Investment Opportunities in Industry 4.0 – Industrial Revolution “Made in Germany”

After the mechanization, the electrification and the digitalization of production, the latest industrial trend is made in Germany: Industry 4.0. But what does Industry 4.0 actually mean? What is the status quo? And what are the opportunities for foreign investors?

The Two Components of Industry 4.0

Industry 4.0 basically describes the fusion of IT and industrial production. In particular, it means that production machines are able to communicate with each other and also with the people who operate them. This makes the employees only supervisors in a ‘Smart Factory’. The ‘Smart Factory’, which is described by connected production components and an efficient and flexible production, is the final goal of Industry 4.0.

Industry 4.0 consists of two components –Information Technology and Engineering. While German engineering has a good reputation worldwide, the German IT industry still leads a shadow existence. Only a few large IT companies such as SAP and Telekom seem to be the leading forces in Industry 4.0.

However, there is a large number of highly specialized “hidden champions” which contribute important innovations in fields like cybersecurity or cloud computing. The fact that most of the German software companies do not focus on end users but rather on corporate customers makes the German software market the largest in Europe with stable growth rates of 5-6%. Nevertheless, the implementation of smart IT solutions requires the engineering side of Industry 4.0.

The Current Status of Industry 4.0

Even though IT is the main driver in Industry 4.0, the highest efficiency gains are expected in other industries. Especially, the traditionally strong German industries, such as engineering and automotive are expected to achieve the highest economic gains from the transition towards a digitalized and smart production. Considering the investment requirements estimated at 18 billion EUR annually, it would still be a profitable step for the German industry.

The willingness of German companies to invest does currently not meet the high expectations of many politicians.

Despite the recent growth of investments in Industry 4.0, it still is at only 1 billion Euro a year. The reason for this underinvestment is not the absence of the technology required. In fact, most essential technologies for Industry 4.0 are already available. The most fundamental obstacle remains the low capitalization and the risk aversion of many German companies.

Especially the German “Mittelstand” (SMEs), which mainly consists of specialized family enterprises, avoids investments in the IT solutions. However, the German government actively supports the goal an entirely digitalized production until 2020. A completely automated production is the next evolutionary step. Besides the education of skilled labor and the financial support for R&D in the relevant fields, the Platform Industrie 4.0 was founded. It is the largest platform of its kind and connects research institutes with companies of the engineering, the IT, and the production industry.

Opportunities for Foreign Investors in Industry 4.0

Like mentioned above, the investments of German SMEs in Industry 4.0 are far too low. In many cases, they lack the required financial capital and therefore foreign investors can compensate this issue by investing. One option for foreign investors is to invest in or to acquire a German company. Another option is a collaboration between German and foreign companies. This can be implemented through outsourcing or through a joint venture with a foreign company. Joint ventures are a popular way to gain know-how about Industry 4.0.

Ecovis is an experienced partner in order to overcome these concerns. The provision of legal and tax information and the mediation between German companies and foreign investors is one of our key competencies.

Ecovis Beijing provides a comprehensive portfolio of legal, tax and audit services for your investment in Germany. If you need further information or advice on investing in Germany, please feel free to contact us:  richard.hoffmann@ecovis-beijing.com.