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Digital Transformation: Alexa, get my work done

Bernd Hartmann, Leiter CIO-Office · Harald Brandl, Senior Equity Strategist · Dominik Pross, Junior Investment Strategist
Reading time: 6 Min
No matter whether beverage bottler Coca-Cola Hbc fills 42,000 pet bottles per hour or Amazon uses more than 100,000 autonomous robots in its warehouses worldwide, the manufacturing credo “ever-faster, ever-cheaper” is passé. Individual customer specifications, a high degree of production flexibility and close interaction between man and machine will drive the factories of the future.

Industrial manufacturing, be it the assembly of an automobile or the machining of screws, has until now centred on maximum output at minimum cost. Thanks to the automation of individual production steps and process optimisation, manufacturing has become increasingly trouble-free and speedy. Today’s widespread use of industrial robots has almost perfected the industrial production routine, and added savings have been achieved by shifting the manufacturing work to low-wage countries.

This is the fifth episode of our series «Digital transformation - The path to the future». The series draws on five drivers to explain how digitalisation is changing business models and how investors can benefit from this evolution. Find the introduction and the overview to the series here.

However, in recent years this tried-and-true model has started to lose its lustre, mainly as the result of two factors. For one, increasing neo-protectionism has given companies cause to rethink their previous globalisation strategies. Trade restrictions and punitive tariffs are disrupting globally networked production processes and forcing internationally positioned enterprises to adapt their business approaches. What’s more, the coronavirus pandemic is now pouring oil on the fire by jeopardising key components of the globally interlinked production process. The internationally uncoordinated countermeasures against COVID-19 are causing disruptions in manufacturing activities, supply chains and logistics – to such an extent that bankruptcy looms in certain instances. Thus today’s globalisation concepts need to be adjusted.

Secondly, technological advancements are enabling traditional manufacturing processes to be merged into the digital universe. So-called “smart factories” are taking leave of the already maxed-out production-optimisation approach and instead focusing on progressively cheaper digital technologies as the catalyst for industrial evolution. These factories of the future will network the entire spectrum of relevant information, from the research and development of new products and services, to the handling of incoming orders, straight through to the manufacture, delivery and end-user application of the products.

The “smart factory” offers its own ideas

But even in the world of tomorrow, “Alexa” will not take over our daily work. Digital language assistants based on artificial intelligence are not only to be found at home, but also in the manufacturing and services sectors. The ambitions in those sectors differ, yet they are also similar. For service providers, the focus is on automation and the resulting economies of scale. For manufacturers, the matter pertains more to new processes designed around customer requirements and added flexibility, since a high degree of automation is already in place. Now the entire value-adding process needs to be integrated. So it comes as no surprise that a survey by venture capital firm MMC Ventures reveals that process optimisation is the No.1 AI application in use.

Artificial intelligence: applications in use in 2019

Artificial intelligence

40% of the surveyed manufacturing companies and 39% of those in the transport sector plan to deploy artificial intelligence in the next twelve months. A.P. Moller-Maersk, one of the world’s leading shipping companies, already has a 100 IT specialists working on the subject. New approaches and innovative solutions are hoped for in the areas of products and services, customer satisfaction, and administration. At leading-edge factories, all data are systematically compiled and assessed in a holistic context. The transparency created by this enables new and flexible solutions.

 

Factory of the Future: agile, digital, sustainable

Digital transformation is making companies more flexible. Besides artificial intelligence, other key digital technologies include virtual reality and mobile IT (e.g. the new 5G generation). Chip manufacturer Intel estimates that a digital factory generates about 1 petabyte of data per day, equal in storage size to some 2003 years’ worth of music or 160 million books. Information technology and transmission, along with data security, are therefore of tremendous importance. High processing speeds and data encryption are made possible by means of blockchains, i.e. decentralised data linking and storage systems.

Influence of the five key technologies

Influence of the five key technologies

A further key technology also deserves mention, namely “additive manufacturing” – otherwise known as 3D printing. This technique not only saves resources, but also enables other means of production. Specialised industrial robots produce components and the related accessories in one casting through the use of semiliquid composites. This can be done for prefabrication purposes, but also utilised directly as part of the production process.

GE Aviation applies this technology in the production of jet engines. For one of its new prototypes, which will be deployed next year, the number of necessary parts has been reduced from 855 to a mere 12. This represents a quantum leap for the aircraft industry, in that it significantly reduces production costs whilst also lowering the aircraft’s fuel consumption thanks to the considerable weight savings.

3D printing technology: forecasted global sales increase (in USD bn)

3D printing technology

Just a few years ago, Volkswagen’s “Transparent Factory” was the non plus ultra in the automotive industry. Today, Daimler’s “Factory 56” sets a new, pathbreaking exclamation point. This German automaker is building a revolutionary, holistically networked production plant at its R&D headquarters. It not only facilitates end-to-end, realtime communication across the entire value-adding chain, but its integrated “TecLines” also enable highly flexible production by replacing the classic assembly line with driverless transport systems that allow the production of different car models on a single conveyer mechanism. Until now, the assembly lines have always been devoted to a specific model. This is an absolute novelty in the car industry and may turn out to be the key to solving one of the challenges in international trade, since it will lead to reduced transport costs and a minimisation of import duties.

In the Factory of the Future, technology is of course a central element, but people – on the customer as well as the employee side - are at the heart of the matter. Especially those industrialised nations with a high density of robotics enjoy, on average, a lower unemployment rate. Moreover, the WEF (World Economic Forum) forecasts that 133 million new jobs will be created worldwide by 2022, compared to 75 million that may be replaced by technology over the same period. Hence the cliché of robots taking jobs away from people, or that labour costs can be saved by relocating production to low-wage countries, is passé.

 

Summary

Digital transformation will not only improve the means of industrial production and reduce the waste of materials, but also significantly enhance the benefits for consumers. It is enabling industry to meet both the geopolitical and environmental challenges of today – in our view, a highly promising and sustainable trend that should be both advocated and used to one’s own advantage.

Important legal information

This document was produced by VP Bank AG (hereinafter: the Bank) and distributed by the companies of VP Bank Group. This document does not constitute an offer or an invitation to buy or sell financial instruments. The recommendations, assessments and statements it contains represent the personal opinions of the VP Bank AG analyst concerned as at the publication date stated in the document and may be changed at any time without advance notice. This document is based on information derived from sources that are believed to be reliable. Although the utmost care has been taken in producing this document and the assessments it contains, no warranty or guarantee can be given that its contents are entirely accurate and complete. In particular, the information in this document may not include all relevant information regarding the financial instruments referred to herein or their issuers.

Additional important information on the risks associated with the financial instruments described in this document, on the characteristics of VP Bank Group, on the treatment of conflicts of interest in connection with these financial instruments and on the distribution of this document can be found at https://www.vpbank.com/legal_notes_en.pdf

 

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