Posts tagged ‘automation’

The Fallacy Behind Populism and Automation Fears

The rise of global populism and anti-immigration sentiments, coupled with the perpetual rising trend of automation and robotics has stoked the fear fires of job security. Many stories perpetuate erroneous stereotypes and falsehoods. The news reports and blog articles come in various flavors, but in a nutshell the stories state the U.S. is hemorrhaging jobs due to the thieves of illegal immigration and heartless robotics. The job displacement theory is built upon the idea that these two sources of labor (immigrants & robots) are cheaper and more productive than traditional blue collar and white collar American workers.

Although these logical beliefs make for great soundbites, and may sell subscriptions and advertising, unfortunately the substance behind the assertions holds little water. Let’s take a look at the facts. In the most recent April jobs report, nonfarm payrolls employment increased by 211,000 jobs, according to the U.S. Bureau of Labor Statistics. Since early 2009 the unemployment rate has plummeted from 10.0% down to a historically low level of 4.4%. Over the similar timeframe, the economy has added over 15,000,000 new jobs. Does this sound like an environment in which immigrants and robots are killing all American jobs?

Sounds like a bunch of phoney-baloney, if you ask me. Just look at the employed person chart below, which shows a rising employment trend over the last seven decades, with the exception of some brief recessionary periods.

As I point out in a previous article (see Rise of the Robots), from the beginning of the United States, the share of the largest segment of the economy (agriculture) dropped by more than 98%, yet the standard of living and output in the agriculture sector have still exploded. There may not have been robots two and a half centuries ago, but technology and automation were alive and well, just as they are today. Although there were no self-driving cars, no internet, no biotech drugs, and no mobile phones, there were technological advances like the cotton gin, plow, scythe, chemical fertilizers, tractors, combine harvesters, and genetically engineered seeds over time.

Source: Carpe Diem

And while there most certainly were farmers who regrettably were displaced by these technologies, there were massive new industries fostered by the industrial revolution, which redeployed labor to new burgeoning industries like manufacturing, aerospace, transportation, semiconductors, medicine, and many more.

While it may be difficult to fathom what industries will replace the workers displaced by self-service kiosks at restaurants, airports, and retail stores, famed economist Milton Friedman summed it up best when he stated:

“Human wants & needs are infinite, and so there will always be new industries, there will always be new professions.”

As globalization and technology continue permeating through society, it is true, the importance of education becomes more critical. Billions of people around the globe in developing markets, along with automation technology, will be stealing lower-paying American jobs that require repetitive processes. Educating our workforce up the value-add food chain is imperative.

The bottom-line is that integration of technology and automation will improve the standard of living for the masses. Sure, immigration will displace some workers, but if legislative policy can be designed to cherry-pick (attract) the cream of the skilled foreign crop (and retrain displaced workers), skilled immigrants will keep on innovating and creating higher valued jobs. Just consider a recent study that shows 51% of U.S. billion-dollar startups were founded by immigrants.

The populist drum may continue to pound against immigration, and horror stories of job-stealing robots may abound, however the truth cannot be erased. Over the long-run, the fallacies behind populism and automation will be uncovered. The benefits and truths surrounding highly skilled immigrants and robots will be realized, as these dynamics dramatically improve the standard of living and productivity of our great economy.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

May 6, 2017 at 11:11 pm Leave a comment

Rise of the Robots

Battery Operated Toy Robot

We’re losing our jobs to robots, and they will destroy our economy. It makes for a great news soundbite, but has no factual basis in reality, if you look at the actual trajectory of automation and technology innovations throughout history. The global economy did not collapse when the steam engine replaced the oar; the automobile supplanted the horse; the computer became a substitute for the abacus; and the combine killed off the farmer. The same notion holds true today as robots become more ubiquitous in our daily commercial and personal lives.

From the early, post-revolutionary birth of our country in the 18th century, the agrarian economy accounted for upwards of 90% of jobs and financial activity…until farming technology evolved (see chart below). As new agricultural advancements were introduced, like the cotton gin, plow, scythe, chemical fertilizers, tractors, combine harvesters, and genetically engineered seeds, human capital (jobs) were redeployed into other growth sectors of the economy (e.g., factories, aerospace, semiconductors, medicine, etc.).

Source: Carpe Diem

Source: Carpe Diem

Given that human labor accounts for about 2/3 of an average company’s expense structure, it should come as no surprise that corporations are looking to reduce costs by introducing more robotics and automation into their processes. The advantages to robotics adoption are numerous and I describe many of the reasons in my article, Chainsaw Replaces Paul Bunyan:

A robot won’t ask for a raise; it always shows up on time; you don’t have to pay for its healthcare; it can work 24/7/365 days per year; it doesn’t belong to a union; dependable quality consistency is a given; it produces products near your customers; and it won’t sue for discrimination or sexual harassment.

 

At Sidoxia Capital Management we opportunistically identified this growing trend quite early as evidenced by our initial 2012 investment in KUKA AG (Ticker: KUKAF), a German manufacturer of industrial robots. KUKA has recently made headlines due to a bid received from Chinese home-appliance company (Midea Group: Ticker – 000333.SZ) that values the dominant German robotics leader at $5 billion. Despite KUKA’s +273% share price appreciation from the end of 2012, not many people have heard of the company. While KUKA may not have caught the attention of many U.S. investors, the company has captured a bevy of blue-chip global customers, including Daimler, Airbus Group, Volkswagen, Fiat, Boeing, and Tesla.

Rather than sitting on its hands, KUKA has done its part to develop a higher profile. In fact, President Barack Obama and German Chancellor Angela Merkel recently received a robotics demonstration from KUKA’s CEO Till Reuter at the world’s largest industrial technology trade fair in Hannover, Germany this April (picture below)

Source: Bloomberg

Source: Bloomberg

The recent multi-billion dollar bid by Midea Group has turned some onlookers’ heads, but what the potential deal really signals is the vast opportunity for robotics expansion in Asia. Rising labor costs in China, coupled with the enormous efficiency benefits of automation, have pushed China to become the largest purchasing country of robots in the world, ahead of the U.S., Japan, Korea and Germany (see chart below). However, according to the International Federation of Robotics (IFR), in 2015, Japan remained the country with the largest number of installed robots. IFR does not expect Japan to remain the “king” of the installed robotics hill forever. Actually, IFR estimates China will leapfrog Japan over the next few years to become both the largest purchaser of robots, along with maintaining the largest installed base of robots.

Source: Financial Times

Source: Financial Times

In the coming months and years, there will be a steady stream of sensationalist headlines talking about the rise of the robots, and the destruction of jobs. We’ve repeatedly seen this movie before throughout history. Rather than a scary bloodbath ending, over the long-run we’ll likely see another happy ending. Any potential job losses will likely be outweighed by productivity gains, coupled with the benefits associated with more efficiently deployed labor to new growth sectors of the economy.

Even KUKA realizes the automation dynamics of the 21st century  will serve as a net labor enhancer not detractor. If you don’t believe me, just ask Timo Boll, world champion table tennis player, who tested this theory vs. a KUKA robot (see video below). Ultimately, the rise of robots will lead to the rise of global growth and productivity.

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), KUKAF, BA, and TSLA, but at the time of publishing had no direct position in Daimler, Airbus Group, Volkswagen, Fiat Chrysler, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

June 11, 2016 at 10:36 am Leave a comment

Why 0% Rates? Tech, Globalization & EM (Not QE)

Globalization

Recently I have written about the head-scratching, never-ending, multi-decade decline in long-term interest rates (see chart below). Who should care? Well, just about anybody, if you bear in mind the structure of interests rates impacts the cost of borrowing on mortgages, credit cards, automobiles, corporate bonds, savings accounts, and practically every other financial instrument you can possibly think of. Simplistic conventional thinking explains the race to 0% global interest rates by the loose monetary Quantitative Easing (QE) policies of the Federal Reserve. But validating that line of thinking becomes more challenging once you consider QE ended months ago. What’s more, contrary to common belief, rates declined further rather than climb higher after QE’s completion.

10-Year Treasury Yields - Calafia 12-14

Source: Calafia Beach Pundit 

More specifically, if you look at rates during this same time last year, the yield on the 10-Year Treasury Note had more than doubled in the preceding 18 months to a level above 3.0%. The consensus view then was that the eventual wind-down of QE would only add gasoline to the fire, causing bond prices to decline and rates to extend an indefinite upwards march. Outside of bond guru Jeff Gundlach, and a small minority of prognosticators, the herd was largely wrong – as is usually the case. As we sit here today, the 10-Year Note currently yields a paltry 2.26%, which has led to the long-bond iShares 20-Year Treasury ETF (TLT)  jumping +22% year-to-date (contrary to most expectations).

The American Ostrich

Like an ostrich sticking its head in the sand, us egocentric Americans tend to ignore details relating to others, especially if the analyzed data is occurring outside the borders of our own soil. Unbeknownst to many, here are some key country interest rates below U.S. yields:

  • Switzerland: 0.33%
  • Japan: 0.34%
  • Germany: 0.60%
  • Finland: 0.70%
  • Austria: 0.75%
  • France: 0.88%
  • Denmark: 0.89%
  • Sweden: 0.98%
  • Ireland: 1.29%
  • Spain: 1.69%
  • Canada 1.80%
  • U.K: 1.85%
  • Italy: 1.93%
  • U.S.: 2.26% (are our rates really that low?)

Outside of Japan, these listed countries are not implementing QE (i.e., “Quantitative Easing”) as did the United States. Rather than QE being the main driver behind the multi-decade secular decline in interest rates, there are other more important disinflationary forces at work driving interest rates lower.

Technology, Globalization, and Emerging Market Competition (T.G.E.M.)

While tracking the endless monthly inflation statistics is a useful exercise to understand the tangible underlying pricing components of various industry segments (e.g., see 20 pages of CPI statistics), the larger and more important factors can be attributed to  the somewhat more invisible elements of technology, globalization, and emerging market competition (T.G.E.M).

CPI Components

Starting with technology, to put these dynamics into perspective, consider the number of transistors, or the effective horsepower, on a semiconductor (a.k.a. computer “chip”) today. The overall impact on global standards of living is nothing short of astounding. Take an Intel chip for example – it had approximately 2,000 transistors in 1971. Today, semiconductors can cram over 10,000,000,000 (yes billions – 5 million times more) transistors onto a single semiconductor. Any individual can look no further than their smartphone to understand the profound implications this has not only on pricing in general, but society overall. To illustrate this point, I would direct you to a post highlighted by Professor Mark J. Perry, who observed the cost to duplicate an iPhone during 1991 would have been more than $3,500,000!

There are an infinite number of examples depicting how technology has accelerated the adoption of globalization. More recently, events such as the Arab Spring point out how Twitter (TWTR) displaced costly military engagement alternatives. The latest mega-Chinese IPO of Alibaba (BABA) was also emblematic of the hunger experienced in emerging markets to join the highly effective economic system of global capitalism.

I think New York Times journalist Tom Friedman said it best in his book, The World is Flat, when he made the following observations about the dynamics occurring in emerging markets:

“My mom told me to eat my dinner because there are starving children in China and India – I tell my kids to do their homework because Chinese and Indians are starving for their jobs”.

“France wants a 35 hour work week, India wants a 35 hour work day.”

There may be a widening gap between rich and poor in the United States, but technology and globalization is narrowing the gap across the rest of the world. Consider nearly half of the world’s population (3 billion+ people) live in poverty, earning less than $2.50 a day (see chart below). Technology and globalization is allowing this emerging middle class climb the global economic ladder.

Poverty

These impoverished individuals may not be imminently stealing our current jobs and driving general prices lower, but their children, and the countless educated millions in other international markets are striving for the same economic security and prosperity we have. The educated individuals in the emerging markets that have tasted capitalism are giving new meaning to the word “urgency”, which is only accelerating competition and global pricing pressures. It comes as no surprise to me that this generational migration from the poor to the middle class is putting a lid on inflation and interest rates around the world.

Declining costs of human labor from emerging markets however is not the only issue putting a ceiling on general prices. Robotics, an area in which Sidoxia holds significant investments, continues to be an area of fascination for me. With human labor accounting for the majority of business costs, it’s no wonder the C-suite is devoting more investment dollars towards automation. Rather than hire and train expensive workers, why not just buy a robot? This is not just happening in the U.S. – in fact the Chinese purchased more robots than Americans last year. And why not? An employer does not have to pay a robot overtime compensation; a robot never shows up late; robots never sue for discrimination or harassment; robots receive no healthcare or retirement benefits; and robots work 24 hours/day, 7 days/week, and 365 days/year.

While newspapers, bloggers, and talking heads like to point to the simplistic explanation of loose, irresponsible monetary policies of global central banks as the reason behind a four decade drop in interest rates that is only a small part of the story. Investors and policy makers alike should be paying closer attention to the factors of technology, globalization, and emerging market competition as the more impactful dynamics systematically driving down long term interest rates and inflation.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own a range of positions, including long positions in certain exchange traded fund positions and INTC (short position in TLT), but at the time of publishing SCM had no direct position in BABA, TWTR or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

December 26, 2014 at 11:04 am 1 comment

Robotic Chain Saw Replaces Paul Bunyan

The world is rapidly changing and so is the profile of jobs. Technology is advancing at an accelerating pace, and this is having enormous impacts on the look, feel, and shape of global workforce dynamics. If lumberjack Paul Bunyan and his blue ox Babe were alive today, the giant would not be chopping down trees with a plain old steel axe, but more likely Mr. Bunyan would be using a 20 inch, 8 horse-power chain saw with side-mounted tensioner purchased from ChainSawsDirect.com.

But productivity in logging is not the only industry in which output has dramatically increased over the last generation. A recent New York Times article published by John Markoff explores how robots and automation are displacing humans across many different companies and industries around the world.

In China, manufacturers have exploited the value of cheap labor in the name of low-priced exports, but with millions of workers now moving to job-filled cities, workers are now demanding higher wages and better working conditions. Besides rising wages, higher transportation costs have eaten away labor expense advantages too. One way of getting around the issues of labor costs, labor relations, and transportations costs is to integrate robots into your workplace. A robot won’t ask for a raise; it always shows up on time; you don’t have to pay for its healthcare; it can work 24/7/365 days per year; it doesn’t belong to a union; dependable quality consistency is a given; it produces products near your customers; and it won’t sue you for discrimination or sexual harassment. The initial costs of a robot may be costlier than hiring a human being by a factor of five times an annual salary, but that hasn’t stopped companies everywhere from integrating robots into their operations.

The Orange Box on Wheels

One incredible example of robot usage (not covered by Markoff) is epitomized through Amazon.com Inc.’s (AMZN) $750 million acquisition of Kiva Systems Inc. last year. In some cases, Kiva uses hundreds of autonomous mobile robots in a warehouse to create a freeway-like effect of ecommerce fulfillment that can increase worker productivity four-fold. Amazon is a true believer of the technology as evidenced by the use of Kiva robots in two of its major websites, shoe-retailer Zappos.com and baby-products site Diapers.com, but Kiva’s robots have also been used by other major retailers including Crate & Barrel, Staples Inc (SPLS), and Gap Inc (GPS). The orange square robots on wheels, which can cost in the range of $2 – $20 million per system, travel around a warehouse tracking the desired items and bring them back to a warehouse worker, ready to then be packed and shipped to a customer. Larger warehouses can use up to 1,000 of the Kiva robots. To see how this organized chaos works, check out the video below to see the swarm of orange machines dancing around the warehouse floor.

 

The Next Chapter

The auto and electronics industry have historically been the heaviest users of robots and automation, but those dynamics are changing. Healthcare, food, aviation, and other general industries are jumping on the bandwagon. And these trends are not just happening in developed markets, but rather emerging markets are leading the charge – even if penetration rates are lower there than in the richer countries. The robotic usage growth is rapid in emerging markets, but the penetration of robotic density per 10,000 workers in China, Brazil and India is less than 10% of that in Japan and Germany (< 20% penetration of the U.S.), according to IFR World Robotics. As a matter of fact, IFR is forecasting that China will be the top robot market by 2014.

What does this mean for jobs? Not great news if you are a low-skilled worker. Take Foxconn, the company that manufactures and assembles those nifty Apple iPhones  (AAPL) that are selling by the millions and generating billions in profits. The harsh working conditions in these so-called massive sweatshops have resulted in suicides and high profile worker backlashes. Related to these issues, Foxconn dealt with at least 17 suicides over a five year period. What is Foxconn’s response? Well, besides attempting to respond to worker grievances, Foxconn chairman Terry Gou announced plans to produce 1 million robots in three years , which will replace about 500,000 jobs….ouch!

As the New York Times points out, the “Rise of Machines” is not about to result in Terminator-like robots taking over the world anytime soon:

“Even though blue-collar jobs will be lost, more efficient manufacturing will create skilled jobs in designing, operating and servicing the assembly lines, as well as significant numbers of other kinds of jobs in the communities where factories are.”

 

Many companies see this trend accelerating and are investing aggressively to profit from the robotic automation and productivity benefits.  In today’s day and age, Paul Bunyan would have surely taken advantage of these trends, just as I plan to through Sidoxia Capital Management’s opportunistic investments in the robotic sector.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), AMZN, and AAPL, but at the time of publishing SCM had no direct positions in  Foxconn/Hon Hai, Crate & Barrel, SPLS, GPS, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

October 8, 2012 at 4:30 am Leave a comment


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