The robots are coming. No, this is not a re-run of Orson Well’s infamous 1938 ‘War of the Worlds’ Halloween radio show prank, but it could be a solution to a productivity conundrum with which mature economies have been grappling for decades.

Experts are calling automation an investment megatrend, including analysts at Goldman Sachs, Morgan Stanley, JPMorgan and Pictet. And thanks to the emergence of dedicated low-cost ETFs and tracker funds, it’s never been easier for ordinary investors to back the theme.

The website Just ETF lists a handful of robotics and automation ETF options for UK investors, while there are several managed funds, if that’s what you prefer.

But why should investors put their hard-earned cash to work in the automation theme?

REASONS TO INVEST IN AUTOMATION

This is an area seeing a lot of investment. Data from Statista shows that global sales volumes of industrial robots have tripled over the past 15 years or so, peaking at around 422,000 units in 2018, before easing back during the pandemic. 384,000 units were sold in 2020.

During the early 1990s, say Canaccord Genuity analysts, there were on average 20 industrial robots per 10,000 employees. That has increased 10-fold for the wider manufacturing industry to 200 per 10,000, yet this is still way behind the automotive industry, the most robot-embracing industry of all. Canaccord estimates that there are about 1,200 robots per 10,000 employees among vehicle makers.

‘Amazon (AMZN:NASDAQ) has about 3,000 robots per 10,000 human workers,’ adds Canaccord.

In 2020, the worst year for global GDP since the Second World War, automation capital spending was the fastest-growing segment of GDP, according to Chris Versace, the chief investment officer and thematic strategist at Tematica Research.

‘This could mean great things for more than just the bottom line of those companies providing such technologies,’ says Versace.

‘Better electronics, microchips, network connectivity and artificial intelligence are improving the capabilities of robots and automation systems at a rapid pace and leading to a sharp rise in the number of so-called “dark factories”.’

These are manufacturing hubs that are fully automated, need no human workforce, and therefore don’t need lighting, freeing humans from boring and repetitive tasks, cutting errors and allowing people to use their soft skills, like customer service.

‘Though it sounds like a dream, lights-out factories are the industry 4.0 future that’s already in action,’ says ASE Group, which operates several dark factories in its homeland of Taiwan.

On a simple level, automation is about getting bang for your buck, both for companies implementing automation strategies, and for investors. ‘When a company spends money, they are trying to generate higher return on investment,’ says Xuesong Zhao, who runs the Polar Capital Automation and Artificial Intelligence Fund (BF0GL54).

‘Even though the initial investment is high, it will solve problems for the long-term.’ This is not always appreciated by investors, Zhao believes.

INSIGHT FROM FOOD AND FARMING

Agriculture is a useful case study about investing in automation, when the tractor transformed agriculture from a human and horse-powered industry into a mechanised one, increasing farm productivity dramatically.

Between 1950 and 2015, total farm output nearly tripled, while employment dropped by more than two-thirds. Farms also switched from horses consuming the equivalent of 22% of farm-produced crops to tractors fuelled by another source of energy, which freed up crops for sale. Overall, the combined impact was to increase returns on capital employed.

Robotics is affecting every link in the food supply chain, from farm to fork. The value of the global food automation industry is expected to double in the next five years, reaching $2.5 billion this year.

‘If we look at the summer earnings season that we’ve just had, we’ve got aggregate robotics and automation company sales growth set to reach 13% for 2022,’ says Richard Lightbound, who has worked for 20-plus years in the financial and treasury services industry and is currently CEO of ROBO Global Partners, which runs the index behind L&G ROBO Global Robotics & Automation ETF (ROBG).

According to Lightbound, average sales growth of companies in the ROBO ETF since inception nine years ago is 8%. ‘Step back and look where we are in the world. We’ve got inflation, we’ve got labour shortages, we’ve got supply chain constraints, the obvious answer is automation.’

With machine learning and connected sensors, low price robots of all sizes and capabilities should continue to empower humans. Over time, most robots will become collaborative, aiding humans and turbocharging productivity as the digital economy empowers the physical economy.

Polar Capital’s Zhao says Siemens (SIE:ETR) is a good example of this inter-connectedness. The German engineering firm has 20 manufacturing hubs that can communicate, collect vast amounts of data, crunch the numbers and come up with predictive outcomes that allow engineers to be directed to where problems are likely to occur soon, rather than waiting for kit to become faulty, potentially saving millions of manufacturing downtime.

French engineering software company Dassault Systemes (DSY:EPA) has a suite of tools designed to develop industrial automation control systems. Its ControlBuild suite is being provided to customers across the industrial sphere, in packaging, metallurgy, power plants for energy, healthcare, food and drink, and more, demonstrating the scope for automation to increasingly touch more parts of our lives.

Leeds-based Tracsis (TRCS:AIM) does something similar for the UK’s rail network, providing remote monitoring systems across the thousands of miles of Network Rail’s track, points and junctions.

SOLVING REAL WORLD PROBLEMS

Robots and automation have the scope to increase productivity, reduce costs and help solve the challenges linked to an increasingly elderly population. As this becomes increasingly apparent, investors can expect to see the automation industry grow significantly faster than the broader economy over the coming years.

‘I’ve got an electric car,’ ROBO Global’s Lightbound says. ‘It had a software upgrade recently and the acceleration was significantly different afterwards,’ he says. ‘I didn’t take it to a garage, did nothing mechanical, it was purely just the software upgrade, delivered remotely, that made the car more efficient and powerful.’

The bottom line for investors is that the pace of automation is likely to accelerate significantly in the coming years, and with it, we will see the potential for dramatic improvements in the quality of life and pace of economic growth along with enormous shifts in the labour force. That sounds like a megatrend that may be worth backing.

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