Robots have become increasingly prevalent in various industries since the 1980s, particularly in sectors that require physically demanding and repetitive tasks. With advancements in technology, robots have been able to enhance labor productivity at both the industry and country levels. However, little research has been conducted on how robots impact profit margins on a similar macro scale. A recent study by researchers from the University of Cambridge delved into this topic, revealing a ‘U-shaped’ effect on profit margins as a result of robot adoption.
The study analyzed industry data from the UK and 24 other European countries over a span of 22 years (1995-2017). It found that at low levels of adoption, robots had a negative effect on profit margins. This phenomenon is attributed to the initial focus on cost reduction and process innovation with the adoption of robotic technologies. Companies implementing robots primarily aimed to streamline their processes, but these process innovations are easily replicated by competitors. Consequently, businesses at the low levels of robot adoption prioritize competition rather than developing new products, leading to a decline in profit margins.
However, as companies increased their adoption of robots and integrated them fully into their processes, the focus shifted to product innovation. This shift enables firms to differentiate themselves from competitors, enhancing market power and ultimately increasing revenue. Thus, at higher levels of robot adoption, profit margins begin to rise again. The researchers published their findings in the journal IEEE Transactions on Engineering Management.
The introduction of robots in various industries has consistently improved labor productivity. This trend has been observed globally, with the continuous increase in robot adoption. Robots equipped with precise and electrically controlled mechanisms have proven particularly valuable in high-value manufacturing applications requiring greater precision, such as electronics. However, the relationship between robots and profit margins remains an understudied area.
Robot Adoption and Profit Margins
The study examined industry-level data from 25 EU countries, including the UK, between 1995 and 2017. While the analysis did not focus on individual companies, it provided insights into whole sectors, predominantly in manufacturing where robots are commonly utilized. The researchers compared this industry-level data with robotics data obtained from the International Federation of Robotics (IFR) database. This comparison enabled them to assess the impact of robot adoption on profit margins at a country level.
Contrary to initial expectations, the study revealed a U-shaped curve when examining the relationship between robot adoption and profit margins. The researchers hypothesized that higher robot adoption would lead to higher profit margins, but the data indicated otherwise. The initial adoption of robots aims to reduce costs and gain a competitive advantage. However, as mentioned earlier, process innovations can be easily replicated by competitors, resulting in margin compression and reduced profit margins.
Incorporating New Business Models
To gain further insights into the relationship between robot adoption and profit margins, the researchers conducted interviews with an American medical equipment manufacturer. The interviews highlighted the challenges associated with adopting robots in businesses, as it often requires substantial investments to streamline and automate processes. The optimal approach is to redesign the entire process alongside the integration of robots, ensuring that new processes are developed concurrently. Failure to do so may lead to a similar pinch point, hindering the attainment of the profitable side of the U-shaped curve.
To reach the profitable side of the U-shaped curve more swiftly, companies must adapt their business models in parallel with robot adoption. Full integration of robots into the business model allows firms to fully utilize the power of robotics in driving new product development, which ultimately leads to increased profits. For small- and medium-sized enterprises (SMEs), the Institute for Manufacturing is leading a community program to facilitate low-cost and low-risk adoption of digital technologies, including robotics. Incremental changes in this area enable SMEs to benefit from cost reduction and margin improvements resulting from new products.
The study conducted by the University of Cambridge shed light on the U-shaped effect of robots on profit margins. While initial robot adoption focuses on cost reduction and process innovation, which negatively affects profit margins, increased adoption allows companies to shift their attention toward product innovation. By fully integrating robots into the business model, organizations can differentiate themselves from competitors, enhance market power, and ultimately increase revenue and profit margins. The findings highlight the importance of considering the concurrent development of new processes to fully leverage the potential of robotics.
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