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AI: Manufacturing and Employment Disruption

April 24, 2019 | Global/Emerging Markets

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While considered ordinary technologies today, the automobile, electricity, and the internet all drastically changed processes and ushered in new eras of economic growth.

Artificial intelligence (AI) is on the cusp of being another transformative technology—one that not only will drive innovation, productivity, and returns, but will also change employment patterns in nearly every single sector and industry.

The healthcare industry is one example; another is in next-generation manufacturing, which is already beginning to displace the decades-old mass production model by reducing times to market, enabling customization, eliminating inventory, and reshaping the employment landscape.

Closer to the Customer

One of the greatest benefits of this smarter, nimbler approach to manufacturing is that it allows companies to connect with customer demand at extraordinary speed. German shoe and sporting goods manufacturer Adidas is a prime example.

Adidas has pioneered what it calls its “Speedfactory,” with production facilities that are using data science to transform the manufacturing process. The results of this experiment have reduced design and production time from about a year and a half to a month and a half.

Adidas has harnessed this efficiency to better connect with its customers' desire for current fashion trends. That means producing as much as it can sell—and doing so at the highest possible price. Batches of shoes at the Speedfactory can be as small as 500 pairs. This compares to tens of thousands or even hundreds of thousands in traditional manufacturing facilities.

This enables Adidas to really understand customer usage. For example, embedding a microchip into the sole can tell Adidas just how a pair of shoes is being used, opening the door for customization and enhanced performance. What if longevity and customer experience could be improved by increasing the size of the sole by millimeters, for example?

And that's just sneakers. Imagine this type of manufacturing ultimately influencing all consumer goods. Think about all the warehousing space and production facilities that will no longer be necessary, along with fewer cargo ships, trucks, and trailers.

Disruption Is a Long-Term Employment Driver

While the immediate benefits of these reductions are clear, there are more menacing parts of the technological transformation that generate significant attention in the near term—namely, the elimination of jobs. Focusing on the destructive side of innovation is natural because it is the most visible and tangible.

In the early stages of technological breakthroughs, only the loss of jobs is seen. But it behooves us to keep thinking further down the line.

The University of Minnesota's Minnesota Population Center, an interdisciplinary cooperative for demographic research, has been collecting and synthesizing 250 years of census data from hundreds of companies around the world. And McKinsey Global Institute has built on this work by doing a deep analysis of specific jobs in different locations and geographies at different points in time.

Looking at two periods—early in the 20th century when the automobile was new, and then later around computer-related employment—McKinsey found that immediate employment generated by either new industry or technology was de minimus, as shown by the small dark blue segments of the pie charts below.

In fact, most of the accretion and generation of employment comes from newly developed industries or industries that use the new technologies (enablers and utilizers in the charts below).

Unfortunately, because the technology or new innovation is so transformative, it takes decades to show up, and it certainly takes decades for new industries to emerge. So in the early stages of technological breakthroughs, only the loss of jobs is seen.

But it behooves us to keep thinking further down the line.

For example, in the late 19th century, at least half of the U.S. labor force was employed in agriculture. Seventy years later, that share had shrunk to 3%, and it has stayed there ever since.

Of course, there is not massive unemployment today because of this shift, and that is the point of transformative technology.

Our society and labor force are on the cusp of undergoing something similar again. To illustrate this phenomenon, we recently searched job openings on Glassdoor that didn't exist 10 years ago; the results included titles such as cloud architect, mobile app manager, and AI engineer. These are not jobs of the future; they are jobs that are posted today.

Enhancing the Productivity of Human Capital

The change is already here. What is important is the scale. Hopefully, the transition to new employment patterns will not be as socially disruptive as previous iterations. New technologies—and the increased speed at which they are adopted—provide optimism that this will be the case.

While new technologies will disrupt existing industries, history tells us that technology creates more—from jobs to innovation to productivity—than it destroys.

Specifically, virtual reality (VR) is making the retraining of workers for new employment opportunities cheaper and faster than ever. Programs where workers use VR headsets for training as opposed to referring to a manual show productivity gains of roughly 20% to 35%, according to the Society for Human Resource Management. VR can also reduce error rates in complex assemblies.

Notably, these changes and their impact on the productivity of human capital are already happening. While new technologies will disrupt existing industries, history tells us that technology creates more—from jobs to innovation to productivity—than it destroys.

To access more insights about how William Blair is reaching beyond traditional investment analysis to think about the white space between asset classes, sectors, geographic regions, and investment teams, we invite you to explore other posts about sessions at our 2018 CONNECTIVITY conference.

 Olga Bitel, partner, is a global strategist on William Blair's Global Equity team.