Bridges vol. 42, December 2014 / OpEds & Commentaries
Industry 4.0 Holds the Key to Modern Manufacturing
By Stephen Ezell, Senior Analyst, Information Technology and Innovation Foundation
This article was written in conjunction with the Center for Data Innovation, a nonprofit, nonpartisan, public policy think tank based in Washington, DC studying the intersection of data, technology, and public policy.
Modern manufacturing processes rely increasingly on sophisticated information and communication technology (ICT) products and services. As noted in a recent study, Emerging Trends in Global Advanced Manufacturing, by the IDA Science and Technology Policy Institute: “[M]odern manufacturers rely less on labor-intensive mechanical processes and more on sophisticated information-technology-intensive processes.” In fact, approximately 90 percent of all industrial manufacturing processes are already supported by ICTs. The term “Industry 4.0” has emerged to describe the smart factories, intelligent machines, and networked processes that increasingly define the modern, data-driven “smart manufacturing” process that market-intelligence firm IDC estimates will create $371 billion in net global value over the next four years alone. This article explores the evolution of Industry 4.0, describes the benefits that enterprises can and have realized from introducing Industry 4.0-based advanced manufacturing techniques, and examines how a range of nations are fiercely competing for Industry 4.0 leadership, in part through significant government investment in advanced manufacturing technologies.
As observed in a report, Recommendations for Implementing the Strategic Initiative INDUSTRIE 4.0, by the German National Academy of Science and Engineering, manufacturing has evolved through four stages of innovation. The First Industrial Revolution, beginning at the end of the 18th century, saw the introduction of water- and steam-powered mechanical production facilities. Almost a century later in the late 19th century, the introduction of electricity-powered mass production based on division of labor and the assembly line concept heralded the Second Industrial Revolution. Today, the Third Industrial Revolution – which started in the 1970s and leveraged electronics and IT systems to further automate manufacturing – has given way to the Fourth Industrial Revolution, the so-called “Industry 4.0,” based on convergence of the physical and the virtual worlds (e.g., cyberspace) in the form of Cyber-Physical Systems.
In other words, Industry 4.0 merges the existing vast industrial infrastructure with wireless communications technologies, remote sensing, the Internet of Things (IoT), and cloud computing technologies to create a direct, real-time interface between the virtual and physical worlds. At this interface, Cyber-Physical Systems including smart machines, robots, storage systems, and production facilities capable of autonomously exchanging information, triggering actions, and controlling each other independently, take advantage of the fact that more than 50 billion devices will be networked with each other within the decade. On the modern advanced manufacturing floor, these automated, intelligent systems will leverage sensor data communicated by wireless technologies to control flows of materials, products, and information, thus transforming once-rigid production processes into modular, flexible systems that increase efficiency, enable innovation, and conserve resources. As Robert Hardt, president and CEO of Siemens Canada, explains: “The basis for Industry 4.0 is the availability of all relevant information in real time, through interconnection of all instances of value creation, and the capacity to derive from this data an optimal value creation flow at any point in time.”
And as ITIF’s Center for Data Innovation notes in Data is the Key to the Factory of the Future, the key to advanced manufacturing is to make better use of data analytics, particularly because they can help streamline the design process, improve factory operations, and help manufacturers better manage risks in their supply chains. As the ITIF report notes, data plays an important role in supporting manufacturing innovation from the very beginning of a product’s life cycle. By helping inform the design process before any physical product is created, data-driven design can cut costs and ensure that final products are better attuned to customer preferences. For example, Autodesk’s computer-aided design software has been popular for decades, but the company is now working on an even more data-driven approach with its algorithmically generated design research initiative called Project Dreamcatcher. Dreamcatcher enables designers to generate designs based on a list of material and performance requirements, which can then be additively manufactured with a high degree of precision. Similarly, vehicle manufacturers such as Audi, BMW, McLaren, and Volvo have taken a simulation-based approach, with McLaren conducting performance analysis on its designs before creating a physical prototype, and Volvo integrating customer data to forecast whether a particular design or feature will appeal to its customers.
Industry 4.0 techniques further leverage data analytics to bring significant efficiencies to manufacturing operations. Manufacturers are using these techniques to increase the productivity and efficiency of manufacturing plant equipment, to predictively model equipment failure rates, to reduce final product defects, to streamline inventory management, to identify energy-inefficient components, and even to optimize factory floor space, among many other applications. For instance, Raytheon famously keeps track of how many times a screw has been turned in its factories. Ford has embedded sensors on virtually every piece of production equipment at its River Rouge factory near Detroit, Michigan, as it seeks efficiencies on the manufacturing floor. Merck improved one of its vaccines by conducting 15 billion calculations to determine what environmental and process factors influenced the quality of the final product. And Intel uses predictive modeling on data to anticipate failures, prioritize inspections, and cut monitoring costs at its chip-manufacturing plants, saving the company $3 million in manufacturing costs in 2012.
Industry 4.0 techniques also help manufacturers manage their supply chains more effectively. The interconnected nature of industrial supply chains makes them hotbeds for risk, and more information can mean the difference between a recall and a successful shipment. For example, GE Oil and Gas now uses a cloud-based supply chain data platform to manage its materials, equipment, and services. The real-time system, now deployed on five continents, was created to minimize the high costs of downtime at oil fields. HP integrates network analysis into its supply chain monitoring, an approach that also includes data visualization, and has cut the time required for supply chain optimization projects by up to 50 percent.
While there are many compelling examples of US enterprises using Industry 4.0 manufacturing techniques, it is in Germany, which originally conceptualized the Industry 4.0 framework, that the manufacturing sector has embraced Industry 4.0 most strongly. In fact, a recent PWC report, Industrie 4.0 Chancen und Herausforderungender vierten industriellen Revolution, found that 85 percent of German manufacturers surveyed planned to implement Industry 4.0 solutions over the next five years. Moreover, the report found that from 2015 through 2020, German industry will invest €40 billion ($50 billion) annually in Industry 4.0 applications. The German industrial firms surveyed said they intended to invest, on average, 3.3 percent of their revenues in Industry 4.0 solutions over that time frame, with those investments accounting for nearly 50 percent of their planned capital investments. The report further notes that, within five years, over 80 percent of German manufacturers will have digitalized their value chains, with those digitalized products and services expected to earn an additional €30 billion ($37 billion) annually for German industry. Likewise, a recent Deutsche Bank report on Industry 4.0 found a similarly substantial impact, estimating that: “Thanks to Industry 4.0, German gross value added could well be boosted by a cumulative €267 billion [$332 billion] by 2025.” More broadly, Germany’s National Academy of Science and Engineering estimates that this new technological revolution will lead to a 30 percent increase in German industrial productivity.
The PWC report finds that German manufacturers are already reaping significant benefits from their Industry 4.0 investments, with those investments leading to higher production and an 18 percent increase in resource efficiency. German manufacturers that have already extensively digitalized their product offerings have demonstrated above-average growth over the last three years, with half of the surveyed companies also expecting two-digit growth due to product and service portfolio digitalization. Every fifth company surveyed predicted a revenue increase of at least 20 percent over the next five years.
With Industry 4.0 so clearly the wave of the future, governments around the world are scrambling to boost their investments in advanced manufacturing technologies and processes. In 2014, the Austrian Federal Ministry for Transport, Innovation and Technology (BMVIT) announced it would dedicate €250 million ($300 million) for R&D projects associated with Industry 4.0. The German government recently pledged €200 million ($250 million) to help industry associations, research institutes, and companies create an implementation strategy for Industry 4.0. The British government will invest £140 million ($219 million) over the next six years in its High-Value Manufacturing Catapult network of seven advanced manufacturing technology institutes, including the Manufacturing Technology Centre (MTC), which focuses on advanced manufacturing technologies. The Horizon 2020 program of the European Union (EU) plans to allocate €17B ($23B) for “leadership in deploying six key enabling and industrial technologies,” including advanced manufacturing, through 2020. This builds on the EU’s “Factories of the Future” program, which received €230 ($267 million) of funding in 2013.
While these investments are impressive, the strategy consultancy RolandBerger estimates in its report INDUSTRY 4.0: The new industrial revolution – How Europe will succeed that for Europe to assume a leading role in Industry 4.0, it will have to invest €90 billion ($112 billion) a year over the next 15 years, for a total of €1,350 billion ($1.677 billion). So, to date, Europe’s investments in Industry 4.0 from government and business are significant but not enough. In part, that’s because other countries are also making significant investments in Industry 4.0. For instance, as part of its Strategic and Emerging Industries (SEI) initiative, China plans to invest €1.2 trillion ($1.5 trillion) in modernizing and transforming its technology-based industries over the next five years (to 2020). While that investment will cover seven key “strategic” sectors – high-end equipment manufacturing, new energy vehicles, new materials, biotechnology, next-generation ICT, renewable energy, and environmental protection – it calls for investment in advanced manufacturing processes across all these sectors.
Finally, as ITIF highlighted at an early December event marking the release of The Advanced Manufacturing Partnership’s report on Accelerating US Advanced Manufacturing, the United States is also focused on investing in Industry 4.0. Specifically, on December 11, 2014, the Obama Administration announced its intent to establish a Smart Manufacturing Innovation Institute (SMII). The SMII intends to develop, demonstrate, and transition to industry advanced sensing, instrumentation, monitoring, control, and process optimization, using advanced hardware and software platforms, as well as real-time and predictive modeling and simulation technologies for industrial automation. The new institute will receive a federal investment of $70 million, which will be matched by at least $70 million in private investments. The SMII will become the sixth Institute of Manufacturing Innovation launched as part of America’s National Network for Manufacturing Innovation – perhaps the most significant technology policy achievement of the Obama Administration – joining other institutes focused on additive manufacturing, next-generation power electronics, lightweight composites, photonics, digital manufacturing, and design innovation.
In conclusion, Industry 4.0 holds the key to modern advanced manufacturing processes. It is imperative for businesses and governments alike to embrace the Industry 4.0 revolution and commit to the necessary investments in both research and technology implementation to make Industry 4.0 a reality for the manufacturing ecosystems of their nations.
Stephen Ezell is a senior analyst with the Information Technology and Innovation Foundation (ITIF), a Washington, DC-based technology and economic policy think tank, where he focuses on science, technology, innovation policy, and trade issues. He is the coauthor, with Dr. Robert Atkinson, of Innovation Economics: The Race for Global Advantage (Yale, September 2012). Ezell came to ITIF from Peer Insight, an innovation research and consulting firm he cofounded in 2003 to study the practice of innovation in services industries. He holds a B.S. from the School of Foreign Service at Georgetown University, with an Honors Certificate from Georgetown’s Landegger International Business Diplomacy program.