June 25, 2015      

Teradyne’s (NYSE:TER) $285 million acquisition of collaborative robot company Universal Robots has drawn guesses from all corners of the robotics and financial markets as to the company’s intentions and long-term risk.

I spoke with Mark Jagiela, Teradyne’s CEO, the day after the acquisition became official, and a few things were made clear: Jagiela is operating under no delusions about competition in the market, the acquisition is a long-term investment intended to move Teradyne beyond the testing market, and we can expect Universal Robots’ share of the collaborative robot market to scale up quickly.

The acquisition was the result of a perfect storm for Teradyne. Rapid development in the collaborative robotics market was projected when Teradyne was evaluating new, high-growth technology platforms, fielding increasing requests from customers to automate the manual processes around its testing offerings, and seeking to diversify business by entering new markets.

Speed to market seems to have been a driving force behind Teradyne’s strategic decision to acquire, rather than develop its own robotics solution. Teradyne has secured internal robotics expertise and diversified its business, and it can now quickly capitalize on pent-up demand.

“The cacophony from our customers has grown, and we’ve gotten in now with the determination to participate directly in this business. We have discovered that not only in the test area, which is our expertise, are there opportunities, but [also] all up and down the assembly line there are adjacent opportunities to our test step,” Jagiela said.

Jagiela, who joined Teradyne 33 years ago, became CEO in 2014. With this acquisition, he boldly takes the $1.6 billion company in what he deems a “slightly different” direction: a high-growth technology area that opens Teradyne’s total addressable market (currently in the area of $3.5 billion to $4.5 billion) by at least an estimated $100 million expected to reach $1 billion by 2020. Jagiela based this estimate on Teradyne and Universal Robot’s internal projections of the current size of the collaborative robots market. Other sources have forecast higher growth, including Barclays (approx. $3 billion) and Myria Research (approx. $1.85 billion).

Compared with the $10 billion to $11 billion industrial automation market, the collaborative robots segment may seem small and fragmented, but it’s the double-digit growth opportunity presented by a still-nascent industry that Jagiela found appealing. The industrial automation industry is mature by comparison, with an average 7 percent annual growth over the past decade, according to Jeremie Capron, director of equity research at CLSA. In the case of collaborative robots, an internal market assessment predicts a CAGR of 50 percent over the next five years.

That vertical climb will also be volatile. Jagiela projects a lot of churn as more startups enter the market and established cobot companies are acquired.

“I think it will be a bit chaotic until the market sorts out in terms of segments, which might be at the turn of the decade, and eventually at that point you’ll see consolidation,” Jagiela said.

Teradyne has no intention of moving up the chain to compete with the big four — ABB, KUKA, FANUC, and Yaskawa — in the heavy industrial automation market. It’s clear, however, that more and more of these companies will gradually penetrate the collaborative robots market with their own commercial offerings. All have been involved in collaborative robot research for years, but expect the pressure to roll out new cobot products to increase.

“They [ABB, KUKA, FANUC and Yaskawa] know the cobot market, have a strong hold in the robotics industry and the financial strength to acquire technologies where they feel there is a gap,” said Capron in a recent interview with Robotics Business Review.

We are already seeing the results: relevant technology acquisitions (as in the case of ABB and Gomtec) and the fruits of R&D finally reaching customers (KUKA’s LWR iiwa).

As you see in the development of any new market, the collaborative robot space has reached a point where barrier to entry is now relatively low. A few model solutions have gained traction, and now lower-cost variations will enter the market to compete such as Smokie Robotics’ OUR Robots priced at around $12,000 to $15,000.

While today’s average cobot installation sits at about $50k (including the cost of deployment, ancillary software, and services), Remy Glaisner, Myria Research’s CEO, projects that within three to four years, the average cost will begin to drop by approximately five to 10 percent as the number of cobot providers increase and compete more on pricing rather than on innovation.

As the shake-out continues, Jagiela doesn’t perceive many direct threats from startups. He expects most to succeed by addressing submarkets and niches in the collaborative robot space.

As more applications arise, there will be a need for “low-payload, high-precision robots for tasks that require precision beyond human capabilities or robots with a certain amount of reach, payload, handling capability, and accuracy that can more directly mimic the performance of a human on the assembly line,” Jagiela said.

With this in mind as Teradyne set out to differentiate suppliers, Universal Robots stood out as occupying a “sweet spot” in terms of application flexibility that Jagiela expects to have broad appeal among Teradyne’s customer base. The balance of ease of deployment and programming against practical functionality and performance factors presented the best technology and pricing advantages in the market.

“We’ve done some test vehicles and demonstrations to prove to ourselves and our customers that this indeed will work,” Jagiela said. “The software Universal Robots has is very innovative and intuitive to use; the price point they’re at is very attractive and somewhat unique compared to where the other manufacturers are, so I think it’s all very positive at the moment.”

Teradyne is also counting on maintaining Universal Robot’s strong lead among competitors. The company currently holds nearly 60% market share. The opportunity to quickly and dramatically widen that lead gap with Teradyne’s sales channel strength was undoubtedly appealing for both parties.

And Universal Robots stands to earn another $65 million if they hit certain performance targets by 2018. “The performance targets include 2015 EBITDA and cumulative revenue targets that run through the end of 2018. The revenue targets equate to over a 50 percent annualized growth rate,” Jagiela said. Universal Robots’ revenue increased by a reported 70 percent from 2013, according to the company’s website.

Throughout our conversation, Jagiela confirmed a few near-term outcomes:

To date, most of Universal Robots’ roughly 4,000 units have sold to customers in Europe or North America despite the company having also set up distribution channels in Asia, but expect this to change quickly. “Over the next five to 10 years, China will prove to be the largest market for Universal Robots’ solutions,” Jagiela said. This is in line with the IFR’s projections, placing China as the world’s largest addressable market for robots.

Roughly 70 to 80 percent of Teradyne’s revenue currently comes from the Asian market, primarily China, and its large group of Asian customers is in the market for low-cost, flexible solutions.

“Even though people think of China as a low-cost labor market, there is a chronic labor shortage and a lot of turnover. Quality and productivity gets lost as you need to retrain people,” Jagiela said.

Teradyne’s current book of business, including high-profile companies like Samsung, Qualcomm, Intel, and IBM, offers the lowest-hanging fruit for rapidly expanding Teradyne’s profits through robot sales. These large, global accounts introduce Universal Robots, which up until now has served primarily small to medium-sized businesses, to a new, high-volume customer base.

“These companies may be in the market for thousands of robots themselves at one time,” Jagiela said.

While some may see the decision propelling Teradyne outside of its core business, Jagiela points to collaborative robotics as a natural extension of Teradyne’s offerings. As a result, the company can up-sell machine-tending solutions that complement its testers to customers faced with rapid product changeovers. Those changeovers often call for a completely different form factor and manufacturing flow every six months to a year. “Any solution that is too purpose-built doesn’t offer real ROI,” Jagiela noted.

“We’ve known about this latent need. Customers have asked us in the past if there is anything that we could recommend to automate the manual handling steps around our tester. And we haven’t had a good solution there,” Jagiela said. Now, instead of recommending a third-party integrator, Teradyne can offer an in-house solution. “It will expand us beyond tests for sure,” Jagiela said.

In China, by far the largest need for robots is to aid assembly operations, and Jagiela pointed to the opportunity to equip customers up and down the assembly line, perhaps gradually growing into owning a larger share of these companies’ supply chain operations.

Make no mistake, this move plants Teradyne squarely in the midst of a cross-selling opportunity, which opens up the company’s core business to manufacturing customers outside of the electronics industry. Jagiela mentioned pharmaceuticals and food processing in particular.

For at least the short term, Universal Robots will continue to grow in Denmark with a high-level of autonomy typical of Teradyne’s standard acquisition model.

“We believe that if you’re acquiring a company, you’re acquiring a DNA and a knowledge base that you’ve got to be careful not to disrupt,” Jagiela said. He cited the level of talent on the Universal Robots’ product team. Astute CEO Enrico Iversen and CTO Esben Ostergaard, whom he described as not only pragmatic but also visionary, will continue to lead Universal Robots into this next evolutionary phase. There is no plan to dismantle the company’s current distribution partnerships, although Teradyne’s direct sales channels will undoubtedly lead the way in terms of major installations.

Jagiela’s eyes remain on the horizon. He abides by a governing philosophy of remaining attune to adjacent technologies opening up new markets. We also discussed intelligent vision, gripping, and tactile ability, which he said are all technologies he continues to track for innovation, but I wouldn’t expect another major acquisition in the near term.

Although there have been no implementations yet and he declined to name customers that have already expressed interest in UR robots, Jagiela did say initial inquiries have made him very optimistic: “We have more opportunities than we know what to do with at the moment,” he said.

This move is one industry spectators can expect to see repeated as this high-growth area of robotics continues to summon competition and entice more multinationals that see robotics as a new business enabler.