Key points
The manufacturing world is under fundamental change. This is marked by the digitalisation of production processes and the integration of the Internet of Things (IoT) which form the basis for increasingly intelligent and highly efficient manufacturing systems.
The development of digital, or “smart”, factories has been driven by the installation of widespread sensors in the physical manufacturing environment. These sensors link the physical and virtual reality, enabling enhancement of production economics through real-time performance data analysis.
As with previous periods of innovation and development triggered by, for example the rise of steam power, the use of electricity and the development of digital technology and the internet, the world is once again witnessing an industrial transformation. These new dynamics have been identified as the “Fourth Industrial Revolution”. (1)
Opportunity for manufacturers
This opens many new opportunities for manufacturers to add value to their products and services. Research by the McKinsey Global Institute (2) suggests that on a global scale, the growing interconnectedness of equipment and machinery via the internet – IoT – may have a potential economic impact of as much as $11.1 trillion (£7.6 trillion) per year in 2025.
Among the physical environments in which these systems are deployed, factories are expected to reap the greatest share of economic gains with up to $3.7 trillion (£2.5 trillion) per year.
These gains are believed to come from productivity growth, enhanced energy efficiency and maintenance savings. Manufacturers can therefore reap significant financial benefits by investing in the Fourth Industrial Revolution.
Companies in the sector have already recognised this opportunity. In a recent study by Siemens Financial Services (SFS) (3) , major manufacturers across the world reported a need to invest in new ‘generation technology in order to manage four key sector challenges.
Firstly, respondents felt an urgency to increase production capacity and flexibility to meet changing demand and drive sales. Secondly, manufacturers are under pressure to enhance client service quality while reducing production costs.
Additionally, respondents reported that they are striving to improve competitive positioning by providing higher quality products and a broader product range, whilst optimising efficiency, cost control and manufacturing agility through automation and digitalisation.
Decisive competitive factor
The ability to acquire new equipment, upgrade existing machinery and invest in new software and hardware solutions is therefore a decisive factor to ensure a competitive positioning within the sector. Access to the appropriate form of equipment finance is an important prerequisite for manufacturers wishing to grasp the benefits of Industry 4.0. (4)
As a consequence, firms in the sector are increasingly diversifying their financing techniques and using a range of financing tools over and above traditional sources such as loans.
The digitalisation of the manufacturing industry also creates an expectation of more, and more frequent, upgrades and enhancements to the existing technology landscape, including software upgrades.
Therefore, in order to remain competitive in the global markets, manufacturers need to find sustainable ways to invest in acquiring as well as renewing new-generation technology.
Consider the funding…
Against this background, various forms of asset finance are seen as an important investment facilitator. They can accommodate the total cost of ownership approach to technology acquisition. In addition to the technology price, individually tailored finance solutions are also able to cover other costs such as installation.
This gives a high level of transparency and allows the business considering the financing to appropriately assess the cost-benefit ratio of the acquisition right from the start. Solutions such as leasing and lease purchase offer reliable financial planning and contribute to the calculation of production cost per unit.
Payments can also be arranged to align with expected cost savings or improved productivity delivered by the newly acquired technology. In effect, the costs for the technology acquisition or upgrade can be offset by the financial gains generated by the deployment of the equipment. Investments in next generation technology can therefore take place in a financially sustainable way.
New era of industrial production
This new era of industrial production is characterised by rapid innovation cycles with new business opportunities continually emerging. Manufacturers have to remain financially flexible and retain their ability to react to unexpected market developments, technology advancements and new investment opportunities.
Businesses are therefore increasingly looking for financing solutions which offer a high level of flexibility to fund investments. Asset finance solutions can include the exchange or upgrade of leased equipment within pre-defined periods.
Specialist financiers
Specialist financiers combine capital markets expertise with a sound understanding of the funded technology and the dynamics of the manufacturing sector. They are therefore in a unique position to structure complex financing solutions and ensure beneficial outcomes for their client.
Equipment and technology finance has now achieved strategic status. This is reflected in the growing importance of financing techniques that release capital from being “locked” in technology acquisition.
Instead, they make that working capital available for, among other things, new product development, sales and marketing initiatives, opportunistic acquisitions, partner promotions and other tactical growth projects. The more capital that is unlocked, the more that is available to invest in growth initiatives.(5)
As well as extending the available volume of financing, the speed and ease of the financing decision and arranging asset finance allows manufacturers to act fast to seize market opportunities.
Balance the financing to keep ahead…
As the world of manufacturing is once again transforming, it appears that it is no longer sufficient to just make the best products in order to stay ahead of the game. Companies who are able to efficiently gather high-quality data and use it to create innovative digital service offerings will be the most competitive.(6)
Consequently, manufacturers are increasingly recognising the need to invest in machinery, equipment and technology that support the integration of IoT applications. Additionally, the digitalisation of the shop floor requires an advanced IT infrastructure and solutions for data management to make proper use of the increasing quantity and quality of data.
Many manufacturing businesses however (SMEs in particular) lack the necessary expertise to assess whether a new application will create the desired return on investment.
Specialist financiers with extensive technology and industrial knowledge can help companies make the right investment decisions and, at the same time, offer them appropriate funding solutions.
In its early stages, the new industrial era presents manufacturers with a unique chance to reinvent themselves and take advantage of an abundance of new opportunities.
For companies that successfully manage this substantial change, rewards lie ahead. More than ever, access to flexible and reliable funding plays a decisive role in establishing and maintaining a competitive positioning for manufacturers both large and small.
With in-depth sector knowledge and technology expertise, specialist leasing providers are well-positioned to provide customised financing solutions to ensure that manufacturers are able to grasp the benefits of the Fourth Industrial Revolution.
References
- World Economic Forum, The Fourth Industrial Revolution: what it means, how to respond, January 2016
- McKinsey Global Institute, The Internet of Things: Mapping the Value Beyond the Hype, June 2015
- Siemens Financial Services, Driving Digitalisation and Automation, Fall 20155 Siemens Financial Services, Investing In Success, Spring 2016
- Siemens Financial Services, Investing In Success, Spring 2016
- Siemens Financial Services, Investing In Success, Spring 2016
- The Economist, ‘Does Deutschland do digital?’, November 2015
