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The Smart Manufacturing Industry– The Industrial Internet creates new opportunities for Swedish manufacturing companies

2015Today, the business models of manufacturing companies are challenged by the rapid advance of digital developments. Read about how the Industrial Internet will change the rules of the game for the Swedish manufacturing industry.

believe that data analytics willrepresent a key competency forcompanies in the future. See page 13

state that digital development will be crucial to the Swedish manufac-turing industry’s competitiveness within 5 years. See page 8

88%

91%

would like to see political support for research and development within Industry 4.0 See page 23

33%

2 The smart manufacturing industry

Foreword

The Industrial Internet creates new possibilities for Swedish manufacturing companies 3

Olof Enerbäck [email protected]

We find ourselves in a creative and innovative world which is continuously providing new products and services. Products are becoming smarter, and both their degree of flexibility and areas of application are steadily increasing, thanks to digital developments.

Within Industry, discussions suggest that we are moving toward an Industrial Internet and to Industry 4.0, a digitali-sation trend which is described as the next industrial revolution, or as a new paradigm shift.

This new phase of development in-cludes, among other things, smart, autonomous factories of the future, where the ambition to achieve econo-mies of scale will no longer apply, and the means of producing customised products at a lower cost, and with shorter lead times, will become a reality.

Naturally, industrial digitalisation with bring with it a number of consequences, but it also presents a number of opportu-nities. The new manufacturing industry, with its less expensive production, will no longer seek to establish itself solely in low-cost countries. This trend could, in turn, lead to a renaissance in manufac-turing in Sweden. The development is likely to result in fewer employees being hired, but, on the other hand, there will be a greater demand for different or increased competencies; this challenges the traditional business model. In the long run, having fewer employees will lead to a change in the country’s tax base. The security of our IT systems and

standardisation are also areas that need to be addressed as increased digitalisation entails new risks.

The likely consequences and possible effects could form a long list indeed, and it is easy to understand how im-portant it is for Sweden, as a leading industrial country, to succeed in this digital industrial readjustment. If we fail to make the needed adjustment, it will have a major impact on our competitive-ness, growth and prosperity.

In this study, we have listened carefully to the comments of more than 60 large Swedish manufacturing companies and to their thoughts about the potential and impact of digitalisation. We have been inspired by a similar study, made by PwC in Germany in 2014, where Ger-man manufacturing companies were interviewed regarding their view of the progress of this transformation process. In spite of the fact that Germany has pursued the issue of an Industrial Inter-net and Industry 4.0 at a political level, the findings show that Swedish and German manufacturing companies are very similar when it comes to their views of the general development of this trend and with regard to where they currently find themselves in this transformation process.

In some regards, the answers dif-fer significantly, especially when it comes to the desired degree of political involvement and the estimated level of investment required to keep pace

with development. This is also the first study in Sweden in which PwC’s group for strategic consulting, Strategy&, has participated.

I hope you find this enticing reading. Please feel free to get in touch with us for a more in-depth discussion regarding the challenges facing the industry.

Olof Enerbäck Partner and Head of Industrial Manufacturing at PwC Sweden


Summary

Digitalisation will be crucial for the competitiveness of the manufacturing industry. Sweden has great opportunities being a country that can create com-

petitive companies also within the Industrial Internet.

1

The Industrial Internet represents an evolution of both existing products and services. The most successful companies are the ones developing

digital business models in order to face new developments. Some of these developments will be disruptive to existing business. Today, companies primarily see the effects of an In-dustrial Internet in the form of decreased costs and increased efficiency, but it is important that companies simultaneously work actively with digitalising existing products and services, as well as with developing new digital services.

2

In this report, we summarise the findings of our survey of Swedish manufacturing companies based on a number of in-depth inter-views, and on our work with a number of clients.

Our observations can be grouped into two categories:

1. Value from digitalisation and the Industrial Internet will be created within three different areas:

• Streamlining of existing busi-ness, for instance, by distribut-ing products or making produc-tion more efficient.

• Digitalisation of current products and services, for instance by selling maintenance services based on the actual wear and tear on machinery.

• New business models, based on information instead of products.

2. The Industrial Internet also gives rise to new challenges, for exam-ple, challenges in terms of com-petencies and standardised data structures.

In this new landscape, it is currently difficult to determine which oppor-tunities actually exist for a specific company and it is also difficult to assess the magnitude of the threat from new actors who might be able to create completely digital businesses without physical products. The report should be seen as a status check based on the cur-rent situation in a time of change.

Competitiveness

Digital business models


A key ability for companies will comprise of advanced data analytics of large amounts of data – the ability to structure information and draw

conclusions based on large quantities of data. There is risk that not enough competence in this area will be available.

3

The surveyed companies see challenges in obtain-ing the necessary competencies – both in terms of quality and quantity. The Industrial Internet

entails the automation and digitalisation of a large number of tasks. The skills and competencies of personnel required by companies to be successful will change. Handling this shift in competencies and avoiding personnel shortages will be a key issue.

4

The greatest challenge identified by those com-panies surveyed is the difficulty in quantifying the business benefits of the Industrial Internet.

Understanding the source of future income and how these sources can be realised requires new ways of looking at the business of today and tomorrow.

5

Within five years, Swedish companies will be digitally integrated, internally as well as with customers and partners. We see the data and application environments, which are often

decentralised and heterogeneous, as challenges that must be addressed. A clear structure for data management, trans-parency and common data handling are key concepts in terms of information being shared widely within organisations and business partners.

6

Companies need to review how they organise their work on digital matters: how they choose to organise themselves, the competencies that

should be prioritised and how the activities are to be managed. This will be critical to a successful transformation into a leading digital company.

7

4.0

Organisation

Integration and structure

Business benefits

Competency

Data analytics


Digitalisation is a decisive factor for the competitiveness of the manufacturing industry

The Industrial Internet, also known as Industry 4.0, the fourth industrial revolution after steam, assembly lines, and the introduction of numerically controlled machines, entails companies digitalising their horisontal and vertical value chains. Companies tie together their own organisations and also con-nects with customers and business partners.

However, the Industrial Internet also provides the opportunity to digitalise

products and services, as well as to cre-ate innovative digital business models where data and information are sold without any direct link to machines and physical products. Common factors for success within the Industrial Internet are the connection of machines and sen-sors, the interconnection between the operators in the value chain, between suppliers and customers, and an ability to analyse large quantities of data in or-der to draw conclusions and see system-atic patterns.

Framework for how the Industrial Internet creates customer value

Industry 4.0

Digitalisation Digitisation of

horizontal value

product and service offerings

Innovative digitalbusiness models

12

3

and integration

Data analytics as core capability

Connection & Collaboration

of vertical and

chains

Digitalisation will be undertaken within both the vertical and hori-sontal value chains. The vertical value chain comprises the com-pany’s own business where the different functions for market-ing, sales, product development, purchasing, manufacturing and distribution are linked together and integrated into a digital flow of information. The horisontal value chain comprises the exter-nal ecosystem of suppliers and customers including a number of stages.

Horisontal value chainIntegration with business partners in a number of stages.

Vertical value chainIntegration of internal operations.

Definition of horisontal and vertical value chain


” ”How important is Industry 4.0 – the increasing digitalisation – for the global competitiveness of the Swedish manufacturing industry, today and in 5 years?

The digitalisation of the manufacturing industry will entail an entirely new type of challenge for today’s manufacturing companies and the industry is in agree-ment that this trend in development will play an increasingly important role in terms of competitiveness. Today, over 60 percent of manufacturing companies see

All companies need to understand how the digitalisation of products and services, but also communication with customers and employees, impacts business. Increasing digitalisation results, of course, in opportunities, something that all of the companies we interviewed have identified, but digi-

talisation also gives rise to challenges. Many products, such as machines, have a long life. Consequently, it will take more than five years before all of the installed machines and products have been fully digitalised, even if a large share of the products manufactured after 5 years will actually be digitalised.

PwC comments

22% 11%61%

5%

Medium Low Don’t kow

Today

In five years

High

6%

1%

4%91%

”Within 5 years, Industry 4.0 will go from being a plan to becoming reality”

Industry 4.0 is a term often used in Germany for the Industrial Inter-net. Industry 4.0 refers to what is perceived as a fourth industrial revolution. After steam, assembly lines, and numerically controlled machines, it is now time to con-nect all of the factors of production within a company, but also with the company’s suppliers and custom-ers. Industry 4.0 implies a new level of organisation and control of the entire value chain and life cycle of products, as well as a better under-standing of the preferences and utilisation of individual customers.

Definition of Industry 4.0

the issue as important and after 5 years, 91 percent estimate that digitalisation will have a significant impact on com-petitiveness. Of those, 58 percent believe that digitalisation will be of major significanceto the companies’ ability to compete globally.


Manufacturing companies will be digitally integrated 2


Description of the current level of digitalisation of the horisontal value chain. An assessment is made of the current situation and after 5 years.

43%42%14%

17%82%

LowMediumHigh

Today

In five years

Don’t know

1%

1%

Less than a fifth of the companies describe their level of digitalisation as being high in the current vertical value chain, while a third describe it as being low. In 5 years, a total of 88 percent estimate that the level will be high, and almost four out of ten believe that digitalisation will reach a very high level in the future.

We see a similar development as well when it comes to the horisontal value chain. At present, as many as 43 percent describe the level of digitalisation as being low. Only one in ten companies

state they are at the forefront. If we look 5 years ahead, more than eight out of ten companies believe that the level of digitalisation will be high.

When looking at Germany, we see that there is a tendency for the German manufacturing companies to experience the current level of digitalisation to be somewhat higher than the level expe-rienced by the Swedish manufacturing industry. A total of 24 percent of the surveyed German companies state that the current level is high, compared with 14 percent of Swedish companies.

Description of the current level of digitalisation of the vertical value chain. Assessment is made of the situation today and after 5 years.

30%48%19%

9%88%

LowMediumHigh

Today

In five years

3%

3%

Don’t know


” ””We will see great changes within 3 years when it comes to the Industrial Internet.”

More than eight out of ten companies estimate that both the vertical and horisontal value chains will attain a high level of digitalisation within the next 5 years. Based on interviews and our own observations, we can see that the Industrial Internet affects the entire company.

The most obvious effects are in-creased productivity when informa-tion regarding what is to be produced improves, as well as an increased pace and promptness in delivering value as companies secure a closer relation-ship to customers and their facilities. However, there are also financial effects as well, such as improved cash flow, when there is a reduced number of changes in stock levels and less ”work in progress”; this reduce some-thing the need to tie-up capital.

Many companies believe, however, that the development pace is higher and that change will happen much sooner than in 5 years, as the In-dustrial Internet itself, will further develop and will undergo changes.

Some companies point out that it will take longer to develop new digital business models based solely on infor-mation and data. In a more short-term perspective, the change is about im-proving production and integrating the company internally, as well as digitalis-ing product distribution.

When it comes to vertical integration (the value chain within the company) and horisontal integration (with busi-ness partners), companies need to estab-lish a view as to their starting point:• How are data structures arranged,

and what are the responsibilities for them? What data can we share, and what do we want to share with our business partners?

• What is of value to us – in the short run and in the long run? How far has our company come?

Value will be created internally and with customers and suppliers. One important area to understand is where and howvalue can be created and what is neces-sary to succeed. Companies will face varying circumstances and situations

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and will have different priorities; the companies having a strong customer relationship directly with the end user of the product and service and who,to a greater extent, sell systems, will want to speed up horisontal integration (and thus will also be able to create value more quickly).

Companies that to a higher degree work through distributors and/or who manufacture components, will face greater challenges in interactingwith business partners down the value chain.

In order to succeed in integrating with business partners in a value chain (horisontally), it is important that the company maintains its own data in good order. This requires data struc-tures and a division of responsibility to be clearly established, as well as transparency in order to be able to open and share data with customers and suppliers.


The value of a deepened cooperation regarding technology/digitalisation with customers and partners

14%

Better fulfilment of customers' demands

Quicker time-to-market

More efficient division of labour along the value chain

More flexibility along the value chain

Higher rate of innovation

Access to technical know-how

Minimization of risks

52%

36%

30%

33%

21%

9%

18%

According to the survey, enhanced digi-tal cooperation leads to better fulfilment of customers’ demands, a quicker time to market process and a more efficient allocation and specification of duties and tasks along the value chain. Companies estimate that the least value brought by this digital development is found within

the areas of risk minimisation, access to know-how and a higher rate of innova-tion.

The responses in the German survey are almost identical to the Swedish responses and show similar priorities when it comes to the issue of cooperation.

We can see from the survey and inter-views, on a fairly unanimous basis, that the benefit companies expect to achieve from increased digitalisation is com-prised of closer relationships with clients and the capability of providing them with an improved and more quickly delivered value. In a first stage, this implies quicker deliveries and increased service levels. In a later stage, such value can be delivered in the form of

competence regarding the client’s use of the products and services. An example of this is the use of predictive analytics to schedule maintenance instead of apply-ing general service intervals. The former approach will result in on-time mainte-nance, but also in enhanced value in the customer-supplier relationship and the possibility of creating added value based on information collected.

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In this section, we study the importance of the analysis and utilisation of data (for instance, production data and sales data, but also data regarding how machines are being used at the customer end) for the companies’ current business model and in terms of the way the business operations are currently undertaken.

The survey shows that, in the long term, the need for data analysis will have increasing significance for industrial busi-

ness models. Today, 40 percent believe that data utilisation and analysis is of great significance, while 25 percent esti-mate that it has little impact on the way they conduct business. This can be com-pared with the view on the development in 5 years, when 87 percent believe data utilisation will have a major significance, and half of them say that data utilisa-tion in the long run will be of very major importance.

We note a great need to be able to effectively and quickly analyse the large amount of information that will be avail-able from the digitalised products, which may have integrated, built-in sensors and which can collect large quantities of data. Already today, there are large amounts of data available from con-nected products within the manufactur-ing industry. Examples include industrial motors, loader cranes or electric screw-driver systems within the automotive industry. In the future, this type of data

One of the most important questions will be who is responsible for analysing the data. Is there a need for dedicated departments, or is it the responsibility of each business unit? Will new roles be required? What competencies will be needed and how should companies en-sure access to them? How can challenges with standardised data structures be met when a company might have differ-ent environments for its IT systems?

PwC comments

25%40% 34%

11%87%

Low importance MediumHigh

Today

In five years

2%

Don’t know

1%

will form the basis for new business models e.g., optimising the utilisation of the products and also selling purely digital services.

The companies we have spoken with highlight a number of challenges in order to successfully utilise these quanti-ties of data. A major challenge is to be able to summarise the vast amounts of data available into reasonable pieces of information that can be acted on by machines and humans.

Data analytics will be a key competency in the future 3

The importance of data analysis today and in 5 years


Digitalisation of products and of the value chain primarily results in enhanced efficiency and decreased costs

4More than a fifth of the respondents believe that the level of digitalisation of their current product range is high, while four out of ten define the level as low. At the moment, this is one of the least developed digitalisation processes addressed in this survey.

The degree of digitalisation is estimated to be drastically different in 5 years;

nearly eight out of ten companies believe that the degree of digitalisation of the product range will be high by that time. A fourth of these even believe that this level will be very high. Despite this development, it is worth noting that one out of ten estimate that the level of digitalisation of the product range will continue to be low in 5 years’ time.

The degree of digitalisation of the current product range and in 5 years

45%22% 31%

2%88%

LowMediumHigh

Today

In five years

11%

2%

Don’t know

The main question is; At what rate will we see the impact of this development? Some of the companies we have spoken with believe that 5 years is a long time and that digital products are coming onto the scene now, while others point out that digital products may take longer to develop.

The pace of digitalisation will vary from one product to another. Several com-panies already have products that are extensively digitalised – in many indu-stries machines are already connected to the Internet, ranging from ball bearings to cranes and industrial motors. Within these industries, the challenge is to create systems based on these connec-ted machines so they can interact and that the data generated by such and that

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systems can be retrieved and analysed. In other industries, primarily the ones focused on components, there are dou-bts over how far digitalisation can go. As one respondent put it: ”We manu-facture sheet metal parts and machine components – the product, itself, can be digitalised only to a certain degree.”


4The benefit of increased digitalisation of the value chain and products

30%

Increased efficiency (for instance, quicker turnover rates)

Decreased costs (total costs)

Increased revenues as a result of the digitalization of existing products and services

Increased revenues as result of new digital services (for instance, sale of data)

8%72% 19%

17%53% 28%

22%43% 34%

35%33%

SmallMediumLarge Don’t know

2%

2%

1%

1%

8% 72%19%

” ””Half of the machines we produce are already connected to the Internet and send us operational data – we could control our customers’ factories remotely and optimise production.”

When companies list the aspects most greatly affected by enhanced digitalisa-tion, the number one benefit is increased efficiency; as many as 72 percent see increased efficiency in connection with digitalisation within 5 years. Number two is reduced costs, although, at the same time, one fifth believe that digitali-sation will, in fact, have little or no effect on total costs.

More than four out of ten companies see increased sales as an effect of the digi-talisation of products and services, while a good 20 percent estimate this effect to be limited.

The least likely benefit as a result of digitalisation is that of increased sales arising as a result of new digital services.


Effects of increased digitalisation of the value chain and products

56%

Better planning and control (within production and logistics)

Increased customer satisfaction

Quicker time-to-market in product development

Greater production flexibility

9%79% 9%

5%74% 21%

14%58% 25%

11%30%

SmallMediumLarge

40% 16%42%

31%37% 30%

Improved quality

More customized products

2%

2%

3%

3%

3%

Don’t know

” ””With increased automation, production costs decrease, and so do the number of errors.”

Companies expect the greatest impact from the growing digitalisation in the area of better planning and control with-in logistics and production. A close sec-ond is increased customer satisfaction, while quicker time-to-market in product development and greater flexibility for

production are number three and four – separated only by a few percentage points. The last of the effects, but still with four out of ten estimating them to be significant, is the improved quality and more customised products.

An interesting observation is that 8 out of 10 companies estimate that the degree of digitalisation of the com-pany’s product/service portfolio will be high or very high in 5 years time. The benefit of this is primarily perceived to be comprised of increased efficiency and reduced costs. Benefits are less expected in increased sales as a result of the digitalisation of existing products and services or due to increased sales as

a result of new digital services. The re-spondents believe that the effects of the entire Industrial Internet, both products and value chain, will manifest them-selves through more efficient production and more satisfied customers. This leads to some questions: If products become digital, how can companies capitalise on this in terms of new products? How do companies find a suitable balance between cost effects for existing prod-

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ucts and production, compared to new revenue opportunities arising from the digitalisation of existing products and from entirely new digital services? How can companies ensure that sufficient attention is put on new services?


During the next 5 years we observe some restraint when it comes to investments in technology for increased digitalisa-tion of the value chain and products. The propensity to invest is highest within distribution (for instance, digital aftermarket and digital order processes), supply chain and sales. In each case, around six out of ten companies say that they intend to invest in new technology in order to increase the digitalisation of these processes. Within product devel-opment, service, and production, the interest in investing is the lowest. Within these areas, one fifth of the companies

say investments have low or no priority at all within the next 5 years.

Compared with the German survey, it is clear that German companies prioritise investments in the supply chain, product development, service and production/manufacturing to the same degree as the Swedish companies do. However, the two countries differ when it comes to their views of distribution, where only 30 percent in Germany, compared with 63 percent in Sweden, believe this to be a high priority for investment.

Investments in the Industrial Internet and Industry 4.0, primarily within distribution

5Investment levels (percentage of the company's sales)

33%

25%36%

40%

Sweden Germany

9%22%

2%6%

5%3%

15%4%

0-1%

2-3%

4-6%

7-10%

>10%

Don’t know


Technology investments within different activities/processes for increased digitalisation of the value chain and products during the next 5 years

Distribution (for instance, digital aftermarket, digital order process)

Supply chain (for instance, self-organizing logistics, automatic inventory management)

Sales

Planning (virtual factory planning, integrated planning processes end-to-end)

Product development/technology (continuous product structures, digital product data, smart products)

Service (real-time location information, remote control, linked sensors)

Production/manufacturing

14%63% 19%

13%61% 20%

14%56% 23%

13%50% 30%

19%48% 28%

22%47% 25%

23%41% 30%

Low priorityMedium priorityHigh priority Don’t know

4%

6%

7%

7%

5%

6%

6%

” ””Today, service is something that comes with the products – in the future, the services are what business will be offering.”

Sensors in products coupled with better communication (”connected machines”) will create more business and better op-erations. This creates fundamental new ways for companies to develop better service, something that was discussed in many of the in-depth interviews form-ing the basis of this survey. Examples of such services could be condition based monitoring, customer specific services and helping customers optimising pro-duction. Therefore we are somewhat surprised to see investments within the

area of service as relatively low on the list of priorities.

Investment levels in Sweden appear to be somewhat lower than among German companies. We can find no direct expla-nation for this, but we note that several of the Swedish manufacturing compa-nies with whom we have spoken see investments as being linked to research and development budgets. In Germany, production is an important focus area for investments. Furthermore, Industry 4.0

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and the digitalisation of manufacturing has been a major matter of public debate in Germany.

From our interviews and discussions with companies, we have also found that the proximity to and contact with customers are deciding factors for invest-ments in the Industrial Internet; being able to get closer to the customer and to be able better to deliver value to the customer are often higher on the agenda than production efficiency.


Economic benefits and competencies are the greatest challenges for companies

6


The greatest challenge in success-fully introducing Industry 4.0 is that the large investments required are perceived to have unclear economic benefits – it is difficult to get an attrac-tive business case. More than four out of ten companies highlight this aspect. Other barriers include the employees lacking adequate qualifications and a lack of standards and norms, as well as certification opportunities. A fourth challenge is that the technology used is not sufficiently developed, and another hinder may be the fact that the issue of digitalisation is not top priority with management.

Companies see fewer challenges when it comes to data security, slow expansion of broadband, stable networks and the legal status in terms of data protection. In summary, the challenges companies face in working with the Industrial In-ternet and Industry 4.0, can be divided into four categories; financing, compe-tencies, administration and technology.

The greatest difference between the German and the Swedish companies is that the German companies are more uncertain about the legal situation with regards to the utilisation of external data (data protection).

The greatest challenges in order successfully to introduce Industry 4.0. Most important and second most important summarised.

56%

The economic benefit is not clearly defined or the need for investment is too great 28% 16%

74%

58%

Most important Second-most important

40%

42%37%

31% 30%

44%

46%The employees are not sufficiently qualified

20% 20% 40%

30%Lack of standards, norms and certification options

17% 8% 25%

26%The technology used is not developed enough

9% 14% 23%

20%

8% 11% 19%18%

3% 8% 11%19%

The issue is not prioritized or supported by management

There are unresolved issues regarding data security

The expansion of basic technology is too slow (broadband)3% 5%8%

13%

2%5%7%6%

There are no networks which are sufficiently stable, nor are there options for data storage

The legal situation is unclear when it comes to the utilisation of external data (data protection)

We have not identified any challenges

Unable to respond6% 8%

3%2%

5% 5%

5%

Germany

22%

14%


PwC comments

The largest challenge identified in the survey is to get attractive business cases to recoup the investments that companies see are needed for the In-dustrial Internet. From the interviews and discussions, we see that the major uncertainty is to quantify the business benefits that a stronger relation with customers can provide. How much revenue can be generated by analysing data from the customers’ machines and selling this information or creat-ing digital services?

In our experience, many specific areas can be found that can provide clear business benefits. One such example is the maintenance of wind turbines, which is complicated and expensive, and where performance data can create significant value. In other areas, such as selling customer data concerning vehicle utilisation, it may be tougher to to recover investments needed. There are of course many potential cases, but our conclusion is that it is important for all companies to understand the impact of their rel-evant opportunities. At the same time, companies may also need to be active within this field in order to anticipate and live up to customers’ expectations. With the uncertainty of customer value, customer willingness to pay and respective company’s “right to win” for different services, it is understandable that business benefit become unclear.

Will our investments in the Industrial Internet merely become a necessity to be on par with competition or can we turn these investments into a differen-tiated, clear advantages vis-à-vis our competitors? However, it is our belief that companies need to map the digi-tal revenue opportunities and focus on the most attractive ones.

Another significant challenge will be the transformation of competencies. Technology in production processes and customer relationships will lead to new skills needed. But, in many cases, the transformation is also about going from being a hardware company (mechani-cal products) to becoming a software company (intelligent products) and onto a service company (intelligent services based on information from the intelli-gent products). The competency require-ments highlighted in the interviews are not only within research, product development or production but are also found within areas such as sales where there will be a need for a different type of knowledge and insights in order to be able to sell digital services instead of physical products. Going forward sales people will have to be able to communi-cate to customers a ”total cost of owner-ship”, applying a completely different set of input variables than previously.

The views regarding the need for stand-ards and norms split the responding companies into two groups; one group believes this to be a crucial area, and the other group sees this area having little or no importance. The explanation for this may be found in the strength of the relations that companies have with cus-tomers, the degree to which they deliver a system (rather than a component) and how close their products are to the customers’ critical operations: Compa-

nies with less need for standards can in many cases establish data protocols themselves, and are distinguished by having more extensive direct contact with their customers (vs. of work-ing through distributors), delivering systems or parts of a system, rather than components or smaller parts of a system, and being closer to customers’ critical processes or critical informa-tion.

Companies operating within larger industrial systems, for example delivering robots to a production line or components, have a greater need for that industrial system to agree on a standard for data transmission and protocol. This does not prevent suppliers of components that are criticaland close to the core of the customers’ value creation, from being successful or even spearheading the development of standards.

Several persons whom we have discussed with, raise the issue that even if the management of the various companies have understood the chal-lenges and possibilities, it is not always clear to management teams at a busi-ness area or middle management level what will happen. It has been pointed out to us that this is where the actual challenge of implementation will take place.


Sweden needs to secure expertise and training for the Industrial Internet

7Despite the major challenges for Swed-ish companies successfully to undertake a digital transformation, the industry sees little need for involvement of policy makers in such issues. The three areas in which the companies see the great-est need for political support are within research and development (universities and institutes), support for graduate and undergraduate education in schools and universities as well as creating an industry and research cluster devoted to Industry 4.0. The third most important area is support for international stand-ardisation and tax relief for investments related to Industry 4.0.

Less urgent areas appear to be data pro-tection legislation, government offers of support for training of employees and an expansion of broadband infrastructure.

The more noticeable differences between German and Swedish surveys are that Swedish companies see less need for the creation of competitive data protection legislation and for the completion of an operationally secure broadband net-work. In both of these cases, the German companies see a greater need for politi-cal support than the Swedish companies.

There was a high level of agreement among those interviewed, that almost all companies operate in an international environment and, consequently, the actions or inaction of a single country will have limited effect. The single most important theme is competence; both ensuring that Sweden can offer exper-tise and also that schools and universi-ties can educate a sufficient number of adequately qualified employees. The in-depth interviews revealed a need for spearhead research in Sweden and

a variety of ideas were presented, for instance, regarding the creation of a research cluster. The Industrial Internet inevitably leads to a shift in competen-cies within companies, which will be a challenge in the long run.

The fact that German companies see a larger value in tax relief for company investments and government support for training can be explained by the com-paratively larger role of Industry 4.0 in the German public debate thus far.

PwC comments


56%

Support to research and development (universities/institutes)20% 13%

74%

58%

Most important Second-most important

40%

42%37%

31% 30%

33%

24%Support to qualified regeneration in schools and universities

20% 20%26%

32%The creation of an industry and research cluster - "Industry 4.0"

16% 9% 25%

17%Support for international standardization

20% 3% 23%

30%

11% 11% 22%27%

3% 9% 12%

28%

Tax relief for company investments

Establishing competitive data protection legislation

Government offer of or support for training of employees3% 6% 9%

19%

5%3% 8%23%

Completion of an operationally secure broadband network (securing service quality)

See no need for political involvement

16%

Germany

6%

25% 41%

7In what way can policy makers best support the work with Industry 4.0

” ””It is our perception that the larger countries in Europe take a greater responsibility in facilitating Industry 4.0”


To become a digital leader; companies need to increase their digital integration, both internally and with business partners

8PwC has developed a model describ-ing the capabilities required to succeed with the Industrial Internet. These abilities are best viewed, we believe, in five dimensions and four steps.

Manufacturing companies often start out on the path towards the Industrial Internet as digital novices. During this stage of maturity, the company often has a positive experience of digitalisa-tion of different business areas and of certain products and services. The challenge here is that these activities are neither coordinated nor do they share a vision of what the Industrial Internet should be like; the risk of digital information management is not handled systematically and compliance is not secured.

In the second stage of maturity, vertical integrators, companies have already digitalised much of their products and services. For instance, companies can load their products with software and can connect their products to be online for remote control or data collection. Both operational and administrative processes can be digitalised. Above all, data is now harmonised and available internally – data can flow from product development to production to logistics, to aftermarket and service. Customer relationships are also digitalised with online communication and customised digital product catalogues.

Horisontal integrators, the third stage of maturity, connect their value chains with customers and partners. Digital communication between suppliers, producers and customers enable better coordination of production and service delivery, which creates higher efficiency and improved quality. This stage of ma-turity also sees innovative concepts that optimise customer utilisation, such as in operating cycles and flow management. It can also be a matter of collecting and analysing customer information to pro-

vide maintenance before the machines encounter problems. Digital risks are managed using standardised and efficient methods and data riskcompli-ance is widely prevalent.

The digital leaders have linked their operational and administrative processes at a global level. They have also created virtual processes within many areas, such as virtual factories, where the com-pany takes charge of certain processes and subcontractors handle others. These companies often have ”digital head-quarters” where all of the administrative processes are managed and optimised in order to be carried out subsequently in the organisation where the actual execu-tion of the processes is optimal. The digi-tal product portfolio has been supple-mented by digital revenue flows. Some of these are disruptive and challenging existing structures. A management team in charge of data management handles internal data management, and the anal-ysis of large quantities of data constitutes a significant part of the operations.


1Digital novice

Vertical integrator

2Horisontal collaborator

3Digitalchampion

3

Business models, product & service portfolio

First digital solutions and isolated applications

Digital product and service portfolio with software, network (M2M) and data as key differentiator

Integrated customer solutions across supply chain boundaries, collaboration with external partners

Development of new disruptive business models with innovative product and service portfolio, lot size 1

Market & customer access

Online presence is separated from offline channels, product focus in-stead of customer focus

Multi channel distribution with integrated use of online and offline channels; Data ana-lytics deployed, e. g. for personalisation

Individualised customer approach and interaction together with value chain partners

Integrated Customer Journey Manage-ment across all digital marketing and sales channels with customer empathy and CRM

Value chains, processes & systems

Digitised and automated sub processes

Vertical digitisation and integration of process and data flows within the company;

Horisontal integration of processes and data flows with customers and external partners, intensive data use

Fully digitised, integrated partner ecosystem with self-optimised, virtualised proces-ses, focus on core competency; decen-tralised autonomy

Compliance, legal, risk, security & tax

Traditional structures, digitisation not in focus

Digital challenges recognised but not comprehensively addressed

Legal risk consistently addressed with collaboration partners,

Optimising the value chain network for legal, compliance, security and tax

Organisation & culture

Functional focus in silos

Cross functional collaboration but not structured and consistently performed

Collaboration across company boundaries, culture and encouragement of sharing

Collaboration as a key value driver


The way forward 9Many of the companies we have spoken with believe that the transition will be quick, quicker than the 5 year horison of this survey. Many questions arise: Where should the transition start? Which value chain should be prioritised? What is the best starting point, vertical or horisontal integration? Below, we have summarised a number of observations regarding the way forward.

The digitalisation of the manufacturing industry creates opportunities for re-duced production costs and new revenue streams. These opportunities do not only refer to digitalised products. Invento-ries and ”work in progress” for existing products will be affected, when produc-tion becomes more efficient and more closely linked with customers’ demand. In addition to the impact on capital need and cash flow, there will also be chal-lenges in terms of the reporting of profits and payment of taxes, as the revenues in-volved may not always refer to a specific jurisdiction.

Companies need to create a solid starting pointIt is important to understand a com-pany’s starting point – how far it has come in the maturity model presented on page 25. The challenges faced by a digital novice will be more basic than the challenges faced by a company that has already taken a step or two in their transition process.

Generally, companies need to become digitally integrated internally (vertically) before they can integrate with custom-ers and business partners (horisontally). Companies will need to tidy up internal data structures, create transparency in their data management and centralise the responsibility of data exchange. Of-ten, it is a prerequisite first to integrate internally in order to be able to manage and share data in a horisontal integra-tion with customers and partners.

It is also important to create an overall target vision as to what is achievable. A vision can be a good tool to unite group-level management with more operational management teams and managers. Creating awareness is a first step in explaining the opportunities and challenges of the Industrial Internet.


The efforts undertaken to digitalise products and services and develop digital business models are essentialThe survey showed that companies primarily expect benefits in the form of increased efficiency and decreased costs. These effects can be attributed to the digitalisation of vertical and horisontal value chains in the model of the Industrial Internet (see the figure on page 7).

A wider view is necessary in order to design new business modelsThe greatest challenge in order to suc-cessfully introduce Industry 4.0 is that the economic benefits are perceived to be unclear – it is difficult to make attractive business cases. There is a risk that investments will tend to focus only on initiatives that short term can improve efficiency or reduce costs in order to ensure that business cases are attractive. There is also a risk that new players outside the industry could enter the market with digitalised service of-ferings and new business models.

This threat scenario must be analysed and addressed, even if it is difficult to quantify and calculate benefits of the new digital service offerings .We believe that it is important to under-stand the business benefits and, at a minimum, identify the areas that are not currently quantifiable.

Organising the digital responsibility around the various opportunitiesIn order to control and lead operations that are increasingly digital depend-ent on data, there are also a number of challenges: Should companies centralise or share the responsibility of this type of business development?

In our discussions, we have seen vari-ous examples of how such efforts can be organised. For instance, this work can be organised under the leadership of a Chief Digital Officer. Even if we believe that certain aspects of the responsibility should be kept centralised, such as the responsibility for common data models and transparency in data management, we also believe that it may be appropri-ate to divide the business driving activi-ties between the different roles in the company.

A fair starting point is to have Produc-tion, Distribution and Procurement assume the responsibility for digitalising the vertical and horisontal value chains. A Chief Digital Officer can be crucial in the digitalisation of products and services but it is important that product planning and research and development assume a large part of the responsibility here.

” ””The Industrial Internet will affect the entire company and lead to a thorough transition.”


As for innovative digital business mod-els, the responsibility for these could fall on the strategy department, or one may want to break out specific entrepreneur cells that can challenge existing conven-tions without restrictions. Even if the responsibility is distributed in this man-ner, the overall transformation should be kept together in a program office. A large portion of the technical efforts will be common for the company, and a common infrastructure can create the required scale for this type of innovation.

The supply of competence will be a crucial issue – both in terms of quality and quantity A number of new competencies will be critical and we will see new titles such as Chief Data Analyst and roles with a clear link to digital revenue streams.

A clear majority of those with whom we have spoken highlight the challenge of the transition of competencies needed when knowledge of ”hardware” in the form of a product is supplemented with knowledge of ”software”. Not only does this affect technicians within production and R&D, it will also impact the skills of the sales force, service technicians and administration.

The ability to manage and analyse large quantities of data will comprise a key competenceA specific skill, which will be critical in the future, is the ability to manage and analyse large quantities of data. The companies that are best able to sift through the enormous quantities of data generated every day will also have the opportunity to gain an advantage vis-à-vis their competitors. In order to do this, specific competencies within mathemat-ics, statistics and data management are required. However, there will also be a need for product developers, market-ers and sales personnel able to identify new customer needs – new values to be created – and who will be able to profit from these opportunities.

One final observation refers to the op-portunity for Swedish manufacturing companies to achieve the estimated level of digitalisation based on the desired levels of investment. Are the levels of investment sufficiently ambitious? As we have highlighted previously, it is important not to overreach right away; however, it is crucial that the invest-ments be correctly focused, based on the stage of maturity, existing abilities and the future strategy of the company. The Swedish manufacturing industry is fac-ing an interesting transformation, with great opportunities.


” ””We will experience more changes within the next 5 years than we have experienced in a very long time. It will be interesting to see which companies will be among the winners in 2020”


Method 10Survey methodDuring the period April – May 2015, a total of 64 Swedish manufacturing companies were interviewed regarding their view of digital developments, how this development challenges industry, and how far along they have come in the transition work. The interviews were made both through online question-naires and over the phone. As a supple-ment, 5 in-depth interviews were also undertaken with leading manufacturing companies in Sweden.

Target groupOf the respondents, almost half, or 49 percent, consist of CEOs, CIOs or CFOs. Other respondents are either part of the management team or are operational

managers. More than four out of ten companies, or 42 percent, have a turno-ver of between SEK 1-10 billion, and 34 percent have a turnover of SEK 10 billion or more. 24 percent of the companies in the survey have an annual turnover of up to SEK one billion. Of these, 19 percent have a turnover of between SEK 500-1000 million.

Of the companies participating in the survey, six percent are suppliers of prod-ucts and solutions for other companies to achieve an increased digitalisation of their operations. Close to half (48 percent) are merely users and 44 percent are both suppliers and users. The rest have not indicated a category, or have responded to the question with “Don’t know”.


10

Strategy& is a global team of practical strategists committed to helping you seize essential advantage. We do that by work-ing alongside you to solve your toughest problems and helping you capture your greatest opportunities. We bring 100 years of strategy consulting experience and the unrivaled industry and functional capa-bilities of the PwC network to the task. We are part of the PwC network of firms in 157 countries with more than 195,000 people committed to delivering quality in assurance, tax, and advisory services.

Fredrik Vernersson+46 708 96 95 [email protected]

Fredrik Lindblad+46 709 29 33 [email protected]

Olof Enerbäck+46 709 29 12 90 [email protected]

PwC Sweden is the market leader within auditing, accounting, tax and advisory services, with 3,600 people with op-erations at 100 locations throughout the country. Using our experience and unique business knowledge, we enhance value for our 60,000 clients, who are comprised of global companies, major Swedish com-panies and organisations, smaller and medium-sized companies, primarily local, and the public sector. PwC Sweden is a separate and independ-ent legal entity. We are the Swedish member firm of the PwC global network. Close to 195,000 people in 157 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. www.pwc.se/verkstadwww.strategyand.pwc.com

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