Industry X.0 in Germany: Time to Get Ambitious
February 19, 2020
As the home of Industry 4.0, Germany has long been regarded as a global leader of industry digitization. Indeed, many German companies have digitized processes and sugar-coated products with digital services. But most struggle to scale their digitization projects and few are driving growth through digitization investments. Meanwhile, other countries are moving into Germany's key industries and creating fierce competition. Is the European industrial champion at risk of losing its leading role? Frank Riemensperger, chairman of Accenture Germany, talked in an interview about digitization in Germany.
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German key industries are struggling: They need to develop and implement new business models like operating systems, e.g. vehicle operating systems for the auto industry, explains Frank Riemensperger, chairman of Accenture Germany, in an Interview. | Image: Lenny Kuhne/Unsplash
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Hi Frank, thanks for joining us today. To start, what’s the current state of German companies?
Frank Riemensperger: Many of the country’s key industries are struggling with uncertainties in the geopolitical, trade and regulation environment and the associated impact on their business outlook. Last but not least: The Coronavirus has created another massive slow down, especially for manufacturing industries. We’ve seen clear downturns in growth momentum across key industries, downturns which started three years ago. Massive investments in Industry 4.0 concepts and technologies have resulted in bottom line productivity improvements—but typically not in business growth.
Why is the growth rate decreasing?
Germany has traditionally been home to global market leaders. However, the landscape is changing and new competitors are emerging. China’s growing economic power and focus to build both local and global market leaders in industries is a game changer. Closer to home we have issues ranging from a lack of scale and associated price performances and a lack of business model innovation. Being a leader in features and functions is no longer sufficient. Especially with emerging markets that want “core functionality” products at the best price possible. This requires a new level of scale and a new level of ambition to successfully scale through digitization.
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"We have issues ranging from a lack of scale and associated price performances and a lack of business model innovation."
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What areas should German companies focus on for now?
The competition here is to develop and implement operating systems into industries, e.g. vehicle operating systems for the auto industry. Currently, I believe there are three areas German companies should focus on:
First, German companies should focus on expanding their business models from “product centric” to “product + service + business outcomes.” So far, only a handful of Top500 companies have launched innovative and platform-based business models. This capability must become commonplace. To begin with, companies should meticulously analyze all business areas in terms of future viability and profitability. Use released investment funds to both augment the core business with future-orientated business models and also scale new and functioning businesses. The goal here is to follow an innovation strategy that develops innovative business models, captures synergies between core and new businesses, and generates sufficient investments funds.
The second area we recommend focusing on is the competitive financial sector. In Germany, and Europe in general, the financial sector doesn’t provide enough capital for innovation. Germany struggles to attract venture capital and the German banking sector provides to little capital innovation. In fact, the banking sector is in a downward spiral that may be difficult to stop. Reduced earnings are resulting in declining investments, which in turn leads to fewer market opportunities. Banks in other countries tend to have higher technology budgets that support new digital business models. These are key to driving competition. The German financial sector must keep pace with the rest of the world if it is to play a leading role on the international stage.
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Germany is lagging in venture capital investments. Venture capital investments volume in billions of US$. | Sources: Accenture Research, Statista, BVK
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The third and final area to focus on is partnerships and digital ecosystems. Specifically, German companies should embrace partnerships and ecosystems as facilitators to drive change. Our analysis found that most German companies are hesitant to set up ecosystems as a means to develop and scale digital services. Digitization encourages collaboration. Participating in digital ecosystems can help forge stronger bonds between companies. And these bonds often cross traditional industry boundaries, opening companies to new ways of thinking and working. It’s important to remember that the digital ecosystem is more than the sum of its parts. And in the post-digital era, companies don’t compete against one another. But digital ecosystems do.
By focusing on these areas, German companies can develop the building blocks to global leaderships.
Can you explain what these building blocks consist of?
Certainly. There are four building blocks all German companies should adopt. Number one, a vision for the platform economy. The value potential of services that make conventional products “smart” is always increasing. This is because of the data generated by smart products, data that can be then used to further improve product quality and customer value. To make the most of data-generated value, German companies must collaborate through digital platforms. And they should begin this journey today.
The second building block is a path from innovation to scalable business models. If they want to be global market leaders, German companies will have to lead in global innovation. Thanks to its numerous scientific institutes, Germany has traditionally enjoyed a place at the top innovators’ table. Inventions are not enough though—they have to be brought into the market. Designing innovative products with scalable business models is proving to be a challenge. This is because scaling digital technologies is a relatively new capability. High investments costs are another challenge. Companies depend on the German banking sector, which as we know is losing global relevance. High-growth companies will therefore have to reply on foreign capital for innovation scalability.
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What are the biggest obstacles using Industry 4.0? High investment costs and concerns about data protection. | Sources: Accenture Research, BITKOM
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Our third building block is a public sector that is digital by default. The German public sector has five million civil servants. If the public sector underwent a complete digital transformation, it would become the leading example for the rest of the world. It would also have a massive impact on German industry and set the standard for scaling digital technologies. Goods and services procured by public authorities in Germany are valued at approx. €350 billion. Currently, there’s plenty of capital for ambitious infrastructure projects. Unfortunately, most investments have failed to deliver results. Putting functioning digital infrastructure in place is how we ensure projects succeed and investments generate desired outcomes. And it’s how we ensure the future global competitiveness of German companies.
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The fourth building block is European digital sovereignty. Companies must offer their products through digital platforms to maintain their position in value chains. The most significant components of these platforms are cloud infrastructures, extensive and fast data networks, data markets plus a secure identity infrastructure. US and Chinese companies, who invested billions into early cloud solutions, already have a considerable head start. Companies which leverage digital platforms need competitive cloud infrastructures to be globally relevant and lead the market. Europe must find ways to leverage the massive investments of others for their own industries while preserving digital sovereignty. Current thinking is in the early stages and much more work is required to create viable solutions.
Are any German companies succeeding at digitization?
Well, Volkswagen’s digital initiative is a good example of the ambition German companies need to adopt. The automaker will hire over 5,000 digital experts by 2025 as part of its new Car.Software unit. As the name implies, the Car.Software unit will develop software for vehicles. This includes a single standard vehicle operation system for all vehicles in the Volkswagen Group. Most important, the new unit will enable Volkswagen to re-invent the car with software and new experiences.
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"Reinventing the automotive industry"
New customer experiences force OEMs to digitize their products and the experiences around them. According to a study, Daniel Tegtmeyer and Tobias Kruse explain in an interview how the requirements of automotive customers are changing.
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Furthermore, Volkswagen is also pooling data from every one of its 122 plants into an industrial cloud, which will be used to optimize Volkswagen’s entire global supply chain. These are obviously very ambitious digital transformation programs. The company plans to spend €60 billion on e-mobility, hybrid drives and digitization over the next four years. Such programs require ambidextrous skills. By ambidextrous, we mean that Volkswagen can both utilize traditional revenue sources and develop innovative business models. Only financially-strong organizations can successfully realize such ambitions.
Any final comments?
Now is the time for action! I hope the Top500 understand this and take the steps to digital transformation outlined in our report. German companies must start this journey today if they are to become the global market leaders of tomorrow. And they should do it with open minds about collaboration and digital ecosystems. The German economy must develop its own global platforms and digital ecosystems to drive the growth of German businesses around the world.
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About
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Frank Riemensperger
Chairman of Accenture Germany, is an expert in IT-based business transformation. Frank is responsible for developing and enhancing sustainable market strategies. Get in touch with him via LinkedIn.
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