There’s an old joke about a man who, lost along the back roads of rural Ireland, spots a farmer and pulls over to ask for directions.
“Well,” the farmer says. “I wouldn’t start from here.”
The same could be said of the UK’s efforts to automate its manufacturing industry. Already lagging its G20 peers, the post-Brexit shortage of skilled workers and spiralling wage demands provide the impetus for manufacturers to increase investment but the worsening economic backdrop weakens the wherewithal.
Figures for automation rates are difficult to come by but using the number of industrial robots installed in factories as a proxy shows that the UK trails badly. It is the only G7 country with a robot density below the global average of 126 installations per 10,000 factory workers. It has 101, compared with Japan's 390, Germany's 371 and the US's 255. South Korea is the global leader, with 932.
Industry experts highlight varying reasons for this. A review in 2017 by Siemens’ (DE:SIE) former UK head Juergen Maier highlighted a lack of national vision or leadership promoting industrial digitalisation, as well as poor levels of adoption – particularly among SMEs.
Last month, the Productivity Commission pointed the finger at manufacturing and finance as the two industries responsible for the biggest decline in productivity growth since the financial crisis – growth in output per hour worked slowed to 0.2 per cent between 2007-19, compared with 2.1 per cent in the 30 years prior and 3.6 per cent in the postwar years.
It highlighted “low levels of investment” in upgrading manufacturing capacity.
Susanne Bieller, secretary general of the Frankfurt-based International Federation of Robotics, told Investors’ Chronicle that the UK relied too heavily on imported labour when it was still a member of the European Union.
“With Brexit, this cheap labour left the country and so there was a void that needs to be filled by automation.”
Robot wars
Decisions on whether to invest in automation “used to be based on a return on capital-type calculation”, Roger Buckley, a corporate finance partner at BDO said on a recent webinar.
“These days it’s now seen as being more business critical just in terms of actually keeping operations going...partly because of staff shortages,” he added.
RHI Magnesita (RHIM), a London-listed maker of refractory products (used to line furnaces, for example), has just invested around €50mn (£43mn) in developing a “flagship” automated plant in the Austrian town of Radenthein.
“The pool of qualified resources that are willing to work in the industry is getting smaller and smaller,” the company’s chief operating officer, Rajah Jayendran, said. Automating the plant will help to improve efficiency not only by reducing headcount but also by allowing more predictive, or risk-based, maintenance. This means fewer shutdowns and increased availability, he said.
RHI expects its investment to generate an internal rate of return of 40 per cent, with a payback in around two years.
The ability to implement a control system that collects data which can eventually be used for machine learning to drive even more efficiencies is seen as a key benefit.
For example, in an older plant, there may be a 20-year-old piece of machinery whose vendor is no longer in business, and only a handful of people know how to use it. "You’re pretty dependent on [them],” Jayendran said.
Digitising that shopfloor knowledge allows it to be shared across an organisation and makes training new people much easier, he said. The Radenthein plant upgrade will lead to at least a one-fifth cut in its workforce, though.
Concerns about job displacement has been one of the main barriers holding back investment in automation, said Raquel Ortega-Argilés, director of the Productivity Institute’s new Productivity Lab. Others include a fear of the disruption from changing processes, concerns about high upfront costs or a lack of flexibility in the system chosen.
Pay to play
Although many manufacturers are aware that automating can be more cost-effective in the long run, “there is a pre-conceived notion” that introducing complex new technology comes with high capital costs, as well as the need to retrain people, Ortega-Argilés said.
This makes smaller firms particularly reticent, but as robotics become more commonplace prices will fall. Technology can also be leased and introduced incrementally, she said.
“Industrial automation and robotic systems have now advanced to a stage whereby they’re more capable, cheaper than they once were and easier to integrate,” she said.
Manufacturers know these arguments but decisions over committing to cash outlays for several years before seeing a return are difficult even in the most benign economic environments. Although there are currently generous capital expenditure incentives – a ‘super deduction’ allows companies to reclaim 130 per cent of money invested in plant and machinery as tax credits until March 31 next year – the take-up has been “quite low”, said BDO’s head of manufacturing, Richard Austin.
The latest BDO/Make UK manufacturing outlook survey published last month showed the net balance of firms intending to make new investments fell to just 5 per cent, from 27 per cent three months earlier.
Although automation makes sense, “the challenge is the cash situation for businesses”, Austin said.
Stephen Harrison, chief executive of brick maker Forterra (FORT), said there was plenty of money available for automation projects, pointing to the number of buybacks currently being carried out by listed firms as evidence of the strength of their balance sheets.
His company is spending £95mn upgrading its Desford factory, where automation will more than double the installed capacity to 180mn bricks a year. The plant will require fewer people to operate, although the increased output means it will employ more people to load and drive lorries, as well as more plant technicians, Harrison said.
It will take “a couple of years” to get up to full speed after construction is finished this year but the upgrades are intended to eventually generate an annual cash profit of about £25mn.
When Forterra began the project, it assessed what it would need to pay to acquire a competitor that could add a similar level of output instead.“For about the same amount of money, we’d have got about half the return,” Harrison said.
“Our view was that if we invest in our own plants, we get a much bigger return to shareholders. But it takes time.”
Cash machines
A Digital Factory Transformation Survey published by PwC last month found that only 10 per cent of companies have fully implemented digital factory strategies, but that industrial companies are already spending around $1.1tn (£910bn) a year on digital transformation. For investors, there are many ways of capitalising on this.
One is to invest in the companies doing the automating. Another is to buy shares in the the big, industrial robot makers – although many of these are either based in Europe or Japan.
Of the European options, ABB (CH:ABBN), Schneider Electric (FR:SU) and Siemens have all “increased their through-the-cycle growth ambitions", said Martin Fujerik, senior credit officer at Moody’s Investors Service.
“Backlogs are really strong. There was a lot of pre-ordering over the last couple of months because [manufacturers] have anticipated higher inflation,” he said.
Closer to home, there are lots of companies that feed into this industry.
Renishaw (RSW), for example, has a manufacturing technologies arm which grew its sales by 22 per cent in the nine months to the end of March. It said demand for its encoders had been “driven by increased investments in industrial automation and the semiconductor and electronics capital equipment” markets.
Peel Hunt analyst Henry Carver also highlighted RS Group (RS1), the company formerly known as Electrocomponents. Although it is a distributor rather than a manufacturer, it has a global footprint that has allowed it to overcome some of the supply chain challenges faced by others in the market, he said.
Simon Bowler, head of research at Numis, pointed to IMI’s (IMI) precision engineering motion and fluid control technologies arm, which grew industrial automation revenues by 17 per cent last year. The company spent €98mn buying Bahr Modultechnik – a German manufacturer of electric linear motion systems – last month.
Other companies offering different degrees of exposure to the automation trend include Gooch & Housego (GHH), Spectris (SXS), Oxford Instruments (OXIG), TT Electronics (TTG), DiscoverIE (DSCV), Mpac (MPAC) and micro cap 600 Group (SIXH).
