The falling cost of technology allows us to connect all sorts of devices to the internet at an increasing pace. The vast amount of generated data can be used to get insights and automate processes in our homes and workplaces. The Internet of Things (IoT) leads to a more connected and smarter world, where companies embracing change can make better-informed decisions and run their businesses more efficiently. This presents opportunities for investors.
The Internet of Things (IoT) has the potential to create a more connected world, where ‘dumb’ objects from our homes, workplaces, and environment become ‘smart’ by connecting to the internet and improving their functionality. Software and Big Data analytics are used to analyze the input data from the objects and generate actionable insights. Technology analysts expect tens of billions of devices, including cars, fridges, industrial sensors, and light bulbs, to connect to the internet for the first time by the end of this decade. We especially see investment opportunities in the industrial Internet of Things, where the technology delivers tangible benefits to enterprises. The consumer IoT, which includes the ‘Smart’ Home and Car concepts, is in an earlier stage of development.
The idea of the industrial Internet of Things has been talked about for a long time but progress has been limited until recently. Industry organizations are now collaborating to set standards and improve interoperability, corporate executives are openly expressing their interest in IoT, and engineers are showcasing new IoT applications. Most importantly, companies from various industries have begun telling success stories about how IoT helps them improve efficiency and serve their customers better. We believe that in the following years we will see increased corporate spending and innovation in industrial IoT, which creates new opportunities for investors.
Industrial IoT has wider implications than helping to boost efficiency. The deployment of sensors in products and the environment allows companies from all sectors of the economy to gain better understanding of their customers’ needs and how their products are being used. Such insights allow companies to move closer to their customers and offer to solve their problems, rather than selling them a tool. This marks a shift from standardized products and services towards more customization and a larger service component in product offerings. Changes in value propositions, such as the move towards provision of solutions, are enabled by data and insights, and can change competitive landscapes. Examining how IoT adoption is influencing sectors of the economy is thus important for identifying potential winners and losers.
Industrial automation is nothing new. Companies from all industries have been automating processes to improve efficiency and quality since the middle of the twentieth century. The industrial IoT is just the next step in the process, triggered by the spread of the Internet and the falling cost of connectivity and data processing. The IoT is therefore an incremental, rather than disruptive, innovation, which largely benefits existing players in the industrial automation business. The complexity of IoT solutions implies that veteran industrial automation companies and technology consultants are well positioned to use their industry-specific expertise to help customers embrace IoT.
Our analysis shows that industrial IoT adoption will have positive effects across industries, and create value spillover to consumers. The clearest beneficiaries would be consultants, as well as software and hardware makers which help companies implement industrial IoT. As we are currently in an early stage of IoT adoption, there are few ‘pure play’ industrial IoT companies. As a consequence, we prefer a diversified investment approach in companies enabling IoT, from IoT platforms, through cloud and analytics companies, to makers of sensors and semiconductors.
A network of connected devices by itself is unusable without the proper set of analytics tools. Valuable actionable insights for companies are generated in the Data Layer, where large amounts of data are pooled and analyzed. We expect much of the value of IoT to be captured by companies providing these analytics services, and this is where we see the best investment opportunities. Companies providing digital security also stand to benefit from the move of the physical world into the digital realm. Companies manufacturing sensors, analog and digital semiconductors, and networking equipment, are also well positioned to benefit from the accelerating adoption of the Internet of Things.
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