Industry 4.0 – Opportunities and challenges of the industrial internet

Editor note: This article is taken from

Authors: Dr. Reinhard Geissbauer, Stefan Schrauf, Volkmar Koch, Simon Kuge

The fourth industrial revolution — characterised by the increasing digitization and interconnection of products, value chains and business models — has arrived in the industrial sector. Our study, Industry 4.0 — opportunities and challenges of the industrial internet, is based on a survey of 235 German industrial companies and was conducted by the market research institution TNS Emnid. It presents the essential attributes, opportunities and challenges posed by this development. The surveyed companies belong to the manufacturing and engineering, automotive and process industries, as well as the electronics and electrical systems and information and communications industries.

They estimate the share of investments in Industry 4.0 solutions will account for more than 50% of planned capital investments for the next five years. German industry will thus invest a total of €40 billion in Industry 4.0 every year by 2020. Applying the same investment level to the European industrial sector, the annual investments will be as high as €140 billion per annum.

The first significant driver for the advance of industrial internet solutions lies in the opportunity to integrate and better manage horizontal and vertical value chains. Companies surveyed expect more than 18% higher productivity over the next five years. While today only one fifth of the industrial companies have digitized their key processes along the value chain; in five years’ time, 85% of companies will have implemented Industry 4.0 solutions in all important business divisions.

The digitization and interconnection of products and services (internet of things/services) is a second important driver. It will contribute strongly to ensuring competitiveness and promises additional revenues of 2% to 3% per year on average. When applied to the German industrial landscape as a whole, additional revenues reach up to €30 billion per year. For the European industry sector, additional revenues amount to €110 billion annually.

A third major driver is the newly emerging, often disruptive, digital business models that offer significant additional value to customers through tailor-made solutions. These new business models are characterised by a considerable increase of horizontal cooperation across the value chains, as well as the integrated use and analysis of data. They are therefore capable of better fulfilling customer requirements.

The results of the study are summarized in the following ten key findings:

  1. The industrial internet transforms the entire company and must be part of the CEO agenda. The industrial internet, also known as Industry 4.0, not only comprises the digitization of horizontal and vertical value chains but will also revolutionise the product and service portfolio of companies — with the ultimate goal of better satisfying customer needs. The potential uses of the industrial internet go far beyond the optimisation of production technologies. However, exploiting these opportunities requires considerable investment. The topic therefore inevitably occupies a leading position on the agenda of directors and managers of industrial companies.
  2. By 2020, European industrial companies will invest €140 billion annually in industrial internet applications. Over the next five years, the industrial companies surveyed will invest, on average, 3.3% of their annual revenues in industrial internet solutions. This is equivalent to nearly 50% of the planned new capital investments and an annual sum of more than €140 billion with regard to the European industrial landscape. These investments will have to be used along the entire value chain in order to achieve maximum success.
  3. In five years, more than 80% of companies will have digitized their value chains. One quarter of the companies surveyed have already achieved a high degree of digitization of their value chains. However, it is mostly only individual units and isolated applications that have been automated and digitized thus far. The companies expect that 86% of the horizontal and 80% of the vertical value chains will have a high degree of digitization by 2020 and will therefore be closely integrated.
  4. The industrial internet increases productivity and resource efficiency — an 18% increase in efficiency within five years. The industrial sector is required to produce ever larger quantities using fewer raw materials and less energy. The industrial internet allows higher productivity and resource efficiency and thus creates the conditions for sustainable and efficient production. The companies surveyed anticipate an average efficiency increase of 3.3% per year across all industry sectors due to the digitization of value chains. This amounts to a total of 18% in the next five years. They expect annual savings of 2.6% with respect to cost reduction.
  5. The integrated analysis and use of data are the key capabilities for the industrial internet. Already today the efficient analysis and use of data is of great significance for half of all companies surveyed. Moreover 90% of companies believe that the ability to analyse data will be decisive to their business model in five years. These companies primarily focus on the efficient exchange of data within their own value chain, the digital labelling of the products and the use of real time data to steer their production.
  6. Digitization of the product and service portfolio is the key to sustainable corporate success. Thirty percent of the companies surveyed have already digitized their products to a great extent and expanded their portfolio to include connected and automated services. A mechanically perfect product will no longer be enough to successfully withstand international competition. More than four out of five respondents — with the exception of the process industry — therefore expect that they will have achieved a high degree of digitization of their product and service portfolio within five years.
  7. Digitized products and services generate approximately €110 billion of additional revenues per year for the European industry. Companies which have already digitized their product portfolio to a great extent have grown above average in the past three years. Half of the companies surveyed anticipate double-digit growth in the next five years due to the intensified digitization of their product and service portfolio. One in five companies even expects sales to rise by more than 20%. In total, this amounts to an average, incremental sales increase of 2.5% per annum. Compared to all industrial companies in the five core industry sectors, this is equivalent to an annual sales potential of more than €30 billion for Germany and reaches up to €110 billion of additional revenues for the European industry in total.
  8. The industrial internet paves the way for new, often disruptive digital business models. The industrial internet will have a lasting effect on existing business models and will particularly also generate new, digital — often disruptive — business models. The focal point of this trend comprises increasing customer benefits through a growing range of value solutions (instead of products) and increased networking with customers and partners. The special quality of the digital change lies in the rapid acceleration of the speed of change. Disruptive innovations will also cause industry sectors like the information and communications industry to sustainably transform within a short period of time.
  9. Horizontal co-operation allows for improved satisfaction of customer needs. About half of all companies surveyed are already convinced that closer cooperation with value chain partners — combined with increased horizontal interconnection — is of great significance. The importance of this will further grow in the context of Industry 4.0 in light of increased digitization — particularly where new, digital business models have to be established. More than 80% of the companies surveyed believe that closer co-operation and a more vigorous horizontal connection of value chains will play an important role in five years.
  10. The industrial internet holds various challenges — policy-makers and industrial associations can help. Companies have to master several challenges on the way to becoming a Digital 4.0 champion. The main focus is on high investment levels and often unclear business cases for new industrial internet applications. Furthermore, sufficient skills to meet the needs of the digital world must be ensured. Binding standards must also be defined and tasks in the area of IT security have to be solved. Policy-makers and industrial associations can help with these latter challenges in particular, by advocating uniform industrial standards at a European or international level and promoting efficient rules for data security and data protection.




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