How Technology will Transform China

At 28, Arnold Schwarzenegger was gearing up to win the Mr Olympia title.

It’s the title that goes to the world’s best body builder each year. Arnold had already won the title five straight times.

1975 was going to be his sixth straight win. He was counting on it.

1975 was going to be his last year. And like any athlete, he wanted to go out on top.

That year Arnold crushed the competition.

At the celebratory after-party, Arnold came in with a slogan on his t-shirt that’s now famous among the gym crowd.

Arnold is Numero Uno.

This is exactly what China wants to do.

They want to be Arnold Schwarzenegger. They want to be the biggest guy in the room, brimming with confidence.

And their ticket to the top spot of the podium is potentially technology, maybe…

Four-Step Guide to Small-Cap Success. Download your free report now.

How China will benefit from tech

China wants that top spot on the podium. They want to be the world’s economic super power.

But they’ll need some tech muscles to get there.

The government funds tech hubs and programs. They’re teaching younger generations about artificial intelligence and coding.

China spends AU$12.5 billion on AI and bio-sciences alone. According to South China Morning Post, they might even rival Silicon Valley when it comes to bio-data.

Equipped with AI programs that can decode the genetic profiles of entire populations and ecosystems, forms of “cybercolonisation” are increasingly likely, along with potentially massive shifts in geopolitical power. In fact, China and Silicon Valley seem poised for a race to control our biological data.

Yet you could argue this is just the flashy noise that makes the headlines.

What China really needs technology for is manufacturing.

China is an export-led nation.

About 15% of global trade are goods from China…

MoneyMorning 19-12-2018

Source: Bloomberg

[Click to open in a new window]

They produce a whole lot of stuff. Most of it is cheap and easy to make. China has become rich from their ability to organise cheap labour to mass produce things.

But this isn’t enough. Not if you want to be a super power.

Cheap labour is not a competitive advantage you can count on. Countries like Vietnam and Thailand have the same advantage. They can compete with China on price.

And as wages continue rising in the Middle Kingdom, their manufacturing prowess diminishes that much more.

MoneyMorning 19-12-2018

Source: Trading Economics

[Click to open in a new window]

What China wants to do is master advanced manufacturing. They want to make stuff like robotics, aerospace and microchips. They want to compete with the likes of Japan, South Korea and the US.

They had the idea a few years back. And in 2015, China announced their ‘Made in China 2025’ plan.

From the ABC:

The plan looks to target emerging industries like robotics, the manufacturing of autonomous and electric cars, artificial intelligence, biotech and aviation.

Those industries will be subsidised, handed low-interest loans, rent-free land and tax breaks in order to beat global competitors in the field.

Right now, China can’t do a lot of these things.

They don’t have the skilled workers. They don’t have specialised facilities.

But they hope one day they will.

With advanced manufacturing, China would no longer need to import important goods. Instead, they could make it all in-house.

There’s just one problem with the plan, though.

What is China going to do with all these people…?

The big challenge for China

Manufacturing is a dying industry.

If you listen to a guy like Bruce Greenwald, efficiency gains for manufacturing are 4% and demand is about 2%.

Over time these efficiency gains stack up. Manufacturing becomes viable for everyone. And now everyone can produce goods cheaply with quantity.

The cost to produce something will be fairly even across the world. And what’s going to happen is a reverse of global trade.

Domestic production meets domestic supply. China’s cheap labour is no longer an advantage. Automation and robotics make those jobs redundant.

Manufacturers that moved overseas will return home. We will not just see trade but globalism in reverse.

It’s why China is sprinting towards building a savvy technology sector now.

When everyone can manufacture things cheaply, today’s China looks a lot less important. But here’s the problem. What does China do with all these manufacturing workers?

The graph below shows the breakdown of China’s labour market. Primary industry is agriculture. Secondary industry is manufacturing jobs. Tertiary industry is the service sector.

MoneyMorning 19-12-2018

Source: Shift in Manufacturing Employment in China

[Click to open in a new window]

The numbers are moving in the right direction.

But there are still about 450 million workers in fields and factories. At some point, a lot of these workers will need to move out into the service sector.

It seems pretty obvious technology will be important for this transition. Without it, China will still need to import a lot of advanced goods.

But with it, China still has hurdles to jump. They need to successfully pull people out of two dying industries and put them into another.

And they want to do this relatively quickly.

Maybe they can do it. Next, they might even throw down their communist shackles, you never know.

One step at a time. China’s growth story continues…

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: Aussie expert reveals his free step-by-step small-cap guide. Read now.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia