Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 315

Investing amid IoT-enabled disruption

Executive summary

1. The impact of the internet of things (IoT) is the ability to leverage real-time data to drive real-time decisions that can bring broad-based economic benefits to companies and consumers.

2. In the context of ‘smart factories’, IoT-enabled automation has led to a dynamic landscape for incumbent industrial automation vendors as they seek to offer integrated hardware-software solutions for industrial customers, i.e., manufacturers. To do so, vendors are either building or buying software capabilities, or partnering with software companies or doing all of the above. Their manufacturing know-how is a key advantage over potential new entrants.

3. Pure software companies are also entering the industrial automation space, and their business models are evolving. A change from traditional licensing models to subscription-based models can bring better customer insights to drive product offerings, but whether this will be acceptable to industrial customers is yet to be seen.

4. The demand from industrial customers for universal, open standards in industrial infrastructure — a change from today’s proprietary, closed architecture — is likely to change the profit equation for existing vendors. Open standards allow factory systems, supply chain, and customers to communicate seamlessly and realize the full benefits of IoT-enabled automation. The industry is likely to move in this direction despite resistance from existing vendors.

5. Investing in this space requires a global and cross-sector view of industrial automation to determine who will benefit from these trends. It is clear that new profit pools are being created as IoT is incorporated into factories (and elsewhere), offering a broader investment opportunity set for active research and management. Our global research platform generates critical insights that help us continually test the investment theses for our industrial automation holdings and spot emerging opportunities in software and other cutting edge technological areas such as machine vision and robotics.

Manufacturing is going through an extended IoT-enabled automation refresh cycle. This is likely to change the traditional global industrial automation vendor landscape as they have to offer new software capabilities in order to be successful in the changing marketplace. The MFS capital goods and technology sector teams did a global cross-sector analysis to assess the impact of IoT-enabled automation in manufacturing and its investment implications.

Impact of real-time information and analytics

The graphic below shows an example from rail operations. Using a continuous data feed from a physical system (a locomotive and its environment), a digital model can be built to simulate live operations, to the extent where the ‘digital twin’ can optimise the locomotive’s journey by controlling speed and braking. The result can be significant savings from the efficient operation and predictive maintenance of the physical system.

IoT-enabled rail operation and predictive maintenance

Source: Adapted from GE, “Digital Twin for the Railway Network,” 2018.

Implication for industrial automation and software companies

In the context of ‘smart factories’, IoT-enabled automation has led to a dynamic landscape for incumbent industrial automation vendors as they seek to offer integrated hardware-software solutions for industrial customers, i.e., manufacturers. To do so, vendors are either building or buying software capabilities, or partnering with software companies or doing all of the above. Their manufacturing know-how is a key advantage over potential new entrants. Pure software companies are also entering the industrial automation space, and their business models are evolving.

A change from traditional licensing models to subscription-based models can bring better customer insights to drive product offerings, but whether this will be acceptable to industrial customers is yet to be seen. The demand from industrial customers for universal, open standards in industrial infrastructure — a change from today’s proprietary, closed architecture — is likely to change the profit equation for existing vendors.

Open standards allow factory systems, supply chain, and customers to communicate seamlessly and realize the full benefits of IoT-enabled automation. The industry is likely to move in this direction despite resistance from existing vendors.

Conclusion

The traditional industrial automation landscape is changing from an IoT-enabled automation refresh cycle, and the winners and losers are still in the making. Investing in this space requires a global and cross-sector view of industrial automation to determine who will benefit from these trends. It is clear that new profit pools are being created as IoT is incorporated into factories (and elsewhere), offering a broader investment opportunity set for active research and management. Our global research platform generates critical insights that help us continually test the investment theses for our industrial automation holdings and spot emerging opportunities in software and other cutting-edge technological areas such as machine vision and robotics.

To learn more, please read our white paper on the subject here.

 

Thomas P. Crowley, CFA, Bradford J. Mak, and CV Rao, CFA are Equity Research Analysts at MFS Investment Management. The comments, opinions and analysis are for general information purposes only and are not investment advice or a complete analysis of every material fact regarding any investment. Comments, opinions and analysis are rendered as of the date given and may change without notice due to market conditions and other factors. This article is issued in Australia by MFS International Australia Pty Ltd (ABN 68 607 579 537, AFSL 485343), a sponsor of Cuffelinks.

MFS
banner

Most viewed in recent weeks

Are you caught in the ‘retirement trap’?

Our retirement savings system is supposed to encourage financial independence but there is a ‘Retirement Trap’ due to the reduction of age pension entitlements as assets and income rise.

The power of letting winners run

Handling extreme winners is a complex task. Conventional wisdom such as “you never go broke taking a profit” often leaves a lot of money on the table as strong growth stocks continue to run.

Tony Togher on why cash isn’t just cash

An active manager of cash and fixed interest funds can achieve higher returns than the cash rate through a selection of other securities while managing both liquidity and income for clients.

NAB hybrid: one says buy, one says sell, you decide

Differences of opinion make a market, and hybrid specialists disagree on the likelihood that NAB will call one of its hybrids early. It makes a major difference to the expected return on NABHA.

Watch your SMSF’s annual return this year

The best way to preserve your SMSF’s favoured status is to make sure the fund’s annual return reaches the ATO on time. There are new rules this year that every SMSF trustee should know.

Worshipping at the altar of alternative assets

Investors worried about an overvalued sharemarket and low interest rates on term deposits and bonds are focusing on alternatives. What are they and how are they used by leading asset allocators?

Latest Updates

Interviews

Kunal Kapoor on different paths to investor success

The Morningstar CEO on democratising investing, why saving in your youth is crucial, and why most investors care more about paying off their debts than comparing their results against benchmarks.

Economy

What is the likely effect of COVID-19 on the Australian economy?

Our close links to China mean the impact of the virus could tip the local economy into recession and certain sectors such as resources, education and travel will be harder hit than others.

Investment strategies

Do sin stocks really give your portfolio the edge?

Should sin stocks, those companies who engage in activities that are considered unethical or immoral, be excluded from a portfolio, or would this compromise potential performance?

Insurance

Poor pricing of life insurance products and the impact on Australians

The use of discounted pricing by insurers to attract new business is unsustainable and leaves existing policyholders on higher premiums for what is essentially the same product.

Retirement

Spotting signs of trouble in a retirement portfolio

Do you risk paying a lot of tax in accumulation phase? Or, if you're in retirement phase, do you face the risk of outliving your asset pool? Two key things to consider in the low-rate world of today.

Sponsors

Alliances