In a post a few days ago on the way forward for OEMs in the IoT era, particularly as regards to initial investments when payback calculations are quite uncertain we reached following conclusion:

“In assessing strategies and responses therefore, OEMs at this stage must be guided primarily by the potential downside of being left out, disconnected from the data rather than concrete upside from new services, the timing and value of which is still uncertain. The best way forward –at least for the time being- is to invest in analytics, computing and data capability and to develop end-to-end Apps (from prognostics to remote intervention) for their installed base using probably GE’s or possibly another platform. While this requires non-trivial upfront investment (best placed here are of course process and industrial automation vendors) and some of the revenue that will eventually be generated will stick with GE, the risks of losing touch with the installed base is reduced and an opportunity opens up in the new market of industrial and asset management Apps. One certainty is that IT is moving from running supporting processes very squarely into the heart of industrial businesses”.

We are pleased now to see that some manufacturers share our views. A Reuters article about the threat facing German engineering firms from technology providers, based also on a discussion with Volker Franke, CEO of the Harting Group, a maker of industrial plugs, sockets and connectors, describes the reasoning behind the company’s investments in industrial automation and IoT (emphasis ours):

“Harting is one of a growing number of German firms investing in software, fearing their excellence in mechanical precision and reliability — the trademarks of “Made in Germany” valued by factory owners around the world — will not be enough to guarantee them success for much longer.As computerised technology becomes an ever greater part of industrial processes, Internet companies are starting to eclipse low-cost Chinese manufacturers as German engineers’ main worry. With the likes of Google investing heavily in robotics and automated driving, the fear is engineers will be relegated to selling generic hardware, while software firms make it rich with the technology that makes the machinery smart. ‘Right now there are makers of factory equipment and those who buy, operate and look after it. Who guarantees that it stays that way?’ asked Franke during a Reuters visit to Harting’s headquarters in Espelkamp, northwest Germany. ‘It could be that somebody will squeeze their way between the two, telling the equipment user he won’t have to bother about what type of machines to use any more. This service provider will be from the digital world,’ he said. Companies that can master vast amounts of data such as Google, SAP, Amazon, EMC Corp’s cloud-computing division Pivotal and Teradata Corp could all open up the breach, industry analysts believe”.

Volker Franke is of course correct. The biggest threat facing manufacturers and OEMs from the IoT and the services it makes possible is commoditization. That bodes ill for margins.