Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.
The robots are coming. Both in the workplace and the home, their presence will soon become ubiquitous. Growth will be exponential. No country or company will be immune from this inexorable trend. These comments are neither the stuff of science fiction nor are they bold hyperbole, but indicative of what constitutes a rapidly developing and empirically observed phenomenon. Already, the global robotics market is worth more than $20bn and there are over 1.1m robots in service, equivalent to one for every 6,000 people. Adoption looks set only to grow given not only ageing demographics in the developed world, but also with increasing competition from low-cost producing countries in the emerging world. Although still a somewhat nascent market and controversial topic, there arise from it significant investment opportunities – for innovative governments, firms and individuals.
There is no commonly accepted definition for what constitutes a robot. Most, however, seem to encompass the idea of a machine or virtual intelligent agent that is able to perform tasks automatically or with guidance, and so is potentially able to function in place of a living agent. The concept of automata is by no means a novel one and there has been a consistent trend across different societies throughout history to reduce human labour and make processes more efficient. Mechanisms designed for this end were present in Ancient China, Greece and Egypt, but their transition to a significantly more modern (and, recognisable) form was driven through developments in the fields of electronics and mechanics. The earliest digital and programmable robot was invented in 1954 and robots were first used commercially by General Motors in 1961 in order to lift pieces of hot metal from die-casting machines.
Over the last fifty years the industry has evolved significantly. Robots no longer exist just to perform simple and repetitive tasks but can now be programmed to undertake a wide variety of more complicated functions. Rather than just improving crude productivity (making more of the same thing at a lower cost), intelligent machines can demonstrate meaningful adaptability across product cycles and improve not just productivity, but also quality and consistency. Some commentators hence see the emergence of robotics as being part of the ‘third industrial revolution.’ Smart manufacturing – which does not just comprise robotics, but also new production methods such as 3D printing and new materials such as carbon fibre – should be seen as being to industry what big data is to computing. Moreover, by enabling a robot to access the cloud, it is possible to move intelligence and processing power away from the physical unit, thereby facilitating the construction of smaller, less expensive robots that are able to use a centralised and more powerful ‘brain.’
Robots are typically classified as either industrial or service-based. The former account for the majority of today’s installed units, used in production and other such processes. Service robots, by contrast, are typically for professional or private use. Within the professional space, robots that can perform surgery are on the rise, while domestically, robots that are able to carry out tasks such as lawn-mowing and vacuum cleaning are becoming increasingly popular. Entertainment and leisure robots also exist and Sony, for example, retails a robotic pet dog for around $5,000. Newer applications on the horizon include handicap assistants (that could administer medicines to the elderly), robots for personal transportation and also for home security.
Data on the robotics market is hard to come by and relates primarily to the industrial segment. The International Federation of Robotics (IFR), a leading body within the industry, calculates that there were 1.1m industrial robot units in service at the end of last year, with 140,000 sold in 2011, an increase of 18% on the previous twelve months. More than 60% of new units sold went to Asia, which is, by far and away, the region with the greatest preponderance of robots. Some 50% of industrial robots in existence can be found in Asia, with around 30% in Japan alone. South Korea is the next most popular market for robots, followed by Germany. By industry, most units at present can be found in the automotive and electronics markets (perhaps not surprising given the countries where their proliferation is highest), which together account for around 40% of all robots in service.
The IFR forecasts industry growth of at least 6% a year compound for the next five years, while Daiwa Capital Markets believes the industry could double in value, to $40bn, by 2030. Such predictions do not seem unrealistic, even against a backdrop of likely anaemic global economic growth, when one considers the benefits that the increasing adoption of robotics can bring. The advantages can be summarised by two words – increased productivity – and this manifests itself in a range of different ways, namely: reduced operating costs (labour is substituted by capital, and this capital can be deployed anywhere), superior product quality, enhanced manufacturing flexibility and better workplace health and safety (robots don’t get ill or distracted; nor do they strike, take days off or demand higher wages).
Many companies have already begun to see the clear gains that the introduction of intelligent robots into the workplace can bring. Within the car industry, around 60% of the manufacturing process in now automated, with robots involved in the welding, gluing, painting and final assembly processes. Correspondingly, some car manufacturers now produce twice as many cars as they did a decade ago, based on research from Berenberg Bank. To give a gauge of the market opportunity elsewhere, robot density (i.e. the ratio of robots to employees) is around ten times higher in the Japanese and German automotive industries than in general industry, according to KUKA, a leading robot manufacturer.
Robots used in warehouses, for example, are poised to boom. Labour accounts for around 80% of the cost of operating a forklift truck at present. Correspondingly, Seegrid Corporation, a private manufacturer of robotic industrial trucks believes that around 30% of all such vehicles could be robotic within the next decade. Against this background, it was noteworthy that Amazon paid $775m in March to acquire Kiva Systems, a supply-chain robot maker. Kiva’s robots are self-propelled wirelessly connected machines that receive orders (from the point when the customer hits the ‘place your order’ icon), move around warehouses to retrieve items and then take them to the appropriate shipping point.
Elsewhere, electronics assembler Foxconn, Apple’s main supplier and one of the world’s biggest employers with some one million workers, has started to talk about building factories manned just with robots. After a number of well-documented employee issues, Foxconn announced a three-year plan last July to start replacing workers with robots. At present, the company just 10,000 of the latter but anticipates growing this figure at least ten-fold by 2015.
Countless other examples abound of companies and industries increasingly embracing the benefits that robots can bring, as businesses are learning that they can do more (and better) with less. However, this changing industrial and societal dynamic does also have its clear critics too. Beyond the superficial concerns of machines potentially going out of control (the ‘Frankenstein’ phenomenon), a more pronounced issue is what happens when Okun’s Law starts to break down. Named after American economist Arthur Okun, it posits that there is a correlation between rising output and rising employment. In the context of already-high unemployment in most of the developed world, how governments may deal with disillusioned workers potentially displaced by robots is not clear. Moreover, while it may be fair to contend that robots, for example, do not get ill or go on strike, they also do not shop in supermarkets or watch movies in cinemas. In other words, there is no ‘trickle-down’ effect to the rest of the economy.
Some of these concerns were also raised when personal computers first began to emerge – and also effectively countered. Rather than simply seeing workers as being supplanted, the increasing prevalence of robots may create new opportunities. People will still be required to tell machines what to do, to service them and to act as ‘minders’ for them. At least for now, workers will also clearly still be required for complex and fiddly operations, and for many small businesses, the cost of robots (industrial robots currently retail from $1m) may be prohibitive.
Bill Gates has said he believes that robots may be as ubiquitous and transformative as the PC once was and envisages a future where humans and robots may work alongside each other. We are clearly still some way from this scenario and from an equity investor’s point of view, the area currently remains niche, but with significant optionality. The development cycle for robots is both highly fluid and very complex. Against this background, it seems most logical to seek to own those businesses that can be considered as early movers within the industry.
Given the entrenched presence of robots in Japan (300 for every 10,000 workers – the highest ratio globally), local companies have historically dominated the industry. Of the four companies that currently control over 60% of the industry, two are Japanese. Ranked in order of market share, the leaders are Japan’s FANUC; Swiss-Swedish conglomerate, ABB; Yaskawa, another Japanese player; and, German-listed KUKA. All have ambitious development plans: FANUC has said it intends to double production capacity to 60,000 units over the course of this year, while KUKA reported consensus-beating results in March with a current order book greater than 1.6 times last reported sales. KUKA also recently signed a major deal to produce robots for car manufacturer Daimler. ABB has said that it expects to post record robot sales this year.
Revolutions rarely happen overnight and we should not expect this to be the case with robots. Nonetheless, given the clear benefits that they can bring, the potential for the industry is significant. Seen alongside the emergence of cloud computing, 3D printing (a topic for a future edition of Helicon Thoughts) and other such developments, the foundations are undoubtedly being laid for the next phase of future global growth.
Alexander Gunz, Fund Manager
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Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation. Executive Summary: Thematic investing is a core part of our investment process at Heptagon. Since 2011, we have published 50 dedicated pieces of thematic […]
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