The statement “Robots cause company profits to fall – at least at first” is not universally true, because the impact of introducing robots into a company can vary significantly depending on a variety of factors such as the industry, the type of robots used, the company’s specific goals and strategies, and how effectively the robots are integrated into the existing operations.
Robots, according to researchers, can have a ‘U-shaped’ effect on profits, causing profit margins to fall at first before rising again. The University of Cambridge researchers studied industry data from the UK and 24 other European countries between 1995 and 2017 and discovered that at low levels of adoption, robots have a negative impact on profit margins. But at higher levels of adoption, robots can help increase profits.
According to the researchers, this U-shaped phenomenon is caused by the relationship between cost reduction, process development, and product innovation. While many companies initially adopt robotic technologies to reduce costs, this ‘process innovation’ is easily replicated by competitors, so at low levels of robot adoption, companies are focused on their competitors rather than developing new products. However, as adoption rates rise and robots become fully integrated into a company’s processes, the technologies can be used to boost revenue by developing new products.
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. It’s interesting that a tool designed to boost productivity had the opposite effect, at least initially.
Professor Chander Velu
In other words, firms that use robots are likely to start by streamlining their processes before shifting their focus to product innovation, which gives them greater market power by allowing them to differentiate themselves from their competitors. The findings have been published in the journal IEEE Transactions on Engineering Management.
Since the 1980s, robots have been widely used in industry, particularly in sectors where they can perform physically demanding, repetitive tasks, such as automotive assembly. Since then, the rate of robot adoption has risen dramatically and consistently around the world, and the development of precise, electrically controlled robots has made them especially useful for high-value manufacturing applications requiring greater precision, such as electronics.
While robots have been shown to reliably raise labour productivity at an industry or country level, what has been less studied is how robots affect profit margins at a similar macro scale.
“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,” co-author Professor Chander Velu of Cambridge’s Institute for Manufacturing said. “It’s interesting that a tool designed to boost productivity had the opposite effect, at least initially. We were curious if there was a similar pattern in robotics.”
“We wanted to know if companies were using robots to improve internal processes rather than the overall business model,” said co-author Dr. Philip Chen. “Profit margin can be a good way to look at this.”
Between 1995 and 2017, the researchers examined industry-level data for 25 EU countries (including the UK, which was a member at the time). While the data did not allow the researchers to drill down to the level of individual companies, they were able to examine entire industries, particularly manufacturing, where robots are commonly used.
The researchers then obtained robotics data from the database of the International Federation of Robotics (IFR). They were able to analyze the effect of robotics on profit margins at the country level by comparing the two sets of data.
“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 explained.
“Initially, firms are adopting robots to create a competitive advantage by lowering costs,” said Velu. “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.”
The researchers then carried out a series of interviews with an American medical equipment manufacturer to study their experiences with robot adoption.
“We found that it’s not easy to adopt robotics into a business – it costs a lot of money to streamline and automate processes,” said Chen.
“When you start introducing more and more robots into your process, you eventually reach a point where your entire process needs to be redesigned from the ground up,” Velu explained. “It’s critical that companies develop new processes concurrently with the incorporation of robots, or they will reach the same pinch point.”
According to the researchers, if businesses want to reach the profitable side of the U-shaped curve faster, the business model must be adapted concurrently with robot adoption. Only after robots have been fully integrated into the business model will companies be able to fully leverage the power of robotics to develop new products and drive profits.
