AT&T is just one of many companies revolutionizing the industrial landscape. Image source: AT&T
December is winding down, and a new year will soon be upon us. According to many industry experts, though, it's not just a new year that's about to begin, but something much larger -- a new age. Dubbed Industry 4.0, this new period entails the digitization of automation and manufacturing. Otherwise known as the Industrial Internet of Things (IIoT), this movement presents a massive market opportunity for numerous companies. Accenture, estimates that the IIoT could add $14.2 trillion to the global economy by 2030. From the assembly line to the customer's front door, the IIoT offers multiple advantages. Let's take a look at five of them.
Operational efficiency
Through advances in automation and more flexible production techniques, Accenture estimates that companies can increase productivity by about 30%. One company at the forefront of driving this innovation is Cisco Systems (NASDAQ: CSCO), which is helping manufacturers realize improvements through its Cisco Connected Factory solution. Stanley Black & Decker, for example, implemented this solution at one of its plants which led to better quality control, a 10% increase in throughput, and an increase in labor productivity to 92%.
Energy efficiency
The IIoT is also bringing savings through better energy management. German conglomerate Siemens (SIEGY 3.16%) is helping companies achieve better energy efficiency by way of its new digital factory division. Building an open cloud platform -- based on the SAP (SAP 1.25%) Hana Cloud Platform -- for its industrial customers, Siemens is helping companies reign in operating expenses by reducing energy consumption. Just one of its many Plant Data Services, the Energy Analytics solution, according to Siemens, can help companies reduce energy costs by 20% or more. For example, one UK glass manufacturer partnered with Siemens to implement a smart lighting solution at one of its production facilities. The investment was worth it, yielding a payback of less than three years.
In fiscal 2015, Siemens reported an 8% improvement in both revenue and orders for the digital factory division over what it reported in FY 2014. As more and more companies transition to smart factories, revenue for the division should increase-- an uncommon growth opportunity for a mature company.
Predictive maintenance
A third benefit of the IIoT is the ability to be proactive, implementing predictive maintenance solutions to identify potential failures. According to Accenture, predictive maintenance can yield approximate savings up to 12% over scheduled repairs, reducing overall maintenance costs up to 30% and eliminating breakdowns up to 70%.
General Electric (GE -0.17%) presents customers with predictive-maintenance capabilities though its Predix-based, SmartSignal solution -- an ounce of prevention over a pound of cure. The company contends that the value proposition is well worth it; the average SmartSignal customer achieves ROI in six to 12 months. In the case of a power plant's fossil-fuel based generating unit, for example, the savings are substantial.
Source: GE.
GE sees considerable demand for its industrial software offerings as companies continue to modernize. According to Barron's, the company has been successful so far, growing its revenue from software by 20% annually in the past four years to $6 billion this year. Management estimates that revenue from Predix-based business will reach $15 billion in revenue by 2020.
By air and by sea
It's not just inside the factory where the value proposition lies. According to research from Cisco, the IIoT will provide savings in the vicinity of $1.9 trillion over the next decade from improving efficiencies in supply chain management and logistics. AT&T (T 2.02%), with its Cargo View with FlightSafe is one solution which improves supply chain management -- ensuring quality assurance, regulatory and compliance requirements, intrusion detection, chain of custody, and customer service.
These benefits directly address the supply chain risks that concern the managements of numerous companies. In an AT&T survey, more than 80% of companies that "do not yet have any operational technologies" identified handling and transfer risks (shipments, damaged, stolen, spoiled, late, and so on) as significant challenges.
Opportunities exist on the seas as well. The Maersk Group, one of the world's largest shipping companies, recognized the value in AT&T's solutions and chose to connect more than 280,000 of its refrigerated containers to its network.
AT&T is helping Maersk with quality assurance of perishable goods by connecting refrigerated containers. Image source: AT&T.
Citing an estimate from Machina Research of 69 million M2M connections in the supply chain by 2023, AT&T finds plenty of opportunity to grow. The deal with Maersk and others from its fixed strategic services accounted for 7.1% of the company's total revenue for the third quarter. As the IIoT market matures, fixed strategic services should be contributing much more to the company's total revenue.
Send in the fleet
Cisco's IoT perspective isn't relegated to the factory; it's addressing fleet management as well with solutions for everything from small automotive to large trucking fleets. With only 25% of fleets using IoT technology, the opportunity is substantial. Not to mention, ABI Research estimates that global fleet management revenues will grow from $9.08 billion in 2013 to $27.61 billion in 2018.
Some fleet managers already recognize the potential. UPS (UPS 0.29%), for one, expects it will save between $300 million and $400 million a year when it deploys ORION -- proprietary software, 10 years in the making, which optimizes drivers' delivery routes. ORION will surely help Big Brown keep operating costs in check and may help to distinguish it even further from its nemesis, FedEx.
FDX Operating Margin (TTM) data by YCharts
With e-commerce continuing to grow by leaps and bounds, delivery routes are only becoming more complicated. Paired with the fact that gas prices will eventually rise again, ORION should help UPS to reign in the costs.
The takeaway
Don't be deceived. Though the wearables and consumer applications of the IoT get the most attention, there are vast growth opportunities for the IoT in industrials, too. Investors looking to wet their feet in the IoT pool may be best off with an industry stalwart such as GE or AT&T -- companies that have the resources to strategically take advantage of the tremendous trillion-dollar market potential.
