The fourth industrial revolution—characterized by the increasing digitization and interconnection of products, value chains and business models—has arrived in the industrial sector, write the Munich, Germany-based authors of the Strategy& report, “Industry 4.0: Opportunities and Challenges of the Industrial Internet.”
The report makes our Required Reading on the Industrial IoT list for the regional perspective it adds to otherwise global trends in technology development and adoption. Indeed, more so than any other country, Germany realized early on that the digital transformation of industry represents an opportunity and challenge of strategic national importance.
Based on a survey of 235 German industrial companies—including manufacturing and engineering, automotive and process industries, as well as the electronics and electrical systems and information and communications firms—the full 52-page study can be downloaded in full at http://www.strategyand.pwc.com/reports/industry-4-0.
Clearly, survey respondents see the digital transformation of their organizations as critical to future success. But the transformation will be neither cheap nor easy. They estimate the share of investments in Industry 4.0 solutions will account for more than 50% of planned capital investments for the next five years. German industry will thus invest a total of €40 billion in Industry 4.0 every year until 2020. Applying the same investment level to the European industrial sector, the annual investments will be as high as €140 billion per annum, the report estimates.
The first significant driver for the advance of industrial internet solutions lies in the opportunity to integrate and better manage horizontal and vertical value chains, write the report’s authors. Companies surveyed expect more than 18% higher productivity over the next five years. While today only one fifth of the industrial companies have digitized their key processes along the value chain; in five years’ time, 85% of companies will have implemented Industry 4.0 solutions in all important business divisions.
The digitization and interconnection of products and services (internet of things/services) is a second important driver. It will contribute strongly to ensuring competitiveness and promises additional revenues of 2% to 3% per year on average. When applied to the German industrial landscape as a whole, additional revenues reach up to €30 billion per year. For the European industry sector, additional revenues amount to €110 billion annually.
A third major driver are the newly emerging, often disruptive, digital business models that offer significant additional value to customers through tailor-made solutions. These new business models are characterized by a considerable increase of horizontal cooperation across the value chains, as well as the integrated use and analysis of data. They are therefore capable of better fulfilling customer requirements.
The various opportunities, the large extent of change and the elevated need for investments make the industrial internet one of the most important topics for corporate management. However, the numerous challenges that the transition entails are also not to be underestimated. Besides the partly still unclear business cases for the industrial internet at company level, industry standards have to be defined and agreed upon and questions need to be answered, for example, in the area of data protection. The respondents also consider the required qualification of employees at increasingly digitized companies to be a major obstacle. Policy makers and industrial associations can provide significant support with these issues.
The report also distills its 52-pages of detailed discussion into the following 10 findings:
1. The industrial internet transforms the entire company and must be part of the CEO agenda. The industrial internet, also known as Industry 4.0, not only comprises the digitization of horizontal and vertical value chains but will also revolutionize the product and service portfolio of companies—with the ultimate goal of better satisfying customer needs. The potential uses of the industrial internet go far beyond the optimization of production technologies. However, exploiting these opportunities requires considerable investment. The topic therefore inevitably occupies a leading position on the agenda of directors and managers of industrial companies.
2. By 2020, European industrial companies will invest €140 billion annually in industrial internet applications. Over the next five years, the industrial companies surveyed will invest, on average, 3.3% of their annual revenues in industrial internet solutions. This is equivalent to nearly 50% of the planned new capital investments and an annual sum of more than €140 billion with regard to the European industrial landscape. These investments will have to be used along the entire value chain in order to achieve maximum success.