and the way that companies transform their businesses by fully integrating digital technology

into all business processes.

Now, digitalizing a business does much more than just putting paper on glass. It weaves

a digital thread through the whole value-chain, giving companies the means to realize innovation

much faster than their competition and to future-proof their businesses in a constantly

changing marketplace.

But the disruptive nature of digitalization brings with it as much potential pain for

manufacturers that ignore it as it does for opportunity for those that embrace it.

You know, entire markets can really disappear overnight with a single innovation. The classic

example here was the rapid shift from film-based to digital photography driven by an improvement

in technology.

But actually, the adoption of phone-based cameras was far more dramatic, and this was

because of the paradigm shift that came with using phones. Whereas you used to take photos

to preserve your own memories, you now take them to share with friends and family.

And as digitalization enters the industrial world, we're certain that if our customers

don't act, then they may also disappear.

Now, it's a bold statement. But we feel confident about our message because we can go back in

history, we can look at what happened during the previous Industrial Revolutions and we

can put what we're doing today in a bigger context.

Now, we had virtually no progress in human life between the end of the Roman Empire and

the late Middle Ages. Between 1300 and 1700, economic growth was only at 0.2 percent per

year. Something growing at that rate requires 350 years to double; you can see that on the

graph.

But since the 1870s, the amount of time that it's taken for the standard of living to double

has been more like 30 years. So what accounts for that incredible change?

Well, actually, it was the discovery, the exploration and even the exploitation of Americas

that showed the Europeans that the pool of resources at their disposal could increase

over time. It seems like an incredibly simple concept, but up until that moment, the Europeans

felt that their pool of resources was fixed. That meant that if I wanted to prosper, you

had to get poorer.

This discovery, that there were more resources available in the world, gave them trust in

the future. Banks were born, and credit was invented in order to finance those adventures

and enterprises, and this had a knock on effect on industry.

So in 1776, Adam Smith published arguably the most important book of all time regarding

economics, and this was called The Wealth of Nations. He explained why some nations

are poor and how wealthier nations fostered this belief in growth.

They encouraged business owners to reinvest profits back into their business. Instead

of taking it out every year and keeping their businesses the same size, he said, well, once

you and your family have eaten, take those excess profits, reinvest them back in the

company, buy more capital equipment, hire more labor and your company will grow. You'll

create more profits that can be reinvested. The overall pie from which everyone eats is

going to grow, and all of society will benefit.

Within a year of Smith coining the term "capitalism," the world had its first truly global generic

technology for increasing productivity. This was James Watt's steam engine.

It was initially applied in the coal mining industry, not to dig the coal out directly.

In the U.K., the coal mines were flooded with water, so they couldn't access much of the

coal. They used the steam engine to pump the water out, giving them far more access to

the coal seams.

They ended up with giant mountains of coal alongside each one of the mines, far too much,

in fact, for the horses to cart away. So, someone had the genius idea of strapping a

steam engine to a wagon, and they invented he railroad. They used this to take the coal

and steam power over the next 100 years throughout Britain, and it became pervasive throughout

all industries.

By the 1800s, in fact, steam was at the heart of all heavy industry in Britain, and all

the factories looked like this.

Now, I'm going to describe the factory a little bit. At the bottom, buried underground in

fact, you have the engine room; there's a giant steam engine. Because it was burning

coal, you always had a coal stack to let the smoke out. And in the factory itself, all

of the equipment was organized vertically behind the engine room on three, four, five

stories.

Now why was this? Because in order to access that power from that single engine, they needed

to be as close as possible to that engine room, and that meant stacking them vertically.

There was a giant pulley with a leather belt, which drove shafts to give power to all of

the equipment.

Here's a picture, actually, of a factory from the 1800s. Isn't it amazing? It's chaotic,

but it's full of energy. Everything's moving. Everything's powered. And you can imagine

the massive leap of productivity that came with all of this free movement.

In fact, that inflection point on that graph, that jump in productivity, was really directly

due to steam power in manufacturing.

But for all its impact, this was an imperfect revolution. We all know the effect of burning

coal on the atmosphere. It wasn't a great place to be in the 1800s. And, of course,

the one massive engine that was installed at the heart of these factories represented

a kind of single point of failure. Plus, the leather belts were driving all of the equipment

at the same speed, which isn't great for flexibility.

And, as you can imagine, with all of the equipment tied to the same machine, I wasn't really

able to make really more than one type of product in one factory. So, very little flexibility.

Now, factories don't look like that anymore, and the reason is this little guy. It looks

pretty innocuous, doesn't it? But it had the power to change everything.

It's a model of the very first electrical motor, invented by a friend of ours, Werner

Von Siemens. He invented this in 1866.

We now a lot about that period because Werner wrote a lot of letters. He wrote letters to

his wife, which is something I don't really understand why didn't he just talk to her?

And, also a lot of letters to his brother, William, who was running Siemens U.K. at the

time. And he wrote him one letter about his electro dynamo:

I believe that this small invention has the power to change everything, to revolutionize

industry, to revolutionize Siemens and to change society for the better.

And he was absolutely correct. What he didn't anticipate was just how long this adaptation

would take.

By 1900, four decades - forty years - after his invention, 95 percent of industry was

still steam powered. And the few companies that had actually shifted to electrical power

were swapping out steam motors one-for-one for the electrical motors. They weren't using

the transformational potential of electricity; they were just installing great, big electrical

motors in the place of the steam engines.

Now, this looks like a picture from a steam factory, right? But, it's actually electrical-powered.

It's one of those early adopters of the big electrical engine using the same old leather

belts to drive the equipment. It wasn't until the 1920s that the diffusion

of the technology passed the 50 percent point. Why did it take so long? Well, for the same

reason that our customers don't always buy the technology we pitch immediately, even

if it is awesome. They want to see the technology mature; existing equipment has to be depreciated.

Business processes get in the way of change.

It took 100 years for steam to become firmly established in industry, and 60 years for

electricity. But once the shift started, it began unlocking major productivity gains as

small electrical motors were used to drive individual machines, and the manufacturing

process fundamentally changed.

More and more companies jumped on the bandwagon, and a kind of polarization occurred. The companies

that didn't move fast enough get left behind.

This is what we call the tipping point.

So here's my first key message: It takes time for change to happen, but once you get to

this tipping point it happens really quickly.

I like to think of a skiing analogy. Picture the slopes. It's been snowing all season;

it's pretty late in the season now. It's nice warm weather. The smart CEOs are down at the

beach with their families. The laggards are still on the slopes. They paid for their season

passes, and they're going to use them. And as the temperature rises, they're really happy

skiing in their shirt sleeves until it all comes crashing down.

Let's take a look at this video.

Now the fact that no rabbits were harmed in this movie is actually where the analogy breaks

down, because in Industrial Revolutions, the laggards die. That has been proven time and

time again.

Now, steam, electricity and automation are the three milestones or revolutions that have

kept productivity increasing for 200 years. And Siemens has been at the forefront of each

of those revolutions.

But since the 1970s, overall productivity growth has been dropping off. As you see,

we're now down at the levels we were in the 15, 1600s, and remember what that means for

standard living improvements.

Why is this?

Well, there are numerous macroeconomic factors at play here, but one significant and surprising

one is the consumer herself.

The Internet has provided transparency and choice for nearly 3 billion connected consumers.

We want smarter products with microelectronics, semiconductors and embedded software. Think

of the sophistication and quality of a family sedan in 2016, and compare it to one from

the 1970s. There is no comparison.

But as products get smarter, their complexity increases. A modern car has more than 100

CPUs, more than 100 computers onboard, controlling everything from entertainment, internal comfort,

ride dynamics, engine performance management.

You have to add to that incredible complexity. The ability that automotive companies provide

to their customers to configure an almost infinite combination of colors, styles, accessories,

engine performance enhancements, interior designs. With current manufacturing technology

that hasn't fundamentally changed since the 1950s, we really struggle to keep up in terms

of productivity.

It's almost as if productivity, flexibility and quality are three mutually exclusive options

you have to decide between. And the more the market expects manufacturers to provide that

flexibility, that individualization and quality - so, productivity suffers.

In 2011, the German government realized that if this continued, then their huge manufacturing

base would soon hit a brick wall.

They launched Industry 4.0 precisely to find a solution to this challenge. They wanted

to apply to manufacturing the same kind of digital technologies that were revolutionizing

the business world and offer bespoke tailoring of these complex products at greater efficiency

than they could offer today with mass production.

They weren't interested in making small, incremental improvements. They wanted to change the paradigm

completely. They wanted a huge leap in productivity. They were looking for a fourth Industrial

Revolution.

Now the video you see here does a pretty good job of showing how this paradigm shift occurs,

taking the fixed but highly automated lines that are in all automotive factories today

and have been since Henry Ford first made the Model T, and turning the paradigm on its

head: putting the intelligence of how a product should be made inside the product itself,

and allowing that product to negotiate with far more flexible logistic systems, robotics,

and having them collaborate with people to make that car, or that train or that aircraft.

Fortunately, Siemens was way ahead of the game. By 2011, we had already been working

on our digitalization strategy for more than a decade. We had developed or had acquired

many of the building blocks that would become our Digital Enterprise Software Suite: PLM,

MES, automation, a collaboration platform, high-performance industrial networks, security.

Of course, we were aware that the market would require convincing references, and so our

attention turned inwards to our own 300 manufacturing facilities.

Today, the Amberg facility in Germany that makes SIMATIC switchgear and industrial computers

is affectionately known as the "Industry 4.0 factory." A lot has been said about it, but

I think it's worth looking again at some of the highlights.

It's not a big factory, but it is fast. We make more than 1 million products a month

- that's one every second. Bang, bang, bang, bang. And these are complex products. Now

normally, in order to be able to achieve this kind of productivity, a factory would have

to concentrate on a very small number of products, would have to set everything up perfectly,

would have to avoid any kind of disturbance or changeover.

But we understood that that was a thing of the past. We didn't want to be that kind of

factory. And so, we built flexibility into our business processes.

Today in Amberg, we offer more than 1,300 products to the market, all designed in NX,

all managed in Teamcenter and all produced with SIMATIC on the factory floor. We offer

these products to more than 60,000 different customers. And, remarkably, we are able to

provide customers with a guaranteed 24 hour lead time. That means you pick up the phone,

you order a product and one day later, you have it. That is unprecedented, and it changed

the paradigm of the industry.

Now, I've met many customers who are fast and flexible. And, what suffers is normally

quality. But in Amberg, we do the seemingly impossible. We have a defect rate of just

11 % it's now 11% defects per million. That's 99.9989 percent perfection. Every single product

we make. Every single second.

So, how did we achieve this? Well, through digitalization, clearly. We create an entire

digital twin of our whole value chain. That means designers, and engineers, and operators

can collaborate within a completely virtual world designing the product, testing the product

without creating physical prototypes.

We can design the factory, the equipment, the logistics systems.

We can push the virtual product and the virtual plant together in order to understand the