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Where we’re finding value in tech

By Archie Foster, Director of Equity Research, Citi Investment Management

January 23, 2018Posted InInvestments and Investment Strategy

We are increasingly surrounded by automation and this trend is expected to accelerate as technologies evolve in the coming years.  While “automation” encompasses many areas of the economy and life –  everything from the potential of autonomous driving to remotely adjusting the temperature in your home to automated warehouses– the area of automation that conjures up the most fantastical and futuristic images is robotics.


While people are beginning to become aware of the profound social and economic effects that increased automation may have, there seems to be more general discussion versus practical preparation taking place at the moment.  However, we see no reason why investors should do the same and believe that the time to begin building exposure to automation is now. 


Robots have actually been with us for years, with the majority of them deployed to the auto sector and other heavy industry.  These robots have tended to be very large, generally dangerous to those working around them (many need to be caged), not particularly “smart” (only programmable for predictive, highly repetitive tasks), and quite expensive, but nonetheless growth has been robust at about 16% per year since 2010. 


However, with the advancements in sensing technology (i.e., force control), semiconductors, and software (visual identification and measurement) the robot industry is changing.  We believe that we are at or nearing an inflection point at which robots become smaller, “smarter” (easier to program, able to learn), more nimble and less expensive, thus allowing their use in much more diverse processes in both manufacturing and service industries. 


This shift from large robots to more nimble “cobots” – collaborative robots – has the potential to lead to productivity gains and cost reductions in diverse sectors of the economy in the coming decade. Focusing on the robot itself is easy to do, but it is worth remembering that the machine, and its evolution, is really dependent on its components and software that allow the machine to perform increasingly complex and fine tasks and learn and report as it goes.  Without these, the machine is just a hunk of metal.  As investors, we certainly focus on the robot makers themselves – but we are perhaps even more interested in companies that make the sensors and software that allow the robots to evolve, collaborate, and report.  


We see the potential for cobots to evolve from novelty acts to a more pervasive presence in our everyday lives – perhaps as the fast food burger flipper, barista, parcel picker, co-pilot/conductor  – but to get to this point sensing, semiconductors, and software must each evolve as well.  Importantly, we believe these functions are evolving and we see long term opportunities in companies that are leaders in these verticals.   Additionally, focusing on the “guts” of the robot allows one to expand exposure beyond robotics into the much broader automation theme.


With regard to the “guts,” one area of focus is sensing technology, particularly the evolution of the sensors themselves, the related software, and wireless networks which allow all manners of devices to become connected.  One area that’s front and center in terms of growth of sensing technology is the automotive industry, where the pace of evolution has been rapid. We are already ceding more and more control of the car to the car itself which has been enabled by advancements in sensing technology.


Consider a car bought in 2010: it may have had some sort of lane departure warning or flashing light to warn a driver of a car in their blind spot.  Today, many cars are able to not only warn the driver of danger but actually take control from the driver (lane departure, autonomous breaking) in dangerous situations.  The technology is now evolving towards convenience features like self-parking and adaptive cruise control.


We expect solid growth in auto-related sensing technology for years to come as we drive towards full autonomy which will require more and more sensing-related content, allowing growth even in a stagnant auto market.  With that said, autos and robots are not the only sensing-related areas of focus: while the growth in sensor content is indeed quite strong in these areas, we are seeing robust growth in areas like warehouse automation, HVAC, lighting, and even home appliances as more parts of “everyday life” become automated or remotely controllable.  


While risk tolerance, equity valuations, and economic cycles must be taken into account, we believe the technology-related themes we see today are secular in nature and should be part of a long-term core portfolio solution.