The Strategist

OECD: Digital transformation in industry is developing unevenly

04/09/2019 - 15:20

Digital transformation is forcing companies to rethink their business models and is changing nature of competitiveness across the economy, the Organization for Economic Cooperation and Development (OECD) report says. However, the expected productivity growth is hampered by the gap between leaders and outsiders. In addition, monopolization processes, which slow down business dynamics, are following after a wave of startups trying to monetize the new technology.

The study’s authors attempted to compare macroeconomic trends in OECD countries with the process of digitization of industry and the transition to Industry 4.0. Thus, the observed slowdown in the growth of most economies is expressed, inter alia, in reduction of number of new entrants to the market and redistribution of labor. Apart from that, there is a widening gap between the most and least productive companies and in the growth share of several major players in each industry. At the same time, changes in production and business dynamics are evidenced by the increase in margins by leading companies and the fall in the share of labor in income. An increase in the number of mergers and acquisitions deals, much of which is accounted for by IT start-ups, is also recorded.

Digitalization allows companies to automate a significant part of production, improve product quality at lower costs, as well as build more complex supply chains, maintain closer relationships with customers and adapt their products to market demands in real time. At the same time, in contrast to the service sector, various industries demonstrate greater homogeneity in the level of implementation of digital technologies. Only one industry out of 13 demonstrated low intensity (food, beverage and tobacco production); three industries showed a high speed of digitalization (computer and electronics production, mechanical engineering, transport equipment). The report noted that the level of digitalization of processes can vary significantly even within the same industry. Intensity of investment in equipment and software is about the same in all sectors, with the exception of transport: there is an unprecedented level of automation, use of electronics and the involvement of IT specialists. And in the food sector, which is far behind the rest of the industry in terms of digitalization, a significant part of it falls on online sales.

The process of penetration of digital technologies in the industry is accompanied by a slowdown in productivity. This may partly be explained by the fact that intensity of digitalization and productivity vary greatly: most of them are concentrated in high-performance firms, where technologies are complemented by good management and high digital skills of employees.

The paper’s authors believe that a surge in technological innovation leads to emergence of many new participants, but as technological maturity is reached, the market is divided between the most successful players who receive all the gains, and barriers to entry are growing. Such effects can be observed as the introduction of new "end-to-end" technologies like artificial intelligence and machine learning, the OECD believes. This mechanism can explain, on average, higher dynamics of industry than in the service sector as digitalization began there later.