Amazon.com (NASDAQ:AMZN) and Volkswagen AG (OTC:VWAGY) announced Wednesday they will join forces to network all 122 VW manufacturing plants in the cloud.

Amazon Web Services (AWS) will form the foundation for the effort, powering the Volkswagen Industrial Cloud. The initiative will automate all of the company's automobile manufacturing and logistics processes in an effort to improve operations productivity.

The companies inked a multi-year global agreement to create a cloud-based digital production platform that "will rely upon the breadth and depth of AWS's portfolio of services, including IoT [the Internet of Things], machine learning, analytics, and compute services to increase plant efficiency and uptime, improve production flexibility, and increase vehicle quality." 

Cloud computing icons over a blurred background

Image source: Getty Images.

A technological edge

Machine learning systems are born of artificial intelligence (AI), and their ability to sift through massive amounts of data and spot patterns that human observers might miss is well documented.

Volkswagen plans to use the insights gained from this new networking effort to "pinpoint operational trends, improve forecasting, and streamline operations by identifying gaps in production and waste." The AI algorithms in the system will also help "optimize the operation of machinery and equipment in all of its plants." This will include Volkswagen subsidiaries such as Audi, Porsche, and others.

Long term, the deal could eventually include Volkswagen's entire global supply chain, which is composed of 1,500 suppliers and partner companies in more than 30,000 locations. AWS CEO Andy Lassy said the process "will reinvent [Volkswagen's] manufacturing and logistics processes." Volkswagen is already in negotiations with a number of major industrial companies that may be interested in piggy-backing on the company's efforts. 

Check out the latest earnings call transcript for Amazon.

A focus on production

In simple terms, cloud computing is the storing and accessing of data and computer programs via the internet. The most commonly used types of cloud services are infrastructure-as-a-service, software-as-a-service, and platform-as-a-service. Industrial cloud services have a much greater focus on optimizing operational technology, particularly in the manufacturing sector. 

To accomplish this task, data is gathered throughout the manufacturing and production process to help improve performance, while using predictive analytics to identify problems before they become costly. The systems can be used for a variety of functions, including tracking and monitoring machines and recording data from sensors and devices, while tracking inventory, production, and completed vehicles.

A large and growing opportunity

The industrial cloud services market is a fast-growing and potentially lucrative opportunity. According to market intelligence provider IDC, five of the largest industry groups -- manufacturing, healthcare, public sector, finance, and retail/wholesale -- are expected to spend a total of $45.4 billion on industrial cloud services in 2019, with manufacturing seeing some of the strongest growth.

This gives AWS a fertile field to cultivate new revenue streams for its industrial cloud businesses. IDC says growth in the industry cloud market will continue to accelerate in the coming years, providing the cornerstones for "next generation growth and innovation strategies."

AWS has been a pillar of Amazon's growth over the past several years. Revenue from the cloud segment grew 47% year over year in 2018 and accounted for 11% of Amazon's total revenue for the year. A partnership of this magnitude with Volkswagen could improve the potential for other such deals in the manufacturing, automotive, or industrial spaces. That's an area of expansion that represents a significant opportunity for Amazon.