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A group of researchers at the University of Cambridge found that robots can decrease productivity in the short term but can increase it in the long term. This U-shaped phenomenon is due to the relationship between reducing costs, developing new processes and innovating new products.
The researchers studied industry data from the UK and 24 other European countries between 1995 and 2017 compiled by the European Union (EU). While robots have been shown to raise labor productivity at an industry or country level reliably, it hasn’t been studied how robots affect profit margins at a similar macro scale.
While the data didn’t allow the researchers to examine trends at the level of individual companies, they were able to look at whole sectors, primarily in manufacturing where robots are commonly used. Combining the EU data with robotics data from the International Federation of Robotics (IFR) database.
Comparing these two sets of data, the team was able to analyze the effect of robotics on profit margins at a country level. The researchers then carried out a series of interviews with an American medical equipment manufacturer to study their experiences with robot adoption. In all, the team found that at low levels of adoption, robots have a negative effect on profit margins, but, at higher levels of adoption, robots can increase profits.
“Initially, firms are adopting robots to create a competitive advantage by lowering costs,” co-author of the study Chander Velu from Cambridge’s Institute for Manufacturing said. “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.”
According to the researchers, many companies adopt robotic technology because they want to decrease costs. This ‘process innovation’ can be easily copied by competitors, decreasing costs across the industry and creating smaller margins for everyone. Once those companies shift their focus from streamlining their processes to product innovation, which can give them greater market power and the ability to differentiate from competitors, profits increase.
“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,” said Velu. “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 research team said that if companies want to reach the profitable side of the U-shaped curve more quickly, then they should focus on adapting their business model concurrently with robot adoption. Companies can only use the power of robotics to develop new products and drive profits after robots are fully integrated into the business model.
This research was published in the journal IEEE Transactions on Engineering Management. It was supported by the Engineering and Physical Sciences Research Council (EPSRC) and the Economic and Social Research Council (ESRC), which are both part of UK Research and Innovation (UKRI). Chander Velu is a Fellow of Selwyn College, Cambridge. Duncan McFarlane, another co-author on the study, is a Fellow of St John’s College, Cambridge.