# Does Industry 4.0 Matter to Automotive SME Suppliers? The Role of Advanced Digital Technologies in the Strategic Work of Firms in the Swedish Automotive Valley

Kristian Ericsson, Seyoum Eshetu Birkie, Monica Bellgran

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Kristian Ericsson, Seyoum Eshetu Birkie, Monica Bellgran. Does Industry 4.0 Matter to Automotive SME Suppliers? The Role of Advanced Digital Technologies in the Strategic Work of Firms in the Swedish Automotive Valley. IFIP International Conference on Advances in Production Management Systems (APMS), Sep 2022, Gyeongju, South Korea. pp.118-125, 10.1007/978-3-031-16407-1_15 . hal-05386030

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# Does Industry 4.0 Matter to Automotive SME Suppliers? The Role of Advanced Digital Technologies in the Strategic Work of Firms in the Swedish Automotive Valley

Kristian Ericsson(✉), Seyoum Eshetu Birkie, and Monica Bellgran

Department of Sustainable Production Development, Production Management, KTH Royal Institute of Technology, Södertälje, Sweden

kerics@kth.se

**Abstract.** Automotive small and medium-sized enterprise (SME) suppliers are important players in many national economies. They are currently facing increased pressure to manage the undergoing, demanding changes in the automotive industry. One proposed way for the firms to manage is to introduce Industry 4.0 (I4.0) technologies in their production, but for this to happen the firms need to consider such technologies in their strategic work. In this study, insights were gathered through interviews with representatives from 24 SME durable goods suppliers within automotive in Sweden, to find out what role I4.0 technologies play in their business-level strategic work. The findings show that these firms do not seem to consider the introduction of I4.0 technologies in production in their strategic work. The firms also do not include any other kind of long-term improvement programs in production in their strategizing. This goes against recommendations from several prior studies, which have emphasized the importance of I4.0 technologies in production for the future competitiveness of automotive SME suppliers. This study contributes to the discussion on how automotive SME suppliers can use I4.0 technologies strategically in their production, by being the first to empirically investigate the role of production in these firms' strategic work.

**Keywords:** Industry 4.0 · Industrial digital transformation · Business strategy · SME · Automotive

## 1 Introduction

The automotive industry is a core sector in most industrialized nations [1]. For some countries it is the largest source of exports overall [2]. However, the automotive industry is currently undergoing demanding changes. The firms are under increased pressure to conduct their business aligned with a sustainable development (particularly the environmental dimension) [3], increase their pace and complexity of innovation [4], and consider radical technological shifts in their business activities [5]. These demanding
changes add to an already difficult competitive situation for firms in the automotive industry [6].

One substantial group of companies within the industry are automotive Small and medium-sized enterprises (SMEs). SMEs are important players in the business landscape overall; in the EU they make up over 99% of all companies, employ more than 50% of the workforce, and have a more than 50% share of the value added ([7, 8]). Automotive SMEs are a big part of the economies in some European countries [9] and their importance have increased [10]. Hence, the ability of these companies to manage the changes in the industry is of importance to several national economies.

To stay competitive in this environment, automotive SMEs will have to improve and adapt several functions in their organisations, and a particularly important function for automotive SME suppliers is production [3]. Prior literature has suggested numerous approaches with which automotive SME suppliers can increase their performance in production, like (a) to introduce lean manufacturing [11], (b) to introduce “Industry 4.0” (I4.0)/smart manufacturing ([5, 12]), and (c) to build networks around manufacturing [13], among others.

Since alternative (b) has been branded as “the next enabler of performance improvement” and is assumed to bring with it “a potential revolution” in manufacturing [14], it is justified to investigate this alternative further. Several studies have evaluated how I4.0 technologies can be used to enhance performance in production in automotive SME suppliers ([15–17]). According to these studies, I4.0 technologies have the potential to enhance the performance in production, and subsequently allow automotive SME suppliers to remain competitive, and should therefore be purposefully included in the business-level strategic work of these firms.

However, no studies have so far investigated the inclusion of I4.0 technologies in the strategic work of automotive SME suppliers (“strategic work” in this case referring to both the strategy formulation and -implementation). The existence of strategic benefits from I4.0 technologies in production has been pointed out, but the process of converting this knowledge within the firms into long-term actions has so far not been investigated, although this process is essential to achieve the strategic benefits.

The research presented in this paper addresses this gap by exploring what role I4.0 technologies play in the strategic work of automotive SME suppliers in Sweden. The research objective is to evaluate how the members of these SMEs choose to position I4.0 technologies as strategic alternatives to manage the demanding changes in the automotive industry. The research question guiding the study is:

- RQ: What role does the introduction of I4.0 technologies in production play in the business-level strategic work of automotive SME suppliers?

By investigating the SMEs’ strategic work, this study can give insights about under what conditions I4.0 technologies are regarded suitable, feasible and acceptable strategic alternatives for these firms.
## 2 State of the Art

Industry 4.0 has been defined as “a new industrial transformation that aims to connect people and things anytime, anyplace, with anything and anyone, ideally using any path/network and any service” [18, p. 1]. It includes advanced digital technologies, like smart worker technologies, smart equipment technologies, data analytics technologies, network technologies, etc. [18], referred to as “I4.0 technologies”.

Prior literature, that has investigated how automotive SME suppliers can achieve increased performance in production through the adoption of I4.0 technologies, typically relate their studies to the strategic situation in the automotive industry. However, these studies usually present strategic recommendations, rather than investigate the strategic work done in practice in their target companies.

Some studies evaluate what different, strategic potentials I4.0 technologies carry for automotive SME suppliers. For example, strategic benefits of individual technologies, like Cloud-Based Advanced Planning and Scheduling Systems [16] and Discrete Event Simulators [17]. Other examples include more general inquiries on how I4.0 technologies will influence key strategy factors, like business models [12].

Other studies assume that I4.0 technologies carry strategic potential and proceed to investigate how I4.0 technologies are best implemented. These are for example studies suggesting procedures for the gradual implementation of I4.0 technologies in automotive SME suppliers [19]. Other studies describe how these companies implement I4.0 [20], or more generally describe facilitators and obstacles when implementing I4.0 technologies (e.g. [15, 21]).

However, no studies have been found that describe strategic work regarding production among automotive SME suppliers, although there are several theoretical frameworks for general SMEs [22]. Questions on how the firms decide if and how to integrate I4.0 technologies in production, to either respond to changes in their surroundings or try to influence their surroundings, have largely remained unanswered.

Prior scholars have pointed out that the competitiveness and resilience of general SMEs can, in part, be attributed to their strategic work, and their use of technology [23]. It should therefore be possible to evaluate the potential, future competitiveness of the automotive SME suppliers based on their strategic work, particularly concerning technology. This study aims to carry out this evaluation concerning I4.0 technologies, and thereby provide insights about the probable future competitiveness of a group of firms with great importance for several national economies.

## 3 Method

An exploratory case study was conducted to fulfil the research objective. The study was carried out in parallel to a study about the future of automotive in the Mälaren Valley in Sweden (“Fordonsdalen Stockholm”) with authors working on both studies.

Representatives from twenty-four automotive SMEs were interviewed, being limited to firms with less than 250 employees and suppliers of physical, durable goods to automotive firms. All SMEs came from the Mälaren Valley-cluster of automotive companies, which is the second largest automotive cluster in Sweden [1].
The respondents were selected by the firms when asked for employees with insights into (a) the situation in the automotive industry at large, and (b) how the firm carries out strategy work. Ten of the respondents were CEOs or regional CEOs, eight were sales managers/CSOs, two were heads of regions, and four had other similarly central roles in the strategic work of SMEs. The firms produced auto parts, auto materials, auto subsystems and production tools for OEMs.

The interviews conducted were semi-structured and held via videoconferencing during late 2020 and the first half of 2021. Since the interviews took place during the COVID-19 pandemic, it's possible that the respondents were occupied with managing the short-term situation rather than strategic work. However, the respondents mentioned stress from demanding changes in automotive rather than from the pandemic.

To avoid false positives, where respondents would claim I4.0 technologies were more prevalent in their strategic work than in reality, the researchers refrained from mentioning digital technologies. The interviews were introduced as being about the SMEs' business-level strategic work, and would begin with open, general questions and proceed into a level of detail where I4.0 technologies in production would inevitably be mentioned if included in the strategic work.

To better understand negatives, where respondents would not talk of I4.0 technologies, two forms of negatives where specifically probed for. The first form where firms that did not carry out any qualitative strategic work at all, or only did rough estimates. To filter out such firms, the respondents were asked to supply their prognoses of the future of the Swedish automotive industry until 2030. Their answers were then compared to a compilation of relatively fresh expert prognoses about industry trends until 2030 (the compilation has been published in a report: [1] pp. 21–54). In cases where the respondents' prognoses of the Swedish automotive industry deviated substantially from the compilation, the firms' strategic work were regarded as of low quality.

The second form of negatives were firms with less advanced production capabilities, for which I4.0 technologies were not (yet) a realistic strategic alternative. To filter out such firms, the answers were probed for other, already established long-term improvement programs in production, like Lean Manufacturing, Six Sigma, various forms of automation, ERP systems, etc. SMEs that mentioned any of these, but not I4.0, would be considered too early in their production development to host I4.0.

All interviews were recorded, and the recordings were later reviewed for quotes and summarising key statements. These were, in turn, eventually gathered to form the high-level results of this study.

## 4 Results

The respondent's prognoses about the demanding changes in the automotive industry were well aligned with the compilation of expert prognoses. The respondents usually mentioned a large share of the compilation, and the most central topics from the compilation were also considered central tropics by the respondents.

Using this knowledge, the respondents had made efforts to predict how the demanding changes in the automotive industry at large would influence their immediate business situation. The respondents could also give reasonable justifications for their prognoses,
which further indicates that business-level strategic work was well established among
these firms.

Based on their predictions of the changes to their immediate business situation, the firms had generated alternative, high-level strategic measures to adapt to these changes. Some commonly mentioned high-level measures were:

- To increase the level of Sustainable Development in the firm, to make it one of their unique selling points.

- To engage in collaborative innovation endeavours with other automotive firms.

- To improve the firm's product portfolios with more product and service bundles, product and software bundles, and products for electric vehicles.

- To enhance the firm's skills and budget used for research and development in the areas of electrical vehicles and digital tools.

Going deeper into these high-level measures, firms mentioned the use of I4.0 tech-
nologies in their product offerings. This could be, for example, including AI in the
software parts of the product and software bundles, or creating functions for gathering
and big data analysis of user data. However, no respondents mentioned the integration
of I4.0 technologies in production as alternative, high-level strategic measures.

Additionally, none of the already established long-term improvement programs in production (referred to above: Lean Manufacturing, Six Sigma...) were mentioned. Very few of the alternative measures mentioned by the respondents were situated in their production function. That is: few respondents made a connection between their strategic work and any long-term improvement programs in production. When the respondents did mention methods to adapt and improve production, they referred to it as something enabling other long-term responses, than long-term responses in their own right. In sum, the lack of evidence that the respondents connected strategic manoeuvring to increased performance in production, was not exclusive to I4.0-enabled performance increases, but to performance increases in production in general.

5 Analysis and Discussion

The results of the study indicate that automotive SME suppliers in Sweden do not include the introduction of I4.0 technologies in production in their strategic work. They also do not seem to consider any other kinds of long-term improvement program in production. The indicated answer to the research question is therefore that I4.0 technologies play no role, which goes against recommendations from prior studies, which pointed out long-term improvement programs in production as suitable strategic measures for automotive SME suppliers (e.g. [16, 17, 24]).

The respondents had insights about industry trends, and few firms were labelled as
doing low quality strategic work. The respondents were informed of I4.0 technologies
and their potential. Several respondents did discuss the use of I4.0 technologies outside
of production to reach strategic goals – for example to capture use data from their
customers – but not within production. Some respondents were critical towards the use
of digital tools in general, but more as inconvenience than antagonism.
It is possible that the respondents were not working close enough to production to see the potential of I4.0 technologies in that environment. However, most firms interviewed had only around 10-20 employees, and an investment in I4.0 technologies in production would be a major investment, so it is improbable that there were discussions of introducing I4.0 in production without the respondents being informed.

It is also possible that I4.0 technologies have not yet reached a level of maturity and sufficiently low costs to come in question as a strategic measure for automotive SME suppliers. However, the respondents were evidently informed of the rapid advances of digital technologies, including their lowered costs, and since the strategic timeframe investigated was between 2021 and 2030, it is unlikely that many of them would dismiss I4.0 technologies as too futuristic or expensive all the way until then.

After ruling out these possible causes as to why the respondents did not mention I4.0 technologies, no conclusive causes could be identified despite the rich data.

The most probable causes with support from the empirical data are the personal opinions of the respondents. The respondents gave indication of viewing their production as strategically insignificant. For example, the respondents frequently mentioned bundles between physical products and services, and physical products and software, as appropriate, innovative next steps for their firms. Comparing to these, production alone had come to be viewed as unfashionable and strategically uninteresting.

Regardless of the causes, and instead looking at what consequences these apparent, contradicting views will have, it depends on the point of view chosen. Assuming the view of prior authors, that claim that the technologies play an important part in the future competitiveness of these firms (e.g. [15, 21]), the consequences of not considering them would be drastically reduced future competitiveness. Assuming instead the respondents' view, the importance of I4.0 technologies has been exaggerated, and the greatest risk probably lies in firms being stressed into implementing complex technology that has little actual potential.

Clearly, further empirical research is needed to understand what actual opportunities and risks arise for automotive SME suppliers that choose to integrate I4.0 technologies in their manufacturing.

# 6 Conclusions

Our results indicate that the introduction of I4.0 technologies in production is not considered in the business-level strategic work of Swedish automotive SME suppliers. This goes against recommendations from prior studies, which have emphasized the importance of I4.0 technologies in the production for the competitiveness of these firms. This study is the first to empirically investigate the role of production in automotive SME suppliers' strategic work, and thereby contributes to the larger discussion on how these firms can make strategic use of I4.0 technologies in production.

It is apparent that the strategic considerations of automotive supplier SMEs and those of prior studies diverge. A recommendation for future research would therefore be to narrow this gap by further investigating how strategic work is carried out in automotive SME suppliers. Enhanced insights about the strategic work might reveal how they select which long-term initiatives (like I4.0 technologies in production) to consider, and not, and why production seems to be so absent in the strategic work.
Another area that might need attention is the relationship between the introduction of I4.0 technologies in production, and the introduction of the same technologies in the products being produced. It is possible that the latter type of introduction will eventually stimulate the former, and since respondents showed apparent interest in the latter, this might lead to enhanced interest for I4.0 technologies in production.

**Acknowledgements.** The authors would like to thank the Swedish Agency for Economic and Regional Growth via the European Regional Development Fund for the funding of the project, and Laith Butty, Sarkis Khatchadourian, Emelie Rhenman and Josefine Sohlman for their valuable contribution to the data gathering for this study.

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