Industry 4.0 - How German companies can benefit from Israeli startups
Germany is Europe's economic powerhouse and is one of the world's leading economies. "Made in Germany" stands for quality in service and manufacturing excellence. To further build and maintain this reputation, German companies need to move along the Industry 4.0 journey by embracing digitization through the Internet of Things (IoT). IoT, the digitization of devices and connectivity to the internet, enables Industry 4.0, the end-to-end automation and online integration of products and services.
“Startup Nation” Israel. Israel has generated a very strong breeding ground for innovative startups with disruptive technologies. After Silicon Valley, Israel is one of the world’s leading tech hubs with approximately USD 5B in startup funding last year . There are nearly six thousand startups in Israel, a country with only 8M citizens, making the startup per capita ratio the highest worldwide. Almost one thousand startups relate to the IoT field. On the international stage Israel is dubbed “Startup Nation” due to the longevity and sustainability of its tech innovation ecosystem. There are various ways on how primarily US, Chinese and European companies have already benefitted from Israeli innovation by investing, partnering and acquiring startups as well as setting up innovation hubs in Israel. Over the course of the last year, for example, VW invested USD 300M in the ride sharing firm Gett , Deutsche Telekom partnered with cyber security firm Zimperium , RNTS acquired media firm Inneractive for USD 46M  and Innogy a subsidiary of RWE opened its Tel Aviv innovation hub .
Mindsets of companies and startups. We could argue when German companies and Israeli startups come together that magic can happen – must happen. Surely, if it is that easy, everyone would have jumped on the bandwagon already. So how does it work in practice? We will share first-hand experience, lessons learned and advice on how German companies can leverage of Israeli innovation. Let us first understand the vantage points and differing needs of Israeli startups and German companies, the resulting challenges, how these can be overcome and the potential benefits.
Tech savvy Israelis have typically served at special tech units at the army, such as the 8200 cyber unit, before setting up their own startup. These elite units provide future entrepreneurs with deep tech and managerial experience at a young age. When setting up their own startup, they understand they need to move forward quickly, get a successful proof of concept (POC) done and swiftly progress to a commercial contract. This stands in stark contrast to German companies, both small medium entities (SMEs) and even more so enterprises, which often have formal procedures and hierarchical levels that cause them to move slowly. Cashflow might become an issue for startups because companies’ slow decision making or unwillingness to pay for POCs pushes startups’ early earnings further away. To overcome this, we see that more experienced Israeli startups work together with German companies to advise on use-cases and educate management and employees on the potential business impact. One of the most enjoyable aspects of working with Israeli startups is their positive can-do attitude towards their clients in Germany, e.g. their hands-on assistance with integration and implementation. Israeli startups are extremely flexible in their approach and are very interested in working with German companies when it comes to Industry 4.0. Having only one hour time zone difference and a four hour flight allows for relatively effortless face to face visits between the two countries.
When it comes to contractual negotiations the tone toughens, and demanding discussions should be expected. Israeli startups are known to come across as being aggressive, which does not resonate with the German corporate work style. Having said this, German managers actually welcome the refreshing upfront and direct attitude to do business pragmatically. For example, Israeli startups often have the “chuzpe” to drive the agenda’s next steps in meetings, e.g. they will propose next steps to promptly kick off a POC to prove their solution will resolve the executive’s pain point as promised. Meetings often highlight Israeli startups’ strength on the technical side whereas the business side is at the forefront of the German companies’ minds. Combining these strengths delivers a more robust and comprehensive offering. This is essential when thinking about scalability for German companies as any new solution needs to be repeatable and profitable with minimum complexity. Israeli startups need to understand the purpose and value proposition of German companies.
Barriers to IoT adoption. So why is IoT adoption on the way to Industry 4.0 relatively slow? From a company’s point of view, the transformation to Industry 4.0 requires business and technological expertise in IoT solutions. However, conflicting priorities, limited resources and knowledge leave executives struggling at times to identify a use-case with a quantifiable pain point to prove the return on investment (ROI) in IoT. Pricing is another challenge posed especially to German SMEs (Mittelstand). A 2016 KfW survey highlights that only 4% have adopted Industry 4.0 projects . Security and privacy concerns, lack of IoT standardization and perceived high upfront investment costs are the main drivers. Skepticism towards new technologies, and having the right talent mix and expertise is not only a challenge posed by IoT but rather something most Information Technology (IT) and change projects have faced before, i.e. lack of resources, resistance to change and trust in the old ways of working. It is imperative to get early buy-in and reduce resistance for change or fear of new unknown technologies that disrupt their old ways of working. German executives need to foster an open culture and should not penalize failure otherwise innovation and working outside comfort zones might not have fruitful grounds.
Benefits. Potential business benefits are huge but often not fully understood at the beginning because not only in-scope activities and processes get improved. Let us use IoT as a more in-depth example. Positive spillover and new business models are being generated that lead to additional cost savings or revenue sources when thought through properly, e.g. predictive maintenance through IoT enables insurance firms to price high value equipments. Cost of connectivity and infrastructure is dropping and reliability and latency will further improve with the introduction of 5G. This opens up new business possibilities that German companies should start realizing. Just as Industry 4.0 is a young topic so too are startups that develop those IoT solutions. Israeli startups, for example in the industrial IoT analytics space, have shown great progress within the last two years. There are more than a hundred Israeli startups in the IoT analytics space specializing on different verticals. Many have managed to develop a solution that can be deployed quickly within a few days to run a POC without deep integration. Companies that are early adopters move ahead to deploy more sophisticated and value-added artificial intelligence (AI) solutions, leaving competitors behind. In Germany the annual economic growth rate is expected to double from 1.4% to 3% when AI is adopted .
We see that traditional German companies frequently only think about basic automation solutions, i.e. digitize existing data and visualize it in real-time for staff and managers. More sophisticated solutions that are already on the market including AI driven prediction-driven solutions might be more relevant and impactful. Businesses are frequently not ready – for some of the reasons mentioned above – to embrace those “too” sophisticated solutions in their view. Israeli Industrial IoT software solutions morph from analytics to predictive to prescriptive maintenance with the help of AI deep learning algorithms. Solutions accurately relay required actions to staff by connecting, i.e. optimizing, multiple activities and processes. They may link back to just-in-time management systems (JIT) as well as enterprise resource programs (ERP), and open up new business models to third parties like insurance firms. Often German companies do not make full use of the outcomes, insights and opportunities generated. They are not under enough competitive pressure to move fast along the Industry 4.0 journey. To take the relevant strategic decisions, their incentives and point of views need to adopt and adapt to the faster changing technological opportunities. Israel is at the forefront of innovating disruptive technologies. For example, the automotive sector has experienced the external pressure over the last years. OEMs felt attacked by the likes of Apple and Google. They consequently took a more proactive stance on partnering, investing and acquiring new technologies. Daimler, for example, adapted its access to startups and new technologies, e.g. the Startup Autobahn program had seven out of thirteen finalists from Israel in 2016 . This allows OEMs to have early access to deep tech solutions that benefit their product development.
Recommendation and advice. Having encountered the differing points of views of German companies and Israeli startups allows us to share some recommendations and lessons learned. German companies should consider the following when adopting IoT solutions towards Industry 4.0.
1. Strategy: make digitization part of your mission, visit innovation hubs to get inspired.
2. Culture: drive a corporate culture of change to embrace digitization.
3. Talent management: acquire the right skill set and train staff continuously.
4. Alignment: secure early buy-in and business pull from executive to staff levels.
5. Make it count: secure early on a customer (both internal and external) for POC to ensure relevancy and ownership.
6. Pragmatism: keep it simple and start with a specific, high impact POC.
7. Speed: move fast instead of being 100% correct.
8. KPIs: agree on measurable results, milestones and commit resources.
9. Accept failure: you cannot learn by success alone.
10. Learn: listen and be open to try new things, generate new ideas.
German companies that are interested in tapping into Israel’s startup pool have several options at their hand. They can establish a local Venture Capital office (e.g. Deutsche Telekom Capital Partners), run an accelerator (e.g. Microsoft), open an R&D centre (e.g. SAP), buy talent and innovation through a JV or M&A (e.g. VW), set up a scouting office (e.g. Munich Re) or any combination of the above (e.g. Bosch). Accessibility and visibility in the local ecosystem is key in order to engage with startups and be inspired. This can be achieved either through local third party representatives or own personnel.
As with any relationship, whether in business or in life, German companies and Israeli startups have to generate a common understanding, and take some reasonable calculated risk to make things work. The result is magic.