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The Adoption of Digital Technology: Survey of Fifth District Firms

Regional Matters
May 31, 2018

Technology is advancing at an astounding pace. Just like individuals are incorporating new devices and technology into their lives, firms are incorporating and embracing new technology in their businesses. To better understand the extent to which Fifth District businesses are incorporating technology, we asked our contacts—composed of services firms, manufacturing firms, and lenders—about their use of digital technology and what impact they expect it to make on their pricing and employment decisions.

Of the 156 manufacturers, retailers, nonretail services firms, and lending institutions that responded, about a third (51 respondents) did not adopt (and are not in the process of adopting) any digital technologies. Of the remaining firms, e-commerce and cloud computing were the two most commonly cited adopted technologies. (See chart below.)

Almost 50 percent of retailers, over 30 percent of manufacturing firms, and over 30 percent of nonretail services firms reported adopting some form of e-commerce. About half of the (small) lending institutions that responded also reported incorporating technology around e-commerce.  For nonretail services firms, the second most commonly reported technology use was around cloud computing, which was being adopted by around 45 percent of the 65 nonretail services firms.

In addition to the technologies listed, firms were given the option to describe other technologies that they have adopted or were in the process of adopting. Other technologies included digital document management, telehealth, enhanced reality, new Enhanced Resource Planning (ERP) software, 3D CAD drawings, digital printing, and increased use of tablets, particularly in the field.

When asked to describe their use of digital technology, firms most often commented on moving data storage and business tools to the cloud, although one firm reported being forced into the cloud by a supplier of one of their applications. Manufacturers discussed piloting 3D printing, using optimization equipment in inventory, engaging robotics in manufacturing equipment, and incorporating ERP systems that could, among other things, give real-time data from the factory floor to the sales department. Retailers talked about using technology for payments processing and for marketing. One retail lender reported that “branches are melting like ice cubes” and then emphasized the importance of delivering services electronically in addition to traditional customer service and in-person relationship building.

With the Federal Reserve’s dual mandate of maximum employment and stable prices, it is important for us to understand how technology could influence firms’ pricing and employment decisions. To this end, we asked about the impact that firms expected the adoption of technology to have on the prices of products or services. Of the 104 firms who responded to the question, most (42 percent) reported little or no impact. In addition, about 21 percent of manufacturers and 35 percent of nonretail service providers reported expecting technology to slightly increase the prices of their products/services. About 11 percent of respondents across industries expected a slight decrease and 12 percent expected a significant increase. The rest were unsure of the impact.

The results were somewhat different when respondents were asked about the impact they expected the adoption by others in their industry (e.g., competitors, suppliers, and customers) to have on the prices of their products or services. First of all, more firms (154 total) responded to that question. Second, although the most respondents (34 percent) still expected little or no impact, a much higher share (24 percent) were unsure what the impact would be. Meanwhile, about 19 percent expected a slight increase while 16 percent expected a slight decrease and only 7 percent expected a significant increase in their prices. 

Most firms commented that they were adopting technology in order to remain competitive, but most also anticipated cost savings to go into profits rather than affect product pricing. One manufacturer wrote that although adding robots should reduce costs, the cost reduction will be offset by wage and other cost increases. This will allow them to maintain margins without passing price increases on to customers. On the other hand, a nonretail services firm reported that the cost increases associated with the technology adoption will be absorbed by the firm rather than passed on to customers.

Finally, contacts were asked about the impact that they expect their technology adoption to have on their number of employees over the next three years. Here, with 103 respondents, about half (50 respondents) reported little or no impact on employment—a result broadly consistent across manufacturing and services firms. Another 21 percent reported a slight decrease in employment while 17 percent reported a slight increase and 4 percent reported a significant increase. About 8 percent of respondents were unsure about the impact on employment and one respondent expected a significant decrease.

Of those who commented, some reported that the increased demand will generate the need for more employees while others reported the possibility of technology replacing some workers or some types of workers. One service provider anticipated using employees’ time more efficiently. A manufacturer anticipated hiring fewer workers in the short term to be more competitive and drive up demand so they could increase hiring in the longer term. Meanwhile, another manufacturer commented on the need for different skillsets to meet the needs of the emerging technologies. Finally, a manufacturer reported investing in technology in order to increase production without increasing the number of employees, thus remaining competitive with lower-cost countries.

In summary, of the two-thirds of respondents who are adopting new technologies, about half reported the technology having little or no impact on prices or employment in the next three years. And most of those who anticipated changes saw slight, not significant, increases or decreases. On the other hand, a notable share of respondents were simply unsure of what the impact would be, particularly when asked about the impact of technology adoption by competitors, suppliers, or customers. In the words of one respondent, “The world is changing fast…three years is like a lifetime.”

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Views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

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