Q-Series Redux: Factory Automation - COVID-19 and the shift to EV

In our Q-Series on factory automation (FA) published two years ago, we expected automation demand to grow to US$2trn by 2025E in tandem with growth in Industrial Internet of Things (IIoT) demand. We also expected a value shift among FA subsectors to become increasingly apparent. Since then, we think a faster EV shift and COVID-19 are likely to lead to the commoditization of automation needs, as well as a re-emphasis on China as a capex destination; thus, we now expect a value shift among FA names to be greater than previously assumed. We think this transition could result in challengers (largely Chinese) gaining significant market share in some cases. In this report, we deepen our analysis by collaborating with 10 analysts covering the industrials and autos sectors, and leverage five UBS Evidence Lab studies and datasets.

Patrick Hummel, head of UBS autos team, expects new capex in ICE vehicles to drop to zero by 2025 as plans to shift entirely to battery EVs by 2035 firm up in the EU and as auto demand remains suppressed vs pre-COVID levels. If that happens, we think trends toward simplified production processes and automation demand could accelerate. The diversification of production locations as highlighted by COVID-19 may also lower capex intensity per project and lead to the adoption of uniform systems, accelerating a shift away from specific-purpose (SP) FA equipment towards lower cost general-purpose (GP) systems. Against this backdrop, we update our nine FA industry value drivers.

UBS Evidence Lab's sixth China Industrial Automation Market Monitor shows challengers making greater leaps forward in China than the market expected. To better illustrate the intensifying rivalry, we divide companies into incumbents and challengers, then rank them by subsector. We see the market increasingly applying valuation premiums/discounts on the basis of these categories. We also look at changes in pace and direction of subsector market position to assess the widening and potentially irreversible gap between winners and losers in coming cycles.