Climbing the value chain

Many Australians seem to take the rise of China for granted. With an enormous pool of inexpensive skilled labour, and mind boggling infrastructure investment programs – it is easy to come to the conclusion that China is different. There are plenty of business analysts that tout the need to shift production to China, underpinned by the assumption that subcontracting or outsourcing work to places with lower labour rates will lead to higher overall profits.

Of course labour rates are just one input you need to worry about. As business process automation becomes more pervasive, the need for large pools of people shuffling paperwork at desks in highrise buildings declines, and technology support, electricity, communications and data storage costs start to play a more important role. Flexibility and dependability increase in importance, and location becomes much less relevant.

Chris Foss - Robots and Empire
Chris Foss - Robots and Empire

The hype surrounding cloud based service models is rather similar in message. Instead of the traditional IT outsourcing model of moving staff and equipment to a service provider, you retire some in-house infrastructure, and buy the specific application as a series of fully maintained web services. Unfortunately, few cloud providers currently offer true flexibility, with many basing their service pricing on vanilla implementations, with term contracts very similar to standard software licencing models.

Managing a transition to these types of arrangements can be very disruptive for a business. Beyond the immediate technical challenges faced by the change process, employee roles will undoubtedly need to be adjusted, and in many cases retrained. The skills and resources need to manage vendor relationships are very different from supporting and tuning in-house applications.

It is ironic then that Foxconn, one of the biggest manufacturing outsourcing firms, is currently at the centre of a maelstrom of challenges. As one of the largest “contract” manufacturers operating in China, the company has usurped  manufacturing for many of the largest global brands – Apple, Dell, HP, Nokia to name a few. You would think Foxconn must be the envy of the manufacturing world, with 1.2 million employees, and operations around the world. Sure they have had some bad press caused by employee strikes, a number of suicides, and horrific work conditions – but those all seem to be trivial inconveniences for their business partners.

In an effort to stabilise their labour related costs, Foxconn recently announced a business strategy to invest in 1 million robots over 3 years for their production plants. As infrastructure investments go, this one seems like a game changer. The reason given for this dramatic step – “The use of automation is driven by Foxconn’s desire to move workers from more routine tasks to more value-added positions in manufacturing such as R&D, innovation and other areas that are equally important to the success of our operations”.

Given their workforce management track record, Foxconn are likely to face an uphill battle moving up the value chain. While their newly commissioned robot workforce will probably help them clean up their corporate image, it is far more likely to merely reduce their need for staff, rather than improve their ability to innovate.

A lot of cheap power will be also needed to grow the army of robots, and it seems like China’s leadership is placing some big bets on where things are heading. While the NSW government has flip flopped on the value of solar energy, and recently released a renewable energy fact sheet questioning the need for a government driven feed in tariff, China has just decided to introduce a 1 yuan kWh (14c kWh) solar feed in tariff for utility grade power stations, and set a target of 5 Gigawatts of solar capacity by the end of 2015.

It seems to me that leaders in China are placing their bets on a low cost clean energy future – rather than a low labour cost future. If Australia wants to cling onto a higher rung of the value chain in the face of that competition, it will require some serious changes in attitudes towards investment in infrastructure – both at a business and government level.

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