PwC_Industry_2015_ENG_FINAL_L

www.pwc.se/verkstad
The Smart Manufacturing
Industry
– The Industrial Internet creates
new opportunities for Swedish
manufacturing companies
2015
Today, the business models of
manufacturing companies are
challenged by the rapid advance
of digital developments. Read about
how the Industrial Internet will
change the rules of the game for the
Swedish manufacturing industry.
believe that data analytics will
represent a key competency for
companies in the future. See page 13
state that digital development will
be crucial to the Swedish manufac-
turing industry’s competitiveness
within 5 years. See page 8
88%
91%
would like to see political support
for research and development
within Industry 4.0 See page 23
33%

2 The smart manufacturing industry
Foreword

The Industrial Internet creates new possibilities for Swedish manufacturing companies 3
Olof Enerbäck
olof.enerback@se.pwc.com
We find ourselves in a creative and
innovative world which is continuously
providing new products and services.
Products are becoming smarter, and
both their degree of flexibility and areas
of application are steadily increasing,
thanks to digital developments.
Within Industry, discussions suggest
that we are moving toward an Industrial
Internet and to Industry 4.0, a digitali-
sation trend which is described as the
next industrial revolution, or as a new
paradigm shift.
This new phase of development in-
cludes, among other things, smart,
autonomous factories of the future,
where the ambition to achieve econo-
mies of scale will no longer apply, and
the means of producing customised
products at a lower cost, and with
shorter lead times, will become a reality.
Naturally, industrial digitalisation with
bring with it a number of consequences,
but it also presents a number of opportu-
nities. The new manufacturing industry,
with its less expensive production, will
no longer seek to establish itself solely in
low-cost countries. This trend could, in
turn, lead to a renaissance in manufac-
turing in Sweden. The development is
likely to result in fewer employees being
hired, but, on the other hand, there will
be a greater demand for different or
increased competencies; this challenges
the traditional business model. In the
long run, having fewer employees will
lead to a change in the country’s tax
base. The security of our IT systems and
standardisation are also areas that
need to be addressed as increased
digitalisation entails new risks.
The likely consequences and possible
effects could form a long list indeed,
and it is easy to understand how im-
portant it is for Sweden, as a leading
industrial country, to succeed in this
digital industrial readjustment. If we fail
to make the needed adjustment, it will
have a major impact on our competitive-
ness, growth and prosperity.
In this study, we have listened carefully
to the comments of more than 60 large
Swedish manufacturing companies and
to their thoughts about the potential and
impact of digitalisation. We have been
inspired by a similar study, made by
PwC in Germany in 2014, where Ger-
man manufacturing companies were
interviewed regarding their view of the
progress of this transformation process.
In spite of the fact that Germany has
pursued the issue of an Industrial Inter-
net and Industry 4.0 at a political level,
the findings show that Swedish and
German manufacturing companies are
very similar when it comes to their views
of the general development of this trend
and with regard to where they currently
find themselves in this transformation
process.
In some regards, the answers dif-
fer significantly, especially when it
comes to the desired degree of political
involvement and the estimated level
of investment required to keep pace
with development. This is also the first
study in Sweden in which PwC’s group
for strategic consulting, Strategy&, has
participated.
I hope you find this enticing reading.
Please feel free to get in touch with us for
a more in-depth discussion regarding the
challenges facing the industry.
Olof Enerbäck
Partner and Head of Industrial
Manufacturing at PwC Sweden

Summary
Digitalisation will be crucial for the competitiveness
of the manufacturing industry. Sweden has great
opportunities being a country that can create com-
petitive companies also within the Industrial Internet.
1
The Industrial Internet represents an evolution
of both existing products and services. The most
successful companies are the ones developing
digital business models in order to face new developments.
Some of these developments will be disruptive to existing
business. Today, companies primarily see the effects of an In-
dustrial Internet in the form of decreased costs and increased
efficiency, but it is important that companies simultaneously
work actively with digitalising existing products and services,
as well as with developing new digital services.
2
In this report, we summarise the
findings of our survey of Swedish
manufacturing companies based
on a number of in-depth inter-
views, and on our work with a
number of clients.
Our observations can be grouped into
two categories:
1. Value from digitalisation and the
Industrial Internet will be created
within three different areas:
• Streamlining of existing busi-
ness, for instance, by distribut-
ing products or making produc-
tion more efficient.
• Digitalisation of current prod-
ucts and services, for instance
by selling maintenance services
based on the actual wear and
tear on machinery.
• New business models, based on
information instead of products.
2. The Industrial Internet also gives
rise to new challenges, for exam-
ple, challenges in terms of com-
petencies and standardised data
structures.
In this new landscape, it is currently
difficult to determine which oppor-
tunities actually exist for a specific
company and it is also difficult to assess
the magnitude of the threat from new
actors who might be able to create
completely digital businesses without
physical products. The report should be
seen as a status check based on the cur-
rent situation in a time of change.
Competitiveness
Digital business models

A key ability for companies will comprise of
advanced data analytics of large amounts of data
– the ability to structure information and draw
conclusions based on large quantities of data. There is risk that
not enough competence in this area will be available.
3
The surveyed companies see challenges in obtain-
ing the necessary competencies – both in terms
of quality and quantity. The Industrial Internet
entails the automation and digitalisation of a large number of
tasks. The skills and competencies of personnel required by
companies to be successful will change. Handling this shift in
competencies and avoiding personnel shortages will be a key
issue.
4
The greatest challenge identified by those com-
panies surveyed is the difficulty in quantifying
the business benefits of the Industrial Internet.
Understanding the source of future income and how these
sources can be realised requires new ways of looking at the
business of today and tomorrow.
5
Within five years, Swedish companies will be
digitally integrated, internally as well as with
customers and partners. We see the data and
application environments, which are often
decentralised and heterogeneous, as challenges that must
be addressed. A clear structure for data management, trans-
parency and common data handling are key concepts in terms
of information being shared widely within organisations and
business partners.
6
Companies need to review how they organise
their work on digital matters: how they choose
to organise themselves, the competencies that
should be prioritised and how the activities are to be managed.
This will be critical to a successful transformation into a
leading digital company.
7
4.0
Organisation
Integration and structure
Business benefits
Competency
Data analytics

Digitalisation is a decisive
factor for the competitiveness
of the manufacturing industry
The Industrial Internet, also known as
Industry 4.0, the fourth industrial
revolution after steam, assembly lines,
and the introduction of numerically
controlled machines, entails companies
digitalising their horisontal and vertical
value chains. Companies tie together
their own organisations and also con-
nects with customers and business
partners.
However, the Industrial Internet also
provides the opportunity to digitalise
products and services, as well as to cre-
ate innovative digital business models
where data and information are sold
without any direct link to machines and
physical products. Common factors for
success within the Industrial Internet
are the connection of machines and sen-
sors, the interconnection between the
operators in the value chain, between
suppliers and customers, and an ability
to analyse large quantities of data in or-
der to draw conclusions and see system-
atic patterns.
Framework for how the Industrial Internet creates customer value
Industry 4.0 DigitalisationDigitisation of
horizontal value
product and
service offerings
Innovative digital
business models
12
3
and integration
Data analytics as core capability
Connection & Collaboration
of vertical and
chains
Digitalisation will be undertaken
within both the vertical and hori-
sontal value chains. The vertical
value chain comprises the com-
pany’s own business where the
different functions for market-
ing, sales, product development,
purchasing, manufacturing and
distribution are linked together
and integrated into a digital flow
of information. The horisontal
value chain comprises the exter-
nal ecosystem of suppliers and
customers including a number of
stages.
Horisontal value chain
Integration with business
partners in a number of stages.
Vertical value chain
Integration of internal
operations.
Definition of horisontal
and vertical value chain

” ”How important is Industry 4.0 – the increasing digitalisation – for the global
competitiveness of the Swedish manufacturing industry, today and in 5 years?
The digitalisation of the manufacturing
industry will entail an entirely new type
of challenge for today’s manufacturing
companies and the industry is in agree-
ment that this trend in development will
play an increasingly important role in
terms of competitiveness. Today, over 60
percent of manufacturing companies see
All companies need to understand
how the digitalisation of products and
services, but also communication with
customers and employees, impacts
business. Increasing digitalisation
results, of course, in opportunities,
something that all of the companies we
interviewed have identified, but digi-
talisation also gives rise to challenges.
Many products, such as machines, have
a long life. Consequently, it will take
more than five years before all of the
installed machines and products have
been fully digitalised, even if a large
share of the products manufactured
after 5 years will actually be digitalised.
PwC comments
22% 11%61%
5%
Medium Low Don’t kow
Today
In five years
High
6%
1%
4%91%
”Within 5 years, Industry 4.0 will go from
being a plan to becoming reality”
Industry 4.0 is a term often used in
Germany for the Industrial Inter-
net. Industry 4.0 refers to what is
perceived as a fourth industrial
revolution. After steam, assembly
lines, and numerically controlled
machines, it is now time to con-
nect all of the factors of production
within a company, but also with the
company’s suppliers and custom-
ers. Industry 4.0 implies a new level
of organisation and control of the
entire value chain and life cycle of
products, as well as a better under-
standing of the preferences and
utilisation of individual customers.
Definition of Industry 4.0
the issue as important and after 5 years,
91 percent estimate that digitalisation
will have a significant impact on com-
petitiveness. Of those, 58 percent believe
that digitalisation will be of major
significanceto the companies’ ability to
compete globally.

Manufacturing companies
will be digitally integrated 2

Description of the current level of digitalisation of the horisontal value chain.
An assessment is made of the current situation and after 5 years.
43%42%14%
17%82%
LowMediumHigh
Today
In five years
Don’t know
1%
1%
Less than a fifth of the companies
describe their level of digitalisation as
being high in the current vertical value
chain, while a third describe it as being
low. In 5 years, a total of 88 percent
estimate that the level will be high,
and almost four out of ten believe that
digitalisation will reach a very high level
in the future.
We see a similar development as well
when it comes to the horisontal value
chain. At present, as many as 43 percent
describe the level of digitalisation as
being low. Only one in ten companies
state they are at the forefront. If we look
5 years ahead, more than eight out of
ten companies believe that the level of
digitalisation will be high.
When looking at Germany, we see that
there is a tendency for the German
manufacturing companies to experience
the current level of digitalisation to be
somewhat higher than the level expe-
rienced by the Swedish manufacturing
industry. A total of 24 percent of the
surveyed German companies state that
the current level is high, compared with
14 percent of Swedish companies.
Description of the current level of digitalisation of the vertical value chain.
Assessment is made of the situation today and after 5 years.
30%48%19%
9%88%
LowMediumHigh
Today
In five years
3%
3%
Don’t know

” ”
”We will see great changes within 3 years
when it comes to the Industrial Internet.”
More than eight out of ten companies
estimate that both the vertical and
horisontal value chains will attain a
high level of digitalisation within the
next 5 years. Based on interviews and
our own observations, we can see
that the Industrial Internet affects the
entire company.
The most obvious effects are in-
creased productivity when informa-
tion regarding what is to be produced
improves, as well as an increased pace
and promptness in delivering value
as companies secure a closer relation-
ship to customers and their facilities.
However, there are also financial
effects as well, such as improved cash
flow, when there is a reduced number
of changes in stock levels and less
”work in progress”; this reduce some-
thing the need to tie-up capital.
Many companies believe, however,
that the development pace is higher
and that change will happen much
sooner than in 5 years, as the In-
dustrial Internet itself, will further
develop and will undergo changes.
Some companies point out that it will
take longer to develop new digital
business models based solely on infor-
mation and data. In a more short-term
perspective, the change is about im-
proving production and integrating the
company internally, as well as digitalis-
ing product distribution.
When it comes to vertical integration
(the value chain within the company)
and horisontal integration (with busi-
ness partners), companies need to estab-
lish a view as to their starting point:
• How are data structures arranged,
and what are the responsibilities for
them? What data can we share, and
what do we want to share with our
business partners?
• What is of value to us – in the short
run and in the long run? How far
has our company come?
Value will be created internally and with
customers and suppliers. One important
area to understand is where and how
value can be created and what is neces-
sary to succeed. Companies will face
varying circumstances and situations
PwC comments
and will have different priorities; the
companies having a strong customer
relationship directly with the end user
of the product and service and who,
to a greater extent, sell systems, will
want to speed up horisontal integra-
tion (and thus will also be able to
create value more quickly).
Companies that to a higher degree
work through distributors and/or who
manufacture components, will face
greater challenges in interacting
with business partners down the value
chain.
In order to succeed in integrating with
business partners in a value chain
(horisontally), it is important that the
company maintains its own data in
good order. This requires data struc-
tures and a division of responsibility
to be clearly established, as well as
transparency in order to be able to
open and share data with customers
and suppliers.

The value of a deepened cooperation regarding technology/digitalisation with customers
and partners
14%
Better fulfilment of customers' demands
Quicker time-to-market
More efficient division of labour along the value chain
More flexibility along the value chain
Higher rate of innovation
Access to technical know-how
Minimization of risks
52%
36%
30%
33%
21%
9%
18%
According to the survey, enhanced digi-
tal cooperation leads to better fulfilment
of customers’ demands, a quicker time
to market process and a more efficient
allocation and specification of duties and
tasks along the value chain. Companies
estimate that the least value brought by
this digital development is found within
the areas of risk minimisation, access to
know-how and a higher rate of innova-
tion.
The responses in the German survey are
almost identical to the Swedish responses
and show similar priorities when it comes
to the issue of cooperation.
We can see from the survey and inter-
views, on a fairly unanimous basis, that
the benefit companies expect to achieve
from increased digitalisation is com-
prised of closer relationships with clients
and the capability of providing them
with an improved and more quickly
delivered value. In a first stage, this
implies quicker deliveries and increased
service levels. In a later stage, such
value can be delivered in the form of
competence regarding the client’s use of
the products and services. An example of
this is the use of predictive analytics to
schedule maintenance instead of apply-
ing general service intervals. The former
approach will result in on-time mainte-
nance, but also in enhanced value in the
customer-supplier relationship and the
possibility of creating added value based
on information collected.
PwC comments

In this section, we study the importance
of the analysis and utilisation of data (for
instance, production data and sales data,
but also data regarding how machines are
being used at the customer end) for the
companies’ current business model and in
terms of the way the business operations
are currently undertaken.
The survey shows that, in the long term,
the need for data analysis will have
increasing significance for industrial busi-
ness models. Today, 40 percent believe
that data utilisation and analysis is of
great significance, while 25 percent esti-
mate that it has little impact on the way
they conduct business. This can be com-
pared with the view on the development
in 5 years, when 87 percent believe data
utilisation will have a major significance,
and half of them say that data utilisa-
tion in the long run will be of very major
importance.
We note a great need to be able to
effectively and quickly analyse the large
amount of information that will be avail-
able from the digitalised products, which
may have integrated, built-in sensors
and which can collect large quantities
of data. Already today, there are large
amounts of data available from con-
nected products within the manufactur-
ing industry. Examples include industrial
motors, loader cranes or electric screw-
driver systems within the automotive
industry. In the future, this type of data
One of the most important questions
will be who is responsible for analysing
the data. Is there a need for dedicated
departments, or is it the responsibility
of each business unit? Will new roles be
required? What competencies will be
needed and how should companies en-
sure access to them? How can challenges
with standardised data structures be
met when a company might have differ-
ent environments for its IT systems?
PwC comments
25%40% 34%
11%87%
Low importanceMediumHigh
Today
In five years
2%
Don’t know
1%
will form the basis for new business
models e.g., optimising the utilisation
of the products and also selling purely
digital services.
The companies we have spoken with
highlight a number of challenges in
order to successfully utilise these quanti-
ties of data. A major challenge is to be
able to summarise the vast amounts of
data available into reasonable pieces
of information that can be acted on by
machines and humans.
Data analytics will be a key
competency in the future 3
The importance of data analysis today and in 5 years

Digitalisation of products and
of the value chain primarily
results in enhanced efficiency
and decreased costs
4More than a fifth of the respondents
believe that the level of digitalisation
of their current product range is high,
while four out of ten define the level as
low. At the moment, this is one of the
least developed digitalisation processes
addressed in this survey.
The degree of digitalisation is estimated
to be drastically different in 5 years;
nearly eight out of ten companies believe
that the degree of digitalisation of the
product range will be high by that time.
A fourth of these even believe that this
level will be very high. Despite this
development, it is worth noting that
one out of ten estimate that the level of
digitalisation of the product range will
continue to be low in 5 years’ time.
The degree of digitalisation of the current product range and in 5 years
45%22% 31%
2%88%
LowMediumHigh
Today
In five years
11%
2%
Don’t know
The main question is; At what rate will
we see the impact of this development?
Some of the companies we have spoken
with believe that 5 years is a long time
and that digital products are coming
onto the scene now, while others point
out that digital products may take longer
to develop.
The pace of digitalisation will vary from
one product to another. Several com-
panies already have products that are
extensively digitalised – in many indu-
stries machines are already connected to
the Internet, ranging from ball bearings
to cranes and industrial motors. Within
these industries, the challenge is to
create systems based on these connec-
ted machines so they can interact and
that the data generated by such and that
PwC comments
systems can be retrieved and analysed.
In other industries, primarily the ones
focused on components, there are dou-
bts over how far digitalisation can go.
As one respondent put it: ”We manu-
facture sheet metal parts and machine
components – the product, itself, can be
digitalised only to a certain degree.”

The benefit of increased digitalisation of the value chain and products
30%
Increased efficiency (for instance, quicker turnover rates)
Decreased costs (total costs)
Increased revenues as a result of the digitalization of existing products and services
Increased revenues as result of new digital services (for instance, sale of data)
8%72% 19%
17%53% 28%
22%43% 34%
35%33%
SmallMediumLarge Don’t know
2%
2%
1%
1%
8% 72%19%
” ”
”Half of the machines we produce are
already connected to the Internet and
send us operational data – we could
control our customers’ factories remotely
and optimise production.”
When companies list the aspects most
greatly affected by enhanced digitalisa-
tion, the number one benefit is increased
efficiency; as many as 72 percent see
increased efficiency in connection with
digitalisation within 5 years. Number
two is reduced costs, although, at the
same time, one fifth believe that digitali-
sation will, in fact, have little or no effect
on total costs.
More than four out of ten companies see
increased sales as an effect of the digi-
talisation of products and services, while
a good 20 percent estimate this effect to
be limited.
The least likely benefit as a result of
digitalisation is that of increased sales
arising as a result of new digital services.

Effects of increased digitalisation of the value chain and products
56%
Better planning and control (within production and logistics)
Increased customer satisfaction
Quicker time-to-market in product development
Greater production flexibility
9%79% 9%
5%74% 21%
14%58% 25%
11%30%
SmallMediumLarge
40% 16%42%
31%37% 30%
Improved quality
More customized products
2%
2%
3%
3%
3%
Don’t know
” ”
”With increased automation, production
costs decrease, and so do the number of
errors.”
Companies expect the greatest impact
from the growing digitalisation in the
area of better planning and control with-
in logistics and production. A close sec-
ond is increased customer satisfaction,
while quicker time-to-market in product
development and greater flexibility for
production are number three and four
– separated only by a few percentage
points. The last of the effects, but still
with four out of ten estimating them to
be significant, is the improved quality
and more customised products.
An interesting observation is that 8
out of 10 companies estimate that the
degree of digitalisation of the com-
pany’s product/service portfolio will be
high or very high in 5 years time. The
benefit of this is primarily perceived to
be comprised of increased efficiency
and reduced costs. Benefits are less
expected in increased sales as a result
of the digitalisation of existing products
and services or due to increased sales as
a result of new digital services. The re-
spondents believe that the effects of the
entire Industrial Internet, both products
and value chain, will manifest them-
selves through more efficient production
and more satisfied customers. This leads
to some questions: If products become
digital, how can companies capitalise
on this in terms of new products? How
do companies find a suitable balance
between cost effects for existing prod-
PwC comments
ucts and production, compared to new
revenue opportunities arising from the
digitalisation of existing products and
from entirely new digital services? How
can companies ensure that sufficient
attention is put on new services?

During the next 5 years we observe some
restraint when it comes to investments
in technology for increased digitalisa-
tion of the value chain and products.
The propensity to invest is highest
within distribution (for instance, digital
aftermarket and digital order processes),
supply chain and sales. In each case,
around six out of ten companies say that
they intend to invest in new technology
in order to increase the digitalisation of
these processes. Within product devel-
opment, service, and production, the
interest in investing is the lowest. Within
these areas, one fifth of the companies
say investments have low or no priority
at all within the next 5 years.
Compared with the German survey, it is
clear that German companies prioritise
investments in the supply chain, product
development, service and production/
manufacturing to the same degree as
the Swedish companies do. However,
the two countries differ when it comes
to their views of distribution, where only
30 percent in Germany, compared with
63 percent in Sweden, believe this to be
a high priority for investment.
Investments in the Industrial
Internet and Industry 4.0,
primarily within distribution
5
Investment levels (percentage of the company's sales)
33%
25%
36%
40%
Sweden Germany
9%
22%
2%
6%
5%
3%
15%
4%
0-1%
2-3%
4-6%
7-10%
>10%
Don’t know

Technology investments within different activities/processes for increased digitalisation of
the value chain and products during the next 5 years
Distribution (for instance, digital aftermarket, digital order process)
Supply chain (for instance, self-organizing logistics, automatic inventory management)
Sales
Planning (virtual factory planning, integrated planning processes end-to-end)
Product development/technology (continuous product structures, digital product data, smart products)
Service (real-time location information, remote control, linked sensors)
Production/manufacturing
14%63% 19%
13%61% 20%
14%56% 23%
13%50% 30%
19%48% 28%
22%47% 25%
23%41% 30%
Low priorityMedium priorityHigh priority Don’t know
4%
6%
7%
7%
5%
6%
6%
” ”
”Today, service is something that comes
with the products – in the future, the
services are what business will be offering.”
Sensors in products coupled with better
communication (”connected machines”)
will create more business and better op-
erations. This creates fundamental new
ways for companies to develop better
service, something that was discussed in
many of the in-depth interviews form-
ing the basis of this survey. Examples of
such services could be condition based
monitoring, customer specific services
and helping customers optimising pro-
duction. Therefore we are somewhat
surprised to see investments within the
area of service as relatively low on the
list of priorities.
Investment levels in Sweden appear to
be somewhat lower than among German
companies. We can find no direct expla-
nation for this, but we note that several
of the Swedish manufacturing compa-
nies with whom we have spoken see
investments as being linked to research
and development budgets. In Germany,
production is an important focus area for
investments. Furthermore, Industry 4.0
PwC comments
and the digitalisation of manufacturing
has been a major matter of public debate
in Germany.
From our interviews and discussions
with companies, we have also found
that the proximity to and contact with
customers are deciding factors for invest-
ments in the Industrial Internet; being
able to get closer to the customer and
to be able better to deliver value to the
customer are often higher on the agenda
than production efficiency.

Economic benefits and
competencies are the greatest
challenges for companies
6

The greatest challenge in success-
fully introducing Industry 4.0 is that
the large investments required are
perceived to have unclear economic
benefits – it is difficult to get an attrac-
tive business case. More than four out
of ten companies highlight this aspect.
Other barriers include the employees
lacking adequate qualifications and a
lack of standards and norms, as well
as certification opportunities. A fourth
challenge is that the technology used is
not sufficiently developed, and another
hinder may be the fact that the issue
of digitalisation is not top priority with
management.
Companies see fewer challenges when it
comes to data security, slow expansion
of broadband, stable networks and the
legal status in terms of data protection.
In summary, the challenges companies
face in working with the Industrial In-
ternet and Industry 4.0, can be divided
into four categories; financing, compe-
tencies, administration and technology.
The greatest difference between the
German and the Swedish companies is
that the German companies are more
uncertain about the legal situation with
regards to the utilisation of external
data (data protection).
The greatest challenges in order successfully to introduce Industry 4.0. Most important
and second most important summarised.
56%
The economic benefit is not clearly defined or the need for investment is too great
28% 16%
74%
58%
Most important Second-most important
40%
42%
37%
31% 30%
44%
46%
The employees are not sufficiently qualified
20% 20% 40%
30%
Lack of standards, norms and certification options
17% 8% 25%
26%
The technology used is not developed enough
9% 14% 23%
20%
8% 11% 19%
18%
3% 8% 11%
19%
The issue is not prioritized or supported by management
There are unresolved issues regarding data security
The expansion of basic technology is too slow (broadband)
3% 5%8%
13%
2%5%7%
6%
There are no networks which are sufficiently stable, nor are there options for data storage
The legal situation is unclear when it comes to the utilisation of external data (data protection)
We have not identified any challenges
Unable to respond
6% 8%
3%2%
5% 5%
5%
Germany
22%
14%

PwC comments
The largest challenge identified in
the survey is to get attractive business
cases to recoup the investments that
companies see are needed for the In-
dustrial Internet. From the interviews
and discussions, we see that the major
uncertainty is to quantify the business
benefits that a stronger relation with
customers can provide. How much
revenue can be generated by analysing
data from the customers’ machines
and selling this information or creat-
ing digital services?
In our experience, many specific areas
can be found that can provide clear
business benefits. One such example
is the maintenance of wind turbines,
which is complicated and expensive,
and where performance data can
create significant value. In other
areas, such as selling customer data
concerning vehicle utilisation, it may
be tougher to to recover investments
needed. There are of course many
potential cases, but our conclusion is
that it is important for all companies
to understand the impact of their rel-
evant opportunities. At the same time,
companies may also need to be active
within this field in order to anticipate
and live up to customers’ expectations.
With the uncertainty of customer
value, customer willingness to pay and
respective company’s “right to win” for
different services, it is understandable
that business benefit become unclear.
Will our investments in the Industrial
Internet merely become a necessity to
be on par with competition or can we
turn these investments into a differen-
tiated, clear advantages vis-à-vis our
competitors? However, it is our belief
that companies need to map the digi-
tal revenue opportunities and focus
on the most attractive ones.
Another significant challenge will be
the transformation of competencies.
Technology in production processes and
customer relationships will lead to new
skills needed. But, in many cases, the
transformation is also about going from
being a hardware company (mechani-
cal products) to becoming a software
company (intelligent products) and onto
a service company (intelligent services
based on information from the intelli-
gent products). The competency require-
ments highlighted in the interviews
are not only within research, product
development or production but are also
found within areas such as sales where
there will be a need for a different type
of knowledge and insights in order to
be able to sell digital services instead of
physical products. Going forward sales
people will have to be able to communi-
cate to customers a ”total cost of owner-
ship”, applying a completely different set
of input variables than previously.
The views regarding the need for stand-
ards and norms split the responding
companies into two groups; one group
believes this to be a crucial area, and the
other group sees this area having little
or no importance. The explanation for
this may be found in the strength of the
relations that companies have with cus-
tomers, the degree to which they deliver
a system (rather than a component)
and how close their products are to the
customers’ critical operations: Compa-
nies with less need for standards can
in many cases establish data protocols
themselves, and are distinguished by
having more extensive direct contact
with their customers (vs. of work-
ing through distributors), delivering
systems or parts of a system, rather
than components or smaller parts of a
system, and being closer to customers’
critical processes or critical informa-
tion.
Companies operating within larger
industrial systems, for example
delivering robots to a production line
or components, have a greater need
for that industrial system to agree on
a standard for data transmission and
protocol. This does not prevent
suppliers of components that are
criticaland close to the core of the
customers’ value creation, from being
successful or even spearheading the
development of standards.
Several persons whom we have
discussed with, raise the issue that
even if the management of the various
companies have understood the chal-
lenges and possibilities, it is not always
clear to management teams at a busi-
ness area or middle management level
what will happen. It has been pointed
out to us that this is where the actual
challenge of implementation will take
place.

Sweden needs to secure
expertise and training for
the Industrial Internet
7Despite the major challenges for Swed-
ish companies successfully to undertake
a digital transformation, the industry
sees little need for involvement of policy
makers in such issues. The three areas
in which the companies see the great-
est need for political support are within
research and development (universities
and institutes), support for graduate
and undergraduate education in schools
and universities as well as creating an
industry and research cluster devoted to
Industry 4.0. The third most important
area is support for international stand-
ardisation and tax relief for investments
related to Industry 4.0.
Less urgent areas appear to be data pro-
tection legislation, government offers of
support for training of employees and an
expansion of broadband infrastructure.
The more noticeable differences between
German and Swedish surveys are that
Swedish companies see less need for the
creation of competitive data protection
legislation and for the completion of an
operationally secure broadband net-
work. In both of these cases, the German
companies see a greater need for politi-
cal support than the Swedish companies.
There was a high level of agreement
among those interviewed, that almost all
companies operate in an international
environment and, consequently, the
actions or inaction of a single country
will have limited effect. The single most
important theme is competence; both
ensuring that Sweden can offer exper-
tise and also that schools and universi-
ties can educate a sufficient number of
adequately qualified employees. The
in-depth interviews revealed a need
for spearhead research in Sweden and
a variety of ideas were presented, for
instance, regarding the creation of a
research cluster. The Industrial Internet
inevitably leads to a shift in competen-
cies within companies, which will be a
challenge in the long run.
The fact that German companies see a
larger value in tax relief for company
investments and government support for
training can be explained by the com-
paratively larger role of Industry 4.0 in
the German public debate thus far.
PwC comments

56%
Support to research and development (universities/institutes)
20% 13%
74%
58%
Most important Second-most important
40%
42%
37%
31% 30%
33%
24%
Support to qualified regeneration in schools and universities
20% 20%26%
32%
The creation of an industry and research cluster - "Industry 4.0"
16% 9% 25%
17%
Support for international standardization
20% 3% 23%
30%
11% 11% 22%
27%
3% 9% 12%
28%
Tax relief for company investments
Establishing competitive data protection legislation
Government offer of or support for training of employees
3% 6% 9%
19%
5%3% 8%
23%
Completion of an operationally secure broadband network (securing service quality)
See no need for political involvement
16%
Germany
6%
25% 41%
In what way can policy makers best support the work with Industry 4.0
” ”
”It is our perception that the larger countries
in Europe take a greater responsibility in
facilitating Industry 4.0”

To become a digital leader;
companies need to increase
their digital integration, both
internally and with business partners
8
PwC has developed a model describ-
ing the capabilities required to succeed
with the Industrial Internet. These
abilities are best viewed, we believe, in
five dimensions and four steps.
Manufacturing companies often start
out on the path towards the Industrial
Internet as digital novices. During this
stage of maturity, the company often
has a positive experience of digitalisa-
tion of different business areas and
of certain products and services. The
challenge here is that these activities
are neither coordinated nor do they
share a vision of what the Industrial
Internet should be like; the risk of
digital information management is not
handled systematically and compliance
is not secured.
In the second stage of maturity, vertical
integrators, companies have already
digitalised much of their products and
services. For instance, companies can
load their products with software and
can connect their products to be online
for remote control or data collection.
Both operational and administrative
processes can be digitalised. Above all,
data is now harmonised and available
internally – data can flow from product
development to production to logistics,
to aftermarket and service. Customer
relationships are also digitalised with
online communication and customised
digital product catalogues.
Horisontal integrators, the third stage
of maturity, connect their value chains
with customers and partners. Digital
communication between suppliers,
producers and customers enable better
coordination of production and service
delivery, which creates higher efficiency
and improved quality. This stage of ma-
turity also sees innovative concepts that
optimise customer utilisation, such as in
operating cycles and flow management.
It can also be a matter of collecting and
analysing customer information to pro-
vide maintenance before the machines
encounter problems. Digital risks are
managed using standardised and
efficient methods and data riskcompli-
ance is widely prevalent.
The digital leaders have linked their
operational and administrative processes
at a global level. They have also created
virtual processes within many areas,
such as virtual factories, where the com-
pany takes charge of certain processes
and subcontractors handle others. These
companies often have ”digital head-
quarters” where all of the administrative
processes are managed and optimised in
order to be carried out subsequently in
the organisation where the actual execu-
tion of the processes is optimal. The digi-
tal product portfolio has been supple-
mented by digital revenue flows. Some
of these are disruptive and challenging
existing structures. A management team
in charge of data management handles
internal data management, and the anal-
ysis of large quantities of data constitutes
a significant part of the operations.

1
Digital
novice
Vertical
integrator
2
Horisontal
collaborator
3
Digital
champion
3
Business
models,
product &
service
portfolio
First digital
solutions and
isolated
applications
Digital product and
service portfolio with
software, network
(M2M) and data as
key differentiator
Integrated customer
solutions across
supply chain
boundaries,
collaboration with
external partners
Development of
new disruptive
business models
with innovative
product and service
portfolio, lot size 1
Market &
customer
access
Online presence
is separated from
offline channels,
product focus in-
stead of customer
focus
Multi channel
distribution with
integrated use of
online and offline
channels; Data ana-
lytics deployed, e. g.
for personalisation
Individualised
customer approach
and interaction
together with value
chain partners
Integrated Customer
Journey Manage-
ment across all
digital marketing
and sales channels
with customer
empathy and CRM
Value chains,
processes &
systems
Digitised and
automated sub
processes
Vertical digitisation
and integration of
process and data
flows within the
company;
Horisontal
integration of
processes and
data flows with
customers and
external partners,
intensive data use
Fully digitised,
integrated partner
ecosystem with
self-optimised,
virtualised proces-
ses, focus on core
competency; decen-
tralised autonomy
Compliance,
legal, risk,
security & tax
Traditional
structures,
digitisation
not in focus
Digital challenges
recognised but not
comprehensively
addressed
Legal risk
consistently
addressed with
collaboration
partners,
Optimising the value
chain network for
legal, compliance,
security and tax
Organisation
& culture
Functional focus in
silos
Cross functional
collaboration but
not structured and
consistently
performed
Collaboration
across company
boundaries, culture
and encouragement
of sharing
Collaboration as
a key value driver

The way forward
9Many of the companies we have spoken
with believe that the transition will be
quick, quicker than the 5 year horison of
this survey. Many questions arise: Where
should the transition start? Which value
chain should be prioritised? What is the
best starting point, vertical or horisontal
integration? Below, we have summarised
a number of observations regarding the
way forward.
The digitalisation of the manufacturing
industry creates opportunities for re-
duced production costs and new revenue
streams. These opportunities do not only
refer to digitalised products. Invento-
ries and ”work in progress” for existing
products will be affected, when produc-
tion becomes more efficient and more
closely linked with customers’ demand.
In addition to the impact on capital need
and cash flow, there will also be chal-
lenges in terms of the reporting of profits
and payment of taxes, as the revenues in-
volved may not always refer to a specific
jurisdiction.
Companies need to create
a solid starting point
It is important to understand a com-
pany’s starting point – how far it has
come in the maturity model presented
on page 25. The challenges faced by a
digital novice will be more basic than
the challenges faced by a company that
has already taken a step or two in their
transition process.
Generally, companies need to become
digitally integrated internally (vertically)
before they can integrate with custom-
ers and business partners (horisontally).
Companies will need to tidy up internal
data structures, create transparency in
their data management and centralise
the responsibility of data exchange. Of-
ten, it is a prerequisite first to integrate
internally in order to be able to manage
and share data in a horisontal integra-
tion with customers and partners.
It is also important to create an overall
target vision as to what is achievable.
A vision can be a good tool to unite
group-level management with more
operational management teams and
managers. Creating awareness is a first
step in explaining the opportunities and
challenges of the Industrial Internet.

The efforts undertaken to digitalise
products and services and develop
digital business models are essential
The survey showed that companies
primarily expect benefits in the form
of increased efficiency and decreased
costs. These effects can be attributed
to the digitalisation of vertical and
horisontal value chains in the model of
the Industrial Internet (see the figure
on page 7).
A wider view is necessary in order to
design new business models
The greatest challenge in order to suc-
cessfully introduce Industry 4.0 is that
the economic benefits are perceived
to be unclear – it is difficult to make
attractive business cases. There is a
risk that investments will tend to focus
only on initiatives that short term can
improve efficiency or reduce costs in
order to ensure that business cases are
attractive. There is also a risk that new
players outside the industry could enter
the market with digitalised service of-
ferings and new business models.
This threat scenario must be analysed
and addressed, even if it is difficult
to quantify and calculate benefits of
the new digital service offerings .We
believe that it is important to under-
stand the business benefits and, at a
minimum, identify the areas that are
not currently quantifiable.
Organising the digital responsibility
around the various opportunities
In order to control and lead operations
that are increasingly digital depend-
ent on data, there are also a number of
challenges: Should companies centralise
or share the responsibility of this type of
business development?
In our discussions, we have seen vari-
ous examples of how such efforts can be
organised. For instance, this work can
be organised under the leadership of a
Chief Digital Officer. Even if we believe
that certain aspects of the responsibility
should be kept centralised, such as the
responsibility for common data models
and transparency in data management,
we also believe that it may be appropri-
ate to divide the business driving activi-
ties between the different roles in the
company.
A fair starting point is to have Produc-
tion, Distribution and Procurement
assume the responsibility for digitalising
the vertical and horisontal value chains.
A Chief Digital Officer can be crucial
in the digitalisation of products and
services but it is important that product
planning and research and development
assume a large part of the responsibility
here.
” ”
”The Industrial Internet will affect
the entire company and lead to a
thorough transition.”

As for innovative digital business mod-
els, the responsibility for these could fall
on the strategy department, or one may
want to break out specific entrepreneur
cells that can challenge existing conven-
tions without restrictions. Even if the
responsibility is distributed in this man-
ner, the overall transformation should
be kept together in a program office.
A large portion of the technical efforts
will be common for the company, and a
common infrastructure can create the
required scale for this type of innovation.
The supply of competence will
be a crucial issue – both in terms
of quality and quantity
A number of new competencies will be
critical and we will see new titles such as
Chief Data Analyst and roles with a clear
link to digital revenue streams.
A clear majority of those with whom we
have spoken highlight the challenge of
the transition of competencies needed
when knowledge of ”hardware” in the
form of a product is supplemented with
knowledge of ”software”. Not only does
this affect technicians within production
and R&D, it will also impact the skills of
the sales force, service technicians and
administration.
The ability to manage and analyse
large quantities of data will comprise
a key competence
A specific skill, which will be critical
in the future, is the ability to manage
and analyse large quantities of data.
The companies that are best able to sift
through the enormous quantities of data
generated every day will also have the
opportunity to gain an advantage vis-à-
vis their competitors. In order to do this,
specific competencies within mathemat-
ics, statistics and data management are
required. However, there will also be a
need for product developers, market-
ers and sales personnel able to identify
new customer needs – new values to be
created – and who will be able to profit
from these opportunities.
One final observation refers to the op-
portunity for Swedish manufacturing
companies to achieve the estimated level
of digitalisation based on the desired
levels of investment. Are the levels of
investment sufficiently ambitious? As
we have highlighted previously, it is
important not to overreach right away;
however, it is crucial that the invest-
ments be correctly focused, based on the
stage of maturity, existing abilities and
the future strategy of the company. The
Swedish manufacturing industry is fac-
ing an interesting transformation, with
great opportunities.

””We will experience more changes within the next
5 years than we have experienced in a very long time.
It will be interesting to see which companies will be
among the winners in 2020”

Method
10Survey method
During the period April – May 2015,
a total of 64 Swedish manufacturing
companies were interviewed regarding
their view of digital developments, how
this development challenges industry,
and how far along they have come in the
transition work. The interviews were
made both through online question-
naires and over the phone. As a supple-
ment, 5 in-depth interviews were also
undertaken with leading manufacturing
companies in Sweden.
Target group
Of the respondents, almost half, or 49
percent, consist of CEOs, CIOs or CFOs.
Other respondents are either part of the
management team or are operational
managers. More than four out of ten
companies, or 42 percent, have a turno-
ver of between SEK 1-10 billion, and 34
percent have a turnover of SEK 10 billion
or more. 24 percent of the companies in
the survey have an annual turnover of up
to SEK one billion. Of these, 19 percent
have a turnover of between SEK 500-
1000 million.
Of the companies participating in the
survey, six percent are suppliers of prod-
ucts and solutions for other companies
to achieve an increased digitalisation
of their operations. Close to half (48
percent) are merely users and 44 percent
are both suppliers and users. The rest
have not indicated a category, or have
responded to the question with
“Don’t know”.

Strategy& is a global team of practical
strategists committed to helping you seize
essential advantage. We do that by work-
ing alongside you to solve your toughest
problems and helping you capture your
greatest opportunities. We bring 100 years
of strategy consulting experience and the
unrivaled industry and functional capa-
bilities of the PwC network to the task.
We are part of the PwC network of firms
in 157 countries with more than 195,000
people committed to delivering quality in
assurance, tax, and advisory services.
Fredrik Vernersson
+46 708 96 95 84
fredrik.vernersson@strategyand.pwc.com
Fredrik Lindblad
+46 709 29 33 18
fredrik.lindblad@se.pwc.com
Olof Enerbäck
+46 709 29 12 90
olof.enerback@se.pwc.com
PwC Sweden is the market leader within
auditing, accounting, tax and advisory
services, with 3,600 people with op-
erations at 100 locations throughout the
country. Using our experience and unique
business knowledge, we enhance value for
our 60,000 clients, who are comprised of
global companies, major Swedish com-
panies and organisations, smaller and
medium-sized companies, primarily local,
and the public sector.
PwC Sweden is a separate and independ-
ent legal entity. We are the Swedish
member firm of the PwC global network.
Close to 195,000 people in 157 countries
across our network share their thinking,
experience and solutions to develop fresh
perspectives and practical advice.
www.pwc.se/verkstad
www.strategyand.pwc.com
For more information
please contact us

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