03 September 2020
By Mark Van Moorsel, Co-Fund Manager DMS Verbatim Portfolio 5 Income Fund
The mention of the term ‘robotics’ often conjures images of futuristic-looking machines competing with humans. However, real-life robotics is not quite so dramatic or threatening, but the potential it adds for our collective productivity presents an attractive opportunity.
As thematic investors, we have identified automation as one of the five key megatrends that will play a significant role in shaping our futures. The food and beverages sector is arguably one where the adoption of automation technology is most advanced, but there is vast potential in other labour-intensive and precision engineering sectors.
Robotics, in particular, can contribute significantly towards improving our lives by performing repetitive and dangerous functions, thereby advancing workforce health and safety as well as assuring product quality.
Where is the growth coming from?
There has been keen demand for industrial robots, owing in part to the significant impact this can have on business’ productivity and cost base. We believe this is a key trend that will continue, with robotics becoming more prevalent in the workplace.
The vehicle manufacturing sector has historically led the robot charge, with other sectors adopting a more cautious adoption rate. One area that has seen more interest, however, is that of warehouse automation.
Businesses are increasingly investing in warehouse automation, which displace or compliment human functions that can be performed more efficiently, accurately and cheaply by a range of machines. There are still significant hurdles standing in the way of wider adoption, including ensuring the hardware has adequate software – or intelligence – to adapt to the bespoke requirements of various businesses and industries.
Asian economies have led the way to date, using robots especially in the manufacturing of electrical or electronic goods, alongside the traditional automotive use. China, in particular, has shown enthusiastic uptake of robots: its demand for industrial robots increased by approximately 160% in the six years to 20181.
Taking over or making us work smarter?
This is by no means a doomsday alarm for human capability, but rather a re-allocation of human skills to functions and roles which require intuition and dynamic decision making. Despite the hype we are still in the early stages of robots ‘learning’ through artificial intelligence.
In this respect, the growth of cobots – or collaborative robots working alongside humans – is of particular interest, as there is an apparent greater willingness to adopt this form of automated help in manufacturing. In just three years between 2015 and 2018, this market grew by approximately 50-60% on average every year1.
The technology associated with cobots – primarily its ability to sense vision and movement, alongside modular axis designs – which allows for one robot to be used for multiple production segments – and safety control, is continuously developing and improving. These all contribute to the growing popularity of such robots for a range of businesses. Expectations are for this sector to continue expanding to reach a value of $8bn in the next five years, growing at an average annual rate of 45%1.
What about ESG?
The possibilities and potential for what our global economy can achieve are exciting, but there are still many hurdles to overcome before robotics can become more widely accepted and invested in. There are still many questions to be answered about where robotics fit into our broader environmental, social and governance (ESG) framework.
There is a fine balancing act between achieving improvements in productivity, efficiency, health and safety and continued employment. There are proposals for a ‘robot tax’ to be used for retraining employees and financing the social costs of automated production.
While cobots are not cyborgs, data security and protection are of increasing concern, given the growing use of open platform ecosystems. Alongside this, there is a myriad of joint ventures and partnerships between robot hardware manufacturers and software companies which may blur the lines of accountability.
Where is the opportunity?
While the sector has seen strong growth and shows attractive future potential, the value of robotics lies in the hardware combined with intelligent technology. From an investment perspective, we are looking to some of the larger assembler businesses who have the research and development muscle to harness the best software and offer a ‘robotics package’ – which is more attractive from a long-term perspective, as well the leaders in the cobot segment and its supply chain.
Siemens is a company that is restructuring to focus on an integrated automation solution to a broad portfolio of customers. It has the balance sheet strength to develop or buy in technology to retain a dominate market position.
Teradyne is the leader in cobot technology. It’s a small but fast-growing segment of robotics that given its working relationship with humans is unlikely to be rapidly commoditised in the same way large parts of the stand-alone robotics hardware has.
Keyence is the market leader in vision systems, which are integral to both standalone robotics and to an even greater extent, cobots. The mission critical status of the component gives its pricing power which tends to elude all other parts of the supply chain.
Our thematic investment process means we look for the drivers of long-term growth. Robotics, as part of our automation megatrend, have the power to shape our world for years to come.
1 Source: AllianceBernstein
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