Earlier this week, I wrote an article discussing Fanuc's (OTCPK:FANUY, OTCPK:FANUF) open platform software bet on the futuristic smart factory. One reader asked about how Fanuc would compete with Kuka and the Chinese. In thinking about this, I decided to analyze the smart factory software playing field as objectively as I can.
For the purpose of getting the conversation flowing, I'll focus on what the big 4 players are doing in the race for smart factory software development.Major Partnerships Are Forming
As part of diving into smart factory software, the industry trend (NASDAQ:ROBO) has been to form partnerships with large tech companies. Currently, the known partnerships are Fanuc-Cisco (NASDAQ:CSCO), Kuka-Huawei (OTCPK:KUKAF, OTCPK:KUKAY), and the most recently announced ABB-IBM (ABB, IBM). Yaskawa Electric (OTC:YASKF, OTCPK:YASKY) seems to be floating around, though the company has had some involvement with Huawei and Midea Group (the folks that acquired Kuka).
China is betting big on industrial robots - so big that most of China's jobs are at risk of being automated. Despite Mark Cuban's call for government support, the US has been dragging its feet. Japan and Germany are robotic as usual. In terms of government support, team Kuka-Huawei probably has a leg up against the rest of the big 4.
I want to emphasize that this discussion revolves around smart factory software and not purely industrial robotics. The reason for this emphasis is that media coverage on the future of industrial robotics seems to place heavy emphasis on technological advantages. While bleeding edge tech might be the name of the game today, the environment is already changing.Service Is The Game Changer
If we take a step back and think about why factories exist in the first place, the importance of after-sale service for industrial robots becomes clear.
Whether using humans or robots, the purpose of a factory is to process/assemble materials into end products of some form. From a business perspective, if the cost of purchasing and operating robots becomes cheaper than human labor, robots are where the money will flow. A perfect example of this line of thinking was observed in 2014, when US fast food workers demanded a $15 an hour minimum wage.
Here is what McDonald's USA's ex-CEO Ed Rensi had to say about the issue:
"I was at the National Restaurant Show yesterday and if you look at the robotic devices that are coming into the restaurant industry - it's cheaper to buy a $35,000 robotic arm than it is to hire an employee who's inefficient making $15 an hour bagging French fries - it's nonsense and it's very destructive and it's inflationary and it's going to cause a job loss across this country like you're not going to believe."
Source: Fox Business
To state the obvious, a robot is only valuable when it is functioning. In the context of factory operations, school teachers and production managers would know: Just as a classroom progresses at the speed of the slowest kid, a production line progresses at the speed of the slowest department. In operations, the slowest department is often referred to as the "bottleneck."
Source: JantooFactory Operations: Yesterday And Tomorrow
Yesterday's factory operations were about moving people across departments to keep a consistent flow of product. Today, it's becoming more about keeping robots running. When a robot (or department) fails, everything downstream of the failure point in the production process is affected.
When we have 20 robots performing the same task(s) and one robot fails, we are at 95% capacity. If the rest of the production line continues to operate at 100% capacity, we will experience a buildup in inventory right before the failure point and underutilized capacity downstream of the failure point, assuming we have a perfectly balanced production process.
In other words, downtime is expensive.
This fuels the push for smart factory software. As Bryan Tantzen writes on Cisco's manufacturing blog:
"Many manufacturers operate at high volumes, and unplanned production downtime is costly. One leading auto manufacturer estimates unplanned downtime in a factory can cost them as much as $20,000 per minute. Often these line down situations are the result of production machine failures that could be avoided if data from the machine was available to anticipate the failure so a planned repair could take place in a standard maintenance window."
Source: Cisco BlogThe Total Package
This is where I say something ridiculous: Whichever company has the technological lead in robotics does not matter. But before any hurtful name-calling ensues, let me add some context.
The big 4 will duke it out with technological advancements no matter what. That's a given. Fanuc might have higher payload for less energy than Yaskawa, Kuka might have higher precision CNC system than Fanuc, etc. At the end of the day, the industry will be faced with the law of diminishing returns. Incremental value creation from improving processing time for whatever task by 0.01 second won't be a major concern for large companies. And sure, there is still a long runway before we get to that point, but I don't imagine a robotics industry missing any of the big 4 companies any time soon.
At the very least, Fanuc's FIELD system announcement, along with the Kuka-Huawei and ABB-IBM partnership, are good indicators that these companies already know where the real opportunity is: Smart factory software.
Now, smart factory software is a new domain, especially since there aren't any fully functional, commercially available solutions yet. Furthermore, smart factory software happens to serve a pivotal function for service - the biggest benefit being predictive maintenance, or solving problems before problems happen. When your robots tell you they'll have problems in a week, it's easier for factory managers to schedule maintenance at a cost-efficient time. Put another way, having a stronghold in smart factory software opens up the door for a total package: building, managing, and servicing the robots.Current Competitive Landscape
In the current environment, I would rank-order the big 4 robot companies' competitive positions in the smart factory software scene as follows:
I put Fanuc-Cisco at the top for several reasons, the main one being that the FIELD system already has a working prototype. Fanuc has already delivered positive results with their Zero Downtime (ZDT) initiative over at General Motors (NYSE:GM) as well.
Kuka-Huawei is still a newly formed partnership. That said, Kuka delivers top-notch robots, like the ones that Tesla (TSLA) is having fun with. More importantly, Kuka is Chinese owned and operates out of Germany, which is among the leaders in robotics. This still makes Kuka-Huawei a China-China partnership, with the benefit of a German footprint. It goes without saying that the Kuka-Huawei partnership will surely have a stronghold in China (as well as government support).
The ABB-IBM partnership was announced a couple of days ago. Just like the Kuka-Huawei partnership, there is no working smart factory software prototype yet. That said, ABB has already proven its executional strength in smart grid technology. And IBM? Well, they have Watson.
Yaskawa is a mystery to me, at least as far as smart factory software goes. I could not find a whole lot of information for Yaskawa, but the company has released a field system called Mechatrolink in 2003 (this is now an open protocol). Basically, Mechatrolink enables connecting a bunch of devices and facilitates data transfer - so the technical infrastructure to develop a smart factory software system already exists at Yaskawa (and has for the past 20 years or so).
I'd love to hear your thoughts on this ranking.
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