Automation for the profits

Opinion

The robots are coming.

Actually, they’re already here.

They have been for decades, boosting productivity — allowing us to do more with less.

Consider a 2018 study: it found that between the early 1990s and early 2000s robots added about 36 basis points (0.36 per cent) to global productivity. That may not sound like much, but it amounts to a 10 per cent boost to global GDP, which in normal years grows at about three per cent.

Although it has been argued robots are job killers, the robotics industry itself is a fast-growing sector of the economy, creating new jobs.

"At the moment this is a $50-billion industry globally," says Rian Whitton, a U.K.-based robotics analyst at global tech market advisory firm, ABI Research.

And these intelligent machines have a long runway to soar.

"By 2030, it will be a $500-billion industry — that’s very significant growth," he adds.

Given their potential, one might ask: Would adding drones and droids boost the productivity of my investment portfolio?

The answer is more complicated than a straight up ‘yes,’ however.

Without a doubt robotics, and more broadly, automation are changing how we work, live and play. What’s more the skyrocketing stock market performance of big tech — Amazon.com Inc., Tesla Inc. and Apple Inc., for example — are undeniably fuelled by advances in these areas.

Robotics and automation are linchpins to their manufacturing processes, or in the case of Amazon, its warehousing and shipping.

Yet those who track the sector argue that while no shortage of investment options exist to gain exposure to robotics and automation, investors should not expect to jump aboard a stock market bandwagon ride to overnight riches. That’s despite the fact major players in the sector have experienced significant share price growth in recent weeks.

"If you were asking that question in March, I would say companies in this sector were all grossly undervalued," says Josh Aguilar, an equity analyst with Morningstar in the U.S. who tracks the American robotics and automation companies.

Many firms saw their share prices dragged down by double-digit percentages by the pandemic.

"You could throw darts at the wall (to pick them) and do pretty well."

Today, the big names Honeywell International Inc., Emerson Electric Corp. and Rockwell Automation Inc. in the U.S. trade once more at fair market value, he says.

Less "consumer facing" than Microsoft Corp., Alphabet Inc. (Google) and other big tech, robotics and automation firms are generally key providers of manufacturing and other services for industrial conglomerates.

And industrial demand is likely to struggle in the near future.

With earnings season, now upon us, expected to be "pretty ugly," and several upcoming months of stagnating economic growth as the world grapples with COVID-19, Aguilar says the sector is likely in for a rough ride.

Indeed, stock market volatility — which often drags down share prices of companies in this space — presents buying opportunities for forward-thinking investors seeking to buy and hold for several years.

Yet investing in pureplay robotics is often challenging for Canadian investors because many of the biggest names in the field are Japanese and European, and trade on overseas exchanges. And homegrown robotics companies — while very innovative — are often small, niche market providers with limited upside for investors. As for the U.S. market, its big players are less involved in robotics and more dominant in automation, providing critical controls for industrial and manufacturing processes. (Albeit, Whitton adds Americans unsurprisingly lead the way when it comes to robotics research and development for military use.)

Japan, however, is the global leader in robotics, home to companies like Hitachi, Ltd., Mitsubishi Electric Corp., Sony Corp., Yamaha Motor Co. Ltd. and Yaskawa Electric Corp. But the true standout is one of Japan’s lesser known corporate brands, at least among consumers — FANUC, the largest maker of industrial robots.

Europe, too, is no slouch in robotics with large firms like ABB, a Swiss-Swedish firm, and KUKA, a German robotics giant.

Then again KUKA is no longer technically a German firm. Chinese conglomerate Midea Group purchased it in 2016. (On a related note, Canada Pension Plan Investment Board is a key investor in Midea, which means we all have a small stake in the Chinese company’s bet on robotics.)

Further to that point, China is now the largest market for robots, says Whitton.

"Their own robotics ecosystem isn’t up to the level of Japan or Germany, so they have been buying up German companies," he says.

"They see robotics as one of the key strategic technologies in the next 100 years that will basically define who calls the shots in the global economy."

Analyst Josh Kern with Lux Research, based in Boston, says China has good reason to invest in robotics.

"The biggest impact robots can make is for organizations dealing with labor shortages, such as those in e-commerce or manufacturing," he says. "These industries have a hard time retaining workers, which often engage in low-skilled repetitive tasks."

Despite claims to the opposite, robots are not stealing our jobs. They’re doing tasks we often won’t or can’t do.

Robots work 24-7; they don’t tire, and they don’t quit jobs involving repetitive tasks we humans often find soul-crushing. Then again, robots are increasingly sophisticated, thanks to data analytics and artificial intelligence, able to do more challenging work better than flesh and blood workers.

Kern points to Lockheed Martin as one example. It recently implemented autonomous mobile robots in its warehouses. "Before deployment, human workers only picked the right part 66 per cent of the time," Kern says. "After implementing the robots, that number increased to more than 99 per cent, increasing the efficiency of the overall process."

For these reasons, robots and automation have sparked a manufacturing renaissance in North America and Europe, and even create jobs in technical and engineering vocations, Whitton says.

"The correlation between robots and losing workers isn’t as high as people think," he argues. "In fact, if anything it is the other way around because companies that invest in robots see productivity increase… which means higher margins, allowing firms to hire more people."

Albeit the new jobs often require skills in automation and robotics.

"And there is a dearth of this kind of skilled labour," Aguilar adds.

Jobs aside, patient investors are likely to find opportunity, too. Exchange-traded funds (ETFs) — of which there are many focused on this sector — offer the easiest way to gain exposure.

Canadians can look to Horizons Robotics and Automation Index ETF (RBOT), for example, which trades on the TSX. It provides low-cost access in one fell swoop to a basket of international companies, like FANUC and ABB, often difficult to access otherwise given their shares trade on overseas markets.

And while the next few years are likely to be challenging, Aguilar notes the sector has a bright future. That’s largely due to the fact automation and robotics firms are tough to supplant because installing these processes are expensive, but necessary for many companies.

"So once it’s in, the equipment is there for two decades at least."

That gives robotics and automation providers steady revenues while at the same time they sell high-margin, replacement parts to keep the systems going, Aguilar adds.

"Because these processes are mission critical, with the risk of failure so high,… the long-term demand and, in turn, revenues are very, very sticky."