21st Century Economics

Background:

Robotics can be defined as any mechanical device that reduces manual labor by humans. This is obviously a simplistic perspective but it suits the purposes of this discussion. You either have cheap labor or you have expensive labor. If you have cheap labor, you have little incentive to seek out and invest in labor saving devices.

If you have expensive labor, you will seek ways to reduce the costs of the labor. That works fine until all your competitors are do the same thing to reduce labor costs.

You might also find that competition has found a way to reduce its labor costs while maintaining a very high degree of productivity, efficiency and quality. Japan did that in the early 80’s.

In the late 70’s and early 80’s, Japan was faced with a labor shortage, increased competition but a potentially large demand for its cars. To reduce costs, it invested heavily in the development of robotics for many of its auto plants. There are now plants that turn out auto parts hours a day and the entire plant employs 15 or 20 people - to watch the robots.

Japan did the same in the electronics industry. Their products dominate the markets in electronics and have challenged the American auto manufacturers in their own country by keeping quality high and costs low.

When Japan was experiencing their high labor costs, America was in the peak years of the baby boomers moving through their most productive labor years - 16 to 34 years old. All 76 million of them reached that age in the same time. This flood of the labor market held down prices for more than two decades with the effects only just now beginning to subside.

While the labor was cheap in this county, there was no incentive to seek labor saving devices. Even after Japan reduced its labor costs, the US industries did not respond until they began to lose large amounts of market share to Japanese products. Then they sought ways to reduce costs. One of those ways was to begin to move their assembly plants to other locations where labor was very cheap. The thinking was that this was cheaper than what Japan did and it avoided the problems of pollution controls and labor unions.

Unfortunately, a robot that can work 20 hours a day, 7 days a week for little more than a can of oil for pay will never be able to compete with a human worker. US auto makers underestimated the degree of efficiency and quality that a robotic force could apply to the complex assembly of cars and electronics. Despite moving 1000’s of jobs to other countries to reduce labor costs, the US businesses have never been able to compete with the quality and productivity of the Japanese robotic assembly plants.

New Motivator Coming:

American business, on average, has never been particularly smart when it comes to long range strategic planning. They are more driven by the quarterly stockholders reports and the annual fiscal balance sheets to worry about three to ten years away. As a result they almost never invest in the long term strategic development of their industry unless and until motivated by loss of profits.

Despite the massive bull market and the long running market expansion that has been flooding billions of dollars into US business, we are about to head into a much different market that will increase the pressure on many American manufacturers to invest in robotics.

Following the baby boom years of 1946 to 1964, when 76 million babies were born, there was about 13 years of reduced birth rates. In this 13 years, 41 million births occurred or about 45% of the baby boom years.

This baby lull period is now coming into the labor force as the boomers leave. In 1999, they are 22 to 35 years old while the boomers are 35 to 53 years old and beginning to move out of the labor force. By 2007, the boomers had started retiring. The net effect is that the labor force is decreasing by more than 30 million people.

There has also been a shift in attitudes and work ethics of these post-boomer babies. Many of them grew up in schools with computers and many more of them went to college than the boomers did. This effectively reduces the blue collar labor force even more. As with any limited supply, and constant or increasing demand, the cost goes up. Labor rates, as a share of real business costs have risen 45% in the last decade and will continue to rise sharply for the next 7 to 10 years - until the echo boomers (the children of the boomers) enter they work force.

The response to this gradual rise over the past decade has been a gradual rise in capital investment in plants and equipment resulting in a 1997 record high post-WWII investment of 16% of their total economic activity. That percentage will be seen as low by comparison in the next few years.

Robotics to the Rescue