Industrial Internet + 5G, we must plan carefully before taking action

In the previous article, "IoT operating system, a road of no return with a narrow escape route?", we mentioned that the underlying logic of IoT hardware, connected devices, and IoT operating systems is completely different. This week, Huang Yujun and I both observed more interesting signals.

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First, 20% of China's machine tool companies are making losses.

According to the analysis of the "Economic Operation of the Machine Tool Industry in the First Half of 2019" released by the China Machine Tool Association, among the 5,547 large-scale enterprises in the machine tool industry, 1,033 were loss-making enterprises, accounting for 18.6%. The association's key contact enterprises accounted for 38.3% of the loss-making enterprises in June, and the new orders for metal processing machine tools in January-June decreased by 38.8% year-on-year.

As a representative example, in mid-July, Shenyang Machine Tool's 2019 semi-annual performance forecast stated that the net profit attributable to shareholders of the listed company in the first half of the year was a loss of 1.1 billion yuan to 1.45 billion yuan, a decrease of 4456% to 5843% over the same period last year. At the end of July, Shenyang Machine Tool was applied for reorganization. The Shenyang Intermediate People's Court ruled to accept the reorganization of Shenyang Machine Tool (Group) Co., Ltd. and its eight subsidiaries.

Second, a company successfully achieved 5G remote “one-click steelmaking”.

Thousands of meters away, with the tap of a button, the company has achieved full automation of the entire process from converter smelting to steel production using 5G technology. It is reported that "this is something that steel workers never dared to think about before, but now it has become a reality."

3,000 meters away from the operation site, as the start button on the iPad program was pressed, a converter officially started the "one-click steelmaking" mode: the oxygen gun slowly lowered, and the molten steel in the converter began to roll... With the help of 5G technology, the remote simulation screen intuitively and real-timely displays the converter smelting situation.

In this article, we will use these two things as an introduction to talk about how Industrial Internet + 5G should create value.

1. Why do we need Industrial Internet and 5G?

What do you think the above two events reveal?

The situation in many market segments in the manufacturing sector is changing, which is a "boiling frog in warm water" process.

The growth of manufacturing companies has slowed down, and they have even started to make losses. You may see this signal more and more outside the machine tool industry.

Although some companies anticipated the change in water temperature, their transformation was not successful.

In 2011, Shenyang Machine Tool was one of the world's top machine tool companies. In the direction of intelligence, Shenyang Machine Tool also made useful explorations. At that time, the i5 intelligent CNC system developed by Shenyang Machine Tool was known as the pioneer of the Industrial 4.0 reform.

However, i5's strategic planning and sales strategy were unreasonable, which led the entire factory into a vicious cycle of blindly expanding its scale. This issue will be discussed later in this article.

Second, manufacturing companies have expectations, enthusiasm, and a desire to try out the Industrial Internet and 5G, but have you discovered any problems with this "bear hug"?

Using the Industrial Internet and 5G to achieve remote “one-click steelmaking” is, to borrow a common saying, a “shotgun to kill a mosquito” approach. This application is still at the stage of showing off skills and is far from having practical value.

This incident shows that the purpose of some companies using new technologies is still unclear. Let's think again, why do we need the Industrial Internet and 5G? What is the purpose of using these new technologies?

There are only a few reasons why it is valuable: helping your own business save money, helping customers add value, and helping partners make money and get a piece of the pie.

The underlying logic of these purposes is completely different, and their business forms, business models and layout methods are also completely different.

Sometimes it is not easy to recognize your purpose and keep moving forward.

To understand the purpose of using new technologies, we need to observe from a larger system perspective. We need to look beyond the perspective of a single production line and our own company and look at it from the perspective of the industrial chain and even the value network.

These purposes do not include "using new technology for the sake of using new technology."

If the purpose is to help your company save money, help customers increase value, and help partners make money, and use the corresponding KPI to measure "one-key steelmaking", you will find that it is useless and just creates a pseudo-demand for 5G. If you cannot break through the limitations of inherent thinking, no matter how good the IIoT+5G technology is, it is just a "three-for-one".

The above two signals actually constitute a set of contradictions: the external environment has made many industries feel the crisis, and the need for enterprise transformation is urgent, but there is no unified understanding of how new technologies represented by industrial Internet and 5G should be used.

2. 3 stages and 3 prescriptions

The problem currently faced by manufacturing companies is to improve profits. Profit = revenue - expenses. To increase profits, they must either "increase revenue" to make money or "reduce expenditure" to save money.

Make money or save money?

In the previous article, I mentioned that saving money is a relatively easy approach, so many companies are always stuck in the idea of ​​saving money. How to make money and increase value can truly bring out the value of the Industrial Internet and 5G.

What should be done specifically?

Among the many analyses, I agree relatively with the three development stages of the industrial Internet proposed by Lin Xueping:

Phase 1: Internalization, opening up the informatization of enterprise business processes

Phase 2: Externalization, extending the value chain of product services

Phase 3: External plug-in, external empowerment to develop new business models

Internalization refers to the company's internal business needs and the use of IT technology to open up business processes.

As information systems such as ERP, CRM, and OA are widely used in industry, a large number of data islands have been formed within enterprises. At the same time, the development of IoT technology has greatly improved the connectivity and data collection of industrial scenarios. How to open up internal data links and achieve more efficient decision-making driven by data is becoming the most important process for enterprise internalization.

Externalization: Due to the greatly improved connectivity and efficiency, the focus of enterprises has shifted from manufacturing to the market, and the value chain has developed around products toward the user end.

The externalization process strengthens the connection between the internal and external value systems of the enterprise through IT, OT technology, data interaction technology, etc., and extends the product value chain with the market and customers as the center, resource sharing, integrated optimization as the means, which includes the collaboration and resource sharing of upstream and downstream enterprises, as well as the expansion of new supply chains, to create "product and service integration".

Plug-ins refer to empowering the digitalization process of the entire industry through more general and broader technical services, thereby achieving the goal of reshaping the business model.

Plug-ins require more modular, standardized and universal technologies that are applicable to the entire industry in order to provide broad support to the entire industry, especially small and medium-sized enterprises, and develop or transform the industry's business model through platform-based operations.

Internalization, externalization, and plug-in, when it comes to different companies in different industries, the development steps of the Industrial Internet will lead to various variations, and there is no unified approach.

In order to extract some commonalities as much as possible, we return to the core business of manufacturing and temporarily divide various enterprises into three categories to see their respective prescriptions:

• Enterprises with weak core business
• Saturated business enterprises
• Steady business enterprises

1. Enterprises with weak core business. The machine tool field mentioned above is a good example. Machine tool enterprises are facing the dilemma of weak growth.

Many companies have prepared for the rainy day and have achieved the staged "internalization" of the industrial Internet earlier, and are exploring the path of "externalization". What problems have they encountered in the process of "externalization"?

First of all, selling equipment and selling services are two completely different business models, and it is difficult to balance them.

The most typical example is the German machine tool giant Trumpf, which incubated the industrial Internet platform company AXOOM in order to achieve transformation.

TRUMPF is a typical equipment manufacturer with rich industrial knowledge and customer base, but the IoT operating system provided by AXOOM belongs to the technology service business. Their business logics are completely different and they do not communicate on the same channel at all. In the end, AXOOM did not survive long in TRUMPF's mother body, but was sold to a consulting company that is well versed in information technology services.

Secondly, product service, product manufacturing sales decline rapidly, product service sales growth slow, how to grasp the rhythm?

Many companies have felt the cooling of the market since the second half of last year and have vigorously promoted the transformation from selling equipment to selling services. Although the revenue from equipment maintenance and consumables sales accounts for a small share of the overall turnover, this part of the revenue is relatively stable. As the overall turnover declines, the proportion of revenue from service projects has gradually increased.

Although product service sales are still in their infancy and are affected by the "J curve effect", the initial ROI return on investment is not significant, but it has gradually shifted the development focus of the entire industry. Complete sets of equipment have become the entrance to service sales, and equipment manufacturers have gradually transformed into equipment operators and service providers.

In order to cultivate "externalization" capabilities, these companies began to collect product usage data and connect it with the company's operational data. The fusion and analysis of external product data and internal operational data will help improve the response speed and quality level of services.

Next, the customer base remains the same, so how can we get old customers to pay for new services?

The focus of product service is not to find new customers, but to increase the revenue contribution of old customers. There must be sufficient reasons to persuade old customers to buy new services. When enterprises jump out of the customer-centric perspective and change to providing services centered on market demand, many answers are self-evident.

Foxconn's logic is quite classic and worth learning from:

• Tools 1.0: Buying and using turning tools
• Tools 2.0: Buy materials, research turning tools, make turning tools, and use turning tools
• Cutting Tools 3.0: Researching materials, using materials, making turning tools, using turning tools, and selling turning tools
• Tool 4.0: research materials, use materials, make turning tools, use turning tools, sell turning tools, sell equipment, sell intelligence

By extending the service chain, machine tool designers and manufacturers and their key component suppliers can use the service network to provide remote operation and maintenance services for their products, creating value together with equipment application companies. Machine tool and other equipment application companies can also achieve information exchange and integrated optimization of their processing and process design, production scheduling, logistics management, etc. through the network.

Having seen this, let us briefly review the problems of Shenyang Machine Tool.

Shenji does not yet have the sales capability for product services. Without verifying the willingness and habits of old customers to purchase new services, the company is eager to promote "externalization". Therefore, the company has designed a quick-success sales model for the i5 intelligent CNC system.

i5's sales are not traditional, but rather a leasing model, where charges are based on usage time, value, or workpieces. This sales model is a challenge to i5's remote monitoring capabilities, the company's sales and management capabilities. If the various indicators for calculating usage time and production value have not reached a market consensus, this leasing model will easily face difficulties in collecting payments, resulting in huge bad debt risks, and the company's debt snowball will naturally grow.

In short, enterprises with weak core business face the most obvious difficulties. How to "externalize" and how to do "externalization" well is the best way to break the deadlock.

2. Enterprises with saturated core businesses. These enterprises are generally hidden champions that have already reached the ceiling of industry development and need to find a broader space for development.

Many traditional system integrators and automation product providers are typical representatives. In the past, they mainly served a single market or a single type of product, and had gained a leading edge in their industry. Now they are facing the dilemma of limited growth space and how to improve market operation efficiency. The connectivity of the Industrial Internet is a weapon for such enterprises to utilize their core industry resources and build a second growth point.

Their "plug-in" is not all smooth sailing. The industry is a market that emphasizes practice, and most companies that "plug-in" will choose to do a "dog food eating" verification first. But such companies often have a question that they avoid talking about: Is their own industrial Internet platform fully used in their own factories?

Based on my understanding of several leading companies, the answer is no.

A common practice is to conduct pilot projects on several demonstration lines within one's own enterprise and then promote and sell them externally, without "internalizing" the Industrial Internet and integrating it into one's entire manufacturing system.

Although there is nothing wrong with this approach, if an Industrial Internet solution has not been tempered by various tricky problems during internal application, it is bound to have a thorny future if it is directly "externalized".

Another challenge of "plug-ins" is the construction of a new business model and the platform's operational capabilities.

Transformers usually first consider whether it will affect their core business. If there is a conflict, they will prioritize maintaining their core business. Second, they lack capabilities and their investment is not sustainable. The Industrial Internet is a highly integrated business, ranging from connection technology, automation, informatization to dataization. It has a large technology span and requires mastering industry know-how and platform operation capabilities. Transformers tend to have too high expectations of the market and find it difficult to continue to invest. Third, for companies that transform into industrial Internet solution providers, if their involvement threatens the future business or services that customers will provide or creates potential business competition, customers may give up halfway.

For example, Caterpillar, a construction machinery giant, initially chose to cooperate with Uptake, a rising star in the industrial Internet platform, to conduct data analysis and service-oriented transformation, but it ultimately ended in nothing.

3. Enterprises with stable core businesses are mostly in professional production fields such as steel, cement, and chemicals. The barriers to production experience are high. The leading enterprises have strong internal IT and automation teams and have integrated information technology and production technology into corporate competitiveness.

According to observations, these companies have also tried the "externalization" of the Industrial Internet, but often retreated to the path of "internalization" and "externalization". What is the reason behind this?

Because they found that this road was blocked.

The technical team mainly serves the enterprise itself and is generally set as a cost center, which means a non-profit business department. Such a department mainly targets internal customers of the enterprise, and its plans and goals are proposed by other units and budgets are prepared, which results in their limited voice within the enterprise.

Most of these technical teams were first cultivated in leading enterprises. Their capabilities are among the best in the industry, and they should have been very motivated to export their industrial Internet solutions and develop "plug-ins" to generate revenue. But when they tried to go abroad, problems arose...

Robust companies generally have certain monopoly characteristics, either with economies of scale or with unique advantages based on proprietary intellectual property or trade secrets. Therefore, each company's industrial Internet solution actually contains a lot of industry know-how and expert experience accumulated over a long period of time. Since "plug-ins" are technical service businesses, they not only contain a lot of industry experience accumulation in software and integration businesses, but also are often required by customers for a lot of training, which invisibly outputs a lot of corporate experience.

So voices of doubt began to emerge: Will "plug-ins" reduce the competitive advantage of the main business? The technical team eventually found that instead of empowering others and teaching competitors, this part of the revenue was not large in the early stage, so it would be better to do the main business well.

Even if they want to make "plug-ins", such companies will carefully select only relatively general and modular solutions to open up to the outside world, and then iterate slowly.

3. IoT+5G: Grasp the cards in your hand

In the past, manufacturing companies only needed to handle the relationship between people and operating equipment, and between people and information systems.

Now, two new weapons have been added: the Industrial Internet and the 5G network. The connection and transmission capabilities of 5G have once again upgraded the connection volume for the Industrial Internet and increased the imagination of the business space. It is not easy to use them well. How to deal with the relationship between people and the Industrial Internet, and people and the 5G network, each company is looking for its own prescription.

To handle these relationships well, we should not just focus on the technology itself, but should start from the ultimate goal, surpass ourselves and achieve sublimation.

From focusing on customers to focusing on the market; from selling products with a short-term perspective to selling services with a long-term perspective; from being based on the core business to creating extensions or deepening the core business... Only by completing these transformations can the value of new technologies be truly realized.

Based on the above analysis, we provide some reference ideas for some typical enterprises, which are briefly summarized as follows:

• Enterprises with weak core business: focus on "externalization"
• Enterprises with saturated core business: first "internalize" and then "externalize"
• Enterprises with stable core businesses: "Internalization" and "externalization" are better than "plug-ins"

Purpose, purpose, purpose.

Going back to the set of signals mentioned at the beginning of the article, we must first clarify the purpose before doing anything. This cannot be emphasized enough.

Summary:

• The external environment has made many industries feel the crisis, and the need for enterprise transformation is urgent. However, there is no unified understanding of how the industrial Internet and 5G should be used.
• When it comes to different companies in different industries, the development steps of the Industrial Internet will result in various variations and there is no unified approach.
• Many times, it is better to think from the beginning: Why do we need the Industrial Internet and 5G? What is the purpose of using these new technologies?