IoT Analytics released an update of the Global IoT Enterprise Spending Dashboard, which comprises the end-user spending of IoT markets and highlights the state of the IoT market today and 16 macro factors affecting the IoT market growth trajectory.
The enterprise IoT market grew 22.4% to $157.9 billion in 2021, according to the March 2022 update of IoT Analytics’ Global IoT Enterprise Spending Dashboard, slightly slower than the 24% forecasted last year due to several factors, including a slower-than-anticipated overall economic recovery, a lack of chipsets, and disrupted supply chains.
North America was the fastest-growing region in 2021 (+24.1%), and process manufacturing was the fastest-growing segment (+25%).
At this point, IoT Analytics forecasts the market to grow at a CAGR of 22% to $525 billion from 2022 until 2027. The five-year forecast has been lowered from the previous year. IoT Analytics says a number of growth headwinds have had a much more profound impact than previously anticipated, namely supply shortages and disruptions (most notably chip shortages which are now expected to extend well into 2024 and possibly even beyond) and labour shortages, especially for sought-after software jobs.
Despite the lowered growth projections, IoT remains a very hot technology topic, with many projects moving into the rollout phase. The number of connected IoT devices is expected to reach 14.5 billion globally by the end of 2022, IoT Analytics forecasts.
As part of our forecasting (and also our upcoming State of IoT 2022 report), IoT examines how the IoT growth trajectory is influenced by major macro trends in the areas of economics, political developments, environmental factors, and technological advances.
ECONOMIC FACTORS
1. Lower than anticipated demand growth
In its January 2022 World Economic Outlook, the International Monetary Fund (IMF) forecasted a GDP growth of 4.4% in 2022 after a 5.9% growth in 2021. Compared to October 2021, IMF economists had already lowered the growth outlook for 2022 by half a percentage point after higher inflation, rising Covid-19 cases, and overall supply chain issues became apparent.
After the Russian invasion of Ukraine, the IMF noted in a blog post, “The conflict is a major blow to the global economy that will hurt growth and raise prices.” The IMF is expected to decrease its forecast once again in its next outlook.
2. Rising input prices
Investment bank Goldman Sachs stated it is increasingly concerned about inflation and raised its inflation forecast for 2022. Because rising input prices have a negative effect on profits, companies have limited room to invest, which has a negative effect on IoT.
A recent IoT Analytics report found that IoT use cases related to improving a company’s operations are among the most adopted. As margin pressure due to inflation increases, companies will look to IoT as a tool to improve operations and invest in cost-saving activities. However, the overall impact of this benefit will not be strong enough to outweigh the negative economic implications of rising input prices, IoT Analytics notes.
3. Lower valuations for disruptive technologies
Central banks around the world are expected to increase interest rates in the coming months to fight inflation. This is bad news for high-growth technology firms and startups because it puts their overall company valuations under pressure. Valuations of VC-funded companies are already down 20% this year, according to some insiders. This might affect funding in the future.
4. Unstable supply chains
Supply chain disruption rose as a concern throughout 2021 due to Covid-19 lockdowns, container shortages, and the blocked Suez Canal. By the end of 2021, the topic was identified as the #1 topic CEOs talked about in their earning calls.
Other supply chains are impacted including those for timber, bicycles, and medical equipment.
Interestingly, supply disruptions are a major tailwind for some IoT initiatives. CEOs are investing into smart solutions that make supply chains more resilient.
Bottom Line:
IoT Analytics concluded that three economic headwinds and one economic tailwind have been identified for the coming years. The ability of governments and central banks to mitigate the disruptions and engineer a soft landing will largely determine the ultimate impacts.
POLITICAL, SOCIAL, AND LEGAL FACTORS
5. Nearshoring/Reshoring
As a result of unstable supply chains, many companies are moving from a single-source supplier strategy to a multiple-source strategy to provide more options in case of a future disruption. At the same time, governments have started to push reshore production to mitigate the effects of increasingly shaky supply chains.
The Biden administration announced that by 2029, a product labelled “Made in America” will need to contain 75% US-made parts—up from 55% today. Europe sees a similar tendency for reshoring and nearshoring. Considering the comparably high labour costs in the US and Europe, companies need to invest to stay competitive.
6. Russian invasion of Ukraine
The semiconductor industry had started to stockpile raw materials before the Russian invasion of Ukraine as a reaction to the invasion. However, since large shares of neon and palladium are produced in Russia and Ukraine, the semiconductor shortage is expected to get worse if the war goes on for too long
In general, the invasion adds to global insecurity regarding supply chains, prices, and security. The sanctions on Russia are expected to have limited effects besides limiting the growth of the IoT market size in Russia. Some Russian technology companies, such as Kaspersky, or companies that are backed by Russian financiers (e.g., Truphone, which is backed by Abramovich, a Russian-based oligarch) are likely to feel the effects.
7. Skill/Labor shortage
Companies have difficulty hiring enough skilled employees and supplying the internal knowledge to move ahead. IoT Analytics tracks online job ads to understand the skill shortage and related trends. Between July 2021 and March 2022, job ads mentioning “Artificial Intelligence” grew by 50%, with “Internet of Things” (+41%) and “Cloud” (+30%) also growing. Moreover, a recent study published by Inmarsat identified a lack of in-house skills as the top barrier to IoT deployments.
8. European Data Act
The European Data Act, which is likely to go into effect in 2023, could have positive implications for competition in the tech space. The European Commission plans to introduce a directive allowing customers (businesses and consumers) to switch between different cloud data-processing services providers and establishing safeguards against unlawful data transfer. Users can gain access to data they generate, which as of now are accessible by manufacturers. End users would then be allowed to share that data with third parties, which could offer additional services. This opportunity could help startups and other actors grow their customer base, forecasts IoT Analytics.
Bottom Line:
Two political/social/legal headwinds and two tailwinds have been identified for the coming years. Reshoring activities might put further pressure on the already existing skill/talent gap.
ENVIRONMENTAL FACTORS
9. Sustainability goals
More than 300 global companies (including Mercedes-Benz, Schneider Electric, Uber, Microsoft, Unilever, and Infosys) have committed to The Climate Pledge, an Amazon-led initiative asking companies to reach net-zero carbon emissions by 2040. To reach this ambitious goal, companies will need to measure and reduce carbon emissions in the coming years. Sustainability-focused use cases, like IoT-based energy management, renewable energy management, and connected HVAC, are expected to be in high demand. Software tools are also required to measure sustainability footprints and achieve ESG goals.
10. Reducing fossil fuel dependence
The British Government pledged to increase the number of electric vehicle (EV) charging stations by ten times by 2030. Moreover, heavy industries and transportation are looking to hydrogen to replace fossil fuels. Saudi Arabia is set to begin a US$5 billion green hydrogen project in March 2022. The project aims to use wind and solar energy to produce more than 650 tons of hydrogen a day through electrolysis. The increase in EVs and EV charging infrastructure and investments into new and greener energy sources in all major economies will likely trigger investments into smart grid and smart city solutions and a general increase in IoT spending from the energy industry.
11. Living with Covid-19
Although vaccination efforts have resulted in billions of administered doses, the world has moved from a narrative of “ending Covid-19” to “living with Covid-19.” In many parts of the world, Covid-19 cases are on the rise again. China even introduced fresh lockdowns, while the rest of the world continues to open up.
However, the high case rate and fear of new lockdowns will further fuel growth of spending on some IoT use cases, such as remote asset monitoring and control. Smart desk tracking and air quality monitoring will likely become more common in modern office buildings going forward.
Bottom Line:
All three identified environmental factors are considered tailwinds for IoT investment. It will be interesting to see whether companies and governments meet their ambitious goals in the coming years and decades.
TECHNOLOGICAL FACTORS
12. Maturing artificial intelligence
A 2021 survey on IoT adoption showed that only 16% of companies have fully adopted AI as part of IoT projects, while 70% are rolling it out or have a pilot. The importance of AI for the IoT is still increasing. The availability of new software tools, the development of simplified AI solutions, the infusion of AI into legacy applications, and advances in AI hardware are expected to boost the artificial Intelligence of Things (AIoT), and is estimated that the AIoT market will reach $102.2 billion by 2026.
13. Cloud vendor focus on IoT
The three main hyperscalers—Microsoft, AWS, and Google—continue to invest in IoT. They enable communication services, offer industry-specific services, and implement digital twins as a core element of their IoT cloud. In many ways, the hyperscalers have become the backbone of the IoT, and their commitment is expected to boost overall IoT market size growth for years to come.
14. Maturing connectivity
5G was the single-most discussed topic at Mobile World Congress 2022. Alongside 5G, a number of more mature connectivity technologies have been introduced in recent years, including LPWAN, single pair ethernet, Wi-Fi 6, and low-orbit satellite IoT. The ability to get more powerful connectivity at lower prices continues to fuel the IoT market and is bringing new concepts to customers.
15. Increasing cybersecurity incidents
Cybersecurity attacks have been high for a couple of years. Toyota had to suspend production in 14 Japanese plants after a supplier suffered a cyberattack, leading to a missed production of 13,000 units. After a ransomware attack in mid-2021, Colonial had to shut down its entire gasoline pipeline network for the first time in its history. The world’s largest meat supplier had to halt production after a cyberattack.
16. Chip shortage
In 2021, 20 million cellular IoT chips were missing due to a global supply shortage. The shortage remains to be a pain point for the semiconductor industry and many of its customers. At MWC 2022, IoT Analytics learned that chip lead times of 40–50 weeks have become the new industry average, that redesigning and pre-ordering chips with an upfront payment has become a standard business practice, and that the industry is unable to determine whether the demand surge for chips reflects panic or the new normal.
According to a survey conducted by Avnet, 85% of engineers expect longer lead times in the next 18 months. With lead times still increasing, many IoT projects will not be feasible given rising prices and limited supply. The shortage is likely to limit growth in 2022 and 2023 at least. However, in the long run, investments into additional capacities could increase the supply and lead to lower prices.
Intel recently announced an investment of €80 billion ($89 billion) into research and development, “state-of-the art packaging technologies,” and manufacturing. The European Union is investing billions to reach the goal of “having 20% of [the] global chips market share by 2030.”
