By Daniel McFetrich, Head of Global and International Equity Research at Schroders

Automation has long been a feature of the manufacturing sector, as companies seek to improve productivity and make high quality goods to a specific standard. But we think the level of automation is set for a sharp increase as innovation sparks a new smart manufacturing revolution.
In the short term, the Covid-19 pandemic has brought the need for automation into the spotlight, but we also see several structural reasons why automation is due to pick up.

1. Covid-19 pandemic and social distancing/worker availability

If companies needed persuading of the benefits of automation, the Covid-19 crisis has cemented the argument. Activity across multiple industries ground to a halt as the pandemic unfolded due to lockdown orders.

Even as activity re-starts, social distancing measures may limit the capacity of many factories. Higher levels of automation would therefore offer an obvious benefit in terms of productivity and reduced chance of future business interruption.

2. Growth of e-commerce

The seemingly unstoppable rise of e-commerce is another trend that has been given a boost by the pandemic, with more consumers switching to online shopping as physical shops closed. But this is a trend that had been on the rise anyway.
Even before Covid-19, it was the warehouse automation sector that had been seeing the fastest rise in automation adoption in recent years. As e-commerce penetration rises due to the pandemic, we believe this trend will accelerate.

3. Increased robotics innovation

Advances in robotics and artificial intelligence (AI) have created robots that can perform many more tasks than was previously the case. Improved embedded technology such as 3D vision systems means that robots can “see” where they are in space. This has led to the rise of “cobots” (collaborative robots) that can work safely alongside human employees and have a more advanced range of capabilities, mainly expanding into non repetitive tasks.
With a wider range of capabilities comes a wider set of applications. Automation has previously been strongly associated with the car manufacturing sector, but increasingly robots are being used in tech and other industries like food & beverage production. The robots can now move out from behind the cage, and perform more flexible manual processes, such as assembly and inspection tasks.

But we think the level of automation is set for a sharp increase as innovation sparks a new smart manufacturing revolution.

Innovations in communications also play a key role in automation adoption. Latency is a huge problem for robot installers; if it takes too long for an input to be received and processed, then robot use is necessarily that much more limited. 5G and new wireless communications networks mean latency issues can theoretically be solved and could also enable the introduction of cloud powered AI to the equation, to further drive new markets for robotics.
In addition, as the innovations scale up, economies of scale mean the cost of producing and purchasing such robots will fall. As a result, they are likely to become more widely used across a broader range of industries as the economics makes them that much more affordable.

4. Renewed focus on supply chain resilience

Again, the importance of robust and flexible supply chains is something that Covid-19 has brought into clearer focus, and this came after a turbulent 2019 when US/China geo-political tensions drove companies to rethink their supply chains.

Bringing supply chains back onshore, further regionalising supply chains, and dual sourcing (using two suppliers) are all now being considered by companies. The disruption caused by lockdowns happening in different geographies at different times led to realisations that supply chains are not resilient enough.
A recent study by Bank of America Merrill Lynch highlighted that 83% or more of sectors which depend on overseas supply chains are considering, or have implemented a plan to shift supply chains – with the ability to automate factories closer to their home markets a key enabler.

5. Demographics

A fifth structural consideration is demographics. The working age population in the top five manufacturing countries globally has started to shrink. This includes China. In the US, the median age of manufacturing workers is now more than two years older than the national average, and 25% of manufacturing workers are over 55 years old. This has resulted in the largest skills gaps on record for manufacturing companies according to a recent Richmond Fed survey.

How do we solve this issue? Robotics and automation is the obvious solution.

6. Rising focus on energy efficiency and sustainability

Recently, fiscal stimulus packages have been unveiled in developed markets to help turn around economies struggling with the pandemic. The overwhelming focus has been on sustainability and solutions to solve the climate change crisis as demand is re-stimulated.

We believe automation plays an important role in improving manufacturing productivity and therefore energy efficiency. For example, new innovations are helping reduce the need for human oversight on production lines, thus raising throughput, and lowering the amount of waste in production.

We can conclude then that there are numerous reasons why companies would turn towards greater automation of their activities. This view is also borne out by a proprietary survey carried out by our Data Insights Unit. Their survey showed that all types of companies were expecting their budget for industrial automation to rise in the next two to three years.

And rather than the manufacturing sector being the main driver of this, the survey found that warehousing and logistics companies are more likely to expect rising budgets, and therefore have more potential for growth in automation.

As investors, this is very interesting to us because it confirms that companies producing robots are not solely reliant on traditional automotive customers for growth. The demand is broadening to other areas of manufacturing, and moving out of the factory and into the supply chain and logistics network.
For all industries, automation can result in higher productivity, reduced labour costs and greater energy efficiency. Recent innovations means robots are now more nimble than ever, and have broader uses, meaning that automation demand is accelerating and becoming less cyclical.
Automation is just one area of the smart manufacturing investment theme. We also see great growth potential from advanced manufacturing hardware (like lasers), data and software analytics providers, advanced material suppliers, and domain experts, which are uniquely positioned in certain end markets to capture the value from these innovations.

Read more: How smart manufacturing could lead to an industrial renaissance

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