Close Links Between the Manufacturing and Service Sectors Propel Digitalisation

A study by the Institute for Applied Economic Research (IAW), the Fraunhofer Institute for Systems and Innovation Research ISI and the ZEW – Leibniz Centre for European Economic Research has shown that Baden-Württemberg does not only host a large, innovative manufacturing sector, but is also home to many, often highly innovative producer-oriented service firms. The interaction between both sectors helps to make better use of the opportunities provided by digitalisation, including digital hybrid services. The study also points out, however, that only some manufacturing companies benefit from offering services, while others have completely or partly withdrawn from providing services.

In the past two decades, the service sector has gained further importance in Baden-Württemberg. Thanks to the strong performance of the manufacturing sector, establishing close connections between industry and services offers a vast potential that can be used for digitalisation. What is more, an increasing amount of industrial enterprises have been offering industrial and product-related services like maintenance contracts or sharing models, often with a considerable impact on company turnovers.

Dr. Andreas Koch from the Institute for Applied Economic Research (IAW) and project leader of the study “Relevance of Producer-oriented Services in Baden-Wuerttemberg, with a Focus on Digitisation” conducted on behalf of the Ministry for Economic Affairs, Labour and Housing of the State of Baden-Württemberg, commented on the significance of establishing close links between the industrial and the service sector in the Southern German state: “Taken together, the manufacturing sector and producer-oriented service providers in Baden-Württemberg account for 43 per cent of the state’s total value added, and for 27 per cent on the federal level. Information and communication services in particular, which are decisive in terms of digitalisation and industry 4.0, play a particularly important role in Baden-Württemberg.”

Strong performance of IT service providers

As the study shows, the strong innovation performance of the service sector and the high-performing IT sector provide considerable benefits for Baden-Württemberg’s economy and its digital transformation. This could, in turn, benefit industrial small and medium-sized enterprises (SMEs) in their digitalisation efforts. Dr. Christian Rammer from ZEW explains: “Service providers in Baden-Württemberg are already making use of online platforms, software-based communication solutions, big data analyses and cloud computing. In order to further expand the range of high-quality and innovative digital services, however, it is still necessary to address challenges relating to data protection, data security, and in particular to improve the technical infrastructure. There is, for instance, considerable room for improvement in the areas of data transmission rates and the reliability of data transfers.” The know-how of industrial enterprises and service providers in Baden-Württemberg in the field of digitalisation has significantly increased their international appeal as cooperation partners, which gives them access to supra-regional markets and external knowledge.

Although it is likely that the provision of services will play a more significant role for industrial companies in the digital age, not all businesses have been successful in making profits from them, explains Dr. Christian Lerch from Fraunhofer ISI: “Our findings show, on the one hand, that almost one third of all industrial companies operating in Germany have not only been successful in integrating services into their business operations, but also in developing hybrid value-added solutions and innovative services. On the other hand, there is a growing share of businesses – currently approximately 30 per cent – that has not been able to generate any revenues from the services they offer.” According to Lerch, the reasons for this are complex. The decline in revenues could, for instance, be explained by the inability of small businesses to offer complex digital services. It is also possible that as a result of a high customer dependency, businesses are forced to offer product-related services free of charge, or that businesses have simply not been successful with these activities.

Digitalisation supports the creation of hybrid services

These developments are particularly alarming, since digitalisation contributes to the creation of hybrid value-added concepts, which are mainly based on product-related services. The share of companies offering such digital hybrid services already stands at 32 per cent. Companies with digital service and business models are also much more likely to achieve higher revenues with services, and are often in a better position to cope with the challenges of digitalisation.

In addition to improving value-added processes and productivity, it is important that producer-oriented service providers succeed in strengthening the interface between the industry and services sector in Baden-Württemberg’s key sectors such as mechanical and automotive engineering one the one hand, and in SMEs on the other hand, so as to prepare the federal state well for future challenges. This is particularly significant for ensuring a successful digital transformation, which constantly requires new business fields and ideas, and for which the foundations should already be laid today.