Robots have long been a staple in industries that require physically demanding and repetitive tasks. However, recent research from the University of Cambridge has found that the adoption of robots can have a ‘U-shaped’ effect on profit margins. Unlike traditional beliefs that higher robot adoption leads to increased profit margins, the study reveals that profit margins actually decline at low levels of adoption before eventually rising again.
The researchers attribute this U-shaped phenomenon to the intricate relationship between reducing costs, developing new processes, and innovating new products. Companies initially adopt robotic technologies to decrease costs, known as “process innovation.” However, this can be easily replicated by competitors, leading to a focus on competitor analysis rather than on product development. As robot adoption increases and becomes fully integrated into a company’s processes, it enables the innovation of new products, resulting in higher profit margins.
Robotic Adoption and Profit Margins
Throughout the decades, the rate of robot adoption has significantly increased across various industries worldwide. While the impact of robots on labor productivity has been widely studied, the effect on profit margins has received less attention. The researchers aimed to explore this relationship and understand if robots had a similar pattern of affecting productivity as computers did in the past.
The study analyzed industry-level data from 25 European countries between 1995 and 2017. By comparing this data with robotics data obtained from the International Federation of Robotics (IFR) database, the researchers were able to examine the effect of robotics on profit margins at a country level. Surprisingly, instead of a linear relationship between robot adoption and profit margins, the researchers discovered a U-shaped curve. This indicates that profit margins initially decline at low levels of adoption, rise as adoption increases, and eventually reach a peak.
At low levels of robot adoption, firms primarily focus on utilizing robots to streamline processes and reduce costs. However, process innovation is easily imitated by competitors, resulting in a squeeze on profit margins. To combat this, companies must develop new processes concurrently with robot adoption to prevent reaching a pinch point where margins begin to decline.
To accelerate the transition to the profitable side of the U-shaped curve, businesses need to adapt their business models alongside robot adoption. Fully integrating robots into the business model allows companies to harness the power of robotics in developing new products, which ultimately drives profits. Without this synchronization, companies may miss out on the full potential of robot adoption and experience stagnation in profit margins.
In addition to the data analysis, the researchers conducted interviews with an American medical equipment manufacturer to gain insights into their experiences with robot adoption. The interviews revealed that adopting robotics into a business is a costly and complex process. It requires substantial investment to streamline and automate processes. As companies introduce more robots into their operations, a point is reached where a comprehensive redesign of the entire process becomes necessary to fully leverage robot capabilities.
Recognizing the challenges faced by small- and medium-sized enterprises (SMEEs) in adopting digital technologies, including robotics, the Institute for Manufacturing at the University of Cambridge has initiated a community program. Aimed at enabling SMEEs to adopt digital technologies in a low-cost and low-risk manner, this program emphasizes incremental and step changes. By enabling SMEEs to benefit from cost reduction and margin improvements through new products, the program aims to facilitate their successful integration of robotics.
The U-shaped effect of robots on profit margins has significant implications for businesses considering robot adoption. While initially leading to declining profit margins, the integration of robots into a company’s processes can ultimately result in increased profits through product innovation. To harness the full potential of robotics, companies must synchronize their business models with robot adoption, ensuring that process innovation is accompanied by the development of new products. By understanding and embracing this U-shaped phenomenon, businesses can navigate the complexities of robot adoption and emerge on the profitable side of the curve.
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