Recent research conducted by the University of Cambridge reveals that the adoption of robots in industries can lead to a ‘U-shaped’ impact on profits, initially causing profit margins to decline before eventually rising again. The study analyzed industry data from the UK and 24 other European countries over a span of more than two decades, shedding light on the complex relationship between robot adoption, cost reduction, and product innovation. In the wake of recent strides in AI technology, businesses are recognizing the immense possibilities and cost-saving opportunities offered by robots, leading to a surge in their adoption across various industries.
The U-shaped effect on profit margins
The research team from the University of Cambridge examined industry data from 25 EU countries between 1995 and 2017, focusing primarily on manufacturing sectors where robots are commonly employed. They observed that at the early stages of robot adoption, companies experienced a decline in profit margins. This outcome was attributed to firms primarily using robots to streamline processes and cut costs. But, this strategy was found to be easily replicable by competitors, leading to increased price competition and reduced profits for companies with low levels of robot adoption.
Co-author Professor Chander Velu from Cambridge’s Institute for Manufacturing highlighted an intriguing similarity to the introduction of computers in the past, where productivity initially saw a slowdown before rising again. The researchers wanted to explore whether a similar pattern existed with robotics. Dr. Philip Chen, another co-author, emphasized that profit margins were used as a valuable indicator to understand whether companies were using robots to enhance internal processes or revolutionize their entire business model.
From streamlining to product innovation
As robot adoption levels increased, a critical shift occurred in companies’ strategies. Instead of solely focusing on cost reduction, firms began integrating robots into their business models more comprehensively, leading to new product innovation and increased revenue. This transition allowed companies to differentiate themselves from competitors and gain market power, eventually driving profits higher.
The study underscored the challenges faced by companies during the process of robot adoption. Integrating robotics into existing processes came with significant costs, and as more robots were introduced, businesses reached a tipping point where an entire process redesign became necessary. This highlights the importance of the simultaneous development of new processes while incorporating robots to avoid bottlenecks and maximize the benefits of robot adoption.
The researchers conducted interviews with an American medical equipment manufacturer to gain practical insights into their experiences with robot adoption. The manufacturer emphasized that robot integration requires substantial financial investments to automate and streamline processes effectively.
Robotics and AI for sustainable profit growth
The research from the University of Cambridge provides valuable insights for companies considering the adoption of robotics. The study’s findings indicate that while robot adoption can initially impact profit margins negatively, a well-planned and integrated approach can lead to a U-shaped effect, resulting in increased profits in the long run. Companies should not only focus on cost reduction but also prioritize process innovation and new product development to harness the full potential of robotics for sustainable growth.
The study calls for a concurrent adaptation of the business model with robot adoption to speed up the transition to the profitable side of the U-shaped curve. As robot technologies continue to evolve and transform industries, businesses must carefully strategize their approach to ensure successful and profitable integration of these transformative technologies.
The Institute for Manufacturing’s ongoing efforts to assist small- and medium-sized enterprises (SMEs) in adopting digital technologies, including robotics, in a cost-effective and low-risk manner hold promise for driving cost reduction and margin improvements from new products. By embracing robot adoption with thoughtful planning and innovation, companies can navigate the U-shaped effect and thrive in the era of robotics and artificial intelligence.
