There is no doubt about it: for some years now, digitization has been at the top of the agenda for mechanical- and plant-engineering companies as a topic with high future importance. Some companies have long been intensively engaged in digitizing their product and service portfolios. Although considerable resources have already been invested in the development and expansion of digital infrastructure and services, and numerous innovative approaches and concepts have been tested in the market, the outcomes have been mixed, at best.
As a result, the industry finds itself in a situation that is uncertain and challenging yet also full of promise. So far, experience shows that mechanical-engineering companies are still facing the challenge of successfully scaling digital platforms in the market. Many fall short of expectations, which are often very high. At the same time, major tech players, among them Amazon, Google, and Microsoft, have invested vast resources in recent years to drive forward the building of industry platforms. As a result, they have been able to grow their stances in the manufacturing space of several end-customer industries—most notably, in the automotive sector.
Recently, the COVID-19 crisis has had a twofold impact on digitization in the mechanical- and plant-engineering sector. First, issues such as workplace health and safety, employment-protection measures, supply-chain safeguarding, and the expected drop in order intake have pushed ongoing digitization efforts into the background. Second, digital innovations have become more relevant. Companies that had already invested in establishing and expanding their digital competencies prior to the pandemic have had a far easier time during the crisis with serving their customers remotely, keeping an eye on supply chains, deploying smart inventory-management solutions, and optimizing plant operations (especially in go-live, maintenance, and service measures).
This article (and the underlying full report it’s based on) provides an overview on the opportunities and challenges for digital platforms and apps in the mechanical- and plant-engineering industry. To take both broad and specific perspectives, considerations are based on the situation of European machinery and equipment players. It explores three key areas of questions, with the aim of deriving specific priorities for action:
- Where do the machinery manufacturers stand today regarding digital platforms and apps? Which are the most promising strategies? What pieces of the puzzle are the industry still missing for a genuine digital breakthrough?
- What do the customers of mechanical-engineering companies demand in the functionalities of digital platforms and the benefits of digital apps? Which market players are best able to satisfy those customer requirements?
- What role can mechanical-engineering companies convincingly and successfully play in the various end-customer industries? With what strategy should they approach the subject of developing and driving forward digital platforms and apps?
Digital solutions: Where the industry stands today, and what needs to change
The volume of the western European market for Industrial Internet of Things (IIoT) platforms, apps, and services was approximately €40 billion in 2019.1 That market is expected to grow by an average of 10 percent per year through 2024. Apps account for the larger share by far, at approximately 40 percent (roughly €16 billion), compared with digital platforms, at approximately 8 percent (some €3 billion). The remainder is attributable to other IIoT services and areas, such as IT security, consulting services, modules, and sensors. Mechanical-engineering companies currently hold a combined market share of approximately 15 percent of the total western European IIoT market.
The majority of mechanical-engineering companies have looked at technology as a starting point for their digital solutions. To be successful, however, digital solutions must be built around the value they offer to the actual customers who are operating the machines. Successful digital solutions call for senior management to acknowledge clearly the strategic relevance of digital solutions, as well as to prioritize business models and the ability to monetize them.
Mechanical-engineering companies should very carefully consider whether to invest in developing their own separate platforms, since the market is rather small compared with that for apps, and such platform initiatives are premised on the accumulation of new know-how. Given the “winner takes all” nature of the platform business (the dominant players are securing the majority of the market), such efforts aren’t advisable for most mechanical-engineering companies.
Digital apps should be seen as a promising segment for mechanical-engineering companies in all end-customer industries. Moreover, they are becoming an increasingly relevant differentiating factor in global competition. With mechanical-engineering companies’ understanding of production processes and technology know-how, they are considered well positioned to satisfy customer needs. In that context, they should focus on applications that offer clear, measurable value.
Machine operators are also interested in solutions that aren’t bound to a specific manufacturer, as well as in the user friendliness of apps. Assuming the role of “first movers” while conserving resources calls for risk-sharing structures and partnerships among mechanical-engineering companies. That would enable the development of scalable and manufacturer-independent solutions.
Challenges and hurdles
What is preventing today’s mechanical-engineering companies from participating in the digital platforms and apps business and from further transforming the market through digitization? Our survey results proved surprising in that respect. The biggest hurdles are considered to be a lack of business models, insufficient strategic relevance, and an absence of standards. In contrast, companies are less concerned about the risk of losing know-how and the lack of monetary resources.
That said, a closer examination and analysis of individual industries reveals some intriguing differences. For mechanical-engineering companies serving certain end-customer industries (such as the food and beverage industry), the lack of management and internal technical know-how and concerns about data loss and integrity pose major challenges, while the lack of standards or strategic relevance are of lesser concern (Exhibit 1).
Cooperation as a key factor
As the results of our survey and other indicators show, mechanical-engineering companies don’t view the “lone wolf” strategy as particularly promising. Only 27 percent of the companies surveyed believe that an approach involving digitization on their own has a high chance of being successful. In the opinion of 77 percent of the companies surveyed, collaboration—especially with companies along end customers’ value chains or production processes—offers great prospects of success when setting up digital platforms (Exhibit 2).
The prospects of successful collaboration with competitors are still viewed with skepticism. However, mechanical-engineering companies should also consider the end customer’s perspective. In many end-customer industries, the customers aren’t interested in closed, manufacturer-specific solutions for fear of a potential lock-in effect.
Digital platforms and apps: What matters for customers
What do end customers prioritize when it comes to digital platforms and apps? And how well do mechanical-engineering companies know the priorities of their end customers? Mechanical- and plant-engineering companies understand their end customers’ priorities in many respects. Nevertheless, our interviews with their end customers suggest that there are needs that the companies should address more diligently if they want to be successful in digital business going forward (Exhibit 3).
In platform functionality, mechanical-engineering companies currently believe that criteria such as availability (for example, of real-time data) and performance are highly important to their customers. That is confirmed by their end customers’ view.
Another topic that enjoys clear priority for both sides is security standards. Opinions differ, however, with respect to the criterion of platform openness and compatibility. End customers attach greater importance to open access and a high level of compatibility, especially the ability to integrate platforms into existing digital ecosystems. Criteria such as customer orientation, scalability, and direct return on investment have a moderate priority for end customers or are taken for granted to a certain extent, an assessment that isn’t yet shared equally by mechanical-engineering companies across the board.
Both groups are in agreement regarding the benefits of apps as far as performance-oriented benefit aspects, such as machine output and use of resources, are concerned. End customers clearly place a focus on apps with added value that is documented by specific use-case examples and that manufacturers can, to some extent, guarantee. Yet most end-customer industries (such as automotive) also give high priority to service, aftersales, and maintenance topics, often in connection with simpler apps that, among other things, increase the transparency of spare-part deliveries or services (such as construction).
Strategic priorities by industry
To provide a profound decision basis for mechanical-engineering companies regarding next steps to be made on digital platforms and apps, we have prioritized actions for five end-customer industries based on interviews with end customers and experts. There is no one-size-fits-all recommendation for each industry. Not only are mechanical-engineering companies too diverse in product portfolio and customer proximity, there are also considerable differences regarding their end customers’ operating structures and digital maturity.
The priorities we highlight are therefore intended to provide orientation; they permit divergences depending on customers and providers. While the five end-customer industries with the highest representation in our survey have been analyzed in detail, the full report on which this article is based illustrates a logic that permits drawing conclusions by analogy for other related end-customer industries. It also provides additional insights into the specific needs of each end-customer industry.
No new digital platforms for the automotive industry should be established by mechanical-engineering companies, since automotive OEMs and suppliers often have their own IoT platforms or are in the process of designing them. The aim in the automotive industry for mechanical-engineering companies needs to be to maximize compatibility with existing ecosystems. The focus should be on apps that improve efficiency and quality by enhancing the integration of heterogeneous machinery and equipment (manufacturer independence). The extended focus should be on optimizing service and installation costs through remote installation and go-live actions (possibly supported by augmented reality).
There is no reason to focus on digital platforms in standard mechanical engineering, since tech players are likely to offer solutions in the area, and corresponding standards will establish themselves (similar to the case in the automotive industry). When it comes to special-purpose mechanical engineering, mechanical-engineering companies have an opportunity to achieve successful scaling through open, cross-segment platforms that cover the relevant apps and process chains. The focus of the apps should be on improving resource efficiency and plant flexibility—areas for which apps’ user friendliness should be decisive.
Food and beverage/pharmaceutical
Because of the existing standards and heavily fragmented end-customer landscape in the food and beverage industry and the pharmaceutical industry, mechanical-engineering companies are in a good starting position to establish industry-specific digital platforms. Efforts should center on entire production lines or production processes and on open standards that enable the integration of heterogeneous machinery and equipment, as well as existing systems. A core element of the app layer should be its ability to optimize the use of resources. Additional critical criteria for apps are production-line flexibility and shortened changeover times—value propositions that end customers are willing to pay for.
Customers want digital-platform standards to be established in the construction industry, such as by opening up existing platforms and improving compatibility with current systems. In the construction-material industry, offerings that include apps to improve the efficiency and use of resources are of high relevance, as are those covering service and replacement-part availability. In the case of mobile construction machinery, the companies buying machines often aren’t the ones that will ultimately operate them. Not surprisingly, the metrics that buyers and operators need optimized through apps differ accordingly. The user friendliness of apps plays an important role throughout the construction industry, as do action recommendations derived from compiled data.
Metal manufacturing and processing
In many cases in the metal-manufacturing and -processing industry, it isn’t so much a matter of mechanical-engineering companies establishing new platforms. Some already exist, especially in metal manufacturing. Instead, the focus should be on achieving maximum compatibility to enable connectivity throughout the end-to-end production process. Value-added services need to aim to improve quality, maintenance, repair, and logistics (for example, by linking mechanical-engineering companies’ equipment know-how and end customers’ process know-how).
End customers expect mechanical- and plant-engineering companies to offer standardized interfaces and open, compatible digital solutions that produce, above all, measurable added value. There is no one-size-fits-all answer to the question of how such companies should go about determinedly initiating and driving forward internal processes to shape the radically new mindsets and cultural changes required to leverage the potential inherent in digital business.
Nevertheless, the industry-specific priorities for action highlighted in this article provide mechanical-engineering companies with clear points of reference for examining the topics in each of the end-customer industries analyzed. With respect to company culture, the path to take is in the direction of closer exchanges (potentially, alliances)—both among providers and with end customers. In most cases, close collaboration and open interactions are necessary to create solutions that provide end customers with added value.
Mechanical-engineering companies have no time to waste in setting the course for a digital future if they intend to safeguard their key positions in the long term and to benefit from their deep process know-how. Otherwise, they risk losing touch with the technology curve. Companies that are quick off the mark are more likely to outpace their peers in the medium and long terms and to defend their positions against new market entrants. Those benefits alone should be reasons enough to adopt the right strategic measures now and get in shape for the industry’s digital age.