Profiles in Innovation: Factory of the Future—Beyond the Assembly Line" Originally Published April 13, 2016 [83Pgs]
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EQUITY RESEARCH | April 13, 2016 The following is a redacted version of the original report. See inside for details. Manufacturing is Daniela Costa undergoing its greatest +44(20)7774-8354 transformation since [email protected] Goldman Sachs International the Industrial Revolution. A wave of intelligent Yuichiro Isayama technologies is shaping a +81(3)6437-9806 [email protected] more connected, flexible Goldman Sachs Japan Co., Ltd. and efficient factory floor—and redefining the Joe Ritchie (212) 357-8914 ecosystem of equipment [email protected] providers in the process. Goldman, Sachs & Co. In the latest in our Profiles Tian Lu, CFA in Innovation series, we +852-2978-0748 examine the six [email protected] technologies driving this Goldman Sachs (Asia) L.L.C. transition and explore how William Turner it could yield more than +44(20)7051-0662 US$500 bn of cost savings. [email protected] Goldman Sachs International Yuki Kawanishi +81(3)6437-9804 [email protected] Goldman Sachs Japan Co., Ltd. Ashay Gupta (212) 902-9429 [email protected] Goldman, Sachs & Co. FactoryPROFILESIN of theINNOVATION Future Beyond the Assembly Line Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. April 13, 2016 Global: Industrials Table of Contents Portfolio manager’s summary 4 What technologies lead the Factory of the Future (FoF)? 4 Opportunity for >US$500+ bn of cost savings 4 Where will these technologies be built? 5 Winners and losers in a changing competitive landscape 5 What could derail increasing adoption? 5 Factory of the Future in six charts 6 Why are we talking about the Factory of the Future? 8 Technologies: Bottom-up: >US$250 bn addressable market 12 Six innovative technologies for the Factory of the Future 13 Product Lifecycle Management software 16 Internet of Things Platform as a Service 18 Collaborative robots 21 Additive manufacturing 24 Automated Guided Vehicles 26 Radio Frequency Identification 28 Other key technologies (ordered alphabetically) 30 Industries: Top-down: >US$500 bn addressable market 32 Total addressable market could be worth more than US$500 bn 33 Winners & losers 43 New players, new business models 44 Drivers & barriers 50 Ten reasons why we are talking about the ‘Factory of the Future’ 50 What could derail it? 58 Disclosure Appendix 62 Prices in this report are as of the close of April 12, 2016. Other contributing authors: Robert D. Boroujerdi, Mohammed Moawalla, Jacqueline Du, Samuel Eisner, Willy Chen, Stefan Burgstaller, Wei Chen, Daiki Takayama, Heather Bellini, CFA, Simona Jankowski, CFA, Toshiya Hari, Diana Zhao, Gautam Pillai, Matthew Cabral, Jessica Kaur, Alex Karpos, Shateel Alam. Note: The following is a redacted version of “Profiles in Innovation: Factory of the future—Beyond the assembly line" originally published April 13, 2016 [83pgs]. All company references in this note are for illustrative purposes only and should not be interpreted as investment recommendations. Goldman Sachs Global Investment Research 2 FACTORY OF THE FUTURE in numbers UNREALISED POTENTIAL INNOVATIVE SOLUTIONS The cost-savings opportunity The number of cost-saving automation from bringing manufacturing up- technologies we think will make the >US$500 to-date with the latest technology. largest impact on manufacturing. 6 This equates to c.10% of current fixed investment. billion The estimated size of the market for these technologies >US$250 by 2020, vs. the US$100+ bn The average potential cost-savings automation industry today. per factory from introducing the billion latest automation technologies. 10%-15% TECHNOLOGY IN PRACTICE COST-EFFECTIVE & COLLABORATIVE The increase in output per employee at Scott Fetzer Electrical Group after introducing The approximate amount of time it will cobots and automated guided take to recoup an investment in a 20% vehicles. 1 vs. 3 collaborative robot (or “cobot”) in 2020 vs. the amount of time for an industrial years robot. The number of buildings on Harley-Davidson’s York campus before and after adopting automated guided vehicles and PRIVATE INTEREST 41 vs. 2 robots to streamline production. The increase in venture capital 188% investment in industrial software and robotics, respectively, over the past The reduction in time-to- four years. market Maserati achieved using 139% product lifecycle management 50% software. MAN VS. MACHINE Current level of automation by industry (maximum of 100%) Automotive 76% Electronics 62% Machinery 32% Textiles, Leather & Apparel 25% Wood & Paper Products 25% Metals 21% Industries where we expect Food & Bev, Tobacco 18% “Factory of the Future” technologies to generate Chemicals & Plastics 18% the greatest cost savings April 13, 2016 Global: Industrials Portfolio manager’s summary We focus on the key Manufacturing is entering a decade of significant transformation comparable to the industrial emerging manufacturing revolution. While the years of abundant EM infrastructure investment are gone, a growing technologies that should middle class continues to demand higher wages, the skilled manufacturing talent pool is allow significant cost shrinking, and new global competitors have emerged. Across most manufacturing industries, savings, including much companies are faced with the challenges of less demand and greater supply, putting strains on faster time to market margins already challenged by growing labour and transportation costs. This report leverages on our extensive interactions with companies and experts in the field globally (some of those profiled throughout the report). We identify the latest developments in manufacturing technologies that can materially improve cost structures, either through capacity utilisation or time to market. These should allow companies to maintain or improve their profitability and returns in an increasingly competitive environment. We also consider how these technologies might develop, reshaping the equipment makers’ competitive and regional landscapes. What technologies lead the Factory of the Future (FoF)? We estimate the TAM of The concept of ‘Factory of the Future’ is a broad one. We narrow the scope of our analysis to the six technologies we three areas: (1) manufacturing design and production simulation – this includes technologies analyse at >US$250 bn by such as product lifecycle management software (PLM) for both factory and product design 2020, around half the and Internet of Things software (cloud computing, data analytics); (2) physical US$500+ bn overall manufacturing – industrial robots, collaborative robots allowing for human interaction potential cost savings we (cobots), additive manufacturing (3D printing); and (3) in-factory logistics – automated see as available to guided vehicles (AGVs), radio frequency identification (RFID). We also take a brief look at manufacturers (c.10% of adjacent technologies that might allow optimisation of manufacturing processes or enable global fixed investment) these six technologies (including virtual and augmented reality, machine vision, machine learning, nanotechnology and demand response). Opportunity for >US$500+ bn of cost savings Electronics, food & We estimate the total addressable market (TAM) opportunity for the ‘Factory of the Future’ beverage and machinery capped by the potential cost savings in the key adoption verticals at US$500-650 bn (equating makers are the largest to c.10% of global fixed investment). We see the largest vertical opportunities as electronics, verticals for deployment food & beverage and machine making (e.g. tool makers, electrical, resource and construction equipment). The TAM will likely be split between payments to firms making enabling equipment, and benefits passed on to customers to remain competitive. Margin increases for first-mover adopters are possible near term, but likely will erode as adoption spreads to the rest of the industry. We use two approaches to estimate TAM: (1) Bottom-up (what is the revenue potential for equipment providers?): we assess the six key innovative technologies we think are most relevant in taking out stranded manufacturing costs, considering current penetration and potential pace of adoption to forecast the size of their markets. These six technologies add up to >US$250 bn by 2020E. (2) Top-down (what is the cost savings potential for industries?): we break down fixed investment by industry and look at its level of automation (i.e. robot penetration) and digitisation (i.e. software penetration). We pro-rata the opportunity in each case, looking at the gap vs. the currently most-advanced manufacturing environment (automotive in robots; electronics in software), and at the average cost savings indicated for each industry by manufacturers of the key technologies. We estimate the TAM is capped at US$500-650 bn. Cross-technology synergies, other technologies not profiled, deflating prices of technology as adoption broadens and, most importantly, benefits sharing between makers and users explain why our top-down forecast exceeds our bottom-up forecast. Goldman Sachs