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What Do We Mean When We Talk about Industry 4.0? An Interview with ISG Digital Expert Prashant Kelker

In working with clients, ISG frequently discusses “Industrie 4.0” and what it means for their businesses. In Germany, the concept has a business-first focus, not a technology focus. When Prashant Kelker, ISG Director in North Europe, works with clients interested in Industrie 4.0, he advises them to consider first the data they already generate and probably underuse. I asked Prashant how he thinks the market is shifting away from selling hard goods to selling services and the rights to use hard goods. He says the change leads to ripple effects through departments inside companies as well as across companies’ supply chains.

Here is our conversation.

Prashant, thank you so much for spending some time with me today. To begin with, what is “Industrie 4.0” and how is it tied to the way businesses in DACH are rethinking how they operate?

As a concept, Industrie 4.0 came out of an initiative of the German government, as a definition for the fourth industrial revolution. The first three were mechanization, mass production and automation. What’s new in 4.0 is connecting the physical assets to digital networks. Industrie 4.0 looks mostly at the manufacturing and digital supply chain side of the Industrial Internet of Things (IIoT). Companies are starting to realize this is not only about technology, it also about end-to-end perspectives on business.

Obviously, Germany is a center for the automotive industry. Give us a high-level view of that and its connections to Industrie 4.0.

Germany is the home of Volkswagen, Opel, BMW, Daimler, Porsche and Audi. The automotive industry does not stop with original equipment manufacturers (OEMS) but continues with the Tier I suppliers, such as Bosch and Continental and also Tier II suppliers, such as Festo. Recent statistics show that almost 50 percent of the German GDP is either directly or indirectly connected with automotive. And now imagine that Industrie 4.0 manifests itself as the interplay between the large OEMs and its suppliers. So I think we will see a lot of innovation coming out of this ecosystem.

The suppliers are concentrated around mainly two regions in the south: Baden-Würrtemberg, Bavaria—with the headquarters of BMW, Audi and Daimler—and the north in the area surrounding Wolfsburg, where there’s the headquarters of Volkswagen. These suppliers together form the Mittelstand—niche enterprises making anywhere between €1-4 billion annually and employing 40-50 percent of the German workforce. These suppliers not only create niche parts for the automotive industry, they also supply to the large industrial engineering conglomerates like Siemens and ABB. This is the “primordial soup” from which Industrie 4.0 originated.

4.0 is about how companies can do business in this new environment?

That’s right. The rest of the world talks about connected things. Germany talks about connected business models first, and then adds the connected things.

Is this part of the heritage from which German manufacturing has come and also been influenced by technology companies there, such as SAP?

Yes. SAP surely had a role. Also, 50-55 percent of German GDP comes from exports. So in a country of 80 million people, Industrie 4.0 has many influences. What we call the Google/Apple/Facebook/Amazon (GAFA) influence is changing the thinking of industry leaders. Germany always has had a hardware and device focus. GAFA shows Germany the importance of software. Germany doesn’t want to lose its advantages so that was a key driver for starting the Industrie 4.0 initiatives.

Did 4.0 grow from the industry side realizing the need to improve, or from the public sector side?

I guess this was a mixture of both. The political leaders are very closely knit with automotive and manufacturing industry leaders due to the large dependence of the German economy on these segments. Germany watches Silicon Valley and clearly knows that it missed the first wave of digital—that is consumer digital and GAFA. So it is a joint initiative.

Tell me about the links between Industrie 4.0 and data-driven business. Is Industrie 4.0 at least partly about German firms becoming data-driven businesses?

Devices are already out there in the field, so the goal is to move toward preventive maintenance. So therefore these are clearly the first use cases that emerged. However, existing devices already generate much data that is not used. We call that dark data. German companies should first mine this data before chasing the smart-device unicorn.

Such data initiatives are bringing out interesting ideas. When one goes beyond technology, then one realizes that a data-driven business means making the mind shift from “selling a device” to “selling the right to use a device.” And this has massive repercussions in every business function—for example, how do you enable your new sales force with these deal shapes?

With the focus on hardware, German companies have not yet come to terms on sharing data. Of late there has been press coverage on who owns the data generated by the car—is it the suppliers who supplied the parts or is it the OEM itself? So these aren’t just academic exercises—businesses need to consider things like data ownership differently now as it can make or break business models.

What are the most important challenges manufacturers and their supply chains need to overcome to take advantage of 4.0 and the data?

First, before reaching outside, they need to bridge their IT and operations data. Start by mining their dark data for insights. And decide what they would do with such insights, even before thinking of what to do with smart sensors and other cool-sounding tech. They need to bring together this mission-critical dark operational data along with enterprise data. The only way to start getting actionable insights is to start working towards big data/IIoT initiatives.

Second, they need to think beyond devices and data and consider the connected business. Current supply chains are geared to buying assets and parts, but this must shift—they need to think now about how to buy the rights to use assets.

What does that mean for the rights to use the data? And what about the right to access the devices?

One major tire company told us that you don’t buy its tires; you buy the distance you drive. So the change is much more far reaching than one might expect—including services that play a role in top and bottom line, and this affects each business function. Device usage goes on the books as a service cost, not an asset cost. Think of the repercussions this has on procurement, sales and more. It’s a huge change across an organization. Once conquered, you can then think about how to monetize the data.

So even when companies are making great strides, they really have to change the business inside before they can take best advantage.

Yes. Though the press loves to talk about the customer side of things, the actual change will come from the shop floor and then go into product engineering. Product engineering is still too close to the heart, and still has to make the leap from “buying stuff” to “collaborating on the right to use stuff.” This simple sentence has far-reaching effects in sales, aftersales, product strategy, manufacturing, servicing and more. This will turn business models on their heads and generate new opportunities. Device manufacturers who will bag these opportunities will find they spend a lot of energy in educating their clients.

What are some other key issues when companies start to consider new technologies?

A complex emerging issue is around the common data and insights. Who owns them? The providers of new systems aren’t answering that. If they bring in a new set of sensors and analytics, it needs to be clear who owns the resulting insights. I’ve seen this question stall projects. Plus security is a big open challenge. Who is responsible? What are the risks? For one auto company, ISG is in the midst of developing a framework for the IoT to nail down exactly such topics—we use our expertise in setting up partnerships in the new IoT world.

Do you think we have a way to go—say, several years—before most large enterprises can scale to get the real business changes and benefits?

It depends. The more embedded the smart devices, the longer it takes. Independent devices are faster to deploy. For example, soil sensors on a farm are easy to deploy and justify. But connected and autonomous vehicles require collaboration between multiple players. And they require exchanges of information between disparate technologies. So it takes time to agree on protocols, standards and data ownership while working out the customer experience and technological issues. It’s complex.

Generating insights and monetization channels through IIoT is only half the battle, the other half is the ability to change strategy and investments in an agile way so that you can make the pivot.

What about on the opportunity side of the equation?

IIoT will generate new opportunities in creating platforms and digital communities. We advise clients to explore how the resulting network effects can generate powerful business opportunities.

Net Impact

Industrie 4.0 is still relatively new, and much remains to be developed and refined as participants build and learn. Clients can look forward to not only further investigation and analysis of the effort but also to analyses of how the model and approach can be applied to collaborative digital business and related technology initiatives like IIoT in markets around the world. First clients should understand:

  • Industrie 4.0 in Germany is about improving business models to take advantage of the emerging connections of physical assets to digital networks.
  • Industrie 4.0 has a strong regional presence where the large automotive companies operate along with their ecosystem of suppliers. This proximity helps in the needed collaborations.
  • Companies succeed when they figure out their business models first and then engage in technology projects that support those models. Business models are shifting from selling things to selling the rights to use things and the data they generate.
  • Security and interoperability are significant obstacles to broad deployments of the IIoT, including within the Industrie 4.0 initiative.


For enterprise IT and business leaders: All the new technologies can be alluring, but resist the temptation to embrace them immediately. Most likely, your existing devices have already been generating data for decades, so explore how to best use it before adding more. First, bring together this mission-critical dark operational data along with enterprise data to start getting actionable insights. Down the road, you can look at big data initiatives. Industrie 4.0 means that business models are changing from selling things to selling the right to use things; this means there will be new opportunities in creating platforms and digital communities. Clients should explore how the resulting network effects can generate powerful business opportunities.

For IT vendors and services providers:  Providers should include security in their product offerings. Providers should not only show the power of their own devices, they should also demonstrate how they can positively affect business or operational decisions by being either part of the entire upstream or downstream business value chain. Businesses don’t create real value in isolation. Industrie 4.0 providers have the responsibility of cutting through the IT and OT silos in their client organizations. Implementing their devices and running away without staying to ensure the required cultural change at the enterprise client is short-term thinking. Service providers will need to bring a lot of education and transformational expertise to the table.

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