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#Market Strategy — 06.01.2017

Technology Innovation: The Key To Corporate Success

Roger Keller

In today’s world of intense competition, the declining working age population, global anaemic demand and appetite for re-industrialization, technology innovation is the key to corporate success. The “survival of the fittest” requires businesses to embrace digital transformation   (industry 4.0, robotics and cybersecurity).

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Industry 4.0 is now on

Over the last few years, companies have been reluctant to invest, because of surplus capacity and anaemic final demand. However, the situation is improving. Going forward, firms will look first to defend or improve their competitiveness, particularly in the face of declining working age populations and deteriorating productivity. Furthermore, they will harness any opportunity to reduce costs. In addition, there is increasing appetite for re-industrialization in developed countries, allowing companies to be closer to consumers and to tailor products to their needs. The best option to achieve these targets is to use technology innovation, but above all, undergo a digital transformation.

There is a lot of talk about “industry 4.0”, which refers to the fourth revolution. After mechanization, with the steam engine, electrification and automation, now comes digitalization. Connected concepts apply to smart factories, smart grids, smart logistics, smart machines and smart products. According to PwC, an audit firm, “Industry 4.0 combines advanced connectivity and advanced automation, cloud computing, sensors and 3D-printing, connected capability, computer-powered processes, intelligent algorithms and ‘Internet of Things’ services.” All these factors help to deliver revenue growth, cost control, efficiency gains and customer satisfaction.
 

Robots are taking over

The “robotics revolution” is another term used to describe the huge transformation in manufacturing. Boston Consulting Group, a consultancy firm, expects advanced robotics to grow by 10% annually over the next decade, thanks to a drop of more than 20% in the price of hardware and enabling software over the next decade. These trends mean that robotics will become affordable for small companies. Productivity will benefit the most from robots (or “co-bots”, as collaborative robots are called). And needless to say, labour costs will also benefit enormously.

Since 2008, there have been more connected objects than human beings! Cisco Systems, a specialized IT group, forecasts that there will be more than 50 billion connected objects by 2020, mostly serving industrial applications but also health and finance apps. The “Internet of Things” is clearly a booming trend.

Artificial intelligence is another field where demand is huge. For the time being, large companies are taking the lead in exploring technology, such as machine learning, chatbots (software to simulate human conversations), virtual assistants, natural language and face recognition. However, as solutions mature and costs fall, artificial intelligence will attract small and medium-sized firms too.

Given that connectivity is becoming widespread, security issues are becoming very complex and difficult to tackle, hence, the exploding demand for cybersecurity.
 

Risks to our base case

This theme is essentially a long-term core investment. It plays heavy structural trends. As these industries are still young and innovations are constantly taking place, today’s winners might not be tomorrow’s winners. A close monitoring of this theme and of the underlying trends is necessary.Although this is a long-term recommendation, we believe that the next few quarters should be profitable for investors who take up this theme, based on our positive macro-economic outlook for 2017. Should the macro-economic climate deteriorate, companies will slow down their digital transformation. In this scenario, stock prices would suffer and long-term promises would take longer to materialize.