Why China gains most from the Fourth Industrial Revolution – according to PwC

Profile picture for user cmiddleton By Chris Middleton September 24, 2018
Summary:
Another week, another report on the employment impact of AI and robotics. But this one is more interesting than most...

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In recent years, the mainstream media has been full of reports about how Artificial Intelligence, robotics, and other ‘Fourth Industrial Revolution’ technologies will decimate human employment, taking anything from ten to 50% of jobs, depending on which survey you believe.

Lawyers, accountants, auditors, financial advisors, bank tellers, and other middle-class careerists will join the redundancy queue, suggested the World Economic Forum. Some might see that as payback for the 2008-09 financial crash, were they not being joined by drivers, factory workers, clerks, and secretaries.

But as the WEF noted, globally these new technologies will create millions of new jobs over the next five years – in robotics, AI, data analysis, change management, and more. Indeed, PwC predicted earlier this year that the long-term employment impact will be neutral in mature economies, like the UK and US. Hardly a night of the long knives wielded by Terminators.

But there is one country where Industry 4.0’s impact will be far from neutral, according to a new PwC report. This is the country that is automating faster than any nation on Earth, and where data from 1.4 billion people can train AI systems, unfettered by data privacy regulations: China.

According to PwC’s prosaically titled report, ‘What will be the net impact of AI and related technologies on jobs in China?, AI, robotics, drones, and autonomous vehicles will boost human employment over the next two decades by a figure that is one and a half times the size of the UK population.

By 2037, it says, 93 million jobs could be added to China’s economy, a net increase of 12%. That’s nearly twice the number of new jobs that the WEF predicted would be created worldwide by 2022.

However, these net gains will not be spread evenly across all sectors, says PwC. Most are likely to be in services – notably in healthcare, where demand is growing due to an ageing population – with modest gains in construction. In this sense, China shares one of the West’s biggest problems – ageing people in ageing cities – while also dealing with another: a burgeoning middle class in young, fast-expanding cities.

The report adds:

The large net positive effect on jobs in services is, however, more due to high projected growth of this sector rather than low automation, as China transitions from an export- and industry-led growth model to a consumption and services-driven model.

This may not be true across all services sectors because, for example, many administrative jobs will be especially vulnerable to displacement through AI and related technologies, such as robotic process automation.

In the longer term, this could also be true of some transport sector jobs with the advent of driverless vehicles, although we are not expecting these to rollout at scale across the Chinese economy until towards the end of our projection period in the 2030s.

Manufacturing is projected to see a broadly neutral effect, with significant job displacement in traditional industries as wages rise, but job gains in manufacturing AI-enabled products. Says PwC:

As China becomes more innovative and less imitative, there will also be an ever-growing demand for manufacturing technologies such as robots, drones, and autonomous vehicles. Chinese industrial employment is therefore likely to shift from lower value, labour-intensive production to higher value roles, including those involved in the manufacture of AI-enabled equipment for export, as well as to meet rising domestic demand.

In short, the robot revolution will feed itself as China starts to service its own economy, rather than the rest of the world’s. This will have major implications for Western businesses that rely on China to manufacture goods at low cost, including much of the IT sector.

And that’s not to mention the ongoing US-China trade war, which Alibaba chairman and China’s richest man, Jack Ma, recently suggested might last for 20 years. On 19 September, Ma withdrew his promise to create one million US jobs, citing the ongoing trade war between the US and China.

In China, the largest net job losses to the machines are likely to be in agriculture, where automation, drones, big data analytics, sensors, and the Internet of Things will combine to help farmers cultivate crops more efficiently, while also moving food closer to the mouths that need feeding (via vertical urban farms, and the like).

But this transformation of an already booming Chinese economy will have side effects, warns PwC. The professional services giant estimates that AI and related technologies could displace around 26% of existing jobs in China over the next two decades – higher than the 20 percent estimate for the UK, for example. However, Industry 4.0 will create significantly more new jobs in China by boosting productivity and real income levels.

This ‘push me, pull you’ effect will cause further, wide-scale disruption to China’s labour markets, as millions of workers switch careers and possibly locations, adds PwC. There will be great opportunities for businesses investing in AI and related technologies, but also mass upheaval in existing business models across every part of the economy.

Uncertain

But PwC acknowledges that future predictions are an uncertain game:

Although our central estimate is that the net effect of AI on jobs will be positive in China, as opposed to broadly neutral in a mature economy like the UK, there are many uncertain factors that could tip the balance towards more optimistic or pessimistic scenarios. Government policy will therefore have an important role, working with business and other institutions, in steering China towards a more favourable outcome.

We have identified some policy areas where action could help to maximise the benefits from AI (e.g. through implementing the Next Generation AI Plan in full) and mitigate the costs in terms of impacts on jobs and income inequality (e.g. through extensive retraining schemes for displaced workers, an enhanced social safety net and increased support for rural areas). In this way, the great potential economic benefits from AI and related technologies can be spread as widely as possible across Chinese society.

The recent WEF report – based on responses from business leaders in 20 countries – suggested that Chinese companies are less likely than their US and UK counterparts to make workers redundant, and more likely to retrain and up-skill them as technology transforms the workplace. In this sense, China appears to be taking more people with it on the journey to an automated economy.

But the challenge for policymakers is that, with so many reports lining up different economic pictures – like a global game of mahjong with people’s livelihoods – no one can be certain what the future will bring.

To its credit, PwC acknowledges this, quoting Frey and Osborne’s seminal 2013 and 2016 studies of job displacement, which suggested 47 percent job losses to the machines in the US, but 77 percent in China – higher than all other countries in their study, except Ethiopia.

However, a job being at high risk of automation does not mean that it will definitely be automated, explains PwC, because there could be economic, legal, regulatory, and organisational barriers to the adoption of new technologies. For this reason, PwC says that its new prediction of 26 percent job displacement in China reflects a reduction of two-thirds from that earlier assessment.

Either way, AI creates jobs through its effect on the cost, quality, and range of products, says PwC, which boosts real income levels and creates additional demand for new jobs.

My take

PwC’s 2017 ‘Sizing the Prize’ report evaluated thousands of potential use cases for AI across all sectors of the economy. It combined these in a global computable general equilibrium (CGE) model to value the total impact of AI on global GDP, as well as on individual countries, such as the US, China, and the UK.

For China, PwC’s headline estimate in 2017 was that GDP could be boosted by up to 26 percent by 2030 through the application of AI and related technologies. By comparison, the global average boost was estimated at 14%. However, in its latest report, PwC has downgraded China’s GDP increase to just 20%, barely a year later.

This is still well above estimated levels in the next highest region – the US, with an estimated GDP uptick of 15%. However, it reveals that not only is the future uncertain, but – as mathematician Dr Jacob Bronowski once said of science – analysis is subjective and constantly on the verge of error.