How to Invest in the Future of Robotics

By Simon Erickson and David Kretzmann Markets Fool.com

Image source: ROBO Global ETF.

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The field of robotics is growing incredibly quickly. Driven by significant investment in the U.S., China, and Japan, the number of industrial robots shipped annually is expected to double within the next two years.

Improvements in technology and in artificial intelligence are expanding the applications of what robots can do in several different industries. Amazon (NASDAQ: AMZN) employs robots to efficiently manage its logistics and inventory;iRobot (NASDAQ: IRBT) sells robots to handle routine household tasks; andIntuitive Surgical (NASDAQ: ISRG) uses robots to perform highly complex surgical procedures. Each of these companies has also seen strong stock returns during the past five years: Intuitive is up 40%, iRobot is up 115%, and Amazon is up 361%.

But hindsight is always 20/20. Looking forward, how should investors gain access to the space?

To answer that question, Motley Fool Exploreradvisor Simon Erickson andSupernova Odyssey 2advisor David Kretzmann recently spoke with executives of ROBO Global -- the first financial company to identify robotics as a unique and investable class, and they have created a robotics ETF to appeal to investors.

During the interview, ROBO Global CEO Bill Studebaker and advisory board member Dr. Wyatt Newman share their thoughts on the following topics:

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  • Why is ROBO so interested in the field of robotics? (0:34)
  • Which companies and industries are most embracing robotics, and which are the most resistant? (2:00)
  • Does the healthcare industry offer significant potential? (6:41)
  • What process do companies use to justify spending on robots? (8:18)
  • Is the opportunity greater for robots that accomplish specific tasks, or for those that are fully autonomous? (13:31)
  • What are the most overlooked and overhyped aspects of robotics in the media today? (15:48)
  • What is the largest misconception about robotics? (18:22)
  • What are a few things investors should be watching? (22:17)
  • Are the companies in ROBO's ETF technology providers, or early adopters of that technology? (26:04)

You can learn more about ROBO Global and its ETFs on its website: www.roboglobal.com.

A full transcript follows the video.

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Simon Erickson: Hi everyone and welcome to our special interview today with Robo Global. Robo is the first financial company to identify robotics as an investable asset class. They created a unique classification system and a global index for investors interested in investing in robotics. I'm Motley Fool Explorer lead advisor Simon Erickson here with Odyssey 2 lead advisor David Kretzmann, and we are joined by Bill Studebaker, the president and CIO of Robo Global, and Dr. Wyatt Newman, the Strategic Advisory Board of Robo Global. Gentlemen, thanks for joining us on the call this evening.

Bill Studebaker: Thank you, thanks for the time.

Erickson: Either Bill or Wyatt, can you give us a really quick recap so that our listeners understand who Robo Global is, and what it is that's got you interested about robotics?

Studebaker: Thank you, thanks again for hosting this. Robo Global is a financial services company that actually was the first entity to define robotics and automation, and we created the first index that tracks and monitors all companies on a global basis. I guess we were fortunate roughly four years ago to recognize the enormous growth prospects and the rapid market developments. But at the time, there weren't any products to track this investment opportunity. So, we basically created an index that's maintained by our team of financial and robotic experts to insure that it remains the leading indicator of robotics and automation. We've created this index where there is an ETF that tracks, the ticker is ROBO, that captures the overall growth trend. It's comprised of 80 companies and 13 of our own proprietary sub-sectors. It's interesting, it's global, it's multi-cap, it's 20% large, 40% mid, and 40% small. Less than 2% of the companies are in any of the traditional indices that you may be following.

David Kretzmann: Awesome. Let's kick it off by talking about some of those companies and industries that you follow at Robo Global through your ETF. What are some of the industries or companies that are most embracing robotics? You might have Amazon on one end of the spectrum. I'm also curious what you think about the other end of the spectrum. What companies or industries are more resistant to changes in robotics and automation? Can you walk us through some industries or companies on either end of that spectrum.

Studebaker: Maybe we could pass that to Dr. Newman to start, please.

Wyatt Newman: OK. I would say, first, the biggest change that we're seeing right now is in autonomous vehicles. Google is leading the way with that, but all of the automotive companies are invested in it. It's interesting that automotive companies, traditionally, are some of the stodgiest, and for good reason. The liability concerns are huge. Make one little change on an ignition key and people die. And for them to be facing self-driving cars must be sheer panic. But, the pressures are so great that it's perceived as, if you want to be a player in the future, you'd better have a self-driving car. And, so, I would say they're embracing, but with a grimace, perhaps, the automotive industry. At the other end of the spectrum, I would say the consumer, for home appliances. There are toys and novelties, but not yet what a consumer would call a good investment in buying a robot. Nonetheless, I would say that ultimately, that's the market that could become a basic industry. That's further out on the time horizon, but I think, ultimately, a bigger impact. In between there, I would say, there's the small and medium manufacturers who are looking for somewhat smarter robots. Previous robots, you program them to do six motions repetitively, but that is not really an option for the small and medium manufacturers who will get batch sizes of, say, "This week we have to make 2,000 of these parts." You'll never get your robot programmed in time to pay that off. But the current edge of technology is that robots are on the verge of learning by demonstration, so that you could train the robot by example and then have it make those 2,000 parts. So, I think there will be an embracing of robots in that sector once they can demonstrate that capability. So, that's my range on it.

Studebaker: I just want to expand that for just a moment, if I could, please. An interesting perspective that we have is that, for investors and consumers to think about, is that robotics is really not a niche, but it's actually a foundational technology that's being applied right now to, basically, all industries, all markets. It's happening now. When you think about automation, it's proliferating in and beyond just factories. Beyond factories, there's a sector trend in logistics, it's in surveillance, it's in medical services, it's in transportation. You have certain technologies that are really allowing this to happen. You have vision technologies, which is the machine vision, the laser sensors, bar code readers, etc., they're really critical and in the sweet spot for automation. So, you're really getting a big convergence of a multitude of sectors that are going to be increasingly having larger exposures and penetration rates.

Newman: Yeah, I would add on top of that, I think the big driver, today, leading to this Renaissance in robotics, is the brain. It's hard to tell if it's hype or if it's real. From my perspective, it's real. We're seeing a dramatic change in AI capability. When you give robots better brains, what you're doing is allowing your AI to have physical effects the world, whether that's transporting you from A to B, or it's doing customer fulfillment, or it's doing farming, manufacturing, security, the brain and the machine is making the difference. That revolution is really spurring things on.

Erickson: Definitely some great opportunities there. One that I didn't hear you mention, and one that's familiar to the investing community, is the use of robotics for exoskeletons for humans for the disabled. I know that's a longer term opportunity, perhaps. But is that something that's hitting your radars?

Newman: I'll comment on that. I appreciate that work, and DARPA, for one, has put a lot of money into it, particularly targeting wounded warriors, and there has been significant progress in that, particularly with the neural interfaces, which I think is fascinating emerging technology. However, I think it is a niche market. People missing limbs often are not people who have a lot of money. The cost of the devices can be extraordinary. If you look at the [...], it pretty much broke the bank when it was decided that Medicare or Medicaid was going to pay for that. Since that time, they've really tightened up on the L codes that will allow reimbursement for a lot of these. So, historically, I think some of that has been foiled, and an exoskeleton is going to be a lot more expensive than a simple [...]. So, I do hope that emerges as an opportunity for improvement of quality of life of affected people, but I just don't think it's going to be as big of an impact as farming.

Kretzmann: When you're looking at companies in these different industries, what is the process that a lot of these companies go through as they transition more to a future of robotics and automation and artificial intelligence. Do you see this largely being driven by economic factors, just looking at profit and loss statement, or are there other factors that go into this? Because, obviously, as you mentioned, with the vehicle industry, we're seeing a complete shift of platform towards an automated vehicle. So, how does that decision making process compare over different industries as they transition to robotics?

Studebaker: I was just going to start by saying the automation of activities can really enable businesses to improve performance by reducing errors and improving quality and speed, and, in some cases, achieving outcomes to go beyond human capabilities. Automation, obviously, contributes dramatically, or can and should, to productivity. So, I think companies, now, are increasingly coming to the conclusion that they can't subsist without it. Amazon, with their purchase of Kiva Systems, effectively started a robotics arms race. For companies to be able to compete, you're not doing it on cost, you're doing it on delivery. And you need the technologies like this that automation provides to make you successful. So, I think it's increasingly becoming not so much a capex decision, but really more of an ROI calculation. With the confluence of the technology improvements with the Moore's Law cost improvements of these technologies are becoming affordable. Wyatt had mentioned previously, alluding to collaborative robots, as an example. Collaborative robots are a game changer, and are highly disruptive. When you think about a collaborative robot that can be sold for somewhere in the vicinity of $40,000 that works 24-7 365 days of the year with no healthcare and no overtime, and that could be basically programmed through manual manipulation versus physical recoding of the assets, and has the flexibility to be put in different positions on the assembly line or whatever, this is disruptive. Universal Robots has a collaborative robot that they maintain has a payback inside of 195 days.

Erickson: Wow.

Newman: I'd like to add on that. As mentioned, the quality that a robot can do in specific applications has been demonstrated to exceed human capabilities, at least in niches. A lesson from the past has been automotive manufacturing, and why it'd be automotive manufacturers who embraced robotics. There were two key areas there. Now, that specific market is more or less saturated, but there's a historical lesson from this, spray painting and spot welding. The robots were so much better at spray painting and spot welding that you could not sell a car where those tasks were not performed by robots. In fact, that held up automotive manufacturing in China. And then as automotive companies started to set up plants in China, we find that China was the biggest importer of robots. And it wasn't an issue of wage costs, it's that a human simply could not produce the quality of finish that a robot could. So, that's a driver where -- and I can't speak for what happens in the corporate boardrooms, but I would say it was recognized that if you want to be a player in this game, you have to have robots. Now, this will happen in other sectors, as well, in the future. I mentioned the automotive in terms of self-driving cars, and in the future, if you want to be a player in the automotive sector, then you'll have to have a self-driving car. We're seeing it in medicine as well. I think part of the initial sales of the Intuitive Surgical robots was largely driven by marketing. "Come to our hospital because we have the latest in robotic surgery." However, there are now instances where you can say that robotic surgery exceeds human-alone capabilities. That would be a co-bot example. But, there are certain operations, particularly around the pelvis, where you just can't get in there with cutting open and operating. So, there's definitely a reason why you can't replace it. And then, one-third anecdotally, we worked with Ford in some automation and transmission assembly, and their primary motivation was actually healthcare. They had some operations that involved handling heavy parts and leaning over to assemble them, and they were getting back injuries regularly. And the impact on their healthcare costs really drove their automation. So, it wasn't as much wages as it was some of these externalities that you might not consider immediately.

Erickson: Right. Following up on that, you mentioned two different types of robots. The first is more of what I would call specific tasks. You mentioned spray painting or spot welding for an automotive company. I think of things like the iRobot, the Roomba that would vacuum your home. On the other side, you also mentioned collaborative robots, which think more autonomously, can do a lot more things, and are back and forth with neural networks. You mentioned, Wyatt, the brains of the operations a short while ago. Which of those two, if it was specific tasks or fully autonomous, do you think the bigger opportunity for investors is in?

Newman: I can't give you an either or, because I have some belief in each. For example, in the huge sector of e-commerce and customer fulfillment, robots that are very good at running through a warehouse and picking out products and putting them in a box, a robot that satisfies that specific capability is going to have a huge market. So, we could say, "There's application-specific." On the other hand, if you look at the demographics of an aging population, and you can see that we're going to need more home healthcare, and if you can do that with robots, if it's a monitor, if it's a companion, but it's also an assistant that can perform chores around the house, but it would have to be a spectrum of chores before it's affordable and economical. It would have to be able to do laundry and dishes and bathrooms and windows and floors. It's not just a Roomba. My belief is that that will be the dominant market in the future, but it's a lot harder to get there because your robot has to be a jack of all trades before it will pass that threshold of value for the money. So, in the interim, I think it will still be the winner-dedicated applications that will be driving some of this. But ultimately, all of that new intelligence will get merged into a multi-purpose brain that will enable the next generation of robots.

Kretzmann: We're seeing robotics in general gain more and more attention from Wall Street, Main Street, and the media alike. I have a few parts to this question, I'll start with the first part. What do you guys see as the most overlooked and overhyped aspects of robotics today?

Newman: The overhyped has been historical, Hollywood is always way ahead of reality. There's still an expectation that robots are capable of much more than they are. And one of the things that holds us back is mobility. You have to be able to handle stairs, so, perhaps human-like robots will make a dent there. But another one that's really tough to lick is emulating the human hand, the flexibility, the dexterity, the strength. Still haven't met that. Power supplies are an issue for robots that have to move around. Can't just stay plugged into the wall. They diminish their power pretty quickly. So, those are all challenges, and I think people are largely disappointed when they see that performance. One that is a mixture of both overrated and underrated is the AI. About every ten years, there's a rebirth of AI. It gets overhyped, overinvested, and crashes down again. We're in another resurgence of AI. You always have to say, when crying wolf, is there really a wolf there? And there really might be a wolf there this time. What has been demonstrated with its new techniques and deep learning is remarkable. It is a sea change versus anything in the past from AI. And combined with some other elements that have happened in parallel that includes cloud computing, so you have a dramatic enhancement of what can be computed, networking these together as you need them, and big data, where many internet entities have been acquiring labeled data, which is the essence of what you need to train some of these systems, you put that together and now you have the potential of a cloud brain that can learn from all robots in parallel, and exploit the techniques of learning from the new deep learning. And I think, maybe, there's really a wolf out there this time.

Kretzmann: What would you say is the biggest misconception about robotics, automation, AI. I know you covered some of those, but can you see something, over and over, that the media and Wall Street just doesn't seem to get? Something that keeps being repeated that just isn't quite right?

Newman: Go ahead and interrupt me, I don't mean to dominate. [laughs] But part of that is, as one -- I've been in robotics research for 30-some years, so I get some of the flak from the public about robots. A current surge, which has been supported by big names is, "Be afraid because the new AI and robots are going to take over." That's one thing, I just don't see the hazard there. And secondly, "Robots are going to take my job." It is a double-edged sword. There will be disruption. There has been, if you look at the promises of the new Administration, saying they're going to bring back coal jobs and steel jobs, 90% of those jobs left through automation, and there's no way they're coming back. That is just a transformation of the industry. And that will continue to happen. All those Uber drivers, what are they going to do? People who run around at warehouses and fill boxes. There will be disruption there. But, the other side of that coin is, where do you get wealth? If you believe that it's through productivity, then you say, where do you get productivity? And robots are right in the mainstream of that. So, ultimately, there will be more wealth because of this. There will also be disruption. There will be winners and losers. But I don't think we should throw our shoes into the gears and say, "Stop technology."

Studebaker: Maybe if I could just add a few things. I think obviously Dr. Newman's technical perspective is great. From more of a qualitative standpoint, I think it's fair to recognize that these activities that are most susceptible to automation are physical ones, in highly structured and predictable environments, as well as in other areas like data collection and processing. But it's still important to think about, here, that automation as the media wants to present it, is not going to happen exclusively overnight. And even when the technical potential exists, we estimate that it's still going to take years for automation's effect on the current work activities to really play out. The pace of automation and the impact on workers is going to vary across different activities, occupations, wage, and skill levels. And the factors that determine the pace and extent of automation are going to include ongoing development of technological capabilities, the cost of the technology, the competition with labor, including skills and supply and demand and things like that. So, it is a little bit deeper of an effect if you think about it. And the effects of automation might be slow at the macro-level within entire sectors or economies, for example. But they could be really quite fast at the micro-level. And for individual workers whose activities are automated, or for companies whose industries are disrupted by competitors really using the automation. So, I think that's just an interesting consideration. And really, while a lot of current debate about automation is focused on the potential for mass unemployment, people are going to need to continue working alongside the machines to produce the growth. So, I think we're ultimately going to result in higher paying jobs for people.

Erickson: Final question for you guys, our audience at the Motley Fool is investors, specifically for the services that we work on, growth investors who are very interested in this field of robotics as it continues to progress. Are there a few things that, as investors that, maybe we should be watching to see how this field is progressing? There's a lot in media coverage, there's more news stories covering robotics. What are two or three things that we really should be watching to figure out how this is coming along?

Newman: The first thing that I think of is to keep an eye on the stories that continue to come out about deployment of the new AI in industries and applications. I think we're going to see a rapid growth of success stories in that area. There may be surprises that we are not thinking about yet. There will be. [laughs] Of, "Wow, AI of that sector made the difference?" But it is a new paradigm. Even Sergey Brin said, "I didn't see this coming," and they're in the mainstream of it. So, that, definitely keep an eye on. I would say another one is, I just think the autonomous vehicle market will be transformative, and automotive companies are racing to get into it. And that will change people's lives. I think it will get more elderly people out, people who have more mobile restrictions. That will be an enhancement to quality of life. I think it's going to be a negative impact on people who are employed as drivers. You look at all the truck drivers in this country, they could be gone in a hurry. So, I would watch out for that. And, there may be fewer vehicles that are produced if you can keep your automated vehicles busy a higher percentage of the time. So, I think those will be couple of the impacts to look for. Bill?

Studebaker: Yeah, I would just say that the field of robotics is advancing rapidly. You have the sophistication of sensors, which gives the robots ability to see, hear and touch, as well as software that empowers them has grown exponentially in recent years. As a result, highly autonomous systems from hundreds of companies around the globe are appearing to address a broad range of needs, ranging from Google's Self Driving Car Project at home and farm robots to entire manufacturing lines to switch over. But I think it's important to recognize that there is tremendous disruption. We're very early in the game here. I'd like to say that we're actually in the first inning of the baseball game, and the players are actually still in the locker room putting on their shoes. It's hard to know who the big obvious winners and losers are going to be, and investing in a rapidly changing and turbulent investment environment can be pretty complex. So, this is why we created ROBO. It is an investment vehicle that doesn't have the idiosyncratic risk of any individual company. We're not going to get all the companies right. But investors need to realize that this trend is very global. There's been 400 venture fundings in robotics since 2012. There are 176 startups in robotics next year. So, the array of technologies, capabilities that are going to be coming to market are going to be tremendous, and we think it's a great time for investors to focus on this as a class.

Kretzmann: Simon said it was the last question, but I have one more to follow up on that. I think there are a couple ways to think about the opportunity with robotics as investors, which obviously, as we've talked about, is an exciting long-term opportunity, which is what we love at the Motley Fool. When you look at the possibilities, do you focus more on the companies that are behind the technology, whether you're talking about robotics, the automation, the AI, or are you looking more for the companies that are the early adopters of the technologies? Or is it a combination of both?

Studebaker: I would say, from our approach, it's exclusively focused on those companies that are producing and selling the technologies, and not on those that are using it to enable their business. We're trying to find and recognize those companies with the highest threshold of revenue exposure exposed to robotics and automation, and not those that are obviously advancing because of that.

Erickson: Great! Well, Bill Studebaker and Dr. Wyatt Newman are both with Robo Global, the leading robotics and automation index for investors interested in the robotics space. Gentlemen, thanks very much for joining us this evening.

David Kretzmann owns shares of Amazon. Simon Erickson owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Ford, Intuitive Surgical, and iRobot. The Motley Fool has a disclosure policy.