After a troublesome begin to the 12 months, robotics and automation shares are displaying indicators of stabilization. The ROBO index is up 15% to this point within the ultimate quarter of 2022.1 We not too long ago spoke with our strategic advisor Morten Paulsen, head of fairness analysis at CLSA based mostly in Tokyo, who has been advising traders in Asian manufacturing unit automation corporations for greater than 20 years. On this interview, we focus on why traders ought to put together for the perfect shopping for alternative for robotics since March 2020, the deflationary impression of automation know-how, and the way Asia is more likely to proceed to play a serious function within the area.
Jeremie Capron, ROBO World Director of Analysis: I want to begin this dialogue with some big-picture questions. Rather a lot has modified since your final interview with us in 2019[VB1] . We’re now in a macro setting of rising rates of interest, geopolitical danger, the best inflation charges for the reason that ’70s, and a doable world recession. How is all of this affecting the demand for robotics and automation?
Morten Paulsen, CLSA Head of Fairness Analysis: That’s plenty of dialogue factors. Let’s begin with inflation and the function robotics and automation play.
Industrial automation is a deflationary power. Robots and automation tools allow producers to decrease marginal unit prices. Robots don’t put upward strain on labor prices both, and that’s one other approach of curbing inflationary strain. I wish to name robots “inflation fighters” for these causes.
Within the setting we’re in right this moment, I’d argue that the one deflationary power we have now left are robots and related applied sciences advancing labor effectivity.
Within the previous system, earlier than 2017 or so, international locations just like the US might import deflation via commerce with low-cost producers like China. That system is now damaged. Manufacturing prices in China are going up. On high of that, you’ve got border tariffs and better transport and logistics prices. The US and Europe are actually 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 proper course?
MP: Some will argue that subsidies solely create inflation as you pump more cash into the system, and I’ve plenty of sympathy for that view. Nonetheless, a good portion of the Inflation Discount Act is aimed to stimulate the availability aspect of the financial system. In keeping with information compiled by the AMT, greater than $88 billion is instantly supporting manufacturing within the US.
Serving to corporations enhance labor effectivity via automation will enable them to raised compete in a extra inflationary setting and will carry costs down and jobs again on the identical 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 excellent, however it’s a step in the proper course.
JC: Inflation can also be inflicting rates of interest to go up. Aren’t increased rates of interest making it more durable for corporations to put money into robotics?
MP: In keeping with textbook economics, rising rates of interest are detrimental for capital expenditure. Nonetheless, in the event you run a historic correlation evaluation between rates of interest and automation investments, you get a optimistic 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 signifies that producers gained’t rush out to purchase tools simply because rates of interest are low. Demand for automation tools 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 document excessive ranges. Every thing 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 have now 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 improve of imports of manufactured items would dwarf the quantity of manufacturing that was introduced again. I imagine that may very well be altering now. Producers wish to localize manufacturing and shorten provide chains. That is additionally a gap for investments in “near-shoring” areas akin to Mexico.
JC: If producers are “re-shoring,” isn’t that detrimental for China? China is, in any case, the world’s largest marketplace for automation tools.
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 data that shall be laborious to switch.
Nonetheless, I do suppose producers outdoors of China are making use of the next danger premium on Chinese language-made parts. Over the subsequent decade, I do imagine {that a} increased share of the incremental manufacturing capability shall be added outdoors of China.
JC: Again in 2007 or 2008, you revealed a landmark report known as “Automating Asia,” the place you appropriately predicted that Asia would turn out to be a serious driver for world automation over the subsequent decade. You sound much less upbeat about Asian automation right this moment, am I proper about that?
MP: Effectively, rather a lot 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 count on development charges to decelerate.
That mentioned, similar to the US, China is going through 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 increased labor value and direct labor scarcity. China is seeking to robots as the answer to their issues.
Past China, I nonetheless suppose Asia will stay a development driver because the area provides plenty of alternatives to extend the extent of automation in manufacturing. We have now massive international locations like India the place the shift to automated manufacturing is simply beginning. I additionally see Southeast Asia as a beneficiary of corporations shifting capability out of China.
JC: What do you count on when it comes to development charges for automation globally and in China going ahead?
MP: Financial development 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 remaining, extra particularly within the April-June quarter of 2021.
China was the primary market to recuperate after Covid, so an earlier peak may very well be anticipated. Nonetheless, within the second half of 2021, the nation confronted plenty of headwinds. It began with the crackdown on massive tech corporations, then we had issues within the development business across the Evergrande disaster. That was once more adopted by energy shortages and rolling blackouts. For China, 2021 was utterly a narrative of two halves. 2022 was speculated to be a restoration 12 months, however Covid lockdowns in Shanghai and different cities put an finish to that anticipated restoration.
I believed 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 is just not good. Individuals are nervous that lockdowns might occur once more, and that’s having a detrimental impression on consumption.
I see combined tendencies relying on finish markets. On the optimistic aspect, the automotive business recovered quick, and the business is investing closely in EVs and electrification. On the detrimental aspect, we’re not seeing a lot funding happening 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 engaging to provide in Japan?
MP: Japan has an inexpensive 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. Thus far, the weaker yen hasn’t led to a lot of a capex spending growth in Japan, however I believe that might change.
It’s laborious to be upbeat on Europe in the meanwhile given the vitality state of affairs and the impression that might have on consumption and manufacturing. Nonetheless, I believe Japan together with North America may very well be one of many extra promising markets over the subsequent 12 months.
JC: In our earlier interview again in March 2019, you mentioned 2020 can be a restoration 12 months for robotics and automation demand, and also you additionally mentioned 2019 can be the perfect time to purchase. In hindsight, these predictions had been pretty good. The ROBO index is up 15% to this point within the ultimate 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 the whole lot went as deliberate. At present, markets are beneath plenty of stress given geopolitical uncertainty, rising rates of interest, and cyclical contraction.
The world could 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 perfect shopping for alternative for robotics and automation since March 2020. As soon as we enter the second half of 2023, I’d count on plenty of 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 Information As of 11/29/22
