5 minute read

Automation: Opportunity Laced with Manageable Downsides

Managing A Future For Everyone    5 minute read

Automation: Opportunity Laced with Manageable Downsides

This article was penned while the author visiting the seaport of Mombasa, a city that needs to undergo a massive structural transformation as the hotel industry, which was once the core of the local economy, has been on a downward trend due to declining hotel occupancy rates. One of the major drivers of declining occupancy rates has been the advent of the hospitality app Airbnb. Industry dynamics have been disrupted as the supply side has essentially shifted to the right exerting a downward pressure on room rates and essentially formal hotel industry earnings.

Technological Disruption

Airbnb essentially matches demand and supply for hospitality rooms outside of the formal hotel setup and primarily what we could possibly call a residential set-up. The chart below illustrates Kenya’s tourism arrivals trend, which has been sloping downwards since 2012 primarily due to travel advisories but also emergence of cheaper alternatives enabled by automation.

Kenya Tourist Arrivals

The points noted above were intended to provide perspective on this important matter.

According to Tech Exec, the main industries facing disruptive forces from artificial intelligence (AI) and machine learning include the taxi industry, with apps like Lyft and Uber driving the transformation; banking, with nearly all commercial banks adopting apps and fintech to enhance their customer experience, shifting away from investments in brick and mortar; media and entertainment, with content consumption shifting to online platforms; retail, where the likes of Amazon and Alibaba are now setting emerging trends; and other nascent “adopter” industries, like insurance and healthcare, that have embraced automation as an enabler of operational efficiencies.

The rise of blockchain is also expected to significantly impact the accounting industry.The chart bellow shows jobs likely to be automated, based on research done by Oxford University. This details the probability of a job being computerised, with a probability closer to one indicative of a higher likelihood of the job being disrupted in that way.

Positives

The question is then asked, is this disruption positive, given the negative knock-on effects it is perceived to be creating, such as structural unemployment impacting those one would consider a fairly aged demographic in society? The answer is that automation is essential and timely, and it is what is expected to drive global GDP growth into the foreseeable future as natural resources deplete. A study conducted by Oxford University suggests that 47% of jobs in the USA are susceptible to disruption from automation, but this is expected to drive productivity – as detailed in this chart.

grocery robots, robots, automation, grocery stores, ARK, ARK Investment Management, Innovation, ETF, Active management, thematic, investing, disruptive innovation, investment management, arkq, industrial innovation, arkindu

Source: ARK Investment Management

Industries are being transformed by the efficiency realised, which in turn is passed onward to consumers in the form of lower retail prices. Ultimately consumer surplus is expected to increase in the process, driving savings levels up, which can be used to drive more investments or even boost leisure activities due to a reduction working hours driven by automation.

There is also an opportunity for governments to increase their tax revenues by levying an automation tax, as proposed by Bill Gates, which can be used to finance welfare programs for the individuals who will be directly impacted with the automation shift. Ultimately the main beneficiaries will be corporate shareholders, who are expected to reap from the increased earnings driven by cost savings, in the form of increased dividends and increase in stock market valuations.The charts below illustrate increasing corporate profits of companies listed on the S&P in a period of declining investments indicative of the benefits of automation.

US Corporate profits

Over the same period, corporate investments as a proportion of GDP has declined as illustrated below.

US Net Business Investment

It is important to note that pension funds are heavily invested in stock markets (accounting for around 17% of daily trades). Hence, from a welfare perspective, those impacted by structural unemployment, especially the aged, would benefit in terms of increase in valuation of their retirement savings.

Negatives

On the flip side, from a political angle, automation does draw some negatives. It has already been witnessed how the rise of populism, as a result of globalisation, has driven a rise in far right parties. Along these lines, it is expected that workers impacted negatively will fall back to their trade unions, creating political tensions.

The taxi industry has already witnessed resistance against automation, where Uber has been under intense regulatory scrutiny and also faced opposition, sometimes violent, from existing players in the taxi industry. Automation essentially rewards the owners of capital at the expense of labour. Hence, it is expected that this will further entrench inequality, and concentration of wealth and political power in the hands of a few. The chart below illustrates the declining trend of wages’ share of GDP.

wages to gdp

There are other, softer negatives, like reduced social interactions, which can drive tensions in the community. The inconvenience of workers having to gain relevant skills in the new age also comes up, as they may have to undergo retraining in order to stay relevant. The question is: who will finance this? This is an issue that will be best be addressed from a policy perspective.

Conclusion

While it is critical that the world embrace automation in order to move humanity forward in terms of wealth creation and productivity enhancements, the matter needs to be viewed carefully with a  clean set of lenses. Mechanisms need to be put in place to ensure that the increased wealth is distributed evenly across all of society’s spectrum through fiscal measures such as the automation tax, increasing national savings by upping pension contributions, setting up relevant training infrastructure to minimize structural unemployment, and regulatory intervention to ensure appropriate licencing of technologies that are perceived to drive concentration of monopolies. As George Bernard Shaw alluded, “Progress is impossible without change.”

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