The impact of robots on profit margins in the industrial sector has been a subject of interest among researchers. A recent study conducted by researchers at the University of Cambridge has revealed a ‘U-shaped’ effect of robots on profits. The study analyzed industry data from the UK and 24 other European countries over a span of 22 years, from 1995 to 2017. The findings indicate that at low levels of robot adoption, profit margins tend to decline, but as the adoption increases, robots can contribute to an increase in profits.
To comprehend the U-shaped phenomenon, we need to delve deeper into the relationship between reducing costs, developing new processes, and innovating new products. Initially, companies adopt robotic technologies to decrease costs through process innovation. However, this process innovation can be easily replicated by competitors, leading to a scenario where companies focus more on competing with their rivals rather than on developing new products. Therefore, at this stage, the focus is predominantly on streamlining processes rather than product innovation. As robot adoption increases and they become fully integrated into a company’s processes, the technology can be leveraged to generate revenue by enabling the innovation of new products. This shift from process innovation to product innovation allows companies to differentiate themselves in the market and gain greater market power.
Since the 1980s, robots have been extensively employed in various industries, particularly in physically demanding and repetitive tasks like automotive assembly. Over the years, robot adoption rates have significantly increased worldwide. The development of precise, electrically controlled robots has made them especially valuable in high-value manufacturing applications that demand precision, such as electronics. While robots have demonstrated the ability to enhance labor productivity at an industry or country level, their impact on profit margins has not been extensively studied on a macro scale.
Analyzing the Relationship between Robots and Profit Margins
To investigate the relationship between robots and profit margins, the researchers analyzed industry-level data for 25 EU countries, including the UK, between 1995 and 2017. Although the data did not provide insights into individual companies, it allowed the researchers to examine entire sectors, primarily in manufacturing where robots are commonly employed. The researchers also obtained robotics data from the International Federation of Robotics (IFR) database. By comparing the two sets of data, they were able to analyze the effect of robotics on profit margins at a country level.
The Surprising U-Shaped Curve
Initially, the researchers expected that an increased adoption of robotics would lead to higher profit margins. However, they were surprised to discover a U-shaped curve instead. The adoption of robots at the initial stage by firms aims to create a competitive advantage by reducing costs. Nonetheless, process innovation, which is inexpensive to replicate, allows competitors to adopt robots and produce their products more affordably. Consequently, this scenario compresses profit margins and reduces profitability.
To counteract the decline in profit margins, companies must focus on process redesign and innovation simultaneously with the adoption of robots. The integration of robots into existing processes necessitates a bottom-up redesign of the entire process when more robots are introduced. Neglecting process redesign can lead to a critical point where companies are unable to fully harness the potential of robots. Only when robots are seamlessly integrated into the business model can companies effectively leverage their capabilities to develop new products, ultimately driving profits.
The study’s findings carry essential implications for businesses seeking to enhance profit margins through robot adoption. It emphasizes the need to adapt the business model concurrently with the adoption of robots to expedite the transition from the low-profit side to the high-profit side of the U-shaped curve. Companies that successfully integrate robots into their business models can fully exploit the power of robotics to develop innovative products and drive profitability.
The Institute for Manufacturing has undertaken a community program to support small- and medium-sized enterprises (SMEs) in embracing digital technologies, including robotics, in a low-cost and low-risk manner. This initiative focuses on incremental and step changes to enable SMEs to benefit from cost reduction as well as margin improvements resulting from the introduction of new products. By providing SMEs with the necessary resources and guidance, this program aims to empower them to leverage the advantages of robot adoption.
The study sheds light on the complex relationship between robot adoption, process innovation, and profit margins in the industrial sector. The U-shaped effect on profit margins demonstrates the importance of simultaneously incorporating process redesign and innovation along with robot adoption. By navigating the U-shaped curve effectively, businesses can maximize their profitability and gain a competitive edge in the marketplace.