Researchers at the University of Cambridge have discovered that installing robots has a ‘U-shaped’ effect on company profits—driving them down at first, before they rise eventually.
The researchers looked at industry data from the UK and 24 other European countries from between 1995 and 2017, and found that low levels of automation actually had a negative effect on company profits, while at higher levels, robots help increase profits.
This is because of the relationship between reducing costs, developing new processes and innovating new products. When companies initially adopt robotic technologies to decrease costs, it’s easy for their competitors to do the same. But as levels of adoption increase, technologies can be used to innovate new products, thereby increasing revenue.
“If you look at how the introduction of computers affected productivity, you actually see a slowdown in productivity growth in the 1970s and early 1980s, before productivity starts to rise again, which it did until the financial crisis of 2008,” said Professor Chander Velu from Cambridge’s Institute for Manufacturing, co-author of the research, which was published in the journal IEEE Transactions on Engineering Management. “It’s interesting that a tool meant to increase productivity had the opposite effect, at least at first. We wanted to know whether there is a similar pattern with robotics.”
“We wanted to know whether companies were using robots to improve processes within the firm, rather than improve the whole business model,” said co-author Dr Philip Chen. “Profit margin can be a useful way to analyse this.”
The researchers examined industry-level data for 25 EU countries (including the UK) between 1995 and 2017. The researchers then obtained robotics data from the International Federation of Robotics (IFR) database. By comparing the two sets of data, they were able to analyse the effect of robotics on profit margins at a country level.
“Intuitively, we thought that more robotic technologies would lead to higher profit margins, but the fact that we see this U-shaped curve instead was surprising,” said Chen.
“Initially, firms are adopting robots to create a competitive advantage by lowering costs,” said Velu. “But process innovation is cheap to copy, and competitors will also adopt robots if it helps them make their products more cheaply. This then starts to squeeze margins and reduce profit margin.”
The researchers then carried out a series of interviews with an American medical equipment manufacturer to study their experiences with robot adoption.
“We found that it’s not easy to adopt robotics into a business – it costs a lot of money to streamline and automate processes,” said Chen.
“When you start bringing more and more robots into your process, eventually you reach a point where your whole process needs to be redesigned from the bottom up,” said Velu. “It’s important that companies develop new processes at the same time as they’re incorporating robots, otherwise they will reach this same pinch point.”
The takeaway for companies is that they can accelerate through the U-shaped curve by adapting the business model concurrently with robot adoption. It’s only then they’ll be able to use the power of robotics to develop new products, driving profits.