Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 174

Smart automation provides competitive edge

A relatively slower capital expenditure cycle is often cited as one factor behind the current tepid economic expansion in many developed markets. However, we believe this top-down view obscures a healthy albeit different sort of capex cycle, one that is more technology-driven and focused on efficiency.

Profits for companies that execute automation well

Rather than driving volume via heavy spending on traditional fixed equipment, companies globally seem focused on gaining more lasting competitive advantages by reducing labour costs while increasing throughput and innovating faster via software-driven automation. This trend is durable and could accelerate profits for companies that execute well. Automation has long been commonplace in manufacturing, logistics and other areas, but we are now seeing a differentiating factor with the rise of ‘smart’ automation and instrumentation.

Underpinning this drive for industrial process innovation and accelerated profit are several things we believe should continue for some time.

Outsourcing, often to emerging markets, has been one common way for companies to lower labour costs. While there are concerns now of moderating emerging markets’ growth, the prior decade or so resulted in high and persistent wage inflation (see table below). In China and other parts of the developing world, these inflation pressures remain largely unchanged despite expectations of more modest top-line economic growth. Rising wages compress the payback period for automation, creating incentives for investments in equipment rather than labour.

Fifteen years of global wage inflation

Source: Economics and Statistics Administration analysis of data from US Bureau of Labor Statistics, International Labor Comparisons program and National Bureau of Statistics of China.

Cost containment and operational flexibility

Automation gives companies greater flexibility to manage a range of costs since operations need not necessarily be close to a large, manufacturing-based labour pool. Other factors, including local taxes and regulations, existing infrastructure and the political environment, may further increase demand for automation equipment globally. Shipping costs are another key factor.

Despite the recent fall in commodities prices, North America’s ongoing energy renaissance has resulted in all-time high US natural gas and crude production, possibly prompting some companies to locate next-generation automation facilities closer to their large North American customer bases.

These factors are behind the recent trend of manufacturing ‘near-shoring’ to Mexico, which is poised to overtake Canada and Japan as the number-one source of US car imports. As of the end of 2015, Mexico is now producing nearly one of every nine light vehicles bought by US consumers. Global automakers have been building state-of-the-art manufacturing centres in Mexico, attracted in part by cheaper wages than in the US and Canada as well as proximity to America’s massive car market.

Consumers and governments are also demanding improved quality and safety profiles on goods, especially in emerging markets, where growing wealth correlates with demand for higher quality. Across industries, product failure and/or tampering can cause an immediate and lasting, even terminal, backlash. Additionally, many governments are making quality a legal requirement via more rigorous safety regulations and product specifications, a trend we expect to continue.

Investing in industrial innovation, including robots to improve precision, vision systems to manage quality control, and automated packaging and fulfillment systems to mitigate contamination or tampering, can help manage these costs.

Government-directed initiatives

As the world’s largest command economy, China can wield tremendous power in influencing certain sectors. As part of its 12th five-year plan, announced in 2011, the government emphasised seven key sectors, including next-generation information technology and advanced equipment manufacturing for attention. In 2015, it announced its ‘Made in China 2025’ initiative, designed to transform the country into a global manufacturing power not only in terms of volume, but also in efficiency and sophistication.

While China has not traditionally been transparent about the progress of its five-year plans, the intensive focus on these areas, combined with any spending the government commits now or in the future, should add materially to demand for next-generation automation systems, instruments and components.

How can investors benefit?

Benefits from increased industrial process innovation are fairly broad-based, potentially touching any industry employing automation or sophisticated instrumentation. From an investing standpoint, we believe there are several interesting opportunities.

Traditional industrial equipment manufacturers that have shifted to become hardware/software fused offer good opportunities, as do companies producing industrial robots or machine tools overlaid with next-generation instrumentation and smart automation.

There are also opportunities among components designers and manufacturers such as companies designing infrared componentry, advanced sensors or advanced location devices. Investing in components providers allows us to invest in the broader trend of more sophisticated instruments without trying to select which software platform will ultimately win.

Managing risks

We are mindful of inherent risks that could derail the profit-acceleration potential from this trend, such as competition from lower-cost start-ups, particularly from emerging markets. Profit growth could also be tempered by a slower pace in artificial intelligence take-up, which could limit industrial robots’ dexterity.

We look for companies with a large and powerful installed base of hardware with existing clients. Dominant market share can result in an effectively locked-in audience, aiding in future profits from product-replacement cycles, upgrades and cross-selling.

We also prefer those willing to invest heavily in research and development now. Such investments do impact margins; however, investing strategically is one way to fend off lower-cost upstarts and amplify scale advantages.

Companies with scientific research-driven backgrounds have good prospects. They often develop products or software for extreme situations and can alter them for more common applications, giving them a technological head start over competitors or a low-cost advantage.


James D Hamel, CFA, is a Managing Director at Artisan Partners and a portfolio manager on the Growth team. Michael A Schneider, CFA, is an analyst on the Artisan Partners Growth Team, where he conducts fundamental research. This material is for informational purposes only and should not be considered as investment advice or a recommendation of any investment service, product or individual security. Any forecasts contained herein should not to be relied upon as advice or interpreted as a recommendation.



Leave a Comment:


Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates


$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.


Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.