The world’s big robotics firms are too dependent on the automotive sector and need to open up new markets according to the latest Morningstar Industrials Observer.
The report suggests that firms such as ABB and other top robotic suppliers need to develop applications for underpenetrated robotics markets.
It says that otherwise they risk the erosion over time of their “massive install basis” that has afforded them economies of scale and margin expansion.
The report notes that the top four suppliers control two thirds of the market, but depend on the automotive sector for as much as 50% of robotics revenue.
The report envisages a wide array of new entrants ‘popping up’ from university programs, specialist cobot providers (robots which work alongside and interact with humans such as robot arms) and private capital, targeting the unmined opportunities which the larger providers have neglected.
The report says that incumbents still benefit from replacement demand and estimates this at one third of total demand in future.
It says that incumbent firms are introducing new, but marginal, applications for their two core markets—autos and electronics—but they will need to fight new entrants in verticals targeted by smaller companies and cobot suppliers.
The report makes the following key observations
Robotics adoption is in its infancy
The market for industrial robotics will outpace global GDP in years to come as most sectors have barely begun to employ robotics in their production processes. Wages are a key input for the calculation of the payback period of a robotics installation. In high wage countries the payback period is obviously shorter, and in low wage countries like China, wage growth is shortening payback periods.
Moats in robotics are locked in upon installation
A robotic, original equipment manufacturer (OEM) establishes a moat upon installation of robotics. An industrial robot before installation is essentially a commodity product but also not very useful. The utility comes in the customization at installation. This integrates the robot into the customer’s operations, creating customer switching costs, the primary moat source, and long-term aftermarket revenue.
Incumbents will benefit from replacement fleet demand
Ongoing replacements of installed robotic fleets will support one third of demand in the future. High switching costs of established fleets positions incumbent OEMs as the primary beneficiaries.
Robotics demand from the automotive sector has probably peaked
New installation demand will increasingly depend on robotics adoption in underpenetrated end markets. The automotive sector, long the core end market, already uses robotics in the most easily automated steps of the production process.
Risk of falling asleep at the wheel
Incumbent robotic arms manufacturers risk missing out on future growth opportunities through focusing new robotic application development on their core end markets, automotive and electronics.
New entrant threats are coming fast on the horizon from university programs, startups, and leading suppliers in the small but fast-growing cobot space.
Existing rivalry is likely to heat up in China
Kuka, one of the incumbent Original Equipment Manufacturers (OEMS), is now owned by a Chinese firm, Midea, and gearing up production capacity in China, the world’s largest robotic market, with the aim of increasing market share. Switching costs will make this difficult on established robotic fleets, but we anticipate there will be plenty of new installation business up for grabs.
ABB offers investors an option on future robotics and industrial automation growth
ABB is the number two robotics supplier globally and the number one in China. More than half of the company’s revenue comes from industrial automation, including 9% from robotic arms and services. Combined, those businesses have the potential to boost group growth to GDP+. Including restructuring benefits, we expect ABB to realize 9% EPS growth annually through 2023.
The report says the size of the industrial robotics industry is just $50 billion thus about one fifth the size of the global mobile phone market with just seven robots today for every 10,000 workers.
However it adds: “Industrial robots have scarcely made a dent in the broader economy. However, narrowing the field to manufacturing jobs shows greater usage of robotics with 99 robots per 10,000 workers.
“Dig deeper and the robots are concentrated in the electronics and automotive segments, with the latter having around 1,300 and 2,400 robots per 10,000 auto workers in countries like Germany and South Korea, respectively.”
The report notes that the automotive sector gave birth to industrial robotics, and that it still accounts for 30% of new unit demand, even after decades of progressive robotic adoption into production processes.
It says the effect on the robotics industry has been volatility in unit growth and supplier margins, swinging with the cyclical ups and downs of auto demand. At the turn of the millennium, rising demand for electronics such as mobile handsets and semiconductors have added another avenue for growth. Morningstar notes these two cyclical end markets are responsible for more than half of demand.
“The incumbents seem to be stuck in the maw of the autos and electronics sectors’ immediate scale for robotics products, focusing new product development on existing verticals and disincentivized to spend significant development costs on applications to jumpstart robotics adoption in new verticals.”