After a tough begin to the yr, robotics and automation shares are displaying indicators of stabilization. The ROBO index is up 15% up to now within the remaining quarter of 2022.1 We just lately spoke with our strategic advisor Morten Paulsen, head of fairness analysis at CLSA based mostly in Tokyo, who has been advising buyers in Asian manufacturing facility automation firms for greater than 20 years. On this interview, we focus on why buyers ought to put together for the very best shopping for alternative for robotics since March 2020, the deflationary impression 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. Lots has modified since your final interview with us in 2019[VB1] . We’re now in a macro surroundings of rising rates of interest, geopolitical danger, the best inflation charges for the reason that ’70s, and a attainable world recession. How is all of this affecting the demand for robotics and automation?
Morten Paulsen, CLSA Head of Fairness Analysis: That’s numerous dialogue factors. Let’s begin with inflation and the position robotics and automation play.
Industrial automation is a deflationary power. 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 manner of curbing inflationary strain. I prefer to name robots “inflation fighters” for these causes.
Within the surroundings we’re in at the moment, I’d argue that the one deflationary power we now have left are robots and related applied sciences advancing labor effectivity.
Within the previous system, earlier than 2017 or so, nations just like the US might import deflation by means 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 may have border tariffs and better delivery 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 couple of months in the past. Is {that a} step in the appropriate course?
MP: Some will argue that subsidies solely create inflation as you pump extra money into the system, and I’ve numerous sympathy for that view. Nonetheless, a good portion of the Inflation Discount Act is aimed to stimulate the availability aspect of the financial system. Based on knowledge compiled by the AMT, greater than $88 billion is instantly supporting manufacturing within the US.
Serving to firms enhance labor effectivity by means of automation will permit them to higher compete in a extra inflationary surroundings 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 best way I see it, the Inflation Discount Act is way from good, however it’s a step in the appropriate course.
JC: Inflation can be inflicting rates of interest to go up. Aren’t larger rates of interest making it more durable for firms to put money into robotics?
MP: Based on textbook economics, rising rates of interest are destructive for capital expenditure. Nonetheless, if you happen to run a historic correlation evaluation between rates of interest and automation investments, you get a constructive correlation coefficient ― which means that robotic and automation investments are excessive when rates of interest are excessive.
JC: In order that’s the alternative of the textbooks. How would you clarify that?
MP: It implies that producers received’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 the moment, the labor market is extraordinarily tight, explaining why robotic demand is at file excessive ranges. All the pieces I heard on the IMTS present in Chicago again in September would recommend that labor scarcity is an actual difficulty and an actual impediment for bringing manufacturing again.
We’ve got talked about re-shoring for a few years now, however other than a couple of examples right here and there, it wasn’t a considerable motion. The online enhance of imports of manufactured items would dwarf the quantity of manufacturing that was introduced again. I imagine that could possibly be altering now. Producers need to localize manufacturing and shorten provide chains. That is additionally a gap for investments in “near-shoring” areas similar to Mexico.
JC: If producers are “re-shoring,” isn’t that destructive for China? China is, in any case, 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 vital benefits when it comes to scale and manufacturing information that might be arduous to exchange.
Nonetheless, I do suppose producers exterior of China are making use of the next danger premium on Chinese language-made parts. Over the following decade, I do imagine {that a} larger proportion of the incremental manufacturing capability might be added exterior of China.
JC: Again in 2007 or 2008, you printed a landmark report known as “Automating Asia,” the place you appropriately predicted that Asia would change into a significant driver for world automation over the following decade. You sound much less upbeat about Asian automation at the moment, am I proper about that?
MP: Nicely, quite a bit 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 should always count on progress charges to decelerate.
That stated, identical to the USA, China is dealing with a labor scarcity. Beginning charges in China dropped dramatically within the ’80s as a result of 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 larger labor price and direct labor scarcity. China is trying to robots as the answer to their issues.
Past China, I nonetheless suppose Asia will stay a progress driver because the area affords numerous alternatives to extend the extent of automation in manufacturing. We’ve got massive 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 count on when it comes to progress charges for automation globally and in China going ahead?
MP: Financial progress is slowing down. I imagine the April-June quarter marked the cyclical peak for world 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. Nonetheless, within the second half of 2021, the nation confronted numerous headwinds. It began with the crackdown on massive tech firms, then we had issues within the development trade 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 speculated to be a restoration yr, 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 shouldn’t be good. Individuals are frightened that lockdowns might occur once more, and that’s having a destructive impression on consumption.
I see combined traits relying on finish markets. On the constructive aspect, the automotive trade recovered quick, and the trade is investing closely in EVs and electrification. On the destructive aspect, we’re not seeing a lot funding occurring in smartphones, PCs, and many others. 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 enticing to supply in Japan?
MP: Japan has an affordable yen, a world-class industrial automation sector, and a gifted workforce. It’s arduous 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 increase in Japan, however I feel that might change.
It’s arduous to be upbeat on Europe in the meanwhile given the vitality scenario and the impression that might have on consumption and manufacturing. Nonetheless, 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 stated 2020 could be a restoration yr for robotics and automation demand, and also you additionally stated 2019 could be the very best time to purchase. In hindsight, these predictions had been pretty good. The ROBO index is up 15% up to now within the remaining quarter of 2022. What’s the subsequent shopping for alternative for automation?
MP: Again in 2019, I wasn’t anticipating a world pandemic to hit us in 2020, so I can’t say every little thing went as deliberate. At the moment, markets are underneath numerous stress given geopolitical uncertainty, rising rates of interest, and cyclical contraction.
The world might look totally 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 very best shopping for alternative for robotics and automation since March 2020. As soon as we enter the second half of 2023, I’d count on quite a few key main macro-economic indicators to stabilize or backside out. That might result in a fast turnaround in sentiment, so in my view, buyers have a transparent six-month window to get again into the sector at a low value.
1 Knowledge As of 11/29/22
