Artificial intelligence and robotics, the next disruptive force?
On a business trip to Norway I watched a special show on CNBC called the Meeting of the Minds: The Business of Science which features several prominent people involved in science and entrepreneurship. At the end of the show they all had to point to which science they believed would be a driving force in the future. The bids came from: genetics, understanding of the brain and biotechnology plus new sources of energy and agriculture etc. One science was left out - robotics.
If I had to point to one science that will revolutionise our world it will undoubtedly be robotics combined with artificial intelligence (AI). The two key factors that will drive this disruptive force are demographics and competition from low-cost producing countries.
The demographic trend in the developed economies is such that in order to sustain our standard of living and manage the increasing burden from more elders, the economy has to significantly increase its productivity and the obvious mean to this end is robotics.
Competition from low-cost producing emerging economies is eliminating industrial jobs in the developed world. But one developed economy has managed to keep a sizeable industrial machine by investing heavily in the automation of production and that country is Japan. Other developed economies will have to adapt in a similar way otherwise their industrial production will continue to diminish.
Those two factors will drive the revolution of robotics. But a key ingredient when we talk about robotics is the combination with AI. Today robots are merely used in the automation of industrial production, for example in car production. The robotics we are talking about in the future will be way more intelligent and the low-intelligent robotic lawnmower is only the very beginning.
How will robotics be used?
I imagine the first phase of intelligent robots (equipped with AI) will appear in the health care industry where robots will replace many functions now carried out by expensive labour. The driver will be the demographic issue with more elderly compared to people employed as a ratio of the total population. With indebted welfare states the introduction of intelligent robots is the only thing that can save health care budgets from imploding. They are more efficient than people and are excellent in repetitive tasks but the future robots will also be able to carry out conversations with people fulfilling purposes that reach far beyond just dish washing.
The next phase could easily be other labour intensive industries such as construction. Imagine if you could load 3D CAD (Computer-aided design) models of new buildings into the robots operating system; combined with cooperative software code, 20 robots are able to coordinate the construction of the building working 20 hours a day with only four hours of idle time as the robots recharge their fuel-system (likely advanced batteries). Imagine driving on the highway and suddenly you see two five metre high advanced construction robots building a bridge above. This way of working is effective, clean, flawless (depending on flawless software of course) and best of all it is cheaper than having 15 construction workers doing the job.
Another straight forward application of AI robotics will definitely be the military. Imagine the US military solving conflicts in Africa by sending advanced robots (able to talk the local language) into the field with special armour. The result will be no or at least very few casualties. Think about how robotics could optimise and reduce the amount of money we use on the military (yes soldiers are very expensive).
One last very simple robotic application could also be in the labour intensive part of the agricultural industry such as banana harvesting. Instead of having an army of workers in plantations robots loaded with schematics would pick bananas, probably more efficiently than their human counterparts.
Fanuc is well-positioned for the future of robotics
Now that we have laid out why AI robotics will be the next disruptive force revolutionising our world and what applications it will have, it is time to tie it together with investing. Which companies are best positioned in the world to take advantage of the exciting future?
Our best guess is the Japanese public listed company, Fanuc, which was founded in 1972 as a spin-off from Fujitsu and today is the one of the largest makers of industrial robots used primarily in the automobile and electronics industries. With Fanuc's technology, Panasonic is able to produce 2 million televisions a month with just 15 people.
Fanuc is a success story as the company has grown its revenue from JPY 125 bn. in 1994 to JPY 535 bn expected this year, corresponding to an annualised growth rate of 8.4 percent (see chart below); this of course is not the equivalent of Microsoft growth but remember so far that growth has been driven by the automation of just a few industries whereas the future will force robotics into every industry and our homes. Even more impressive, the company has such an advantage that it sports a 42-45 percent EBITDA margin over a business cycle. The growth rate has in recent years been higher than the historical rate and that is pretty impressive when you think about the strong Yen. Again we believe we have only just begun the robotics revolution.
On valuation investors will have to pay a higher price compared to the average market. Fanuc trades at 16.6x current 12 months earnings and the EV/EBITDA is 8.7x. These figures are 14.4x (P/E) and 18.1 (EV/EBITDA) for General Electric.
We believe the future for AI robotics is very bright and that it will be a major disruptive force in this century. If you want to exposure yourself for the future, potentially via your pension, a long (minimum 10-20 years investment horizon) bet on Fanuc might be worth considering as it seems well positioned for this 'revolution'. Otherwise keep your eyes open for other emerging companies in this Al robotics space.