Robotics is one of the hottest areas for investors. According to a 2014 Global Venture Capital Confidence Survey released by consulting firm Deloitte & Touche and the National Venture Capital Association, robotics showed the biggest year-over-year jumps in global investor confidence with a 4 percent increase over 2013.

Jeremy Capron and Steve Crowe sit down to discuss one major sector for investors to consider: industrial robotics. Join them as they cover the most promising enabling technologies, key companies and small upstarts positioned for growth in the industrial robotics space.

Everyone is aware of the big four who seem to dominate the industrial robotics landscape: ABB, KUKA, Fanuc and Yaskawa. Still, if you’re looking for open opportunity in the space there is plenty of room for growth and more companies than you think are set to leverage the proliferation of robotics in manufacturing.

RBR’s Managing Editor, Steve Crowe, interviewed Jeremie Capron, Director of Equity Research at CLSA about how to spot trends, opportunities and risks in the manufacturing robotics market.

Podcast Transcript

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Steve: Hey everyone! Welcome to the latest edition of the RoboBriefing’s podcast, my name is Steve Crowe. We’ve got a great show on top today as we’ll be discussing investing in robotics. Joining us for today’s podcast is Jeremie Capron, Director and Research Analyst at CLSA Americas. He covers the industrial sector with a particular focus on Industrial Automation. Jeremie, thanks for being here, let’s get right into it. What criteria do you look for in a robotics manufacturer when evaluating a company as a good investment candidate? Are there telltale signs that alert you to an unwise investment in such a manufacturer? If so, what are they?

Jeremie: I think as an investor, the first thing that you look for is a large addressable market. When I attend robotics trade shows or industry events, I often see a lot of impressive technology coming up for startups but in many cases I don’t see a large market opportunity and that’s an issue. I think the robotics industry outside of the Big Boy industrial robot makers–Fanuc, ABB, Yaskawa and KUKA–it largely consists in small-size companies and some of the more innovative companies or products that you see coming up, in many cases, don’t have an obvious business opportunity, and I think that’s the major issue for the industry, for the smaller companies that are trying to come in to the space. Now, the large players in this space, they have a very large addressable market and that is industrial automation, so Fanuc, ABB, Yaskawa and KUKA have a big market with automotive companies and an increasingly large number of other vertical industries. The other thing that I look for when evaluating a company is a sustainable, competitive advantage which can be a technological advantage, it can be a cost advantage, and this is generally synonymous with sustainably high returns on capital which is what investors are looking for. One last comment here, I advise institutional investors in public companies and the universe of investible robotics companies is still fairly limited. You’ve got the ‘big four’ players, they are all public listed companies, they’re trading on foreign stock exchanges, and here I think that what we look for as investors is growth opportunity that is more structural than cyclical grow in nature, and that means is that we tend to like companies that are largely more diversified in terms of the end markets that they serve as opposed to being largely driven by the automotive sector, and we also tend to favor companies that have large exposure to Asia because of the high growth potential within markets like China where penetration of robotics who remains relatively low. iRobot, is a different beast, I would say it’s a very interesting company that’s been very innovative here in the US. I think, we as investors, I think it’s a hard stock to trade because, yes, it has a lot of technology but it also has a major issue for investors which is that its core product, its main product is, at the end of the day, a consumer product. iRobot was very successful in selling over 10 million units of its robotic vacuum cleaner but it’s laying in a state where you have very large competitors, resourceful competitors that could be significant threat to iRobot’s profitability if it doesn’t manage diversify outside of this vacuum cleaner market. I’m thinking of the likes of Samsung, Panasonic which all play in the vacuum cleaner market, and so when you sit back and look at iRobot, it is a robotics company, but from an investors’ perspective it’s consumer electronics maker, and that can put off a number of investors.

Steve: It’s seems to be a given that trying to squeeze significantly more cost out of production requires automation, which in turn, will require robots in order to maximize automation. This seems especially apt when talking about end-user needs in advanced manufacturing and supply chain logistics. Across the landscape of robotics manufactures, Jeremie, do you see any as being better than others in supplying these end-user needs, and which would make for a more meaningful investment, for example, Foxconn which supplies automation in the form of robots to Apple’s products?

Jeremie: Sure, yes. I think the short answer to this question is that it certainly looks like automation technology is at a turning point right now and this is an industry that has grown dramatically over the past couple of decades, but automation technology itself into have progress that in much slower pace. Robotics, generally, has made serious advances but its growth only represents a relatively small portion of the automation industry overall, probably, just about 10 percent of a $100 billion industry at this point. I think the much larger market of control systems has actually seen relatively limited technological change over this period, and you can see a lot of factories that have been running on seriously old technology. You know, 20 to 30-year old control systems are still prevalent in many process plants in the West. When we researched the industry, and we speak with executives at some of the major automation companies out there, I think there is keen sense that we are at a new flexion point with the explosive growth in mobile technology, in open platform, in computing power, in storage capacity, we’re seeing a proliferation of inexpensive sensors, and all this suggests that the industrial internet is becoming a reality. I think this is the biggest point in terms of where the automation industry is going. When we think about some of the major beneficiaries here, beyond robotics, we think the automation control system suppliers are particularly well-positioned, they are very much software-driven already. They are in a key position where they already understand the world of manufacturing inside-out, and they have a product that is the natural interface between production equipment and the world of data and data analytics. Companies like Rockwell Automation, ABB, Siemens with pretty broad portfolios of automation products and services should benefit. I think automation companies are only just starting offer a mobile access to some of their systems out there, be it from Smartphones and tablets, this is a big trend. I think the productivity gain are simply too large to ignore. I think this is set to accelerate dramatically going forward and, probably, one of the key issues that comes to mind here, one of the constraints will be cyber security.

Steve: Some say the era of tepid funding of robotics is ending and that 2013 revenues of 29 billion in robotics purchases could more than double by 2025. Jeremie, do you agree with that transition to high-growth over the next decade? If you do, where in the industrial robotics landscape would you see the most opportune investments: Asia, Europe, North America? Who among the publically traded industrial robot majors like ABB, KUKA, Fanuc and Yaskawa are well-positioned to take advantage of this growth forecast?

Jeremie: Yes, in general, I would say that I agree, they would transition into a high growth period. Robotics has already grown at a pretty fast pace, largely exceeding the growth rate that we saw for the broader factory automation industry, which has been at around of 7 percent per annum or so over the past decade. Robotics has grown in the double digits, we are now seeing annual shipments in excess of 150,000 units, and I think that trend is going to accelerate as we start to see major application outside of the automotive sector that has been the key driver of so-called robotics in recent years. If companies start looking beyond the automotive sector and start offering cheaper robots that are easier to use that can address needs for the general manufacturing industry or electronics or the food and beverage sectors among others, I think we’re going to continue to see an acceleration in the growth rate for the industry. In terms of who’s best positioned to grow, again, I think exposure to Asia is critical. This is because we’re starting from much lower penetration levels in markets like China where you have an install base of industrial robots that is below 30 robots per manufacturing worker, and that compares to numbers that are in the hundreds in Western markets like Germany, or even Japan, and South Korea. Naturally, I think there is a lot of runway for growth in China, and that means the likes of Fanuc and Yaskawa are especially well-positioned. ABB has a very fine robotics business, but ABB is a much bigger company overall, very diversified, and some of its none-robotics business have some structural issues there. KUKA is really interesting because KUKA is a pure-play. KUKA seems to be aligned with some of the right customers, customers that have been very successful, particularly within the auto markets. Western or German auto makers in particular. KUKA understands that it needs to diversify. They recently made significant acquisition, that of Swisslog, which will give it more exposure outside of automotive, and I think that’s good for them. Maybe one last comment on your question regarding the funding of the robotics industry, yes, it has been a great year in terms of venture capital and private equity funding for the industry but it’s also been a great year in terms of large mergers and acquisitions. I think you need to put this year in the context of a very strong year for venture capital, private equity and M&A overall, and this is not just limited to robotics. I think across markets, including the broader industrial market, we’re seeing a very strong year in terms of deals and funding.

Steve: Jeremie, do you see any smaller competitors as potential drivers of industrial robot sales? If you do, who among the smaller robot manufactures have an edge at taking significant market share, especially focusing on publicly traded companies like Adept?

Jeremie: Yes, we are starting to see some smaller competitors making headway with innovative products. I think the most obvious ones are Universal, which is based out of Denmark, and Rethink Robotics also comes to mind. These two companies are focused on so-called collaborative robots, and they’re trying to address in a very smart way, a potentially huge market outside of the traditional robotics applications in automotive. Much lower price points, easy to use products that can be easily programmed by what we could call more traditional manufacturing companies or smaller mom-and-pop shops here in the US. I think Universal and Rethink are remarkable in terms of their approach to the market in terms of the products that they bring to the market place. However, we also need to put things in prospective here, they only represent a few thousands of units, and that compares to an industrial robot market of more than 150, 000 units annually. Yes, they are making head way. Are they going to revolutionize the industry? I don’t think so. I think the‘big four’ really understand the transfer to collaborative robotics. I think they have in-house capability to address that market. I think they have a strong hold on the robotics industrial world and then they have the financial capabilities to acquire any technology where they feel there’s a gap. Interesting landscape, smaller competitors, increasing market share at this point, however, I don’t think that we’re going to see major disruption of the established players at this point.

Steve: Jeremie, final question for you here, and then we’ll let you go. I want to focus on components that enable robotic systems like vision systems and other sensors. Do you see these enabling technologies as strong potential investment candidates? There are companies like Cognex and Siemens that come to mind for vision systems, there are plenty of others. Are there any in particular that caught your attention as good investment candidates?

Jeremie: Yes, absolutely. I think you’re right. Enabling technologies are a key area of focus for us. It goes back to the pick-and-shovel business example along with the zoom in mining in many cases, buying the suppliers of equipments that’s needed for certain application proves to be the right move from an investment perspective. We’ve researched a number of enabling technologies at length. I think vision systems are one of those very exciting technologies that enable a broader use of robotics. There’s a number of companies that play in that space, Cognex which is based in Massachusetts, has been a dominant player here. KEYENCE in Japan also plays in that space. I think vision is increasingly becoming critical not only to robotics but also to factory automation in general, and vision, computer vision, helps you do quality inspection in mass manufacturing in a much more efficient way than human operators have been able to do for many years. I think the penetration rate of vision system in factories is still extremely low. We’re starting to see a more rapid adoption and that’s good for the likes of Cognex and KEYENCE. In terms of robotics, vision, obviously, enables a much broader use of robotics beyond automotive. The vast majority of the install base of industrial robots, you could qualify as Blind Robots that are programmed to repeat the same motion at high speed and high accuracy. However, once you start using vision technology and vision-guided robotics, you dramatically expand the range of potential applications. When you start to see a robot that can solve the bin picking problem, when you start to see a robot that can pick up random objects on the conveyor at a high speed, you can start envisioning applications in agriculture and robots that could pick fruits and also some other use cases. Vision is critical, yes. I also think automation control systems are critical. Here, it could provide a strong potential investment candidate, we talked about Rockwell Automation earlier, I think the automation for full equipment suppliers are in a fantastic position. They have a huge install based of controllers that essentially run production lines in factories, and these equipments generate a tremendous amount of data. Data which can be used to generate insights into production systems and these insights can be used to increase productivity. When we think about efficiency improvements in manufacturing, I think automation control system suppliers are front and center, and we’re starting to see convergence between the world of automation control system and the world of robotics. We’re starting to see equipment suppliers align and one of the best examples is Fanuc and Rockwell getting closer and starting a partnership a couple of years ago, and taking this partnership a step beyond just a few months ago. I think that’s still positive for the industry. I think the industrial laser providers are also providing good investment candidates. Industrial lasers I think have had increased penetration in factory automation be it the cutting or welding of metals, engraving and marking, and also potentially in the 3D printing of metal. We’re researching the industrial laser industries to a great amount of detail and like companies like IPG photonics and in the space.

Steve: Great stuff, Jeremie, I want to do this again soon. We could discuss for hours, but thanks for being here. Jeremie Capron, Director of Equity Research at CLSA Americas. To listen to other episodes of Robo-briefings, please visit roboticsbusinessreview.com. Plus, check out all our additional industry coverage available to RBR members including in-depth reports, research and expert interviews. If you’re not already a part of the RBR community, we encourage you to visit roboticsbusinessreview.com to become a member today. We’ll see you next time.

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