Industry 4.0 and the Internet-of-Things (IoT): Learning from the German Chemical Industry

By: Innovation Management

The keyword “Industry 4.0” is no longer an empty cliché or a black box; it is currently probably the most important topic within the German economy. Not only will existing processes be revolutionized – but also new businesses and business models will arise. More and more companies have already started to tap into its potential.

At the heart of Industry 4.0 is the emerging Internet of Things (IoT). What will the IoT mean for the chemical industry? A chemical company is naturally process oriented, with excellence in managing ultra-complex processes, and very strong in product and processes innovation in existing business models. But it may be less well prepared for a fast changing business environment and the emergence of new business models.

What future business models will arise through the avalanche of data becoming available and utilizable for the business? How will the IoT change supply and value chains? How will the expanded data integration change manufacturing capabilities and IT infrastructure? What should the chemical industry do to prepare for the IoT?

These and related questions were discussed from different perspectives by leading IT vendors and engineering companies focusing on implementing the IoT and first movers amongst the chemical industry on a conference organized by the VCW (Chemistry & Industry Section of the German Chemical Society) at Merck, Darmstadt, on September 1, 2016.

Here the key conclusions from this one-day event full of information, new ideas, insights, and discussions:

• IoT is a BIG thing – some call it the 4^th industrial revolution. The IoT connects machines or objects which can collect data so that they can communicate with one another. This machine-to-machine data exchange network will create new structures for processes and value creation. Thus it will drive innovation and (re)distribute value generation in the supply chain. Net, the IoT will generate new opportunities for value creation in a big way.

• IoT – a machine-to-machine data exchange network – is more than a new app or another tool to just improve process efficiency and costs. Indeed, it enables improving existing processes and systems by dramatically increasing data based feedback and control. However, it generates so much more data that the related improved understanding of processes and systems turns into a value in its own right. It allows running processes and systems in completely new ways never possible before like employing many real-time feedback loops in parallel, even on a micro scale. Big data analysis enables predictions of system behavior with a probability never experienced before like 24h weather forecast.

Example: John Deer used the IoT to improve performance of their tractors at their customers (farmers) by turning the individual machine into a smart machine which reports on its performance. Farmers started to use these data to improve their farming practices, in particular when combining individual tractor data from several farmers (smart, connected machines). Then tractor machine data were connected with data from other participants in the farming machine system like tillers and harvesters creating an even better understanding of the farming machine system. Lastly, other systems like weather or irrigation were connected to the farming machine system creating an even deeper understanding of how to better manage the total farming ecosystem.  And John Deere started to sell results of this data analysis and predictions to other, new customers.

• BUT the chemical industry is slow in realizing the potential of the IoT. According to IT leaders (IBM, SAP) the chemical industry is not even on their map of players aggressively expanding the IoT across their businesses. But they are not alone: Nearly all senior business leaders see the potential of IoT (~85% of senior industry executives*) but only a few act on it (~15 %*).

• IoT shift paradigms. However, executives of the chemical industry overestimate the related threats but vastly underestimate the related benefits. They see cyber security issues as the biggest threat (62% of CEOs of the chemical industry#). But the real threat is that their business is destroyed by IoT powered changes – like Kodak’s business based on chemical film by digital imaging. The real opportunities of IoT driven changes are the creation of new, superior business models creating new markets and innovation ecosystems, not just incremental improvements of existing processes and systems.

• There are hidden challenges when implementing the IoT which can significantly reduce its benefits. Implementing the IoT will create change on an unprecedented scale. Companies currently focused on products will have to refocus on increasing customer value and experiences. Product development will have to morph into (holistic) system design thinking. Manufacturing organizations must become learning organizations. Innovation needs to happen in (eco) systems rather than in one company. But as the saying goes ‘People like progress but hate change’ (M. Twain) – so the implementation of the IoT will often encounter strong opposition. Successful implementation of the IoT will critically depend on the company’s ability to communicate within the company and its ecosystems up and down the value chain. In the future the competence to create alignment to and get buy-in into change within the company and its ecosystems will become a decisive competitive edge which will separate the wheat from the chaff.

• Value chain aspects and innovation ecosystems will play an even more dominant role in the IoT world. Finding the right partner here is more critical for success than ever. This requires changing the company’s perspective on its value chain: Moving from telling vendors what you want and informing customers what you have to offer, to perceiving them as partners to create and maximize value along the supply chain. This will turn the table in many supplier/customer relationships: from selecting the ‘best’ supplier or be chosen as the ‘cheapest’ purveyor by your customer to be elected as a preferred partner to work with. This is not easy a challenge as many companies experienced when embarking on an open innovation journey.

 By Joachim von Heimburg

 * Data from SAP presentation to VCW, * Data from IBM presentation to VCW, # Data from Siemens presentation to VCW