We're already getting used to seeing industrial robots join humans in manufacturing. As I've previously noted, several of the world's most innovative companies are already incorporating them into their operations. Tesla (TSLA 3.11%) uses industrial robots to assemble its Model 3 electric vehicles, Amazon (AMZN 1.21%) uses them to pick up warehouse items, and Apple (AAPL 0.48%) uses them to assemble incredibly complex electronic devices.
Understandably, the safety requirements for industrial robots are extremely strict. The robots must be surrounded by cages, far away from human contact, to avoid any serious injuries. The companies who have deployed industrial robots are using them for very precise and highly optimized processes, which require an almost-zero margin of error.
Several vendors -- such as Japan-based FANUC (FANUY 1.57%) and Germany-based KUKA -- provide the robots for these functions, but also lock in service and maintenance contracts that can run for decades. Even given those recurring maintenance costs, customers have been more than willing to deploy the robots. The annual cost savings that they obtain from robotic labor far outweigh the depreciating capital investment.
But there's a new wave of robots that aren't just doing repetitive tasks like spot welding or painting. Collaborative robots are now being deployed for a variety of commercial opportunities, and they're even providing their brains instead of just brawn. Advances in artificial intelligence have enabled SoftBank Group's (SFTB.Y 3.38%) Pepper robot to serve as a concierge at Marriott's hotel locations. At some outpatient health facilities, robots help the elderly with their daily routines.
But what will these collaborative robots mean for those industrial companies? Should they tear out their older and outdated robots (and accept the associated downtime) to replace them with less expensive collaborative ones? Is it worth retraining their staff on how to use and work with the newer and more intelligent robots?
To answer these questions, I recently spoke with Brian Gahsman, the portfolio manager of AlphaCentric's Global Innovations Fund. Brian is an expert in the robotics space, and he believes collaborative robots are beginning to see adoption at smaller industrial companies. This could be an opportunity for investors with exposure to smaller robotic vendors.
Our conversation and a partial transcript are included below.
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This conversation was originally recorded on Nov. 8, 2018.
Motley Fool Explorer lead advisor Simon Erickson: Yeah, makes a lot of sense, Brian. The passive ETFs pushing up and down those P/E ratios like you mentioned earlier. Let's touch on something about that active management. Long term, we've talked a lot about the opportunity in industrial manufacturing for robotics. We've already touched on this. For our last interview, you said that industrial automation is still nowhere near saturation. We talked about the Made in China 2025 policy over there. They want to automate everything in the next, basically, seven years. We know that automotive is using robotics quite a bit, but then others like consumer goods and food packaging are following suit.
And there's huge switching costs for this, right? Once you put a robot in, it's really hard to just take it right back out again, because that would be downtime and a lot of money, but I know that there's also restrictions -- Brian, this is a longer-term question, but about the regulations around safety for industrial robots. They have to be kept in cages if they're fully automated, and sometimes that's difficult, to work alongside with human workers on those automation lines.
And so, one thing that we're seeing out there, at least for people that are self-proclaimed cutting-edge innovators is they like the idea of collaborative robots. Maybe they're offering augmented reality and vision, maybe there's these smaller co-bots that are responding to what the human is wanting to do, rather than just some task-specific thing on an industrial line. They're more regulatory-friendly and they're more human-worker-friendly.
My question for you is, how do you see this playing out? Is this really the trend, that we're going to have more collaborative robots in industrial manufacturing? Or is this more of a complement to those more rigid industrial robots that are doing step-by-step on those assembly lines? How do you see this playing? Is collaborative robots -- is this an opportunity or is this a threat for those large robotic manufacturers?
Global Innovations Fund portfolio manager Brian Gahsman: No, no, I think it goes hand in hand. You have to realize that, A, when one company implements robotics and automation in their line, their competition really has no choice to do it. As you mentioned, just due to the cost savings. If you're an average-sized company in the U.S., just because you have the option now to implement FANUC or Yaskawa, total automation, all of your lines, just completely automated, that does not mean that every company has the capital to be able to do that, to be able to afford to do that. Everyone would love to automate their entire facility and drop their costs completely, but that's not feasible.
So the collaborative robots, by, as you mentioned, yes, taking the cages down from around the big machines ... They're also less expensive than using the big machines and automating an entire facility. Using the collaborative robots, you maintain much similar sizing in your human staff and they're smaller, less expensive. And the collaborative robots, they work with humans and they check and they optimize and they document any improvements that can be done. They also learn from working hand in hand with humans, due to the advancements in AI that we've had up to this point. Now, to be completely honest, if every company in this country had the cash bucket that Amazon did, then sure, you would just have FANUC or KUKA come in and have your whole factory automated from the front door to the package that's going out the back.
So, collaborative robots are, I think, more realistic. And they also are kind of a catalyst to this global adoption that we've seen.