Businesses that integrate robots see profits fall in the short term, study finds

Robots have been found to initially reduce the profits of firms that start using them, University of Cambridge researchers have said.

The team studied industry data from the UK and 24 other European countries between 1995 and 2017 and found that, at low levels of adoption, robots have a negative effect on profit margins.

However, at higher levels of adoption, robots can help to increase profits. This U-shaped phenomenon is due to the relationship between cost reduction, development of new processes and innovation of new products, the study suggests.

While many companies first adopt robotic technologies to decrease costs, this process can be easily copied by competitors. However, as levels of adoption increase and robots are fully integrated into a company’s processes, the technologies can be used to increase revenue by innovating new products.

Firms using robots are likely to focus initially on streamlining their processes before shifting their emphasis to product innovation, which gives them greater market power via the ability to differentiate from their competitors.

Industry’s widespread use of robots began in the 1980s, especially in sectors where they can carry out physically demanding, repetitive tasks, such as automotive assembly. In the decades since, the rate of robot adoption has increased dramatically and consistently worldwide, and the development of precise, electrically controlled robots makes them particularly useful for high-value manufacturing applications that require greater precision, such as electronics.

While robots have been shown to reliably raise labour productivity at an industry or country level, what has been less studied is how they affect profit margins at a similar macro 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,” said the study’s co-author, Professor Chander Velu. “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.”

The researchers examined industry-level data for 25 EU countries (including the UK, which was a member at the time) between 1995 and 2017. While the data did not drill down to the level of individual companies, the researchers were able to look at whole sectors, primarily in manufacturing where robots are commonly used.

They then obtained robotics data from the International Federation of Robotics database and compared the two sets of data to determine the effect of robotics on profit margins at a country level.

“We found that it’s not easy to adopt robotics into a business – it costs a lot of money to streamline and automate processes,” said co-author Dr Philip Chen.

The study suggests that firms need to adapt their business model concurrently with robot adoption in order to reach profitability faster.

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