Study finds adopting robots leads to initial profit drop before increase.

Study finds adopting robots leads to initial profit drop before increase.

The Paradox of Industrial Robots: Slower Rewards and Higher Profits

Robots in a factory

As demand for industrial robots continues to surge, new research from Cambridge University suggests that the rewards of adopting these machines are slow to materialize. According to a study analyzing industry data across 25 EU countries between 1996 and 2017, robots typically cause early losses before they can yield a payoff.

At first glance, it may seem counterintuitive that robots could negatively impact profit margins. However, the research reveals a U-shaped effect of robot adoption. When adoption levels are low, businesses experience a decline in profit margins. However, as automation increases and robots are fully integrated, profit margins start to rise again.

The initial decline in profit margins can be attributed to the integration process. When companies first start using robots, their focus is primarily on streamlining operations. This process can be expensive and laborious as businesses invest in rethinking and redesigning their existing processes to accommodate automation. However, as automation increases, the emphasis shifts to product innovation. This shift allows companies to discover new revenue streams and gain competitive edges.

Chander Velu, a professor at Cambridge’s Institute for Manufacturing, explains, “Initially, firms are adopting robots to create a competitive advantage by lowering costs. 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.”

Velu drew inspiration from the impact of computing in the workplace during the 1970s and early 1980s. Initially, the introduction of computers resulted in a slowdown in productivity growth before eventually rising again. Velu aimed to understand whether robots have had a similar effect.

To investigate, Velu’s team analyzed industry-level data, primarily focusing on the manufacturing sector where robots are most commonly used. They then compared this data with robotics data from the International Federation of Robotics (IFR) to deduce the impact of robots on profit margins. Additionally, the researchers reached out to manufacturers for insights into the adoption process.

Dr. Philip Chen, a co-author of the study, explains, “We found that it’s not easy to adopt robotics into a business – it costs a lot of money to streamline and automate processes.”

The findings of this study come at a time when industrial automation is expanding rapidly. While robots were initially employed for demanding and repetitive tasks such as vehicle assembly, they have now become capable of handling more intricate jobs, including complex electronics manufacturing. This advancement has convinced more businesses to integrate robotic processes into their operations.

For firms exploring the possibilities of adopting robots, Velu provides some advice. He suggests that as more robots are incorporated into a company’s processes, there will come a point where the entire process needs to be redesigned from the ground up. It is crucial that companies develop new processes simultaneously with the incorporation of robots to avoid reaching a bottleneck.

The study paper, published in the journal IEEE Transactions on Engineering Management, sheds light on the paradox of industrial robots. While the rewards may be slow to materialize, robot adoption has the potential to drive higher profits once automation is fully integrated and companies focus on product innovation.

So, as the demand for industrial robots continues to grow, businesses must carefully navigate the integration process, keeping in mind the long-term benefits of automation and the importance of process innovation. Only then can they fully leverage the competitive advantages these machines have to offer and secure a profitable future.

Robots in action