The Digital Transformation Of Industry
A European studycommissioned bythe Federation ofGerman Industries (BDI)and conducted byRoland BergerStrategy ConsultantsTHE DIGITALTRANSFORMATIONOF INDUSTRYHow importantis it?Who are thewinners?What mustbe done now?
1.25trillion eurosSEIZE OPPORTUNITIES!CHANGE STRUCTURES!JOIN FORCES!2Roland Berger Strategy Consultants / BDI
The digital transformation of industryIn brief1The digital transformation of industry is creating tremendous opportunitiesfor Europe – and confronting it with huge challenges. The possibilitiesopened up by connected, more efficient production and new business models arehighly promising, yet the risks are equally dramatic. By 2025, Europe couldsee its manufacturing industry add gross value worth 1.25 trillion euros – or sufferthe loss of 605 billion euros in foregone value added.2The digital transformation of industry is also driving a radical structuraltransition in Europe's economies. New data, connectivity, automation and thedigital customer interface are challenging existing value chains. Companiesmust take a long, hard look at their products and skill sets. And they have toimprove their digital maturity if they are to recognize new opportunities, developsuitable offerings and get them to market quickly.3The digital transformation of industry demands concerted actionwithin Europe. The regulatory framework must be harmonized, with a newweighting given to relevant issues. At the same time, a powerful, no-gaps information and communications infrastructure is needed if European industry is toremain competitive. As standards are shaping our digital future, companies andgovernments need to get engaged seriously in their global definition.Roland Berger Strategy Consultants / BDI3
22 Electric performance: How the digitaltransformation is affecting individual industries"Digitalconnectivitywill continueto develop fasterand faster.Today, you don'twin the globalcompetitive battlein the realworld alone, butalso in thedigital one."DIETER ZETSCHE,Chairman of the Boardof Management,Daimler AG32 Take-off: How industry and governments must rise to the digital challenge4Roland Berger Strategy Consultants / BDIPhotos: Andrew Brookes / Corbis; Thomas Ernsting / laif; Henrik Spohler / laif26 Adjustment needed: Why companies lag behind in the digital race
The digital transformation of industryContents6WHAT THE DIGITAL FUTURE HOLDS8WHAT IS AT STAKE14 Why Europe must get involved in the standardization debate without delay16 THE LOGIC OF DIGITIZATION17Four levers of transformation19The atomization of value chains22 THE SITUATION OF GERMANAND EUROPEAN INDUSTRY24Wave 1: The automotive and logistics industries are reaching a digital watershed25 Wave 2: Medical technology, electrical engineering, mechanical and plant engineering and energy systems are experiencing a digital upheaval25Wave 3: Digital change will come later to the chemical and aerospace industries26 GERMANY'S DIGITAL MATURITY30Huge shortfall in penetration30Urgent need for action32 WHAT NEEDS TO BE DONE NOW33What companies must do35What governments must do43Target corridor43Time frame46 SERVICE46Network47Imprint50ExtrasRoland Berger Strategy Consultants / BDI5
PrefaceOCharles-Edouard BouéeStefan SchaibleCEORoland Berger Strategy ConsultantsCEO Germany/Central EuropeRoland Berger Strategy Consultantsur life has gone digital. For consumers, digitization – inthe form of e‑commerce, the mobile internet and social media, to name but three of many examples – has longsince been part and parcel of everyday life. Now, the digitaltransformation is also permeating every link in the industrial value chain, from logistics through production to serviceprovision. Germany's and Europe's industrial core stands onthe threshold of fundamental change – change that promises fresh growth, prosperity for large parts of the populationand greater resource productivity. Alternatively, that samechange could see German and European industrial companies forfeit their global market leadership.We understand the digital transformation as the seamless, end-to-end connectivity of all areas of the economy,and as the way in which the various players adapt to thenew conditions that prevail in the digital economy. Decisionsmade in connected systems affect data exchange and analytics, the calculation and assessment of options, the initia-6tion of actions and their consequences. In line with Schumpeter's principle of creative destruction, these new tools willbring fundamental change to many established businessmodels and value-added processes.Commissioned by the BDI (the Federation of German Industries) and conducted by Roland Berger Strategy Consultants, this is the first study to explore the causes and effects ofthe digital transformation with regard to the "industrial heart"of Germany and Europe, by which we mean the automotiveindustry, logistics, mechanical and plant engineering, medicaltechnology, electrical engineering, energy systems, the chemical industry and aerospace. To this end, we performed anextensive strategic analysis supported by workshops involvingindustry experts, received questionnaire responses from morethan 300 key decision-makers at German companies, andinterviewed 30 board members and chief technology officersat DAX-listed companies and leading medium-sized players.On this basis, we were for the first time able to measure theRoland Berger Strategy Consultants / BDIPhotos: Roland BergerWhat the digitalfuture holds
The digital transformation of industryoverall effect of digitization on the German and Europeaneconomy. The findings reveal the dramatic consequences ofthe changes currently in progress: If Europe fails to turn the digital transformation to its ownadvantage, the potential losses for the EU-17 countries1 addup to 605 billion euros by 2025 – equivalent to the loss of wellover 10 percent of the continent's industrial base. This wouldpush the EU's stated aim of increasing manufacturing's shareof European GDP to 20 percent by 2020 way back out of reach. For Germany alone, the positive scenario would add extrapotential value totaling 425 billion euros by 2025. The corresponding figure for European industry as a whole would be1.25 trillion euros over the next ten years.In light of these high stakes, our study makes specificrecommendations on what companies, their national associations and the governments in Germany and Europe cando to safeguard the future of Germany's industrial base andgenerate positive employment effects throughout Europe.The key areas in which action is needed are these:DIGITAL MATURITY. Top priority must be given to raisingawareness among companies and mobilizing them, becausemany firms see digitization primarily as a way to boost efficiency. Yet the digital economy does more than merelyoblige companies to optimize existing business models: Italso promises new and hitherto untapped potential to addvalue. To identify and realize these opportunities, companiesneed to become more digitally mature. One aspect involvesincreasing their penetration of digital trends and possibilities. Another is to gain a better understanding of how thedigital space is changing the rules of competition, as this willallow them to optimize existing business models and developnew ones. Third, firms must cultivate the ability to developand multiply the resources they need in order to seize newopportunities in practice.COMMON STANDARDS. The rules of the game in a givenindustry play a vital part if companies are to translate theirspecific capabilities into competitive advantages. That will1) The EU-15 countries (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain,Sweden and the UK) plus Norway and Turkey. (The other EU countries wereexcluded due to a lack of detailed industry data.)be the case even more so in the future. German and European companies must therefore move quickly to define thesestandards, working together to create suitable platforms forthe sharing of ideas, knowledge and experience. German andEuropean government organizations should support this process. The EU would, for example, do well to emulate the German government's National Electromobility Platform (NPE)program – a fine example of standard setting via effectivecollaboration between the state, the corporate sector andthe unions.POWERFUL INFRASTRUCTURE. A robust infrastructureforms the backbone of a connected economy. The successof the digital transformation hinges on no-gaps broadbandnetworks and the guarantee of a high quality of service formission-critical applications. Plant and machinery must beconnected as extensively and securely as possible.PAN-EUROPEAN COORDINATION. Success in the digitaleconomy is equally dependent on cross-border collaboration. Investment programs such as the Juncker plan shouldfocus rigorously on promoting the digital transformation.As part of a harmonized EU-wide approach, the aim is fora European economic alliance to encourage the development of clusters, cooperative ventures and syndicates orassociations, bringing the skills and capabilities that arespread across Europe together in a virtual Digital Valley.This kind of European counterpart to Silicon Valley wouldinterconnect all relevant developers and providers of digital solutions, from start-ups to global players, from garagefirms to high-tech laboratories, thereby concentrating thestimulus needed to drive new developments and innovativebusiness models.Our thanks go to the BDI in general, and to Dieter Schweer,member of the Executive Board responsible for digital transformation, in particular for initiating and commissioningthis study, and for their openness and cooperation. Specialthanks also go to board members and decision-makers inGerman industry, as well as to EU Commissioner Günter Oettinger, who took the time for detailed interviews and discussions on the subject of digital transformation.Berlin, February 2015Charles-Edouard Bouée, Stefan SchaibleRoland Berger Strategy Consultants / BDI7
Faster, more synchronous,more transparent:The European logistics industrystands to gain an extra 54 billioneuros a year in value addedby the digital transformation.8Roland Berger Strategy Consultants / BDI
The digital transformation of industryWHAT ISAT STAKEPhoto: Roberto Caccuri / laifFor decades, Germany has ranked among theworld's leading industrialized nations. Manufacturing accounts for more than 22 percent of itseconomic output (2013), compared with a figure of around12 percent in the USA.2Global corporations are the driving force behind Germany's manufacturing sector. They include automotive companies such as BMW, Daimler and Volkswagen and corporategroups such as Airbus, BASF, Bosch, Fresenius and Siemens(all of whose top managers we talked to in the course of thisstudy) as well as an array of medium-sized firms that rightlyreceive widespread plaudits. The hidden champions in thissegment – global leaders that often fly under the public radar– shape Germany's industrial landscape to a very considerable degree. In terms of sales revenue, more than 1,300 German medium-sized firms figure among the top three playersin the world in their chosen niche markets. In other words,almost half of the world's roughly 2,700 "hidden global leaders" come from Germany.32) UNCTADstat Database, United Nations Conference on Trade andDevelopment3) Investment Guide, Germany Trade & InvestOther regions too are looking to strengthen their domesticmanufacturing industries as part of a drive toward reindustrialization. After two decades of seeing production and jobsbeing transferred to emerging markets, the United States inparticular is stepping up moves to return to the very top ofthe global industrial table. In Europe as well, the need toreinforce manufacturing is a key topic of debate. In 2012,the EU Commission formulated the ambitious goal of raisingmanufacturing's share of European economic output from 16to 20 percent by 2020. Without digitization, however, reindustrialization is unthinkable.Deep and direct integration in customers' processes anda vast store of manufacturing competency are two of German industry's main strengths. Both translate into specialized hardware and embedded software that enable the entirespectrum of corporate knowledge and experience to be putto good use in high-quality production. However, the digitaltransformation is shifting the ability to add value in manufacturing platforms and more standardized software solutions.At the same time, new players are threatening to replaceincumbents at the interface to customers. This shift in theshare of value added and disruptions to customer interfacesare creating a scenario that poses a lasting threat to theRoland Berger Strategy Consultants / BDI9
What is at stakepowerful position currently enjoyed by global market leadersfrom Germany and Europe.If the manufacturing industry is indeed toppled from itsleading position in value creation and allows other companiesto take their place by controlling the interface to customersand applying superior digital expertise (Figure 1 ), this willlead to painful losses in value added and thinner margins:POTENTIAL LOSSES IN GERMANY. Our negative scenarioassumes a decline in industrial value added totaling 220billion euros by 2025 in the eight sectors of industry analyzedin Germany alone. The automotive and logistics industrieswould be especially hard hit, losing out on as much as 140billion euros in gross value added.POTENTIAL LOSSES IN EUROPE. If the European manufacturing sector misses out on the digital transformation,the sum of 605 billion could be at stake in the years ahead(Figure 2 ). This potential loss is calculated from the continuing increase in the share of gross value added accounted for by information and communications technology (ICT).In automotive engineering and logistics alone, this share is1NEW DIGITAL COMPETITORS ARE FORCING THE HANDOF EUROPEAN MANUFACTURERSRisk scenarios in the digital transformationPosition in the value chain1ICT's contributionto value addedAssault on European positionsin the value chainNewcompetitorsShare of the value chainSource: Roland Berger10Roland Berger Strategy Consultants / BDIEuropeanindustrytoday2Possible lossof interfaceto customers
Photo: Jochen EckelThe digital transformation of industryslated to rise by 15 and 18 percentage points respectivelybetween now and 2025. If European companies are unableto stake their claim in this fast-growing market with their ownproducts and solutions, value will be added by new competitors instead.These negative scenarios can be prevented from happening if Europe gains greater influence over the design ofstandards for the digital economy. Standards are necessaryto ensure interoperability and generate economies of scale.However, unsuitable standards would put pressure on margins and jeopardize the competitive advantages enjoyed byGerman and European industry. This issue is of concern tothe production knowledge that many manufacturers channel into their embedded software. Standards that are toonarrow or to simple could undermine this advantage, for example by altering important conditions governing embeddedprograms such that high-quality individual solutions can nolonger be developed.It is also important to understand that a new standard –even one that favors the strengths of German and Europeancompanies – can open the door to the redistribution of globalmarket shares. Armed with high-quality products based onthe right standards, German industry is well placed to standup to competition. On the other hand, today's global marketleaders have so much further to fall than other players. Ourcompanies must therefore prepare themselves for the fullforce of the digital transformation that is about to be unleashed. They must understand how important it is for thecoming decades.At the same time, changes at the customer interface canhave a powerful influence on the development of companies'margins – witness our example from the mobile communications industry (Figure 3 ). Per device sold, Apple's proprietary software and hardware ecosystem today earns thecompany five times as much profit as Nokia realized whenit led the market in 2005. By contrast, the margins of nicheplayers such as HTC, who have no interface to the customer, are experiencing very negative development. Only massproducers such as Samsung are able, by virtue of the sheerscale of production, to offset the loss of a customer interfaceand thus continue to post positive margins, albeit much thinner ones than those of integrated premium providers."The possibilities of thedigital revolution must beput to good use.That involves designing,developing andmanufacturing our productsmuch more efficientlyand much faster. In theaerospace industry,we are currently seeing alevel of competitionthat we havenever experienced before."TOM ENDERS, CEO, Airbus GroupRoland Berger Strategy Consultants / BDI11
What is at stake2IF EUROPE MISSES OUT ON THE DIGITAL TRANSFORMATION, IT COULDFORFEIT 605 BILLION EUROS IN LOST VALUE ADDEDPotential losses arising from a shift in the shares of value addedWave 1Growth in ICT's share of gross value addedChange in ICT's share of GVAin 2025, relative to 2015 17% pointsPotential losses through2025 (cumulative)Automotive, logisticsEUR350 bn in GVA1)Wave 2Disruptive to serious impact onentire industry 10% pointsWave 3Serious to moderate impact onindividual segments2015 5% pointsMedical technology, electricalengineering, mechanical/plantengineering, energy systemsEUR215 bn in GVA1)Chemicals, aerospaceEUR40 bn in GVA1)Evolutionary to minor impact2025Source: Roland Berger1) Gross value added foregone by the EU-17 countries if the increase in ICT's share of GVA is lost to international competitors3COMPANIES WITH NEITHER A CUSTOMER INTERFACE NORLARGE-SCALE PRODUCTION ARE SEEING THEIR MARGINS COME UNDER HUGE PRESSUREProfit margins in mobile communicationsMargin per unit sold relative to the market leader in 2005 [percentage points]IntegratedHardware only580150–150–2801. Integrated premium vendors (e.g. Apple)2. Mass hardware producers (e.g. Samsung)3. Niche hardware players (e.g. HTC)4. Integrated niche players (e.g. Blackberry)Source: Roland Berger12Roland Berger Strategy Consultants / BDI
Photo: Audi AGThe digital transformation of industryA similar scenario is unfolding in the automotive arena, asOEMs fight to control the ever more important customer interface. Volkswagen, Fiat, Renault and other European manufacturers have thus joined the Open Automotive Alliance(OAA). This Google-led community is developing a sharedplatform for the connected car in order to be able to integratenavigation data and infotainment. Other manufacturers suchas BMW are driving development emphatically but on theirown initiative. The expectation is that those market playersthat only back incremental changes and fail to invest in digital platforms will come under pressure from – or even beedged out by – the new standards birthed by alliances suchas the OAA, or by mobility service providers.The importance attached to integrating automobiles inthe digital ecosystem is likely to be critical. Will this question be as crucial to the purchase decisions of car buyersin the future as the question "iOS or Android" is for smartphone buyers today? How important will it be to them tohave seamlessly integrated digital services? Where will theline be drawn between navigation and entertainment data onthe one hand and user data that is of relevance to insuranceand safety issues on the other? Will OEMs have to pay acommission to use a third-party customer interface, or mightthey even end up as little more than hardware suppliers?These few questions and examples alone make it clearwhy a successful digital transformation is so important toindustry: This transformation is what will enable industryplayers to r
19 The atomization of value chains 22 THE SITUATION OF GERMAN AND EUROPEAN INDUSTRY 24 Wave 1: The automotive and logistics industries are reaching a digital watershed 25 Wave 2: Medical technology, electrical engineering, mechanical and plant engineeri
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