Industrial Innovation - Automation
Fixed v Non-Fixed Automation
The fourth industrial revolution, incorporating technology, digitisation and automation into industrial strategy and buildings – is well underway. While there are the obvious occupier benefits of increased efficiency, productivity, resilience, competitiveness and an increase in higher-paid employment at the expense of low-paid, repetitive and dangerous jobs, there are also impacts on the properties in which the automation is located.
Looking at the current and expected changes to the manufacturing sector as a result of Industry 4.0, m3property in this paper explores automation as a part of this accelerating revolution.
We will focus on how fixed and non-fixed automation is growing and impacting the value of industrial property in Australia and assess if properties will change due to advanced manufacturing processes.
Fixed automation includes:
» Automated assembly machines
» Chemical manufacturing processes
» Material handling conveyor systems
» Machining transfer lines
» Paint & coating automation processes
» Web Handling and converting systems
Non-fixed automation includes:
» Automatic guided vehicles (portable robots)
Fixed automation or “hard automation” is primarily designed to perform a single, specific set of high volume operations. It has applications for both continuous flow and mass-production systems. The commands or coding is usually contained within the machines in the form of cams, gears and wiring.
According to Manufacturing Automation MWES engineered systems (October 2020), fixed automation systems include the assembly machines, manufacturing processes, conveyor systems, transfer lines, automation processes and handling and converting systems listed above.
Fixed automation can significantly increase production, reduce labour costs, lower operating costs on an ongoing basis and provide a high degree of quality control. However, it is often task and product specific and, therefore, is usually not transferable to other uses without a reasonably high cost and involves a higher initial set-up cost for the business. The initial additional cost is offset reasonably rapidly by the ongoing savings achievable through the automation of processes.
Fixed automation makes warehouses smarter, faster, and more economical, as well as reducing order status calls, increasing sales and reducing costs.
From a landlord’s perspective, the application of fixed automation may have a positive effect on property value, as it is expected to improve ongoing tenant retention upon future lease expiries. In the long term, however, broad market appeal may be reduced due to the aforementioned task and product specificity.
Non-fixed automation has grown significantly over recent years in Australia after a period of relative stability from 2011-2017. Internationally and particularly in the Asia Pacific region, growth in non-fixed automation has been significant (as shown in the chart below), so Australia has over the past few years been on a steep curve of trying to catch up to our neighbours.
The International Federation of Robotics has released data that reveals the acceleration of industrial automation across most of the developed world. Industrial robots include collaborative robots, cartesian, co-ordinate or linear robots, gantry robots, SCARA robots, other articulated arm robots and human assist robots. According to their results, on average, 113 industrial robots were installed globally for every 10,000 employees in 2019. They make up the vast majority of non-fixed automation within industrial properties in Australia.
The benefits of non-fixed automation are generally similar to those provided by fixed automation, however, it is also transferable to new locations when businesses relocate and cheaper to maintain and upgrade as required. Set-up expenses and implementation plans add to the initial cost, but the ongoing savings quickly offset these costs.
Most fixed automation will come with an element of non-fixed components.
Industrial buildings designed to accommodate occupants who benefit from automation may warrant a higher value.
Growth of Robotics
- The list of countries which are quickly adopting robotic practices is unsurprising with Singapore (918 robots per 10,000 employees) and South Korea (855) leading the world.
- Over 2019, robotic installations were concentrated in the electronics and electric sectors. Japan had around 350 robots per 10,000 employees. Japan’s total seems underwhelming, given it accounts for over half the global supply of industrial robots.
- Australia saw the installation of industrial robots grow marginally between 2011 and 2016, while the World total rose by 56%, according to Aumanufacturing (2019). The 2017 numbers (which are the latest available for Australia) still show 83 robots per 10,000 employees, indicating that Australia has fallen behind the rest of the world over the six years from 2011-2017.
- Anecdotal evidence provided by firms expanding in Australia (including Amazon, Coles and Woolworths) indicates that they have embraced robotics in manufacturing and logistics, and this shows an increasing number of robots are likely to have been employed by businesses in Australia over 2019 and 2020.
- We are also undertaking significantly more research and development in the area of robotics and producing more robots within Australia than even a few years ago as evidenced by the growing list of suppliers on the Australian Robotics and Automation Association website (ARAA).
COVID-19 has thrown off the shackles in terms of the way things are processed, manufactured, distributed and purchased. It is resulting in an acceleration of change that should lead to greater efficiencies, increased productivity and resilience.
COVID-19 driving increased use of automation
COVID-19 impact on industrial innovation and change in Australia.
- COVID-19 continues to be a digitalisation booster.
- The electronics industry and logistics sector, due to increased online shopping, appear to have been winners of social distancing. The March 2020 paper on SEQ Industrial Market Outlook explored this trend in greater detail.
- Increased demand for new applications, particularly in healthcare and for the increased production of personal protective equipment.
- COVID-19 has provided a good opportunity for modernisation and digitalisation of production in Australia.
- Automation may provide enhanced opportunities in respect to reshoring/repatriation of some manufacturing due to reduced labour costs as explored in the July 2020 paper The Onshoring of Manufacturing.
- The Australian government is supporting investment in modern production technology and automation as it creates higher paid jobs and makes our manufacturing more resilient.
- COVID-19 has resulted in the deferral of some investment, reduced consumer demand and other demand-side issues.
- Travel restrictions disrupted supply chains, and other supply-side issues have hindered the application of automation in some areas/industries.
- Adaption to the new normal and its associated COVID-safe personnel and outgoings costs have in some cases resulted in multiple costs for firms also looking to automate.
- Non-COVID-19 issues remain such as automotive transition cost and delays.
Economic recovery to pre-COVID-19 levels is expected to be from the second half of 2021 depending on the impact of outbreaks, particularly on employment, and the speed of vaccine deployment when it becomes available. The economic recovery is likely to continue to benefit from and to drive initiatives taken during COVID-19 in the industrial sector. Australia is forecast to benefit from the catch-up effects of industrial innovation which has already advanced in many other countries.
Automation also has the benefit of making production resilient to future health and economic crises as it does not require social distancing, sick leave and with remote operation can continue despite many lockdown scenarios.
COVID-19 Summary of changes
COVID-19 is changing industrial market trends:
- Social distancing and travel restrictions have accelerated the trend of consumer preferences towards e-commerce.
- Disruptions to supply chains have resulted in just-in-time systems failing due to excess demand, particularly for household products such as paper goods, medications and cleaning products but also for building products and raw materials sourced from Asia initially and now products sourced from Europe.
- Focus shifting towards manufacturing of health and safety products.
- A greater focus on high-value manufacturing.
- There has been increased spending on automation, drones and robotics, along with the application of IoT/smart sensors to detect maintenance requirements, improve monitoring and to reduce the risk of disruption due to health concerns.
Government support for innovation
The Federal Government has thrown its support behind industrial innovation in Australia through the Modern Manufacturing Initiative ($1.3 billion), the Manufacturing Modernisation Fund ($52.8 million) and Supply Chain Resilience Initiative ($107.2 million), Industry Innovation and Science Australia (IISA), Cooperative Research Centre grants (CRCs) and the Department of Defence Program 2.13 – Defence Science and Technology. The Centre for Defence Industry Capability (CDIC) provides “advice, assistance and grants to eligible businesses to better position them to support the Department of Defence. It also facilitates access to Defence’s innovation programs for Australian industry, academia and research organisations, working closely with the Defence Innovation Hub and Next Generation Technologies Fund.” DISER Budget Statements (October 2020). These programs support networks and research and development, which is helping many firms implement automation into their manufacturing, distribution and logistics processes.
Hybrid buildings incorporating retail and industrial are likely to become more common.
Automation impact on building and valuations
- Large scale manufacturing facilities and distribution centres may be more impacted than smaller, more typical general industrial stock, given the potential for both short to medium term uplift; and longer-term automation specific obsolescence.
- Given the flexibility associated with applying automation to new builds, occupant specific automation may increase demand for vacant industrial land, as opposed to retro-fitting existing stock (where this cost may be prohibitive).
- Hybrid buildings incorporating retail and industrial are likely to become more common. These are likely to have a high degree of non-fixed automation to reduce cost, increase productivity and speed up the last mile delivery.
- Turnover rent may become more critical for future rental growth as industrial buildings take on more retail aspects.
- Longer lease terms are likely for tenants who undertake the expense of adding fixed automation, increasing the buildings Weighted Average Lease Expiry (WALE).
- Building obsolescence becomes more likely with the application of fixed automation.
- Tenants may benefit from cost savings associated with fixed automation, while landlords may extract a higher rent and longer lease terms from properties where this option is available and the benefits outweigh the costs.
- Industrial properties that have been designed for adaptability (strong floors, higher clearance, access to cheap power, etcetera) or which are designed to accommodate occupants who benefit from automation may warrant a higher value. This value-add could be through lower capitalisation rates (potentially due to longer than typical lease terms, higher tenancy retention potential or tenancy covenant) or increased achievable market rents where the fixed automation fitout remains with the landlord.
Woolworths – a case study in automation
Store networks and well-located neighbourhood shopping centres have become more strategic and are blurring the lines between industrial and retail. Woolworths is developing a decentralised system of micro-fulfilment supermarkets that pick, pack and dispatch groceries to consumers within a day. They are effectively integrating a distribution centre and a supermarket into one building, containing fixed and non-fixed automation. At the front is an ordinary store, but in the back is a technology-driven assembly line with staff and robots feeding delivery vans. It is only in the early stages, with two trial stores in Australia, which means it will take some time before we fully understand the rent and valuation consequences. However, with speed to market or same-day delivery now expected by some customers, for many firms this may become essential.
Store hybrids are likely to have a large portion of non-fixed automation as the technology will be retro-fitted into existing locations. In the example above, Woolworths Carrum Downs, one of the stores in the trial, would be required to ‘make good’ the property at the end of the lease term as usual. Non-fixed automation may allow Woolworths to use the technology in another hybrid store or given this is a trial they may be amortising the cost over a shorter period commensurate with the remaining lease term.
- There is a rapid uptake of fixed and non-fixed automation currently occurring in Australia after a period where we had started to fall behind the rest of the world. While it is still not fast enough for many businesses, a large number have embraced the change and are already reaping the benefits.
- COVID-19 and government initiatives to drive economic growth following the health-driven recession has accelerated existing trends and has driven increased uptake of automation.
- Non-fixed automation is unlikely to impact the value of the building itself; however, the ability of the building to incorporate non-fixed automation adds value to existing buildings.
- Automation will make our manufacturing sector more competitive, resilient and productive.
- Automation processes mean building owners and tenants can become more creative with existing space. This thinking outside the box is resulting in trials of hybrid retail/industrial buildings. It is also likely to drive further experimentation with existing buildings to obtain the optimal results for the operators.