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Automation on steroids - Will Covid accelerate automation?

The covid pandemic has changed a lot of things in the lives of everyday individuals and corporates. One very important assumption that is has shaken for firms is the consistent availability of cheap labour - something that was earlier taken as the norm in emerging markets like India. In light of this change, what are the short and long term changes that firms may make to deal with the issue? In today's ZappChai post we deal with all that and more.

Status- quo short term

Let's tackle the demand for labour and the supply of labour to understand short term dynamics. The recent covid pandemic has seen a lot of migrant labour moving back to their home-states. They have in many cases made a long and arduous journey to get back to their homes, and would be hesitant to head back out on first signs of a recovery. Combine that with the Kharif season, and the government's focus on employment in India's rural areas, and the return is likely to be extended. Most current estimates see the migration back into cities happening around Q3 FY21.

The "good" news is that demand is fairly muted too. Auto players, for example, are observing sales at ~25% of original levels, with other discretionary items seeing similar levels. Firms can meet the demand quite well working at a lower utilization level than earlier, thereby being able to manage in the short term with the scarcity of labour.

A risk highlighted

That being said the event has certainly highlighted a risk in the system, and firms would want to protect themselves against it. Perhaps the safest way to protect against a labour scarcity is to automate out an increasing number of functions.

Automated units on the shop-floor were fairly popular before the shift began as well, especially in the developed markets, but the recent shock could work on accelerating that shift. The IFR forecasts an additional 20 lakh automated units to be brought online globally in the next two years, over and above the 24.4 lakh units already deployed.

Impact on business dynamics

While efforts are increasingly being made to make automation more accessible to smaller companies, the larger firms with surplus cash to deploy as well as accessibility to cheap credit would disproportionately gain from the long term switch, being able to either expand margins or pass through the gains to the customer and expand share. The change would be even more important for us to track given that we derive a bulk of our competitive edge as a nation for our availability of labour.

We at ZappChai will continue to track this and keep our readers updated.

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