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Transformation will create opportunities

Image of a truck.

The development of manufacturing – starting with the Industrial Revolution in the 18th century – has led via a series of technical innovations in mechanics and energy production, electrification with mass production and digitisation to the manufacturing companies of today. Development work is continuing at a rapid pace, with smart integration of computer systems and more efficient supply chains from purchasing to sales resulting in more independent, flexible production processes. This concept is called Industry 4.0, and Swedish companies are at the forefront of these improvements. 

This is a summary – read a longer article on pages 24-27 of the latest Investment Outlook (pdf).

 

The term “Industry 4.0” originated with the German government's strategy for the Fourth Industrial Revolution. Put simply, it refers to digitally connected systems that coordinate information from multiple sources in order to independently influence physical production.

Wireless connectivity between machines via actuators and sensors helps companies and individuals to make the right decisions. A large quantity of data is stored, organised and analysed in order to discover patterns, trends, correlations and opportunities. Every item in the production chain carries with it information about where it should go and how, enabling the factory to organise itself. The goal is production with fewer errors, more flexibility and shorter adjustment and lead times. Given the ability to adapt and learn from real-time data, the production of goods and services becomes more proactive and foresighted.

Increased profitability potential

Getting maximum use from connected devices requires fast, reliable and secure data transfer. This is expected to be possible with 5th generation (5G) mobile networks. The integration of large quantities of data can create new services that optimise the entire value chain. Increased service sales, in turn, increase the stability of cyclically sensitive industrial companies. Environmental/Social/ Governance (ESG) risk in companies can also be favourably affected by increased traceability along the entire supply chain and greater energy efficiency.

Swedish industrial companies among top patent recipients

We have studied patent applications related to new Industry 4.0 technology to see which Swedish companies are well-positioned ahead of the upcoming transformation. These companies are generally in the forefront of this work. During the period 2010-2016, they submitted 2,600 such patent applications − equivalent to nearly 4 per cent of total applications globally in this field, according to the Swedish Patent and Registration Office (PRV).

A bit surprisingly, outdoor power tool manufacturer Husqvarna (5th place) and Essity (8th) are among the companies that have applied for the most Industry 4.0 patents. Husqvarna is increasing the intelligence in its products by enabling users to communicate with them via the Internet and by boosting the role of self-driving vehicle technology.

Essity develops hygiene products featuring sensors and communication via the internet for more efficient planning of needs. In its third quarter 2020 report, the company stated that increased digitisation in processes is a weapon to boost profitability. Its target is to achieve a return on capital employed of more than 17 percent, compared to the current level of about 15 percent.

“Ericsson accounted for 2,200 of Sweden’s 2,600 Industry 4.0-related patent applications”

Ericsson, with SEK 40 billion in annual development costs − equivalent to 17 percent of its revenue − filed nearly 2,200 Industry 4.0-related patent applications during the period 2010-2016. The development of connected products and processes by companies broadens the market for Ericsson's base stations, software, security and cloud services. In most industries, we are at the inflection point between testing and mass adoption of digitally connected processes and products. According to Ericsson, services to companies and other service providers can generate yearly sales of USD 700 billion by 2030. The largest service markets are in health care, manufacturing, energy and vehicles.

A perpetual motion machine

Preventive maintenance with the help of data analysis enables a manufacturer to anticipate problems even before they occur. Without access to data from sensors, regular maintenance takes place on the basis of routines or on specific dates. To quantify the potential, we have used the costs of planned and unplanned stoppages at Boliden smelters, SSAB steel mills, and Holmen paperboard production during a two-year period. Average maintenance costs at these three Swedish companies represented a quarter of earnings in 2018 and 2019. For manufacturers of paperboard, nonferrous metals and steel, more efficient maintenance means major opportunities for improved profitability.

SKF monitors millions of bearings used by its customers and expects the number to increase exponentially. The data can also be used in the development of future products. The COVID-19 pandemic has probably intensified the need for digitally connected machines, since maintenance has been hampered by restrictions and shortages of critical components.

“Opportunity of the century” according to Volvo

At its recent capital markets day, commercial vehicle maker Volvo declared that technological change in the logistics field offers "the greatest opportunity of the century".

Logistics is a major cost item, but also important to consumer goods companies and the customer experience in the rapidly growing e-commerce sector. For pure e-commerce market players, logistics-related costs account for 20 per cent or more of their total costs. Consumers today expect deliveries of goods to occur within 24 hours or faster, with flexibility as to where the delivery is to take place. At manufacturing companies, logistics may account for around 10 per cent of costs. This is also true of logistics as a share of GDP in more advanced economies.  In countries where a large share of the economy consists of commodities and agriculture, the percentage is higher.

“Forty per cent of truck traffic in China takes place with empty trucks

Today an estimated 20 per cent of all truck traffic in Europe takes place with empty trucks. In China the figure is a full 40 per cent. A large part of this is when the truck is travelling to a pick-up point for goods. With the help of real-time data about truck locations, and by combining the shipping of goods more optimally, delivery cost can be reduced by up to 25 per cent and emissions by 30 per cent.

Digitally connected technology makes it possible to achieve more efficient logistics flows, by knowing exact positions and being able to calculate the estimated arrival times of vehicles. The use of 5G improves the potential for offering self-driving trucks and construction machinery, for example in mines, quarries, ports and logistics centres. These self-driving vehicles can be used 24 hours a day, 7 days a week. One example of a company that is testing industrial applications is metals group Boliden, which has digitally connected vehicles and drilling rigs at its Aitik copper mine. Generally speaking, digital connections for both light and heavy vehicles are expected to be a major market in industry, as well as for self-driving vehicles.

More ambitious targets

The new technology can change the way companies that successfully participate in the Industry 4.0 transformation view both their potential revenues and earnings volatility. SKF recently raised its operating margin targets, with increased automation and service sales expected to make a positive contribution. Volvo has also confidently announced its potential for boosting service sales.

Increased productivity thanks to this new technology can help make supply chains more local. Production that takes place today in low-wage countries can move closer to final markets. The cost of capital and access to technological expertise is likely to become more important than wage costs in many industries when the new technology is fully used. The need for expertise at industrial companies is shifting towards more software and electronics. Companies that actively change their operations with the help of the new digital technology are probably the future winners on the Swedish stock exchange.

Image of Stefan Cederberg, equity analyst at SEB.

Stefan Cederberg

Equity Analyst
Investment Strategy

Read more

You can read more in “Theme: Industry 4.0” on pages 24-27 in the latest                                               

Investment Outlook (PDF)
Summary (PDF)

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