Robots cause company profits to fall — at least at first
Researchers have found that robots can have a ‘U-shaped’ effect on profits: causing profit margins to fall at first, before eventually rising again.
The researchers, from the University of Cambridge, studied industry data from the UK and 24 other European countries between 1995 and 2017, and found that at low levels of adoption, robots have a negative effect on profit margins. But at higher levels of adoption, robots can help increase profits.
According to the researchers, this U-shaped phenomenon is due to the relationship between reducing costs, developing new processes and innovating new products. While many companies first adopt robotic technologies to decrease costs, this ‘process innovation’ can be easily copied by competitors, so at low levels of robot adoption, companies are focused on their competitors rather than on developing new products. However, as levels of adoption increase and robots are fully integrated into a company’s processes, the technologies can be used to increase revenue by innovating new products.
In other words, firms using robots are likely to focus initially on streamlining their processes before shifting their emphasis to product innovation, which gives them greater market power via the ability to differentiate from their competitors. The results are reported in the journal IEEE Transactions on Engineering Management.
Robots have been widely used in industry since the 1980s, especially in sectors where they can carry out physically demanding, repetitive tasks, such as automotive assembly. In the decades since, the rate of robot adoption has increased dramatically and consistently worldwide, and the development of precise, electrically controlled robots makes them particularly 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,” said 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,” said co-author Dr Philip Chen. “Profit margin can be a useful way to analyse this.” More