Robotics and the increasing use of automation represent one of the most exciting investment avenues for stock buyers in the coming decades. The makers of robotics and automation systems understand that there is a growing need to improve the efficiency of production in several sectors of the overall economy. With the increasing penetration of information technology in manufacturing and the explosion of the Industrial Internet of Things (IIoT), the already well-established robotics sector is entering a new round of long-term growth that should propel many of the companies involved even higher. Let's take a look at how an investor might go about getting some exposure to robotics and automation stocks and what these companies -- some of which you might be surprised to see mentioned -- actually do. Image source: Getty Images. Investing in robotics is a cyclical exercise The robotics and automation industries have some peculiarities about them that we should note right from the start. First, spending in the industry tends to be driven by what the business community calls expansionary or growth capital spending, which is distinct from maintenance capital spending. In other words, when the economy is doing well and manufacturing companies are growing sales strongly, they tend to think about expanding their plants or adopting new technologies in them -- this is expansionary or growth capital spending. Maintenance capital spending is simply what companies must spend in order to continue existing levels of production. So even if the long-term trend toward spending on robotics automation is upward, investors are going to have to tolerate some ups and downs, because economies tend to have ups and downs too. Second, robotics is really a subset of industrial automation, and in most cases, it's almost impossible to separate robotics from industrial automation in terms of investment. This means that it's highly unlikely that a company with broad-based exposure to industrial automation will be able to avoid a slowdown in the economy -- even if its robotics sales are growing. To bring these points together, let's look at leading U.S. industrial automation company Rockwell Automation's (NYSE: ROK) sales pattern in the 2014-2019 period. As you can see in the chart below, sales growth turned sharply negative in the 2015-2016 period due to the slump in commodity prices caused by a collapse in oil and gas, mining, and heavy industries spending. It recovered in the following years but then fell back most recently due to a combination of a slowing overall economy, specific cyclical weakness among automotive and semiconductor companies, and fears over the U.S.-China trade conflict. Data source: Rockwell Automation presentations. Long-term investors in the industry will simply accept that there will be ups and downs along the way, but the underlying secular drivers will remain strong. The third point is that Asia (and China in particular) is the driving force behind the demand for robotics and automation. The International Federation of Robotics (IFR) sees the supply of robots quadrupling over the 10 years that followed the last yearly drop in worldwide supply back in 2012. Data source: International Federation of Robotics. Chinese companies purchase roughly 37% of the units sold around the world, and the rest of Asia (including Japan) buys about 33%. Europe's share of automation units purchased comes in at around 18%, and the Americas (mostly the U.S.) roughly make up the remaining 12% share. And the demand for units is only expected to grow in China, as the IFR says the country's robot density -- defined as the number of robots installed per employee -- is still low compared to that in other major industrialized countries. In other words, look to China to drive growth for robotics and industrial automation in the future. Data source: IFR World Robotics 2018. On a related note, the traditional early adopters of automation/robotics, such as the automotive and electrical and electronics manufacturing industries, are set to lead volume growth in the near future. This is important to consider, because if these two industries turn down aggressively -- as they did in 2019 -- then robotics automation companies can suffer falling sales. All told, if you are investing in the robotics industry, you must be aware of the cyclicality of the industry, its outsized connection to China, and the fact that buying into the robotics sector will almost certainly involve exposure to industrial automation at large. How to invest in robotics stocks When researching robotics stocks, it will help to understand that there are four distinct groups to consider. They are: Companies that make the core automation and robotics technology. Companies that make technologies and components that work with or in robotics. Industrial software companies, which are an integral part of the smart automation revolution and the segment in which the highest growth rates are likely to be found. Companies that are using robotics and smart automation to enhance their product offerings to existing customers. This is an intriguing group that can fly under the radar of many investors. Let's take a more detailed look at each of the four groups and include some specific stocks as part of that discussion. 1. Core automation and robotics So what is the difference between a robot and a piece of factory automation equipment? The IFR uses the International Organization for Standardization (ISO) definition to explain that a robot is "an automatically controlled, reprogrammable, multipurpose manipulator programmable in three or more axes, which can be fixed in place or mobile in industrial automation applications." The robot definition makes it pretty clear that robotics is actually a subset of factory automation. For reference, automation is usually prominent in two main markets. One is factory or discrete automation (think of a bottling plant or of an assembly line of robots putting together a car), and the other is process automation, which is the automated control of raw materials (think of oil and gas refining or chemicals processing). So companies like Fanuc, ABB, Yaskawa, and Kuka that say they are robotics companies are also factory automation companies. As you can see below, ABB is the only company to be a major player in all three markets, but Germany's Siemens is also a major player in factory and process automation. Japan's Fanuc and Kuka (a German company now majority owned by China's Midea) are also active in robotics and factory automation. Company Robotics Factory Automation Process Automation Fanuc (OTC: FANUY) Major* Yes -- ABB (NYSE: ABB) Major Major Major Yaskawa (OTC: YASKY) Major Minor -- Kuka (OTC: KUKAF) Major Yes -- Siemens (OTC: SIEGY) -- Major Major Schneider Electric (OTC: SBGSF) -- Yes Yes Rockwell Automation (NYSE: ROK) -- Yes Minor Mitsubishi Electric (OTC: MIELY) -- Yes -- Emerson Electric (NYSE: EMR) -- Minor Major Honeywell International (NYSE: HON) -- -- Major Data source: UBS research. *Major means controls at least 10% of the market. Minor means the company controls 2% or less of the market. Yes indicates the market share is 2% to 10%. As noted earlier, the U.S. is a smaller market for robotics than Asia and even Europe. So it makes sense that more leading robotics and factory automation companies traded on U.S. markets are European (Kuka, ABB, Siemens, and Schneider) and Japanese (Yaskawa, Fanuc, and Mitsubishi). The only significant U.S.-based factory automation companies are Rockwell and Emerson Electric. Emerson tried to create a U.S. automation champion in 2018 by launching a takeover bid of Rockwell that ultimately failed. Look out for cyclicality in all these businesses. It's reasonable to expect faster growth from the robotics sector, but factory automation, in general, will oscillate in line with the economy. And capital spending in process automation is somewhat guided by trends in commodity prices. ABB is an interesting company, but it has a significant amount of restructuring ahead of it. Siemens is an attractive investment that tends to pay a healthy dividend, but its industrial automation operations only make up a portion of a much larger and diversified organization. Rockwell is probably the best way for U.S. investors to get long-term direct exposure to industrial automation. As the Emerson Electric takeover bid demonstrates, Rockwell is a strategically attractive company for others looking to get exposure to the U.S. industrial automation market. 2. Robot technology stocks Until now, we've been discussing very large companies working to develop wholesale solutions for the robotics and automation markets. But what about some of the smaller companies that specialize in just a segment? These companies focus on improving certain aspects of robotics and industrial automation by developing and marketing things like vision systems, digital sensors, motion-control sensors, and video compression. If robots are going to take the place of human activity in the manufacturing process, the machines will have to behave more like humans. Part of that is being able to see and define images better in order to monitor and control automated processes. Company Products Teledyne Technologies (NYSE: TDY) Digital imaging and sensors Cognex (NASDAQ: CGNX) Machine vision systems Flir Systems (NASDAQ: FLIR) Imaging and detection systems IPG Photonics (NASDAQ: IPGP) Industrial lasers Novanta (NASDAQ: NOVT) Lasers, machine vision, motion-control sensors Ambarella (NASDAQ: AMBA) Video compression, computer vision semiconductors Data source: Author research. Cognex's machine vision systems are a good example for this sector. The company's largest customer is Apple, and its biggest end markets are automotive and consumer electronics. For example, its solutions help to guide and monitor robots on a car production line and also help smartphone manufacturers to precisely align the manufacturing of display panels. Cognex's management believes it can grow its factory automation-based revenue by 20% a year over the long term. But it's not going to be 20% a year every year, because its end markets can have ups and downs from year to year. In addition to its factory automation end markets, Cognex also has a fast-growing logistics end market with its machine vision systems for e-fulfillment warehousing. E-commerce sales continue to grow at a mid-teens rate in the U.S., and there's a need to expand warehouse space in order to meet the demand for e-commerce deliveries. It's an exciting end market, and Cognex believes it can grow its logistics sales by 50% a year in the near term. The need for better robotic vision and detection is a byproduct of the growth in automation. Likewise, the growing adoption of smart sensors and actuators to improve manufacturing processes means more data will have to be captured and analyzed. This virtuous cycle of productivity requirements and subsequent advancements will help the companies in this sector continue to benefit. 3. Industrial software companies and IIoT Before we go any further, it would help to provide a bit more explanation of what the Industrial Internet of Things is and how it relates to this sector. The IIoT is simply the process whereby web-enabled sensors are used to create data and information that will help companies better manage physical assets. An example could be the use of sensors on a gas turbine in order to predict when it will need servicing. Arguably the most exciting growth area among the four sectors, the growing penetration of IIoT software tools and digitization is changing how manufacturing companies manage their devices. Naturally, this is highly relevant to robotics, because as processes become automated, more and more data can be captured and utilized. Image source: Getty Images. As such, manufacturers are even more eager to robotize production, because IIoT and industrial software applications are enhancing the value of an investment in robots and automation. In a nutshell, manufacturing is probably the best way to play the IIoT revolution. Indeed, all leading automation companies have their own industrial software solutions or partnerships with other leading companies. For example, Siemens and Rockwell Automation dominate the market for programmable logic controllers (PLCs), and Siemens has its own product lifecycle management (PLM) software, while ABB partners with Dassault Systemes (OTC: DASTY) and Rockwell with PTC (NASDAQ: PTC). (PLM is software used to design products and physical assets and then manage them as they are used.) Meanwhile, software companies, such as PTC, Dassault, and ANSYS (NASDAQ: ANSS), offer solutions that help manage automation assets better, including the exciting world of so-called digital twins. In digital twinning, a physical asset is replicated digitally and then different simulations are run in order generate comparative information that is analyzed and used to run the physical asset better. In a sense, all these software companies have a symbiotic relationship with robotics, and the two often end up being mutually beneficial. Increases in software applications and IIoT adoption will make automation and robotics investments more cost effective, and companies buying more robots will encourage more software development. Alongside PLM, other software solution providers such as Aspen Technology (NASDAQ: AZPN) help companies optimize asset performance. An example is the need to reduce downtime on machinery in a heavy-duty industry like pulp and paper. Aspen's software helps pulp and paper companies monitor the performance of motors and drives in the manufacturing process. As investment in smart automation increases, companies like Aspen are going to see more growth opportunity ahead. 4. Under-the-radar robotics stocks There is a growing subset of companies using smart automation and robotics in order to enhance or develop new solutions for customers. Investors will probably know about companies like domestic appliance maker iRobot (NASDAQ: IRBT) or even Intuitive Surgical (NASDAQ: ISRG) and its groundbreaking da Vinci robotic surgical system. In fact, Intuitive's growth has been so impressive that medical device company Medtronic (NYSE: MDT) is muscling in on the market and intends to compete directly with Intuitive. Image source: Getty Images. Also, so-called old-economy stocks like agricultural equipment manufacturer Deere (NYSE: DE) are benefiting from the strong adoption of its IoT-enabled precision agriculture solutions. Using Deere's onboard telematics, computers, and hardware solutions, farmers can better manage their operations by getting digital assistance to guide and steer equipment. In fact, Deere even sells robotic lawnmowers. Meanwhile, Oceaneering International (NYSE: OII) makes automated guiding vehicles used in industries as diverse as materials handling, subsea engineering technologies used in offshore energy (wind power and oil and gas), and vehicles used in space. AeroVironment (NASDAQ: AVAV) makes unmanned aircraft systems and drones for the defense and satellite industries. Brooks Automation (NASDAQ: BRKS) makes robotics and handling solutions for the life sciences and semiconductor industries. Another area in which robots are adding significant value is in warehouse automation -- a high-growth area given the huge expansion of e-commerce and the increased need for e-fulfillment. Honeywell's (NYSE: HON) purchase of material handling company Intelligrated has been a huge success, and as noted previously, Cognex believes it can grow its logistics-based revenue at a 50% rate in the near future. Honeywell's Intelligrated is a solution provider (materials handling, sorters, and conveyors) to Amazon.com (NASDAQ: AMZN) and its growing investment in warehouse automation. In fact, Amazon's investment in robotics extends to buying a robotic technology company -- Kiva Systems (now called Amazon Robotics) -- for $775 million in 2012 in order to use its technology in house. Moreover, in 2019, Amazon bought Canvas Technology, a robotics start-up building autonomous carts for warehouses. Two other stocks that benefit from automation in the warehouse are Germany's KION Group (OTC: KIGRY), a manufacturer of forklifts and warehouse equipment and owner of Intelligrated's rival warehouse robotics company Dematic. Another interesting company in the sector is Zebra Technologies (NASDAQ: ZBRA). The company makes mobile computers, scanners, and barcode printers, which will be needed to support companies investing in robotic automation in logistics. While robots will perform repetitive tasks, there will still be a need for humans to work alongside robots in smart automation centers. Another way to invest in the sector is via a robotics ETF, or exchange-traded fund, such as the ROBO Global Robotics and Automation ETF (NYSEMKT: ROBO). The robotics ETF will tend to own most, if not all, of the robotic automation stocks discussed here, and it's a good way to gain exposure to the sector for investors looking to avoid the process of picking out the best stocks individually. A long-term investment opportunity Putting all of this together, it's clear that the structural drivers behind robotics companies are very strong. A combination of rising labor costs in emerging markets, the growing adoption of IIoT in manufacturing, and relatively low levels of robots used in China all point to a significant runway of growth for companies working in emerging markets. Meanwhile, in developed markets, the need to improve productivity, particularly in light of slowing GDP growth, will drive investment in robotics and automation. Moreover, the opportunity to fully benefit from the IIoT revolution will also make automation investment a compelling proposition. That said, investors in the industry will have to be able to ride out the ups and downs of the business cycle, particularly as capital spending reflects efforts to expand rather than just maintain the respective businesses. And investors should remember that two industries -- automotive and electronics/electrical -- still dominate the immediate prospects for the industry. The underlying secular growth driving the industry makes it a good place for the long-term investor. 10 stocks we like better than Rockwell AutomationWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.* David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Rockwell Automation wasn't one of them! That's right -- they think these 10 stocks are even better buys. See the 10 stocks *Stock Advisor returns as of June 1, 2019 Lee Samaha owns shares of Honeywell International. The Motley Fool owns shares of and recommends Ambarella, Apple, Cognex, Intuitive Surgical, IPG Photonics, and iRobot. The Motley Fool has the following options: short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool recommends AeroVironment, Dassault Systemes, Fanuc, Oceaneering International, and Zebra Technologies. The Motley Fool has a disclosure policy.Source