The compelling case for greater investment in industrial automation.

Productivity – or the UK’s lack of it – has long been identified by politicians, central bankers and economists as the root cause of the economy’s rather tepid recovery in the decade following the financial crisis. Solving the ‘productivity puzzle’ has proven a complex challenge, with a number of factors identified but an agreed explanation remains elusive. The changing sector composition of the economy, for example, is often cited and has compelling logic. The collapse of the oil price and the unwinding of the banking sector’s swollen balance sheet reduced the contribution to the economy from two high GDP per capita industries. Indeed, this arguably creates an unfair basis for comparison when judging current economic performance as, with the benefit of hindsight, both industries were enjoying unsustainable bubble-like conditions in the years preceding the crisis.

Business investment has persistently lagged historical trend rates as firms took advantage of the plentiful supply of labour rather than invest in more efficient plant and machinery…

Weak productivity has, however, not just been a UK phenomenon as most major western economies have exhibited similar trends. Business investment has persistently lagged historical trend rates as firms took advantage of the plentiful supply of labour rather than invest in more efficient plant and machinery to boost output as the recovery took hold. With labour markets now tightening, firms now have a clear incentive to invest, but will they and if they do what will be the impact?

Our recent meetings with businesses operating across a range of manufacturing and service industries have been fascinating and have reinforced our conviction that we are in the foothills of an exciting period of economic development. In basic industries, for example, FTSE 100 mining company Rio Tinto is pioneering the use of fully autonomous trains, resulting in almost 20% reduction in time taken to transport its product from the mine to the port. Oil major BP has deployed a robot in a US oil refinery to perform safety inspections using ultrasound technology to detect microscopic cracks in the walls. Previously the inspection team would have had to spend over 20 manhours to achieve a task the robot can complete in one hour. Pest control specialist Rentokil Initial has now installed over 50,000 connected devises at customer sites, offering real time updates on pest activity, delivering meaningful improvements in service quality and reducing cost to serve. These are only a tiny handful of examples of investments being made by UK-listed companies today across almost every industry.

The evidence suggests to us that we have reached a tipping point where the benefits of ‘digitalisation’ have become so financially and industrially compelling that companies simply must invest to remain competitive. If this anticipated wave of investment is sufficient to reverse the recent trend of weak productivity, the implications for the sustainable growth potential of the global economy could be significant.

 


This article was created for DISCUS by David Appleton, Investment Director at Cornelian Asset Managers. You can find out more about Cornelian’s discretionary investment services here