After a tough 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 closing quarter of 2022.1 We lately spoke with our strategic advisor Morten Paulsen, head of fairness analysis at CLSA primarily based in Tokyo, who has been advising traders in Asian manufacturing unit automation corporations for greater than 20 years. In this interview, we talk about why traders ought to put together for the perfect shopping for alternative for robotics since March 2020, the deflationary impression of automation expertise, and the way Asia is more likely to proceed to play a serious position within the area.
Jeremie Capron, ROBO Global Director of Research: I wish to begin this dialogue with some big-picture questions. Loads 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 very best inflation charges for the reason that ’70s, and a potential international recession. How is all of this affecting the demand for robotics and automation?
Morten Paulsen, CLSA Head of Equity Research: That’s loads of dialogue factors. Let’s begin with inflation and the position robotics and automation play.
Industrial automation is a deflationary power. Robots and automation gear allow producers to decrease marginal unit prices. Robots don’t put upward stress on labor prices both, and that’s one other means of curbing inflationary stress. I wish to name robots “inflation fighters” for these causes.
In the setting we’re in immediately, I might argue that the one deflationary power we’ve got left are robots and comparable applied sciences advancing labor effectivity.
In the outdated system, earlier than 2017 or so, international locations just like the US might import deflation by commerce with low-cost producers like China. That system is now damaged. Production prices in China are going up. On prime of that, you’ve border tariffs and better delivery and logistics prices. The US and Europe at the moment are importing inflation, not deflation. Demographics and a shrinking workforce are additionally fueling inflation.
JC: The US launched the Inflation Reduction Act a number of months in the past. Is {that a} step in the appropriate path?
MP: Some will argue that subsidies solely create inflation as you pump extra money into the system, and I’ve loads of sympathy for that view. However, a good portion of the Inflation Reduction Act is aimed to stimulate the provision aspect of the financial system. According to information compiled by the AMT, greater than $88 billion is immediately supporting manufacturing within the US.
Helping corporations enhance labor effectivity by automation will permit them to raised compete in a extra inflationary setting and may convey costs down and jobs again on the similar time.
Supply-side insurance policies aimed to stimulate investments in effectivity are part of the answer. The means I see it, the Inflation Reduction Act is much from good, however it’s a step in the appropriate path.
JC: Inflation can also be inflicting rates of interest to go up. Aren’t greater rates of interest making it tougher for corporations to spend money on robotics?
MP: According to textbook economics, rising rates of interest are damaging for capital expenditure. However, should you run a historic correlation evaluation between rates of interest and automation investments, you get a constructive correlation coefficient ― that means that robotic and automation investments are excessive when rates of interest are excessive.
JC: So that’s the alternative of the textbooks. How would you clarify that?
MP: It implies that producers gained’t rush out to purchase gear simply because rates of interest are low. Demand for automation gear is extra tied to capability utilization ratios and tightness within the labor market.
Currently, the labor market is extraordinarily tight, explaining why robotic demand is at document excessive ranges. Everything I heard on the IMTS present in Chicago again in September would counsel that labor scarcity is an actual concern and an actual impediment for bringing manufacturing again.
We have talked about re-shoring for a few years now, however other than a number of examples right here and there, it wasn’t a considerable motion. The internet enhance of imports of manufactured items would dwarf the quantity of manufacturing that was introduced again. I imagine that might be altering now. Manufacturers wish to localize manufacturing and shorten provide chains. This can also be a gap for investments in “near-shoring” areas equivalent to Mexico.
JC: If producers are “re-shoring,” isn’t that damaging for China? China is, in any case, the world’s largest marketplace for automation gear.
MP: I don’t suppose the world will cease shopping for Chinese manufactured items. The nation has vital benefits when it comes to scale and manufacturing information that shall be exhausting to switch.
However, I do suppose producers outdoors of China are making use of the next danger premium on Chinese-made parts. Over the following decade, I do imagine {that a} greater share of the incremental manufacturing capability shall be added outdoors of China.
JC: Back in 2007 or 2008, you revealed a landmark report known as “Automating Asia,” the place you accurately predicted that Asia would turn into a serious driver for international automation over the following decade. You sound much less upbeat about Asian automation immediately, am I proper about that?
MP: Well, lots has modified since 2008. China’s robotic density in manufacturing is now pretty near that of the US and Western Europe. As the market matures, we must always count on progress charges to decelerate.
That stated, similar to the United States, China is going through a labor scarcity. Birth 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 is once more resulting in greater labor price and direct labor scarcity. China is seeking to robots as the answer to their issues.
Beyond China, I nonetheless suppose Asia will stay a progress driver because the area gives loads of alternatives to extend the extent of automation in manufacturing. We have large 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 progress charges for automation globally and in China going ahead?
MP: Economic progress is slowing down. I imagine the April-June quarter marked the cyclical peak for international equipment orders. China peaked out 12 months earlier than the remainder, extra particularly within the April-June quarter of 2021.
China was the primary market to recuperate after Covid, so an earlier peak might be anticipated. However, within the second half of 2021, the nation confronted loads of headwinds. It began with the crackdown on large tech corporations, then we had issues within the development trade across the Evergrande disaster. That was once more adopted by energy shortages and rolling blackouts. For China, 2021 was fully a narrative of two halves. 2022 was imagined 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 isn’t good. People are anxious that lockdowns might occur once more, and that’s having a damaging impression on consumption.
I see combined developments relying on finish markets. On the constructive aspect, the automotive trade recovered quick, and the trade is investing closely in EVs and electrification. On the damaging aspect, we’re not seeing a lot funding occurring in smartphones, PCs, and many others. in the mean time. Chinese exporters are additionally nervous about weaker finish markets.
JC: And what about Japan? Is the weaker yen making it extra engaging to supply in Japan?
MP: Japan has an affordable yen, a world-class industrial automation sector, and a gifted workforce. It’s exhausting for me to see why the nation wouldn’t be a extremely aggressive manufacturing nation. So far, the weaker yen hasn’t led to a lot of a capex spending growth in Japan, however I believe that would change.
It’s exhausting to be upbeat on Europe in the mean time given the vitality state of affairs and the impression that would have on consumption and manufacturing. However, I believe Japan together with North America might be one of many extra promising markets over the following 12 months.
JC: In our earlier interview again in March 2019, you stated 2020 can be a restoration 12 months for robotics and automation demand, and also you additionally stated 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 closing quarter of 2022. What is the following shopping for alternative for automation?
MP: Back in 2019, I wasn’t anticipating a worldwide pandemic to hit us in 2020, so I can’t say every little thing went as deliberate. Currently, markets are beneath loads of stress given geopolitical uncertainty, rising rates of interest, and cyclical contraction.
The world could look completely 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. Once we enter the second half of 2023, I might count on a variety of key main macro-economic indicators to stabilize or backside out. That might result in a fast turnaround in sentiment, so in my view, traders have a transparent six-month window to get again into the sector at a low value.
1 Data As of 11/29/22