Despite its ubiquity, digital technology has only just begun to penetrate industries, argues Matthew Courtnell, Equities Product Specialist at Legal & General Investment Management.
Looking beyond the tech-related hype and industry buzzwords, digitalisation is a rapid driver of change for the manufacturing and asset value chain. As a global secular theme, the sheer breadth of industries where digital-focused strategies have the potential to transform business models quickly is fascinating.
While this concept has been around for a while, one notable change is the speed in which we are approaching a tipping point for adoption. In a global context, the proposition of digital transformation has stimulated a step-change in focus from corporate management teams as they bid to improve asset efficiency and drive future earnings.
Whether it’s an industrial engineering plant managed by a digital twin, a fully automated manufacturing system or grocery packing robots, we are now assuming a faster rate of future growth. As this growth accelerates, we expect digital trends (alongside cybersecurity) to drive an even higher percentage of corporate budgets on IT.
Increasingly capable software and services look set to redefine industries
Such is the industrial world’s focus on optimisation, these digital initiatives are fuelling order book and demand growth for industry leaders across software, tech hardware and services. For corporate management, harnessing technology and understanding how it can enhance operations has become incredibly powerful.
From recent conversations with industry experts and mega-cap oil companies, we know that their ability to generate higher free cashflow will most likely hinge on the way the oil industry uses technology to create value. For instance, BP’s Upstream CEO, Bernard Looney, recently stated that “Digital is going to be as important a skill set in the oil and gas industry as knowing how to drill a well”.
If they embrace this at scale, many asset-intensive industries can seek to increase efficiency, enhance decision making and deliver significant cost savings. Within the theme, we expect data analytics and asset performance management to be key drivers of digitalisation. This can be deployed to understand the correlation between steel production parameters and refractories, improve maintenance and minimise downtime at an oil refinery, or be used to create an inventory and purchasing platform that enables mass individualisation for millions of holidaymakers.
As this trend unfolds, increasingly capable software and services look set to redefine industries as growth and value drives adoption. The end result can significantly increase returns on capital and profitability, as businesses become far more technologically focused than ever before.
We believe much of the digital disruption is yet to come. But we are already seeing evidence of such technology delivering commercial success. A recent visit to Cambridge to meet Aveva Group highlighted their technological prowess and the significant opportunities behind digital transformation. Those companies adopting forward-thinking strategies have already begun to use tech-enabled functionality from the Cloud, Industrial IOT, Augmented Reality and Big data, as part of a bid to capture new growth.
At a time when the market is beginning to fret over a global growth slowdown, the secular trend of digital transformation appears to have only just started
Accordingly, debating the winner and losers from this type of disruptive innovation is a key focus of our time on the Active Equity team. As we consider the potential ramifications of this thematic trends, we look for companies that are optimally placed for growth as the secular trend towards digitalisation continues. Right now, many of these companies are still at the early stages of valuing the significance of their intellectual property, and the subsequent value creation for their customers. Yet there is no doubt that these digital pioneers will be able to strengthen their ability to further monetise this opportunity as adoption increases.
One thing is for sure. At a time when the market is beginning to fret over a global growth slowdown, the secular trend of digital transformation appears to have only just started.
This article has first been published on futureworldblog.lgim.com.