The Impact of Robots on Profit Margins: A U-Shaped Effect
A recent study conducted by researchers from the University of Cambridge reveals an interesting phenomenon in the relationship between robots and profit margins. The researchers analyzed industry data from the UK and 24 other European countries between 1995 and 2017 and found that robots initially have a negative effect on profit margins at low levels of adoption, but as adoption increases, they can ultimately help increase profits.
The U-Shaped Effect: Innovating New Products
The researchers attribute this U-shaped effect to the interplay between reducing costs, developing new processes, and innovating new products. Initially, companies adopt robots to decrease costs through process innovation. However, this type of innovation can be easily replicated by competitors, leading to increased competition and a focus on cost reduction rather than developing new products.
As companies further integrate robots into their processes, the technologies can be leveraged to innovate new products, enabling companies to differentiate themselves from competitors and increase revenue. This shift from process streamlining to product innovation gives companies greater market power, resulting in improved profit margins.
The Rise of Robots in Industry
Robots have been widely used in industries since the 1980s, especially in sectors involving physically demanding and repetitive tasks such as automotive assembly. Over the years, the adoption of robots has significantly increased worldwide, particularly in high-value manufacturing applications that require precision, such as electronics.
Uncovering the Impact on Profit Margins
While previous studies have highlighted the positive impact of robots on labor productivity, less attention has been given to their effect on profit margins. The researchers aimed to examine whether a similar pattern to the initial productivity slowdown observed with the introduction of computers (followed by rising productivity) could be identified with the adoption of robots.
The research involved analyzing industry-level data from 25 EU countries over a span of 22 years. Although the data did not provide insights into individual companies, it allowed the researchers to study whole sectors, primarily in manufacturing where robots are commonly utilized.
The researchers compared the industry-level data with robotics data obtained from the International Federation of Robotics (IFR) database. Through this analysis, they were able to explore the impact of robotics on profit margins at a country level.
The Surprising U-Shaped Curve
The findings of the study were unexpected. Initially, the assumption was that increased robotic technology adoption would lead to higher profit margins. However, the researchers discovered a U-shaped curve instead.
At low levels of adoption, companies adopt robots to lower costs and gain a competitive advantage. However, since process innovation is easily imitable, competitors also adopt robots, leading to reduced profit margins.
Redesigning Processes for Optimal Results
Further interviews with an American medical equipment manufacturer provided deeper insights. The researchers discovered that incorporating robots into a business is a complex and costly process that requires streamlining and automating processes. However, as more robots are introduced, a point is reached where the entire process needs to be redesigned. To fully leverage the power of robotics and drive profits, it’s crucial for companies to develop new processes alongside robot integration.
Reaching the Profitable Side of the U-Shaped Curve
To expedite the journey to the profitable side of the U-shaped curve, companies must concurrently adapt their business model with robot adoption. Only when robots are fully integrated into the business model can companies fully capitalize on robotics’ potential for developing innovative new products.
To support small and medium-sized enterprises (SMEs) in adopting digital technologies, including robotics, the Institute for Manufacturing is leading a community program. This program aims to provide cost-effective and low-risk ways for SMEs to benefit from cost reduction and margin improvements through incremental and step changes in their operations.
The research was conducted with the support of the Engineering and Physical Sciences Research Council (EPSRC) and the Economic and Social Research Council (ESRC) under UK Research and Innovation (UKRI). The co-authors of the study include Professor Chander Velu, who is affiliated with Cambridge’s Institute for Manufacturing, and Dr Philip Chen.