The coronavirus pandemic has spurred companies to upgrade their digital capabilities, creating investment opportunities in previously overlooked niches.
During the COVID-19 pandemic, companies have stepped up investments in technology to ensure they can communicate remotely with customers and keep their businesses running under lockdowns.
Predictably, big tech companies have been among the main beneficiaries, with revenues and share prices soaring amid turbocharged demand for online services.
Companies in other sectors, too, have sought to accelerate investment in digital solutions, including those that have traditionally lagged. One simple way of tracking progress on digital implementation is to compare sectoral investment in IT as a percentage of overall revenue. A global 2017 study from Deloitte showed finance, professional services and education were the leaders in IT spending; manufacturing and construction were at the bottom of the list (see Figure 1).1
Figure 1: Global IT spending across sectors as a percentage of revenue
This is partly a reflection of the technology required – it is much harder to digitise a construction site or assembly line than a trading floor or classroom. But the pandemic, coupled with the advent of 5G technology, is creating a revolution in these niches, as companies find ways to link the physical and digital worlds with new design tools and connected machinery. (A note on terminology here: digitisation refers to the process of converting an analogue process into a digital one; digitalisation denotes the use of technology to improve the way businesses operate.)
“The pandemic has accelerated a digital wave that is rolling through all avenues of human activity,” says Mikhail Zverev, head of global equities at Aviva Investors. “It’s starting with the most easily digitalised workplaces and rolling onwards. But the earlier you are in this process, the more years of growth you have ahead of you. That’s where the most attractive investment opportunities are – in the sectors where the runway for growth is longest.”
Construction goes digital
Construction firms have long been hampered by low productivity. According to one study, the industry, which accounts for 13 per cent of global GDP, has posted annual productivity growth of just one per cent over the past two decades (see Figure 2).2 Even well-run firms regularly deliver projects late and over budget. And an estimated 20 per cent of the global construction workforce is set to retire over the next three years.3
Figure 2: Labour productivity in construction and manufacturing
The pandemic has acted as a spur to investment in digital tools to improve productivity by cutting waste and boosting efficiency.
The digital element of the construction process used to end with the computer-aided design (CAD) tools used in the architect’s office. Now, companies employ building information modelling (BIM) software to simulate and cost the entire project, using collaborative interfaces that bring together multiple sources of data and track progress in real time.
Digital methods are powering the construction process
Digital methods are also powering the construction process. Leading firms will now fly survey drones over a site before the build starts, gathering high-resolution, three-dimensional images to generate geospatial maps. This data is plugged into smart bulldozers equipped with machine-control technology; as the vehicles move, they collect information that is fed back to office-based teams so progress can be monitored remotely.
Two-thirds of industry respondents to a recent survey thought COVID-19 would accelerate adoption of digital methods in construction.4 Global spending on BIM will more than double between 2020 and 2024, from $6 billion to $13 billion, according to Berenberg estimates.
The savings in cost and material waste can be substantial. A commercial concrete contractor recently announced the results of its first project using 3D-modelling software, which vastly improved accuracy and eliminated waste.5 Similarly, an infrastructure contractor found machine-control technology sped up road excavation by 44 per cent and improved accuracy by 75 per cent.6
As more companies take up digital methods, the industry could become cleaner and more efficient – an important consideration given building and construction account for 40 per cent of the world’s carbon emissions, according to the United Nations Environment Programme.
90 per cent believe new regulations will have a major impact on construction operations
Over the coming years, new buildings standards and green regulation are likely to compel further improvements. Around 90 per cent of industry experts believe such regulations will have a major impact on operations over the next decade.7
From an investment perspective, providers of BIM software, machine-control technology and other digital solutions are obvious beneficiaries: firms such as Trimble, Autodesk and Graphisoft. But value should accrue to companies across the supply chain.
Digitally connected sites offer further advantages after projects are completed; BIM-powered buildings typically come with “digital twins”, or virtual facsimiles that serve as a reference point for refurbishments and upgrades. This could prove useful for asset owners as they seek to renovate and adapt buildings.
Meanwhile, manufacturers of elevators, air-conditioning units and door locks can take advantage of improved connectivity to monitor performance and offer maintenance before problems arise, minimising disruptions for a building’s owners and tenants. For their part, such manufacturers are able to retain lucrative service contracts.
Industrial manufacturing and the internet of things
Digitalisation is also evident in advanced manufacturing. Experts have talked for years about the fourth industrial revolution, big data and the internet of things (IoT). But it is only now that companies are beginning to fully appreciate the value of these tools.
Rising investment in product engineering software/digital tools and operational technology
Market intelligence firm IDC has identified rising investment in two categories: product engineering software, or digital tools and services that help companies design and manage industrial products, such as CAD, computer aided manufacturing (CAM) and product lifecycle management (PLM) systems; and operational technology, which helps with manufacturing and related services. It expects industrial companies to spend $21 billion on these areas by 2024, up sharply from $14 billion in 2020.
Firms are also exploring sophisticated ways to link hardware and software, using artificial intelligence and augmented reality (AR). As industrial products such as cars and aeroplanes increasingly resemble computers, so the factories that make them are taking on a digital character. Machinery is becoming autonomous, with each part of the assembly line connected with the others using data and cloud infrastructure linked to the company’s broader CAD and PLM systems, allowing it to monitor the entire installed base to analyse data and quickly identify issues.
While they hold great promise, these systems can be fiendishly difficult (and expensive) to roll out. As a result, industrial firms usually prefer to collaborate with third-party digital specialists rather than build in-house platforms. UK-based digital services provider Aveva, for example, has expertise in the oil and gas industry, and offers predictive maintenance technology to its customers to help them monitor the status of their facilities and fix problems remotely.
Firms are exploring sophisticated ways to link hardware and software, using AI and AR
Aveva is also among the companies that offer AR applications, a method of visually overlaying digital information on physical environments. The best-known example is the mobile video game Pokémon Go, which uncannily deposits fantastical creatures into real-world scenes. But AR has more serious applications.
At defence and aerospace contractor Lockheed Martin, engineers building F35 fighter planes and NASA spacecraft now wear AR glasses, which display virtual renderings of components with instructions on how and where they should be installed. The glasses have improved accuracy and allowed engineers to work 30 per cent faster, bringing substantial savings.8
Meanwhile, US industrial software company PTC says AR tools help manufacturing teams quickly monitor the status of equipment, simulate the effects of new component installations or provide immersive training. The company has forged strategic partnerships with Microsoft and hardware specialist Rockwell Automation. This is indicative of a growing trend for collaborations between software and hardware firms.
While there are parallels between the digital tools being rolled out across construction and manufacturing, the competitive dynamics of each industry are very different.
In construction, the market for digital solutions is concentrated around a few providers
In construction, the market for digital solutions is concentrated around a few first movers who have a significant advantage, partly because construction engineers and architects trained on one BIM platform tend to be reluctant to switch to another. These firms also have significant brand recognition.
By contrast, the structure of the manufacturing industry militates against the supremacy of individual software platforms. Digital providers tend to leverage their expertise in a particular field – Aveva in oil and gas, PTC in consumer goods, and Dassault Systemes in car-making and aerospace, for example – in which they can consolidate their positions in CAD and PLM and upsell value-added services in areas such as predictive maintenance and AR.
But expanding across the verticals is difficult, with the complex nature of manufacturing creating opportunities for more specialised firms.
Industrial manufacturing is a messy, complicated environment
“Industrial manufacturing is a messy, complicated environment,” says Zverev. “In a way that’s good for investors, because they can focus on the value opportunity in each vertical without worrying too much about a new competitor coming in and changing the landscape overnight.”