July 7, 2023
Patrick A. Snell, CFA, CAIA
Chief Investment Officer
Automation & Robotics Theme
Companies across the globe are facing structural changes in their manufacturing and supply chains, driven by exogenous shocks (e.g., Covid pandemic), geopolitical pressures, evolving customer purchasing habits (e.g., e-commerce/omni-channel), shrinking product lifecycles, and tight labor markets. Given these conditions, we expect the adoption of automation and robotics will remain robust and extend across nearly every industry as these technologies provide a host of benefits, including reduced unit production and labor costs, improved inventory management, and enhanced customer service.
Automation & Robotics (A&R) includes hardware and software applications that perform tasks without human intervention. Powered by advanced technologies (e.g., machine vision, artificial intelligence), automation is advancing to the next level. According to Boston Consulting Group, global A&R sales are expected to climb from this year’s estimated ~$40B to $260B by 2030 (CAGR = ~30%). Over the next three years, robot installations are projected to grow at a 7% CAGR, from last year’s 570K to 690K (source: World Robotics).
A&R – Hardware & Software
Industrial robots are used in manufacturing and production settings and include stationary robotic arms on an assembly line, as well as programmable mobile robots that can move freely around a warehouse. Collaborative robots (Cobots) are smaller, cheaper, and more intuitive industrial robots that can be programmed by machine operators rather than engineers. Costing ~$20-30k vs. $100K+ for more comprehensive, fixed-installation systems, cobots appeal to small and medium-sized enterprises. The global cobot market is expected to average 30% annual growth through the remainder of this decade (source: GrandView Research).
Other Automation Technologies – A key technology underpinning industrial automation, machine vision collectively refers to the systems (i.e., scanners, mobile terminals, 3D dimensioning / laser profiling), sensors, and related software that allow operations to process the vision data into computer-understandable information. Machine vision systems allow multiple robots to execute synchronized processes. In manufacturing, 3D Printing allows companies to bypass long lead times and print small parts and components in a relatively short time frame. The 3D printing market is expected to reach $50B by 2030, up from $12B in 2020 (source: Lux Research).
Deployment Settings Proliferating
- Logistics & Warehouse – The global market for warehouse-based robots is expected to exceed $51B by 2030, a 23% CAGR (ABI Research). Micro fulfillment centers (MFC), automated storage and retrieval systems (ASRS), bin picking solutions, and autonomous mobile robots (AMR) are some of the leading solutions that are currently being deployed to accommodate e-commerce and direct-to-consumer business models. Utilizing bard code and radio-frequency identification (RFID) tags, automatic identification & data capture (AIDC) technologies enable inventory to be automatically identified and tracked. As a result, leading companies are marching toward operating fully automated dark warehouses. The poster child for automated warehouse operations is arguably Amazon. The company has recently introduced a series of advanced new robots: (a) a robotic arm, Sparrow, leverages machine learning to reliably pick ~65% of 100M+ inventory items, and (b) a mobile robot, Proteus, autonomously navigates warehouses and can distinguish between people and objects using AI technologies.
- Ag Machinery – Precision ag equipment includes targeted chemical sprayers and self-driving / camera-equipped turbines and tractors. Not surprisingly, farmer adoption has been impressive, as such equipment is lowering costs, improving crop yields and minimizing waste.
- Other Industries – Elsewhere, companies are increasingly turning to automation to address hard-to-fill roles at hotels (e.g., check-in kiosks) and restaurants (e.g., cooking equipment). In health care, surgical robots have been adopted by leading hospitals to improve patient outcomes and attract physicians.
A&R – Software Solutions
Low-Code & No-Code Software: The growing demand for apps and overall shortage of software developers has created a development backlog of 10+ years. As a result, time-saving low-code / no-code development software spend is expected to reach ~$32B by 2024, an increase of 19% from 2022 (source: Gartner). Microsoft recently introduced its own no-code platform which allows users to speak to a generative AI system and have the code instantly created.
Robotic Process Automation (RPA) Software: Leveraging machine learning, RPA software automates routine, high-volume tasks that are sensitive to human error. Automated activities commonly include opening pdf files attached to emails, scanning documents for specific information, and then entering the information in other company databases. The global RPA market is expected to reach ~$3.4B this year, up 18% from 2022 (source: Gartner).
Digital Twins & Design Simulation Software – Digital Twins are computer-generated replicas of manufacturing facilities or products. Allowing for greater precision and simulation, this software reduces production errors and inefficiencies.
A&R – Key Growth Drivers
Current Labor Market Dynamics – U.S.: A shortage of labor has placed upward pressure on wages, which in turn is driving enterprises to seek automation solutions. In May, the U.S. unemployment rate reached 3.7%, a slight improvement from April’s record low of 3.4%. The ratio of unemployed workers to total job openings also reached a low of 0.48, signaling an extremely tight labor market (source: Bureau of Labor Statistics). In May, wages rose 4.3% y/y (~40% above 2019 levels). Such conditions are leading to unionization efforts across several industries (i.e., airlines, e-commerce, restaurants), as well as increased investment in automation equipment. We believe automation is becoming a more significant component of corporate capital spending. The secular shift in automation investments is illustrated by the ratio of capex spend to GDP, which has expanded from ~25% to ~38% since 2000 (source: Federal Reserve).
Source: Federal Reserve Bank of St. Louis
Labor Market Dynamics – China: Accounting for ~29% of global manufacturing (source: United Nations), China has been the largest global purchaser of A&R equipment, accounting for ~65% of global capacity in 2022 (source: International Federation of Robotics). Faced with a shrinking supply of cheap labor, factory wages have doubled since 2007, making robotics more economical for assembly-line work (International Labor Organization). Given US / China trade tensions, China may come under even more pressure to invest in automation in order defend its manufacturing base’s competitive cost advantage.
Nearshoring and Reshoring: Increased geopolitical tensions (think US vs. China), government funding programs, and supply chain restructurings (post Covid-induced dislocations) are driving U.S. corporations to shift automated production closer to home. In fact, near-shoring manufacturing facilities to Mexico is expected to amount to $60B-$150B in investments (source: Brookings Institution). Government programs including 2021’s Infrastructure Investment and Jobs Act (IIJA), and last year’s CHIPS Act and Inflation Reduction Act (IRA) are expected to provide $2T+ in federal funding and incentives over the next decade (source: Deloitte).
Improving functional capabilities and cost benefits from automation solutions: Until recently, robots have been limited to preprogrammed and repetitive heavy-duty manufacturing jobs. Today, machine vision, artificial intelligence, and advanced “hands” take automation from factory to warehouse and effectively provide hand-eye coordination. Technologies that will undoubtedly drive future adoption of A&R include the following:
- Optics & Lasers – Lasers enable flexible, non-contact, high-speed ways to manage materials and produce increasingly complex products.
- Connected Automation – The low latency of private 5G networks allows instantaneous communication between the systems for efficient coordination and connectivity. 5G and Wi-Fi networks allow companies to monitor, program, and troubleshoot robots remotely.
- Embedded Artificial Intelligence – AI algorithms customized with domain-specific content are proliferating with the recent introduction of generative AI. Real-time insights from AI should increasingly enable A&R technologies to problem-solve and respond to new information, resulting in enhanced utility.
- AR/VR Headsets – Augmented reality (AR) superimposes computer-generated images over the real world, unlike virtual reality (VR), which completely immerses the viewer in an artificial world or metaverse. We expect these advanced headsets will increasingly integrate with industrial automation software.
A&R Investment Areas
In an effort to capitalize on the rapid adoption of automation & robotics, we are focused on identifying attractive investment opportunities in the following areas:
Automation & Robotic Equipment: Hardware and software systems deployed in warehouses and industrial environments.
Additive Manufacturing: 3D-printers for small-batch manufacturing.
Artificial Intelligence – Software and Cloud Platforms: Advanced software and machine learning that enhances the intelligence and functionality of automation systems.
Electronic Manufacturing Services: Operators of highly automated production / assembly facilities well positioned to meet the needs of global enterprises looking to near-shore / re-shore.
Simulation Software: Digital replication programs (i.e., digital twins) allowing for advanced stress testing and identification of inefficiencies prior to production.
Robotic Process Automation Software: Software that automates routine and repetitive digital tasks, resulting in reduced process time and errorsOver the next few years, we expect the rebound in global travel to approach and soon surpass pre-pandemic levels. Such a forecast suggests strong demand and related growth in order backlogs and deliveries for both commercial aircraft and business jets, along with continued growth for aftermarket parts & services.
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