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We may not end up like the ancient Romans after all

We may not end up like the ancient Romans after all

30.1.2013 16:26

Seduced by government subsidies, cheap labor, lax regulations and, some claim, rigged currency, American and multinational corporations have been relocating to China for decades. First to increase their profits by benefiting from substantially lower cost of production. In recent years also to establish a foothold in what appears to be a highly promising domestic Chinese market, where foreign companies are seeking to tap into the growing domestic consumption of over one billion previously isolated consumers, both the nouveau riche and the new middle class.

This has resulted in what opposition politicians anywhere like to call “millions of [American / French / German / whatever-country-you-are-in] jobs lost”. As I wrote a while ago it also resulted in a very profound global imbalance between on one hand countries and households that incur debt and on the other those that act as global lenders. It is well known that the Chinese government has been worrying about its status of world lender of last resort at least since 2008 when the financial crisis resulted in huge currency and asset price volatility. It is when it also became apparent that the preferred route out of the hole for the US, UK and to a lesser degree other European governments is to print money like there is no tomorrow, which in turn threatens with long term inflation, which of course can melt the mountains of debt like butter. The route the Chinese government initially took to diversify its holdings of dollar assets by investing to euro assets has, with hindsight, proven a dead end. And just buying more gold doesn’t seem to work either. Gold is already trading on levels which show that it has become an asset class popular even in tabloid media which makes its function as value preserver very dubious.

Fortunately for the Americans, it seems that, as so many times before, the tide is turning in their favour. Many American company CEOs have in the past year or so declared their intention to bring manufacturing back home. The reason is not the rising cost of Chinese labour or appreciating yuan. Many believe it is technology. Technological progress, facilitated by advances and subsequent commercialization of innovations by leading American universities and tech companies. Innovation, that the US has always been able to foster by offering the smartest people from all over the world shelter and the best conditions for research & development and lifestyle (read: mostly more money, scientists are human, too, you know). 

Firstly, it is robotics. The robots today are specialized electromechanical devices run by software and remote control and capable of ever increasing levels of sophisticated production at ever increasing productivity and ever declining cost, soon to become cheaper than human labour. Then there is artificial intelligence (AI), that is software that makes robots intelligent enough for the tasks required. This is the technology behind self-driving cars, voice and face recognition and others. It is AI that allowed IBM’s Deep Blue computer to beat chess grandmaster Garry Kasparov in 1997 or more recently IBM Watson to beat TV-show Jeopardy champions in 2011. Some experts believe that use of AI will facilitate the change of product manufacturing from mass to personalized. Predictions are that people will be customizing designs themselves with use of AI design assistants developed at home or downloaded from internet.

How will they produce these products? Well, they will print them. No, this is not a joke. Pioneered by American scientists at University of Texas, Austin and at MIT, 3D-printing is a new production process which uses three-dimensional printing of objects according to a digital design fed into the machine. In a 3D printing an object is created by laying down successive layers of material. This makes it distinctly different and far more precise and advanced than the traditional machining techniques which mostly rely on the removal of material by methods such as cutting and drilling. Since the start of the twenty-first century there has been a large growth in the sales of these machines, and their price has dropped substantially. The technology is already used in production of footwear, engineering and construction, automotive, aerospace, dental and medical industries, and many other fields. A home version of a 3-D printer currently retails under the name of Makerbot and allows you already now to print small objects using polymers.

Lastly, the significantly reduced energy costs brought about by the US shale gas (and now shale oil) revolution are also cited as a significant contributing factor. The energy revolution in the US has not been discussed in Central Europe much although industry people are naturally aware. The fact is, that the discovery of shale gas and the associated extraction technology resulted in the US recently becoming fully sufficient in natural gas production. This U.S. natural gas self-sufficiency has been a true domestic bonanza. The country’s balance of trade has improved, gas is now competitive in price with coal and despite the absence of a carbon price or cap in the US legislation (!), U.S. carbon dioxide emissions in the first quarter of 2012 fell to levels not seen since 1992, in large part due to the decline in coal-fired electricity generation as utilities substituted gas for coal. As it is a bit more difficult to export gas then oil, and substantial investment into gas liquefying is not to everybody’s taste, the result of the hugely increased domestic supply of gas has been the collapse of domestic price. A cubic meter of natural gas now trades as US$3 in the US. Not so in Europe however. While in the US the price of gas has traditionally been a spot market price, in Europe it has been derived in complex formulas from the price of oil and secured by long term take-or-pay contracts which facilitated the construction of numerous costly pipelines and remain one the main sources of income to President Putin’s Russia’s Gazprom. The price of gas in Europe thus remains at US$ 11.80 per cubic meter.

This affects everything of course. From the national energy policy of individual countries, where the selection of appropriate fuel for the yet to be built power plants is a decision which will impact even the children of our children (Temelin, anyone?), through the cost of production of a variety of chemicals and other products, the US are already enjoying a massive advantage over the old continent and over the resource-poor Asian countries. Michael Lind and Joshu Freedman of the New America Foundation e.g. estimate in their new book “Value Added: America’s Manufacturing Future”, that a 25% increase in supply in ethane derived from natural gas creates 17 thousand new jobs in the US chemical industry and 395 thousand US jobs overall. The return of production by US companies large and small, they say, will increase US chemical production by US$32.8bn and economic output as a whole by a whopping US$132.4bn.

Advanced manufacturing, that is manufacturing that depends on the use of information, automation, computation and software, and makes use of cutting-edge materials and emerging capabilities enabled by sciences such as nanotechnology, biotechnology and photonics seems well on its way to save the leading western civilization from the doomsday scenario of ancient Rome.

Anecdotal evidence supports this theory in full. Having spoken to senior executives of several German and European equipment manufacturers recently, the trend is very clear. Forget Asia, the head of sales for an unnamed German industrial giant told me, our 12-month order book is 80% filled by US orders. We are now delivering most of our equipment to American homeland. The lead time between plant delivery and start of production of course means that tangible benefits of this increased investment in the US will only be visible to all in the medium term, say at best in a couple of years. But they are there, for sure…

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