A negative interest rate and the perceived failure of Abenomics have undermined investor confidence in Japan, stealing attention from robust fundamentals and an untapped growth story. Strong company earnings and structural reforms combined with improving governance are creating real value in innovative sectors of Japan’s equity market, such as robotics.
Japan has always been seen as the most robot-savvy nation on earth and its superiority has been particularly prominent in industrial robotics, used for the production of cars, electronic goods and food. The growth rate of the country’s robotics sector has been around 5 to 6 per cent per annum over the last decade and the challenge for Japan now is to maintain this level in the face of global competition.
Robots have recently become one of the nation’s top priorities after Prime Minister Shinzo Abe called for a “robotics revolution”, a five-year plan to increase the use of intelligent machines and boost sales. Fundamental lifestyle factors in Japan, including an ageing population, shrinking workforce and public aversion to immigration, present huge challenges for the Japanese economy. But with the backing of government and corporate initiatives, these factors will prove significant demand drivers for the robotics industry.
Japanese robotics companies also have the potential to benefit from increasing demand from emerging economies, particularly China, which is the largest buyer of industrial products. According to World Robotics’s 2015 Industrial Robots report, only 36 robots were installed per 10,000 employees in China’s manufacturing industry in 2014, compared with 314 units in Japan. The figures highlight the huge potential for robot installations in this market.
Has the future arrived?
Japan currently plays a key role in the future of the global growth of the sector and its robotics industry’s revenues are predicted to grow by ¥9.7 trillion (£60.3bn) by 2035. Robots are currently being widely used in the car industry and the latest developments in this area include advanced driving assistance systems (ADAS), which assist, complement and will eventually substitute the driver.
As part of a wider plan to boost the stature of Japanese technology and revitalise the economy, the government also aims to introduce self-driving cars in time for the Tokyo Olympics in 2020. One of the companies well positioned to take advantage is Toyota, which is responsible for a large share of patent applications. Nidec, a specialist maker of small electric motors used in hard disk drives and other technologically advanced equipment, will also benefit from rising demand for smart cars.
Rise of artificial intelligence
Factory automation is one of the latest developments in artificial intelligence (AI) and Japan has recently become very competitive in this area, with the development of AI expanding beyond production lines to areas such as analytics and logistics, where the software will be used to upgrade supply chain procedures.
Blue-chip firm Denso recently announced that it will connect all of its 130 factories globally in real-time by 2020. It hopes to profit from efficiency gains by using the latest technology in robotics and analysis. Denso is the latest of a number of businesses to announce a major technology-driven initiative to improve productivity.
Another example is Japanese manufacturer Fanuc, which has developed industrial robots which are able to learn mechanical tasks on their own. The robots use algorithms in datasets to recognise patterns and act accordingly. This could help make industrial production processes up to 10 per cent more efficient.
Will robots replace humans?
Much ink has been spilled over robotics and its potential to replace part of Japan’s working population within the next 10 to 20 years. The displacement of jobs by robots is very unlikely; however, people who use them will certainly start outperforming those who don’t. Many industries increasingly rely on robots and AI to provide goods and services, and robots will soon become an integral part of our everyday lives. For investors, this creates an exciting opportunity to participate in the development of technologies that rapidly spread across the world.
Industrial robots are conquering the world and companies in this space have the potential to deliver higher returns than the broader market over the long term. Although the investment potential of the sector has not yet been fully recognised, the rise of intelligent machines is imminent and can’t be ignored.