While technological advances dominate the media coverage of Industry 4.0, there are equally significant changes coming in how we think of business models, with the rise of the subscription economy. By Iman Ghodosi.
We’re in the early stages of what is widely regarded as the Fourth Industrial Revolution – or Industry 4.0. As the name suggests, this is a period of momentous (as well as complex) change, but also of extraordinary opportunity, especially in the field of manufacturing.
The tectonic shifts brought about by the preceding revolution – the digital revolution – has led us to a new world of industrial possibility. If you’ve ever read one of the thousands of articles, explainers or opinion pieces on the subject, you’ll know that this fourth era encompasses sensor technology, data analytics, artificial intelligence, machine learning, advanced automation, robotics, human-to-machine communication, the Internet of Things and more.
What you probably haven’t heard so much about, though, is the similarly radical transformation that could – and I think must – accompany these much-talked-about changes: a shift in business models.
What about the Subscription Economy?
What do I mean by business models in the context of Industry 4.0? It’s the way that organisations are reacting to the world’s movement away from products and towards services. You might think of it as the ‘Spotification’ of industry. It’s the advent of the Subscription Economy, encompassing a profound reimaging and reorganisation of business-to-customer and business-to-business relationships.
Let me use some examples to make the whole concept clearer.
- Adobe – Adobe saw the writing on the wall almost a decade ago. In 2012 the company stopped selling software – its famous Photoshop application, for instance – in boxes, forever. The share price has risen by around about 800% since it set out its subscription strategy in 2011. Five years ago, it moved everything to the cloud and its share of recurring revenue has jumped from 19% to 70% from then to now.
- Caterpillar – What about an example more specific to manufacturing? Caterpillar Inc. is almost a century old – an icon of the Second Industrial Revolution. The company has embraced Industry 4.0 in many significant ways, none more important than in its use of sensors on its new generation of excavators, dozers, trucks and loaders. These sensors provide vital data on everything from safety and equipment management to sustainability and productivity. And through CAT Connect, Caterpillar offers this data as a subscription service. Today Caterpillar has the largest connected industrial fleet in the world, incorporating more than 500,000 machines.
- Volvo – And what about something that seems, at first glance, to be the epitome of an individualised, status-symbol product that could never be sold as a service – the car? Well, Volvo recently announced that they’re aiming for 50% of their cars to be driven on subscription by 2025.
As Gary Brooks, Chief Marketing Officer at Syncron, predicts in a recent article for Manufacturing Global, in the future many OEMs will no longer report on the number of new products sold, or even service parts revenue. In fact, they will follow the path many Software as a Service (SaaS) companies have taken, reporting on recurring revenue from subscription-based services.
Indeed, many already do. And they should. In Germany, the heartland of mechanical and plant engineering, 80% of revenue is generated by the sale of new equipment and 20% by services. But that 20% accounts for 60% of profits.
The future is here already.
Are we missing a manufacturing trick?
The future is here, but not everybody is talking about it. Or, more precisely, not everybody is talking about it in its entirety.
Take the recently released research report from Swinburne University of Technology, PwC, Siemens and the Australian Manufacturing Workers’ Union, titled Transforming Australian Manufacturing: Preparing Businesses and Workplaces for Industry 4.0. This is an outstanding and timely piece of work that I would recommend to anyone with an interest in the field of Australian manufacturing. However, it’s notable for the absence of any mention of business models.
I wonder whether the relative lack of focus on business model innovation in the Industry 4.0 conversation has meant that companies like Adobe, Caterpillar and Volvo are in an exclusive minority. According to a recent PwC report, only 14% of manufacturers say they have created go-to-market Internet of Things strategies. And according to Stephan Liozu, Chief Value Officer of Thales Group, despite a high level of interest and investments from some deeply engaged companies, the reality is that most companies are just getting started [with their digital business models].
It doesn’t need to be this way. As our just-released white paper Reaping the Recurring Benefits of Industry 4.0 outlines, if executed successfully, business model innovation can unlock new value pools, while enabling new recurring and predictable revenue streams.
Zuora’s biannual Subscription Economy Index (SEI) demonstrates that Australian subscription companies grew revenues at ten times the rate of the ASX sales-per-share index over the past seven years. In that same period, companies across North America, Europe and the Asia-Pacific region, have grown their subscription-based sales by more than 300%.
Yes, business model innovation in the Industry 4.0 age is fraught with complexity. But when subscriptions and services have the power to change many things we’ve long taken as a given and upend economic conventions, untangling complexity may be a small price to pay when the alternative is obsolescence.
Iman Ghodosi is Vice-President & General Manager of Asia Pacific Region for Zuora.