Industrial innovation: hype or investment opportunity?

Industrial innovation: hype or investment opportunity?

09-10-2017 | Insight

The world is on the eve of the fourth industrial revolution. New developments in robotics and exponential growth in digitization will make factories smart, flexible and very efficient. Renewable energy will take over as the world’s main energy source and cyber insecurity will unlock massive investments to protect companies. Our Global Industrial Innovation strategy aims to benefit from these rapid transformations.

  • Marco van Lent
    Marco
    van Lent
    Senior Portfolio Manager Equities
  • Henk Grootveld
    Henk
    Grootveld
    Fund Manager Rolinco & Head of Trends Investing

Speed read

  • The fourth Industrial Revolution is transforming global production
  • Robotics and digital manufacturing are two key investment trends
  • Investors underestimate the investment potential of robotics

While the first industrial revolution was marked by the shift from manual to mechanical production, the second one by mass production and the third one by automation, the fourth industrial revolution is about robotics and digitization. In this era of industrial innovation, we discern four disruptive trends: robotics, digital manufacturing, energy transition and cybersecurity. In this article, we give a brief update on the two key trends: robotics and digital manufacturing.

Intelligent manufacturing: a key element in industrial innovation

Nowadays, robots and machines have sensors, machine vision and other features that allow them to work together in an intelligent and highly efficient way. Not only will they enable a new wave of productivity increases, they will also improve quality, shorten lead times for new products and require less energy to produce them. What’s interesting at this stage is that robots are being combined with new technologies, such as self-learning software, allowing the robot to collect and analyze data and give feedback autonomously.

A sector that is being completely overhauled by these developments, is the logistics sector. Many tasks that used to be done by humans are now being carried out by robots in all shapes and forms, such as automated guided vehicles (AGVs). Demand for robotic systems in warehouses is expected to surge from 40,000 in 2016 to a mind-boggling 620,000 in 2021, says 13D Research. A 2013 Oxford University study already estimated that up to 98% of US packaging and filling machine operators and tenders, shipping, receiving and traffic clerks’ jobs would be robotized by 2030.

An unintended but interesting effect is that production capacity is moving back from low-wage countries to developed countries, as it no longer pays off to have the products made by cheap labor in Asia. Production by robots at home, without transport costs, is cheaper.

From hype to disillusionment and long-term underreaction

With all that is being written about robotics nowadays, people often ask us if it isn’t it a hype, which has already been discounted in stock prices. The answer is that we are already past the hype and investors are actually underestimating robotics’ potential.

To explain why we believe this, we first have to explain the Gartner hype cycle, which we use as a tool in our portfolio construction process (see Figure 1)1 . In the first two stages of the hype cycle (technology trigger and peak of inflated expectations), the investment community gets excited about a trend and the media picks it up. Every company that can be associated with the trend increases in value. Overreaction can result in bubble-like valuations.

Figure 1. Portfolio construction in line with the hype cycle

Source: Gartner; Robeco Trends Investing

During this phase, there are no clear winners yet, and we construct broad baskets of companies with good (preferably pure) exposure to the technology in question. Another approach is to invest in companies that facilitate the new technology. This is the ‘picks and shovels’ approach. Instead of trying to invest in a (presumed) star gold miner during the gold rush, our approach is to invest in the shop in town that is supplying the picks and shovels.

After the hype has peaked, the next phase is the ‘trough of disillusionment’. Sentiment is very negative and some companies cease to exist. It is hard to invest during this period.

The second stage of investment opportunity takes place halfway up the ‘slope of enlightenment’ and continues onto the ‘plateau of productivity’. This is where we find the companies that have survived. Companies actually implement the new technology and are able to monetize this development with a sound business model. The best investment opportunities occur during the ‘slope of enlightenment’, when sentiment is still negative because many investors witnessed the crash period. The portfolio approach during this phase is to identify and invest in the long-term winners. Industrial robots are in this slope of enlightenment phase. We are past the hype and investors are underestimating the potential of robotics companies.

1 For more detailed information about our trends investment philosophy, please read our white paper The rationale for trends investing, Bergakker and Van Oerle, August 2017.

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