Science & Technology, UK (Commonwealth Union) – A recent study conducted by researchers from the University of Cambridge has unveiled an interesting pattern in how robots impact a company’s profits. Their findings indicate that there is a ‘U-shaped’ relationship between the adoption of robots and profit margins – initially causing profits to decrease, followed by a subsequent increase.
The researchers analyzed industry data from the UK and 24 other European countries spanning the years 1995 to 2017. They discovered that when robot adoption is at a low level, it has a negative impact on profit margins. However, as the adoption of robots increases, they begin to contribute positively to profits.
The reason behind this U-shaped trend lies in the intricate interplay between cost reduction, process development, and product innovation. Typically, companies begin incorporating robotic technologies to lower costs. This process innovation, though beneficial in the short term, can be imitated by competitors, leading to a focus on competition rather than product innovation when robot adoption is low. As the use of robots becomes more prevalent and deeply integrated into a company’s operations, they can be leveraged to drive revenue growth through the innovation of new products.
To put it simply, companies that employ robots tend to first optimize their processes, then shift their attention towards developing innovative products. This strategic shift enables them to stand out from competitors, granting them greater market influence. The findings from this study were published in the IEEE Transactions on Engineering Management journal.
Since the 1980s, robots have played a significant role in various industries, particularly in tasks that involve repetitive physical work like automotive assembly. Over the years, the adoption of robots has surged globally, particularly in high-precision manufacturing applications like electronics, where their precision and electronic control capabilities prove highly advantageous.
While the positive impact of robots on labor productivity at an industry or country level is well-documented, this study delves into the relatively unexplored realm of how robots influence profit margins on a broader 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,” explained co-author Professor Chander Velu from the University of Cambridge, 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.”
To accelerate the journey towards the more profitable phase of the U-shaped curve, researchers suggest that companies should align their business models with the adoption of robots. It’s crucial that the adaptation of the business model happens concurrently with the integration of robots. Only when robots become an integral part of the business model can companies effectively harness their potential to innovate and create new products, ultimately boosting profits.
The Institute for Manufacturing is also overseeing a related initiative aimed at assisting small- and medium-sized enterprises (SMEs) in embracing digital technologies, including robotics, in an affordable and low-risk manner. This community program aims to bring about incremental improvements and step changes, enabling SMEs to experience both cost reductions and improved profit margins through the introduction of new products, as indicated by co-author Professor Duncan McFarlane.
Funding for this research was provided by the Engineering and Physical Sciences Research Council (EPSRC) and the Economic and Social Research Council (ESRC), both of which are components of UK Research and Innovation (UKRI). Chander Velu holds a fellowship at Selwyn College, Cambridge, while Duncan McFarlane is a fellow at St John’s College, Cambridge.
