Business | Schumpeter

Smart products, smart makers

The internet of things will strengthen manufacturers’ hands in the battle for customer loyalty

IN “CAPITAL”, Karl Marx presented some striking thoughts about the nature of everyday products, which he called commodities. A commodity ought to be “a very trivial thing”, he argued, and “easily understood”. But in fact it is the opposite: “a very queer thing, abounding in metaphysical subtleties and theological niceties.” In primitive societies people fetishise religious objects, imagining that they are living beings that can enter into relations with each other and with human beings. In capitalist societies they do the same thing with commodities.

Today the queerness of many products is material rather than metaphysical. Stuffed with sensors and microchips, ever more of them really can communicate, via the “internet of things”, with each other and with human beings. Even such mundane things as fizzy drinks and washing powder are set to become “smart”, as their makers attach sensors to their packaging that can detect when the product is being used, and that can communicate with smartphones when scanned. Gartner, a research firm, predicts that the number of wirelessly connected products in existence (not including smartphones or computers) will increase from perhaps 5 billion today to 21 billion by 2020.

The power of connecting up previously dumb objects is most obvious in stock-keeping and supply-chain management. Andy Hobsbawm, the founder of Evrythng, a provider of technology for connected objects, notes that businesses will be able to follow the progress of their products from factory to shop to end-consumer—and the products will be able to “speak” to whoever handles them. Designer handbags will be able to vouch for their own authenticity via embedded codes. Machines will be able to tell their owners how best to dispose of them at the end of their lives.

However, Mr Hobsbawm argues, the biggest revolution will come in customer relations. Manufacturers are realising that the best way to sell their products is to forge personal relations with customers rather than to spend large sums on broad-brush marketing. So far, manufacturers have lost out to others in this new world. Retailers have made inroads through loyalty cards, which allow them to gather data on their customers in return for discounts or rewards. Amazon’s business model has been built around understanding shoppers’ interests and suggesting things they might want to buy. Google is exploiting its expertise in integrating user data into its products to move into new areas such as home maintenance (witness its Nest smart thermostats).

As it becomes cheaper to add sensors and microchips to products, and to connect them to the internet, their manufacturers will know lots more about how end-consumers are using them. This will help them develop their products more rapidly, fix any faults more quickly and tailor products more snugly to an individual buyer’s needs. General Electric uses sensors to monitor how its jet engines are performing in the air, and to diagnose emerging problems. Diebold likewise monitors its cash machines for signs of trouble, either fixing problems remotely by means of a software patch or, if that does not work, dispatching a technician.

The same approach is now being seen in consumer products. When Tesla found that some of its cars had a problem with uphill starts, for example, it fixed it by transmitting a software update. Sonos, a maker of music systems, has just sent out an update that gives its loudspeakers the ability to tune themselves to the acoustic qualities of the room they are placed in. The old form of capitalism based on built-in obsolescence is giving way to a new one in which products get better after they are bought. This robs firms of the ability to make a quick profit by selling new models, but may bind them much closer to their customers.

Michael Porter of Harvard Business School predicts that the rise of wirelessly connected products, and the resulting entry of manufacturers into the battle for customer loyalty, will bring a “new era of competition”. Makers of products will gain an equal footing with retailers and the owners of technology “platforms”, such as Google, as all three vie for the consumer’s affections. Manufacturers will also be able to expand into providing services. Babolat, which makes tennis racquets, is getting into the business of coaching: its racquets contain sensors that feed data to your smartphone, to advise you on how to improve your serve. Gooee, a lighting firm, is moving into the security business by giving its lamps the power to activate alarms in the event of a fire or a break-in. John Deere, a maker of agricultural equipment, is helping farmers get the most out of their land by building machines that can receive data on weather and soil conditions, enabling better decisions on when and where to sow and plough.

Culture clash

Taking full advantage of smart products will require a revolution on the part of incumbent manufacturers. They will need to hire more information-technology specialists, who may not fit easily into a culture dominated by mechanical and electrical engineers. They will have to rethink their core competences: for example, instead of outsourcing their data management to IT firms, they may find that the ability to crunch data about their products in-house is as valuable as making the products themselves.

They will also have to grapple with such unfamiliar issues as privacy and cyber-security. A recent survey of 561 executives worldwide by our sister company, The Economist Intelligence Unit, suggested just how far the average business is from understanding any of this. Only 19% were planning radical changes to harness the potential of smart things; and only 39% had introduced training in digital skills. The rapid rise of Uber and Airbnb suggests that it is foolish to underestimate the speed of the digital revolution. If they dawdle, manufacturers will be left behind as other types of business draw ever closer to customers. But if they embrace the smart revolution, they may create products—and indeed services—that really are worthy of being fetishised.

This article appeared in the Business section of the print edition under the headline "Smart products, smart makers"

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