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Apple's Biggest Contractor Builds a Robot Army

By Rich Smith - Jun 8, 2016 at 5:47PM

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Long a bastion of cheap manual labor, China, too, is being taken over by robots.

Robots are coming to steal all of our jobs.

I'm sorry. Does that sound a bit hyperbolic? Well, consider: Toyota Motors already uses thousands of robots on its car assembly lines and is perhaps only hours away from buying a humanoid robots-producer to do even more specialized work. At Amazon.com, one out of every four workers in the e-commerce giant's warehouses is a robot. And now, even China -- once home to some of the lowest wages for manual labor on the planet -- is beginning to switch out humans for robot workers.

Last week, we learned that Foxconn, the contract manufacturer responsible for building most of our Apple (AAPL 0.63%) iPhones, has replaced 60,000 human workers with robots.

Foxconn isn't stopping there, either -- and it isn't alone.

In a statement supplied to Marketwatch lat week, Foxconn acknowledged that it is "applying robotics engineering and other innovative manufacturing technologies to replace repetitive tasks previously done by employees." The Apple contractor also says it has "plans to automate more of our manufacturing operations over the coming years." In fact, it plans to eventually put 1 million robots to work, replacing 30% of its human workforce by 2020.

What's more, China's South China Morning Post reports that "roughly 600 companies in the Kunshan region," which Foxconn calls home, "are reportedly looking to reduce headcount with robots."

Humans = obsolete technology?

Why all the fascination with robots? Well, there's the cost factor, for one thing. Industrial robots can cost as little as $25,000. For a $12.50 an hour a job here in the U.S., that means a robot capable of replacing one human's worth of work can pay for itself in a year. Raise wages to $15 an hour, and a robot will pay for itself even sooner (and be more likely to get hired). Lower them to $4.20 an hour (the average manufacturing wage in China today), and you still recoup your investment in three years.

Here in the U.S., the Robotic Industries Association (RIA) reports that more than 260,000 robots are already on the job, and this number is growing. RIA says North American companies ordered 31,464 new robots in 2015, a 12% increase worth $1.8 billion.

How to profit from the robot revolution

It's important to keep those numbers in context. The U.S. added 38,000 jobs last month. So from one perspective, even anemic jobs growth in the U.S. still has humans landing new jobs more than 12 times faster than robots -- for now. But the percentage rate at which robot jobs are growing vastly exceeds percentage job growth for humans. Over time, it's not hard to predict how this trend plays out.

So, what's a human to do? Well, one thing you might do is focus on finding a job that can't be done -- or can't be done economically -- by a robot. (Interior designer? Park ranger? I'm open to suggestions...)

In the meantime, it only makes sense for investors to begin buying stock in robotics companies that are supplying this trend. In Foxconn's case, unfortunately, Investors Business Daily confirms that Foxconn actually builds its robots in-house -- logical, for a high-tech electronics manufacturer. But elsewhere in China, the biggest suppliers of robots currently include foreign names such as Japan's Fanuc (FANUY 1.12%), Germany's Kuka (KUKAF 0.35%), and Switzerland's ABB (ABB -0.52%). Throw in Japan's smaller and less-famous Yaskawa Electric, and these four companies produce 60% of the robots currently in use in China.

According to data from S&P Global Market Intelligence, all four of these companies are profitable, with Fanuc leading the pack with $2 billion in trailing profits. Each of the four companies also generate positive free cash flow, with Kuka generating the least, and ABB throwing off the most cash -- $3.1 billion annually, or 68% more than its $1.9 billion in reported profit.

Despite being the strongest cash-generator, ABB stock sells for a very reasonable price -- less than 15 times free cash flow. Its projected growth rate exceeds 11%. Throw in a very respectable 3.6% dividend yield, an NYSE listing that makes the stock easy to trade, and a leading position in a growing segment of the market, and ABB looks like a great way to profit from the growing trend of robots in the workplace.


Manual labor at a Foxconn factory in Shenzhen -- soon to become obsolete? Image source: Wikimedia Commons.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 309 out of more than 75,000 rated members.

The Motley Fool owns shares of and recommends Amazon.com and Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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