Automation and robotics: the next industrial revolution

robotThe slow pace of change in Japan and the meagre improvements made so far have been a difficult pill to swallow for Abenomics supporters. On top of the lack of reform, there is the ageing population, a deflationary environment and negative interest rates to contend with.

Unfortunately, it is far too easy to get stuck on the top-down negativities when investing in Japan and lose sight of the real investment opportunities on the ground. We have been mindful of this and, while we share the market’s concerns at the macro level, we believe that there are numerous gems to be found in Japan.

A recent trip to the country reinforced our long-held view: that Japan is changing; but in its own way and at its own pace. For example, 80 per cent of the companies listed on Tokyo’s stock exchange, the Topix, now have at least two independent directors, up from 30 per cent in 2012. This is a positive step in the right direction, though there is still some way to go.

Alongside these positive manoeuvres and amid acute labour shortages, we believe the deflationary environment in Japan could be coming to an end. While recent unemployment figures stood at 2.3 per cent – the lowest since 1994, the ratio of jobs to applicants rose to 1.8x – the highest in 25 years. One of the biggest conundrums in Japan’s economy has been its anaemic wage growth, despite the tightening labour market. We are however seeing this starting to change, with some evidence of upwards pricing pressure coming from companies such as door-to-door delivery service Yamato Holdings and Seven & I Holdings, a master franchisor of Seven Eleven convenience stores.

Initially, one might sense that corporate Japan has a lower priority on returns, or has a lack of motivation and alignment. True, Japanese companies are run not primarily for shareholders, but for all stakeholders, and the Japanese management style is based on a deep-rooted belief in corporate social responsibilities over profit maximisation.

An increasing number of Japanese firms have shifted the focus to quality driven growth and innovation, and though the changes seem incremental, we believe one should not underestimate the rationality behind incremental change, nor neglect the fact that such increments usually add up to more radical changes in the long run. Overall, the Japanese proclivity towards excellence and product obsession, combined with more than two trillion US dollars of cash sitting on companies’ balance sheets, present an appealing investment opportunity.

 The next industrial revolution

In order to tackle global issues of an ageing population and the increasing challenges in precision technology, we believe automation has become a secular movement, spilling over from traditional manufacturing industries such as automotive and electronics into general industries such as pharmaceutical, food and beverages and logistics. This has been boosted by initiatives such as Industrie 4.0 in Europe and the Made in China 2025 strategy more recently announced by the Chinese government.

Although automation in the manufacturing industries is nothing new in itself, the use of robots is now reaching a tipping point. It took almost 30 years for the global operational stock of industrial robots to grow to 1 million units in 2010; this number is expected to reach 2.6 million in 2019. Large-sized industrial robots and compact-sized robots are expected to grow at 10 per cent and 15-20 per cent compound annual growth rate respectively over the next three-to-five years, of which the leading Japanese automation companies are poised to benefit.

There are a number of driving forces behind this predicted growth; here we look at three of these prominent drivers.

The advent of ‘co-bots’

Collaborative robots, or ‘co-bots’, are compact-sized and mobile robots designed for collaborative work with human operators. Co-bots are an attractive option for smaller and medium-sized enterprises unwilling or unable to commit to the large outlay for traditional automation systems.

Smarter robots

Robots are becoming progressively smarter and more capable. By harnessing the growth in computer processing power, new-generation robots have been fitted with vision sensors and controllers that can ‘see’ their surroundings and make judgement calls that would otherwise require manual recalibration. Today, vision-guided robots account for less than 15 per cent of the total; this ratio is expected to grow significantly, particularly in nonautomotive industries where the product lifecycle is shorter and procedures are less standardised.

The ‘Industrial Internet of Things’

Smart technology and greater interconnectivity, coined as the ‘Industrial Internet of Things’, have led to new applications, one of which is the trace, track and control (TTC) system used in production processes. TTC pinpoints where in the process problems occur, thus contributing to greater efficiencies in supply chain management by allowing manufacturers to quickly identify and correct any issues. TTC systems in manufacturing facilities are currently only around 15 per cent of the total global stock and also expected to rise significantly in the coming few years.

As fundamental, long-term investors, now, could be the best time to utilise these potential drivers in Japan, particularly when the global investment landscape is experiencing a number of radical secular shifts. With this in mind, we wait patiently for market dips in order to add to our positions with a greater margin of safety.

Sophia Li is portfolio manager at First State Stewart Asia