Summary: The Third Industrial Revolution has arrived. Slowly arrived, but not so slowly that we cannot see its effects. Here we look at one company’s participation in the revolution, and the effects. It’s a lesson of what’s coming, which we pay for with the scarcest of resources: time.
Contents
- Nike joins the 3rd industrial revolution
- Looking ahead at the results
- Implications for the 21st century
- For more information
(1) Nike takes a step into the 3rd industrial revolution
The emerging nations have grown through the outsourcing of manufacturing jobs from the developed nations, relying on companies like Nike, and hoping to follow in the footsteps of America, Europe, and Japan. Now they’re ready to transition from low-value-added jobs to those requiring more training and skill. Unfortunately the third industrial revolution has arrived, disrupting this natural evolution — destroying jobs while the resulting unemployment keeps wages low for all workers — both skilled and unskilled.
And of course they lack the unions that boosted wages and improved working conditions in the developed nations. The gains from increasing economic productivity go to the managers and shareholders of the megacorps. Let’s see this process at work…
“Nike to tackle rising Asian labour costs“, Financial Times, 27 June 2013 — Excerpt:
Nike is to tackle rising labour costs at its Asian factories by “engineering the labour out” of its shoe and clothing production as it seeks to defend its profits. Don Blair, Nike’s chief financial officer, said its objective was to reduce the number of people making its products as he highlighted the impact of a sharp increase in wages in Indonesia.
The US sports group and other multinational manufacturers are also battling a sustained rise in Chinese labour costs. Mr Blair said: “I think the longer-term solution to addressing a lot of these labour costs has really been engineering the labour out of the product and that really is with technology and innovation. He cited Nike’s Flyknit running shoe, whose upper part is a machine-knitted yarn. Nike is also using 3D printing technology to make prototype soles for professional athletes.
Cutting factory workers could also reduce Nike’s exposure to criticism over labour practices at its contractors, which has dogged it sporadically since the first big anti-sweatshop campaigns of the 1990s. In January this year activists criticised Nike’s suppliers in Indonesia for seeking exemptions to the minimum wage, which are allowed for companies that cannot afford to raise pay.
…when Nike reported its quarterly results on Thursday it said higher wage costs had eaten into its profits. Even so its profitability was still higher than a year ago thanks to product price rises, lower raw material costs and a lower tax rate.
Shoe and garment making remains more labour-intensive than most other manufacturing, which explains why 98-99 per cent of items worn by Americans are made in emerging markets with relatively low wage costs. The three biggest source countries for Nike products are Vietnam, China and Indonesia.
(2) Looking ahead at the results
From a report by Deutsche Bank, 28 February 2014 (red emphasis added):
Nike is transforming their footwear manufacturing process (Flyknit). They are transitioning from a low value add, labor intensive, highly inefficient process to one that is more highly automated, higher value-add — via operating high-tech machines. This change will allow Nike to reduce their labor cost/unit by up to 50%, lower material usage by up to 20%, increase {profit} margins by +250bps {2.5%} & ultimately move manufacturing jobs. Roughly one million workers are involved in manufacturing Nike product; ~550K of those produce footwear.
As usual when discussing technology, the analysis quickly becomes faith-based. The author does not explain why these new high-tech jobs will leave the emerging nations (e.g., China and Indonesia). The emerging nations produce much of the world’s high-tech goods. They manufacture everything from semiconductors to iPhones. They can produce high-tech sneakers as well.
(3) Implications for the 21st century
Almost every analysis about the Third Industrial Revolution (especially those by economists) — both those cheering and booing — overlook the essential aspect. This is not an outside force acting on our society. These are our commercial institutions working according to our society’s rules. Rules that have worked well since our modern economy emerged in the 17th century, but might have catastrophic effects if allowed to continue in the 21st century without basic change.
Each of the previous two Industrial Revolutions has had astonishingly large and unexpected effects on society. We can only imagine the effects of the third, even if it is only more of the same we see today. If we get any of the breakthrough technologies — artificial intelligence, nanotechnology, genetic engineering — the unexpected will be just the beginning.
Increased income inequality is just the first wave of what’s coming. It’s not too soon to start preparing, to start responding. This will require us to more clearly see the world than we do today. And to act together, coherently and wisely than we do today. We can do this.
(4) For More Information
These posts link to a wealth of information and speculation about the 3rd industrial revolution, helping you to prepare for what is to come.
(a) Preparing for the future: should we be precautionary or proactionary?.
(b) Dynamics of the robot revolution
- The coming big increase in structural unemployment, August 2010
- The coming Robotic Nation, 28 August 2010
- The coming of the robots, reshaping our society in ways difficult to foresee, 22 September 2010
- Economists grapple with the first stage of the robot revolution, September 2012
- The coming big inequality. Was Marx just early?, 27 November 2012
(c) First signs of the robot revolution appear
- The Robot Revolution arrives & the world changes, 20 April 2012
- In Friday’s job report you’ll see early signs of the robot revolution!, 5 December 2012
- Krugman discovers the Robot Revolution!, 9 December 2012
- How do we respond to the Robot Revolution?, 11 December 2012
- 2012: the year people began to realize the robots are coming, 3 January 2013
- Journalists reporting the end of journalism as a profession, 19 March 2013
- The next step of computer evolution: becoming bloggers, 20 March 2013
- A book about one of the trends shaping the 21st century: the next industrial revolution (robots), 29 December 2013
- The promise and peril of automation, 6 January 2014
- Looking at America’s future: economic stagnation, or will computers take our jobs?, 7 January 2014
- 50 years of warnings about the next industrial revolution. Are we ready?, 12 January 2014
- Experts see that the 3rd Industrial Revolution is upon us. How many jobs will be lost?, 21 January 2014
- A look at the wonders coming from the Third Industrial Revolution, 25 February 2014
(d) See all posts about this topic at the FM Reference Page Forecasts – possible futures for America and the World.
“This change will allow Nike to reduce their labor cost/unit by up to 50%, lower material usage by up to 20%, increase {profit} margins by +250bps {2.5%} …”
So… 50% of labor + 20% of material = 2.5% of profit? Sounds like labor costs aren’t their main problem. They’ve probably losing market share to competition, can’t get the brand-name premium they used to.
Peteybee,
It increases their profit margin by 250 bps. That is, profit as a percent of sales will increase from X% to (X + 2.5%). Since profit margins are usually in the teens, that is a very big deal.
Update: Nike’s profit margin runs aprox 10% during the past 5 years. Was 8.4% in the most recent quarter. Boosting that back up to 10% would be a very big deal.
See a graph of the history here.
Anything they could do to squeeze out another 2.5% earnings would delight investors and makes business sense, so I’m not questioning the business motivation for new technology.
That’s sortof not what I was going after though. Was questioning Nike’s diagnosis of rising labor costs as the main source of it’s reduced profitability.
If 2.5% of sales = 50% of labor + 20% of materials, then what’s 100% of labor? less than 5% of sales? less than 6% of costs? I was wondering if there’s a bigger factor moving the needle.
In other words, has their reduced profitability been caused by their labor cost getting doubled?
Peteybee,
You are doing the math wrong. Nike sells more than one product.
I do not have figures for shoes, but I remember to have seen statistics regarding clothes. There, the typical production costs (includes material, energy and labor) amount to about 15% of the final price, with labor a minimal part of those 15%. I do not know how many pieces are rejected because of poor workmanship that would no longer be a problem with full automation.
Guest,
Remember that the manufacturer ( in this case, Nike) gets only a fraction of the final retail price. Wholesalers and retailers get very roughly half ( this varies greatly by product).
Does Nike report as sales the price charged at retail by the merchants, or the price the merchants pay to Nike for the merchandise. So which number is used to calculate the profit margin? is that before taxes?
Most likely marketing and product development is the larger part of the expense. I wonder how many jobs that creates and where they exist. How much do they pay athletes for endorsements? That employs maybe a couple thousand plus their agents and financial advisors.
Doug,
Revenue on Nike’s financial statements is what Nike received.
Oh, I forgot to say this. A really great post – should lead to some great discussions and deep thinking.