Even Sweatshops are Getting Automated. So What’s Left?

Comparison of Nike’s successive sustainability reports reveals that the company used 106,000 fewer contract employees around the world in 2013 than 2012 (a greater than 9% drop), even as both profits and revenues increased by 16% and 5%, respectively. A story in the International Business Times states that this is because the company is “shift[ing] toward automation” even though it already makes most of its products in some of the lowest-wage countries in the world — shoes in Vietnam, Indonesia, and China; apparel in Brazil, Mexico, Argentina and India.

It could be that Nike’s overall contract employment went down because its product mix changed away from shoes and clothes and toward higher margin, lower labor offerings like the Fuel Band. However, this doesn’t appear to be the case. The company notes in its annual report “a shift in the mix of the Company’s revenues to lower margin geographies, products and businesses.” Furthermore, Nike has recently backed off from the Fuel Band and other wearables (and might soon drop them altogether). 

So it appears that instead of chasing ever-lower labor costs around the world, the world’s largest sportswear maker is instead turning to automation. Nike’s financial results show that this strategy is paying off so far. Anyone think that what this company is doing is the exception, rather than the rule and the shape of things to come?

If so, challenges are looming for developing countries.

Dani Rodrik and others have highlighted the phenomenon of ‘deindustrialization‘ around the world — the growing tendency of developing countries to not go through a period of heavy employment in manufacturing. In the past, countries like Korea, Taiwan, and China raised up many of their people by having them make stuff (i.e. by industrialization).

If Nike’s example really is part of a larger trend, however, this path to prosperity might become less available in the future. Companies will use automation rather than cheap labor to make their goods, in which case the workers who would have supplied that cheap labor are left out. As Rodrik writes,

Less room for industrialization will almost certainly mean fewer growth miracles in the future… Given premature deindustrialization, today’s developing countries will have to travel different, as yet unknown, and possibly bumpier paths to democracy and good governance.

Erik and I keep saying that offshoring is a way station on the way to automation. Nike’s recent experience with contract labor looks like a data point in support of that contention. I predict that there will be others.

The research is clear that technological progress has greatly benefitted people in the developing world so far. I wonder, though, if automation and deindustrialization might be creating a ‘silicon ceiling’ on growth — a situation in which even low wages are no longer an attractive alternative to technology. If so, the global shift away from labor and toward capital will only accelerate.