Equity Research Global Industrial Infrastructure | Multi-industry March 6, 2020 Industry Report Nicholas Heymann +1 212 237 2740 [email protected] Ross Sparenblek, CFA +1 212 237 2752 Robotics, Automation, and AI: [email protected] Explosion of New Markets Across Tanner James +1 212 237 2748 Broad Segments of the Economy [email protected] Please refer to important disclosures on pages 81 and 82. Analyst certification is on page 81. William Blair or an affiliate does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. This report is not intended to provide personal investment advice. The opinions and recommendations here- in do not take into account individual client circumstances, objectives, or needs and are not intended as recommen- dations of particular securities, financial instruments, or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. William Blair Contents Investment Overview .........................................................................................................3 Risks ................................................................................................................................10 Defining RAAI Applications and Their Commercialization ............................................12 Rise of RAAI Applications from Factory Automation ......................................................16 From the Factory Floor to the Grocery Store ..................................................................35 Industrial Robots and Collaborative Robots (Cobots) ....................................................46 The Push Toward Adaptive Robotics ...............................................................................50 Robotic End-of-Arm Tooling ...........................................................................................55 Software for Robotic Piece-Picking ................................................................................59 Autonomous Robotic Software .......................................................................................62 Autonomous Mobile Robots and Guided Vehicles .........................................................65 Other Robotic Solutions ..................................................................................................74 - art, Arjun Bhatia, and Matt Pfau for their assistance in putting together this report. We would like to acknowledge Bhavan Suri, David Griffin, Jim Breen, Jon Anderson, Ralph Schack 2 Nicholas Heymann +1 212 237 2740 William Blair Investment Overview The migration of robotics, automation, and artificial intelligence (RAAI) technology outside the factory floor and into myriad new market applications began a decade ago but really accelerated 1.in theWhat last fivecaused years the beginning RAAI revolution? in about 2015. Dramatic Key insightsdeclines from in the this cost report and functionalityinclude: of critical sensors, along with the emergence of more standardized operating software, made applying - ingly feasible and economically compelling. Rising labor shortages spawned the emergence of RAAI technologies to new markets inside—but especially outside—the factory floor increas- ated new markets in which to deploy RAAI technologies, such as distribution warehouse auto- collaborative robots (cobots) in factories, while the accelerating shift to online retailing has cre mation. The advent of autonomous mobile robots (AMRs) has expanded the use of autonomous 2. Howguided are vehicles RAAI technologies (AGVs) to automate deployed? movement AMR functionality of products is controlledin both factories by increasingly and warehouses. standard- ized embedded operating software. AMR coordination is achieved by orchestration software that synchronizes the operation of multiple AMRs for product movement, order picking, and inven- tory replenishment. In factories, the speed of cobot operation was initially constrained by cobots’ lack of situational awareness to avoid injuring workers, but still enabled manufacturers to expand their production. The imminent introduction of advanced machine vision is expected to enable cobot speed to markedly increase without jeopardizing the safety of adjacent workers. 3. Key next RAAI-enabling technologies include 3-D vision and 5G wireless. The emergence of advanced machine vision is now on the cusp of creating a new generation of cobots that use cameras, LIDAR, and infrared sensors to enable faster but safe collaborative applications, - unleashing a new wave of productivity gains. Vision-guided robots (VGRs) are highly adapt able to dynamic operating environments by soon (late 2020/early 2021) combining safety- ablecertified precision 2-D and controlled 3-D vision movement. hardware Fullywith sophisticatedfunctional 5G software wireless andwith large nominal computing latency, power real- timeto process speed, immense and vastly quantities faster transmission of visual data rates in real will time. link Advanced robotic devices VGRs use with algorithms real-time to com en- puting to enable fully dynamic integrated performance functionality. When fully operational in technologies in unstructured environments such as outdoors. Currently, most commercially viableperhaps autonomous three to five RAAI years, technology 5G is expected applications to enable have broader occurred deployment in more of autonomousstructured indoor RAAI environments. Much like real-time wireless video streaming created the last buildout wave of localized micro-data centers to process the expected explosion in real-time data processing. cloud computing (often in remotely located data centers), 5G could spawn the emergence of 4. Critical RAAI hurdles and constraints that are likely to determine RAAI company end- game strategy. Once a new RAAI market has become commercially established and proved, the largest challenge for smaller private companies is the ability to fund aftermarket support infrastructure. We believe the elevated aftermarket support infrastructure investment is likely to result in most RAAI companies being acquired by private equity or larger established indus- trial companies with established aftermarket service networks rather than going public. 5. Key emerging new RAAI markets. Several new commercially viable applications of RAAI tech- manufacturing, distribution warehouse automation, autonomous robotic indoor security and nologies have been created over the past five years, including cobots and AGVs for automated guarding, automated online grocery order fulfillment, recycling automation, industrial and commercial AMR floor care, and AMR cleaning for hazardous industrial environments. Nicholas Heymann +1 212 237 2740 3 William Blair Exhibit 1 Robotics, Automation, and Artificial Intelligence (RAAI) New Derivative Industrial RAAI Markets Market Market Status 5-Year Market CAGR Distribution Warehouse Automation Established ~15%-20% Recycling Automation Accelerating ~10%-12% Cobots and AGVs for Automated Manufacturing Accelerating ~15%-20% Online Grocery Fulfillment Rapidly Emerging ~100%+ Guarding and Robotic Security Automation Emerging ~8%-10% Industrial and Commercial Floor Care AMRs Emerging ~20%-25% AMR Cleaning for Hazardous Industrial Environments Emerging ~8%-10% Automated Commercial Space Vehicle Construction Nascent ~5%-10% Source: William Blair estimates Potential Winners and Losers From Commercialization of RAAI Technologies A usual area of focus as new disruptive technologies emerge is whether software or hardware will emerge as the critical value driver and over time provide and capture the majority of the value cre- ated by the commercialization of new RAAI technologies. Currently, most developers of new prod- ucts, systems, and solutions using RAAI technologies have tended to internally develop their own operating software that they then combined with off-the-shelf, lower-cost components to create discrete robotic solutions. The current market focus is to develop fully functional but safe station- ary or mobile robotic devices that can operate autonomously. Low-cost LIDAR, infrared, and other sensors that enable autonomous operation have required core mobility functions to be processed Inonboard the future, because however, of the datadeployment lag (still of elevated fully functional latency) inherent5G cellular in allis currentexpected cloud to enable computing. autono- mous robots to process information on a real-time basis in highly unstructured or variable en- vironments. We anticipate this will create a next generation of devices that can operate in highly - cales. Fully functional 5G is expected to enable functions such as real-time data collection, object dynamic outdoor environments versus today’s primary focus on structured (typically indoor) lo- cally operate autonomously. Ultimately, the ability to dynamically capture and process data on a real-timeidentification, basis and is likely global to pathcreate planning a large increaseoptimization in the for coordinated a connected functionality set of devices for that multiple today types typi of real-time connected devices. We are aware of only one company, Brain Corporation, that has attempted to develop standard- ized operating software to enable autonomous mobile robotic operation of traditionally