SINCE it was founded in 1923 Trumpf, a family-owned company based near Stuttgart, has had one main mission: making things that make things. It started out with motorised hand shears and other tools to work sheet metal. It then invented fabrication machines with a numerical-control system and later was among the first to use lasers to cut metal. A prime example of a firm from Germany’s industrial Mittelstand that has outgrown the label (which literally means “mid-sized trades”), the firm today has annual sales of €2.7 billion ($3.2 billion) and more than 10,000 employees worldwide.

Trumpf’s roots in metalworking and other hardware stand in stark contrast to what it is trying to achieve next: building a new business purely based on software and data. Unveiled last month, its online offering, called Axoom, connects machines built by Trumpf and others, and uses the data it collects from them to help customers organise their production—for instance, to warn them when they are running out of material or to order it directly from the supplier. Much like smartphones, Axoom will be able to run “apps” from other providers, such as software to schedule workloads, or to predict when machines will need a spare part.

The company’s attempt to redefine itself is emblematic of the leap that manufacturers, in Germany and everywhere else, now have to make. The much-discussed “internet of things” (IoT) is becoming a reality on factory floors: industrial machines and the products they make are increasingly packed with sensors and connected to the internet (see Schumpeter).

As a result, the rules in many industries, from construction equipment to cars, are changing: making things matters less and knowing things more. In many cases the successful companies will no longer be the ones that make the best products, but the ones that gather the best data and combine them to offer the best digital services. And the biggest winners of all may be those that control a “platform”, a layer of software that combines different kinds of devices, data and services, on top of which other firms can build their own offerings—just as Trumpf is trying to do with Axoom.

Mastering this sort of transformation ought to be on the agenda of any country with a big manufacturing base (see chart 1). But nowhere is the sense of urgency more developed than in Germany, where the fear that digitisation threatens its position as a leading industrial nation has been given added piquancy by Volkswagen’s recent emissions scandals. The first half of the battle to master the digital world was lost, according to Timotheus Höttges, the boss of Deutsche Telekom. “The question now is: how do we win the second half?”

The problem is not that German companies have stopped innovating. In fact, many are ahead of the pack in digitising their products as well as their shop floors. Making products and factories “smart”, however, is only the first stage in the digitisation journey, argues Germany’s National Academy of Science and Engineering (Acatech) in a recent report. The next is to use the data generated by connected devices and other information to offer clever services, and make money with new business models. Firms that cannot create such offerings “may quickly lose their ability to compete,” argues the Acatech report. Smart services do not have to be closely related to the principal use of the product. A high-end car, for instance, has the digital horsepower of 20 personal computers and generates 25 gigabytes of data per hour of driving, estimates Gabriel Seiberth of Accenture, a provider of IT and consulting services. Rather than just building vehicles, he argues, carmakers should be thinking about how to provide, and profit from, the entertainment and e-commerce services that could be offered on the screens inside a vehicle. “The car will become a central part of a person’s digital life,” says Mr Seiberth. That strikes a particular chord in Germany. Some fear that its carmakers, which directly or indirectly employ one in seven workers nationwide, could be demoted to low-margin metal-bashers, while American tech giants make most of the money by providing the software and the in-car entertainment—and perhaps, in time, designing the cars themselves. Apple and Google are pressing carmakers to install the operating systems they have designed for cars’ entertainment systems, which in practice will suck up all sorts of other data about the car and its occupants. Carmakers are realising that to give up this territory would risk their “sovereignty over the data” generated by their vehicles, in the words of Wilko Stark, Daimler’s strategy chief. They could end up like Samsung, whose profits from smartphones are limited by the fact that it depends on Android, Google’s mobile operating system.

It is not just German carmakers which worry about this sort of future, however. The American tech giants are also trying to establish platforms for the “smart home”, which collect data from appliances, heating systems and the like. “Whoever controls the platforms will rule the future,” declares Henning Kagermann, the head of Acatech, who coined the term “Industrie 4.0” for German industry’s collective efforts to make the transition to a digital, internet-connected future.

Despite such concerns, in some ways Germany’s industry seems well prepared for the rise of services and platforms. Its bosses are alive to the threat. Axel Springer, a publishing giant, started a trend among German firms by having some of its top people live in Silicon Valley for several months. The experience led the firm to invest in a consulting firm, gratingly called Hy!, which introduces old-economy executives to startups and helps them plan their digital transformation.

Some firms have already acted on the insight that digital platforms are crucial for their futures. One is Trumpf. Another is Klöckner, a metals trader, which has created a platform to connect steelmakers with construction firms and other customers. Germany’s engineering and manufacturing giants, too, have started to take platforms seriously: Bosch now offers an “IoT Suite” to help other companies create new services around connected devices. Deutsche Telekom has teamed up with other firms to establish Qivicon, a smart-home platform to rival Apple’s and Google’s.

The government is trying to help. It has taken the lead in Industrie 4.0, creating around it an unwieldy structure that ropes in everyone from trade associations and ministries to unions and academics. Only in a country with Germany’s corporatist tradition would an effort to make businesses more agile and responsive to change be so stuffed with steering committees, working groups and advisory boards.

The first aim of this bureaucracy is to produce templates and test beds for trying out innovative digital services, and to publicise interesting examples. Its second aim is to convince two groups of the need for change: the smaller among Germany’s Mittelstand firms, and the industrial trade unions, which, under the country’s “co-determination” model of labour relations, have a say in many management decisions. “Creating acceptance is key,” says Matthias Machnig, a senior official who leads the Industrie 4.0 effort at the ministry of economic affairs.

Fortunately for many German industrial firms—and, for that matter, their counterparts in other countries—they have more time to adapt than consumer firms. In consumer markets, digital newcomers can quickly become dominant by exploiting the “network effects” in some technology platforms: the more people use them, the more apps and other offerings they generate, and the stronger they get versus any rivals. This is why German makers of cars and heating equipment look with trepidation at Google’s work on self-driving cars and intelligent thermostats.

Yet the economics of the markets for industrial equipment, and the other business-to-business products many German firms make, are different, explains a report this month by Stiftung Neue Verantwortung, a think-tank, and other organisations. These markets move more slowly and are more complex. The expertise of incumbents is hard to replicate and, more important, in many cases they control access to the data their products generate. As a result, network effects are not as strong in these sorts of business.

If that offers some comfort to German manufacturers, it only goes so far. First, platforms thrive when other firms, developers and customers make use of them. Most big IT companies have grown up managing such “ecosystems”, but this will not come easy to manufacturers. As Sangeet Paul Choudary, a technology analyst, puts it, they are steeped in “pipe thinking”: firms order supplies, fashion them into products and then send them towards customers. Now they must think more like a gardener, and maintain a park which attracts and retains other firms and customers, in order to flourish.

Second, successful platforms tend to be “open”, meaning chiefly that their owners encourage other firms, including competitors, to build applications that run on them. Bosch, Trumpf, Siemens and others claim to be open, but it is not clear how welcoming they will be in practice. German bosses tend to think that they can offer all the necessary services themselves and do not like the idea of inviting others onto their platform. German carmakers could probably build the dominant operating system for vehicles if they overcame their rivalries. But it is unclear whether BMW, Daimler and VW’s Audi subsidiary will turn Here, the digital-maps business they are buying from Nokia, into a bona fide platform. Such proprietary thinking also makes German industrial firms reluctant to produce open-source software, or to give away other forms of intellectual property, in the way that Tesla, an American maker of electric cars, has done with its patents in an effort to spread its technology.

Shy about sharing

Third, platforms are about sharing the data they gather. The best new services are often the result of combining information from different sources. But in Germany this can be difficult. One barrier is privacy: in addition to the country’s strict data-protection laws, there is a widespread suspicion of anything that smacks of monetising data. Even among younger Germans, nearly two-thirds worry that data generated by their cars will be sold on, according to a recent study by Deloitte, a consulting firm. Many Germans are wary of what has come to be called Plattform-Kapitalismus, meaning the dominance of new markets by mighty foreign providers such as Google and Facebook (see chart 2). This is seen as somehow unfair and an example of American “cowboy capitalism”, which adds to the reluctance of German firms to create and promote their own platforms. Mittelstand firms too are reluctant to share data: they fear they could lose control of their intellectual property and thus their competitive edge.

A fourth and final hurdle relates to German corporate culture. Although German firms are no longer as hierarchical as they once were, they are still managed from the top down; risk-taking is discouraged. A key to developing successful platforms and services is to put them in the hands of autonomous teams—rather like internal startups—and to be prepared to shut projects down if they fail to take off. Many German giants now have “accelerators” to incubate new business ideas, but lots are just public-relations exercises. Only a few have gone as far as Klöckner, which has set up an incubator for internal startups in Berlin, far away from its headquarters in Duisburg, with the aim of digitising the firm’s entire supply chain. Many employees, too, are not ready for the digital world. At German universities computer scientists are trained much like engineers, meaning they are focused on precision, explains Clemens Westerkamp of the University of Applied Sciences in Osnabrück. This mindset, he says, is a big advantage when building highly reliable systems, which are required in many industries. But it is a drawback in the world of software and data, where quick thinking and risk-taking are more important. “The battle for industrial platforms will be a fight between German precision and American speed,” says Mr Westerkamp.

User-unfriendly

The engineering background of many managers also explains why they focus more on incremental improvements than on making drastic gains in their products’ functionality and ease of use. “Germans are really good at reducing the Spaltmass, the clearance between the parts of a car’s body,” says Christoph Keese, who was one of the Springer executives who spent a few months in Silicon Valley and has written an influential book about the experience. But the user interfaces for German products are a different matter. They are often so complex, says Mr Keese, that the word that appears most often on their displays is Anwenderfehler (“user error”).

Compare Silicon Valley and Germany’s equivalent for industrial firms, the region around Stuttgart, and the cultural differences are clear. Google’s campus in Mountain View offers about 30 different canteens with free food and generous opening hours. Visitors can see some self-driving cars, but the scenery is dominated by bicycles in primary colours which employees use to pedal between the many buildings. At Bosch in Gerlingen, employees all stream into a huge, centralised corporate cafeteria at lunchtime. And the most striking vehicles are green self-driving lawnmowers that keep the grass around the firm’s office block in perfect trim.

Yet it would be unfair not to mention the “Bosch Start-up Platform” which the firm has recently set up in Ludwigsburg, a short drive away. It has already incubated a handful of firms. One has developed a wireless sensor to improve asparagus yields, another builds agricultural robots that kill weeds. Germany’s manufacturers are clearly changing. The question is whether they can do so fast enough.