OREANDA-NEWS. April 09, 2015. European industry faces radical structural change, with the digital transformation offering enormous opportunities but also presenting stiff challenges. The Roland Berger study, "The digital transformation of industry", produced in collaboration with the Federation of German Industries (BDI), investigates the causes of digitization and the impact it is going to have on industry in Germany and Europe, and calculates its overall economic effect.

The experts found that the digitization of industry could open up additional value creation potential of EUR 425 billion for Germany alone in the period through 2025. For Europe the accumulated figure is as high as EUR 1.25 trillion. If, however, Europe proves unable to turn the digital transformation to its advantage, European industry could suffer an accumulated loss of as much as EUR 605 billion in revenues.

Europe therefore needs to act fast: European companies have to develop a more profound understanding of what the digital transformation means and come up with new and sustainable business models. Otherwise market players from outside the industry who boast very high levels of digitization expertise could come in and crowd them out of lucrative parts of the value chain. "They also need to help shape digital industry standards in the interests of the European economy and build up the right infrastructure," recommends Stefan Schaible, CEO for Germany and Central Europe at Roland Berger Strategy Consultants. "What we need is a "Digital Valley" for Europe to enable Europe's digital economy to become more interconnected."

Digitization is fundamentally changing the way value is created
Digital systems will give companies the capability to gather, process and analyze large amounts of data on production processes, suppliers and customers. This will enable firms to anticipate market developments more precisely and make decisions more expediently. Production processes will reach a new level of automation owing to the march of digital progress and the application of artificial intelligence. Links in the value chain will be more efficiently interconnected, leading to better supply chain synchronization, shorter production times and faster innovation cycles. Customers' specific needs will also become more transparent. Companies will therefore be able to develop and offer brand new types of products and services.

All of these factors are going to fundamentally transform value chains in industry. Traditional, staggered value chains will become dynamic value chain networks. Communication and constant sharing of information between production units, corporate departments and external suppliers will bring flexibility into value chains.

Risk of being "ubered"
This opens up new opportunities for the existing market players, as well as for non-industry players such as those in the IT sector. Established firms with considerable expertise in their industry could quickly fall behind as a result. Even industry leaders are at risk of being "ubered" – an allusion to digital service provider "Uber", whose app is challenging the established chauffeur and taxi market on an international scale. "Whether you take what Amazon did a few years ago or what Uber is doing now, these examples highlight what a sea change the digital transformation can bring to markets," says Stefan Schaible. "Service providers and industry need to quickly gear themselves up for this new competitive landscape. New cooperation between different companies is what's needed here – and it will even include working with competitors, for instance in piloting and establishing shared digital platforms and business models."

Digitization is going to hit the different sectors of European industry at different times and with different intensities. The automotive and logistics sectors, for their part, have already been swept up in the tide of digitization. EUR 445 billion in additional value creation potential is now open to them in the period leading up to 2025. The second wave of digitization will affect the mechanical and plant engineering, electrical engineering and medical technology industries, offering the prospect of EUR 630 billion in additional value creation potential through 2025. The third wave of digitization will finally reach the chemical and aerospace industries and could yield additional value creation potential of EUR 175 billion in the years to 2025. This is potential that needs to exploited!

Industry and policymakers need to take action
"Europe has a good chance of coming out of the digital transformation in a stronger position than when it went in. This is a major action item given the EU Commission's ambitious target of raising industry's share in economic output in the European Union from 16 to 20 percent by 2020," says Stefan Schaible. Both Europe's companies and its policymakers will need to take action.

Companies urgently need to become more digitally mature: Firms often see digitization as little more than a means of increasing their efficiency. But that is only one aspect of it. The Roland Berger study found that what is more important is that they tap into the new value creation potential. To do that, companies will need to build up a deeper understanding of what "digital" means and its consequences for the market.

Moreover, Europe's economy will need to pool its strengths to help shape the definition of common standards. Europe's industrial strength lies in the software embedded in its products. But industry standards defined in the US to apply across the entire globe and leaving no scope for specific configurations to suit European industry serve only to jeopardize Europe's industrial future.

The study addresses a call for the expansion of an efficient digital infrastructure to Europe's political players in particular. Nationwide broadband networks form the backbone of the digitization of the economy. And data security has a key role to play.

Europe needs a "Digital Valley"
The Roland Berger experts are championing the establishment of a European "Digital Valley" akin to the one in the US, to enable the continent to support its digital economy better. "Compared with the US, Europe's digital landscape is highly fragmented, featuring a huge diversity of players," says Stefan Schaible. 13 of the top 20 digital companies by market cap are located in the US and seven are in Asia. None of the companies originate in Europe.

According to Roland Berger Strategy Consultants, the success of digital platforms like those in America's Silicon Valley or Shanghai Shenzhen in China is based particularly on the art of bringing three crucial elements together: innovators, venture capital and talent. But other stakeholders like companies, research institutions and decision makers also need to become part of a widespread European network. Roland Berger Strategy Consultants has taken the initiative here and set up Terra Numerata™ – a platform to support the European economy as it enters the digital age.

Methodology and authors
The study draws its analytical foundations from workshops with industry experts, a survey of more than 300 top decision makers in Germany and 30 interviews with CEOs and Chief Technology Officers in DAX-listed corporations and leading SMEs. The study's authors are experienced Partners and experts from the various Competence Centers (CCs) at Roland Berger Strategy Consultants: Prof. Bj?rn Bloching (Partner in the Digital CC), Philipp Leutiger (Partner in the Digital CC), Prof. Torsten Oltmanns (Partner in the Global Marketing CC), Carsten Rossbach (Partner in the Engineered Products & High Tech CC), Dr. Thomas Schlick (Partner in the Automotive CC), Gerrit Remane (Senior Consultant in the Engineered Products & High Tech CC), Paul Quick (Consultant in the Digital CC) and Oksana Shafranyuk (Senior Researcher in Support Services).