At a glance
The world will become more digital. Lockdown measures have forced many businesses to change fundamentally the way they buy and sell goods and services, which is accelerating digital adoption rates. US-China trade tensions had already demonstrated the interconnectivity of global supply chains and how vulnerable they are if even small parameters change. After COVID-19, we believe companies will start to reshore (localize) some of their production. We believe the transformation of the industrials sector in the Fourth Industrial Revolution will have major implications for SME entrepreneurs, and so in this report, we discuss secular shifts in the context of the COVID-19 health crisis.
The impact of COVID-19 on SMEs
We believe an inflection point is imminent in terms of: a) the connectivity of manufacturing equipment; b) the use of industrial software; and c) data analysis in the manufacturing process. All components will permanently change how companies run their factories and influence the business models of equipment suppliers. We discuss how more efficiency (e.g., preventive maintenance) and new business models may hurt the firms that don't have the management resources, IT knowledge, and funding to prepare for the Industrial Internet of Things environment. But there is clearly upside for companies that integrate their IT and software expertise into their offering.
We think SME entrepreneurs in the industrials sector must act now to digitalize their equipment; it could be too late in a few years' time. The experience from the current pandemic has made it even more important that SME companies act immediately. Continue reading for more information.
Opportunities and threats
Industry 4.0: After COVID-19
The coronavirus crisis has triggered a new discussion about globalization versus localization. During the crisis it has been obvious that firms that have been able to take decisions country by country had an advantage in terms of production flexibility as well as from demand perspective. Also, the recent escalation in China-US trade tensions has highlighted again the vulnerability of supply chains. This and the pandemic experience has put the spotlight back on supply chain adjustments, given how many countries were forced to announce lockdowns with limited time to procure supply of essential goods. Therefore, we believe companies and governments will increasingly consider moving some production closer to home or to their customers after the crisis. This represents a paradigm shift in manufacturing from the cost focus over the last few decades which favored concentrated manufacturing hubs.
Another key conclusion is that the manufacturing sector will become more digital in the next few years. We expect an increasing focus on connected devices and their use of the Industrial Internet of Things (IIoT). Some key manufacturing hubs in Asian markets, including China, South Korea and Japan, have maintained uninterrupted production despite limited manpower availability thanks to use of sensors and IIoT to monitor production. With investment in 5G remaining on track, IIoT adoption should continue to rise. At present, the feedback from industrial companies is that their customers are showing strong interest in "remote everything." Ultimately social distancing in factories means more automation equipment.
We also predict several other trends such as localisation, emerging technologies and smart manufacturing all of which are discussed in the full version of the report.
Figure 1 - Robot density in manufacturing industry by country
Installed robots per 10,000 employees in the manufacturing sector (in 2018)
Industry 4.0 market opportunity for investors
We believe that over the long term spending in this market will accelerate yet further. We estimate the IIoT share of the total IoT market at 15%. Based on IDC and Bloomberg Intelligence, the IoT market is expected to reach USD 1.1tr by 2021, growing 13% annually from 2016 to 2021. The growth opportunity shows that it is important to participate, but as highlighted above to not underestimate the potential costs involved (forfeited spare part sales, etc.). Download the full report for more investment takeaways.