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The Deflationary Nature of Automation Is Creating Alternative for Buyers in Robotics


After a tough begin to the 12 months, robotics and automation shares are displaying indicators of stabilization. The ROBO index is up 15% to date within the closing quarter of 2022.1 We lately spoke with our strategic advisor Morten Paulsen, head of fairness analysis at CLSA primarily based in Tokyo, who has been advising traders in Asian manufacturing unit automation firms for greater than 20 years. On this interview, we focus on why traders ought to put together for the most effective shopping for alternative for robotics since March 2020, the deflationary affect of automation expertise, and the way Asia is more likely to proceed to play a significant position within the house.

 


 

Jeremie Capron, ROBO World Director of Analysis: I want to begin this dialogue with some big-picture questions. Loads has modified since your final interview with us in 2019[VB1] . We’re now in a macro atmosphere of rising rates of interest, geopolitical danger, the best inflation charges for the reason that ’70s, and a doable international recession. How is all of this affecting the demand for robotics and automation?

 

Morten Paulsen, CLSA Head of Fairness Analysis: That’s a number of dialogue factors. Let’s begin with inflation and the position robotics and automation play.

Industrial automation is a deflationary pressure. Robots and automation gear allow producers to decrease marginal unit prices. Robots don’t put upward strain on labor prices both, and that’s one other method of curbing inflationary strain. I prefer to name robots “inflation fighters” for these causes. 

Within the atmosphere we’re in right this moment, I’d argue that the one deflationary pressure we’ve got left are robots and related applied sciences advancing labor effectivity. 

Within the outdated system, earlier than 2017 or so, nations just like the US might import deflation by way of commerce with low-cost producers like China. That system is now damaged. Manufacturing prices in China are going up. On prime of that, you might have border tariffs and better transport and logistics prices. The US and Europe at the moment are importing inflation, not deflation. Demographics and a shrinking workforce are additionally fueling inflation. 

 

JC: The US launched the Inflation Discount Act a number of months in the past. Is {that a} step in the best path? 

 

MP: Some will argue that subsidies solely create inflation as you pump more cash into the system, and I’ve a number of sympathy for that view. Nevertheless, a good portion of the Inflation Discount Act is aimed to stimulate the availability facet of the financial system. Based on knowledge compiled by the AMT, greater than $88 billion is immediately supporting manufacturing within the US. 

Serving to firms enhance labor effectivity by way of automation will enable them to higher compete in a extra inflationary atmosphere and will convey costs down and jobs again on the similar time.  

Provide-side insurance policies aimed to stimulate investments in effectivity are part of the answer. The way in which I see it, the Inflation Discount Act is way from excellent, however it’s a step in the best path.

 

JC: Inflation can be inflicting rates of interest to go up. Aren’t greater rates of interest making it more durable for firms to put money into robotics?

 

MP: Based on textbook economics, rising rates of interest are unfavorable for capital expenditure. Nevertheless, in case you run a historic correlation evaluation between rates of interest and automation investments, you get a optimistic correlation coefficient ― that means that robotic and automation investments are excessive when rates of interest are excessive. 

 

JC: In order that’s the other of the textbooks. How would you clarify that?

 

MP: It implies that producers gained’t rush out to purchase gear simply because rates of interest are low. Demand for automation gear is extra tied to capability utilization ratios and tightness within the labor market. 

At present, the labor market is extraordinarily tight, explaining why robotic demand is at file excessive ranges. Every little thing I heard on the IMTS present in Chicago again in September would recommend that labor scarcity is an actual challenge and an actual impediment for bringing manufacturing again.

We’ve talked about re-shoring for a few years now, however aside from a number of examples right here and there, it wasn’t a considerable motion. The web enhance of imports of manufactured items would dwarf the quantity of manufacturing that was introduced again. I consider that could possibly be altering now. Producers wish to localize manufacturing and shorten provide chains. That is additionally a gap for investments in “near-shoring” places similar to Mexico.

 

JC: If producers are “re-shoring,” isn’t that unfavorable for China? China is, in spite of everything, the world’s largest marketplace for automation gear. 

 

MP: I don’t suppose the world will cease shopping for Chinese language manufactured items. The nation has important benefits when it comes to scale and manufacturing information that will probably be laborious to interchange. 

Nevertheless, I do suppose producers outdoors of China are making use of a better danger premium on Chinese language-made elements. Over the following decade, I do consider {that a} greater share of the incremental manufacturing capability will probably be added outdoors of China. 

 

JC: Again in 2007 or 2008, you revealed a landmark report known as “Automating Asia,” the place you accurately predicted that Asia would change into a significant driver for international automation over the following decade. You sound much less upbeat about Asian automation right this moment, am I proper about that?

 

MP: Effectively, so much has modified since 2008. China’s robotic density in manufacturing is now pretty near that of the US and Western Europe. Because the market matures, we must always anticipate progress charges to decelerate. 

That mentioned, identical to the US, China is going through a labor scarcity. Beginning charges in China dropped dramatically within the ’80s because of the one little one coverage, and that’s now leading to a pointy drop in labor entry and labor participation. That’s once more resulting in greater labor price and direct labor scarcity. China is seeking to robots as the answer to their issues.

Past China, I nonetheless suppose Asia will stay a progress driver because the area affords a number of alternatives to extend the extent of automation in manufacturing. We’ve large nations like India the place the shift to automated manufacturing is simply beginning. I additionally see Southeast Asia as a beneficiary of firms shifting capability out of China. 

 

JC: What do you anticipate when it comes to progress charges for automation globally and in China going ahead?

 

MP: Financial progress is slowing down. I consider the April-June quarter marked the cyclical peak for international equipment orders. China peaked out 12 months earlier than the remainder, extra particularly within the April-June quarter of 2021. 

China was the primary market to get well after Covid, so an earlier peak could possibly be anticipated. Nevertheless, within the second half of 2021, the nation confronted a number of headwinds. It began with the crackdown on large tech firms, then we had issues within the building business across the Evergrande disaster. That was once more adopted by energy shortages and rolling blackouts. For China, 2021 was fully a narrative of two halves. 2022 was imagined to be a restoration 12 months, however Covid lockdowns in Shanghai and different cities put an finish to that anticipated restoration.  

I assumed China would have a stronger restoration within the second half of 2022 popping out of lockdowns, however that didn’t occur. The temper on the bottom isn’t good. Persons are fearful that lockdowns might occur once more, and that’s having a unfavorable affect on consumption. 

I see combined developments relying on finish markets. On the optimistic facet, the automotive business recovered quick, and the business is investing closely in EVs and electrification. On the unfavorable facet, we’re not seeing a lot funding happening in smartphones, PCs, and so on. in the meanwhile. Chinese language exporters are additionally nervous about weaker finish markets.

 

JC: And what about Japan? Is the weaker yen making it extra engaging to provide in Japan?

 

MP: Japan has an affordable yen, a world-class industrial automation sector, and a gifted workforce. It’s laborious for me to see why the nation wouldn’t be a extremely aggressive manufacturing nation. To this point, the weaker yen hasn’t led to a lot of a capex spending growth in Japan, however I feel that might change. 

It’s laborious to be upbeat on Europe in the meanwhile given the power state of affairs and the affect that might have on consumption and manufacturing. Nevertheless, I feel Japan together with North America could possibly be one of many extra promising markets over the following 12 months.

 

JC: In our earlier interview again in March 2019, you mentioned 2020 could be a restoration 12 months for robotics and automation demand, and also you additionally mentioned 2019 could be the most effective time to purchase. In hindsight, these predictions have been pretty good. The ROBO index is up 15% to date within the closing quarter of 2022. What’s the subsequent shopping for alternative for automation?

 

MP: Again in 2019, I wasn’t anticipating a worldwide pandemic to hit us in 2020, so I can’t say every little thing went as deliberate. At present, markets are beneath a number of stress given geopolitical uncertainty, rising rates of interest, and cyclical contraction. 

The world could look completely different, however the attractiveness of automation is arguably even higher than what it was within the earlier cycle. 

I do suppose we’re approaching the most effective shopping for alternative for robotics and automation since March 2020. As soon as we enter the second half of 2023, I’d anticipate various key main macro-economic indicators to stabilize or backside out. That would result in a fast turnaround in sentiment, so for my part, traders have a transparent six-month window to get again into the sector at a low worth.

 

 

 

 

1 Knowledge As of 11/29/22



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