There is much talk about Industry 4.0 in Germany. Why is this?
The manufacturing industry is a key driver for the German economy. Therefore, any debate of the future competitiveness of this sector deserves and receives much attention. Discussions about highly automated factories trigger concerns about employment, while on the other hand reports about 3-D Printing and other new technologies ignite speculations about the future of manufacturing and logistics as we know it.
The concept of Industry 4.0 has been promoted in Germany since 2012 by Professor Kagermann and others, as a wake-up call to the well-established German manufacturing industry. A key element of this vision is the strongly increasing (digital) networking between machines, between factories and between companies in the value chain. Also, the vision of more intelligent, possibly autonomous, manufacturing processes, in which the unfinished product itself ultimately steers the production process, has been part of the concept. The latter element has been often described as the “batch-size 1” promise of Industry 4.0, enabling really individual products to be produced in a factory.
In the meantime, it is broadly accepted that not only the production industry, but practically every business sector will be heavily impacted by what is now generally called “Digitization of Industries”. The digitization of the Media Industry, which started already in the 1980´s with the music CD and, later, the Internet, was relatively straightforward as the “product” itself can be digitized (think MP3 music).
The digitization of the manufacturing industry, however, can only address the monitoring and steering of processes – the product itself remains physical in the end, even when considering 3D Printing. Although we can learn much from understanding what happened to the media industry, the digitization of manufacturing will have its own characteristics.
In the next few years, how does the impact of Industry 4.0 look within the German market?
Much is happening already in a less-observed production industry – agriculture. “Precision agriculture”, levering satellite or drone-based sensors, Big Data analytics, autonomous machines and supply chain integration, is already used to reduce cost and environmental impact while increasing yield.
In regards to manufacturing, we are seeing brand-new pilot or demonstration factories that give us a glimpse of the future factory floor. However, as the machines in existing manufacturing plants have a very long lifespan, new digital steering technologies have to work together with existing machines. Therefore, much of Industry 4.0 will happen as a rather evolutionary process.
We will probably see more revolutionary change in business models and value chains. Digitalization, including the deployment of “Big Data” and ubiquitous sensors, can substantially impact topics like logistics, remote servicing and the tracking of products and their usage through their life cycle. Also in supply chain management and outsourcing, we might see more short-term impact of digitalization.
If we consider the impact of internet-based “platforms” like Uber and Airbnb for matching supply and demand in their respective markets, we can imagine what might happen in industrial ecosystems. Such internet brokerage platforms tend to become rather powerful, due to their scale and networking effect. They therefore can take over part of the value that traditionally was allocated to the owners of physical assets like cars and spare beds – or, in our industry, factories or machines.
It might take a while before there is an “Uber for the steel industry”, an “Airbnb for spare manufacturing capacity” or an “iTunes for 3D-Printable spare parts”. But it they arrive, they will move fast and most likely not stem from traditional German manufacturing companies.
Let´s also consider which trends that affected the media industry, in conjunction with societal changes, could also impact the manufacturing industry. An example is the shift from product ownership to service: consumers don´t buy music but subscribe to an online music library, young city dwellers don´t buy cars but use a car sharing service. In the B2B world, we see similar trends: building management companies don´t buy (LED) lightbulbs but subscribe to a lighting service, mechanics workshops don´t buy compressors but “hot air” on a pay-per-use basis.
When Industry 4.0 allows us to produce “smarter” products, this raises the question whether products produced in our factories are still relevant after leaving the factory. If they are part of a subscription service rather than bought by the end-user, they can and should be tracked and re-collected at the end-of-life for recycling, especially of rare materials. If they can be remotely monitored, serviced and updated, a substantial part of the lifetime value is created after production. Thus the relationship of the manufacturer with their products can expand substantially.
What advantage does Industry 4.0 have for small and medium companies in Germany?
Generally speaking, Industry 4.0 promises to allow for optimization between cost and flexibility. In order to reap the full benefits, we have to consider “integral cost”, as especially aspects like logistics, maintenance and service during the product lifespan, as well as recycling, should be included.
Flexibility can manifest itself in many ways, like being able to adapt production lines to rapidly changing demand and small batch sizes. In this context the notion of “batch-size 1” can be realized at different levels: from configuring standard building blocks (like when ordering a car) and personalizing software functions (like some PC manufacturers offer) to a fully individualized piece of hardware (as 3D-Printing enables). To what extent customers are willing to pay for individualization is, however, an open question.
When increased flexibility is combined with better digital interfaces between players in the manufacturing ecosystem, it can become easier to outsource activities or to fill free capacity with small batches. This could help smaller manufacturers. However, if big internet platforms bring supply and demand together efficiently, this might create substantial price pressure, as has happened in other market sectors already.
Whether Industry 4.0 will help smaller companies in Germany to deal with the expected shortage of qualified works, is also an open question. In general, digitization reduces the need for knowledge workers more than for factory workers. Robots could reduce the need for factory workers, but outside of heavy, dangerous, or monotonous tasks, human workers are often still more suitable and especially more flexible. Finally, the monitoring and steering of smart factories will require specialized staff – which is scarce.
How can German manufacturers get ready for Industry 4.0?
Established manufacturers should actively think “out-of-the-box” about how business models in their industry might change, what key assets they own and what their sustainable added value in the new business models could be – likely something different than what has made them successful until now. It is important to consider all functions and business processes integrally, as new business models are likely to impact several.
It can be helpful to start by focusing on the changing expectations of end-users and understanding what happened to totally unrelated industries that are already “digitized”. We should keep in mind that paradigm shifts often come from outside industry – so looking at what competitors and partners are doing is not sufficient.
As Industry 4.0 is largely based on smart usage of data, it is often said that “data is the new currency” – data can be highly valuable. Therefore, each company should consider what data it has or could collect, from its machines, business processes, products (in the field), customers and partners, and for whom it could be valuable. Such data should be actively collected and protected, and business models for monetization are to be developed.
Legal and regulatory aspects must be considered, also their international differences. Unlike common belief, there is no concept like legal “data ownership”. Especially when establishing digital communication with value chain partners or machine suppliers, it must be clearly defined who has what access and what rights to use certain data, also taking privacy (of factory workers) into account.
Last but not least, any Industry 4.0 implementation should be based on a solid IT-Security concept. The risks of industrial espionage and sabotage through cyberattacks are substantially increasing with digitalization of business processes. With the proper technical and organizational measures in place, this can be managed. However, this must be planned in advance, as is described in the White Paper “Managing security, safety and privacy in Smart Factories” edited by Dr. Florian von Baum and Willem Bulthuis and available on www.munichnetwork.com/2nd-smart-factory-innovation-forum/pressemeldung.html.
Industry 4.0 is clearly a broad and complex topic, and there are no “one-size-fits-all” answers to the many questions manufacturers are facing. For many companies that want to take the digital future in their own hands, it is not realistic to develop in-house expertise and insights sufficiently fast. External experts or Digital Advisory Boards therefore can be a good first step to develop a solid understanding of what the future might bring. The tough decisions, though, can´t be outsourced.