The Industrial Internet of Things and Why It Matters to You and Your Business

The Internet of Things (IoT) means many things to many people. With much in the way of venture capital dollars invested, several high profile flame-outs, and little in the way of demonstrable RoI, naturally and justifiably, people are sceptical amid the hype. In fact, in 2017, Gartner had the IoT and many of its constituents sitting atop its much vaunted hype cycle, about to plummet into the depths of the trough of disillusionment.

I believe we’re now at an inflection point due to the confluence of several technologies and trends that will unlock value on an epic scale in the next several years, touching almost every industry and going some way to delivering the $11.5 trillion in value estimated by McKinsey in 2025.

Much of this value will be captured in a B2B or industrial setting (McKinsey estimates 2x that of B2C), and so I’ve been digging in to understand why the Industrial Internet of Things (or the IIoT) matters, what the key drivers of (and barriers to) deployment are, and where the opportunities lie for entrepreneurs and investors in a complicated ecosystem with many incumbent juggernauts and other well funded competitors.

This is the first article in a series about the Industrial Internet of Things:

1. The Industrial Internet of Things and Why It Matters to You and Your Business
2. The Barriers to Establishing the Industrial Internet of Things: Where are the Opportunities?
3. A Framework for Assessing IIoT companies / Advice for IIoT Entrepreneurs

If you’re building a startup innovating on any of the components of the IIoT, especially those mentioned in the following articles, please DM me on Twitter at @aaroncsmall as I’d love to chat.

The Industrial Internet of Things

The Industrial Internet of Things (also referred to as the “IIoT” or “Industry 4.0”) refers to the application of connectivity and data analytics to industrial processes and equipment to bridge the physical and digital world. This includes machines, computers, and people and excludes consumer applications like wearables and connected appliances and homes.

The evolution of the IIoT: how did we get here?

Much has been written on the various stages of industrial revolution, but below is a quick recap:

The IIoT is comprised of a diverse tech stack and can be applied across many industrial segments. Its benefits, which improve business and operational processes, and can enable new business models, typically fall into two main categories: revenue enhancement and cost reduction.

The industries the IIoT will touch are some of the least digitised and slowest moving around. Although progress remains slow, in 2017 we are now seeing some evidence of traction in the market (more so for IIoT than B2C applications). Gartner says 8.4 Billion connected “things” will be in use by 2017, up 31% from 2016, while IDC estimates that the top three areas of IoT spending will be 1) Manufacturing, 2) Transport and 3) Utilities, with consumer in fourth place.

What has driven this?

1. Macro Drivers

Several of the usual suspects provide an underlying impetus for the adoption of IIoT technologies and services. IIoT technologies can help counter rising energy costs through improved operational efficiency (energy management, fleet management, advanced manufacturing techniques, optimised maintenance cycles, for example). Similarly, supply chain efficiency can help to optimise inputs which can help to counter rising raw materials costs.

2. Customer Behaviour

Customers are increasingly seeking the ability to monitor, control and optimise their assets/outputs resulting in generated value. According to McKinsey, 90% of the value generated by the IoT is retained by the customer in terms of operational benefits. Through connectivity and analytics, the IIoT can enable new business models (like pay per use, or software based services), which further enhances operational efficiency and lowers the barrier of entry for customers into capital intensive industries.

3. Government Incentives

In order to give their industries a competitive advantage, governments around the world have used policy as a driver for modernisation and efficiency. Examples include Industrie 4.0 (Germany), Smart Factories (EU), Make In India, Make In China 2025, and Japan’s Industrial Value Chain Initiative Forum for example.

4. Technology

But perhaps the biggest of these (and most interesting if you’re an entrepreneur or investor) is technology. Although M2M and telematics technologies have existed for decades, several technology trends make this an exciting time to be active in the IIoT space.

Sensor price reductions over the past decade and the falling bandwidth cost of the near ubiquitous connectivity offered by long range Wi-Fi, LoRa and Cellular networks, have enabled the connection of previously unconnected assets.

A core component of the IIoT is the processing of vast amounts of data from these connected assets to generate actionable insight. The availability of cloud computing (e.g. Amazon Web Services) provides the infrastructure and computing resources necessary to achieve this at economies of scale that lower cost and reduce entry barriers. Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS) or Infrastructure-as-a-Service (IaaS) offerings negate the need for IIoT customers to purchase upfront software licences, hardware, hosting or networking for example.

Cloud computing power combined with advancements in data analytics have enabled new tools such as predictive analytics, real-time processing, data cleansing and preparation, data integration, data virtualisation, distributed storage and low latency access, all of which make drawing insights from large, complex, or disparate data sources easier. Throw in machine learning techniques on top of that and we’re only just getting started.

So where does this take us and why does it matter?

Now nobody has a crystal ball, but the World Economic Forum outlines 4 Phases of the IIoT which offer a glimpse of how we might produce and consume in a hyper connected environment. I believe we’re in a sort of “Phase 1.5” where we’re busy “connecting the unconnected” and making those objects somewhat smart.

1. Operational Efficiency benefits include improved up-time, asset utilisation, and worker productivity through predictive maintenance and remote management.
2. New Products and Services, such as pay-per-use products, software based service/maintenance programs and monetisation of output data emerge when assets become connected.
3. The Outcome Economy will involve companies becoming more ingrained in solving their customers problems, where rather than selling a product the customer uses, the company sells an outcome (i.e. a Service Level Agreement based on data collected from assets owned by the vendor, not the customer) and then analysed as a service.
4. The Autonomous, Pull Economy will involve a high level of connectedness and data sharing across the entire economy, from producer through to end user. For example, ubiquitous demand and inventory sensing can be linked to automated manufacturing and distribution.

The biggest implication of phases 2 through 4 is how work will be done and how industrial processes will serve the customer.

And so as an industrial business this matters to you because you will be connected to your customers 24/7. As detailed in the outstanding series of articles by Michael Porter and James Heppelmann in Harvard Business Review, your strategy and business model will change, your supplier relationships will change and your business operations and processes will change. There is no way to make this happen other than to make use of data and software (and in particular machine learning). You will leverage software and analytics to lower cost, increase productivity and improve customer relationships to give a competitive advantage. As famously said in 2013 by Jeff Imelt, ex GE CEO and IIoT godfather:

“If you went to bed last night as an industrial company, you’re going to wake up today as a software and analytics company.”

Still a long way to go, however…

Despite the above, many barriers remain in moving from the “Phase 1.5” we’re currently in today to a software-defined autonomous world. In the next post I’ll take a look at what is holding IIoT back and as such where the opportunity might lie for early stage investors and entrepreneurs in the space.

Sources:

1. Gartner Hype Cycle for Emerging Technologies 2017.
2. Unlocking the potential of the Internet of Things, McKinsey Global Institute.
3. Digital Europe: Realising the continent’s potential, McKinsey Global Institute.
4. Gartner, Press Release
5. Worldwide Semiannual Internet of Things Spending Guide, IDC.
6. The Internet of Things: Making sense of the next mega-trend, Goldman Sachs.
7. Industrial Internet of Things: Unleashing the Potential of Connected Products and Services, World Economic Forum.
8. How Smart, Connected Products Are Transforming Companies,
   Michael E. Porter and James E. Heppelmann, Harvard Business Review.
9. GE Says Industrial Internet Is Here, CIO.com.