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Chinese Automation Investment on the Rise

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With China now accounting for 15.6 percent of the world’s manufactured goods, it has surpassed Japan as the second largest producer after the United States.

Re-reporting a story that first appeared on the Signal Fire blog (http://signalfire.org), Chinese automation magazine GongKong is reporting that a supplier of car body frames to Honda Motor Co. (www.honda.com) has earmarked the equivalent of a half year’s profit to triple the number of robots at its three Chinese plants. According to the report, the $22 million investment by Japan-based H-One is part of a push to automate factories across China—a move that is expected to gather pace in the coming years.

“The automation equipment industry is growing very, very fast. Sensors, frequency converters, conveyor belts, pneumatic systems, power tools—you name it,” said Raymond Tsang, head of consultancy Bain & Co.’s Greater China industrial practice. “We’re seeing anywhere between 20 to 30 percent growth in those sectors year over year.”

The series of high-profile strikes in early 2012 has affected mostly Japanese-owned auto and parts factories including Honda and Toyota Motor Co. (www.toyota.com) in southern China. It has put a spotlight on growing unrest among China’s massive migrant worker population wanting a greater share of the country’s growing wealth.

Although labor remains a small portion of overall Chinese manufacturing costs, some see the worker unrest as further spurring a move to mechanization.

With China now accounting for 15.6 percent of the world’s manufactured goods—having last year surpassed Japan to become the second largest after the United States—the automation trend holds the promise of big profits for equipment suppliers such as Japan’s Fanuc Ltd. (www.fanuc.com), Germany’s Siemens AG (www.siemens.com), and U.S.-based Rockwell Automation (www.rockwell.com).

Investors have taken notice. Shares of Fanuc, the world’s top maker of equipment that numerically controls machine tools, have jumped 16 percent over the past month as the strikes began getting wide media coverage. Sensor maker Omron Corp. has shot up 13 percent.

But analysts argue the growth potential of this trend is far from factored into share prices. The prospect for rapid automation is likely as wages rise and manufacturers look to move up the value chain and produce higher quality goods.

According to Nomura Securities, the ratio of machine tools in China that use numerical controls, a good measure of the level of automation, climbed to 27 percent in the quarter to May, up from 22 percent in 2009 and 19 percent in 2008. This brings China to the level of Japan in the 1980s, when it was in still in a phase of strong economic growth. Japan’s numerical control ratio has since risen to a world-leading 82 percent, offering a glimpse of where China may be headed as its economy develops.

Yaskawa America, Inc. (www.yaskawa.com) says China demand helped it log record orders overseas for its industrial robots in May, and it reckons the prospect for further growth is strong with the ratio of China plants using robots at just one-fourth the level of Japan.

“The pace of automation in Chinese factories is faster than Japan in the 1980s,” said Wenjie Ge, an analyst at Nomura Securities, which forecasts wages to double in China in five years. “Rising labor costs would not only lead to an automation of Chinese factories but also increase personal incomes, which is spurring the spread of cars and electronics, and this is again favourable for machinery demand.”

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Bain’s Tsang says not all production will go the way of automation given that wages, while rising, are still in most cases a fraction of what they are in the West. It also makes little sense to automate when a manufacturer’s business model is based on being flexible to deliver volumes based on demand.

Further automating their factories is something that most of them are thinking about doing. But they may not do it in same way as in Germany or in the U.S. where production lines are 100 percent automated with robotics, Tsang said.

The overall momentum behind automation is strong. Shin-Etsu Chemical, which had been reluctant to place a factory in China due to the difficulty of procuring a stable supply of raw materials, said it would build a silicon plant in Jiangsu Province in response to rising demand. The Japanese chemical firm plans to invest about $95 million, its first major investment in China, to boost its annual silicon output by about 30 percent.

Electronics parts maker TDK Corp. (www.tdk.com) is also planning to add new machinery at its Chinese factories, and THK Co., which makes linear motion guides for machine tools, received orders of 274 million yuan ($40.35 million) in China in Q1 through March, a record high for a second straight quarter.

Fanuc, which is also a top maker of industrial robots, plans to lift its monthly output of robots to a record high by this fall to meet surging demand in China and India.

“Japanese automation-related makers such as Fanuc have been in a better position than European rivals to benefit from the trend as their products are generally cheaper,” said Mitsushige Akino of Ichiyoshi Investment Management. “But the recent weak euro is supporting European makers such as Siemens to gain momentum. Japanese and European makers are even in their product quality, and thus the real game is going to start now.”

For more on automation in China see http://china.gongkong.com

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