Megatrends: Technology and the ‘Smart’ Corporate

From
Charles Stodart

Charles Stodart

The former CEO of General Electric Jack Welch once said that “if the rate of change on the outside exceeds the rate of change on the inside, the end is near.” Corporates have always been subject to forces for change, whether regulatory, economic or financial. But it’s the current challenge of technological change, driven by the ongoing shift to the digital economy, that’s proving especially testing.

To recognise how disruptive this can be, you need only consider the well-documented stumble and near-demise of Kodak – a one-time dominant leader in camera film sales – which severely misjudged the advent of the digital era on their analogue photography business. There’s a sense that the accelerating pace and pervasiveness of technological change today makes it even more disruptive. Certainly, several other ‘consumer-facing’ industries, such as retail, travel and journalism, are feeling heightened challenges to their business models.

While technological change can often be a disruptive force in the corporate world, it need not be all ‘doom and gloom’. Companies that can figure out how to adapt to these forces or even exploit these changes for their own competitive advantage and embrace the digital economy will be well positioned to stay relevant and even thrive.

Many will have heard of the ‘Internet of Things’ (IoT); an environment where ‘machines talk to machines’. In the manufacturing world, adoption of IoT is an example of how companies can benefit from the digital era. And while the adoption of IoT is still in its relative infancy, we’ll probably see a much faster and far wider acceptance in the next five years. Broadly speaking, IoT adds an information or ‘data layer’ on top of a company’s physical assets or systems that allows increased operational efficiency and improved asset management potential.

The investable opportunities within the ‘Smart Corporate’ megatrend

Within the manufacturing industry, the companies to keep an eye on will be those embracing IoT and successfully combining lean manufacturing principles, integration of IT systems and machine automation infrastructure. Within the services industry, companies that leverage the data layer to their logistical advantage or incorporate it into their current processes will have an advantage. These may be companies in industries as diverse as finance, pharmaceuticals, and security.

There are also investable opportunities within those companies that are offering the solutions that enable the implementation of IoT. Providers that can create their own ecosystems of support will have a strong competitive edge. Some of these companies already have the capability and are starting to exploit this massive opportunity.

The Smart Factory

Over the last few decades, the big developments in manufacturing have been around the steady improvements in automation and the broad adoption of lean manufacturing principles with the integration of enterprise IT systems. Going forward, there will be a merging of IT systems and machine automation infrastructure; dubbed the fourth industrial revolution, or ‘Industrial 4.0’ – a collective term for devices, machines and materials that communicate with and control each other cooperatively. IoT is an important early part of this process in terms of optimizing asset utilization. The idea is that IoT can help improve overall equipment effectiveness.

In manufacturing, IoT is largely enabled by sensors monitoring and tracking data, which is then gathered and communicated for real-time analysis to improve efficiencies. For the smart factory of the future, this will impact across supply chains and right through the manufacturing process, with IoT being a core enabler across key areas of the whole.

Technology company Cisco is a key player in this space. The company has invested heavily to develop IoT products – specifically an ‘end-to-end’ IoT solution that combines network connectivity, fog computing, data analytics and security. Other key players in the related factory automation space are Fanuc, a leading robot manufacturer and Rockwell Automation, which is looking to develop a product eco-system. The key aim is to raise asset efficiency to improve returns and competitiveness.

Leveraging the data layer

Within the services industry which is typically ‘asset light’, the aim is to use the data layer to build a dominant platform or standard. A service company can leverage the information that it gets from its customers to enhance its product.

One example is internet security provider Check Point Software Technologies, which has been able to exploit first mover advantage and now counts all Fortune and Global 100 companies among its customers.

Driverless vehicles

Google is currently championing the driverless car capability. The concept of the ‘connected car’ is already here, enabled either via your smartphone or directly through partnerships with a telecom operator, though with a focus on entertainment, media and relevant updates. The driverless car aims to automate the operation of the car itself, while at the same time communicating with other

cars and central traffic monitoring information points to optimise traffic flow. Notwithstanding yet-to-be-resolved ethical issues, this is expected to advance much further over the next five years. There are also possible investment opportunities in the technology that makes it possible, including sensors, cameras and lenses.

FinTech

Digital innovation is increasing in importance in the financial services space, with many potentially transformational changes on the way. The launch of Fintech hub ‘Chalk & Stone’ in Australia, acknowledges the arrival of one of the fastest growing sectors in the financial services industry globally. FinTech includes things like mobile payments, crowd-funding, peer-to-peer, automated advice, capital markets and cryptocurrencies. But while many FinTech companies have been successful, they are still largely operating only at the edges of banking at this point.

While the early focus of FinTech has been around leveraging social media type platforms to create specific solutions and even automated advice, one area that’s been relatively modest to date has been the incorporation of IoT. IoT could be leveraged to enhance fleet management; streamline

contractual processes in trade finance, and improve risk management through the provision of real-time data analysis and other automated systems relating to physical assets.

From manufacturing to service companies, the adoption of the digital economy is a broad theme that will impact across multiple sectors. Companies to watch over the next few years include those that are investing in IoT; those which provide IoT solutions; security companies and FinTech.

By Charles Stodart, Investment Specialist, Zurich Investments

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