Next wave of adoptions will push connected devices to center of business in Asia Pacific

The world is being measured at a mind-boggling pace and Asia Pacific is at the heart of it...

From sensors embedded in oil and gas pumps sending performance data back to operations centers, to tracking a fish from a pond in Java to a plate in a Singapore restaurant, a core set of businesses in the region already receives information like this from connected devices.

Over the next three years, expect a new wave of adoptees to push the Internet of Things (IoT) to the default setting for business in the region. Few businesses expect to sit this out, according to a new survey of executives in Asia-Pacific Economic Cooperation (APEC) economies.

The survey shows that most of today’s heavy users (33% of respondents)–in companies that today collect real time or near-real time information in at least four places in their operations–are not slowing down instrumenting the organization. At the same time, today’s light adopters expect to catch up, albeit at a slower pace.

Their plans suggest that operational as well as business model designs specifically built around IoT are taking shape in a range of sectors as well as economies in the region. It’s no longer a matter of “if” but “when” businesses will make use of these technologies. Business leaders see the technology as a way to make the best of operations, create stronger customer bonds, find new revenue streams and build a secure brand. They also see their current business models being disrupted by rivals using data in new ways.

Full details on PwC's 2016 APEC CEO Survey research methodology

Most IoT devices and protocols are lightweight in order to maximize battery life, lower costs and facilitate ease of set up. Due to this and lack of common technical standards, many IoT implementations are left vulnerable. Engineers are navigating 100s of platforms; no complete solution exists.


 

Benefits expected to flow from better customer experiences, security and interoperability concerns surface

Companies today are largely making use of connected devices as point solutions, or collecting and receiving information for a single purpose, such as early reads on equipment malfunctions, tracking inventory or connecting their workforce. Presently, most CEOs continue to see such operational, cost-cutting efficiencies as the main benefit to investing in IoT technologies.

Yet CEOs are also laying the groundwork for what IoT will become in the APEC region, home today to the world’s established manufacturing centers in China, the US and Japan as well as rising ones such as Viet Nam. Increasingly, this will come to include innovations in the consumer arena. In fact, according to CEOs’ deployment plans, the fastest growth in IoT usage will be for devices that track end consumer behavior. Consider the lessons retailers likely took away from the Pokemon Go craze this past summer and how that particular use of augmented reality + GPS might influence design of consumer IoT.

As IoT systems become intra-connected, effectively building out “system of systems” networks, benefits are likely to multiply for companies that have tethered to such systems. At that stage, the IoT will feel very different than today. “Looking five to ten to 15 years in the future, we expect the second phase of IoT to evolve--an all-encompassing vision where everything talks to everything else, where your refrigerator talks directly to the shop to send your shopping list, or your car autonomously negotiates a rate for an electric charging,” is how Maarten Bron, Head of innovation, transaction security, UL, describes the transition in an interview for this report.

Before that stage–which to some observers is at least a decade away–there are the security and interoperability hurdles to cross. These issues will influence design and business models and, in turn, be influenced by a regulatory environment that is starting to take form. As IoT applications become more pervasive, less expensive and easier to deploy, companies will likely negotiate a fine line as they adopt the IoT. They will be considering fuller use of advances in digital connectivity, automation and artificial intelligence (AI) as needs to address IoT vulnerabilities become ever pressing.

As Bron notes, “if we all believe in a growing the Internet of Things, then security is going to be a very important prerequisite in order to make that happen. Security is not something that you smear on at the end, it's something that you have to bake in from the beginning.”

Clearly, business concerns over security and the lack of common technical standards for data usage to protect privacy are very much top of mind: one in four APEC CEOs agreed they would be ‘highly likely’ to invest more in APEC economies if regulations or standards for data security and privacy were harmonized across the region. At the moment, many existing regulations and laws are outdated and not optimized for the digital world.

There’s room to grow

The global sensors and actuators market alone–with applications ranging from industrial machine monitoring to smartphones to wearables–is estimated to grow to US$13.4 billion in 2020 from US$10.2 billion in 2015, driven largely by the automotive and industrial sectors; Asia Pacific is the fastest growing region, forecast to capture 56% of the market by 2020, up from 36% in 2005. The market for IoT solutions (including sensors, but also connectivity and IT services) is much larger.

Most APEC economies—from the number of connected devices, to mobile penetration, to internet usage—are well on their way to building out IoT infrastructures. Korea has its “Master Plan for building the Internet of Things”, and Singapore aspires to be the first “Smart Nation,” both nods to Germany’s Industry 4.0, the government-backed industrial internet program. Meanwhile, China is building out machine-to-machine (M2M) ecosystems.

Yet there is certainly room for growth. Consider, for example, that most small merchants in China still do not use wireless point-of-sale technology that process credit or debit card purchases (as opposed to using landline, dial-up)—or that less than 10% of China’s autos currently have embedded SIMS (built-in connectivity). Meanwhile, funding of industrial IoT start-ups globally continues its steep trajectory, hitting $1.3 billion in 2015, more double than the amount two years earlier, while the number of venture capital backed virtual reality and augmented reality start-ups alone doubled in 2015 to 137.


IoT is far from mature. But what will commitment to this new level of internetworking mean for doing business over the near term? Here are the sector findings
 

#1 Industrials power ahead in IoT, consumer CEOs plan to up their game

Over the next three years, according to CEOs’ plans, consumer companies will seek to close the adoption gap with industrials in several IoT categories (e.g., in or on products) or to extend their lead (e.g., technology that tracks customer preferences). They’ll seek to create higher levels of interactive customer experiences by digitizing equipment, product and devices.

For manufacturers and industrial products businesses, connecting products will mean getting closer to end users in a way that most have never experienced. Industry 4.0 is about “a lot size of one.”For example, imagine that as a customer at home chooses options on a jacket, the factory floor tailors the manufacturing process to produce the product in near real time. Manufacturers are among the organizations that will be impacted most directly by the disruptions springing from the Industrial IoT; they also have among the largest numbers of devices and appliances that can be digitally upgraded.

There is an extraordinary convergence taking place with traditional heavy-industry players looking more like software firms (jumping offline to online with services-based offerings), and Internet companies making inroads into autonomous vehicles and drones (jumping from online to offline). This convergence is creating interesting new alliances. Take Ford Motor Co. and China’s search engine Baidu, Inc. which agreed to co-invest $150 million in Velodyne, a maker of laser sensors aimed at the driverless car market.

#2 As IoT technology costs decline, Industrials CEOs plan on aggressive deployments and to capture more efficiencies in operations

Industrial manufacturers have made a big bet in IoT technology. They’re adopting a widening portfolio of advanced technologies—chiefly 3D printing, intelligent sensors, virtual reality and robots, all tethered by the IoT. Over the next three years, APEC industrial CEOs expect to continue to deploy IoT aggressively. Meanwhile, as costs of connectivity, sensors, data storage and analytics software decline, IoT is being incorporated into ‘light manufactured’ goods—from wearable fitness and health devices, to smart homes systems (connected lighting, irrigation, security, white goods/appliances). PwC expects the Industrial IoT will grow faster than consumer with manufacturing leading the way. Connectivity will be a big driver for change. LPWA (low power wide area networks) such as LORA and Sigfox are disrupting the market with networks where connectivity is as low as US$1/year (vs $10-$20/month today). With these new economics, business case outcomes will be easier to achieve and this will drive billions of devices on the internet.

Six in 10 APEC CEOs believe their IoT initiatives will yield operational efficiencies or cost reduction. This is the most common motivator for deployment. Yet one in three also expect added revenue from new IoT-related products and services. IoT is opening new models for product makers to become providers of pay-per-use services for their products. As an example of IoT-driven services, consider GE, which provides aftermarket services for remote monitoring of gas turbine jet engines and compressors by embedded sensors that transmit data back to their facilities to predict maintenance and repair needs. This agrees with a separate recent PwC study which finds that global industrial products companies expect digital or Industry 4.0 initiatives to lift revenue by an average 2.9% annually over the next five years. Over the same period, those companies expect such initiatives will yield annual cost reductions averaging 3.6%.

#3 FS, Consumer and Technology CEOs signal where IoT design is heading

A majority of CEOs expect investments in IoT technologies to deliver operational cost savings, but Financial Services, Technology and Consumer CEOs are more likely to also expect improved customer experiences. These views on the benefits of IoT investments signal where IoT systems design is likely heading.

A first wave of this connectivity, largely driven by industrial manufacturing and utilities sectors, brought the digitization of operations (e.g., smart meters for electric utilities, sensors and robotics, and smart fleets for industrials). Now, applications of IoT are proliferating in electronics (thermostats that know you’re in the room) to retail (athletic clothing that sends biometric data to the cloud for real-time analysis), and banking and insurance.

APEC Financial Services CEOs hold high expectations for returns on their IoT investment inrisk mitigation. As assets become more connected, insurers and lenders can more readily offer ‘usage-based insurance’—when car insurers, for example, link real-time driving behavior and risks to car insurance rates (via data gathered and sent by connected cars to insurers). Health insurers, too, via their customers’ wearables, can monitor patients remotely, offer health information alerts or special rates for healthy behavior.

The Financial Services sector in our survey shows plans to increase the use of IoT technology in tracking end consumers trends and to deploy it in offices (e.g., bank branches).

Technology CEOs aspire to become just as much makers of technology hardware as providers of personalized digital products and services. They (54%) are more likely to expect to generate new revenue from services resulting from IoT deployments. This compares with 35% of all APEC CEOs.

High-tech companies—from Silicon Valley to Beijing’s Zhongguancun district—are developing the minds (e.g., software and storage platforms) and bodies (e.g., smart phones, computers, sensors, semiconductors) that enable the IoT. One such breakthrough that could be on the foreseeable horizon: rice-sized, wireless and solar-powered sensors that do not require maintenance for a decade.


Implications across APEC

As the digital divide closes, IoT benefits open

With low-cost Internet, mobile-phone access and embedded sensors forming the backbone of IoT infrastructure, commercial and societal benefits will be driven by public and private efforts to strengthen and widen information and communications technology networks. Cities will feel more pressure to lead the charge as they face unprecedented management challenges that demand data-driven solutions. First and foremost, with populations moving in from rural areas, cities will need to scale. Cities will leverage a host of IoT solutions to manage costs (optimize lighting, energy spend, trash pick-up, irrigation) as well as make life better for their citizens (lower crime, track taxis and buses, improve parking, etc.).

There’s much to be done before that backbone can take shape

As the edge of the Internet extends to billions of devices, interoperability is fast moving to the center. Businesses are asking, how can we make it work, how can we make it secure? Expect shared responsibility for a safe, reliable and interoperable IoT among all participants. Many companies have not thought through what it will take to operationalize and scale operations to support their use cases. Instrumenting the workplace and the broader environment implies phases of workforce changes and new levels of collaboration with strategic partners. Business leaders should consider actively participating in standards bodies and organizations.

Be prepared to test out multiple technologies

There are 100s of platforms today. No complete solution for IoT exists; however, open standards will usually win in the end. Establish short-term architectures to consolidate IoT projects and test platforms, and build a long-term roadmap. A clear IoT vision will be needed. This vision will drive the use cases and the use cases will help determine the right technologies and platforms. The requirements and technology needs around controls for nuclear power plant will be quite different than those monitoring the levels of garbage in a dumpster.

Making workforces—and society—IoT-ready

As the IoT advances, it may well replace workers through automation. Both private and public sectors will need to ensure that workers’ skills and training keep pace. The need for organizational and cultural change will loom larger. This is an often overlooked area with the success of organizational transformation dependent on the commitment of the CEO.

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Scott Likens
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Alan Morrison
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