Drives and Controls Magazine
Adopting robots can cut manufacturers’ profits – at first
Published:  04 August, 2023

Installing robots can cause a company’s profit margins to fall – initially, at least – but as more are added, their margins will start to rise. This is the finding of a team of University of Cambridge researchers who analysed industrial data from the UK and 24 other European countries between 1995 and 2017.

The researchers found that at low levels of adoption, robots have a negative effect on profit margins. But at higher levels of adoption, they can help increase profits.

According to the researchers, this phenomenon is due to the relationships between cutting costs, developing new processes and innovating new products. While many companies adopt robotic technologies initially to cut costs, this can be copied by competitors, so at low levels of robot adoption, companies focus on their competitors rather than on developing new products.

But as levels of adoption increase and robots are integrated fully into a company’s processes, the technologies can help to boost revenues by innovating new products.

Firms using robots are likely to focus initially on streamlining their processes before shifting their emphasis to product innovation, which allows them to differentiate themselves from their competitors.

“If you look at how the introduction of computers affected productivity, you actually see a slowdown in productivity growth in the 1970s and early 1980s, before productivity starts to rise again, which it did until the financial crisis of 2008,” says the study’s co-author, Professor Chander Velu from Cambridge’s Institute for Manufacturing. “It’s interesting that a tool meant to increase productivity had the opposite effect, at least at first. We wanted to know whether there is a similar pattern with robotics.

“We wanted to know whether companies were using robots to improve processes within the firm, rather than improve the whole business model,” adds co-author, Dr Philip Chen. “Profit margin can be a useful way to analyse this.”

The researchers examined data for 25 EU countries (including the UK, which was a member at the time) between 1995 and 2017. While the data did not drill down to individual companies, the researchers were able to look at whole sectors, mainly in manufacturing.

The researchers compared their findings with data from the International Federation of Robotics (IFR) to analyse the effect of robotics on profit margins at a country level.

“Intuitively, we thought that more robotic technologies would lead to higher profit margins, but the fact that we see this U-shaped curve instead was surprising,” Chen comments.

As companies integrate more robots they tend to become more profitableImage: UR/Hirebotics

“Initially, firms are adopting robots to create a competitive advantage by lowering costs,” Velu explains. “But process innovation is cheap to copy, and competitors will also adopt robots if it helps them to make their products more cheaply. This then starts to squeeze margins and reduce profit margin.”

The researchers interviewed an American medical equipment manufacturer to examine its experiences with robots. “We found that it’s not easy to adopt robotics into a business – it costs a lot of money to streamline and automate processes,” says Chen.

“When you start bringing more and more robots into your process, eventually you reach a point where your whole process needs to be redesigned from the bottom up,” Velu adds. “It’s important that companies develop new processes at the same time as they’re incorporating robots, otherwise they will reach this same pinch point.”

The researchers suggest that if companies want to reach the profitable side of the U-curve faster, their business model needs to be adapted at the same time as they adopt the robots. Only after robots are fully integrated into their business model can they fully use them to develop new products, driving profits.

The results of the University of Cambridge research have been reported in the IEEE Transactions on Engineering Management journal. The research was supported by the Engineering and Physical Sciences Research Council (EPSRC) and the Economic and Social Research Council (ESRC), both part of UK Research and Innovation (UKRI).

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