THE DIGITAL TRANSFORMATION of INDUSTRY How Important Is It? Who Are the Winners? What Must Be Done Now? in Brief

A European study commissioned by the Federation of German Industries (BDI) and conducted by Roland Berger Strategy Consultants THE DIGITAL TRANSFORMATION OF INDUSTRY How important is it? Who are the winners? What must be done now? In brief +1.25 trillion euros SEIZE OPPORTUNITIES! CHANGE STRUCTURES! JOIN FORCES! 2 Roland Berger Strategy Consultants / BDI The digital transformation of industry In brief 1 The digital transformation of industry is creating tremendous opportunities for Europe – and confronting it with huge challenges. The possibilities opened up by connected, more efficient production and new business models are highly promising, yet the risks are equally dramatic. By 2025, Europe could see its manufacturing industry add gross value worth 1.25 trillion euros – or suffer the loss of 605 billion euros in foregone value added. 2 The digital transformation of industry is also driving a radical structural transition in Europe's economies. New data, connectivity, automation and the digital customer interface are challenging existing value chains. Companies must take a long, hard look at their products and skill sets. And they have to improve their digital maturity if they are to recognize new opportunities, develop suitable offerings and get them to market quickly. 3 The digital transformation of industry demands concerted action within Europe. The regulatory framework must be harmonized, with a new weighting given to relevant issues. At the same time, a powerful, no-gaps informa- tion and communications infrastructure is needed if European industry is to remain competitive. As standards are shaping our digital future, companies and governments need to get engaged seriously in their global definition. Roland Berger Strategy Consultants / BDI 3 Contents 22 Electric performance: How the digital transformation is affecting individual industries 26 Adjustment needed: Why companies lag behind in the digital race "Digital connectivity will continue to develop faster and faster. Today, you don't win the global competitive battle in the real world alone, but also in the digital one." DIETER ZETSCHE, Chairman of the Board of Management, Daimler AG 32 Take-off: How industry and governments must rise to the digital challenge Photos: Andrew Brookes / Corbis; Thomas Ernsting / laif; Henrik Spohler / laif 4 Roland Berger Strategy Consultants / BDI The digital transformation of industry Contents 6 WHAT THE DIGITAL FUTURE HOLDS 8 WHAT IS AT STAKE 14 Why Europe must get involved in the standardization debate without delay 16 THE LOGIC OF DIGITIZATION 17 Four levers of transformation 19 The atomization of value chains 22 THE SITUATION OF GERMAN AND EUROPEAN INDUSTRY 24 Wave 1: The automotive and logistics industries are reaching a digital watershed 25 Wave 2: Medical technology, electrical engineering, mechanical and plant engineering and energy systems are experiencing a digital upheaval 25 Wave 3: Digital change will come later to the chemical and aerospace industries 26 GERMANY'S DIGITAL MATURITY 30 Huge shortfall in penetration 30 Urgent need for action 32 WHAT NEEDS TO BE DONE NOW 33 What companies must do 35 What governments must do 43 Target corridor 43 Time frame 46 SERVICE 46 Network 47 Imprint 50 Extras Roland Berger Strategy Consultants / BDI 5 Preface What the digital future holds Charles-Edouard Bouée Stefan Schaible CEO CEO Germany/Central Europe Roland Berger Strategy Consultants Roland Berger Strategy Consultants ur life has gone digital. For consumers, digitization – in tion of actions and their consequences. In line with Schum- O the form of e-commerce, the mobile internet and so- peter's principle of creative destruction, these new tools will cial media, to name but three of many examples – has long bring fundamental change to many established business since been part and parcel of everyday life. Now, the digital models and value-added processes. transformation is also permeating every link in the industri- Commissioned by the BDI (the Federation of German In- al value chain, from logistics through production to service dustries) and conducted by Roland Berger Strategy Consul- provision. Germany's and Europe's industrial core stands on tants, this is the first study to explore the causes and effects of the threshold of fundamental change – change that promis- the digital transformation with regard to the "industrial heart" es fresh growth, prosperity for large parts of the population of Germany and Europe, by which we mean the automotive and greater resource productivity. Alternatively, that same industry, logistics, mechanical and plant engineering, medical change could see German and European industrial compa- technology, electrical engineering, energy systems, the chem- nies forfeit their global market leadership. ical industry and aerospace. To this end, we performed an We understand the digital transformation as the seam- extensive strategic analysis supported by workshops involving less, end-to-end connectivity of all areas of the economy, industry experts, received questionnaire responses from more and as the way in which the various players adapt to the than 300 key decision-makers at German companies, and new conditions that prevail in the digital economy. Decisions interviewed 30 board members and chief technology officers made in connected systems affect data exchange and ana- at DAX-listed companies and leading medium-sized players. Roland Berger lytics, the calculation and assessment of options, the initia- On this basis, we were for the first time able to measure the Photos: 6 Roland Berger Strategy Consultants / BDI The digital transformation of industry overall effect of digitization on the German and European be the case even more so in the future. German and Europe- economy. The findings reveal the dramatic consequences of an companies must therefore move quickly to define these the changes currently in progress: standards, working together to create suitable platforms for If Europe fails to turn the digital transformation to its own the sharing of ideas, knowledge and experience. German and advantage, the potential losses for the EU-17 countries1 add European government organizations should support this pro- up to 605 billion euros by 2025 – equivalent to the loss of well cess. The EU would, for example, do well to emulate the Ger- over 10 percent of the continent's industrial base. This would man government's National Electromobility Platform (NPE) push the EU's stated aim of increasing manufacturing's share program – a fine example of standard setting via effective of European GDP to 20 percent by 2020 way back out of reach. collaboration between the state, the corporate sector and For Germany alone, the positive scenario would add extra the unions. potential value totaling 425 billion euros by 2025. The cor- POWERFUL INFRASTRUCTURE. A robust infrastructure responding figure for European industry as a whole would be forms the backbone of a connected economy. The success 1.25 trillion euros over the next ten years. of the digital transformation hinges on no-gaps broadband In light of these high stakes, our study makes specific networks and the guarantee of a high quality of service for recommendations on what companies, their national asso- mission-critical applications. Plant and machinery must be ciations and the governments in Germany and Europe can connected as extensively and securely as possible. do to safeguard the future of Germany's industrial base and PAN-EUROPEAN COORDINATION. Success in the digital generate positive employment effects throughout Europe. economy is equally dependent on cross-border collaboration. Investment programs such as the Juncker plan should The key areas in which action is needed are these: focus rigorously on promoting the digital transformation. DIGITAL MATURITY. Top priority must be given to raising As part of a harmonized EU-wide approach, the aim is for awareness among companies and mobilizing them, because a European economic alliance to encourage the develop- many firms see digitization primarily as a way to boost ef- ment of clusters, cooperative ventures and syndicates or ficiency. Yet the digital economy does more than merely associations, bringing the skills and capabilities that are oblige companies to optimize existing business models: It spread across Europe together in a virtual Digital Valley. also promises new and hitherto untapped potential to add This kind of European counterpart to Silicon Valley would value. To identify and realize these opportunities, companies interconnect all relevant developers and providers of digi- need to become more digitally mature. One aspect involves tal solutions, from start-ups to global players, from garage increasing their penetration of digital trends and possibil- firms to high-tech laboratories, thereby concentrating the ities. Another is to gain a better understanding of how the stimulus needed to drive new developments and innovative digital space is changing the rules of competition, as this will business models. allow them to optimize existing business models and develop Our thanks go to the BDI in general, and to Dieter Schweer, new ones. Third, firms must cultivate the ability to develop member of the Executive Board responsible for digital trans- and multiply the resources they need in order to seize new formation, in particular for initiating and commissioning opportunities in practice. this study, and for their openness and cooperation. Special COMMON STANDARDS. The rules of the game

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