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Digitise or die - why small companies need to take the leap

Jørn Madslien

(Credit: iStock)
(Credit: iStock)

Europe is well placed to take a lead in the digital revolution, but many small companies are reluctant to make the necessary investment.


When viewed across the River Elbe from the centre of the city, it is easy to understand why the port of Hamburg has been dubbed the gateway to the world. Cruise ships line the pier and are passed by a steady stream of container, ro-ro and cargo vessels. Every year, 9,000 vessels come and go, linking the industrial powerhouse that is Germany to international markets.

The port’s expanse across a 43km² patch of land resembles urban sprawl, which in a sense is exactly what its three cruise terminals, four container terminals and 50 specialised vehicle and cargo facilities amount to, for it is all within the city limits. There are rows and rows of shipping containers stacked three, four, five, six, perhaps even seven high, forming blocks separated by streets where forklift trucks, lorries and freight trains flit like worker ants between trading ships and warehouses. 

The queen ant is a computer, brought to life by Hamburg’s smartPORT project which has transformed the port into a digital interface at the core of Germany’s industrial supply chain. “With smartPORT logistics, we connect everyone involved in the supply chain, enabling them to coordinate their processes with one another in real time,” says Jens Meier, chairman of the management board of Hamburg Port Authority. 

As a result, efficiency has been improved across the port, from digital stock-taking and the operation of infrastructure to reduced energy consumption, coupled with a shift to renewable energy sources.

Similar improvements are seen across the country, indeed across the continent, where a digital transformation is changing the entire industrial landscape. “We stand on the brink of a new industrial revolution,” states the European Commission on its website, “driven by new-generation information technologies such as the Internet of Things, cloud computing, big data and data analytics, robotics and 3D printing.” 

Strength and unity

Each year, 140 million tonnes of cargo is shipped through the port of Hamburg, much of it by more than 100,000 freight train journeys, the rest by countless trucks that head off on the autobahn. Europe’s longest motorway, Bundesautobahn 7, links the port to the Nordic region and to Europe’s centre and south.

The autobahn, an engineering marvel in its own right, offers further insight into Germany’s role as the beating industrial heart of Europe, with its colourful cocktail of sophisticated vehicles and driving skills that typify quintessential German qualities. The rules are clear. The traffic moves efficiently. There is little reliance on swift, impulsive responses. As metaphors, these are qualities that represent both strengths and weaknesses that are evident in Germany’s solid but staid industrial landscape.

Heading south on Bundesautobahn 7, which splits Germany roughly in half and serves as a poignant reminder of a nation once divided, takes us to Hanover, home to the world’s largest industrial fair. It is April 2017, and at Hannover Messe there is strength and unity on display. The message here is clear: Germany, indeed Europe as a whole, is ready for Industry 4.0, the fourth industrial revolution, of which digitisation is a vital component.

By way of examples, Siemens’ and ABB’s sprawling exhibits showcase how digitisation is powering Industry 4.0. There are digital cameras and sensors that monitor light, temperature and vibration, aiding remote maintenance, updates and upgrades, or advanced diagnostics that help operators discover problems with machines long before they actually occur. Visitors are told how project risk can be reduced through virtual commissioning, how service planning and prioritisation can be improved by sophisticated analysis of data, and how automation and autonomy help industrial companies to optimise the use of their assets.

They are told that food and beverage challenges require virtual solutions, that digitisation makes the power grid more efficient, reliable and predictable, and that digital technologies bolster productivity in low-volume, high-mix manufacturing. Mantras on exhibition displays insist that challenges can be managed digitally, that we need more digital collaboration, and that people must be powered for the digital age. 

“We have incredible solutions with very strong return-on-investment potential – 30% savings off energy, 30% extension of the lifetime of motors. We can also reduce the failure rate of products and technology,” says Guido Jouret, chief digital officer at ABB. Harriet Green, general manager at Watson Internet of Things at IBM, which is partnering with ABB on artificial intelligence projects, agrees. Together, people and machines “can go forward in a big way”, she says. 

And there is a “double-digit billion euro market for digitisation”, says Hans-Georg Krabbe, chairman of the board of management of ABB. His estimate comes in somewhat below the one quoted by the European Commission, that “digitisation of products and services can add more than €110 billion of annual revenue in Europe in the next five years”.

Economic impact

Globally, the benefits of digitising horizontal and vertical value chains, as well as building digital product and service portfolios, are even greater, according to consultancy PwC’s 2016 Global Industry 4.0 Survey. The researchers spoke to more than 2,000 people in 26 countries – and identified $493 billion in annual digital revenue gains, alongside $421 billion worth of cost and efficiency gains per year.

Maserati Ghibli luxury cars move along the semi-automated production line at Fiat SpA’s Grugliasco ‘digital’ factory in Turin, Italy

“The digital transformation in industry is creating new opportunities,” says Klaus Helmrich, member of the managing board of Siemens. “New business models and ecosystems are emerging.” That’s true, he adds, for anything from mechanical components to smart, integrated systems; from traditional materials and production to new materials and processes; and from permanently defined variants of products to personalised products.

Digital simulation solutions offer design, production and process optimisation for electric and electronic components and systems, analysis of air flows, heat transfer, fluids and gases, product developments in 3D environments, and also for the behaviour of mechanical and mechatronic systems. 

And, says Helmrich, the opportunities affect the whole spectrum of industries. In the food and beverage, and consumer goods industries, digitisation is making it easier to create individual packaging. Car manufacturers use digital solutions to offer more flexible options. In medicine, drugs formulae tailored to the patient have become viable. And house-builders use digital technologies to build and complete entire homes. No industry will be left untouched, and “at the end of this transformation process, successful industrial companies will become true digital enterprises, with physical products at the core, augmented by digital interfaces and data-based, innovative services”, predicts PwC. “These digital enterprises will work together with customers and suppliers in industrial digital ecosystems.”

Productivity boost

The economic impact could be huge, according to the investment bank Morgan Stanley. “This next (and perhaps final) leg of the digital revolution could reinvigorate global productivity, which has been in slow but steady decline over the past decade,” the bank notes in its report Riding the Long Tail of the Digital Revolution.

But, while the industry giants embrace the potential of digital technologies, many small and medium-sized enterprises (SMEs) across Europe remain on the fence. “At ABB, we are used to thinking in terms of systems – how to bring things together, how to integrate solutions in factories – so for big companies it’s in their genes, it’s in their history,” says Krabbe. “If you’re a small or medium-sized company, you’re probably a product specialist. You’re the perfect guy for tyres, you’re the perfect guy for motor protection devices, but how to integrate, how to look for new applications, is more of a challenge. For them, it’s much harder to get a grip on the new world.”

But they must, says Marco Taisch, professor of advanced and sustainable manufacturing at the Polytechnic University of Milan, who also represents Italy’s economic development ministry. “We need to make them aware that digitisation is not just for large companies,” he says.

Matthias Machnig, state secretary at Germany’s federal ministry for economic affairs and energy, agrees. “The competitiveness of industry depends on digital becoming part of the DNA of companies,” he says. “It’s time for all SMEs to get involved. What they look for is how to use digitisation to become more productive, how to be part of digitised supply chains, how to come up with digitised products, and how to be part of the digital ecosystem.”

Yet many are holding back from investing in the digital transformations of their companies because they lack finance and digital skills. After all, as Morgan Stanley points out, “the transition from legacy processes and technologies to new, more efficient systems can take time and carry significant short-term costs and risks”.

“It has to become cheap,” says Benjamin Gallezot, enterprise deputy director general at the French ministry of the economy, industry and digital affairs. And it has to become easier to finance, he adds, as banks are often loath to lend for digital investment in intangible assets. 

And, says Machnig, “we have to invest massively in qualifications, otherwise we won’t make this transition for years. But the most important thing for SMEs is cooperation. Big companies must support SMEs, or they won’t get what they need from them”.

Need for cooperation

Executives of big companies agree. “We want to generate value together,” says ABB’s Krabbe. “Combining our technology experience with their product experience” will aid cost reduction, bolster supply chains and make manufacturing more efficient, he says.

“The digital transformation requires new forms of cooperation at all levels – between companies, industries and institutions,” agrees Siemens’ Helmrich, who also chairs Germany’s Taskforce Digitalization at B20, a group of business representatives that makes policy recommendations to the G20 countries.

Governments and policy makers also have a role to play, of course. The digitisation of European industry must be encouraged, and the first step must be a clear set of rules and regulations that provide certainty and predictability to industry executives. “This new revolution raises security and data protection questions,” points out Gallezot. “Interoperability for the exchange of data requires standards, and we must make sure regulation balances the need for free flow of data with the rights of stakeholders.”

Wolf-Dieter Lukas, head of department at the German federal ministry of education and research, agrees. “Digitisation is all about data. We need secure platforms to store and share it,” he says. And we need to learn from each other, believes Max Lemke, deputy director of DG Connect, the EC’s Directorate General for Communications Networks, Content and Technology. He stresses the importance of pooling best practice across the European Union and beyond. “Different countries are more advanced in particular areas, so let’s bring it together and agree on shared standards,” he says.

European governments and the European Commission are also offering direct assistance, ranging from billions of euros investment in digital innovation hubs to the employment of a broad range of policy instruments. Gallezot is eager to stress the importance of getting this right. “Digitisation is a must,” he says.

“It is digitise or die.”

This article appears in the print July/August issue of PE

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