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Embracing Automation in More Manufacturing Verticals
It is no doubt that demand for automation and robotics solutions is high in fast growing and new infrastructure industries (e.g. battery, solar, electric vehicles and semiconductor). Many of these areas have new production lines and factories that are great platforms to bring in new designs. However, we note that automation use cases are not limited to these sectors only. There are many great samples that show ample potential to bring advanced manufacturing and digitalization to existing production lines across multiple manufacturing verticals. In China, many industries are going through such transformation. Here we want to bring in the context of how automation has proceeded in manufacturing sectors in China as well as key opportunities and challenges. In separate articles, we will bring forward use cases of automation solutions in various manufacturing verticals such as furniture, steel and construction machinery.
China’s Automation Level Is Lagging Behind
Despite being the global manufacturing hub, China has a lower level of automation adoption and innovation in various manufacturing verticals vs. key developed countries such as the U.S., Japan and Germany. China is still catching up on their overall research and development spending in bringing more digitalization and automation solutions to the existing supply chain. We attribute the lower penetration to the following key reasons:
1) Limited Use Cases/Samples: From manufacturers’ perspective, they tend to rely on leading players domestically or globally to set samples before they feel comfortable adopting changes to their existing production lines. For market leaders in China, they generally are more dependent on overseas automation solution and equipment suppliers, who have a longer history and many more overseas use cases. Hence, the domestic automation solution suppliers often have limited use cases and samples.
2) Scale Prioritization: China’s manufacturing sector is still in its fast-growing phase. Under this backdrop, the economic benefits from scale expansion are much more meaningful and obvious. A newer and larger factory or production line could easily translate to lower cost of production and operation.
3) Policy Uncertainties: The ever-changing policy and operating environment lead to entrepreneurs’ low commitment to long-term industry growth and therefore lower priority of spending in research and development and product quality improvement.
4) Low Incentive for Innovation: We see a lack of corporate incentives to reward innovation as well as insufficient intellectual property protection in China. For instance, almost half of the corporates across industries in China are classified as high-tech enterprises which enjoy lower income tax rate.1 The lack of intellectual property protection means new products or technology can easily be copied by domestic competitors, which has also caused low incentive for innovation.
Acceleration of Automation Adoption
We believe China is well set to be a great breeding ground for automation adoption in traditional manufacturing sectors and existing production lines. Below we highlight a couple of key growth drivers:
1) We see a growing focus on supply chain reliability in China after the heightened geopolitical risks starting 2018 and COVID-19 starting 2020. The parts/components and equipment that we once thought could be freely purchased from other countries are now subjected to availability risks. As such, we see greater acceptance for manufacturers to accept domestic automation solution and equipment suppliers. This creates a virtuous cycle because increasing use cases and penetration could create good business reasons and samples for more companies (within the same industry or cross industries) to rely on domestic automation companies to revamp their production lines.
2) Growing desire to adopt automation for industry leaders. Chinese manufacturers are more open to adopt automation in their supply chains. Firstly, labour supply tightness in manufacturing sectors and labour inflation pressure remain key constraints to operation. Secondly, there are some historical pain points in manufacturing processes (e.g. procedures that risk employee safety or demand repetitive labour output) that are yet to be addressed. Industry leaders are now more willing to take a step further to redesign the production supply chains to address the issues.
3) The push for digitization in manufacturing process is another key driver. Digitalization (internet of things) has created new value and experiences within the existing supply chains, enabling many possibilities to bring efficiency and productivity. There are ample manufacturing data points that allow quantitative assessment of factory efficiency and output (e.g. machinery utilization, power and energy usage, raw material and inventory management, etc). It creates a positive feedback loop for corporates to seek continuous improvement in the manufacturing process and revise production/logistics/supply chain management in a timely manner.
4) The availability of technology and infrastructure. New technology, both hardware and software, is a key enabler for more automation adoption in manufacturing sectors. For hardware, we see higher availability of cost competitive robotics, laser components/equipment, and electrical components. For software, we see better computing power, visual database and AI models as positive drivers. The big number of engineers in China, strong and complete manufacturing supply chains and more targeted government incentives are supportive of this growing trend.
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