Vision for the future: Are you ready for Industry 4.0?

Expense Reduction Analyst Survey on SMEs Vision for the future: Are you ready for Industry 4.0? Finding sources of funding and securing new business opportunities

Content 02 Content and imprint 0 Foreword 04 Study results 06 Methodology and information about the sample 08 Industry 4.0: Significant impact across the entire company 09 Everyone talks about Industry 4.0. But who deals strategically with Industry 4.0? 10 4th industrial revolution and opportunities Imprint Expense Reduction Analysts Suite 24, 40 Churchill square, Kings Hill, West Malling, Kent, ME19 4YU, U.K. Telephone: +44 172 52 58 56 Fax: +44 172 52 58 50 www.expensereduction.com info@expensereduction.com Contact: Paolo Massimilla Authors: Thomas Löwer Klaus Jeschke Concept and Design: Counterpart GmbH Copyright: E R Associates (Europe) Ltd. Nominal Fee: 90, EUR 02

Foreword Successful companies are always trend-setters. They are the first to spot, understand and implement new technologies. After seeing over the past decade the internet become an integral part of working life, now the entire value chain is being digitalised. The keyword here is Industry 4.0. The present survey shows however that the vast majority of businesses has not yet understood what is behind Industry 4.0. Many have no idea what it means, and hardly any business has started to effectively drive Industry 4.0 processes forward. It is quite significant that one in three companies cannot allocate areas of responsibilities in-house. Here Industry 4.0 has not even reached strategic level not to mention operational implementation. The vast majority of businesses has not yet understood what is behind Industry 4.0. It is evident from investment priorities that companies focusing on the future are always a step ahead. In our survey, decision-makers who concentrate on the implementation of Industry 4.0, confirm that budget resources are allocated above average not only in this area but also in research and development. These businesses bet heavily on the future and seek opportunities to position themselves more clearly and more successfully within the competitive environment. New technologies are always associated with investments. Industry 4.0 in particular represents a structural change for companies that needs to be funded. Sources of funding must be found and exploited. As a result a third of those funds have been gained through cost management. This means that this tool is much more significant than for instance investment resources financed by credit. For companies that currently lack the financial resources for investments towards Industry 4.0, the message is clear. There is actually some money available it just needs to be identified and converted. This is where management and people making decisions on finance need to set the right priorities so that the company itself does not miss the boat because of a lack of financial resources, and falls behind the competition. I hope you will enjoy reading the results of the survey and that you will find some suggestions to, as a trend-setter, effectively implement Industry 4.0 in your company. With best regards Fred Marfleet 0

Study results Understanding digitalisation as key factor and opportunity The opportunities of digitalisation the global business world digitalised and inter-connected with fully automated manufacture and industry sectors - are in 20 still being underestimated by SMEs. Only around a third of respondents regardless of their level of knowledge perceive to be exposed to increased competition due to digitalisation. Therefore, companies that now recognise the way to digitalisation move quickly forward and invest in smart, networked production have a great opportunity of taking a pioneering role to ensure the success and sustainability of the company. Fig. 1 Statement agreement: competitive pressure My company will be more vulnerable and have to face more competitive pressure through digitalisation (in %) 1 Agree completely 7 7 1 6 10 21 12 Agree slightly 20 26 8 17 21 Neutral Disagree to a certain extent 2 26 28 25 2 Disagree completely 24 22 2 Don t know Industry 4.0 Experts Industry 4.0 Interested Industry 4.0 unknowing Total Expense Reduction Analysts Industrie 4.0 A vision for the future, starting today 40% of the companies surveyed consider Industry 4.0 as one of their investment priorities. Therefore, for companies that have a clear idea of Industry 4.0, it is one of the highest investment priorities (65%). Those familiar with Industry 4.0 also expect to have to invest some 67% or even the majority of investments in the digitalisation i.e. in the factory of the future. Other fields of investments mentioned are research and development (54%) and diversification (45%). Companies with a clear idea of Industry 4.0 consider Industry 4.0 and R&D as the main investment priorities, since intensive collaboration is required between IT and R&D. Besides R&D companies consider Industry 4.0 as one of their investment priorities. Cost savings funding the 4 th industrial revolution New technologies are always associated with investments. Industry 4.0 in particular represents a structural change for the company that requires funding. This is where a third of the funds come from savings gained through cost management programmes. This means that cost management is here more important than for instance credit-financed investment funds. Besides the reinvestment of profits and cost savings, the other potential tools hardly play any role for the majority of companies surveyed. 04

Fig. 2 Investment priorities and needs In which areas are your investment priorities, if you had additional financial resources? (in %) Industry 4.0 26 40 65 Reseach & Development/ Innovations 50 48 51 54 Recruitment/Search for Talents 18 28 0 8 Increasing Company s Capital Ratio 12 18 16 Diversification, i.e. Entering new markets 6 42 41 45 New Foundation i.e. of a subsidiary 14 1 No Comments 8 16 28 0 5 10 20 25 0 5 40 45 50 55 60 65 Industry 4.0 Interested Industry 4.0 unknowing Total Expense Reduction Analysts Fig. Financial instruments proportional allocation: important role and very important role How do you plan future investments? How important are the following tools? (in %) 5 5 0 0 25 25 20 Profits/Depreciation 4 Cost Savings 1 20 10 5 Leasing 14 Leasing 7 Venture Capital 4 10 5 0 Expense Reduction Analysts Public funding 5 Contracting Issuing of shares 1 Issuing of bonds 1 0 05

Methodology and information about the sample Methodological approach To carry out the study, the chosen methodological approach was that of an online survey, conducted over a period from May 19 th to August 27 th 20. Overall 02 companies took part in the survey. Companies from Germany, Spain, Italy, Finland, Switzerland, Belgium, The Netherlands, Norway and Austria were interviewed. Fig. 04a, Participants per Country (in %) Germany Spain Italy Finland Switzerland Belgium Netherlands Norway Austria Other 4 9 16 14 0 0 5 10 20 25 0 5 40 45 Structural characteristic of the sample The underlying sample of this survey comprises SMEs of various sizes and from different industries. As shown in Fig. 04b, the sector of machines and plant engineering, the largest group, represents 40%, followed by companies from the consumer goods industry with 18%, and the financial services sector with 12%. Within the companies surveyed, top management people made 6% of the respondents. 06

Fig. 04b, Participants per Industry (in %) Mechanical engineering / plant engineering Chemical industry Logistics Banks / Insurance / Financial services Health sector / Pharmaceutical industry Retail / Consumer Goods Public sector / Not-for-Profit (NPO) Other 7 6 5 5 7 12 18 40 0 5 10 20 25 0 5 40 45 Fig. 04c, Participants per role (in %) Member of the Board / Director / CEO CFO Head Procurement / Head Logistics Head of Division / Department Employee Assistant to Management Other role 4 6 1 18 45 0 5 10 20 25 0 5 40 45 Fig. 04d, Participants per Company Size (in %) Up to 99 Employees 100 249 Employees 250 499 Employees 500 999 Employees Above 1,000 Employees 12 17 21 9 0 5 10 20 25 0 5 40 45 07

Industry 4.0: A significant impact across the entire company Digitalisation will not only change production The vast majority of respondents believe that digitalisation will not only change production, but all the divisions of the company will be changed permanently. Industry 4.0 will bring structural changes within the company, with rapid developments in the area of digitalisation. Therefore many features are embedded in digital components, and can be controlled by i.e. iphone or software. The more respondents are engaged in the implementation of Industry 4.0, the greater is the agreement with the statement that all company divisions will be permanently changed (over 90%). This development is expected in particular in the consumer goods sector, where over 62% of respondents agree with this statement. Fig. 05, Statement agreement: areas of the company will be affected by the change The digitalisation will not only change the products but all areas of companies. (in %) 1 1 29 5 61 1 2 2 9 4 6 28 9 45 8 2 9 6 4 46 Agree completely Agree slightly Neutral Disagree to a certain extent Disagree completly Don t know Industry 4.0 Experts Industry 4.0 Interested Industry 4.0 unknowing Total Expense Reduction Analysts Fig. 06, Statement agreement: areas of the company will be affected by the change (per Industry) The digitalisation will not only change the products but all areas of companies. (in %) 2 2 2 4 4 4 4 4 7 1 41 0 6 62 1 2 9 45 9 6 4 Agree completely Agree slightly 46 Neutral Disagree to a certain extent Disagree completly Don t know Manufactoring Industry Consumer Goods/ Retail Other Total Expense Reduction Analysts Fig. 07, Knowledge of Industry 4.0 How familiar are you with the concept of Industry 4.0? (in %) 1 2 1 0 8 7 9 10 16 42 4 28 2 1 5 1 26 9 5 Very clear idea Clear idea No clear idea No idea at all First time I hear about it No Comment Digitalisation plays an important role Digitalisation plays an average role Digitalisation plays a small role/is not important Total Expense Reduction Analysts 08

Well over half of the participants have no clear idea of what is behind the notion of Industry 4.0. Even companies for which digitalisation is of great significance have, with almost 50 % of all businesses surveyed, no clear idea of what Industry 4.0 is. Everyone talks about Industry 4.0. but who deals strategically with Industry 4.0? Successful entrepreneurs find themselves significantly bound to drive ahead and push with the digitalisation processes. Industry 4.0 must be a top priority! Since Industry 4.0 has yet no strategic significance in a third of companies surveyed, it is not clear where the responsibility within the organisation should lie in the first place. Interdisciplinary project groups i.e. the groups that have the operational responsibility for Industry 4.0 are only in place in 14% of companies. Interestingly, Germany is doing far below average compared with other European countries. In Finland, the responsibility lies within interdisciplinary Industry 4.0 teams. Only very few companies (%) have given the total strategic professional responsibility to their respective production managers. However, a total of 54% of companies surveyed reported that, in their opinion, the strategic planning of digitalisation should be the responsibility of the management or the board of directors. Even if they have some trouble clearly understanding Industry 4.0 (see Fig. 06), successful entrepreneurs find themselves significantly bound to drive ahead and push with the digitalisation processes. The digitalisation of the whole value chain must be in the foreground for the management. Therefore not only a better monitoring of the overall process can be ensured, but also Industry 4.0 offers an opportunity to develop brand new business models and to define the corporate strategy. Fig. 08 Organisational assignment of responsibilities (Breakdown per country) In your company, who is taking care of the Industry 4.0 topic? (in %) Germany Finland Italy Spain Other 44 7 9 1 7 6 27 21 4 21 6 18 24 5 14 7 50 17 8 27 2 25 21 5 5 1 1 4 12 29 Member of Board/CEO Chief Finance Officer (CFO) Chief Information Officer (CIO) Chief Procurement Officer (CPO) Production Manager Interdisciplinary Group No comment Total 2 6 1 14 29 Expense Reduction Analysts 0 10 20 0 40 50 60 70 80 90 100 09

4 th Industrial revolution and opportunities Far-reaching impact for companies and markets The survey shows that German companies in particular plan to achieve with Industry 4.0 projects higher productivity (60%), innovative business models (47%) and a better control of the value chain (59%). People with intensive knowledge about Industry 4.0 appreciate the opportunities of digitalisation especially for new corporate concepts and business models by up to 7 times more than people who confess having no insight into Industry 4.0. Fig. 09 Opportunities through Industry 4.0 Which opportunities in Industry 4.0 do you see for your company? (in %) Higher Productivity 19 8 19 7 4 1 26 48 16 6 1 6 25 12 5 4 48 Better control of value-added chain 19 6 20 8 14 27 42 19 7 2 25 4 46 Innovative business models 22 2 22 8 2 14 5 5 20 5 2 6 22 14 47 Higher customer loyalty 1 5 20 12 5 14 2 4 20 7 4 8 17 6 5 49 Better coordination of production stages 18 0 22 10 6 14 27 21 10 7 2 6 20 17 6 5 46 Greater added-value 14 2 20 16 5 1 19 40 21 1 5 2 9 18 9 5 48 Diversification Opportunities 1 2 2 14 24 9 21 10 4 2 5 22 12 12 49 Cost Reduction 27 26 17 5 14 1 6 26 16 7 2 5 8 21 17 46 Expansion of the product portfolio 10 26 25 17 8 14 14 5 28 14 6 8 6 45 0 10 20 0 40 50 60 70 80 90 100 Very big Big Medium Small Very small Don t know Expense Reduction Analysts 10

Cost savings in particular play a significant if not very significant role in the funding of Industry 4.0 projects The feeding changes in the production environment, brought by Industry 4.0, will bring far-reaching consequences to businesses and markets. Therefore, companies which quickly push forward the way towards digitalisation and invest in the smart factory have great chances to take a pioneering role in their industry and actively build their future success. Cost savings in particular play a significant if not very significant role in the funding of Industry 4.0 projects. Cost reduction programmes (47%) are, in addition to the reinvestment of profits (48%), the main financial tool to fund the investments required and to provide the crucial resources for changes and advancements to implement Industry 4.0 projects. Companies are thus planning to fund necessary investments from cost reductions by up to 1%. Furthermore, the survey shows that respondents faced with issues they do not understand, feel uncomfortable and identify risks with Industry 4.0. In addition to the technical challenges such as the dependency of function reliability (5%), the interface definition (52%) or the data security (49%), the availability of expertise and staff (47%) are rated as the biggest obstacles. Fig. 10 Risks through Industry 4.0 What risks do you see in Industry 4.0 for your company? (in %) Dependency on well-operating functionality 14 9 24 12 Compatibility of Interfaces 1 9 24 10 1 1 Data protection 17 2 27 10 12 Know-how/Staff 1 8 1 12 Increasing competition 8 29 1 17 12 High investment capital 8 28 6 1 1 Public Infrastructure 7 20 19 7 16 Loss of competitiveness due to lack of investment funds 4 19 28 25 9 0 10 20 0 40 50 60 70 80 90 100 Very big Big Medium Small Very small Don t know Expense Reduction Analysts

About Expense Reduction Analysts Established in 1992, Expense Reduction Analysts is a cost management consultancy focused on delivering improved business performance to clients of all sizes in both the private and public sectors. Operating in over 25 countries, Expense Reduction Analysts' 700 consultants provide deep industry expertise in a wide variety of expense categories, such as waste management, insurance, transport, marketing costs, bank charges, fleet management, telecommunications and many others. Expense Reduction Analysts' clients include thousands of mid-sized companies and many well-known names. To find out more, visit www.expensereduction.com Paolo Massimilla Head of European Marketing +44 172 52 58 56 pmassimilla@expensereduction.com