Industrie 4.0

F
Equity Research 360 Report Full report
Ca pital g oods $Com panyRe gion$ Sector re sea rch360_SR
Capital goods
Europe
04 September 2017
Digital convergence
Whats it all about?
As the pace of convergence between operational and information
technologies accelerates, so does speculation regarding the potential
impact of digitalisation, the fourth industrial revolution, the Industrial
Internet of Things, and Industrie 4.0. However, beyond the hype,
contextualising the impact on future growth and profit opportunities for Main author
the industrial sector is a challenge for investors. As both a creator and William Mackie
Head of Capital Goods
user, the capital goods sector is well-positioned to benefit from these
wmackie@keplercheuvreux.com
emerging technologies. This comprehensive review of key investment +44 (0) 207 621 5183
issues creates a framework to gauge the potential winners and losers
across 65 listed capital goods companies using six assessment criteria. Capital goods research team
Biographies at the end of the report
$William Macki eHea d of Capi tal Goodswmackie@ ke plerc he uv re ux.com+44 (0) 207 621 5183
IMPORTANT. Please refer to the last page of this report for Important disclosures and analyst(s) certifications.
This research is the product of Kepler Cheuvreux, which is authorised and regulated by the Autorit des Marchs
keplercheuvreux.com
Financiers in France. It is distributed by Kepler Cheuvreux and its affiliates in their respective jurisdictions. This research is the product of Kepler Cheuvreux, which is authorised
and regulated by the Autorit des Marchs Financiers in France.
Capital goods
360
in 1 minute
Investment case summary

Digitalisation across industrial markets represents a significant
opportunity and threat for companies across the capital goods sector.
Top-down expert projections point to a 2-3% acceleration in annual
growth, 3-5% productivity gains, and scope for margin expansion. In our
view, the pace and nature of technology adoption will favour global
industrial control and automation companies with deep industrial vertical
expertise and a strong industrial software and service offer. Specialist
players in certain verticals or holdings should also achieve above-trend
growth. We see Siemens, ABB, Schneider Electric as winners among the
large industrials and also consider Hexagon, Cargotec, Duerr and
Datalogic to be well-placed as more focused companies.
Key findings of the report
This report provides a comprehensive introduction to digitalisation across
the capital goods sector while giving investors the means to navigate this
broad landscape and build a framework to assess the constant flow of
news related to Industrie 4.0 and the Industrial Internet of Things while
identifying attractive mid-term investment prospects.
We provide a complete framework to assess how digitalisation is
impacting the capital goods sector and its key customer verticals.
We carry out a review of 65 capital goods companies, based on six
relevant criteria and highlight seven capital goods companies that
we believe are well placed to become long-term winners.
Top-down headline projections for 1-2% mid-term growth, 3-5%
productivity and 10-20% margin expansion create an enticing
investment backdrop. Initial benefits from technology application
are being realised with new service and maintenance models.
We focus on seven industrial segments where future adoption
creates the best opportunities for the capital goods sector;
transportation & logistics, discrete and process automation,
construction, utilities and healthcare sectors.
Three sectors provide the enabling technology: capital goods &
industrial equipment providers, information communication &
equipment players, and IT software & services. Provisions for
nuclear decommissioning costs are considerably underestimated
in companies accounts and in consensus expectations.
The change is likely to be evolutionary not revolutionary in nature
and gradual not abrupt. In our view, the principal beneficiaries are
likely to be large caps such as Siemens, Schneider Electric and ABB.
2 keplercheuvreux.com
Capital goods
Investment case in six charts

Chart 1: Overview of industrial revolutions Chart 2: Adoption driven by three main factors
Source: Kepler Cheuvreux Source: Kepler Cheuvreux
Chart 3: Digitalisation seen rising in all business areas Chart 4: Greatest value potential for factories
80% Today In 5 years 6% 4% 2%

70% Home
60% Offices
17%
50%
40% Factories
30% 32% Retail Environments
20%
10%
Worksites
0% 9% Human
Level of Vertical Horizontal Digital Product Customer
digitisation value-chain value-chain business development access, sales Outside
integration integration models, & channels &
product and engineering marketing Cities
service
portfolio 12%
11% Vehicles
7%
Chart 5: Additional spending seen in six key segments Chart 6: We assess 65 companies based on six key criteria
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Contents
Investment case in six charts 3
Summary 6
A ten-year road to full digitalisation 12
From Internet of Things to Industrial Internet of Things 12
Enablers of this fourth industrial revolution 18
Who are the key players? 22
Industrial sectors at the core of I4.0, attention rising 25
Capital goods companies stand at the heart of evolution 30
Acceleration of investment the first key step 32
Summary and direction 33
Investments driven by financial gain 35

Gauging the digitalisation opportunity 35
Top-down projections point to huge potential 37
Bottom-up analysis confirms cost and growth potential 46
IoT platforms at the heart of change 51

IoT platforms at the heart of realising digital gains with IIoT 51
Review of the leading and key IoT platform providers 60
For IT services sector, IoT not a game-changer 81
Slow-paced disruption underway 83

Focus to shift from asset utilisation to outcome-based offers 83
A three-pronged transition 84
Customers to first demand predictive maintenance 85
Four areas of the business model set for change 87
Outcome economy evolution a long-term phenomenon 88
National initiatives speed up digitalisation 90

Western Europe dominated by German efforts 91
US focused on commercial solutions 95
China driving structured march towards higher added value 96
South Korea: focused on maintaining an edge 98
Japan: set to build on automation strength 98
India promoting adoption of Industrie 4.0 99
Digitalisation trends across industries 100

Process industries and infrastructure in most need 100
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Ranking digitalisation across the sector 105

Summary of findings for the sector 106
Reviewing dimensional results 107
Company section 114

Amazon (AWS) 115
Cisco 118
Emerson Electric 121
Fanuc 125
General Electric 128
Honeywell 134
IBM 138
KUKA 141
Microsoft 147
Omron 151
PTC 155
Rockwell Automation 156
Yaskawa 160
ABB 163
Dassault Systmes 168
Datalogic 170
Drr 175
Hexagon 180
Krones 185
SAP 190
Schneider Electric 192
Siemens 198
Research ratings and important disclosures 208

Legal and disclosure information Error! Bookmark not defined.
Capital goods
Summary
Industrial focus on the topic of digitalisation has steadily intensified over the last
five years as the maturing of technology and its application promises an exciting
investment cocktail of higher growth, productivity gains and enhanced
competitive position. Yet the multiple corporate messages, technical jargon and
fuzzy market definitions pose a significant challenge to accurately assessing the
investment opportunity. Here, we provide a comprehensive introduction to the
subject that aims to provide a solid foundation for future detailed investment
analysis.
Over the next three years, the industrial verticals set to provide the greatest
growth potential for providers of enabling technologies are within the process
and discrete industry sectors, logistics, alongside utilities, transportation and
cities. Suppliers of automation, controls, industrial software, IoT platforms,
analytics and enhanced digital services will experience the most rapid growth,
supporting higher valuations.
We expect the long-term winners to be those best able to leverage insights from
specific industrial verticals, using the latest technology and software to deliver
productivity-driven cost savings, operational enhancement and improved
flexibility. Among the larger companies in our coverage universe, Siemens, ABB,
and Schneider appear to be the best-placed to win, drawing on their breadth and
depth of capability, capital strength and far-reaching partnerships in the
software and technology sectors. Among the smaller capital goods companies
with more focused portfolios, we flag Hexagon, Cargotec, Duerr, Konecranes,
and Datalogic.
Intensified focus on digitalisation over last six years

Over the last six years, rapid deflation in costs for sensors, interconnectivity of
devices and cloud-based data storage combined with rising software and data
analytics capabilities has led to an acceleration in digitalisation across the industrial
sector, which is relevant for capital goods companies and their investors.
Adoption has been encouraged and promoted by a number of national and
corporate media drives which notably started in 2011 when the concept of Industrie
4.0 (I4.0) was first introduced at the Hannover Messe, the same year GE began
promoting the Industrial Internet of Things (IIoT). While the terms are often used
alongside each other, we aim to clarify the clear differences. Industrie 4.0 spans all
aspects of industrial value chains, while the Industrial Internet of Things centres on
the optimisation of asset utilisation through the connection of objects, data
gathering, and analysis.
Building an investment framework is challenging for investors

As investors survey the landscape today, it seems that almost every capital goods
company dedicates a lot of commentary to the far-reaching concepts of IIoT and
I4.0, yet for investors it is hard to contextualise this information and create an
investment framework structured around the potential market size, competitive
Capital goods
landscape, growth or eventual impact on profit and earnings. Moreover, we are

seeing an increasing convergence between operational and informational
technologies into a cyber-physical landscape which in turn is blurring competitive
boundaries, thereby increasing complexity for investors aiming to delve deeper and
decipher the actual prospects for this technology beyond corporate
communications.
We provide a comprehensive introduction to the subject

With this report, we aim to provide a comprehensive introduction to the subject of
how adoption of new technologies, software and business processes within an
industrial setting are affecting business and investment prospects in the capital
goods sector as this fourth industrial revolution unfolds. Out of necessity, much of
the report is descriptive and provides a framework to contextualise themes,
concepts, and terminology, including I4.0, IIoT, IoT platforms, data analytics, and
predictive maintenance.
After providing an overview of the global context for these technology-related
trends, we go on to discuss the relevant themes for investors, conduct a review of 65
capital goods companies within our coverage, and highlight seven capital goods
stocks we think are well-placed to be long-term winners as digitalisation unfolds. We
expect the report to provide a solid foundation for future investment analysis across
the capital goods sector.
Seven industrial segments to gain the most

The intensity of media noise related to the so-called fourth industrial revolution, or
second machine age has increased substantially over the last three years, driven by
German, US, and Chinese political and industrial bodies, global industrial
corporations such as GE, Siemens and SAP, discussion of the theme during the
World Economic Forum, and almost every global consultancy firm establishing and
promoting a practice to drive technology selection, incorporation and corporate
transition.
As technologies, business processes and the capabilities of human capital mature,
hopes are high that a number of industrial sectors will experience a structural step-
up in revenue growth, productivity and profitability. We identify transportation &
logistics, discrete & process automation, construction, utility and healthcare as the
best-positioned sectors to benefit. However, the conservative nature of corporate
investment and speed of technological development mean that for capital goods
companies, the impacts on business development are likely to be more evolutionary
than revolutionary in nature.
Three sectors provide enabling technology

Within the industrial environment, we find that the fourth industrial revolution is
being shaped globally by three sectors: 1) capital goods and industrial equipment
providers; 2) information, communication, and technology players; and 3) IT
software and services companies. We see industrial customers purchasing products,
software, systems and services from each of these sectors and prioritising based on
the potential near- and mid-term productivity, cost and flexibility benefits.
Capital goods
Consequently, as digitalisation moves up the priority list of corporate agendas, we

believe the early winners will be in three categories: 1) suppliers of connected
sensors, automation and controls; 2) providers of design, simulation, automation,
control and analytics software; and 3) services business delivering increased asset
utilisation or production efficiencies.
On the flipside, improved asset utilisation and production efficiency may reduce
classic demand for machinery and capital equipment. In part, the differentiation
between these future trends is reflected in Siemenss mid-term annual growth
expectations for industrial software of 8%, automation of 5% and electrification of
2.5%, or GEs promise of a USD90bn saving in the oil and gas industry through a 1%
reduction in capital investment needs.
Enticing projections for growth, productivity and margin expansion

Enticing headline growth potential is captured in Gartners projection for the
number of industrial connected devices to rise from 2.5bn to 7.5bn between 2016
and 2020, while GE estimates that nearly 50% of the global economy will be
impacted by IIoT. The Boston Consulting Group and Accenture project 1-2% annual
additions to national GDP through I4.0 adoption, which could be around three times
higher for the industrial sector.
When combined with top-down projections for productivity improvements of 3-5%
annually over 5-10 years through the full incorporation of I4.0 ideas, the impact on
industrial profitability could amount to a 10-20%+ improvement in operating
margins for the best-in-class players. To achieve these potential gains, industrial
investment needs to increase. Surveys by Roland Berger project a 20-30% CAGR for
investment in IIoT and I4.0 enabling technologies with 75% spent on software and
services and 25% on hardware. This suggests that the main benefit for capital goods
companies will be through the adoption of technology, and promotion to customers,
rather than sales of hardware.
Service and maintenance models deliver shortest payback, best growth

The level of demand growth for I4.0 and IIoT hardware and software over the next
3-5 years will hinge on the length of payback times and the speed at which economic
advantages can be realised. We see the fastest payback from the potential to
improve asset utilisation and control, which has prompted spending in the areas of
predictive maintenance, remote asset monitoring and control.
We see the greatest opportunities in the process industries (oil & gas, chemicals,
petrochemicals and mining), cities, mobility, transport, logistics, healthcare and
utilities. Remote monitoring sensors, data capture and communication, aggregation
on IoT platforms and data analysis are the key enabling technologies. The concepts
linked to Industrie 4.0 (I4.0) are more focused on the full application of digital
technologies across the horizontal and vertical value chains linked to product
design, development, production and supply chain to allow self-optimisation of
design and production.
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We believe potential gains in productivity and flexibility will take longer to

materialise and companies are more hesitant to invest until systems and
technologies have matured, standardisation is more prevalent, and the potential
gains are proven by the trial implementations underway. Implementation of I4.0 has
the greatest potential benefit for the discrete and hybrid manufacturing industries
including automotive, electronics, food & beverage, and pharmaceuticals.
Evolution not revolution ahead: slow-paced disruption

While we see no Kodak-like event arising from disruption in the sector, we do expect
a gradual shift toward outcome-based business models, facilitated by closer service-
based relations between suppliers and customers. Early signs of this shift are
evident as software as a service takes preference over license sales. Later
developments will be towards product as a service or infrastructure as a service.
These shifts ensure that the rebalancing of structural growth away from traditional
capital goods hardware toward complex electronics, automation and software and
services will continue over the next five to ten years.
We expect management across the capital goods sector to increase capital
allocation to this trend, aligning via M&A (Siemens acquisition of Mentor Graphics
and partnership with Bentley Systems, GEs purchase of ServiceMax and Schneider
Electrics approach to AVEVA), higher internal capital investment, a step-up in R&D,
and rapid expansion of partnerships and joint ventures with software and
technologies companies to achieve combined leadership across all new technology
areas. On the latter point, GE, Siemens, Schneider and ABB have all been quick to
extend partnership agreements with companies including Microsoft, IBM, PTC, and
Cisco to expand the exposure of their automation, software and service offers.
Winners for investors: mainly the large companies

As the fourth industrial revolution progresses, the winners in the capital goods
sector will likely be those companies that are able to fully utilise specialist
knowledge and operational insights of particular industrial verticals to provide new
revenue opportunities and productivity gains. Scale, size and capital availability will
be key advantages, which will ensure Siemens, General Electric, Bosch and
Schneider Electric are well-positioned to emerge as clear winners, as they combine
deep industrial knowledge with internal software development and partnerships
across the software and services sector.
Smaller, more focused, companies with specific vertical knowledge of products and
service strength also remain well-positioned winners, in our view. They include
Hexagon, Cargotec, Duerr, Konecranes, Datalogic, and TKH Group. Given the
critical importance of the Internet of Things (IoT) Platforms, tailored analytical
software and enhanced automation and control, a number of smaller venture capital
funded start-ups are also set to experience rapid growth in conjunction with
specialist software and services companies
Table 1: Industrie 4.0 Valuation table
10
Mkt cap TP Rating EV/Sales EV/EBITDA PER Industrie 4.0 Classification

Stock EURm 2017E 2018E 2017E 2018E 2017E 2018E Survey Comments
keplercheuvreux.com
Grade
Siemens 88,642 125.0 Hold 1.23 1.20 9.01 8.55 13.00 13.19 4.13 Invested c. EUR10bn in M&A to develop industrial
software activity
Software targets Digital Design, Engineering,
Manufacturing, Service and Support serving Discrete and
Hybrid Manufacturing Industries as well as Process
Automation Industries.
Digitalisation is at the heart of the company's strategy
both internally and through added services and products
Capital goods
for customers.
EUR8bn invested over 10 years in R&D in its Industrial
Automation and Software Business
It is one of the fastest growing businesses of the portfolio
in conjunction with digital services. Pure players trade at
higher multiples"
Digital strategy based on the appointment of a Chief
Digital Officer and the launch of ABB Ability (Q4 2016)
through the unification of the company's portfolio of
connected products and systems
We expect the firm to develop its strategy around its
installed base of connected objects supported by a wider
ABB 41,020 25.5 Hold 1.61 1.54 10.80 9.83 18.12 16.12 3.73 array of partnerships, along lines of IIoT.
Long-standing technology and market leadership will
prove crucial to provide digital solutions to optimise asset
utilization and production efficiency.
To date, ABB has provided limited detail on Capital
commitments to expand capability."
R&D targeted to increase capacity to connect products,
control with secure software and utilised operational
data to enhance asset efficiency and energyu use
Ecostruxure platform: a stack of devices, edge control
and apps that can be tailored for each end-market
application.
Ecostruxure connects >1bn devices. The company has a
Schneider Electric 37,384 77.0 Buy 1.83 1.74 11.09 10.10 16.56 14.63 4.00 long track record of developing leading capabilities. It is a
leader in multiple Industrial software areas. Digital
growth in the Industrial business should be supported by
Invensys acquisition (2014).
The open-source structure of the platform enables the
company to benefit from pure players applications to
further develop the capacity and strength of its multiple
applications."
Source: Kepler Cheuvreux
Table 2: Industrie 4.0 Valuation table (continued)
11
Mkt cap TP Rating EV/Sales EV/EBITDA PER Industrie 4.0 Classification

Stock EURm 2017E 2018E 2017E 2018E 2017E 2018E Survey Comments
Grade
keplercheuvreux.com
" Best grade of our IIoT Analyst Survey. Strengths were

seen in each dimension showing the company's
leadership on the topic.
R&D represents 12% of firm's revenues, it is central to
the firm's digital strategy.
Hexagon 14,670 454.0 Buy 4.93 4.64 15.28 13.60 23.43 21.16 4.53 IIoT Strategy is based on 2 pillars: 1) automation of
manufacturing operations, 2) automation of information
sharing; both are based on an Industrial software.
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Future investments expected in connectivity and
digitalisation to reach the company's target of synergies
between its 3 main focuses: inspection, results and design. "
" Digital strategy well implemented under the flagship
""Digital@Drr"" and based on 4 pillars: Smart products,
Smart Processes, Smart Services and Smart Factories.
Leader in its field and technologically advanced with its
Drr 3,351 117.0 Buy 0.83 0.76 8.05 7.03 16.99 15.20 3.73 elaborated software development strategy and
automation levels.
The company's leaner processes and client-focused
applications has helped it expand revenues and lower
production costs for its customers "
" Developed SitePilot software solutions regrouping the
group's MES, WMS, and PCS solutions. Solutions target
exclusively the F&B Industry.
Development of predictive maintenance tools through
Krones Asset Management
Krones 3,282 101.0 Hold 0.85 0.80 8.50 7.76 18.24 16.90 3.47 Further down the line, Krones can expect better insight in
its customers' operations and derive operations
optimization from it.
New revenue streams are also to be expected through the
use of its data centres and consulting and business
services."
" Datalogic is an Industrie 4.0 enabler: it delivers
connected scanners, sensors and markers that enable
traceability along the value chain as well as inspection for
better production precision.
9% of revenues are invested in R&D to support
Datalogic 1,559 30.0 Buy 2.47 2.27 14.41 12.73 23.48 20.53 2.87 development of new connected products and solutions.
Competition from Keyence, Zebra, Sick, Honeywell, and
Cognex will prove the company's strength along its
different business lines during the global digital
transformation."
Capital Goods Mean 1.7 1.5 11.3 9.8 22.1 18.8 2.4
Capital Goods Median 1.3 1.2 10.6 9.0 18.8 16.5 2.1
Capital goods
A ten-year road to full digitalisation

According to governments, industry leaders, academics and consultants, we
are witnessing the emergence of a fourth industrial revolution that promises
to bring new productivity gains for countries and corporations, and a
competitive advantage to early adopters. At its heart, this revolution is being
driven by the convergence of information and operational technologies
enabled by the proliferation of smart sensors, the widespread use of wireless
communication and internet technology, the commoditisation of data
storage, and the rise of smart data analytics to provide efficiency insights
across industrial value chains.
This revolution promises closer customer ties, reduced time to market for
products, mass customisation in manufacturing, and new revenue growth
opportunities. It also carries the threat of lost business for laggards, shifts in the
sources of value creation, disruption of business models, and the need for higher
investments in technology and people. Capital goods companies stand at the
centre of this disruptive evolution, which will support attractive demand growth
for industrial software and services, albeit at the expense of traditional
operational technologies. In this section, we provide an extensive review of key
issues linked to digitalisation.
From Internet of Things to Industrial Internet of Things

Nearly 25 years have passed since David Gelernter published Mirror worlds (which
imagined a digital world able to capture a physical reality) and 18 years since Kevin
Ashton coined the term the internet of things (IoT), a concept that is driving the
changes underway across the industry sector today. IoT is defined as the network of
physical objects that contain embedded technology to communicate and sense or
interact with their internal states or external environment.
Supported by the IoT, Gelernters dream is rapidly becoming reality. Across multiple
industrial verticals, the mass proliferation of sensors able to capture and transmit
gigabytes of data to cloud-located databases, where intelligent analysis provides
meaningful insights, offers the prospect of a step change in productivity throughout
industrial value chains. Supported by a chorus of political, academic and corporate
marketing and capital allocation through M&A, the topic of IoT as applied to the
industrial sector is at the top of many C-Suite investors agendas, as it creates a
shifting investment landscape of opportunity.
IoT is a well-developed concept now, especially in B2C-related industries. With
advancements in data science, big data and application and analytics software
coupled with declining data storage costs and increased connectivity of objects, the
potential value for industrial companies can only increase, driven by potential
productivity gains.
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It is already common in residential or office settings to see connected heating,

ventilation, air conditioning or security systems developed by a multitude of
companies (from telecom operators to shutter specialists) supported by tech start-
ups. Such applications enhance energy use and/or provide improved functionality.
Today, it is possible to wake up to a diode mimicking the sun rising while the shower
is warming up and an espresso is prepared and waiting, accompanied by results from
a wearable personal healthcare monitoring device. Moreover, power use can be
monitored and managed by algorithm-based applications that aggregate, optimise,
and distribute power use to utilities providers. Against the backdrop of increased
renewable generation, the consequences of this energy management are significant
at the single house level and have the potential to impact utility revenue models.
Changes are already occurring and utilities such as RWE are preparing to change
and develop new revenue streams through investments in start-ups, such as Innogy
SE.
Moreover, the development of wearable devices, a subcategory of IoT, is rising
exponentially, reflected in the success of LVMHs recent launch of a high-value
smart watch that generated sales of a thousand units on its first day. With market
competitors ranging from Fitbit to LVMH through Samsung and Apple, the use of
connected devices has been adopted by many consumers and software platforms
and applications have proliferated while competitive boundaries have shifted.
One of the many examples of these shifts is the recent acquisition of Withings (a
health tech and wearables company) by networking giant Nokia, who invested in the
start-up to integrate new technologies into its product lines and revenue streams.
Wearable devices produced by the French company include its best-selling watches
as well as connected scales and air quality monitors, all connected to the companys
Health Mate App, a health tracker. Through the integration of this health and tech
company, Nokia is shifting its scope from a telecom company to a broader business
delivering connected products and solutions to both consumers and businesses.
Beyond personal health and home, IoT is becoming ubiquitous in the truck and car
industries, most notably in relation to fleet management and navigation applications.
More sophisticated unions of technology are emerging, with Tesla, Google, and
Ubers development of driverless cars or enablers, along with actions by existing car
manufacturers such as Volvo.
The rapid increase in the number of sensors embedded in vehicles able to detect
movements, lines, road signs, cars braking or acceleration, and engine performance
along with the GPS and route guidance systems, is expanding vehicle functionality,
including interconnectivity between vehicles to optimise their movement.
Moreover, further technological development linked to the IoT for vehicles could
enable predictive maintenance rather than defined interval servicing and road
worthiness checks. Even the insurance industry may need to adapt to the availability
of dynamic driver data when determining the risk profile of drivers, while rental car
companies could use sensors to maintain databases of car usage and customer
grading, allowing them to better price their fleet sales.
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After nearly 20 years of development, the IoT now offers unimaginable amounts of
not only collected but processed data to its users to understand any specific
environment, from vehicles, cities, health, retail, offices, agricultural machines to
homes. While the popular view is to regard the IoT as a mass-market, consumer-
driven opportunity, the business segment of the market is actually expected to be
much larger, with applications set to enhance business performance in every sector.
Given our focus on the capital goods sector, we review the impact of these
technological changes on the industrial sector, an opportunity that we expect to
eventually eclipse the consumer IoT. While the penetration of digital technologies
accompanied by the integration of operational and Informational technologies has
been underway for nearly 30 years now, its significance has now been elevated by
the heightened interest surrounding potential growth and productivity appearing on
the Gartner hype curve over the last couple of years.
Chart 7: Adoption of IoT began to accelerate ten years ago
Moving towards the Industrial Internet of things

The IoT reached a milestone in 2008/09, when more things than humans were
considered connected to the internet, and in 2011 when the launch of the IPV6
protocol allowed for enough scope to assign IP addresses to every atom on the
planet a hundred times over. With this explosion in potential IP addresses, Cisco,
IBM, and Ericsson launched far-reaching marketing and educational initiatives. In
2012, GE claims to have coined the term Industrial Internet of Things (IIoT), a year
after IoT appeared on Garters hype cycle for emerging technologies. At the same
time, the first references to Industrie 4.0 (I4.0) by the German Federal Ministry of
Education and Research appeared, and the concept was crystallised in 2012 and
2013 with a multitude of German government initiatives.
Capital goods
The IIoT can be defined as the application of IoT in the industrial sectors including
energy, utilities, oil & gas, metals & mining, aviation, logistics and other
manufacturing end-markets. While IIoT covers a huge variety of opportunities, its
application is currently mostly focused on the optimisation of industrial operations,
enhanced automation and maintenance, and acts to accelerate the convergence of
information and operational technologies.
The rise of the IoT has been enabled by the development of technologies such as: 1)
cloud computing and the decline in IT costs for data storage; 2) advances in big data
analytics to help improve processes and create specific optimisations from the
masses of data gathered by sensors; and 3) machine learning, which allows machines
to learn by themselves to attain a certain degree of artificial intelligence (AI), thus
enabling predictive analytics (the analysis of past data to identify the likelihood of
future outcomes such as maintenance needs).
As the uses of IIoT develop, disruption is expected with the acceleration of
predictive maintenance service models and the selling of more customer solutions.
The concept of Industrie 4.0 (I4.0) uses all functions derived from IoT, data capture
and analysis, industrial software and smart manufacturing technologies and
specifically applies them to the manufacturing environment to optimise all aspects
of a products value chain and builds on all prior automation and IT capabilities. We
see it as a far more comprehensive and complex application of technologies and
corporate relations, but focused on manufacturing.
Over the past five years, the amount of hype surrounding IIoT and I4.0 has gathered
momentum, while the pace of implementation is just getting started. Expectations
for potential revenue growth and productivity gains appear high, lifted by literature
from global management consultancies including BCG and AT Kearney. While it is
clear that there will be benefits from digitalisation for industrial companies, these
benefits are likely to be evolutionary rather than revolutionary, and ICT companies
are set to tap greater revenue growth opportunities than capital goods companies.
Industrial companies adopting new digital-based operating methods have more to
gain in the form of accelerating productivity improvements. However, as we will see
in the following sections, IoT by itself is unlikely to boost IT software and services
companies top-line growth in the mid-term, although we are convinced that it will
become one of the key components of the global shift towards digitalisation that we
are already seeing.
Within the European capital goods sector, interest in the IoT emerged in 2011, when
Henning Kagermann (co-founder of SAP and President of Acatech) along with fellow
German politicians began championing Industrie 4.0 and marketed it at the
Hannover Messe of the same year. This PR and education movement aimed to
promote key German interests in the industrial and IT sectors, thereby sustaining
German leadership in key industrial sectors over the long term.
The plan was then adopted by the German government in 2013, and promoted by
industry leaders such as Bosch, SAP, Deutsche Telecom, and Siemens. Following the
German lead, the EU and many European nations launched their own movements to
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promote industrial digitalisation, extending the narrative to the reindustrialisation

of national industries. Other initiatives across Europe include political action in
France and Italy, with the launching and promotion respectively of Industrie du Futur
and Fabbrica del Futuro, and action is also underway in Spain, the UK, Sweden, and
other EU countries.
While Europes efforts to enhance awareness among the industrial base have been
heavily supported by the governmental agenda in the US, development has been led
by more commercial initiatives. GE has pledged to become a top-ten software
company with revenues of over USD15bn from programmes and services by 2020,
emphasising a commitment to IIoT that began with a focus on enhancing internal
performance. US interests were harnessed by the formation of the Industrial
Internet Consortium (IIC) in 2014, founded by AT&T, Cisco, GE, IBM, and Intel.
Chinas launch of its ten-year plan Made in China 2025 in 2015 also captures the
drive towards the increased use of technology in the Industrial sector. Building on
many ideas and concepts from Germany and the US, the plan promotes
technological advancement across ten target sectors. The plan provides financial
and political support to increase the use of smart factories, automation, robotics,
and ICT in a stated policy to raise Chinas global competitiveness in advanced
manufacturing.
How I4.0 is cast as a revolution

While the concepts of the Industrial Internet of Things (IIoT) and Industrie 4.0 (I4.0)
are merging, we see several clear differences. IIoT evolves from the notion of
connecting industrial objects to create value from sensing, data collection and
analysis, and is best applicable to equipment monitoring, predictive maintenance,
and patient monitoring. In contrast, Industrie 4.0 aims to harness the notion of a
fourth industrial revolution, also expounded at the WEO and in Klaus Swabs recent
book.
At the heart of I4.0 is the concept of a smart factory that brings machines, objects
and humans together in perfect harmony along the value stream to self-organise in
the most efficient manner, allowing production systems to eliminate waste while
maximising quality and flexibility. Today, the concepts of this almost utopian vision
remain quite theoretical, as many of the enabling technologies are available but
there are limiting factors associated with human resources, management practices,
and the penetration of technologies across supply chains for individual companies
and industries.
Since its introduction at the Hannover Messe in 2011, Industrie 4.0 has been adopted
as a generic term to address the digitalisation of the sector. It is now common to see
companies mentioning their work and development towards Industrie 4.0 in their
presentations. Indeed 4.0 is being linked to development in sectors including
logistics, chemicals, farming, and healthcare to express a targeted implementation of
integrated digitalisation across industries.
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While the concept has reached the ears of the entire industrial and investment
world, after six years of promotion, it is worth asking whether the interest in the
terminology is not far greater than the actual value potential, especially because a
lot of the progress is based on technologies that have been under development for
decades.
From the outside, while the digitalisation of the entire value chain may look like a
game-changer in terms of productivity costs and new revenue generation, much of
what is promoted as a revolution appears more as a natural evolution and the union,
or convergence, of IT and OT that has been predicted and underway for a long time
could be seen as analogous to the former convergence of mechanical and electrical
technologies. Indeed, Siemens started thinking of this future, acting and allocating
capital to build it in 2007 when it acquired UGS, its first major pure industrial
software acquisition.
Those corporations or countries able to develop and harness the necessary skills and
technologies to optimise value chains related to product creation, production
management and system operation are set to secure a competitive advantage for all
respective stakeholders.
Companies across numerous industrial disciplines have the opportunity to generate
value by creating the necessary tools to enable this fourth industrial revolution and
utilising the multiple technical disciplines to enhance their own productivity,
efficiency, and quality. As we explore in this report, leading global industrial
equipment makers, information & communication suppliers, and data collection and
analytics companies are shaping change in conjunction with national policymakers
and academic bodies, but small innovative specialists are also carving out fast-
growing profitable niches.
Chart 8: The various stages of industrial revolution
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The chart above represents how the unfolding revolution follows and builds on
technologies and processes developed with the first, second, and third industrial
revolutions.
The first industrial revolution saw mechanisation replace manual production, most
notably transforming the textile industry and giving birth to factories, delivering a
22x increase in productivity between 1770 and 1860. The period of rapid
transformation lasted 60-80 years.
The second industrial revolution involved widespread electrification, the
development of advanced logistics and production processes, and rapid
industrialisation, taking place mainly in the UK, Germany, and the US. This was
supported by the evolution of a number of technologies including the Bessemer
process, electrification, the oil industry, the internal combustion engine, and telecom
equipment, and matured around 1915.
A third revolution began around 1970 and can be attributed to the development of
information and communication technologies (ICT). This was led by US companies
including Intel, IBM, and Microsoft, and transformed business processes related to
information management.
The unfolding fourth revolution combines IT and OT systems in a seamless cyber-
physical world, unleashing a wave of productivity and growth.
Enablers of this fourth industrial revolution
Today, this emerging fourth industrial revolution is defined as the merging of
operational (OT) and informational technologies (IT) to form a complex cyber-
physical system (CPS) that marries the digital virtual world with the real world in
multiple industrial situations. The application of these digital twins in production,
systems, and projects from conception to creation and operation offer a multitude of
ways to improve the value process for companies, through improved efficiency in
processes such as product design, manufacture, supply chain management,
production management, after-sales service, and support.
Current shifts in production processes are based on a multitude of key components,
technologies, and systems that enable the development of data usage at all levels of
the company. These enablers are provided by companies from a number of sectors
including mechanical and electrical equipment makers, information and
communication companies, and data storage and analytics providers. The following
chart gives an overview of all the enablers, shown horizontally, and the vertical
elements of the classic control stack in a production environment.
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Chart 9: An overview of Industrie 4.0
Industrie 4.0 (I4.0) incorporates the digitalisation of the entire horizontal value
chain spanning the integration of suppliers and logistics providers through to the
production floor and out to warehouses and customers. It also includes vertical
integration within a company from strategic management through to data and
control and to the shop floor. Each element of the value chain is being transformed
with the introduction or evolution of IT in its field. Following the numbered system
in the chart above, we review how each element of the value chain has the
opportunities to change and evolve.
1. Industrie 4.0 (I4.0): The full integration of digital and physical data
throughout production value chains to realise increased productivity,
efficiency, flexibility and quality while facilitating better strategic and
operational decision making and closer supplier and customer relations,
which in turn leads to the prospect of new revenue-generating business
models. Some companies will be able to integrate both results while others
will only manage to be effective in one of the two - either revenues or higher
margins.
2. Enablers: Through the use of IoT platforms, which connect sensors and
devices to the cloud, ensuring cybersecurity, managing IoT devices,
analysing the data collected and allowing the building of ad-hoc applications,
companies are going to change the way they collect and read data, making
the process of collection faster and the analysis more useful with a plethora
of applications already available on the market. Declining costs, the
increased prevalence, and higher technical capability for a range of physical
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and digital systems, are enabling the realisation of the fourth industrial
revolution as the penetration of the enabling technologies across industries
increases.
3. Internet of Things/Connected devices: IoT is a key component of the IIoT
and Industrie 4.0. It refers to all devices, sensors, connection devices
(smartphones and tablets), computers and smart devices (e.g. watches) that
collect data and use wireless and ethernet connections. IoT is having an
impact on all sectors of the economy spanning cars, health, security,
consumer, energy, trade, aerospace and banking, to name only a few.
Machine-to-Machine communications (M2M) are also crucial in the
development of the Internet of Things at the industrial level. They enable the
direct transmission of data between elements of the production floor and
the concept of mass customisation, the main driver of the fourth industrial
revolution. Through the use of sensors and bar codes, communication and
data collection are made easier and faster over the entire value chain. The
surge in the use of smart connected devices is being driven and supported by
continued increases in microprocessor power and declining processor
prices.
4. Cloud services: They allow the outsourcing of data management onto
remote servers. Cloud infrastructure offers larger sizes of storage and
better monitoring and maintenance compared to in-house servers. They also
allow the connection of all the parts of a company to a same closed system
where top management can have access to production floor data in real
time. Data can be stored and analysed to improve performance of
equipment and manufacturing systems. Cloud services are being created by
global technology leaders such as Amazon, Microsoft, and IBM among
others, pure IT players such as SAP, PTC and Atos, and dedicated industrial
providers (e.g. Siemens, GE).
5. Robotics and Automation: These technologies form the backbone enabling
the physical part of the industrial transformation across 4IR. Robotics is
widely used in car manufacturing, but adoption rates are accelerating
throughout the entire industry. Sensors, software and services attached to
robotics and automated machines represent a significant future
opportunity.
6. Data analytics: The advancement of data analytics from the volumes of data
produced by the industrial complex is key to reaping all benefits of smart
factories. Only a small part of data produced is currently being used to
create valuable corporate outcomes, but this is set to increase. More and
more IT players are launching IoT platforms that enable the management of
connections with sensors and devices, the analysis of data collected and
stored in the cloud, as well the building of ad-hoc applications dedicated to
specific IoT-related business needs, all within in a secure environment.
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Chart 10: Key I4.0 enablers
Source: BCG
7. Strategic management: Management to gain better access to information,

supported by connected devices and machines and due to data from
customers and suppliers, which will help to achieve personalised
manufacturing (known as batch size one). Increased visibility across the
entire value chain should enhance decision-making.
8. Operational management: Increased depth of understanding and control
provided by high visibility of the local manufacturing environment and
demands up and down the value chain will provide local management with
greater autonomy. The visibility offered by the new amounts of data also
permits the evolution of technologies such as predictive maintenance and
remote monitoring. The combination of the two enables the user and
producer of the machine to anticipate failures and repairs by predicting
them. Thus, the operator and machine seller can set a fixed time and date to
carry out the needed changes. This system allows for a higher productivity
rate per machine and a decrease in global downtime for the company.
9. Data and the control layer: The local control layer holds a high level of
embedded processing and communication capabilities that provide
intelligent connection across the value chains. Data collected from the
production lines can be scheduled for local processing and analysis or
directed to the cloud for central processing. This data processing can be
carried out with the use of fog computing (also known as processing at the
edge of the network). Fog computing enables communication systems to
operate directly between machines and connectors at the production level
rather than being processed in the cloud. This accounts for a lower amount
of data travelling in the cloud and reduced latency: only the relevant data
collected is sent to the cloud for further analysis.
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10. The smart production floor: The production shop floor will be transformed
as machines become more intelligent and operators need to develop new
skills. Shifting requirements in terms of workforce, skillsets and human
capacity are a real challenge for the industry. Production systems target
increased productivity and flexibility, with the ultimate aim of achieving
personalised manufacturing (i.e. the cost-effective batch size one output).
11. Suppliers: Through horizontal integration, technology enables closer
collaboration between suppliers and production to allow increased working
capital efficiency, improved logistics, and faster throughput. Closer
collaboration with suppliers gives companies a greater knowledge of
delivery dates and preparation statuses that can then be refined in future
projects.
12. Customers: The shift towards 4IR places the customer at the heart of the
production process. It aims to offer the customer higher quality, greater
choice and customisation, and faster delivery, allowing customer choices to
be reflected back through the value chain at much greater speed. The
customer, with the digitalisation of the space, has access to more
information including data related to order status.
13. Feedback: New data offers new efficiency information at the shop and
data/control levels. Through ERPs and PLMs, access to deadlines is clearer
and more precise which is critical to enhance strategic and operational
decision-making. Feedback data is derived from suppliers, customers,
production lines, and internal operations.
14. Planning: Full vertical and horizontal integration allows for the optimisation
of business decisions at every level and an increased amount of automation,
such as automatic supplier ordering scheduled maintenance customer
demand aggregation, and dispatch.
15. Vertical integration: Full vertical integration allows for faster decision-
making, closer proximity between upper management and production, and
greater autonomy for local decision-making.
16. Horizontal integration: Increased connectivity means better reaction times
and readiness among suppliers, factories and customers and among product
designers, production engineers and aftersales support teams.
Who are the key players?

A perfect transformation to the idealised next level in manufacturing demands the
complex integration of multiple operational technologies: data-collecting sensors,
data communication and interpretation capabilities, decision-making, and control
signals to automate equipment and supply chains. It also requires a strong IT
structure including fibre optic cables, routers, switches, and secure mobile
communication technology. Achieving the smooth operation of a complex cyber-
physical system will require high levels of corporate commitment and capital.
Software and hardware providers in this system include traditional industrial
companies, Information and Communication Technology companies (ICTs),
including established technology companies and, more recently, data storage and
data analytics companies. Start-ups are also emerging as innovation accelerators.
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Differences and barriers between traditional industrial companies, service providers

and technology companies are starting to blur as key players are trying to gain as
much market share as they can, while start-ups are creating new business models. In
this context, many of the capital goods and IT software & services companies under
our coverage play a special role, as they are either suppliers or users (or both) of
Industrie 4.0 technologies, while they are also set to benefit both from increasing
revenues and decreasing costs (productivity gains) through investment.
On the IT side, software companies such as SAP (with its Leonardo digital innovation
systems) and Dassault Systmes are bringing valuable solutions to the market, while
service companies like Cap Gemini and Atos are offering their integration skills.
Chart 11: Corporate interrelationships supporting development of Industrie 4.0
1. Established manufacturers: Companies set to experience the greatest

impact from Industrie 4.0 are central to our stock coverage and include
Siemens, ABB, Schneider, General Electric, Emerson, Rockwell Automation,
and Mitsubishi Electric. They all offer products and services to enable their
customers to adopt I4.0 processes and stand to benefit from application
within their own plants and factories. Smaller players offering more niche
products and systems are also set to benefit.
Our coverage includes companies in the following sectors: home technology
(Legrand, Rexel, Osram Licht), healthcare application (Philips, Siemens &
GE), robotics (KUKA, ABB, Fanuc and Duerr), energy and renewables
(Vestas, Gamesa, Schneider, ABB, Siemens), transport and specialist
manufacture (Drr, Alstom, ABB, Siemens), and mining equipment (Atlas
Copco, Sandvik, Rockwell Automation, ABB), etc. In fact, I4.0 covers such a
broad scope of themes and end-markets that almost all of our coverage is set
to benefit from investment in I4.0 technologies.
2. Digital and tech companies: Companies involved in software development
data analytics, data storage, system integration, and hardware are playing a
critical role in the development of I4.0. On the software and infrastructure
front, the sector is dominated by US tech players, including Amazon,
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Microsoft, and IBM. Strong capability is also found in Europe with SAP,
Software AG, Dassault Systmes, and Hexagon. Leading consulting and
systems integration players in IoT include Accenture, TCS, Cognizant, IBM,
and Deloitte. In Europe, Atos and Capgemini are also active in the area.
Leading Global industrial OEMs, including Siemens and GE, have already
developed their own data analytics tools and CPS. Traditional
manufacturers are forming partnerships with tech players to allow each
company to exploit their specific strengths. Tech firms are largely focused on
software services, data storage, cloud, and communication technologies.
3. Start-ups and niche players: Smaller, more agile companies will play an
important part in reaping the benefits from a more digital interconnected
industrial environment. Their adaptability, flexibility and creative abilities
are powerful drivers for innovation, which is evident from global companies
willingness to establish incubator funds. They focus on all aspects of I4.0:
software development, cybersecurity, robotics and artificial intelligence.
Smaller players include security companies like Nextnine, and IOT software
companies including C3 IoT.
4. Acquisition: Acquisitions play an important role in terms of the
development of large companies. Successful value-added start-ups and
niche players provide innovation input for traditional industrial companies
or technology giants. Traditional manufacturers have acquired small tech
companies while tech giants have acquired cutting-edge manufacturing
start-ups, demonstrating a two-way flow of capital between the business
areas. The IoT platforms we review further on have mostly been developed
through multiple acquisitions of such smaller and highly specialised
companies. Examples include PTC (with the acquisition of ThingWorx) and
SAPs acquisition of Fedem Technology to gain key capabilities in Industrie
4.0.
5. Partnerships (or not): Lines separating traditional industrial companies and
IT firms are blurring and shifting fast. There are plenty of examples, such as
Apple and Google developing their self-driving cars, or Google developing
robots and augmented reality glasses that could be used in factories.
However, the recent trend seen in the Industrie 4.0 market is a real need for
collaboration and focus on the companys core businesses. Indeed, there are
numerous partnerships between tech and industrial players, as industrial
companies offer physical products along with the software to run them
smoothly, while harbouring deep vertical knowledge. Tech companies, along
with platform and services companies, gather, analyse, and interpret the
data. This process is one of the key enablers to release value, as customers
need to have a common IT protocol in order for machines from different
suppliers communicate with each other.
In this universe, country-specific regulations will play an important role in how cloud
providers data centres are set up to meet national data security laws. Data centres
are key to the I4.0 transformation process. Over the last ten years, all of the
companies in our coverage have started to shift their data storage from in-house
servers to external cloud providers, gaining space and lowering server maintenance
costs.
Datacentres represent the backbone of cloud computing and enable companies to
access huge amounts of storage space. As data creation expands exponentially, so
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does data storage space. Choosing the right data storage provider is key due to
variations in in data protection laws according to the country. Beyond data
protection, there are other differences between European and US data centres in
areas such as the emergency power off function, which can represent a major
source of downtime, but is required in some areas.
Larger regulatory issues could affect data protection in emerging countries such as
China and Brazil, where data centres are growing but legislation has not matured
yet. As an example, in June 2017 the Chinese government implemented a law on
cybersecurity and data protection, which has changed the game for network
operators there, as they now must immediately communicate any breaches in the
data centres, and the new rules prevent any data in their data storage centres being
sent outside the country.
However, at company level, the state has imposed a random security assessment on
companies. A security assessment is mandatory for businesses exporting data
packets larger than 1,000GB or affecting more than 500,000 users. Data generated
in China must be stored within Chinese borders, and non-compliance could trigger
potential fines against the company or worse, permit or license cancellations,
suspension of operations, or a shutdown of the companys website. Finally,
companies must allow Chinese officials to access their data in the event of an
investigation.
Industrial sectors at the core of I4.0, attention rising
Mounting interest in Industrie 4.0 is reflected in the rising number of Google
searches and confirmed in various consultancy surveys. Three trends are driving the
acceleration of technology and methods linked to I4.0: 1) a rapid decline in the cost
of sensors; 2) a fall in data storage costs; and 3) exponential growth in the number of
connected objects, which the Gartner Group projects to rise from c. 2.5bn in 2016 to
7.5bn by 2020. We expect much of this growth to take place in the commercial
sectors.
Chart 12: Volume of Industrie 4.0 searches on Google Chart 13: Rise of connected objects
Source: Google Trends Source: Gartner group
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As we discuss further on, the extent to which the Industrial Internet of Things spans
numerous segments of the economy was captured by GE economists, who identified
that 46% of the global economy is expected to be affected by the Industrial Internet
of Things, including the transport, healthcare and manufacturing sectors in both
developing and advanced economies. The scope of application and business areas to
be affected were also reflected in a study by the German Federal Ministry of
Education and Research, who placed the smart factory at the heart of the evolution.
Chart 14: Scope of global economy impacted by IIoT Chart 15: Scope of I4.0 and adjacent concepts
Source: General Electric Source: acatech
Adopting technology hinges on a positive financial outcome

There is growing motivation to procure Industrie 4.0-related technologies and
services in order to benefit from some form of economic advantage, through
increased asset utilisation, higher productivity, flexibility, or quality. The main
sectors to benefit from IIoT are transport, mobility, logistics, utilities, healthcare,
and manufacturing. We expect value to be created in three streams:
1. End-to-end product development: The complete integration of the digital
product design and development, production planning and engineering data
release for the production and support of product service offers gains in
time to market and responsiveness to customer needs. Moreover, the
horizontal integration of designers, suppliers and the production value chain
offers additional advantages in design.
Automotive, aerospace and consumer product developers are all sectors
currently benefiting from the full digitalisation of product development.
Siemens claims that car development times have been cut from eight to
three years and production development has been cut from 11 to six years.
Siemens has integrated Product Lifecycle Management software (including
product data management, computer-aided design, computer aided
manufacture and engineering analytics) with Manufacturing Execution
Systems and dedicated automation software, integrating horizontal and
digital processes. The full digitalisation of product and service offering
allows for the creation of smart products.
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Chart 16: Horizontal integration (top) end-to-end engineering along value chain
Source: Siemens
2. Optimisation of industrial value chains: The optimisation of horizontal

value chains creates value by bringing all the players together, allowing the
value chain to achieve greater horizontal collaboration between suppliers,
the production system and distribution and sales. In the industrial
environment, this is expected to raise speed to market, increasing service
levels, while lowering working capital (lift W/C turns) and enhancing
production flexibility. Tighter vertical integration and digital control should
provide higher asset utilisation, increased quality and productivity levels.
Chart 17: Horizontal industrial value chains
Source: KeplerCheuvreux
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4. Asset use optimisation: The opportunity offered by access to real-time data

is a massive step forward for any company in the industrials sector. This data
can be used to optimise asset utilisation and reduce downtime. With sensors
collecting data from machines, it can be directly sent to a remote monitoring
centre that can then use predictive maintenance with this additional
knowledge. Predictive maintenance helps machine owners reduce the
downtime of their machines as they can be fixed on a set date and time
before a major issue arises. With the optimisation of asset use, companies
could massively improve their productivity and lower their costs over time,
as well as take into account more demand with the same assets.
Chart 18: From operating data to insights
Source: GE
Traditional capital goods companies must increase digital content

Historically, many of the companies under our coverage in the capital goods sector
have focused on the design, building, and installation of industrial products and
systems, while targeting service revenues. Opportunities to maximise value within
specific industry verticals remain dependent on the level of digitalisation.
Readiness for the transition can also be considered at a national level: the reduction
in manufacturing contribution to GDP has become a focal point for governments.
The implementation of I4.0 in the industrial sector is seen as a way to support a
manufacturing revival, although there are varying degrees of readiness across
different countries when it comes to adopting new techniques.
The countries taking the lead to support the development of digitalisation, advanced
communications and smart manufacturing include Germany, the US, Japan, and
China, which we will review in greater depth further on. However, Roland Berger
highlights a varying degree of readiness across Europe too, slowing the pace of
adoption. As we will explore further on, the focus of application of I4.0 and IIoT
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between North America, Europe, and Japan differs markedly, with North America
leading in the development of service models, while Germanys focus is on the
application of the technology stack to manufacturing.
Chart 19: Varying levels of readiness across Europe Chart 20: Pace of adoption will be measured
Source: Roland Berger Source: Roland Berger
Enhancing the productivity of countries and companies is a key objective when

allocating capital to I4.0 projects. From a national perspective, governments target a
resurgence of value-added manufacturing as a proportion of GDP, which has been
declining in developed countries over the past two decades. Corporate focus is
centred on retaining a competitive edge (lower costs, higher quality, increased
flexibility, higher productivity), while pursuing additional growth opportunities. Cost
reduction, increased customer satisfaction and revenue growth are the key drivers
when it comes to boosting shareholder returns.
Chart 21: Key drivers behind I4.0 adoption
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Capital goods companies stand at the heart of evolution

While concepts, physical building blocks and software are advancing quickly, the
extensive penetration of I4.0 concepts across the industrial base is still at an early
stage. However, capital goods companies are some of the best-positioned to benefit
from the internal transition toward I4.0 operating methods, while those with a solid
product offering encompassing the enablers described above should also experience
revenue growth.
Sequential studies undertaken in recent years demonstrate that digital
transformation is becoming more of a priority on corporate agendas. A recent report
by PWC (surveying more than 2,000 companies in 26 countries) showed that the
digitalisation of the industrial process was a major concern for respondents.
Between 2016 and 2021, they expect the level of digitalisation in their company to
more than double, from 33% to 72%, (through their entire business stream).
The overall industrial process is expected to shift towards digitalisation, from product
design and engineering, to factory management and even sales channels and
marketing, changing the entire business model of traditional industrial companies,
which we will discuss further on. The survey provides a qualitative insight into the
growth potential for industrial software and digital enablers over and above hardware.
Chart 22: Companies are expecting to increase their level of digitalisation
80%
70%
60%
50%
40%
30%
20%
10%
0%
Level of Vertical value- Horizontal Digital business Product Customer
digitisation chain integration value-chain models, product development & access, sales
integration and service engineering channels &
portfolio marketing
Today In 5 years
Source: PWC
All respondents agreed on the importance of adopting digital strategies for their
companies and factories. While it is likely that early adopters will benefit more from
these new technologies than followers, there are many risks related to launching a
digital strategy, the first one being the heavy cost of implementing I4.0 initiatives
across the value chain.
While industrial companies will no doubt all embrace I4.0 to varying degrees, we
assume that larger conglomerates such as Siemens, GE, Rockwell, Honeywell, ABB,
Schneider Electric, and Johnson Controls will lead the way, as they benefit from
larger investment and software development capabilities. Indeed, they can couple
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their own software with their machines internally. Investing in proprietary software
platforms provides a further trade-off.
With traditional lines of competition blurring the business opportunities linked to
software, data collection, analysis and interpretation, we are likely to see
competition between traditional industrial companies, ICT giants like IBM, Cisco,
SAP, Microsoft, Amazon, Google and start-ups. It remains unclear at this stage
whether IIoT software models will standardise towards free common open
platforms, allowing many developers the ability to design I 4.0 software, or whether
there will be more bespoke solutions. What is most likely is standardisation at higher
control levels and for horizontal applications and more bespoke solutions closer to
the device levels for specific industry applications.
Chart 23: Expectations for digitalisation and integration by sector over five years
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Electronics
Manufacturing
Chemicals
Automotive
Aerospace and
Energineering
Packaging
Metals
Transportation
Paper and
Products,
construction
and Logistics
Forest
Industrial
Defence
and
Now In five years
Source: PWC
We see the blurring of competitive boundaries between capital equipment and

software providers as a function of where industrial customers will prioritise capital
investment over the next 5-10 years, which will be towards all technologies and
systems that facilitate greater digitalisation. Since much of the technology is
software-related, this business activity can be expected to demonstrate the greatest
growth, thereby attracting both traditional capital goods companies and software
providers onto the competitive battlefield.
Chart 24: Capital goods sector is the heart of the Industrie 4.0
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ICT and technology companies are set to provide much of the communication, data
capture and analysis (e.g. IBM, Cisco, Microsoft, SAP, Atos, Software AG) while the
traditional capital goods companies will offer enabling hardware, including robots
(e.g. Duerr, KUKA, ABB, Fanuc, Yaskawa), discrete, hybrid and process automation
(e.g. Siemens, Schneider, ABB, Valmet, Emerson, Rockwell), smart grid equipment
(e.g. ABB, Siemens, Schneider, GE and ABB), mining and marine (e.g. Sandvik, Atlas
Copco, Wartsila) consumer appliances (e.g. Legrand, Rexel, Philips, Electrolux,
Husqvarna) urban infrastructure and transport equipment (e.g. Alstom, Siemens,
ABB) and construction-linked products (e.g. Assa Abloy, Kone, Schindler, Thyssen
Krupp) but also application and product-specific software for design and operations
(e.g. Hexagon, ABB, Siemens, Schneider, Dassault Systmes, AVEVA).
Acceleration of investment the first key step
The concepts related to I4.0, and the touted potential benefits, provide a framework
for boardrooms of industrial companies to increase capital investment. Adoption of
technologies and processes linked to I4.0 is expected to boost industrial productivity
by 3-5% a year, raising the prospect of margin expansion. The benefits of higher
production flexibility, higher quality, increased production efficiency, tighter
customer relations and faster demand responsiveness could strengthen customer
ratings, while the opportunity to develop new business could boost revenue growth
by 1-3% a year.
Investment to drive revenue growth

Unlocking the potential requires accelerated investment by the industrial sector,
which may see capex requirements increase to 2-3% of revenues. For vendors, the
opportunities stem from both hardware (enablers) sales and software, although we
expect the latter to demonstrate higher growth.
Hardware companies include cable, router, switch, and gateway manufacturers and
PLC and industrial PC suppliers. ABBs April 2017 acquisition of B&R, a product and
technology company whose main business industrial PCs, PLCs and gateways
increases the groups exposure to growth segments. On the other hand, Siemenss
recent purchase of Mentor graphics follows a number of similar industrial software
acquisitions since the 2007 UGS acquisition, all increasing Siemens capabilities in
industrial software.
Through the possibilities of predictive maintenance, it seems obvious that assets will
have longer lifecycles. Therefore, some companies under our coverage face the risk
of declining demand for physical operating assets. Indeed, the electromechanical
equipment providers will need to offer smarter products with longer lifecycles and
better adaptability to updates (as opposed to todays era of planned obsolescence
for certain products on the market).
In the case of companies with little to no organic growth, this could entail fewer
machines sold each year and therefore a potential decrease in revenues. Strategic
choices when deciding to invest in hardware or software companies should strongly
favour the latter. The possibilities emerging from hardware companies exist if the
Capital goods
buyer has the skills and efficiency to reduce the targeted companys costs as much as
possible.
Strategic capital allocation to favor digital business

As shown in further detail in this report, we realise that software will be the main
driver of this shift towards digitalisation, with many sub-sectors enjoying 5-10 years
of double-digit demand growth. Even though software and especially IoT specialised
companies currently trade at (or are priced at) higher valuation multiples than
traditional industrials, the value creation potential remains due to top-line growth
potential. With smart acquisitions and synergies, a strong company could be capable
of creating new revenue streams with the launch of bespoke applications for the
products it sells, bespoke lIoT, or new service offers. Since IoT platforms remain an
attractive but minor part of the income stream in our coverage universe of IT
software and service companies, we do not see this as a key share price driver.
The rationale behind future acquisitions in the capital goods sector must be carefully
scrutinised in the context of digitalisation and I4.0 concepts, as future acquisitions
and partnerships will define both the growth potential and the appeal of the
corporate offer. In this report, we aim to provide a clearer understanding of the
existing and future technologies and enablers and the links between them. We also
define where the value is (and could be) and where the productivity gains and new
revenue streams are expected to be.
Chart 25: Steps towards Industrie 4.0
Summary and direction

We view the current pace of digitalisation and connectivity across the industrial
base as more of an evolution that is building on 20 years of prior technological
investment. The concepts of Industrie 4.0 and the Industrial Internet of Things do
offer the prospect of a step-change in industrial productivity, and something of a
revolution in production system operation, but the pace of adoption is likely to be
slower than current hype suggests.
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Some industries (e.g. electronics, car manufacturing) are already well advanced in
the transition toward I4.0, but other industries and smaller companies have a long
way to go and appear cautious when making investment decisions. Growth
opportunities for vendors are set to be greatest in the software and automation
segments, and traditional electromechanical equipment vendors may even see
pressure on revenue growth.
In the following sections, we review the potential financial impact of I4.0/IIoT
rollout, the competitive landscape across the main enabling technologies, the
disruptive impact of digitalisation on business models and corporate performance,
national interest and support, the pace of adoption expected across differing end
markets, expected corporate winners and losers, and the main investment
opportunities in our coverage universe.
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Investments driven by financial gain

Given that the pace at which industrial verticals will adopt full digitalisation
hinges on the prospects of realising targeted financial and operational benefits,
we review the attempts by global consultancies to quantify and gauge the
opportunity. Full incorporation of best-in-class digital technologies is expected
to boost GDP by 1-1.5% a year. Productivity gains of 2-3% a year above normal
gains are envisaged, with most benefits accelerating over 3-5 years.
Multiple corporate case studies are maturing and offer proof as to why
companies should accelerate investment, often encouraged by national policies.
Combinations of top-line growth and productivity have the potential to lift
capital goods companies margins by 10-20% under stable price conditions.
Spending on products, software and services that facilitate I4.0 and IIoT are
expected to post a 20-30% CAGR over 2015-25E, with c. 25% directed towards
hardware and 75% for implementation services, IoT platforms, software
applications and analytics, communications technology, and data storage.
As industrial companies remain focused on increasing ROIC through
productivity gains and cost reduction, we expect 15-20% growth in certain
industrial software verticals. The opportunity this creates will be contested by
traditional industrial companies, multinational software companies, and niche
focused start-ups.
Gauging the digitalisation opportunity

Defining the scope of the Industrial Internet of Things (IIoT) and Industrie 4.0 (I4.0)
requires consideration of the broader Internet of Things (IoT), which is a more all-
encompassing trend. A huge range of consultants forecasts exists to gauge what
proportion of the global economy will be affected as the IoT develops. By 2020, Bain
predicts that annual revenues for hardware, software and solutions could exceed
USD470bn, while others suggest that the IoT will grow to affect 60% of GDP in
developed economies.
We highlight some estimates related to the impact of IoT, generated by global
consultancies, which take the all-encompassing view of those segments that will
benefit most. More specific studies target the narrower subject of IIoT and I4.0 and
confirm that revenue and productivity opportunities are greatest for discrete
manufacturing, transport and logistics, process industries and healthcare, which are
also the most important target markets for the capital goods sector.
Productivity remains the critical driver for CEO/CFO investment

Over the past ten years, underlying global growth rates have slowed, despite
ambitious government stimulus measures to restart growth after the global financial
crisis. This slowdown has weakened the primary driver of shareholder value, which
is revenue growth. In its absence, corporate leaderships have intensified efforts to
improve the second most important lever behind value creation, which we see as
productivity.
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Most companies under our coverage are currently focused on traditional measures
including working capital reduction, lean manufacturing, R&D efficiency, and
procurement. For industrial companies, IIoT and I4.0 offer the potential to make a
step-change in productivity gains over the next 5-10 years, which could result in a
direct boost to profitability, EPS growth, and ROIC. As a reminder, we consider
increased productivity to be the third key step on the route towards full I4.0
integration.
Chart 26: Higher productivity is the reward for investment
Increase in
productivity is hard to
quantify, but
Industrie 4.0 is
expected to improve
all components
The adoption of digitalisation tools along the value chain provides scope to enhance
asset utilisation levels, raise labour productivity, reduce energy costs, and improve
service performance, which are all key inputs in the productivity equation.

=
( + + + + )
Investment decisions that drive growth hinge on companies
As indicated in the opening paragraph to this section, the decision to invest in I4.0
enabling technologies and training will be made at individual company level. The
allocation of capital on a regional and business division basis will depend on national
policy environments, cultural towards innovation, readiness of the workforce, local
communication and ICT capabilities, cyber security, and opportunities to grow
revenues or secure customer loyalty. Defining the total revenue opportunity by
region or sector is fraught with uncertainty. Top-down estimates are prone to
consultant hype (motivating industry change), while bottom-up are also exposed to
similar forecast errors. Nonetheless, the potential is clear and the opportunity is
real.
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Top-down projections point to huge potential

We review the projections for future revenue growth and productivity gains
associated with the rollout of IoT software, services and hardware over the next five
years. In our view, there are four key points that are relevant for investors:
1. Growth boost expected by all major consultancies. Accenture estimates
that real GDP growth could be increased by 1-1.5% through the full
adoption of IIoT/I4.0 technologies over 15 years and its sees the potential to
add USD14.2trn to global GDP including direct investment in IIoT products
and services and indirect factors such as productivity benefits, which
accelerate GDP growth. McKinsey takes a similar all-encompassing
approach, estimating direct IoT technology spending at USD95bn and
forecasting average growth of c. 25% over 2015-25E, with a bias toward
software and services, reaching a total of c. USD800bn by 2025.
In 2012, GE projected total spending on IoT of USD20bn, which was
expected to reach USD500bn by 2020, and which can be compared with
McKinseys estimate of c. USD300bn by 2020. In Germany alone, BCG
estimates that I4.0 could add 1% to GDP, while the group also sees total
spending on IoT Technologies rising by 33% a year between 2015 and 2020,
from USD70bn to USD285bn. PWCs survey from 2016 appears even more
optimistic, suggesting that a sample of 2,000 companies expect 2.9% annual
growth from digitalisation over the next five years. The Fraunhofer/Bitkom
study of 2014 calculated a 1.7% annual addition to Germanys national gross
value added over 2013-25E.
2. Annual increases in productivity of 2-3% projected, higher in some
segments. McKinsey estimates a 10-25% increase labour productivity,
energy savings of 10-20% and 15-20% productivity gains over a ten-year
period. For existing assets, the benefits are more closely linked to predictive
maintenance, which could lower maintenance costs by 10-40%.
For Germany, BCG also forecasts additional total productivity gains of 5-8%
over ten years including material expenses, or 15-25% excluding materials,
implying a potential annual productivity boost of 1.5-2.5% on an underlying
basis. Applying similar metrics to Europe suggests potential productivity
gains of EUR110-175bn. PWCs 2016 survey implies that companies expect
a 3.6% annual cost reduction from digitalisation and may spend 5% of
revenues a year on digitalisation technologies.
3. Growth of investments to target software and services with less emphasis
on hardware: Productivity gains from existing hardware may lead to lower
capital investment as capital intensity increases. Spending is likely to be
accelerated to target connectivity, data storage, analysis and
implementation costs in businesses. Spending on devices/sensors is likely to
be more limited.
4. The main economic segments set to benefit are manufacturing, transport &
logistics, and utilities. Studies imply that the bulk of investment will be
directed towards discrete manufacturing, transport & logistics, utilities,
healthcare, process and energy & natural resources. These are the industries
and existing assets that are likely to see the greatest productivity boost.
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McKinsey identifies an USD11trn potential from IoT

In 2015, McKinseys IoT: Mapping the Value Beyond the Hype study flagged a potential
economic impact of USD11.1trn per year by 2025, with a range of between
USD3.9trn and USD11trn. The figure reflects value captured from customers and
consumers and extends to 11% of global projected GDP in 2025 at the upper end.
Perhaps more interesting is the breakdown of value across nine settings, shown in
the table below, where we take the mid-point of McKinseys projections at USD8bn
potential value. Factories represents the largest segment for potential value
creation and is nearly twice as significant and the next major category - cities.
Chart 27: Split of value potential across nine sectors
Vehicles Home
6% 4% Offices
2%
Cities
17%
Factories
32%
Outside
9%
Human
12% Worksites Retail Environments
7% 11%
Source: McKinsey, Kepler Cheuvreux
McKinseys value creation estimate is so large because the study incorporates all the
potential benefits for stakeholders across the value chain of consumers, businesses,
governments, and suppliers. In each setting, there is a range of benefits that are
realised such as cost savings, price reduction, productivity, and new revenue
streams.
Table 3: Range of IoT applications across settings

Setting Key applications
Home Energy management, safety & security, home automation, increased functionality of appliances
Offices Organisational redesign, worker monitoring, augmented reality, energy monitoring and building
security
Factories Operations optimisation, predictive maintenance, inventory optimisation, health & safety.
Retail Automated checkouts, layout optimisation, smart CRM, in-store personalisation, promotions,
inventory control
Worksites Optimisation of operations, equipment maintenance, health and safety, IoT R&D.
Human monitoring and managing illnesses and supporting personal healthcare
Outside Logistics routing, autonomous cars and trucks and navigation
Cities Improvement of public safety, traffic control and resource management
Vehicles Conditional based monitoring, maintenance and smarter insurance products
Source: McKinsey, Kepler Cheuvreux
Capital goods
The factory setting is estimated to offer the largest potential value and incorporates
all standard product environments from hospitals to agriculture and classic
manufacturing. The main benefit stems from productivity improvements, which are
seen in the form of energy savings of 10-20% and a 10-25% improvement in labour
productivity, with other benefits in the areas of equipment maintenance, inventory
optimisation, and worker health & safety. In the worksite setting (including oil & gas
platforms or metals and mining facilities), the prime benefits are seen from
streamlined operations and predictive analytics. Benefits in cities include enhanced
transport management, resource management, and health.
Overall projections target a total economic benefit of USD3.6trn in 2020, up from
USD0.9trn in 2015, equivalent to a 32% CAGR, which is seen slowing to a 25%
CAGR over 2020-25E. By 2025, the total economic benefit is projected at
USD11.1trn.
Of the total economic benefit, 15% was seen spent on IoT technology in 2015,
equivalent to USD50-140bn, which is expected to grow at a rate of c. 20% over ten
years between 2015 and 2025. This IoT technology spending equates to new
revenues for the sector. Around 75% of spending on IoT technology is expected to
be focused on integration services, software, software infrastructure and
connectivity, with only 25% allocated to hardware.
Chart 28: USD3.6trn value by 2020 Chart 29: Split of IoT tech spending
Integration
11%
services
25% 25%
Consumer 30% Software/app
surplus development
Customer Software
value 5% infrastructure
Technology Connectivity
spending 12%
64% 28% Hardware
Reviewing the split of IoT business and services provides insights into the
competitor landscape and which companies will be best-positioned to provide the
enabling technologies to release the envisaged economic value:
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Table 4: IoT technologies and key suppliers/competitive landscape

Category % of spend IoT Technology % value Competitve landscape
Integration services 30% Physical setup 15% Atos Origin, Accenture, IBM, CSC
General contracting/project mgmt 15% Deloitte, Atos, Cap Gem
Software/app development 28% Algorithums 3% Aspen Tech
Business apps 13% Siemens, GE, Schneider, users
Packaged software 13% Microsoft, IBM
Software infrastructure 13% Device cloud 3% Microsoft, IBM
Secuity 3% Symatec
Analytics tools 8% IBM
Connectivity 5% Connectivity 5% Alcatel Lucent, Cisco
Hardware 25% Other hardware costs 18% Siemens, Schneider, ABB, Rockwell
Sensors 8% Cognex, Keynence
As mentioned, the potential for value creation in factories is the greatest of all
setting values, driven by the next phase of factory automation, defined as Industrie
4.0. Alongside productivity, predictive maintenance could lead to maintenance cost
reductions of 10-40% according to McKinsey, also cutting equipment downtime and
capital investment needs due to longer machine lifecycles.
Cities provide the second-largest set of economic benefits as a vertical for IoT
application and represent a pressing issue due to the continued rates of urbanisation
expected over the next ten years. Applications include electricity distribution and
substation management, water leak identification, traffic control, autonomous
vehicles, bus and train schedule management, air and water quality management,
and crime monitoring and prevention.
McKinsey notes that cost pressures across industries drive the need for companies
to find 2-4% productivity gains each year under normal conditions. In addition,
digital advancements leave open the potential to secure an additional 15-20%
productivity improvement from factors including 30-50% less machine downtime
and 40-50% improvements in labour productivity.
Accenture estimates 1% hike in GDP growth

Accenture, in conjunction with Frontier Economics, built a model aiming to measure
the economic potential of IIoT/I4.0. The study suggests that real GDP across 20
major economies may be lifted by 1% a year until 2030 over trend projections, while
specific targeted investments could raise the total to 1.5%. In total, a baseline of
USD14.2trn additional GDP was projected to be generated over 15 years, with
USD6.1trn added to the US, USD700bn to Germany, and USD500bn to China.
The increases in potential GDP provide a framework for how investment in IIoT
technologies may increase growth across the sector. One of the notable features of
the study is that the acceleration of the impact on GDP is not seen across major
economies until 2022-24, implying that the adoption of technologies and the
realisation of benefits should be considered over a 3-5 year period, which we would
see partly due to the delay effects of technology adoption (previously highlighted as
the productivity paradox).
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Chart 30: Model to measure the economic impact of IIoT
Source: Accenture
Accenture highlights that the IIoT spans industries representing 62% of GDP among
the G20, including manufacturing, mining, agriculture, oil & gas and utilities, while
incorporating hospitals, warehouses and ports offering transport, logistics and
healthcare services. In 2015, Accenture quoted work from GE suggesting that total
spending on IIoT in 2012 was USD20bn and could rise to USD500bn by 2020,
equivalent to a CAGR of nearly 50%.
BCG focuses on growth and productivity

Studies by BCG focused on Germany indicate that the implementation of Industrie
4.0 practices could drive 5-8% productivity gains on total manufacturing over ten
years, equivalent to a total saving of EUR90-150bn for the German economy alone,
or a 0.5-0.8% annual increase in productivity. Pre materials expenses, the potential
gain is estimated at closer to 15-25%. The sectors expected to reap the greatest
benefits include industrial component makers and car suppliers. To achieve this
savings target, demand for enhanced equipment and new data applications is seen
rising by c. EUR30bn a year, or 1%. BCG expects German producers to have to invest
EUR250bn over ten years (or 1-1.5% of revenues) to realise potential benefits,
which would represent a structural demand boost for key technology suppliers.
In a similar conclusion to Accenture, the BCG team states that Germany could add
1% a year to GDP over ten years, create 390,000 jobs (thereby easing concerns
about the jobs paradigm) and add EUR250bn to manufacturing investment,
equivalent to 1-1.5% of revenues a year. While the full shift might take 20 years, key
advances are seen over the next 5-10 years and will define winners and losers. The
figures for Germany are affected by the importance of manufacturing for the
countrys economy.
Capital goods
Chart 31: Summary of BCG potential productivity benefits Germany
Source: Boston Consulting Group
Beyond the review of potential productivity gains, BCG also reviews the size and
potential applications for IoT-related technologies and services, which is expected
to grow from c. USD70bn in 2015 to USD285bn by 2020, equivalent to a CAGR of
33%. Reviewing the spending split, 80% relates to services, software, cloud, platform
and communication products, and 20% to hardware such as sensors. The highest
rates of growth are expected to be seen in IT services, IoT applications and IoT
analytics.
BCGs review across 11 market segments demonstrates that 50% of total spending
on IoT is expected to be directed towards three verticals: Discrete Manufacturing,
Transportation & Logistics, and Utilities, with Healthcare, Energy & Natural
Resources and Process industries accounting for another 20%, split evenly.
Chart 32: Allocation of IoT spending by category Chart 33: Expected spending by end market
Service Discrete
17% manufacturing
20%
24%
IoT Applications Transportation and
34% logisitics
IoT analytics Utilities
10% 16%
Indentity and Healthcare
security
6% IoT backbone (cloud Process

24% and platform)
5%
8% Communications 16% Energy & Natural
6%
8% 6% resources
Source: BCG, Kepler Cheuvreux Source: BCG, Kepler Cheuvreux
Capital goods
In the same study, BCG highlights the IoT applications that are likely to see the
greatest level of corporate investment, summarised in the following chart. This
shows that the largest applications are expected to be remote patient monitoring,
self-optimising production, predictive maintenance and automated inventory
management. The relative importance of each segment is reflected in the chart
below.
Chart 34: BCG - use cases driving IoT
Source: BCG
PWC appears optimistic about growth and productivity

In 2016, PwC surveyed 2,000 participants in 26 countries at companies with total
revenues amounting to c. USD17trn. The survey concluded that the companies
surveyed were expecting additional annual revenue growth of 2.9% from
digitalisation, equivalent to a total of USD493bn a year on average over the next five
years. The survey was split as follows: 21% industrial manufacturing, 19%
construction, 11% chemicals, 10% electronics, 9% transport & logistics, 9%
automotive, 8% other, 8% metals, 4% forest, paper, packaging, 2% A&D.
The results also reveal the expectation among survey participates of a 3.6% annual
cost reduction , equivalent to a total saving of USD421bn per year on average over
the next five years. The survey also indicated a total spend by participant companies
of c. USD907bn a year, or just over 5% annual revenues on digital technologies
including hardware and training.
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Companies in all sectors see annual savings of 3.2-4.2%, while investments are
expected to amount to 4-7% a year.
Chart 35: Cost reduction potential by sector Chart 36: Investment plans by sector
Source: PwC Source: PwC
PWCs data, from its surveys, appears more optimistic that expectations from other
major consultancies in terms of growth potential, productivity, and cost-saving
potential from IoT. The surveys conclude that the fastest growth is likely to be seen
in advanced manufacturing.
IDC worldwide spending

IDC estimates that global spending on IoT hardware, software, services and
connectivity reached USD737bn in 2016, which it forecasts to rise to c. USD1.4trn
by 2021, equivalent to annual growth of 14%. In 2017, it estimates total spending at
just over USD800bn, with manufacturing accounting for 22%, transport 11% and
utilities 8% (these are seen as the three most important sectors).
The companys estimates may be very broadly defined, as the projections of total
spending are 5-6x greater than other more specific estimates, although they confirm
a strong trend of expected growth.
Zinnov technology specialist sees 15% growth

Specialist consultancy Zinnov identified total IoT spending of USD120bn in 2016,
split as follows: USD54bn for IoT products and USD66bn for IoT services. Products
included sensors, MEMS, Actuators, chipsets, connectivity hardware, network
bandwidth, storage and server infrastructure and IoT platforms, while services
included advisory, consulting, product development, and managed services.
Average growth in each sector was estimated at 15% and 17% respectively until
2021. The industrial segment is the vertical expected to be the largest adopter of the
technology.
Capital goods
Bain analysis indicates market size, profitability and split

Bains study covers the entirety of the IoT landscape, including B2B and B2C
applications. As shown below, the majority of the future value is expected to centre
on systems, software, cloud, and network applications.
Chart 37: Projected revenues and profit from the IoT (2020)
Source: xxx
ATKearney expects ten-year period to full fruition

Globally, by 2020, ATKearney forecasts that 6% of the world economy will be
impacted by IoT, with a 1.9% increase in productivity. Reviewing the allocation of
additional revenues, it estimates that 57% could be directed toward services, 12% to
applications, 18% to Infrastructure platforms, and only 13% to sensors and devices.
By 2025, ATKearney estimates a value creation potential of 7% for the EU28 GDP,
equivalent to EUR940bn, of which EUR430bn from productivity, EUR80bn from IoT
solutions, a EUR300bn increase in purchasing power, and EUR210bn in monetised
time economies. Of the total, it estimates EUR160m from Industry, EUR165m from
housing and hospitality and EUR235m from healthcare.
Based on ATKeaneys commentary it is clear that the incremental revenue in target
segments is estimated to be small, and the main IoT benefit (productivity) may take
ten years to emerge.
Fraunhofer institute and Bitkom on impact on German GDP

A study conducted by the Fraunhofer Institute and Bitkom in 2014 concluded that
the economic potential of Industrie 4.0 on six economic sectors in Germany could
add an additional 1.7% annual growth to value added until 2025, which would add an
additional EUR78bn gross value added to Germany for the six key sectors, shown in
the table below. Across the whole economy, the potential increase gross value
added was extrapolated to EUR189bn and only a 0.8% rise. As the study assumed no
underlying GDP growth, projections implied the additional growth in value added
expected over the 12-year period and hence implies real benefits and increased
value added to Germany, while also indicating that the main focus will be the
industrial sector, which accounts for around one-third of GDP.
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Table 5: Reviewing the potential impact of I4.0 across six key industrial sectors
Gross value Gross value Increase in gross cumulative
I4.0 potential % gross value add Annual growth
added 2013 (bn) added 2025 (bn) value added productivity 12Yr
Auto 74.0 3% 88.8 14.8 1.53% 20%
Mechanical and Plant Engineering 76.79 3% 99.83 23.04 2.21% 30%
Electrical equipment & chemical 40.27 2% 52.35 12.08 2.21% 30%
Chemical 40.08 2% 52.1 12.02 2.21% 30%
ICT 93.65 4% 107.7 14.05 1.17% 15%
Agriculture 18.55 1% 21.33 2.78 1.17% 15%
Six key industries 343.34 15% 422.11 78.77 1.74% 23%
Other sectors 1983.27 85% 2170.95 188.68 0.76% 10%
Total Germany 2326.61 100% 2593.06 267.45 1.27% 11%
Source: BITKOM, Fraunhofer
Bottom-up analysis confirms cost and growth potential

Here we have generated our own estimate of what the total revenue potential for
digitalisation could be for our coverage universe and review GEs approach to
identifying the market potential.
GE reviews the potential gains for its most important customer base based on a 1%
saving across five industries over 15 years. Using this method, GE identifies
USD276bn of total potential savings, which the asset operators can realise in the
form of higher profits on increased investment. GE does not provide an indication of
the level of investment required by the specific industries to achieve the target
savings. Internally, GE claims that in 2016 it achieved productivity savings of
USD500m from the application of industrial internet applications internally,
equivalent to 40bps of revenues.
Chart 38: GE savings by segment
Source: GE
In recent presentations, ABB adopted a similar approach to communication and

highlighted five key markets where management sees scope for USD90bn savings
potential for customers. Across 15 key markets, management estimates total
potential customer savings of USD988bn, although no timescale for achieving these
savings was provided, leaving the numbers looking attractive but lacking much
substance in terms of timing or specific scope.
Capital goods
Our bottom-up review

Many of the studies we have reviewed above imply that companies are currently
spending 0.5-2% of sales annually on digitalisation, and this may gradually increase
to 2-4% by 2020. We expect the additional investment to come mostly from Tier 1
companies with large investment capabilities operating in the industrial sectors
mentioned above. We see spending biased toward IT, software, and integration
costs.
As a basis for our own analysis, we take our bespoke global capex study which
reviews capex for the 1,500 largest global companies. In 2015, the sample of 1,500
companies totalled sales of EUR25trn. However, a substantial portion of the 1,500
companies are not involved in Industrie 4.0, as they operate in business segments
that will not be affected by it, or only very marginally. Our capex study monitored 56
sectors covering the entire global economy. We estimate that the main capital goods
end markets that will be impacted are:
Utilities: Power generation, transmission and distribution and renewables
and water.
Transport & logistics: auto, railway and aerospace & defence, distribution.
Building & infrastructure: residential, non-residential and civil
infrastructure
Process industry: metals & mining and oil & gas, chemical and
petrochemical.
Discrete manufacturing: Auto, machine building.
Health: Medicines, consumer monitoring and health facilities.
Chart 39: Summary of key end markets impacted by Industrie 4.0 and KECH coverage players in those end-markets
The five big sectors we selected narrow the scope of our study to c. 1,000
companies, and we expect all of them to see increased spending on digitalisation,
IoT, IIoT and I4.0 initiatives.
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Chart 41: Yearly investment in Industrie 4.0 over next five

Chart 40: Current level of digitalisation versus in five years
years (% sales)
90% 8%
80% 7%
70% 6%
60% 5%
50%
4%
40%
30% 3%
20% 2%
10% 1%
0% 0%
Now In 5 years Industry 4.0 p.a investment (% of revenues)
To evaluate the total investment in digitalisation by industrial companies and the

global economy, we apply the broad methodology shown below.
Chart 42: Steps to estimate investment in IoT/IIoT/I4.0 in 2016
1) We start with the overall sales generated by the top 1,500 companies
worldwide in the 56 sectors covered in our capex study from April and
September 2016, reaching combined sales of EUR25,000bn in 2015.
2) Out of the 56 subsectors reviewed in the capex study, only 35 fall into our KECH capital goods
definition of relevant end market for Industrie 4.0, totalling more than 1,000 coverage is expected to
companies and sales of EUR19,000bn in 2015. capture between
3) If we assume 0.5-2% of sales invested in Industrie 4.0, the amount ranges EUR9.5bn and
EUR28.5bn of revenues
between EUR95bn and EUR380bn. We expect this range to grow and reach
from investment in
c. 4% by 2020 as spending priorities of the sample group shift.
Industrie 4.0 in 2016
Capital goods
4) However, as we said, not all of this additional investment would be entirely

captured by capital goods companies. We estimate that, on average, capital
goods companies product portfolios can cover 50% of the needs of Industrie
4.0, as a large part of the investment remains the machine, its setup and
related services. The remaining 50% includes the cloud, the platform, the
sensors and other related service that capital goods companies do not
typically provide. Again, large conglomerates like Siemens and ABB benefit
from broader portfolios. If we apply this 50% ratio, the additional revenues
for global capital goods companies would range between EUR47.5bn and
EUR190bn.
5) We then narrow this investment again to determine what part of this range
would be captured specifically by our coverage and end up with a range of
between EUR9.5bn and EUR28.5bn in 2015 (we estimate that our capital
goods coverage will capture c. 20% of the investment reachable by
worldwide capital goods companies), which provides scope for the market
potential.
If we extrapolate these numbers to 2020, we can use the IMFs growth estimates to
obtain the total 2020 sales of our capex sample, and assume that investments will
not be 0.5-2% but closer to 2-4%. Accordingly, the investment in the digitalisation of
the relevant economy that is reachable by the companies under our coverage ranges
between EUR35bn and EUR65bn in 2020 (see Table 4 for calculations).
Table 6: Investment in Industrie 4.0 in 2016E and 2020E

EURbn 2016E 2020E
Sales from top 1000 global companies concerned by IIOC 19,000 23,365
% sales invested in Industrie 4.0 0.5% 2% 2% 4%
Amount Invested in Industrie 4.0 from top 1000 companies 95 380 436 872
Reachable by cap goods sector (50% ratio) 47.5 190 218 436
Reachable by KECH coverage (20% ratio) 9.5 28.5 32 65
% sales due to additional investment 2% 7% 7% 13%
Given that these estimates depend on a large number of assumptions, they should
be treated with caution. Some parts of these additional sales might already be part
of current sales, some companies might benefit more than others, additional sales in
Industrie 4.0 might erode sales in other segments under our coverage, etc. However,
these calculations give a rough idea of the significant potential for European capital
goods companies, as Industrie 4.0 could represent 2-7% of sector sales in 2016 and
7-14% in 2020, a substantial part of the business, although most sales would not be
generated by hardware.
Capital goods
Chart 43: Investment in Industrie 4.0 , 2015 (total USD100bn) Chart 44: Estimated IoT spending (USDbn)
900
Integration services 800
700
600
Software/app
development 500
400
Software
infrastructure 300
200
Connectivity
100
0
Hardware 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Lower Higher Mid-range
Source: McKinsey Source: Kepler Cheuvreux
We now review each of the key end markets that are expected to go undergo the We expect the capital
biggest transformation thanks to the adoption of digital technology. The following goods product
chart summarises our expectations for additional investment by end markets. It portfolio to reach c.
50% of the investment
starts with the lower range of 2016E investment (EUR95bn) and adds the lower
in Industrie 4.0
range of our expected increase in investment to reach a total EUR413bn annual
investment in 2020E.
Chart 45: Expected additional investment in Industrie 4.0 by end-market
450
400
350
300
250
200
150
100
50
-
While not all our end markets offer the same potential and are at the same stage of
development, almost all of them are capital goods customers.
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IoT platforms at the heart of change

By providing connectivity, software, data capture and analysis Internet of Things
(IoT) platforms sit at the centre of IIoT and Industrie 4.0 implementations. For
businesses, the importance of selecting the right platform for the future means
that many projects are in the pilot phase, meaning that the market is relatively
small but growing very fast. Currently, the range of companies providing IoT
platforms is large, diverse, and highly fragmented, including over 450 businesses,
of which only 50+ are full-capability providers.
Over 5-10 years, we expect a period of organic and inorganic consolidation of
the market, with the largest players surviving. We review in detail six leaders
able to offer cloud computing, targeting applications, data analytics, IoT
platforms, and IT services. We think that the current IoT platform leaders are
IBM, GE, PTC, Microsoft, and Amazon Web Services (AWS) , and expect them to
be joined by Siemens (MindSphere) , SAP (Leonardo) , and Bosch, who are all
building leading positions.
The worldwide implementation of IoT solutions by companies is likely to be
driven by Accenture, Cognizant, and IBM, and in Europe by Atos and Cap Gemini,
as they are involved in the integration and consulting phase. Over the next five
years, the market for IoT platforms is likely to grow by 30-40% a year with IoT
platforms becoming the critical factor when determining success in the field of
industrial digitalisation.
IoT platforms at the heart of realising digital gains with IIoT

What is the IoT platform and what differentiates providers?
The internets ongoing transition from being a network of connected computers to
an all-encompassing cyber-physical system that connects people, smart devices,
sensors, mobile and fixed assets, and products requires a framework over which the
devices can securely share and analyse data to create valuable business outcomes.
Today, nearly all manufacturing and industrial companies are operating a range of
information and automation technologies that have been installed and
commissioned over the last 10, 20, or 30 years. While all may have been state-of-
the-art at the time of implementation, the scope of interoperability can be a limiting
factor when maximising IIoT capabilities. An IIoT platform represents a collection of
software components that allows the deployment of applications that monitor,
manage, and control connected devices, facilitates data collection in a fully secure
environment, and provides device and sensor management and integration with
other software systems such as data analysis and ERP. We view the Industrial IoT as
a sub-set of the broader IoT, with IIoT platforms being a sub-set of the broader
scope of IoT platforms.
Capital goods
The IoT platform is well represented by Gartners chart below. It incorporates a The IoT platform
suite of software that facilitates connection between IoT end points, such as devices connects and combines
and sensors, edge platforms and gateways able to conduct local processing, and multiple devices with
control and analytics
consolidation of data and information into an IoT platform hub. Gartner states, an software, data storage
IoT platform is an on-premises software suite or a cloud that monitors and may manage systems and enterprise
and control various types of endpoints (sensors and devices), often through applications software
that business units deploy on the platform. The platform: 1) provides the capability to
monitor IoT event streams; 2) enables data aggregation, specialised analysis and
application development; and 3) engages back-end IT systems or services. By 2020, two-
thirds of companies adopting IoT business will use an IoT platform for at least one
IoT project, up from one-third currently.
Chart 46: Reference model for IoT business solutions
Source: Gartner
An IoT platform usually performs the following tasks:

1. Connection of things to the internet: IoT platforms support various radio
or ethernet technologies, to create and manage the link from the device to
the communication medium and then the internet.
2. Cybersecurity: authentification, encryptions, certificate management, etc.
IoT platforms incorporate security components to ensure device attestation,
network connectivity, software upgrades, authentication, identity and
access management, and data loss prevention. Some platforms may use such
emerging technologies as Blockchain for the encryption process.
3. Management of the IoT devices: provisioning, maintenance, and operations Six key tasks can be
of IoT devices. IoT platforms simplify the process of configuring, defined
provisioning and initiating of connected assets and products. This is a critical
task, as the number of connected devices may be very high.
4. Analysis of the data collected: The extent of capabilities of a platform in
terms of analytics and machine learning is a key differentiating factor in the
IoT platform market. All the data collected from the potentially very
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numerous sensors must be analysed in a timely manner to add value to the

end-user. Some vendors such as SAP also offer machine learning capabilities
embedded into their platform. This allows the prediction of machine failures
and need for imminent maintenance before machines fail. Some vendors,
including industrial ones such as GE and Siemens, along with Dassault
Systmes on the software side, offer digital twin capabilities (i.e. the real-
time 3D virtual model of physical assets with their current status, working
condition, or position. SAP also proposes a digital twin offering).
5. Building of applications: The IoT enables developers to create their own ad-
hoc applications by providing them with a range of Application Programming
Interfaces (APIs), software development kits (SDKs), and development tools.
The level of openness of any given platform is another key differentiator. An
open platform will allow many independent developers and partners to
create applications integrated into a dedicated marketplace.
Another, less open, model, is to offer primarily the applications developed by
the vendor of the platform itself. This seems to be a choice that is currently
more developed among traditional software vendors, which obviously have
better software development capabilities than traditional industrial players.
As such, while for example SAPs network of developers partners looks
limited, Siemens places the greatest emphasis on the openness of its
platform, with many partners coming from the IT software and services
space, including IBM and Microsoft.
As we have aimed to demonstrate above, a comprehensive IoT platform seamlessly
connects devices, applications, and data and allows customers to focus on the
specific context in which the IoT platform will be used. The platform must provide
customisation, data collection, storage, and connectivity. Platforms offering
technology agnostic capability are likely be preferred by customers. BCG aims to
capture this in its definition of required IoT platform capabilities.
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Chart 47: Core capabilities of IoT platforms
To perform these tasks, the platform is made up of three layers: 1) the cloud
platform (Platform as a Service or PaaS, which enables the building of ad-hoc apps
and storage of data); 2) the operating system with embedded analytics; and 3) the
applications, which may be either pre-packaged (provided by the vendor), purchased
through the platform vendors marketplace (third-party apps), or developed
internally via the PaaS.
Besides these essential capabilities, IoT platforms are usually associated with the
following features:
Cloud Infrastructure: The data collected by sensors needs to be stored in
order to be analysed. This is even truer for platforms that feature machine
learning and predictive analytics and they must be able to access large
amounts of historical data to identify patterns and predict the repetition of
these patterns in the future. IoT platform vendors usually choose to offer
access to their own private cloud, or partner with public cloud providers in
order to store the data. On-premises storage is also an option, depending on
the vendor. In addition to data storage, the cloud environment also enables
the development of applications (PaaS) and the hosting of these applications
(SaaS).
Connectivity to enterprise ERP/CRM: The output of the data analysis
coming from the platform and applications needs to be integrated into the
enterprises systems to make the whole system more efficient. This is easier
Capital goods
to achieve with vendors such as SAP who can leverage their huge installed
base of ERP/CRM software and connect it seamlessly with its IoT platform.
Edge computing: Makes computing run closer to the data sources, i.e. closer
to the sensors and other hardware equipment in the case of IIoT. Benefits
include lower latency and more limited use of bandwidth and of the clouds
computing power.
The following chart presents an alternative visualisation of the relationship of the

IoT platform with endpoints through Application Programming Interfaces (APIs).
The enterprise systems and applications could have been added on top to make it
more complete.
Chart 48: IoT platform capabilities
According to market analysts, the marketplace for IoT platform providers remains IoT platforms are seen
extremely fragmented, with over 450 active providers being tracked by IoT encompassing the full
analytics, each with a variety of capabilities. The range of IoT platform provider range of software,
analytics and
capabilities includes the following:
connectivity through an
1. IoT application enablement platforms (AEPs typically a platform as a enterprise
service that enables developers to deploy an IoT application or service and
includes communication, data storage, application building and enablement).
2. IoT Device Management Platforms systems that provide connectivity and
control of devices distributed across the system.
3. IoT Cloud Storage Platforms (IaaS). These typically comprise a vital
component of the system.
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4. IoT Analytics Platforms. Platforms and software systems able to analyse and
interpret large volume of data created by the devices to provide valuable
insights for business.
5. IoT Connectivity Backend (Platforms). Platforms and systems that facilitate
the secure sharing of data between devices and between devices and other
components of the entire platform.
Currently, the market landscape appears highly fragmented, as shown in the

following chart. Only 7% of the companies have revenues in excess of USD10m and
the market incorporates a large number of small focused start-ups with revenues of
less than USD1m. The market leaders comprise large cloud providers (e.g. AWS,
Microsoft), legacy device management and connectivity providers (e.g. Alcatel-
Lucent and Ciscos Jasper) and Silicon Valley-backed start-ups (e.g. Uptake, C3 IoT).
Chart 49: IoT platform companies by revenue

The market place for
IoT platform providers
is currently highly
fragmented. We
expect consolidation in
the future
Source: IOT Analyticsx
Across the market, growth expectations for the next five years are running at
between 25% and 40% annually, with growth rates above this in the current year.
Reviewing the IoT provider context and considering the strategic nature of selecting
an IoT platform, we expect the market to gravitate and consolidate around the
largest players in the industry. We see a number of differentiators among the IoT
platform providers:
Prebuilt apps: Ensure the rapid implementation of IoT platforms for
targeted use without the need for developing ad-hoc apps internally.
Ecosystem of partners: A rich ecosystem of partners to enable the
development of many different applications, to make the platform available
to many cloud environments, to promote the IoT platform and integrate it at
the customers premises, and to ensure compatibility with as many sensors
and chips as possible, limiting future interoperability risk.
Analytics: We believe that the level of advanced analytics and machine
learning capabilities will be the most important factor for IoT platforms
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vendors as the market matures and each vendor enriches its partnerships.
Software vendors hold an advantage (IBM with Watson, SAP with HANA) via
knowledge of tailoring digital solutions, while industrial players hold the
application knowledge and customer relations and have built capabilities,
through acquisitions and partnerships.
Edge processing capabilities: The ability for the platform to manage edge
computing is another key differentiator. Edge computing capabilities means
that a part of data storage and analytics are performed near the source of
the data, using the power of local computing such as smartphones, routers
and PCs. Benefits include lesser needs for bandwidth, more limited use of
cloud power, lower latency and improved scalability.
The commercial focus for IoT platforms is concentrating on the business segment
rather than consumer and in the segment the most popular areas for investment are
manufacturing, smart cities, energy, mobility and healthcare. These are typically key
markets for the industrial and capital goods sector, amplifying the importance of IoT
platform development for global industrial companies. Companies including
Siemens, ABB, Schneider, GE, and Bosch are offering solutions to the industrial
segment alongside providers like IBM, PTC and Microsoft. The specific customer
applications or usage scenarios are predictive maintenance, manufacturing
analytics, production performance management, and remote service.
Chart 50: Market focus of IoT platform providers
Industrial
applications are the
most popular
solutions offered,
followed by smart
cities, energy,
mobility, and health
Source: IoT Analytics, Note: the data represents the % of the total sample offering application for the designated market
A recent survey of 640 IoT projects worldwide confirmed a close match between IoT
platform applications and current projects in focus. 22% of projects are related to
connected industrial applications, 20% to smart cities, 13% to smart energy
applications, 13% for connected cars (mobility), 6% for agriculture, 5% for buildings
and 5% for connected health.
Market posting a c. 33% CAGR from a low base

Industry analysts estimate the market for IoT platforms at USD298m in 2015. The
relatively small size shows that many companies are currently hesitant to accelerate
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adoption and remain in the pilot phase. Industry observers project a c. 33% CAGR
with the market size approaching USD1.6bn by 2021. Clearly, while the definition of
market size is hard to exactly pinpoint, recent comments by market participants
such as PTC confirm that these growth rates (or higher) are currently being
observed.
Chart 51: Estimates of the overall market size of the IoT platform (USDm)
1,800 1,644
1,600
1,331
1,400
1,200 1,043
1,000
792
800
583
600 417
400 298
200
0
2015 2016E 2017E 2018E 2019E 2020E 2021E
Market size (USDm)
Source: IoT Analytics GmbH, IoT platforms: market report 2015-2021
As industry standards and leaders take shape and leadership is formed around
specific IT and OT ecosystems, we expect the pace of adoption of IoT platforms and
associated software and services to accelerate. Currently, the early adopters are
running the risk of redundancy, obsolescence, or lack of interoperability of
purchased systems, which means that many initial investments are in the pilot phase.
Leaders in the IoT platform market

As shown above, the definition for the IoT platform market remains broad and there
are many small participants targeting specific niches or segments and a number of
well-financed and larger software or industrial groups that appear well-positioned
to win in the market segment. We expect companies to continue to direct a large
amount of financial and human capital at becoming a leader in the IoT platform
market, since success could allow better access to profitable segments, including IoT
applications and analytics.
Of the 400+ companies mentioned above as active in the IoT platform market, BCG
estimates that Enterprise Software and Service companies represent 22%, and IoT
start-ups 32%. In addition, industrial technology companies are seen accounting for
18% of the market (shifting from hardware-centric business models) while internet
and telco companies comprise the remaining 28% of the supplier group.
A comprehensive review of IoT platform providers suggests that fewer than 15% are
able to provide a comprehensive solution, rather than being focused on a small sub-
segment of the market, which in total represents about 50 vendors. BCG highlights a
number of main traits that should ensure success for the industry leaders:
Capital goods
Chart 52: A limited number of vendors offer full platform capabilities
One of the key factors that will determine the success of the IoT platforms in the
marketplace will be the willingness of software developers to use the platform,
which in turn will determine the number of applications developed. Ultimately, we
expect successful IoT platform players to be narrowed down to a small number, in a
similar fashion to Windows & Mac OS/Andriod & iOS / Playstation & Xbox.
We may possibly see a small number of leaders in the consumer and industrial
verticals related to leading application areas. Key factors will include open source, a
large number of developers, availability of APIs, potential for income and earnings,
and widespread adoption. Siemens believes the winners in the segment will be
companies able to best turn industry vertical insights into customer productivity and
efficiency.
Leading companies in the IoT platform market (as identified by Forrester and IDC
Research) include IBM, Watson IoT, PTCs ThingWorx, GE Digitals Predix,
Microsofts Azure, and Amazon Web services. Other major players include SAPs
Leonardo, Bosch Software Innovations IoT platform, Hewlett Packard Enterprises
(HPE), Oracles IoT, and Ayla networks. We also believe that Siemenss MindSphere
platform will grow to become a leader when it is introduced. Other IoT providers
with a developed offer include Cisco IoT connect, Salesforce IoT platform, and
Carriot/Altair (a recent acquisition). Other players include Aeris, Electric Imp,
Particle, Relayr, Teezle, Telit, and Zebra.
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Chart 53: Forresters view of IoT platform leaders Chart 54: IDCs view of IoT platform leaders
Source: Forrester Research Source: IDC
Ultimately, we expect leadership to migrate toward those companies able to provide

a fully capable platform from a firm financial foundation. While start-ups may
provide many new, innovative ideas to the sector, their financial weakness often
affects stability. In fact, the best innovative and niche start-ups may ultimately be
acquired and represent solutions in large company portfolios as the industry
consolidates. Openness and simplicity in integrating the platforms will also be key,
alongside the ability to fit each industrys specific needs.
Review of the leading and key IoT platform providers
In the following section, we review a number of the leading IoT platforms currently
offered to the market. First, we review the five leading companies as defined by
Forrester and IDC: IBM Watson IoT, Microsoft Azure, GE Predix, PTC ThingWorx,
and Amazon Web Services. Thereafter, we review SAP Leonardo and Siemens
MindSphere. The platforms from AWS, IBM, SAP, and Microsoft appear largely
generic with, in some cases, dedicated solutions to the manufacturing space. In
contrast, those of PTC, GE Digital, and Siemens are clearly focused on industrial
applications, IIoT, and the enablement of Industrie 4.0.
First with regards to generic platforms, IBM looks the strongest to us for now. While
the four software vendors/cloud providers of this category all share a strong market
presence and brand recognition, IBM proposes some distinctive and valuable
features. Its platform is very open, allowing for the deployment of its platform in
three configurations: public cloud, private cloud, and on premises. Also, the Watson
brand is very well recognised for its strong analytics and machine learning
capabilities. Augmented reality is also included in IBMs offering. Finally, customers
highly value the superior security offering of IBMs platform, according to market
intelligence agencies.
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The technical capabilities of AWS, Microsoft and SAP mean they lag slightly behind
in our view, especially SAP, as it just rebranded Leonardo from a pure IoT suite of
solutions to a Digital innovation system on which SAP is counting to fuel future
growth. However, AWS and Microsoft certainly have very strong
datacentre/storage offers. SAP, for its part, may need more time to build the
necessary ecosystem of partners able to promote, sell and integrate its new offering
to the market, while AWS platforms architecture may look too complicated for the
least sophisticated customers. For now, Microsoft is growing rapidly, supported by
its large community of developers. In the medium term, we believe that SAP
Leonardo is also very well positioned to increase its market share, with a very broad
offering, many pre-packaged apps, and even digital twin capabilities.
For platforms focused on the manufacturing space, we would argue that PTC is
probably still leading and will continue to lead in the midterm given its established
community and recent alliance with GE. PTC has been able to combine the best of
both software and manufacturing worlds: it is very much aware of manufacturers
precise needs through its years of experience in designing software solutions for the
industrial world, and is also able to create itself the pre-packaged applications which
represent a large part of the value of an IoT platform.
Also, PTC acquired an early market lead, according to market intelligence agencies,
which of course has played in the companys favour. Its ecosystem of partners is
impressive too, and the community of app developers for ThingWorx looks very
active. Finally, PTCs platform owns the very capabilities that differentiate an IIoT
platform from a generic IoT platform: very strong digital twin offering and the best
augmented reality capabilities on the market.
The two industrial players in the field, GE Digital and Siemens, also offer convincing
products and are able to leverage on the strength of their installed base in industrial
equipment and industrial vertical expertise. However, in terms of broad acceptance,
the range of applications provided on their platforms looks too limited for now. Of
course, their principal advantage lies in their knowledge of the industrial sector, and
the fact that they have been developing and testing their respective platforms in-
house for concrete applications for months before making them available to the
market.
IBM Watson IoT: well positioned for leadership, developing verticals

From its IBM Watson products and APIs, dedicated mainly to Big Data analytics and
machine learning, in October 2014 IBM released Watson IoT Platform. In April
2015, the company announced investments of USD3bn in IoT to complete its
solutions and has more than 1,000 researchers, developers and designers dedicated
specifically to the Watson IoT platform. IBM is clearly seen as the leader for IoT
platforms by market intelligence companies such as Forrester and IDC. With its
Watson IoT platform, IBM is currently helping customers transform in three discrete
areas: 1) improve operational performance and reducing costs; 2) create new
business models; and 3) drive customer engagement.
The platform runs on IBM Bluemix, IBMs PaaS. However, it is also available in public
clouds or on-premises. The solution includes Software Developments Kits (SDK),
Capital goods
Blockchain and payment processing capabilities into the platform, while machine
learning and security analytics are add-on products.
IBMs IoT platform capabilities are broad-based, shown in the chart below, and
organised into four categories. The comprehensive nature of the offer supported by
the financial strength of IBM provides a high probability of long-term success for the
platform.
Connectivity to sensors and devices, with associated device management
and data visualisation.
Risk management enabled by security analytics and anomaly detection.
Information management encompasses storage and data transformation.
Analytics: predictive and cognitive in addition to edge capabilities (analytics
performed at the edge of the network).
Chart 55: IBM Watson IoT platform and dedicated applications
IBM has chosen to vertically and horizontally divide its IoT solutions offering
integrated into its platform. Since IBM targets specific industry verticals, which may
be supported by the groups business services activities, IBM maybe considered a
competitor by some industrial providers.
Solutions by industry:
o Automotive, which includes various solutions for connected cars
and car manufacturing.
o Electronics, with solutions dedicated mainly to connected homes
electronics.
Capital goods
o Insurance product provides a view on the policyholders assets and

situations to provide risk assessment.
o Manufacturing utilises analytics and cognitive to improve process
and product quality, automate inspections, reduce warranty costs
and optimise maintenance schedule and resources. It is IBMs
solution for Industrie 4.0.
o Retail enables the emergence of connected stores to reduce energy
use, maintain product freshness, and improve asset reliability.
Solutions by business application:
o Enterprise asset management proposes solutions to optimise asset
lifecycle, using sensors to put in place predictive maintenance and
improve ROA across industries.
o Facilities management provides workplace management solution to
optimise core facilities maintenance, lease accounting, capital
project management, space management and energy management.
o Product development uses IoT to prevent product failures before
production, validate and verify design, maintain integrity.
IBM appears to already have developed a large and growing partner network, which
looks very robust. Partners extend to software, services, network and hardware
sectors and in various industries.
The pricing of the platform is dynamic and depends on a number of factors including
the amount of data ingested, analysed and stored as well as the number of devices
used. The percentage of data analysed by Edge also makes pricing changes. IBM
provides on its website a comprehensive pricing calculator to provide an estimate of
the platforms cost (http://iot-cost-calculator.ng.bluemix.net/). We see this as a
positive, as pricing clarity is key to customer satisfaction in this market.
IBM Watson IoT platform pros and cons:
(+) Strong market presence with high installed base and geographical
presence (175 countries including China) and dedicated employee
resources.
(+) Three options of cloud deployments are available (public, private cloud,
and on-premises).
(+) Strong brand recognition of Watson, especially in analytics.
(+) Superior security strategy with security built into the architecture,
security analytics dashboard, threat intelligence, data anonymisation.
(+) Solutions specially dedicated to the IIoT.
(-) Low level of coordination between the various teams within IBM,
according to IDC.
Microsoft Azure IoT Suite: well-placed for leadership
Microsofts leadership has assigned a high level of priority to developing its
industrial software offers including the Azure IoT suite, supported by one of the
largest global datacentre networks.
Capital goods
The Azure IoT Suite, Microsofts IoT platform, was released in September 2015,
although the company had already launched IoT-related products and services
before this date. It has been one of the leaders of the market since then, with a large
preconfigured offer. The high level of financial resources and human capital
directed at Azure, one of Microsofts fastest-growing divisions, ensures that the IoT
platform is well-placed for future leadership.
Microsoft states that its platform allows customers to transform their business,
through the insights provided by the analysis of the data collected from sensors.
Azure IoT Suite can address various business cases in a number of industries, and is
not especially focused on manufacturing applications, although it offers a specific
solution for the manufacturing sector.
Similar to its competitors, Microsofts IoT platform includes the following business
capabilities and managed services, which span the entire range of IoT platform
technology.
Chart 56: Azure IoT Suites range of business capabilities
Source: Microsoft, Kepler Cheuvreux
Microsoft offers various services with its platform, including analytics (Cortana),
machine learning, several software development kits (SDKs), IoT Edge, data storage,
data visualisation capabilities, as well as a range of preconfigured solutions. The
comprehensive nature of the offer and the potential to include applications and
intelligence position Azure as one of the favourites to win as the industry
consolidates on leaders. The offer includes pre-configured solutions including:
Connected factory is the preconfigured solution of the Azure IoT platform
dedicated to Industrie 4.0.
Capital goods
Remote monitoring is dedicated to asset management, such as fleet and

inventory management for the freight logistics industry.
Predictive maintenance helps prevent equipment failure and avoid
downtime.
Connected vehicle provides IoT solutions for connected cars.
Smart Buildings helps reduce costs and improve building efficiency.
Preconfigured solutions consisted only of the first three examples provided above,
and has since been extended to the current five solutions. We see preconfigured
apps as a key differentiator and think that the addition of more of these apps is a
clear positive for Microsofts platform.
When it comes to partners, quite unsurprisingly, Microsoft seems to be ahead of its
competition. Its network of partners is deep and global, covering 13 regions
including China and Germany. Its strong market presence, due the wide breadth of
its offerings and the success of its cloud solutions, is another big positive.
On pricing, Microsoft charges a one-off fee for a preconfigured solution and a
subscription depending on the number of messages/devices/amount of storage
used. This model makes Azure IoT platforms pricing look fairly complicated.
Microsoft Azure IoT Suite pros and cons :
(+) Strong network of partners.
(+) Huge market presence through its installed base and broad geographical
reach.
(+) Convincing preconfigured apps.
(-) Complicated pricing.
(-) The platform is not available in private cloud environments currently.
Amazon Web Services IoT platform
AWSs IoT Platform was launched by Amazon in December 2015 following the
acquisition of 2lemtery earlier in 2015, a US-based company that had developed an
IoT platform. Overall we see the AWS offer as more directed toward consumer-
based applications, while AWSs offer seems to leverage on the groups large
existing datacentre service offer.
From an architectural point of view, AWSs IoT platform differs from that of many of
its competitors due to the high degree of configurability of the platform. While this is
clearly a plus for the most sophisticated potential customers, it may put off those
looking for a more turnkey solution. Moreover, AWSs IoT is mainly focused on
increasing the use of AWSls managed cloud platform. The platform aims to offer a
cloud-based system for different devices. AWS now offers device gateways and IoT
device SDKs, all accompanied by secure data and interactions.
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Chart 57: Overview of AWS IoT
Source: AWS
Differentiating features include strong authentication and encryption capabilities at

all points of connection, which ensures that data is never exchanged between
devices and AWS IoT without proven identity. Market intelligence agencies all note
that customers view security as one of the key strengths of AWSs IoT platform.
Chart 58: AWS IoT platforms authentication and encryption process
Source: AWS
Capital goods
Like all big software players reviewed here, AWSs ecosystem of partners is very
rich, ranging from hardware vendors to integrators and software makers.
Interestingly, it also displays as partners the names of other IoT platform vendors
such as PTC as other IoT platform providers use AWSs cloud computing services.
This certainly represents a threat, in our view, as competition can therefore gain
access to the architectural elements of AWS IoT solution, which could otherwise
help Amazon differentiate itself from its competitors.
Related portfolio offerings include Kinesis (analytics), Amazon Machine Learning,
and Amazon S3 (storage).
Pricing looks somewhat simpler than what the competition proposes. It is based on
1) the number of messages published to AWS IoT, and the number of messages
delivered by AWS IoT to devices or applications. In addition, the AWS IoT free tier
gives access to 250,000 free messages per month, for 12 months. A message size
increment is a 512-byte block of data processed by AWS IoT.
AWSs pros and cons:
(+) Amazons broad presence in enterprise environments through its range
of cloud offerings.
(+) Strong security model.
(+) Large and diverse ecosystem of partners.
(+) Easy pricing .
(-) Configurability may prove too complicated for the least sophisticated
customers.
PTC ThingWorx the benchmark for industrial IoT platforms
PTC is one of the leading IoT platforms providers, according to Forrester and IDC,
and has been actively developing its offer since the 2013 acquisition of ThingWorx.
ThingWorx is the oldest IoT platform on the market, having been released in March
2011. Following PTCs acquisition of ThingWorx, the group added augmented
reality capabilities to the platform in 2015 after the acquisition of Vuforia.
Since the acquisition of ThingWorx, PTC has invested an additional USD1bn in the
platform to add new functionalities and to ensure solid and comprehensive
capability. According to IoT Analytics, PTC dominated the IoT platform market in
2015, with an 18% market share overall, which may be higher in certain verticals.
PTCs platform is clearly focused on the Industrial segment and comprises a number
of core building blocks that combine to create a comprehensive offer.
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Chart 59: ThingWorxs architecture
Source: PTC
ThingWorx is built on the following pillars:

Foundation is the end-to-end technology platform which empowers
developers to connect, create, and deploy applications and solutions through
DevOps. It also includes connection servers, device/cloud adapters and Edge
connectivity
Utilities are capabilities built into IoT applications to manage the
performance of connected products (user-interface component). It includes
pre-defined capabilities in an environment for non-developers to create, edit
and manage business processes related to connected devices.
Analytics enables developers to add real-time pattern and anomaly
detection, predictive analytics and simulation to the solutions they build,
similar to the previous platforms we have reviewed before (PTC added
capabilities in analytics to its platform after the acquisition of ColdLight in
2015)
Studio is a key differentiator to PTC ThingWorx compared to its
competitors. It features augmented reality capabilities (from the acquisition
of Vuforia in 2015) on top of 3D modelling (digital twin). Visualisation of
3D data occurs in real-time in an augmented reality environment with the
help of a tablet, smartphone, or virtual reality helmet. While it is difficult for
now to gauge whether this type of offering really adds value to engineers, it
must at least attract a lot of interest from customers and prospects.
Industrial connectivity is the layer in charge of capturing and
communicating data from industrial equipment and applications to
ThingWorx.
PTCs ecosystem of partners looks the broadest and largest of our sample.
Moreover, the recent strategic alliance with GE creates a further strengthening of
the position. ThingWorx displays on its website a list of more than 130 partners
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(https://www.thingworx.com/ecosystem/partners/directory/) including the largest

vendors in the IT hardware/software/services spaces as well as industrial players
such as Bosch, who have also been developing their own IoT platform offer.
ThingWorx also features a tool called ThingWorx Community, featuring help forums
and used by developers and customers to share and learn from their respective
experiences with the platform. Accordingly, PTC is actively fostering the
development of the forums, with regular postings and quick answers as shown in the
screenshot below. In addition, it offers academic programmes on IoT, covering
software, curriculums and projects to help customers develop smart, connected
products. Webinars are available too.
Chart 60: Screenshot from ThingWorx communitys website
Source: PTC
In addition, ThingWorx has already developed a marketplace featuring many

applications covering all industries from aerospace, automotive, construction,
consumer products, IT, healthcare, oil & gas, agriculture to smart cities.
In terms of ecosystem, for both partners and applications available in its
marketplace, PTC looks like the most advanced of all the vendors we have reviewed
in the study.
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Pricing is based on a subscription model and depends on the feature set chosen by
the client and the number of users.
PTC ThingWorxs pros and cons:
(+) Multitude of applications available in its marketplace.
(+) The largest ecosystem of partners among the solutions we have studied.
(+) The best augmented reality capabilities.
(+) Extensive experience in industrial software (CAD, PLM).
(+) First mover premium, early market leader with an 18% market share in
2015, according to IoT Analytics.
(+) Numerous delivery models and broad ecosystem of cloud services
providers.
(-) Platform made out of a patchwork of acquisitions means potential
integration issues.
GE Predix: a leading IIoT platform focused on service
GE markets Predix as the worlds first industrial internet platform, which has been
under development for a number of years before being officially released in
February 2016, just before Siemens MindSphere. The system is a cloud based offer
that connects machines to data gathering and analytics offers to product
productivity and services benefits to users. Predix was first built for GEs own use,
internally. It invested more than USD1bn in Predix. The fact that GE built, tested
Predix and then used it for its own plant is an important differentiator for potential
industrial customers, who are able to review proof points.
The platform connects machines, data, and analytics to people, primarily in GEs
main industrial markets of transportation, power generation and distribution,
healthcare, oil & gas, water, mining, manufacturing, automotive, wind, and aviation.
GEs current focus in on scaling its Predix platform, further developing its digital
twin capabilities, enhancing edge to cloud capabilities, and providing a strong
developer experience. Use cases by industry promoted by GE are summarised
below and illustrate the well proven capabilities of the groups offer.
Chart 61: GE use cases for Predix by industry
Source: GE
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GE Predix includes the following capabilities:

Scheduling & logistics: increase asset utilisation with analytics, improving
efficiency and performance.
Connected products: Replace the break-fix model with a predict-and-
prevent services approach.
Intelligent Environments: IoT solutions in cities and buildings to enhance
everyones experience.
Field Force Management: Give workers the data they need to make repairs
and upgrades more effective.
Industrial Analytics: monitor asset wealth to identify problems, then use
predictive analytics to boost productivity.
Asset Performance Management: Achieve new levels of performance,
reliability throughout the life cycle of assets.
Operations optimisation: Use key insights on an enterprise-wide scale to
resolve operational issues, drive productivity and increase efficiencies.
Two types of data analyses are supported by Predix:
Operational analytics: Data is analysed real time at the edge. Predix offers
three types of operational analytics:
1) Descriptive analytics determine what happened and why.
2) Predictive analytics make forecasts based on a model.
3) Prescriptive analytics determine possible actions to move towards a
solution that has the largest impact on a companys bottom line.
Historical analytics: analysis of petabytes of historical data to build
predictive models (traditional cloud computing).
In terms of apps, Predix appears concentrated on its core markets in a similar way to
Siemens. However, Predix supports the building of responsive web, mobile, and
embedded applications that integrate with smartphones to computers. It provides
software developer kits (SDK) for laptops and smartphones to simplify building of
applications. This relative scarcity of GEs pre-packaged apps is offset, like Siemens
again, by an extensive list of partners ranging from hardware vendors (Cisco, Dell,
Intel, etc.) to software (PTC, Oracle, Microsoft, etc.) and services (Accenture, TCS,
Cap Gemini, Cognizant, HCL, Infosys, Wipro, Altran, etc.)
On top of its complete portfolio of analytics offerings, GE also features the most
advanced digital twin capability, according to Forrester, which partly justifies the
fact that it is considered by the latter as a leader in the IoT platform market.
We consider GEs platform to be mainly focused on facilitating the monitoring and
management of industrial assets supplied by GE to provide customers with
productivity and uptime benefits in their own operations, which leaves GE focused
on service, predictive maintenance and optimisation of industrial asset utilisations.
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Chart 62: GE Predix Platform - overview
Besides the cloud component, Predix Edge is divided into three layers:
1. Predix Machine is GEs tool for device positioning, monitoring, data
collection and edge analysis. It runs on a wide variety of hardware platforms
from sensors, controllers, gateways, to on-premises appliances.
2. Predix Connectivity. The design and initial deployment of connectivity can
typically take 6-12 months. Predrix Connectivity offers secure
communications between Predix Edge gateway and controller devices and
Predix Cloud over various access networks.
Chart 63: Predix connectivity
Source: General Electric
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1) Predix EdgeManager provides and centralised view of edge devices that are
running Predix Machine. It is basically the user interface.
Predix Cloud is built on Pivotals Cloud Foundry, an open-source PaaS. The system
primarily operates on the edge, as according to GE, industrial volumes of data are
too large to guarantee a high level of security. GE has preferred to build its own data
centre with its partners.
The pricing is based on a pay-as-you-go pricing model whose cost depends on the
number of services and amount of usage. Each subscribed service includes a monthly
price that will vary based on usage each month. Billing charges are monthly,
quarterly, or annually, depending on the clients needs.
GE Predix pros and cons:
(+) Good knowledge of the IIoT, platform tested in-house in various
industrial environments.
(+) Advanced analytics.
(+) Best digital twin product in the market.
(+) Very broad range or partners in the IT hardware/software/services
sectors.
(-) Few pre-packaged apps.
(-) No public cloud option.
Siemens MindSphere targeting leadership in core segments
Siemenss has committed to spend EUR250m+ over the next 18 months to
accelerate the development of the industrial IoT platform MindSphere, which is
described by the company as an open IT ecosystem for the manufacturing industry
launched in March 2016. It was initially based on the SAP Cloud Platform, but is now
available through a number of public cloud infrastructure providers including AWS
and Microsoft Azure. Like SAPs, the platform allows the creation of digital models
(digital twins) of plants with real data from the production assets.
Siemenss existing capabilities in industrial design and testing software and the
groups data monitoring and analysis capabilities ensure that the company is able to
provide sophisticated digital twin solutions that can improve asset utilisation and
reduce time to market for new products by 30-40% and cut engineering costs by 40-
50%.
Like other IIoT platforms, MindSpheres benefits include increased revenues and
customer satisfaction, reduced claims and warranty costs, reduced downtime,
maintenance costs, energy consumption, and increased machinery lifetime. The
platform is purely dedicated to the industrial and manufacturing space and aligned
with Siemenss core automation and engineering capabilities.
A central part of Siemenss strategy is digitalisation, industrial software and digital
services across each of the groups verticals. The groups IoT platform, MindSphere,
is a central component of this strategy, which also spans industrial design software,
manufacturing control and automation software and digital testing and modelling
software.
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From 2017, following organic and inorganic business development, Siemens is

expected to generate revenues of over EUR5bn from industrial software business
and a further EUR1bn from its digital services vertical. The two business activities
are expected to grow by close to 8% a year, 2-4pp faster than the group. In the US,
more than 120 customers are interested and more than 20 customers ar eactually
already connected and using MindSphere, demonstrating customer acceptance for
the Siemens offer.
Rather than an IoT platform, MindSphere is labelled by Siemens as an operating
system component of the IIoT platform used to build apps. Currently, neither IDS
nor Forrester incorporate Siemens MindSphere in their segment of market leaders.
Accordingly, MindSphere is equivalent to the PaaS component of SAP Leonardo. In
any case, Siemens platform is made up of three layers:
1) MindApps are apps from Siemens and partners used to deliver asset
transparency and analytics insights (SaaS layer where apps are developed):
The layer is open: first beta APIs were released to allow developers
to start developing apps.
The aim is to build an expansive industrial app store through which
many digital services will be generated.
On analytics for example, it will be a combination of Siemens and
third-party apps. Apps will basically compete against each other, and
the best will eventually win.
2) MindSphere OS is the interface used to create customer-specific apps and
works on a variety of cloud infrastructure including SAP, Atos, AWS and
Azure (PaaS layer).
The platform was started with HANA but is gradually being opened
up for various cloud providers to offer choice to the customer.
3) MindConnect offers secure and encrypted data communication to deliver
plug-and-play connection of both Siemens and third-party products to the
MindSphere OS (Connectivity layer).
Chart 64: Siemens IoT platform architecture
Source: Siemens
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The pre-packaged apps offered by Siemens to facilitate customer adoption include

the following:
Fleet manager: Provides an overview of the plant assets data and monitors
them to facilitate improved productivity.
Manage MyMachines: Improves maintenance and servicing and provides
transparency on the status of machines. It shows information on the current
operation of the machines and recent productivity history. Additional
customisation allows the monitoring of the critical variables to reduce
inspection and maintenance costs and aims to offer your customers a range
of improved services.
Keep Secure!: monitoring of systems and plants, with security reports
generated periodically.
Product Intelligence for MindSphere: Omneo is a SaaS solution for Big Data
management providing visibility in both products and supply chains
performance.
At first, the number and range of services provided by the apps developed by
Siemens look rather weak. To increase the number of available apps, Siemens chose
to emphasise the openness of its platforms, welcoming many partners on board to
develop their own apps. Siemens is also willing to offer as many options as possible
to its customers in its role as cloud provider.
To increase the range of companies and developers working with Siemens, the
MindSphere network has been extended to include the following that is heavy on
large corporate IT services companies that will support implementation of Siemenss
offers:
AWS - Providing cloud infrastructure (data centres) and its services to
Siemens.
Bluvision (subsidiary of Assa Abloys HID Global) - Made available its own
IoT solutions on the MindSphere. Manufacturing companies can subscribe to
Bluvisions condition monitoring solutions through the Bluzone app running
within MindSphere.
Accenture - developed a suite of applications for MindSphere to enable new
digital services such as predictive maintenance or remote condition
monitoring, while furthering its implementation credentials.
Atos to deliver digital services for the platform such as use case evaluation
workshop/prototype/integration.
IBM- Watson (IBM Analytics) is included to the platform to help MindSphere
users access and analyse data from sensors.
SAP - MindSphere was initially built on the SAP Cloud Platform and Hana
database.
TCS - Will develop applications and digital services for manufacturing
customers
From this group of partners, Siemens aims to rapidly build a community of app
developers and software engineers familiar with the groups systems.
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Chart 65: Siemens MindSphere partners
For go-to-market, Siemens said it will use both partners/system integrators and its
own direct sales force. Pricing will be based on a mixed model and is likely to
incorporate both consumption and subscription models, which are being further
formulated and will be based on the number of assets connected, the amount of data
used, and the number of applications employed.
Siemens MindSpheres pros and cons:
(+) An open platform with large ecosystem of partners and developers which
allow the development of various apps made available to all clients.
(+) Huge installed base of industrial customers provide easy-to-access
potential clients for MindSphere: fleet of 30m automation devices, 70m
contracted meters, 800,000 connections for buildings, turbines.
(+) Pricing seems transparent and easy to understand.
(-) Apps developed by Siemens look fairly limited.
All in all, while MindSphere looks like a strong pure IIoT platform for the long-term,
we believe it will find it hard to gain much momentum short-term because of its
number of applications. It will take time for MindSpheres partners to develop the
right applications, and even more for the best one to stand out from the crowd.
SAP Leonardo: focused on leveraging on the existing IT leadership

During late 2016, SAP committed itself to invest EUR2bn in IoT by 2020. Since then,
it has transformed its SAP Leonardo IoT solutions brand into a digital innovation
system encompassing a number of capabilities. While SAP Leonardo used to the
name of SAPs solutions for the Internet of Things, since the last SAP user
conference (Sapphire) in May 2017, management has presented Leonardo as a
whole digital innovation system including all of SAPs competencies in Big Data and
machine learning, as well as emerging technologies such as Blockchain. SAP markets
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Leonardo as a system enabling businesses to rapidly design, prototype, and deploy

industry-specific solutions. Each solution designed through SAP Leonardo is called
an Accelerator.
SAP Leonardo is not only focused on industrial applications, but also encompasses
solutions for connecting cities and agricultural IoT, among others application
markets. It can be run either in the cloud (Microsoft Azure, Amazon AWS and
Google Cloud are among SAPs partners for Leonardo, in addition to a bespoke SAP
Cloud Platform) or on-premises. Deloitte has been designated as a preferred
partner, facilitating implementations.
As of today, SAP Leonardo is set to be running on revenues of around EUR100m,
posting triple-digit growth. We believe it could achieve EUR1bn in the medium term,
although the ramp-up may take 5-10 years.
SAPs Leonardo suite, as mentioned above, goes far beyond IoT and includes the
following technologies:
1. IoT: Includes pre-packaged applications developed by SAP such as SAP
Connected Goods, SAP Vehicle Insights, SAP Asset Intelligence Network,
SAP Predictive Maintenance and Service.
2. Machine Learning: Empowers software algorithms to learn from history how
to handle unstructured data through the recognition of patterns. With it, an
application can learn how to initiate appropriate action without being
explicitly programmed and expand its expertise in each case. For example:
auto-matching of payments to receivables, automatic learning of customer
behaviour to alert to the risk of client churn, matching of jobs with
candidates (by extracting patterns of past successful hires).
3. Analytics: Business Intelligence (data visualisation, dashboards, mobile
analytics, reporting), Predictive Analytics, Enterprise Performance
Management (strategy management, profitability & cost management,
financial consolidation).
4. Big Data - SAP Hana platform for big data.
5. Blockchain: It is not yet totally clear what the applications of Blockchain may
become for SAP Leonardo, but first uses are tied to the security and
encryption of the data received and stored.
6. SAP Cloud Platform: SAP PaaS.
7. Data Intelligence: Extracts insights from a large network of anonymised
data. Find ways to solve business problems, monetise data.
8. Design Thinking: Business innovation, digital transformation & value
optimisation. SAP-s consultancy offer.
Each SAP Leonardo accelerator includes a combination of these technologies,

which are represented in the following chart, which illustrates the functioning of the
platform:
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Chart 66: SAP Leonardo - technology overview
Similar to any other IoT platform as we described earlier, SAP Leonardo connects
endpoints to channels (left part), applies analytics and machine learning (SAP
Leonardo IoT Foundation), integrates data to the enterprises systems (right part)
and embeds pre-packaged applications (top part).
The SAP Leonardo Foundation has two components:
1. SAP Leonardo Business Services: reusable microservice framework to
enable customers to build their IoT model/apps and connect it with business
context from back-end systems leveraging configuration-driven tools
2. SAP Leonardo Technical Services: technical services of SAP Cloud Platform
for SAP Leonardo IoT Portfolio that enables customer platform capabilities
to effectively manage their sensors and devices. As shown in the following
chart, technical services include device management, big data connector,
and real-time analytics.
To promote SAP Leonardo, SAP decided to create Innovation Centres where

customers and prospects can test SAP Leonardo and design the apps that address
their specific needs. The first innovation centre was opened in Paris on 21 June
2017. Others will follow in New York, Bangalore, and Sao Leopoldo.
SAP is offering six categories of pre-packaged applications while also allowing the
development of ad-hoc applications through the companys PaaS. SAP has built six
well-advanced categories of applications that leverage the power of IoT in various
fields. These are as follows:
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Chart 67: SAP Leonardo (IoT) connected things
Source: SAP
1) Connected products enable end-to-end visibility on product-centric

operations and offer the ability to optimise compliance visibility and service
availability.
2) Connected assets link production systems and assets with manufacturing
and maintenance business processes to reduce operational and maintenance
costs and increase asset uptime.
Connecting machines, assets such as pipelines to enhance
maintenance.
Typical results (SAP performance benchmark for organisations
adopting preventive and predictive maintenance and service
approach compared to organisations practicing reactive
maintenance and service): -44% lower unplanned downtime, -17%
lower annual service and maintenance costs, +28% ROA.
3) Connected fleets track, monitor, analyse, and maintain all moving assets,
wherever they are in the network.
Connecting vehicles and collect their sensor data to improve the
collection of goods, delivery process, safety (driving behaviour), and
enhance in-transit inventory management.
4) Connected infrastructures deliver new forms of digital operational
intelligence to transform physical-infrastructure systems to improve service,
drive economic growth, and allow for more efficient and cost-effective
operations, infrastructure compliance, and risk mitigation.
Use of data to manage and maintain properties/buildings, manage
construction projects (to deliver on time and within budget by
ensuring that materials are in the right place at the right time),
optimise energy grids by ensuring visibility of all assets across the
grid.
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5) Connected markets foster local markets, cities, and urban and rural areas to
optimise the utilisation of natural resources and assets, reduce emissions,
congestion, and energy usage, and protect the environment.
Market insights, increase farming efficiency by connecting
agricultural machines, for urban areas: traffic flow management,
parking management, lighting, open public spaces, yards, ports and
other infrastructures.
6) Connected people enables improvements to be made to lives, work, and
health by linking people and communities and providing better lifestyle
experiences and opportunities for organisations to evolve into new business
models.
In healthcare, connecting people to the centre, get patients a real
health dashboard, people and homes: connected energy and security
systems.
This range of applications is obviously very broad and goes far beyond typical IIoT.
Other industrial vendors such as Siemens and GE will typically focus only on the
connected products and connected assets parts.
Another key focus in the IIoT segment, which is offered by both GE and Siemens, is
the digital twin, which allows for digital medialisation and simulation of an asset.
Since its acquisition of Fedem Technology, SAP is able to provide Leonardo
customers with a digital twin tool (examples of digital twin uses include dynamic
simulations, fatigue assessments of offshore oil & gas platforms, offshore wind and
wave power technology, vessels and marine systems).
In terms of pricing, SAP has chosen to adopt a fixed-price approach for each business
issue. Price is therefore defined in advance, and the company commits itself to
deliver its SAP Leonardos base value proposition within eight weeks.
SAP Leonardos pros and cons:
(+) Offering is way broader than peers, it goes beyond pure IIoT only and
address fleet management, supply chain, connected cities, people and
markets as well as products/assets.
(+) SAPs pre-packaged applications for each of its six categories look very
solid compared with some of its competitors.
(+) An installed base that can be levered to include other SAP products such
as CRM/ERP. Leonardo can also be integrated to these solutions to make it
more efficient.
(+) The marketing strategy, based on innovation centres in various cities
worldwide, coupled with transparent fixed price seems the right one to make
business leaders aware of the specific uses of SAP Leonardo.
(-) SAP has been relatively shy so far when it comes to providing a list of
partners for applications development/hardware makers, which could
potentially mean a limited choice of third-party applications and connecting
devices
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For IT services sector, IoT not a game-changer

Mid-term IoT unlikely to boost IT companys growth profile alone
In the IT services sector, we see opportunities raised by the IoTs expected boom
supporting more integration and consulting work. IoT is part of the new digital kind
of service emphasised by large IT service players, including cloud, analytics, machine
learning and artificial intelligence, and as opposed to legacy, traditional, low value-
added services.
Digital services are growing fast (around 25% for Tata Consulting Services -TCS,
strong double-digit for Accenture, mid to high 20% for Cognizant), while legacy
services are slowing down. This means that their relative importance in IT services
companies business is growing: TCS said that digital revenue made up 18.9% of its
Q1 2018 total top line, while the figure reached c. 50% at Accenture (Q3 2017) for
what the company calls the new (digital, cloud, security).
From the headline proclamations of digital service growth, it is difficult to estimate
pure IoT revenues, especially since digital revenues are often a mix of different
technologies. A fair estimate, in our view, would be that IT integrators and
consulting players derive 10-20% of their digital revenues from IoT. This means that
overall IoT could represent 1-5% of IT players total revenues, growing at 15-30%,
depending on the company considered. Thus, we believe IoT is still only marginally
influencing IT services players financial performance. Extrapolating the current
growth pace in IoT, we believe it could represent up to 10% of IT services revenues
in five years time.
With this figure in mind, which we already see as a pretty bullish estimate, we do not
expect IoT alone to be a game-changer for IT services companies in the mid-term. It
is more the combination of emerging technologies that is changing the sectors
landscape right now.
The leaders in IoT consulting and systems integrations are

According to IDC, the IT services players leading in IoT are Accenture, HCL,
Cognizant, TCS, Deloitte, IBM, and PwC, which implies a geographical bias towards
North America. In our coverage of the IT software and services sector, Atos and Cap
Gemini are both among the major players, as they are in IDCs classification.
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Chart 68: IDC Marketscape worldwide IoT consulting and system integration
Source: IDC, Kepler Cheuvreux
Unsurprisingly, the current leaders in the IT services race are seen as the leaders in
IoT integration and consulting. They are also the ones who talk the most about the
move to digital, the integration of new technologies, and partner with the IoT
platform vendors we reviewed in the previous section.
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Slow-paced disruption underway

Despite the hype, we do not see digitalisation across the capital goods sector
creating a Kodak-like technological disruption. Rather, we expect a gradual
evolution of business models over 10-15-years that will occur as the penetration
of the latest digital technologies permeates throughout each respective industry
vertical.
The shorter-term focus is likely to centre on the monetisation of data from each
industrial vertical principally through predictive maintenance but also through
software-driven service offers and a focus on enhancing operational efficiencies.
Longer term, the largest players are set to lead the transition toward outcome-
based products and solutions, such as product as a service (PaaS). Reaching the
aspirational operating efficiencies envisaged by the Industrie 4.0 concepts is
both complex and expensive, ensuring that the largest capital goods companies
are best-positioned to lead the transition and secure future revenue streams.
Focus to shift from asset utilisation to outcome-based offers

The vision for the fourth industrial revolution presented by the members of the
World Economic Forum provides a good backdrop with which to picture future
business transformation for the capital goods sector. The first phase of integrating
the latest digital technologies will centre on realised promised annual asset
efficiency gains of 3-5%.
As the ubiquitous application of smart sensors allows increased data capture,
storage and meaningful analysis of the data, we expect capital goods companies to
aim to expand the range of service offered, thereby increasing service-based
revenue streams. As the level of interconnectivity and intelligence in products and
solutions offered by industrial companies expands and operating and information
technologies merge more tightly, we expect leading capital goods companies to
accelerate the shift towards outcome-based offers.
Chart 69: Adoption and impact path of the industrial internet
Source: World Economic Forum
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The later phases of transition shown in the above chart will take longer to realise
and represents a shift towards the outcome-based economy and an integrated
human machine workforce. Today, these concepts are more aspirational and such
transitions are only likely to take shape over a 5-10-year period. The long-term
nature of realising this later shift towards selling measurable outcomes is due to
enormity of the task and risks and natural reluctance likely to emerge from
customers. During both the first and later phases of development, capital goods and
IT and software companies will need to build new partnerships, extend their range of
capabilities, and shift their focus from sales, marketing and product development
towards improving customer outcomes rather than solely product optimisation and
services.
A three-pronged transition
Across the capital goods sector, the transition driven by digitalisation is taking place
along three channels, each with a varying impact on business models. Along the
horizontal channel, digitalisation has driven software companies to consolidate and
create a full suite of software systems able to accelerate the process of moving from
product conception, design, production, and entry into service.
This integration process has been led by Siemens, mainly through the acquisitions of
UGS and Mentor graphics. Two vertical channels for product creation and support
and experiencing change from digitalisation: 1) the concept of Industrie 4.0 focuses
on the whole of the production supply chain from customer demand through to
production and supplier management; and 2) the focus is on in-service product
support and management, which is more closely aligned with IIoT and GEs
initiatives that focus on predictive maintenance, dynamic control and increasingly
providing assets or software as a service.
Of the three transitions, we expect the fastest transition toward new business
models to happen in the service segment, which carries less risk of adoption and
requires a lower penetration of digitalisation throughout industrial value chains.
Chart 70: Digitalisation affective horizontal and vertical business development
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As stated earlier on, the drivers behind the adoption of each new approach to
business include lower costs, enhanced productivity, increased speed to market,
faster responsiveness to customer demands, and closer customer relations.
Customers to first demand predictive maintenance
Surveys from the World economic forum indicate that the prime motivations for Near-term changes
investment in digitalisation technologies are; 1) optimisation of asset utilisation; 2) to target asset
lower operational costs; and 3) the creation of new revenue streams through optimisation and
new service- linked
products and services.
revenue streams
The realisation of each of these benefits carries different costs and risks and is
dependent on the collection, monitoring, and analysis of data. One of the leading
value added applications today for industrial customers is predictive maintenance.
Industry consultant IoT Analytics predicts a market rising from USD2.2bn in 2017 to
USD10.9bn by 2022, offering an area for accelerating growth, with a CAGR of nearly
39%, and attracting corporate attention as a growth opportunity. While we would
take the projections for the size of the market with caution, with note the high level
of expected growth.
Chart 71: Industrial priority when considering application of IIoT
Source: IoT Analytics
Companies throughout our industrials coverage universe are already offering the
necessary data capture, communication, storage and interpretation of data to offer
value-added predictive maintenance services. We expect this to remain a key focus
area. What is notable when reviewing predictive maintenance is the mix between
ICT, IT services and hardware companies, which demonstrates clearly how
competitive boundaries are blurring, as shown in the following chart.
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Chart 72: Predictive maintenance survey
Source: Conducted by IOT Analytics,
One of the core capabilities that will be required to optimise asset utilisation and
generate productivity benefits in the manufacturing environment is data capture,
storage and smart analytics. Capital goods businesses, with their deep industry
knowledge and recognition can use the enabling software and systems to deliver
value adding customer solutions. The rise of data analytics and the need for more
data scientists in industrial markets is summarised in the following chart. The
response from capital goods companies is set to be increased investment capabilities
of own human resources to capture and use data, complemented by partnerships.
Chart 73: Data analytics to become a critical part of the value proposition
Manufacturing and
industry represents a
huge opportunity, but
multiple sectors will
benefit
Source: IoT Analytics
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Four areas of the business model set for change

We provide the classic overview for a business model applicable to capital goods Adaption of business
companies in the chart below. Across the various components we see four areas models to centre on
where we expect business models to alter and change: 1) the value proposition of value propositions,
core competencies
capital goods companies is being enlarged to incorporate more digital features such
and customer
as predictive maintenance, assets as a service, enhanced customisation and outcome relations
based offers; 2) core competencies of employees need to be enhanced within the
digital sphere and IT and software capabilities need to be increased through
partnerships, JVs and co-operation; 3) customer relationships will be deepened as
capital goods companies move into customer asset management and optimisation;
and 4) the value configuration needs to be expanded to incorporate enablers such as
big data storage, data analysis and artificial intelligence, connectivity solutions and
sensors.
Chart 74: Core elements of business model
Source: Kepler Cheuvreux, Osterwalder, Pigneur & Tucci
For capital goods companies, we expect limited change in the distribution channels,
core revenue model, and target customers. Moreover, adjustments to cost
structures are likely to be limited.
Two examples of digitalisation in action

In these examples, GE and Claas are using their extensive knowledge of the
equipment they produce with expertise gained from customer operations to
enhance the value proposition being offered.
The first chart below shows how General Electric has shifted its value proposition
from solely selling jet engines to fleet optimisation for customers. Initially as digital
capabilities evolved GE expanded revenue streams by providing preventive
maintenance capabilities. Then by combining enlarged data capture and analysis
tools, GE has broadened the scope of capabilities to airline fleet optimisation, both
deepening the customer relationship and extending the duration of revenues
toward a continuous service offer.
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The second chart below shows how Claas has shifted its business from selling farm
equipment to providing farms with target crop yields on their land, a transition that
has required Class to expand its range of capabilities to encompass remote
diagnostics, machine monitoring and incorporation of multiple weather, location and
chemicals data.
Chart 75: General Electric engine support Chart 76: Claas tractors target yield
Partnerships set to be critical in future

To facilitate the shift into more services and asset optimisation for customers, the
capital goods sector needs to incorporate new capabilities, beyond the existing
skillsets. The most important additional skills will include data capture,
communications, data storage big data management and analysis, artificial
intelligence and data visualisation.
With the exception of a number of major global industrial companies, including
General Electric and Siemens, most companies are seeking partners to assist in
developing the backbone of data management (the IoT Platform or IIoT Platform).
We are seeing capital goods companies forming partnerships with global technology
A key long-term shift
companies like Microsoft, IBM, and Amazon Web Services, to provide cloud-based in the market will
open IoT platforms that encourage the widest possible number of software centre on a shift to the
developers and data scientists to create industry-specific applications and analytics outcome-based
economy and an
programmes. Partnerships are also being expanded with artificial intelligence
increase in As a
providers like IBM and Google and leaders in communication such as Cisco and service offers from
Alcatel Lucent. traditional
manufacturers
Outcome economy evolution a long-term phenomenon
Capital goods companies have historically built their reputation on supplying high-
quality products and systems at competitive prices while satisfying customer needs.
The exploitation of the installed base of production and solutions has provided a
complementary service revenue stream.
Digitalisation is creating enhanced product connectivity and functionality, which in
turn is greatly expanding the capabilities that capital goods companies can offer.
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Forward-looking industrials are seeking to align themselves more closely with

customers by searching for ways to better address customers business performance
by looking forward in the value chain to providing specific outcomes for customers.
We have aimed to highlight this above.
Other examples of forward integration include plant optimisation, increased
efficiency of transportation networks, and raised farm yields. However, in many
cases this shift toward solutions selling will involve undertaking operations than
many customers consider core operations. The surrender of core competencies to
equipment vendors creates multiple risks and will delay the adoption of the outcome
economy.
The outcome economy is a world where capital goods companies compete to deliver
quantifiable results that matter to customers at a specific time and place. It is
contingent on the marketing, pricing, and selling of goods and services based on the
results or outcomes they produce for customers, not on the items service or face
value. It aligns suppliers with the ultimate goal of greater productivity and flexibility
within the value chain.
We see the shift enabled by widened business partnerships, digital technologies,
high power analytics and connectivity. It will undoubtedly force traditional capital
goods companies to critically examine their business models and may require
increased skills and partnerships. Guarantees to maintain factory uptimes,
contracting to energy savings in buildings or assuring higher farm crop yields will
shift risk profiles and will hinge on increased asset connectivity and real-time
operational performance.
As monitoring capabilities of software and hardware providers increases we expect
the prominence of software, platform, infrastructure and everything as a service
(SaaS, PaaS, IaaS, etc.) will increase. Traditional capital goods companies will be
forced to review their value proposition and may need to bring additional
partnerships into business relations. In addition, there is likely to be a further
blurring of the competitive boundaries between traditional capital goods companies,
software and ICT companies and smaller start-ups. However, we do not see these
types of changes in the value proposition for industrial companies occurring on a
broad basis over the next ten years.
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National initiatives speed up digitalisation

The development of industrial automation hardware, software and systems
driving increased digitalisation is occurring concurrently across private and
public bodies worldwide. National governments are incentivising public and
private sectors to make technological advances to increase national productivity
and competitiveness and to foster reindustrialisation. We review initiatives in
ten key nations where there is co-operation between business, trade unions,
trade associations, government, and academia.
Notable differences by nation are apparent, reflecting differing industrial and
cultural starting positions. We conclude that national policies in Germany and
the US are at the forefront of defining standards and driving the adoption of
digital technologies, albeit based on differing approaches. The focus in China and
South Korea is more on accelerating the adoption of smart manufacturing
technologies and automation to enhance productivity and the competitive
position of the industrial base. Japanese industry also leads in the field of next-
generation automation and robotics but appears less motivated to drive
standardisation.
National initiatives capitalise on regional and local strengths

The pace of adoption of digitalisation, Industrial Internet of Things (IIOT) or
Industrie 4.0 is occurring in two main areas of the value chain; 1) the digitalisation of
the horizontal value stream of product development, manufacture and supply and in
life service a field being led by German and European companies, with SAP, Siemens,
Schneider Electric, and Dassault Systmes at the forefront; and 2) smart monitoring
of equipment through interconnected sensors creating new service-based business
models, leveraging on the ICT revolution, which is being promoted more
aggressively by US-based companies and championed by GE.
Table 7: Overview of national iniatives

Lead countries Key features Historical context Corporate landscape
Germany Nation focused on retaining global Leading high tech manufacturing nation Global leader in automation and equipment
leadership in next-generation factory and intent on leadership in the production supported by ecosystem of governmental
value chain automation, focused excellence equipment and control and academic support
in production processes to deliver
productivity, flexibility and quality gains
China Government directed approach to adopt 20 decades of rapid development in A few large global leaders and a huge SME
best in class technologies to increase value manufacturing, but largely through low base that has low adoption of technology
added in manufacturing across key sectors cost labour, which has shifted to an
increase in automation
US Target to bring digital innovation to the US companies led the ICT revolution. GE, Cisco, Microsoft and large industrials
physical world to leverage capabilities in Today's culture and mindset built around leading the change, supported by multitude
big data, internet, software, analytics and these capabilities of innovative SMEs
service models.
Japan Leaders in advanced automation and Japanese conglomerates leaders in 4-5 global majors leading the trend to
robotics advanced manufacturing, automation and adoption and setting Japanese biased
robotics aligning the country with Germany standards
rather than US
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The engagement of national associations and government bodies plays an important

role in technological development for large corporations and SMEs, exemplified by
the Frauhofer institute in Germany. Ecosystems in each country will define the
speed of implementation and the ability of respective nations to achieve gains in
productivity in the industrial sector as digitalisation is rolled out further. Beyond the
key countries mentioned above, we review a number of other important countries
below.
Table 8: Key countries in transition to Industrie 4.0

Key regions and Key features Historical context Corporate landscape
countries
EU EU focused on encouraging national EU central mandate to support technology Leader among global companies in EU
adoption to support renaissance in and industrial development across EU working closely to support EU and national
manufacturing member states initiatives
Italy Many technically advanced SMEs looking Italian manufacturers lead in product Many SMEs being financially incentivised
to increase digitalisation, supported by design, lack global leader for industrial to adopt latest technology
government
France Government driving multiple actions to More of an adopter of industrial Large nations biased towards adoption of
increase capabilities and adoption of technology, rather than leader technologies
industry
UK UK government formulating an industrial UK manufacturing has been de- Leading foreign companies leading
strategy around key technologies and emphasised relative to services. I4.0 adoption efforts
support a manufacturing revival offers a chance for revival of the sector
South Korea Manufacturing a leading part of national Rise of South Korea within the OECD Driven by Chaebol, with suppliers
GDP, country in crosshairs of China's supported by manufacturing, key focus to following the trend
ascent, government driving adoption to support national income
enhance national productivity
India National government keen to leverage Recent growth of IT service sector offers Reliance on overseas expertise.
strength in IT, software and low cost opportunity
manufacturing. Created Make in India
initiative
Source: xxx
Western Europe dominated by German efforts

As early as 2012, the European commissions industrial policy communication was
spotlighting technologies linked to Industrie 4.0. In 2014, the EU parliament
recognised emerging digital technologies including cloud computing, big data,
industrial internet applications, robotics and 3D printing will all contribute to
enhance European productivity through the creation of new business models,
products, and services.
The European government is directing funds to enhance digital skillsets among
students and employees. Recognising the potential emergence of a fourth industrial
revolution the European Parliament published a policy document on Industrie 4.0 at
the end of 2015. The combined efforts of the EU aim to support a recovery of
industry as a share of GDP back toward 20%, from 15-16%, which is considered an
ambitious target. Adoption is most significant in Germany, where industrial
production accounts for over 30% of GDP.
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Chart 77: Summary of European national initiatives
Source: European Commission
A number of member states, explored in more detail below, are sponsoring

initiatives, including Germany, the UK, Italy, and France. Europes efforts are largely
directed towards industrial and professional platforms, rather than consumer digital
platforms. The efforts are supported and guided by large multination corporations
including Siemens, Schneider, ABB, Dassault Systmes, SAP, Bosch, and Atos.
Europe has a number of guiding bodies that we summarise in the table below:
Table 9: Overview of Industrie 4.0 initiatives

Region/Country Programme Comment
Europe EFFRA European Factories of the Future Research Association.
Germany Plattform Industrie 4.0 Sponsored by Germany Federal Republic
France Nouvelle France Industrielle French government initiatives
UK 4IR UK Manufacturer's organisation + Innovate UK
Italy Fabbrica Intelligenta A number of Government and Industry initiatives
Spain Industria Conectada Government and industry working together on multiple actions
Netherlands Smart Industry Government-led
Belgium MADE DIFFERENT Government focus
Sweden Producktion 2030 Government focus
Czech Republic Prumysl 4.0 Government focus
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Germany a center of the fourth industrial revolution

Industrial contribution to German GDP at 31% is one of the highest in Europe. The
German government, in combination with a series of globally leading private and
academic institutions, is co-ordinating a concurrent approach to the widespread
development and adoption of technologies and skills necessary to succeed in the
fourth industrial revolution. The widespread use of the term Industrie 4.0 can be
traced back the Federal Ministry of Educations document: Recommendations for
implementing the strategic initiative Industrie 4.0 in 2013.
Industrie 4.0 is a national action plan sponsored at the federal level and includes the
financing of company projects, applied research centres and the provision of tax
incentives for investment in technology start-ups. The initiatives incorporate
German policymakers, large government multinationals, small companies, and
academia all working together to better develop standards that will speed up
adoption. Industrie 4.0 offers a strong technology-based vision of the future, focused
on optimising production processes to improve quality, price, flexibility, and financial
returns. Ultimately, the government wishes to maintain Germanys strength in the
area of manufacturing and mechanical engineering. In contrast to the US, we see less
focus on the development of new business models and smart products.
According to Acatech (The German National Academy of Science and Engineering)
Germany is currently 2-3 years ahead of other nations in the area of Industrie 4.0.
Germanys goals include the creation of a reference architecture, interoperability,
the customised production to batch size one (personalised manufacturing), the
dismantling of the automation pyramid, plug and produce and semantic processes,
and technologies for smart services and devices. To support these goals, actions are
underway with a number of industrial bodies including the BDEW, BDI, Bitkom,
VDA, VDMA, and the ZVEI.
UK working to catch up with Europes co-ordination

After a 20% decline in the contribution of UK manufacturing to GDP between 2001
and 2012, UK policymakers are searching for a way to reverse the trend. UK
manufacturing accounts for c. 10% of national GDP. The government is following an
active industrial, export and research policy, aiming to spend GBP6bn on science by
2021 and have identified around ten areas to accelerate capability with investments.
The UKs catapult centres aim to bring researchers and companies together to
create products and systems that are applicable to Industrie 4.0. A number of
centres in the UK including the Manufacturing Technology Centre and the
Advanced Manufacturing Research Centre are active promoting the fourth
industrial revolution. Despite these initiatives, the UKs Department of Business
Innovation & Skills appears less developed in its approach than other European
countries.
In comparison to other European nations, we consider the initiative under funded by
the government, with actions lacking a strong centralised co-ordination and
direction. In a similar way to the US, the UK maybe best-positioned to benefit from
e-commerce based software and services, but will need to encourage adoption of
Industrie 4.0 technologies to enhance productivity across the manufacturing base.
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France showing a concerted governmental drive

In April 2015, France launched its Industrie du Futur initiative, which is a
reindustrialisation plan that includes investments in Industrie 4.0 technologies and
is driven by the government. French manufacturing accounts for c. 11% of GDP. The
plan centres on creation of demonstration centres to showcase products and
services. EUR1bn of loans are being made available to SMEs that target robotics,
digitalisation or energy efficiency projects.
The incentive measures include tax incentives for private investment, preferential
financing for SMEs and mid-tiers, tax credits for research, and project financing.
There are a number of industrial support plans for robotics, the Internet of Things,
big data, high-performance computing, cloud computing, and augmented reality.
These target some specific product areas including energy-efficient cars and electric
aircraft.
Italy making a large commitment to SMEs

At the end of 2016, the Italian Ministry of Economic Development presented the
Industria 4.0 national plan which combines a range of public and private bodies and
academic institutions and the unions. In total, the scheme aims to release EUR24bn
of funds to enhance the capabilities of Italian manufacturers. Italy also expects
funding of up to EUR900m directed towards increased skills in the workforce. Italian
value-added manufacturing accounts for c. 16% of GDP.
Italys main challenge is the absence of large industrial groups of ICT companies to
lead Italian transformation and a heavy reliance on small and mid-sized companies
and a strong global reputation for finished product design. To meet this challenge,
Industria 4.0 targets a range of direct and indirect measures to raise awareness,
increase investment, and foster innovation.
The Italian government has formulated a range of targets including a step-up in
innovation investment and education support to boost skills. These are supported by
direct and indirect financial incentives including subsidies, tax incentives, and
support. Italy is directing effort toward digital innovation hubs and I4.0 competence
centres.
Spain actively driving Industrie 4.0 adoption

The Spanish governments approach is directed toward adopting the Industrie 4.0
initiative emanating from Germany, supported by close collaboration between
public and private bodies. The Spanish government supports the Industria Conectada
4.0 programme, which offers financial and educational support for industry in four
areas: 1) ensure suitable knowledge and skills; 2) encourage multidisciplinary
collaboration; 3) promote digitalisation and support for technology companies; and
4) support industrial adoption of Industrie 4.0 by manufacturing companies in Spain.
The programme promotes the digital transformation of Spanish industry through co-
ordination between the public and private sectors and aligns with two other national
initiatives: the Digital Agenda and Agenda for the strengthening of the Industrial
Sector, which are supported by Banco Santander, Telefonica, and Indra. Spanish
industry accounts for 13% of GDP and 11% of the workforce.
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US focused on commercial solutions

The central governments main initiative is Manufacturing USA, which incorporates a
network of private institutions and laboratories established by large ICT players, but
encouraged by the government and financed by public-private partnerships.
As the worlds largest economy and a leader of the third industrial revolution, the US
is playing a central role in shaping the development of the industrial internet,
leveraging on prior ICT leadership. The US is the largest importer and the second-
largest exporter of goods globally. The US is the largest market for German exports
and Germany is the most important trading partner in Europe for the US. Both
nations are focused on the importance of manufacturing, which accounts for c. 21%
of US GDP.
Industrie 4.0 is conceptualised as a much more broadly-based subject in the US than
in Germany, with interchangeable terms including the Internet of Things, smart
production and the industrial internet all being used. The disparity between the two
interpretations is evident from a review of the respective descriptions of the
industrial internet from the US Industrial Internet Consortium (IIC) and the German
platform, Industrie 4.0.
In the US, the concept is focused on the convergence of machines and intelligent
data to transform a multitude of industries through intelligent and interconnected
objects to improve performance, lower operating costs, and increase reliability. The
IIC is seen as holding cross-industry knowledge of the industrial internet. In
contrast, as previously mentioned, the German concept is more focused on factories
and the optimisation of associated vertical and horizontal value chains, and platform
Industrie 4.0 is considered to focus on manufacturing expertise.
Surveys have shown that US company interest is focus on creating new business
models and offering smart services. This makes the US approach more market-
driven in contrast to a more technology-driven approach in Germany. Promotion of
the concept of the industrial internet has been largely driven by the private sector in
the US rather than the public sector.
Table 10: Review of US industrial internet initiatives

Initiative Objective Promoter
Industrial Internet Consortium (IIC) Worlds leading organisation transforming business and society by accelerating the Corporate
Industrial Internet of Things (IIoT). Mission is to deliver a trustworthy IIoT in which the
worlds systems and devices are securely connected and controlled to deliver
transformational outcomes
National Network for A network of research institutes in the United States that focuses on developing and Corporate
Manufacturing Innovation commercializing manufacturing technologies through public-private partnerships between
U.S. industry, universities, and federal government agencies
Smart Manufacturing Leadership Building the nations first Open Smart Manufacturing Platform for collaborative industrial- Government
Coalition networked information applications through at-scale demonstrations
Allseen Alliance a cross-industry consortium dedicated to enabling the interoperability of billions of devices, Corporate
services and apps that comprise the Internet of Things.
Open Connectivity Foundation Dedicated to ensuring secure interoperability for consumers, businesses and industries by Corporate
delivering a standard communications platform, a bridging specification, an open-source
implementation and a certification program allowing devices to communicate regardless of
form factor, operating system, service provider, transport technology or ecosystem
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Reviewing the communication of US companies and the initiatives with various

consortia, US companies are targeting growth opportunities in data storage, big
data, data analytics sensors and wireless technology, these builds on US strengths
building innovative internet, software and service business models. Nonetheless,
both major US and German consortia are targeting the interoperability between the
two developing industrial internet architectures.
Chart 78: US development of Industrie 4.0 initiatives
Source: acatech study
China driving structured march towards higher added value

China is a specific and important country for the fourth Industrial revolution.
National policy is well-formulated and focused on advancing the countrys
manufacturers in the global marketplace by increasing added-value, quality and
efficiency across a multitude of industry verticals through the application of
innovative manufacturing technologies. The strategy specifically targets high-tech
industries that contribute to growth including automotive, aviation, machinery,
robotics, high tech maritime and railway equipment, energy saving vehicles, medical
devices and information technology. This is being conducted beneath the umbrella
of Industrie 4.0.
Chinas actions taken with a long-term view

The industrial landscape in China is seen as very diverse, spanning sophisticated
large multinationals such as Haier, Sany and Huawei, and large and small companies
with almost no automation, with many still introducing ICT integrated
manufacturing. Nonetheless, at 43%, the contribution of industrial production to
Chinese GDP makes the sector critical to national development.
Policymakers have taken swift and concerted action to develop plans that will
strengthen the position of Chinas industry. Both the Chinese government and
industry remain committed to strengthening engagement with Germany, which is
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partly reflected in the existing industrial cooperation and foreign direct investment
that Germany has seen. Such measures have accelerated technology transfer.
Chart 79: Roadmap of Chinese plans to implement smart manufacturing
Source: Kepler Cheuvreux, Mercer
Chinas commitment to increasing the level of added value in manufacturing is

reflected in Made in China 2025, which aims to enhance the contribution in a number
of key manufacturing sectors. The advancement of Chinas producers up the
technology curve represents an initial threat to countries, including South Korea,
Japan, and eastern European manufacturers.
The modernisation of Chinas manufacturers has a long way to go, and research
suggests that ERP, MES and PLM software penetration hovers close to 60%. To
drive the change, initiatives including Smart Factory 1.0, Smart Cities and the
Internet of Things are all targeted at enhancing capabilities in areas including IT,
machines, robotics, aviation, aerospace, marine equipment, rail, electric mobility,
power equipment, agricultural machinery, materials and high-end medical
equipment sectors.
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Chart 80: Chinas Industrie 4.0 evolution
South Korea: focused on maintaining an edge

South Korea is in the crosshairs of Chinas planned advance in smart and higher tech
manufacturing. While the country has a leading manufacturing network and IT
backbone, the industry is seen as weak in software development and sensors.
South Koreas manufacturing sector contributes c. 38% to GDP. It is very
hierarchical and structured around chaebols (large, family-owned business
conglomerates), which are critical customers for many SME suppliers. Policymakers
are intent on bolstering the competitive position of South Koreas manufacturers to
retain strength versus Chinese producers.
To drive transformation, the South Korean government is promoting Manufacturing
3.0, which targets the ability of SMEs to increase production through the use of
smart factory technologies. South Korea aims to create up to 10,000 highly
productive factories by 2020. Other programmes in South Korea include the Korean
Smart Factory Foundation, the Smart City Testbed Initiative, and the Smart Factory
initiative.
Since South Korea lacks any major automation equipment suppliers, the focus of
many companies is on exploiting data-driven business models in areas such as smart
cities. South Korean appears more focused on capitalising on the potential benefits
of manufacturing technology evolving with Industrie 4.0 rather than being a prime
provider of automation and communication technologies.
Japan: set to build on automation strength
Japans well-established capabilities in advanced manufacturing and automation
technologies make the country a natural adopter of Industrie 4.0 technologies and
capabilities while being a beneficiary of the sale of automation and network
technologies.
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The Japanese government plays a significant role in funding, and both companies
and the government appear comfortable working towards own standards and
methods rather than promoting international standards.
Chart 81: Japans evolution in the area of Industrie 4.0
India promoting adoption of Industrie 4.0

In 2014, the Indian prime minister launched Make in India. This overarching
programme aims to increase adoption of Industrie 4.0 technologies and processes
across Indian industry. The initiative to combine Indias ICT strengths and the
governments target of creating 100 smart cities is targeted at supporting smarter
Indian manufacturing. National skills are being fostered by Boeings construction of
a smart factory in Bengaluru and Boschs intent to build 15 smart manufacturing
centres, while GE also claims to have invested USD200m in smart manufacturing in
India.
The Make in India programme is based on FDI (Foreign Direct Investments) in
manufacturing to grow. The programme aims to minimise the countrys reliance on
imports, enhance job opportunities (250m people are expected to enter the Indian
workforce over the next 15 years), expand infrastructure (through Smart Cities, as
stated above), and promote technological evolution. The main industries targeted
are automotive, defense and aerospace, electronics and semiconductors, and
pharmaceutical and chemicals. According to the Reserve Bank of India (RBI),
Manufacturing is likely to account for 25% of Indian GDP by 2025 (vs. less than 15%
now) and the country could reach 4% of global manufacturing output (vs. less than
2% now).
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Digitalisation trends across industries

All industries are in pursuit of enhanced productivity, greater profitability and
strengthened competitive advantage. Industrial digitalisation promises all of
these improvements. Our reviews show that the pace of adoption across
industry verticals varies greatly, depending on the current levels of digitalisation
and potential benefits. We identify the greatest structural opportunity in the
process industries (oil, gas, petrochemical, chemical, utility and metals and
mining) and infrastructure (logistics, healthcare and building) end market
sectors. In contrast, sectors such as automotive and retail have already advanced
levels of sensor utilisation, data collection and analysis, and use of industrial
software.
Process industries and infrastructure in most need

Companies in the capital goods sector derive their demand from investment and
demand patterns across 25-30 subsectors that can be condensed into 10-12 end
markets. ABB shows these in the following chart alongside levels of digitalisation.
Adoption levels can be seen to differ significantly. Rates of growth in digitalisation
for each sector are dependent on structural trends, available technology, and the
underlying potential to secure competitive advantage through technological
investment.
Chart 82: Digitalisation across industries
Source: ABB Group
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ABBs view of digitalisation by end market should be compared to McKinseys

analysis by sector and business area, set out below. The chart splits the level of
digitalisation into two dimensions; by sector and across assets, usage in industry and
in the labour force. Industries with a relatively low level of digitalisation, that offer
the greatest opportunity for demand growth of digital solutions include oil & gas,
utilities, chemicals and pharmaceuticals, mining, transport and logistics, healthcare
and construction.
Chart 83: McKinsey reflects the opportunities for growth
Source: McKinsey
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Drivers and facilitators in each sector offer structural growth potential

For each of the key sectors identified above, there are a number of key drivers than
will support the adoption of digital technologies. Many of the capital goods
companies highlighted in this report play a vital role it facilitating the transition to
full digitalisation through the provision of connected devices, automation and
control technology, industrial software, and services. We expect the promise of
gains from productivity, greater speed to market, new revenue opportunities and
closer customer relations to support increased spending in each of the industrial
verticals highlighted above.
The leading electrical equipment companies such as Siemens, General Electric, ABB,
and Schneider Electric are all set to benefit from a degree of improved growth, as
they offer the necessary tools, data analysis software, automation and sensors to
their customers while partnering with software companies to broaden the products
and solutions on offer. In addition, smaller, more focused groups such as Datalogic
and Hexagon remain well-placed to benefit from a shift in customer investment
patterns.
The expansion of digital capabilities and new service models is also pushing capital
goods companies towards closer integration with customers, making them key long-
term partners. For each of the key market segments identified above we review the
key trends, facilitating technology, and underlying growth potential.
All industries to increase digital focus to a greater or lesser extent

All the leading consultancies have conducted surveys and reviews of industry
verticals and specific companies to estimate the target areas of spending and the
level of commitment from industrial companies to raise spending for digitalisation.
We see numerous software and hardware technologies being applied, as
summarised for the key industries in the following table.
The next two tables provide an overview of a number of the key trends we are
observing by industrial segment, the facilitating technologies, and the underlying
growth potential.
Chart 84: Trends by industrial segment, facilitating technologies and growth potential (I)
Digitalisation
Sector Key trends Key terms / targets Facilitiating technology and suppliers Underlying growth potential
importance level
Pressure to raise service levels and reduce Control software for network management and monitoring Highest growth for predictive maintenance and smart
production costs Smart Grids to reduce opex & minimise outages grid controls
Incorporate of new loads (EV) demand for Predictive maintenance Sensors, data collection and analysis to provide predictive Overall growth to be greater for T&D networks than
Utilities Mid/high
smarter grids & energy storage increased productivity, higher maintenace and service for energy production, transmission generation assets
Rising complexity from incorporate of volatile uptime and distribution A 50- 100bps incresase in investment over 5 year
renewables into the mix Key supplier: Siemens, ABB, Schneider Electric, GE period
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Optimise asset utilisation, minimize downtime, Control software for network management and monitoring Highest growth for predictive maintenance and asset
Predictive maintenance
flexibility to adjust capacity to reduce opex & minimise outages management
higher productivity
Closer upstream and downstream collaboration Sensors, data collection and analysis to provide predictive Upstream investment to target productivity and
Mid (greater focus on reduction inventory holding
Oil & Gas to optimise production levels with market maintenace and production optimisation along value chain output, downstrean to optimise responsiveness to
price realisation) costs
price/demand Key suppliers: GE, Siemens, ABB, Schneider Electric, Emerson market needs
reduced time to market
Minimisation of capital investment needs via Electric, Honeywell, Yokogawa, Aspen Technologies, AVEVA, Industrial software, sensors and analysis segments to
lower maintenance costs
improved planning and execution/modelling Hexagon see step-up in structural demand
Predictive maintenance Control software for network management and monitoring Long cycle investment sector, highest growth for
Optimisation of process control via increases
higher productivity to reduce opex & minimise outages predictive maintenance and asset management
use of sensors and process management
reduction inventory holding Sensors, data collection and analysis to provide predictive expect increased sensor use, data capture and
Higher uptime via predictive maintenance and
Chemcials High costs maintenace and production optimisation along value chain analysis to optimise through put and market
asset optimisation
reduced time to market Key suppliers: GE, Siemens, ABB, Schneider Electric, Emerson responsiveness
Vendor managed inventory and supply chain
higher traceability Electric, Honeywell, Yokogawa, Aspen Technologies, AVEVA, Industrial software, sensors and analysis segments to
optimisation via digital technologies
lower maintenance costs Hexagon see step-up in structural demand
Machine sensors and equipment monitoring and mining

Long cycle investment sector, highest growth for
Digitial mapping and inspection of mines Predicitive maintenance mapping and monitoring
predictive maintenance and asset management
Asset integration and monitoring for predictive asset optimisation Data collection and analysis to provide predictive
expect increased sensor use, data capture and
Mining Mid/High maintenance and repair remote operations / maintenace and mine optimisation along value chain
analysis to optimise mine and machinery use
Inventory management and total production productivity Key suppliers: Sandvik, Atlas Copco, GE, Siemens, ABB,
Industrial software, sensors and analysis segments to
quality control supply chain management Schneider Electric, Emerson Electric, Honeywell, Yokogawa,
see step-up in structural demand
Aspen Technologies, Rockwell Automation AVEVA, Hexagon

Chart 85: Trends by industrial segment, facilitating technologies and growth potential (II)
Digitalisation
Sector Key trends Key terms / targets Facilitiating technology and suppliers Underlying growth potential
importance level
Improvement supply chain co- Highly profitable sector willing to invest in improved
Accomodating rising need for tailored therapies Process management controls and software, machine
ordination process technologies to deliver uptime and flexibility
- the move to batch size one monitoring and control software
reduced batch sizes, increased Increased use of data capture and analysis and
Pharmaceuticals High Optimisation of complex supply chain Sensors, data collection and analysis, hybrid manufacturing
production flexibility investments
Effective track & trace systems to limit drug controls and automation.
track & trace and customer Expect slight increase in spending with bias toward
counterfeiting Key suppliers: Schneider Electric, Siemens
support enhancement digital technology and applications
Short/mid cycle investment sector, highest growth in

equipment for machine flexibility, uptime and
Production and demand matching via digitial
Capital goods
Supply chain Process management controls and software, machine performance
integration along supply chain
tracking/accountability monitoring and control software expect increased sensor use, data capture and
Effective track & trace systems to ensure food
Food & Beverage HIgh machine optimisation Sensors, data collection and analysis, hybrid manufacturing analysis to optimise through put and market
quality
production flexibility / controls and automation. responsiveness and predictive machine maintenance
Production system optimisation via machine
individualisation Key suppliers: Schneider Electric, Siemens, Krones, GEA Industrial software, sensors and analysis segments to
monitoring and predictive maintenance
see step-up in structural demand, plus remote
monitoring, customer tracking and tracability
Expect focus on increased sensors and asset

Internal operational improvements along the
Supply chain optimisation Equipment sensors and monitoring systems, communication tracking/performance with remote monitoring and
logistics value chain
asset tracking and monitoring gateways data analysis
Digitial workflow, track & trace, warehouse
Rail & Road Logistics High enhanced customer service data collection and analysis, software algorythums for Rising spend on network and system information
robotics
performance predictive maintenance. allowing parcel tracking and travel system monitoring
Data analytics to increase customer service
Key suppliers: Alstom, Siemens, Bombardier, ABB, GE continued high spend on IT by logistics and travel
offers and account management
companies and logitistics businesses
Rising digital healthcare monitoring equipment for

Shift to mass customisatioin, increased speed patients. Digitalisation of hosptial processes and
Personalised healthcare Wearable monitoring devices, data collection and analysis
and product quality, personalised healthcare management
home healthcare, remote digitial diagnostics machines, data capture and cloud based
Increase customer proximity for healthcare, bio Higher spend along value chain for drug delivery,
Healthcare Mid/high patient monitoring analysis. Additive manufacture
printing, leverage AI, healthcare data leveraging patient records, hospital management, patient data,
reduced through care cycle Key suppliers: GE, Siemens, Philips, Draeger, ThermoFisher,
Remote patient care and monitoring, enhanced care cycle management
costs Danaher
diagnostics, home healthcare Continued steady increase in IT and digital spend
throughout value chain
3d design printing, building modelling, software

3d design and modelling and 3d design and model software, digital simulation and
design, drone surveillance, enhanced planning
digital surveying analytics, EV infrastructure Increase spend on building monitoring and controls
Enhanced logistics and working capital
supply chain management and Building monitoring and control product for electrics, HVAC equipment
Building and Infrastructure Mid/High management, procurement management and
supplier qualification and security and water management Increase spend on data analysis and asset monitoring
supplier evaluation
Through life asset monitoring Key suppliers: Hexagon, Dassault Systems, Siemens, and control
Digital sales and direct service and
and maintenance Honeywell, Johnson Controls, Eaton, ABB, Schneider Electric
infrastructure/building management

Capital goods
Ranking digitalisation across the sector

Based on the insight and knowledge of nine analysts covering 66 capital goods-
related companies, we have undertaken a detailed review of each companys
capabilities in the framework of a structured survey. We have identified six key
dimensions of corporate development that reflect advancement in the field of
Industrie 4.0 or the Industrial Internet of Things for internal corporate activities,
external relations, and product capabilities. While all companies are aware of the
issues related to digitalisation at board level, we find that the degree of
digitalisation for each company is closely related to end market and size, with
best-in-class companies typically active in the most high-tech and largest
industries. Headline results are shown below.
Chart 86: Large caps ranking Chart 87: SMID caps ranking
Hexagon 4.53 Drr 3.73

Siemens 4.13 Konecranes 3.53
Schneider Electric 4.00 Cargotec 3.27
KUKA 3.80
Datalogic 2.87
ABB 3.73
Jungheinrich 3.60 TKH Group 2.73
KION Group AG 3.60 Valmet 2.40
SKF 3.60 FLSmidth 2.13
Wartsila 3.53
Krones 3.47 Arbonia 2.07
Assa Abloy 3.40 Koenig & Bauer 2.00
Sandvik 3.33 Outotec 2.00
Atlas Copco 3.27 RHI 1.93
Metso 3.13
Schindler 3.13 Schoeller-Bleckmann 1.93
Vestas Wind Systems 3.13 Zehnder Group 1.87
Dormakaba 3.07 Kendrion 1.80
Kone 3.00 Palfinger 1.80
Georg Fischer 2.87
Alstom 2.73 Rosenbauer 1.80
Andritz 2.73 Bucher 1.73
GEA Group 2.40 KSB 1.67
Trelleborg 2.40
SFS Group 1.60
Gamesa 2.20
Nordex 2.20 Nexans 1.53
Osram Licht 2.20 Belimo 1.47
Legrand 2.13 Stabilus 1.40
Electrolux 2.00
Semperit 1.27
Rexel 1.93
Sulzer 1.93 SAF-Holland 1.13
Philips Lighting 1.73 SGL CARBON 1.13
Husqvarna 1.67 Zumtobel 1.13
Hexpol 1.60
Wacker Neuson 1.07
Geberit 1.53
Aalberts 1.40 Bauer 1.00
NIBE 1.33 Vossloh 0.87
Capital goods
We developed this methodology after reviewing Impulss Industrie 4.0 readiness

white paper and VDMAs Industrie 4.0 guideline, which provides a good basis for
corporate self-appraisal. As shown above, across the coverage universe of capital
goods companies, the best-positioned large caps are Hexagon, Siemens, KUKA, and
Schneider Electric. Among the smaller companies, we see Duerr, Nescranes,
Cargotec, and Datalogic.
Summary of findings for the sector
Below we show the aggregate result of our survey for the whole sector, which
provides an overall result for each of the six dimensions and gives a reference (or
average) for the total sector. We present these results in the following radar charts
for each sub-segment and discuss in more detail the performance in each of the six
digitalisation dimensions.
Chart 88: Spider chart and table of overall sector performance
Note that the fourth industrial revolution (as it is described) is based on

digitalisation and connectivity levels across an entire firm. Implementation of the
ideas will lead to much greater connectivity and co-ordination between all business
areas. We review each of the dimensions separately.
In each of the dimensions we highlight above, there are a number of sub-sectors we
call arguments (15 in total). Our methodology has been to grade each of these from
0 to 5 (from no action to best-in-class), which provides a string of grades by
company. These grades are separated across the six dimensions. For example:
Capital goods
Schneider Electric scored 5, 4 and 5 in Strategy and Organisations three arguments,

giving it a Strategy grade of 4. 7.
The same method is applied to all dimensions, leaving us with six dimension grades.
To assign an overall grade to each firm in the sector, we calculate a weighted
average based on the number of arguments of each dimension: Strategy will receive
a weight of 3, Smart factories will receive a weight of 3, Smart operations a weight of
4, etc. This then gives us the final grade for a firm. For example, Schneider Electric
received an overall grade of 3.7 based on a Strategy grade of 4.7, a Smart Factory
grade of 3.7, a Smart Operations grade of 3.3, a Smart Products grade of 4.5, a Data-
driven services grade of 2.5, and an Employees grade of 3.0.
While we are conscious that there is scope for bias from each of our analysts and the
level of disclosure by company also varies (which limits our ability to make a strong
judgement), we believe the results provide a good overall picture. The results may
also incorporate more bias toward OT (automation) or IT (cloud and edge
networking).
Reviewing dimensional results
Dimension 1: Strategy and organisation
As we stated previously, Industrie 4.0 is not only about improving existing products
and processes through digital technologies; it is also about creating new business
models. This is why strategy at the company level is important and crucial to become
an Industrie 4.0 leader. We look more closely at the companies Industrie 4.0
strategies, investments, and how they direct their R&D management. Overall,
companies under our coverage perform well following this criterion:
Strategy: We analyse the place of Industrie 4.0 in the companys overall
strategy, and what importance it gives it.
Investments: We asked our analysts to estimate or state the percentage of
R&D or sales directed directly to the development of Industrie 4.0 solutions.
R&D Management: We look at the development of Industrie 4.0
technologies or applications both in the internal and external value chains.
The best performers in the large and small company categories in the context of
strategy and organisation are shown in the following chart.
Chart 89: Chart of best five large and SMID companies for strategy and organisation
Capital goods
Change management is driven by strategy. During the ICT revolution over 1980-
2000, there was a clear lag between strategic intent and implementation. The
intention is reflected in the high grade achieved by this dimension; at 2.7, it is the
second-highest grade. We conclude that most European capital goods companies
acknowledged the need to change and are starting to implement actions across
divisions and products. This process is likely to be evident over the next 5-10 years.
The difference in this dimension between large caps and SMIDs is very clear: on
average, Large caps scored 3.2 while SMIDs were lower at 2.1.
Dimension 2: Smart factory

This dimension of the survey targets the level of intelligence and connectivity of a
firms factories and plants. Interesting points include interconnectivity between
overlying IT systems (MES, ERP, SCM) and smart products or production lines. A key
component of the smart factory we also look at is the integration and self-regulation
of processes. The placement of sensors on factory lines to analyse the distribution
and situation of processes allows a company to gather more data and enables better
decision-making. Therefore, the three criteria we asked our analysts in relation to
companies under their coverage included equipment infrastructure, data usage, and
IT systems:
Equipment Infrastructure: We look at the companies installation of sensors
and other data capturing objects as well as the overall automation of
factories. Machine-to-Machine (M2M) communications fit into this category.
Data usage: We look at the amount of data used in a companys decision-
making. We also analyse if the decisions are locally made or at a more global
level depending on the amount of data used at the firm.
IT systems: In this subsection/question, we ask our analysts where their
companies stand regarding the use of management software. This includes
ERP, MES, SCM, and PLM. The goal is to see if the software products are
being used, and if so at what level within the firm. Furthermore, we look at
interconnectivity between the software solutions.
Chart 90: Top-ranking companies in the smart factory dimension
Capital goods
We believe that many companies in the capital goods sector are lagging compared to
other sectors (autos, petrochemical, healthcare, etc.). While automation is usually
already in place, we see that new technologies and connectivity, beyond traditional
ERP systems, are often lacking on the shop floor. With a few exceptions, the benefits
of connectivity to the Cloud or the Edge have not yet been captured by
manufacturers. The potential of predictive maintenance has been analysed and
targeted through strategies (as seen previously) but is not always in place in
factories. Our coverage scored an average of 2.4 on this part of the survey. While
large caps logically scored better (2.7), SMIDs scored a mere 2.1.
Dimension 3: Smart operations

Smart operations relate to the horizontal integration of digitalisation along the value
chain and specifically the connectivity between supplier and customers.
Cybersecurity is set to become a key issue in the coming years, as more data will be
gathered and transferred along value chains, which creates more entry points for
hackers. Cloud usage is also tested in this dimension along with the use of an IoT
platform encompassing data analysis tools and management solutions mentioned
previously. Smart operations also include the supplier and customers operations.
This horizontal integration enables better supply/demand management and more
efficient production lines and supply chains.
Cloud usage: We looked for a companys use of the cloud, not only at
management level but across the entire firm, enabling direct communication
between factories and management.
IT security: Cybersecurity is key. We attempt to understand the companies
IT security evolution over time and the importance it has in the companys IT
strategy.
Autonomous processes: Here, we analyse the companys production lines
and identify its levels of autonomy. Through processes and automation
combined, a production line can now be fully autonomous. This includes the
likes of alarms to prevent downtime through predictive maintenance and
software systems preventing design flaws.
Information sharing: The insights that arise from a companys operations
will allow both customers and suppliers to have a better view and therefore
prepare to adjust their demand/supply balance. This trade also works the
other way round: when the companies under our coverage have access to
their customers operations, they will be able to adjust their production line
intensity.
Capital goods
Chart 91: Leaders in the sphere of smart operations
Across the capital goods sector, the widespread integration of suppliers and
customers information networks has not yet happened. The advantages of having
access to the operations of both ends of the supply chain enable companies to have a
better view on supply/demand ratios, improving on-time deliveries and working
capital cycles. Connectivity at group level enables the collection of data to analyse
the supply chain situation and take better decisions to reduce costs.
The importance of data in this part of the capital goods companies businesses is not
yet apparent in the full implementation of relevant technologies. Linking up to a
customers operations is a good way to gain insight into future needs and analyse
unmet needs in other fields to enable cross-selling. The digitalisation of operations
linked to the cloud could therefore enable sales teams to target certain customers
with new products and solutions. In this dimension, our capital goods coverage
scored an average of 2.3, with large caps at 2.6 and SMIDs below the 2-point
threshold at 1.8.
Dimension 4: Smart products

They are the foundation for the smart operations and smart factories. Smart
products are CPS (Cyber-Physical systems), physical objects equipped with ICT. It
makes them uniquely identifiable, so that they can interact with their environment,
recording their environment and status through sensors.
Data analytics: We investigate companies data issued by sensor-equipped
products across the factory. In the shift towards full digitalisation, a
company will first start gathering small batches of data without using it,
before its collection enters a larger scale. The installation of analysis tools on
premises or in the cloud is recommended to use the information collected.
ICT add-on functionalities: We analyse to what extent a product is
connected and what functionalities it offers. The more functionalities a CPS
will offer, the more it will be considered intelligent. Intelligent CPSs then
enable smart factories and operations through full automation and
autonomy.
Capital goods
Chart 92: Best-performing companies in the dimension of smart products
Within the smart product dimensions, we review companies ability to supply smart-
connected products, software and services to enable customers in each market
vertical to accelerate their own digitalisation journey. OEMs are able to use the
Internet of Things to operate their production lines and collect data to be used in
data analysis tools. However, with the lagging operations and factories to follow this
trend, the production of smart products is obviously affected. While large companies
score better (3.0), the overall average stands at 2.4, in line with operations and
factories, and SMIDs score a low 1.6.
Dimension 5: Data-driven services

With this dimension, we aim to determine what revenue streams can be generated
from the collection and analysis of data to empower a companys customers. This
directly relates to predictive maintenance services and offer. Certain companies will
have the potential to leverage their installed base with new products, while other
companies will also be able to generate new revenues from the sale of data-related
services.
Share of data used: To what extent is the gathered data used, and what is
the complexity of the purposes it serves? Analysts are thus able to gauge a
companys real use of data and the appeal it has for existing or potential
customers. To answer this question, they are invited to share their used
data/collected data ratios.
Share of revenues: We look at the top-line contribution of data-driven
services. As in the previous argument, we grade it using a ratio: Data-driven
revenues/revenues.
Capital goods
Chart 93: Top corporate rankings for data-driven services
Across the coverage, some firms have already started offering and selling data-
driven services for a variety of applications. The most advanced companies are the
large ones. We discuss corporate positions in the company section at the end of this
report. The industry leaders have used early-adopting models to exploit data
services through software solutions and in-house developed IoT platforms
(MindSphere from Siemens is a good example).
In other cases, companies have adapted or transformed their software and products
(sensors, robots, machines) to fit an existing IoT platform (usually Amazon AWS or
Microsoft Azure). Offering those possibilities to the different end-markets allows
the development of new future potential sales to the same customers.
Furthermore, having access to this level of data from a customer gives companies a
competitive edge and enables better targeted selling. However, on a global average
of our coverage, this is where the capital goods sector hit the rocks, scoring a very
low 2.0, where large caps are averaging at 2.2 and SMIDs at 1.6. We believe the
development of data-driven services has clear potential to be a catalyst for future
top-line growth at capital goods firms in our coverage. The low level of this grade
shows its potential for development.
Dimension 6: Employees
Employees will be the most affected by the shift towards a digital strategy. Their
working environment will be altered and they will thus have to develop new skills
and obtain new qualifications. It is critical for companies to understand the changes
their employees will face through digitalisation. The grading of this
dimension/argument is based on the level of digital qualifications of a companys
employees along with the development opportunities offered by the firm.
Capital goods
Chart 94: Top corporate rankings for employee capability
The Employees dimension was in the average of the overall results. It is hard to
determine to what extent this dimension is accurately graded, as companies in the
capital goods space disclose little to no information about employee training and
development in the Industrie 4.0 space. Accordingly, we are left with the analysts
own impressions. Employee competence will be critical for the implementation of
the Industrie 4.0 strategy and therefore this dimension will have to be reviewed
further down the road. As for the uncertainty of the results of this dimension, its
weight was the lowest in our overall calculations. Companies across our capital
goods coverage scored an average of 2.3, with large caps at 2.5 and SMIDs at 2.1.
Capital goods
Company section
We have split the following section into two parts. The first part includes comments on
those companies not covered by Kepler Cheuvreux. For each we provide a brief
overview, assessment of the IIoT and I4.0 strategy, announced future investment
needs, and assessment of digitalisation capabilities. The second part includes a similar
review for each of those companies under coverage.
Capital goods
Amazon (AWS)
United States | Information Technology
Renting free space has proven to be a

smart strategy
Amazon is a 23-year-old company that went public three years after it was
founded by multi-entrepreneur Jeff Bezos. It generated sales of USD135,987m
and net income of USD2,371m, with 27% top-line growth YOY in 2016. AWS
(Amazon Web Services) added USD12,219m to the companys total revenues in
2016, growing by 55% due to increased customer take-up, although this growth
has been tempered somewhat by pricing changes. In this increasingly
competitive environment, prices are reviewed every semester or year in
response to the competition.
As a whole, Amazon has always been an extremely customer-centric company
with a strong technological backbone that helps it to deliver value to its
customers. Through the development of AWS and the extended R&D in
machine-learning and AI assistance (Alexa), the company is set to improve the
level of digitalisation among consumers and companies in an era of perpetual
change. Amazons launched its data service in the mid-2000s when it had no idea
what to do with the extra space left in its data centres once the Christmas period
was over. Jeff Bezos then had the idea of renting out the server space and
provide services to companies located around Amazons data centres at a
competitive cost.
AWS has since grown into a proper business segment for the firm, generating
operating income of USD3,108m or 74.2% of the firms total operating income.
To develop this potential goldmine, Amazon has been acquiring data analytics
companies as well as software developers to broaden its simple storage offer.
AWS now includes Cloud and Edge functionalities linked through an IoT
Platform. Its solutions are accessible from anywhere around the world. Its IoT
and cloud platforms can compete with any of its peers through the open-source-
based solutions.
IIoT strategy
Amazons AWS comprises all of its cloud solutions, from bare data centre/data
storage to IoT services and Analytics tools. AWS works as an open-source platform
and allows its partners and external developers to produce generic, pre-crunched
applications as well as tailor-made entities. Users can then choose which tools are
more appropriate for their business or can develop a new solution.
Among those tools, the company has developed AWS Analytics and more specifically
Kinesis. It is a pay-as-you-go solution enabling data collection from sensors, data
analysis and data spreading through the firms cloud and edge. Through Kinesis,
users can shape data as needed, meaning that they can collect relevant and
unstructured data and analyse it using predefined processes.
Capital goods
AWS most important contribution to Industrie 4.0 is its Greengrass solution.

Greengrass is IoT software which facilitates the connection of a group of devices to
the cloud and between them. Once the group is defined in the cloud (i.e.: when all
devices are listed as part of a certain group) and the Greengrass core software is
installed on the physical device, the communication of data and other information is
possible. Devices can communicate to the cloud, through the cloud with each other
but also together when they are disconnected from the cloud. This enables
communications on the edge of the network and therefore directly on the users
premises, at the plant level.
Although Greengrass and the companys regular presence at the Hannover Messe
shows its willingness to further expand its offer to the Industrials sector, AWS and
its services remain generalist in nature and target companies in all the sectors. Other
competitors like PTC are more focussed on sector verticals and on providing core
solutions for them.
Industrie 4.0 development initiatives
AWS addresses the existence and development of Industrie 4.0 on its website but
does not directly mention Greengrass. After extensive research we discovered the
industrials-specific solution from the cloud provider. The companys presence at the
Hannover Messe is a way to further develop its ties with the industrial sector. AWS
is developing rapidly and so are its revenues and operating margins. AWS already
represents 75% of the companys EBIT. Through increased R&D, the firm will try to
make its solutions more specific for each sector including the industrials.
AWS is an open-source service and any partner of the firm can develop applications
to enhance its portfolio. While Microsoft plays a neutral role, AWS also designs its
own applications and software. Greengrass was part of this development and was
the first real step towards IIoT for the firm. Combined with Kinesis, it already allows
companies to benefit from M2M communications on the shop floor as well as data
collection, treatment and analysis.
Actyx EOS, a solutions editor, has based all of its Industrie 4.0-related applications
on AWSs IoT platform. Through similar partnerships, AWS will be able to further
develop its customer network. Actyx offers different software solutions to capital
goods companies such as Real-Time Production Management, Real-Time Material
Management, Intelligent Worker Assistance. The latter offers different
functionalities such as Standard Work Instructions, Advanced Work Instructions,
and Smart Quality Inspections. With the Material Management software, users can
also access different functionalities including Material Identification, Batch
Tracking, and Manual Material Tracking.
If Amazon is able to forge more partnerships of this sort with specialised software
editors, AWS will have a strong impact on the IIoT platform market. Competing with
the likes of PTC and IBM, AWS will have to extend its network of partners to stay in
the same league as those firms.
Capital goods
Announced future investment needs

The company is constantly increasing its Research & Development spending
(Technology and Content on their Income Statement) which grew from USD2bn in
2010 to USD16bn in 2016. Through R&D, the company is growing its asset base
(mainly data centres), boosting data capacities to appeal to new customers. The
technology infrastructure costs included under this item are principally allocated to
AWS. Technology and content accounted for 10% of sales in 2014 and 12% since
2015. The company is entering two new regions this year with two new data centres
located in the UK and in South Korea. Through AWS Edge and Cloudfront, the IoT
platform and applications are available in all of the worlds largest cities.
Most of the costs associated with AWS stem from T&C thanks to the units ability to
leverage the same IT infrastructure that supports both the companys internal
technology requirements and customer sales. Expenses should continue to grow in
order to further develop and reap the full potential of AWS.
Through partnerships, the company will be able to offer a state-of-the-art solution
to its industrial clients as well as to other business verticals. The company has the
scale to further develop with large firms in different business verticals. Its data
analysis software could also help many capital goods companies to deliver strong
and intelligent treated data.
Ranking of Industrie 4.0 capabilities
The company still lags behind competitors in Industrie 4.0. However, the
development of Greengrass and new partnerships could support future profit
growth in this business vertical. It is one of the best generalist IoT platform services
according to Gartner research. Its extensive knowledge and strong relationships
with customers will allow AWS to learn more about the sectors it serves and what
the company can improve upon in terms of its services and software solutions.
The company has addressed the existence and the investments it makes in IIoT but
does not consider this to be a central focus of AWS maintaining that growth is not
necessary in this business vertical. IBM, Microsoft and PTC have stronger
equipment on hand to serve the IIoT market.
SWOT analysis
Strengths: With AWS, the company provides powerful generalist solutions and
services and the ongoing developments in data analytics help it to serve a large and
growing pool of customers. The company has unrivalled customer knowledge as it is
a customer-focused company.
Weaknesses: The company faces more prepared and focused competitors in the
Industrie 4.0 arena, and Amazon lacks effective software for the IIoT
Opportunities: AWS can grow its revenues further by carrying out more R&D
related to the development of specific business applications.
Threats: Amazon will face growing competition from its fiercest Chinese competitor,
Alibaba whose revenues doubled in 2016. Its rival has been investing more and is
expanding its cloud business.
Capital goods
Cisco
The leading backbone provider

Cisco is the market leader in cloud, data centre, enterprise and multimedia
networks and generated USD49,247m in revenues and USD10,739m in net
income in 2016, with the top line growing by a total of 14% in the past 5 five
years. The companys business divisions are: Switching (30% of revenues), NGN
Routing (17%), Collaboration (9%), Data Centre (7%), Wireless (5%), Security
(4%), Service Provider Video (4%), and Services (24%).
The company has been able to expand internationally and now generates 40% of
its sales overseas, among which EMEA is accountable for 25% and APJC (Asia-
Pacific, Japan and China) for 15%. Sales in the Americas account for
USD29,392m. The companys mission statement is to help companies transform
how people connect, communicate and collaborate. Regarding specifically
Industrie 4.0, the company is a market leader in communication infrastructure,
data centres, and enterprise and multimedia networks. Its leadership in the ICT
sector makes it one of the strongest enablers of Industie 4.0.
IIoT strategy
The company is a global leader in network and communications equipment, enabling
customers to integrate all of its levels from shop floor to top management through
data control levels. The companys investments in R&D have been growing at a low
but stable pace, rising 31% over the last ten years representing 12.8% of sales in
2016. Industrie 4.0, IIoT and IoT have been areas of focus for the company since
their inception. Cisco operates at all levels of the communication network.
The company enables communications between objects at the shop floor level and
at the edge of the network. Through its new products, the company is targeting
customers who are shifting towards Industrie 4.0 or planning to do so. The company
also offers strategic, operational and technical consulting services along with its
products.
Over the years, Cisco has developed communication components which help
integrate IT and automation. Cisco then began including edge networking
capabilities, offers software that allows Java and Python-based containers to collect,
analyse and distribute data directly through the companys switches and routers.
The company has developed ONE Software, a solution designed to facilitate the
integration of new software into a company. It helps make buying, managing, and
upgrading network and infrastructure software easier. Once the software is
installed, ONE automatically updates and upgrades the network while managing and
deploying licenses around the firm. Overall, ONE brings down costs and TCO (Total
Cost of Ownership), as it is not tied to any specific hardware and can be applied to
the next generation of devices.
Capital goods
Furthermore, Cisco developed Cisco Connected Factory, an all-in-one solution that

includes Cisco ONE Software, routers and switches, wireless products, end-to-end
security and Cisco services. The service provides a network that is ready to integrate
Industrie 4.0 devices and accumulate larger amounts of data. The company can also
add management solutions and tools to deal with manufacturing complexity and
cost-cutting strategies (through partnerships with companies such as AeroScout and
its asset location tools).
Since 2014, Cisco has joined forces with AT&T, GE and IBM to form the Industrial
Internet Consortium, an initiative to improve integration of the physical and digital
worlds. The overall objective is to accelerate reliable access to Big Data and
encourage innovation by developing and influencing the global standards
development process for Internet and Industrial systems, facilitating open forums to
share and exchange real-world ideas, practices, lessons and insights, and building
confidence around new and innovative approaches to security.
Edge computing has also become a larger part of the companys product and service
offering. Edge computing through Ciscos solutions offers machine data
normalisation. Through the IOx, an open development platform based on the
companys routers, a customer can develop its own data collection and analysis
application (using Java or Python-based containers) and keep it deployed on the
router rather than in the cloud.
Finally, the company is targeting a move towards a Product-as-a-Service (XaaS)
strategy in the future, following the likes of Rolls-Royce and its jet engines. This
strategy would fully restructure the companys business model but also bring it
closer than ever to its customers with repeated revenue flows. With such a strategy,
customers will have access to the companys updated products and services and the
company will have a more secure revenue stream in line with the cross-sector trend
towards XaaS.
As stated above, the company is expected to at least partially change its business
model. Through the development of new solutions and its historical investments in
R&D, Cisco is expected to further innovate in the field of digitalisation. At the
moment, the company is considered one of the best positioned to become a global
market leader in connectivity services for Industrie 4.0, along with Nokia Alcatel-
Lucent, Ericsson and Nortel.
The company will therefore continue its usual R&D investment levels to make sure it
is capable of securing a leadership position through the ONE Software programme.
For the time being, the company is strongly positioned to attain its objectives. It is a
global leader in cloud, data centre, enterprise and multimedia network technology.
Through various partnerships and new product lines, the company is showing its
commitment to this segment of the market.
Capital goods
Not only has the company shown interest in the segment, it has put in place a
strategy to recruit as many clients as possible. Through its services branch, the
company offers consulting services to help customers or prospective customers to
implement an Industrie 4.0 strategy. Its presence throughout the value chain and
unique software tools make it a turnkey solution for customers.
The company will be competing fiercely with Alcatel-Lucent for leadership in this
area. By continuing R&D efforts in ONE Software and continuing to develop routers
to support the transition to Industrie 4.0 and edge networking, the company is likely
to continue demonstrating its strengths in communications and networking.
SWOT analysis
Strengths: The company is constantly launching new products, solutions, and
services to serve the Industrie 4.0 trend. Through its knowledge and technical
capacities at the Edge of the Network (Fog), the company is a strong leader in North
America, while further expanding to Western European customers eager to move
forward with the changes of the potential fourth industrial revolution.
Weaknesses: Size means Cisco may miss smaller, more targeted ICT solutions.
Opportunities: The company should continue to develop partnerships with key
players within the growing trend. Choosing IBM as a partner was a wise choice.
Threats: Alcatel-Lucent was building a strong position in Europe using a similar
strategy. The company recently acquired and integrated Nokia and is looking to
become a connectivity leader to bring its customers and revenue line to a new level.
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Emerson Electric
United States | Capital Goods
Restructuring to digitalise
Emerson is an industry leader in the Automation Solutions and Commercial and
Residential solutions segments that generated sales of USD14,522m in 2016
(down by 11% versus the previous years results) and USD1,635m in net profits (-
40% YOY). While the Automation segment generated 62% of the groups sales
(or USD9bn), the Commercial and Residential Segment generated 38% in 2016
(USD5.5bn). Sales by region are dominated by the US and Canada (51% of sales in
2016), followed by Asia (20%), Europe (16%), the Middle East and Africa (7%), and
Latin America (6%). The companys market growth drivers are present in both of
its businesses and it will be able to achieve growth through further investments
in IIoT and greater connectivity.
The company is undergoing a restructuring phase to rebuild a core and more focused
business in order to reach a USD20bn top line. It aims to do this by 2021 in three
steps (restructuring, repositioning, and acquisitions). Emerson acquired Pentair V&C
last year and expects to decrease its restructuring costs by 25-45% this year
depending on its integration. The repositioning included the complete divestment of
the Network Power and the Motor & Drives/Power Generation businesses, realised
in 2016, while ClosetMaid should be sold this year. The potential size of the
Automation Solutions market is nearing USD200bn, while the Commercial &
Residential Solutions markets have reached USD30bn.
IIoT strategy
Thanks to the restructuring plan described above, the company is setting its
strategic segments around industrial internet-based segments. Both businesses will
thrive from the emergence of connectivity, cloud platforms and edge networks.
Within the Automation Solutions business, the company sees multiple market
growth drivers relating to the IIoT: Lifecycle Services, Hybrid and Discrete
Automation, Wireless Solutions, Pipeline Management, Integrated Coordination and
Control, Pervasive Sensing, Energy Management, Reliability and Safety. The
Commercial & Residential Solutions segment also has Industrie 4.0-linked growth
drivers: Refrigeration Lifecycle Services, Sensors, Controls and Connectivity, Food
and Pharma Transport Solutions.
Industrie 4.0 and connectivity trends are growing across all of Emersons
Automation end-markets. For this reason, Emerson launched Plantweb, an IIoT
platform that harnesses the power of its applications to expand digital intelligence
to the entire manufacturing enterprise and help its customers achieve Operational
Certainty.
Plantweb has adopted and developed a partnership with Microsofts Windows 10
IoT technology both for its intelligent Edge (Windows) and intelligent cloud (Azure).
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The company is promoting the use of its IIoT platform and the development and
integration of sensors to further analyse energy, reliability, safety and optimisation.
Through the use of a Logic Analytics Modelling software based on Plantweb,
companies can reach diverse, rich data sets, the cloud and its storage, and its data
analysis platform.
Focusing on the Automation solutions for Emerson, IIoT enables new deployment
models for operational excellence applications and expertise.
Through Plantweb, the company has been able to digitalise its foundational
solutions: Intelligent Field Devices, Control & Safety Systems/Asset Management,
and Services & Consulting. The new solutions that transfer those skills include, in the
same order, Data, Security and Applications, from bottom to top. Through Emersons
products and software applications supported by edge devices and the cloud,
customers can now, through just one firm, have full access to the capacities of
Industrie 4.0.
Chart 95: Plantweb devices and software map
Source: Emerson Investors Day 2017 Presentation
The Secure First Mile is an in-house developed approach to securely connect OT and
IT Systems. The company uses three main components: a Field gateway, a Data
diode, an Edge gateway. The Field gateways collect the data from the OT systems
and convert it into protocols supporting unidirectional flows. Data diodes then
physically disable the inbound path creating an air gap for inbound communications.
Finally, the Edge gateway converts protocols and provides secure data transfer to
the IT systems.
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Chart 96: Secure First Mile
Source: Emerson Investors Day 2017 presentation
Emersons suite of applications is set on the cloud. Through Plantweb Insight and
Plantweb Advisor, it offers asset-specific apps and analysis tools that enable better
decision making and operational efficiency. Plantweb Insight enables the use of
analytics for pumps, steam traps, corrosion and valves with minimal business
integration and low-barrier ROI. On the other hand, Plantweb Advisor offers robust
enterprise software with statistical analysis for energy, health and performance with
a potential scalability to reach thousands of assets across facilities.
Emersons connected services allow both vertical and horizontal communications.
The data is collected on premise and then transferred to Emersons Monitoring
centre, which can then determine if maintenance is necessary or not, and offer
further collaboration and services.
The company is following up on its restructuring plan, refocussing its business
around core activities and its presence along the vertical value chain of the two
segments we previously mentioned. With the proceeds of divestments, past and
upcoming, the company plans to make further acquisitions, in line with the new
strategy.
Further developments are to be expected on its IIoT platform to fit new customers
and further digitalisation needs. The companys portfolio of products is being
revamped and actualised when necessary, which could lead to further investments.
Research and Development costs amounted to USD320m in 2016, or 2% of
revenues, where capex reached USD447m (3% of revenues).
Emerson has completely rebalanced its portfolio. It now serves two main business
streams that are both impacted by the digitalisation of the value chain. Through a
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concentrated focus on the Automation solutions segment, we see how Emerson has
been able to change in order to resolve the key problems of the fourth industrial
revolution.
SWOT analysis
Strengths: Emerson deployed its own IoT platform responding to its customers
issues with a tailor-made suite of applications.
Weaknesses: Emerson is in the middle of a restructuring programme and it
announced its IIoT platform late to the market, which may have cost the company
some key accounts. Furthermore, the solutions are not fully developed yet.
Opportunities: Further development of the applications along with smart
acquisitions to fill the gaps in its two businesses will allow Emerson to thrive and
remain an industry leader.
Threats: Competitors such as Honeywell, Siemens, and GE have also equipped
themselves with strong IoT platforms and digitalisation solutions for the entire value
chain. Customer acquisition could become expensive.
Capital goods
Fanuc
Japan | Capital Goods
Japanese robot specialist undergoing

changes
FANUC is a 59-year-old Japanese firm, which is a global market leader in the
development of Computer Numerical Control (CNC) equipment (27% of sales),
which generated revenues of EUR4,800m and profits of EUR1,230m in 2016. Its
revenues have grown by 40% over the last five years. To complement its human-
to-machine interface (HMI), the company has successfully developed two other
business segments: Robot (30% of sales) and Robomachine (29% of sales).
Japan accounts for 19% of sales the rest of Asia for 42%, America for 22% and
Europe for 15% of the groups revenues. The Robot segment includes the
companys robot arms, which are the widest range of robots in the world. These
robots are also considered to be cobots, meaning they are collaborative robots
requiring humans and robots to operate. The Robomachine division comprises
heavier machinery with three ranges of products: the Robodrill (small machining
centre), Roboshots (electric injection moulding machines), and Robocuts (wire-
cut electric discharge machines). All of these businesses are constantly
developing to improve their capacities and efficiency.
Through those three business divisions, the company was able to foresee the need
to develop IIoT solutions to optimise the use of the edge network and introduce
machine-to-machine (M2M) communications. The company is a global leader in
industrial automation and has installed 3.6m CNC systems worldwide. 60% of the
worlds precision machine tools use FANUCs CNC. The company offers the widest
range of robots in the world and specialises in collaborative robots.
IIoT strategy
FANUC is well prepared for Industrie 4.0. It its view, the main goal is to allow
machines, storage systems and equipment to network with each other to exchange
information while constantly adapting to production requirements. The ultimate
objective for its clients according to the group is to rapidly boost productivity while
saving on energy and material costs.
FANUC has developed solutions that can be integrated into an Industrie 4.0 world
or meet basic requirements today.
FANUC has invested in R&D and partnerships to develop its offering around its core
products. It has added sensors to its robots and has prepared for the advent of vision
in robotics for the past 25 years. Through partnerships with Cisco, Rockwell and
Preferred Networks, the company has been able to develop its FIELD (FANUC
Intelligent Edge Link and Drive) system and project ZDT:
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FIELD connects CNCs, robots, peripheral devices and sensors in an effort to

deliver analytics that optimise manufacturing production. This partnerships
second project is to increase uptime for connected machines. FIELD acts as
an Industrial App Store making it the most open technology the company has
ever produced, allowing its partners and customers to develop tailor-made
applications on it with open source tools.
Project ZDT (Zero Downtime) relies on CNC connectivity to allow real-
time data flows through the network. The system will proactively detect any
issue and send out an alert to prevent downtime. Maintenance can then
address the issue during a planned outage without impacting production.
Both technologies will be crucial to optimise productivity in the automotive industry.
FANUC has also developed operations management software on its own: FANUC
MT-LINKi. Connected to the upper host system (such as a manufacturing execution
system or MES) and to the PLC, machines and CNCs, it enables edge networking
management and optimises data flows into the Cloud.
To provide further support to its customers, FANUC has also developed flexible
software modules connected to sensors based on intelligent input for the robot. In
addition, dual safety check and learning vibration control provide additional data
to the client but also to the machine, which can learn from previous events.
Finally, to ease the integration of its suite of products, the company recently
developed a servo and control system called OneCommon, which connects its
equipment to meet the growing demand for industrial IoT connectivity.
The partnership with Preferred Networks will also target potential innovation
through deep learning. Through a capital tie-up in September 2015, FANUCs total
commitment to Preferred Networks is JPY900m (or EUR6.72m, as of September
2015) for a 6% share of the companys share capital.
The partnership will focus on machine learning and deep learning technologies
which intelligently process big data at the edge of the network (fogging), in real time
and enable a high level of automation at manufacturing sites such as machine tools
and robotics. The final aim is to create machine tools and robotics that are capable of
self-learning and cooperation and self-detection of deficiencies and self-repair.
FANUC has invested in several laboratories in the recent years to further develop its
technological leadership through R&D. Over the years, nine laboratories have
opened their doors to serve the companies three business segments and the future
models or technologies the company plans to offer to businesses in the coming
years. The focus is on adding IIoT capacities to its entire line of products and
solutions to allow companies to work more on the edge of the network and cut costs.
Compared to its local peers and international competitors (KUKA and European
peers), the company was an early mover. It has already carried out the digitalisation
of its entire value chain and has consistently developed better solutions for its
Capital goods
customers. Involved in the use and development of sensors since the 1990s, the
company uses visual sensors to improve its robots precision and overall capacities.
We see FANUC as one of the best-positioned Japanese companies to benefit from
Industrie 4.0 and the Industrial IoT. Its extensive knowledge of CNCs and
connectivity in general has helped the company embrace the shift towards wireless
connections and the use of IoT on the shop floor. The integration of the horizontal
value chain seemed obvious, allowing companies to communicate better with their
suppliers and customers and ensuring greater efficiency, punctuality and larger
productivity gains for its clients and the company itself.
Its historical performance and long-term vision makes it a leader in the development
of Industrie 4.0 both in terms of its internal processes and the use of IoT platforms to
control its value chain more precisely with real-time data. Its leadership in the sector
has prompted competitors to catch up such as Mitsubishi Electric and Yaskawa with
some success.
Its FIELD system has inspired US giants and Japanese peers such as Rockwell
Automation, Cisco, and Preferred Networks to develop similar systems through
partnerships. This was an important stepping stone for the company when it decided
to open up to partnerships and allow external developers to access its coding
platform and applications.
SWOT analysis
Strengths: Market leader in CNCs and strong implementation of its robots; the
development of solutions to connect its products together as well as improve HMIs;
Strong partnerships with leaders in their sectors and large customer base (including
GM).
Weaknesses: The companys focused technology and concentration in hardware
limits its development and revenue growth opportunities in comprehensive factory
solutions, tools and services.
Opportunities: Integrating its IIoT solutions into its products to create new revenue
streams and safeguard its large customer base.
Threats: Large software developers and IoT platform providers could capture some
of its existing M2M communications business. With larger investment pools and
cloud computing excellence, they are developing smart factory solutions and could
pose a threat to installed machine and CNC providers.
Capital goods
General Electric
United States | Capital Goods
The IIoT service play

GEs digital rollout began on a small scale, focused on predictive maintenance in
2011. It has rapidly increased in prominence, and the company is set to book
USD5bn of business this year, a large set step forwards on the way to realising its
ambition of becoming a top-ten software company by 2020. The company says it
has invested nearly USD5bn since 2011 in digital and the cloud- based operating
system, Predix.
This sets the group on course to meet its 2020 target of achieving digital
revenues of USD15bn by 2020. As one of the leading US industrials, GE is well-
positioned to leverage on its huge installed base and breadth of customer
relations to build one of the leading industrial operating platforms for apps that
enhance the efficiency of operating assets, including jet engines, compressors,
and wind turbines.
Ambitious 2020 strategy to realign the group

The outgoing CEOs ambition to be become a top-ten US software company by 2020
looks within reach if growth of digital capabilities is sustained at current rates. If its
targets are realised, the groups open web-based industrial operating system, Predix,
will be central to expansion.
GE Digital growing rapidly with proven benefits

From almost a standing start in 2011, GE Digital generated revenues of USD4bn in
2016, and its performance was broken out separately. Expansion of software offers
and digital services is expected to drive 25% growth in digital revenues in 2017. If
the groups high targets are reached, GE is looking to treble business by 2020 to
revenues of USD15bn.
Predix operating platform taking a leadership position

Multiple IoT operating platforms are being offered to industrial customers. GEs
solution is Predix. Its open structure, rapidly growing network of partners, and GEs
ability to test the system internally to provide proof-points to customers should help
GE achieve a leadership position.
GE set to become a leading IIoT provider

In contrast to tech competitors, GE is uniquely positioned to leverage its 400+
factories and huge installed base of equipment as proof-of-concept points. By
demonstrating its ability to realise efficiency gains in target industries, GE is set to
become the IIoT leader, utilising using deep strong industrial customer ties and
vertical knowledge, which differentiate it from traditional tech companies.
Capital goods
IIoT strategy
The importance of developing GEs digital strategy is clear. At the end of Q2 2017, We estimate 70%
74% of GEs order backlog stemmed from services, while 50% of the order intake industrial profits from
was from services. Looking at FY 2016, 46% of group revenues were derived from services, where data
services, and we estimate that 70% of group profits were generated from the sale of will be critical to
future success
services. Data capture, interpretation and utilisation to enhance the operating
efficiency of the installed asset base are critical to the long-term success of GEs
ability to continue to harvest value from the installed base of its complex machinery.
Data from industrial processes is becoming more valuable, and the control and
correct application of that data is likely to create more value than the sale of
equipment in the future. With this prospect in mind, GEs ambition to be a top-ten
software company by 2020 makes perfect sense.
In 2016, the GE Digital business unit was split out from the groups reporting GE Digital unit broken
structure. The units organic expansion from San Ramon California, which houses out in 2016, set for
over 1,400 of the 2,000 software developers and engineers, began in 2011. During rapid growth
the early phase of build-out for GEs digital capabilities, the focus was on predictive
maintenance, mainly applied to aviation and power applications, but this has
expanded into other areas across the GE portfolio. Moreover, GE Digital has evolved
as a core centre of digital excellence and its centrepiece offer is Predix, which today
is a cloud-based open operating system.
Expansion in digital began in earnest in 2011, when William Ruh was hired from
Rapid growth of
Cisco to head GEs industrial internet strategy, aimed at combining GEs physical digital started in
assets with the digital world, leveraging the importance of data analytics. By late 2013
2015, and after a multi-billion investment, GE formed GE Digital. In 2016, GE stated
USD4bn orders in
the company invested c. USD4bn to build its analytics software and machine
2016 expected to rise
learning capability and a further USD2bn to build additive manufacturing, a business by 25% in 2017 as
seen growing from USD300m to USD1bn revenues between 2016 and 2020. adoption accelerates
GE Digital is focused on software design, fulfilment and product management and

the construction of a strong cloud-based open operating system known as Predix.
Revenues for the business area include internal software, hardware and software
solutions (akin to digital services at Siemens). The rollout has centred on the internal
application of solutions and subsequent marketing to customers. Revenues are
generated within GEs operating businesses and consolidated in the divisional
results, but broken out for visibility. In 2016, Digital revenues were aggregated at
USD3.6bn, up 16%, driven by expansion within Power, Energy Connections, Lighting
& Oil & Gas. Orders in 2016 reached USD4bn, up 22%.
The strategy at GE is both externally and internally focused. In 2016, the group
spent USD400m internally to enhance operations and claims USD700m of
productivity benefits were realised, mainly linked to the service business. For 2017,
USD1bn of productivity gains are targeted internally.
GE estimates that data collection from its and others machines will increase 100x by
2020, which provides the fuel for data analytics and digital service business. From
USD4bn of orders in 2016, GE targets its digital services and software revenues to
Capital goods
reach USD15bn by 2020, against an industrial internet market that some USD4bn orders in
consultants have placed at USD225bn by 2020. 2016 and digital
revenues of USD15bn
Additional monitoring, control and optimisation of industrial assets and fleets should targeted by 2020
increasingly enable GE to shift its sales approach from the classical equipment +
spares package towards selling business outcomes for customers that includes
uptime, availability and productivity gains. In turn, this ability to capture huge
volumes of data, which can be interpreted for valuable customer insights, is set to
change the nature of equipment sales and increase the amount of physical product
as a service business.
GE Digital is being rolled out in three phases: 1) internally focused improvements,
with the goal of reaching USD1bn of productivity by 2020; in this regard, GE Digital
is a key part of the Brilliant Factory productivity programme across GEs 400+
plants; 2) selling Predix applications into the installed base across the power,
transport, healthcare and other industrial systems (aviation already well advanced);
and 3) we see GE Digital selling software and services into other industrial settings,
including commercial and residential building systems, auto production lines or
consumer goods inventories.
Predix platform at heart of strategy

Predix is an open cloud-based software platform targeted at collection and analysis Predix aims to be
of data from industrial machines. From its origins as a brand of software used to the operating
system for industrial
service GEs equipment, focused on the aviation segment supporting GEs aero
customers when
engines, the expansion has been rapid. Diversification into other end-market looking for digital
verticals accelerated in 2013, and GEs urgency seems partly prompted by the threat solutions to optimise
of US tech companies seeking to leverage their internet connectivity into the use of industrial
assets
industrial markets. GEs hiring of leading Silicon Valley players sees Predix being
positioned as an operating system similar to Apples iOS , but for industrial end
markets.
Widening the adoption of Predix across the industrial sector is being encouraged by
expanding the number of external partners and independent app developers that
can operate in the system with the aim of improving the efficiency of industrial
assets in areas such as gas turbines, wind turbines, and oil & gas processing plants.
The open nature of the platform broadens the appeal of the platform as much as
possible.
Capital goods
Chart 97: GE Predix platform placed at the centre of GEs IIoT strategy
We estimate that GE has spent over USD1bn on developing the platform, and this
has been further enhanced through acquisitions that incorporate additional
technologies and capabilities, often through buyouts from GEs own venture capital
network.
The Predix ecosystem now has over 400 partners and 22,000 developers, including
system integrators, software resellers, and technical partners. Microsoft is including
Predix as a key platform on Azure, while Tata Consultancy already has over 50
Predix-based apps.
GE states that Predix-powered software orders reached USD4bn in 2016 and are
seen rising to over USD5bn during 2017, with the 25% growth driven by acquisitions
and organic expansion. For example, managements target is to see Predix used by
over 100 airlines by the end of 2017, alongside hospitals, rail operators, and utilities.
Bringing customers to the platform is also being driven by Predix conferences (1,200
developers in Las Vegas) and leverage of the installed base (a third of energy is built
on GE machines), targeting aircraft makers, oil companies, hospitals and utilities. By
the end of 2016, GE stated that there were already 670 digital twins created on
the platform and 250 software applications.
Capital goods
GE sells the Predix platform as offering greater security than onsite datacentres and
able to support the creation of digital twins (a conceptual representation of an
operating asset that uses a digital thread to monitor performance against a baseline
level of expected performance). The Predix offer incorporates edge devices that run
algorithms and analyse data and the ability to work within the cloud or onsite
enterprise systems.
The entire Predix system is able to provide the connection of physical assets at the
edge of a network, collection and modelling of data, construction of analytics tools
and the visualisation of outcomes all within a secure environment. Asset
performance management is the greatest area of expertise. There are already over
250 apps developed on the platform to enhance asset performance, many of which
are used in the Brilliant Factory programme, allowing for the creation of over 18
showcase sites by the end of 2017.
IIoT and Industrie 4.0 development initiatives
A combination of a focus on service activities, the expansion of Predix as an open GE is clearly focused
operating platform, and GEs participation in the US-based Industrial Internet on building
capabilities linked to
Consortium, coupled with GEs focus on the energy, aviation and oil & gas sectors,
IIoT conceptions
leaves GEs focus on IIoT concepts rather than on Industrie 4.0. rather than Industrie
4.0
GEs investment is directed towards building a very strong and comprehensive
secure internet-based operating platform, which, through specific apps, can collect,
store, and analyse data to formulate methods of enhancing the operating
performance of industrial assets across a range of end markets including oil & gas,
manufacturing, power & utilities, transport, healthcare, food & beverage, chemical,
aviation and automotive. In fact, GE sees the digitalisation of field services as the
cornerstone of a successful digital strategy.
In contrast, the fulfilment of efforts to deliver a strategy centred on Industrie 4.0
concepts requires a more compete industrial automation and control product line-
up and capability, which is more optimally suited for competitors including Rockwell
Automation and Siemens.
GE claims to have invested nearly USD5bn to date in developing GE Digital
capabilities. While this was largely organic up to 2015, since then GE has been more
active, acquiring small companies that complement the Digital offer. GE has been
one of the most active venture capital funds in the IoT space over the past two years,
and recent acquisitions have been from the pool of companies where GE has made
previous investments.
Capital goods
SWOT analysis
Strengths: GEs global scale, installed base and capital strength can be leveraged to
drive growth of the digital offer across the areas of domain strength such as the oil &
gas, aviation, healthcare and energy equipment markets. With decades of long-term
relations with global industrial customers, GE is in one of the best positions to
leverage these relations and specific industry vertical knowledge to expand the
digital product and service offer.
Weaknesses: A lack of cultural agility represents one of the greatest challenges for
GE. The group has traditionally been a supplier of large complex highly engineering
equipment and associated spares. Success in the expansion of the digital business
will require a sustained shift in mindset throughout management, sales and
production, to align itself with new business models.
Opportunities: With a new incoming CEO, GE could accelerate the groups move
towards even greater volumes of software and service business, achieve the goal of
becoming a top-ten software company, and further streamline the mature, lower
value added, industrial business.
Threats: Beyond traditional competitors such as Rockwell Automation or Siemens,
the group may see increased competitive pressure from tech giants such as Intel and
IBM, which are also looking to leverage capabilities to achieve growth in the
industrial internet service market. We are seeing an increase in the amount of
venture capital finance being directed toward IoT platforms, and GE may also see an
escalation of competitive threats from smaller start-up companies.
Capital goods
Honeywell
United States | Industrial Conglomerate
Looking for new revenue streams

Honeywell is a global industrial player that generated USD39.3bn in revenues
and USD4.8bn in Net Income in 2016. The company operates in four business
segments: Aerospace (38% of revenues in 2016), Home and Building
Technologies (27%), Performance Materials and Technologies (24%), and Safety
and Productivity Solutions (12%). It operates primarily in the US (46% of
revenues), Europe (25%), the Americas ex-US (8%), China (5%), Middle East (4%)
and India (2%).
The company has changed completely since 2002 and David Cotes appointment
as chairman and CEO. Cote led the implementation of key processes and unified
the business segments culture. In terms of Industrie 4.0 and the industrial
internet, Honeywell focuses on optimising users existing automation
equipment. It is also ready to deploy technology across all elements of the
industrial internet: smart and connected assets and devices, data management
and onsite control, analytics, smart and secure collaboration.
The aerospace business supplies products, software and services for aircraft and
vehicles that it sells to OEMs and other customers in a range of markets, including
air freight, airlines, aircraft operators, defence and space contractors and
automotive and truck manufacturers. Its main competitors are Borg-Warner,
Garmin, GE, Rockwell Collins, and Thales.
The Home and Building Technologies segment provides products, software
solutions and technologies that help homeowners to remain connected and in
control of their comfort, security, and energy use and enables commercial building
owners and occupants to ensure that their facilities are safe and productive. In this
segment, the company competes mainly with Emerson Electric, Johnson Controls,
Siemens, and Schneider Electric.
Performance and Material Technologies aid in the development and manufacturing
of materials, process technologies and automation solutions. The products include
catalysts and adsorbents, equipment and consulting services that enable customers
to produce petrol, diesel, jet fuel, petrochemicals and renewable fuels for the
petroleum refining, gas processing and other industries. Its main competitors include
Albemarle, BASF, Dow, Dupont, and Emerson.
Safety and Productivity solutions are engaged in providing products, software, and
connected solutions to customers that manage productivity, workplace safety, and
asset performance. Honeywell competes in this segment alongside 3M, Kion Group,
TE Connectivity, and Zebra Technologies.
Capital goods
IIoT strategy
The company has achieved its digitalisation through the inclusion of software and
smart processes throughout its value chain. Its main objective now is to bring
connectivity to its clients.
Through the development of predictive maintenance and remote monitoring,
Honeywell is already able to connect its engines and products to its aftermarket
services. Predictive maintenance allows the company to plan repairs with clients.
Furthermore, Honeywell has acquired Nextnine to further develop its cybersecurity
activities. As seen in the technology section of this report, cybersecurity is key to
companies development of IoT. By securing the cloud, the edge and the existing
communications between both environments, there is less risk of hacking and
downtime is therefore avoided.
Through all of its business segments, Honeywell underlines the importance of
connectivity and digitalisation.
Honeywell participates each year in the Hannover Messe, home of industrial
innovation and the place where the term Industrie 4.0 was first clearly defined. The
company aims to offer its customers productivity gains and reposition them for
growth.
Honeywell underlined the importance of its cybersecurity solutions at the fair in
2016. The group showcased its broad portfolio of cyber-secure automation software
and hardware designed to make industry smarter, safer as well as more efficient,
productive, and reliable.
Honeywell spent more than USD6bn on software-focused acquisitions in 2015. It
expects 77% of growth from breakthrough initiatives involving embedded,
networking, mobility and cloud-based software. It implements solutions in various
areas such as connected workers, connected buildings and IIoT. The company offers
fast and seamless processes to companies along with energy savings and predictive
maintenance.
The company has developed IIoT-specific solutions, including HOS Gold (Honeywell
Operating System Gold) and HUE (Honeywell User Experience), both enabling the
company to rapidly develop and deploy cyber-secure and digitally enabled solutions.
Both solutions help Honeywell to create and deploy leaner processes for its
customers to make their experience increasingly seamless.
The company has developed new partnerships and obtained new contracts in Q2. In
the aerospace segment, it sold its connected maintenance system to Cathay Pacific,
enabling lower maintenance and downtime costs for its customer. In the safety and
productivity solutions business, it introduced connected freight to the public,
allowing real-time information about the location and condition of freight while in
transit.
Capital goods
Chart 98: Sentience IIOT platform structure
Source: Honeywell
Finally, and most importantly, Honeywell has developed its own IIoT platform.
Sentience is at the core of Honeywells latest offerings and delivers secure and
robust big data capabilities for all of the companys solutions.
Among a myriad of other services, the platform offers real-time analytics (collection,
analysis, and translation of data), dynamic tasking (prioritisation of maintenance
tasks to mitigate downtime risks and improve operational efficiencies), a
performance dashboard and reports (easy-to-use, cloud-based interface to monitor
performance vs. KPIs), PLM (roadmap with predictable costs to keep applicable
systems current and IT-compliant), and continuous service improvement (systematic
reviews conducted to promote the prevention and eradication of problems, reducing
the risk of critical incidents and downtime).
All of Honeywells connected services can be linked to the customers IIoT platform
to develop leaner operations.
The company has been investing heavily to develop its software and platform offer
in recent years. It has digitalised its lines and promoted digitalisation among its
customers. Further promotion is to be expected as well as further innovation and
development of existing solutions.
R&D costs represent 5% of sales annually: USD2,143m in 2016, USD1,856m in 2015
and USD1,892m in 2014. This includes customer-sponsored R&D investments,
coming mainly from the US government. Its R&D efforts are greater than its peers.
Honeywell is one of the better positioned companies in the industrials sector. With
its wealth of experience, it has been able to address the emergence of IoT with a
Capital goods
focus on security. Security and productivity levels have always been central to the
companys strategy and across its segments.
This focus on cybersecurity and the recent development of its own IoT platform
make Honeywell a strong competitor in the IIoT space. The connectivity it brings to
its products and services are beneficial for clients, helping them to prevent
downtime, optimise maintenance and realise productivity gains.
SWOT analysis
Strengths: The company offers its own IIoT platform, Sentience, to the market,
which is still rare (off the top of our head, only Siemens and GE do this within the
industrials sector to date).
Weaknesses: At an investor level, detailed and comprehensible information is hard
to come by, making it hard to understand the companys position on the subject.
Opportunities: Further development of applications and the potential
transformation of the sector towards Platform-as-a-Service (PaaS) and Product-as-
a-Service (XaaS) are interesting directions Honeywell can take to further develop
and digitalise its business.
Threats: Competitors are gearing up to develop their own applications, software
products, and platforms in some cases. Keeping development at its current level and
not furthering it is a risk.
Capital goods
IBM
An endangered heavyweight
IBM is an IT player that emerged as an industry leader at the beginning of the
computer era. The firm generated USD79,919m in revenues in 2016 down 2%
YoY and a net profit of USD11,872m, down 10% YOY. The firm is going through a
lot of changes, trying to set its AI provider as a strong leader in its field. The
companys largest market remains the Americas (47% of revenues), followed by
EMEA (31%) and Asia-Pacific (22%).
The company built its revenue stream around four main business segments:
Cogntive Solutions (23% of revenues), Global Business Services (21%),
Technology Services & Cloud Platforms (44%), and Systems (10%). The company
has based its future growth and strategy on IBM Watson, an AI platform that
won the Jeopardy! game against two champions in 2011.
Since then, Watson has expanded to include IoT platforms, AI services,
predictive maintenance and the development of applications related to those
environments. The company has been struggling in recent years to maintain
revenue levels. Over the past 21 quarters, revenues have declined as Watson is
having a hard time making a place for itself.
With its dramatic win on Jeopardy!, Watson AI accomplished one of the greatest
challenges of artificial intelligence: making sense of language. After this, IBM quickly
turned Watson into an umbrella brand that includes a myriad of applications for
different sectors. The firm has still not revealed the financials of the Watson
business, but claims that it is growing.
As a whole, the company spent USD6bn on R&D, USD4bn on capex, and another
USD6bn on acquisitions in 2016. Most of the acquisitions were designed to expand
Watsons portfolio. IBM has also been signing partnership agreements with
companies across various sectors, including industrials and healthcare. The firm says
that Watson IoT has more than 6,000 clients and 50,000+ developers working on
the unit. Watson is due to reach 1bn users (direct and indirect) in 2017.
In 2016, the companys new businesses (including cloud platforms and AIs)
generated sales of USD33bn, and the company thinks it will reach USD40bn within
the next year. On the other hand, IBM Systems has been struggling recently, with
sales down 10% YOY.
IIoT strategy
Through Watsons IoT platform, IBM offers key applications for the industrial sector.
The development of those applications is accomplished by the companys network of
partners.
Capital goods
IBMs CEO, Virginia Rometty, has been focusing a lot on Watson lately. Through her
shareholder letters, she addresses the brands potential and specific applications.
Clearly, it looks from the outside like she has put all her eggs in one basket. In the
meantime, IBM has long been a digital enabler for its clients. Its data centre and
cloud capabilities make it a strong candidate to further develop this skill through the
IloT. The companys data centres are numerous and located in key regions such as
Brazil, India, China, Australia, Europe, and obviously the US.
The company has also divested most of its hardware businesses including its famous
ThinkPad computer brand, sold to Lenovo. The company is focusing on software and
wants to reach as far as it can with Watsons potential. As stated above, the Watson
community is growing as are developers trying to improve it. However, it seems that
Watson is an umbrella for multiple ideas, solutions, concepts, software, and
platforms. Watson is still at the developmental stage, although some of its
applications are already state-of-the-art technologies.
It is hard from the outside to clearly see where the Watson business is heading.
However, we know that its IoT platform is already being used by large corporate
clients and its applications are functional and efficient. For example, Fincantieri, one
of our capital goods companies, has been able to access and develop 13 private data
centres connected to IBMs Milan data centre to collect and analyse data as well as
benefit from IBMs cloud solutions.
With IBM IoT for manufacturing, companies will be able to improve asset reliability,
process and product quality, automate inspections, increase OEE, reduce warranty
costs and optimise maintenance schedules and resources. This mainly constitutes an
after-market service for IBMs clients and an added service for customers. With
analytics and cognitive capabilities to help improve quality, operations and
maitenance, machine operators will obtain greater value from production assets and
processes. Through IBMs systems, data collection and analysis is translated into a
comprehensive and minable corpus of information leading to new patterns of data
enabling remote monitoring and predictive maintenance.
Recent resultsat the firm include a 34% decrease in downtime for a global car
manufacturer through the prevention of production delays and improvement in line
performance, less equipment downtime and better process efficiency, and fast
equipment repairs using predictive maintenance. Similarly, a European carmaker
was able to increase its overall productivity by 25% through cognitive operations
that enabled an increased yield from manufacturing operations and processes,
better productivity on the manufacturing line, and expedite service calls and repairs
reducing the warranty costs.
Finally, Watson IoT also optimises production resources. This reduced energy and
resource costs by 8% at a manufacturing facility through improved worker safety
and workforce management, increased worker productivity and expertise, and
reduced energy consumption.
Capital goods
Watson IoT and IBM are already serving supporting Industrie 4.0 by helping
customers increase productivity and decrease costs. What we see lacking here is
probably an impact on its customers top line.
The company has acquired and developed a plethora of solutions under Watson.
From bartender applications to healthcare solutions, the array of possibilities is vast.
IBM has always been able to adapt its flagship solutions to all sectors.
We therefore see the firm trying to further develop solutions, making objects
smarter and more connected, but we also see the company investing in better
marketing. The firm has had 21 straight disappointing quarters and has still not
reported Watsons financial performance.
With a better structure, we are certain that Watson can become a strong player.
IBM has a strong brand famous for the excellence of its solutions. With better
structuring, and a clear direction, the company can offer a better and more targeted
product that will not only serve the industrial sector but a whole range of industries.
Without information on Watsons financial performance except statements from the
companys management that it is growing, we believe that IBM is having a hard time
generating margins that are aligned with its expectations.
SWOT analysis
Strengths: The company understands its end-markets expectations and businesses.
Watson has already built a strong community around itself and offers the largest
array of applications we have seen.
Weaknesses: Watson has a poor structure, and it is not clear to outsiders how it can
be used.
Opportunities: A better structure will offer the companys salesforce a strong
product to offer to its existing clients.
Threats: SAP, Microsoft, Amazon and PTC (more Industrials sector specific) are all
equipped to address growing demand for IoT and IoT-related solutions.
Capital goods
KUKA
Germany | Capital Goods
Best-in-class robotics provider

KUKA is one of the worlds leading suppliers of robotics and plant manufacturing
and system technology. It is seen as a pioneer of Industrie 4.0 in its home
country, Germany, as well as in Europe. It was acquired by Midea in 2016, a move
that fits with the governments Made in China 2025 strategy. The firm has
partnered with many IT companies to offer digital capacities to its customers.
Capex accounted for 3% of the companys sales in 2016 (EUR100m) and R&D
costs reached EUR127m in 2016, or 4% of KUKAs sales last year.
Industrie 4.0 pioneer

The company has identified fundamental changes in the production line through the
impact of digitalisation. Robot-based automation along with data analysis and
cooperative networking is a key investment today for the industrial sector and
KUKA is well-positioned to serve this growing need.
Numerous partnerships in different applications

KUKA has partnered and invested with Salesforce, SAP and in Nebbiolo
technologies) to develop its Industrie 4.0 capabilities as well as its connectivity and
cloud-access capacities, thereby broadening its market appeal.
Additional R&D spending announced after Midea acquisition

KUKA is expected to increase its R&D investments to continue to revamp and
develop its existing products and upcoming software and hardware solutions to
meet Industrie 4.0 needs.
Growth expected in every business segment

KUKA is a major automotive industry automation provider which also serves other
businesses. The introduction of data analysis in the metal transformation industry is
crucial and enables unrivalled precision levels. In the energy business, KUKA is
investing in research to achieve operational optimisation through the use of larger
data volumes. Further innovations are expected in the electronics, aerospace, e-
commerce/retail, consumer goods, and healthcare segments.
IIoT strategy
KUKA is a firm believer that Industrie 4.0 is a revolution for the manufacturing
environment. This is at the centre of its strategy, although the market is still
sceptical about the potential benefits of this trend. The company has always pursued
innovation, producing its first arm robot in 1973. It has therefore fully digitalised its
line of products and itself, thus enabling suppliers, and more specifically customers
to be constantly aware of robot movements, failures, maintenance requirements
and other metrics at any time with real-time data.
Strategically, the company has decided to partner with numerous firms to spread
out its R&D expenses and keep them in line with previous years. It has formed key
Capital goods
partnerships with SAP, Huawei, BEET, and Nebbiolo Technologies. Each partnership
takes a different angle to tackle the issues related to the industrial internet.
Nebbiolo is focused on the development of Fogging (which refers to the edge of the
network). Nebbiolo enables companies to connect all smart objects to the cloud and
then control them within the cloud through their warehouse management system
and their fleet manager system. With the use of flexible, modular and high
performance gateways, the company also enables the transmission of real-time data
from the robots to the ERP. This is supported by a rich software stack on each CPU
subsystem which allows for fast and secure solution deployment. Finally, end-to-end
management enables distributed networking and computing systems assets,
software and applications.
KUKA has signed a VAR (value added reseller) agreement with BEET to leverage its
IoT technology as another tool in its digital ecosystem. BEET enables overall
equipment efficiency (OEE). BEET Technology is a predictive maintenance enabler.
ENVISION Technology (BEET-developed) collects, processes and presents down to
the motion of each device of a production line.
The companys partnership with SAP started at the Hannover Messe in 2017 when
SAO integrated KUKAs robots in its digital manufacturing showcase. KUKA
complements SAPs Leonardo technology through its expertise in intelligent
automation. The partnership will be focused mainly on the construction of mid-sized
machines.
Through the seamless integration of automation solutions from KUKA and solutions
from the Leonardo IoT platform and SAP connected manufacturing software, the
partnership will make a significant contribution to the integration of the top floor
and shop floor in manufacturing. In addition, SAPs technology components and
business applications will supplement KUKAs Connyun Industrie 4.0 platform
provided by the start-up company of the same name. The former will allow for
optimal adjustments to its existing and future customers requirements and KUKA
will support them throughout their digital transformation.
The Huawei-KUKA partnership is focused on R&D investment. It will pave the way
for the development and integration of 5G technology to manufacturing robots for
swifter and leaner communication. Latency times will be further reduced within the
cloud and the edge. The companies will also work together on the deployment of
Huaweis infrastructure-as-a-service (IaaS) solutions to further develop cloud-
connected smart manufacturing services. Furthermore, KUKA and Huawei will
jointly set up an intuitive robot programming team to explore the immediate
potential of deep learning in manufacturing environments.
As a whole, these partnerships and others will contribute to KUKAs leading position
in the robotics and systems industries. Its automation levels, coupled with its
Industrie 4.0 dynamics and connectivity, will put the firm in a strong position to win
contracts in smart manufacturing. The connectivity level of the firms robots allows
it to produce entirely automated production lines. The next step to add further value
Capital goods
will be the optimisation of downtimes and the pursuit of faster transmission of data
for real-time shop floor management from the cloud.
When Midea decided to acquire KUKA, it was essentially to make a strong push to
exploit Chinas Made in China 2025 macro-strategic plan. The benefits of the plan
and the size of the potential market in its home country convinced the firm that
strong organic growth could be achieved at KUKA .
Now, the objective is to invest further in R&D, while strategically targeting Industrie
4.0 partnerships and innovations. KUKAs key value to Midea is its capacity to ally
and align digital and physical technologies. Excluding its acquisition, the firm was a
pioneer in developing Industrie 4.0 capacities directed towards its robotics and
systems products in Germany, which is a pioneer itself.
In the metal industry, the difficult production conditions and extreme time pressure
cannot impact the defects ratio. KUKA intervenes to supply Industrie 4.0
technology which works with pin-point accuracy. KUKA ArcTech, KUKA SeamTech
or ROBOTstar System software are innovative software technologies allowing for
fast configuration and evaluation of welds and data. This allows the operator to
conduct quality checks during the production cycle.
For the automotive Industry, KUKA provides the keys to developing smart factories.
It helps speed up the interval between the initial concept and market launch.
Intelligently networked value chains enable less downtime through predictive
maintenance and machine-to-machine (M2M) communications. These two pillars of
the Smart Factory strategy are developed in both hardware and software solutions
to achieve maximum variability, availability and greater throughput.
Finally, through its increasing investments in dedicated Industrie 4.0 start-ups, such
as Connyun, the firm is strengthening its portfolio of industrial internet capacities.
Connyun is an IoT platform which ensures particularly strong security for its
customers. The platform enables the connection of assets through networking and
communication. This allows for the acquisition and analysis of real time data.
Overall, the firms Industrie 4.0 developments meet the Chinese governments
expectations. This allows Midea to promote new robotics solutions to a wide range
of potential customers in China and their highly automatable factories and
production lines which could benefit KUKAs top line and future development.
The firm has analysed its end-markets and identified in a white paper the
innovations it must invest in to maintain its market position in the automotive, metal
industry, energy, electronics, e-commerce/retail, consumer goods, and healthcare
segments. Each of those business segments can be further developed to reach M2M
communications for the targeted product lines as well as specific software
applications to collect, analyse and deliver specific real-time data. Further
investments in R&D are expected.
Capital goods
On the other hand, with the development of a new customer base, we can expect an
increase in SG&A expenses. Since 2013, the firm has invested to develop production
in China as well as sales. 15% of the firms employees are in Asia/Other regions, the
smallest of the companys four regions. Furthermore, the ratio of robots to
employees in China is among the lowest in the world (and even lower in India), which
shows the potential for change in the region. Finally, KUKAs sales in Other Regions
(including China) represent less than 20% of the groups total sales.
Chart 99: Robot installation by region Chart 100: Employees by region
Source: KUKA Source: KUKA
To further assess the companys presence in China, Chart 3 shows that the firms
non-current assets in other regions (including China) are extremely low (4%)
compared to the other regions. As stated above, large investments are expected in
this region, and some of them could also stem from synergies with Mideas
capacities. Globally, the rest of the data is in line with robot installations and justifies
the need for assets in those regions.
Chart 101: Revenues and non-current assets per location
Source: KUKA
Capital goods
Ranking of Industrie 4.0 capacities

KUKA has showed its capacity to develop Industrie 4.0 solutions for its Automotive
and Metal Industry Robots and System businesses. As stated above, further
investments are expected to bring the other end markets to an equal or higher level
of digitalisation. The automotive business is the most robotised industry of all,
meaning that KUKA made a smart call when it decided to invest in this end market
first.
If the company reaches similar levels of digitalisation and connectivity in other end-
markets, ultimately it will be well-positioned to remain a leader and a pioneer among
its peers. The company also shows strong levels of competitiveness versus its
Japanese peers. Compared to Fanuc, Yaskawa, and Omron, the hardware and
software offered by the firm are at similar levels. It will compete with these firms to
capture market share in China and India, two countries that are lagging behind in
their digitalisation efforts. China shows the most potential for KUKA, after the
acquisition by Midea and in terms of the potential benefits from the Made in China
2025 plan. This should help KUKA secure new market shares.
Overall, the firm is one of the strongest players in Europe as an enabler of Industrie
4.0 capacity at OEMs and automotive manufacturers, along with the metal industry
and in particular arc welding. Further innovations are expected in the remaining end
markets it serves.
SWOT analysis
Strengths: KUKA is ahead of its European competition in terms of digitalisation. It is
both an enabler and a respected innovator. The firm is a good benchmark to assess
its peers.
Weaknesses: The firm has a limited presence in EM countries which are likely to
face growing demand for digitalisation of their production lines.
Opportunities: The acquisition is an exceptional opportunity to develop sales in
China, in Asia (India potentially) and EM. Industrie 4.0 is likely to be used in all of its
end-markets.
Threats: KUKAs main competitors are based Japan and could therefore make it
harder to secure new customers in Asia and in very large markets such as China or
India.
Capital goods
Chart 102: KUKA internal survey grading
Strategy & operation

5
4
3
Employees Smart factory
2
1
0
Data-driven services Smart operations
Smart products
Capital goods
Microsoft
The leading cloud and IoT partner

Microsoft is a 42-year-old global IT & and software leader that generated
revenues of USD85,320m and net income of USD16,798m in 2015. Through
ingenuous strategies and a strong vision, the company has been able to swiftly
change its business model to take advantage of the emergence of cloud
technology. The group is split into three divisions: Productivity and Business
Processes (29% of revenues), Intelligent Cloud (28%), and More Personal
Computing (44%).
Geographically, the company is present in more than 200 countries through its
various and numerous subsidiaries. Overseas sales therefore account for
USD44,742m (52% of the companys total sales), versus USD40,578m and 48% in
the US. Since Satya Nadella assumed the position of CEO, the company seems to
have gotten back on track. The shift towards corporations and the cloud started
earlier, as well as its 365 strategy, whereby the software is paid for by
subscription rather than purchased from a store.
The subscription system model allows subscribers to access the latest software
updates and new features. The company expects to generate annualised sales of
USD20bn in FY 2018E in its commercial cloud sub-segment. For now, the
company has achieved an annualised rate of USD12.1bn in 2016, up by more
than 50% YOY. Microsoft Azure, the groups cloud platform, saw its revenues
grow by triple-digits.
The Productivity and Business Processes unit includes several offerings targeting
productivity, communication, and information services. The product and services
offer includes Office Commercial, for example, which offers licensing and
subscriptions to Office 365 for products such as Office, Exchange, SharePoint, and
Skype for Business., Office Consumer, which meanwhile, consists of the retail
version of the Office (through retail) productivity suite and the Office 365 consumer
subscription service, as well as Office Consumer Services (which includes Skype,
Oultook.com, and OneDrive), Microsoft Dynamics business solutions including
includes Dynamics ERP on-premises, Dynamics CRM on-premises, and Dynamics
365 (a set of cloud-based applications across for ERP and CRM). Finally, it also
includes LinkedIn with its Talent Solutions, Marketing Solutions, and Premium
Subscriptions.
Finally, the More Personal Computer segment consists of a portfolio of products and
services aimed at end-users, developers, and IT professionals. This segment includes
four categories: 1) Windows (which includes Windows original equipment
manufacturer licensing) Windows Commercial (with volume licensing of the
operating system) Windows Cloud services, and other Windows Commercial
offerings, patent licensing, Windows embedded, MSN display advertising, and
Capital goods
Windows Phone licensing; 2) the devices business, which includes the Microsoft
Surface, phones and PC accessories; 3) gaming, which includes the Xbox platform
and software and services such as live transactions, subscriptions, advertising, video
games, and third-party video game royalties; and 4) Bings search advertising
business.
Hardware has played an increasingly important role in the companys strategy over
the past few years. Its gaming business (Xbox accounts for sales of USD9.3bn, 11%
of the group) and devices category (the Surface and phone categories generated a
combined USD7.5bn, 8.8% of total revenues) gives the firm a position in two
markets that will only grow in importance in the future.
IIoT strategy
The company has acknowledged the importance of the cloud for its large customers.
Through regular R&D investment (14% of sales in 2016) and capital expenditure
(10%), Microsoft has been able to build a global network of data centres across the
world. All key countries have been addressed, including not only developed markets
but emerging ones such as Brazil, China, and India. The size of the companys
network ensures that clients can reach their data at all times from anywhere in the
world. Microsoft has the worlds largest data centre network, making it an
exceptional competitor in the sector.
Microsoft Azure is an open-source cloud platform that allows external developers to
create and update generic solutions for other potential customers, as well as to
customise solutions. Customised solutions can then be developed for or by industry-
vertical specialists. The group positions itself as a neutral player looking to develop
more partnerships with software solutions providers, rather than developing them
in-house.
To grow its partner network, Microsoft has not only made its cloud solution open
source, it has decided to incentivise its Microsoft Azure salesforce. This encourages
both Microsoft and its channel partners to develop more applications and sell the
product through their consulting services, and encourages salespeople to lever their
existing client base to migrate to the cloud.
With Office Dynamics 365, the company has developed a suite of products including
a CRM and an ERP solution that can be deployed both on- and off-premises. Through
its integration with the cloud, the suite can be accessed from either the cloud or the
edge of a network or both simultaneously. Clients can access the products at
different times and different sites.
These integrations demonstrate Microsofts ability to scale its operations, develop
open-source products, and partner with other providers. This flexible approach has
already made Microsoft a key player in IIoT and industrial digitalisation.
Capital goods

The firm offers digitalisation services to its clients both directly and through its
growing partner network.
With Azure, the company has created a cross-sector adaptable base for commercial
customers. By integrating the Office suite (and many other business apps) with the
cloud, Microsoft has already planned its future strategy and given companies a
reason to choose Office 365. Its ability to migrate enterprise customers to the cloud
suggests it should be able to capture a significant chunk of the industrial market with
its Azure and Dynamics services.
Recently, the company partnered with GE. The partnership relies on the fact that
Azure will offer Predix customers access to its cloud services (the largest cloud
presence currently available) along with data sovereignty, hybrid capabilities, and
advanced developer and data services. In addition, the partners plan to integrate
Predix with Azure IoT and Cortana Intelligence as well as Microsoft business
applications such as Office 365 and Dynamics 365 to connect industrial data with
business processes and analytics. Through this partnership, Microsoft has taken a
step closer towards Industrie 4.0 and Industrial Internet applications and could
generate new revenues from this vertical through new or existing customers.
Adopting an open-source model for its Azure business has enabled the business to
develop across all sectors, including capital goods. By developing Dynamics 365 and
applications targeting on- and off-premises deployment, cloud and edge usage,
Microsoft is becoming a key player for companies looking to adopt an Industrie 4.0
strategy. Furthermore, the companys network of data centres across the globe
makes it one of the most accessible and useful cloud service providers on the
market. The group seems to have adopted the right strategy to answer to future
needs of existing and potential customers.
Future investment needs
The company is already a worldwide data centre player. It will likely seek to extend
its reach further with more data storage volume and more facilities to enable the
acquisition of new customers.
The company is basing its strategy on new partnerships, which will likely give it
access to new customers. By partnering with digitalisation companies and
integrating its cloud and business solutions, it is extending its ability to help
enterprises reach their digital goals. CEO Satya Nadella said that any product or
service can be digitised and bring more value to clients through cloud integration
and network-edge. The company is further developing its intelligent cloud and is
trying to become a strong player in the intelligent edge business.
The company has been a global market leader since it produced its first operating
system. It has understood and adapted to the arrival of the cloud and data centre,
along with the services related to them. With the emergence of Azure, the
development of its intelligent cloud business, and the growth of intelligent edge,
Microsoft is becoming a key partner for companies in our coverage universe and
Capital goods
beyond. Nadella said he plans to make CPS commonplace, saying that any product or
service will have a digital element and connection. Microsoft is an enabler and seems
to be leading the way among its peers, developing its core business around the idea
of serving its partners and commercial customers.
SWOT analysis
Strengths: The company has the largest and most international data centre network
at the moment. This allows it to sell its solutions worldwide offer data services its
competitors cannot. The emergence of Azure as an open-source platform allows an
infinite number of applications to be developed from generic apps to apps
customised for a specific company or factory. Azure is accessible from both the
network edge and the cloud, and can intelligently guide and make data accessible to
users accessing it from either point.
Weaknesses: Due to its large customer base, integration and adoption will be
relatively long.
Opportunities: The company can further develop its existing technology and
infrastructure. Through the intelligent cloud, intelligent edge and sound
partnerships, it will be able to bring more value to its existing customers. Through
the development of data centre infrastructure, it will be able to maintain a
leadership position serving global businesses looking for the best and cheapest
solutions, a niche Amazon is also trying to occupy.
Threats: Amazon has the potential to surpass Microsofts data centre scale.
Regulatory and architecture issues on both its data centre and cloud/edge
businesses could grow overtime.
Capital goods
Omron
The third Japanese player

Omron is a Japanese manufacturer of control equipment, factory automation
systems, electric components, automotive electronics, and other equipment that
generated sales of JPY794bn in 2016. We estimate sales of JPY810bn for 2017,
and net income amounted to JPY46bn last year. Geographically, sales in Japan
accounted for 43% of total sales in 2016 (JPY340bn), while 14% came from the
Americas (JPY112bn), 13% from Europe (JPY102bn), 19% from China
(JPY148bn), and 12% from the rest of Asia including Australia (JPY92bn).
The companys revenues are separated into six business segments: Industrial
Automation Business (IAB, 42% of revenues), Electronic and Mechanical
Components (EMC, 12%), Automotive Electronic Components (AEC, 17%), Social
Systems, Solutions and Services Business (SSB, 8%), Healthcare Business (HCB,
13%), and Others (8%). In 2016, the firms R&D expenses reached 6% of its
revenues, slightly higher than in 2015.
New mid-term management plan

Through its new VG2.0 plan, the firm is looking to reach JPY1trn in sales by the end
of 2020, along with operating profits of JPY100bn, an ROIC of greater than 10%, an
ROE of over 10%, and EPS of more than JPY300. The groups policy is to achieve
self-driven growth through technological innovation. To do so, it plans to strengthen
its ILOR+S (Input, Logic, Output, Robot, Safety) operations through the innovation of
production lines by integrating control application software at high speed and with a
great degree of precision.
Targets for 2017

Omron expects to generate sales of JPY810bn this year, driven by IAB and HCB
while AEC should hit top-line growth. The focus is on further investment in research
and development.
Upcoming innovations
The company aims to leverage its AI technologies and knowledge to strengthen
three technical fields within OMRONs core Sensing & Control + Think technology.
This includes developing Deep Sensing technology to extract data and images from
the interior of objects and convert it into valuable information, sensor-based
technology to obtain flexible, real-time control based on sensor/device data, and
component technology to provide the optimum components for value creation
under different restrictive conditions.
Capital goods
IIoT strategy
Through its presence at Hannover Messe, Omron promoted the idea that data
integration is a key enabler for companies to minimise costs and customise final
products to be better aligned with customer preferences. The group believes that by
collecting production data can help companies to measure their Overall Equipment
Effectiveness (OEE) and meet increasing legal requirements for reporting, among
other benefits.
By measuring OEE, companies can discover bottlenecks and weaknesses in their
production lines. Omrons value proposition for customers is to support data
gathering with systems that are easy to design and use, enabling them to predict
problems with key components before they become critical issues.
The firms overall Industrie 4.0 strategy overlaps with its VG2.0 strategic plan and
long-term plan. The primary goal of VG2.0 is to grow sales in IAB and HCB. With
software development, the company is creating a new revenue stream that could
help it reach its JPY1tn sales target in 2020.
Furthermore, Omron has been developing Adept, an intelligent robotics brand, since
the 1980s. Recently, it launched the Omron Mobile Robot, claims will transform
manufacturing and logistics floors. It has also developed the Lynx Cart Transporter,
a new module for Adepts robot. The product is designed to help companies achieve
productivity and efficiency gains and improve safety, part of the companys ILOR+S
strategy. The primary use of the Transporter is to handle carts, line side, Work in
Process (WIP) (moving functional parts of a production lines process), and Finished
Goods Inventory (FGI).
Overall, Omrons group strategy is in line with the Industrie 4.0 developments of its
IAB customers. The company brings automation and IoT technology to customers
through data collection and analysis, improving production efficiency and predictive
maintenance.
The company is particularly active in two of its business verticals: IAB and HCB.
Both segments aim to develop and promote the use of sensors, data recording and
data analysis. With ILOR+S, Omron is developing control software that can use data
to adapt and optimise production lines.
The company sold AI robots by Adept (the Lynx Cart Transporter) to Tesla for its
GigaFactory. The robots are independent and able to pick up, carry and drop off
product batches. Through Adept, Omron is expected to further develop its robotics
offering, which it hopes will help industrial clients implement more automation and
connectivity technology on their shop floors. By developing software to run on its
robots, the firm can help customers to pre-program them for specific tasks and use
machine learning abilities to help them become more independent. Like Yaskawa
and Fanuc, Omron has also developed one-armed robots for manufacturing lines.
Capital goods
The company has also developed an HMI, through an Industrial PC platform (IPC).
The group says it will help innovate manufacturing processes through IoT utilisation
and high-speed, high-precision automation. This is part of the companys strategy to
further develop its IAB. The IPC is designed to support the growing innovative
manufacturing trend (IoT, Big Data, Robotics). The product helps address the
markets need for greater efficiency in manufacturing processes. With its predictive
maintenance services, the group helps customers reduce downtime on their
production lines and improve production efficiency. Predictive maintenance along
with remote monitoring and data analysis are key elements of the Industrie 4.0
revolution.
Future investment needs
The firm expects to increase its R&D, capex, and M&A spending to reach its medium-
term goals. Through acquisitions and organic growth, the firm expects to strengthen
its position in IAB and HCB to achieve its strategy and guidance.
The firm does not offer its own IoT platform and has not partnered with any
particular platform provider, but already provides multiple IoT devices, including
sensors, robots and HMIs. Multiple platforms support both those products and the
firms software solutions for Adept and data collection. It could invest further in the
developing software and a devoted IoT Platform or in partnership with an IoT
platform provider.
Omron is well positioned to provide IIoT equipment and solutions to manufacturers.
Compared to national peers Fanuc and Yaskawa, the firm is more like Yaskawa with
regard to its IIoT capacities. This is based on the fact that the firm does not offer an
IoT platform to its customers and seems less digitalised than Fanuc.
The company has been investing in robotics and sensor development for 30 years,
meaning we could expect more from such a firm. The convergence of IT and OT has
been a trending topic since the beginning of the decade. The integration of
predictive maintenance has become almost commonplace for robots and product
line manufacturers. Through ILOR+S, Omron has the opportunity to move forward.
However, the firm has been working on advanced AI technology through its Adept
business. It already offers Tesla fully automated logistics solutions with remote
guidance, monitoring and predictive maintenance. As a reminder, Teslas Elon Musk
aims to build a fully automated GigaFactory to produce car batteries.
SWOT analysis
Strengths: The firm offers independent robots, advanced AI technology and
connected sensors. It is an enabler of IIoT strategies at customer companies.
Weaknesses: The company is missing a proper IoT platform or partner. Even though
its software applications and products are supported by some platforms, this could
become an issue.
Opportunities: Opportunities arise from the further development of AI and
connectivity in its IAB product range. The firm is also rapidly developing in HCB.
Capital goods
Threats: Omrons national peers have identical geographical exposure but are more
focused on factory and industrial automation, allowing them to allocate more capital
to developing Industrie 4.0 solutions. Omron could find itself lagging in the end.
Capital goods
PTC
United States | IT Software & Services
Well-positioned to continue to lead

PTC is a CAD/PLM player that posted revenues of USD1.14bn in FY 2016 (ended
in September 2016 -9.1% YOY), while non-GAAP operating income reached
USD172.7m (15.1% margin, -910bps YOY). PTC is facing a tough transition due to
its choice to shift its business from perpetual licences to subscriptions. The
company is expected to return to modest growth in FY 2017, as investments in
IoT should lead to higher growth opportunities. Indeed, PTC was one of the first
movers in IoT: it has acquired several companies in the field, including
ThingWorx, an IoT platform company. Based on its first-mover advantage and its
broad group of partners, we believe PTC is likely to be among the software
vendors that benefit the most worldwide from the rise of IIoT.
Subscription mix weighing on short-term performance

PTC is far more advanced than Dassault Systmes in the shift from a perpetual
licence model to a subscription model. FY 2016 was a tough year for PTC, which has
seen perpetual licence revenues drop by -40% YOY to USD173m, while
subscriptions went up by 81% to USD118m, causing margins to fall by 9.1pp YOY to
15.1%. The shift was much quicker than anticipated by PTC, which forced the group
to revise down its FY 2016 guidance several times. PTC believes it can grow its
business in the low double digits. The most important pillar of the companys
strategy to drive this kind of growth is to capitalise on the IIoT opportunity, a market
PTC claims to be leading, both in terms of its market share and technology.
Betting on IoT to fuel growth

PTC sees IoT as its main growth driver for the years to come. It started investing in
the field early and acquired Axeda and ThingWorx in 2014 to build an IoT platform, a
market we believe PTC is currently leading (1,200 customers as of November 2016),
thanks to an unmatched ecosystem of partners (partners currently account for one-
third of IoT deals), strong technology (analytics, augmented reality, digital twin) and
openness (all delivery models available). IoT business at PTC currently runs at an
annual run-rate of USD100m and is losing money (breakeven seen at USD200m of
revenues). Its aim is to grow it at a 40% CAGR though to 2021 and reach a double-
digit operating margin by then.
Our take
PTCs position in IIoT looks very convincing, and we believe its strong offering,
combined with its first-mover advantage will continue to provide the company
with a critical advantage in the IIoT field.
Capital goods
Rockwell Automation
United States | Capital goods
The connected enterprise partner

Rockwell is a leading provider of power, control and information solutions and is
a single integrated business that generated sales of USD5.9bn in 2016 with
22,000 people across 80 countries and is a leading provider of power, control and
information solutions. Rockwells main differentiating features are its
innovative strength, leading partnerships, a strong market access model, large
installed base, global presence, and strong focused culture. It is a key technology
provider for critical industry verticals, within the context of the fourth industrial
revolution. Rockwell is set to play a role at the centre of transformation as a key
technology provider for critical industry verticals.
Growing R&D expenses

In 2016, the company spent USD319m on R&D (5% of sales), a 6% drop YOY, lower
than the companys top line (7%). Customer research is not significant.
The Connected Enterprise

To promote its products and solutions, Rockwell Automation has developed The
Connected Enterprise. In research papers and product presentations, the company
explains how smart manufacturing will transform companies productivity and
operations. Rockwell is also becoming a strong advisor in risk and security.
Smart manufacturing and the IIoT

The company is strongly encouraging its clients to move to digitalised factories and
operations. Through connected, optimised and monitored devices and processes,
manufacturing is set to become highly connected and knowledge-enabled. Thirty
years of experience providing factory-floor software makes Rockwell an important
player in the smart factory market.
Different business verticals, one common goal

The company serves six sectors: automotive, F&B, O&G, mining, metals & cement,
life sciences, and wastewater. By installing routers and switches through IO linking
to industrial software, the company has an in-depth knowledge of existing
infrastructure in each business vertical and knows what has to be changed and how
to go about it.
IIOT strategy
The companys growth prospects are driven by the declining cost of connectivity, the
ongoing OT-IT convergence, as well as scalability of computing and mass availability
of data. In addition to these longer-term drivers, Rockwells strength is its domain
expertise, the offer of a secure, standard open ethernet, a wide portfolio of devices,
software, scalable architecture and integrated control and information.
The groups established position in the smart factory environment stems from 30
years of experience providing factory floor software. Over 60% of the groups
Capital goods
development engineers are software engineers, with 1,000 more at the companys
partners. Software usage ranges from embedded software in devices to
programming tools, visualisation software, application software and information
solutions. Rockwell believes the key to IIoT is M2M communication as well as M2E
(Machine 2 Enterprise) communication.
Rockwell has based its strategy on the deployment of smart manufacturing at its
customers installations. It is an enabler of Industrie 4.0. The companys products
and software allow its clients to further connect their devices with each other and
create an internet of things.
The Connected Enterprise is the foundation of Rockwells smart manufacturing
solutions, which aim to achieve greater connectivity and information sharing. This
programme, along with others, supports the industrial deveoplemnt of smart
manufacturing, where devices and processes are optimsed to serve productivity,
performance and security. The company acknowledges and promotes the creation of
value from smart manufacturing.
Rockwells goal is help its customers improve quality, increase productivity, mitigate
labour shortages, enhance customer satisfaction, expand market opportunities,
hone business skills, and expand market opportunities.
For the IoT platform, the company has partnered up with Microsoft Azure to use its
services in its customers fields. It has developed cloud-based solutions, using
software, sensors and devices to predict equipment failure along the supply chain,
track its performance in real time, and help refine designs and processes to prevent
those failures in the future.
Through this partnership and solution development, both Rockwell and its
customers will benefit from improved access to production and supply chain data
worldwide, reducing downtime through predictive maintenance, increased
productivity, and accelerated business growth, through a highly scalable cloud
platform. Rockwell is also building up a competitive edge with easier development
and faster time-to-market with new features.
Overall, the compnay is targeting customers that rely on antiquated technology,
corporate misalignement, a talent shortage, and a perceived lack of ROI. Here,
Rockwell can help stabilise operations, secure infrastructure, improve production
(quantity, quality and margins), and allow compnaies to make better decisions as a
whole.
Rockwell has carried out several acquisitions over the past few years to strengthen
its software portfolio and prepare the strategy shift towards the industrial internet
and the smart factory.
In September 2016, it bought Automation Control Products (ACP), a specialist in
centralised thin-client, remote desktop and server management software. The
companys two core products are its ThinManager and Relevance software, which
Capital goods
help to manage information and streamline workflows in connected manufacturing

environments.
A few days later, Rockwell acquired Maverick Technologies, a leading systems
integrator, to expand its domain knowledge and deliver innovative control and
information solutions to customers in three of its business verticals: Chemicals, F&B,
and Oil & Gas.
Through these two acquisitions, Rockwell strengthened its connected enterprise
strategy in order to meet customers demands in the industrial internet era.
The company has always worked in the fields of control devices and control
processes. To this knowledge, it has added software and connectivity to its product
and solutions portfolio. This enables productivity gains for customers and a full
digitalisation of the value chain.
Rockwell has looked at how to apply the concepts and technology to its other
facilities. It says that it is not as automated as many of the groups customers are.
However, there has been a positive effect from digitalisation at the company. It has
developed value stream mapped processes, improved inventory from 120 to 82
days, seen a 30% improvement in capital avoidance, reduced supply chain lead times
by 50%, and increased deliveries by 16%. Overall, this has resulted in productivity
gains of 4-5%.
Furthermore, with the installation of Rockwells devices, customers will be able to
gather more data than ever, and through analysis be more aware of its factory floor
performance than ever before. With data collection, translation, analysis and
gathering, performance tools can be developed to enhance a companys
productivity. Moreover, with the gathered data, companies will be able to keep their
suppliers and customers informed in real-time about delays and needs.
To serve its customers fully, Rockwell wants to ensure that it will be able to bring the
product to the market faster, help to lower TCO, increase the utilisation of assets,
and comply with regulation and architecture requirements.
Rockwell sees a global installed base of legacy automation plants worth USD65bn.
The focus in the upcoming months and years will be on security, and more precisely
cybersecurity, as 20% of manufacturers have suffered losses of IP addresses in the
last year.
Rockwell aims to understand customer applications and define the best
opportunities for productivity. It will make technology innovation and expertise a
key element of the company. This will be applied through design, commissioning and
lifecycle support. Simplification will drive productivity.
Future partnerships with ICTs are to be expected as well as future acquisitions. To
develop its software knowledge, investments will be key.
Capital goods

Rockwell is one of the enablers of the industrial internet era. Through intelligent
acquisitions and sound marketing, it has been able to position itself as a key player in
the development of its customers. Its devices and processes, along with the software
mean the company enables predictive maintenance, remote monitoring, data
analysis and M2M communications, four central pillars of the digitalisation of
companies.
Rockwell compares well with peers, and we think it will be able to further develop its
customer base through the acquisitions made in 2016.
SWOT analysis
Strengths: The company offers both devices and software to its customers, which
makes us think it can cross-sell its products - a key feature of capital goods
companies these days.
Weaknesses: The company serves six different sub-industries, and therefore could
face different competition in each, facing more specialised and more adaptable
companies.
Opportunities: Further acquisitions in the domain of software technology will
strengthen its position in this area.
Threats: Six different sectors to serve allow six times smaller and leaner competitors
to appear.
Capital goods
Yaskawa
Automation follower lacking scale

Yaskawa is a 102 year-old company that defines itself as a mechatronics
company. It generated revenues of EUR3,166.7m and net income of EUR172.2m
in 2015, and has grown by 38% over the past five years. Its CEO aims to
contribute to the evolution of society and its welfare. The company is divided
into three main business segments: Motion Control (46% of revenues), Robotics
(36%), and System Engineering (11%).
Its overseas sales ratio grew from 53% in 2011 to 67% in 2015 thanks to its
efforts to become a glocal (globally local) company. In 2015, its biggest market
was Japan (33% of sales), followed by the rest of Asia (33%), the Americas (21%)
and Europe (13%).
Its core businesses are Servo Motors, Controllers, AC Drives, and Industrial
Robots along with an expanding range of new solutions that permit its existing
technologies to be used to the fullest. It is making the transition towards
becoming a mechatronics company. Its main goals are to empower innovation
through new ventures in nascent technologies, and to improve the general
quality of life of its clients through new technologies. It plans to adapt
mechatronics to meet the needs of its end markets: agriculture and food, and
healthcare.
The company is implementing its Vision 25 strategy after completing the Realize 100
programme which led to the transformation of its existing businesses and the
creation of a new one. The new strategy will be divided into three phases: Dash 25
over 2016-18, Challenge 25 over 2019-22, and Realise 25 over 2023-25. Vision 25 is a
broad strategy to meet the requirements of and more importantly to prepare its
product line for Industrie 4.0.
With this strategy, Yaskawa aims to address three societal and business issues: 1)
structural changes in the population (aging population, rising birth rates in
developing countries and a decline in the developed ones); 2) rising energy
consumption (expansion of environmental protection measures, growth of
distributed power usage, increase in renewable energy supply); and 3) the ICT
Industrial Revolution (IoT, BtO (Build to Order), Industrie 4.0).
IIoT strategy
The company aims to achieve global leadership in the motion control and robotics
segments, by developing cutting-edge mechatronics and ICT technology to provide
brand new solutions that will pave the way for automation, and will allow the
company to build and expand its energy creation and storage application business to
respond to environmental issues. Finally, it wants to become a challenger in the
Medical and Welfare sector with improved technology and robots. Its R&D expenses
Capital goods
have grown along with its revenues, accounting for around 4% of the groups
revenues.
To achieve its first goal, it will have to develop connectivity in its core business, and
therefore install M2M communications between its Servos, Robots and Drives. The
company sees the Smart Factory as the nexus of interaction between robots and
humans where IIoT technology will allow the workers to gain access to data in real
time along with predictive maintenance and remote monitoring.
According to the company, IoT and M2M solutions will drive business innovations in
various application areas: permitting remote maintenance of products, tracking of
vehicles and goods during transportation, and product marketing based on usage
data. Ultimately, it will appeal to myriad end-receivers in healthcare, logistics,
energy, infrastructure, traffic, security and factories.
Importance is placed on implementing these solutions through the edge of the
network to allow faster communication and less data entering the cloud.
The company aims to facilitate full automation of the production chain in the
agriculture and food Industry. To do so, it needs to reach full cultivation control
along with harvest automation. When the raw product reaches the factory, Yaskawa
intends to introduce collaborative production lines using robots and humans
through the entire food production process (processing/preparation, loading/layout,
packing/shipping).
In its other end-market, Yaskawa uses open-source innovation. By acquiring low-
cost production and sales through partnerships, the company is expanding its
portfolio of components for humatronics devices and accelerating the
commercialisation of the latter through alliances with governments and universities.
Dash 25, the first leg of the plan, focused on the development of new products in
each business segment. Each of them have enhanced functions compared to their
predecessors but they do not yet have proper IIoT capabilities such as M2M
communication. The company is moving forward with the installation of sensors to
collect more data from its products but seems to be lagging behind its national peers.
It is developing MOTOMAN and MOTOMAN-Cloud which should connect its
robots, controllers and drives through the internet of things and the cloud. Its
capacities are still limited as it does not provide predictive maintenance but only
monitoring of its devices.
The first phase of the Vision 2025 plan (which started in 2016) is to move towards
the companys major realisations and potential market leadership. The company is
trying to forge partnerships with major players in the ICT industry, especially those
involved in the cloud and fog business. The company is a latecomer compared to its
peers in the transition towards Industrie 4.0.
Capital goods
It must invest more in the field of connectivity, either through developing better and
stronger partnerships or via higher investments in ventures with competent
startups that can offer technology that is ready to use or ready to implement.
The Realisation 100 strategy yielded mixed results as it was too ambitious and
missing out key investments to develop solutions to push sales of its products and
create new revenue streams.
Compared to national peers, Yaskawa seems to have entered the race later than the
other competitors. If we compare the company to Fanuc, we can see that it has not
put the same effort into Industrie 4.0 developments. The company is focused on a
long-term strategy to become a glocal company (globally local).
This very Japanese term reflects the companys objective to extend its market reach
and revenue lines to the US, Europe and other developed countries as well as China
while remaining a purely Japanese company with Japanese management overseeing
all of its branches. This strategy has been implemented by many of its Japanese
peers throughout the sector and has always been a typical characteristic of Japanese
companies. Secluded as they are, Japanese companies remain technology leaders
developing best-in-practice robots and general technology.
However, Yaskawa seems to have missed the transition towards Industrie 4.0 and
the Industrial Internet. Through its new strategies (Vision 25 encompassing all of
them), the company addresses the emergence of IIoT and therefore tries to bring
new products to respond to the growing demand. Yet, while Fanuc has been working
for 30 years on vision sensors, Yaskawas solution appears to be weaker.
SWOT analysis
Strengths: The company is implementing a new strategy that finally addresses the
IoT topic and the potential of M2M communications.
Weaknesses: Yaskawa seems to have started late compared to its national peers. It
has yet to bring its new product lines to life to respond to the lack of IIoT solutions in
its portfolio.
Opportunities: Through swift decisions, rapid actions and strong additions to its
core products, the company can get around this lack of answers to market demand.
It also has the opportunity to partner with strong players in other fields to develop
its customer portfolio and IIoT capacities.
Threats: With a growing presence and product SKUs in the field of IIoT and robotics,
Yaskawa took a risk when it decided to show up late to the show. Its robotics and
connectivity knowledge will not be able to compensate for fleeing customers looking
for more connected robots and CNCs able to integrate an IoT environment.
Equity Research $:m:
m:m:m:
24.50 ReportT ype$ $Com panyRe gion$
ABB Hold
Switzerland | Capital goods | Mcap CHFCHF 46.9bn Target Price CHF 24.50
Current Price CHF 21.90
Up/downside 11.9%
Change in TP none
31 August 2017 Change in EPS none 17E / none 18E
Finally pulling the threads together William Mackie

+44 (0) 207 621 5183
As the worlds leading supplier of distributed control systems for process Market data
and hybrid manufacturing environments and the second producer of Bloomberg: ABBN VX Reuters: ABBN.S
Market cap (CHFm) 46,885
robots, ABB offers an array of highly advanced control software suites and Free float 92%
also connected devices. In Q4 2016, the launch of ABB Ability, a strategic No. of shares outstanding (m) 2,141
digital drive across the group, created a clear direction for the company, Avg. daily volume (CHFm) 277.1
YTD abs performance 2.0%
pulling together the threads of ABBs software expertise and connected 52-week high/low (CHF) 24.83/19.91
devices to enhance the value proposition offered to customers, based on
FY to 31/12 (USD) 12/17E 12/18E 12/19E
its deep domain knowledge in over 15 end markets. We see scope for ABB Sales (m) 33,829 35,106 36,494
to enhance growth in the medium term by promoting the efficiency and EBITDA adj (m) 5,034 5,489 5,995
productivity gains it can achieve for clients. Our target price is built from a EBIT adj (m) 4,266 4,697 5,169
Net profit adj (m) 2,697 2,996 3,338
blended average of six valuation approaches: a DCF, and a number of
Net fin. debt (m) 1,499 1,631 1,394
multiples-based valuations. The target is built on multiples applied to 2018 FCF (m) 2,625 3,075 3,406
forecasts, with the implied 2018 year-end target discounted back to mid- EPS adj. and fully dil. 1.26 1.42 1.62
2018, hence creating our 12-month forward figure. The range of valuations Consensus EPS 1.2 1.4 1.6
Net dividend 0.80 0.84 0.88
spans from CHF22 to CHF27, with a mid-point of CHF24.4.
FY to 31/12 (USD) 12/17E 12/18E 12/19E
Digital strategy now centred on ABB Ability P/E adj and ful. dil. 18.1 16.1 14.1
EV/EBITDA 10.8 9.8 8.8
The Q4 2016 launch of ABB Ability and the prior appointment of a chief
EV/EBIT 12.7 11.5 10.2
digital officer have created a focal point for ABBs future digital initiatives FCF yield 5.4% 6.4% 7.2%
and pull together the multitude of smart products, edge control and central Dividend yield 3.5% 3.7% 3.9%
software products and systems existing in the groups portfolio. Net fin.debt/EBITDA 0.3 0.3 0.2
Gearing 10.6% 11.2% 9.2%
Strong customer relations and in-depth domain knowledge ROIC
EV/IC
12.0%
2.1
12.6%
2.0
13.4%
1.9
ABBs long-standing leading technology and market leadership in its key
15+ end markets provide crucial domain knowledge to develop digital 25.0
24.5
solutions that generate actionable operating strategies to raise asset 24.0
efficiency and productivity and hence generate incremental revenues. 23.5
23.0
Expect digital strategy to align toward IIoT approach 22.5
We expect ABB to develop its strategy towards one focused on optimising 22.0
21.5
asset performance from its installed base of connected devices in each 21.0
market. This is likely to entail forming a wider array of partnerships and 20.5
developing more targeted software. In the field of discrete manufacturing, 20.0

19.5
ABB is set to leverage on its robotics business and should expand within Aug 16 Nov 16 Feb 17 May 17
discrete automation markets after the B&R acquisition. Price DJ Stoxx 600 (rebased)
Investment levels restrained

Unlike peers, we have not seen ABB make any large capital commitments
to its digital strategy. We wait to see how targeted software and partners
will form to provide solutions that stand strongly against competition.
ABB Hold TP CHF 24.50
ABBs digital strategy

While there have been many pockets of software and control expertise within the ABB has been late to
group, this had not been captured in a central strategy until late 2016, a number of the party framing its
years behind other leading industrial groups. ABB already delivered digital offers to digitalisation
opportunity
verticals including utilities, mining, automotive, marine and building. Recent efforts
are directed at pooling the entire digital and software offer. In essence, the drive at
ABB follows a similar path to other electric equipment suppliers: capture data from
devices, review and interpret the data, simulate, predict and optimise the
environment, and improve operating performance.
As part of stage 3 of ABBs Next Level strategy, management branded its digital
There is a huge wealth
drive ABB Ability, pulling together past software, digital and connected devices of knowledge and
into one initiative spanning connection of device installation and enhancement of capability throughout
control systems and collection and interpretation of data on local servers or the the group
cloud. ABB Ability combines the portfolio of digital solutions and services across all
segments while leveraging the Microsoft Azures cloud platform. The combination
aims to leverage on ABBs domain knowledge within utilities, industry, transport &
infrastructure and the groups installed base of 70m connected devices and 70,000
control systems to build a large industrial cloud platform. To lead this new drive,
ABB hired Guido Jouret, who has 20 years experience in the field of device
connectivity, as chief digital officer.
ABB has a number of capabilities required to create value within digital; a large Leadership in the
installed base of devices and equipment and the deep understanding of the control market for distributed
control systems is a
loop. With this, ABB has sought to build a strong partner network starting with
key strength
leverage of the Microsoft Azure platform and IBMs cognitive capabilities. The ABB
stack, which conceptually shows ABBs capabilities, is shown below.
Chart 103: ABBs current penetration in digital factories
Appointment of high
level dedicated
leadership creates a
focus throughout the
organisation
Source: ABB, Kepler Cheuvreux
ABB already claims that 55% of sales are generated from software and digitally
enabled devices. By applying the full range of capabilities from partners and from
within ABB, management estimates it could tap USD988bn of savings across 15 of
the groups main end markets, which could drive a USD20bn annual business
opportunity for ABB.
Positioning for Industrie 4.0, IIoT

ABB already has extensive knowledge in markets including mining, oil & gas and
ABB has the greatest
petrochemicals, chemicals, automotive production, utilities and marine. Over the
opportunity by
past decades, it has sold over 100m devices including motors, drivers and actuators, increasing the level of
all critical to industrial operations and consuming resources in the form of electricity connectivity across
and service. Many of these devices are connected to control systems that ABB has customers industrial
assets, collecting data
supplied, ranging from small systems in markets such as food production through to
and determining
complex distributed control systems spanning entire petrochemical processing value added outcome
plants.
We see the group
As the global leading supplier of distributed control systems for the process more biased to
industries with one of the largest installed bases of electrical equipment, ABB is supporting
extremely well positioned to development IIoT-based solutions targeted at development of IIoT
based gains with
improving asset utilisation of customer equipment. This creates the chance for ABB
customers rather than
to develop new outcome-based business models aimed at capturing value for development of I4.0 s
customers based on the savings ABB can achieve for customers. Smart predictive
and preventative maintenance provides a further IIoT-based opportunity.
The robotics portfolio within ABB provides scope for the group to participate in
development and construction of increasingly smart and interconnected factories,
thereby supporting development of Industrie 4.0 concepts. ABBs larger robot
offering is already extremely connected and smart, particularly within the
automotive sector, but its application is being expanded to other end markets where
its supports the development of smart manufacturing.
Size and direction of investment for digitalisation
ABBs specific investment in ABB Ability has largely been limited to marketing spend
for the launch of the programme. There have been no specific software-focused
acquisitions to increase the groups capability and no announcements of a dedicated
ramp-up of investment in software and connected capabilities, which is in contrast
to a number of other leading electrical equipment makers. Moreover expansion of
the partner network appears relatively limited below Microsoft and IBM. We expect
that capabilities in the area will continue to be expanded, albeit at a slow pace.
Digitalisation SWOT
Strengths
ABBs breadth and depth of market vertical customer relationships provide strong
sector expertise and process knowledge, which will be critical as the group devises
the optimal means of improving customer efficiency, flexibility and productivity.
Decades of leadership within the market for distributed control systems also
provide strength in the development of solutions from the process industry
customers.
Weaknesses
ABB has been late in creating an umbrella strategy to pull together its digital
capabilities, in contrast to competitors. There appears to be limited development of
a partner network of software and app developers that work on solutions for ABBs
customers using ABBs connected products. Moreover, in the field of industrial

automation and control, ABB is smaller than the industry leaders.
Opportunities
There is a clear opportunity for ABB to leverage its installed base, data management,
and digital and software capabilities to devise new business models that aim to
create value for ABB via savings achieved in energy use or production efficiency at
customer sites. Expansion of its partner network and creation of an IoT platform
where development can create value-added apps alongside ABB would create an
additional opportunity.
Threats
ICT providers and smaller, agile, software companies design and develop solutions
for ABBs core process industry customers faster than ABB and overcome ABBs
advantage of existing customer relations. Migration of value for ABBs largest
customer segments towards capture and interpretation of operating data may led to
lower demand growth for the equipment portfolio.
Chart 104: ABBs Internal Survey grading
Strategy & organisation

5
4
3
2
1
0
Smart products
Key financials
FY to 31/12 (USD) 2012 2013 2014 2015 2016 2017E 2018E 2019E
Income Statement (USDm)

Sales 39,336 41,848 39,830 35,481 33,828 33,829 35,106 36,494
% Change 3.5% 6.4% -4.8% -10.9% -4.7% 0.0% 3.8% 4.0%
EBITDA adjusted 5,555 6,075 5,538 5,129 5,051 5,034 5,489 5,995
EBITDA margin (%) 14.1% 14.5% 13.9% 14.5% 14.9% 14.9% 15.6% 16.4%
EBIT adjusted 4,594 5,058 4,630 4,169 4,191 4,266 4,697 5,169
EBIT margin (%) 11.7% 12.1% 11.6% 11.8% 12.4% 12.6% 13.4% 14.2%
Net financial items & associates -220 -321 -282 -209 -188 -242 -195 -191
Others 0 0 0 0 0 0 0 0
Tax -1,030 -1,122 -1,202 -788 -781 -922 -1,128 -1,260
Net profit from continuing operations 2,808 2,944 2,694 2,052 2,018 2,598 2,901 3,240
Net profit from discontinuing activities 4 -37 24 3 16 0 0 0
Net profit before minorities 2,812 2,907 2,718 2,055 2,034 2,598 2,901 3,240
Net profit reported 2,704 2,787 2,594 1,933 1,899 2,458 2,755 3,088
Net profit adjusted 2,965 3,076 2,854 2,177 2,164 2,697 2,996 3,338
Cash Flow Statement (USDm)

Cash flow from operating activities 3,779 3,653 3,845 3,818 3,843 3,481 3,956 4,314
Capex -1,293 -1,106 -1,026 -878 -831 -856 -882 -908
Free cash flow 2,486 2,547 2,819 2,940 3,012 2,625 3,075 3,406
Acquisitions & Divestments -3,694 -772 1,073 81 34 -1,105 0 0
Dividend paid -1,747 -1,816 -1,973 -1,357 -1,732 -1,785 -1,856 -1,919
Others -406 93 -1,304 -1,982 -1,279 -29 -1,350 -1,250
Change in net financial debt -3,361 52 615 -318 35 -293 -131 237
Balance Sheet (USDm)

Intangible assets 13,727 13,967 12,755 12,008 11,497 11,497 11,497 11,497
Tangible assets 5,947 6,254 5,652 5,276 4,743 5,340 5,787 6,273
Financial & other non-current assets 1,394 1,418 1,485 1,312 1,319 1,319 1,319 1,319
Total shareholders' equity 17,446 19,208 16,776 14,988 13,897 14,177 14,502 15,237
Pension provisions 2,290 1,639 2,394 1,924 1,834 1,834 1,834 1,834
Liabilities and provisions 29,334 27,217 25,669 24,444 23,768 24,022 24,609 25,244
Net financial debt 1,590 1,538 923 1,241 1,206 1,499 1,631 1,394
Working capital requirement 3,084 3,718 2,991 2,172 1,939 1,916 1,986 2,064
Invested Capital 30,990 33,259 30,096 27,760 25,837 26,434 27,244 28,124
Per share data

EPS adjusted 1.29 1.34 1.25 0.98 1.01 1.26 1.42 1.62
EPS adj and fully diluted 1.29 1.33 1.24 0.98 1.00 1.26 1.42 1.62
% Change -13.2% 3.3% -6.8% -21.5% 2.9% 25.4% 12.4% 14.0%
EPS reported 1.18 1.21 1.13 0.87 0.88 1.15 1.30 1.50
Cash flow per share 1.65 1.59 1.68 1.72 1.79 1.63 1.87 2.09
Book value per share 7.37 8.13 7.11 6.51 6.23 6.40 6.63 7.14
Dividend per share 0.68 0.70 0.72 0.74 0.76 0.80 0.84 0.88
Number of shares, YE (m) 2,295.00 2,305.00 2,295.00 2,230.00 2,154.00 2,140.87 2,114.76 2,066.67
Ratios
ROE (%) 18.1% 17.3% 16.3% 14.2% 15.5% 19.9% 21.6% 23.2%
ROIC (%) 12.0% 11.4% 10.1% 10.4% 11.3% 12.0% 12.6% 13.4%
Net fin. debt / EBITDA (x) 0.3 0.3 0.2 0.2 0.2 0.3 0.3 0.2
Gearing (%) 9.1% 8.0% 5.5% 8.3% 8.7% 10.6% 11.2% 9.2%
Valuation
P/E adjusted 14.5 17.1 18.9 20.6 20.1 18.1 16.1 14.1
P/E adjusted and fully diluted 14.5 17.2 19.0 20.6 20.2 18.1 16.1 14.1
P/BV 2.5 2.8 3.3 3.1 3.3 3.6 3.4 3.2
P/CF 11.4 14.4 14.0 11.7 11.3 14.0 12.2 10.9
Dividend yield (%) 3.6% 3.1% 3.1% 3.7% 3.8% 3.5% 3.7% 3.9%
FCF yield (%) 5.8% 4.8% 5.2% 6.6% 6.9% 5.4% 6.4% 7.2%
EV/Sales 1.2 1.4 1.5 1.4 1.4 1.6 1.5 1.4
EV/EBITDA 8.8 9.5 10.7 9.7 9.6 10.8 9.8 8.8
EV/EBIT 10.6 11.4 12.8 12.0 11.6 12.7 11.5 10.2
m:m:m:
Dassault Systmes Hold

France | IT software & services | Mcap EUREUR 21.1bn Target Price EUR 78.00
Current Price EUR 82.75
Up/downside -5.7%
Change in TP none
Strong expertise in manufacturing Laurent Daure

Head of IT Software & Services
ldaure@keplercheuvreux.com
+33 1 53 65 36 36
Dassault Systmes (DSY) main products include Catia, Solidworks, Delmia Market data
and Enovia, along with 3D Experience, the groups business platform. The Bloomberg: DSY FP Reuters: DAST.PA
Market cap (EURm) 21,101
company posted total revenues north of EUR3bn in 2016, and we expect its Free float 52%
top line to grow at c. 7% a year in the years ahead, while margins should No. of shares outstanding (m) 255
continue to grow by 50-100bps a year in the medium term. While DSY is not Avg. daily volume (EURm) 42.4
positioned in the middleware space, it has strong expertise in the design of 52-week high/low (EUR) 84.65/68.25
connected objects and analysis of data collected.
FY to 31/12 (EUR) 12/17E 12/18E 12/19E
Top line growth expected at 7% Sales (m) 3,275 3,508 3,760
EBITDA adj (m) 1,085 1,200 1,323
We expect Dassault Systmes top line to grow roughly 7% organic a year EBIT adj (m) 1,035 1,145 1,263
in the coming years on the back of continued momentum in new licence Net profit adj (m) 684 774 863
sales with the ramp-up of the 3D Experience platform. Net fin. debt (m) -2,000 -2,632 -3,334
FCF (m) 714 778 867
Complete offer for IoT design EPS adj. and fully dil. 2.65 3.00 3.34
Consensus EPS 2.7 3.0 3.3
Unlike many of its competitors - both industrial companies and software Net dividend 0.58 0.65 0.70
vendors - DSY has not developed an IoT platform to collect data, not being
FY to 31/12 (EUR) 12/17E 12/18E 12/19E
interested in the middleware field. However, its suites of products all P/E adj and ful. dil. 31.2 27.6 24.7
enable the rise of IoT to a certain extent and are also driven by it. DSY has EV/EBITDA 17.6 15.4 13.4
recently emphasised the usefulness of its products (Solidworks and Catia, EV/EBIT 18.4 16.1 14.1
FCF yield 3.4% 3.7% 4.1%
above all) in the design and creation of IoT products and devices. It has also Dividend yield 0.7% 0.8% 0.8%
combined Solidworks with Xively (partner in IoT platform) and Netvibes Net fin.debt/EBITDA -1.8 -2.2 -2.5
(analytics and data visualisation) in order to offer its customers a Gearing -45.7% -61.8% -80.7%
ROIC 18.5% 20.1% 21.7%
comprehensive IoT offering to help them design IoT products, connect EV/IC 5.3 5.0 4.7
them to the cloud, and analyse the data generated. Exalead can also be
used in the analysis of data. 88
86
Business apps for IIoT 84

82
Delmia, Dassault Systmes product for digital manufacturing and
80
manufacturing simulations, is a key enabler of IIoT. Delmia Apriso includes 78
digital twin capabilities, integrates IIoT architecture with cloud-based 76
services, and also recently expanded capabilities to support edge 74
computing IIoT communications. Dassault Systmes is then focussing on 72

70
helping clients to optimise their manufacturing process based on the 3D
68
experience platform. The recent win of the very large Boeing contract Aug 16 Nov 16 Feb 17 May 17 Aug 17
against key competitors reflects the strong positioning of DSY in Price DJ Stoxx 600 (rebased)
manufacturing, confirming that providing in-house IOT middleware tools

was not needed to gain large contract.
Our take
We value Dassault Systemes at EUR78 (DCF with 7.9% WACC, 7%
medium-term growth and 35% EBITA margin).
D Experienc e platform.
Dassault Systmes Hold TP EUR 78.00
Key financials
FY to 31/12 (EUR) 2012 2013 2014 2015 2016 2017E 2018E 2019E
Income Statement (EURm)

Sales 2,039 2,073 2,347 2,877 3,066 3,275 3,508 3,760
% Change 14.3% 1.7% 13.2% 22.6% 6.6% 6.8% 7.1% 7.2%
EBITDA adjusted 677 686 736 927 1,000 1,085 1,200 1,323
EBITDA margin (%) 33.2% 33.1% 31.4% 32.2% 32.6% 33.1% 34.2% 35.2%
EBIT adjusted 644 653 699 885 958 1,035 1,145 1,263
EBIT margin (%) 31.6% 31.5% 29.8% 30.8% 31.2% 31.6% 32.6% 33.6%
Net financial items & associates 18 18 15 0 -11 26 15 20
Others -143 -150 -268 -252 -287 -286 -250 -250
Tax -180 -166 -153 -227 -209 -263 -300 -336
Net profit from continuing operations 339 355 293 406 451 510 610 697
Net profit from discontinuing activities 0 0 0 0 0 0 0 0
Net profit before minorities 339 355 293 406 451 510 610 697
Net profit reported 335 352 291 402 446 509 607 694
Net profit adjusted 425 447 466 575 641 684 774 863
Cash Flow Statement (EURm)

Cash flow from operating activities 562 507 500 633 620 784 850 942
Capex -41 -42 -45 -44 -57 -70 -72 -75
Free cash flow 522 464 454 590 563 714 778 867
Acquisitions & Divestments -178 -127 -956 -17 -242 -14 0 0
Dividend paid -88 -35 -36 -98 -102 -51 -148 -166
Others 9 -53 -76 63 -65 -143 0 0
Change in net financial debt 265 250 -613 537 154 505 630 701
Balance Sheet (EURm)

Tangible assets 108 100 137 135 135 153 169 183
Financial & other non-current assets 0 0 0 0 0 0 0 0
Pension provisions 0 0 0 0 0 0 0 0
Net financial debt -1,255 -1,424 -816 -1,351 -1,493 -2,000 -2,632 -3,334
Working capital requirement 393 432 520 1,018 1,243 1,331 1,426 1,531
Per share data

EPS adjusted 1.74 1.80 1.84 2.26 2.51 2.68 3.03 3.37
% Change 15.5% 3.7% 4.4% 23.0% 11.0% 6.6% 13.0% 11.4%
EPS reported 1.38 1.42 1.15 1.58 1.75 2.00 2.37 2.71
Number of shares, YE (m) 122.10 126.00 255.00 255.00 255.00 255.00 256.00 256.00
Ratios
ROE (%) 19.2% 18.0% 16.8% 17.9% 17.5% 16.7% 18.0% 20.6%
ROIC (%) 34.7% 30.3% 22.2% 19.9% 18.5% 18.5% 20.1% 21.7%
Net fin. debt / EBITDA (x) -1.9 -2.1 -1.1 -1.5 -1.5 -1.8 -2.2 -2.5
Gearing (%) -52.7% -54.3% -27.6% -38.7% -38.4% -45.7% -61.8% -80.7%
Valuation
P/E adjusted 21.3 25.3 25.5 29.2 28.3 30.8 27.3 24.6
P/BV 3.8 4.3 4.0 4.8 4.7 4.8 5.0 5.1
P/CF 16.1 22.3 23.8 26.5 29.3 26.9 24.9 22.5
Dividend yield (%) 1.1% 0.9% 0.9% 0.8% 0.7% 0.7% 0.8% 0.8%
FCF yield (%) 11.5% 8.1% 3.8% 3.5% 3.1% 3.4% 3.7% 4.1%
EV/Sales 1.6 2.1 4.7 5.3 5.4 5.8 5.3 4.7
EV/EBITDA 4.8 6.2 15.1 16.5 16.5 17.6 15.4 13.4
EV/EBIT 5.0 6.6 15.9 17.3 17.2 18.4 16.1 14.1
m:m:m:
Datalogic Buy
Italy | Capital goods | MCAP EUR 1.6bn Target Price EUR 30.00
Up/downside 12.5%
Change in TP none
Sensors and scanners Matteo Bonizzoni, CFA

Equity Research Analyst
mbonizzoni@keplercheuvreux.com
+39 02 80 62 83 43
Datalogic is a global leader in the automatic capture and process Market data
automation markets. Overall, the company is a traceability enabler. It Bloomberg: DAL IM Reuters: DAL.MI
operates within four industries: Healthcare (5% of revenues), Free float 33%
Transportation & Logistics (9%), Manufacturing (27%), and Retail (50%). No. of shares outstanding (m) 58
By offering its sensors, scanners, and laser marking solutions, Datalogic Avg. daily volume (EURm) 3.0
enables automatic data capture and industrial automation. Our EUR30 52-week high/low (EUR) 27.11/16.10
TP is based on a DCF valuation with a WACC of 6.8%, a terminal growth
FY to 31/12 (EUR) 12/16 12/17E 12/18E
rate of 1.5% implying a 12.9x terminal EV/EBITDA, and a 19% terminal Sales (m) 576.5 616.2 651.7
EBITDA margin. EBITDA adj (m) 90.4 105.6 116.2
EBIT adj (m) 76.1 90.0 99.7
Different competitors along the product lines Net profit adj (m) 50.6 66.4 75.9
In all of its markets, Datalogic is the only player that can offer experience Net fin. debt (m) -3.5 -37.8 -80.9
FCF (m) 42.7 51.8 66.2
and offer in both automatic data capture and industrial automation. In the EPS adj. and fully dil. 0.87 1.14 1.30
former, it competes with the likes of Zebra and Honeywell, while in the Consensus EPS 0.82 1.09 1.23
latter, it competes with Cognex, Keyence, and Sick. Net dividend 0.30 0.40 0.45
FY to 31/12 (EUR) 12/16 12/17E 12/18E

What Datalogics offer implies for its customers P/E adj and ful. dil. 19.1 23.5 20.5
Looking more closely at the Manufacturing business, Datalogic offers EV/EBITDA 10.7 14.4 12.7
multiple opportunities to serve Industrie 4.0 needs. Within industrial EV/EBIT 12.7 16.9 14.8
FCF yield 4.4% 3.3% 4.2%
automation, the company offers four subcategories of products: Sensor & Dividend yield 1.8% 1.5% 1.7%
Safety, Vision, Laser Marking and Identification. These products allow Net fin.debt/EBITDA 0.0 -0.4 -0.7
customers to implement batch size one production through product Gearing -1.0% -9.9% -18.9%
ROIC 16.0% 21.0% 22.9%
identification and allow automated visual inspection. EV/IC 2.9 4.4 4.3
Industrie 4.0 actions 28

By embedding its solutions in its customers value chain, Datalogic allows
26
its customers to trace, inspect and mark their products. They also support
tracking and product customisation. To further develop solutions for the 24
Industrial Internet of Things, Datalogic invests 9% of its revenues in 22

research & development.
20
Sensors, scanners and markers are key to Industrie 4.0
18
Datalogics services are crucial to the development of the Industrial
Internet. Sensors allow companies to collect data. A connected plant 16
Aug 16 Nov 16 Feb 17 May 17
collects on average 0.5bn data points per day. The transformation and Price DJ Stoxx 600 (rebased)
analysis of this data allows companies to optimise their value chains.

Markers allow them to identify individual products within a line. Finally,
scanners allow items to be traced throughout the production line and
beyond. With connected scanners positioned at each step in the process, a
company can obtain an unprecedented level of detail about its operations.
Datalogic Buy TP EUR 30.00
IIoT strategy
Datalogics take on Industrie 4.0 is clear: it provides customers throughout the
entire production line with sensors and connectivity tools. In its Manufacturing
division, the company serves several different sectors: Automotive, Automated
Machinery, Electronics and Intralogistics. Within those lines, the company has
developed products to serve both industrial automation and automatic data capture.
Within its four areas of business, Datalogic delivers tools to automate the value
chain. As seen previously, Datalogic serves its clients efforts to adopt Industrie 4.0
techniques. Its product offering is wide and complementary in all segments, allowing
customers to add traceability, identification, and inspection to their production lines
through smart sensors and machines.
Datalogic has partnered with B&R and Comau to develop solutions for connected
robots. A prototype system was presented at the SPS fair in Italy in 2016. The
companies partnerships were based on Datalogics sensors, Comaus Racer3 robot,
and B&Rs automation system. Datalogic collected data and sent it to the cyber
physical system (CPS) while B&R connected the system to the Internet of Things. By
engaging in such partnerships, Datalogic is able to demonstrate its ability to perform
in an Industrie 4.0 environment.
Further technological developments are expected by the firm, which invests 9% of
its revenues in research & development on an annual basis. In 2016, the company
generated 24% of its revenues from new products (announced in the last 24
months). The R&D process has been modified to focus more on customer needs
along with the overall strategy of the firm becoming more customer-centric.
Industrie 4.0 direction
As we have seen, Datalogic has worked to seamlessly integrate its products and
their benefits into its customers production lines.
With MARK & READ, Datalogic has demonstrated the potential applications of its
sensors, scanners and inspection tools. With Datalogic AREX, a compact pulse fibre
laser system writes a 2D code on different materials (organic plastic or metal) for a
mechanical part. Datalogics T47 and MATRIX300 which are, respectively, a smart
camera and an imager, will then read the information. This process enables the
customer to create an IP address for each individual product coming off its
production line. This is crucial for both traceability and customisation. Before taking
any steps, a machine will be able to read the 2D code and execute the correct task.
The group has developed a Fieldbus device to be used in manufacturing plants that
protects operators entering dangerous areas and automatically deactivates any
dangerous machinery. The device requires less wiring, labour, time, downtime and
allows faster diagnosis at HMI or through the IoT. By developing such a product,
Datalogic once again demonstrates its Industrie 4.0 capabilities. Increased
connectivity and digitalisation helps drive cost reductions, increases productivity
and the overall automation of data collection on the production line. By providing
such capabilities to its manufacturing customers, Datalogic has become an

important player in the Industrie 4.0 market.
With the companys levels of R&D expenditure (9%), we can expect it to continue to
develop products that will be key to the digitalisation trend. Along with the usual
investments, we can expect the company to further develop partnerships with robot
and machine manufacturers to provide a potentially larger installation base for its
scanners, markers and inspection tools.
Overall, the company said it plans to serve the Industrie 4.0 trend but does not
mention the potential development of software or IoT applications to expand the
use of its tools. We therefore can only assume Datalogic is relying on its customers
digitalisation plans for the integration of their products through their
machines/robots manufacturers.
In 2016, Datalogic opened a new plant in Hungary (an overall investment of EUR9m)
dedicated to factory automation. Datalogic had two objectives at the time: to
expand its production capacity in accordance with its growth strategy and to use the
new plant to install new SMT lines, which offer the best quality in the production
process. The technology on those lines from the installation of electronic circuit
boards to the assembly of finished products fit Industrie 4.0 requirements.
Datalogic compares favourably to most other Industrie 4.0 providers we have
looked at. Its R&D levels are high compared to the capital goods average, and it
offers crucial tools for data collection (sensors), factory automation (scanners for
traceability) and digitalisation (Fieldbus).
Within our Capital Goods coverage, the firm is lagging on its own development
towards Industrie 4.0 (excluding its new Hungarian plant). However, the products
that come out of its factory are key and ready to be integrated into digital systems
and CPSs.
SWOT analysis
Strengths: Datalogic delivers Industrie 4.0-ready products to its customers and
empowers manufacturers to move towards digitalisation.
Weaknesses: Datalogic did not transform itself sufficiently in regards to the
potential it offers to clients.
Opportunities: The company has the opportunity to convert this weakness into a
strength. Digitising its own value chain will also provide the company with more
insight into its customers operations and, for example, recalibrate its
supply/demand levels or introduce predictive maintenance to reduce downtime
even further.
Threats: The company operates in a market with multiple players, and the first
mover will have a long-term advantage.
Chart 105: Datalogics internal survey grading

5
4
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2
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Smart products
Key financials
FY to 31/12 (EUR) 2011 2012 2013 2014 2015 2016 2017E 2018E

Sales 425.5 462.3 450.7 464.5 535.1 576.5 616.2 651.7
% Change 8.3% 8.6% -2.5% 3.1% 15.2% 7.7% 6.9% 5.8%
EBITDA adjusted 59.2 62.7 60.0 69.4 73.7 90.4 105.6 116.2
EBITDA margin (%) 13.9% 13.6% 13.3% 14.9% 13.8% 15.7% 17.1% 17.8%
EBIT adjusted 48.8 53.0 50.1 58.0 61.2 76.1 90.0 99.7
EBIT margin (%) 11.5% 11.5% 11.1% 12.5% 11.4% 13.2% 14.6% 15.3%
Net financial items & associates -3.2 -6.8 -10.0 -7.7 -1.4 -3.4 -6.0 -3.7
Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Tax -7.3 0.8 -8.6 -8.3 -11.0 -21.0 -16.3 -18.6
Net profit from continuing operations 25.9 9.9 26.9 30.9 40.5 45.8 61.3 70.1
Net profit from discontinuing activities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net profit before minorities 25.9 9.9 26.9 30.9 40.5 45.8 61.3 70.1
Net profit reported 25.9 9.9 26.9 30.9 40.5 45.8 61.3 70.1
Net profit adjusted 35.8 39.6 30.6 39.7 47.2 50.6 66.4 75.9

Cash flow from operating activities 36.9 52.9 50.4 54.3 61.7 59.2 74.3 84.9
Capex -13.6 -14.4 -17.1 -12.7 -22.0 -16.5 -22.5 -18.7
Free cash flow 23.3 38.5 33.2 41.6 39.7 42.7 51.8 66.2
Acquisitions & Divestments -8.4 -96.1 -1.2 0.2 -1.1 0.0 0.0 0.0
Dividend paid -8.2 -8.4 -8.5 -9.1 -10.5 -14.5 -17.5 -23.1
Others 10.4 4.3 0.6 8.6 6.7 -3.7 0.0 0.0
Change in net financial debt 17.1 -61.7 24.1 41.3 34.8 24.5 34.3 43.1

Intangible assets 154.4 211.4 204.2 221.4 239.6 240.9 235.9 230.9
Tangible assets 50.0 51.6 51.3 57.2 68.4 72.1 78.9 81.2
Financial & other non-current assets 39.9 50.9 44.9 47.6 55.9 55.9 55.9 55.9
Total shareholders' equity 170.3 173.4 185.2 241.3 298.3 336.4 380.2 427.2
Pension provisions 6.7 7.4 7.0 7.2 6.8 6.6 7.1 7.5
Liabilities and provisions 390.7 377.0 387.2 328.3 352.2 367.7 374.1 379.0
Net financial debt 59.4 121.1 97.0 55.7 21.0 -3.5 -37.8 -80.9
Working capital requirement 29.8 19.9 16.7 13.9 4.1 9.8 18.7 26.4
Invested Capital 229.7 294.5 282.3 297.0 319.2 332.9 342.4 346.3
Per share data

EPS adjusted 0.61 0.68 0.52 0.68 0.81 0.87 1.14 1.30
% Change 72.2% 10.7% -22.8% 29.9% 18.7% 7.2% 31.3% 14.4%
EPS reported 0.44 0.17 0.46 0.53 0.69 0.78 1.05 1.20
Ratios
ROE (%) 23.0% 23.1% 17.1% 18.6% 17.5% 15.9% 18.5% 18.8%
ROIC (%) 17.3% 16.0% 13.7% 15.8% 15.7% 16.0% 21.0% 22.9%
Net fin. debt / EBITDA (x) 1.0 1.9 1.6 0.8 0.3 0.0 -0.4 -0.7
Gearing (%) 34.9% 69.8% 52.4% 23.1% 7.0% -1.0% -9.9% -18.9%
Valuation
P/E adjusted 9.7 9.5 13.2 12.9 15.9 19.1 23.5 20.5
P/BV 2.0 2.2 2.2 2.1 2.5 2.9 4.1 3.6
P/CF 9.4 7.2 8.0 9.4 12.2 16.3 21.0 18.4
Dividend yield (%) 2.5% 2.3% 2.3% 2.0% 1.9% 1.8% 1.5% 1.7%
FCF yield (%) 6.7% 10.2% 8.2% 8.1% 5.3% 4.4% 3.3% 4.2%
EV/Sales 0.9 1.1 1.1 1.2 1.5 1.7 2.5 2.3
EV/EBITDA 6.7 7.9 8.3 8.3 10.5 10.7 14.4 12.7
EV/EBIT 8.2 9.3 9.9 9.9 12.7 12.7 16.9 14.8
m:m:m:
Drr Buy
Germany | Capital goods | MCAP EUREUR 3.4bn Target Price EUR 117.00
Up/downside 20.8%
Change in TP none
Digital and automated paint shops Hans-Joachim Heimbuerger

hheimburger@keplercheuvreux.com
+49 69 7569 6121
Drr is a Germany-based company providing equipment and services mainly Market data
to the auto industry. Drr operates five divisions: Paint and Assembly Bloomberg: DUE GR Reuters: DUEG.de
Systems (32% of revenues in 2016), Application Technology (16%), Free float 71%
Measuring and Process Systems (17%), Wood Processing Systems (30%) and No. of shares outstanding (m) 35
Clean Technology Systems (5%). Geographically, the company is exposed to Avg. daily volume (EURm) 27.6
both developed (65% of sales in 2016) and emerging markets (35%). In 2014, 52-week high/low (EUR) 107.35/66.48
Drr acquired Homag Group to develop, among other segments, its Wood
FY to 31/12 (EUR) 12/16 12/17E 12/18E
Processing System activity, for EUR228mn and a year later acquired iTAC Sales (m) 3,574.9 3,639.1 3,773.8
Software to extend the groups activities in the Manufacturing Execution EBITDA adj (m) 358.6 374.1 407.6
Systems (MES) field, a central component of Industrie 4.0. Drr is an EBIT adj (m) 271.7 285.7 315.9
Net profit adj (m) 188.6 197.2 220.5
example of technology being applied to a specialist niche to support a
Net fin. debt (m) -154.8 -388.5 -537.2
competitive advantage. It benefits from operating within Germany and its FCF (m) 132.7 214.0 224.0
Industrie 4.0 strategy. EPS adj. and fully dil. 5.45 5.70 6.37
Consensus EPS 5.26 5.71 5.89
IIoT strategy Net dividend 2.10 2.21 2.35
Drr has launched Digital@Drr to implement its own Industrie 4.0 practices. FY to 31/12 (EUR) 12/16 12/17E 12/18E
It is based on four pillars: Smart Processes, Smart Products, Smart Services, P/E adj and ful. dil. 12.7 17.0 15.2
EV/EBITDA 6.4 8.1 7.0
and Smart Factories. Smart processes are based on different principles and the
EV/EBIT 8.4 10.5 9.1
company relies on an array of functions to serve them. When a customer FCF yield 5.5% 6.4% 6.7%
orders a paint shop, they receive a fully digitised model of it. Drr can then use Dividend yield 3.0% 2.3% 2.4%
a 3D modelling simulator to inspect the digitised machine to identify any Net fin.debt/EBITDA -0.4 -1.0 -1.3
Gearing -18.5% -40.6% -49.0%
defects it might have and correct potential flaws. Smart products enable the ROIC 33.4% 41.3% 51.0%
firm to sell multiple connected and intelligent products in a single package. EV/IC 4.3 7.0 6.6
Through Machine to Machine communications (M2M), it enables smart 110
processes. For example, the deep coding system will identify procedural 105
delays and notify the machine operator through an application, while also 100
providing predictive maintenance information. Through Homag Group, Drrs 95
subsidiary, we can see further development for this pillar. It has developed 90
software to ensure the quality and customisation of products for each 85
customer allowing batch size one configurations. The firms robots are ready 80
to produce batch size one products with the same efficiency and speed of 75
automated mass production systems. Smart services guaranty efficient 70
customer care. They create video diagnosis in no time. Video-based diagnosis 65

Aug 16 Nov 16 Feb 17 May 17
enables quick troubleshooting. Schenck, a subsidiary of the group, offers a Price DJ Stoxx 600 (rebased)
particular smart service. Before Schenck delivers a smart balancing system,

the systems individual digital print is saved.
Drr Buy TP EUR 117.00
During operation, the optimum vibration pattern reveals whether repairs are
needed via remote diagnosis and therefore regardless of location.
The focus of smart factories is networking and automatic control. The key
technology involved in this is MES. An efficient MES is a central component of the
Digital@Drr strategy. The software application links together independent
machines. It then collects, evaluates, and aggregates their data. Big data analysis
enables targeted production optimisation. ITAC, the software company recently
acquired by Drr, is a leading provider in the field. Drr is a case study of IIoT in
action. The company is focused on capturing and harnessing technologies to the
benefit of its customers in the corresponding target verticals.
Our DCF yields a per share fair value of EUR117 with a WACC of 7.8% and 2017-
26E sales and EBITDA CAGRs of 3.0% and 4.4%, respectively. A FCF perpetuity
model shows that Drr can generate FCF of around EUR230m on a normalised
basis. Our EVA model shows a discounted fair value per share of EUR118 for 2019E.
Chart 106: Drrs strategy
Source: Drr, Drr Investors Day 2016
Overall, Drrs digital strategy is set to offer productivity gains to clients and,
through the acquisition of iTAC and Homag Group, to extend its revenue stream to
software equipment for its customers.
Direction of Industrie 4.0
Drr seems to be one of the strongest firms among its peers in terms of Industrie 4.0
advancement. Its recent investment in iTAC shows the firms willingness to adapt to
the new realities of the sector. The company knows it has to answer to the
customers new and more technical demands. To confirm this transition, the firms
R&D costs grew by 9% YOY in 2016 reaching EUR106m, or 3% of sales. Capex
stands at EUR70-80m.
The company has set a goal to reach EUR5bn in sales by 2020, as well as an EBIT
margin of 8-10%, and a >30% ROCE. To do so, it plans to grow both organically and
through acquisitions. The company has implemented its digital strategy across all
segments, which means that future acquisitions would target digitised or digital
companies.
The company sees itself as a leader in digitisation, automation and networking in
industrial production using intelligent products and services. The companys MES
software suite controls and analyses production processes. We believe the current
automation and customisation trends in the industry are beneficial to the firm. They
favour innovative companies, differentiation levels and promise consolidation of the
competitive environment.
The company now has to improve its technology through the optimisation of
manufacturing productivity, predictive maintenance and digital services.
Announced investment needs
The companys upcoming targets will include helping Homag Group reach its full
potential. The subsidiary is benefitting from the automation trend, and management
hopes to strengthen its position as a leading supplier of automated solutions. To do
so, further investments in software will be needed, and the product range will need
to be realigned with customer expectations. The FOCUS program for Homag
includes expansion in China and the US. Drr wants to follow up with synergies and
transfer its project business know-how. Finally, through an innovation program, a
group-wide standardised product development process will be defined and
implemented and Homags whole portfolio should be replaced by 2019.
The company is also investing and developing its brownfield business. Its goal is to
modernise its older projects to make them more flexible and automated. This will
mainly affect the Chinese and emerging markets. Among OEMs, maintenance is
always low and the first paint shop in China was launched in 1982. The challenges
emerging from these Chinese brownfield projects are the time constraints
(productivity loss), the requirements for innovative products with short payback
times, and the difficulties of an international collaboration including sharing
competencies. Overall, Drr will require best-in-class execution.
Ranking Industrie 4.0 capabilities
Drr is one of the most advanced companies within our capital goods coverage. It is
a case study in applying technology to achieve success. Through its software
development strategy, its automation levels and its recent acquisitions, the company
has become one of the strongest competitors in its field. The group has made
revolutionising its digital capabilities the core of its strategy. Through leaner
processes and client-focused applications, Drr has been able to expand its revenue
line while offering productivity gains to its customers.
The iTAC acquisition is the one that impresses us the most. The company already
had a foot in software development at the time, but was able to identify a strong
player and to seamlessly integrate to its operations. Through iTAC, Drr offers M2M
communications to its customers and stronger and better big data (data collection)
and data science (data analysis and aggregation) capabilities.
SWOT analysis
Strengths: Drr is fully digitalised. It offers productivity gains to its customers while
adding new revenue streams through Industrie 4.0.
Weaknesses: The company is highly exposed to emerging markets and this could
slow its growth over time. The company is highly dependent on single customers.
Opportunities: Through a better integration of Homag and iTAC and additional well
selected acquisitions, the firm could reach its 2020 revenue and EBIT targets.
Threats: The companys exposure to OEMs is high. It has to be careful with the
pricing of its upcoming acquisitions.
Chart 107: Drr internal survey grading

5
4
3
2
1
0
Smart products
Key financials
FY to 31/12 (EUR) 2011 2012 2013 2014 2015 2016 2017E 2018E

Sales 1,922.0 2,399.8 2,406.9 2,574.9 3,767.1 3,574.9 3,639.1 3,773.8
% Change 52.4% 24.9% 0.3% 7.0% 46.3% -5.1% 1.8% 3.7%
EBITDA adjusted 127.1 205.4 230.3 262.9 348.2 358.6 374.1 407.6
EBITDA margin (%) 6.6% 8.6% 9.6% 10.2% 9.2% 10.0% 10.3% 10.8%
EBIT adjusted 106.5 176.9 202.9 220.9 267.8 271.7 285.7 315.9
EBIT margin (%) 5.5% 7.4% 8.4% 8.6% 7.1% 7.6% 7.9% 8.4%
Net financial items & associates -20.7 -29.2 -18.4 -16.2 -23.3 -14.5 -16.5 -14.2
Others 0.0 0.0 0.0 0.0 0.0 0.0 -23.0 0.0
Tax -21.6 -36.3 -43.7 -54.4 -78.0 -72.0 -75.4 -84.5

Capex -19.6 -31.4 -51.0 -53.6 -99.8 -89.4 -83.0 -94.3
Free cash flow 108.3 86.2 278.0 188.4 73.2 132.7 214.0 224.0
Acquisitions & Divestments -5.7 -2.1 -7.1 -227.1 -31.7 0.0 108.0 0.0
Dividend paid -6.6 -22.0 -40.9 -51.6 -59.3 -64.0 -72.8 -76.4
Others -67.7 -33.4 -68.3 -53.0 7.0 1.7 -21.6 0.8
Change in net financial debt 28.3 28.7 161.7 -143.3 -10.6 70.4 227.6 148.4

Tangible assets 144.9 152.3 173.8 362.1 394.7 405.4 299.9 311.2
Financial & other non-current assets 57.2 72.9 94.7 142.5 138.4 90.9 90.9 90.9
Total shareholders' equity 364.3 432.1 511.4 725.8 714.4 835.5 956.5 1,097.4
Liabilities and provisions 1,238.9 1,322.1 1,430.7 2,196.7 2,222.6 2,156.2 2,188.6 2,256.7
Net financial debt -48.3 -77.0 -238.8 -95.4 -84.7 -154.8 -388.5 -537.2
Working capital requirement -63.0 -29.2 -177.8 -107.8 -311.4 -389.3 -387.1 -396.5
Invested Capital 438.4 522.2 387.4 755.9 602.7 535.7 432.3 434.2
Per share data

EPS adjusted 1.79 3.10 4.05 4.50 5.19 5.45 5.70 6.37
% Change 875.2% 73.3% 30.6% 11.2% 15.4% 5.0% 4.6% 11.8%
EPS reported 1.79 3.10 4.05 4.33 4.67 5.27 6.01 6.20
Ratios
ROE (%) 18.4% 27.4% 30.2% 27.8% 27.4% 24.6% 22.0% 21.5%
ROIC (%) 17.1% 25.8% 31.2% 27.1% 27.6% 33.4% 41.3% 51.0%
Gearing (%) -13.3% -17.8% -46.7% -13.1% -11.9% -18.5% -40.6% -49.0%
Valuation
P/E adjusted 7.6 8.2 12.4 13.5 15.9 12.7 17.0 15.2
P/BV 1.3 2.1 3.4 3.4 4.1 2.9 3.5 3.1
P/CF 3.7 7.5 5.3 8.7 16.5 10.8 11.3 10.5
Dividend yield (%) 4.4% 4.5% 2.9% 2.7% 2.2% 3.0% 2.3% 2.4%
Dividend yield preference shares (%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
FCF yield (%) 22.3% 9.5% 16.0% 8.9% 2.5% 5.5% 6.4% 6.7%
EV/Sales 0.2 0.4 0.6 0.8 0.7 0.6 0.8 0.8
EV/EBITDA 3.8 4.2 6.7 7.9 8.1 6.4 8.1 7.0
EV/EBIT 4.5 4.8 7.6 9.4 10.5 8.4 10.5 9.1
m:m:m:
Hexagon Buy
Sweden | Capital goods | Mcap SEK 139.4bn Target Price SEK 454.00
Current Price SEK 386.80
Up/downside 17.4%
Change in TP none
At the top of our analyst survey Markus Almerud

malmerud@keplercheuvreux.com
+46 8 723 51 63
Hexagon is implementing connectivity along its entire product range. Market data
While the company serves a plethora of end-markets, its technological Bloomberg: HEXAB SS Reuters: HEXAb.ST
Market cap (SEKm) 139,419
knowledge and extensive investments in research & development (12% Free float 74%
of sales) have made it one of Industrie 4.0s first movers. Its products and No. of shares outstanding (m) 360
solutions serve its customers along their whole value chain, from design Avg. daily volume (SEKm) 447.2
to final product. With the application of IoT, it can enhance the 52-week high/low (SEK) 418.50/304.00
production efficiency and operational optimisation of its customers. Our
FY to 31/12 (EUR) 12/16 12/17E 12/18E
target price is based on a mix of a DCF and P/E valuation. Using a WACC Sales (bn) 3.1 3.4 3.5
of 8%, a long-term growth rate of 3% and a long-term EBIT margin of EBITDA adj (m) 970 1,092 1,193
25%, we reach a value of EUR47 or SEK460 per share. We further apply a EBIT adj (m) 736 816 907
Net profit adj (m) 573 630 698
target multiple of 25x on 2020E EPS, which we then discount back to the
Net fin. debt (m) 1,429 1,887 1,419
end of 2018, reaching a value of EUR47 or SEK452. Our target multiple is FCF (m) 517 535 685
based on the peer group median (c. 30x) with a discount to account for EPS adj. and fully dil. 1.59 1.74 1.92
the management risk. Consensus EPS 1.6 1.7 2.0
Research & development is central to the firm FY to 31/12 (EUR) 12/16 12/17E 12/18E
The firm invests 10-12% of its revenues in research & development. This P/E adj and ful. dil. 21.4 23.4 21.2
EV/EBITDA 14.2 15.3 13.6
compares to a 5% average in the capital goods sector. Furthermore, 18% of
EV/EBIT 18.7 20.4 17.9
the firms employees are devoted to R&D (c. 3,400 employees). Finally, the FCF yield 4.2% 3.6% 4.7%
companys patent portfolio amounts to 3,200+ patents, showing its Dividend yield 1.4% 1.4% 1.5%
determination to be ahead of competition. R&D is key to the development Net fin.debt/EBITDA 1.5 1.7 1.2
Gearing 31.1% 38.0% 26.1%
of Industrie 4.0 capacities across the companys business portfolio. ROIC 9.2% 9.3% 9.7%
EV/IC 2.1 2.2 2.2
Hexagons Industrie 4.0 strategy based on two pillars
Hexagon has disclosed its Industrie 4.0 strategy, which is based on two 420
pillars: 1) the automation of manufacturing operations; and 2) the 400

automation of information. Concerning manufacturing operations, OEMs
380
have been struggling with increased demand, both in quantity and quality.
The challenge of information automation is the need for multiple end- 360
markets to link together islands of information, while the manufacturing 340

body requires a seamless flow of information between design, engineering,
quality controls and inspection. 320
300
Future investments Aug 16 Nov 16 Feb 17 May 17
The company outlined the future expected investments in the areas of Price DJ Stoxx 600 (rebased)
connectivity and digitalisation: the realisation of digital synergies between

the companys three main focuses (inspection, results and design); the
conversion of its whole product line in order to become Industrie 4.0-
friendly, IP enabled, delivering automatic feedback; and overall being more
ready for the new production environment.
Hexagon Buy TP SEK 454.00
IIoT strategy
Overall, Hexagon is a strong technology player that has based its growth both on an
organic increase of sales and M&A. On a YOY basis, the company expects to grow its
top line 8-10%, mainly on the back of organic growth (5%) and M&A consolidation
(3-5%). This being said, the firm has been able to build a strong product and solutions
offering around its two core businesses, Industrial Enterprise Solutions and
Geospatial Enterprise Solutions. Both divisions are split into sub-divisions and serve
different industries. The technological component included in the companys value
offer is core. By selling both software and proper tools, the company can ensure a
presence along the whole length of its customers production lines.
Through its sales of CAE (Computer-Aided Engineering), CAD (Computer-Aided
Design) and CAM (Computer-Aided Manufacturing) software as well as sensors
along the production line, Hexagon enables its customers to develop better
productivity through higher precision in the production processes.
Specifically, through its Manufacturing Intelligence business (the successor of
metrology), the company has pinned Industrie 4.0 as a strategical turning point for
the company. The precision tools it delivers to the customer industries along with
automation robots such as KUKA and RFID readers allow the company to install
itself in the digitalisation space of manufacturing. Through multiple partnerships
with companies such as KUKA, ROMI, SKA and technical partners such as Sandvik,
Hexagon is able to bring important added value.
Furthermore, the company has understood that the instalment of Industrie 4.0 did
not just rely on M2M or automation but rather on an overall connectivity of the
assets and the software solutions. Real-time data is key to the evolution of
production lines. Through the development of new sensors and new visualisation
tools coupled with the acquisition of MSC (a CAE software company), Hexagon is
developing its potential to further allow digitalisation and connectivity for its
customers. The CAE software will allow a company to leverage the lessons learned
through a failed or unprecise production line development. The communication
between metrology and the software enable such evolution through the collection
and analysis of data.
Overall, Hexagons Manufacturing Intelligence strategy was clearly stated in the
manufacturing world: to enable further automation of manufacturing operations
and enable the automation of information. Hexagon is focusing on this second pillar.
Key account customers are looking for seamless solutions to treat islands of
information (data) from engineering and design teams all the way to quality and
control processes. Most of those functions are executed from different places
around the globe and the linkage has to be realised through the cloud, which is the
main challenge for the industry. By enabling its sensors and machines to
communicate (making them smart), Hexagon can help its customers embed a
precision control tool in their production line seamlessly and further grow their
Industrie 4.0 potential.
Direction of Industrie 4.0 action

As we have mentioned previously, Hexagon has given particular importance to its
Research & Development capacities. With 12% of sales invested in R&D, Hexagon is
ahead of comparable firms such as Ametek (5% of sales and 11.5% of employees)
and in line with companies like Renishaw (15% of sales). This positioning on research
is crucial for the company to develop further core competencies in the domain of
Industrie 4.0. The rebranding of its Metrology division into Manufacturing
Intelligence shows the will to develop a marketing strategy targeting companies
with a digital bias as well as key accounts. The development of the digitalisation
trend has reset the focus of this subdivision.
By offering inspection tools along with software solutions, the Manufacturing
Intelligence part of the group has a presence along the entire production line of its
customers. This enables it to have more information about its customers and to be
more embedded in their operations. This could therefore have a positive impact on
the companys top line.
As seen above, the company has to make its entire product offer Industrie 4.0-
friendly. This will enable it to provide more cross-selling possibilities to its
salesforce. Furthermore, development of synergies is also expected across the three
areas of Manufacturing Intelligence, design, inspection and results. Created through
better connectivity, they will allow the customers to integrate all of Hexagons
applications and tools and seamlessly transfer data from the engineering and design
teams to the shop floor and vice versa. When Hexagon will have realised this, it will
definitely be closer to its customers and will have become a pure enabler of
digitalisation.
Investments will remain at 12% for Research & Development. We also expect
Hexagon to further continue its M&A strategy. The firm grows its sales by 3-5%
through consolidation on a yearly basis.
Within the area of the Industrial internet, we expect the firm to transform its
products and solutions, offering to make them completely Industrie 4.0-friendly.
Furthermore, the proliferation of smart sensors is increasing and Hexagon is
following this trend as connectivity is key to Industrie 4.0. Through connectivity, the
company will then succeed in its objective of information automation.
The elements seen above show the accent that Hexagon is on the Industrie 4.0
trend. The rebranding of one of its subdivisions attached to high investments in
Research & Development show the companys resolve to further develop its offering
and remain a technology leader in its area.
Moreover, through our Analyst Survey, Hexagon has come out as the strongest
company among our Capital Goods coverage. It reached an exceptional score of
4.47/5, making it by far the most advanced company among the coverage in the
sphere of digitalisation. Competing with the likes of Siemens, KUKA and Schneider
Electric, this shows the potential of the company in this area.
Through the integration of connectivity to its suite of devices, machines and

software solution, it will be able to obtain a better knowledge of its customers
operations and therefore have a better opportunity to target its sales to those
customers.
SWOT Analysis
Strengths: The company has a long track record of growth and investments in
technology. Its positioning in the precision tools linked to engineering and design
software makes it unique in our coverage.
Weaknesses: Hexagon has not yet fully transformed its product offer to match
Industrie 4.0 standards.
Opportunities: Through the multiplication of synergies, Hexagon should be able to
cross sell its solutions to be integrated along the entire value chain and product
lifecycle of a company or product range. Further connectivity and partnerships will
make a strong case for the firms solutions.
Threats: Companies like Renishaw have slightly higher levels of investment in
Research & Development and its European position could impact Hexagons margins
over time if the company fails to modernise its product line.
Chart 108: Hexagon Internal Survey grading

5
4
3
2
1
0
Smart products
Key financials
FY to 31/12 (EUR) 2011 2012 2013 2014 2015 2016 2017E 2018E

Sales 2,178 2,380 2,430 2,622 3,044 3,149 3,386 3,499
% Change 46.4% 9.3% 2.1% 7.9% 16.1% 3.5% 7.5% 3.3%
EBITDA adjusted 542 606 642 744 901 970 1,092 1,193
EBITDA margin (%) 24.9% 25.4% 26.4% 28.4% 29.6% 30.8% 32.2% 34.1%
EBIT adjusted 440 485 508 578 693 736 816 907
EBIT margin (%) 20.2% 20.4% 20.9% 22.0% 22.8% 23.4% 24.1% 25.9%
Others 0 0 0 0 0 0 0 0
Tax -75 -83 -88 -102 -125 -136 -144 -176
Net profit from continuing operations 297 351 371 406 505 579 576 705
Net profit before minorities 297 351 371 406 505 579 576 705
Net profit reported 295 348 368 403 500 573 569 698
Net profit adjusted 301 349 380 432 528 573 630 698

Cash flow from operating activities 353 497 502 549 704 774 805 964
Capex -136 -172 -216 -233 -230 -258 -270 -279
Free cash flow 217 326 286 317 474 517 535 685
Acquisitions & Divestments -83 -67 -35 -537 -194 -172 -794 0
Dividend paid -56 -60 -99 -110 -133 -156 -198 -216
Others -25 -7 -1 30 57 1 0 0
Change in net financial debt 54 192 151 -301 203 189 -458 468

Tangible assets 229 239 253 312 288 295 373 331
Financial & other non-current assets 117 127 121 91 84 76 76 76
Net financial debt 1,745 1,561 1,423 1,802 1,615 1,429 1,887 1,419
Working capital requirement 451 385 367 394 380 465 505 525
Per share data

EPS adjusted 0.85 0.99 1.08 1.21 1.47 1.59 1.75 1.94
% Change 33.1% 15.4% 8.5% 13.0% 21.2% 8.2% 9.4% 10.8%
EPS reported 0.84 0.99 1.04 1.13 1.39 1.59 1.58 1.94
Ratios
ROE (%) 12.9% 13.3% 13.6% 13.7% 14.0% 13.2% 13.2% 13.4%
ROIC (%) 8.0% 8.5% 8.9% 9.0% 9.3% 9.2% 9.3% 9.7%
Gearing (%) 69.1% 56.8% 50.0% 51.9% 39.4% 31.1% 38.0% 26.1%
Valuation
P/E adjusted 16.4 15.8 20.2 20.1 21.2 21.4 23.3 21.0
P/BV 2.0 2.0 2.7 2.5 2.7 2.7 3.0 2.7
P/CF 14.0 11.1 15.3 15.8 15.9 15.8 18.2 15.2
Dividend yield (%) 1.2% 1.8% 1.4% 1.4% 1.4% 1.4% 1.4% 1.5%
FCF yield (%) 4.4% 5.9% 3.7% 3.6% 4.2% 4.2% 3.6% 4.7%
EV/Sales 3.1 3.0 3.8 4.0 4.3 4.4 4.9 4.6
EV/EBITDA 12.4 11.8 14.3 14.3 14.4 14.2 15.3 13.6
EV/EBIT 15.3 14.7 18.1 18.3 18.7 18.7 20.4 17.9
m:m:m:
Krones Hold
Germany | Capital goods | Mcap EUREUR 3.3bn Target Price EUR 101.00
Up/downside -2.8%
Change in TP none
The bottle-making digital player Hans-Joachim Heimbuerger

hheimburger@keplercheuvreux.com
+49 69 7569 6121
Krones digitalisation strategy is one of the most advanced in the Market data
coverage universe. Through the development and deployment of its IT Bloomberg: KRN GR Reuters: KRNG.DE
services and product digitalisation, it redefines equipment performance Free float 48%
in the food & beverages industry. Furthermore, the company should be No. of shares outstanding (m) 32
able to sell its developed solution to competitors creating new revenues. Avg. daily volume (EURm) 7.4
The company spent EUR170m on R&D in 2016, or 5% of group sales. 52-week high/low (EUR) 113.25/81.00
Through smart acquisitions, the company intends to further develop its
FY to 31/12 (EUR) 12/16 12/17E 12/18E
IoT capacities. Our DCF model yields a fair value per share of EUR101 Sales (m) 3,391.0 3,638.0 3,760.0
(2016-25E sales and EBITDA CAGRs of 3.4% and 5.5% respectively). Our EBITDA adj (m) 336.9 362.2 385.4
EVA model indicates an undiscounted fair value per share of EUR102 for EBIT adj (m) 233.5 254.9 277.1
Net profit adj (m) 169.0 180.0 194.3
2018E. Our TP values Krones at 7.5x 2018 EV/EBITDA.
Net fin. debt (m) -373.1 -449.6 -546.8
IIoT strategy FCF (m)

EPS adj. and fully dil.
37.2
5.35
119.2
5.70
143.8
6.15
Krones is a manufacturing leader in the field of processing, filling and Consensus EPS 5.40 5.70 6.20
packaging technology. It serves OEMs with state-of-the-art bottle-making Net dividend 1.75 1.91 2.07
and bottle-filling machines. Every fourth bottle in the world was made by a FY to 31/12 (EUR) 12/16 12/17E 12/18E
Krones machine. With Microsoft and Cisco, the company has developed an P/E adj and ful. dil. 17.6 18.2 16.9
EV/EBITDA 8.4 8.5 7.8
IoT platform that serves as a tool for its entire operations management.
EV/EBIT 12.1 12.1 10.8
Through the integration of Microsofts IoT platform and Ciscos FCF yield 1.3% 3.8% 4.6%
components in its new data centres, it has manged to transform itself and Dividend yield 1.9% 1.8% 2.0%
become not only a machine provider but also a solutions and services Net fin.debt/EBITDA -1.1 -1.2 -1.4
Gearing -29.4% -32.2% -35.7%
provider as well as a consultancy firm. ROIC 17.7% 17.4% 18.4%
EV/IC 2.8 3.0 2.8
Huge data processing capability
With 200 physical servers and 700 virtual machines spread across three 115
data centres, the company can handle an average of 1.3 petabytes daily 110
and serves 5,500 users concurrently. The IoT platform has brought even 105
more capabilities. Krones has optimised its cost structure through new 100
capabilities such as remote monitoring, support and diagnostics, integrated
95
predictive management and real-time communication. Most importantly,
this data is accessible from anywhere with a smart device. The solution 90
developed can be fully integrated with other enterprise IT systems. 85
80
Offering a wide range of services to clients Aug 16 Nov 16 Feb 17 May 17
With this new solution, the company offers more possibilities and services Price DJ Stoxx 600 (rebased)
to its clients, widening its revenue stream with new consulting services,
data centre services and a better understanding of its customers through
CRM. Krones offers a fully IIoT line-up for its customers, making their
operations leaner and more productive. As a result, it acts as an example
for its peers.
Krones Hold TP EUR 101.00
Direction of Industrie 4.0 development

To enable its customers to accelerate and steer their production facility processes,
Krones has developed its SitePilot software solutions. Each of the solutions is
designed to allow the workflow in specific parts of the company to be organised on a
reproducible and efficient basis. All of Krones IT solutions were brought under the
same roof and include, among others, an MES, a Process Control System (PCS), and a
Warehouse Management System (WMS). All applications are divided into nine
families of products, but are all connected to each other.
Krones solutions are tailor-made for the F&B industry. The companys knowledge of
the production line and challenges of the industry is used to develop and implement
SitePilot. The overall objective is to have production and software interacting
seamlessly and provide support for each other.
The results of the implementation allow customers to reduce downtime, lower total
cost of ownership, valuable indicators and data analysis (allowing an improvement of
the production line).
More specifically, among other solutions, the company offers Line Diagnostics, Line
Management Systems, Krones Asset Management, and Interfaces for smooth
communication. Line Management Systems allows for the identification of weak
points along the production line as well as bottlenecks together with the
optimisation of operational processes. The line management system will enable
customers to receive information about the line status, make changes to production,
and organise necessary jobs in a timely manner. Krones Asset Management offers
the opportunity, among other things, to plan maintenance work with the least
downtime, and have access to spare parts availability. Finally, with the smooth
communication interfaces, it will permit its SitePilot applications to communicate
with each other.
Chart 109: Krones digitalisation of customers
Source: Krones
SitePilots Manufacturing Intelligence ensures that customers have access to all IT

data and analysis, wherever they are, regardless of the boundaries of individual IT
systems. Business Intelligence allows companies to determine precisely where
operational optimisation can be realised. Finally, SitePilot Planning ensures that
operations are smoothly run by planning orders, setting up intelligent packaging and
container types, to recipes, stock levels and scheduling specifications. All three
solutions ensure the development of smart factories around Krones production
lines, making Krones a central player in Industrie 4.0.
Krones owns and operates three data centres, representing a total of 1.3 petabytes
of data. Through a partnership with Cisco, the company has been able to modernise
its assets and install intelligent device gateways, making IT operations smoother.
The existence of these data centres and SitePilot allows Krones to develop a new
line of revenues.
The company has also partnered with Microsoft to develop M2M communications
between OEMs and their end-users. Back in 2014, OEM customer services were
inefficient, as no direct connections existed between them and the installed base.
Equipment maintenance schedules were based on time intervals, meaning they were
either performed too early or too late. Through the development of new digital
solutions, Krones has been able to eradicate these issues and make operations
leaner for its customers. Through the integration of real-time data, data analysis,
predicted events, real-time communications and more, it has aided companies with
remote monitoring, remote support, and remote diagnostics, predictive
maintenance, M2M communications, edge to cloud communications, and digital
platforms to interact and aggregate data. Krones optimises the cost structure
through new capabilities, provides new consulting and services, deepens the CRM,
and improves productivity.

Krones has set up key elements to ensure the digitalisation of its own company as
well as that of its customers, allowing them to realise beneficial gains in productivity
and time through the acquisition of SitePilot tools and the use of Microsoft Azures
cloud.
The company is expected to create new revenue streams through the use of its data
centres and consulting and business services. Its digital knowledge will be key when
competing for new customers. Key competitor, Sidel, is also developing its digital
capabilities, meaning Krones will have to invest further in R&D to keep its actual
position in the market.

Throughout our analysis of our capital goods coverage, Krones has emerged as one
of the most automated and digitised companies. Its partnerships with Cisco and
Microsoft show the companys interest in the topic and make us think it will continue
to develop its solutions, which represent a competitive edge.
With its SitePilot solution, the company offers multiple software products that
enable not only monitoring but also data analysis and predictive maintenance,
reducing downtimes and allowing operational optimisation. These elements result in
productivity gains for customers.
The company owns data centres but is not the owner of its IoT platform, relying on
other operators, which alleviates the companys cost line but hits customer
retention levels.
SWOT analysis
Strengths: The company offers a digitalised solution to its customers and enables
them to realise productivity gains.
Weaknesses: The company does not offer its own platform yet, which could make it
harder to retain customers.
Opportunities: Further development and stronger marketing of its solutions would
allow the company to make it more popular to its existing client base as well as to
potential new customers.
Threats: Competitors such as Sidel are moving forward with digitalisation and could
become a threat to Krones market position.
Chart 110: Krones Internal Survey grading

5
4
3
2
1
0
Smart products
Key financials
FY to 31/12 (EUR) 2011 2012 2013 2014 2015 2016 2017E 2018E

Sales 2,480.3 2,664.2 2,815.7 2,953.4 3,174.0 3,391.0 3,638.0 3,760.0
% Change 14.1% 7.4% 5.7% 4.9% 7.5% 6.8% 7.3% 3.4%
EBITDA adjusted 140.8 170.2 257.6 276.3 305.3 336.9 362.2 385.4
EBITDA margin (%) 5.7% 6.4% 9.1% 9.4% 9.6% 9.9% 10.0% 10.3%
EBIT adjusted 70.5 93.5 172.8 185.1 216.9 233.5 254.9 277.1
EBIT margin (%) 2.8% 3.5% 6.1% 6.3% 6.8% 6.9% 7.0% 7.4%
Net financial items & associates 4.0 5.6 -3.1 6.7 6.4 4.0 5.1 3.2
Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Tax -30.9 -30.9 -50.2 -56.2 -67.1 -66.5 -78.0 -84.1

Capex -100.0 -100.0 -100.0 -113.4 -51.5 -143.9 -133.7 -142.0
Free cash flow 16.0 35.2 -16.5 153.2 75.9 37.2 119.2 143.8
Acquisitions & Divestments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Dividend paid 19.0 23.7 63.2 39.5 45.8 55.3 60.5 65.3
Others -41.5 -51.5 60.2 -96.1 -93.2 -82.9 -102.0 -99.5
Change in net financial debt -6.5 7.4 106.9 96.5 28.5 9.6 77.7 109.6

Tangible assets 441.3 441.3 475.1 479.2 465.2 482.7 484.4 493.8
Financial & other non-current assets na na na 1.7 1.7 1.7 1.7 1.7
Total shareholders' equity 785.5 762.8 954.2 988.5 1,143.0 1,268.2 1,394.9 1,530.7
Liabilities and provisions 1,172.1 1,168.2 1,161.3 1,262.2 1,309.3 1,386.3 1,487.3 1,537.2
Net financial debt -125.5 -132.9 -239.9 -336.4 -365.0 -373.1 -449.6 -546.8
Working capital requirement 219.9 229.7 350.4 310.6 427.9 521.2 557.6 576.3
Invested Capital 661.2 671.0 825.4 789.8 893.1 1,003.9 1,042.0 1,070.1
Per share data

EPS adjusted 1.38 2.16 3.78 4.30 4.98 5.35 5.70 6.15
% Change -14.1% 56.4% 75.0% 13.8% 15.9% 7.4% 6.5% 7.9%
EPS reported 1.38 2.16 3.78 4.30 4.98 5.35 5.70 6.15
Ratios
ROE (%) 5.7% 8.8% 13.9% 14.0% 14.8% 14.0% 13.5% 13.3%
ROIC (%) 6.4% 9.7% 16.3% 16.2% 18.0% 17.7% 17.4% 18.4%
Gearing (%) -16.0% -17.4% -25.1% -34.0% -31.9% -29.4% -32.2% -35.7%
Valuation
P/E adjusted 33.7 19.1 15.2 16.2 19.6 17.6 18.2 16.9
P/BV 1.9 1.7 1.9 2.2 2.7 2.3 2.4 2.1
P/CF 12.7 9.6 21.8 8.3 24.2 16.4 13.0 11.5
Dividend yield (%) 1.3% 1.8% 3.5% 1.8% 1.5% 1.9% 1.8% 2.0%
FCF yield (%) 1.1% 2.7% -0.9% 7.0% 2.5% 1.3% 3.8% 4.6%
EV/Sales 0.6 0.5 0.6 0.7 0.9 0.8 0.8 0.8
EV/EBITDA 10.1 7.4 6.7 7.5 9.6 8.4 8.5 7.8
EV/EBIT 20.2 13.4 10.0 11.2 13.5 12.1 12.1 10.8
m:m:m:
SAP Hold
Germany | IT software & services | Mcap EUREUR 108.3bn Target Price EUR 90.00
Up/downside 2.2%
Change in TP none
IoT not yet a game changer Laurent Daure

Head of IT Software & Services
ldaure@keplercheuvreux.com
+33 1 53 65 36 36
SAP has regained revenue momentum in recent years thanks to Market data
investments in mobility, real-time analytics, and cloud activities. Bloomberg: SAP GR Reuters: SAPG.DE
Revenues should continue to grow in the high-single-digits (we see an Free float 77%
8.1% CAGR over 2017-20E to reach EUR30.2bn in revenues). The group No. of shares outstanding (m) 1,229
announced in September last year that it will invest EUR2bn in IoT by Avg. daily volume (EURm) 364.0
2020. SAP Leonardo, the groups Digital Innovation system, which 52-week high/low (EUR) 96.10/75.84
comprises IoT solutions, is running on estimated revenues of around
FY to 31/12 (EUR) 12/17E 12/18E 12/19E
EUR100m currently with triple-digit growth. Sales (m) 23,916 25,701 27,806
EBITDA adj (m) 7,450 8,090 8,865
Shift to the cloud ongoing EBIT adj (m) 6,950 7,590 8,365
With an estimated 8.1% CAGR over 2017-20E, SAP is set to remain a nice Net profit adj (m) 5,047 5,504 6,100
top-line growth story for the foreseeable future. Growth will be driven Net fin. debt (m) 1,737 -263 -2,973
FCF (m) 3,757 3,994 4,623
mainly by cloud subscriptions, which we see growing at around 30% a year, EPS adj. and fully dil. 4.21 4.59 5.09
while licence sales should decelerate. By 2020E, we expect cloud Consensus EPS 4.2 4.6 5.1
subscriptions to represent 28% of SAPs total sales, up from 16% in 2017E. Net dividend 1.30 1.50 1.60
FY to 31/12 (EUR) 12/17E 12/18E 12/19E

Margin pressure short-term P/E adj and ful. dil. 20.9 19.2 17.3
On the other hand, cloud investments are putting pressure on margins in EV/EBITDA 14.6 13.2 11.7
the short term, as SAP remains in investment mode in the public cloud EV/EBIT 15.6 14.0 12.4
FCF yield 3.5% 3.7% 4.3%
(data centres). Over FY 2017, operating margins should therefore drop by Dividend yield 1.5% 1.7% 1.8%
around 1pp to 29.1%, and then progressively rebound (+40bps in 2018E, Net fin.debt/EBITDA 0.2 0.0 -0.3
+60bps in 2019E and 2020E), as investments in data centres will have been Gearing 6.1% -0.8% -8.6%
ROIC 20.0% 21.4% 23.3%
completed and the stronger effort on hiring is behind it. EV/IC 4.3 4.1 4.0
SAP Leonardo 100

SAP Leonardo, once the groups IoT solutions brand, has been transformed
into a digital innovation system working on the SAP cloud platform and 95
comprising machine learning and big data capabilities. It is set to be

90
running on revenues of around EUR100m, and management hopes to get
this number to about EUR1bn per year. 85
IoT not a game changer 80

SAP Leonardos strength lies in the fact that it goes beyond pure IIoT
offerings and addresses market segments like connected cities, markets, 75
Aug 16 Nov 16 Feb 17 May 17 Aug 17
and people (consumer market). However, with a still limited top-line Price DJ Stoxx 600 (rebased)
impact, IIoT alone is unlikely to change materially our organic growth

estimates for the coming years. The impact could be limited to a maximum
of an additional 1% of organic growth over 2017-20. We value the shares
at EUR90, based on a DCF with 8.1% WACC, 7% sales growth and 32%
long-term EBITA margin.
SAP Hold TP EUR 90.00
Key financials
FY to 31/12 (EUR) 2012 2013 2014 2015 2016 2017E 2018E 2019E

Sales 16,304 16,901 17,578 20,809 22,068 23,916 25,701 27,806
% Change 14.3% 3.7% 4.0% 18.4% 6.1% 8.4% 7.5% 8.2%
EBITDA adjusted 5,616 5,917 6,087 6,816 7,129 7,450 8,090 8,865
EBITDA margin (%) 34.4% 35.0% 34.6% 32.8% 32.3% 31.1% 31.5% 31.9%
EBIT adjusted 5,210 5,509 5,638 6,348 6,629 6,950 7,590 8,365
EBIT margin (%) 32.0% 32.6% 32.1% 30.5% 30.0% 29.1% 29.5% 30.1%
Others -173 -16 49 -256 -233 -10 -70 -50
Tax -995 -1,069 -1,082 -929 -1,230 -1,264 -1,593 -1,808

Capex -502 -512 -691 -569 -938 -1,200 -1,200 -1,200
Free cash flow 3,320 3,322 2,883 3,067 3,678 3,757 3,994 4,623
Acquisitions & Divestments -6,094 -1,160 -6,465 -39 -106 -22 0 0
Dividend paid -1,310 -1,013 -1,194 -1,316 -1,378 -1,498 -1,557 -1,799
Others 532 -251 14 474 -559 -500 -100 -100
Change in net financial debt -3,552 898 -4,762 2,186 1,636 1,738 2,336 2,725

Tangible assets 1,708 1,820 2,102 2,195 2,580 2,980 3,380 3,780
Net financial debt 2,617 1,507 7,536 5,752 3,468 1,737 -263 -2,973
Working capital requirement -573 -550 -581 -663 -765 -909 -746 -952
Per share data

EPS adjusted 3.03 3.37 3.49 3.77 3.89 4.21 4.59 5.09
% Change 6.9% 11.2% 3.6% 8.2% 3.2% 8.2% 9.0% 10.8%
EPS reported 2.37 2.79 2.74 2.56 3.03 3.03 3.67 4.17
Number of shares, YE (m) 1,228.00 1,229.00 1,229.00 1,229.00 1,229.00 1,229.00 1,229.00 1,229.00
Ratios
ROE (%) 26.9% 26.6% 23.4% 21.1% 18.8% 18.4% 18.4% 18.5%
ROIC (%) 31.2% 27.2% 21.9% 19.8% 19.5% 20.0% 21.4% 23.3%
Net fin. debt / EBITDA (x) 0.5 0.3 1.2 0.8 0.5 0.2 0.0 -0.3
Gearing (%) 18.5% 9.4% 38.5% 24.7% 13.1% 6.1% -0.8% -8.6%
Valuation
P/E adjusted 17.0 17.4 16.4 17.2 19.1 20.9 19.2 17.3
P/BV 4.3 4.4 3.5 3.3 3.4 3.7 3.4 3.1
P/CF 16.0 18.3 19.1 21.4 19.2 21.3 20.3 18.1
Dividend yield (%) 1.7% 1.8% 1.9% 1.8% 1.7% 1.5% 1.7% 1.8%
FCF yield (%) 5.3% 4.6% 4.1% 3.8% 4.0% 3.5% 3.7% 4.3%
EV/Sales 4.0 4.3 4.4 4.1 4.2 4.5 4.1 3.7
EV/EBITDA 11.6 12.4 12.6 12.4 13.1 14.6 13.2 11.7
EV/EBIT 12.5 13.3 13.6 13.3 14.1 15.6 14.0 12.4
m:m:m:
Schneider Electric Buy

France | Capital goods | Mcap EUREUR 37.4bn Target Price EUR 77.00
Up/downside 15.8%
Change in TP none
Complete tailored solutions William Mackie

+44 (0) 207 621 5183
Schneiders leading portfolio of connectable, intelligent, low and medium Market data
voltage products acts as a backbone or foundation for the digitalisation of Bloomberg: SU FP Reuters: SCHN.PA
the groups offer. The flexible suite of software creates the ability to Free float 100%
provide tailored solutions in each of Schneiders target markets. No. of shares outstanding (m) 562
Partnerships with analytics and IoT platform providers create the Avg. daily volume (EURm) 155.4
capabilities required for Schneider to enhance its ability to drive increased 52-week high/low (EUR) 74.50/59.11
operating efficiency and productivity in building, datacentre, industrial and
FY to 31/12 (EUR) 12/17E 12/18E 12/19E
electrical grid environments. The groups capabilities position Schneider as Sales (m) 25,343 26,417 27,187
an IIoT enabler. We use the average of DCF and multiples based EBITDA adj (m) 4,189 4,559 4,829
approaches to arrive at a fair value of EUR77 with a range of EUR73- EBIT adj (m) 3,665 3,983 4,241
Net profit adj (m) 2,239 2,516 2,736
EUR82. Our multiples based valuation approach applies EV/EBITDA,
Net fin. debt (m) 4,388 3,980 3,186
EV/EBITA and PER multiples of 11x, 12.5x and 16x, respectively, to 2018 FCF (m) 2,023 2,234 2,518
forecasts and discounts back to year-end 2017. Our DCF central case uses EPS adj. and fully dil. 4.02 4.55 5.00
a 7.8% discount rate, 2% terminal growth, and a 15% margin mid-term. Consensus EPS 3.9 4.4 4.8
A leader in low-voltage electricals betting on digital FY to 31/12 (EUR) 12/17E 12/18E 12/19E
Schneider Electric is the leader in low- and medium-voltage product and P/E adj and ful. dil. 16.6 14.6 13.3
EV/EBITDA 11.1 10.1 9.4
system supply applied to six core market verticals. Schneiders five-year
EV/EBIT 12.7 11.6 10.7
strategy places digitisation as a key pillar for investment and growth. R&D FCF yield 5.4% 6.0% 6.7%
is directed toward increasing its connectivity, control with secure software Dividend yield 3.3% 3.7% 4.0%
and data analytics to enhance the asset efficiency and energy use. Net fin.debt/EBITDA 1.0 0.9 0.7
Gearing 21.0% 18.7% 14.6%
Ecostruxure platform, the full digital offer ROIC
EV/IC
11.9%
2.0
12.6%
2.0
13.2%
1.9
The digital system Schneider offers to all markets is the Ecostruxure
platform. It represents a stack of devices, edge control and apps that can be 76
tailored for each end-market application via different architectures. We 74

72
expect adoption of digital solutions to support growth.
70
A long track record developing leading digital capabilities 68
The first smart factory initiative was taken in 1997, when the group 66
introduced its transparent factory product, offering ethernet and web 64

62
technologies on the shop floor. Since then, EcoStruxure was developed and
60
has seen 450,000 systems deployed, connecting more than a billion devices.
58
The 2014 Invensys acquisition enhanced the offering in Industrial. Aug 16 Nov 16 Feb 17 May 17
Price DJ Stoxx 600 (rebased)
Partnerships and open platform maximise opportunity

Schneider has adopted an open source strategy, levering partners
strengths, including the Microsoft Azure IoT platform, IBM intelligence and
communication and network technology company offers, while enlisting
expertise from customers in software development for analytics.
Schneider Electric Buy TP EUR 77.00
Schneider Digital Strategy

As a global specialist in energy and automation management, the development of
the industrial internet and digitalisation of business throughout Schneiders end
Provision of
markets is critical to the future development of the groups EUR25bn of revenues. connectable low and
The convergence of IT and OT is central to the development of Schneiders strategy. medium voltage
The mix of business at Schneider is split c. 55% products, 15% software and services, products is at the
and 30% end-user applications, meaning that the current bias of the business is heart of Schneiders
offer
toward ensuring connectivity for devices, while levering on the existing software
offer. The groups digital strategy is centred on three pillars set out below.
Chart 111: Schneider Electric digital strategy focused on three ideas
Since 2016, Schneider has centred its digital strategy on is EcoStructuxe internet of
things platform. EcoStruxture as a brand and system has been under development
since 2007, with over 450,000 systems deployed, but the relaunch creates a single The groups digital
umbrella concept under which a number of tailored offerings have been created. The offer is centred on the
Ecostruxure brand
Ecostruxture platform is a technology stack that provides connectivity for
Schneiders multiple products and devices, an element of control functions and
cloud-based apps, analytics and services. The platforms capabilities are focused
across each of the groups target market segments - buildings, data centres,
industrial applications and electrical grids - and hence it is a key supporting digital
application for the whole of the business.
During 2016, Schneider indicated that nearly 50% of revenues were generated with
IoT enabled products. Conceptually, the Ecostruxure offer is shown below, but
Schneider is able to offer more tailored and dedicated solutions in each of its target
segments: building, data centre, industry and grid.
Chart 112: Schneiders Ecostruxure brand
Schneiders core
strength is within the
connected products
segment
Source: Schneider Electric
The first device layer of Schneiders offer builds on the companys core competence,
i.e. supplying connected products with intelligence, including sensors, medium and The group has a
low voltage circuit breakers and actuators. These product types are core strong leading
components in each of the groups divisions and sold across virtually all target portfolio in each part
of the technology
markets. Schneider is adding value to the sale of components via the enhanced
stack.
functionality and connectivity of its devices.
The second layer of Schneiders digital offer centres on edge control and
..Level 1 connected
incorporates connected control platforms that provide remote access and advanced devices.
automation with local control and firewall protection. In the field of buildings, this
incorporates the PowerStruxure or SmartStruxure software suites, while for
Industry it includes the MachineStruxure and PlantStruxure offers alongside the
Modicon, Foxbrobro and Triconex brands. For grids, Schneider has the PACiS and
MicroGrid offers, and in the datacentre/IT environment it has specific software for
data centre operation and monitoring, used alongside the SmartStruxure and Level 2 intelligent
offers at the edge
PowerStruxure offers.
The third layer comprises a portfolio of apps, analytics and services. For each of the
end markets, Schneider and partners have developed a range of cloud or server-
based apps and software systems that provide control, planning, scheduling, asset
management and analytics functions. Schneider already has a broad collection of
offers for each segment.
level 3 Apps and
Schneider tailors its offer for each of the core end markets - buildings, grid, industry solutions to extract
and data centres - while offering specific solutions for industrial plants, machines value from the data
set
and power distribution. The range of software offers and capabilities has been
amassed via the groups legacy of prior acquisitions, such as Invensys, alongside
internally development software.
To support Ecostruxure, Schneider has built a network of alliances with companies
including Accenture, PTC, Microsoft, IBM, Intel, Dell, Cisco, Salesforce and ARM, to
provide access to all necessary technologies and to create an attractive platform for
integrators and partners. The platform is positioned to be open to and operated by
an ecosystem of developers and data scientists.
Tailored for and targeting the core verticals

Todays EcoStruxure system is tailored to six specific architectures for building, Schneiders connected
power, datacentre, machine, industrial plant and electrical grid applications. In each and intelligent offer is
case, Schneider is able to provide smart connectable products (devices) that can be tailored for each end
connected to localised processes or to the cloud, where data can be collected and market
converted to actionable information. Within each environment the value of
connecting Schneiders devices in smart networks offers enhanced asset use,
performance management and operational efficiency.
Schneider aims to leverage the collection of data in each operating environment to
extract value for Schneiders customers and the group, especially in the field of
energy management and efficiency and in the discrete, hybrid and process
engineering environments. Within the group there are a range of software systems
that provide connectivity and control. A good example of Schneiders software
capability is Wonderware, a leading industrial software company that supplies
human machine interface solutions and control. Cloud-based capabilities are
supported by the platform and intelligence provided on the Microsoft Azure
platform.
Positioning for Industrie 4.0 and IIoT
At heart, Schneider is a product company, supplying low and medium voltage control
and automation equipment for electrical systems. This means that as digital
Schneider should be
technologies and capabilities have evolved, the principal need for Schneider has
thought of as driving
been to increase the amount of embedded intelligence within the groups product towards an IIoT
offer and expand the ability of all devices to securely connect with associated strategy rather than
devices and control software via wired and wireless networks. Management has I4.0
pursed exactly this strategy, making the groups portfolio of equipment a preferred
choice for the device backbone in any of the key markets - building, industry, data
centres or grid - via continual expansion of the range of connected products.
Over the past decade, Schneider has built and acquired a full suite of software
systems that interface with the groups range of connected devices and provide
monitoring, control and analysis functions. For end of the groups target operating
environments, which could include residential/commercial buildings, manufacturing
facilities, datacentres or electrical distribution networks, Schneider has created
industry-specific solutions that can be run securely in the cloud or on premises.
The nature of Schneiders core business - developing and selling connected devices -
with complementary software naturally aligns the group toward facilitating
adoption concepts linked to the IIoT, as applied to Schneiders markets and around
electrical technology. The groups capabilities in the specific field of industrial
production limit its ability to be a full capability provider of Industrie 4.0
technologies and software, although this can be largely achieved via partnerships.
Size and direction of investments for digitialisation
Schneider maintains a high level of commitment to developing leading-edge
technologies and designs across the product portfolio, which has been reflected in
R&D investments remaining stable as a proportion of revenues. Organic investment
in the field of industrial software has been more selective. Schneider already owns a
broad range of software systems able to provide direct control in each market. The
2015/16 approach to AVEVA for a merger of the software businesses is the one
exception to this path. The merits of a combination of Schneiders software activities
with AVEVAs software business remain unclear to us.
SWOT
Strengths as a leading connected product supplier
Uniting Schneiders global relationships with leading distributors of low and medium
voltage electrical products with the groups leading technology and market share in
the supply of connectable smart products is a powerful combination. This is
enhanced by the groups experience and knowledge in each market vertical.
Weaknesses
We believe a weakness for Schneider is that the software strategy as applied to each
functional application remains relatively uncoordinated. Schneider has acquired and
built a range of software applications, most recently via the acquisition of Invensys,
although much of the capability and talent is embedded in silos.
Opportunities
The main opportunities come from building: 1) a globally strong partner network
that constructs and maintains market and industry-specific applications that can sit
on open IoT platforms (such as Microsoft Azure) to generate value from Schneiders
(and competitors) connected devices; 2) business models that generate revenues
for Schneider from the enhanced asset efficiency it can offer.
Threats
If Schneider is unable to provide software and project solutions that provide many of
the promised benefits associated with the IIoT, the group may lose market share to
competitors able to offer more effective and comprehensive software solutions.
Chart 113: Schneider Electrics Internal Survey grading

5
4
3
2
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Smart products
Key financials
FY to 31/12 (EUR) 2012 2013 2014 2015 2016 2017E 2018E 2019E

Sales 23,946 23,108 24,939 26,640 24,693 25,343 26,417 27,187
% Change 7.0% -3.5% 7.9% 6.8% -7.3% 2.6% 4.2% 2.9%
EBITDA adjusted 3,899 3,450 3,771 4,067 3,869 4,189 4,559 4,829
EBITDA margin (%) 16.3% 14.9% 15.1% 15.3% 15.7% 16.5% 17.3% 17.8%
EBIT adjusted 3,030 2,824 3,098 3,069 3,327 3,665 3,983 4,241
EBIT margin (%) 12.7% 12.2% 12.4% 11.5% 13.5% 14.5% 15.1% 15.6%
Others -97 -159 -155 -151 -190 -132 -127 -127
Tax -554 -665 -551 -389 -712 -796 -933 -1,017

Capex -719 -714 -829 -787 -764 -750 -786 -811
Free cash flow 2,082 2,240 1,704 2,045 2,206 2,023 2,234 2,518
Acquisitions & Divestments -121 -294 -2,490 232 47 -1,261 0 0
Dividend paid -919 -1,025 -1,095 -1,108 -1,127 -1,157 -1,223 -1,372
Others -171 143 190 -778 -1,319 831 -604 -352
Change in net financial debt 871 1,064 -1,691 391 -193 436 407 794

Tangible assets 2,622 2,574 2,751 2,729 2,642 2,721 2,807 2,895
Working capital requirement 2,559 2,190 2,204 2,146 2,151 2,270 2,537 2,727
Per share data

EPS adjusted 3.95 3.74 3.42 3.07 3.25 4.06 4.60 5.06
% Change 5.7% -5.3% -8.5% -10.1% 5.5% 24.8% 13.2% 10.0%
EPS reported 3.28 3.44 3.07 2.28 3.06 3.89 4.38 4.84
Ratios
ROE (%) 13.2% 12.2% 10.6% 8.6% 8.8% 10.9% 12.0% 12.7%
ROIC (%) 11.3% 11.8% 12.2% 10.8% 10.5% 11.9% 12.6% 13.2%
Gearing (%) 26.1% 19.2% 24.9% 21.8% 23.4% 21.0% 18.7% 14.6%
Valuation
P/E adjusted 12.1 15.8 18.7 20.3 17.6 16.4 14.5 13.2
P/BV 1.6 1.9 1.9 1.7 1.6 1.8 1.7 1.6
P/CF 9.3 11.0 14.5 12.5 10.8 13.2 12.1 10.8
Dividend yield (%) 3.9% 3.2% 3.0% 3.2% 3.6% 3.3% 3.7% 4.0%
FCF yield (%) 7.8% 6.8% 4.7% 5.7% 6.9% 5.4% 6.0% 6.7%
EV/Sales 1.5 1.7 1.9 1.7 1.7 1.8 1.7 1.7
EV/EBITDA 9.2 11.7 12.6 11.1 10.8 11.1 10.1 9.4
EV/EBIT 11.8 14.3 15.3 14.8 12.5 12.7 11.6 10.7
m:m:m:
Siemens Hold
Germany | Capital goods | Mcap EUREUR 88.6bn Target Price EUR 125.00
Up/downside 14.4%
Change in TP none
Powerhouse of digitalisation William Mackie

+44 (0) 207 621 5183
Over a decade, Siemens has invested c. EUR10bn in M&A and a further Market data
EUR8bn in organic R&D to build its unrivalled capabilities in industrial Bloomberg: SIE GR Reuters: SIEGn.DE
software, digital services and industrial automation. We see annualised Free float 94%
revenues in this area of c. EUR5.5bn, growing at an 8% CAGR and No. of shares outstanding (m) 811
delivering operating margins c. 2x the groups average. Siemens is a leading Avg. daily volume (EURm) 456.5
YTD abs performance -6.4%
supplier of integrated industrial software and automation technologies 52-week high/low (EUR) 133.20/101.05
and actively promotes adoption of Industrie 4.0 production methods.
FY to 30/09 (EUR) 09/17E 09/18E 09/19E
Mindsphere, Siemens specialised IIoT platform, represents the final Sales (m) 83,656 86,197 88,846
element of the groups digital suite and will require considerable EBITDA adj (m) 11,395 12,049 13,089
investment until late 2018. We use an average of DCF and multiples based EBIT adj (m) 8,028 8,308 9,434
Net profit adj (m) 6,818 6,660 7,265
approaches to arrive at a fair value of EUR125 with a range of EUR107-
Net fin. debt (m) 23,522 22,914 21,277
137. Our multiples-based valuation approach applies EV/EBITDA, EV/EBIT FCF (m) 4,294 6,572 7,364
and PER multiples of 9.5x, 11x, and 15x, respectively, to 2018 forecasts EPS adj. and fully dil. 8.41 8.28 9.14
and discounts back to year-end 2017. Our DCF central case uses 7.8% Consensus EPS 7.8 8.2 8.9
WACC, 2% terminal growth and a 11% EBITA margin mid-term.
FY to 30/09 (EUR) 09/17E 09/18E 09/19E
Unrivalled full spectrum capabilities P/E adj and ful. dil. 13.0 13.2 12.0
EV/EBITDA 9.0 8.6 7.8
Siemens c. EUR10bn in M&A investment since 2007 provides a
EV/EBIT 12.8 12.4 10.8
comprehensive industrial software offering for digital design, engineering, FCF yield 4.6% 7.3% 8.2%
manufacturing, entry into service and support throughout the continuum of Dividend yield 3.4% 3.5% 3.6%
discrete, hybrid and process automation industries. This is complemented by Net fin.debt/EBITDA 2.1 1.9 1.6
Gearing 71.4% 65.2% 55.4%
digital service growing at c. 15% per year. ROIC 13.8% 13.6% 15.0%
EV/IC 2.4 2.3 2.2
Sustained high levels of investment expand capabilities
Over ten years, we estimate Siemens has invested EUR8bn in research and 135
development in its industrial software and automation businesses. We 130
expect the future growth potential offered by digitalisation in the industrial 125
sector to ensure a high commitment to the development of the groups 120
market-leading portfolio, supported by c. 18,000 software engineers.
115
Digitalisation is a central part of the strategy 110

Siemens board has placed digitalisation at the heart of the groups strategy 105
(internal and external). The trend spans all aspects of Siemens activities, and
100
is one of the key drivers of the groups mid-term growth prospects. Aug 16 Nov 16 Feb 17 May 17
Price DJ Stoxx 600 (rebased)
Undervalued component of group activities

The groups industrial software and automation portfolio, along with digital
services, is one of the fastest-growing businesses. Pure play industrial
software peers trade at higher multiples than the Siemens group, showing, in
our view, that Siemens digital portfolio is not fully recognised.
Siemens Hold TP EUR 125.00
Siemens digital strategy exploit leadership and scale

Digitalisation has been a central piece of Siemens strategy for the past four years,
Between 2014 and
and perfectly complements the capabilities of the automation and electrification 2016 industrial
businesses and the huge installed base of equipment. In FY 2016, Siemens generated software revenues
EUR3.3bn in revenues from industrial software and EUR1bn from digital services. grew c. 40% and
digital services
Consolidation of Mentor Graphics will increase annualised revenues in these fields
revenues doubled
to EUR5.5bn. The scope of these activities extends all along the horizontal value
chain.
Between 2014 and 2016, industrial software revenues grew c. 40%, while revenues
from digital services doubled. Looking forward, we believe the combined digital
software and services offering will grow 12% per year. Both areas generate
attractive margins. The consolidation of Mentor Graphics will add an additional
EUR1.1bn in annual software revenue and enlarge the groups footprint and ensure
Siemens has the most comprehensive digital offering for industrial design,
engineering, operation and service. Across all categories of the industrial vertical,
from process industries to discrete, Siemens is in the leading position to provide
secure and integrated digital and physical design, automation and control software.
Chart 114: The leading industrial automation and software company
Source: Siemens
Over 2017-20, we expect the market for these digital products and services to grow
c. 8% annually. By leveraging cloud technologies, increased connectivity, big data Post-consolidation of
and analytics and the groups specialist industrial software, Siemens is increasing its Mentor Graphics, we
see Siemens
growth potential across its portfolio, not only within the digital factories division but
generating almost
within every part of the group. Digital services is a fast-growing business offering EUR5.5bn in revenues
that spans the most relevant end-market verticals for Siemens, while Industrial from industrial
Software is more closely aligned with large manufacturers of complex software and digital
services
electromechanical equipment. The recent launch of Siemens Mindsphere IoT
platform is the centrepiece of its strategy to support the wide-scale adoption of

digitalisation among Siemens customer base.
Siemens strength in industrial digitalisation comes from its exceptional depth of
knowledge across a broad range of end-markets and industries, a huge installed base
and large fleet of connected equipment, built over its long history industrial
leadership, and a well-developed digital portfolio that is already proven within
Siemens own operations.
Siemens was visionary and well ahead of Industrie 4.0
Siemens was one of the first global industrial automation companies to position
itself for a convergence of mechanical and control design, which motivated its
acquisition of UGS in 2007. The upper section in the chart below reflects Siemens
vision in 2007, while the lower sector reflects the trends taking hold across the
industry today. Siemens full spectrum of software capabilities enables the seamless
creation of digital twins of products that can act as a master reference for the
physical product and offer significant benefits, including increased efficiency, quality
and flexibility.
Chart 115: Siemens vision 2007
Source: Siemens
The acquisition of UGS in 2007 illustrated Siemens vision of integrating the stack of
industrial software and technologies from computer aided
design/engineering/manufacture through to product data management and
planning and simulation of manufacturing processes. In fact, five years before the
concept of Industrie 4.0 was introduced, Siemens was already highlighting the
concept of the digital factory. In 2005, the product lifecycle software market was
seen growing 7-9% annually, which is the same as our current growth expectations
of 8% annually to 2020.
Chart 116: Overview of product lifecycle management software
Source: Siemens
Since 2007, Siemens has invested almost USD10bn in industrial software

acquisitions, expanding its capabilities in PLM software. Following the acquisitions
of UGS, Vistagy, LMS, CD, Adapco and Mentor Graphics, Siemens capabilities
throughout the horizontal digital value chain are almost unrivalled, spanning
product design, production planning, equipment design and automation engineering
combined with virtual commissioning. This ensures Siemens has the most complete
product and service offering for industrial customers and is a direct competitor for
purer play software companies such as Dassault Systmes.
Table 11: Siemens acquisition track record

Year Target FX Price Rev EV/Sales
2007 UGS USD 3,500 1,200 2.9
2011 Vistagy USD Not disclosed
2011 Emeter USD 200 (estimate) 35 5.7
2012 LMS EUR 680 187 3.6
2014 Camstar USD Not disclosed
2015 Polarion USD Not disclosed
2016 CD Adapco USD 970 190 5.1
2016 Mentor Graphics USD 4,500 1,200 3.8
The historical background of how the Industrie 4.0 concept evolved in Germany
means it is no surprise that Siemens capabilities are closely aligned with the
concepts and recommendations set out by the Industrie 4.0 working group in 2013.
As highlighted above, Siemens suite of software, in combination with partnerships
(including IBM and Microsoft), allows for the digitisation of the entire value chain,
allowing for the creation of a complete digital twin. The evolution of the groups
capabilities is illustrated in the chart below, which also shows how its acquisitions
have facilitated a merging of the physical and virtual worlds.
Chart 117: Historical development of Siemens software and automation capabilities
Source: Siemens, *In-house developments/digital upgrades
It is notable that UGS brought 7,300 people focused on PLM software and a business
with over 4m licensed seats across 47,000 customers generating USD1.2bn sales.
Mentor had 5,700 employees and was generating revenues of USD1.2bn. Before the
consolidation of Mentor Graphics at the end of 2016, the digital offering was
generating EUR4.3bn in revenues and set to grow close to 12% per year.
Unrivalled capability via c. EUR18bn investment in ten years
We estimate Siemens total spend on industrial software acquisitions, software R&D
and automation R&D was nearly EUR18bn over ten years. We believe Siemens has
invested nearly USD13bn in its industrial software offering for digital factories, split
c. 25% for R&D and 75% for acquisitions. In addition, we believe the group has
invested around EUR5bn in automation R&D.
This unrivalled investment has been directed at accelerating the convergence of the
groups production engineering and automation portfolio with the industrial
software for design manufacture and support. In conjunction with M&A and directed
research and development expenditures, Siemens has extended its reach into the
wider technology marketplace with venture capital provider Next47, which is
searching for disruptive businesses in the fields of decentralised electrification,
artificial intelligence, autonomous machines, connected mobility and block chain
applications. The reach of the groups offering, which extends across the whole
group, is illustrated below.
Chart 118: Main features of Siemens offering
Source: Siemens
With over 70m contracted meters, more than 800,000 connected devices and
products and over 30m automation system installations, Siemens is extremely well
positioned to leverage its installed base for service revenues.
Looking at the 2017-20 period, its offering will be further strengthened by the
consolidation of Mentor Graphics, the partnership with Bentley Systems and the
global roll-out of Mindsphere. Managements plan is to continue to increase the level
of penetration of Siemens offering to increase its value and extend the depth of data
use. This strategy is illustrated below.
Chart 119: Siemens path to higher value with smart data application
Source: Siemens
Sinalytics at the core of Siemens digital services

Siemens built the Sinalytics platform in 2014 to provide a foundation for the groups
digital services. Sinalytics combined Siemens domain know-how, industrial context,
security software and analytics capabilities to create valuable outcomes from
customer data, most commonly in the field of asset utilisation and operation. In
2015, the platform had over 300,000 connected devices collecting data to be
reviewed by advanced analytic functions, and was leveraging 17,500 software

engineers knowledge and 160 data scientists to optimise product domain
knowledge to improve outcomes for Siemens customer base.
The knowledge and capabilities developed within Sinalytics are being applied across
multiple end-markets where Siemens software and systems can bring
improvements in productivity and efficiency and increased asset availability all
within a secure environment. The range of digital services Siemens is able to offer
spans across all its divisions.
Chart 120: Selection of Siemens digitally enhanced service offering by division
Source: Siemens
The pace of the roll-out of the service offering depends on the level of technology
adoption among the respective industries and customers. Ultimately, Siemens
envisages bringing together advanced data analytics, connectivity and smart
networked devices in a secure environment to deliver prescriptive analytics and
automated service offerings, a complete transformation from the classical time and
material maintenance business model. This will take time. Predictive analytics for
local service has been achieved. Streaming analytics and distributed analytics are
speeding up the process.
Mindsphere cloud-based open industrial system

Siemens Mindsphere, the Siemens cloud for industry, was launched in Q1 2016 and
was designed as an open ecosystem that companies can use for digital services in
areas such as preventative maintenance, energy data management or resource
optimisation. In many ways, it provides the backbone on which much of the
Sinalytics capabilities will depend.
The platform is well designed to allow machine builders and plant constructors to
monitor machine fleets throughout the world, allowing the builders to offer new
business models. It also forms the base for data-driven services from Siemens, such
as preventative maintenance, or drive train analytics. To allow interoperability of
other machines with Mindsphere, Siemens will offer a connector box, under the
brand MindConnect.
To support customer implementations, support and operation, Siemens has
partnered with a number of groups including Atos, Microsoft, SAP, evosoft,
Accenture and IBM, to support the adoption of Mindsphere among its customer
base.
Data is generated by the physical assets, passed to the Mindsphere cloud via secure
plug and play connection technologies and then analysed by apps that can be
tailored to each customer vertical to determine value-creating outcomes. To date, it
is estimated that Siemens has migrated about 70 customers onto the Mindsphere
platform, but this can be expected to rise rapidly, and the global roll-out continues,
which can be expected to extend over a 5-10 year period.
Chart 121: Mindspheres relation key physical and virtual assets
Source: Siemens
SWOT of Siemens industrial digital capabilities

Strengths industrial software and digital services leadership
The breadth and depth of Siemens industrial software capabilities and industrial
vertical knowledge represent an almost insurmountable competitive advantage over
the medium term. The groups complete portfolio of industrial PLM, manufacturing
execution and product data management soft, in conjunction with the dominance in
the market for supply of industrial automation and control equipment, make
Siemens the best positioned global industrial equipment supplier to provide the
range of software and hardware needed to achieve the concepts set out within
Industrie 4.0.
Weaknesses scale may hinder the pace of innovation in niches

Maximising the value of digitalisation for Siemens customer base will, to a large
extent, hinge on the ability to apply artificial intelligence, cloud-based computing, big
data management and IT integration skills. Many of these skills are outside the
domain of Siemens core capabilities. The groups size, hence lack of agility, may
hinder the ability to nimbly transform in a period of disruption.
Opportunities pushing capabilities internally and externally

The main value from digitalisation comes from increased productivity in
manufacturing, enhanced working capital management, lower time to market for
product development and higher flexibility within manufacturing systems. Siemens
should leverage its own capabilities internally to enhance competitiveness while
working closely with partners to accelerate adoption through the customer base to
drive growth.
Threats may emerge from other industrial software suppliers

Rising demand for cloud-based computing or remote computing and control at the
edge of industrial networks may eventually impact demand for industrial PLCs,
which is at the heart of Siemens automation offer. Industrial customers may choose
to accelerate investments into industrial software and services rather than
hardware, at the expense of growth for Siemens industrial portfolio. Software-
focused companies such as SAP or IBM may choose to build a specific vertical
offered in the markets Siemens is targeting.
Chart 122: Siemens Internal Survey grading

5
4
3
2
1
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Smart products
Key finanials
FY to 30/09 (EUR) 2012 2013 2014 2015 2016 2017E 2018E 2019E

Sales 78,295 75,882 71,920 75,635 79,644 83,656 86,197 88,846
% Change 6.9% -3.1% -5.2% 5.2% 5.3% 5.0% 3.0% 3.1%
EBITDA adjusted 9,613 8,215 9,850 9,784 9,986 11,395 12,049 13,089
EBITDA margin (%) 12.3% 10.8% 13.7% 12.9% 12.5% 13.6% 14.0% 14.7%
EBIT adjusted 6,796 5,328 7,311 7,275 7,162 8,028 8,308 9,434
EBIT margin (%) 8.7% 7.0% 10.2% 9.6% 9.0% 9.6% 9.6% 10.6%
Net financial items & associates 501 5 117 -58 242 550 250 250
Others 0 0 0 0 0 0 0 0
Tax -2,094 -1,630 -2,028 -1,868 -2,008 -2,359 -2,439 -2,760
Net profit from discontinuing activities -595 197 108 2,031 188 35 0 0

Capex -2,206 -2,049 -1,831 -1,897 -2,135 -2,342 -2,414 -2,488
Free cash flow 4,687 4,238 5,401 4,982 5,533 4,294 6,572 7,364
Acquisitions & Divestments -702 -711 264 -4,903 -807 -4,327 -300 -300
Dividend paid -2,784 -2,680 -2,658 -2,873 -3,064 -3,108 -3,243 -3,251
Others -5,497 -2,275 -4,296 -3,727 -2,203 -1,311 -2,421 -2,175
Change in net financial debt -4,296 -1,428 -1,289 -6,521 -541 -4,452 608 1,637

Tangible assets 10,763 9,815 9,638 10,210 10,157 10,157 10,157 10,157
Working capital requirement -572 229 4,160 3,726 6,722 8,894 10,089 11,322
Per share data

EPS adjusted 5.98 5.31 6.67 6.85 7.12 8.41 8.28 9.14
% Change -18.1% -11.3% 25.6% 2.7% 3.9% 18.0% -1.5% 10.4%
EPS reported 4.98 5.08 6.37 8.83 6.75 7.53 7.26 8.25
Ratios
ROE (%) 16.8% 15.1% 18.9% 17.3% 16.8% 20.5% 19.9% 20.1%
ROIC (%) 18.3% 13.7% 17.8% 15.7% 13.4% 13.8% 13.6% 15.0%
Gearing (%) 30.2% 37.4% 38.1% 52.9% 54.8% 71.4% 65.2% 55.4%
Valuation
P/E adjusted 12.1 15.3 14.3 13.7 13.0 13.0 13.2 12.0
P/BV 2.1 2.4 2.6 2.2 2.2 2.7 2.5 2.3
P/CF 9.2 10.9 11.1 11.2 9.8 13.4 9.8 8.8
Dividend yield (%) 4.1% 3.7% 3.5% 3.7% 3.9% 3.4% 3.5% 3.6%
Dividend yield preference shares (%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
FCF yield (%) 7.2% 6.0% 6.5% 6.3% 7.1% 4.6% 7.3% 8.2%
EV/Sales 0.8 0.9 1.1 1.1 1.1 1.2 1.2 1.1
EV/EBITDA 6.8 8.7 8.4 8.4 8.5 9.0 8.6 7.8
EV/EBIT 9.6 13.4 11.3 11.4 11.9 12.8 12.4 10.8
Equity Research
Research ratings and important disclosures

The term "KEPLER CHEUVREUX" shall, unless the context otherwise requires, mean each of Kepler Cheuvreux and its affiliates, subsidiaries and related companies (see
Regulators table below).
The investment recommendation(s) referred to in this report was (were) completed on 01/09/2017 10:07 (GMT) and was first disseminated on 04/09/2017 5:05
(GMT).
Prices in this report are taken as of the previous days close (to the date of this report) on the home market unless otherwise stated.
Companies mentioned
Stock ISIN Currency Price
ABB CH0012221716 CHF 22.20
Dassault Systmes FR0000130650 EUR 82.75
Datalogic IT0004053440 EUR 27.66
Drr DE0005565204 EUR 97.84
Hexagon SE0000103699 SEK 389.90
Krones DE0006335003 EUR 103.90
SAP DE0007164600 EUR 88.10
Schneider Electric FR0000121972 EUR 67.73
Siemens DE0007236101 EUR 109.80
Source: Factset closing prices of 31/08/2017

Disclosure checklist - Potential conflict of interests
Company Name Disclosure
ABB nothing to disclose
Dassault Systmes nothing to disclose
Datalogic nothing to disclose
Drr nothing to disclose
Hexagon nothing to disclose
Krones nothing to disclose
SAP nothing to disclose
Schneider Electric nothing to disclose
Siemens nothing to disclose
Organizational and administrative arrangements to avoid and prevent conflicts of interests

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The functional job title of the person(s) responsible for the recommendations contained in this report is Equity/Credit Research Analyst unless otherwise stated on
the cover.
Name of the Research Analyst(s): William Mackie
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US affiliate and parent company of Kepler Capital Markets, Inc. a SEC registered and FINRA member broker-dealer. Equity/Credit Research Analysts employed by
KEPLER CHEUVREUX, are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of Kepler Capital Markets, Inc. and
may not be subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a
research analyst account.
Rating ratio Kepler Cheuvreux Q2 2017
Rating Breakdown A B
Buy 45% 50%
Hold 35% 35%
Reduce 17% 9%
Not Rated/Under Review/Accept Offer 3% 6%
Total 100% 100%
Source: KEPLER CHEUVREUX
A: % of all research recommendations
B: % of issuers to which material services of investment firms are supplied
Equity Research
12 months rating history

The below table shows the history of recommendations and target prices changes issued by KEPLER CHEUVREUX research department (Equity and Credit) over a
12 months period.
Company Name Date Business Line Rating Target Price Closing Price
ABB (CHF) 24/10/2016 08:49 Equity Research Hold 24.00 22.18
13/12/2016 09:40 Equity Research Hold 23.00 21.52
Dassault Systmes (EUR) 19/09/2016 08:38 Equity Research Hold 76.00 76.25
Datalogic (EUR) 26/10/2016 07:37 Equity Research Buy 21.50 18.20
13/03/2017 09:21 Equity Research Buy 24.50 22.09
Drr (EUR) 26/09/2016 08:49 Equity Research Hold 77.00 78.33
Hexagon (SEK) 02/11/2016 09:29 Equity Research Buy 350.00 309.50
Krones (EUR) 14/09/2016 17:40 Equity Research Reduce 80.00 89.65
03/03/2017 08:41 Equity Research Reduce 85.00 103.45
28/04/2017 07:10 Equity Research Reduce 90.00 105.05
SAP (EUR) 10/01/2017 09:54 Equity Research Hold 82.00 84.34
Schneider Electric (EUR) 21/09/2016 17:36 Equity Research Buy 74.00 60.27
Siemens (EUR) 19/09/2016 08:38 Equity Research Buy 116.00 103.75
Siemens () 18/04/2017 08:32 Equity Research Buy 135.00
Siemens (EUR) 22/05/2017 08:25 Equity Research Hold 135.00 128.15
Credit research does not issue target prices. Left intentionally blank.
Please refer to the following link https://research.keplercheuvreux.com/app/disclosure for a full list of investment recommendations issued over the last 12 months
by the author(s) and contributor(s) of this report on any financial instruments.
Equity research
Rating system
KEPLER CHEUVREUX equity research ratings and target prices are issued in absolute terms, not relative to any given benchmark. A rating on a stock is set after
assessing the twelve months expected upside or downside of the stock derived from the analysts fair value (target price) and in the light of the risk profile of the
company. Ratings are defined as follows:
Buy: The minimum expected upside is 10% over next 12 months (the minimum required upside could be higher in light of the companys risk profile).
Hold: The expected upside is below 10% (the expected upside could be higher in light of the companys risk profile).
Reduce: There is an expected downside.
Accept offer: In the context of a total or partial take-over bid, squeeze-out or similar share purchase proposals, the offer price is considered to be fairly valuing
the shares.
Reject offer: In the context of a total or partial take-over bid, squeeze-out or similar share purchase proposals, the offered price is considered to be undervaluing
the shares.
Under review: An event occurred with an expected significant impact on our target price and we cannot issue a recommendation before having processed that new
information and/or without a new share price reference.
Not rated: The stock is not covered.
Restricted: A recommendation, target price and/or financial forecast is not disclosed further to compliance and/or other regulatory considerations.
Equity Research
Due to share prices volatility, ratings and target prices may occasionally and temporarily be inconsistent with the above definition.
Valuation methodology and risks

Unless otherwise stated in this report, target prices and investment recommendations are determined based on fundamental research methodologies and relies on
commonly used valuation methodologies such as Discounted Cash Flow (DCF), valuation multiples comparison with history and peers, Dividend Discount Model (DDM).
Valuation methodologies and models can be highly dependent on macroeconomic factors (such as the price of commodities, exchange rates and interest rates) as well as
other external factors including taxation, regulation and geopolitical changes (such as tax policy changes, strikes or war). In addition, investors confidence and market
sentiment can affect the valuation of companies. The valuation is also based on expectations that might change rapidly and without notice, depending on developments
specific to individual industries. Whichever valuation method is used there is a significant risk that the target price will not be achieved within the expected timeframe.
Unless otherwise stated, models used are proprietary. Additional information about the proprietary models used in this report is accessible on request.
KEPLER CHEUVREUX equity research policy is to update research rating when it deems appropriate in the light of new findings, markets development and any
relevant information that can impact the analysts view and opinion.
Credit research
Rating system (issuer or instrument level)
Buy: The analyst has a positive conviction either in absolute or relative valuation terms and/or expects a tightening of the issuers debt securities spread over a six-
month period.
Hold: The analyst has a stable credit fundamental opinion on the issuer and/or performance of the debt securities over a six-month period.
Sell: The analyst expects of a widening of the credit spread for some or all debt securities of the issuer and/or a negative fundamental view over a six-month period.
Not covered: KEPLER CHEUVREUXs credit research team does not provide formal, continuous coverage of this issuer and has not assigned a re commendation to the
issuer.
Restricted: A recommendation, target price and/or financial forecast is not disclosed further to compliance and/or other regulatory considerations.
Recommendations on interest-bearing securities mostly focus on the credit spread and on the rating views and methodologies of recognized agencies (S&P, Moodys and
Fitch). Ratings and recommendations may differ for a single issuer according the maturity profile, subordination or market valuation of interest bearing securities.
Valuation methodology and risks

Unless otherwise stated in this report, recommendations produced on companies covered by Kepler Cheuvreux credit research, rely on fundamental analysis combined
with a market approach of the interest-bearing securities valuations. The methodology employed to assign recommendations is based on the analyst fundamental
evaluation of the groups' operating and financial profiles adjusted by credit specific elements.
Valuation methodologies and models can be highly dependent on macroeconomic factors (such as the price of commodities, exchange rates and interest rates) as well as
other external factors including taxation, regulation and geopolitical changes (such as tax policy changes, strikes or war) and also on methodology changes at recognized
agencies. In addition, investors confidence and market sentiment can affect the valuation of companies. The valuation is also based on expectations that might change
rapidly and without notice, depending on developments specific to individual industries.
Unless otherwise stated, models used are proprietary. If nothing is indicated to the contrary, all figures are unaudited. Additional information about the proprietary
models used in this report is accessible on request.
KEPLER CHEUVREUXs credit research policy is to update research rating when it deems appropriate in the light of new findings, markets development and any
relevant information that can impact the analysts view and opinion.
Equity Research
Regulators
Location Regulator Abbreviation
KEPLER CHEUVREUX S.A. - France Autorit des Marchs Financiers AMF
KEPLER CHEUVREUX, Sucursal en Espaa Comisin Nacional del Mercado de Valores CNMV
KEPLER CHEUVREUX, Frankfurt branch Bundesanstalt fr Finanzdienstleistungsaufsicht BaFin
KEPLER CHEUVREUX, Milan branch Commissione Nazionale per le Societ e la Borsa CONSOB
KEPLER CHEUVREUX, Amsterdam branch Autoriteit Financile Markten AFM
Kepler Capital Markets SA - Switzerland, Zurich branch Swiss Financial Market Supervisory Authority FINMA
Kepler Capital Markets, Inc. Financial Industry Regulatory Authority FINRA
KEPLER CHEUVREUX, London branch Financial Conduct Authority FCA
KEPLER CHEUVREUX, Vienna branch Austrian Financial Services Authority FMA
KEPLER CHEUVREUX, Stockholm Branch Finansinspektionen FI
KEPLER CHEUVREUX is authorized and regulated by both the Autorit de Contrle Prudentiel et de Rsolution and the Autorit des Marchs Financiers.
CIMB
Country CIMB entity Regulated by
Hong Kong CIMB Securities Limited Securities and Futures Commission Hong Kong
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Morgans
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Australia Morgans Financial Limited Australian Securities & Investments Commission
SB Equities
Country SB Equities entity Regulated by
Philippines SB Equities Inc. Securities and Exchange Commission of Philippines
VN Direct
Country VN Direct entity Regulated by
Vietnam VNDirect Securities Corporation State Securities Commission
Equity Research
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Capital goods research team
Baptiste de Leudeville Markus Almerud

William Mackie bdeleudeville@keplercheuvreux.com malmerud@keplercheuvreux.com
Main author
wmackie@keplercheuvreux.com Benjamin Terdjman Martin Flueckiger
+44 (0) 207 621 5183 bterdjman@keplercheuvreux.com mflueckiger@keplercheuvreux.com
Charles-Louis Scotti Matteo Bonizzoni, CFA
William Mackie is Head of Capital Goods cscotti@keplercheuvreux.com mbonizzoni@keplercheuvreux.com
Research at Kepler Cheuvreux. Most
Craig Abbott Matthijs Van Leijenhorst
recently, before joining Kepler Cheuvreux
Head of German Small & Mid Caps mvanleijenhorst@keplercheuvreux.com
in September 2014, he worked at cabbot@keplercheuvreux.com
Berenberg Bank where he headed the Nikolas Mauder
Douglas Lindahl nmauder@keplercheuvreux.com
Capital Goods team for over four years.
dlindahl@keplercheuvreux.com
He also worked in Capital Goods Equity Peter Olofsen
Research at MainFirst AG and as a Geoffroy De Mendez polofsen@keplercheuvreux.com
gdemendez@keplercheuvreux.com
Director of Capital Goods Research at Pierre Boucheny
Commerzbank AG. Over 16 years, he has Guido Nunes Head of French Research
actively researched most companies gnunes@keplercheuvreux.com pboucheny@keplercheuvreux.com
within the UK and European Industrial Hans Pluijgers Stephan Trubrich, CFA
sectors, gaining a vital perspective and a Head of Benelux Equity Research strubrich@keplercheuvreux.com
deep understanding of the global hpluijgers@keplercheuvreux.com
Thomas Neuhold, CFA
industrial landscape and key competitive Hans-Joachim Heimbuerger Head of Austrian Research
success factors. William Mackie has a hheimbuerger @keplercheuvreux.com tneuhold@keplercheuvreux.com
Mechanical Engineering degree from the Iigo Egusquiza Torsten Sauter
University of Exeter (1993) and an MSc in Head of Iberian Research Head of Swiss Research
Management with a focus on iegusquiza@keplercheuvreux.com tsauter@keplercheuvreux.com
Manufacturing Systems from Cranfield Joaquin Ferrer, CFA
School of Management. jferrer@keplercheuvreux.com
Assisted by Johan Eliason

Laurent Daure, Head of IT Software & Services jeliason@keplercheuvreux.com
Research
Thomas Poutrieux
Joffrey Bellicha Meller
keplercheuvreux.com

Industrie 4.0

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Industrie 4.0

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F

Equity Research 360 Report Full report

Ca pital g oods $Com panyRe gion$ Sector re sea rch360_SR

Investment case summary

Investment case in six charts

Source: Kepler Cheuvreux Source: Kepler Cheuvreux

80% Today In 5 years 6% 4% 2%

Source: Kepler Cheuvreux Source: Kepler Cheuvreux

Source: Kepler Cheuvreux Source: Kepler Cheuvreux

Investments driven by financial gain 35

IoT platforms at the heart of change 51

Slow-paced disruption underway 83

National initiatives speed up digitalisation 90

Digitalisation trends across industries 100

Ranking digitalisation across the sector 105

Company section 114

Research ratings and important disclosures 208

Intensified focus on digitalisation over last six years

Building an investment framework is challenging for investors

landscape, growth or eventual impact on profit and earnings. Moreover, we are

We provide a comprehensive introduction to the subject

Seven industrial segments to gain the most

Three sectors provide enabling technology

Consequently, as digitalisation moves up the priority list of corporate agendas, we

Enticing projections for growth, productivity and margin expansion

Service and maintenance models deliver shortest payback, best growth

We believe potential gains in productivity and flexibility will take longer to

Evolution not revolution ahead: slow-paced disruption

Winners for investors: mainly the large companies

Mkt cap TP Rating EV/Sales EV/EBITDA PER Industrie 4.0 Classification

Mkt cap TP Rating EV/Sales EV/EBITDA PER Industrie 4.0 Classification

" Best grade of our IIoT Analyst Survey. Strengths were

A ten-year road to full digitalisation

From Internet of Things to Industrial Internet of Things

It is already common in residential or office settings to see connected heating,

Chart 7: Adoption of IoT began to accelerate ten years ago

Source: Kepler Cheuvreux

Moving towards the Industrial Internet of things

promote industrial digitalisation, extending the narrative to the reindustrialisation

How I4.0 is cast as a revolution

Chart 8: The various stages of industrial revolution

Source: Kepler Cheuvreux

Chart 9: An overview of Industrie 4.0

Source: Kepler Cheuvreux

Chart 10: Key I4.0 enablers

7. Strategic management: Management to gain better access to information,

Who are the key players?

Differences and barriers between traditional industrial companies, service providers

Chart 11: Corporate interrelationships supporting development of Industrie 4.0

Source: Kepler Cheuvreux

1. Established manufacturers: Companies set to experience the greatest

Source: Google Trends Source: Gartner group

Source: General Electric Source: acatech

Adopting technology hinges on a positive financial outcome

2. Optimisation of industrial value chains: The optimisation of horizontal

Chart 17: Horizontal industrial value chains

4. Asset use optimisation: The opportunity offered by access to real-time data

Chart 18: From operating data to insights

Traditional capital goods companies must increase digital content

Source: Roland Berger Source: Roland Berger

Enhancing the productivity of countries and companies is a key objective when

Chart 21: Key drivers behind I4.0 adoption

Source: Kepler Cheuvreux