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Altrinsic Global Advisors
About Altrinsic: Altrinsic Global Advisors, LLC (Altrinsic) is a specialist global equities manager based in Connecticut, USA. It is the investment manager of the Altrinsic Global Equities Trust (Trust) issued by responsible entity, Antares Capital Partners Limited. The Trust invests in an actively managed portfolio of equities listed (or expected to be listed) on share markets around the world including in developed markets as well as emerging markets.
As investment markets stress about a tightening labour market in the United States and the potential for increased inflation, China is making big strides to be a leader in industrial automation, with forecasts showing that China will account for 40% of the world’s industrial robots by 2020. This potentially positions China yet again as the dominant manufacturing cost leader – not through cheap labour, but through a more scalable automated economy. The implications are huge.
Much of China’s manufacturing growth has been built on low-cost labour, but as the country’s economy has matured, this is ceasing to be a competitive advantage. As always, when labour costs rise, companies typically adjust by increasing automation at existing production lines, and where automation is cost prohibitive, supply chains are often relocated to regions with lower labour costs. While these fundamentals have unfolded elsewhere in the world, China’s focus on being the world leader in trade could unfold a further dramatic shift in global competitive dynamics as broadly-adopted automation initiatives are applied to the country’s huge manufacturing scale. The implementation implications are two-fold: not only are companies investing more in automation initiatives, increasingly the supply of automation equipment is being sourced not from traditional Japanese suppliers but from local Chinese suppliers thereby vertically integrating an automated industrial powerhouse.
In the recent past, China has often been a showcase for its extraordinary ability to generate rapid change, sometimes with state assistance. It is clear that industrial automation is a priority for the Chinese government as incentives have increased at both the central and local government levels.
China’s demand for automation equipment increased towards the end of 2016 as the industrial economy experienced a cyclical pickup. Also, in 2016 the central government dramatically increased subsidies for buyers of automation equipment. The central and local governments have always offered various subsidies and tax benefits for domestic equipment manufacturers, however, these additional subsidies for buyers of automation equipment are estimated to be up to 20% of project costs. Whilst this is providing incremental stimulus to the manufacturing economy it is also serving the larger policy goal of ensuring China remains the manufacturing hub of the world.
Following central government impetus, local governments recognised the need to preserve their existing production bases, and also began offering incremental subsidies. Subsidies from both the central and local governments continued to grow between 2016 and 2017, and equipment demand continues to be brought forward. We recently visited an industrial automation plant in Suzhou owned by a Taiwanese equipment manufacturer, which produces servo and AC motors that are essential to automating production lines. At this plant, the company has been automating production lines and cutting its employee base by half over the last two years. They expect to cut the employee base by another 70-80% over the next three years, while increasing revenue output by 65%.1
Management has indicated that this remains the company-wide plan at all plants. Among the company’s other product offerings are industrial robots, which are essential for automating production lines. Historically, this area has been dominated by Japanese manufacturers, such as FANUC, but Taiwanese and domestic Chinese manufacturers are muscling into the sector. On the company’s production lines, we found that they were replacing FANUC’s robotic arms on older lines with its own robotic arms on newer production lines with greater automation.
During our tour, we saw that the company is incrementally pushing into traditional Japanese territory with products that are 50% cheaper, albeit at the lower end of the product range. However, a Chinese domestic leader in robotics, is focusing on disrupting Japan’s dominance at the high end of robotics. This company indicated that almost all components in its high-end robots are now made by Chinese champions. The central government’s extraordinary support for creating national champions combined with strong demand trends have recreated a frenzy similar to the US technology boom of the 1990s.
China is rapidly moving up the value chain in many sectors and industries. Our recent trip to China provided strong evidence of the strides it is making in the manufacturing sector. This presents significant risks for the global landscape as companies face new competitors subsidised by the deeppocketed Chinese government with a mandate to accelerate the pace of innovation. It is clear that China will continue to optimise its position in global trade. The automation initiatives investigated during our trip, applied to China’s huge manufacturing scale, have deep implications for global competition – watch this space.
1 Altrinsic Research
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