As a director at the international technology advisory and investment firm GP Bullhound, investment banker Dr. Nikolas Westphal has an eye on the technology trends of the future. His latest report is dedicated to the topic of smart manufacturing. In an interview with Germanedge, he talks about why this sector is so attractive to investors, why Europe has to be careful to keep up, and what trend forecasting has to do with canaries.

Germanedge: In June you published a report entitled “Smart Manufacturing – The Rise of the Machines.” What made you choose this topic and who was the report written for?

Dr. Nikolas Westphal: As investment bankers, we always keep an eye on any new developments we come across that have the potential to become attractive to us. Smart manufacturing is a relatively new sector, but one that shows interesting development. Of course, our reports are primarily for clients and industry representatives, but they are also interesting to a wider audience, which is why they are free to download on our website. While other topics like Blockchain might be trendier at the moment, smart manufacturing will remain current for a long time.

Companies that produce smart manufacturing technologies received a good 5.9 billion euros in funding in 2018, while it was still only 0.6 billion euros in 2013. What lead to this increase?

At the moment, there’s a lot of capital in the market, which is also related to macroeconomic factors, and the volume of funding is increasing significantly across all technological sectors. The situation is even more extreme when it comes to artificial intelligence, where funding is in the tens of billions. A considerable portion of it comes from China, where platforms are deliberately being set up in the areas of artificial intelligence and edge computing in order to counteract potential US dominance. However, the increase in smart manufacturing is also a sign of increasing market maturity. Five years ago, there simply weren’t enough business models to invest in.

©GP Bullhound, „Smart Manufacturing – The Rise of The Machines“, June 2019, p. 49.

In your report you examine not only international investment and transaction movements over the last five years, but also the social and political implications of the subject. Do investors have any interests here beyond the economic aspects?

Absolutely. At the very least, large strategic players are automatically exposed to social and political developments. Trends like the demand for carbon neutrality require changes in production. Economic policy decisions – like how France is considering the introduction of a digitalization tax on automated labor – have an influence on how much turnover remains at which location. The fact that a society may not be sufficiently prepared for digitalization is also a highly influential factor. That is why I point out in my report that there is a lack of digitalization in commerce as well as in society as a whole. It absolutely must be addressed – otherwise part of the value added will likely be shifted away from Germany and Europe. And, of course, that would have implications for society as a whole.

In Germany, particularly in the SME sector, companies are often readily certified as lacking digital competence, which is a necessary prerequisite for the digitalization of production. Is this assessment due to the German tendency to diminish one’s actual value, or is it really true? Where do you see Germany in a global context?

According to estimates from various international sources, only three percent of all Germany companies are in the cloud to date, which means that 97 percent are still working on-premises. Meanwhile in the UK, for example, around 20 percent may already be in the cloud. Even if it isn’t entirely relevant for every company, this estimate shows that there’s a lack of basic infrastructure to some extent. Our clients in the IoT sector have also observed that many companies have neither Wi-Fi nor any other means of receiving mobile data in their production or logistics facilities – no data, no digitalization. Or consider work protection laws. Methods of augmented reality may not be applicable in Germany because recordings in the workplace are subject to heavy restrictions. But that’s something you can’t avoid if you are working with AR glasses. On the other hand, China is also a leader in AI because there are no rigid data protection laws there. Of course, this brings up the question of whether such a thing is actually desirable. Nonetheless, it’s an economic reality that we aren’t facing enough. For example, I don’t know of any plans on how European approaches to data protection can be reconciled with modern machine-learning concepts so that all social participants are satisfied. As far as I can see, there is a lot of potential for social discourse to be lifted.

Another problem is the migration of technological know-how. The media attention surrounding the takeover of German robot manufacturer Kuka by China’s Midea Group is just one example of it. Is it true that these types of deals weaken Germany as a production location?

If you look at cross-border M&A activities, it’s at least clear that European companies are mainly being acquired by Asian and American companies. To be sure, the transfer doesn’t only go in one direction, considering how companies like Bosch or Siemens invest and buy. But, for an equally weighted exchange, you need very strong industrial platforms and my impression is that in the digital sector the strong platforms tend not to be located in Europe. This could also be due to differences in thinking: I believe that product thinking is dominant here. Many European start-ups develop great, useful products, but for them it’s more important to realize a good product than to build a successful, commercially scalable company.

Global overview of key trends in smart manufacturing. ©GP Bullhound, „Smart Manufacturing – The Rise of The Machines“, June 2019, p. 44.

But isn’t product thinking precisely what led to the proverbial quality of German craftsmanship and made Germany a strong industrial location in the first place? The smartest digital solutions are worthless if there is no production to digitalize.

Yes, and that focus on a high-quality product applies to all of continental Europe. But the value added is less and less about the product itself and more in the service it offers. For example, if a shipping company needs a ship turbine, it will no longer pay for the physical equipment, but instead for its operational life. Those who continue to focus only on the physical product will see more and more parts of the value added migrate to where the service orchestration is built. Fundamentally, German industry has all the strengths it needs and the German software and IT industry has many hidden champions – companies that are not as visible as Salesforce or Google, but that offer excellent solutions in certain areas and have highly trained computer scientists who can implement those solutions optimally. But when I look at something like the auctions for the 5G frequencies, I’m afraid the urgency of the issue hasn’t really caught on in Germany yet.

With your focus on technology investments, do you not at least indirectly contribute to the promotion of future technologies? To what extent can you influence the future through your work?

I would rather compare us to a canary in a coal mine. In the past, miners brought canaries into the mines because they reacted faster than humans to changes in air quality, serving as an early warning system. By working with many technology companies that are relatively new to the market, we can predict where the trends are going with relatively good accuracy.

If we stick to the canary comparison, what dangers are lurking in the technology mine?

I think bankers have to be careful not to underestimate the technological hurdles. Even if a technology is already very visible, like self-driving vehicles are now, it can sometimes take a very long time before it reaches the market. But we’ve been doing quite well with our technology forecasts for years, our hit rate is around 80 percent. The time period we consider is always only about 12 months, but I think capital flows are a good indicator of how relevant a market will become.