Digitalization Drives New Business Models for OEMs and Manufacturers. Jose M. Rivera, CSIA CEO May 23 rd, 2017

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1 Digitalization Drives New Business Models for OEMs and Manufacturers Jose M. Rivera, CSIA CEO May 23 rd, 2017

2 Control System Integrators Association The leading global association in our industry: 400+ System Integrator and 100+ vendor Partner companies. Founded in 1994 to make SI companies better businesses. Best Practices kept up-to-date through periodic review. CSIA Certified members are audited every 3 years to ensure they are current in their business and technical practices.

3 Agenda Revolutions don t always feel like Revolutions Machine Builders Manufacturers Role for System Integrators The New Challenges Summary

4 Visions of the Future - Coming True? Vision Reality (?)

5 Visions of the Future - Coming True? Earlier Star Trek Later Star Trek but who saw the internet coming? Who imagined the internet revolutionizing our world?

6 Revolutions don t always feel like Revolutions Parents raising young kids don t get to appreciate the rapid day-to-day growth until they take a step back or go on a long business trip

7 Revolutions don t always feel like Revolutions Boeing 767 Boeing 787 Look very similar Huge differences in: fuel efficiency, construction materials, noise, comfort, and in particular the way they were designed and are being built.

8 Revolutions don t always feel like Revolutions Conventional AM/FM Radio Hotel chains New Internet Radio (streaming) Private homes for rent Look very similar Very big differences in value proposition to the user and required infrastructure to deliver their services.

9 Revolutions don t always feel like Revolutions Conventional New. Look very similar: Both approaches bring passengers from Point A to Point B upon request...

10 Uber Just another taxi company? Worth $70 billion started in Improved rider experience leveraging technology. Departure from traditional vehicle ownership, employment, and geographic coverage (Uber at 425 cities around the world). Challenges taxi market and the entire car making industry. Part of the solution to city congestion? Demonstrations against Uber in Europe and US. WSJ 1/31/2017 Uber Takes a Hit for Pricing Policy After Trump Travel Ban Sources: Uberworld - The Economist, Sept 3 rd, 2016

11 Uber A closer look at the Enablers Technology Ubiquity of smart phones. Connectivity anywhere. Inexpensive and wireless sensors. Powerful and inexpensive data processing capability. Innovative approaches to data analytics. Non-Technology Focus on improving customer experience. Real Business Model innovation.

12 Technology no longer an Obstacle Past technology restrained the mind and reinforced silos. People, systems, equipment protocols, standard operating practices,. Technology evolved to unleash powerful opportunities. Focus on solving customer problems. Need to shift thinking. New business models.

13 IoT will transform every Industrial Company Drivers: Cheaper, Faster, Better Solution Focus - Ease of use Extreme customization Technology as an enabler, less of a differentiator. Business models as an Innovation Axis. Traditional business models will be challenged. Service from necessary evil in support of product sales, to real core offering. Solution focus changes competition; may alter suppliercustomer relationship.

14 Agenda Revolutions don t always feel like Revolutions Machine Builders Manufacturers Role for System Integrators The New Challenges Summary

15 Leasing a Machine Builder Innovation - Past Important business model innovation 1959: Xerox delivers model 914 to the market only via a leased (not sold) copier. Approach makes it easier for users to adopt the new technology. Xerox gets the upside of exploding usage.

16 Business Model Innovation - Today Commercial jet engines: GE and Rolls Royce charge customers per flying hour of the engine Food and Beverage packaging: Tetra Pak provides the aseptic packaging machine, charging their clients for the consumed packaging material. Air Fractionation on site plants: Praxair, Air Liquide charge consumption.

17 Technology to support Differentiated Value Propositions Service level - A key element of any powerful value proposition. Technology deployment enables the creation of relevant differentiation. Examples: Proactive approach to maintenance via predictive technology and improved scheduling. Better anticipation of peak demand. Sensing of inventory levels with automated replenishment deliveries. Expert systems to guide technicians and orders required spare parts. Technology enables billing based on actual consumption. Mechanical counter of older copying machine.

18 A Working Model ThyssenKrupp elevators (1.1M units around the world). Proactive and predictive maintenance. Helps with limited availability of qualified labor / experts. Data improves design of new generation of elevators. Machine: Elevator ` Action with Coaching Tools Next step: Elevators and BMS sharing data! Office or residential building Service Call Center

19 The Same?

20 Transformation of the Vending Machine via IoT Smart, connected terminal. User identification Billboard Source of content and advertising revenues. Non cash payment options. Source: 5 Ways the Internet of Things transformed the vending machine. Efrat Kasznik, April 10,

21 All about loading up on gadgets? Transformation of the vending machine: Highly customized customer experience. Loyalty reward program. Flexibility in the forms of payment. Gamification. Smart approach to replenishment (automatic dispatching and routing of distribution truck). Opportunity to generate a revenue stream by selling consumer consumption pattern data even from non-self identification (e.g. through image recognition) Gender, purchased product, time of purchase.

22 Agenda Revolutions don t always feel like Revolutions Machine Builders Manufacturers Role for System Integrators The New Challenges Summary

23 Manufacturers will Benefit Manufacturers as recipients of new business models from their suppliers Beneficiaries of new approaches by OEMs. Enticed by propositions that lowers Capex and transfers to Opex. Enticed by risk reduction propositions. Plant floors already with: Leased equipment. Outsourced personnel (e.g. security). Consumption driven invoicing of supplier product kept (e.g. spares in lock box) or produced (e.g. air fractionation) on plant premises. Manufacturers may get closer to: Supply chain Plants Consumers of their products Manufacturers can generate new business models alone or with others.

24 Amazon Dash easing the replenishment process Dash Button, Wi-Fi connected, placed around the house and programmed to order a particular consumer good. Integrated into smart appliances that can automatically order replenishments when required: Whirlpool: washers and dryers Brother: printers

25 Linking Parts Machining capacity with Demand CNC machines - a significant capital investment. Need to ensure full utilization. Users upload their parts on a master library (cloud). Vetted supplier network. Match part requirements with manufacturer. Leverage technology to provide quotes, track production from start to delivery.

26 Agenda Revolutions don t always feel like Revolutions Machine Builders Manufacturers Role for System Integrators The New Challenges Summary

27 The Role for System Integrators: Put it together! Group A Supply Group B Demand Applies to: Uber Airbnb MakeTime Smart Cloud Phone / Devices (sensors) Software / Algorithms Data Analytics System Integration

28 System Integrators System Integrators bring the capability to integrate the various components into a solution. Their traditional business model will most certainly be challenged as well. Increase in solutions scope, likely to integrate non-industrial systems. Move from project to ongoing service centric, potentially subscription based. Move from generic to vertical / application specialist. At CSIA we work towards converting the change brought by digitalization into transformation for our members and System Integration community in general.

29 Continuum of Opportunities for System Integrators Traditional SI work New Opportunities enabled by IoT Reward Risk Traditional System Integration business that may get supplemented with opportunities brought by IoT. Project centric. SI as App developer Develops apps and makes them available though portals of automation vendors. SI as a IoT Venture Partner Provides system integration work that may include applications outside of the traditional automation space and/or involves some risk sharing in venture. SI as IoT Entrepreneur Develops and commercializes platform / services. Likely to seek external investment to share risk and enable scaling up.

30 Agenda Revolutions don t always feel like Revolutions Machine Builders Manufacturers Role for System Integrators The New Challenges Summary

31 The New Challenges Partnering with traditional and non-traditional parties to deliver solutions. Subscription as the norm. Upfront investment in platform development demands capital. Open to third party investment? Ability to SCALE UP. IP (intellectual property) ownership. Who owns the data? Reliability: Approach taken by consumer side of fail fast / rework / relaunch is not acceptable. for mission critical processes at industrial sites. Cybersecurity.

32 Agenda Revolutions don t always feel like Revolutions Machine Builders Manufacturers Role for System Integrators The New Challenges Summary

33 Summary We are living an important revolution whether we realize it or not. Every Industrial Company will be transformed, this includes manufacturers, machine builders and system integrators. Technology has become an enabler; less of a differentiator. Innovation, along with the ability to partner with non traditional parties will become capabilities determining success.