Initially, Robots Lead to a Decline in Company Profits
Research conducted by the University of Cambridge reveals that the impact of robots on company profits follows a ‘U-shaped’ pattern. Initially, as companies adopt robots at low levels, their profit margins tend to decline. However, as robot adoption increases, profit margins start to rise again, eventually leading to higher profits.
An Analysis of Industry Data (1995-2017)
The study, which analyzed industry data from the UK and 24 other European countries between 1995 and 2017, found that at the early stages of robot adoption, the focus is primarily on cost reduction through process innovation. However, this approach can be easily replicated by competitors, leading to a negative effect on profit margins.
As companies integrate robots more extensively into their processes, they shift their focus towards product innovation, which differentiates them from competitors and enhances their market power, ultimately resulting in increased profits.
The Macro Impact of Robot Adoption on Profit Margins
The research sheds light on how robots, which have been increasingly used in industries since the 1980s, affect overall profit margins on a macro scale, in addition to their well-documented impact on labor productivity. The findings highlight the dynamic relationship between robot adoption, process improvement, and product innovation in driving company profitability.
The researchers analyzed data at an industry level for 25 EU countries, including the UK, covering the period from 1995 to 2017. Although the data didn’t offer details at the individual company level, it enabled them to examine entire sectors, particularly in manufacturing where robots are commonly utilizing.
The U-shaped Relationship between Robot Adoption and Profit Margins at a Country Level
To understand the impact of robotics on profit margins at a country level, the researchers collected robotics data from the International Federation of Robotics (IFR) database. Comparing these two datasets enabled them to study the relationship between robot adoption and profit margins, revealing the unexpected U-shaped curve.
Contrary to their initial expectations that more robotic technologies would lead to higher profit margins, the researchers found that firms tend to adopt robots initially to gain a competitive edge by reducing costs. However, since process innovation can be easily replicated by competitors, the widespread adoption of robots in the industry starts to squeeze profit margins, leading to a decline.
Exploring Robot Adoption Challenges and Costs – A Case Study with an American Medical Equipment Manufacturer
To gain further insights, the researchers conducted interviews with an American medical equipment manufacturer to explore their experiences with robot adoption. The interviews revealed that integrating robotics into business operations is a challenging and costly process, involving streamlining and automating various processes.
According to Velu, as companies introduce more robots into their processes, they eventually reach a point where a complete redesign of their entire process becomes necessary. To avoid this challenge, it’s crucial for companies to develop new processes simultaneously with the incorporation of robots. This way, they can expedite their journey towards the profitable side of the U-shaped curve.
Complete Integration of Robotics into the Business Model for Enhanced Profitability
The researchers emphasize that for companies to fully harness the benefits of robotics and achieve higher profits, they must fully integrate robots into their business model. This integration will enable them to leverage the capabilities of robotics to innovate and create new products, which can drive profitability.
In addition to the research, the Institute for Manufacturing is leading a community program aimed at helping small- and medium-sized enterprises (SMEs) adopt digital technologies, including robotics, in a cost-effective and low-risk manner. By making incremental and step changes in this area, SMEs can benefit from cost reduction and margin improvements through the introduction of new products.
The study received support from the Engineering and Physical Sciences Research Council (EPSRC) and the Economic and Social Research Council (ESRC), both part of UK Research and Innovation (UKRI). Chander Velu holds the position of Fellow at Selwyn College, Cambridge.
Read the original article on Science Daily.
Read more: Enabling Autonomous Exploration for Robots.
