2020 outlook: Industrials

The industrial internet is coming, but in stages.

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Key takeaways

  • Advancements in technology, coupled with China's slowing growth and transition toward a consumer-driven economy, are pushing industrial firms to develop their "industrial internet of things" (IIoT) capabilities at a faster pace.
  • But headwinds—such as concerns about data security and insufficiently robust communications networks—will likely constrain the adoption of IIoT technology over the near term.
  • We are working to determine which companies have IIoT opportunities that could drive meaningful improvement in revenue and profit margins, especially companies that are first movers or that generate meaningful economic value for customers.

Virtually every management team we've met with recently has highlighted its company's "digital" and "services" capabilities. We see a couple of factors driving this trend. First is the recent advancements in technology, such as cloud computing and software applications that use artificial intelligence. These advancements have made an "industrial internet of things," or IIoT, a realistic intermediate-term goal for many companies. With IIoT, industrial devices are networked in such a way as to enable systems that can monitor, collect, exchange, and analyze data like never before, delivering valuable new insights in the process. The broader internet-of-things (IoT) market, which includes IIoT, is expected to experience dynamic growth over the next few years.

China's ongoing metamorphosis has accelerated this shift toward IIoT. The Chinese economy has slowed noticeably over the past few years. At the same time, an increasing percentage of China's economy is tied to the consumer-oriented areas of travel and leisure, health care, and financial services, reflecting the dynamic growth of its middle class. Both trends have dampened demand for traditional industrial products and services. Even within the nation's industrial sector, the emphasis has shifted in favor of technology-driven markets. For example, China already has the world's largest robot market, and its government is actively promoting the robotics industry with special funding for research and development.*

Despite these changes, however, headwinds remain that will likely limit the adoption of IIoT technology over the near term. Data security is a particular concern on the minds of IIoT providers and customers, especially as the number of connected devices increases and network infrastructure grows. This concern is prompting providers to proceed cautiously, often in partnership with other companies, to help insure standardization of security technologies.

Progress on the IIoT front will also be constrained by the current state of the art in communications networks. For example, the much-touted 5G wireless-network standard is probably years away from anything approaching full implementation, and the 5G networks currently available can't support advanced IIoT applications such as autonomous driving.

We are working to determine which companies have IIoT opportunities that could deliver meaningful improvement in revenue and profit margins—most likely, those with strong software offerings—versus those that offer products or services likely to suffer from commoditization over time. First movers or companies that are employing business models that generate meaningful economic value for customers have the best chance for success, in our view.

Next steps to consider

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