COVID-19 Pandemic Accelerates the Journey to Industry 4.0

Jason Celino and Steve Barger, KeyBanc Capital Markets Equity Analysts, October 2020

COVID-19 Pandemic Accelerates the Journey to Industry 4.0

Just as the COVID-19 pandemic has re-shaped how consumers live and work, it is also influencing how companies operate. For many industrial companies, digital transformation has become a necessity to be pursued today to build resiliency for any future waves of COVID-19 or another pandemic. The concept of Industry 4.0, driven by the Industrial Internet of Things (IIoT), has come to the forefront as industrial companies consider how to boost performance in the new normal of the pandemic.

Industry 4.0 encompasses a wide range of IoT-related technologies and applications, from intelligent consumer products to intelligent assets and factories driven by automation, real-time data and analytics. IoT technologies also support the connected worker, empowered by data and sophisticated collaboration tools that improve human performance.

A recent KeyBanc Capital Markets (KBCM) webinar brought together KBCM analysts and guest panelists to discuss how the COVID-19 pandemic is affecting adoption of IIoT technologies and the latest phase of Industry 4.0. KBCM analysts Jason Celino and Steve Barger moderated the discussion with the following panelists:

  • Neil Schrimsher, President and CEO, Applied Industrial Technologies
  • Kelly Ireland, Founder and CEO, CB Technologies
  • Craig Melrose, EVP, Digital Transformation Solutions, PTC

Defining “Industry 4.0”

The discussion began with a look at current interpretations of “Industry 4.0.” In the view of Applied Industrial Technologies’ CEO Neil Schrimsher, Industry 4.0 is about using the Internet of Things (IoT) to automate demand loading and workload balancing in the factory, support remote monitoring and create self-healing operating processes.

“We will have the same levers—the same operational improvements that have always been present,” added PTC’s Craig Melrose. “But now we have the ability to enhance, reinforce or accelerate those levers to drive new levels of savings across [a business]. Now you can drive that faster, further, higher, larger, more than we have before. That is the real difference.”

Taking the systems integrator’s perspective, CB Technologies’ Kelly Ireland described Industry 4.0 as the convergence of operational technology (OT) with information technology (IT). “IT has always had the legacy of supporting the infrastructure,” she observed. “Now you’re having the combination of OT and IT in smart factories.”

Industry 4.0 Investment Trends

Given the meeting and travel constraints of the COVID-19 pandemic, it is no surprise that remote access technologies – including cloud-based software-as-a-service (SaaS) platforms – are seeing significant corporate investment.

Creating the smart factory is one area attracting investment. “We’re seeing a lot of interest in connecting legacy infrastructure to motors and pumps,” said Schrimsher. “Many manufacturers and power transmission products are adding sensors and adding technology that might not be used immediately, but offers a great deal of potential. We spend a lot of time around that equipment today to keep uptime and productivity. As intelligence comes into it, we can contribute to customers realizing that potential.”

Ireland’s firm, meanwhile, has seen intense interest in the connected worker concept, involving technologies that enable collaboration between distant colleagues and equipment. Ireland anticipates deeper integration of remote workers and systems with the evolution of OT and IT, for condition monitoring and other purposes.

“Creating a connected workforce is low-hanging fruit—it’s not a giant investment and it’s a very quick ROI,” she noted. “Enabling someone to facilitate a repair with a repair person halfway across the globe or doctors to access patients who are nowhere close to them – that’s what we’ve been seeing. It’s transformational.”

Evolving Use Cases

IoT technologies are being deployed in industries ranging from medicine to manufacturing. For example, CB Technologies helped one of the largest seafood companies in the world use IoT technology to connect its onboard fishing boat medics with onshore specialists.

In industrial operations, Ireland cited such uses as using remote worker technology to generate documentation, audit trails and video records of repairs completed in the field. Melrose also recognized the value of workers in the field being able to leverage expertise remotely, citing the example of a technician needing to repair a generator in the Arctic Circle without needing the equipment expert by their side.

On the manufacturing floor, Industry 4.0 use cases entail data and the IoT to improve manufacturing capacity, along with labor and material productivity, according to Melrose. “We’re thinking about not just the use case, but the scaling of the use case,” he said, “when you’re able to break down data to problem-solve more effectively and increase the throughput in the factory. “Scale a 2 million-a-month factory output across 50 factories—100 million is a competitive advantage.”

Industrial companies are focusing on hardware and connectivity in factories or warehouses in which sharing data can be difficult, observed Schrimsher, this includes a growing use of robotics and automation. “A lot of data is in industrial facilities, so we need to work on displays to make key performance indicators more visible,” he said. “There’s also a focus on greater material flow, with RFID, RTLS and other technologies in some of the most progressive—and expensive—componentry.”

Obstacles to Adoption

As the panelists agreed, the COVID-19 pandemic has created some momentum for Industry 4.0 and IIoT technologies. Getting in the way of broader adoption, however, are the risks – including the plethora of new technologies, the risk of choosing the wrong problem to solve, selecting the wrong solution, or undertaking a technology implementation that fails to meet the expected timeline, budget and return on investment.

The sheer number of technologies and potential projects can become obstacles. As Schrimsher pointed out, “With so many good ideas for operational improvements, how do you prioritize? How do you select? How do you sequence? Few companies will turn over an entire facility for digital transformation. Instead, they’re going to experiment in hopes of seeing proof and evidence as it emerges.”

Conversely, companies that have taken big steps have not always achieved their goals. “We’ve seen people approaching it in a very broad sense, like digital transformation, and make it a massive project, boiling the ocean,” said Ireland. “We see those get stalled.”

It’s important to remember that Industry 4.0 and the IIoT is a whole new frontier, Ireland emphasized. Until relatively recently, OT and IT teams operated in different silos and rarely interacted. “You started with addressing the culture, teaching OT and IT how to work with each other and how to be respectful of each other so they work together for the gains that the company is trying to achieve.”

What has worked is when companies tackle a distinct project. “What we’ve seen succeed is finding a business unit and a very specific need and providing an ROI on that,” explained Ireland. “There’s a trust factor: you came in, you achieved it, and you go on to the next step.”

In the manufacturing environment, companies haven’t always started with the right project, according Melrose. If a factory has 100 assets and 10 create bottlenecks with a constraint on throughput, companies should prioritize the bottlenecks—but often they do not. “Unfortunately, several customers are piloting technologies on one of the 90 assets that is not a bottleneck or constraint,” he explained. “As a result, they may see a relative improvement, but not an absolute improvement in throughput. It may be too small of a pilot, or it’s a pilot on one of the 90 assets that wasn’t a bottleneck. They don’t see the ROI because it is the wrong area, not the wrong technology.”

A better approach, Melrose emphasized, is to review the data generated by a bottleneck asset to understand why it is creating constraint. “Then you can use augmented reality technology to help an operator see what they do differently or more proficiently, whether it’s this sequence, quality check or safety check, to allow that constraint to disappear in a closed, repeatable loop.”

Another underlying issue that companies have seen are the failings of previous technology innovations. Cloud-based services, for example, were initially assumed to reduce IT costs and solve numerous IT challenges—but that wasn’t always the case. “We’ve seen some of the failings of the early cloud adoption and promise that people don’t think were kept,” said Ireland. “What we’re seeing right now are clients taking little steps.”

Another ongoing issue is the workforce challenge, when aging workers lack the technical expertise to manage the latest IoT technologies. Technology vendors and services providers can help bridge the gap between expertise and technology—and help increase implementation and adoption. “Third-party providers eventually leave,” notes Schrimsher. “You need to have the training and education to be able to operate from within.”

“For a customer, these new technologies may not be their natural inclination or their forte,” concurred Melrose. “So how do they think about upskilling or partnering or a blend of the two to get the right level of expertise to take advantage of this opportunity?”

COVID-19 Accelerating Demand for IoT Solutions

As the pandemic has become the new normal, panelists reported a major uptick in demand for connected workers and other IoT solutions after the initial shock of widespread stay-at-home orders. Moving into summer and fall, companies began to urgently seek ways to leverage technology in order to operate safely and productively.

As Melrose put it, citing a meme that has become popular in industrial IT circles, “Who’s leading your digital transformation—your CEO, your CFO, or COVID-19? It has caused everyone to think differently and say, ‘I can no longer wait on the sidelines. I need to get ahead of this myself or get left behind. That urgency is there.”

“COVID-19 is not why this is happening, but it has created the momentum,” explained Melrose. “Urgency is forcing the creativity. It’s unfortunate that it takes a pandemic to make it happen, but it’s wonderful to see the reaction.

CB Technologies, for example, has seen a dramatic shift from having conversations with companies about potential projects to securing new commitments on a weekly basis. “They weren’t taking that next step, but we’ve seen that completely turn around with COVID,” explained Ireland. “It’s a hockey stick, going from the bottom to now having 40 active opportunities with clients and active deployments going on.”

Ireland’s firm has seen multiple clients start with creating connected workers and advancing to condition monitoring or asset integrity IoT implementations. “We’re now seeing a domino effect because they are seeing the ROI immediately.”

PTC has seen a four-fold increase in its lead pipeline—the equivalent of a year’s worth of new business in mere months as clients recognize the value of being able to access PTC applications via a web browser. “People are thinking through creative ways to leverage that,” he said. “We’re unlocking double-digit impact in different flavors – financial, 10%-plus increase in throughput, overall equipment effectiveness or labor or maintenance productivity, uptime, improvement in quality.”

While the pandemic may be driving the uptick, the advantages will potentially transform entire industries. “This is not just COVID-specific,” said Ireland. “Companies are making investments that will take them to the next level.”

“Our mantra is double-digit impact,” Melrose emphasized. “If you aren’t aspiring to that, you’re not doing enough. It’s game changing. It’s time to embrace this and accelerate it to deliver value and impact for everyone in the ecosystem.”

To discuss this information in more detail, connect with your investment banker or reach out to Jason Celino and Steve Barger of KeyBanc Capital Markets Equity Research team.

About the Future of Technology Series

This inaugural seven-week virtual series centered on timely and unique content across the Technology landscape. Leaders from today’s most relevant technology names gathered to take a thematic approach toward exploring market shifts, particularly in light of an increase in digital acceleration, remote work, deglobalization and changing consumer consumption habits. Attendees included more than 977 investors, 164 private and public companies, with 115 fireside chats and panels, and more than 700 one-on-one meetings.

This article is for general information purposes only and does not consider the specific investment objectives, financial situation, and particular needs of any individual person or entity.

KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp® and its subsidiaries, KeyBanc Capital Markets Inc., Member FINRA/SIPC, and KeyBank National Association (“KeyBank N.A.”), are marketed. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A. Banking products and services are offered by KeyBank N.A.

Please read our complete KeyBanc Capital Markets disclosure statement.

Connect With Us

  • Social Share Icon
  • Social Share Icon
  • Social Share Icon

Find an Expert