EurActiv.com

EU news and policy debates across languages

26/06/2016

Industry 4.0: The future of manufacturing is here

Innovation & Industry

Industry 4.0: The future of manufacturing is here

HUBO, a multifunctional walking humanoid robot lifts a piece of wood in front of the logo on the opening day of the 2016 World Economic Forum meeting in Davos. Switzerland, Tuesday (January 19).

[World Economic Forum/swiss-image.ch]

The European Commission is preparing an action plan for publication in April to mobilise an estimated €25 billion to harness the potential of the fourth industrial revolution, EurActiv.com has learned.

Background

The world is currently witnessing the dawn of a new industrial revolution, according to a growing number of business leaders, politicians and academics.

Huge strides were made since the first computers and electronics emerged in the 1970s, which helped develop the automation of manufacturing processes.

Now, progress made on artificial intelligence, virtual reality, advanced robotics, the Internet of Things and big data are expected to radically change not only the way we work, but also the way we live.

The speed, scope and impact of those technological developments herald a promising era of smart manufacturing, less routine jobs, customised products, more efficient cities and even better leisure experiences.

This is made possible via the widespread use of small and cheap sensors that will basically allow every physical object to be connected to the Internet. Combined with 3D printing, this will massively reduce the cost of producing any good according to consumer wishes.

The pace of the revolution is also speeding up. While more than a century passed between the birth of the steam engine and the advent of electricity, only seven decades were needed for the introduction of the computer. Now, in less than half a century, the physical and virtual worlds are being connected seamlessly.

Data as the new oil

For the first time since the outset of the industrial era, “the value is going to be in the data, not in the product itself", explains John Straw from iDisrupted, echoing growing talk that data will be the new oil of the 21st century.

This is bad news for Europe because the main data holders on the planet are mostly in the hands of US firms like Amazon, Google, Apple and Facebook. Now, they are starting to use this data to manufacture autonomous vehicles and customised products.

In Europe, the traditionally powerful industrial sector is lagging behind the digital transformation but is working hard to catch up. The result is a race between America's top-down and Europe’s bottom-up approaches.

The fourth industrial revolution could also mark the final stage of China’s emergence as the world's number one superpower. China lost its crown when Europe took off during the first industrial revolution, as the Chinese did not adopt the machines that had been developed by European entrepreneurs.

In the years to come, a stagnant European economy will have to compete with America's tech giants and the rise of China in the wild ‘winners-take-all’ reality of the digital world.

A bright future may be there for some, but inequality and volatility could also become the norm for many.

Issues

Fourth industrial revolution: Only a hype?

Since the concept of a fourth industrial revolution, or Industry 4.0, was first coined at the Hannover Fair in 2011, it has become “true hype” in the manufacturing industry.

“Hardly any conference, think tank or exhibition escapes the gravitational pull caused by the promise of a new industrial revolution,” said the Capgemini Consulting group in a recent report.

German Chancellor Angela Merkel defined Industry 4.0 as “the comprehensive transformation of the whole sphere of industrial production through the merging of digital technology and the Internet with conventional industry”. Now the product itself, suppliers, plants, distributors and consumers can be digitally connected in a highly integrated and transparent value chain.

But the hype may have reached its peak in January 2016, during the World Economic Forum in Davos. As global business and political leaders gathered in the Swiss Alps, there were few who saw the digital transformation only through rose-tinted glasses.

Deutsche Bank put it this way: “It is certainly possible that following the hype which typically surrounds such new ideas and the subsequent disillusionment there will be no-one talking about Industry 4.0 in a few years’ time.”

Davos 2016 certainly acted like a warning: Businesses and organisations need to embrace the digital transformation, otherwise they risk being crushed.

“The speed of current breakthroughs has no historical precedent,” said Klaus Schwab, founder and executive chairman of the World Economic Forum. “When compared with previous industrial revolutions, the fourth is evolving at an exponential rather than a linear pace”.

Job creation and destruction

But the revolution will not affect all economic sectors evenly. “While some areas will see fast and disruptive changes, others will change slowly and steadily,” said the Roland Berger consultancy in a report.

It's not yet clear whether the positives will outweigh the negatives.

According to the European Parliament’s Research Service, the digital revolution could reverse the de-industrialisation process seen in Europe over the last half century. A successful transition towards Industry 4.0 could help the EU reach its target of raising the share of manufacturing to 20% of the bloc's GDP by 2020, up from 16% currently, it said.

However, the massive uptake of advanced robotics makes it unlikely that Industry 4.0 will create millions of low-qualified factory jobs. On the contrary, the rise of intelligent machines could continue squeezing the middle class if no jobs are created in other sectors, where talent or the human factor are essential, like in nursing.

“We cannot say if jobs will be created or destroyed, but what is clear is that they will change,” said Peter Scherrer, Deputy General Secretary at the European Trade Union Confederation.

Serrer welcomed that routine jobs and those related with heavy and dirty industries will increasingly be taken by robots. But he underlined the importance of preserving social dialogue and protecting workers’ rights in the new industrial ecosystem. He also urged policymakers to ensure the digital transformation does not widen inequality.

In Davos, Klaus Schwab also underlined the social risks associated with the transition. “Inequality represents the greatest societal concern associated with the fourth industrial revolution,” he wrote in his curtain raiser essay. Technology, he stressed, is one of the main reasons why salaries have stagnated or even decreased in developed nations. It has also hollowed out the middle class with less education and talent.

Like the force in Star Wars

For business leaders, it is too early to say whether the changes will be for better or for worse.

“The technology is like the force in Star Wars, the results depend on how you use it,” said the CEO of Mahindra Group, Anand Mahindra, at the 2016 Davos summit.

Experts agree, however, that digitisation will optimise the whole value chain process, saving capital costs, energy and low-skill needs.

Integrated value chains can speed up the manufacturing process by around 120% in terms of time to deliver orders and by 70% in time to get the products to the market, according to the Parliament study. The same study foresees productivity gains of 20% through various effects and a cutting of downtime in factories by half. Overall, the top 100 European manufacturers could save around €160 billion thanks to improved error-correcting systems and the ability to adjust production in real time.

But doubts are being cast about the cost-cutting potential of Industry 4.0. Deutsche Bank underlined that it is “certainly possible” that the total savings could be “negligible” for numerous firms. “There is even the danger that the economic efficiency may decline overall, at least in the short term”. Besides, companies will have to make “significant investments” to digitise their processes, which would be challenging for small and medium sized companies.

The European Parliament study estimates that €40 billion in investments will be needed every year in Germany alone to make Industry 4.0 a reality. In Europe, the figure could be as much as €140 billion and many of these technologies are still five to ten years away from an evident payoff, the Gartner Group said in 2014, warning that new business models have yet to emerge.

Despite those warnings, companies and governments are enthusiastically embarking on the crusade to conquer the promised digital land. The Boston Consulting Group estimates that, in Germany, the fourth industrial revolution could contribute 1% per year to the GDP over the next decade, creating up to 390,000 jobs.

Technology, ‘agile’ management and regulation

A handful of technologies will drive Industry 4.0:

  • Cheap sensors will connect every object to the digital world, laying the bedrock of the Internet of Things.
  • Artificial intelligence will generate self-learning machines and even robots capable of teaching one another.
  • The next generation of mobile internet (5G) will facilitate the transfer of immense data at the speed of light, supporting up to 100 devices per square metre.
  • Supercomputers, big data analysis and cloud computing will allow the collection of vast quantities of data to be exploited.
  • Augmented reality, virtual reality and 3D printing will improve the production process and also our leisure experiences.

But these engines of change will only unleash their full potential if there is a “shared vision” between governments and the business sector. “All parties need to align and move in the same direction, with an open approach, promoting entrepreneurship, risk taking, innovation and agility,” stressed Roland Berger Consulting.

The need to embrace agile governance and management processes does not only affect the private sector, but also public authorities. As Klaus Schwab warned, “the ability of government systems and public authorities to adapt will determine their survival”.

“Current systems of public policy and decision-making evolved alongside the Second Industrial revolution, when decision-makers had time to study a specific issue and develop the necessary response or appropriate regulatory framework,” he explained.

But this rigid top-down approach is no longer valid in the hyper-connected world of Industry 4.0, where lower parts of the value chain are empowered (bottom-up), mirroring the agile integration of the manufacturing process.

The systemic transformation of industrial production processes could also force us to rethink institutions which surged as a response to the Second Industrial Revolution, notably the welfare state.

As intermittent work is expected to “increasingly prevail”, the task of the decision-makers of this century will be to find ways of enabling workers to have “rich, full and successful lives even as their careers undergo great volatility”, said Nicolas Colin and Bruno Palier in an essay last August.

In the digital context, Denmark’s ‘flexicurity’ model of deregulated labour markets and robust protections offer the best option, the authors noted.

A European plan for the next revolution

But is Europe ready for such radical societal change?

For Roland Berger, the EU is “in better shape to embrace the new industrial world than many people think”, citing the continent's “solid” industrial base and good position in terms of equipment, knowledge, expertise and networks.

However, policymakers appear more cautious. In an interview with EurActiv last October, the EU Commissioner for Innovation Carlos Moedas, pointed out that countries with a traditionally robust industry “are not making the merge with the digital world”.

While US firms are successfully moving from the digital to the physical world, Moedas urged European companies to go from traditional to digital, saying “we cannot lose this transition”.

VDMA, the German association of mechanical engineering industry, is concerned about the lack of an integrated approach from EU authorities in reviewing single market rules applying to physical and digital goods and services. In addition, it says Europe lacks clear rules for the use of industrial data.

The risk is that “Europe will fail to properly set the political framework for the changes ahead, and wastes its opportunity to boost production in the EU,” VDMA warned.

The handling of industry data is of particular importance because data will gradually become more important than the products themselves, according to the consultant John Straw. Given that global data giants are mainly US firms like Google, Amazon, Facebook or Apple, European efforts should build on the decades of experience gathered in the automotive, health, media, transport or energy sectors; the European Commission and experts agree.

The Commission acknowledges that competition from non-EU players, in particular data platforms, is one of Europe's key challenges. But it is far from being the only one, the EU executive noted in a preparatory document for its upcoming action plan to digitise European industry.

The executive also mentioned the lack of a digital single market, low level of investment in research and development compared to other regions, a fragmented standards landscape and lack of inter-operable solutions as well as regulatory gaps. It also underlined the need to enhance digital skills among the European workforce, and the slowness and disparities in adopting digital solutions across industries and regions. Less than 2% of SMEs use advanced digital technologies.

Action plan

To address those shortcomings, the European Commission is expected to unveil an action plan on 6 April to unify and galvanise member states’ efforts towards the fourth industrial revolution.

To that end, the Commission plans to allocate €5 billion over the next five years, while the industry is expected to contribute around €18 billion, a Commission official told EurActiv. The Commission will present three communications as part of its action plan:

  • A horizontal paper setting the tone of the plan;
  • A communication on standardisation, and
  • A communication on cloud computing.

The package will include two staff working documents on high performance computing and on the Internet of Things, outlining the challenges and opportunities in those fields.

The overall aim is to put in place all the necessary building blocks for the next industrial phase so that European firms remain in the driving seat. To that end, the executive wants to encourage regional innovation hubs and industrial platforms to increase innovation capacity, a Commission official explained.

Given that the main effort should come from the private sector, the executive will pay special attention to public-private partnerships, like the one already in place for developing the next generation of mobile Internet networks (5G).

According to the European Commission, these public-private platforms could help bridge the physical and the digital worlds in industries where European firms are strongest — including the automotive sector, avionics, energy, agri-food, manufacturing or chemical processing.

But the most important element, the EU official acknowledged, is the development of cross-sectoral IT platforms — built on the Internet of Things, big data, super-computing and cyber-physical systems — to maximise value creation across all industries and their respective value chains.

The Commission strategy will also identify three legislative gaps that the EU should address in the months to come to count with a legal framework fit-for-purpose.

  • The first is the issue of data ownership, data exploitation and the free flow of data. The Commission will set its orientation in a communication due in April 2016, to be completed by the end of the year in a separated piece.
  • The second is the liability and safety aspects related to the Internet of Things or autonomous objects, such as driver-less cars and robotics. In this regard, the executive’s intention is not to “over-regulate”, the official said, but to adapt existing EU laws to the next generation of autonomous objects. The bottom line is that “the more autonomous systems are, the less they can be considered simple tools in the hands of other actors (the manufacturer, the owner, the user…)”, a Commission draft document said. A proposal on this is expected by the end of the year.
  • Finally, the Commission intends to address the issue of security in the context of the Internet of things in a separate communication expected in June.

A global race for digital talent

Given Europe's need to catch-up in the digital race, the executive will ask member states to better align their national strategies with the EU action plan. This would be of particular importance in the realm of digital industrial platforms and related standardisation processes.

Germany, France, the United Kingdom, The Netherlands, Sweden and Spain have all presented national plans for the digitisation of their industry, and Italy is expected to announce its own plan in the next few months.

But Germany stands out as the most advanced country. According to Deutsche Bank, Germany creates the lion’s share of industrial value added in Europe, representing 31% of the EU's total. Italy (13%), France (10%), the UK (10%) and Spain (7%) appear far behind. And the potential for digital upgrading is “particularly pronounced” in the German economy, it said.

A report sponsored by the German government also concluded that Germany is “uniquely positioned to tap into the potential” of the fourth industrial revolution. “Germany has one of the most competitive manufacturing industries in the world and is a global leader in the manufacturing equipment sector,” the report noted.

Competition will be fierce, however, especially from the US and Asia.

The quasi-monopolistic position of firms like Google and Facebook and their access to massive amounts of data place the US in a dominant position. However, the country faces similar challenges to those seen in Europe, such as the de-industrialisation of its economy and digital skills shortage.

The situation is “especially urgent” in Silicon Valley, where there are 13,700 computer science jobs opening but only 416 master’s degrees in computer science granted this year, according to P.K. Agarwal, the regional dean and CEO of Northeastern University-Silicon Valley. For biotechnology, there were 8,200 job openings and only 22 master’s degrees granted.

In Europe, the labour market could be short of as many as 825,000 ICT professionals by 2020, according to the European Parliament’s report.

“We must align industry needs and educational opportunities, both in the near term for displaced workers as well as for current and future generations of students,” Agarwal said. Otherwise, he warned that America could lose the “very building blocks of our nation’s innovation toehold”.

Meanwhile, Asia is also gearing up for the digital transformation.

According to Roland Berger, Japan is “probably the most advanced country” in this field, especially in robotics and automation. The nation sees the introduction of robotics as a response to the rapid ageing of its population. The country is expected to lose 40 million citizens by 2050.

China, for its part, has embarked on a deeper process of turning its export-led and resource intensive economy into a more sustainable, consumer-oriented one. And it is doing so while heading towards Industry 4.0. One of Beijing's initiatives has been to set up a 3D Printing Technology Industry Alliance.

All global powers want to take the lead in a revolution that is expected to change “not only what we do but also who we are,” Klaus Schwab wrote.

Europe is only starting to speak up on how it sees this future. But action will speak louder than words.

Positions

The European Commission’s action plan for Digitising European Industry builds on a vision outlined by Günter Oettinger, the EU commissioner for the Digital Agenda, at the Hannover Fair in April 2015. He argued that an EU wide strategy for digitisation, building on and complementing national initiatives, can ensure “scale”, mobilise actors with value chains spreading across Europe and support interoperability and standardisation.

The European Parliament’s Research Centre noted that industrial transformation faces major obstacles in Europe. “The need for investment, changing business models, data issues, legal questions of liability and intellectual property, standards, and skills mismatches are among the challenges that must be met if benefits are to be gained from new manufacturing and industrial technologies.”

The Parliament also pointed out that Industry 4.0 “is being driven largely by equipment producers rather than customer demand.”

In order to succeed in the next industrial revolution, a report sponsored by the German Ministry of Education and Research called for a dual strategy:

“Germany’s manufacturing equipment industry should seek to maintain its global market leadership by consistently integrating information and communication technology into its traditional high-tech strategies so that it can become the leading supplier of smart manufacturing technologies. At the same time, it will be necessary to create and serve new leading markets for cyber-physical technologies and products.”

Meanwhile, the UK’s High Value Manufacturing Catapult programme wants “to significantly grow” the contribution of the manufacturing sector to the UK economy. The initiative combines seven centres of industrial innovation to offer companies of all sizes access to:

  • Capability spanning basic raw materials to product assembly processes;
  • World-class facilities and skills to scale-up and prove-out high value manufacturing processes;
  • A network of leading suppliers who contribute to key UK industry supply chains;
  • A partnership between industry, government and research in a shared goal to make the UK an attractive place to invest in manufacturing.

The idea behind France’s Industry of the Future programme unveiled in May 2015, is “to help companies transform their business models, organisational methods and design and marketing approaches in a world where digital tools are breaking down barriers between industry and services". The plan is built on five pillars:

  • Develop cutting-edge technologies;
  • Help companies adapt to the new paradigm;
  • Employee training;
  • Strengthen international cooperation around standards, and
  • Promoting the French industry of the future.

In a report published in 2014, Capgemini Consulting pointed out that the next industrial revolution “will force manufacturers to rethink how to actually create their value, i.e. rethink the back-end of their business models.” It urges corporate leaders to decide which fundamental drivers they want to base their business in the future:

  • An innovation-driven one, based on a strong partner network and Smart Innovation processes, whilst outsourcing major physical production processes?
  • An extremely agile production focusing on customised products in batch sizes of one, enabled by Smart Factories?
  • An efficiency-driven one, with low prices and market-beating lead times, made possible by a Smart Supply Chain?
  • Or a service-based one, transforming the manufactured product to serve only as the source for valuable data and the door-opener to a wealth of Smart Services around it which form the actual value proposition?

VDMA, the German engineering association, lists five principles that should be taken into account when preparing an Industry 4.0 strategy:

  • Cyber-physical and autonomous systems cannot be allowed to pose any risk to people or property;
  • The systems need to be available and reliable;
  • Business secrets, intellectual property and investment in innovation need to be protected;
  • Identities and responsibilities need to be obvious online, too;
  • Legal certainty, fair rules and opportunities to access technologies and markets are essential.

Jim Moffat, Managing Director and Global Consulting Business Leader at Deloitte Consulting, believes that “Europe has been slower to embrace the digital transformation”. But Europe is still “well positioned” to take advantage of the digital revolution, not only because of its strong industrial base but also because of its “huge” talent base and strong education system.

“Now what is needed in Europe is to create the entrepreneurial culture that spurs innovation within companies,” similar to what's happening in the US, Moffat told EurActiv during the 2016 World Economic Forum in Davos. In Europe, only a few companies have started to realise the “profound impact” that these technologies will have on their business. “I’ve seen more of that embracement in Asia-Pacific than in Europe," he warned.

Unilever’s Chief Supply Chain Officer, Pier Luigi Sigismondi, believes “a lot has been said and not necessarily been done” around Industry 4.0. Speaking to EurActiv in Davos, he said Unilever was “very active” on big data to make its supply chain more efficient. “There is a lot of telemetric and advanced information that we are now monitoring globally in all our industrial network that allow us to understand the consumption of natural resources like water, electricity that has deliver significant amount of savings,” he explained.

“Consumers, on the other end, are also expecting more information about the products, such as the traceability of the ingredients, if they are good for them, or even the name of the farmer," he said. For a company that produces billions of units per year, this technological revolution could allow Unilever to adapt its products at small scale and prepare them almost on demand.

But contrary to mechanical and machine sector, he considered that Industry 4.0 would not be a “revolution” for a consumer goods company like Unilever. Rather, he sees it as just another step towards greater efficiency and customisation.

What will happen to the job market is a more pressing concern for Jyrki Raina, secretary general of IndustriAll Global Union, representing 40 millions workers in industries potentially affected by Industry 4.0. Raina expects that new highly-qualified jobs will be created, some of which do not exist today, in areas such as planification, configuration or maintenance of new manufacturing processes.

At the same time, he said “there are some jobs that simply will disappear, like has been the case over the three previous industrial revolutions". But he resisted to paint a gloomy scenario, telling EurActiv at the Davos Forum that “change is a natural part of our industrial life".

"But one thing is clear, it requires active measures by the national governments, and I am not seeing that today,” Raina said, underlining that significant training efforts and flexible working mechanisms need to be put in place. “It is becoming clearer and clearer that, in the future, people will not work in the same job their whole life as they did in the past.” The “danger”, he said, is that if people feel abandoned by decision-makers, “that can lead to radicalisation and more social instability".

Timeline

  • 2011: Industry 4.0 term is used for the first time during the Hannover Fair.
  • 2012: European Commission sets target to increase the share of industry from 16% to 20% of EU GDP by 2020.
  • Oct. 2012: Expert working group presents recommendations on Industry 4.0 to the German government.
  • April 2015: Commissioner Günter Oettinger hints at EU action plan on digitising European industry during Hannover Fair.
  • June 2015: 1st roundtable hosted by Commissioner Oettinger on Industry 4.0, with representatives of national initiatives.
  • September 2015: 2nd roundtable with industry and representatives of national initiatives.
  • December 2015: 3rd roundtable, where Commission outlined the pillars of its action plan for digitising Industry.
  • January 2016: Mastering the fourth industrial revolution is the overarching topic of the World Economic Forum in Davos.
  • 6April: 2016: European Commission expected to unveil Industry 4.0 package, comprising three communications and two staff working documents.
  • 25-29 April: Hannover Fair.
  • June 2016: The Commission will present a proposal to improve security in the context of Internet of Things.
  • End of 2016: The EU executive will adapt existing laws to address regulatory gaps in regards to liability and safety in the context of the Internet of Things and advanced robotics.