Market expected to recover from the setback, albeit slowly
In the past 18 to 24 months, the market for business applications of the Internet of things (IoT) has moved from the rather frustrating proof-of-concept phase it had been in for three years, and had started to grow strongly. Reliable market data is hard to come by, but some companies do report their IoT numbers. Intel is a good example: its IoT group has typically reported growth rates of between 8% and 20% per year steadily during the past eight quarters. The value of many IoT systems is now clearly understood and the biggest market question had become how to accelerate adoption and scale systems up in order to tap into the enormous potential that exists in various industries.
Then the coronavirus pandemic hit.
It brought two major effects to the macroeconomic climate. Firstly, governments are trying to prevent their economy freezing up by pouring money into supporting companies and workers in their countries. Secondly, many sectors of the economy have almost completely slammed the brakes on while the virus is brought under control. This has affected airlines, much of the retail industry, many factories and large parts of the service sector. Their global supply chains have ground to a halt.
At present, the common working assumption is that the acute crisis will pass within a few months and that economies will get back to functioning something like normally during the second half of 2020. But there’s high uncertainty in this assumption, with no clear view about what happens next winter in the northern hemisphere if there’s no suitable vaccine or antibody test by then.
In the short term, the business IoT market will suffer a severe hit because so many of its customers have stopped their operations. But what about its prospects as the economy gets going again?
It’s clear that economies worldwide will slide into recession, but the big questions are how deep the recession will be and how long it will last. CCS Insight isn’t qualified to forecast that. However, while the high uncertainty remains, we can see that the focus for most companies will be getting cash flow back to levels near normal and getting the business to be the right size to ensure survival through 2020 and 2021. The focus will be the immediate future, and one of the biggest areas companies will try to understand as part of that is what consumer spending and corporate investment will look like as business resumes.
Of course, the effects won’t be evenly spread between sectors. Supermarkets may find their already strong positions are actually strengthened by the pandemic. They and their supply chains won’t suffer the same negative impact as others. Pharmaceutical companies will continue with similar, or possibly increased, levels of demand.
For logistics companies delivering online shopping orders, current demand levels are expected to soften as the pandemic eases, but they may still benefit from a step change in consumer behaviour. Other parts of logistics are grappling with the problem of flexibility. The Covid-19 outbreak has shown that a system optimized for normal conditions can be really problematic when conditions aren’t normal, with significant quantities of products and produce stuck in one country while there’s demand in others. We expect continued investment in IoT to help.
As economies come back to life, we expect some IoT uses to become really prominent. Predictive maintenance is one of the big IoT use cases anyway, but it will rise to new levels of importance. Machinery and goods will continue to break, stopping production lines and leaving consumers without appliances such as ovens or washing machines, and the availability of spare parts and support may take a while to get back to full operations. Under those conditions, efficiencies in maintenance will prove highly valuable.
By contrast, oil companies and their biggest customer groups — the transportation industry — may well be burdened with longer-term negative effects. Governments will have no spare money and their first priority will be to get their country working again. Several other sectors will suffer long-lasting damage.
For IoT markets, it’s not yet clear what the recovery will look like in detail. Our initial expectation is that it will generally be frustratingly slow, although some areas may benefit.
With the drastic changes that the pandemic has brought to society, some companies will have an opportunity to make a step change in their digital transformation plans by bringing forward their investment in automation, IoT, intelligent processes and so on. This could be a reset to their business, and should help companies become revitalized, with greater flexibility and lower-cost operations. Some players will take this opportunity to change the way they work and will prioritize this investment. They will either be companies trying to use IoT to be disruptive, or those that have invested in IoT during the past few years, that understand the technology and the benefits they can get from it. For many of these businesses, IoT is already mission-critical and they will want to expand their use of it.
However, we expect that most players will either take a more cautious view, or will have been worse hit. Sectors that have been hugely hurt by the pandemic will take some time to restart their capital expenditure. They will have no cash available for investment in new systems and will rebuild their businesses on their existing assets before considering spending on technology for the future. Even if the need will be higher than ever, government-funded IoT projects will struggle, including smart cities, unless they can find alternative sources of funding.
Between these two extremes there will be a range of customers whose willingness to dig deeper into their pockets in IoT rests on many factors including who the main sponsor is in the organization; which part of the organization is leading the IoT projects; which customer groups they serve and how badly those sectors have been hit by the pandemic; and so on.
These conditions will tend to favour larger players with stronger balance sheets as well as those who can mobilize effort from significant partner ecosystems. As a result, the recovery during 2021 may well accelerate the expected consolidation among IoT suppliers. The conditions will also force IoT suppliers to focus hard on making it easier to buy and integrate IoT solutions with other business systems. It will also be important to improve marketing and communications. Given the short-term focus of everyone in the market, this will not be the time for messages like “5G will boost global GDP by $X trillion by 2030“. Taken together, these effects will be beneficial to buyers who typically find the IoT landscape challenging to navigate.
However, our concern is that the supply of chips and components may take longer to ramp back up to normal in IoT than in other business areas. This is because the larger players involved typically have IoT as a smaller part of their business and may not give it the highest level of priority.
Overall, our hope is that customers in all industries will realize, as they emerge from the current conditions, that they could have been operating more flexibly and efficiently if they had been more advanced with digital transformation and IoT in their business or supply chain. This realization should be a spur to continued investment for the future, once companies’ finances get back to a steady state.
It’s very early days to make detailed assessments of the impact on a broad technology area such as IoT that affects all sectors. However, we will keep this under review and will update our evaluation periodically as the world deals with the pandemic.
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