Industry 4.0 — Opportunities from an M&A Perspective

Strategic insights for the manufacturing industry how to stay competitive and embrace the digital transformation

Photo credit: Siemens
“The Internet of Things is ground zero for a new phase of global transformation powered by technology innovation, generating significant economic opportunities and reshaping industries.” (Marc Benioff,

The term “Industry 4.0” is much talked about in recent times, including first showcases about smart factories being more energy efficient and more productive thanks to greater digitization of its machines and processes. However, according to my conversations and research the economic opportunities are not yet always clear and especially the potential ways how to exploit them. With em2’s focus on entrepreneurial transactions in technology I want to share in this article my thoughts about the

  • Scope of Industry 4.0 (with focus on the manufacturing industry) and the technology stack framework
  • Changing business models and ecosystems
  • Selected strategies of German incumbents in automation and robotics
  • Drivers and recent developments in M&A transactions
  • Conclusion and Outlook

Scope of Industry 4.0

Industry 4.0 is based on the Internet of Things with its ubiquitous digitization of physical objects through sensors. Low-power sensors enable every object to become part of the digital world in the Internet of Things (IoT). Here, a digital “clone” of the object, its functions and associated processes is created, can be analyzed and manipulated. As exhibited below, through the intelligent aggregation of data ultimately added value for the customer is produced.

According to Gartner, connected IoT devices are estimated to grow rapidly from 6.4bn (2016) to 20.8bn (2020) (CAGR 34%).

McKinsey refers to four technology clusters that drive this development:

  • Data and connectivity
  • Analytics and intelligence
  • Human-machine interaction
  • Digital-to-physical conversion

All this lead to new consumer and enterprise applications within revised value chains and business model opportunities for both incumbents and new players. Here, the greatest impact is seen in enterprise applications in factories which size is assumed to reach up to USD 3.7 trillion in 2025 according to the McKinsey Global Institute.

Technology Stack

We can also think about the opportunities arising from this development in the framework of a technology stack: For the manufacturing industry the layers would consist of

  • Bottom layer: Hardware (machines, robots, etc.) on the shop floor and sensors plus their connectivity over networks (M2M communication)
  • Middle layer: Data management platform with analytics, based on data repository and data transformation, including Manufacturing Execution Systems (MES), in a mostly cloud-enabled architecture
  • Top layer: System of records, such as ERP, PLM or CRM, and applications, such as predictive maintenance, demand forecasting, energy usage optimization, capacity utilization, etc.

Within the stack the MES can be seen as the central platform as it is the real-time link between the shop floor and top layer systems. It effectively allows to control and optimize the production. With MES one batch production becomes possible as well as enhanced product quality, and thus it enables the so-called “Smart Factory”.

Evolution of business models in Industry 4.0

The aggregated data in the production process and the actual product’s usage throughout its lifecycle do not only lead to greater operational efficiency, but create greater service-focussed business models (pay-per-use, etc.), too. Many implementations are already happening right now and will accelerate in the near-term.

However, the main disruption from Industry 4.0 will come from the shift to an “outcome economy” with reshaped value chains in the next evolutionary step shown below.

In an outcome economy businesses will need to guarantee certain outcomes of their products/services based on data and their customers’ needs, resulting in greater risks for them as well. In order to successfully meet customer needs collaboration of businesses across ecosystems is required. This will also result to the emergence of new software platforms to facilitate these ecosystems, which leaders will benefit from their scale and allow them to set standards.

Industry 4.0 strategies at incumbents

Some steps towards this changing business models have already been taken by incumbents as seen during my analysis of their Industry 4.0-related strategic developments. Analyzed incumbents in German-speaking Europe include, among others, the robotics specialist KUKA and the automation and machine tool leaders Dürr and Trumpf. Summarized I have observed the following:

  • While all incumbents analyzed have Industry 4.0 strategies at hand and most of them first showcases to demonstrate their customers how to add value through e.g. data-driven manufacturing solutions, overall a comprehensive implementation of the possibilities did not take place yet.
  • So far, most have recognized that they are missing the needed software competence, specifically in MES, to aggregate, analyze and use data for new solutions. This has led to either own efforts to build software platforms in-house or in acquisitions, such as the acquisition of the MES software provider iTAC by Dürr. With foresight to partnership opportunities and the ultimate aim to establish platforms in their segments, these are open to third parties to integrate with. In the case of Trumpf’s AXOOM, which is a separate venture to develop and operate this platform, even as an app store.
  • Nevertheless, digitization of their own processes have only started and most incumbents try to cover all aspects along the technology stack on their own, including their product applications. Only some, such as KUKA, have leveraged strategic partnerships in order to enter new industries and markets with customized solutions resulting from better insights of customer needs.
  • Finally, the need of a transformed organization towards an integrated, technology-driven company has only been addressed in some cases.

In general companies that have embraced early on the possibilities from Industry 4.0 and were able to advance their technology and product roadmap through targeted M&A activities, such as KUKA (mainly with their acquisitions of Reis Robotics and Swisslog), were able to create value and secure their leading positions in a more competitive environment.

Drivers of M&A in Industry 4.0

This is why the following drivers can be seen as an effective way to accelerate the transformation path towards Industry 4.0:

  • Access to Technology Assets and Product / IP Portfolio
  • Access to new Industries and Markets
  • Transformation of Organization through Talent
  • Consolidation — vertically and horizontally — to foster own ecosystem

As exhibited above, these drivers affect a diverse potential buyer universe. Hence, for strategic reasons not only domestic incumbents compete for suitable targets, but also international incumbents and technology players. Besides, there are more financial investors with a special industrial technology focus, such as the Asian-European private fund AGIC.

Industry 4.0-related M&A activity in DACH

Overall this has led to an increased M&A deal activity in German-speaking Europe as observed by Lincoln International during 2011-Q1 2015.

As displayed in the chart besides, these transactions are characterized by:

  • Majority of deals are domestic driven by adding Industry 4.0 competencies in context of Smart Factory
  • 75% of all transactions involved target companies with less than EUR 50m revenue which reflects both early phase of Industry 4.0 activity and high fragmentation of relevant technology companies
  • Increasing trend in number of transactions since 2013

Conclusion and Outlook

To sum up, most players need to embrace Industry 4.0 more comprehensively in order to exploit its opportunities and stay competitive.

Main focus to achieve this is to adopt the required new competencies (such as data analytics) in order to compete successfully in a rapidly changing environment driven by new emerging ecosystems and platforms.

So far, mainly incumbents are prepared for this transformation with an Industry 4.0 strategy which implementations often include M&A in order to accelerate their technology roadmap and to get the right talent for its execution.

Beyond M&A strategic partnerships across industries become more important besides cooperative ventures (including own corporate venture funds in certain cases) in order to stay competitive through early-on identification and adaptation of new technologies.

Learnings from the Consumer Internet

Similar to the development in the Consumer Internet, but at a slower pace due to the complexity, I expect certain industry-leading networks to evolve first, followed by vertical applications customized to specific customer groups. Simultaneously, innovations in enabling technology (based on the analytics and connectivity layer of the stack, such as decentralized data) will mature.

Overall, for potential M&A targets domestic players will not only compete with their international counterparts, but also much more with technology players besides (specialized) financial investors in the near future. This increased competition will most likely lead to higher multiples being paid.

Please feel free to comment on my thoughts and have a look at the associated slides below. You can also reach me under to personally discuss the opportunities arising from Industry 4.0.