DESPITE the tech sell-off seen this year, we reiterate that the robotics and artificial intelligence (AI) industry remains firmly supported by ongoing labour and productivity trends –- both short-term and long-term.
Robots could be a cost killer across many industries, as it alleviates structural labour shortages and rising labour costs, which have arisen due to ongoing demographic trends but have also accelerated as a result of the pandemic.
Robots can also be a solution to the low-productivity problem affecting the entire world, especially in industries which are physically demanding, involve repetitive tasks, or are dangerous.
The Global X Robotics & AI ETF (NASDAQ: BOTZ) has not been spared from this onslaught with a 43 per cent decline year-to-date (YTD), though this was slightly better than the global tech sector as a whole (gauged by the Alps O’Shares Global Internet Giants ETF) which fell 53 per cent YTD.
In this article, we explore the favourable tailwinds supporting the robotics industry.
With the dramatic sell-off thus far, valuations have become more attractive considering the long-term growth potential of this industry, and we believe investors should consider an investment into this industry through the Global X Robotics & AI ETF.
Robotics could be a cost killer across many industries
The pandemic has given birth to a series of labour shortages, sprouting from manufacturing (such as durable goods) to services industries (e.g. professional services and finance).
This has contributed to the record-low unemployment rates in 2022 across major economies like the US, which fuelled a climb in labour costs this year.
While rising labour costs might be painful for businesses in the interim, it has accelerated the implementation of robotics, which we believe to be a key beneficiary in this post-Covid world.
This large increase in labour costs has been most apparent in developing markets like China, where manufacturing wages have climbed over 400 per cent from 2006 to 2021.
We also see a smaller but still marked increase in manufacturing wages over the same period in developed markets like the US and Europe.
Conversely, while wages have generally increased across the globe, industrial robotics costs have largely declined with the advancement of technology.
As a result, industrial robotics has become increasingly cost-efficient as compared to human labour, and from a cost-minimising perspective, we expect this to drive robotics demand for manufacturing companies.
Already, we see rising adoption of robotics in warehouses across the world, where intense human labour is required.
For instance, JD.com opened an almost-fully-automated warehouse in Shanghai in 2018 while Amazon also recently unveiled its new Proteus robot in June 2022.
Apart from short-term pandemic factors, we are also seeing a shortage of labour across many key markets on a long-term basis.
Based on UN forecasts, key markets across Asia and Europe (but not the US) are expected to see their total working-age population decline by the 2050s, while ageing populations (especially in Japan) should further reduce the amount of available labour in these countries.
Underpinned by these trends, we foresee continued adoption of robotics in the long term as companies seek to mitigate the effects of a shrinking labour force as they have been in recent years.
A solution to the low-productivity problem witnessed post-GFC
In the early-2000s, the internet boom was a key catalyst for productivity gains. However, productivity growth has stalled since the Great Financial Crisis (GFC), with the World Bank estimating that global productivity remains one per cent below pre-GFC levels (as of 2021).
In our view, robotics is the answer to the next phase of the productivity boom as companies pursue the goal of lowering production cost per unit and/ or production per unit cost, many would be incentivised to ramp up the adoption of robotics.
A US Department of Commerce report has estimated that a one per cent increase in robot density is correlated with a 0.8 per cent increase in productivity across all industries, with an up to 5.1 per cent increase in productivity observed for industries slower to adopt robots thus far.
Combined with the evidence of the falling cost of robotics (highlighted in the previous section), we are seeing a robust trend where robotics offer rising productivity at declining costs.
This is a stark comparison to human labour, where productivity growth has been lacklustre while wages (cost of human labour) are facing upwards pressure.
As a result, we believe this observation reaffirms our view that more companies will be compelled to adopt robotics, including those without traditional robot usage.
There are already multiple industries that prove robots are more efficient and productive as compared to human labour.
These examples include (highlighted in our previous article) industries which are physically demanding (such as lifting heavy boxes in warehouses), involve repetitive tasks (such as painting a car), and are high-risk or dangerous (such as laser cutting).
Hence, it is unsurprising that robot adoption continues to remain robust in industries with tasks falling in the three categories above, such as electronics, autos, and metals/machinery.
Weakening macro backdrop and rising rates are the main risks
In our view, a global recession next year raises the risk of a fall in demand for robots in the near term, as falling corporate profits prompt a pause in capital expenditure.
However, this may be partially offset by reshoring tailwinds. The cost benefits of robotics are apparent (discussed previously), and the presence of increased government support (such as NextGenerationEU in Europe and Five Year Plan in China) may provide the additional impetus for companies to continue investing in robotics even after the post-pandemic boom.
As such, the IFR estimates that robotics demand will continue growing on the back of still-full order books, albeit at a slower pace compared to the post-Covid boom.
We also caution that valuations could remain under pressure if the Fed continues hiking rates aggressively.
However, we also note that valuations for this ETF have already compressed in the year-to-date, even after incorporating an earnings downgrade (discussed in the next section).