Industry 4.0 – Starting the next industrial revolution in Germany Preface Dear Reader, We are entering a new phase of industrial production. It is so radically different from what we’ve seen before that some call it a revolution. In Germany, it was dubbed Industrie 4.0 and the name is increasingly applied internationally. While the first industrial revolution was fueled by the power of mechanics, the second push was provided by electricity and the third by electronics. The latest jump in technology is driven by the mushrooming amount of information available, which can now be transmitted at the speed of light in near limitless volumes and processed at virtually no cost. This allows for widely applying artificial intelligence and a new level of automatization, yielding ever-shorter production cycles and an instant customer-producer-supplier feedback loop. It would seem that Germany is leading this development. At least, that is what all indicators point to, as does our ­survey among foreign companies operating in Germany. The reasons are easy to point out. A long tradition in engineering, an excellent and independent research landscape, as well as strong political support, provide a habitat for innovation at an epoch-shaping level. But check for yourself whether I am over-promising or not. This whitepaper will tell you what other foreign companies active in Germany think about its role. I look forward to your feedback. Yours sincerely, Andreas Glunz © 2017 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks of KPMG International. Germany is a pioneer in Industry 4.0 The wealth of German economy is mainly based on its highly productive and worldwide leading industry. The way digitization is changing whole production processes and supply chains is therefore both a threat and a great opportunity for Germany. The German government first realized this back in 2011, implementing a national high-tech strategy for which more than 470 million euros were invested in research, enhancing the digitization of industrial processes in Germany – and it has been successful. Among industrialized countries, CEOs from Germany are the most confident in approaching technological disruption as an opportunity rather than a threat, closely behind Indian and Chinese CEOs, as KPMG’s CEO Outlook 2017 reveals. Figure 1: How technological disruption is viewed, by country 80 % India 75 % China 74 % Germany 70 % Spain 69 % UK 65 % Australia 60 % USA 53 % Japan 48 % France 46 % Italy 0% 10% 20% 30% 40% 50% We see technological disruption as more of an opportunity than a threat 60% 70% 80% 90% 100% Source: KPMG, Germany, 2017; n= 1261 The name of the government’s research initiative – “Industry 4.0” – has become a synonym all over the world for digitized industrial production. Moreover, the pioneering efforts Germany is taking to digitize its industry have also been recognized by companies from abroad. This is the result of KPMG’s study Business Destination Germany 2018, for which we surveyed 529 CFOs from German Subsidiaries of non-German companies. From 398 CFOs who claimed that digitization and Industry 4.0 are affecting their business, 67% gave Germany an “important” or “very important” role in the digitization strategy of their parent company. Figure 2: Which role does Germany play in the digitization strategy of your parent company? 30 0% 10% very important 20% important 30% 37 40% rather important 50% 60% not important 18 70% 80% I don´t know / no answer 13 2 90% 100% Source: KPMG, Germany, 2017; n=398 3 © 2017 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks of KPMG International. Companies need a fact-based vision of their digitized future that is unique in the world. More than 150 research institutes collaborate closely with industrial companies towards developing new technological solutions. Just like the German government started with a vision for a digitized German industry in 2011, companies should start getting a concrete vision of their future digitized industrial company for successful transformation. It is crucial that this vision be based on a solid foundation of facts. Therefore, companies should not only assess their needs in various business units internally, but also assess technological trends and co-operate with research institutes and other companies to cultivate a deep understanding of technological opportunities, risks and challenges. Germany offers great research infrastructure to meet these requirements. Aside from its universities, which are especially known for having leading expertise in engineering, the country offers a landscape of semi-public research institutes In total, 64% of the CFOs surveyed in KPMG’s study, Business Destination Germany 2018, stated that the German research landscape is one of the top five in Europe. 30% of the German subsidiaries of foreign companies even employ their own Research & Development units in Germany – a very high fraction, compared to other countries. However, in their opinion it is not even the excellent research landscape that makes Germany a leading location for Research & Development, but the availability of highly qualified research employees. Figure 3: Which are the three greatest advantages Germany has to offer for research & development? Availability of research employees 78 % Good infrastructure 75 % Access to universities and other research institutes 49 % Political will 35 % Excellent industry cluster landscape Vital start-up scene 0% 26 % 20 % 20% 40% 60% 80% 100% Source: KPMG, Germany, 2017 ; n=438 4 © 2017 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks of KPMG International. “Since the scope of Industry 4.0 ranges from internal improvements like reduced production times or increased flexibility to new digital and data-driven business models, the formulation of realistic objectives is a prerequisite for future success. Upon that foundation, one of the key issues is to define how the specified target state can be achieved and what concrete measures should be taken. In this context, it is essential that existing projects be evaluated regarding their impact on the target picture and that future projects be consistently aligned with the overall Industry 4.0 target picture based on internal and external perspectives. However, regardless of how well prepared a company may be in terms of vision and related measures, one factor cannot be left out of the equation. Not everyone recognizes the shift towards Industry 4.0 as a promising opportunity, but a considerable number of employees are sceptical and fear that their workplace could be at stake. This is an important aspect, because the transformation is likely to fail if employees are not convinced of benefits from the proposed organizational changes. Consequently, management needs to involve employees in working towards Industry 4.0 and create a uniform understanding of potentials for their daily working life. To achieve this, the company’s strategic direction and related actions need to be based on internal and external perspectives.” Internal Assessment Motivation Draft assessments Implementation Evaluation Presentation of results Formation and implementation of a digital board Enrichment of the vision through a “Digital Round Table“ Ioannis Tsavlakidis Partner, Head of Consulting Sascha Glemser Senior Manager, Consulting Concept and initialization of process to realize your vision External Assessment Collect and maintain topics Identify innovations, trends and risks Anticipate fields of innovations Conduct research and analytics Assess the influence of the innovation fields Synthesis of both assessments to project trends & risk on your individual value chain Creation of a concrete vision Finalization and approval of your vision 5 © 2017 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks of KPMG International. Germany offers key technologies for Industry 4.0 Over 20 years ago, the Fraunhofer Institute for Integrated Circuits in Erlangen, Germany developed a data format that disrupted the music industry. The mp3 format was the beginning of the digitization of music. Following this tradition, German research institutes are always aiming to be at the edge of time. It is therefore not surprising that the oldest and one of the largest research centres for artificial intelligence in the world, the German Research Centre for Artificial Intelligence, is located in Germany. Research institutes collaborate closely with German and international companies to test, validate, and ultimately turn their technologies into real benefits for companies and for society as a whole. Industry clusters across the country, such as Silicon Saxony in Dresden and the IoT World in Munich, further provide crucial networks that help companies convert to Industry 4.0. Even large US tech companies want to profit from this unique environment and sometimes even relocate their global Research & Development unit, as IBM did in Munich. Germany has become the leading country in the world for applying Data & Analytics, as illustrated by a survey among 900 international business makers conducted by leading data warehouse provider Teradata. “When it comes to digitization, the whole world is looking at Silicon Valley. Large tech companies from California are worldwide leaders in technologies like big data and analytics. However, these technologies are only one aspect of Industry 4.0. The other part is “hardware” technologies like robotics and mechanical engineering – areas in which Germany is known all over the world for having the highest quality and reliability. Large tech companies from Silicon Valley have therefore shown strong interest in Germany in recent years. They have built up large research centres in the country or have even relocated their global R&D centre to Germany to find synergies between their Data & Analytics expertise and leading engineering technologies from German companies and research institutes. They form strong partnerships to work together on the future of industrial production. Industrial companies located in Germany, on the other hand, have the chance to test and use top-level Data & Analytics applications in close co-operation with top US tech firms, leading to an ever-increasing number of companies that implement such technologies in everyday business. Besides large US companies, a German start-up scene focusing on digital technologies such as big data, analytics and Fintech has emerged, making Germany an even more important place for international industrial companies for Data & Analytics and Industry 4.0 applications.” Thomas Erwin Partner, Head of Data & Analytics 6 © 2017 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks of KPMG International. Ecosystems enable companies to keep up Leading German research institutes, excellence clusters all over the country and large technical leaders provide highly efficient ecosystems for the development and application of Industry 4.0 technologies. These ecosystems are politically backed and promoted by the German government. Additionally, a dynamic start-up scene in Berlin, Munich, Hamburg and Frankfurt constantly challenges providers of old technologies with new applications. As a consequence of Brexit, one can already see tendencies that the popularity of Berlin and other German start-up hubs will increase further as their strongest competitor London exits the EU. While these start-ups may also become serious competitors, the proximity to a vital start-up scene is a great chance for many companies. By co-operating with less bureaucratic and hierarchical start-ups, large companies can significantly increase their speed developing new technologies, products and services. One fifth of the international companies KPMG surveyed for its Business Destination Germany 2018 study even stated that the start-up scene is one of Germany’s three major advantages in the field of Research & Development. Altogether, national and international companies find an ideal environment that is crucial to keep up with the everincreasing dynamics of disruptive technologies. Figure 4: Percentage of companies which named the German start-up scene as one of the three major advantages of Germany in the field of Research & Development, by country of origin Netherlands 34% Austria 34% Switzerland 24% USA 24% Others 24% By co-operating with start-ups, established companies can increase both the speed and disruptiveness of their innovation processes. However, there are crucial preconditions to successful co-operation. First, companies need to find the right start-up for their co-operation and vice versa. Beyond expertise, a good understanding of the company culture and the goals of the potential co-operation partner are vital. Secondly, large companies should not try to establish their daily business processes in the co-operation. Start-ups often don’t have the capacities for processes that were designed for large companies. Moreover, in many cases these processes prevent large companies from being innovative. It’s better to let start-ups achieve the common goals of their co-operation the way they are used to. Thirdly, don’t underestimate the importance of a good relationship between the operating teams on a personal level. If employees don’t like co-operating with their partner, the co-operation will fail.” 10% UK 9% China Japan “Start-ups have become increasingly important players in all parts of the economy in recent years. Due to their small size and flat hierarchies, they are often more flexible and innovative than large companies and therefore pose both a major threat and a great chance to the future competitiveness of the latter. It lies within the established companies’ control whether they have to fear these new competitors or whether they experience enormous advantages by co-operating with them. Tim Dümichen Partner, Tax 4% 0% 10% 20% 30% 40% Source: KPMG, Germany, 2017; n=438 7 © 2017 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks of KPMG International. To support organizations in creating and presenting these facts, KPMG has developed an approach that combines internal and external perspectives related to Industry 4.0. Industry 4.0 Assessment With KPMG’s Industry 4.0 Assessment, companies can easily assess their current Industry 4.0 maturity level and derive specific needs by benchmarking against competitors and technology leaders. The assessment focuses not only on the technological readiness but also on the mind-set of the employees, which is crucial for a successful implementation. KPMG Research Cloud The KPMG Research Cloud is a highly sophisticated tool for trend detection that uses semantic analyses and machine learning algorithms. It scans hundreds of thousands articles, patents and other documents on the internet, structures them and measures what future significance the trends could have for the respective company. Learn more at: https://atlas.kpmg.de/business-assessments/ industrie-4-0-readiness-assessment.html Learn more at: https://atlas.kpmg.de/trendanalysen.html Contact KPMG AG Wirtschaftsprüfungsgesellschaft Andreas Glunz Partner, Head of International Business T +49 211 475-7127 aglunz@kpmg.com Ioannis Tsavlakidis Partner, Head of Consulting T +49 711 9060-41118 itsavlakidis@kpmg.com Thomas Erwin Partner, Head of Data & Analytics T +49 621 4267-249 terwin@kpmg.com Tim Dümichen Partner, Tax T +49 30 1068-1939 tduemichen@kpmg.com Authors Jan Hempel International Business Sascha Glemser Senior Manager, Consulting www.kpmg.de www.kpmg.de/socialmedia The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2017 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Germany. The KPMG name and logo are registered trademarks of KPMG International.
