Brian Foster, Head of Industry Finance at Siemens Financial Services in the UK
The key question relating to digital transformation in manufacturing is no longer ‘whether’ to invest in it but rather ‘when’ to do so. Whilst most manufacturers understand the benefits of investing in digitalised technology, Industry 4.0 requires transformational change at a pace the majority of manufacturers are not yet matching. If manufacturers continue on the current trajectory, they are unlikely to meet the realities of manufacturing both now and in the future and may be disrupted by competitors and new market entrants. Accordingly, manufacturers must embrace digitalisation now in order to draw the benefits of early adoption, or else risk being left behind.
Estimating the “tipping point” of Industry 4.0 - the point at which the pioneering first half of manufacturers will have substantially migrated to Industry 4.0 digital production platforms – is the focus of Siemens Financial Services’ (SFS) latest research. Manufacturers across the world are in a race against time to gain competitive advantage from Industry 4.0 investment before the ‘tipping point’ of majority adoption.
While the first 50% of players to invest in new technologies or business models will gain a significant competitive advantage over rivals – an estimated 25% gain on return on capital employed (ROCE) by 2035 – the second half of the manufacturing community will simply be playing a game of catch-up. Later adopters will still benefit from the cost savings and economies from digital transformation, but their investment will merely represent a must-do strategy of realignment enabling them to compete in markets at all. It is therefore critical to know how long the window of opportunity will last for manufacturers to be part of the first cohort in digital transformation.
SFS’s latest report “Countdown to the tipping point for Industry 4.0” captures testimony from over 40 manufacturers, trade associations and academics from across the world, in order to forecast the window of opportunity for manufacturers to reap the expected return on investment (ROI) from their digital transformation initiatives.
Respondents estimated that larger manufacturers would reach this point within 5 and 7 years whereas SME manufacturers would take 9 to eleven years – thus highlighting the two-tier nature of the digital race. Even within that window of opportunity, the pressure to transform remains high – after all, the competitive advantage from conversion reduces as more and more manufacturers adopt Industry 4.0 platforms.
Respondents were also asked about the proportion of manufacturers to have implemented a significant Industry 4.0 pilot. This is an important insight into the current rate of adoption, since many manufacturers start their Industry 4.0 journey by piloting new technology or solutions before embarking on a full roll-out of digital transformation. The research found that 70-80% of larger manufacturers have implemented a significant pilot project for Industry 4.0 production solutions, compared to 40-50% of SME manufacturers Interestingly, although the advantage of scale and market power have placed larger players ahead of the game in terms of pilot testing, their digital transformation is likely to be more complex and drawn-out, thus offering small nimble players an opportunity to challenge a misconception over the achievability of digital transformation by smaller players.
Manufacturers were also interviewed for their views on the role that specialist finance was playing in enabling their digital transformation. Challenges to implementing digital transformation tend to pivot around the issue of finance – understanding the commercial benefits of Industry 4.0, knowing that there will be a reliable return-on-investment, and paying for Industry 4.0 technology at a rate that is less than or matches those expected commercial gains. These hurdles, however, can be tackled using smart finance techniques - known as “Finance 4.0” - which cover the full range of requirements, from the acquisition of a single digitalised piece of equipment, to financing a whole new factory, to even acquiring a competitor. As the pace of digital transformation gains momentum, manufacturers are increasingly making use of integrated finance options to facilitate their industry 4.0 investments and accelerate their journey towards digitalisation.
Whilst traditional financiers do not provide appropriate mechanisms for this kind of project, Finance 4.0 arrangements tend to be offered by specialist providers that have a deep understanding not only of how the digitalised technology works, but also of how that technology can be leveraged to deliver the benefits of digitalisation.
Financiers with knowledge of manufacturing in general and digitalisation in particular will adapt the finance arrangement to align with the likely benefits or “outcomes” the manufacturer will gain from the technology. Savings or gains from access to the technology are used to fund monthly payments, making the technology cost-neutral for the manufacturer. Consideration is given to the complete technology solution in order to identify the best finance package to effectively digitalise a manufacturing facility’s operation. Furthermore, equipment and technology finance options allow manufacturers to upgrade during the financing period and offer protection against technological obsolescence – providing manufacturers with an additional flexibility to roll out Industry 4.0 and grow at the same fast pace as the accelerating demand for their products.
Whilst the benefits of moving to a digitalised manufacturing environment are clear, the process of transition has to be carefully managed and commercial risk eliminated by rigorously testing new technology in the real-world production environment. This can often act as a barrier to digital transformation because the manufacturer is discouraged by the idea of having to pay for both the pilot arrangement and the scaled approach during the transition period. Recognising the challenges of transition, financing arrangements are available that defer payment for a new system until it is reliably up and running. This removes the financial challenge of having to pay for the new system while the old one is still running – and helps reduce the risk of “pilot purgatory” for manufacturers.
Ultimately, while there is momentum behind the transition to Industry 4.0, the pace of transformation could stand to accelerate, especially as incumbent players look to compete with rival economies, stay ahead of new entrants, and manage disruptive change. By enabling manufacturers to invest immediately through flexible finance solutions, they are able to secure a competitive advantage from Industry 4.0 before the tipping point is reached, after which the early-mover advantage will have largely diminished.