World Reimagined

Industrial AI: How Is Artificial Intelligence Transforming the Manufacturing Industry?

manufacturing robot

When thinking about artificial intelligence (AI), many think of tools like ChatGPT or DALL-E. However, AI is also making enormous headway in the industrial sector, and those advances couldn’t come at a more critical time. 

Today, AI is being used worldwide to improve production times and boost safety in manufacturing plants in what is referred to as the “Industry 4.0” era. In this piece, we will discuss why the need for industrial AI is accelerating and highlight some of the companies that are leading the change.

Why Now? 

For years companies have been struggling with a tight labor market. With the advances in industrial AI, companies are increasingly looking to build the right intelligence machine(s) for the job rather than trying to find the right person.

Remember that the growth of an economy is simply a function of two things, the growth of the labor pool and the growth in productivity. If the growth of the labor pool slows, productivity must increase to keep the same level of economic growth. 

  • From 1949 through 2000, the average monthly YoY growth in the workforce was 1.7%. From 2001 through 2022, growth slowed to nearly a third of that pace at just 0.6% YoY. From 2010-2022 it was even slower at 0.5%. Declining fertility rates and the political climate around immigration indicate that this slowing is not likely to reverse anytime soon. 

Corporate margins have been unusually elevated relative to the overall economy for over a decade, putting pressure on executives to protect profitability to prevent damage to share prices, which is often a big part of their compensation.

  • Corporate profits as a percent of GDP have been unusually high following the dot-com recession. From 1947 through 2000, the median and average were both 6.1%. From 2001 through 2022, the average increased to 8.8%, with the median at 9.1%. From 2010 through 2022 the average had risen to 9.7% and the median at 9.8% with the average for 2022 at 9.7%. So over the past thirteen years, average and median corporate profits relative to GDP have been more than 50% higher than during the fifty-four years from 1947 through 2000. To determine if corporate profits can continue on this trajectory, we must determine what drives it.
  • One of the biggest drivers is the slowing growth in payrolls for the roughly 80% of the workforce in the Production and Non-supervisory category. From 1964 (the earliest data available on wages) through 2000, the average ratio of the growth between corporate profits and wages was 1.1, with the median of 1.0, meaning profits and wages grew at roughly the same pace. From 2001 through 2022 the average ratio rose to 2.1 with the median at 2.2, meaning profits were growing at 2.1x the rate of wages. From 2010 through 2022, the average again rose to 2.3 with the median 2.3 as well, meaning profits were growing at 2.3x the pace of wages.

The bottom line is that corporate profits have been growing faster than both wages and the overall economy at an accelerating pace. The tightening labor market puts pressure on margins that can be reduced by replacing labor with smart automation. In the aftermath of the pandemic, this is particularly attractive. Machines don’t need to practice social distancing and don’t get sick. The pandemic also highlighted the vulnerabilities in supply chains and production lines that had been trimmed down as much as possible, expanding margins but reducing resiliency. Now many companies are looking to onshore more of their production and increase the resiliency of the production lines. Industrial AI can potentially give companies the ability to produce more, faster and better at a lower cost, thus protecting margins. 

Industrial AI in Action

In 2022, North American companies ordered over 44,000 robots (including solely traditional industrial robots and excluding autonomous mobile robots or collaborative robotic arms), or 11%  more than in 2021, for an estimated $2.4 billion, an 18% YoY increase. 

These are some of the companies that are driving advances in Industrial AI. 

DHL is the first commercial deployment of Boston Dynamic’s – a subsidiary of Hyundai Motor (HYMLF- Stretch Robot, which can grab packages from all corners of a shipping container without knowing how it was loaded or having information about the individual packages themselves. Click here to watch of video of it in action.

Emerson Electric (EMR) announced earlier this month that it has entered into a definitive agreement to acquire National Instruments Corp (NATIat an enterprise value of $8.2 billion. The acquisition is intended to bolster Emerson’s position as a global player in the industrial automation industry, particularly in the semiconductor, transportation and electric vehicle markets. 

GE (GE) offers an autonomous robotics system designed to improve productivity using AI technologies.

In the manufacturing industry, Intel (INTC) is using AI to enable its customers to generate real-time data to fine-tune workflows.

NVIDIA (NVDA), a major player in many AI arenas, offers IGX Orin, an industrial-grade edge AI platform with industrial inspection, predictive maintenance and robotics solutions. 

Siemens’ (SIEGY) Teamcenter® software for product lifecycle management is being integrated with Microsoft’s (MSFT) OpenAI Service to harness the “power of generative artificial intelligence (AI) to help industrial companies drive innovation and efficiency across the design, engineering, manufacturing and operational lifecycle of products.”  

In February, Microsoft released a technical paper describing design principles that could guide language models, namely OpenAI’s ChatGPT, to adapt to different robotics tasks, simulators and form factors. Examples of this can be viewed in this YouTube video or this one involving a drone.

Rockwell Automation (ROK)’s “Smart Manufacturing” uses AI to anticipate potential manufacturing process problems and provide proactive solutions, support cybersecurity measure and preserve product quality.

On April 4, 2023, Walmart announced that, by the end of FY 2026, roughly 65% of stores would be serviced by automation, and 55% of fulfillment center volume will move through automated facilities, which it expects could improve unit cost averages by 20%. Walmart is the largest private employer in the United States, with around 1.6 million workers. In response to concerns that this will mean material job losses, Walmart U.S. President and CEO John Furner told investors, “There will be new roles emerging that are less manual, better designed to serve customers and pay more."

Despite those assurances, the retailer is reportedly cutting over 2,000 jobs at e-commerce warehouses across Texas, California, Florida, New Jersey and Pennsylvania. Those cuts are likely to result from the return to normal following the surge in online sales during the pandemic.

Walmart investors recently were able to tour a 1.4 million-square-foot facility in Florida, the company’s first automated distribution center for packaged foods and other shelf-stable household items. The automation was implemented by an AI-powered supply chain technology company, Symbotic (SYM), in which Walmart has a minority stake. Symbotic debuted on the Nasdaq in June 2022 through a merger with a Softback-backed SPAC.

The Bottom Line

Companies are facing growing pressure to do more with less, particularly when it comes to labor. The recent pandemic highlighted the vulnerabilities in production lines and supply chains that spanned multiple countries and involved human contact. As a result, companies are looking to improve resiliency, defend margins, in some cases onshore production, as well as reduce their exposure to tight labor markets in an economy where the labor pool is growing ever more slowly. All that makes opportunities for companies that offer AI-based solutions that can help us do more with less.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Lenore Elle Hawkins

Lenore Elle Hawkins has, for over a decade, served as a founding partner of Calit Advisors, a boutique advisory firm specializing in mergers and acquisitions, private capital raise, and corporate finance with offices in Italy, Ireland, and California. She has previously served as the Chief Macro Strategist for Tematica Research, which primarily develops indices for Exchange Traded Products, co-authored the book Cocktail Investing, and is a regular guest on a variety of national and international investing-oriented television programs. She holds a degree in Mathematics and Economics from Claremont McKenna College, an MBA in Finance from the Anderson School at UCLA and is a member of the Mont Pelerin Society.

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