Migrating to smart factories: a key to surviving and thriving

Early adopters of smart factory transformation stand to gain the most competitive advantage from Industry 4.0. In a recent study “Industry 4.0 – Rising to the Challenge”, Siemens Financial Services (SFS) estimates the ‘investment challenge’ for manufacturers to convert to smart factory technology.

 

 

The current health and economic crisis has affected all industries, with manufacturing no exception. Many factories are either ramping up production or pivoting processes to support urgent product needs. Others adapting at speed to maintain any form of throughput. In either case, the agility, cost-efficiency and productivity benefits that stem from transforming to a fully digitalised factory floor can be critical to helping manufacturing businesses withstand times of change and seamlessly adapt to a fluctuating demand in either direction. 

 

Siemens Financial Services (SFS) is helping many manufacturers – large and small – move to Industry 4.0 and grasp its competitive advantages as soon as possible, without incurring unsustainable debt or cash flow pressures.

Finance 4.0

The latest whitepaper “Industry 4.0: Rising to the Challenge” from Siemens Financial Services (SFS) estimates the ‘investment challenge’ for manufacturers to convert to smart factory technology 

Surviving and thriving: a window of opportunity for competitive advantage

Historical evidence points to those who invest (wisely) – even in a downturn – often gain a long-term competitive advantage that their rivals struggle to match.  A recent HBR analysis[1] points out that “digital technology can help cut costs…. [and] make companies more agile and therefore better able to handle […] uncertainty and rapid change.”  The same analysis finds that companies who do not invest in digital transformation are likely to fall dramatically behind their competitors[2], noting “Companies that have neglected digital transformation may find that the next recession makes those gaps insurmountable.”

Digital technology can help cut costs.

New financing business models to manage growth

Streamlining operating costs while continuing to invest can be made possible by deploying smart financing techniques. A study from McKinsey[3] identified several management principles that help companies survive challenging markets and thrive afterwards; and went on to observe that “companies that emerged in the top quartile spent 15 percent more on capital expenditures.” Yet the same top quartile companies also, the study says, “reduce leverage” and maintained a “higher cash balance”. Smart finance helps to address both these objectives, harnessing sustainable third party capital to reduce the burden on corporate lines of credit, as well as deploying cash flow management techniques that help maximize available working capital.

 

In the context of digital transformation, a growing number of Industry 4.0 solution providers are integrating smart finance into their overall value proposition for manufacturers. This makes their proposition more compelling – not only providing best-in-class technical solutions, but also making access to them financially sustainable and aligned to the business benefits they deliver.

A growing number of Industry 4.0 solution providers are integrating smart finance into their overall value proposition.

Manufacturing management are better placed to achieve their desired business outcomes, using the most appropriate combination of industrial technology and software, advisory, service and financing. Smart financing therefore deploys a combination of new business models and financing techniques, with a focus on achieving the expected measurable business outcome.

The cost of not investing

A study by McKinsey[4] notes that companies expect to replace around 50% of the installed base of manufacturing equipment in the course of Industry 4.0 transformation. Additional this investment level can be expected to be amplified by retrofit and upgrading of existing machinery and technology. The window of opportunity to invest and thereby gain competitive advantage is limited, making the issue an urgent one.

 

Previous research from Siemens Financial Services (SFS)[5] has shown that the window of opportunity to get ahead of the competition has a ‘tipping point’ of five to seven years. By this point, it is expected that 50% of manufacturers will have made substantial investments in Industry 4.0, and so after this point manufacturers who have not yet invested in digital transformation will be playing catch-up[6].

The window of opportunity to get ahead of the competition has a ‘tipping point’ of five to seven years.

What, then, is the cost of manufacturers not investing? Where are the potential financial gains from Industry 4.0 that the low or no-investors will miss out on, and which smart finance enables?

  • The benefits of digitalization have been highlighted by several studies: Overall productivity benefit from reduced costs and increased revenues: ca. 6% of revenues[7]
  • Predictive Maintenance: maintenance cost reduced by 12%[8]
  • Energy optimization: the baseline cost benefit from optimizing manufacturing energy generation and consumption is ca. 25%[9]
  • Process optimization and production productivity: 5% cost reduction, 20-30% gains in production volume[10]
  • Product quality improvements: 50% fewer defective products and 10-20% reduction in quality failure costs[11]
  • Reduction in inventory holding costs of 20-30%+[12]   

The smart factory investment challenge

SFS has developed a model[13] which conservatively estimates the size of the investment challenge faced by manufacturing industry as it seeks to digitally transform. The model takes a variety of analyst predictions of the value of the smart manufacturing market for the five-year period 2020 to 2024 inclusive. The resulting figures are then adjusted by the proportion of smart manufacturing that is already being acquired through smart finance. Additionally, the estimate is reduced to just half of the ‘available market’, to give a highly conservative view of the sheer scale of investment required even to reach 50% market penetration[14].

 

These modelled estimates will be of particular interest to international Industry 4.0 solution vendors in the U.S., Europe, and Asia-Pacific, as they represent their market opportunity for business growth over the next five years. Smart finance, embedded as part of the overall value proposition, will help global manufacturers to navigate the economic ‘new normal’. It will act as a key enabler for each solutions provider across the entire Industry 4,0 technology supply chain to maximize their market penetration. Smart sales finance makes digital transformation more financially sustainable for manufacturers – removing obstacles to investment. Moreover, refinancing tools for solutions providers refresh cash flow and make sales volume acceleration similarly sustainable for the vendor.

Contact:

Fraser McGregor
+44 7808 827282

 

 

March 2020

[1] Harvard Business Review, How to Survive a Recession and Thrive Afterward, May/June 2019

[2] ibid

[3] McKinsey, Preparing for the next downturn, April 2007

[4] McKinsey, Industry 4.0 – How to navigate digitization of the manufacturing sector, 2015

[5] Siemens Financial Services, Countdown to the Tipping Point for Industry 4.0, April 2019

[6] Siemens Financial Services, Countdown to the Tipping Point for Industry 4.0, April 2019, Estimates the time period to the ‘tipping point’ for investment - when 50% of the global manufacturing community will have substantially converted to Industry 4.0 platforms

[7] Sources: SFS, Digitalization Productivity Bonus, 2017; PwC, Financial Benefits of Industry 4.0, 2018

[8] Sources: PwC 2018; McKinsey, How to navigate digitization, 2015

[9] Source: SFS/Siemens DES, Future savings – current gain, 2019

[10] Sources: Deloitte Insights, The smart factory, 2017; McKinsey 2015; Flex/WSJ/Emerson, How manufacturers achieve top quartile performance, 2019; Accenture, Industrial smart manufacturing, 2015

[11] Sources: Deloitte Insights, 2017; McKinsey, 2015
[12] Sources: PwC, 2018; IIoT, Bosch, an example when Industry 4.0 makes a difference, 2017; McKinsey, 2015

[13] See specific table references

[14] Estimation models built by Siemens Financial Services seek to avoid any risk of an exaggerated view of the investment challenge that manufacturers face globally. By sizing just half the ‘available market’ for smart factory transformation, this model builds in a margin of error for factors such as: over-prediction of market growth by analysts; price competition among solutions providers; breakthrough technologies that reduce the cost of transformation; step change in consumption of manufactured product markets; and so on.

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