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The impact of the internet of things (IoT) is the ability to leverage real-time

data to drive real-time decisions that can bring broad-based economic

benefits to companies and consumers. Manufacturing is going through

an extended IoT-enabled automation refresh cycle. This is likely to change

the traditional global industrial automation vendor landscape as they

have to offer new software capabilities in order to be successful in the

changing marketplace. The MFS capital goods and technology sector

teams did a global cross-sector analysis to assess the impact of IoT-

enabled automation in manufacturing and its investment implications.

Impact of real-time information and analytics

Exhibit 1 shows an example from rail operations. Using a continuous

data feed from a physical system (a locomotive and its environment), a

digital model can be built to simulate live operations, to the extent where

the “digital twin” can optimize the locomotive’s journey by controlling

speed and braking. The result can be significant savings from the efficient

operation and predictive maintenance of the physical system.

Implication for industrial automation and software companies

In the context of “smart factories,” IoT-enabled automation has led to

a dynamic landscape for incumbent industrial automation vendors as

they seek to offer integrated hardware-software solutions for industrial

customers, i.e., manufacturers. To do so, vendors are either building or

buying software capabilities, or partnering with software companies or

doing all of the above. Their manufacturing know-how is a key advantage

over potential new entrants. Pure software companies are also entering

the industrial automation space, and their business models are evolving.

A change from traditional licensing models to subscription-based

models can bring better customer insights to drive product offerings, but

whether this will be acceptable to industrial customers is yet to be seen.

The demand from industrial customers for universal, open standards

in industrial infrastructure — a change from today’s proprietary, closed

architecture — is likely to change the profit equation for existing vendors.

June 2019

Investing Amid IoT-Enabled Disruption in Manufacturing

Exhibit 1: IoT-enabled rail operation and predictive maintenance

Source: Adapted from GE, "Digital Twin for the Railway Network," 2018.

Digital twin for a locomotive■ Through life cycle: design, build, testing■ Live, continuous learning: continuous IoT data feed

to the model to simulate live operations■ Scalable: component-level to system-level to network-level

Use cases■ Route optimization■ Predictive maintenance■ Track inspection■ Minimizing human error

Rail operation and predictive maintenance… …achieved through a digital twin

Physical AssetDigital Twin

A Learning Digital Model

f(x)Transfer Function

Automatic control of throttle and dynamic brakes

~ 100MGallons fuel saved

~ 200MAuto miles run

~ 7,500MLocos installed

Trip optimizer

The views expressed are those of the author(s) and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor.

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June 2019

The views expressed are those of MFS and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any other MFS investment product.

Open standards allow factory systems, supply chain, and customers to communicate seamlessly and realize

the full benefits of IoT-enabled automation. The industry is likely to move in this direction despite resistance

from existing vendors.

Conclusion

The traditional industrial automation landscape is changing from an IoT-enabled automation refresh cycle,

and the winners and losers are still in the making. Investing in this space requires a global and cross-sector

view of industrial automation to determine who will benefit from these trends. It is clear that new profit

pools are being created as IoT is incorporated into factories (and elsewhere), offering a broader investment

opportunity set for active research and management. Our global research platform generates critical insights

that help us continually test the investment theses for our industrial automation holdings and spot emerging

opportunities in software and other cutting edge technological areas such as machine vision and robotics.

To learn more, please read our white paper on the subject here.

Authors

Thomas P. Crowley, CFA

Equity Research Analyst

Bradford J. Mak

Equity Research Analyst

CV Rao, CFA

Equity Research Analyst

MFSE-IOT-BLOG-6/1943347.1