Fundnel Spotlight 07 July 2020

Investing in the Building Blocks of Industry 4.0: Manufacturing & Logistics


Fundnel's Growth Lead spoke with innovation and investment experts in manufacturing and logistics on how they leveraged their expertise to adapt to the effects of Covid-19 and what the future of automation innovation looks like

Manufacturing and logistics are two sectors that form the building blocks of the Industry 4.0, and are leading the way in leveraging smart technology and automation solutions to drive productivity and effectiveness. While the adoption of automation was initially driven by a global shift in demographics and labour shortages, both industries have had to contend with the challenges Covid-19 posed to manufacturing output and supply chain operations.

In a recent webinar, Fundnel's Growth Lead, Eunice Cheng, spoke with innovation and investment experts in manufacturing and logistics on how they leveraged their expertise to adapt to the effects of Covid-19 and what the future of automation innovation looks like.

Our guests:

Webinar: Investing in the Building Blocks of Industry 4.0 — Manufacturing and Logistics

Watch the recap above and check out some highlights from the conversation below.

Market Realities during Covid-19

Are you seeing an increased interest in automation innovations in your business areas during these times? Which verticals are you seeing more investment interest in?

Champ: We have seen increased interest across multiple areas, in terms of safety concerns, and people wanting to think about things long-term and anticipating the new normal with Covid-19 in the picture.

We have also seen a surge of automation services in food services that have a high hygiene factor. In the F&B space, pizza and sandwich automation, or fast food automation in general has also seen an uptick as people tend to be more concerned about hygiene. Less value is now placed on handmade items like pizza and sandwiches because of Covid-19.

Gaps in the Manufacturing Industry that Technology Addresses

Applying automation in manufacturing is recognised now as a necessity rather than a good-to-have, and is complicated due to the number of moving parts within the process of manufacturing and moving goods. What specific challenges does Riven’s solution address?

James: Riven provides unified quality control in manufacturing. The manufacturing industry is worth USD30 trillion but with almost 25% waste. Riven helps reduce incidences of waste and corrects processes before products are produced with defects. For example, we help companies by enabling them to share 3D data and quality of whole parts produced with their customers to give them confidence the parts will meet their needs.

With a shortage of skilled labour, how is adoption of automation solutions effective?

James: The way we see the adoption of tech and our system is supplementary in nature. They level-up the workers you have to increase the effectiveness of their output.

Barriers to Adoption of Technology in the Logistics Industry

The issue of scalability in an industry as broad as logistics must be challenging for automation solutions to address. What have you seen to be barriers to automation adoption in logistics?

Junxian: In Southeast Asia (SEA), small-medium providers are interested in 2 things: 1) how to earn more money, 2) how to save more money. Adoption is tough, especially in SEA where there are many family-run service providers where digitisation is not commonplace. This slows down the adoption process as we have to give time for our service providers to catch up. For example in some regions, our service providers may use APIs while others may still rely on fax.

As a logistics-tech solution provider, operating in a fragmented market has its opportunities, but adoption will definitely be slow. First and foremost, we have to solve the commercial problem — if no one subsidises the adoption, people will not be keen to adopt new technologies. At the same time, it is difficult for us to force it, so it becomes a chicken and egg problem.

Given the low labour cost, what do you think of the value automation brings, relative to manual inspection and processes within manufacturing and micro-fulfilment?

Champ: There is a difference between direct and indirect automation. We tend to begin with things with low CAPEX and installation costs because manufacturers are very reluctant to pay for these, especially if they are very novel and you do want to reduce the friction. In terms of indirect automation, for companies that already have existing robots, new software can be installed to empower these robots to do more. From the service-provider perspective, you can then price these based on value. Scalable software that does not require much customisation is definitely adoptable in the SEA market.

Junxian: Ultimately in logistics, there needs to be someone physically on the ground to do something. The role we play is more of an enabler than a replacement. In the short-term, it is difficult to replace a player with physical elements of the business. But in this state of hyper-consumption, people are 10x more open to new brands and 85% of people are willing to purchase from the first brand they see because convenience is king when relocating. To make it commercially viable, we have to fundamentally rethink the monetisation and business model now that you have tech and data, such that different stakeholders — the end-consumer or service provider — might be willing to pay for it.

Understanding Investment Opportunities in the Manufacturing & Logistics Industry

What can investors do to understand the automation investment opportunity in manufacturing and logistics better?

James: Opportunities often arise at the connection points between processes that already exist and are those that still need to be fine-tuned. For example, machining is already very well-automated, whereas quality control isn’t, and the opportunities lie in the hand-off from one process to the next. To understand the opportunities well, having a deep understanding of factory owners’ pain is important, and speaking to investors who have understood the industry well is another way to do it.

Champ: You do not need to be a tech expert, but you do need to understand if a certain workflow can be automated — i.e. putting a robot in can effectively substitute a human. Compared with a job that requires many skills that are not homogenous, repetitive work like sorting, loading and unloading can be automated, and then it's really about understanding the workflow and how technology will fit seamlessly into the operating procedure without changes, creates low friction and the greatest potential for adoption. After that comes the question of whether it makes sense from a cost-value perspective.

In terms of indirect automation, you are usually fighting with a knowledge worker where trying to automate a workflow necessitates finding a better way to do things. There is usually a resistance in terms of getting people to learn how to reprogram things which creates a barrier to adoption. To make technology accessible to everyone, and not just people with specific domain knowledge and expertise however can create a catch-22 situation where for example, everyone is now able to work with robots and not just engineers. However, the only ones who buy these solutions are the engineers themselves, which makes them feel undervalued. Understanding the path to adoption is thus crucial.

Junxian: Compared to my previous cybersecurity startup, what we realised during our fundraising is that it takes a bit longer in the logistics space. Logistics is nuanced like manufacturing. The investors that really care will take time to understand specifically where value is created and where it is merely a nice to have.

To understand the opportunities, you have to understand the process. Each process is very different. Because it takes a lot of time, there are not many mass market investors, making it a blue ocean.

Covid-19: An Accelerator or Brake for Automation?

In today's world, is there still space for automation in light of the massive unemployment that Covid-19 has caused? Should we still be taking away jobs with automation or should we put a pause on it and revisit how we can keep more people gainfully employed?

Champ: Opportunities in the post-pandemic world will be concentrated in a few areas. Demand has been more concentrated, and shortages where there were already existing shortages are amplified. Labour is one of them. Firstly, they are not very mobile, for example in fulfilment centres. People are not going to move from one state to another so readily just to get a job. This is why we look for long-term structural problems around the labour market where there are clear semi-skills that are needed, so that robots cannot readily replace them.

We look for areas whereby even if there is more unemployment, it does not equate to simply solving it with automation by robots. Concentration of demand however has forced the adoption of automation. Increased demand but insufficient supply, or — in view of Covid-19 — sufficient supply but concerns about social distancing resulting in no safe way to carry out normal processes will also result in more impetus to adopt technologies.

James: Governments have to support companies. Because when companies do better, the economies do better and that helps bring everyone up. By leveraging automation technologies that enable workers to be more effective, it increases the net output and creates value so these companies can be more productive and profitable for the economy’s betterment.

Champ: Back in 2008, we saw 2 things:

1) Crunch in corporate profits. There was one increase in expenditure however, and that was in IT spend. Any kind of project that is about long-term cost-saving or revenue generation got killed and people had to look to save money.

2) Automation historically has the highest adoption when people need to save money. In many labour-intensive industries (e.g. food services), there is a lot of incentive to adopt. The technology does not necessarily replace humans but it should save significant amounts of money for adoption to make sense.

Junxian: People will have to figure out where their skills are needed and also pick up new skills to find new employment. Some things we are seeing are the rise of digital nomadism and the gig economy. Because SaaS-based systems are becoming highly popular, it does create spikes in demand that requires manpower on an ad-hoc or short-term basis. We don’t know where this is going per se but there will be a new normal. As businesses, in order to be responsible to the people we work with, it is important to figure out where the future of the business will be to stay relevant, and to create demand for it despite Covid-19. If we can do that, we can hire people.

One reason for automation is to meet rising demand from e-commerce. Will this demand be sustained in post-Covid where demand starts to depress — will we still be able to offset the cost of adopting expensive technologies?

Champ: Covid-19 will accelerate changes that are already happening — like e-commerce. It forces new demographics that never had the ability or incentive to use e-commerce to do that, creating higher density that makes delivery more feasible from a logistics standpoint. E-commerce is very region-dependent.

For example in SEA, there are many market players and their focus is on generating demand, and so automation is placed on the back-burner versus in the US where Amazon is being placed under a lot of scrutiny because of worker safety and underdelivering on fulfilment promises. In SEA, people are less gung-ho on getting things in a day via e-commerce, whereas consumer behaviour in the US is very different. Customer expectations are way higher such that you do need automation to live up to that expectation. That’s where the mismatch is, and also where we see the opportunity.

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To receive a copy of Champ’s keynote presentation on “Ventures Perspective: Mapping automation opportunity in Logistics and Manufacturing”, contact Creative Ventures here.