The Rise of the Machines

Jack Ablin Market Commentary

The potential for robotics to have an impact on our lives over the next decade is breathtaking. Beginning as an integral element in basic manufacturing, its promise extends into advanced manufacturing and even the service sector. That’s why Cresset includes robotics as one of its thematic investments as part of our Aspirational (15 years and beyond) investment strategy. Growth in robotics has been strong and is expected to continue: the global market for robots is forecast to expand at a compound annual growth rate (CAGR) of around 18 percent by 2025, to reach just under $210 billion dollars.

The automotive industry is the largest user of robots, representing about one-third of industrial robots in production. Demand from the world’s automakers is expected to increase with the trend toward automation and as electric vehicles, with more electronic components, become increasingly popular. The electronics industry, including computers, communication devices, medical equipment, and precision & optical instruments, is a close second for robotics usage, representing slightly more than 30 per cent of current utilization, with a faster growth trajectory than the automotive sector. Future demand will be fueled by the need to automate production of batteries, chips and displays.

Looking ahead, medical and health facilities, relatively minor participants in the robotics sector globally, have benefitted from robots to transport supplies and medications throughout hospitals, and robotic devices assist surgeons in the performance of highly precise procedures, like delicate eye surgery. We expect increased uptake in robotics for medical procedures and health care delivery. Food service, which accounts for less than 10 per cent of robot utilization, is another industry ripe for robotic automation, due in large part to the “hands on” involvement in food preparation and recent hikes in the minimum wage. Already, robots are utilized in preparing salads and flipping burgers. Expect to see robots at work at local fast food chains over the next few years.

Robots are increasingly employed in jobs that are dirty, dangerous, repetitive and generally undesirable to human workers, representing another opportunity for expansion. Robots were sent out to clean up nuclear debris at Japan’s Fukushima reactor after its earthquake-induced meltdown in 2011. Useful “heavy lifting” by robots is literal: hoisting and moving things that would be dangerous or harmful for humans to do, particularly repeatedly. For example, Amazon employs robots in their fulfillment centers to lift and move heavy objects around their warehouses.

The promise of robotics and automation is a global phenomenon. In fact, robotics utilization largely occurs outside of the United States, thanks to America’s service-focused economy and the outsourcing of manufacturing. The US accounts for roughly 14 per cent of robot installations, according to a 2017 International Federation of Robotics report. Asia, particularly China, South Korea and Japan, account for most of the installed capacity. China, the world’s heaviest user of robotics, came close to matching the sales volume of Europe and the Americas combined in 2017.

We expect faster adoption in areas of the world, like South Korea, Japan, Canada and the US, where the automation cost advantages vs labor are the greatest. According to a recent report by the Boston Consulting Group, robotic automation has the potential to save 22 per cent in production costs vs a labor alternative in the US by 2025. We expect increased utilization of robots in manufacturing, assembly and warehousing in the United States as trends in reshoring continue.

Robotics is a key element in Cresset’s Aspirational theme because we believe it has a very promising future.  The automotive and basic manufacturing sectors were just the low-hanging fruit. The relative cost advantage over labor will continue thanks to several factors including labor shortages and rising compensation due to wage and benefit costs, most notably health care. We expect robotics will become a more important input to a much wider variety of industries and activities as both hardware and software evolve and robots become less expensive to purchase and to operate. This is already evident as producers develop intermediate-sized, general-purpose robots with increasingly flexible and sophisticated software. The potential for robotics applications is mind-boggling.

Please do not hesitate to reach out if you would like more information on how you could ride global robotic trends, or on any of Cresset’s other thematic investment strategies.