The impact of digital technologies on plant engineering and construction projects
Recently, PwC and the German Large Industrial Plant Manufacturers´ Group of VDMA published a benchmark report on digital business models in plant engineering and construction in an international comparison. It was done in the light of urgent need of improvements for the European business models as the players in Germany and other European countries lagging behind the productivity of other industries and especially the digitalisation.
The Executive Summary of the survey highlights that “pressure on the EPC industry has increased noticeably in recent years. Stagnation and in some cases a decline in market share have been the consequences of this development. Nevertheless, the VDMA’s large-scale plant manufacturers were able to record 2018 their first increase in orders after five years. However, the experts are reluctant to rate this development as a turnaround. Digitalisation seems to be the way out for German EPCs with its promise of releasing hitherto hidden potential for efficiency gains. So far-reaching changes are imminent for the EPC industry.”
It is worth mentioning, that digitalisation has not led to new customer requirements. Digitalisation is instead viewed as an enabler which promises to meet these requirements in a new way. The customers´ demands increased visibility at business process level throughout the project lifecycle. This is different than the classical approach of EPC industry, which is rather characterised by lump sum turnkey contracts. The trend towards greater customisation is affecting the EPC industry. Owners are being forced to accede to their end customers’ demands for personalisation (for example for personalised products). This requirement is then passed on to the EPC Providers. The demand for shorter project lead times, reduction in total costs and trust-based customer relationships have long been an inherent part of the EPC industry. Many initiatives in recent years have been aimed at reducing time and costs. Often, it seems that there are solid technical reasons why processes cannot be shortened, but here new approaches are necessary. A key focus should be on non-value-adding processes. For example, the process of project development, sales and tendering often takes one and a half years or more. Almost no value is being generated during this period. Customised advisory activities and new contract models may suggest controversial new approaches. Customers clearly say they are not willing to pay a premium for digital tools. However, 40% of German EPCs believe that their customers are willing to pay a premium for the use of digital tools…
According to the PwC/VDMA Benchmarking Survey, 40% of German EPCs say they have only partially initiated the digital transformation. In the future, German EPCs are aiming to make significant investments in this field. The key question is what form these investments should take. German EPCs plan to build many of the required capabilities organically. The international competition, on the other hand, takes an opposite approach. They are trying to have as many external partners as possible. They also try to apply more innovative and cooperative development approaches (e.g. open-source and open-innovation). Thus they are able to react faster on trends, develop and place new products and services much faster on the market. Unlike the German EPCs they do not have any constraints on the use of open-source and open-innovation approaches that may endanger the protection of their critical know how.
Based on the PwC/VDMA survey and numerous expert interviews performed it is concluded that German EPCs will be forced to progressively transform their businesses from a digital-enabled product (“Technology-enabled”) to a digitally open service business, as the market potential for the technology-enabled archetype will drop from 60% to 20%. Additionally, it is expected that enormous pressure is being put on the adequate margins in the services business. The suppliers have the expertise and data inherent in the individual technical components (machines, for example) and thus fulfil the potential for new competition. Clients are increasingly keen on evaluating their own operational data systematically. In addition, too many participants of the survey are behind the competition on strategic harmonisation and integration of external partners into digital R&D. A major obstacle seems to be the Intellectual Property (IP) protection. However, German EPCs increasingly integrate as many external partners as possible during the R&D process, including but not limited to academic institutions and start-ups. Finally, Strategic Business Alignment, Smart transport logistics, community management and personalised employment addressed in the PwC/VDMA study.
In summary, German EPCs have made remarkable efforts, built up many capabilities and have shown competitive advantages in various fields of action (e.g. cyber security). However, German EPCs have potential for optimisation in the following five areas, “Change Management”, “Integration platform”, “Digital sales”, “Agile working environment” and “Innovation governance” in order to even better exploit the opportunities offered by the digital transformation. To pick just one, the “Agile working”, it is highlighted in the survey that “agile project management” has not yet gained widespread acceptance in the EPC industry. 6% and 37% consider these abilities to be very important or important respectively. It was often stated in the interviews that the deliverables or plant outputs to be fulfilled are clearly defined, but in practice agile methods require and reinforce cross-functional collaboration. Thus, the requirements of the EPC industry are promoting initial efforts and concrete use cases that reflect the growing importance of agile project management. International competitors rate agile project management as one of the top priority capabilities that will be needed in 2025. They have already implemented agile project management in their day-to-day operations, partly due to their extensive partnerships with IT companies and start-ups. It will be important in future to support the EPC companies to understand the value of Agile and implement it step-by-step in their approaches…