The rise of robots

The rise of robots

Robots could also be a solution to the problem of low productivity affecting the entire world, particularly in industries that are physically demanding, involve repetitive tasks, or are dangerous.

Despite the technology sell-off we’ve seen this year, we reiterate that the robotics and artificial intelligence (AI) industry remains strongly supported by continued employment and productivity trends – both in the short and long term.

Robots can be a cost killer in many industries, as they mitigate structural labor shortages and rising labor costs, which have been triggered by ongoing demographic trends but also accelerated as a result of the pandemic.

Robots could also be a solution to the problem of low productivity affecting the entire world, particularly in industries that are physically demanding, involve repetitive tasks, or are dangerous.

The Global X Robotics & AI ETF (NASDAQ: BOTZ) was not spared from this onslaught with a 43 percent year-to-date decline, though that was slightly better than the global tech sector as a whole (measured by Alps O’Shares). Global Internet Giants ETF) which is down 53 percent year-to-date.

In this article, we explore the favorable tailwinds that underpin the robotics industry.

With the massive sell-off to date, valuations are becoming more attractive given the long-term growth potential of this industry, and we think investors should consider investing in this industry with the Global X Robotics & AI ETF.

The BOTZ ETF has fallen in line with its tech ETF counterparts.

Industrial robot costs have fallen over time, in contrast to manufacturing wages around the world.

Robots can be a cost killer in many industries

The pandemic has given birth to a cascade of labor shortages, which has spread from manufacturing (such as durable goods) to service industries (such as professional services and finance).

This has contributed to record low unemployment rates in 2022 across major economies such as the United States, which has pushed up labor costs this year.

While rising labor costs may have been painful for businesses in the meantime, it has accelerated the implementation of robotics, which we believe is the main beneficiary in the post-Covid world.

This significant increase in labor costs has been most evident in developing markets such as China, where manufacturing wages have increased by more than 400 percent from 2006 to 2021.

We are also seeing a smaller but still significant increase in manufacturing wages over the same period in developed markets such as the US and Europe.

Conversely, while wages have generally increased around the world, costs of industrial robots have fallen considerably as technology has advanced.

As a result, industrial robots are becoming increasingly cost-effective compared to human labor, and from a cost reduction perspective, we expect this to lead to an increased demand for robots for manufacturing companies.

Already, we’re seeing increasing adoption of robots in warehouses around the world, as they are human-intensive.

For example, opened an almost fully automated warehouse in Shanghai in 2018 while Amazon recently unveiled its new Proteus robot in June 2022.

Aside from the short-term epidemiological factors, we are also seeing labor shortages in many key markets in the long-term.

Based on UN projections, major markets across Asia and Europe (but not the US) are expected to see a decline in the total working-age population by 2050, while the aging population (particularly in Japan) should reduce of the amount of labor available in these countries. Countries.

Based on these trends, we expect continued adoption of robots over the long term as companies seek to mitigate the effects of a shrinking workforce such as they have in recent years.

The size of the working-age population is gradually shrinking in major markets, with the exception of the United States.

Robot installations are highest in industries where there can be significant productivity benefits.

A solution to the problem of low productivity experienced post-GFC

In the early 2000s, the boom of the Internet was a major catalyst for productivity gains. However, productivity growth has stalled since the Great Financial Crisis (GFC), with the World Bank estimating that global productivity remains one percent below pre-GFC levels (as of 2021).

In our view, robotics is the answer to the next phase of the productivity boom as companies seek to lower their cost of production per unit and/or cost of production per unit, and many will be incentivized to ramp up adoption of robotics.

A report by the U.S. Department of Commerce estimated that a one percent increase in robotics intensity is associated with a 0.8 percent increase in productivity across all industries, with up to a 5.1 percent increase in productivity noted. Industries are slower to adopt robots so far.

Along with the evidence of robots falling in cost (highlighted in the previous section), we are seeing a strong trend whereby robots deliver increased productivity at reduced costs.

This is a stark comparison to human labor, where productivity growth has been lackluster while wages (the human labor cost) face upward pressure.

As a result, we believe this observation reaffirms our view that more companies will be forced to adopt bots, including those that do not use traditional bots.

There are already many industries proving that robots are more efficient and productive compared to human labor.

Such examples (highlighted in our previous article) include industries that are physically demanding (such as lifting heavy boxes in a warehouse), that involve repetitive tasks (such as painting a car), and that involve high or dangerous risk (such as laser cutting).

Thus, it is not surprising that robot adoption remains strong in industries with tasks that fall into the three categories above, such as electronics, automotive, and metals/machinery.

Bot installs are expected to continue to increase despite a weak overall backdrop.

Weak macro background and rising interest rates are the main risks

In our view, a global recession next year raises the risk of lower demand for robotics in the near term, as lower corporate earnings lead to a pause in capital spending.

However, this may be partially offset by redeployment of tailwinds. The cost benefits of robotics are clear (discussed earlier), and the presence of increased government support (such as NextGenerationEU in Europe and the five-year plan in China) may provide additional incentive for companies to continue investing in robotics even after the pandemic bubble.

As such, the IFR estimates that demand for robots will continue to grow on the back of still-full order books, albeit at a slower pace compared to the post-Covid boom.

We also caution that ratings could remain under pressure if the Fed continues aggressive rate hikes.

However, we also note that these ETF valuations have actually compressed in the year-to-date, even after incorporating the dividend cut (discussed in the next section).

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