Better business: How to harness value from IoT technologies

The Internet of Things (IoT), the convergence of the digital and physical worlds, has emerged as one of the fundamental trends underlying the digital transformation of business and the economy. From the fitness trackers we wear to the smart thermostats we use in our homes to the fleet-management solutions that tell us when our packages will arrive to the sensors that promote increased energy efficiency or monitor natural disasters resulting from climate change, the IoT is now embedded in the lives of consumers and the operations of enterprises and governments.

In 2015, the McKinsey Global Institute published a research report entitled The Internet of Things: Mapping the value beyond the hype. The report analyzed the economic potential that the IoT could unleash through consideration of hundreds of use cases in the physical settings in which they could be deployed.

Six years later, in a new report, The Internet of Things: Catching up to an accelerating opportunity, we have updated the analysis to estimate how much of that value has been captured, how the potential value of the IoT could evolve in the coming decade, and the factors that explain both (see sidebar, “Defining the Internet of Things”). The market has grown considerably in the intervening years but not as fast as we expected in 2015. The IoT has faced headwinds related to change management, cost, talent, and cybersecurity, particularly in enterprises.

Here’s what our latest research found:

Our research began in 2020 before the spread of SARS-CoV-2 virus, which causes COVID-19, led to a global pandemic in the first quarter of that year. The COVID-19 crisis represents a threat to both lives and livelihoods, but it also serves as a market-shaping force. While the report on which this article is based does not focus solely on the impact of the pandemic, that impact has been acting as a catalyst for the deployment of IoT solutions in specific areas as the world grapples with managing the pandemic and enabling a faster and safer return.

The IoT stands at the forefront of our ability to bring together the digital and physical worlds in a manner that could have profound implications for both society and the economy. The benefits could be in the form of improving operations, the management of physical assets, and health and well-being, for example. Against that backdrop, the IoT can be the beating heart of digital transformations.

Setting is the main way we disaggregated the potential economic value of the IoT (Exhibit 1). Factory, the setting with the largest potential economic value in 2030, could generate around $1.4 trillion to $3.3 trillion by 2030, or 26 percent of the total.

To see the full interractive chart, click here.

Based on our research, the greatest potential for value creation in the factory setting will be optimizing operations in manufacturing—making the various day-to-day management of assets and people more efficient. Overall, operation-management applications in manufacturing could account for around 32 to 39 percent of the total potential IoT economic value created in the factory setting, or around $0.5 billion to $1.3 trillion, by 2030.

n the human-health setting, the second largest, IoT value involves applications that are deployed in and affect the human body. We estimate that IoT economic impact in the setting could reach around 14 percent of the total, or between $0.5 trillion and $1.8 trillion, by 2030.

Over the past five years, the perceived value of IoT solutions within healthcare has increased. From connected glucose and heart monitors for patients with chronic diseases to mass-market solutions that monitor physical activity, consumer awareness has grown significantly. IoT solutions are not only being used by individual customers but also being provided by some insurers and governments as a way to improve health and patient outcomes. The COVID-19 pandemic has potentially accelerated the use of IoT solutions in healthcare, as the world wrestles with both virus containment and a safe return to the workplace.

Another way to disaggregate potential economic value is by use-case cluster. This view allows us to observe the effects of use cases that are similar in nature but arise in different settings (Exhibit 2).

Using this approach, our research indicates that the operation-optimization and human-productivity clusters could comprise around 56 percent of IoT economic value in 2030; health and condition-based maintenance are estimated at around 15 and 12 percent, respectively.

In relative terms, autonomous vehicles (which include partial-driving automation, or level-two autonomy, and up) make up the fastest-growing IoT-value cluster. Its expected CAGR between 2020 and 2030 is 37 percent (to $0.3 trillion in 2030, from $0.01 trillion in 2020) in the high-end scenario. While autonomous-driving systems steal the headlines, the steady increase in the use of sensors throughout vehicles is set to continue as consumers demand greater safety and reliability. Indeed, during the first half of the next decade, increased safety features are expected to account for much of the IoT added value.

The safety and security use-case cluster in the vehicle setting is estimated to contribute around $130 billion to $140 billion to IoT potential value by 2030. By the end of 2020, 20 percent of vehicles globally were likely to have already been equipped with safety systems (for example, forward-collision avoidance, blind-spot assistance, and adaptive cruise control), potentially reducing the number of accidents and the value of personal auto-insurance policies.

Our 2015 research estimated that B2B solutions would represent around 70 percent of the total value creation potential of the IoT. Five years later, B2B solutions remained the majority of the economic value from IoT solutions. But the value of B2C applications has accelerated as a result of faster-than-expected adoption of IoT solutions within the home (for example, home automation).

As a result of these dynamics, B2B applications are expected to account for 62 to 65 percent of the total IoT value in 2030. In economic terms, this translates to around $3.4 trillion in the low-end scenario and around $8.1 trillion in the high-end scenario.

While the developed world is expected to account for around 55 percent of estimated IoT economic value in 2030, the real growth story, from a geographic perspective, is China. It has become a global force in the IoT. China could be responsible for around 26 percent of the estimated economic value of IoT globally by 2030, slightly above its forecasted 20 percent share of the global economy and greater than the estimated IoT economic value from all emerging markets—19 percent of the total (Exhibit 3).

We estimate that China’s share of IoT economic value from factories could be higher than either developed or emerging markets by 2030. Today, China is estimated to have a significant share of the IoT-device installed base at around 32 percent, triple the estimated share of the emerging markets. ¹

While the potential economic value from the IoT is large and growing, capturing this value has proved challenging. Our latest research shows that the total value captured in 2020 ($1.6 trillion) is at the lower end of the range of the scenarios we mapped out in 2015. We have updated our estimates for 2025 and beyond by adjusting for current conditions, and we have developed scenarios that account for the range of various uncertainties. In aggregate, both the low- and high-end scenarios are lower than the original 2015 estimates: around $2.8 trillion to $6.3 trillion in potential IoT economic value in 2025, compared with around $3.9 trillion to $11.1 trillion from the 2015 work.

The revisions reflect a world that has changed significantly since 2015. There have been material changes in both the trajectory of IoT adoption and realized IoT impact. In addition, scale factors, such as GDP growth and oil prices (which are exogenous to the IoT), have also shifted. In this section, we discuss the main factors influencing the future growth of the IoT market overall, though there are some variations in each setting that are detailed in the full report.

Three main factors are spurring a material acceleration in the adoption of and impact from IoT solutions today:

The news is not all favorable for the at-scale adoption and impact of IoT solutions. Five factors are acting to dampen both areas overall (again, with some variations across specific settings):

The IoT market is growing fast. The growth may be slower than expected, but it’s not for lack of confidence or belief in the impact that the technology can have. Rather, we find that operational factors are holding back the market. As we have seen, there are nuances at a setting and use-case-cluster level. This is true in not just growth but also the tailwinds and headwinds. If the IoT is to fulfill its potential, companies and their customers must address these headwinds.