Robotics.. The Next Big Thing

This is very good read from the folks at Lord Abbett on Robotics.  We are very positive on the technology sector.  A long term shift is afoot that will impact our lives in ways still yet to be imagined:

The robotics revolution may be in its early stages, but unlike earlier technological advances, it is moving at a rapid clip that draws comparisons to the way the World Wide Web upended industries in just 20 years. Lord Abbett professionals discuss the investment implications.

For well over a century, robots¹ have figured in all kinds of theater, literature, and film. In some cases, they were benign, like the life-size dancing doll in the 1870 French ballet Coppélia, or WALL-E, the 2008 animated film about a futuristic, anthropomorphic waste collector. In most cases, however, robots were villains, like the marauding army of 300-foot-tall automata in the 1926 movie The Metal Giants, or the sentient computer HAL in Arthur C. Clarke’s first Space Odyssey novel in 1968. Fast-forward to the present, and technology has elevated robotics’ reach to epic proportions, not just in manufacturing, where automakers, chemical companies, and electronics firms have long automated dangerous tasks once performed by humans, but also in the aerospace and defense, health care, and consumer sectors.

While Google’s purchase of eight robotics companies in 2013 and Amazon’s demonstration of delivery drones have garnered tremendous publicity, the trend toward automation has accelerated all over the world. According to the International Federation of Robotics (IFR), sales of industrial robots² have soared since the global economic recovery began in 2009. (See Chart 1.) In 2012, sales to the automotive industry continued to increase. So did orders from the chemical, rubber and plastics, and food industries. And about 70% of the total robot sales went to Japan, China, the United States, South Korea, and Germany.

Chart 1. Robot Production Has Surged Since the Great Recession Began, and Is Expected to Surge between 2013 and 2016*
World annual supply of industrial robots, 2005–16Source: World Robotics, 2013. * Forecast.
Forecasts and projections are based on current market conditions and are subject to change without notice. Forecasts should not be considered a guarantee.

As for service robots,³ IFR says sales of robots for personal and domestic use⁴ showed the most cumulative growth, up 20% versus 2011, for a total of $1.2 billion, and even greater momentum is expected in the next several years. (See Chart 2.) Sales of professional robots (for defense, field, logistic, and medical purposes) rose by a relatively low 2% in 2012, but the dollar value amounted to $3.42 billion.

Chart 2. Sales of Personal and Domestic Service Robots Are Expected to Soar
Service robots for personal/domestic use, unit sales forecast, 2013–16* (actual 2011 and 2012)

Source: World Robotics, 2013. *Forecast.
Forecasts and projections are based on current market conditions and are subject to change without notice. Forecasts should not be considered a guarantee.

“Robotics is one of a few technologies that has the potential to have an impact that is as transformative as the Internet,” says the Robotics Virtual Organization (“Robotics-VO”), a consortium of major robotics manufacturers and academics sponsored by the National Science Foundation.⁵

Consider the extent to which robotics has diminished developing countries’ comparative advantage of cheap labor—a key factor in some major companies’ decision to move manufacturing operations from China to the United States. But that’s only one aspect of the robotics revolution. In a lengthy 2013 report, Robotics-VO examined the growing applications of robotics in services (home, power plants, bridges, logistics, security), health care (surgery, hospitals, home health care), defense (unmanned ground and aerial systems), and space (extended missions on faraway planets).

Investment Implications
“Robots are not just about speed and efficiency; they’re also about quality,” said Harold Sharon, Lord Abbett Partner, International Strategist. “Countries with the highest concentration of robots per employee have seen a large shift in their ability to compete efficiently in high-quality industrial areas.”

Sharon is hardly surprised that Japan has so many robots. In 1928, the nation’s first robot, “Gakutensoku” (Japanese for “learning from the laws of nature”), was designed and built by biologist Makoto Nishimura.⁶ Decades later, improved robotic technology helped Japanese automakers and electronics manufacturers face a number of competitive and economic challenges.

As Sharon put it, “From 1998 to 2012, Japan’s currency strengthened by 50%, hurting its competitiveness. The Japanese had to find a way to lower costs and gain efficiency  quickly, and robotics was clearly part of that equation. Now with the yen weakening, it’s Japan’s industrial competitors like Korea, Germany, the United States, and, to some extent, China that need to use robots to lower costs further.”

According to the IFR, China was the second-largest robot market in the world, following Japan. Although robot sales to China increased only slightly in 2012, to about 23,000 units, it is the most rapidly growing market in the world, the IFR said. Between 2005 and 2012, sales of industrial robots rose by about 25% on average per year.

“The yen’s weakening is having a significant effect on the pace of penetration for those countries,” Sharon added. “China only has 21 robots per 10,000 workers in manufacturing (versus about 400 in South Korea, 332 in Japan, and 273 in Germany), and as their labor-cost competitiveness fades, they need to do what Japan did over the last 15 years. Furthermore, given the adoption rates in the developed world, low-wage labor is much less of a competitive advantage than it was in the past. As we’ve seen in Japan, finding those companies that are early adopters of robots and that significantly move their productivity levels up is generally a good investment strategy. Unfortunately, it typically doesn’t help the companies’ financial ratios in the early years, as investment can be extensive and there is implementation risk. The mitigating factor is that the costs of robotics are far lower now, and the implementation learning curve is not as steep.”

No matter which country deploys the most robots, Todd Jacobson, Lord Abbett Partner, Associate Director of International Equity, found a good way to play the trend several years ago: a Japanese company that makes the speed-reduction gears used for industrial robots. Since the global financial crisis of 2008–09, global demand for industrial robots has been growing at a high rate relative to real global GDP⁷ growth, and this particular company has built a 60% market share supplying all the key global industrial robot manufacturers. Some research analysts expect that growth in 2014 will remain robust, although year-over-year growth rates are likely to be lower. Even so, the company could still get a boost from the booming solar energy industry, where robotics has facilitated large-scale manufacturing.

F. Thomas O’Halloran, Lord Abbett Partner & Director of Multi and Small Cap Growth, believes growth opportunities may reside in leading providers of advanced technology and training that will increase productivity, flexibility, and efficiency while lowering costs and making manufacturing competitive globally. These include the leading provider of fiber lasers used in cutting and welding applications and a producer of vision systems and surface inspection systems. In health care, minimally invasive surgery, whereby a doctor uses robotically controlled instruments, has become one of the fastest-growing segments of the industry. As for the consumer sector, O’Halloran also sees considerable growth potential in robots that perform household chores, such as vacuuming and floor and window washing.

“Robotic technology has played a significant role in the revival of American manufacturing by helping factories become more productive and competitive while protecting workers from job injuries and improving energy efficiency,” O’Halloran said. “It has allowed surgeons to perform operations with smaller incisions, less pain, fewer complications, and a faster return to normal activities. And it has made consumers’ lives more convenient and economical.”

While current technology has enabled an increasing number of pragmatic and affordable solutions, many experts believe we are still 10–15 years away from robots with full-scale, general autonomous functionality. Even so, one of the key factors driving continued innovation is an aging population. (See Chart 3.)

Chart 3. Aging Population Underscores the Push for Service Robots to Offset a Shrinking Workforce and Help Frail or Disabled Citizens Live Longer in Their Homes
Elderly (age 65 and over), as a percentage of the population, 2010–50*

Source: “Global Aging and the Future of Emerging Markets,” Center for Strategic & International Studies and Everest Capital, March 7, 2011. *Forecast.
Forecasts and projections are based on current market conditions and are subject to change without notice. Forecasts should not be considered guarantees.

As the 2013 Robotics VO report puts it, “The United States is on the threshold of a 20-year trend that will see a near doubling of the number of retired workers as a percentage of the current workforce—from just over two retirees for every 10 workers today to just over four retirees for every 10 workers in 2030. In Japan, the situation is even worse and has fueled a major national initiative to develop robotics technology needed to help care for their rapidly aging population.”

“Japan in particular has a large shortage of caregivers,” Sharon added, alluding to how the government health service had budgeted and implemented a program to hire two million caregivers but was able to hire only 1.4 million qualified caregivers. “If robotics in any way helps to offset the rising costs of health care, it would be a huge overall positive for the economy.”

Will Robots Destroy Jobs—or Create New Ones?
Do robots and other types of industrial automation destroy jobs? Or do they improve output and create other jobs elsewhere in the economy?

While jobless statistics paint a picture of worsening long-term structural unemployment, some manufacturers point to a chronic inability to fill positions for trained technicians able to work in state-of-the-art factories.

History shows that low-skill manufacturing jobs have been reduced by robotics and automation. But as Milton Ezrati, Lord Abbett Partner, Senior Economist and Market Strategist, put it, “They will increase demands for higher-skilled technical people in production. And this dichotomy again makes the case for training and education, in this case, more the former than the latter. Further, robotics, by increasing output at lower cost, should also increase job prospects in distribution, marketing, and design. By enabling business to customize product at a lower cost, it will also protect American jobs generally by making domestic industry more competitive.”

“Robots have the potential to bring manufacturing jobs back to the United States, to improve our quality of life, and to make sure our first responders and warfighters stay safe,” said Georgia Tech professor Henrik Christensen, who is also the coordinator of Robotics VO.⁸

With historical data showing that robotics and automation almost always increase output, a 2013 study by Metra Martech Ltd. of London predicted that more than two million jobs will be created globally within the next eight years by such technological advances.⁹

The study provides data illustrating that when automation displaces people in manufacturing, it almost always increases output, creates new markets, and generates the need for downstream jobs to get the product to the consumer.

According to the Metra Martech, with the exception of Japan, countries whose manufacturers have embraced the use of robots have seen greater manufacturing output and lower unemployment. Japan was an early adopter of robotics and for years had the most robots per manufacturing employee. In recent years, though, it has lost ground to China, South Korea, and the United States.

Now robotics is poised to expand into nontraditional industries such as food manufacturing, where companies are eager to increase productivity and lower worker injuries, and pharmaceuticals, where there is pressure to decrease costs and increase production accuracy, speed, and flexibility.

Meanwhile, science and industry continue to focus on robotic technology that can:

• help the health care sector control costs and empower workers;

• automate the acquisition of energy and monitor the environment;

• further automate the manufacture and movement of goods;

• advance driver assistance and collision avoidance systems;

• continue improving unmanned public transportation systems;

• expand border protection and search and rescue, as well as inspection and security of ports, bridges, highways, water and sewer systems, energy pipelines and facilities, and other critical infrastructure; and last, but not least,

• bolster ongoing educational initiatives to strengthen the teaching of science, technology, engineering, and math.

From an investment perspective, all these developments have the potential to drive a long-term bull market for the makers of robots and related systems, a sector currently dominated by developed-world companies. But they are bound to generate some controversy. As Pierre Fournier, geopolitical analyst with Montreal-based National Bank Financial, put it, “The combined impact of all these changes not only puts into sharp focus the potential of robots to significantly improve the world’s quality of life but also brings to the forefront the unavoidable debate countries will have over how wealth and work should be redistributed on a societal level.”¹⁰

—Reported by Steve Govoni

¹ The term “robot” was first used by the Czech writer Karel Capek in a 1921 play called R.U.R. (an abbreviation for “Rossum’s Universal Robots”).
² According to the International Federation of Robotics (IFR), an industrial robot is an automatically controlled, reprogrammable, multipurpose manipulator programmable in three or more axes, which may be either fixed in place or mobile for use in industrial automation applications.
³ A service robot is a robot that performs useful tasks for humans or equipment, excluding industrial automation application. A professional service robot is typically operated by a properly trained operator for a commercial task. Examples are cleaning robots, for public places, delivery robots, in offices or hospitals, fire-fighting robots, rehabilitation robots, and surgery robots in hospitals.
⁴ Personal service robots, on the other hand, may include a domestic servant robot, automated wheelchair, personal mobility assist robot, and pet exercising robot, among others.
⁵ “A Roadmap for U.S. Robotics—From Internet to Robotics (2013),” Robotics Virtual Organization, March 20, 2013.
⁶ “Japan’s First-Ever Robot, Version 2.0,” Daily Yomiuri Shimbun, May 15, 2008.
⁷ GDP is widely considered the best measure of the health of a country’s economy. It measures the monetary value of final goods and services-i.e., those purchased by the final user-produced in a country in a given period of time (say, a quarter or a year).
⁸ “Robots to Spur Economy, Improve Quality of Life, Keep Responders Safe,” Georgia Tech University, March 20, 2013.
⁹ “Positive Impact of Industrial Robots on Employment,” Metra Martech, February 2013.
¹⁰ Pierre Fournier and Angelo Katsoras, “How Robotics Will Reshape the Global Geopolitical and Economic Landscape,” National Bank Financial, June 25, 2013.