Last week we kicked off our automation series with an overview of the various sectors of the economy that are ramping up their automation levels. This week we are doing a deeper dive into industrial automation, which was already seeing an acceleration pre-pandemic. The pandemic provided further powerful tailwinds as human interaction became riskier and supply chains were brutally disrupted. The new US presidential administration is likely to push for higher wages, which only adds further momentum to this trend.
The pandemic forced many factories to either close or materially reduce their output, which caused industrial production to drop to a level not seen in over ten years and a profound loss of jobs that have still not yet been recovered. As the lockdowns eased, companies had to find ways to make their production lines safe, which meant fewer people on-site and increased the need for automation to allow for greater production levels at a lower level of labor.
The 2021 BDO Manufacturing CFO Outlook Survey, conducted in September 2020, provides some fantastic insight into how things are changing for those manufacturing companies with revenues ranging from $250 million to $3 billion and how the pandemic has affected them. According to the report, “Prior to the pandemic, the Industry 4.0 paradigm shift was already underway, bringing together the physical and digital worlds to change the fundamentals of production. COVID-19 has accelerated the paradigm, compressing the timeframe for the industry to get on board.” The top CFO priority for 2021 is “Investing in Technology or Infrastructure.” The most critical factor for recovery, according to middle-market manufacturers, is “Supply Chain Stability” followed by “Productivity Gains” and when it comes to evolving their workforce strategy in the coming year, the second-highest priority (after diversity and inclusion as a business strategy) is automating manual labor.
According to the recent research report, “Industrial Automation Market by Component (Plant-level Controls, Enterprise-level Controls, Plant Instrumentation), Mode of Automation (Semi-automatic, Fully-automatic), and End User (Oil & Gas, Automotive, Food & Beverage) - Global Forecast to 2027”, the industrial automation market is expected to grow at a CAGR of 9.3% from 2020 to 2027, growing from $164.2 billion to $306.2 billion by 2027.
Industrial automation is in the midst of a game-changing transformation. Advancements such as machine learning, augmented reality, cyber-physical systems, autonomous assets, real-time analytics, and the IIoT (Industrial Internet of Things) promise extraordinary operational achievements. In addition, we are seeing similar pressures here against closed systems that we saw in corporate automation (which we will cover in the weeks to come). In much the way that consumers of office software and automation systems pushed for solutions being more easily integrated with other products and less fussy (technical term) about the platforms on which they operate, we are seeing similar demands for industrial automation solutions. This bodes well for more flexible and more rapidly improving solutions.
Closed systems are expensive to upgrade and maintain, limit innovation and restrict access to best-of-breed technologies. Just as we’ve seen in the office, industrial enterprises are increasingly demanding open, standards-based automation systems that are portable, interoperable, and intrinsically cyber secure. As we look towards the future, we see digital-first industrial enterprises and smart factories using universal automation that will significantly increase efficiency, reliability, and productivity from safe and secure (often remote) operations that easily adapt to market changes and customer demands. In short, industrial operations of the future will be data-driven, asset-centric architectures leveraging human innovation rather than relying on a workforce engaged in endless repetitive tasks. We also expect to see accelerated adoption of edge computing along with 5G and WiFi 6. After experiencing first-hand the vulnerabilities of their operations during lockdowns, we expect to see a push to implement systems that will allow for maintenance and upgrades to be conducted remotely and/or via automation.
What does this mean for investors?
First, much of this automation is going to be dependent on expanded data networks such as 5G and WiFi 6, which means further demand for products from companies providing the underlying digital infrastructure technologies such as Maxlinear (MXL), Skyworks Solutions Inc (SWKS), Applied Optoelectronics Inc (AAOI), and Broadcom (AVGO).
Companies providing factory automation products include Fanuc (FANUY),Danaher Corporation (DHR), Siemens AG (SIEGY), Yaskawa Electric Corp (YASKF), Emerson Electric Co (EMR),Honeywell (HON),Rockwell Automation Inc (ROK), and Eaton Corp (ETN).
Finally, let us not forget that many manufacturers are turning to 3D printing, which bodes well for companies such as The ExOne Co (XONE), Markforged - which has announced plans to go public via a merger with publicly trade SPAC One (AONE),Stratasys Ltd (SSYS), and Materialise NV (MTLS).
Disclosures
Maxlinear (MXL), Skyworks Solutions Inc (SWKS), Applied Optoelectronics Inc (AAOI), and Broadcom (AVGO) are constituents in the Tematica BITA Digital Infrastructure and Connectivity Index.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Chris Versace
Christopher (Chris) Versace is the Chief Investment Officer and thematic strategist at Tematica Research. The proprietary thematic investing framework that he’s developed over the last decade leverages changing economic, demographic, psychographic and technology landscapes to identify pronounced, multi-year structural changes. This framework sits at the heart of Tematica’s investment themes and indices and builds on his more than 25 years analyzing industries, companies and their business models as well as financial statements. Versace is the co-author of “Cocktail Investing: Distilling Everyday Noise into Clear Investing Signals” and hosts the Thematic Signals podcast. He is also an Assistant Professor at NJCU School of Business, where he developed the NJCU New Jersey 50 Index.
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Lenore Elle Hawkins
Lenore Elle Hawkins has, for over a decade, served as a founding partner of Calit Advisors, a boutique advisory firm specializing in mergers and acquisitions, private capital raise, and corporate finance with offices in Italy, Ireland, and California. She has previously served as the Chief Macro Strategist for Tematica Research, which primarily develops indices for Exchange Traded Products, co-authored the book Cocktail Investing, and is a regular guest on a variety of national and international investing-oriented television programs. She holds a degree in Mathematics and Economics from Claremont McKenna College, an MBA in Finance from the Anderson School at UCLA and is a member of the Mont Pelerin Society.
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Mark Abssy
Mark Abssy is Head of Indexing at Tematica Research focused on index and Exchange Traded Product development. He has product development and management experience with Indexes, ETFs, ETNs, Mutual Funds and listed derivatives. In his 25 year career he has held product development and management positions at NYSE|ICE, ISE ETF Ventures, Morgan Stanley, Fidelity Investments and Loomis Sayles. He received a BSBA from Northeastern University with a focus in Finance and International Business.
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