Morgan Stanley
  • Research
  • Jul 31, 2018

Tech's Next Big Wave: Manufacturing

The worlds of technology and manufacturing are converging, creating a virtuous cycle that could drive IT spending and lead to productivity savings equal to 5% of global GDP.

In just two decades, technology has transformed how the world gathers, analyzes, shares and stores information. But while advances such as big data and cloud computing have resulted in major changes for communication, commerce and media, they have only scratched the surface of the material world.

What makes this theme even more powerful is that, for the first time in decades, IT and industrials are moving in sync.

Now, the two seemingly disparate paths of technology and manufacturing are converging, creating a virtuous cycle that could drive information technology spending while boosting productivity for a wide range of industries, from aerospace and energy, to healthcare and manufacturing.

“For the first time in decades, we are seeing higher spending in both the IT and manufacturing industries—a parallel upcycle," says Katy Huberty, head of research for the Technology Hardware industry. That's good news for information technology, where annual investments are poised to nearly triple to $1.6 billion, with much of that coming from industrial original equipment manufacturers (OEMs).

For their part, OEMs could see a profound increase in productivity for such data-era advancements as artificial intelligence, industrial internet of things and robotics, among others. “We think this could be at least 5% of total costs, or about $3.6 trillion," says Ben Uglow, head of European Capital Goods equity research, noting that it could improve global corporate profitability by more than 20%. “This is the equivalent of 5% of global GDP."

In a recent report from Morgan Stanley Research, Huberty, Uglow, and their colleagues outline how a new era of innovation is unfolding as exponential growth in computing power is driving productivity improvements across a wide range of sectors, including Automotive, Chemicals, Mining, Oil & Gas and more.

A Mutual Sweet Spot

Technology advancements that benefit industrials are in and of themselves notable; they offer the potential for improved quality, greater cost savings and fewer shutdowns. For example, the U.S. utility industry alone loses $80 billion a year to power shutdowns that could be avoided with asset management software. Similarly, in Oil and Gas, drilling costs could be reduced by 10-20%, using mechanisms like real-time live feeds that improve drill bit accuracy.

Historically, the manufacturing industry has lagged non-manufacturers on IT spending, but a shift is already underway, with manufacturers accounting for the lion's share of incremental IT investment through 2022, and possibly beyond.


Industrial OEMs may account for 40% of total IT spending

Source: Morgan Stanley Research estimates

What makes this theme even more powerful is that, for the first time in decades, IT and industrials are moving in sync. “Since 2016, there has been a notable pickup in both IT investment and Industrial Equipment spending in the U.S., at the same time," Huberty says. “The two worlds of technology and manufacturing are entering a mutual sweet spot."


IT and industrial investment are in a coincident
upcycle for the first time in decades

Source: Federal Reserve Bank of St. Louis, Morgan Stanley Research

Poised for Digital Revolution

Broadly speaking, the Second Machine Age involves two distinct groups: There are the Data Era Enablers, which include software and hardware suppliers focused on industrial applications, and the Data Era Adopters encompassing a wide range of sectors that stand to benefit from innovation.

“At the early stage of the Data Era investment cycle, the most value will be captured by the 'Data Era Enablers,'" says Huberty, who sees a $1.6 trillion annual opportunity in data-centered IT investment over the next decade, with $650 billion of that (40% of the total) coming from industrial OEMs. While there is no simple way to play this theme, investors may want to focus on industrial software first, followed by hardware companies where software is an important value driver.


Data era investment expected to increase
from $0.6trn in 2008-2017 to ~$1.6trn

Source: Morgan Stanley Research estimates

Within IT Hardware, says Huberty, storage demand represents the greatest opportunity. Manufacturing industries accounted for 42% of incremental enterprise storage demand last year, roughly double the next biggest sector. Even so, just 1% of available data is stored, and this will likely need to increase to generate insights that improve productivity.

Turning to Data Era Adopters, the potential for productivity gains and other improvements spans nearly every industry, notably Healthcare, Industrials and Manufacturing. 


Oil & Gas and other industries could realize significant EBITDA margin
(EBITDA Margin Gain %)

Source: Morgan Stanley Research estimates

Artificial intelligence will allow manufacturers to create safer workplaces through the use of collaborative robots; supply chain efficiencies help forecast demand patterns, macroeconomic cycles and even weather patterns; and automated quality controls help OEMs tackle unplanned downtime.  

Augmented Reality could allow OEMs to create fully-workable, near real-time virtual models of either real machinery, products, an entire manufacturing process, or in the largest cases, an entire factory.

Finally, Industrial Internet of Things could enable companies to pick up on inefficiencies and problems sooner, saving time and money and supporting business intelligence efforts. In manufacturing specifically, IIoT holds great potential for quality control, sustainable and green practices, supply chain traceability and overall supply chain efficiency.

The sector that could see the most profound benefits of these technologies could be Oil & Gas. Drones and digitalization help companies check pipelines more efficiently and rapidly, sensors for data collection allows continuous monitoring of equipment, and advancements with digital oilfields and real-time live feeds on drill bits could lead to 7% to 8% productivity gains.  The result could increase profitability for the sector by more than 60%.

For more Morgan Stanley Research on the convergence of technology and industry, ask your Morgan Stanley representative or Financial Advisor for the full report, “Data Era Investment and the 'Second Machine Age,'" (July 8, 2018). Plus, more Ideas.