The next industrial revolution

Impact Lab

The designer leggings manufacturer, Bombsheller, based in Seattle, Washington, claims to be the world’s first fully-programmable clothes factory.  

Patterns uploaded by designers (such as the leggings pictured left) go on sale online within one hour and are delivered the next day.  

Welcome to the future of factories, or Industry 4.0, the fourth industrial revolution. The first version, which took place at the end of the 18th century, introduced mechanical production powered by water and steam; the second started at the beginning of the 20th century with the introduction of mass production powered by electrical energy; the third began in the 1970s with electronics and IT for the customization of production. The fourth introduces cyber-physical systems that blur the line between man and machine and dramatically increase manufacturing efficiency, making it possible to create bespoke products for the masses.

Bombsheller is only a few months old and uses micro-production technology to make only one customized product — leggings — so no one is expecting it to overtake Zara or H&M anytime soon. But the fact that it can make customized products from quality fabric purchased in Italy and have seamstresses in Seattle turn them around in a day at a price within reach for many people (the leggings sell for between $75 and $90, which includes a royalty for the artist) is proof that Industry 4.0 — one of the themes at the DLD conference in Munich this year — is no longer a vision of some far-off future.
It is already happening and is expected to pick up pace over the next few years. So the apparel industry — and manufacturers in other sectors — had better start copying Bombsheller or snap up other start-ups to learn how it’s done, says Holman.

“There is no way an American Apparel or Zara can compete with Bombsheller on leggings — we are never out of stock and it doesn’t cost us more to make them to order,” says Holman. “They will never be able to do that in stores if they are making a zillion of something and sell the same thing.”

Bombsheller is Holman’s way of testing his thesis in a commercial environment on his own dime. Going forward, robots will increasingly make custom orders for people in the color, shape and size they want, he says.

That’s radically different from how things are manufactured right now. But soon, “virtually no manufacturing company anywhere in the world will be unaffected by Industry 4.0 — it will impact their corporate strategies and fundamentally change the way they operate. It must be part of the CEO agenda,” says Volkmar Koch, a partner in the Frankfurt office of Strategy& (formerly Booz & Company), which specializes in Industry 4.0.

The main drivers of this new industrial revolution are changes in consumers’ expectations — they want customizable products delivered in Internet time — as well as the convergence of new technologies such as the Internet of Things, collaborative robotics, 3D printing and the Cloud, together with the emergence of new business models, according to the more than a half a dozen people interviewed.

A Chance To Steal A March On China

In the near future pundits interviewed say products, people and machine will communicate with each other as in a social network. To remain competitive factories will have to: accommodate custom designs and have the ability to make rapid changes to the products being produced; use the Internet of Things and other technologies to digitize the entire process, reducing time to market; integrate their supplier and production networks using Internet-based product lifecycle management, so that employees throughout the network can collaborate; have semi-autonomous robots working alongside humans to accelerate production while ensuring quality; and analyze data collected about customers to offer a plethora of new digital services.

If companies get it right there is a chance to steal a march on China and bring manufacturing back to the West. That’s why Industry 4.0 is capturing the attention of European governments. “In Europe, the unemployment rate is running near the Euro-era high of 12% even though the European Central Bank also cut interest rates to zero,” explains author Richard Koo in his book The Escape from Balance Sheet Recession and the QE Trap: A Hazardous Road for the World Economy. “The picture for output is even bleaker. Although German industrial production has recovered to the levels of 2007, output in France and Spain is no greater than it was in 1994 and in Italy production has fallen back to 1987 levels. United Kingdom industrial production is no higher than it was in 1992… Some have dubbed this situation ‘secular stagnation.’”

It is expected that Günther Oettinger, the EU Commissioner for the Digital Economy and Society, a scheduled speaker at DLD15, “will bring some attention to Industry 4.0 at the European level,” says Reinhard Geissbauer, a partner at PwC Management Consulting in Munich who specializes in Industry 4.0 and the digitalization of the value chains of industrial and tech companies.

While initiatives have already been launched in individual member states such as the UK, which hopes that the digitization of factories can bring back a lost manufacturing base, Germany is placing a particularly strong emphasis on Industry 4.0 for a different reason: it can’t afford to lose the one it has. “The manufacturing sector is the backbone of the German economy,” says Geissbauer.

So it comes as no surprise that German companies are gearing up to make massive investments. An October 2014 survey jointly conducted by Strategy& and PwC of some 235 industrial companies headquartered in Germany found that Industry 4.0 technology will account for more than 50% of planned capital investments for the next five years.
That translates into a total investment by German industry of an eye popping €40 billion in Industry 4.0 technology every year between 2015 and 2020. If the rest of Europe follows suit at the same pace, investments in Industry 4.0 could be as high as €140 billion per annum, the report says.

Only 20% Of Germany’s Industry Has Digitized

Companies like German car-maker BMW and semiconductor manufacturer Infineon Technologies have already started implementing some Industry 4.0 technologies. For example, BMW is using 3D printing in its Munich plant to make flexible finger “cots” which protect workers against excess strain on their thumb joints while carrying out certain assembly jobs.

Still, it is early days. Today only one-fifth of Germany’s industrial companies have completely digitized their key processes along the value chain. But by 2020 85% expect to have implemented Industry 4.0 technology in all important business divisions, according to the Strategy& and PwC survey. In the survey the 235 companies were asked to estimate productivity gains from Industry 4.0 technologies over the next five years; 18% was the average. What’s more, the digitization and interconnection of products and services promises to allow companies to offer new services for their clients, which the report says could bring in significant new revenues.

Half of the German companies surveyed anticipate double-digit growth in the next five years due to the intensified digitization of their product portfolios. One in five said they expect sales to rise by more than 20% over the next five years. In total this amounts to an average incremental sales increase of 2.5% per annum. Adding up all industrial companies in the five core industry sectors — manufacturing and engineering, automotive, process, electronics and electrical systems, and information and communications sectors — this is equivalent to an annual sales potential of more than €30 billion per year in Germany alone and €110 billion annually for the European industry sector, the report says. It says the optimism is based on the fact that companies that have already extensively digitized their product portfolio have grown above average in the past three years.

Of course, every company has to justify huge capital expenditures by telling shareholders that it will reap efficiency gains and add to the bottom line. It is too soon to know whether this will really be the case with Industry 4.0 investments, says Markus Löffler, director of the Stuttgart office of McKinsey & Company, who specializes in digital transformation of big corporates. “Traditional large industrial companies, such as many German manufacturing firms, are still not doing enough to prepare for Industry 4.0.”

“The awareness is high enough now but actual actions are not fast enough. One aspect that is being underestimated [by Germany’s largest companies] is cultural change and change in behavior in management styles and methods. That aspect is not looked at systemically because managers don’t understand that this is a major driver of innovation.”

A massive redistribution of value

It is not the Mittelstand (Germany’s mid-sized manufacturers that have underpinned the country’s emergence from the financial crisis) which are worried the most but the larger corporations and “rightly so,” says Löffler. “If you are afraid of Silicon Valley innovators you have to worry more about your ability to innovate if you are on the board of a big company than if you are aMittelstand company.”

That is because mid-sized companies are generally more entrepreneurial and Industry 4.0 requires companies to be not only nimble but willing to change business processes and company culture, he says.

“What is sure is that there will be a massive redistribution of value,” says Löffler.
“There will be ton of opportunities and also lots of threats. The Internet giants have huge innovation power and super-deep pockets. They are really scary attackers so they [big German companies] are right to watch that carefully.”

Take the automotive sector. Its engineering quality has made the German automotive industry the global frontrunner but “boundaries are very much blurring, resulting in competition across industries,” says Löffler. “In the connected car who owns the customers?”

Driverless cars made by the likes of Google may one day be given away for free in exchange for access to the users’ data, says PwC’s Geissbauer. “Whoever owns the data owns the customer so the fear is that actual manufacturers will become irrelevant.”

Net Neutrality and Data Security

Fears about U.S. internet giants dominating traditional industries — such as automotive — are helping color discussions in Germany about net neutrality — the requirement on Internet Service Providers (ISPs) that all internet traffic should be treated equally.

In December, German chancellor Angela Merkel raised eyebrows when she said the government should consider allowing telecom operators to offer “special services” at a higher speed.

In an internal position paper Deutsche Telekom drafted last year for talks with politicians, the German telecom giant argued for fighting over-the-top or OTT companies like Google and Facebook in order to help Europe “regain a leading position,” according to a December Wall Street Journal blog posting. “Net neutrality the way it has been sold to the public is, in truth, the privileging of American companies,” Telekom spokesman Philipp Blank said in an interview with the Journal. (Deutsche Telekom declined to be interviewed by Informilo for this story.)

To successfully establish Industry 4.0 systems stable Internet connectivity and sufficient bandwidth are necessary, says Thomas Kaufmann, Infineon Technologies Vice President Division Automotive and the company’s representative to the German industry association Plattform Industrie 4.0.

Once manufacturers start streaming huge amounts of critical data throughout their supply chain they can’t fight for bandwidth with “their neighbor who is home watching a movie or people talking on Skype,” he says. “There has got to be a cascading quality of service to make sure manufacturing data is not interrupted by some kids doing online gaming. Down the road we have to start thinking about securing a certain quality of service.”

Success Dependent On Data Security

Deutsche Telekom has argued publicly that this would require more investment in the physical infrastructure for connectivity, and that it should be able to charge more than it is currently permitted.

The success of Industry 4.0 is also dependent on the security of the data, says Infineon’s Kaufmann. Streams of highly-valuable data have to be protected against unauthorized use by third parties, he says.

Infineon has teamed with Deutsche Telekom and other German companies to develop a “made-in-Germany” end-to-end “communications solution” aimed at small and medium-sized manufacturers. The security technology, based on Infineon security chips, was demonstrated at a Hamburg event called Nationaler IT-Gipfel 2014, attended by Merkel and Infineon CEO Reinhard Ploss, a scheduled speaker at DLD 2015.

The German press has noted that with Chancellor Merkel’s past experience and suspicions of having her cell phone calls monitored, without her knowledge or consent, by the United States National Security Agency, the idea of secure communications totally developed in Germany is a welcome one.

The demonstration showed how security chips can be used to authenticate people and communication components and to initiate a secured channel. The technology is expected to be brought to market in 2015 by Deutsche Telekom and the other partners.

Factory automation will also bring advances in robotics. In this new world, which blends cyberspace with the physical world, humans are going to have to get used to working alongside robots. Infineon Technologies is testing collaborative manufacturing — safely putting robots and human workers on the shop floor at the same time, at plants in Dresden and in Villach, Austria, says Kaufmann. The pilot programs are using specialty robots made by Kuka Robotic. And at BMW’s Spartanburg, South Carolina, plant collaborative robots are already working side-by-side with assembly workers — without a safety fence — on door assembly.

Winners Will Be Those Who Understand The Whole Business System

Factories — like robots — will have to be ready to constantly switch what they are doing — if they want to remain competitive.

“One thing I am convinced of is the whole Industry 4.0 transformation takes away a major part of the competitive advantage of China because intelligence and knowhow become more important than sheer cost advantage,” says McKinsey’s Löffler. “This gives North America and Europe the opportunity to reintegrate the value chain and get back in the game. There is a clear opportunity for the Old World to regain market share.”
But success is not guaranteed, says Löffler. His advice to CEOs?

“Be ready for failure. This new world of factory automation will require agility and trial and error, a different management system and a different way of investing. The question is how do you invest smartly and in a balanced way instead of investing in technology solutions and forgetting about changing the management or the connection between manufacturing and the whole supply chain?

“The winners will be those who understand the whole business system and then invest in relevant areas and not over-invest in tech.”