Is This as Good as it Gets? (Finally! Part 3)

This is the 3rd installment of a 3-part BLOG series.   Did you catch the first two?

Why you should care:   I believe the US economy is fundamentally different today.   Temporarily.  Confused? … Sorry, keep reading.

Let me be clear:  Developed nations are in a transition period.   Emerging market nations?  Not as much, but they’re not far behind.   Even there, in many instances, human labor is being replaced by machine labor:  automation and robotics.  And artificial intelligence (in many forms) use is growing.   All with one objective:  to increase business productivity at a lower cost.

And the impact of this transition on US GP?   Challenging.   Our GDP is unlikely to grow at rates exceeding 2 or 2.5% for some time.  Probably 5 or more years.

But there is light at the end of the tunnel.  And once we get there, GDP growth and corporate profitability growth are likely to reclaim the much higher numbers we’ve seen in the past.   Perhaps even exceed them.

Be sure to read Part 1 of this series:  https://terryliebman.wordpress.com/2016/04/30/is-this-as-good-as-it-gets-part-1/

And here’s part 2:  https://terryliebman.wordpress.com/2016/05/01/is-this-as-good-as-it-gets-part-2/

Taking action:   Have you seen I, Robot yet? yet?   Yes?   Great!  Well, don’t stop there!   Go see Minority Report (again) and, if you haven’t seen this one, check out Robin Williams in his 1999 movie, Bicentennial Man.

And ask yourself this question:  Why does Warren Buffet (Berkshire Hathaway) own over 81 million shares of IBM worth almost $12 billion?  (Down 17% this year, by the way.)

THE BLOG:

The rally cry, “This time is different!” is oft used, most often in error.  In most cases, however, and in most ways, history does tend to repeat itself.

In their amazing book, ‘This Time is Different, 8 Centuries of Financial Folly‘ by Carmen Reinhart and Ken Rogoff, analyzes 800 years of government defaults, bank panics, hyper-inflation spikes, and currency debasements, they conclude that, no, this time is not different.  Same problem, new country, new century.  (A truly amazing book, by the way.  If you enjoy this type of stuff, it is fascinating; if not, it can be a great cure for insomnia.)

But the concept of ‘different’ is more nuanced than that.   In many respects, our lives today are much different than 100 years ago.    And, I’m sure you’d agree, they will be much different again 100 years from now.  We’re in the middle of that transition right now.

As I demonstrated in Parts 1 and 2, the labor force needed for the US to achieve high levels of GDP growth is unavailable.

In Part 2, we left off briefly touching on ‘labor productivity.’  This term is defined:

“Labor productivity measures the amount of goods and services produced by one hour of labor. More specifically, labor productivity measures the amount of real GDP produced by an hour of labor.

And 3 conditions are needed to grow labor productivity:

• investment and saving in physical capital,
• new technology; and,
• human capital

The BLS defines labor productivity as “real output per labor hour,” and growth in labor productivity is measured as the change in this ratio over time.  They’ve been tracking this data since 1948.   Here’s the data in graph form:

In 1950, labor productivity (let’s call it LP for short) hit a high of 8.2%.  This is the highest one-year growth rate ever.  Said another way, by 1951, the typical worker was able to produce 8.2% more ‘stuff’ – in one hour – than they could in 1950.   Pretty impressive.  By contrast, in the past 5 years, productivity has been quite low.  After healthy 3.3% LP gains in 2009 and 2010, productivity pretty much fell off a cliff:

• 2011:   0.1%
• 2012:   0.7%
• 2013:   0.4%
• 2014:   0.7%
• 2015:   0.6%

And this doesn’t bode well for GDP growth.   The combinations of a shrinking labor pool, an expanding dependency ratio, high labor costs, and almost no LP growth are all working against GDP growth.

I know I’m painting a pretty dismal picture … so let’s quickly move on to the good news!   The future is bright!   We have robots!

In many parts of the world, robots are the new labor class.  They will work 24/7.  They don’t go on strike.  They don’t ask for raises.   And they eat very little (a bit of oil, some electricity, and they’re good to go!)

And not just in developed nations.  Consider this article entitled, “China’s Industrial Robot Boom Amazes Experts” from February 7, 2015.   It would appear a 255% increase in labor costs over 10 years have inspired China manufacturers to automate:

• Fact:  Nike, the world’s largest sport shoe manufacturer and its Chinese partner factories, Yue Yuen Industrial  fired 106,000 contract workers in the past year. In addition, Nike has weeded out 125 less-efficient factories.
• Result: Nike increased profits by 16 percent in the last fiscal year.
• Future outlook:  More of the same.  By 2017, there will be more industrial robots in China than in either the EU or North America.

From Robotics Business Review:

Ironic, right?   A country with 1.4 billion people investing in robotics and automaton?  Surprised?  I suspect many Chinese laborers are too.   (The box to the right represent the 50 companies RBR belo watch…per the RBR…in this space.)

As I was writing this blog, on April 28th the Financial Times of London published an article called ‘China’s Robot Revolution.‘   An excerpt:

“Guangdong is the growth engine of China’s manufacturing industry, generating $615bn in exports last year — more than a quarter of the country’s total. In this part of the province, the standard wage for workers is about Rmb4,000 ($600) per month. Ying Ao, which manufactures sinks destined for the kitchens of Europe and the US, has to pay double that, according to deputy manager Chen Conghan, because conditions in the factory are so unpleasant. So, four years ago, the company started buying machines to replace the ever more costly humans.“

The article goes on to say 9 robots now do the work of 140 employees.   Hmmm….

“Since 2013, China has bought more industrial robots each year than any other country, including high-tech manufacturing giants such as Germany, Japan and South Korea. By the end of this year, China will overtake Japan to be the world’s biggest operator of industrial robots, according to the International Federation of Robotics (IFR), an industry lobby group.”

For the business itself, is the capital investment a good choice?

If the investment has a 1.5 year payback, as this image suggests, for every business owner the answer is a resounding “yes!”

So, are you ready to invest in robots?  Not convinced yet?   Perhaps you’re thinking robots will work in manufacturing, but not at McDonalds, 24-Hour Fitness,  or in the doctor’s office … or around the house?   Guess again.

The International Federation of Robotics, an expert in the field, splits robots into ‘industrial’ and ‘personal/domestic’.  Their growth forecast is impressive:

“From 2015 to 2017, robot installations are estimated to increase by 12% on average per year (CAGR): about 6% in the Americas as well as in Europe, and about 16% in Asia/Australia. The trend towards automation continues to increase the volume of robot installations. Industry 4.0, linking the real-life factory with virtual reality, will play an increasingly important role in global manufacturing. The robotics industry is looking into a bright future.

Consider the following facts:

• Global competition requires modernization of production facilities. 
• Energy-efficiency and new materials, e.g. carbon-composites, require retooling of production.
• Human-machine collaboration will open up new applications and attract new customers.
• Growing consumer markets require expansion of production capacities.
• Decline in products’ life-cycle and increase in the variety of products require flexible automation.
• Technical improvements of industrial robots will increase the use of robots in the general industry and in small and medium sized companies, e.g. user-friendly robots, uncomplicated, and low priced robots for simple applications.
• Improved quality requires sophisticated high tech robot systems.
• Robots improve the quality of work by taking over dangerous, tedious and dirty jobs that are not possible or safe for humans to perform.”

Industrial robot growth:

Personal/domestic use:

Sure, it’s a forecast, but look at that ‘blue’ line in ‘household robots.’   The growth rate is staggering.  I’ll be naming mine ‘Jeeves.’   And he’ll have a British accent.

If you’re looking to invest in or around this space, check out OppenheimerFunds.  They have a fund named ‘International Growth Fund.’   (Symbol:  OIGAX; CUSIP:  68380L100).  Their investment approach:

“The portfolio managers invest in well-established foreign businesses that appear likely to grow at a faster pace than world GDP and may benefit from four distinctive global themes that we call MANTRA®: Mass Affluence, New Technology, Restructuring and Aging. Within this framework, the portfolio managers rely on fundamental analysis to search for various types of quality growth companies with sustainable competitive advantages and above industry revenue growth.”

Promoting this fund, in March they penned this article entitled, “Inhuman is Beautiful.”   Check it out:  https://www.oppenheimerfunds.com/investors/article/inhuman-is-beautiful

Be sure to watch the very short video.   🙂

Remember, today we’re focusing on labor productivity.   Recall that the working definition included “new technology” as a component.   Robotics … automation … and artificial intelligence play a big part here.   I believe this is why Berkshire Hathaway owns IBM, in spite of the stock’s poor performance of late.

Reading the IBM “1Q16 prepared remarks” you’ll find these comment around their major initiative ‘cognitive solutions‘:

“In the first quarter, Cognitive Solutions generated revenue of $4 billion, which was up modestly year to year. Solutions Software grew, mitigated by a decline in Transaction Processing Software. Our Solutions Software growth of three percent was a significant sequential improvement from the fourth quarter of last year. Contributing to this growth was strong double-digit performance in our Watson cloud-based offerings, and acquisitive content. From an offering perspective, the growth was led by analytics and security.”

IBM reported $18.7 billion in Q1 revenue – so Cognative Solutions was over 21% of total Q1 revenue.   Apparently ‘Watson’ is more than just a toy.  And I suspect Warren Buffet agrees.  (Perhaps IBM is a ‘buy’ too?)

OK…let me summarize and bring this full circle.   Once again, social and political commentary aside, consider these points:

• developed nations (and even rapidly developing ’emerging’ nations) have a serious challenge confronting them today:
  • an aging human labor force,
  • a expensive labor force, one already expensive or rapidly become too expensive, and,
  • an insufficient (size) skilled labor force.
• labor productivity is stagnant, no longer growing at past rates
  
• GDP growth is limited as a result

But all is not lost.  Implementation of a new wave of technology, in robotics, automation and intelligence, is expanding – world wide – at a rapid clip.  Yes, this is not new … but adoption is accelerating – at an accelerating rate.

And as implementation expands, US industry here and abroad will profit significantly.   Corporate profits will increase and potential US GDP will rise.   And rise significantly.

It will take time … but the revolution continues.    I think Ronald Reagan said it best:

“America’s best days are yet to come. Our proudest  moments are yet to be. Our most glorious achievements are just ahead.”

• Terry Liebman