 (Nolan, 2014). On the other hand, Kuka which is one of the global robots manufacturers plans to improve its production from 1,000 to 5,000 units (Nolan, 2014). The adoption of the robots by the companies in the country is likely to lead to a number of benefits. Firstly, robotics are likely to lead to a reduction in the operating costs. According to Tamney and Chiang (2002), using robots, companies are able to avoid the direct and overhead costs associated with employing human workers. Besides reducing the labour costs, robots can also help firms avoid the costs associated with training, and employee administration. Secondly, robots will lead to improved product quality and consistency. This is one of the major reasons why the domestic factories are adopting technology, in order to compete effectively in the global arena. Automation in industries also makes work easier for the employees. Thirdly, the use of the robots is associated with increased production output rates. With minimal supervision, robots can work f extended hours, unlike human beings who can only work for a limited time. Fourthly, the technology is associated with an increase in product manufacturing flexibility. In addition, it can help firms to reduce material waste. These capabilities ensure that firms are able to meet important deadlines, and while reducing the amount of breakages. In this regard, robots can be applied to carry out sensitive assignments which require great precision and care. Fifthly, Killion (2006) suggests that robots should help the Chinese companies to comply with the safety rules and maintain a suitable working environment. Sometimes employees industries are physically affected by performing repetitive assignments. Unlike human beings, the robots do not suffer from performing repetitive or intensive processes. Sixthly, robot usage eliminates the challenges associated with employing human workers. Just to illustrate, organizations may be affected by high turnover rates and the difficulties of training workers. Using robots, not only helps organizations to deal with these problems, but also allow them to exercise greater flexibility. In addition, robots and other machinery can be arranged well in order to ensure maximum utilization of space. Some of them can even be hanged from the ceilings hence helping companies to eliminate costs associated with renting large spaces. Although it is likely that domestic and multinational companies will be forced to use robots, there is a possibility that some of them may be forced to transfer their operations to other countries. 5.1 Labour costs As indicated earlier, the low labour costs have given China a significant competitive advantage over other countries. However, this advantage no longer exists as the, wages have risen in the recent years. Just to illustrate further in 2000, the average monthly wage was £56 but this figure rose to £416 in 2013 (Nolan, 2014). The increase in the labour costs is discouraged firms willing to open up business in the county. Already, the current wages are higher that in other countries such as Mexico and Vietnam. According to Sultan (2012), the rising labour costs could be one of the reasons why the country is boosting its innovation and productivity levels. Fox (2010) observes that the country has hit the ‘Lewis turning point, with the educated citizens preferring to work in more lucrative industries. The government has also interfered with the labour market by setting the average growth at 13% for the next five years to 2015 (Nolan, 2014). The new move by the Chinese government is intended to reduce income in the country. The move follows sustained pressure from civil groups, but it will no doubt lead to an increase in the manufacturing costs. The rise in the minimum wages is further complicated by the on-going labour shortage in the country. According to Hayter (2007), it has become increasingly difficult to retain workers, as they have more choices compared to the factory owners. They move from factory to another looking for a better way, and in the end companies loose for lack of a stable workforce. In order to help factories and companies deal effectively with the problems of labour shortage and erratic workforce, some provinces have come up with appropriate measures. For instance, the Zhejiang Province recently launched an initiative valued at £49 billion to encourage manufacturers adopt the robotics technology (Nolan, 2014). The average labour costs more than tripled between 2005 and 2012, forcing some of the firms to reduce the number of the production line employees (Nolan, 2014). By replacing workers with robots, companies will be able to save more in labour costs. The use of robots is likely to become prevalent in the telecommunications and healthcare sectors. The labour shortages in the country are also attributed to the rise in the educational levels. The young people no longer apply for lower-paying manufacturing jobs, instead preferring to pursue skilled service positions. According to Isermann (2011), since 2007, the labour surplus reduced from 120 million to 25 million and the coastal labour markets are short of an estimated ten million people. Isermann, (2011) believes that the labour shortage, especially in the coastal areas is due to the booming urban property markets. As a result, employees no longer travel to the coastal towns in search of jobs; rather they prefer engaging in farming activities. Lu (2010) argues that the Chinese labour is one of the most expensive in the Asian market. 6. Trends in globalization and internationalization There is no doubt that firms are increasingly adopting technology in order to reduce the operating costs. Organizations are motivated to automate their processes due to several factors. In the emerging markets, the robot density stands at 17 per 10,000 manufacturing employees while in advanced economies the ratio is 149 per 10,000 employees (Moskowitz, 2009). Companies are ever striving to produce goods and services at the cheapest price. In some of the countries, where the manufacturing process is heavily automated, firms can be able to produce low priced products, unlike their counterparts operating in countries where wages are high. It is also increasingly becoming clear that robot usage in the manufacturing industry will continue to grow. With globalization, firms are under increased pressure to maximize their profits, and use of robotics provides them with a sure way of cutting down the operating costs. 6.1 Future trends It is possible that in the future, organizations will be linked through automation and digital supply chain management. Using resources such as cloud computing, manufacturing firms will be able to share information to speed to speed processing at the facility level. In addition, it is foreseeable that in future organizations will adopt more energy and resource efficient systems in order to reduce costs decrease the supply chain risks and enhance the quality of products available to the consumers. Already this is a reality in the automotive industry, where technology is being used to reduce wastage and. Through lean and just-in-time manufacturing concepts firm are able to achieve efficient production. In future all traditional manufacturing processes will be replaced with more automated processes, and firms will increasingly rely on sensors, robots and condition based systems. With more flexible technology, human interventions will be minimized and firms will significantly reduce their labour costs. 7. Reflection From the above information it is apparent that China will adopt robotics and other technologies in order to reduce the labour costs. The role of human beings is fast changing, and organizations are being forced to produce products cheaply. The use of automation systems and robotics will be greater in the automotive industry, where human interventions will have been reduced to a minimum. In china, the penetration of the automation systems and robotics will increase tremendously with the discrete automation growing at a significant rate Already the developed economies are way ahead of China, and it seems the government needs to step in order to fasten the automation process. While large organization the costs of automation, small and medium sized enterprises will continue relying on human labour. In the end, they may be forced to close down due to the high labour costs and lack of competitive advantage. Despite the growing penetration of the automatic systems, some of the human activities will remain unaffected. For instance, the construction industry will still require manual labourers and human workers will still continue operating in the service industry. With the competitive pressures resulting from globalization, companies will also be forced to adopt smart technologies. Some of the technological concepts that are gaining popularity include cloud computing, and mobile communication technologies. Organizations will in the future utilize these resources to achieve greater productivity and efficiency. Providing customized service solutions and flexible manufacturing will also become prevalent in the future. 8. Conclusion The demand for the automations and robot has driven up sales, with the main consumers being Japan, China, United States, Korea and Germany. Currently, China is the second largest robot market behind Japan and the sales are expected to increase further due to the ongoing labour shortage in the country. From the look of things, there is no doubt that the automation systems will be used mainly in the automotive and petrochemical industries. In addition, the automation penetration will persist due to demographic shifts and government efforts to push up wages. While automation systems and robots are associated with many benefits, small-and-medium enterprises may not afford the high costs of installation. This means, that it is important for the Chinese government to intervene by establishing subsidies or advancing credit facilities to the affected firms. References Abetti, P. A., & Haldar, P. (2009). One Hundred Years of Superconductivity: Science, Technology, Products, Profits and Industry Structure. International Journal of Technology Management 48 (4):423-447. Christensen, C. (2012). The ongoing process of building a theory of disruption,” Journal of Product Innovation Management, 23, 50-54 Fox, A. (2010). Opportunities and Challenges of Cloud Computing. 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