Apple's Revolutionary Move Into Robotic Manufacturing
Apple (AAPL) is about to become one of the world's biggest buyers of industrial robots. The company has announced a 78% increase in its non-retail capital expenditure to $7.1bn. Analysts in Asia and America believe that the size of Apple's robot purchases could tie up the market for several years, making it difficult for companies such as Samsung (OTCPK:SSNLF), Nokia (NOK) and HTC (OTC:HTCXF) to compete.
Up to 700,000 people are employed in China, making products like the iPhone and iPad for Apple. It takes 141 steps to make an iPhone and each iPad will, over the course of the 5 days that it takes to build it, pass through 325 pairs of hands. Although labor only represents about 3% of the cost of building these products for Apple, the wages of Chinese factory workers have been rising at about 15% a year for much of the last decade. Problems managing this workforce have also harmed Apple's image in a region that has become the most important engine of its growth.
Apple's move represents an important step in the use of robots in manufacturing. Robots have long been used to build cars, but not so widely used in consumer electronics because these products are more difficult to make.
The main beneficiary of Apple's move will be Fanuc, the world's leading robot maker. However, other firms, such as ABB (ABB) and Siemens (SI) may also benefit. Apple is also buying a large number of computerized machine tools. While Apple will own these tools and the robots will be installed in the plants of its leading contractors, Hon Hai and Foxconn.
Apple is not the only consumer electronics giant planning to move to robotic production. Canon, one of the world's leading camera makers, has just announced that it will shift production of cameras back from China to Japan. The company plans to have a fully robotic plant in operation by 2015. Canon estimates that this could save it $4.82bn over a four-year period.
Canon also plans to develop a new generation of sophisticated vision systems that will enable the robots to handle the delicate task of making lenses and assembling tiny components. Like Apple, Canon plans to use robots to establish a competitive advantage of its rivals.
Apple is likely to sell around $95bn worth of iPhones this year, a number equal to the total sales of personal computers that will be sold in the USA and China. To add more context to that number, consider the following: The iPhone was launched five years ago. PCs, by comparison, have been on sale in the US since the late 1970s. Apple itself went public in 1980.
Last year there were about 1.1m robots installed around the world, according to the International Federation of Robots. Foxconn, we know, has already announced plans to install a million. It now seems that many of these robots will actually be owned by Apple and so they will not be able to be used to produce the goods of other manufacturers. This is vertical integration in all, but name. Just as vertical integration is taking over the online domain, robots may be about to usher in a return to vertical integration in manufacturing too.
Consumer electronic devices are complex and sell in the hundreds of millions. At the other end of the scale, over the last five years robots are being increasingly used by mining giants such as Rio Tinto (RIO) and BHP Billiton (BHP) to mine and transport tons of ore. Rio has announced the Mine of the Future program that will see the trucks and trains that it uses to carry ore become robotic. On its part, BHP has a joint venture with Caterpillar (CAT) to develop robotic trucks.
According to a report in Brisbane's Courier Mail, some hauling trucks operating inside Rio's West Angelas plant in the remote Pilbara region, are robotic and controlled by operators 700 miles away in Perth. West Angles is the home for Rio's R&D program that has been running for four years. Rio says that automated production drills, loaders, and the haul trucks will be operated remotely by personal working like U.S. servicemen and women who fly drones.
Problems can create profits, for somebody. The long-term planners at Apple and Canon will look at the same demographic charts that we do. Later in this decade, the working population of China will begin to decline. It may have already just peaked in Europe, while in Japan it peaked during the middle of the 1990s. It will become increasingly difficult to gain workers, so robots and deeper levels of automation than we have seen in the past are the only solution. Apple is one of those companies that can use labor shortages to increase its competitive advantage. Japan is doing the same as a nation, and what happens in South Korea is likely to find an echo in South Korea. However, South Korea is still a long way behind when it comes to using and designing robots, just as Samsung lags Apple.
As a nation, China will be forced to look at increasing the number of robots its uses. However, even though robots might be situated in China, making goods for Apple, it is hard to see how China as a country benefits. Unless, of course, someone steals Apple's secrets. Maybe Canon has the right strategy - with robots you can take production back home.
How to play robots
Fanuc trades on almost 19 times this year's numbers and a price to book of 2.67 times. The book value is about twice the average for corporate Japan. Together factory automation and robots represent just over 80% of Fanuc's sales. This makes it far and away the purest play of any of the world's major companies. The likes of ABB and Siemens also make robots and industrial automation systems, but their main area of business is power generation. Fanuc has about 20% of the global robot market, about the same as ABB. Yaskawa, another Japanese company, is also a significant player in this market.
Another example of how robots are being used for complex tasks is Iintuitive Surgical (ISRG). This California-based company is capitalized at $21bn and trades on 30.6 times prospective earnings. The price to sales is 11.24 times. The company's main product is the da Vinci robotic surgical system, which is controlled remotely by a surgeon. ISRG has grown EPS at 45% a year during the last five years and makes operating margins of almost 40%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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Comments (18)
....and treat them as robots, yes?
....but robots/androids don't strike or riot, you say? 'nuff sed.
Steve Jobs and Sir Jono Ive. Gene Munster of Piper has them taking 10-14% more up to almost 40% of world smart phone share from Sammy/Android in the next 3 years.50 million iPhone5s to be sold in this years refresh largest in world history target $910.500% increase in China iPhone sales.Tim Cook has an engineering degree from Auburn and it shows making brilliant acquires. Long lots of Apple a long time bought some @ $570 3 days ago sold to open cash secure PUTS SEP 515 strike @$1830.00/contract into close yesterday.98% chance we keep the cash or 2% chance we get long more Apple @ $497. So win win.for us.
(ADEP). Even though it is a micro cap, their IP is interesting as is the range of products. PHG's decision to use ADEP's technology for their consumer electronics assembly plant is somewhat of a validation of their technical expertise.
Their weakness appears to be that the company has been run for many years as an "engineers toy store". Supposedly that is now changing.
