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A few years ago, we wrote a note in which we pointed out that data of all kinds are a source of value that is under-appreciated and under-analyzed by many investors. We wrote:
“Some physicists are grappling with the idea that the universe is not composed just of matter and energy, but also of information. Economists, financial analysts, and investors are dealing with a similar problem… Facebook (FB) may have the largest and most valuable trove of individual consumers’ data ever compiled. The problem is that there is no accepted method to calculate the value of those data — valuation, in this sense, hasn’t caught up with the digital age… [and] with no consistent means to assess the value of a company’s key assets, market analysts will produce widely varying estimates of what a company is worth.
“These data troves may lie where you don’t expect them… Generally accepted accounting practices (GAAP) mean that data can’t be counted as an asset — and furthermore, that resources spent accumulating and analyzing data can’t be accounted for as investment expenditures, but must be treated as costs… Investors should be aware that valuable data may be missing from companies’ balance sheets — so that for some companies, a balance sheet analysis that fails to take those data into account may be misleading… A careful investor could be presented with a way to take advantage of the market’s undervaluation of a company holding valuable data.”
One of the sectors of the economy where businesses may have the potential to harness neglected data to create more value is manufacturing.
Manufacturing: Harvesting Data For Efficiency and New Revenues
The value of data to firms whose revenue derives from advertising is apparent, even if there’s no consensus on analytical methods to assess their value. But many investors don’t consider the value of data to manufacturers of consumer goods and capital goods.
Social media and providers of internet-based services are digital natives whose business models came into existence at the same time as the internet, so they have had a natural affinity for data.
Modern industrial manufacturing, on the other hand, grew up before the digital revolution. Therefore, there have been hurdles to cross in recognizing, harvesting, and exploiting sources of data-based value in manufacturing. Those hurdles are now being crossed thanks to some of the major technological trends that have been on everyone’s lips for years: the internet of things and artificial intelligence. “Software is eating the world,” as Marc Andreessen famously said six years ago — and it is finally the turn of manufacturing to be served up for the feast.
The Digital Factory Is Now Technologically Feasible
According to Morgan Stanley’s analysis, manufacturing globally generates 2,000 petabytes of data annually. That’s two million terabytes. (Imagine a ten-mile-high stack of hard drives.) Until recently, most of those data were not captured — manufacturing was not set up to capture them, because the tools to do so did not exist.
Now, those tools do exist: exponentially cheaper and more powerful processors, sensors, and data storage. We have often called the digital revolution a “new industrial revolution,” and this reality will be embodied fundamentally in a shift of the focal point of manufacturing from the assembly line, to the data. That in turn will re-shape techniques of manufacturing and the relationship between designers and the factory floor. Software will be what holds the new structure together.
What Will Drive Adoption of Digital Manufacturing Technologies
“Necessity is the mother of invention,” and this is as true for digital manufacturing as for anything else. The fundamental positive drivers arebetter margins and new revenue streams.
What are the advantages to be gained by digital integration that lead to leaner manufacturing and improved margins?
• For manufacturers of consumer goods, additive manufacturing — 3D printing, colloquially speaking — will be one of the key value drivers. Industrial-scale additive manufacturing continues to grow closer (witness the recent comments of HP Inc. (HPQ) CEO Dion Weisler about his company’s intent to ramp up 3D printing technology in 2018). Additive manufacturing will help make manufacturing intensely customized, even on an industrial scale. Printed clothing, for example, will make for perfect, individual tailoring — likely delivered to you the next day.
• Additive manufacturing will permit much greater interaction between designers and the factory floor, and so will data captured by omnipresent sensors within the production environment, enabling a faster iteration process in the optimization of product design.
• Factory operations themselves will be streamlined by analysis of data flow from machinery, allowing predictive maintenance — rather than pre-emptive maintenance or reactive maintenance, both of which are disruptive to the manufacturing process.
New Revenue Streams
More interesting, perhaps, are the opportunities that digital manufacturing will produce for new revenue streams, especially for manufacturers of capital goods. The movement here could be a manufacturing parallel of the effect that digitization has had wherever it has occurred in the economy — recasting ownership as access.
The purchaser of an expensive piece of capital equipment — say, an industrial robot — is not fundamentally concerned with ownership; they’re concerned with effective use: how much of the time is the equipment functioning, and how effectively is it functioning?
The arrival of digital manufacturing and the internet of things affords manufacturers the opportunity to build in sensors and monitors that collect data on the product as it functions in the field. That will allow them to shift to a pricing structure based more on services — on guarantees of uptime, or on preventive maintenance that will optimize its function. (We noted while listening to Boeing’s (BA) third-quarter conference call that the company is doing exactly this — expanding revenues from maintenance contracts driven by internet-of-things derived data.) As data become more significant, more widely collected, and more useful, purchasers of capital goods may begin to think more in terms of the use of those goods than their ownership, and the significance of the services provided will rise in importance correspondingly.
Investment implications: The digital manufacturing revolution will need to be a marriage of equals between manufacturers and software firms, with the former bringing deep experience, expertise, and customer relationships, and the latter bringing a generally more dynamic culture of innovation and risk-taking. Large manufacturers, especially of capital goods, have been investing heavily in software companies for several years. We like industrial companies that are well-positioned at the nexus of manufacturing and software. Honeywell’s (HON) recently announced restructuring, for example, may permit more focus on its productivity and workflow solutions division, and we expect further M&A tie-ups between manufacturers and software firms. Please note that principals of Guild Investment Management, Inc. (“Guild”) and/or Guild’s clients may at any time own any of the stocks mentioned in this article, and may sell them at any time. Currently, Guild’s principals and clients own BA, FB, and HON. In addition, for investment advisory clients of Guild, please check with Guild prior to taking positions in any of the companies mentioned in this article, since Guild may not believe that particular stock is right for the client, either because Guild has already taken a position in that stock for the client or for other reasons.
To learn more about Guild Investment Management, please go to www.guildinvestment.com.
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