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- Manufacturers are investing more than $1 trillion annually in attempts to create fully digital factories
- Despite high levels of investment, more than half of the 700 global corporations are still in very early stages of digitization
- Companies that spend at least 3 percent of net revenue on digital investments often achieve higher returns
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The ‘Digital Factory Transformation Study 2022’ conducted by the auditing and consulting firm PwC Germany shows that the manufacturing sector worldwide is now investing more than $1 trillion annually in digital transformation programs, and where companies previously prioritized cost reduction and efficiency, they are now investing in greater flexibility and resilience.
The last few years have been crisis years for major global manufacturers. Their supply chains have been disrupted, demand volatility has been high, all accompanied by acute inflationary pressures. As a result, almost all manufacturers have been forced to seek greater production flexibility and shift to a value chain model that prioritizes resilience.
For many, this means new digital investments. While the number of companies claiming to use digital technologies to reduce costs has sharply declined, PwC’s global study of 700 manufacturing companies shows that the number of companies stating that resilience and flexibility are key investment drivers has increased by 67 percent.
Another significant change in how companies invest in the future is the rise of sustainable manufacturing. Contrary to expectations that the crisis caused by the Covid-19 pandemic would push sustainability to the background for large manufacturers, the opposite has occurred, and the number of companies stating that sustainability drives digital investments has more than doubled.
– The study shows that while increasing regulatory requirements have already been driving investments in sustainability, the new imperative of achieving operational resilience has provided additional momentum – explains Reinhard Geissbauer, partner and head of digital transformation services for Europe at PwC Germany.
Factory of the Future
Based on the report, it can be concluded that digital transformation takes various forms among manufacturers. There are core IT systems such as widely used packages of Enterprise Resource Planning (ERP) and Manufacturing Execution Systems (MES), as well as newer innovations like operational platforms for various devices and sensors that make up the Industrial Internet of Things (IIoT).
There are business applications or ‘use cases’ based on software, such as production quality management systems or machine maintenance. Many digital devices are also in use, including drones, wearable technology, and automated robotic vehicles.
– Manufacturers now realize that many of these digital innovations must be combined to successfully transform the way the manufacturing process operates, from design to distribution – says Michael Bruns, partner at PwC Germany.
At the Tail End of Events
However, PwC’s study shows that despite the prevalence of new technologies and high levels of investment, many companies are failing to meet their digital transformation goals. This is reflected in the fact that companies find it harder to expand digitization than expected. In an earlier PwC study from 2014, 80 percent of companies stated that they expected to achieve full digitization by the end of 2019. To this day, those optimistic expectations have not been fulfilled.
Although the rate of implementation of new IT systems, business use cases, and applied technologies has sharply increased in the last four years, many of the largest global companies are still working on it. More than 60 percent of companies are still in the early stages of their digital journey, while only 10 percent of companies have achieved high returns, flexibility, and resilience of complete digital transformation or are in its final stage.
Four Success Factors
PwC’s study on digital transformation of factories for 2022 identified the success factors that distinguish these so-called ‘digital leaders’. The results show that these companies:
- developed the right digital strategy
- focused on the most relevant technologies
- developed a standardized digital enabling IT structure
- adapted their organizational structure to support a digital operational model.
– Organizational support and improved skills are also crucial for the functioning of digitalization programs because without them, the power of digital technologies cannot encompass the entire business – explains Geissbauer.
Additionally, companies must significantly invest in connecting and aligning their systems so that new ways of working can be introduced into a large number of different factory environments, he added.
Higher Investments Mean Higher Returns
Companies from six industrial sectors represented in PwC’s 2022 study plan to invest at a rate equal to 1.8 percent of annual net revenue in the coming years (which represents a significant increase in capital investment compared to recent PwC studies). This would estimate the total investment of the manufacturing industry in digitization to exceed $1 trillion. However, some companies may need to further increase their investment rates as the study indicates a strong correlation between higher investment and higher returns.
Currently, the average investment across all sectors is 1.8 percent of annual net revenue. However, according to respondents who participated in the study, for those companies that invest more than 3 percent of their net annual revenue in factory transformation, the likelihood of achieving high returns is 2.5 times greater than for those investing less than 2 percent.
The study adds that companies that invest more in digitization and accept the risks of potential failure often achieve better results and realize their return on investment faster. For most investments in digital technology, the payback period is around three years, but in some cases, even large investments in core technologies like basic IT systems can pay off within a year.
– There is no one-size-fits-all strategy for achieving digital transformation, as success can only be achieved based on the complex interaction of systemic changes in IT architecture, the development of business use cases, and the implementation of specific technologies. Insufficient investment means missing opportunities to realize the benefits of transformative technologies, but it is also possible to over-invest in applications that are not relevant to the business – says Bruns.
In general, the study concludes that exceptional returns from digital transformation will be achieved by those companies that thoughtfully select technology and use cases and establish the right balance between standardized systems and flexibility in local implementation.
