How China’s “Robot Revolution” Could Impact U.S. Commercial Real Estate

PLAY OF THE LAND

Here’s an interesting fact to note amid the discussion of the loss of domestic manufacturing jobs to lower cost locations like Chinaaside from periodic dips during recessions, U.S. manufacturing output has actually been rising steadily over the last 30 years.

Manufacturing employment isn’t down because the U.S. doesn’t make anything anymore. It’s down because the U.S. manufacturing sector makes things much more efficiently. And one major reason for that is automation, or robots.

China’s economy is changing. It’s becoming more of an American, Western-style consumption economy because people are making more money. 

As a recent CBRE report notes, China is undergoing a “robot revolution” of its own. A declining labor supply and rising wages have made the country less competitive as a manufacturing destination. And so the Chinese government is now following the path previously trod by other nations like the U.S.investing in automation to improve manufacturing efficiency.

According to CBRE Research, Chinese manufacturers purchased 67,000 industrial robots in 2015, a number that is projected to more than double by 2018. Additionally, the Chinese government has announced a goal of raising the country’s robot-to-worker ratio to above 100 per 10,000 by the second quarter of 2020. That would almost triple the current ratio of 36 per 10,000, a figure that still lags far behind other countries in the region, such as Japan (315 per 10,000) and South Korea (478 per 10,000).

“China’s economy is changing,” says David Egan, Americas head of industrial and logistics research at CBRE and one of the study’s authors. “It’s becoming more of an American, Western-style consumption economy because people are making more money. And so the cost of labor is going up as well.”

“So the low-cost manufacturing, which is the first type of manufacturing that made its way to China, is getting priced out,” Egan adds. “The Chinese government, rather than lose those plants and give up that segment of manufacturing, is trying to find a solution to it. They want to lower their costs, and one of the ways they intend to lower their costs is by replacing people with robots.”

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China’s investments in robotics, along with similar such investments globally, could have implications for U.S. manufacturing and commercial real estate, as well, Egan says. Specifically, advances in automation could open for business segments of the country that have previously been considered unattractive due a lack of labor and their distance from large economic centers.

So what robotics can do is take away that labor crunch, or at least alleviate it some degree, and it could open up new locations.

“One of the biggest problems [distributors and warehouse facilities] are having in the marketplace is finding sites and locations that have adequate labor to work inside of their buildings,” he says. “Unemployment is very low right now. Labor is scarce. It’s getting more expensive. It’s just getting more difficult to find people to work.”

“So what robotics can do is take away that labor crunch, or at least alleviate it some degree, and it could open up new locations,” he adds. “Think about an area in the middle of the country that has a lot of land. It’s cheap land, so you could build a building inexpensively, but you don’t have labor there to work inside the buildings. But if you don’t need as many people, now you can look at that site. A developer can build, a user can go there, both at a much lower cost, and they can run an operation in an area where it is currently not feasible.”

Advances in automated driving could have similar effects, Egan notes. “If we have automated trucks, then the amount of space the truck can cover in one day is much bigger. All distribution location decisions are based on, ‘How far can my stuff get in one day?’ And that’s really limited by the roads and by the amount of time truckers can spend on the roads. So, if you can spend more time on the road, you can go farther in one day, and now you can [work] in a different type of location.”

“From a U.S. point of view, this kind of automation and these kind of solutions really could revolutionize and change some of these distribution markets,” he says.

It’s a small world, after all. And getting smaller all the time.

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