The many faces of Industry 4.0

The many faces of Industry 4.0

The Walter Scott research team looks at how the phenomenon of 'digital twins' improves business efficiency and creates new investment opportunities

"If only there were two of me!" is the kind of statement you might hear from time-poor individuals wishing they could divide and conquer their to-do lists with the help of a clone. For forward-thinking companies this isn't too far from reality, says the Walter Scott research team.

Businesses are creating ‘digital twins' to check the efficiency of new ways of working prior to implementing costly changes in the real world: this is just one manifestation of ‘Industry 4.0', with implications that we believe reverberate along the value chain. 

Industry 4.0 was a term we started to discuss in our research meetings a couple of years ago. Since then, members of our team have travelled to the heartland of industrial Germany, to the American mid-West, Silicon Valley, South Korea and Taiwan to pursue research on the subject and to determine whether it will be a serious differentiator in terms of winners and losers in the manufacturing world.  

So-called because three industrial revolutions have preceded it, Industry 4.0 builds on their innovations. We view it as the convergence of physical and digital that can create a digital feedback loop leading a specific outcome in the real world. 

One example we discovered was a sawmill whose owner had attached sensors to the motors of the saw and created a digital model to capture data. Based on that data it could then look for patterns to identify which components were working and which were likely to break so should be fixed. 

This allowed the company to get better operational time from its assets but could also lead to reduced costs in future because preventative maintenance tends to be cheaper than unexpected maintenance. 

This extrapolation and feedback loop is the starting point for Industry 4.0, and the first and obvious implication is the potential to improve the efficiency of the manufacturing process. 

We believe if you are an early adopter of a new technology you will likely see margins rise, while if you are a follower and wait to see if an early adopter is successful then you are likely to be under-competitive. Over time the new technology becomes commoditised but to begin with it is a competitive advantage. 

Another impact of Industry 4.0 we are watching carefully is the ability for businesses to change their models, allowing them to move from solely producing and selling a product to also selling a service based on that product. 

A good example of this is the harbour cranes used to fill shipping containers. Previously, a company we knew of only manufactured the motors to power those harbour cranes. In a new development, it started to put sensors on those motors, which gave it new information about the best ways to load those containers to make sure the weight is evenly distributed, increasing the trim of the ship and creating significant cost savings on fuel costs for the shipping company. 

These types of business model changes create potential investment opportunities that can vary across different parts of the Industry 4.0 technology stack. For example, the core IT infrastructure and software services required for these newly digitised manufacturing processes could create a waterfall of opportunities for incumbent technology firms. It is not just the obvious beneficiaries of manufacturing efficiencies that we are considering. 

For more information contact: Kenneth Tomlin, head of UK institutional business at [email protected]

Important information: For professional clients only. Any views and opinions are those of the investment manager and is not investment advice. This is not investment research or a recommendation for regulatory purposes. Issued in the UK by BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority.  

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