First State Japan Focus fund is increasing its exposure to automation as robots become smarter and superhuman in their capabilities.
Sophia Li, its Citywire AAA rated lead manager, believes the use of robots is reaching an inflexion point as they spread from traditional manufacturing industries, such as automotive and electronics, to general industries like pharmaceuticals, food, warehouses and logistics.
‘Automation has become a secular movement and is one of the best investment themes today,’ she said. ‘As companies move up the value chain and make higher quality products, they require a level of precision that can’t be achieved by human hands or eyes.’
Penetration of robotics around the world has risen for the past three decades, but while it took 30 years for the global operational stock of industrial robots to reach one million units in 2010, it is expected to balloon to 2.6 million as early as next year.
China is installing more robots than any other nation – its usage has doubled in the past three years and the government would like it to double again in the next three to five as part of its Made in China 2025 strategy. Nevertheless, China is playing catch-up with other countries. There are 68 robots per 10,000 manufacturing workers in China compared to 150 in the US and around 300 in Germany, Korea and Japan.
Li points to three driving forces of growth, the first being the emergence of collaborative robots, or ‘co-bots’, as an attractive proposition for small and medium-sized companies unwilling or unable to commit to the large outlay required for traditional automation systems. These compact-sized, mobile robots are designed to work collaboratively with human operators.
‘Historically, robots couldn’t work with humans because they were pre-programmed, but this new type of robot facilitates their transition from factories to service industries,’ she said.
Secondly, robots are becoming progressively smarter and more capable. By harnessing advances in computer processing power, new generation robots are being fitted with vision sensors and controllers that can ‘see’ their surroundings and make judgement calls that would otherwise require manual recalibration.
Vision-guided robots account for less than 15% of the total – a ratio that is expected to grow particularly significantly in non-automotive industries where the product lifecycle is shorter and procedures less standardised.
Thirdly, smart technology and greater interconnectivity, coined as the ‘industrial internet of things’, have led to new applications. One of these is the trace, track and control (TTC) system used in production processes. These also account for around 15% of total global stock at present, but are attracting increasing interest from manufacturers who can use the systems to quickly identify where in the process a problem has occurred and drive greater efficiencies in supply chain management.
The fund seeks to tap into these trends through holdings in Keyence Corporation (6861T), a leading factory automation company that makes sensors, laser markers and machine vision systems; Harmonic Drive Systems (6334.T) , which has a global monopoly in strain-wave speed reduction gears (a key component in a robotics system and the largest portion of its cost); and Misumi Group (9962.T), which makes components as well as operating an online maintenance, repair and operations platform.
Yaskawa Electric Corporation (6506.T), a manufacturer of motion controllers and motor drives, is another holding. Li and her deputy manager Martin Lau have added to the position on recent weakness in the shares. ‘We were waiting patiently for a market dip and that materialised when a number of stocks pulled back amid concerns over trade tariffs, allowing us to add to our positions with what should prove to be a greater margin of safety,’ said Li.
The ageing population has driven other changes to the portfolio this year – a new position in employment agency Fullcast (4848.T) that stands to benefit from a structural labour shortage and additional investments in three existing drug store holdings – Tsuruha (3391.T), Welcia (3141.T) and Kusuri No Aoki (3549.T).
‘Consumers in Japan are paying more and more attention to their health,’ said Li. ‘Drug stores are one of the fastest-growing areas of retail as customers look for a one-stop-shop and drug stores broaden their product offering and take market share from supermarkets.
‘The market is relatively young in terms of history, with the top three companies commanding 35% of the market compared to the 50-90% that is commonplace in other retail sectors. Leadings drug stores have been growing rapidly through organic growth and acquisitions of smaller companies.’
Despite recent volatility in Japanese stocks, Li highlights strong company fundamentals and healthy balance sheets. By focusing on companies with strong cash flow generation, entrepreneurial managements and the power to disrupt incumbents she aims to unearth Japan’s ‘hidden gems’.
‘Arguably now could be the best time to consider these companies – when the global investment landscape is experiencing a number of radical secular shifts. Automation and robotics is just one of many examples,’ she said.
‘The Japanese proclivity towards excellence and product obsession combined with more than $2 trillion of cash sitting on companies’ balance sheets present an appealing investment opportunity.’