Platform economy: Mechanical engineering drives the digital transformation

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Value creation in B2B business is increasingly coming from digital services. Mechanical engineering can be a driver of the new platform economy – as long as the topic is internalized all the way up to board level.

Mechanical engineering is succeeding in driving the digital transformation – so far mainly in production, but soon through new business models, too. Digital platforms and the platform economy they foster will play an ever-growing role, with value creation in the mechanical engineering industry increasingly coming from digital services. “Unlike in the consumer sector, the often complex processes do not lend themselves to radical simplification – be it the joint development and individual, customer-specific configuration of a machine, commissioning or aftersales service. But the companies have the expertise needed to meet a customer’s requirements. That will enable mechanical engineering to act as a driving force for change in the platform economy, too,” explains Hartmut Rauen, Deputy Executive Director at VDMA.

The industry will only be able to adopt this leading position, however, if smaller and medium-sized companies drive the digital transformation forward. “The issue of the platform economy needs to become firmly established at board level. Companies have to develop a clear strategy for the platform economy,” says Rauen.

Platform economy needs robust framework conditions!

As the platform economy in mechanical and plant engineering moves forward, the companies driving this development are faced with fundamental questions about the framework conditions. These form the foundation of lasting success for their projects. Efficient network infrastructures are vital for transporting large volumes of data with low latencies. The lack of efficiency in the current network infrastructure is hindering development, particularly of high-performance runtime environments in the Internet of Things (IoT). Under present conditions, it is almost impossible to imagine how complex production environments could be controlled sufficiently across companies. This creates enormous volumes of data in next to no time, which all has to be gathered, analyzed and interpreted in order to influence product processes quickly. From this point of view, the investment goods industry's hopes of establishing itself as a world-leading driver of the platform economy are under threat. The sector cannot accept having to wait until some point in the next decade for a gigabit infrastructure to be completed. It is high time that policymakers begin to act. So far, there has been plenty of talk, but little action.

Although many mechanical engineering companies are world-leading hidden champions, most of them are medium-sized businesses. By their very nature, they are therefore restricted in terms of the complex organizational and operative business processes they are capable of. However, since deep and complex connections with both procurement markets and sales markets for products and services are required, the current platform incompatibility will present a serious problem in the medium term. The services on the platforms of the leading infrastructure providers (Amazon, Google, Microsoft, …) cannot communicate with one another. As a result, the only way to achieve comprehensive market access is to develop and operate duplicate solutions for the various platforms. This excess work inordinately hinders the efforts of medium-sized companies and is not acceptable in the long term. Activities like the Industrial Data Space, which are intended to combat this incompatibility, are therefore receiving a lot of attention from the sector. Investment to support such developments is to be welcomed.

Data security, data integrity and data sovereignty are topics that are being widely and prominently discussed by all companies working on cross-company solutions for mapping business processes. The activities of state bodies outside the European legal sphere are a particular cause for concern, causing reluctance to invest in solutions for the platform economy. It is therefore extremely important that high standards and clear regulations for the security, ownership and legally-binding availability of data are not only defined, but also actively enforced internationally.

In the run-up to Hannover Messe 2018, VDMA has come together with the consulting firm Roland Berger and Deutsche Messe AG to produce the “Platform Economy in Mechanical Engineering” study, which analyses the structures for digital business models across the entire spectrum of an industrial sector in the B2B segment for the first time.

"Companies have the expertise to meet customers’ requirements. That will enable mechanical engineering to act as a driving force for change in the platform economy, too.”

The study also lists the greatest challenges facing medium-sized mechanical engineering companies, and recommends courses of action. Dr. Michael Zollenkop from Roland Berger explains: “The biggest obstacle for mechanical engineering companies lies in becoming aware of the relevance of platforms for their own business and for existing and new customer groups. Additional hardware sales, increased customer retention, standing out from the competition with innovative digital services – companies can use different types of platforms depending on their aims.”

 

Further challenges include:

  • The platform economy presents totally new requirements of expertise compared to the core business. 
  • The complexity of the B2B landscape is currently producing a large number of platforms, although the network effect is creating pressure to consolidate.
  • The pressure of competition and the opportunities in mechanical and plant engineering will both increase thanks to new opportunities for companies to stand out.

 

How digitally mature is the company?

“Before thinking about platforms, mechanical engineering companies should evaluate their situation objectively in order to set realistic targets and schedules for establishing a platform business. How digitally mature is the company? Which existing initiatives and knowledge base within the company can be built on? And finally, which knowledge holders and budgets are available for working on platforms?” says Martin Lüers from Roland Berger.

Further recommendations from the study: 

  • Developing options – which positioning with regard to platforms is right for the company? How will the business model and services need to be adapted?
  • Control over the customer interface – expanding the range to include digital services/apps and business models as the key to the customer interface.
  • Joining collaborations – some elements of digital business models are best tackled alone, others are more successful as partnerships.

 

On the „Platform Economy in Mechanical Engineering" study

The mechanical engineering industry is characterized by high levels of complexity. Many market participants produce specialized machinery in line with very specific customer demands, while many smaller markets are served by medium-sized companies. Mechanical engineering is thus very different from other industrial segments or the consumer sector. The platform economy now presents a new way to conduct business processes.

Interviews on the platform economy (German only)

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Two key versions:

  1. Digital marketplaces for industrial goods and services
  2. Industrial Internet of Things (IIoT) platforms

The success of digital platforms is based on three characteristics: they reduce transaction costs, they enable new services and business models, and the network effect increases the benefits of platforms exponentially as the number of participants grows.

 

Currently, most of the platforms arising in the marketplace segment have vertical structures that compete with one another. A company offers its products, accessories, spare parts, services and perhaps even used machinery via the platform. The range is supplemented by suppliers of raw materials, logistics service providers, financial service providers or software houses. As a result, the customer can not only purchase the core product, but also pick up all relevant goods and services to complement it from the same platform.

"The platform economy will ring in a new age in mechanical engineering, just as it has in the B2C sector."

The success factors for platforms:

  • Low barriers to entry
  • Wide range of products and services
  • Fast platform growth
  • Gradual expansion to include payable premium services

 

 

 

Conclusion:

The platform economy will ring in a new age in mechanical engineering, just as it has in the B2C sector. In the future, the added value provided via digital services and business models will be a key element in helping mechanical engineering companies stand out. A position in the platform economy must therefore be a crucial part of any mechanical and plant engineering company.

 

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