When a rose is not a rose: Defining the theme of robotics, automation & AI
Just six years ago, ROBO Global was a lonely voice in the world of robotics investing. While many saw robotics, automation, and AI (RAAI) as an exciting theme, almost everyone was quick to recognize the momentous challenge of making sense of this fractured and almost completely unstructured space. Who were the real front-runners? Who were the emerging players? How would the theme unfold in the years to come? It was obvious that with so many moving parts, the answers to these key questions were changing quickly—and sometimes dramatically. Sectors that appeared stagnant would suddenly take off as investors scrambled to capture new growth. Others that seemed poised to create massive change would hit an unexpected snag, either in technology or demand, and stall completely.
To tackle the challenge, we knew a systematic method was needed to accurately define which companies truly fit within the theme, and a classification methodology was required to pinpoint companies with a high potential for future growth.
As we began searching for answers, we learned quickly that investment analysts—even those with a focus on technology—knew a whole lot about finance, but very little about the inner workings of RAAI. That realization led to another: we needed to reach beyond Wall Street and build a team of industry experts that could provide greater, deeper insights in all things robotics, automation, and AI. We began talking to experts in the trenches—entrepreneurs, PhDs, university professors, researchers, and developers who were immersed in RAAI every day—and we knew immediately that we were on the right track. Within months, the ROBO Global Strategic Advisory Board was born. Since then, the unique perspectives, technical knowledge, and industry networks of these specialists have made it possible for us to understand where the greatest innovations are taking root. They are able to research companies at a highly technical level, as well as provide direct access to the leadership of some of the most innovative companies across the globe. Working together, we’ve built a strong, consistent methodology for defining the universe of RAAI, as well as a classification methodology that helps us select the right companies at the right time based on their long-term potential for growth. Ultimately, the insights of these experts have made it possible to recognize when a rose is a rose—and, indeed, when it is not.
What are ‘RAAI’ companies?
The fact that so many companies that sit squarely in the space of RAAI are almost indefinable is precisely what makes this research invaluable. This research is the only way to accurately determine which companies are the ‘makers’ of these technologies, and which are the ‘users.’ That differentiation is one example of what sets ROBO apart from other indices and strategies.
Before the digital revolution, the answer to the question, “What does this company do?” was relatively simple. A company either manufactured something, or they offered a specific service. Businesses were easy to qualify and quantify, and investors didn’t have to dig very deeply to understand the basics and determine if they wanted to invest. GM made cars. GE provided electricity. Goodyear made tires. Simple. That is no longer the case. In fact, one of the most challenging questions we receive from investors is, “What do RAAI companies do?” The simple answer is that RAAI companies are the ‘makers.’
It may come as a surprise that differentiating between ‘makers’ and ‘users’ is anything but simple. Yet, you need look no further than Amazon for the ideal example. Amazon is famous for its orange bots that cruise around its warehouse floors, picking and fulfilling customer orders 24/7. The company has created massive disruption across the retail industry, in large part due to its use of robots to accelerate the speed of delivery from order to delivery while simultaneously reducing costs. And yet, while Amazon has set the gold standard for success across the retail industry, the company is a ‘user’ of RAAI. In contrast, Kiva Systems (which was co-founded by ROBO Global Strategic Advisor Raffaello D’Andrea) is a ‘maker’. Kiva Systems is the company that developed and manufactured Amazon’s bots. Amazon itself does not derive revenue from making anything defined as robotics, automation, or AI, and so the company does not hold a place in the ROBO index.
So if Amazon doesn’t belong in the ROBO index, what companies do belong? Only ‘makers’ who fit into two specific categories, with each category representing 50% of the ROBO index:
1. Companies that create technology to enable
truly intelligent systems that can sense, process, and act
2. Companies that apply those technologies to deliver
RAAI-enabled products—including robots—to businesses and consumers
Even with such clear definitions, identifying which companies meet these requirements requires deep research and vast knowledge of the technologies themselves, as well as how they fit together to create intelligent systems. (This is one reason newer entrants tracking the theme choose not to distill down to this level of detail.) Here are three specific examples of companies that meet the strict criteria for our definition of RAAI:
- Intuitive Surgical made a name for itself with its da Vinci system, which was used to perform more than a million procedures in 2018. A ‘maker’, the company designs, manufactures, and markets the systems, as well as other da Vinci system-related instruments and surgical accessories such as surgeon's consoles, patient-side carts, 3-D vision systems, skills simulators, integrated table motions, and fluorescence imaging products. A constant innovator, the company recently announced FDA clearance for Ion, a system that uses flexible robotic catheters enabled by AI and computer vision to obtain lung biopsies in a minimally invasive procedure.
- Teradyne’s Universal Robots designs and manufactures collaborative robots, and is the market leader for cobots. The growing demand for cobots aligned perfectly with the maturity of robotic technology. For the first time in history, almost anyone, anywhere, can use adaptable cobots to complement and enhance the skills, creativity, and productivity of the human workforce, and Universal Robots is at the forefront of this major shift. Cobot sales are expected to increase ten-fold to total 34% of all industrial robot sales by 2025, and the company is poised to capture the majority share of that tremendous growth. (To learn more, see Welcome to the Age of the Cobots.)
- Nvidia dominates the machine-learning segment for virtually all providers of hyperscale datacenters and cloud services with its Graphics Processing Units (GPUs). While there is no such thing as a general-purpose data center chip, cloud providers are hungry for big leaps in performance and bandwidth to support the computational requirements of today’s environment. Nvidia is positioned to address that need, with deployments of its 5G chips expected in 2019.
Each of these companies is a true ‘maker’ of RAAI technologies, actively enabling and creating intelligent systems that sense, process, and act. As well, each meets the minimum threshold of revenue generated from RAAI according to our Industry Classification Methodology. These details are precisely what sets the ROBO index apart from newer indices that have jumped onto the playing field in hopes of capturing the obvious growth potential that RAAI has to offer.
The ROBO difference
When comparing ROBO to any of the 25+ new entrants in the space since the inception of the index, many investors are surprised by the fact that not one of these indices has more than 30% overlap with ROBO. The reason? Nearly every one of these indices was created by a large company with the goal of adding robotics to an already vast menu of investment vehicles—and they are building a robotics index based on financial criteria alone. Without the research to support the process or the insights of experts in the space, they are forced to make concentrated bets on the next ‘sure thing’. And as the technologies and players change over time, they are rarely able to adjust nimbly to those critical changes in the landscape.
The ROBO Global Robotics & Automation Index is run using a completely different approach. Our Index Methodology, Index Classification Methodology, and the insights of our Strategic Advisory Board come together to create an index driven by active research, passive implementation, and strong diversification. With 100% of our time and resources focused on one thing—RAAI—ROBO is designed to select the right players at the right time to create the potential for long-term growth.
At a recent investor conference, I was sitting with strategic advisor Raffaello D’Andrea, PhD, when someone asked if ROBO Global uses AI to identify potential index members. In other words, they wanted to know if we practice what we preach. I loved Raff’s explanation of why we don’t. Why we can’t. One of the world’s foremost experts in AI, Raff is a Professor of dynamic systems and control at ETH Zurich, co-founder of Kiva Systems, founder of Verity Studios, and co-founder of ROBO Global. He not only knows AI, he knows its limits. Why is it impossible to rely on AI to select index members? According to Raff, the theme is too diverse, too fractured, and too dynamic. Until RAAI matures, the best way to truly understand how the theme is evolving and which companies hold the greatest growth potential is good old-fashioned research—by experts.
Daunting? Absolutely. But it works. In the past six years, we have defined the space, refined our processes, grown the number of indices we offer, and expanded our network of product partners with their ETFs and Index Funds. Guided by our processes and our people, the ROBO Global index is more equipped than ever to help investors benefit from all that RAAI has to offer.
By Richard Lightbound, ROBO Global