Industry 4.0 – The next revolution in the industrial sector

We are in the midst of the so-called “4th Industrial Revolution”, named Industry 4.0 – after steam engine, mass production and automation, today it is the digitization, which completely changed the way industries work. But are the companies ready for it? Do they use digitalization and networking actively to increase their productivity or do they run behind the development? What should policy makers do to support the process supportive? Georg Kube, Global Vice President, Industrial Machinery and Components Industry, SAP and Thomas Rinn, Partner, Roland Berger Strategy Consultants talked about this and set up interesting theories.

Industry 4.0 is a concept for the future, but it is also already reality to a certain degree. How much digitization and networking of the real and digital worlds is already taking place in the industrial sector?

Georg Kube: The Industry 4.0 concept is based on the idea of bringing the world of machines together with the Internet. If we define the final state of Industry 4.0 as the autonomous communication of the workpieces with the machine tools, then we are still at the very beginning of the process right now. I think we have perhaps put about a quarter of the process behind us, so we have three-quarters of the way to go.

Thomas Rinn: From numerous discussions with companies, we know that many haven’t even reached 25% yet. Industrial companies are still working hard on the horizontal integration of their business processes, such as improving the management of their value chain. Vertical integration down to the machines is often only the next step after that. But the changes are taking place at high speed. Industry 4.0 is an issue in nearly every manufacturing company in Europe now; that is, the comprehensive interconnection of production, logistics and service processes, although it isn’t always known by the name Industry 4.0.

What is the quantum leap that Industry 4.0 represents?

Rinn: Linking all objects and systems accelerates production systems. Companies have been talking about total flexibility of production – working lean while at the same time making custom-tailored products on demand – but they haven’t been able to realize the concept entirely yet. Today the technologies, communication channels and possibilities for data storage and analysis exist that make it possible.

Kube: Industry 4.0 is often referred to as the fourth revolution of production. What is revolutionary about it becomes apparent when considering all four revolutions through the eyes of the consumer. The first revolution, with water power and the steam engine, gave people access to a wide range of goods for the first time. Electric power led to mass production. In the third phase, computerization brought immense advances in the quality of the products. And Industry 4.0 will make extensive individualization possible, radically changing how we manufacture and sell products.

How do companies profit from Industry 4.0?

Kube: I see that the companies benefit in three areas when they digitize their business processes. Firstly, their products get better. For example, sensors and software functionalities make a machine more network-capable and smarter, which gives it a competitive edge. Secondly, by connecting digital and real processes with each other, Industry 4.0 improves the efficiency of company processes and makes cost savings possible. Thirdly, entirely new business models arise. One of many examples of this is that plant-building companies are now starting to bill only the output that the machines they sell achieve for the customer.

Rinn: The Industry 4.0 concept is a major driver of innovation, and it can also be positioned as such. It will demand and free up additional creativity. Because companies are realizing that a new era is dawning, they are willing to change their old, familiar procedures and try out new things, partly as a result of pressure from customers or suppliers. In the consulting business, we have for some time now been feeling this positive influence on the management bodies of companies that want to remain among the best. The demand for business-model innovation is rising.

The German Fraunhofer Institute for Industrial Engineering and Automation forecasts that Industry 4.0 may lead to a leap in productivity of 20-30% by 2025.

Kube: That would equate to an increase of productivity of 2–3% per annum. We think the potential is much greater than that. Improvements of up to 5% per year are already accounted for in many company budgets anyway – without anyone considering Industry 4.0. I am pretty sure that the systematic networking and digitization of processes will enable productivity to be improved by a factor of two or three. To cite just one example: In its new digital factory near Washington, the US motorcycle maker Harley-Davidson can build 1300 different versions of its five basic model series, and it only has to know the specific customer’s desired configuration a few hours before starting. That is the leap forward!

Doesn’t rapidly increasing industrial productivity always end up costing jobs?

Rinn: No. I don’t think that is a necessary consequence. A lot depends on how important industry is to a given economy. If the foundation is broad, there is more room at the top. Take Germany, for example. As industry makes a major contribution to the country’s overall value added at around 24%, I think there is a good chance that Industry 4.0 will enable additional growth through new and improved products and new business models. And this can ultimately create more jobs. Furthermore, a new branch of industry will be born that assists companies on their way to Industry 4.0. By the way, contrary to the general view, the automation that has taken place in industry since the 1970s – Industry 3.0, so to speak – has not been a job killer at all. For this reason, it is and remains important that all those involved – companies, employees, politicians, associations – perceive Industry 4.0 as the best opportunity to further develop an ­economy.

Large US IT and Internet groups are increasingly entering the industrial sector by buying companies. Many people in Europe see that as a menacing trend. Will it ultimately be the IT companies that determine the way Industry 4.0 goes and hence dominate production as well?

Rinn: It cannot be denied that software solutions, big data and social media applications are becoming ever more important in industry, so it only makes sense for Google & Co. to enter the industrial sector. They are helping to provide better production possibilities and occupying important interfaces to the customer. That said, I am not convinced that these US companies are really interested in making machines, sheets of metal and automobiles and the like.

Kube: Indeed, it is not very probable that software groups will be swallowing up, for example, European automakers in the next years. At the same time, however, the development could be unfavorable for Europe’s companies. Let’s stay in the automotive industry: If software and Internet solutions become the decisive distinguishing features in the competitive environment, the company with the biggest know-how and the best people in this field will set the standards and define which direction things progress in. In that case, what cars look like in the future, and what driving a car means will not be determined in Munich, Sindelfingen, Paris or Turin, but in Silicon Valley. That cannot please the European market leaders.

How should Europe’s industry respond?

Kube: Every company should itself master the core technologies that give it and its products the decisive competitive advantage and that therefore account for the biggest share of its future value proposition. In the past, these were often customary product or manufacturing competencies in the automotive industry, such as the ability to build lightweight bodies in series. If motor vehicles in future define themselves more through virtual components such as Internet-based services, the key competencies will be outside the scope of classical car making.

Rinn: I am sure that the European companies will bring with them extensive experience in the various industries about when the time has come to integrate certain competencies into their structures, and when they can continue to focus on suppliers and cooperation.

In the USA, the Obama administration wants to invest about a billion US-Dollars into modern, networked and digital industry by 2023. How could Europe help its companies?

Kube: Europe should launch a qualification and education offensive, and pursue it rigorously in the years to come. The demands on many positions in the fields of development, manufacturing and logistics will significantly increase as a result of Industry 4.0. We have to adapt an interdisciplinary, holistic way of thinking in all areas, and we shouldn’t make the mistake of only concentrating on academically educated data specialists. Skilled workers will also be needed, who have a good command of the practical side, and who can implement what is needed on real, tangible objects. In short: We need expert hands-on craftspeople and technicians, for things like turbine runners or steering-knuckle guidance systems.

Rinn: Yes, we can only hope that Europe will crank up the qualification engine quickly. It is also just as important that the transition in industry be accompanied by a real sense of optimism, especially in the political sector, and the way I see it, politicians are still very skeptical as of now. Perhaps, people don’t know enough about Industry 4.0 yet. We have to accomplish that people understand what Industry 4.0 is and that they see it as a huge opportunity to position our production venue as one of the most competitive on the planet.


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