The rise of the machines

The race to automate the workplace is on. James McKeigue, Matthew Partridge and John Stepek look at how you can invest in the robotics revolution and tip four tech stocks to buy now.

There are many reasons why robots are better than human beings, at least from an employer's point of view. Robots don't need holidays, they don't go on strike, get sick, or even ask for pay rises. Robots do exactly what you tell them to, and they don't make mistakes.

They can cope with doing repetitive tasks endlessly without a break, and if they get damaged on a production line (which they usually won't), you have some costs for maintenance and downtime on your hands, rather than a medical emergency. In fact, there are so many benefits to automation, it's a wonder that we haven't all been replaced by machines already.

That comes down to two main things: costs and capabilities. Robots have the potential to save money over their lifetimes, but they are expensive to buy and install. So it's often been cheaper to find human beings who will do the same job cheaply -generally in China. Also, robots have their limitations. There are certain tasks that they just aren't very good at, such as work that depends on a lot of sensory feedback, or that requires operating in unpredictable environments.

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But both of these factors are changing. On the technological side, as John Markoff notes in The New York Times, a "new wave" of "more adept" robots means that the list of tasks that robots can't do is shrinking by the day. Among the examples cited by Markoff are a Philips factory in Holland where "128 robot arms" overseen by a few dozen humans assemble electric shavers, doing the same job "with yoga-like flexibility" that hundreds of human workers do by hand in a sister factory in China.

It's not just manufacturing, says Markoff. In one automated warehouse near New York, fast-moving robots replace human-driven forklifts, storing and fetching grocery products for distribution to supermarkets. Not only is the system more efficient, but it also takes up far less room in terms of real-estate space.

As for the cost front, much of that comes down to China. China's labour force no longer looks as cheap as it once did. Last year, the cost of employing urban workers in the country rose by more than 12% in real (inflation-adjusted) terms. As has been widely reported in the US press, this is giving America an opportunity to take back some of the jobs that were once almost automatically outsourced to the Far East.

With American labour costs falling or static (due to high unemployment), and energy costs rising, the advantages of making goods in China, only to have to pay to ship them over to the States, are far less obvious than they once were. Throw automation into the mix and suddenly America looks a lot more attractive.

Once you reduce the importance of wages within the equation, the biggest worry cost-wise is to find a supply of cheap electricity to run these factories. That's one area where America has a big advantage over China. The shale gas bonanza has already driven natural gas prices to near-record lows in the States. Coal is also cheap and plentiful. Each accounts for roughly one third of electricity generation in America.

So it seems to make sense for technologically savvy companies with a big US customer base to build their factories there too. As Time magazine put it last month: "Low-wage workers in China look attractive until robots operated by highly skilled labourers at home are able to do their jobs even more cheaply."

But don't expect China to stand still and let America eat its lunch. The same forces that are driving jobs back to America and the West in general rising Chinese wage costs and the superior productivity of Western workers are persuading Chinese manufacturers to invest in robots too. As the chief executive of Philips, Frans van Houten, tells Markoff: "The window of opportunity to bring manufacturing back [to the West] is before that happens."

Taiwanese electronics manufacturing giant Foxconn (which makes Apple's iPhones, for example, and has repeatedly been accused of poor working conditions) has said that it will install around a million new industrial robots in its factories in the next three years. Indeed, by 2014, the International Federation of Robotics believes that China will be the biggest global market for robots and it's already the fastest growing.

By automating their factories, Chinese manufacturers aim to improve both the quality and the quantity of goods they can produce. Machines are more accurate and work to higher standards than human workers, boosting productivity. As Don Durfee puts it on Reuters: "China may soon be known less for cheap Christmas toys and more for high-end medical equipment, luxury cars and jet engines."

There's certainly a lot of room for improvement. China's factories are nowhere near the automation levels seen in Japan: there are 306 robots working per 10,000 people, while in China the equivalent figure is just 15, reports CNN. The race to automate the global workplace is on.

Life-saving robots

Amid all the fear over what we'll do with ourselves when robots have taken all our jobs, it's easy to forget the benefits. It's perhaps easiest to see the upside of robotic assistance in the medical sphere. To train a surgeon takes years; however, there are some tasks that even the most skilled doctors find difficult to do well, and where there is little or no margin for error, such as surgery on the brain or prostate.

Robot systems, which allow surgeons to control instruments remotely via a console, can overcome this by enabling surgeons to perform even the most complex tasks with a great degree of precision. This reduces the risk of complications and means patients recover faster, reducing aftercare costs and improving their quality of life.

These benefits have led hospitals to invest large amounts of money in the latest robot surgery equipment. The Seattle Times reports that despite a $2.6m price tag, even small hospitals in the US are splashing out on the Da Vinci surgical system, for example, which is made by Intuitive Surgical (seebelow for more). The increasing use of robotic assistance has also created a need for tools that train surgeons to use the latest machines.

Indeed, apart from the installation of the robots themselves, the need to teach surgeons new ways of working is the biggest cost involved in moving away from conventional surgery. However, several firms have produced simulators that cut down on retraining time and ensure that operators enter the theatre fully prepared to use the robots.

The potential gains are not limited to simply helping surgeons perform better, or even supplanting humans in routine tasks. The latest development in miniature technology means that robots can do tasks that would previously have been impossible.

For instance, researchers at Singapore's National University Hospital have created a robotic crab that is small enough to enter through the mouth and journey to the stomach, where it can remove cancerous tissues and then close the resulting wound. Currently the only way to treat this type of cancer is for a surgeon to cut open the stomach, a dangerous procedure. They hope that this device could be in hospitals and operating theatres within three years.

Even more radical treatments may be just around the corner. Capsule endoscopy, the use of pills equipped with cameras to look inside the body, is now widely used. However, ongoing research is focused on even smaller devices that could target individual cells. This would avoid the well-known problem in cancer treatment where healthy tissue is killed along with the cancer. Teams at Harvard University and Massachusetts Institute of Technology demonstrated last year that this type of treatment is possible. In the future many treatments could involve nano-robots being injected direct into the bloodstream.

Medical robots can also play a part in preventative medicine. Devices equipped with sensors would be able to monitor and detect health problems, such as heart disease and diabetes, before they became apparent, enabling treatment at an early stage.

But on a more mundane level, they can also ensure that patients take their medicine when they should. In July, the US Federal Drug Administration approved an ingestible sensor, which can be attached to a pill. This records when the pill was taken, as well as information on the patient's heart rate. This makes it ideal for closely monitoring the use of medication. We look at some of the best bets in the medical sector below.

The new Luddites?

The rise of the robot will have profound social implications. The most obvious is unemployment, or at least a major change in the sorts of jobs many of us do. Robots won't be confined to mass-production factories. They'll also replace humans in service roles.

Among the first casualties could be post office sorters, warehouse operators and hospital porters, but it won't stop there. As David Fuller notes on, "there is very little in the way of human endeavour that future generations of robots will not be able to do more successfully than people". With unemployment in the West stubbornly high, this robotic competition is particularly unwelcome.

Of course, fears of technology stealing jobs are not new. The most famous example comes from the 19th-century textile workers the Luddites who smashed new automated looms. And in 1930, John Maynard Keynes talked of "technological unemployment", whereby automation displaces jobs more rapidly than the economy can create new ones.

Yet the majority of people of working age still have jobs: we're neither enjoying lives of leisure tended by robot servants, nor living in post-apocalyptic squalor under our robot masters. Erik Brynjolfsson and Andrew McAfee of the Massachusetts Institute of Technology are two of the main voices warning of just how transformational the robot revolution could be, comparing it in their book Race Against The Machine to the collapse in agricultural unemployment seen in the last century.

Yet even they argue that the solution is "not to compete against machines but to compete with machines". In other words, use computers to complement skills that remain unique to humans: intuition, creativity and adaptability.

As Time magazine points out, the main issue for human workers could be education, rather than obsolescence. While construction giant Caterpillar has added many robots to its business, "the number of human employees hasn't actually decreased". What has changed is the level of skill required: "welding is no longer a job for someone with only a high-school degree. It's something that requires advanced in-house training."

Where to put your money now

We last looked at robotics in 2010, since when all of our tips have performed strongly. However, even after posting strong gains, several of them still look like solid buys'. Our favourite in the industrial robot sector was Drr AG (Xetra: DUE). The German firm specialises in designing, installing and supplying car assembly and paint-spraying plants with robotic systems. It also provides testing equipment for mechanical engineering.

The firm has had a great two years, winning more contracts in emerging markets, and the share price is up 190% since we tipped it at €17.52. If you bought in back then, we'd understand if you felt tempted to take profits. However, the firm looks as though it has plenty of room to deliver an even bigger return.


Around 80% of its sales come from the car industry and, by positioning itself in emerging market countries where both automation and the car industry have a bright future, Drr looks set for a busy few years. With earnings growing faster than the share price, on a forward price/earnings (p/e) ratio of 8.8, it's a lot cheaper than when we tipped it last time.

Another option is Kuka AG (Xetra: KU2X). Kuka is a leading supplier of industrial robots to manufacturers, and also supplies automated production systems to customers. Business is booming at the moment with sales and profits growing rapidly. The company also has a strong order book. Kuka is confident that it can keep growing and is expanding capacity in both Germany and China.

While it has historically focused on selling robots to car manufacturers, it is now looking to sell into other sectors, such as food manufacturing, aeronautical engineering and logistics. It also has big hopes for its Advanced Robotics business, where it sees lots of potential from the medical and health sectors. The shares have done well this year but still look decent value at €20, trading on just over 13 times 2012 profits.

When it comes to dedicated medical robots, Intuitive Surgical (Nasdaq: ISRG) is the world leader in robot-assisted minimally invasive surgery. The share price is up by around 40% since we tipped it in 2010, but it still looks worth holding on to. By using the robotic arms on Intuitive's Da Vinci surgical system, a surgeon can operate with more precision, dexterity and control. A 3D graphic console allows the surgeon to see inside the body, which allows for fewer major cuts than conventional surgery.

Intuitive sells its machines to hospitals in America, Japan and Europe. It then earns extra money by servicing and restocking installed systems. This gives it a "monopoly franchise", says JP Morgan analyst Tycho Peterson. The major risk is that austerity measures in Europe, America or Japan cause hospitals to cut back on investing in new equipment. But so far it's had no effect, and in the last quarter, sales were up 30% year on year. The company is also working on new products, such as an automated stapler, to help knit up organs after surgery. All in all, we're still positive on the stock.

Another option in the sector is Israeli rival Mazor Robotics (TSE: MAZOR). Sales of its products have risen 17-fold since 2007, with 34 hospitals around the world using its products. It also has many new products in various stages of development, and its brain surgery platform received approval from the US health regulator.

James graduated from Keele University with a BA (Hons) in English literature and history, and has a NCTJ certificate in journalism.


After working as a freelance journalist in various Latin American countries, and a spell at ITV, James wrote for Television Business International and covered the European equity markets for the London bureau. 


James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. 


He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.