Assessing the Broad Robotics Landscape

AI has been garnering significant attention and investment. But robotics remains a more established industry with its own unique cycles. Most recently, the sector has seen its strongest performance in chip and battery manufacturing end-markets. As AI continues to advance, it is expected to drive efficiency gains and increase the adoption of robotics across a wide range of industries over the next decade. This development could potentially create new markets that far surpass the size of the current robotics ecosystem.

Despite the prospect of not only larger markets but also accelerated adoption on the horizon, forward guidance and valuations in the robotics industry remain conservative. The ROBO index, which serves as a benchmark for the robotics and automation space, saw through the most recent earnings season. That suggests the market has navigated through the worst of the slowdown and is now entering a new growth cycle.

The ROBO Global Robotics and Automation Index (ROBO) represents a global, diversified market-cap strategy. It has 42% allocated to large-cap companies, 43% to medium-cap companies, and 14% to small-cap companies. The index covers the robotics and automation space by focusing on companies that provide underlying and enabling technologies. It also focuses on those involved in key applications.

Last year saw a rare decline in robotic order shipments in the largest industrial robotics center – China. And the most recent Q1 earnings season saw a YoY weighted average decline of 14.4% in EPS and 2.15% in sales.

It is crucial to view any recent outperformance by strategies covering the robotics space with caution. Such outperformance may be largely attributed to the strategies holding megacaps that have some operations in the robotics or AI spaces without actually focusing primarily on those areas. In particular, Nvidia has been a standout performer due to its strong position in the GPU market and contributions to AI development. But its rise does not indicate a broad-based recovery in the robotics industry.

Of course, there are certain subsectors and companies that have been outperforming across the board. Those includes surgical robots provider Intuitive Surgical, marine logistics automation leader Cartogec, chip quality inspective and cobot provider Teradyne, and companies involved in electrification (and data center exposure) such as Yokogawa Electric and Schneider Electric. In fact, there hardly is an area of society that won’t benefit from increased robot utilization and adoption over the coming years.

Despite these challenges, we maintain our outlook for a recovery in the second half of this year, with both core and new markets contributing to the growth (which will be discussed further below).

 Several factors support our optimistic outlook for the robotics industry:

• Increasing adoption of automation: As companies across various sectors seek to improve efficiency, reduce costs, and enhance product quality, the demand for robotics and automation solutions is expected to rise.
• Advancements in artificial intelligence (AI): The integration of AI technology into robotics systems is expected to drive growth by enabling more sophisticated and intelligent automation, opening up new possibilities for applications across a wide range of industries.
• Expansion into new domains – closer to everyday life
• Smart homes and elderly support (home automation, monitoring, caregiving)
• Food industry (preparation, cooking, serving)
• Delivery and logistics (autonomous drones, self-driving vehicles)
• Healthcare (surgical assistance, rehabilitation, telemedicine)
• Agriculture (precision farming, crop monitoring, automated harvesting)
• Construction (prefabrication, site monitoring, heavy lifting, welding, painting)
• Increased Global Story: Global reshoring and new domains = more global adoption and investment, budget and high-tier options in personal and professional use

Unlike AI (an area we capture via our ROBO Global Artificial Intelligence Index (THNQ)), which is seeing massive, real-time ecosystem and infrastructure investment, robotics is an entirely different — and more established — animal with its own cycles. Most of the benefits of AI toward the robotics space so far have only been upticks in semiconductor fabrication (equipment), rather than downstream performance enhancements leading to increased adoption and new markets, which we anticipate occurring in the near term.

The ChatGPT moment for robotics is coming soon, but it hasn’t happened yet. Until then, the traditional markets maintain a grip on performance, and valuations remain close to long-term averages. There are many solid companies that faced a tough year with declines greater than 10% in sales year-over-year, such as in the agriculture subsector, where both John Bean Technologies and Deere saw declines coming off tough comps. For example, Deere had seen revenue grow 34% the prior year.

However, there are companies in ROBO benefiting from the semi-fab growth cycle, such as Teradyne. The strongest end-markets have been in chip and battery manufacturing plants (not necessarily EV). The bulk of that can be attributed to the computing and AI sectors, with Nvidia and Qualcomm at the forefront.

Conversely, companies within the actuation subsector, such as Hiwin, THK, and IPG Photonics, have faced ongoing pressure. Logistics automation, a winning subsector for multiple years, experienced a cooling-off period with mixed performance. Cargotec, a company in the category focused on maritime and port automations, saw a 26% increase. Toyota Industries Corp., one of the previous quarter’s top performers, declined by 9.5%. 3D printing has remained an underperformer, albeit at a very small weighting (2%) in the index, as end-markets have struggled.

Meanwhile, the manufacturing construction subsector’s spending in the USA is holding steady at all-time highs.

This is, in our view, a leading indicator of future robotics installations.

Robotics is often perceived through a dual lens. On one hand, it is a long-standing, almost mundane industry that has been quietly underpinning manufacturing and modern society for decades. It is a sector that has become so deeply ingrained in our lives that it’s easy to overlook its significance.

On the other hand, robotics is seen as a cutting-edge, exciting field that holds the promise of a future filled with advanced, intelligent machines. From this angle, it has the potential to transform our world in ways we have only dreamed of since the “Jetsons” first captured our imagination in 1962.

Despite the grand visions of robots integrated in all parts of our lives, the current market remains relatively small.  Estimates suggest there are only around 4 million “fully fledged” robots deployed in traditional industrial automation settings. This dichotomy between the established, reliable workhorse and the flashy, futuristic technology of tomorrow creates a unique perspective on the robotics industry. It’s a point of view that acknowledges the industry’s rich history while eagerly anticipating the revolutionary advancements yet to come.

Over the course of several decades, robots have quietly become the unsung heroes of our modern world. They seamlessly integrate into the fabric of our lives as essential building blocks for the industries that enable a modern way of life. At a grander scale, they help to drive the global energy transition and the reshoring and deployment of critical infrastructure. Meanwhile, at a more intricate level, they enable geographically diversified semiconductor fabrication.

Robots have been playing a crucial role behind the scenes for many years. These technological marvels have advanced at an astonishing pace. However, they often go unnoticed and underappreciated. That’s because they drive innovation and efficiency in ways we now take for granted.

When we look at the practicalities, the robotics space remains deeply intertwined with global manufacturing. That is a sector that accounts for approximately 12% of the world’s GDP, according to our research. This industry is a behemoth, employing a staggering 400 million people worldwide. Many of those are still engaged in manual labor.

However, the recent surge in AI advancements is rapidly transforming the landscape, revolutionizing training and control mechanisms, and paving the way for increased utilization and a plethora of new use cases. As a result, the core markets are poised for significant growth, even as serviceable markets expand. Both trends will contribute to the rising tide of more advanced underlying technologies that will propel the industry to new heights.

Automation goes well beyond and includes not only high-tech underlying technologies such as actuation (precision movement), computer vision and sensors, but also system integrators (macro implementation and controls), 3D visualization and design. During the past few decades, we’ve seen robots get more involved in agriculture, healthcare, and general all-purpose automation.

If we are going to extrapolate robotics beyond manufacturing and logistics, we must also expand the definition of robotics to begin to include an array of services and task-solving that exceeds former capabilities simply due to such concerns as technical, safety or energy constraints.

Goldman Sachs’ projection of a $38 billion market for humanoid robots by 2035 might appear modest at first glance. That’s because it equates to just 1.5 million robots at an average price of $25,000 each. However, this forecast indicates the market is still in its early growth stages. There is immense potential for expansion.

It’s essential to recognize that the humanoid form factor is just one of many that will emerge and evolve, alongside wheeled, flying, and other robot types, each designed for specific tasks and environments. Many experts are contemplating the possibility of the robot population reaching 1% of the human population as a plausible baseline. That would be at least 53 times Goldman’s 2035 projection, resulting in a staggering $2 trillion market for this new segment alone.

To put this into perspective, this would surpass the size of the entire current semiconductor market. It would even exceed the projected $1 trillion semiconductor market by 2030. The robotics industry looks to possess immense growth potential and meaningful transformative capabilities.

China still represents most of the industrial automation and robotics investment as the predominant manufacturing region in the world. According to the 2023 World Robotics report by the International Federation of Robotics (IFR), 73% of newly deployed robots in 2023 were installed in Asia. Another 15% was in Europe, and 10% in the Americas. That said, our research indicates the future of robotics is much more globally distributed.

Notably, China is itself overdue for an upgrade cycle. Recently, the People’s Republic of China announced on March 25, 2024 “a fresh round of large-scale equipment upgrades… in the directions of energy conservation and emission reduction, ultra-low emissions, safe production, digital transformation and intelligent upgrading, which is conducive to promoting the high-end, green and intelligent industry and further expanding effective investment.” 2

Take Fanuc, for example. It is one of the most recognized pure-play robotics companies. The company provides robot systems, control systems, lasers, cobots, and more. Its latest earnings report on January 24 saw 49% of revenue tied to robots, 13% tied to robo-machines, 20.9% tied to FA, and 16.7% tied to service. Over the past year, we saw China decline from 28.5% of revenues to 18.6%. In that same time frame, the Americas grew from 24.1% to 30.4% overall sales. This is largely due to increased U.S. sales pull-through (+13.5% YoY) in contrast to a 41.5% decline YoY in sales. Overall, the company experienced a 30% decline in robot orders YoY. Fanuc’s revenue is in the $5.5 billion range, which is relatively miniscule compared to the potential future deployment of robotics and overall GDP percentage that the space will eventually represent (again, in our view).

We are increasingly seeing questions and interest on the differences of AI between robotics, and how each may impact each other. At ROBO Global, our research is pointing to massive improvements in sustainability from adoption and deployment of AI, contradicting the themes currently playing out around AI in the mainstream media.

If you look at the world through the lens of, let’s say, how a human body operates, the brain consumes a constant 20% of energy overall. Currently, there are estimates that data centers could end up consuming 7.5% of energy (BCG) as soon as 2030. What many are missing here is that a lot of these AI investments will cause a ripple effect of efficiency gains across the materials consumption, energy usage, and workflows of physical-world applications (e.g., transportation and logistics).

One of the huge, misunderstood benefits of AI on the robotics and physical automation space is that we’re seeing massive improvements at the micro scale. This includes the ability to do more types of tasks, faster, at par or superhuman. At the macro scale, the coordination of increasingly efficient and capable robots will reimagine not only how manufacturing and warehouses work, but also services.

Robots will soon be everywhere, such as in multimodal logistics: robotic arms handing off to drones or autonomous-mobile-robots (AMRs) on moving vehicles to achieve seamless package delivery. Service robots are taking off in food service and could potentially become common in homes. Humanoid form factors are being created and tested for viability to help augment difficult jobs and labor shortages.

In the long run, anything that can be automated most likely will be. That is, unless we collectively elect not to do so. Many are suggesting that these newer markets, such as in professional and consumer services, could dwarf the existing entire robotics market. We anticipate many of the established (robotics) players to cross over and work in this space. Many often talk about taking over low-skill, low-wage jobs. But there is also tremendous opportunity and real value in high-skill, high-wage, areas, too.

In a recent webinar we hosted with our strategic advisor Henrik Christensen on the (U.S.) National Robotics Roadmap, we dived into the most pressing issues and challenges of our modern days, and how robotics can engineer a solution for nearly all in good time (energy and sustainability, aging populations, labor shortages). From our polling during the webinar: 48% said they are more likely now to invest in robotics and AI. And 36% said they are definitely exploring investment opportunities in the space. To watch the webinar, click here.

The latest Q1 Earnings season (as of 6/13/2024) saw, as previously mentioned, an overall decline on the top and bottom line. And there are expectations of upside as automotive, energy, and chip markets gain ground. Overall, we saw signs of recovery and more conservative optimism, with larger beats from companies like Teradyne, Cargotec, Mitsubishi Electric, and Yokogawa Electric. (Note: Many of our non-U.S. companies report biannually, so we do not get to 100% reporting during Q1 and Q3.)

Many robotics companies are established (93% are profitable). But several younger companies like Samsara and Symbotic are just now entering profitability. As a result, they have higher forward P/E (317X and 192X respectively) with forward revenue growth projections of 39% and 54%, again, respectively. Looking through earnings reports, the focus still remains on the next six months rather than bigger opportunities discussed. Although this past year has undoubtedly seen underperformance, the longer trend remains bullish in our opinion.

These new markets that are potentially larger than the current robotics ecosystem that lie ahead (not including new growth shoots of “traditional” markets from reshoring and upgrade cycles). But forward guidance and valuations remain muted. We believe that we have effectively passed through the eye of the (ROBO) storm and are entering a new cycle that will transform humanity.

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