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 Finances of Industry 4.0
How to invest and win in the
technological revolution?

2020
ASTOR WHITEPAPER
Finances of Industry 4.0
How to invest and win
in the technological
revolution?

2020
ASTOR WHITEPAPER

ASTOR whitepaper 2020 1

© ASTOR Sp. z o.o.

ISBN 978-83-943833-6-7
ASTOR Publishing
Kraków 2020

Materials contained in the publication are property of ASTOR Sp. z o.o.

If you wish to reprint, please contact the authors.

Contact: Michał Wojtulewicz

phone: +48 12 428 63 31
e–mail: Michal.Wojtulewicz@astor.com.pl

2 Financing of Industry 4.0

 “Help small businesses and care more about them
than you care for yourself, focus first on customer
satisfaction and second on teamwork. Shareholders’
interests come third, because they are outcomes,
not inputs”.

Jack Ma,
Founder and CEO of the Alibaba Group

CASE: Preparation for implementing Industry 4.0 requires development of business and
financial competences in companies. In addition, a paradigm change in relations
between investors an technology providers is needed. The current approach loses
its effectiveness, and is not motivating for engineering teams.

POSSIBLE
SOLUTIONS: Building relationships with employees and technology providers in win–win spirit.
Building systems that support sharing of economic effects of investments with
employees.

ASTOR whitepaper 2020 3

→ Table of Contents

1. Introduction

1.1 Industry 4.0: challenges

1.2 Industry 4.0: opportunities

2. A strategic view on Industry 4.0

2.1 Value chain

2.2 Business models and value chain reorganization in Industry 4.0

2.2.1 Categories of digital business models

2.2.2 Technological megatrends that transform production

2.2.3 Archetypes of innovation in business model

2.2.4 Market disruption

2.3 Strategic approach to digital transformation

2.4 A win–win model for digital transformation

3. How to finance investments

3.1. Enterprise budget: CapEx and OpEx

3.2 Profit reinvested in organic growth of the company

3.2.1 Financing new ventures: bootstrapping

3.2.2 Bring Your Own Device model [BYOD)

4 Financing of Industry 4.0

3.3 New financing models for enterprise development

3.3.1 Performance Contracting

3.4 Digital platform as basis for subscription model

3.4.1 Subscription as a business model

3.4.2 SaaS model

3.4.3 XaaS model

3.4.4 Sharing economy

3.5 A fresh idea – binary economics

4. Business case for an investment

4.1 A broadened definition of capital

4.1.1 Technological capital

4.1.2 Intellectual capital

4.1.3 Social capital of an enterprise

4.2 Business case for an investment – levels of financial efficiency

4.2.1 Basic financial efficiency (ROI)

4.1.2 Extended financial efficiency (ROI + TCO)

4.1.3 Strategic financial efficiency

4.3 How to measure and monitor economic effects of investments?

4.4 Sharing of benefits

ASTOR whitepaper 2020 5

5. The new investor–contractor paradigm

5.1 Theses of the research

5.2 Findings of the research

5.2.1 Main responsibility

5.2.2 A good investor

5.2.3 What is the main motivation for companies to implement a contract?

5.2.4 Challenges in cooperating with investors

5.2.5 The cheapest supplier

5.2.6 Contractual penalties and rewards

5.2.7 Final approval of a project

5.3 Win–win in cooperation with technology contractors

5.3.1 Success fee

Annex 1 Research methodology

Annex 2 Glossary of financial concepts

6 Financing of Industry 4.0

ASTOR whitepaper 2020 7
8 Financing of Industry 4.0
“Industry 4.0 is a phenomenon that changes not only the way we produce things
and think about business; our approach to finances must also undergo a major
shift. All the more so, that large scale introduction of Industry 4.0 technologies,
such as robots and artificial intelligence, is bound to cause major social changes.
The world is already facing effects of the capitalist economy, in the form of
economic globalization, market monopolization and growing social inequalities.
An important question arises in the discussion about new technologies: who will
buy goods manufactured in fully automated way? One idea is a guaranteed income
for everybody. Personally, I am not in favor of giving people livelihood for free.
Instead, I am convinced that we need major changes in how profit is shared.

In a thriving capitalist economy, work serves to create capital. However, the creat-
ed capital should be used to support work, which means maintaining and creating
jobs. What gives a company this opportunity is profit.

I am in favor of thinking that goes even further. I think it is important to enable

large groups of people to become capitalists and draw additional income from
capital. Binary economics is a solution in this spirit. It gives companies tax breaks
in exchange for enfranchisement of employees, while capital obtained from em-
ployees is cheaper for the company than for example a bank loan. There are en-
terprises in the USA that have been successfully implementing this idea for years.
In spite of its weak points, binary economics is a notion well worth considering,
among other available options. Obviously, its introduction in Poland would require
some high level decisions.

What everyone can do in present circumstances is to adopt win–win mind frame.

For me the concept is broad, and it takes into account interests of entrepreneurs
and employees, investors and technology contractors, engineers implementing
new technology and regular production crew. I also requires looking at a business
in its broad social context. As a financial director, I want to know how win–win
translates into concrete amounts of money that each party gets. To begin with,
I suggest the following thought: the manufacturing revolution called Industry 4.0
introduces groundbreaking changes in business models. Let us also be brave with
introducing deep changes into the accompanying finances.”

Michał Wojtulewicz

Chief Financial Officer

ASTOR Board Member

ASTOR whitepaper 2020 9

10 Financing of Industry 4.0
1.

Introduction

ASTOR whitepaper 2020 11

1.1. Industry 4.0: challenges

Production sector in Poland faces PRODUCTION CAPACITY AND DEMAND

the following challenges: 85 30
84 27
The market is becoming more com-
petitive. This is caused by an increase 83 24
in production capacity and a simul- 82 21
taneous decrease in demand. The 81 18
increase in efficiency is the effect of
80 15
successful implementation of Industry
79 12
4.0 technologies, robotics in particular.
At the same time, costs of raw materi- 78 9
als are rising, and customers demand 77 6
reduction of prices. 76 3
75 0
Meanwhile, effectiveness in imple-
menting Industry 4.0 technologies in 20 0 8 20 0 9 20 10 20 11 20 13 20 14 20 15 20 16 20 18 20 19
Poland remains low. For example, in
the field of robotics, our country still capacity utilization
has a lot to catch up on, in compari- demand barrier
son to other countries.
Source: NBP Fast Monitoring 2019

NUMBER OF ROBOTS FOR 10 THOUSAND EMPLOYEES IN INDUSTRY

710
700
631
600
531
500
437
400
323 309 303 322 308
301 305
300 282

200
200 176 189
152

100 68 97
22 30 28 36 32 36
0
2 014 2015 2016 2017

Source: International Federation of Robotics Report, 2018

POLAND GERMANY JAPAN CHINA SOUTH KOREA USA

12 Financing of Industry 4.0

Investments in new technologies are On top of that, the number of people All over the
a huge challenge for manufacturing in productive age is falling. The
companies. There is a financial barrier, number of people willing to work in world a question
especially when inefficient production industry is also decreasing, so recruit-
is not able to create a profit sufficient ment costs are going up. Also, financial arises more and
for reinvestment in technology. This expectations of employees are rising.
increases the distance from leaders to Only 13% of companies do not report more often: who
laggards in production efficiency. difficulties in recruiting. This demo-
graphic trend cannot be altered; its will buy goods
Another barrier is difficulty in finding impact can only be slightly softened by
effective contractors for technolog- the business cycles, when an economic manufactured in
ical implementation in a production downturn causes drop in the demand,
plant, along with inefficient and ineffec- so fewer employees will be needed. At fully automated
tive course of implementations of new the same time, productivity in Poland
technologies. has been decreasing since 2017. way?

FORECAST OF THE NUMBER OF PEOPLE IN THE PRODUCTIVE

AGE IN POLAND UP TO 2030

[MLN]

25

24

23

22

21

20
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030

Source: Ministry of Labor and Social Policy based on CSO data, 2019

ASTOR whitepaper 2020 13

1.2. Industry 4.0: opportunities
Industry 4.0 brings a fresh perspective on the
value chain in industry and on business models
in manufacturing. Industry 4.0 technologies are
disrupting ways in which goods are produced.
This opens up new opportunities for
manufacturing companies. The arising
opportunities give them a stronger
position at these stages of the value
chain, that generate more value for the
company (such as R&D, design, market-
ing and after–sales services).
Another area of opportunity is revealed
by focusing on the most effective
technological trends. They are: connec-
tivity, use of AI in production and flexible
automation. Automation and robotiza-
tion of the production process are tools
that can increase efficiency of Polish
enterprises. Robotization also adresses
companies’ current problems with find-
ing employees for production.
The third area of opportunity is defined
by analytical and creative approach to
business models and search for inno-
vative ways to respond to customers
needs. This includes new responses to
low price expectations, use of on–line
cloud platforms and focus on user
14 Financing of Industry 4.0
experience. Exploring these opportu-
nities requires deep commitment at all
levels of the organization and a strategic
approach to Industry 4.0 challenges.
Effective implementation of tech-
nologies that increase efficiency of
production and allow an enterprise to
climb to Industry 4.0 level, requires
a diligent and innovative approach to
financing. In addition to reinvesting the
company's profit, there are also other
ways to obtain financing for technology
investments, such as performance pon-
tracting, implementing a subscription
based business model or acquisition of
an investor.
The investment process begins with pre-
cise monitoring of cash flow (CapEx and
OpEx). Insight and discipline are required
for building layered business cases for
the investment. They go beyond the
basic measure of return on investment
(such as payback and ROI). Total cost
of ownership (TCO) is a more effective
measure of effectivness of investing in
technology. In the emerging Economy
4.0, the basis for success goes beyond
pure financial capital. Some companies
will be able to take advantage of emerg-
ing opportunities through other types of
capital: technological, intellectual and
social capital of the company (which
includes its organizational culture).
The most important aspect of such a
broadened view of capital is that the
other types of wealth must be invested,
and not “consumed”. The starting point
for creating an effective strategy for
building capital in each area is to be able
to measure it. Technological capital can
be measured with ASTOR Technology
Index (ITA).
The second factor of success in Econ-
omy 4.0 is the ability to effectively
cooperate with contractors who
implement a technological invest-
ment. ASTOR has conducted a survey
among automation system integrators
and machine and device manufactur-
ers (OEMs). It shows that successful
implementation of a technology project
requires commitment and partnership
in cooperation between the investor and
the technology contractor. Adequate
sharing of profits is also necessary, in
place of pressure to lower the price of
the product or service. The win–win
approach seems to works best for
achieving success in implementation of
technology.
a level of efficiency to generate sufficient
profit for building the multiple facets
of their capital and for providing their
employees with fair wages.
If the economy is to flourish, new
ways of manufacturing must bring
benefits for broad groups of market
participants, not only for a small
group of the owners of financial
capital.

The third factor of success in the

current market for industry is to cre-
ate balance between engagement of
people and effectiveness of technolo-
gy in the company. The balance can be
estimated with the already mentioned
ASTOR Technology Index. The company
can create an additional competitive
advantage through consistent win–win
approach in relations with employees,
which includes transferring to them part
of the responsibility for implementation
of new technologies in a plant. Compa-
nies that operate in this way can achieve

ASTOR whitepaper 2020 15

16 Financing of Industry 4.0
2.

A strategic
view on
Industry 4.0
The strategic approach to Industry 4.0
requires thoughtful selection of technologies,
as well as deep changes in the value chain
and in the business model of the company.

ASTOR whitepaper 2020 17

2.1 Value chain
Definition of Industry 4.0
Industry 4.0 is implementation of
innovative technologies to achieve op-
erational excellence in the enterprise,
or a radical reorganisation of the value
chain in the enterprise and creation of a
new business model to support it. The
changes require an appropriate level of
WHAT IS INDUSTRY 4.0?
INNOVATIVE
TECHNOLOGIES
RADICAL
IMPROVEMENT
OF KPIs
Source: ASTOR 2019
18 Financing of Industry 4.0
digital competence among the crew of
the enterprise, and a competent and
committed leadership. The transfor-
mation is expected to lead to a radical
improvement in Key Performance
Indicators (KPIs).
Industry 4.0 is thus referred to as the
fourth industrial revolution.
INDUSTRY 4.0
More information on the technolo-
gies of Industry 4.0, competences
necessary for transformation and the
leadership of an enterprise undergoing
a change can be found in the studies
available at: www.astor.com.pl/industry4
REORGANIZATION OF
THE VALUE CHAIN /
BUSINESS MODEL
DIGITAL
COMPETENCES AND
LEADERSHIP
Value chain
Value chain is a sequence of actions
performed by a company to devel-
op, manufacture, sell and deliver a
product, and then provide after–sales
services for it, including disposal at
the end of the product's life cycle. The
simplified value chain model below
presents the range of activities needed
for a product to pass from the concept
phase, through the production phase
(including its physical transformations
and services necessary to generate val-
ue) to delivery to end users, including
after–sales services.

GLOBAL CHANGES IN THE VALUE CHAIN MODEL

Value Added

The highest risk range

global value chain
in the 2000s

R&D services

value chain in the 1970s

design marketing

purchase
logistics
logistics
production

value chain activities

pre-production pre-production post-production Source: ASTOR 2019
intangible activities tangible activities intangible activities

In practice, value chain of an enterprise
is much more complicated, due to the
fact that each link of the chain covers
an entire range of minor interrelated
activities. Production as such is one
of the many links that add value. This
means that an overwhelming number
of manufacturing companies rank as a
specialized sub–supplier in at least one
value chain built by a larger enterprise.
Being located in the links that provide
the least value, automatically places products, and to increase efficiency.
the supplier in a weaker trade position If they do not automate or build new
than that occupied by an enterprise value, e.g. in the form of R&D and
managing the entire value chain. In design, they will be eliminated from the
the last 30 years, we have seen an supply chain in a short time.
increase in the significance of almost all
elements in the presented value chain
model, except for one: the manufactur-
ing stage. This means that producers
who focus only on manufacturing are
under pressure to lower prices of their

1
It is worth creating precise models of actual value chains in an enterprise, to better understand which activities undertaken by the company have
the greatest growth potential in its position.
2
This also applies to the economics of entire countries in global value chains. See R. Kaplinsky, M. Morris A Handbook for Value Chain Research,
written for the International Development Research Center in Canada.

ASTOR whitepaper 2020 19

Opportunities brought about
by digital transformation
The discussion on Industry 4.0 usually
focuses on digitization of production
operations (automation, robotization,
predictive analytics, digital process
simulations, etc.). This is understand-
able, given the pressure to increase
efficiency and reduce production costs.
The key opportunity created by
transformation within Industry 4.0 is,
however, brought about by the fact that
each of the stages of creating value in
the production business model opens
up new opportunities, with the use of
technology for the innovative reintegra-
tion of the entire value chain being the
greatest resource.
Example
A company can monitor costs of
using a product and its lifecycle,
thus gathering knowledge that
than can be monetized in the pro-
cess of updating existing prod-
ucts and to create new elements
of the offer.
Opportunities of digital
transformation in value
chain
Benefits in areas producing the highest
added value, such as R&D and after–
sales services, require listening most
closely to customers’ feedback and ob-
serving their behavior. At the research
and development stages, the ability
to generate added value results from
a better understanding of customers’
needs. In turn, at the stages of market-
ing and after–sales services, the possi-
bilities lie in using digital sales chan-
nels and technologies to strengthen
customer relationships, offer the most
relevant products to them and create
an encouraging online experience.

DIGITAL TRANSFORMATION OPPORTUNITIES OF THE VALUE CHAIN

STAGE R&D Design Logistics of Production Logistics of Marketing After–sales
purchases delivery & sales services

BENEFITS Awareness of Industrial de- Optimal Knowledge of Relations with Relationship Customer ser-
customers’ sign, knowledge purchase optimal pro- producers and with end custo- vice throughout
needs of manufactu- prices duction process, distributors mers product life
ring technology volume etc. cycle

VALUE ADDED High High Medium Low Medium High High

RISK OF
Low Low Medium High Medium Low Low
REPLACEMENT

DIGITAL Research of Simulation and Optimization of Digitization Supply Digital sales Digital customer
TRANSFORMA- customers’ digital design, purchases of production optimization channels, digital service,
TION OPPORTU- needs Virtual Reality process, auto- experience Augmented
NITIES (VR) mation, roboti- Reality (AR),
zation, predic- predictive
tive analytics, analytics
simulations

20 Financing of Industry 4.0

2.2 Business models and value chain
reorganization in Industry 4.0

2.2.1
Categories of digital
business models
The Global Center for Digital Business
Transformation distinguishes three
categories of digital business models.
They are based on key value that is
provided to the customer, or which the
company can obtain.
In a situation where the customer
looks for the lowest price of product
or service, additional value may lay in
ensuring cost transparency, letting the
customer pay exactly for the portion of
resource used, or providing discounts
and rewards. Aggregation of buyers
through a cloud platform lets them
negotiate terms with a large supplier.
On the other hand, the “reverse auc-
tion” model (also via an online trading
platform) connects B2B entities, allow-
ing buyers to find the cheapest supplier.
Digital platforms, which are the tech-
nological core of many digital business
models, are a source of additional
value for enterprises. First of all, they
give them access to global markets
and allow to collect data about users
and monetize that information. They
also give access to a wide pool of other
resources, such as information (the so–
called “crowdsourcing” from people
connected through online communi-
ties). Digital platforms are a disrup-
tive technology (see pp. 28/32), and
they have formed the basis of a new
network of economic exchange, called
the sharing economy, and with it a new
segment of peer–to–peer service pro-
vision, which is different from providing
goods and services through traditional
business entities.
Striving to create a better experience
for the customer (user experience,
UX) is a way of building additional value
mainly on the consumer market. It can
also create additional value in the B2B
arena, where a potential customer can
be convinced by a wider scope of offer,
shorter order processing time, ability
to personalize a product, automation of
certain parts of the process, as well as
by remote access to the service from
any device at any time.

THREE CATEGORIES OF DIGITAL BUSINESS MODELS

COST EXPERIENCE PLATFORM

• price transparency • customer choice • new markets
• consumption based • personalization • crowdsourcing
pricing • automation • peer–to–peer
• reverse auctions • lower latency • sharing economy Source: Global Center for Digital
• buyer aggregation • on any device, at any • monetization of data Business Transformation 2015
• discounts and rewards time

3
The Global Center for Digital Business Transformation http://imd.org/dbtcenter is a combined initia-
tive of Cisco and DBT, a Swiss company that runs business education programs.

ASTOR whitepaper 2020 21

2.2.2
Technological megatrends
that transform production
In 2019 The World Economic Forum
has indicated three megatrends that
drive digital transformation in man-
ufacturing plants around the world.
These are bold, artificial intelligence
and flexible automation. Megatrends
have been inferred from an analysis
of how existing production plants are
dealing with digital transformation.
16 successful units were selected out
of 1000 plants. They are the enterpris-
es that recorded a significant increase
in efficiency, thanks to the implementa-
tion of specific technologies on a large–
scale (they are marked as “change
leaders” on the diagram below).
Most of all, the leading plants were
able to transfer new technologies from
the pilot phase to the full implementa-
tion phase, “thus escaping the inertia
of the purgatory of pilotage, in which
many organizations are stuck”.
The growing importance of BigData and
connectivity in production changes the
dynamics of technology implementa-
tion, so that waiting for cheaper and
better technology no longer pays off.
It is anticipated that the leaders of the
present moment will be the ones to
reap the greatest benefits.

MEGATRENDS IN DIGITAL TRANSFORMATION

ARTIFICIAL FLEXIBLE
CONNECTIVITY
INTELLIGENCE AUTOMATION

automates event recognition creates connections between includes responsiveness,

and decision making distinct network nodes, automation and remote
increasing visibility movement

Source: The Fourth Industrial Revolution: Beacons of Technology and Innovation

in Manufacturing, World Economic Forum 2019

4
Plant performance was measured using a set of detailed indicators. The successful units were also to present a high standard in the areas indicated by
WEF (the changes had a significant impact; the plant successfully implemented several use cases of new technology; the technology was scalable; the
so–called critical effectiveness factors, such as change management, competence building and cooperation with the community were effectively cen-
tered around Industry 4.0). The featured plants are run by: Bayer, BMW, Bosch, Danfoss, Fast Radius (UPS), Foxconn, Haier, Johnson & Johnson, Phoenix
Contact, Procter & Gamble, Rold, Sandvik Coromant, Saudi Aramco, Schneider Electric, Siemens and Tata Steel. Nine of the recognized plants are in
Europe, five in China, one in Saudi Arabia and one in the USA.
5
The Fourth Industrial Revolution: Beacons of Technology and Innovation in Manufacturing, whitepaper, World Economic Forum, 2019

22 Financing of Industry 4.0

RELATIVE CHANGE IN THE COMPANY CASH FLOW AFTER
IMPLEMENTATION OF ARTIFICIAL INTELLIGENCE

( %)

130
122 FRONTRU NNERS
120
(absorbing within
fi r s t 5 t o 7 ye a r s )
110

100

90

80

70

60

50

40

30

20

10 10 FOLLOWERS
( a b s o r b i n g by 20 3 0 )
0

-10

-2 0
-23 L AGGARDS
-30 ( w i l l n o t a b s o r b by 20 3 0 )

2 0 17 2 02 0 20 25 20 30

Source: McKinsey Global Institute analysis, The Fourth Industrial Revolution: Beacons of Technology and
Innovation in Manufacturing, World Economic Forum, 2019

ASTOR whitepaper 2020 23

2.2.3
Archetypes of innovation in
business model
Researchers from the University of
Brisbane in Australia studied digital
transformation in terms of business
models. They analyzed 15 case studies
of successful companies from around
the world, that have implemented In-
dustry 4.0 technologies in their existing
value chain (3.0 model), creating an
innovative business model (4.0 model).
The study resulted in the emergence
of 13 archetypes, showing promising
directions for the transformation of
industrial business models6.
INTEGRATION is the pursuit to change
the entire value chain. It requires mov-
ing away from being a highly specialized
company in a selected part of the value
chain, in favor of integrating many of its
elements.
For example, intelligent production
allows a manufacturer to transform its
production process from a push to a
pull model, and changes the way a plant
operates. As a result, a shift can be ob-
served: manufacturers move away from
low–wage countries where centralized
production for the global market used to
be conducted, and place their decen-
tralized production near local markets
(even if wages are higher there). There is
also a shift in sales strategy, as compa-
nies exchange intermediaries for direct
interaction with customers in their own
stationary and online stores. Some en-
terprises launch their internal innovation
processes, inviting customers and other
external entities into development of
their products. Integration as the prima-
ry archetype includes three subtypes.
6
J. Weking, M. Stöcker, M. Kowalkiewicz, M. Böhm, H. Krcmar, Archetypes for Industry 4.0 Business Model Innovations, 2018. The article is
available at: http://bit.ly/BMArchetypesIndustry
24 Financing of Industry 4.0
1. Crowd-sourced innovation is based 3. Mass customization incorporates
on digital innovation platforms, through the client into the value chain. Mass
which companies open their R&D pro- production is transformed into mass
cesses and allow individuals and other personalization, which is a feature of
organizations to participate in them. In Industry 4.0. It allows customers to
this way, a community can participate in choose from the options offered by a
product design, not only hired experts. manufacturer, and adapt the final prod-
uct to their tastes. This is enabled by
intelligent production, which allows for
EXAMPLE releases of short series, including one
item batches.
Local Motors, an engine manu-
facturer, announces engineering
challenges for members of its EXAMPLE
Launch Forth platform.
Adidas e-store's customers
can choose the color of their
sneakers and add their own
2. Production–as–a–Service offered inscriptions.
to people and companies that want
to transform their ideas into physical
products. Companies offering that
service support the whole of production
process, from technical check of the de-
sign, to shipping the finished product to
the customer. The value chain departs
from “custom–made product, designed
by an expert” model, towards “mass–
personalized product, designed by the
user” model.
EXAMPLE
Shapeways.com created by
Philips Electronics, is a
platform on which individual
customers can order 3D
printing of items.
ARCHETYPES OF INNOVATION IN INDUSTRY 4.0 BUSINESS MODEL

MASTER ARCHETYPES SUBARCHETYPES

Integration Crowd-sourced innovation Production–as–a–Product Mass customization

Servitization Lifelong partnership Production–as–a–Service Result–as–a–Service

Expertise–as–a–Service Product related Process-related Broker platforms Internet of Things

consulting consulting (IoT) platforms

Source: J. Weking, M. Stöcker, M. Kowalkiewicz, M. Böhm, H. Krcmar, Archetypes for Industry 4.0 Business Model Innovations, 2018

Digitally charged products, that is the
ones equipped with sensors, form a
technological base for the servitization
archetype. They enable intelligent pro-
duction and allow for building innovative
systems around a product, in place of
simply selling the physical thing alone.
The sources of innovation in business
model come from new elements of
offer, not from new processes. The
basic structure of value chain does not
change, but there are changes to its
architecture and target clients, depend-
ing on the sub–archetype. Key resources
are secure IoT platforms and websites
for customers, as well as data for analy-
sis, derived from production processes.
The role of production supervision is
evolving. The person responsible for
maintaining on–site traffic in the plant
(3.0 model) is replaced by remote
maintenance (4.0 model). Long–term
service contracts transform one–off
transactions (3.0 model) into sources of
continuous revenue, e.g. in the sub-
scription model (4.0 solution), and make
customers dependent on the supplier
(vendor lock–in, a situation where a the form of a contract for services pro-
customer cannot change the supplier vided throughout the product life cycle
without incurring costs). Predictive in the subscription model.
maintenance which makes service more
efficient helps service providers reduce
their own costs. EXAMPLE
SERVITIZATION offers services com- AVL List is a leading supplier
plementary to traditional product sales of custom drive trains and test
(lifelong partnership), or replaces prod- solutions. In addition, the
uct sales with a service that includes the company offers remote moni-
product, while reducing costs for the toring of devices performance,
customer (Product–as–a–Service and which allows for optimizing
Result–as–a–Service). a product life cycle, with worn
parts being replaced with new
1. Lifelong partnership is enabled by ones before a fault occurs.
IoT platforms. They allow companies to
replace traditional service portfolio (re-
pairs and ongoing maintenance in 3.0
model) with remote defect monitoring
and predictive maintenance, through-
out the product life cycle (4.0 model).
The company becomes an integrated
solution provider and a partner for the
entire product life cycle. The supplier
continues to generate a significant pro-
portion of turnover by selling physical
products; innovation in the business
model adds new source of revenue, in

ASTOR whitepaper 2020 25

2. Product–as–a–Service means
lending the product, in place of selling
it along with services. The customer
pays for the product being available
(not for ownership and delivery). This
creates new value for the customer
in a form of guaranteed product
availability.
EXAMPLE
Konecranes not only sells
industrial cranes, but also
rents them for a monthly fee.
3. Result–as–a–Service is a model
in which the results provided by the
product are sold, which opens new
sources of continuous revenue for the
company. In this sub–archetype, the
full service includes responsibility for
security of operations and their com-
pliance with law.
EXAMPLE
Kaeser has redesigned its
business model; from sale of air
compressors (3.0 model) to sell-
ing compressed air, measured
in cubic meters (4.0 model). The
company takes full responsibil-
ity for maintaining air compres-
sors in customers’ plants.
26 Financing of Industry 4.0
EXPERTISE–AS–A–SERVICE introduces
hybrid innovation to business model.
Product or process knowledge, which
has been accumulated within a com-
pany, is offered to clients as a consult-
ing service, or as a product, through
broker platforms and IoT platforms.
The method of acquiring value and
the value chain itself do not change
significantly (this is a one–time sale of
services as a complementary product
offer), but services and support gain
significance in the value chain. The key
resources are people – consultants. By
comparison, the archetype of serviti-
zation also includes services, such as
repair, maintenance and operation,
with the exclusion of consulting.
1. Product–related consulting com-
plements product sales (3.0 model)
with expert advice based on the
company's own experience with the
product. The company offers new value
to customers in the existing business
segment, in the form of an integrated
product–service solution, in which the
company becomes a solution provider
(4.0 model).
EXAMPLE
Kaeser uses its know–how
associated with air compressors
to offer consulting on system
development planning and
energy saving, thus helping
customers to optimize their
investments.
2. Process-related consulting is a
result of experience gained from the
company's own internal processes.
This new type of service does not in-
clude a physical product. The company
offers its internal knowledge to external
clients in the form of consulting. The
service can be provided both for
existing customer segments, and for
new ones (e.g. consulting on intelligent
production and digital transformation).
Compared to product–related con-
sulting, changes in business model are
deeper in this case and may require the
creation of a separate business unit.
EXAMPLE
TRUMPF is a pioneer of Industry
4.0. The company offers its know–
how acquired during its own
transformation from model 3.0
to model 4.0. Consulting service
is offered by a newly created
AXOOM company.
3. Broker platforms are a result of
using existing experience in production offer elements, derived from expe-
and sale of expensive equipment and
machinery (3.0 model) to build new on– process management, as it is accumu-
line elements of the offer (4.0 model) in lated in the company. An IoT platform
the form of digital platforms operating
in the cloud, intended for commer-
cial exchange of goods and services
between various groups of customers
of an enterprise.
EXAMPLE 1
Claas, an agricultural equipment
manufacturer, has created a new
company 365Farmnet, offering
farm management software in
a cloud platform. The company
uses IoT data provided by trac-
tors to solve customer problems
related to farming, planning of
sowing and documentation.
EXAMPLE 2
TRUMPF manufactures and sells
machine tools (3.0 model), while
running a trading platform with
information about process pa-
rameters of their tools (4.0 mod-
el). The platform helps clients
adapt process parameters to
various semi–finished products
and enables faster and better
retooling of production.
4. IoT platforms allow for adding new
rience in intelligent production and
enables its community of users to
develop and build complementary
products. Unlike broker platform, IoT
platform value is drawn from analytics
of data.
EXAMPLE
GE Software Center has built
Predix, its own internal IoT plat-
form for machine operators and
maintenance engineers. The goal
was to minimize GE downtime
and cut costs of maintenance
planning. In response to market
demand, the company decided
to make the product available
to its customers as an industrial
IoT platform.
2.2.4
Market disruption
The introduction of innovative business
models usually causes a fundamental
change in expectations for all suppliers
in a given sector. The phenomenon is
known as market disruption and the
specific interference caused by digital
technologies is called a digital disrup-
tion. According to Gartner's definition,
a digital disruption is “an effect that
fundamentally changes expectations
and behavior on the market, in the in-
dustry, a process and even in the whole
culture. These fundamental changes
are triggered or expressed by new digi-
tal possibilities, channels or resources”.
Often, the position of current market
leaders gets undermined and new lead-
ers emerge, as a result of a disruption.
EXAMPLE
Launch of smartphones (which
required implementation of sev-
eral disruptive technologies) re-
sulted in disappearance of Nokia
as a current leading provider of
mobile phones.
Traditionally, the manufacturing sector
has been protected from rapid tech-
nological changes, due to stability of
high–cost manufacturing technologies.
However, it is currently undergoing a
multidimensional disruption, referred
to as Industry 4.0.
ASTOR whitepaper 2020 27
2.3 Strategic approach to digital
transformation

Given the potential for radical disrup-
tion, that digital technologies bring
across the entire value chain in the
manufacturing sector, one should ex-
pect changes in the balance of power
on the market, as a disruption is tra-
ditionally a threat to large enterprises,
and an opportunity for dynamic small
contenders. Market leaders may adopt
several strategic approaches when
faced with the thread of disrupting the
status quo.
The Global Center for Digital Business
Transformation uses war terminology,
outlining strategic perspectives of the
disruptive potential of Industry 4.0.
However, it is worth bearing in mind
that new cooperation opportunities
enabled by digital technologies are
pillars of disruptive change. Also, as
we observe, cooperation in win–win
spirit turns out to be more profitable
in the long run in many cases.

STRATEGIES OF ENTERPRISES IN THE FACE OF DIGITAL TRANSFORMATION

HARVEST DISRUPT
Block disruptive threats Introduce a disruption into
and maximize revenue the core of your business,
from business at risk or create new markets

DEFENSIVE OFFENSIVE

RETREAT OCCUPY
When sources of income Take over markets created
are dry, leave the market as a result of a disruption
or move to a well–protect-
ed niche

Source: Global Center for Digital Business Transformation 2019

28 Financing of Industry 4.0

Industry 4.0 “lighthouses”
Change leaders selected by The World
Economic Forum have been called
“lighthouses” of Industry 4.0. These
enterprises have achieved measurable
success in implementing key Industry
4.0 technologies, by following one of
two paths. The first is to introduce
innovations to the production
system, so as to obtain a competitive
advantage by achieving operational
excellence. The second path is an
innovative approach to an entire
value chain and creation of a new
business model, by changing the eco-
nomics of the operations.
“The lighthouses” have introduced These companies are also equipped
five value drivers, which allow them with four scaling activators.
to create a large impact with imple- These are:
mentation of Industry 4.0 technolo-
gies. These are: • strategy and strong business case for
Industry 4.0,
• making decisions based on Big Data,
• scalable IoT architecture,
• democratization of technology in the
production hall, • building capability by acquiring new
skills,
• agile work models,
• workforce engagement.
• minimal incremental cost of adding
new use cases,
• new business models.

VALUE DRIVERS

BIG DATA DEMOCRATIZED AGILE MINIMAL NEW BUSINESS

TECHNOLOGY WORKING INCREMENTAL MODELS
MAKING MODE COST TO ADD

SCALING ACTIVATORS

INDUSTRY 4.0 IoT ARCHITECTURE CAPABILITY WORKFORCE

STRATEGY AND BUILT FOR BUILDING ENGAGEMENT
BUSINESS CASE SCALE-UP

Source: The Fourth Industrial Revolution: Beacons of Technology and Innovation in Manufacturing, World Economic Forum 2019

7
As lighthouses to ships at sea, the selected plants show the way to other entities. Source: The Fourth Industrial Revolution: Beacons of Technolo-
gy and Innovation in Manufacturing, whitepaper, World Economic Forum, 2019

ASTOR whitepaper 2020 29

FEATURES OF ENTERPRISES DEFINED AS
“INDUSTRY 4.0 LIGHTHOUSES”
Injectors of human capital
Industry leaders resetting
benchmarks
Open innovators
and collaborators
Represent both large
and small companies
Can be found in emerging
and developed economies
Achieve high impact with minimal
replacement of equipment
Source: Fourth Industrial Revolution: Beacons of Technology and Innovation in Manufacturing, World Economic Forum, 2019
Where to start?
Enterprises enter the digital transfor-
mation from various points.
Full use of opportunities that come with
digitization requires a significant shift
in thinking at the strategic level,
followed by consistent changes in
business organization. In practice,
launching initiatives related to Industry
4.0 requires involvement of high–lev-
el managers, and often the company
owners themselves. They are the ones
with authority to change business mod-
30 Financing of Industry 4.0
Rather than replacing operators with machines, lighthouses are transforming
work to make it less repetitive, more interesting, diversified and productive.
They have moved beyond the continuous improvement efforts that have charac-
terized factories for decades, instead making a change that resets benchmarks.
They engage a trisector innovation system comprising business, government
and the social sector, including academia.
Fourth Industrial Revolution innovation is accessible not only to large organiza-
tions but also to small- and medium-sized enterprises (SMEs).
Industry 4.0 technologies are also paying off in manufacturing environments
that benefit from low labour costs.
Most were created by transforming existing brownfield operations.
Optimizing existing infrastructure and augmenting it with new machinery
can deliver many benefits.
el, reorganize an entire value chain, be opening a strategic conversation
introduce systemic changes in the among managers and to build a road
organization and, last, but not least, map for Industry 4.0 in the company.
launch significant investment funds.
Enterprises that fail to act in time will
Start with answering the question: be forced to engage in small scale local
“What role does the organization that initiatives. Their aim will not be proac-
I manage / work in play in the entire tive adding value on a larger scale, but
value chain of a product or service?” reactive cost reduction, forced by their
If the enterprise is involved in only one weak position in value chains in which
or two elements of the value chain, and they participate.
especially, if it is production alone, the
next question is: “What are we going
to do when a cheaper supplier enters
the market?”. The following step should
FREQUENTLY SELECTED PATHS OF DIGITAL TRANSFORMATION

MODEL METHOD OF BENEFITS

IMPLEMENTATION

Pilot projects Pilot implementation • learning by experimenting

approx. 70% of of new technology in a • availability of technology, ease and speed of implementation
companies selected area • low entry barrier (e.g. access to technology in XaaS model, leasing, etc.)
• rapid increase in productivity
• quality improvement
• standardization of processes
• defects reduction
• respect from customers
• increased access to data
• extra time for strategic business thinking thanks to process automation
• creating basis for system of knowledge management in the organization

Creating Option 1 • starting with a goal and clear strategic goal

new business Creating a new busi- • long–term thinking
models and / or ness model or product, • easier to get financing (owners understand the strategic goal)
reorganisation followed by a digitalized • transformation based on market trends, tailored to the market develop-
of the value factory ment
chain • ability to measure impact on business and future effects of change
approx. 20% of Option 2 • lower risk of mistake (due to decisions based on data) in the long run
companies Investment in • product releases / implementation of a new technology determined by
development of R&D the model
teams or digital sales • reorganization of value chain and long–term investments in areas with
channels high added value (e.g. R&D, design, customer service, after sale services)
• improvement of communication within the company due to the integra-
tion of value chain

Systematic Developing competences • use and development of talents within the organization
approach to the of leaders and engineers • knowledge transfer and building implementation capacity
development of (including Engineers 4.0), • openness to the market environment – attentive observation
digital compe- entrusting them with • a broader perspective for transformation
tences in the responsibility for develop- • a good business model and appropriate technology easier to find
organization ment of technology and • greater openness to change and transformation
approx. 10% of business models • employee involvement at an early stage, bottom–up generation of ideas
companies • innovative thinking and modern working methods
• increased pace of change implementation in the long run
• flexibility of the entire organization improved and increased (not limited
to a selected area)

Source: ASTOR 2019

ASTOR whitepaper 2020 31

2.4 A win–win model for
digital transformation
The concept of win–win was popularized by
Stephan Covey and his successors and is
derived from the game theory.
Acting in the spirit of win–win can
be considered as a choice based on
values, such as partnership, people's
agency, or creating a fairer society.
However, game theory argues that
there are situations in which collabo-
ration is a more rational choice than
aggressive competition.
Looking at economic relations, it is im-
portant to divide games according to
the sum of “payout”. There are fixed–
sum games, where there is a conflict
of interests, because the payout of
one player can only be increased at
the expense of payout of other players.
The second type are non–zero sum
games. In this case, every player can
profit from the game, so the game is
not based on conflict alone.
8
S. Covey, The 7 Habits of Highly Effective People
9
A specific case of fixed–sum games are zero–sum games. In a simple two–player model, they allow three options: the entire payout
goes to player A, the entire payout goes to player B, or there is a tie (payout is split in half).
10
R. P. Kostecki, Introduction to game theory, University of Warsaw
32 Financing of Industry 4.0
The economy can be analyzed from
this perspective: players compete for
limited resources (e.g. want to collect
as much cash as possible), or they
work together to achieve their goals
(e.g. they want to successfully imple-
ment a technological project). Game
theory can provide useful models for
analyzing to what extent decisions and
strategies adopted in an economic
game are rational, i.e. they maximize
the payout or minimize the penalty of
a market game participant, in a par-
ticular situation. It allows for clearer
recognition of what kind of game is
played in a given situation. There are
types of games in which the adop-
tion of a cooperation strategy gives
a smaller payout to each cooperating
player, but it aggregates a larger “pay-
out pool” for all the participants. By
transferring this thinking to the mar-
ket, we can for example understand
how focusing on maximizing share-
holders’ profit initiated in the 1980s
has hit the entire US economy as a
system, impoverishing the majority of
people in the society. The US econom-
ic system might be stabilized with a
game strategy based on agreement
that the goal is to ensure fair profits
for all market participants, starting
with regular employees, in place on
maximizing individual wins. Game the-
ory shows how this strategy leads to
an increase in the sum of payout pool
in the entire economic system.
 EXPERT VIEW

The win–win approach requires responsibility on both sides. It cannot

be implemented in every relationship, and it is worth having tools to dis-
cern it in a cold way. When win–win is not an option, people who prefer
a partnership approach to business can choose the no–deal option, and
refrain from entering a venture.

Another thing to consider, is that there are moments of ambiguous

choice. For example, when I am a supplier and my client finds himself
in a crisis situation, I can seize the opportunity and maximize my profit.
However, during my long years as the CFO, I have seen that win–win ap-
proach is a more profitable choice in the long run.

Michał Wojtulewicz
Chief Financial Officer and ASTOR Board Member

This conclusion leads back to the most cases a win–win approach,

choice of values: whether it is possible
to cooperate in a given market or if it
is necessary to compete, partly de-
pends on the decision of most players
on which game they choose to play.
It seems that digital transformation
involves more cooperation, than com-
petition for limited resources. Moreo-
ver, success requires engagement of
several groups of stakeholders, such
as technology providers, employees,
customers, innovation–developing
communities, and finally investors.
It can therefore be assumed that in
that searches for ways to increase
benefits for everyone is a more ra-
tional strategy, in place of aggressive
approach aimed at taking over as
much of the payout as possible. More
information about win–win strategies
for employees and technology provid-
ers can be found in chapters no. 3 and
4 of this study.

11
See also Time for better capitalism, Business Insider, 26/03/2019
Business Insider founder Henry Blodget explains why companies must break with what he calls a “shareholder religion”

ASTOR whitepaper 2020 33

EXPERT COMMENTARY

What is the significance of business model in

Industry 4.0?
“The belief that the ability to generate
competitive advantage in the future will
not depend on products, prices or even
effective processes, but on the skill
to create innovative business mod-
els is increasingly common. Business
models are understood broadly, as the
competences of discovering, creating
and delivering value to clients. The
spectacular successes of recent years
are e.g. Netflix, which has outclassed
Blockbuster, and Uber, which has
changed the travel market. Sources of
these successes can be traced back
to the ability to build and manage an
innovative business model.
The industrial world is also revolution-
izing its business models. For example,
Skanska outsources 85% of its activi-
ties, and the number of company sup-
pliers exceeds 90,000. The company
can thus focus on its key competences.
At the same time, it strives to educate
its business partners and it includes
business responsibility and care for
the quality of cooperation into its core
organizational values.
Although everyone has an intuition
what a business model is, in practice
it often causes misunderstanding
and difficulties. It is also an effect of
paradoxes that are associated with
truly innovative business models. Using
well–known examples: Alibaba, the
most profitable retail network, has no
warehouses, and Facebook, the world's
largest media network, does not create
its own content.
Business model is a challenge that
managers must face. The subject
becomes even more significant if con-
fronted with changes generated by the
fourth industrial revolution. Industry
4.0 does not just mean new technol-
ogies based on artificial intelligence,
automation or robotization of process-
es. Rather, it is a definition of a specific
way of thinking and approach to doing
business. One of its key issues is which
business models will dominate the
market in the coming years.
It is difficult to clearly predict how the
winning business models will be build
and what will be the scope of their
application. Nevertheless, they will
certainly be based on solutions, that
will contradict classical economics
and traditional principle of rational
management. More and more often
companies will generate higher value
for clients at ever lower costs. Klaus
Schwab, the creator of The Global
Economic Forum, noticed that cur-
rently the three largest companies in
the world generate a similar level of
revenues as those in the 1990s (about
USD 250 billion), but they achieve it
with 10 times lower employment 1990s
– approx. 1.2 million employees, 2014 –
137 thousand employees). According to
Robert Kaplan, business models of the
future will be built around 15 principles
that can be grouped around three core
values: connect, inspire, transform.
If we take all this into account, a
forecast that 40% of the Fortune 500
companies will not survive the next 2–3
years is not surprising. In these circum-
stances, can responsible leaders of the
future leave the issues of building and
managing business models to chance?”
Robert Kozielski
Chartered Marketer, University of Lodz

12
S. S. Kaplan (2012), The Business Model Innovation Factory – How to Stay Relevant when the World is Changing, John Wiley & Sons, London
13
https://www.forbes.com/sites/philfava/2012/11/09/how–skanska–incorporates–sustainability–in–their–business–model/
14
See. T. Godwin, The Battle is for the Customer Interface, TechCrunch, March 2015 –http: //techcrunch.com/2015/03/03/in–the–age–of–disintermedi-
aion–the–battle–is–all–for–the–customer–interface/; downloaded on June 4, 2016.
15
K. Schwab (2016), The Fourth Industrial Revolution, Portfolio Penguin, London

34 Financing of Industry 4.0

ASTOR whitepaper 2020 35
36 Financing of Industry 4.0
3.

How to
finance
investments
In addition to traditional methods, such
as credit or investor acquisition, there are
innovative ways of financing technological
investments.

ASTOR whitepaper 2020 37

3.1. Enterprise budget: CapEx and OpEx

The company's budget is created by financial income,

as well as financial expenses comprising of CapEx
and OpEx.

ENTERPRISE
BUDGET

FINANCIAL FINANCIAL
INCOME EXPENDITURES

CapEx OpEx
EXAMPLE

Capital expenditures (CapEx) Operational expenditures (OpEx)

expenditure on the purchase of new expenses related to maintaining

machinery or adaptation of existing the production process
equipment to production

purchase of software and servers expenditure on training or purchase

of software updates

purchase of a photocopier expenditures on paper, toner and service

38 Financing of Industry 4.0

CapEx (capital expenditures) are
funds used by the company to acquire,
improve and maintain physical assets,
such as real estate, buildings, industrial
plants, technologies or equipment.
This type of expenditure creates future
benefits for the enterprise by increas-
ing usability of the held assets or
buying new ones. CapEx is often used
to undertake new projects or invest-
ments by the company.
CapEx expenditure includes the
sums spent on:
• purchase of fixed and intangible
assets,
• repairing existing assets to increase
their usability,
• modernization of assets held,
• preparation of assets for the use in
business,
• adapting real estate or assets for
other uses,
• starting a new business or taking
over another enterprise.
When it comes to accounting, a cost is
considered a capital expense (CapEx)
when the asset is:
• new acquisition,
• an investment of life span exceeding
one year,
• an investment that improves the
usability of an existing asset.
Expenses for items with a life span of
less than one year must be included in
the operational expenditures (OpEx).
A concept related to CapEx is OpEx.
OpEx (operational expenditures, CapEx is any type of expenditure that
operating expenses) are current the company capitalizes or shows on
costs of maintaining a company, its balance sheet as an investment,
system or product, considered in the rather than as an expense on the prof-
perspective of a tax year. it and loss account. It therefore indi-
cates how much the company invests
Operating expenses (OpEx) are ex- in existing and new fixed assets.
penditures incurred in the processes
of using the assets, including general The comparison of OpEx with net sales
costs of a business. OpEx thus include: is a measure of the company's profit-
ability and efficiency, called operating
• administration costs, index. The lower the value of the oper-
• sales costs, ating index, the better the company’s
• marketing costs, performance in generating revenues,
• accounting and legal fees, as compared with total expenses of
• bank charges, the company.
• non–capitalized expenditure on
research and development, Capital expenditures (CapEx) are not
• costs of office supplies, included in the company’s expenses,
• rental and utilities costs, save for the deduction of depreciation
• costs of ongoing repairs and installment.
maintenance,
• salaries and wages.
Unlike long–term capital expenditure
(CapEx), operating costs (OpEx) are
short–term and can be fully deducted
from company taxes in the same year
in which expenses occur.
EXAMPLE
General costs of a business
include, among others, office
and administrative costs. They
are indispensable in the compa-
ny's operations, but they are not
directly related to production.
ASTOR whitepaper 2020 39
3.2 Profit reinvested in organic growth
of the company
Organic, or internal, growth is the
growth rate that a company can achieve
by increasing production and sales
through internal operations.
In large companies the term is used in
contrast to profits and growth achieved
through acquisitions and mergers with
other companies, which is referred to as
inorganic growth.
In the case of small and medium–sized
enterprises in Poland, internal (organic)
financing of growth is the most common
model. Unlike growth through acquisi-
tions, organic growth can be achieved
in stages, depending on the company's
financial resources.
Enterprises have different goals, there-
fore their approaches to development
are also different. The most common
approaches and related activities are:
• development equated with growth,
which aims to increase value of trans-
actions, number of customers, market
share or number of employees.
• development related to implementa-
tion of a specific market opportunity,
achieving initial stabilization, and finally
profitable sale of the created venture.
17
B. Glinka, J. Pasieczny, Enterprise creation: opportunities, implementation, development, Scientific Publisher of the Faculty of Management at the Univer-
sity of Warsaw, Warsaw 2015, pp. 240–241.
18
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) – the company's operating profit before deducting interest on interest–bearing
liabilities (loans, bonds), taxes, amortization of intangible assets and depreciation of tangible assets permanent (depreciation). EBITDA equals revenues,
minus operating costs, without depreciation and depreciation.
40 Financing of Industry 4.0
• development identified with quality
of the company's functioning, which
strives to improve its product or cus-
tomer service, build trust and increase
loyalty in relationships.
• development consisting in ensuring
market survival and maintaining
selected production scale and form of
activity.
With the goal of raising investment
funds, an appropriate measure of organ-
ic growth efficiency will be an increase
in revenues and profits (e.g. EBITDA or
operating profit) on quarterly or annual
basis.
The company can achieve such
growth through:
• increasing sales of products or servic-
es to existing customers,
• acquiring new customers,
• launching new products or services,
• optimization of pricing policy,
• optimization of production processes,
• optimization of other processes in the
company (administration, marketing,
sales, finances etc.)
Building a mature company through
organic growth usually requires a long
time, at least a few years. Organic
growth is a gradual process, that is
a subject to market and operational
restrictions, but does not involve much
risk. Existing risks associated with it
include, but are not limited to:
• faulty management,
• faulty team building,
• loss of financial liquidity,
• lack of access to sufficient capital.
Successful startup ventures begin to
rapidly grow after exceeding a critical
employment number and scale of activ-
ity, and they might reach double–digit
growth per year. After exceeding the
next level of size and scale, which is con-
nected with achieving market maturity,
this dynamics slows down. At that stage
inorganic development is a strategy,
that allows a venture to maintain high
growth dynamics. Inorganic develop-
ment in that case means taking over
small businesses or “transformation-
al” absorption of a larger organization,
preferably one that is rapidly developing.
This strategy may be desirable, as long
as it is financed by the company’s own
means, rather than by debt or equity
financing. The combination of organic
and inorganic growth diversifies revenue
base, without relying solely on ongoing
operations to increase the company's
market share.
Purely organic growth strategy means
that the company’s growth is achieved
through reinvestment of its profit and
other resources. This includes investing
in fixed assets, such as new technology.
In this model enterprises also might
reach for other sources of financing to
accelerate their development, fix effects
of mistakes or adverse market events, or
take advantage of market opportunities.
3.2.1
Financing new ventures:
Bootstrapping
Bootstrapping is a startup term, that re-
fers to financing new business ventures.
Literally, it means “getting out of an
existing situation or entering it with the
use of existing resources”.
In relation to business, bootstrapping
describes a situation in which an entre-
preneur starts a new venture with little
capital, based on financing other, than
that from external investors. Bootstrap-
ping, therefore, is financing the compa-
ny's development from personal funds
or operating revenues of a new venture.
Compared to using venture capital, de-
veloping an enterprise without external
investment can be beneficial because it
gives the entrepreneur full control over
all decisions. On the other hand, this
19
Startup is a newly founded company that aims to grow quickly and in a scalable way, most often on a global market and in a new branch of the economy.
Its strategy usually includes the use of external financing to fuel rapid growth. In the subsequent stages of business development these are: initiatory
seed capital from friends or a business angel, followed by venture capital (VC), followed by private equity from share issues or loans.
form of financing may expose the en-
trepreneur to unnecessary financial risk,
when the resources are not sufficient to
achieve the business goals.
In our opinion, bootstrapping practices
can also be helpful when looking for
funds to finance innovative projects
within an existing enterprise.
Ways to minimize risk and maximize
the chances of success are:
• operating in a well–known market and that employees use private devices
business area,
• using previously built relationships in network, and outside it. This mainly
this area,
• team remuneration in the form of
shares, not cash,
• no physical headquarters in the initial
period, a remote office and work from This is enabled by mobility of devices
home instead,
• position to negotiate prices and con-
ditions with suppliers,
• cooperation with well–established
partners who can handle temporary
cash shortages in a new venture (as
trade credit),
• a business model that maximizes the
possibility of cash inflow and widens
a pool of potential customers (e.g.
subscription, 24–hour online sales,
worldwide sales, use of relatively
cheap marketing channels, such as
social media).
A limited budget can be seen as the
biggest constraint on business devel-
opment, or as an incentive for a crea-
tive approach. Strong market players
with large budgets strive to bring the
already tested solution to the market
as soon as possible, while minimizing
the risk. Therefore, some possibilities
lie in recognizing and embracing mar-
ket niches, overlooked by big business
models.
3.2.2
Bring Your Own Device model
(BYOD)
“Bring Your OWN Device” (BYOD) is an
idea connected with the bootstrapping
model of venture financing. It means
at work, both within the company IT
applies to IT and telecommunications
devices, such as smartphones and
laptops.
and transfer of a large part of business
processes to the cloud. These tech-
nological changes cause shifts in work
culture, and make such solutions, as
home office (i.e. occasional work from
home) or fully remote work possible.
The sharp division between work and
personal life becomes blurred.
BYOD model brings savings to the
company, and some employees prefer
to work on equipment that they choose,
and on which they can seamlessly
perform all of their online activities,
without sharply dividing them into work
and private life.
The main challenge in this model is to
ensure an appropriate level of cyber
security in the venture. Therefore,
BYOD policy cannot be introduced in
every area of business activities. In
addition, it requires an appropriate
organizational culture in the company.
ASTOR whitepaper 2020 41
Issues to consider in the BYOD
approach:

• technological competence of employ-

ees (the higher, the better),

• existence of sensitive data in the

company (in extreme cases this ex-
cludes BYOD model),

• how many employees would like to

use their own device (for many it is
not attractive),

• what is the growth rate of the venture

(if it grows very quickly, BYOD should
be seriously considered),

• trust in employees and their account-

ability (BYOD is a model for compa-
nies in which employees are granted
full responsibility and have clearly set
goals, for which they are accountable).

20
This refers to an observation that the concept of work–life balance is becoming a thing of the past, in favor of seeking tech–life balance.

42 Financing of Industry 4.0

3.3 New financing models for enterprise
development
When looking for financing of development and technological
investments, an enterprise can reach to the following sources:

• financing with a loan,

• acquiring an investor,
• traditional capital tools, such as shares and bonds,
• modern capital tools, such as securitization and mezzanine finance,
• subsidies and tax breaks.

SOURCES OF INVESTMENT FINANCING IN AN ENTERPRISE

Financing with a loan Trade credit
Leasing
Bank credit

Acquiring an investor Strategic (sector) investor

Private equity investor (PE)
Venture capital investor (VC)
Seed capital funds
Business angel
Crowdfunding

Other capital tools Issue of shares

Bond issue
Asset securitization
Mezzanine finance

Subsidies and tax breaks European funds

Norwegian and EEA funds

Government instruments • Polish Agency for Enterprise Development

of innovation support (Polska Agencja Rozwoju Przedsiębiorczości, PARP)
• Intelligent Development Program
(Program Inteligentny Rozwój)
• Programs of the Ministry of Enterprise
and Technology (Ministerstwo Rozwoju
i Przedsiębiorczości, MPiT)

Tax breaks • Relief for industrial investments (Polish

Investment Zone, Polska Strefa Inwestycji)
Source: ASTOR 2019 • R&D relief

ASTOR whitepaper 2020 43

3.3.1
Performance Contracting
New technologies have a high initial
cost, with large savings after their in-
troduction. This is the basis for looking
for win–win models, that spread the
cost of implementation over time.
Performance Contracting used in
the energy industry is one of the well
tested models. It allows for financing
an investment by creating sufficient
energy savings to cover the costs of im-
plementing an energy–saving solution
over a given period of time.
The client contracts results of mod-
ernization with a private entrepreneur,
called the technology contractor. Some
of the contractor's initial costs might be
covered with a bank credit, but typical-
ly the project is financed by a customer,
after modernization is completed, with
savings obtained with the new tech-
nology. At the end of the contract, the
customer is a sole owner of the entire
modernized infrastructure and retains
all savings.
In this model, projects that are expect-
ed to bring savings are selected on
the basis of their potential to reduce
energy consumption. In principle, this
should give contractors and investors
an incentive to focus on the most prof-
itable projects. Technology contractor
performs an initial energy audit to
determine where the largest savings
can be found, since the project must
guarantee sufficient energy savings to
cover costs of the modernization.
Local governments and administration
units often use Performance Contract-
ing to increase energy efficiency in the
area for which they are responsible.
44 Financing of Industry 4.0
However, the model is also available
for educational institutions, production
plants, housing estates, healthcare and
commercial units.
In case of local governments and
national administrative units, lack of
initial large investment funds gives
the investor an additional benefit of
avoiding political complications related
to budgeting process.
Contract for performance is con-
cluded by 2 or 3 parties:
1. Investor: an administrative unit,
company or institution requiring energy
efficiency improvement
2. Technology contractor
3. Optionally, a financial institution
providing some initial funding.
Arrangements between parties depend
on the type of contract and the source
of financing. Other important issues to
consider include project size, savings
guarantee and verification, as well as
risk management and insurance.
CONTRACT TYPES
1. The most common type of con-
tract is “first savings” or “guaran-
teed savings”. All contractor costs
(equipment, installation, margins,
fees, etc.) are paid annually with the
savings, as they accumulate. The
duration of the contract is usually
four to eight years, and is adjusted,
so that all costs are paid back by the
end of the contract period. This type
allows for adding additional funds,
as the contract progresses, with in-
creasing savings covering the costs.
2. The second type of contract is
known as “joint savings”. In this
contract, investor and contractor
agree to share the savings over the
duration of contract, in accordance
with an agreed formula. The actual
cost of the funding is not included
in the contract, and the investor is
not obliged to pay those costs back.
In return, the contractor does not
guarantee savings. Contract terms
are usually up to 10 years, because
it takes longer to pay an investment
back, and there is a higher risk for
the contractor.
3. The third type of contract is called
“the chauffeur”, denoting the full
scope of modernization services.
Technology contractor takes over
the management of energy provision
to public utility or production plant,
which includes the modernization
and paying utility bills. The investor
pays the contractor a regular fee,
equal to utility bills before modern-
ization, or another negotiated rate.
This model is often used in Europe.
EXAMPLE
An American company Ameres-
co operates in the Performance
Contracting model. It delivers
energy efficiency and provides
solutions, based on renewable
energy sources.
PERFORMANCE CONTRACTING:
A BUDGET NEUTRAL SOLUTION
CUS TO M ER CA S H F LOW

SAVINGS

SAVINGS
DEB T
SERVICE

CO ST S

COST S COST S

CO NTRACTI NG BEF O RE CONTRACTING DURING CONTRACTING AFTER THE COM P LETION

TH E E NE RGY SAVI NG PROJE CT THE ENERGY SAVING PROJECT OF THE ENERGY SAV ING PROJECT

E NE RGY, OPE RATI ON

AND M AI NTE NANC E C OSTS

PAYM E NT FOR THE TE C HNOLOGY

C ONTRACTOR AND LOAN RE PAYMENT

SAVI NG S

Source: www.ameresco.com

ASTOR whitepaper 2020 45

3.4 Digital platform as basis
of the subscription model

The model of digital platforms avail- 3.4.2

able online via cloud computing is
considered one of the most promising
segments of digital economy in the
21st century. It enables, among others,
major shifts in internationalization
process of enterprises and opens
access to new customer groups in local
markets. Concepts that help to better
perceive new business opportunities
emerging from this model are SaaS,
XaaS and sharing economics.
3.4.1
Subscription as
a business model
Subscription–based business models
rely on repeated sales of a product or
service to generate monthly or yearly
subscription revenue. They focus on
how the revenue is generated and are
based on an assumption, that a single
customer periodically repeats pay-
ment to prolong access to a product
or service. Customer retention is more
important than customer acquisition
in this model.
EXAMPLE
Subscription of monthly maga-
zines, weeklies and newspapers
is a popular traditional model.
Instead of selling a publication
as a stand–alone product for a
one time purchase, a publisher
offers a subscription service for
its regular delivery.
The publisher's revenue mod-
el gets stronger, because the
subscription guarantees sales
over a 12–month period, instead
of unpredictable individu-
al purchases. This facilitates
revenue forecasting and busi-
ness planning, as the company
can predict sales results more
accurately.
SaaS model
Technology companies popularize the
subscription model under the SaaS
(Software–as–a–Service) acronym.
Many software producers move from
one–time sales model to a subscrip-
tion–based model, in which a cus-
tomer periodically pays for access to
a service or product through a digital
platform located in the cloud. Indus-
trial software is also available in this
model, however the challenge for
industrial operations is to ensure an
appropriate level of digital security of
a SaaS platform.
EXAMPLE
The British company Aveva
develops industrial software
available in the SaaS model.

Historically, subscription meant a

written commitment to buy a book or
shares, bonds or other securities, often
combined with prepayment. Currently,
this term covers a much broader spec-
trum of products and services, and it
emphasizes repeatability of purchases
over a longer period of time.

46 Financing of Industry 4.0

3.4.3
XaaS mode
XaaS (X–as–a–Service) is analogous
to the concept of SaaS, and refers
to growing variety of services traded
online in the model of digital cloud
platforms, as opposed to goods and
services available offline.
The “X” in the acronym refers to all
services provided remotely, in the
model of the digital platform available
to users through the cloud: from Soft-
ware–as–a–Service (SaaS), to comput-
er memory as a service (Storage–as–a–
Service), Desktop–as–Service (DaaS),
Disaster–Recovery–as–a–Service
(DRaaS), Network–as–a–service (NaaS),
Infrastructure–as–a–service (IaaS) and
Platform–as–a–Service (PaaS). It also
includes emerging new services, such
as marketing as a service or health
care as a service.
3.4.4
Sharing economy
There is no single and unambiguous
definition of sharing economy. The
most general definition is a system
activating unused assets by launch-
ing business models and creating
markets, both enabling access to
these resources, and increasing their
efficiency. These assets are various
tangible and intangible goods. Sharing
economy models are characterized by
replacing material goods rarely used
21
Terms Whatever–as–a–Service and Anything–as–a–Service are also used, which reflects the huge potential of services and products available through cloud.
22
M. Poniatowska–Jaksch, Foreign expansion of enterprises in the sharing economy model, International Economy 22 (2018)
23
Typology: Kohen B. (2016), Making Sense Of The Many Business Models In The Sharing economy, www.fastcompany.com/3058203/making–sense–of–
the –many–business–models–in–the–sharing–economy (access date: 18.01.2018)
during the year with services; see also
the concept of XaaS discussed above
(Anything–as–a–Service).
Sharing economy initially referred to
an emerging sphere of P2P economy
(peer–to–peer, analogous to B2C,
business–to–consumer, and B2B
business–to–business market activi-
ties). Therefore, it also has a dimension
referring to values other, than just pure
pursuit of profit (such as a desire to
share resources, limit environmental
impact of the economy or expand one's
social network). However, the business
sphere has already noticed that new
profit opportunities are emerging in
this model.
EXAMPLE
The most frequently cited
successful projects based on
sharing economy philosophy
are the Uber transport network
and the Airbnb accommodation
network.
Six key dimensions of business models
in sharing economy have been identi-
fied, indicating at the same time three
sub–types, resulting in a total of 729
unique business models. The basic
dimensions are:
1. Technology
Some business models use technology
not only to connect users, but also
to complete transactions offline (e.g.
crowdfunding companies). Others have
business models based on technolog-
ical connectivity (e.g. Uber). However,
it is also possible to find local enter-
prises where technology is an auxiliary
tool (e.g. coworking).
2. Transactions
The basic variants of transactions are:
market, alternative and free.
3. Business approach
Uber, Upwork and eBay are profit–ori-
ented exchange platforms. However,
there exist hybrid models, which are
usually created with a profit–oriented
approach, and at the same time aimed
at achieving social and / or environ-
mental goals. An example is Zipcar
(acquired by Avis), one of which goals
was traffic and pollution reduction in
cities. Mission–based models, mostly
non–profit, are primarily neighborhood
initiatives.
ASTOR whitepaper 2020 47
4. Common resources

In this cross–section, three approach-

es to optimization are possible: new
TECHNOLOGY
resources (purchase for new business, SHARIN
G MARKET
e.g. Zipcar), unused existing resources
E
or inventory (e.g. Rent the Runway for

tech based

TR
d
P

y
base
TY

AN
ilia
unsold wedding dresses) and finding

SA
aux
tech
new users of the existing resources (e.g.

FOR

CTI
h

co
tec
borrowing a used drill).

mm
PLAT

ONS
B2B

alt

erc
ern
B2C

ial
ativ
5. Management model

fre
P2P

e
e
This section includes various solutions, COMMON

ion
from traditional corporate structures, SHARINGS

missi
tion
perat
to cooperation models. Corporate
EL

BUSIN
on
era
coo
structures are chosen in most venture

hyb
ba
op
MOD

for
rat

s
co ed

d
capital supported business models

rid
te

pro
rpo

na

ESS
(e.g. Uber, Airbnb, Upwork, Rent the di

fit
co
T

or

new unused
N

exist
co
Runway).

AP
ME

new
i

P
E

ng

RO
G
NA

6. Platform type

A
CH
MA SHARIN
G MARKET
In practice, there are at least three SHAR
types: B2B (e.g Yardclub founded by ED RESOURCES
Caterpillar is a tractor renting platform),
B2C (e.g. Zipcar, Rent the Runway) and
social P2P type, the classic of the shar-
ing economy (e.g. Airbnb, Task Rabbit, Source:
Indiegogo, Blablacar etc.). Foreign expansion of enterprises in the sharing
economy model, M. Poniatowska–Jaksch
When it comes to financing the com-
pany's development, sharing economy
creates new ways for increasing finan-
cial liquidity and reducing costs (e.g.
instead of buying or leasing a machine
the company may rent it in a subscrip-
tion model, to handle a small order).
On the other hand, sharing econo-
my allows for creation new business
models and market opportunities for
technology providers.

48 Financing of Industry 4.0

3.5 A fresh idea – binary economics

Binary economics results from a Louis Kelso, from whom the idea of
critique of the current form of capi- binary economics originated, de-
talism24, which in principle leads to a signed the ESOP model (Employment
widening of wealth gap between the Stock Ownership Plan) as a type of
holders of capital and the rest of the employee shareholding. In this model
society, and deprives the crushing the government gives entrepreneurs
majority of market participants of an a substantial tax relief, when they en-
opportunity to accumulate capital, franchise their employees by issuing
that could be invested. This model new company shares, or transferring
also criticizes existing ways of reduc- part of the existing stock to their crew.
ing social tensions, that result from
the wealth gap (the ways are: redistri- In practice, in addition to classic
bution of wealth from the rich to the forms of financing (such as debt, issue
poor, bureaucracy, indebtedness of of shares, leasing, obtaining invest-
the poor to the rich). ment capital, etc.), this gives com-
panies one more option of gathering
If a developed economy is to function capital for investment, the so–called
well, most people need income from binary financing through ESOP.
capital, in addition to work. Binary
economics considers a situation in
which people derive at least half of their
income from capital desirable. Accord-
ing to binary economists, the idea of full
employment and wage–based growth
is outdated and does not fit the current
economy, because human labor means
and will mean less and less in the econ-
omy. Economic policy must be adapted
to this.

24
“Investment is the most important growth mechanism in the economy. It is most often financed by an investment loan. Who has access to it? It is the rich
people, because they can present their assets to the bank as collateral. They are also able to multiply their assets. It is difficult for the poor to get the first
quantum of property to multiply (Save for the important exception of entrepreneurship of people without capital, which however does not change the
basic principle). The poor do not have access to the basic mechanism for creating wealth in the economy. The mechanism of growing inequality is built
into the very foundation of the capitalist economy.” Krzysztof Nędzyński, A new paradigm: binary economics at www.obserwatorfinansowy.pl

ASTOR whitepaper 2020 49

CLASSIC METHODS OF FINANCING COMPANIES

CREDIT

CR E DI T

TAX SHI ELD:

COMPANY BANK INTEREST INSTALLMENT S AND TA X RATE
CAP I TAL I NSTAL L M E NT S

INT E R E S T I NSTAL L M E NT S

RAISING CAPITAL

CA SH

TA X S HI E L D :
COMPAN Y S TA K EH OLDE RS NO TA X S HI E L D

NEW SHA RES

OPERATIONAL LEASING

ASSET

C OM PA N Y T HE LESSOR TA X S H I E L D :
LE A SE INSTA LLM E NT S A ND THE TA X R AT E

LE A SIN G I N S TA LLM E N T S

Source: Krzysztof Nędzyński, A new paradigm: binary economics

50 Financing of Industry 4.0

METHODS OF COMPANY FINANCING IN A BINARY MODEL
CR E D I T
C O M PAN Y
NEW SHARES
e m p l oye e s a re
m o re m o t i va t e d
PU RCH A S I N G PO W E R
Source: Krzysztof Nędzyński, A new paradigm: binary economics
Financing through ESOP means that
a company, for example, buys a
machine needed on credit through
an employee trust. As a result, the
entire payment (both interest and
capital) becomes a tax deductible
for the company, as part of employee
remuneration. ESOP is not taxable, so
the company can transfer all the sum
to the bank as a loan repayment. As a
result, the cost of investment is lower
for the company.
The company must issue new shares
and transfer them to ESOP, to be able
to take advantage of tax relief. As
debt is repaid to the bank, the shares
transferred to ESOP are allocated to
employees. They become sharehold-
ers of the company, in which they
are employed, and get the right to
dividends and, most often, limited
voting rights.
E M PLOY E E S
CR E D I T I N S TA LLM E N T S
capital and interest
E MPLOYE E S
H AV E MO R E
Currently, companies with ESOP plan
employ 15 million people in the United
States. Mostly these enterprises are
more productive than the competition.
As Steven Freeman's research shows,
employee participation in ownership
and management increases productivity. •
In the economy as a whole, binary
financing through ESOP has the
following effects:
• For employees – after the loan is
repaid, employees take up shares
without any further payment, and
the dividend increases their dispos-
able income.
• For the company – the ownership
structure gets “diluted”. Owners lose
a percentage of shares in the compa-
ny, but receive a tax relief and they
BANK
TA X S H I E L D :
LOA N R E PAYM E NT A ND THE TA X RAT E
employees become more engaged.
Instead of paying income tax, com-
panies transfer it to employees in the
form of shares (with an excess, that
the company pays for).
For the state budget – initially the
cash inflow is smaller. With time,
however, it gets higher due to higher
VAT coming from employees’ private
spendings and faster economic
growth.
• For the entire economy – the
purchasing power of people
increases. There is less political
pressure on redistribution and greater
financial stability, due to smaller debt
among the poorer people and less
public debt.
One of the most frequently raised
arguments against ESOP is the lack
ASTOR whitepaper 2020 51
of diversification. In the event of
a bankruptcy of a company with ESOP,
people lose their jobs and their shares,
as an alternative source of income.
The collapse of Enron is a spectac-
ular example of an ESOP enterprise
bankruptcy.
In Poland ESOP encounters an obstacle
in the form of a rooted culture of dis-
trust of employees towards company
owners, while binary economics re-
quires a deep sense of shared respon-
sibility. Despite this, it is a promising
model of property succession for
mature enterprises in our country.
For some company owners, selling a
company to employees has the advan-
tage of it retaining its identity, which
is less likely in case of it being sold to
a corporation or a financial institution.
Employees pay the company off its
gross profits, i.e. on the same terms as
if it was bought by an investor.
EXAMPLE
A transport company wants to finance a replacement of its truck fleet,
worth PLN 12 million. The loan costs 10 percent per year, and is to be
repaid in five years. If the company gets into a bank debt, it will pay
back PLN 200,000 of capital installment for 60 months and, with de-
creasing installments, a total of PLN 3,050,000 of interest, that will be
deducted from the tax base.
With 19% tax, it will pay PLN 579,500 less tax in five years. With binary
financing, the company will be able to deduct PLN 1.55 million from the
tax base, which will reduce its tax liabilities by almost PLN 3 million within
five years. In order to take advantage of this relief, it will have to transfer
new shares worth over PLN 3 million to employees.
The worth of the transferred shares may differ, depending on the CIT tax
rate. The basic idea is that employees get shares worth more, than the
state budget loses on tax.
Source: Krzysztof Nędzyński, A new paradigm: binary economics

The basic concept of binary economics

is to enable people without collateral
assets, so that they can start compet-
ing on the capital market with the rich.
For this to happen, a paradigm shift is
required, that is a fundamental change
in recognizing and solving problems.

52 Financing of Industry 4.0

ASTOR whitepaper 2020 53
54 Financing of Industry 4.0
4.

Business
case for an
investment
Business justification for investing in Industry
4.0 technologies requires more than a simple
return on investment calculation. Traditional
financial measures, such as ROI, still apply,
but are considered in a broader context.

ASTOR whitepaper 2020 55

4.1. A broadened definition of capital

Capital is a term used in the fields of
economics and finance, denoting fixed
assets used to start or continue a busi-
ness. It is one of the basic and classic
factors of production, next to labor
and land. It has the form of monetary
resources, means of production and
intellectual resources.
In a broad context, capital is a “self–
multiplying” value. Investment of capi-
tal enables profitable production. Profit
earned from capital investment can
be reinvested, which creates capital
accumulation. First of all, the definition
indicates that apart from money and
goods, capital also takes form of tech-
nologies and other intangible assets.
Secondly, it states that not all money,
goods or technology is capital, only
those which get invested.25.
Money, therefore, is not capital in
itself. It becomes capital if a capitalist
uses it to purchase means of produc-
tion and labor, transforming it into
productive capital. The goal is to make
a profit.
Traditionally, it is in the area of
financial capital that we are looking
for measures of enterprise efficien-
cy. In the era of rapid and disruptive
market changes, however, it turns out
that this method of measurement is
incomplete, because it the non–finan-
cial forms of capital that allow some
companies to generate new value and
compete more effectively.
The following chapter looks at ways to
assess several capital areas in an en-
terprise, alongside its financial capital.
A multi–factor evaluation paints a more
complete picture of the viability and
potential of an enterprise.

AREAS OF ASSESSMENT OF ENTERPRISE VALUE

NEW APPROACH TO CAPITAL

FINANCIAL TECHNOLOGICAL INTELLECTUAL SOCIAL

CAPITAL CAPITAL CAPITAL CAPITAL

OF THE COMPANY'S VALUE

Source: ASTOR 2019

25
An investment gives the owner a title to an annuity, e.g. in the form of interest, dividends, license fees, etc.

56 Financing of Industry 4.0

4.1.1.
Technological capital
Production capacity of a plant is
created by people, tools and raw ma-
terials, that they have at their disposal.
In other words, a company's produc-
tive capital consists of workforce and
means of production.
It is obvious, that what differentiates a
manufacture from an industrial plant
is the technology used for production.
Manufacture is based on manual labor,
while the purpose of industrialization
is to create means of production, that
increase efficiency of human work,
so that greater volume of goods can
be produced, at increased speed
and of better quality. As a result, the
enterprise can achieve higher profit
from production. Without technology
thus, people are inefficient. While
technology is useless without people,
production based mainly on manual
labor is not competitive in the current
market realities.
What's more, for 10 years we have ob-
served a decrease in number of people
willing to work in industry, in Poland
and in the world. In this situation pro-
duction based on manual labor is no
longer possible. It is the more so, that
an inefficient company is not able to
generate enough profit to finance the
necessary investments and the grow-
ing salary expectations of employees.
Investment in automation of produc-
tion is no longer a choice between two
options, but becomes a necessity.
A question arises: what proportion
of technology and payroll expenses
allows to remain competitive and
generate sufficient profit and to ensure
enterprise development and fair pay
for employees?

PRODUCTION CAPITAL OF AN ENTERPRISE

PRODUCTION CAPITAL

WORKFORCE MEANS OF PRODUCTION

OBJECT OF LABOR MEANS OF LABOR

○ raw materials ○ production halls
○ materials ○ land
○ semi-finished products ○ machines and tools
○ production lines
Source: ASTOR 2019

ASTOR whitepaper 2020 57

MORE JOBS THAN THE UNEMPLOYED IN THE USA
(M L N )
11
10
8
7
6
Dec
2 014 2015
Source: USA Bureau of Labor Statistics (BLS), March 2019
We suggest introducing a concept of
technological capital for the purpose
of a precise understanding of how
technology influences creation of profit
and how it stimulates an enterprise
development. In the classic approach,
means of production include material
objects necessary for the production
process, divided into objects of labor
(raw materials, materials, semi–fin-
ished products) and means of labor
(production halls, land, machines,
tools and production lines). Land and
production halls are capital–intensive
elements, but they are necessary,
regardless of production technologies
used. For this reason, we propose to
58 Financing of Industry 4.0
all jobs offered on 31.03.2019 7,488,000
number of unemployed 5,824,000
7,488,000
5,824,000
March
2016 2017 2018 2019
single out machines and production
lines from the means of labor. This cre-
ates a starting point for estimating the
technological capital of the company.
If we consider technology to be a form
of capital, the question of its reinvest-
ment arises automatically. In a healthy
capitalist economy, an appropriate
amount of profit must become capital.
In the case of industrial technological
capital, this means that part of the
profit generated through technology
should be reinvested in further tech-
nological improvements, which further
increase production efficiency and
allow more profit to be generated.
 TECHNOLOGICAL CAPITAL OF AN ENTERPRISE

MEANS OF PRODUCTION

7488

OBJECT OF LABOR MEANS OF LABOR

○ raw materials ○ production halls
○ materials ○ land
○ semi-finished products ○ machines and tools TECHNOLOGICAL
○ production lines CAPITAL

Source: ASTOR 2019

It is worth noting that technological

lines in Poland are depreciated over
5 years on average. However, equip-
ment in Polish industrial plants is
often older than that. This means that
enterprises “spend” their technological
capital, instead of multiplying it.

To answer the question of proper rela-

tionship of human labor and technology
in the pursuit of production and profit
efficiency, we introduce the ASTOR
Technology Index (ATI) as a measure-
ment that helps to determine the pro-
portion of expenditure on technological
capital and expenditure on labor in the
company's production capital.

ASTOR whitepaper 2020 59

ASTOR TECHNOLOGICAL INDEX (ATI)
FOR PRODUCTION COMPANIES IN POLAND

DEPRECIATION* + LEASING + LEASE

OF THE MEANS OF PRODUCTION
ATI = × ζ × 100
PAY FUND

LEGEND

*Fair depreciation
Production lines and machines
(excluding land and halls) are included
in the depreciation. If a machine is
out of production, it should not be
included. If an enterprise is in the
economic zone, depreciation should
be normalized.
(dzeta) is a shift factor and equals:
• for 3 shifts, 5 days a week: 1
• for 2 shifts, 5 days a week: 0.66
• for 1 shift, 5 days a week: 0.33
• for continuous operation 7 days a week: 1.4
Source: ASTOR 2019

EXAMPLE

DEPRECIATION = 2,000,000 / month

ATI = × 100 = 20
PAYROLL FUND = 10,000,000 / month

60 Financing of Industry 4.0

The ATI is a number from 0 to 1000,
where zero means fully manual pro-
duction, and 1000 - fully automated
one. This is an ASTOR proprietary
indicator which is in the testing phase.
Tests conducted among ASTOR cus-
ESTIMATION OF THE VALUE OF THE ASTOR TECHNOLOGICAL INDEX
0 10 20
MANUFACTURE
POLISH PLANT
AVERAGE
POLISH PLANT
LEADING
ATI = Estimated for 2019, averaged for all industries. The ratio measure
will likely change in the coming years.
Source: ASTOR tests, 2017–2019
Contrary to the first association, the
way to raise the ATI is not to reduce
employees’ salaries. The ATI indicator
has the following key implications for
companies determined to increase
their production efficiency and striving
to generate higher profits:
• The higher the ATI, the greater the
efficiency of production and the
greater an opportunity to generate
profit, and also to offer higher earn-
ings to employees.
• Investment in technology is not a one–
time, or occasional one. It is a continu-
ous process, that should be included in
the company's financial strategy, as a
decrease in the ATI means a decrease
in the company's competitiveness in
the field of technological advancement.
tomers for one and a half year allowed
to estimate the level of ATI indicator
for average and leading companies in
Poland, and among leading global com-
panies. The estimations are presented
in the diagram below.
100 1000
CLASS
WORLD
AUTOMATIZED PLANT
FULLY
• Part of the profit generated by imple- • The ATI is also a measure that allows
menting a new technology must be investors to estimate a company's
reinvested in the technology. The ATI technological potential.
indicator is a tool for calculating the
precise amount of reinvestment.
When it comes to remuneration, enter-
• When labor costs increase (e.g. prises that have achieved a high level
new employees are hired, or wages of investments in technology have also
increase), investment in technology greater freedom in offering employees
must also increase. higher salaries. This is due to a relative
decrease of payroll fund, in relation to
• If a company starts at a low tech- the technological investment pool.
nological level, raising the ATI is
challenging, as it is difficult for an
inefficient company to generate a
sufficient profit to finance investment
in technology. Such a situation also
contains a potential that can be
unleashed, e.g. by finding an investor
with capital and know–how.
ASTOR whitepaper 2020 61
 EXPERT COMMENTARY

“It is better for the health of the economy if a company employs 50 people
who earn PLN 6,000 each, than if it has 100 employees with PLN 3,000
salary each. Also, from employee's point of view, I think it is better to work
in a strong company, than in a weak one. Lifting a weak company to a higher
level is difficult and it requires a lot of effort and commitment.

Capitalism has its laws, that cause the least effective companies to drop out
of the market. That said, I haven’t noticed that companies, which decide to
invest in technology would fire people. This has not been happening in the
last 10 years. On the contrary, companies tend to grow and employ more
staff, after technological recapitalization. Let’s take an example of a domes-
tic furniture manufacturer, who has increased its production efficiency and
developed the sales, after investing in 7 industrial robots. The company has
achieved such a profit, that it needed to employed 300 additional people
to handle the growth.

The relations between entrepreneurs and their employees are often difficult.
As ASTOR, our answer is to promote the win–win philosophy in business.
In the long run, keeping all the profit earned to oneself is less profitable, than
sharing it with employees, contractors, customers and the wider society.
For this to be possible, however, a business must make profit first. Raising the
level of technological capital is one of the necessary steps for a manufactur-
ing company to being able to create profit.

I observe that companies that have the ASTOR Technological Index at a rela-
tively high level, 20 and higher, are more open to this idea. In companies with
a below 10 ATI measure, the mention of technological capital causes a lot of
frustration. It takes a huge financial effort to lift the ATI level, and inefficient
production cannot generate adequate profit. However, there is another side
to this challenge, as these are enterprises with great potential that technology
can release. One way out of this vicious circle is to find a good investor. There
are cases like this among our customers”.

Stefan Życzkowski,
President, ASTOR

62 Financing of Industry 4.0

4.1.2
Intellectual capital
There are many definitions of intellectu-
al capital. The most common practice
for an enterprise is to create its own
definition. The following section ex-
plains why this is the most appropriate
approach to defining the intellectual
capital of the company.
Broadly speaking, intellectual capital is
the wealth created as a result of knowl-
edge of the company's employees, as
they engage in a constant process of
increasing the value of business, which
they develop. From the perspective
of what is important for a company's
growth and development, intellectual
capital can be divided into three cate-
gories, as shown in the figure below.

INTELLECTUAL CAPITAL OF AN ENTERPRISE

HUMAN CAPITAL INFORMATION CAPITAL ORGANIZATIONAL CAPITAL

○ skills ○ systems ○ culture
○ training ○ database ○ leadership
○ knowledge ○ networks ○ integrity
○ cooperation

Source: R. Kaplan, D. Norton, Measuring Strategic Readiness of Intangible Assets, Harvard Business Review 2004

While there is a widespread belief that
knowledge is one of the most impor-
tant factors driving an increase in the
value of an enterprise26, it is difficult to
measure intellectual capital accurately.
The Chartered Institute of Management
Accountants (CIMA)27 explains why.
First of all, traditional accounting was
invented for physical things, such as
machines, that enabled production
of goods in the industrial economy.
Second, some of intellectual goods are
not tangible. Thirdly, their combination
is unique to a particular organization,
and they create intellectual capital only
as a whole system. What adds value
to one company, can be worthless in
another. The unique system of tangible
and intangible assets is therefore a
source of enormous market advan-
tage, because it is impossible to copy
by competitors. The existing systems
for classifying and measuring intel-
lectual capital should therefore serve
as a source of inspiration, leading to a
discovery of a unique constellation of
factors constituting a unique capital of
a specific organization. Based on this
knowledge, the company should create
and improve its own system.
The International Federation of
Accountants (IFAC) has created a de-
tailed and broad classification that can
be a starting point for considerations28.

26
There exists a concept of a knowledge–based economy. According to the OECD definition, it is a kind of economy in which knowledge is an independent
entity, treated as a product. It is manufactured, distributed and then implemented as one of the engines, that drive business development. This state of
affairs is reflected in the creation of a new financial accounting department, i.e. accounting for competence assets and intellectual capital.
27
See Understanding corporate value: managing and reporting intellectual capital, The Chartered Institute of Management Accountants (CIMA).
www.cimaglobal.com/Documents/ImportedDocuments/intellectualcapital.pdf
28
Other advanced methods for recognizing and measuring the company's intellectual capital can be found in the above document.

ASTOR whitepaper 2020 63

DETAILED CLASSIFICATION OF INTELLECTUAL CAPITAL
Human
capital
• knowledge
• education
• professional qualifications
• knowledge related to the scope
of tasks
• professional assessments
• psychometric assessments
• competences related to the scope
of tasks
• entrepreneurship, innovation, pro-
active and reactive skills, flexibility
Source: IFAC 1998 (after CIMA)
Intellectual capital should not be con-
fused with knowledge management.
Intellectual capital covers the entire
functioning of a company. Knowledge
management, on the other hand, is
an internal process in an organization
that allows it to increase its intellectu-
al capital.
64 Financing of Industry 4.0
Customer capital
(relationships)
• brands
• customers
• customer loyalty
• brand names
• orders awaiting implementation
• distribution channels
• business partnerships
• license agreements
• good terms of contracts
• franchise agreements
4.1.3
Social capital of an
enterprise
Some of the elements that IFAC clas-
sifies as intellectual capital can be
also classified as social capital. Social • Value of social structure, created by
capital is a term that functions at the
crossroads of economics and sociology, • Cultural capital, made of certain
to denote these elements of produc-
tion and life in an organized society,
that derive value from mutual social
relations and trust of individuals. Peo-
ple can achieve more benefits through
them, and in addition, relationships
and trust motivate them to act, just
as material stimuli do.
Organizational capital
(structural)
intellectual property:
• patents
• copyright
• proprietary projects
• trade secrets
• trademarks
infrastructure assets:
• management philosophy
• corporate culture
• management processes
• information systems
• networking systems
• financial relations
In the area of social capital, we can
talk about:
• Important aspects of human capital,
such as a sense of identity and indi-
viduality;
tradition, religion and other factors;
norms and values of a group, ena-
bling or hindering specific actions.
There are two different approaches
to the concept of social capital in
sociology. An American promoter of
this term, Robert Putnam, writes:
“Social capital refers to such features
of the organization of society as
trust, norms and connections, that
can increase the efficiency of society,
facilitating coordinated actions. Like
other forms of capital, social capital
is productive, because it enables
the achievement of certain goals,
that could not be achieved, if it were
missing [...] For example, a group
whose members show that they are
trustworthy and trust others will be
able to achieve much more, than a
comparable group in which there
is no trust [...] In a community of
farmers [...], in which farmers help
each other stack hay and where tools
are widely borrowed, social capital
allows each of the farmers to do their
work with less physical capital in the
form of tools and equipment. Spon-
taneous cooperation is easier, thanks
to social capital.29”
This notion of social capital is an
element of studies on non–economic
factors of economic development. For
example, the World Bank studies social
capital resources based on Putnam’s
approach30.
A different approach is represented by This approach helps to recognize
a French sociologist Pierre Bourdieu. some ambiguous effects of operating
He emphasizes the following features within a network of social connections.
of social capital: Social capital is the hardest to meas-
ure, among the types of capital listed.
• Social capital is not a value in itself; However, it gives a useful perspective,
its final value is measured by the sum that allows a better understanding
of other capital and power that can of success or failure of business
be mobilized through it, ventures. By understanding what
elements make up its positive social
• Social capital is defined from the capital, an enterprise can actively
point of view of an individual, and strengthen them.
not the entire community (in the first
approach, virtually all members of
the community have equal access to
the collective social capital, based on
mutual trust),
• From the point of view of a wider
community, social capital is not an
unequivocally positive resource. In-
dividuals having it can use it in a way
that is not in line with the interests of
the collective or other individuals,
• It can be used to describe the exist-
ence of social inequalities, in par-
ticular the non–obvious and informal
networks of relationships31,
• Political capital (in particular in the
form of membership in political
parties) is understood as a form of
social capital.

29
R. Putnam, Democracy in Action. Civic traditions in modern Italy. According to Putnam’s approach cooperation in the win–win spirit, based on trust,
can be classified as social capital.
30
See also F. Fukuyama, Trust: social capital and the path to prosperity
31
In this perspective, bonds of social capital that are too strong, in particular in their entangling form, may have a number of negative effects, including
exclusion of persons not belonging to the group and the group's use of coercion and restriction of the freedom of persons operating within the group.
These are forms of so–called negative social capital. It is the basis for operation of socially harmful organizations, such as mafia.

ASTOR whitepaper 2020 65

4.2. Business case for an investment –
levels of financial efficiency
With a broadened perspective on
types of capital helping an enterprise
to succeed, the following part of the
chapter focuses on financial capital,
to consider what financial measures
should be used to assess profitability
of an investment.
An investment in new technology in
an enterprise should be supported
by a business case. This document
should demonstrate profitability of
a proposed technological change,
in financial terms. It may be a simple
one pager or an extensive analysis;
either way, it should provide answers
to some questions, including the most
basic ones:
• What are costs of the project?
• What benefits will the project bring?
• What is the payback period?
There are a number of methodolo-
gies for preparing a business case for
technological projects. In this study, we
propose a perspective of three levels
of measuring financial efficiency: basic,
extended and strategic.
66 Financing of Industry 4.0
EXAMPLE 1
PURCHASE OF GRINDING MACHINE TOOLS
Investment (USD): 40,000
Year: 1987
The investment was requested because:
• There were several hundred machine tools in the plant.
• It was necessary to outsource grinding to another company.
• Repair time for machine tools was being prolonged.
• Price of the outsourced service was high.
Not bought because:
• Number of sanded beds turned out to be small.
• Even a basic payback period significantly exceeded the depreciation period.
• The applicants themselves decided that the purchase was not justified.
EXAMPLE 2
MODERNIZATION OF CHEMICAL SYNTHESIS INSTALLATION
Investment (USD): 4,000,000
Year: 2005
The investment was requested because:
Its effect was to increase the production capacity.
• The issue was known in the company for several years.
• Investment efficiency was high (IRR = 53%).
• It has not been implemented yet just because of lack of funds
in the company.
Actions and results:
Verification of the business case.
• Review of other investment initiatives.
• Schedule verification.
• Accelerated implementation of the project.
4.2.1 PAYBACK (return) is the period after
Basic financial efficiency which investment outlays will be
(ROI) returned.

ROI (Return on Investment) is the basic The procedure of determining

indicator used to assess the effective-
ness and profitability of the company
activities and its investments, or to
compare the effectiveness of various
investments. ROI measures the amount
of return on an investment in relation to
the cost of that investment.
payback is as follows:
Part of the flow from the next period
(n + 1) that is required to fully cover
Number of full periods (n) investment outlays
RETURN
= in which the investment has +
PERIOD
not yet returned Total cash flow from the next period (n + 1)

There are several methods for
calculating ROI:
• Payback (return),
• Break–even point,
• Net Present Value (NPV),
• Internal Rate of Return (IRR).
The calculated value represents the
time (number of periods) necessary to
return the expenditure.
This is a popular method, because of
its simplicity; it is easy to understand
and quite simple to calculate.
In traditional economics it is assumed,
that the shorter the payback period,
the better, but this can be deceptive.
Payback calculation does not provide
complete information about the total
ROI, because it does not take into
account the change in the value of
money over time and does not show
how much, how and when the compa-
ny earns on an investment.

EXAMPLE

A company wants to buy a computer for PLN 3,000. The device will allow an
employee to serve customers faster. The computer will work for three years.
At the end of each of the three years, the cash that will flow in thanks to the
equipment is estimated at PLN 1,300. This is the additional amount the com-
pany will earn thanks to serving more customers.

PLN 1,300

PLN 1,300 PER YEAR

= 2.31 YEARS
The assumed lifetime of the computer is 3 years, so in this case the payback
period is shorter than the lifetime of the project. Let's assume, however, that
the cash flow for the example project is PLN 3,000 a year in the first year and
zero in subsequent years. According to the payback calculation, the return
period is one year, which seems good: the company recovered the invested
money in one year. However, if there is no further return on the investment
in the next years, the company did not make any profit out of it.

ASTOR whitepaper 2020 67

THE BREAK–EVEN POINT (BEP), is
the point at which the income from
3 METHODS OF PRESENTING
an investment equates with the total THE BREAK–EVEN POINT
costs incurred by the company, and
the financial result is zero. At this
point, the audited project is neither 1. Quantitative
profitable, nor loss–making.
The amount of production at which the break–even point is zero.
In a situation where an enterprise
finances its activities with external Quantitative Break–even point = FC × (Up − Vuc)
capital, and it constitutes an important
part of the total costs, the break–even where:
point should be extended, to include • FC – total fixed costs
financial costs. Such an enterprise will • Up – unit price
be profitable, when revenues cover not • Vuc – variable unit cost
only its fixed and variable costs, but • Up - Vuc – unit margin
also the financial costs. If the values
needed for calculations are uncer- 2. By value
tain (e.g. sales value), more advanced
methods are used, based on historical The value of production at which the break–even point equals zero, providing
data estimation. that the value of sales revenues equals the total costs. It is calculated by mul-
tiplying the quantitative break–even point by the unit price.
The break–even point is one of the key
parameters in managing a company's Break–even point by value = quantitative break–even point × Up
finances because:
where: Up – unit price
• It allows to assess whether the
company is profitable at all;
a well–calculated break–even point
is the best indicator of whether the 3. By percentage
business makes profit;
It defines how much of the expected demand should be used, to offset costs
• It facilitates financial manage- incurred by sales revenues.
ment; determining the break–even
point helps in making decisions Break–even point by percentage = Break–even point Xm × 100%
about investments or cutting costs;
where:
• It helps determine the price of Xm – maximum possible sales volume determined
a product; with the knowledge what on the basis of a demand forecast
income the company should achieve
to cover costs, it is easier to deter-
mine the optimal price of the product
(one that will allow to achieve the
break–even level of revenue as soon
as possible).

68 Financing of Industry 4.0

NET PRESENT VALUE
Net Present Value (NPV) is the net
value of future cash flows coming from
investments. NPV calculation allows
one to determine whether an invest-
ment will bring profit or loss. A positive
value indicates that the expected prof-
its exceed the expected costs. The big
advantage of this indicator is that it
takes into account impairment of
money over time.
NPV is described by the formula:
n CFt
NPV = ∑ –I
t=1 (1 + r) t IRR calculation is relatively complicat-
where:
• CF – net cash flow
• r – discount rate
• I – capital expenditure
• t – subsequent investment periods
(month, quarter, year, etc.)
NVP is used, when discount rate (cost
of capital, required rate of return,
threshold rate) is known. There are ta-
bles and sheets calculating the value
of this measure.
INTERNAL RATE OF RETURN
Internal Rate of Return (IRR) is a meas-
ure that allows one to estimate profita-
bility of an investment, by determining
the actual rate of return on investment.
Simply put, IRR is the rate at which a
project reaches the break–even point.
IRR measure is usually used in conjunc-
tion with the Net Present Value (NPV).
IRR is the discount rate for which NPV,
i.e. the Net Present Value of an invest-
ment, equals zero (NPV = 0). The IRR is
therefore the interest rate at which the
economic break–even point is reached,
i.e. the current value of expenditure will
be equal to current inflows.
When calculating NPV, a specific dis-
count rate for the company is assumed,
and then the current investment value
is calculated. IRR, on the other hand,
allows one to calculate the actual
return on cash flow in a project, and
then compare this rate of return with
the required level of return on invest-
ment. The investment is profitable, if
the IRR is higher than the required level
of return on investment.
ed, but there are electronic calculators
for this value. The formula used for
calculations is:
n CFi n CFi
NPV = ∑ – I0 = ∑ = 0
i=1 (1 + IRR) n i=0 (1 + IRR) n
where:
• CF1 – cash flow from investments
• I0 – initial investment
• n – number of periods in which
cash flows occur
• IRR – internal rate of return
EXAMPLE
A company is considering an investment of PLN 3,000,000, which
will bring PLN 1,300,000 in cash per year for the next three years.
One cannot take a total cash flow of PLN 3,900 to calculate the
rate of return, because it is spread over three years.
One needs to use an iterative process, with different annual interest
rates, until NPV equals zero.
ASTOR whitepaper 2020 69
A good practice is to use NPV and
IRR indicators simultaneously. The
NPV gives a clearer understanding
of the expected return, while the IRR
measure is easier to understand and
more intuitive for people, who are not
related to finances in the company.
EXAMPLE
4.2.2
Extended financial efficiency
(ROI + TCO)
An extended analysis of profitability of
a technology project should take into
account the Total Cost of Ownership
(TCO), in addition to the traditional
Return on Investment calculation (ROI).

The IRR rate in a project is 14%,
while the company accepts 10%
as a minimum interest rate on
its investments. Even people
with little financial knowledge
immediately understand, that
the business receives 4% more
return on a project, than the
expected minimum. However,
information that NPV in a project
amounts to PLN 2,000,000 does
not say that much to financial
laymen.
EXTENDED ANALYSIS TOTAL RETURN ON TOTAL COST OF
OF PROFITABILITY INVESTMENT (ROI) OWNERSHIP (TCO)
According to Gartner's definition, the ment itself (CapEx) and its use (OpEx),
Total Cost of Ownership is the total and also takes into account external
cost of acquiring, installing, using, costs and benefits generated by an
maintaining and eventually disposing investment.
of assets in the company over a speci-
fied period of time. CapEx and OpEx indicators are dis-
cussed in chapter 3.
In classic financial terminology, TCO
includes costs related to the invest-

The disadvantage of IRR is that it is an

abstract indicator. It does not indicate TOTAL COST OF OWNERSHIP (TCO)
the amount of profit, neither does it
refer to the scale of a project.

EXAMPLE TCO
CapEx
Total Cost
cost of investment
NPV can provide information of Ownership
that if assumptions are correct,
a project will bring a profit
of PLN 2,000,000, thus help-
ing to calculate the project's OpEx
contribution to the company's costs of using
income. However, information investment
that IRR is 20% does not say
anything about an amount that
the company will gain from the
investment32. External costs
generated by
investment
32
A Refresher on Internal Rate of Return, Harvard Business Review, 17/03/2016,
https://hbr.org/2016/03/a-refresher-on-internal-rate-of-return

70 Financing of Industry 4.0

The Total Cost of Ownership is dis-
cussed in the context of investing in
IT technology and tools, in particular.
This indicator is used to assess current
and projected expenses or costs of IT
and telecommunications infrastructure,
as well as other technologies related to
digitization. The Total Cost of Owner-
ship includes direct costs, disclosed
in budgets and payrolls, and indirect
(hidden) costs, designated as costs
related to user activities and downtime.
There are many models describing
TCO. A number of consulting com-
panies propose their own approach,
based on their experience, and, apart
from the Gartner's methodology, the
McKinsey model is also popular. Gates,
for example, suggests that, in addition
to the price of the product itself,
which is the initial capital expenditure,
TCO should include the costs of:
• service,
• guarantees,
• employee training and development,
• inspections,
• modernizations, updates and
replacements,
• risk associated with the operation of
technology,
• waste disposal,
• ensuring safety,
• environmental protection,
• impact on customer perception.
This example shows how TCO models
help control the total costs associated
with owning technological resources.
In addition to detailed and extensive
cost classification systems, an impor-
tant element of the systems offered
by consulting companies are databas-
es gathering statistical information
about IT costs for many industries.
They contain companies' own data
and data researched by independent
associations. This information allows
an enterprise to benchmark its level
of expenditure against IT spending in
its industry, and the market in general.
The Total Cost of Ownership calcu-
lation also helps answer questions
arising in the process of selecting
a technology contractor.
EXAMPLE
Which contractor is better for modernization of a technological line,
which is to operate for 5 years until the next modernization?
Contractor A, with a project valuation of PLN 400,000 and unknown
annual cost of ownership.
Contractor B, with project valuation PLN 480,000 and cost of
ownership of PLN 18,000 per year.
The answer is impossible, according to the principle that only a
comparison of “an apple with an apple” is reliable. In the example, the
selected contractor should provide further information about TCO of
the investment, including technical challenges that might affect other
aspects of the company's operations.
In this context, TCO as a basis for deci-
sions about technological investments
leads to better strategic planning for
the entire company. While it is easier to
do for private companies, in the case of
state owned companies, adopting the
TCO principle would require fundamen-
tal changes in public procurement law
and planning approach.
ASTOR whitepaper 2020 71
 EXPERT COMMENTARY

The “Swiss watch” of costs and benefits33

It is worth learning from Swiss management experts. For example, when plan-
ning construction of a road, they precisely define the purpose of the construc-
tion, i.e. what the road is supposed to improve in the transportation system,
what is its traffic capacity, how it should be constructed, etc. TCO perspec-
tive is also included, with specifications on the road life cycle and its costs.
The parameters easily translate into the choice of construction technology,
and thus, the choice of contractors. With investments with long life cycle, this
excludes the lowest purchase price. In addition, the Swiss Federal Office of
Spatial Development (ARE) analyzes in detail total costs and external benefits
of transport, associated with safety and environmental impact. One of the
goals of ARE analyses is improvement of long–term planning and inclusion
of environmental benefits. Another goal is to mobilize people to change their
transport habits for healthier ones, e.g. cycling.

The extended analysis of cost efficiency is crucial, because of the large total
amount of expenditure. In Switzerland, the total transport costs in 2010
amounted to 94.3 million francs, which is 16% of the gross domestic product.

Jarosław Gracel
Director, Industry 4.0 Transformation, ASTOR Board Member

33
J. Gracel, Total Cost of Ownership. Is it worth to own cheaply?, Harvard Business Review, https://www.hbrp.pl/b/calkowity–koszt–posiadania–tanio–po-
siasc–czy–tanio–posiadac/1DKa2xKkm

72 Financing of Industry 4.0

Labor market as the invisible
part of business cases for
investment in technology
When analyzing the profitability
of investments in technology, it is
also worth considering situation on
the labor market. In the traditional
approach we assume that job candi-
dates are available on the market. In
that case, we can also assume that
there will be an increase in production
efficiency, quality, or that safety will
be improved, after the technology is
implemented.
New technology, however requires
capital expenditures (CapEx) and it
incurs operational costs (OpEx). When
employee availability is very low on
the labor market, it is also worth con-
sidering additional factors. We can call
them hidden costs and benefits.
From the hidden costs perspective, we
should also consider the risk of failure
to implement the production plan, due
to lack of the required number of em-
ployees on production lines or higher
costs of recruitment and training of
new employees.
On the other hand, well–implemented
technologies in the areas of auto-
mation, robotization and digitization
ensure predictability of production,
regardless of the situation on the labor
market, which we can call hidden
benefits. Moreover, investments that
seem unprofitable in a normal market
situation (e.g. have a payback period
of more than 2–3 years), prove to be
profitable, when the hidden costs and
benefits are included into the financial
analysis. It is thus worth taking the
above mentioned “invisible” factors
into account, when building a business
case for a technological investment.

ANALYSIS OF PROFITABILITY OF INVESTMENT IN CASE OF

“NO PEOPLE TO WORK”

TRADITIONAL APPROACH ADDITIONAL ASPECTS OF PROFITABILITY ANALYSIS

TO PROFITABILITY ANALYSIS IN THE SITUATION OF “NO PEOPLE TO WORK”

CAPITAL BENEFITS HIDDEN COSTS HIDDEN BENEFITS

EXPENDITURE
(CAPEX)

• purchase of technology • performance increase • uncertainty of the pro- • certainty of the produc-
• implementation • increase in productivity duction plan implemen- tion plan implementation
services • shortening of lead time tation (due to high staff – guarantee of technolo-
• fixed assets • improving quality of turnover) gy continuity
products • additional recruitment • reducing the risk of “no
OPERATIONAL • improving production costs people to work” situation
EXPENDITURE repeatability • uncertain quality of the • repeatable production
(OPEX) • increasing availability of final product (due to high
production lines staff turnover)
• maintenance and • improving data quality
development and information flow
• license fees
• training
• maintenance services

Source: ASTOR 2019

ASTOR whitepaper 2020 73

4.2.3.
Strategic financial efficiency
At the most advanced level of project
profitability analysis, the company:
• Uses multidimensional methods to
calculate the total return on invest-
ment (ROI),
• Estimates the total cost of ownership
(TCO, including CapEx, OpEx and
external costs of the investment),
• Compares its results to market
benchmarks (the industry average
and the leaders),
• Seeks to link profitability of its in-
vestments with implementation of its
strategic goals.
Enterprises with high capital invest-
ment and capital–intensive industries,
such as the manufacturing sector, often
use the ROIC indicator to justify finan-
cial decisions at the strategic level.
Return on Invested Capital (ROIC)
measures how effectively the busi-
ness entity uses the invested money
to generate profit. It informs what is
the efficiency – or profitability – of the
capital invested in the enterprise. The
higher the ROIC value, the better.
This ratio is related to the cost of capi-
tal. The profitability of capital is meas-
ured with Weighted Average Cost of
Capital (WACC). A capital unit brings a
surplus to an enterprise when the ROIC
74 Financing of Industry 4.0
is greater than the WACC. The method
of ROIC measuring is as follows:
NOPAT
ROIC =
fixed capital
EBIT*(1–T)
ROIC =
fixed capital
where:
• NOPAT – Net Operating Profit
After Tax
• fixed capital – capital invested in the
company, i.e. equity (e.g. inflows from
issued shares) and long–term liabili-
ties (issued bonds or loans),
• EBIT – Earnings Before Interest
and Tax
• T – tax amount.
The Return on Invested Capital is one of
the most reliable measures of invest-
ment performance:
• it indicates how much capital a
business generates, compared to the
amount of capital invested in it,
• it is useful when comparing financial
performance of companies in the
same sector with each other.
Other types of capital
at the strategic level
With the perspective of multiplying
the company's capital, the strate-
gic level also seeks ways to multiply
other types of the enterprises capital:
technological, intellectual and social
one (see subsections 4.1.1, 4.1.2 and
4.1.3):
Measure of technological capital
In this study, we propose the ASTOR
Technology Index as an indicator of
the company's technological capital
level, measured in comparison to other
companies on the market (see section
4.1.3). The most important idea is that
technology is a form of capital. This
means that a part of the profit gener-
ated by technology implementation
should be allocated to further tech-
nological investments in a strategic,
planned and systematic way.
Measure of intellectual capital
Recognizing the importance of intel-
lectual capital helps create a more
systematic financial framework for
investments in training and devel-
opment of employees competence.
Also in this case, a part of the profits
generated by development of employ-
ees competencies should be allocated
to their further improvement.
The companies, which are more than
a machine for generating income for in-
vestors, have also non–financial goals,
and produce profit partially in order to
be able to reach them.
To better understand that, let us recall
the classic model of Abraham Maslow's
needs, in a version simplified for busi-
ness purposes. The original concept
regards individuals and their motiva-
tion. Assuming that goals are answers
to specific needs, the Maslow’s model
can also be used to put an organiza-
tion's goals in a hierarchy. Starting from
the bottom up:
• The first and the second level is to
survive on the market and ensure a
degree of operational safety; which
means generating a profit, that covers
current costs and builds a reserve to
overcome unexpected difficulties.
• At the third level we can place goals
related to well–being of employees and
existence of the company in its social
THE PYRAMID OF NEEDS AND THE HIERARCHY OF COMPANY'S GOALS
SELF-REALISATION
NEED
RESPECT AND
RECOGNITION NEEDS
LOVE AND
BELONGING NEEDS
SAFETY
NEED
PHYSIOLOGICAL
NEEDS
Source: ASTOR 2019
environment, which implies funding for
employees' benefits and charity.
• The fourth level is associated with
an ambition to gain respect on the
market, achieve a significant position
in industry associations or to become a
market leader. Some Corporate Social
Responsibility (CSR) activities belong
to this level.
• Level five usually means an innovative
vision that brings something that has
never existed to the market. This also
applies to a sense of mission and a
desire to introduce a specific change in
the world through CSR activities.
Hierarchy means that achieving higher
level goals is possible after achieving
the goals of lower levels, even in the
case, when owners and employees of
the company have aspirations that be-
long to the higher levels, than the ones
the company has managed to achieve
so far in its development.
This view helps to organize thinking
about what goals the company should
strive for and in what order. At the
same time, it helps to maintain a vision
of full success, which requires taking
into account all levels of needs and
their corresponding goals.
GOAL: FIND THE REASON WHY
GOAL: LEADERSHIP
GOAL: GOOD RELATIONS
IN THE COMPANY AND OUTSIDE
GOAL: TO CONTINUE IN
UNEXPECTED CIRCUMSTANCES
GOAL: TO SURVIVE
AND CONTINUE OPERATIONS
ASTOR whitepaper 2020 75
4.3. How to measure and monitor economic
effects of investments?
Economic effects of technology in-
vestments can be precisely measured
by breaking production process into
measurable elements. Industry 4.0
technologies make it much easier, as
one of their distinctive features is con-
tinuous and precise measurement of
key points of production process. They
also provide tools for data analysis,
SELECTED INDICATORS MEASURING THE EFFECTIVENESS
OF INDUSTRY 4.0 TECHNOLOGIES
AREA
Productivity
Agility of production
Customization
Source: The Fourth Industrial Revolution. Beacons of Technology and Innovation in Manufacturing, The World Economic Forum 2019
76 Financing of Industry 4.0
including multidimensional cost
reporting.
The World Economic Forum recom-
mends, that key indicators of effec-
tiveness of technological investments
in the field of Industry 4.0 be meas-
ured in three areas: productivity, agili-
ty of production and customization.
KEY PRODUCTION EFFICIENCY INDICATORS
• Increase in production volume at a plant
• Increase in productivity
• Increase of OEE (Overall Equipment Effectiveness)
• Reduction of quality maintenance costs
• Lower product costs
• Energetic efficiency
• Reduced inventory
• Shortening of the Lead Time
• Shortening of the Time–to–Market
• Reduction of retooling times
Lot size reduction
Productivity COMPONENTS OF THE TOTAL PRODUCTION COST
At present, three production efficiency
indicators are most commonly used in
production practice.
TOTA L TCP
COS T
Total Production Cost (TCP) is the
sum of fixed and variable costs, i.e. all
expenses of an enterprise incurred in
the manufacturing process at a given
time. T VC

• Total Fixed Costs (TFC) are the items

of expenditure, that are independent
of the current level of production, e.g.
administrative and management costs,
insurance costs of fixed assets, depre- TF C
ciation costs of fixed assets, etc.

• Total Variable Costs (TVC) are the

cost components, that depend on
PRODU CTION VOL U M E
the current level of production, e.g.
cost of raw materials and electricity
for production, salaries for produc-
tion workers, storage and transport Source: www.mfiles.pl
costs, etc.

Knowledge about the production cost structure is a basis for many decisions, including:

• what should be the volume of produc- • whether to buy machines and produce
tion, so that revenues equal the total semi–finished products in–house, or
costs (the break–even point), to outsource,

• what should be the volume of pro- • what budget to spend on bonuses for
duction, in order for the enterprise to the improvement of performance.
produce a certain profit,

• how much should the production vol-

ume be increased, to reduce unit costs
and achieve the assumed increase
in profit,

ASTOR whitepaper 2020 77

The Overall Equipment Effectiveness
indicator (OEE)34 measures the number
of good quality units produced by a
machine in a given period of time, after
deducting downtime and slower than
assumed pace of work.
OEE is calculated as follows:
OEE% = A% × E% × Q%
where:
• A is for availability – the percentage of
time the machine is available for work,
• E is for efficiency – the percentage of
machine efficiency (speed) in relation
to the standard,
• Q is for quality – what percent of units
is of good quality.
Therefore, OEE is affected by down-
time, which reduces availability of a
machine, slowdowns reducing its per-
formance and incorrect operation of
a machine producing faulty products.
The value of OFF indicator should be
as high as possible, especially for criti-
cal resources, i.e. producing the most
demanded products. In practice, it is
assumed that 85% of Overall Equip-
ment Effectiveness is a very good
result.
Application of the OEE
measurement:
• comparison with production effec-
tiveness goals,
34
More information about OEE is available at www.itwiz.pl/wnikiniki–production efficiency–standardization–analytics–for–manufacturing–companies/
78 Financing of Industry 4.0
• comparison with the best practices in
the industry,
• comparisons within the organization,
e.g. comparison of OEE level of differ-
ent machines,
• OEE monitoring of critical machines,
• monitoring the percentage of down-
time due to breakdowns,
• Mean Time to Repair (MTTR) estima-
tions.
On–Time In–Full (OTIF) is a measure
of quality and reliability of order or
delivery.
OTIF is a synthetic indicator, i.e. its
value is calculated on the basis of two
other indicators. The first element is
the On–Time (OT) indicator, which
measures timeliness of order com-
pletion. The second element is the
In–Full (IF) indicator, measuring overall
completion of the order. The final result
is given as a percentage, as both com-
ponents are measured in percent.
The measurement method is as follows:
OTIF% = OT% × IF%
where:
• OT means On–Time
• IF means In–Full (completely).
The expected level of OTIF indicator
is usually 92% to 98%, which results
from typical target values for com-
ponents of OTIF indicator. It should
be noted, that in practice OTIF rate of
98% means that both timeliness and
completeness of orders are at the level
of 99%.
A measure complementary to OTIF
is the First Time Yield index (FTY),
which is defined as the number of units
leaving the production cycle, divided
by the number of units entering this
cycle over a given period of time. Only
the units that meet the quality criteria
are counted in a single production
cycle, with the exclusion of repaired
or defective products.
FPY is measured as follows:
where:
• LPP is the number of good quality
units produced in the single cycle,
• LW is the total number of units pro-
duced,
• FTY is used to measure the efficien-
cy of a production line in terms of
providing quality products. It is also
a measure used in the process of
continuous improvement.
Agile production
Kanban system uses Lead Time in-
dicator (LT) to measure time it takes
to complete one production cycle,
including production time and waiting
time between individual operations in
a cycle (preparation, transport, control,
pickup e.t.c.). In logistics, LT is the
period between order registration and
its delivery to a customer.
Measuring Lead Time in an plant, one
should consider:
• preparation time, needed to place
an order for production or delivery,
• time of waiting for production pro-
cess to be completed or for delivery,
• time for other procedures (quality
control, transport to warehouse, etc).
In agile methodology, a similar indi-
cator is called Time to Market (TTM).
TTM is measured from the start of work
on a product, to its release. In IT “the
product” may be a new functionality in
the system, an application or an entire
system. Release is the moment, when
the product becomes useful, which
means it can be sold or is made availa-
ble for a customer.
LT and TTM indicate competitive ad-
vantage. A company that is able to de-
liver a product faster than its competi-
tors is more likely to win a customer.
ASTOR whitepaper 2020 79
10 BEST COMPANY INVESTMENT PRACTICES 35
1. Always create formal
assessments of investment
effectiveness
The management of the company
should require a business case for
investment activities, based on per-
formance measures such as NPV, IRR
and TCO.
2. Assess, calculate and, if possible,
minimize the risk of investment
When deciding on large investments,
risk should not be left without control.
Before launching a project, you should
be aware of the key risks and assess
likelihood of them occurring. At a later
stage, it is worth to estimate risk effects
and the costs of implementing a possi-
ble recovery plan. This will allow you to
build a budget for servicing risk costs.
3. Prioritize your investment
portfolio in terms of efficiency
and risk
The use of formal criteria and meas-
ures for assessing investment effec-
tiveness and risk (such as NPV and the
NPVR extension ratio, i.e. NPV Ratio =
NPV/CapEx) gives the management a
tool to prioritize projects to launch.
4. Ensure there is competition,
when choosing suppliers and
contractors for your investment
The key to right choice of a contractor
is a well–prepared project specifi-
cation, one that takes into account
detailed technical aspects (system
functions, technologies), business
factors (experience, references, back-
35
M. Mroczkowski, J. Gracel, Ten principles of effective investing, Business and Production 4 (1/2011), www.astor.com.pl/biznes–i–produkcja
80 Financing of Industry 4.0
ground of the company) and service
conditions. A request based on a
specification document allows you to
compare offers according to the prin-
ciple that “apples should be compared
with apples”. Note, that the greatest
risk comes with investments, that have
price as the sole criterion for choosing
the contractor.
5. Accelerate the implementation of
the best projects by appropriate
allocation of financial and / or
personal resources
Investment “pearls” are extremely
rare nowadays, so it is worth support-
ing implementation of projects with a
strong business case.
6. Verify effectiveness of
an investment during its
implementation
Savvy enterprises carry out periodic
inspections, in which they review
results of implemented investments.
If the sum of costs needed to finalize
a project far exceeds its potential
benefits, a decision is made to discon-
tinue or suspend the project. However,
an economic calculation should be
supplemented with an analysis of
potential opportunities and threats
resulting from the continuation or
closure of the project.
7. Evaluate and verify project
managers, both on investor’s and
contractor’s side
The right choice of the project man-
ager and the contractor strongly
impacts the probability of a project
success.
8. Clearly communicate goals, meas-
ure results and motivate staff and
contractors accordingly
A well–prepared project should have
clearly defined goals and they should
be effectively communicated, both at
the management and operational level.
9. Evaluate implemented invest-
ment projects and draw conclu-
sions for the future
Building a database of good practices
and risk mitigation methods for var-
ious types of projects contributes to
a significant increase in the effective-
ness of future investments, because
situations of “breaking the open door”,
i.e. solving the same problem multiple
times, are avoided.
10. Use common sense
Procedures and workflows are neces-
sary, but they might obscure a larger
view. It is always worth asking the
simplest questions such as: Can't it be
done better, cheaper, faster, in a differ-
ent way? Is it really needed?
4.4. Sharing of benefits
Employees involvement, or lack of it,
often determines success or failure of
an investment project. For this reason,
considerations about business cases
for investments would not be com-
plete without a reflection on tools for
teams’ motivation.
Success fee for the teams participat-
ing in technology project implemen-
tation, is rarely used in Poland is an
incentive tool. In this approach con-
tractors are offered a bonus based on
business performance of the project,
which means sharing with them part
of the profit achieved by delivering the
solution ahead of schedule or from
better quality of implementation. The
supervision team and future users of
the implemented technology in the
plant might also be included into the
scheme. Detailed recommendations
for building success fee plans are
provided in subsection 5.3.1.
Global competition is currently forcing
manufacturers to redesign their busi-
ness processes, to focus on integrat-
ing knowledge, technology and people.
One way to implement this idea is the
Total Productive Maintenance (TPM)
methodology. The core idea of this
methodology is strengthening of deci-
sion–making processes of production
operators, while providing them with
detailed data on the process and
equipping them with advanced control
systems. Based on the provided infor-
mation, they make their own decisions,
aimed at achieving excellence in the
production process.
Innovative plans and tools can be
successfully implemented, if they are
based on mutual trust and
WIN–WIN IN COOPERATION WITH EMPLOYEES
WIN–LOSE
All profit or a significant part for
oneself
Controlling:
• strict expenditure control
• all decisions made by the
business owner
Investment concepts come from
the board
Corporate training forced
by employees
Employees' own initiative not
welcome
Employees’ creativity is ignored
Degradation or loss of job as a
result of a failure
Source: ASTOR 2019
a willingness to cooperate. ASTOR's
experience proves that consistent ap-
plication of the win–win approach in
relations with employees is the most
effective method of creating favorable
conditions for trust and cooperation.
WIN– WIN
Profit sharing
Empowerment:
• budgeting system
• delegating responsibility
Investment concepts come from the
board, management and employees
Strategic development programs and
development paths
Bonuses for employees’ initiative
Openness to innovation, active
encouragement for creativity, bonuses,
a budget “to burn”
Learning lessons from failure together
ASTOR whitepaper 2020 81
CASE STUDY:
Total Productive Maintenance at LOTOS Asfalt
LOTOS Asfalt is one of the leading
bitumen producers in Europe, and
leader in the production of MODBIT and
WMA modified bitumens in Poland. The
biggest challenge for the company is
to follow market trends and meet very
strict legal standards regarding gas
emissions, and also other environmen-
tal protection requirements. Custom-
ers expect low prices for the same high
quality of products.
The company has a MES (Manufactur-
ing Execution System), that collects all
its production data. It was built so that
valuable information and data could
be visible “at a glance”. Data from all
systems are collected in one database,
where they can be aggregated and
which can calculate a large number
of process, business, production and
efficiency indicators.
The system enables employees to
precisely plan the production, so as to
optimize the availability of production
installations, in relation to incoming
orders. They can also recreate any past
production process, which allows them
to optimize costs, while ensuring the
highest quality of products, as well as
carrying out production according to a
recipe. In this way the use of raw mate-
rials can be controlled, and deviations
82 Financing of Industry 4.0
from a recipe can be prevented. Based was returned within 1 year. The main
on data from MES, technologists have source of savings is the reduction of
the ability to optimize reference recipes utilities costs.
in SAP, which allows them to reduce
cost of producing specific types of “Part of the success in savings results
asphalt, while maintaining their quality. from simple economic sense of em-
MES also alerts production masters to ployees operating installations. Some-
errors. In that case they have an au- times all it takes is to turn off a device,
thority to activate repair mechanisms, a pump engine, for example” – explains
after consulting a technologist. Piotr Dąbek, production master at
LOTOS Asfalt.
MES automatically accounts for pro-
duction and creates a work plan, in
accordance with the incoming orders,
relieving employees of tedious paper Source: ASTOR case studies
work. In addition to managing produc-
tion operations, collecting data and
calculating performance indicators,
the system can generate numerous
reports providing data on technology,
efficiency, production and planning.
Monitoring of daily CO2 emissions is
among them.
The MES at LOTOS Asfalt has an inno-
vative feature, that helps save energy
in everyday operations. In addition
to typical measurements of utilities,
control screens in the plant also display
the current costs of utilities in PLN.
This solution has helped to significantly
lower energy consumption of the unit.
Initially, the ROI period for the invest-
ment was calculated for 2 years, but it
ASTOR whitepaper 2020 83
84 Financing of Industry 4.0
5.

The new
investor–
contractor
paradigm
The win–win approach significantly
increases the chances of success in
implementing breakthrough technologies
in a production plant.

ASTOR whitepaper 2020 85

5.1. Theses of the research
The win–win model provides the highest probability
of success, when implementing automation projects
in manufacturing.
Observation of the market allows us to
put forward a thesis that in reality busi-
ness relations between manufacturing
companies and technology integrators
are far different from the win–win mod-
el. For example, contracts are usually
constructed to the advantage of an
investor. Responsibility for the success
of a project is shifted to a contractor
and penalties are the preferred tools
for influencing successful implementa-
tion of an investment, while rewards for
exceptional delivery are rarely used.
ASTOR conducted a survey to check
the validity of these observations.
Respondents were asked about their
motivation to engage in a project, opin-
ion on the responsibility for success
and how contracts are constructed.
The survey also asked open questions
about a good investor and the greatest
challenges of technology projects. The
survey was completed by 101 com-
panies from the ASTOR's ecosystem
(the ones which ASTOR contacted or
cooperated with at least once).
86 Financing of Industry 4.0
Segmentation of companies
participating in the survey
99.8% of surveyed companies belong
to the category of integrators of
automation and industrial robotics
systems or OEM (Original Equipment
Manufacturer) group, and are medi-
um–sized enterprises (with less than
250 employees). For greater precision,
companies participating in the survey
were segmented into 3 further subcat-
egories, according to their number of
employees:
• small Technology Contractor (small
TC) employing up to 20 people,
• medium Technology Contractor (me-
dium TC) with 20–50 employees,
• large Technology Contractor (large
TC), with a crew of over 50 people.
Note: This segmentation does not re-
flect the generally accepted method of
segmenting businesses into small and
medium (SME) and large enterprises.
Companies employing up to 20 people
have the largest representation in the
surveyed group, with 44% of respond-
ents working in them. 27% of respond-
ents work for companies employing
21–50 people, as well as for those with
over 50 employees. 74% of answers
come from integrators of automation
and industrial robotics systems, while
26% from original equipment manu-
facturers (OEM).
People who responded most often
manage and implement technology
projects (42% of respondents) or
combine sales, financial and project
functions (41% of responses). The
smallest part of respondents manage
the company (15% of responses).
THE SIZE OF
RESPONDENTS'
COMPANY 27,72%
LARGE TC
>50 EMPLOYEES

44,55% 27,72%
SMALL TC MEDIUM TC
1-20 EMPLOYEES 21–50 EMPLOYEES

INDUSTRY

26%
ORIGINAL EQUIPMENT
MANUFACTURERS
(OEM)

74%
INTEGRATORS OF
INDUSTRIAL AUTOMATION
AND ROBOTICS SYSTEMS

RESPONDENT'S
ROLE IN THE 15%
COMPANY THE COMPANY
MANAGEMENT
(SALES, FINANCES)

42% 41%
PROJECT SALES, FINANCES,
MANAGEMENT AND PROJECT MANAGEMENT
IMPLEMENTATION COMBINED

Source: ASTOR 2019 study

ASTOR whitepaper 2020 87

5.2. Findings of the research

5.2.1
Main responsibility WHO SHOULD TAKE THE MAIN
In response to the question on who
RESPONSIBILITY FOR THE SUCCESS
should take the main responsibility for OF A TECHNOLOGY PROJECT IN A PLANT?
the success of a technology project in
a plant, 85% of all the respondents, 5,94%
and 92% of integrators, indicated the
joint responsibility of the technology 8,91%
contractor and the investor. Small TCs
indicated this preference slightly more
often than average (91% of responses).

Medium TCs are slightly more likely to

transfer the main responsibility to the
investor (14% of responses).

There is also a slight trend related to

the number of implemented projects.
Companies implementing less than
10 projects per year, less often than
the average declare taking all responsi-
bility on themselves (2% of responses),
while those implementing more than
10 projects within twelve months de-
clare such readiness more often (9% of
responses).

85,15%

CONTRACTOR IS RESPONSIBLE

INVESTOR IS RESPONSIBLE

RESPONSIBILITY SHOULD BE SHARED

Source: ASTOR 2019 study

88 Financing of Industry 4.0

5.2.2
A good investor
According to the respondents, a good
investor: is able to define and stick to
goals and conditions of the projects
(49% of responses), is a contractor
partner and is cooperative (37% of
responses), shares responsibility with
the contractor (16% of responses).
Small TCs slightly more often than
average indicate that a good inves-
tor values technical support (9% of
responses).
Clear rules, goals and conditions are
particularly important for medium
TCs (57% of responses). Also these
respondents indicated acceptance
of higher costs in exchange for better
quality (14% of responses) and solven-
cy (11% of responses) more often than
representatives of the other groups. On
the other hand, partnership is slightly
more important for large TCs, than for
the average, (43% of responses). This
group also gives more value to modern-
izations and servicing of technological
lines by an investor (7% of responses).
However, the acceptance of higher
costs in exchange for better quality,
solvency, as well as the fact that an
investor values technical support are
irrelevant to this group (0% of re-
sponses).
These differences may indicate that
for medium TCs (those employing
21–50 people) financial liquidity is
a challenge, while the financial situa-
tion of large TCs may be more stable.
Regardless, most companies value
ability to provide technical service
and participate in further development
of technology systems.

HOW TO TELL A GOOD INVESTOR?

(ALL ANSWERS)
CAN DEFINE AND MAINTAIN RULES,
OBJECTIVES AND CONDITIONS 49%
COOPERATES WITH THE
CONTRACTOR / IS A PARTNER 37%
AGREES ON A JOINT
RESPONSIBILITY 16%
ACCEPTS HIGHER COSTS FOR
BETTER QUALITY 8%
VALUES TECHNICAL SUPPORT 5%

IS SOLVABLE 4%

MEETS DEADLINES 4%

MODERNIZES AND SERVICES 4%

DISTINGUISHES A PROJECT CONCEPT 2%
FROM ITS IMPLEMENTATION

INVESTS IN GOOD IMPLEMENTATION 1%

DOCUMENTATION
ALREADY HAS SOME SOLUTIONS 1%
IMPLEMENTED

Source: ASTOR 2019 study

ASTOR whitepaper 2020 89

5.2.3 MOTIVATION FOR CONTRACT
What is the main motivation
for companies to implement
IMPLEMENTATION (ALL ANSWERS)
a contract?

The most motivating aspects for

technology integrators and equipment
manufacturers who implement a tech- 84% 77%
nology at a plant is good cooperation
with the investor (84% of responses)
and clearly defined investor expecta-
tions (77% of responses). The least
motivating are high penalties (5% of GOOD COOPERATION CLEAR EXPECTATIONS OF
responses), except for large TCs, which WITH THE INVESTOR THE INVESTOR
find penalties more motivating than the
average (11% of responses). Let us re-
member, that contracts with large TCs
more often than the average contain
the highest fines, exceeding 10% of a 51% 48%
contract value.

TECHNICAL CHALLENGE A PERSPECTIVE OF LONG

TO SOLVE TERM COOPERATION

Medium TCs are more motivated then 23% 5%

the average by clearly defined investor
expectations (89% of responses) and
technical challenges to be solved (61%
of responses).
SUCCESS FEE HIGH PENALTIES
Lareg TCs in turn, are less interested in
the prospect of long–term cooperation
(36% of responses). As for the type of Source: ASTOR 2019 study
services offered by a company, per-
spective of long–term cooperation is
a more motivating factor for technology the number of implemented projects
integrators (78% of responses) than for per year. Respondents from companies
OEMs. However, technical challenges to implementing less than 10 a year, more
solve are less motivating for the second often than average indicated it as a
group (38% of answers). motivating factor (30% of responses),
and those from companies that carry
The survey showed a difference in out more than 10 projects a year – less
approach to success fee, depending on often (17% of responses).

90 Financing of Industry 4.0

5.2.4 WHAT IS THE BIGGEST CHALLENGE
Challenges in cooperating
with investors
IN COOPERATION WITH MANUFACTURING
COMPANIES/INVESTORS?
The survey results show that the big-
gest challenges, that the respondents
face are: the accepted concept (36% of
responses), short implementation time 36,6% 17,8% 10,9% 7,9%
(nearly 18% of responses) and investor
education (nearly 11% of responses).
THE ACCEPTED SHORT IMPLEMEN- EDUCATING THE FLEXIBILITY/
CONCEPT TATION TIME INVESTOR PARTNERSHIP IN
The main challenges of small TCs are: COOPERATION
short delivery time (22% of responses),
educating of investor (15% of respons-
es) and contract construction (nearly
9%). On the other hand, the accepted 6,9% 5,9% 5,9% 5%
concept (nearly 29% of responses),
flexibility and partnership in coopera-
GOOD HOW THE CONTRACT FAIR IMPLEMENTATION
tion (4% of responses) and fair valua- COMMUNICATION IS CONSTRUCTED VALUATION PLANNING
tion (2% of responses) were mentioned
less often in this group, than in the
whole pool of respondents.

Medium TCs are more often than aver- 3% 2% 2% 2%

age challenged by the accepted concept
(46% of responses), good communica-
tion (nearly 18% of responses), flexibility
and partnership in cooperation, and
fair valuation (14% of responses each),
as well as by implementation planning
(nearly 11% of responses). They are less
disturbed by short implementation time
(14% of responses) and the contract
construction (0 responses).
Large TCs are less than average chal-
lenged by short delivery time (14% of
responses), educating of investor
(3% of responses) and good com-
munication (0 responses). However,
maintaining quality is a much bigger
challenge for them, than the average
(7% of answers). Also, they have less
patience that all the respondents as
a whole (3% of responses).
When it comes to the number of pro-
jects implemented annually, companies
UNFAIR CLEAR DIVISION OF
COMPETITION RESPONSIBILITY
1% 1%
EFFICIENT PATIENCE
LAUNCH
Source: ASTOR 2019 study
implementing less than 10 of them
less frequently indicate a fair valuation
(2% of responses) and implementation
planning (0 responses) as a challenge.
Implementation planning is more often
a difficulty for companies with more
than 10 implementations per year.
On the whole, challenges associated
with the accepted concept are some-
MAINTENANCE OF ZERO CHANGES IN
QUALITY THE CONTRACT
what more severe for medium and large
TCs. Small TCs are more disturbed by
short delivery time. The biggest dif-
ference is observed in opinions about
education of investors, which is the
third most important challenge for the
whole pool. Although this challenge is
perceived as big by small TCs (15% of
responses), it is not significant for large
TCs (only 3% of responses).

ASTOR whitepaper 2020 91

5.2.5 HOW OFTEN DO YOU ENCOUNTER A SITUATION
The cheapest supplier
WHEN THE CHEAPEST CONTRACTOR WITH LITTLE
Choosing the cheapest supplier with EXPERIENCE WINS A TENDER FOR TECHNOLOGY
little experience in the tender is a
situation that the respondents face IMPLEMENTATION?
quite often (71% of responses).

Such a situation is indicated slightly

more often (78% of responses)
by medium TCs and companies
implementing less than 10 projects per
year (also 78% of responses). It is less 28,71%
SELDOM
common in companies implementing
over 10 projects in twelve months
(nearly 65% of responses).

71,29%
OFTEN OR ALWAYS

Source: ASTOR 2019 study

5.2.6 HAVE YOU ENCOUNTERED AN FINANCIAL

Contractual penalties
and rewards AWARD SYSTEM FOR EARLY COMPLETION
OF THE PROJECT?
The vast majority of companies have
not encountered a financial reward
system for earlier completion of the
project (88% of responses).

Technology integrators as a group have

11,88%
encountered it even less often than YES
average (8% of respondents came
across it). When it comes to the size of
the company, this solution is slightly
more familiar to medium TCs (nearly
18% of responses) and enterprises
implementing more than 10 projects a
year (nearly 15%).
88,12%
NO

Source: ASTOR 2019 study

92 Financing of Industry 4.0

The most common contractual penal- WHAT IS THE QUOTA OF THE MOST
ties are 5–10% of the contract value
(42% of responses). In turn, 61% of
FREQUENT CONTRACTUAL PENALTIES?
respondents indicate penalties of over
5% of the contract value. Penalties
below 5% of the contract value are
the least common (nearly 14% of
responses).

The highest penalties, above 10% of 13,86%

the contract value, more often than LESS THAN 3%
average apply to medium and large TC OF CONTRACT
VALUE
(25% of responses). Companies that
carry out over 10 contracts per year 42,57% 18,81%
are more likely to have both the highest MORE THAN 10% MORE THAN 10%
fines (24% of responses) and the low- OF CONTRACT OF CONTRACT
VALUE VALUE
est, not exceeding 3% of the contract
value, in the contract.
24,75%
3-5%
OF CONTRACT
VALUE
Source: ASTOR 2019 study

Does high penalty motivate a tech- DOES A HIGH PENALTY MOTIVATE A GREATER
nology contractor to become more
involved in implementation? ASTOR COMMITMENT TO IMPLEMENTATION?
study respondents most often chose
the ambiguous answer to this question:
33% of them indicated the “Yes and
No” option. 45% of all respondents are
“not motivated”, while 21% of them are
“motivated”.
4,95%
On the whole, integrators are more DEFINITELY YES
undecided, and so are small TC (44% 15,84%
RATHER YES
and 42%, respectively, answered “Yes
and No”). Medium TCs are more often
not motivated (53% of answers), while
large TC are more often motivated
33,66% 16,83%
YES AND NO DEFINITELY NO
(32% of answers). It is probably related
to the fact that high contractual pen-
alties, exceeding 10% of the contract
value, are more common in this group. 28,71%
RATHER NOT

Source: ASTOR 2019 study

ASTOR whitepaper 2020 93

Nearly 29% of respondents have HAVE YOU ENCOUNTERED A BANKRUPTCY
encountered a bankruptcy of a
technology contractor, due to high OF A TECHNOLOGY CONTRACTOR CAUSED
fines. This situation is more familiar BY HIGH PENALTIES?
to large TC (35% of responses) and
companies implementing over 10
projects a year (37% of responses).

28,71%
YES

71,29%
NO

Source: ASTOR 2019 study

81% of respondents said that ARE PENALTIES IN CONTRACTS SYMMETRICAL,

penalties proposed in contracts are
not symmetrical; and they are skewed E.G. IF AN INVESTOR REQUIRES HIGH PENALTIES
in favor of the investor. Symmetry is FOR PROJECT DELAY, ARE THERE ALSO
slightly less common in contracts with
small TC (13% of responses), and PENALTIES FOR PAYMENT DELAY?
slightly more common for medium TC
contracts (28% of responses).

18,81%
YES

81,19%
NO

Source: ASTOR 2019 study

94 Financing of Industry 4.0

5.2.7 WHAT IS THE MOST FREQUENT PROCESS OF THE
Final approval
of a project FINAL APPROVAL OF A PROJECT?
A total of 73% of respondents said that
the final approval process was some-
how agreed on. The largest number of
respondents, i.e. slightly more than 1/3
of them, have chosen: “The accept-
ance process is agreed, described and 12,87%
consists of describing the categories of
defects: critical, important. Everyone
helps in starting the production line”
(35% of responses). This approach is
slightly more common for small TCs 35,64%
(46% of responses). 24,75%

26,73%

The acceptance process is agreed on. Launch of a production line means

an automatic approval of the project.

The acceptance process is agreed on and described. All faults are described
as priorities and they delay the launch.

The acceptance process is not described, the investor focuses on finding

faults and forcing the contractor to perform additional work, not included in
the contract.

The acceptance process is agreed, described and consists of describing the

categories of defects: critical, important. Everyone helps in starting the pro-
duction line.

Source: ASTOR 2019 study

ASTOR whitepaper 2020 95

ASTOR respondents answered three open questions.
Here are the selected answers.
HOW TO TELL A GOOD INVESTOR?
DECIDED
• knows what he or she wants,
has a competent team to implement
the project,
• has specific requirements, is able
to compromise,
• has development plans and makes
sure they are precise.
FOCUSED ON QUALITY
• is looking for an optimal and econom-
ical solution, that is open to future
development,
• has sustainable criteria for selecting
contractors; in contrast, an investor
who chooses a contractor focused
100% on price definitely makes
a bad impression,
• makes no superficial savings, values
quality and technical support.
96 Financing of Industry 4.0
PROFESSIONAL IS A PARTNER
• the decision–makers are • uses symmetrical entries in the
professionals, contract,
• understands the production process • is willing to cooperate, has clearly
and recognizes possible threats, defined goals, is focused on success,
• tries to eliminate risks at the stage of • is involved, that is willing to help
concept development, shares his or in the design and implementation
her fears and takes a conscious part phases,
in creating the concept, • treats the contractor as a partner.
• has a well–prepared specification • understands that cooperation is
of the order, needed on his or her part, to make
• invests in good implementation a project successful,
documentation, • shares responsibility for the success
• knows the realities of the market and of a project,
is aware that sometimes a seemingly • takes into account the contractor's
small change in the project gener- advice and suggestions.
ates high costs or requires time for
implementation.
RESPONSIBLE
• is characterized by responsibility and
timeliness,
• has clearly defined expectations,
maintains good contact, responds
quickly, tries to organize production,
so that the contractor can complete
the task as soon as possible,
• does not change requirements during
project implementation.
WHAT ARE THE CHALLENGES IN COOPERATION WITH
MANUFACTURING COMPANIES WHO ARE INVESTORS?
UNCLEAR EXPECTATIONS
• difficulty meeting the investors’
expectations when they don’t know
exactly what they want,
• unclearly defined tender conditions
and randomness in proposing
solutions,
• failure to develop assumptions,
solutions, projects,
• clear definition of cooperation rules
not provided by the investor,
• difficulty agreeing on the require-
ments and functionality expectations.
TIME PRESSURE
• reconciliation of remuneration,
implementation time and investor
expectations,
• unrealistic expectations, most
often regarding deadline for
completing the task,
• short deadlines, changes in
assumptions during the project.
LACK OF COMPETENCE
• incorrect description of the subject
of the contract,
• contract should be signed with
a legal advisor,
• lack of appropriate competences
of project managers on the part
of the investor,
• investor's technical and legal
awareness not sufficient,
• cooperation with an inexperienced
investor's representative.
LACK OF TRUST AND COOPERATION
• gaining investor confidence,
• investors getting used to their own
existing solutions,
• convincing the investor to a new
solution,
• agreeing on details at the design stage
and who is responsible for what,
• developing clear conditions for cooper-
ation and verification of results,
• investor employees' involvement,
• openness, understanding for problems,
• responsibility for the design errors not
on the contractor, but on the investor,
• elimination of scuffles during the launch,
• involvement in the production launch of
equipment – training for operators,
• joint success,
• pioneering projects.
REWARD
• payments,
• methods of accounting for the project,
• profitable implementation of the project
acquired through an on–line auction,
• quality / price ratio.
Source: ASTOR 2019 study
ASTOR whitepaper 2020 97
5.2. Win–win in cooperation with
technology contractors

The opinion of Alpha Consulting is consulting company proves that a well– and risks associated with working with
presented in the following part of balanced operating model in cooper- external contractors. Meanwhile, many
the chapter, as a commentary to the ation with a technology contractor is of the current models of collaboration
ASTOR's research. The international the key to significantly reducing costs lead to the opposite effect.

INVESTMENT COSTS IN TWO DIFFERENT MODELS OF COOPERATION

WITH A TECHNOLOGY CONTRACTOR
SCENARIO 1 SCENARIO 2
Currently used model of managing cooperation The suggested model of managing cooperation
with technology contractors with technology contractors

Greater operating Savings are

margins shared with
in contracts the contractor

5%
10 %
20 %

Additional costs avoided

5% thanks to more effective 20 %
implementation
15 %

15 %
10 %
100 % 92,5 %

50 % 50 %

A CONTRACT CONSTITUENT COSTS (SAMPLE VALUES)

Operating Overhead Operating margins Operating Overhead Operating margins

costs of technology costs of technology
contractors contractors
Ineffectiveness Ineffective Contract Ineffectiveness Ineffective Contract
related to management value related to management value
operating costs operating costs
costs costs

36
The Right Contractor Operating Model – a Win–Win Model, Alpha Contracting blog, 2017 Source: Alpha Contracting 2017

98 Financing of Industry 4.0

The contract is often structured so that
a technology contractor bears the costs
of operational and managerial inefficien-
cy on the investor's side, which reduces
the contractor's margin. The pressure
to lower prices during contract negotia-
tions additionally diminishes this margin.
Other elements of the vicious circle
leading to deterioration of cooperation,
up to a point that it is impossible to con-
tinue, are: lack of compliance with dead-
lines and plan, quality problems and the
need for alterations, increasing addition-
al costs, enforcement of penalties and
lack of trust between the investor and
the technology contractor.
The proposition of a healthier model is
based on the win–win approach. It cre-
ates conditions in which cooperation
can positively affect functioning of both
companies. This model builds on mutual
trust and commitment of both parties.
Thanks to good cooperation, both con-
tract partners can also benefit finan-
cially, because in conditions of trust and
cooperation it is possible to increase the
margin and reduce costs on both sides.

MODELS OF COOPERATION WITH A TECHNOLOGY CONTRACTOR

WIN–LOSE WIN–WIN

All profit or a significant part for oneself Profit sharing

Low price as the main criterion Balanced selection of criteria for selecting a project
contractor

Technology contractor responsible for the success of Joint responsibility for the project
the project

Investor unwilling to finance the proof of concept Agile approach to risky investments: investor is willing
to invest in the proof–of–concept

Lack of commitment to the concept and its implementation Co–creation of the concept, facilitating implementation

“I pay, and I require” approach Treating technology contractor as an equal partner

Unclear goals, requirements and scope of responsibility Clearly defined goals, requirements and division of
responsibility

Difficulties with communication and access to Open communication, project is led by decision makers
decision makers

Unlimited penalties for suppliers Limited fines, success fee for early delivery of the project

Plant crew removed from the project Training for operators

Source: ASTOR 2019

ASTOR whitepaper 2020 99

QUESTIONS TO DETERMINE IF AN AGREEMENT WITH AN INVESTOR
IS BASED ON PARTNERSHIP
YES NO

1. Does the contract have several Go / No Go points to verify if an

innovation is possible to implement?

2. Are the provisions in the contract symmetrical (e.g. penalties for delivery
and payment delays)?

3. Does failure of the project result in bankruptcy of the supplier or a strong

disturbance of its financial position?

4. Are penalties for delays limited or non–existent?

5. Is there a success fee structure, with particularly fast return on investment?

The “5 questions to determine if an
agreement with an investor is based
on partnership” draw attention to
critical points of a contract and allow
one to easily estimate to what extend
a win–win result is possible in a given
situation. The more YES answers, the
greater the area of cooperation, joint
responsibility and sharing of wins.
5.3.1
Success fee
The theoretical model of cooperation
with the technology contractor in the
win–win spirit can be transferred to the
hard ground of implementing specific
projects, with the help of a well–de-
signed bonus plan. Practitioners'
experience shows that such a plan is
more likely to accelerate completion of
an investment. As we have shown, faster
and cheaper launch of the investment is
profitable for the investor, assuming that
the investment is well designed from the
economics point of view. The investor
can therefore share part of the surplus
value created with the project team in
the form of a bonus for earlier imple-
mentation of the investment.
An enterprise makes a profit on a
financially effective investment, if it is
launched as scheduled and implement-
ed in accordance with the cost budget.
Each day ahead of schedule, or savings
in the budget can be quantified as a
surplus of value relative to the plan.
The surplus can be shared with the
team that implements the investment.
The board or project steering committee
should make the decision on the “bonus
multiplier”, i.e. how much of the surplus
is to be allocated to the bonus fund. The
maximum size of the bonus fund, in per-
centage of surplus value, must take into
account customs in the industry and the
level of earnings of team members.
If bonus is too large, it may lead to
subsequent demotivation of employees
(e.g. in the absence of further invest-
ments). The exact value of the bonus
fund should thus be compared with the
payroll fund of people who are awarded.

37
A. Życzkowski, How to reduce investment implementation time, Business and Production No. 5, 2/2011. The article can be downloaded at
www.astor.com.pl/business–i–produkcja/zView–numer.html

100 Financing of Industry 4.0

 EXPERT COMMENTARY

“Each investment is to some extent a unique and unpredictable project. Therefore, the investment process requires
exceptional effort and a great deal of creativity in solving problems on the part of the implementation team, to complete
this process as soon as possible, realizing the full scope of work with the lowest possible consumption of resources.
To unleash such effort and creativity in the employees implementing the investment, special team motivation is usually
necessary. To motivate the team, one can use the so-called soft or hard motivation, and most often their combination
is the best solution. Soft motivation is to create a positive atmosphere around the project, so that people undertaking
effort and achieving investment goals feel appreciated by the organization. The team's soft motivation is a very impor-
tant challenge for project management, and often for the management of the entire plant. Hard motivation consists in
establishing a dedicated team remuneration plan for results achieved during the implementation of the investment.”

Adam Życzkowski,
business restructuring consultant

DETERMINING THE MAXIMUM VALUE OF THE INCENTIVE FUND

The part remaining with the investor

Bonus part
Savings
relative to
the budget

Implementation 20–40% 20–30%

ahead of schedule OF THE SURPLUS OF THE SURPLUS

Surplus Maximum Payroll fund for

investment bonus fund the crew as the
value basis of calculating
bonus

Source: Adam Życzkowski, BiP 2011

Basic determinants of the payment
of bonuses are those that generate a
surplus of investment value, i.e. the
deadline for implementing the in-
vestment and implementation costs,
relative to the plans in the project
schedule and the budget. However,
if a team is motivated just to deliver
faster and at lower costs, there may
be a tendency for shortcuts focused
on faster and cheaper delivery, re-
gardless of the scope of work, quality,
safety, ecological conditions and other
considerations. Therefore, in addition
to the schedule and costs, investment
implementation criteria should also
be taken into account as necessary
restrictions.

ASTOR whitepaper 2020 101

HOW TO CREATE AN EFFECTIVE MOTIVATION PLAN?
1. How to start?
Analyze the foundations of the
investment project.
• in your currency / day, calculate
value that the company will generate
thanks to earlier delivery of the in-
vestment, starting from the day when
the investment begins to function
properly,
• the second source of surplus value
of the project are savings achieved
by the team, in comparison to the
assumed budget.
2. Whom to motivate?
Determine which people are to
be awarded.
The system should include:
• employees and contractors working
directly on the implementation,
• investment users – it depends on
them how quickly the investment will
pay off, counting from the critical
moment right after its launch.
You can include:
• people from the broadly understood
support system (they will be more
willing to get involved),
• a small part of the bonus fund
should be allocated to other employ-
ees of the enterprise. This creates a
positive atmosphere around the pro-
ject and reduces risk of demotivating
the rest of the crew.
102 Financing of Industry 4.0
3. How to determine the maximum
value of the bonus fund?
Choose the “determinants that
generate excess value”.
• a bonus fund of 20% –40% of the
surplus value is sufficient,
• the maximum value of the incentive
fund should not exceed 30% of the
basic remuneration of the invest-
ment project participants
(see “Example for calculating the
bonus fund”, p. 104).
4. Establish determinants to guaran-
tee the process and result quality.
Prevent unwanted “shortcuts”
in implementation.
Examples of determinants:
• scope of work completed during the
investment implementation,
• quality of work performed,
• work safety during investment imple-
mentation,
• consistency of investment implemen-
tation with ecological standards, etc.
5. Establish a measurement system
and success criteria for each deter-
minant.
Examples of objective measurement
methods:
• deviation of investment delivery in
relation to the schedule,
• deviation of actual costs from the
budget,
• number of potential accidents.
Examples of subjective measure-
ment methods:
• employees evaluate their work,
• a manager assesses the level of
support for the project,
• auditors assess compliance of works
with standards.
6. Determine a method of calculat-
ing the real bonus fund.
Addition method: set the weight
for each determinant and add them.
A bonus is possible, even if one of the
determinants has a very bad result.
Calibration method: multiply your
weighted results. There is no bonus if
any determinant is zero.
Hybrid method: The deadline and
budget surplus are determined by the
addition method. Other determinants
are quantified, reducing the premium
by a certain percentage.
7. Determine a method of distribut-
ing the bonus fund to employees.
Objective method: value of the bonus
is predetermined, as a percentage of
the basic salary of an employee.
• the percentage ratio should reflect
the level of responsibility (e.g. max.
40% of the manager's basic sala-
ry, 30% of the salary of a key team
member, 25% of the salary of another
person in the team, 10% of the salary
of the supporting staff, 5% of the
salary of the remaining crew),
• assumptions must be adjusted, ac-
cording to the obtainable value of the
bonus fund,
• maximum value of the bonus should
be noticeable for all levels of bonus
(otherwise the effect will be demoti-
vating).
Subjective method: bonus distributed
by superiors.
• boundary conditions are set (maxi-
mum and minimum bonus for team
members),
• it is a good practice that a direct su-
pervisor of the person distributing the
bonuses accepts the scheme.
8. Set bonus payment dates. 10. Always carry out what you have
communicated.
Payment in 2 installments is a good
practice: Each investment process is unique
and surprising.
• immediately after starting the invest-
ment, estimate the value of the bonus • do not change any parameter after
fund and pay out up to 60% of its calculating the results,
amount,
• use the conclusions to create your
• up to a maximum of 3 months, cal- next incentive plan.
culate the total size of the bonus fund
and pay the second installment, in
accordance with the adopted ratios
and the bonus distribution method.
9. Clearly communicate basic ele-
ments of the bonus system.
• try to make the message regarding the
bonus system clear and legible,
• the whole system should be based on
2–3 pages of presentation and docu-
mented on an example.
• IMPORTANT: every employee should
know what determinants affect
the amount of the bonus and be
convinced that the system is unam-
biguous, reliable and verifiable.
ASTOR whitepaper 2020 103
EXAMPLE OF CALCULATION OF THE BONUS FUND
INVESTMENT PROJECT DETAILS
Value of early delivery:
INVESTMENT PROJECT DETAILS
PLN 0,1 million / day
Value of early delivery:
Cost budget: PLN 10 million
PLN 0,1 million / day
Including remuneration: PLN 3,5 million
Cost budget: PLN 10 million
Duration of investment: 60 days
Including remuneration: PLN 3,5 million
Duration of investment: 60 days
POTENTIAL VALUE SURPLUS MAX. BONUS FUND
Early launch possibility: 40% x PLN 2,5 million
POTENTIAL VALUE SURPLUS MAX. BONUS FUND
15 days = PLN 1,5 million = PLN 1 million = 2,8% of salaries
Early launch possibility: 40% x PLN 2,5 million
Budget savings: of crew that gets bonuses
15 days = PLN 1,5 million = PLN 1 million = 2,8% of salaries
10% of budget = PLN 1 million
Budget savings: of crew that gets bonuses
10% of budget = PLN 1 million

SUCCESS CRITERIA
SUCCESS CRITERIA
DETERMINANT MEASURING SYSTEM IMPLEMENTA- DETER- RESULT IMPACT ON
TION RESULT MINANT THE FUND
DETERMINANT MEASURING SYSTEM IMPLEMENTA- DETER- RESULT IMPACT ON
VALUE
TION RESULT MINANT THE FUND
Launch date The difference between -15 days VALUE
100% –7 days 0.7 x 40% = 0.28
Surplus value
Launch date planned and actual date of
The difference between -15 days 100% –7 days 0.7 x 40% = 0.28 for the bonus
launching the investment 0 days or more 0% Surplus value
planned and actual date of fund = PLN
for the bonus
launching the investment 0 days or more 0% 0,48 million
Investment Percentage of actual costs incurred 90% of the budget 100% 95% of the budget 0.5 x 40% = 0.20 fund = PLN
cost for carrying out the investment, 0,48 million
Investment Percentage of actual costs incurred 90% of the budget 100% 95% of the budget 0.5 x 40% = 0.20
cost relative to the approved budget 100% of the budget 0%
for carrying out the investment,
relative to the approved budget 100% of the budget 0%
Scope The difference between the planned 0% of the difference 100% 0% of the difference 100%
of work and actual number of work packages
Scope The difference between the planned 0% of the difference 100% 0% of the difference 100%
of work designated in the accepted scope of -8% of the difference 60% 60%
and actual number of work packages
the investment project
designated in the accepted scope of -8% of the difference 60% 60%
the investment project
Work Percentage of man–hours spent by 0‰ 100% 50 hours of 90%
quality contractors or employees on 0‰ 100%
corrections = 1‰
50 hours of 90%
Work Percentage of man–hours spent by
quality necessary but unplanned corrections = 1‰
contractors or employees on
modifications or corrections 2‰ 80%
necessary but unplanned
modifications or corrections 2‰ 80%
Safety Number of employees or 0 accidents 100% 0 accidents 100%
Safety contractors accidents resulting 0 accidents 100% 0 accidents 100%
Number of employees or
in a loss of working time 2 or more 80%
contractors accidents resulting
in a loss of working time 2 or more 80%
Ecology Number of violations of ecological 0 violations 100% 1 violation 95%
Ecology standards detected in ISO audits 0 violations 100% 1 violation 95%
Number of violations of ecological
during the implementation of the 4 violations 80%
standards detected in ISO audits
investment or more
during the implementation of the 4 violations 80%
investment or more
Real bonus fund
= max 41% = PLN 0,41 million
Source: Adam Życzkowski, BiP 2011 Real bonus fund
= max 41% = PLN 0,41 million

INVESTOR COMMENTARY important thing is to listen to the inves- to changing market environment and
tors’ needs, as they are the clients for requirements of the investor's target
What is the basis of good cooperation whom the project is being carried out, customers, as well as the production
with a technology contractor? and they assess the final result”. requirements and information flow.
“The simplest answer is the well–known A good technology supplier uses effec-
saying ‘the client is our master’. A con- How can you tell a good contractor? tive solutions, that are both scalable
tractor, that is good to cooperate with, “Projects created together with the and adaptable to changing production
is well aware of the meaning of this investor should provide for project conditions, when needed”.
phrase. He or she knows that the most extension and integration, in response

104 Financing of Industry 4.0

What is the biggest challenge
in cooperation with technology
contractors?
“Each team must have a project leader,
who is up to date with the implemen-
tation. The right person, both on the
side of the technology provider and
the investor, is indisputably the key
to achieving the right quality of the
project. Another two elements, that
affect mutual understanding, are
a good needs analysis before the pro-
ject starts, and the ability to reach
a compromise in difficult situations”.
What does a “mature contractor”
mean?
“Not only the company's technologi-
cal experience is important, but also
quality of its customer service, from
the very first meeting, to after–sales
service. First of all, this means main-
taining high standards, even when tem-
porary problems arise. Such situations
are tests. If the crew can maintain the
initial standard of communication and
service, we are dealing with a mature
company”.
Maciej Mrzygłód​
CEO
Bratex Dachy
Bratex Dachy is a Polish manufacturer
of the highest quality roofing materials.
The company focuses on unique prod-
ucts and customized solutions, with
above average technical and functional
values. In 2017 the company moved
its production to a newly created
plant, which is highly automated and
equipped with technology that allows
for comprehensive product quality
management.
EXPERT COMMENTARY
What makes a cooperation between
an investor and a contractor success-
ful in implementing Industry 4.0?
“The starting point for effective cooper-
ation between investors and technology
contractors is the general principle of
partnership in investing; they should
share a common vision for the future.
The investor must know and understand
trends in their area of activity, and use
the knowledge as a basis for specifying
the requirements. The technology sup-
plier should recognize the client's needs
and propose future–oriented solutions,
with Total Cost of Ownership in mind.
Reaching Industry 4.0 level requires
meeting specific technological criteria.
These criteria should be included in the
investor's specifications, and their fulfill-
ment should be confirmed in practice by
the technology contractor. Competence
Centers will be an important partner
both for investors, and technology
contractors, as they will support the
process of defining and confirming of
the above criteria”.
What aspects will be crucial,
and what habits should companies
get rid of?
“Widespread servitization, meaning the
sale of a physical product with its ser-
vice, as a package, requires a change in
definition of the subject of the invest-
ment, and the way it is implemented.
Technology contractors will increasing-
ly be responsible for the implementa-
tion of a specific function, e.g. lighting,
and not for the supply of means to im-
plement this function (sources of light
in this case). In addition, the main goal
of an investment should be to increase
the investor's USP (Unique Selling
Proposition), as opposed to a goal of in-
creasing production capacity. Agile ad-
aptation to functioning in value chains
is particularly important. That said,
ensuring that a technology contractor
can reconfigure the means of produc-
tion is crucial. Therefore, definition of
subject of an order will change. Another
important shift is active participation of
specialists, on the part of the inves-
tor, in the process of creating, testing
and verifying technological solutions,
thanks to virtual engineering”.
Andrzej Soldaty,
President of the Platform of the Industry of
the Future Foundation (Platforma Przemysłu
Przyszłości)
Andrzej Soldaty has associated most
of his career with industry automa-
tion. Apart from being the president
of the Platform of the Industry of the
Future Foundation, he is an expert in
the Industrial Transformation Team
established at the Polish Ministry of
Development. He is a mechanic and
automation specialist by profession,
and has earned a Master’s degree in
economics.
ASTOR whitepaper 2020 105
106 Financing of Industry 4.0
Annex 1

Research
methodology

ASTOR whitepaper 2020 107

The study was conducted in 2019 The study was conducted using the The survey was sent to approximately
among a group of integrators of CAWI method (Computer Aided Web 1,000 respondents, and 101 respons-
automation and robotization systems Interview). es were received (approx. 10%).
(Technology Contractors, TC) and Orig-
inal Equipment Manufacturers (OEM)
from all over Poland, gathered in the
ASTOR's client database.

SURVEY FORM: STUDY OF TECHNOLOGY INTEGRATORS AND ORIGINAL

EQUIPMENT MANUFACTURERS / SUBJECT: CONTRACTS FOR THE SUPPLY
OF TECHNOLOGY.
1. Who should take responsibility for a success of a technology project in a plant?
a. Investor
b. Contractor
c. Responsibility should be shared

2. How to tell a good investor? An open question.

3. What is the biggest challenge in cooperation with manufacturing companies /

investors? An open question.

4. What is the main motivation for companies to implement a contract?

a. High penalties
b. Clear expectations of the investor
c. Good cooperation with the investor
d. Success fee
e. A technical challenge to be solved
f. Other

5. What are the most common penalties in contracts with manufacturing

companies?
a. Less than 3% of the contract value
b. 3–5%
c. 5–10% of the contract value
d. More than 10% of the contract value

6. What are the effects of high penalties? An open question.

7. Does a high penalty motivate you to be more involved in a project implemen-

tation?
a. Definitely not
b. Rather not
c. Yes and no
d. Rather yes
e. Definitely yes

108 Financing of Industry 4.0

8. Have you encountered a financial reward system for an earlier comple-
tion of the project / investment in the contracts carried out so far?
a. Yes
b. No

9. How often do you encounter a situation where the cheapest provider with
no experience wins the tender / competition for the supply of technology?
a. Almost always
b. Very often
c. Rarely
d. Very rarely
e. Almost never

10. What is the most frequent process of the final approval of a project?
a. The acceptance process is agreed on. Launch of a production line
means an automatic approval of the project.
b. The acceptance process is agreed on and described. All faults are
described as priorities and they delay the launch.
c. The acceptance process is not described, the investor focuses on find-
ing faults and forcing the contractor to perform additional work,
not included in the contract.
d. The acceptance process is agreed, described and consists of describ-
ing the categories of defects: critical, important. Everyone helps in
starting the production line

11. Company size.

a. 1–10 employees
b. 11–20
c. 20–50
d. 50–100
e. Over 100 employees

12. Role in the company (main responsibility).

a. Company management (sales, finance)
b. Project management and implementation

13. Type of activity.

a. Integrator of automation and industrial robotics systems
b. Original Equipment Manufacturer (OEM)

CONTACT TO THE STUDY AUTHORS

Michał Wojtulewicz: michal.wojtulewicz@astor.com.pl
Stefan Życzkowski: stefan.zyczkowski@astor.com.pl
Jarosław Gracel: jaroslaw.gracel@astor.com.pl

ASTOR whitepaper 2020 109

110 Financing of Industry 4.0
Annex 2

Glossary
of financial
concepts

ASTOR whitepaper 2020 111

How to finance technological investments

Editor: Aneta Rząca

→ Table of Contents

A. Financing with a loan

A.1 Trade credit

A.2 Leasing

A.3 Bank loan

B. Acquiring an investor

B.1 Strategic investor

B.2 Private equity investor (PE)

B.3 Venture capital investor (VC, high risk capital)

B.4 Seed capital

B.5 Business angel

B.6 Crowdfunding

112 Financing of Industry 4.0

C. Other capital tools

C.1 Issue of shares

C.2 Issue of bonds

C.3 Asset securitization

C.4 Mezzanine finance

D. Subsidies and tax breaks

D.1 European funds

D.2 Norwegian and EEA funds

D.3 Government instruments for innovation support

D.4 Tax breaks

ASTOR whitepaper 2020 113

A. Financing with a loan
A.1
Trade credit
Trade credit takes two forms in busi-
ness transactions:
• supplier's credit – a recipient is credited
and makes the payment after delivery
of goods or service, in agreed time,
• buyer's loan in the form of an advance
– the supplier is credited, when the
buyer makes a prepayment.
Trade credit does not require a special
legal form. It can be confirmed by
a contract, agreed conditions or pay-
ment deadline. There are no explicit
regulations specifying the repayment
date of a trade credit. The most com-
monly accepted deferment period is
30 days. There are two basic methods
of granting trade credit: individual and
systemic approach. The first involves
checking the creditworthiness of each
contractor and preparing an individual
offer. The system method consists in
grouping contractors into categories,
to which particular loan granting con-
ditions are assigned.
As a rule, trade credit is based on trust
and cooperation in a win–win spirit, in
114 Financing of Industry 4.0
which the benefit of both parties is to
increase exchange liquidity. The lend-
ing company may, however, protect
itself against bankruptcy or payment
gridlocks; one of the ways is the
so–called discount. It consists in the
fact that the seller lowers the price
in exchange for immediate payment.
A more expensive way is payment
insurance.
Benefits for the borrower:
• Trade credit as a non–bank form
of business financing is a popular
alternative to loans granted by credit
institutions. It eliminates the com-
plicated banking path and enables
crediting of trade exchange between
contractors.
• This is a loan form available to small
and medium–sized enterprises with
small assets, as due to lack of credit-
worthiness, they cannot rely on short–
term bank loans.
• In commerce, trade credit is con-
sidered the cheapest. Most often it
is offered free of charge, therefore
the credited company does not bear
interest costs.
A.2
Leasing
Leasing is one of the contractual civil
law relations. Under leasing, one of
the contract parties (financing party,
lessor) transfers to the other party
(the lessee) the right to use a specific
item for a certain period, agreed in the
leasing contract, in exchange for fixed
installment payments (leasing install-
ments). The leasing comes from the
English word “for lease” (Anglo–Saxon
law does not distinguish between rent,
lease and leasing).
Types of leasing:
• Operating (service) leasing consists
in the temporary transfer of invest-
ment goods into use. The time is usu-
ally shorter than the period of norma-
tive consumption of the leased item.
Lease installments are tax deductible
for the lessee, and the subject of the
lease is not depreciated by them.
• Financial (capital) leasing consists in
putting things into use, in exchange for
leasing installments. The subject of the
lease is owned by the financing party, it
is depreciated by the lessee, while the
 transfer of title can be guaranteed in
the contract. Therefore, the company
increases the value of its assets, with-
out incurring additional costs after the
end of the contract, and the increased
form of depreciation allows it to regu-
late its costs and income. The leasing
installment in financial leasing is divid-
ed into capital and interest parts. The
interest part is tax deductible cost of
the user, and the capital part is treated
as capital for a credit transaction.
• Returnable leasing occurs when
the company has numerous fixed
assets, but does not have the cash
it needs; it can then give some of its
fixed assets to the leasing company
in exchange for cash, and than lease
those assets from it. Thanks to such
a procedure, the company receives
a one–time cash injection.
Lease benefits for the lessee:
• low involvement of own capital,
• optimization of tax burdens
(tax shield),
• VAT settlement option.
A.3
Bank loan
A loan is an agreement between a bank
and a borrower. The bank undertakes
to transfer the sum of money con-
tained in the contract for a specified
period and purpose, while the bor-
rower undertakes to use this loan in
accordance with the purpose set out in
the contract. The borrower's commit-
ment is also to repay the loan in a time-
ly manner, along with due commissions
and interest. If a company applying for
a credit is a legal entity, it must meet
different conditions, than a sole propri-
etor applying for a loan from a bank.
In practice, a bank loan is difficult to
obtain for new businesses. This applies
to both lending to sole proprietorships,
and to business entities. Companies
can take a bank loan only when they
are reliable for the lending institution.
In many cases, a minimum 12–month
market experience and a confirmation
of obtaining sufficiently high income
will be required, to build a bank's cred-
itworthiness.
In the case of a limited partnership, it
is known that its capital will be created
from external sources – e.g. from bank
loans of the partners – at the stage of
establishing the company. The owners
of such a venture bear personal finan-
cially responsibility for the company's
obligations, in case the enterprise does
not have enough funds.
If a limited liability company applies for
a bank loan, then if the debt is not paid,
it will be recovered from the company's
assets, which will be limited by the
amount of the share capital. A com-
pany of this kind is responsible for its
debts independently, without mobiliz-
ing the property of the owners for this
purpose. A limited liability company
must obtain a consent from its Man-
agement Board for an investment loan,
when the loan amount exceeds the
amount of the share capital by half.
Types of loans granted to companies
and institutions:
• Short–term overdraft facility. The
loan is repaid from the first inflow to
the borrower's account.
• Overdraft. It is a special short–term
loan, in which the repayment period
is 30 calendar days from the day of
the negative balance on the account.
• Investment loan. Granted to finance
investment projects, related to a
company’s business activity. The
investment loan may be granted for
a period not longer than 60 months,
and in the case of loans with one–off
interest and loan repayment, not
longer than for 6 months. The in-
vestment loan term cannot be longer,
than the investment completion and
settlement date.
• Loan for indicated investments. This
is a variation of investment loan, which
can only be used for the purpose
indicated by the bank. Typically, these
loans are targeted at the purchase of
specific capital goods. An entrepre-
neur who wants to use them, must
spend the money obtained solely for
the specified purpose, but thanks to
this he or she can use the loan accord-
ing to simplified procedures, or on
preferential terms.
ASTOR whitepaper 2020 115
Benefits Limitations

Taking a bank loan allows one to obtain
the desired amount relatively quickly.
Loan conditions can usually be adjust-
ed to the size and nature of a business.
Contrary to the expectations of invest-
ment capital, the high final profitability
of the project is not the most important
premise for banks. Basically, banks do
not interfere in the way entrepreneurs
run their businesses.
Banks strive to minimize the risk of
default. The restriction on taking bank
loans for enterprises is therefore the
need to demonstrate sufficient credit-
worthiness and credibility as a debtor.
In addition, banks may require solid
credit repayment collateral, in the
form of material collateral and / or
loan repayment guarantees.

Costs

Cost of a loan results primarily from its

interest rate, and depends on many
factors related to the company itself, or
the loan period. When using a loan, one
should take into account the costs in the
form of:

• preparation costs, including commis-

sion for examining the application,

• commission for acquiring the loan,

• interest calculated for each principal

and interest installment,

• any costs of operating a bank account,

• any established costs of guarantees

of repayment.

116 Financing of Industry 4.0

B. Acquiring an investor
An investor is a natural or legal person,
who invests free financial resources
in profitable ventures. The state can
also be an investor. There are various
investment strategies. From the point
of view of a company which is looking
for financing, the most important types
of investors are:
• Portfolio investor: usually not involved
in the operational activities of the
company. Therefore, the current
owner may retain full control of the
company,
• Strategic (sector, industry) investor,
• Capital investor.
B.1
Strategic investor
A strategic investors’ goal is to acquire
a controlling interest, or the entire
company with rights to control its
activities, and then include it in the
network of their influence. They are
also known as industry or sector in-
vestors, because they often operate in
the same or a related industry, and the
prospect of long–term strengthening of
the competitive position of the merged
companies is the most important goal
for them.
Unlike capital investors, they do not
attach so much importance to the
return on investment rate, nor to
financial risk. Industry investors usually
look for entities with a strong market
position, or with a portfolio of products
or services, that can complement their
own offer. In the event of a takeover of
the entire company, strategic investors
frequently require the participation of
existing owners or management in run-
ning the business, at least for a period
of 2 years after the investment.
Benefits:
• a company that receives financing
from an industry investor can take
advantage of synergies between com-
panies in the form of cost reduction
and improvement of tax efficiency,
• in most cases, the acquired entity
gains additional access to new tech-
nologies and know–how of the new
owner,
• the company can also expand its
customer and supplier base.
B.2
Private equity investor (PE)
Private equity (PE) funds seek to
maximize company value to achieve in-
vestment gains, once the goals are met.
This is a special type of capital invest-
ment. They rely on the involvement of
investors' funds in companies not listed
on stock exchanges, or the purchase of
shares of public companies and their
withdrawal from the stock exchange.
The subject of the transaction can be
both new, and developing companies,
as well as mature enterprises that need
improvement.
The private equity fund carefully
selects candidates for investment,
looking for:
• solid business that fits into its invest-
ment strategy,
• technological or product advantage
over competition,
• industry with strong growth potential,
• good EBITDA to cash conversion ratio
(i.e. a possibility of obtaining trade
credit from suppliers),
• a strong, committed and ambitious
management team (or opportunities
to introduce it),
• clear corporate governance (or
a possibility of its introduction),
• a broad exit market (many potential
buyers in the future),
• lack of significant risk factors,
• areas for the professionalization of
processes in the enterprise, such as:
revenue growth, cost optimization,
improvement of operational efficiency
and the quality of management.
In addition to capital, private equity
funds also offer knowledge, experi-
ence and contacts of their partners
ASTOR whitepaper 2020 117
and managers, and with them a num-
ber of suggestions aimed at acceler-
ating growth and increasing the value
of an enterprise. Existing owners
and management must be ready to
introduce the advice. Investment
combined with transfer of know–how
is called “smart money”.
PE funds are usually interested in
investments related to broadly under-
stood digitalization, since the private
equity sector, which has existed for
over sixty years, has been associated
with the development of technology
and knowledge transfer since the
beginning of its existence.
EXAMPLE
The MCI fund specializes in dig-
ital transformation processes.
The fund is looking for prospec-
tive enterprises that are not
yet “digitized” at the moment,
and offers them support in
creating additional competitive
advantage using technology. In
investment jargon, transferring
the business model from the tra-
ditional economy to the digital
one is called “unleashing value”.
1
Źródło: Puls Biznesu, Private equity: zysk dla spółek inwestorów, 26.03.2018
118 Financing of Industry 4.0
From an enterprise point of view,
capital received from a private equi-
ty fund can be used to:
• develop the company, including
development of new products and
introduction of new technologies,
• increase its working capital,
• acquire another enterprise,
• improve or strengthen the company's
balance sheet.
From the capital owners' perspective,
the profit on PE investments most
often results from the increase in
the company's value in the medium
and long term. It is by definition a
long–term capital investment and is
an alternative to traditional investment
tools, such as deposits and bonds. The
investment horizon is usually set for
a period of 3–5 or 5–7 years.
In the United States, where private
equity funds originated, typical PE in-
vestors are insurance companies, pen-
sion funds, non–profit institutions and
the wealthiest individual investors. In
Poland there are around 50 dedicated
PE funds. Usually they are closed, be-
cause private equity is an elite form of
investing, created for private investors
and wealthy clients from the private
banking sector (people with financial
assets above amount of PLN 0.5 million
of free funds).
B.3
Venture capital investor
(VC, high risk capital)
Venture capital (VC) is focused on
financing small enterprises in the
early stages of development and early
expansion (the startup phase). VC
investors use a portfolio approach,
which assumes that not every invest-
ment will bring a positive return. They
look at the overall value of the portfo-
lio, and ensure that each investment
brings learnings that improve return
on the portfolio.
VC funds, accepting high risk, expect
a high return on investment. Therefore,
they are interested in companies op-
erating on new markets and in market
niches, that are growing faster than
the entire market. In practice, current-
ly these are most often the areas of:
• digital disruption, meaning a solution
or technology that revolutionizes the
existing rules of a market,
• digital transformation, i.e. techno-
logical reorganization within tradi-
tional business models, that increas-
es their competitiveness,
• digital ecosystem, which supports
existing business (e.g. online pay-
ments, logistics companies, cloud
services, etc.).
As a rule, the payback time of a VC
investment is long, and can reach up
to 10 years. New ventures that have
already introduced a product or solu-
tion to the market, have high growth
potential and show a high increase
in revenues, number of customers or
users have the most chance to receive
VC financing. Similar to private equity,
high–risk investments are also most of-
ten combined with managerial support.
The venture capital market in Poland
is still small, although the number of
funds of this type is growing. There are
currently 130 of them in our country
and they manage assets of PLN 11.2
billion. Interestingly, 52 percent of
funds available on the VC market in
Poland come from the state.
B.4
Seed capital
Seed capital is a special form of fund-
ing, belonging to the higher risk group.
Its task is to finance ventures in the
earliest stages of the venture operation
(called the seed or the sowing phase).
In Europe seed capital funds have been
supported by the European Union since
the beginning of the 1990s. This is to
help new companies move to a level of
development, at which they become
the subject of interest of venture capi-
tal funds.
The seed phase is the period from the
creation of a business idea, to the crea-
tion of an enterprise on the market. The
seed capital financing is assumed to
cover the costs of the initial stages of
its development, preceding the startup
phase. They are usually:
• legal costs occurring at this stage,
• costs of in–depth market research,
• costs of product development and
initial construction of distribution
channels.
2
Źródło: Złota Księga Venture Capital 2018, fundacja Startup Poland.
This is not an investment in an existing
enterprise with products on the mar-
ket. Seed capital funds invest in ideas
and innovative projects created by
scientists, technologists or managers.
The basic investment premise is the
potential to implement an idea on the
market and the entity's growth in the
coming years. The authors of the idea
sign the contract with the investor, to
receive funds in the amount of PLN 20
thousand up to PLN 1 million.
Entities providing seed capital financ-
ing can be investment funds, private
persons (the so–called business
angels) and entities associated per-
sonally or socially with the founders
of the new venture. The initial devel-
opment phase carries the highest risk
of failure in the entire life cycle of a
business project. Therefore, a high
degree of investment risk results in
a high expected level of return on the
investment. The average expected
rate of return per year on this type
of investment exceeds several dozen
percent.
The early stage of a venture forces
a potential investor to adopt a long
investment horizon, enabling full use
of the investment growth potential,
before making a planned exit. In the
case of financing concept tests (the
seed phase), the investment time
exceeds 5 years. When a start–up
is financed, the exit horizon usually
exceeds 7 years.
B.5
Business angel
Business angel (angel investor) is a
popular term for a private investor,
who usually has a lot of experience in
running a business. They invests their
own funds and experience in a busi-
ness projects in the early stages of its
development, in exchange for shares.
Business angels are usually “retired”
entrepreneurs or senior high–level
managers, who may be interested in
supporting young businesses, for rea-
sons other than pure financial gain. Ad-
ditionally, they may be driven by desire
to establish business contacts, “repay”
to the society, have an opportunity to
transfer experience and knowledge,
participate in the economic devel-
opment process, or to confirm their
social success. It is therefore a specific
“smart money” offer, including mana-
gerial assistance, experience, contacts,
know–how, skills, etc. Direct super-
vision from this type of investors also
usually means, that they are interested
in projects located in their region.
Funds offered by this group of business
investors are another form of filling the
capital gap between financing obtained
from friends, family and own savings
and venture capital funds. Most ven-
ture capital funds are not interested in
investments below PLN 5 million, as
these business projects are usually at
an early stage of development, where
the risk is too high. Business angels
are willing to invest in such enterpris-
es, counting on an above average rate
of return.
ASTOR whitepaper 2020 119
Unlike venture capital funds, which
usually manage a pool of capital be-
longing to private investors, accumu-
lated in a professional fund, business
angels invests their own resources.
Therefore, decisions on capital entry
are made independently, often based
on subjective factors. Involvement
of a business angel is a long term
investment, that usually lasts from
3 to 6 years. During this period, they
often engage in increasing the value
of the venture, after which they sell
the shares.
Business angels often gather in net-
works or informal clubs, that allow
them to remain discreet, help in the
initial selection of projects, and sup-
port entrepreneurs seeking funding
for training and project preparation.
The largest such network in Poland is
Lewiatan Business Angels, operating
at the Polish Confederation of Private
Employers Lewiatan. In the European
Union, the largest organization of this
type is the European Business Angels
Network. There are also other organ-
izational forms for business angels,
such as clubs, funds and groups.
Example
Amazon.com, Apple, Goog-
le, Starbucks, Dell and Cisco,
among other companies, were
created with the support of
business angels in the early
stages of their development.
120 Financing of Industry 4.0
B.6
Crowdfunding
Crowdfunding is a modern form of
raising capital for investments, using
digital platforms. Crowdfunding is
based on the easy accessibility of
extensive networks of people through
social media and crowdfunding portals
to attract investors and connect them
with entrepreneurs (see also sharing
economy description in Chapter 3).
Crowdfunding platforms and portals
give the opportunity to reach a large
number of people for funding, each
of whom transfers a small amount of
capital. Platform revenue is the per-
centage of funds collected, deducted
when the collection goal is achieved.
This model increases the amount of
support available to entrepreneurs, by
expanding the pool of potential inves-
tors beyond the traditional circle of
owners themselves, their relatives and
friends, business angels and venture
capital investors. Anyone can become
an investor in this model.
From the investor's point pf view:
• Crowdfunding allows investors to
choose from hundreds of projects in
which they can invest small amounts.
• If the collection target is not achieved,
the money is returned to investors
in full.
• In regulated markets there are re-
strictions on who can finance a new
business and the amount of their con-
tribution (due to the high risk, this is
to protect inexperienced people from
losing too much money). In Poland,
investors take their own risk.
From the entrepreneur's point
of view:
• This form of financing is also a proof
of concept contacted on the mar-
ket, which allows an entrepreneur to
directly check to what extent an idea
is interesting to potential customers.
What's more, a base of committed
clients, who may have a sense of per-
sonal participation in the success of
the venture, is created in this way.
• It gives an entrepreneur more inde-
pendence than a bank loan or venture
capital. On the other hand, the bank
and VC provide some degree of
mentoring.
• It requires a specific marketing
setting (an interesting story, able to
stimulate the emotions of potential
investors).
• There is a risk of underestimating the
amount needed to meet the project's
assumptions, with possible legal
consequences.
Factors that increase chances of
success in crowdfunding:
• At least a small network of support-
ive friends and family, who want
to help in distributing information
about the collection,
• Pool of profits attractive to investors,
in exchange for support, adequate
gradation of profits,
• A reliable and thoughtful business
plan, justifying the effort put into
organizing the collection,
• A pool of own funds that can be
added to the collection,

• Professional marketing (a movie,

convincing presentation of the
collection purpose, clever use of
social media, including readiness
for 24–hour personal involvement
in social networking sites during the
collection).

Popular crowdfunding platforms:

• PolakPotrafi.pl

• Kickstarter.com

• Indiegogo.com

• Wemakeit.com

ASTOR whitepaper 2020 121

C. Other capital tools
There are many legal forms of raising
capital on capital markets, from the
most–known, such as the issue of
shares or bonds, to forms rarely used
on the Polish market, such as asset
securitization. These are tools that
can be used by mature and developed
enterprises.
C.1
Issue of shares
The issue of shares is the process by
which a share is created as a security.
This is one of the basic ways to bring
more capital into a company. Thanks
to the funds obtained from the issue,
the company can continue its business
and finance its development. In order
to issue securities in the form of shares,
a company must have the status of
a joint stock company.
The issue of shares is used by com-
panies that need cash for a specific
purpose. Also, some successful com-
panies issue shares to help strengthen
their image and market position. For
this reason, it is very important to
choose the right moment for the issue,
so as to increase the chance of getting
to the desired place on the public
market. The “right moment” is related
to the existing and planned financial
situation of the company, but also to
the market situation and the overall
economic situation.
122 Financing of Industry 4.0
The issued shares can be introduced
to trading on two markets:
• the main (regulated) market of the
Stock Exchange (Giełda Papierów War-
tościowych (GPW), in Poland) consisting
of two markets: primary and parallel,
• Newconnect – an over–the–counter
market operated by GPW outside the
regulated market, as an alternative
trading system.
Actions that precede the issue of
shares to market in Poland:
1. Change in the form of a company
functioning to a joint–stock company
(or a limited joint–stock company),
2. Selection and consultation with
advisers,
3. Choice of partners (public rela-
tions agencies, auditors, brokerage
houses),
4. Creating a concept regarding the
company's development (goals of
the issue, strategic and financial
plans),
5. Formal decisions made by the au-
thorities regarding the issue, e.g the
manner of conducting the offer,
6. Issue prospectus (the Information
Memorandum),
7. Application and approval of the
prospectus (the Information Mem-
orandum) by the Polish Financial
Supervision Authority,
8. Conducting the public offer (pro-
viding the issue price, subscription
for shares, allocation of shares,
registration of issues in court,
registration of shares in the National
Depository of Securities, admission
of shares to public trading).
Conditions for admitting shares
to trading on the alternative stock
market in Poland:
1. Change in the form of a company
functioning into a joint–stock company
(or a limited joint–stock partnership),
2. Agreement with an authorized adviser,
3. Preparation of the vision regarding the
company's development (goals of the
issue, strategy, financial plan),
4. Formal decisions by the authorities
regarding the issue,
5. Issue prospectus (The Information
Memorandum),
6. Application and approval of the
prospectus (the Information Mem-
orandum) by the Polish Financial
Supervision Authority or information
document by an authorized adviser.
7. Conducting a public or private offer
(determination of the issue price,
subscription for shares, allocation
of shares, registration of issues
in court, registration of shares in
the National Depository of Securi-
ties, admission of shares to public
trading)
8. Agreement with a market maker.
Functions
• the company development: obtain-
ing funds that will contribute to the
expansion of its business activity,
• acquiring a strategic investor,
• restructuring – the funds obtained
are allocated for modernization,
• increase in supplementary capital –
it is a kind of protection against risk
related to conducting a given activity,
• creation of holding companies – infor-
mal groupings of enterprises, that buy
blocks of shares of other companies,
• preparation for the issue of un-
secured bonds – the company is
required to meet high capital require-
ments, e.g. minimum share capital,
to carry out such an issue.
Benefits
• ease of finding an investor,
• increasing the pool of investors
contributing capital and taking part
in the risk,
• obtaining necessary funds without
the need to return them and improv-
ing the company's balance sheet
structure (increase in equity),
• high issue price,
• a form of recapitalization, that is
more favorable than credit (interest
on bank debt affects the company's
net result),
• meeting the requirements of the issue
of shares translates into improved
image on the market,
• presence on the capital market
positively affects the possibility of
obtaining loans from banks,
• raising capital through public issue
allows the company to achieve com-
petitive advantage,
• objective assessment of external enti-
ties allows problems to be eliminated
or prevented,
• the company gains access to infor-
mation about financial situation of
competitors.
Threats
• the need to meet numerous informa-
tion requirements,
• assessment of financial statements
by a certified auditor,
• costs of share issue,
• establishing cooperation with capital
market institutions,
• the obligation to publish information
about the company results in com-
petition getting access to it,
• threat of the company takeover by
competition (through investors gain-
ing ownership and corporate rights
to the company).
C.2
Issue of bonds
Bond issue is a tool for obtaining funds
for investments, available for compa-
nies that are not joint–stock companies.
A bond is a security issued in a series,
in which the issuer states that it is the
debtor of the owner of the bond (bond-
holder, the entitled) and undertakes
to meet a specific benefit. The benefit
may be of a monetary or non–mone-
tary nature. A bond is therefore a form
of credit granted by the buyers of the
bonds to the issuer. Bond issuers may
be entities conducting business activity,
having legal personality, as well as
limited joint–stock partnerships.
Bonds may be registered for a given
person or to a bonds bearer, and the
issuer may impose a ban or limit on
sale of registered bonds. The issue of
bonds must be preceded by the estab-
lishment of collateral, as stated in the
terms of issue.
The issuer is liable with all his assets for
the obligations arising from the bonds,
although this liability may be limited to
the amount of the proceeds, or the val-
ue of the enterprise's assets, to which
the obligator has a priority right.
Benefits for the company
• Bonds do not give buyers the right to
decide on strategy and vision of the
company, therefore the issuer does
not lose control over his enterprise.
ASTOR whitepaper 2020 123
• Benefits include also an improved
balance sheet structure, the option
of leverage and a tax shield, and
the flexibility of such a financing
instrument.
• The costs of obtaining money from
a corporate bond compared to the
issue of shares or taking out a bank
loan are small.
Restrictions for the company
The issue of bonds will not be
profitable for entities with unstable
financial standing, because this
form increases financial risk and
involves additional costs related
to information obligations.
C.3
Asset securitization
Securitization is a modern financial
operation that allows enterprises,
financial institutions and banks to
raise capital.
The name of the operation comes
from the English term for securities.
It means conversion of receivables
into securities, consisting in the issue
of short–term debt securities against
collateral. Receivables usually come
from mortgage loans, car loans, loans
for installment purchases, leasing con-
tracts, rents, telephone bills, etc.
Securitization is not carried out directly
by a company interested in obtaining
funds from the market, which initiates
the undertaking, but by a Special Pur-
pose Vehicle (SPV) established for this
purpose. This company takes over the
assets of the initiator's company.
124 Financing of Industry 4.0
Securitization applies when, as part of In the United States, mezzanine finance
debt–debt relations, entities decide is similar to the form of bonds, and is
to exchange assets, e.g. in the form of treated as a high yield bond version.
receivables, for debt securities (shares) Capital market instruments are used
or debt (commercial papers, bonds), in the US to a greater extent than in
that are more easily negotiable than Europe, with an emphasis on their privi-
classic receivables. leged nature in the capital structure (the
so–called protected income). By invest-
ing in mezzanine finance, the investors
C.4 secure the minimum income that they
Mezzanine finance intend to achieve from the investment,
while leaving the possibility of obtaining
Mezzanine finance is an intermediate unlimited income.
form of credit and sale of shares. This
form was created in the 1980s on the As a rule, mezzanine financing is of a
wave of mergers and acquisitions of long–term nature, and funds are grant-
companies around the world. It enjoys ed for a period of 7–10 years.
considerable popularity in countries
with developed market economies,
while in Poland it is relatively little
known. It is used for management
buyouts and supporting the market
expansion of companies in a situation
where access to traditional bank debt is
limited (e.g. due to lack of appropriate
assets for collateral), and the owners
are reluctant to dilute the shareholding,
due to further increase in equity.
Mezzanine is an indirect form of financ-
ing, that fills the space between bank
debt and equity, and combines these
two forms of financing into one financial
instrument. What makes it different
from these forms, is the repayment
method (and hence the price terms).
In Europe, mezzanine finance often
takes the form of credit. The repayment
period is longer than the bank debt,
without the need for regular repayment
of installments. Unlike a traditional loan,
this form of financing contains addition-
al elements typical of capital market
instruments, that increase the rate of
return on this type of investment. They
include variants, options or convertibles.
D. Subsidies and tax breaks
There are a number of funds, as
well as institutions that have funds
intended for the development of
entrepreneurship. When looking for
a source of financing for a project in an
enterprise, it is worth working with an
experienced consultant, who has full
information about the funds available
and the requirements that must be
met to obtain them.
D.1
European funds
The European Union budget is created
by the European Council under the
so–called budget perspectives, which
cover 5–7 years. The current per-
spective covers the years 2014–2020
and is therefore coming to an end. In
addition to governments of the member
countries, its largest beneficiaries are
entrepreneurs.
The largest range of support is offered
to micro, small and medium enterprises.
Subsidies for them are provided pri-
marily through the Regional Programs
of individual provinces, but also in the
Intelligent Development (Inteligentny
Rozwój) and the Eastern Poland (Polska
Wschodnia) programs.
The biggest chance for subsidies
have investments implemented in
the areas of:
• Research projects and
implementation of innovations
Co–financing for research and devel-
opment (R&D), research infrastructure
and implementation of innovations.
• Digitalization
Co–financing for the preparation of
an e–service platform, development
of e–commerce, creation of a digital
B2B solution as well as digitization of
processes in the enterprise.
• Resource saving solutions
Co–financing for thermo–moderniza-
tion of buildings (heating, air condition-
ing, ventilation), energy–saving technol-
ogies, reconstruction of a production
line, obtaining energy from renewable
sources and production of renewable
energy (including creation of wind, solar,
geothermal or biomass power plants).
Some funding options in this area are
repayable instruments, not grants.
• Access to foreign markets
Co–financing for the preparation of a
business model in the field of interna-
tionalization, preparation of its strategy
implementation, product adjustment,
participation in trade fairs and eco-
nomic missions.
• Business development
European Funds may also guarantee
repayment of a loan for purchase of
equipment and development of infra-
structure for activities not falling within
the scope of innovation.
More information can be found at:
www.funduszeeuropejskie.gov.pl
D.2
Norwegian and EEA funds
Norwegian funds (or the Norwegian
Financial Mechanism) and EEA (Euro-
pean Economic Area) funds are a form
of non–repayable assistance granted
by Norway, Iceland and Liechtenstein
to new EU members (which is syn-
onymous with joining the European
Economic Area covering the EU and
Iceland, Liechtenstein and Norway).
The purpose of the funds is to reduce
social and economic, disparities, as
well as strengthen bilateral relations
with the three donor countries. The
current funding period is 2014–2021.
Poland is the largest beneficiary among
the 15 assisted EU members.
Initiatives are supported in the
fields of:
• innovations,
• research,
• education,
• energetic safety,
• climate changes,
• increased cooperation between
Poland and donor countries in the
fields of justice and home affairs.
More information can be found at:
www.funduszenorweskie.pl
ASTOR whitepaper 2020 125
D.3
Government instruments for
innovation support
Under the aegis of the Government of
the Republic of Poland, entrepreneur-
ship and innovation support programs
for Polish enterprises are carried out.
The Polish Agency for Enterprise
Development (Polska Agencja Rozwoju
Przedsiębiorczości, PARP) focuses on
needs of the SME sector. The agency
implements programs in the areas of:
• economic development,
• support for innovative and research
activities of small and medium–sized
enterprises (SMEs),
• regional development,
• increase in exports,
• development of human resources and
use of new technologies in business
operations.
PARP's activities are financed from
structural funds, the state budget and
multiannual programs of the European
Commission.
More information can be found at:
www.parp.gov.pl
126 Financing of Industry 4.0
The Intelligent Development Program
(Program Inteligentny Rozwój) run by
the Ministry of Investment and Develop-
ment (Ministerstwo Inwestycji i Rozwoju,
MIiR) has funds allocated for:
• research and development (R&D) in
enterprises and implementation of
the results of this work,
• supporting business environment in
conducting R&D activities,
• investments in innovative enterprises,
• capital support for newly established
companies,
• development of modern research
infrastructure of the science sector.
The program is financed from both EU
funds, and public and private national
funds.
More information can be found at:
www.poir.gov.pl
The Ministry of Entrepreneurship
and Technology (Ministerstwo Przed-
siębiorczości i Technologii, MPiT) is an
operator or partner of innovation sup-
port programs. A list of these programs
can be found at:
www.gov.pl/web/przedsiebiorczosc–
technology/integrated–instrumenty–
support
D.4
Tax breaks
By law, companies investing in their
development can benefit from tax
breaks. These are:
• Support for industrial investments –
entrepreneurs can obtain an income
tax relief when they invests in con-
struction or expansion of an industrial
plant. Minimum cost and amount of
the discount depend on the invest-
ment location, with preference for
micro– and small companies, as well
as for investments located in small
cities and towns.
More information at:
www.paih.gov.pl/strefa_inwestora/
Polska_Strefa_Inwestycji
• Research and development (R&D)
relief – in exchange for the costs
incurred, the entrepreneur receives
a few percent tax relief, in the form
of a lower income tax to pay.
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128 Financing of Industry 4.0

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downloads/biznes–i–produkcja/biznes_i_produkcja_5.pdf

Annex 2: GLOSSARY OF FINANCIAL CONCEPTS

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www.entrepreneur.com/encyclopedia/
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www.webopedia.com

ASTOR whitepaper 2020 129

130 Financing of Industry 4.0
Authors
Jarosław Gracel
ASTOR Board Member
Director, Industry 4.0
Transformation, ASTOR
phone: + 48 12 428 63 00
e–mail: Jaroslaw.Gracel@astor.com.pl
Stefan Życzkowski
President, ASTOR
phone: + 48 12 428 63 00
e–mail: Stefan.Zyczkowski@astor.com.pl
Consultation:
Zbigniew Bartuś
Publicist of Dziennik Polski
All photographs in the publication come
from the ASTOR archives, except for the
photograph from p. 10.
We look forward
to hearing
from you
Michał Wojtulewicz
ASTOR Board Member ASTOR Headquarters
Chief Financial Officer 29, Smolensk St.
phone: + 48 12 428 63 00 31-111 Kraków
e–mail: Michal.Wojtulewicz@astor.com.pl tel. +48 12 428 63 00
fax +48 12 428 63 09
e-mail: info@astor.com.pl
ASTOR Robotics Center
3, Feliksa Wrobela St.
30-798 Kraków
tel. +48 12 428 63 06
e-mail: arc@astor.com.pl
Adam Jawor
www.astor.com.pl
Editing: Graphic design:
Aneta Rząca Małgorzata Orzechowska-Nosek,
aer studio | seeds of change Hanna Pitala, Zuzanna Opozda,
aneta.rzaca@gmail.com, Olga Godek, Grzegorz Podsiadlik
Proofreading: Parastudio | graphic design
Joanna Kowalkowska mail@parastudio.pl
joanna.kowalkowska@astor.com.pl
The ASTOR Technology Index is the
original concept of ASTOR. Its main
author is Stefan Życzkowski.
ASTOR whitepaper 2020 131
www.astor.com.pl
www.astor.com.pl/INDUSTRY4/

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