Digital Transformation - The path to the future

The car will drive itself, the refrigerator orders food by itself. There will even be things like diabetes patches which measure the blood sugar level and control the insulin pump via a smart app. Already today, Digitalisation is changing our lives in many ways. New technologies such as the 5G-mobile telecommuncation standard are accelerating this development. Digital transformatoin is a pivotal long-term industry trend that investors, too, need to have in focus. 

The digital transformation is a key driver of the global economic upswing that has been going on for more than ten years now. All along the way, a high degree of international technology transfer and a pronounced decentralisation of manufacturing processes and services have been taking place. It therefore should come as no surprise that the trade disputes sparked by the US are causing turmoil in the manufacturing and high-tech industries, as the underlying technologies originated at just a handful of US companies. The shares of companies like Amazon, Microsoft and Nvidia are therefore highly appreciated by investors. However, productivity gains are achieved across the entire spectrum of industrial and service activities.

Seven in one fell swoop

With our new study on digital transformation, we want to step aside from the currently volatile, recession-phobic markets and take a look at the broader horizon that lies ahead. The innovative business models resulting from digitalisation, as well as the related potential for productivity gains, are indeed far-reaching. With that in mind, we have identified seven topics that in the future will undergo a significant transformation and in so doing lead to above average growth for companies and investors alike:

This introduction explains the things that are driving digitalisation. They are applied to a greater or lesser extent depending on the industry or service. However, it is frequently the case that an admixture of technologies triggers the actual digital transition. 

Technological change as a process per se

At the heart of digitalisation lies the seamless networking of value creation and value chains. In terms of industrial production, this begins with research partners and suppliers, continues onwards in the manufacturing process to transportation and logistics, and ultimately to the end product that is delivered to the customer’s premises. All the while, this is accompanied by a revamping of the in-teraction between man and machine.
When talking about digitalisation, one usually refers to it in connection with disruption, i.e. the destruction of traditional business models. And the more “disruptive” a technology is, the more value the financial markets attach to it. In actual fact, destructive changes seldom take place, and if they do, the change often takes decades. In the past, this was primarily triggered by mechanical, or even device-related, innovations. Flat screens have replaced television tubes, but not television per se. However, today’s TVs have been transformed into modern communication interfaces, quasi as windows into the digital world. Electric vehicles are revolutionising the drive, but are not replacing the vehicle as such. A major change will come from autonomous driving and enable the emergence of many new business models. The app-based transport service Uber is seen as “destructive” for the taxi industry, but the company itself has no influence on the fact that people are simply on the move. Smartphones and Apple’s iPad tablet computers, however, have definitely had an impact on how we absorb and process information. The reverberations extend even into the industrial world: for example, the significant increase in digital media consumption has triggered a wave of consolidation among manufacturers of printing presses.
Be it the weaving loom, steam engine, a flat screen or the interlinkage of digital technologies with traditional services: the previous uses are morphing into completely new applications through innovative transformation. These multiply the original benefits and engender broad-based, global productivity gains. The actual value driver – digital change – is therefore not a matter of the technology that is being applied, but rather the transformation of how and what has been manufactured or offered as a service in the past. In other words, it is a matter of the consequences of change.

Five drivers of transformation

The wellspring of digitalisation takes the form of all data necessary for the operation of a company. The data has to be collected and compiled, and transparency created – this with the aim of identifying and optimising action and decision patterns by means of analytical evaluation. A prerequisite here is the capacity to store enormous amounts of data and to make the findings available in a new virtual
form and usability. We have identified five key technologies that are decisive for this digital transformation.

Big Data is the term used to describe the linking and analysis of enormous amounts of data of different kinds in order to discern patterns, correlations or other useful findings. The systematic and comprehensive storage, identification and grouping of data is a basic requirement for the digital value creation process, from which user applications and data analysis can be derived.

Artificial intelligence or simply “AI” has to do with the automation of intelligent behaviour and the ability of machines to learn independently. Essentially, this emulates human decisionmaking mechanisms. Complex applications are being de-veloped for the diagnosis of diseases, troubleshooting technical systems, image/speech recognition, and even the forecasting of events. Currently, the focus is on helpdesk chats and, above all, verbal command-driven programs. Speech assistants like Alexa from Amazon and Siri from Apple are two protagonists in the digitalisation of the home environment. According to a recent study by Deutsche Postbank, especially households with three or more people use this technology most frequently. So for today’s youth, the seeds of the digital transformation are already being planted in the family environment.

Blockchain is nothing more than a transactional technology – but an important one. It is somewhat like an accounting system, but one which is conducted decentrally. The linking of datasets by means of leading-edge encryption technology makes this possible. Since all of the relevant transactions are based on and hence reliant on each other, they are very secure. For example, until now, the purchase and sale of real estate required an intermediary to represent the interests of both parties (e.g. a notary public), but also a land office to register the ownership rights. Blockchain, in contrast, enables the seamless documentation of both parties to the transaction and at the same time coordi-nates the transfer of the purchase price. Both the notary and land office become superfluous in such a change of ownership. This of course reduces the transaction costs.

Virtual reality is created by optically simulating an artificial, interactive environment. The next innovation step has been the evolution to a hybrid reality in which reality is merged with digital elements. This technology gained fame thanks to computer games, but today it is of tremendous benefit to industrial product design, healthcare, spatial planning, architecture and occupational safety. Moreover, virtual reality is crucial to the interpretation of complex, three-dimensional representations.

Robotics has long been associated with the automation of manufacturing processes. This also applies to the present day. The automotive and electronics industries together buy almost every third robot that is manufactured. China, once the world’s sweatshop, now accounts for as much as 30% of the global demand for “mechanical men”. The future of robotics will bring man and machine much closer together, and the areas in which it is applied will certainly expand. It is therefore not surprising that military industrial complex as well as the healthcare sector will be major beneficiaries of the added value afforded by robotics.

Alexa: Let’s invest!

In the upcoming seven episodes of our series on digital transformation, we will address the growth potential that lies beneath these five core aspects of digitalisation. They are the areas where the momentum of change is particularly strong and the opportunity for investors to profit is correspondingly high. Find the links to the episodes above.

Content responsibility
Bernd Hartmann, Head of Group Investment Research
Harald Brandl, Senior Equity Strategist

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