Industrial automation will likely see explosive growth over the coming decade.
In our introduction to this series on investing in AI technologies, we examined 14 AI technology ecosystems and discussed how a hypothetical hardware/chip manufacturer looking to invest might segment them. One promising ecosystem in the “gold rush” quadrant (with both high strategic alignment and financial attractiveness) is industrial automation. AI-driven industrial automation extends the current widespread use of robotics and control technologies in manufacturing, quality control, and materials handling with greater levels of situational awareness and autonomous operation—including the ability to seamlessly interact with humans.
We believe that the future value of the industrial automation market is significant as these technologies are already being deployed, their promise is just beginning to be fulfilled, and the market for them is so sizable.
The promise of industrial automation
When thinking about industrial automation, images of large robotic arms performing repetitive tasks on an industrial assembly line likely come to mind. However, advances in AI/machine learning algorithms (for example, computer vision), computing power (onboard computing), and communication technology (5G, Wi-Fi6, and so on) are pushing the frontiers of independent robotic functionality. Robots are becoming more maneuverable and nimble, which allows them to intermingle more naturally with humans. While traditional form factors (for example, stationary, wheeled, or tracked path robots) will continue to dominate for the immediate future, we’ll see a growing number of autonomous robotic operations over the next few years (see figure).
The investment thesis
Although most industrial automation technologies are still several years from maturity, we consider industrial automation to be a prime investment candidate for our hypothetical hardware manufacturer because it’s a large market that already has proven applications and because the plethora of AI technologies within this ecosystem provide space for a wide array of investors. Those investors interested in industrial automation can carve out a niche that aligns with their investment strategy, using our three criteria:
Addressable market. The industrial automation market is currently large and offers both increasing AI intensity and significant overall growth trajectory. Industrial automation has the potential to become a $250 billion market by 2035 because:
- Each of the myriad specialized applications is or has the potential to disrupt a multibillion-dollar market, creating ample opportunity for outsized returns in industries as diverse as transportation, mining, and high-tech manufacturing.
- Manufacturers (that is, customers) are hungry for the sort of step change in productivity that AI can offer to overcome the lackluster productivity growth they’ve experienced so far this century, especially given the recent impetus for more supply chain flexibility and security.
- Enabling technologies such as 5G are reaching the mainstream and removing barriers to adoption.
Competitive intensity. The steep learning curve for each specialized application makes it difficult for a single player to dominate multiple applications, so investors should be able to carve out their own space. Additionally, the relatively low network effects make it unlikely that a handful of companies will come to dominate this technology the way they do with search and social media.
Technological maturity. Industrial automation already has many applications that are in-market with proven value (for example, asset monitoring), and Industry 4.0 investments are in full swing. Investors with shorter time horizons for returns are therefore more likely to benefit from industrial automation than other AI investments.
We then factor in strategic alignment, which accounts for our hypothetical investor’s specific goals. Because of the clear adjacency with our investor’s chip manufacturing business, including chips needed for on-board, real-time processing tasks, the value capture potential is high. This investor is also likely to be able to play to its strengths by taking advantage of existing manufacturing relationships and go-to-market infrastructure. Furthermore, its own automation experience gives this investor a leg up in understanding and expertise along with a captive market into which it can test and iterate products. The breadth of use cases with known value and a clear path to cash flow for more established applications means that industrial automation technologies fit well with the company’s portfolio approach, providing the opportunity for diversified investments within a relatively short time horizon.
Industrial automation will play a crucial role in Industry 4.0 by driving efficiency and agility. As a result, industrial automation will likely see explosive growth over the coming decade as robots ultimately gain the ability to collaborate seamlessly with both people and other machines. Regulation, behavior, and even corporate inertia may slow the adoption of collaborative robotics and crimp the long-term growth curve, so investors will need to chart a careful course. Additionally, the hype factor means that a premium will be paid for value. Despite these caveats, industrial automation technology is fertile ground for investors who focus on generating outsized synergies.
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