MANUFACTURINGTRANSFORMATION

Connecting theory to practice

July 2nd 2018Stuttgart

SUMMARY PAPER

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F O R E W O R D

Rapid technological change has transformed the way we live and do business, forcing companies to innovate to remain competitive. Manufacturing is no exception. A cocktail of technologies and trends, known together as Industry 4.0, promises to radically change the way that we make things. Many manufacturing companies are seeking out new business models to enhance their top line. By embracing data, automation, and artificial intelligence, they have started to streamline value chains, enhance efficiencies, and respond in real time to customers’ needs. Yet these changes also pose challenges for big businesses, many of which have been building products the same way for decades. Manufacturing Transformation, a series of roundtable events held by The Economist, has convened senior industry leaders in several cities to discuss how digital transformation is reshaping manufacturing, and how to overcome the challenges it poses. On 2nd July, they came together in Stuttgart for a frank discussion about how to keep up with the remarkable pace of change within their industry. Moderated by Pete Swabey, the Economist Intelligence Unit’s EMEA editorial director of thought leadership, participants explored their own companies’ use cases and the wider trends surrounding Industry 4.0. The goal was to foster an atmosphere of open innovation, and establish pathways between rhetoric and reality.

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A S P E C T S O F I N D U S T R Y 4 . 0

Opening the discussion in Stuttgart, keynote speaker Michael Lickefett, head of factory planning and manufacturing management at Fraunhofer IPA, outlined the aims of digital industrial innovation: to create “dynamic, real-time, optimised and self-organised, cross-corporate value adding systems”; and to fulfil individual customers’ demands - all at the costs of mass production.

Mr Lickefett identified three key aspects of Industry 4.0. Firstly, manufacturers must build new business models which leverage the so-called “platform economy”. Just as Uber, Airbnb and Spotify have

Aspects of Industry 4.0

reshaped the way we live, new platforms are emerging for manufacturing and production. Some come from giants such as Microsoft, GE or Siemens, whose internet of things operating system, MindSphere, connects machines to the digital world; and others come from startups which are looking for a share of this massive market, Mr Lickefett said

A second iteration of digital transformation is the creation of individualised products and services. A prototype example is the smartphone. “The hardware is not very sophisticated. It’s not the hardware that makes it intelligent,” Mr Lickefett explained. “We use

“The hardware is not very sophisticated. It’s not the

hardware that makes it intelligent. We use it to

get services through it, to individualise it by ourselves,

and to adapt its function over the lifecycle”.

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A S P E C T S O F I N D U S T R Y 4 . 0

it to get services through it, to individualise it by ourselves, and to adapt its function over the lifecycle”.

The third aspect is to build new organisations and value chains through smart manufacturing. Here, Mr Lickefett gave the example of robots at Google, which use machine learning to sift through waste, and share their experience with each other. “These robots learn very fast how to grip, and that’s an example for smart manufacturing,” he explained.

Many manufacturers already applying such strategies. Take Schunk, which produces grippers for robots, and has enhanced its customer experience using digital technologies. Previously, its customers had to work directly with engineers to build a product suitable for their machinery; but Schunk now offers a platform solution which allows a customer to upload a computer-aided design of the part to be transported by the gripper. “The platform decides the gripper it needs. The design is uploaded to a company called Materialise, and the gripper is printed instantly through a 3D process,” Mr Lickefett explained. “It takes hours or days, and no longer weeks, and that’s a very impressive example of how you come into new business.”

However the precise nature of

digital transformation will vary by company. The Fraunhofer Institute surveyed more than 30 companies about their readiness to implement Industry 4.0. “What we found was that it was very dependent on the digital potential of the products, as well as the proximity to the end customer, which way of digitisation is fruitful,” Mr Lickefett said. The research showed that companies with few potential digital products and a high distance to the customer invested foremost in the digitisation of performance. By comparison, manufacturers which are close to their customers and could easily digitise their products, invested in digitising products.

Many policymakers are concerned about employment as cheaper, more efficient robots replace humans. Yet Mr Lickefett believes that manufacturing jobs will change, rather than being lost altogether, as demand for highly-skilled workers rises. “We think that employment will not be reduced. Of course it will change… Less qualified employment will be automated... but we need people in future production,” he said. “We will have people who orchestrate the new production, who will much more be the route to optimise production, and not so much in routine tasks.”

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D I G I T A L T R A N S F O R M A T I O N I N A C T I O N

Digital transformation in action

During the roundtable, delegates talked of their own experiences of implementing digital strategies. They noted that change is underway at their companies, which are using data and automation to create products ranging from smart motor sensors, and smart light bulbs, to traditional scaffolding.

“The old fashioned business model will not fly,” one senior executive said. “You have to rethink and reinvent yourself. If you are in an old fashioned product like electric motors, you have to create a new

mindset in R&D.” He added: “That only happened because of low cost electronics, because of experience, and [because we could make data] available through the cloud”.

Delegates agreed that many companies innovate not organically, but because they are forced to by disruptors. “Someone really has to see: do I see a disruption in my business model, through someone else, that is really going to kill me?” one participant explained. “Then things start changing.”

A representative from a lighting business used his industry as an

Delegates agreed that many companies innovate not organically, but because they are forced to by disruptors.

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D I G I T A L T R A N S F O R M A T I O N I N A C T I O N

use of quality measuring devices. He said these could identify quality problems in a vehicle production line, but the process still has to be adjusted manually. “It would be pretty cool to connect all those different devices; to have this automated, so that machines can communicate automatically and try to learn from themselves,” he said. “My experience is that we neither have any connectivity standards nor common communications protocols. And I think this is one of the major challenges we are facing in Industry 4.0.”

Others raised concerns about “lack of talent”, particularly in senior decision-making positions. Notably, a delegate from the lighting industry noted that executives require education about the implications of digitisation.

Using the example of smart lightbulbs, he said: “All of a sudden we could charge 20 bucks for a lightbulb, and everyone said: “That’s great… There must be a lot of profit”. I had to explain that in the good old days you sold your lightbulb and as it was gone - no further costs were incurred… Now you have to calculate over the whole lifetime of your product all the continuous costs that

come along with it - like maintenance and development efforts to enhance the product functionality … It takes a while for people to understand that a software product is not a product that you sell one time and it’s gone.”

He added concerns about rigidity within big business. “Many companies with a strong product are very focused on the technology of the product, rather than solving a problem for the customer,” he said. “We look at problems as a lighting company, but lighting is just part of your smart home and what happens is start-ups are eating your lunch because they don’t care. They put a unit to control all shades and blinds next to your smart lightbulb, and the real value comes from them by connecting everything.”

He cited a need for “flexibility and risk appetite to say: I may not look for a component supplier for LED light bulbs in China, but I may also look for new components. We may not have so much experience about that, but electronics manufacturing is in our genes, so why not take in also something that will also control shades and blinds, and put it together in one offering?

Digital transformation in action

example: “The lighting industry has been totally disrupted by LED. The competitive pressure is forcing people to think in new ways, and what it changes is the ability to take risks… There is now this openness to new business models and processes,” he said, using the example of smart light bulbs.

Yet delegates agreed there is much further to run. Germany laid out a vision for “Industrie 4.0” in 2010 and has since invested hundreds of millions of dollars in industrial research , however participants all said that businesses have not adopted innovations as quickly as they might have done. “I would have expected more use cases in the industry”, one senior participant stated.

He said that confusion over the precise nature of Industry 4.0 may have slowed down its implementation: “One problem is that our government does not have a clear definition of Industry 4.0. Neither do companies: when you talk to five people you get five different answers. For example, with building information modelling, Germany has a definition, but the UK has a totally different one.”

Another participant agreed, noting experience from the

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T O W A R D S O P E N I N N O V A T I O N

Towards open innovation

and engage in collaborative platforms. One attendee from a car manufacturer explained: “The challenge in manufacturing is that the world is changing in a direction that we lose a lot of our value chain. We have to work with more partners when it comes to electrical engines and the car of the future. That changes our world from having everything under control, having the data that is generated from manufacturing under our control, to having that data outside the company. The complexity will dramatically go up. I think it’s more challenge than opportunity in the context of manufacturing.”

Participants overwhelmingly agreed that a lack of knowledge-sharing, or openness, between companies may be hindering digitisation. “People and companies are very keen on their intellectual property, for good reason, and are cautious about what pieces of data we can share safely,” one said. “I think this is something that is putting yet another dimension on the complexity of the whole topic.”

They agreed that this was, in part, a “cultural” issue in Germany, and said that it will become a growing problem as manufacturers are required to work increasingly with partners,

“The challenge in manufacturing is that

the world is changing in a direction that we lose a lot of our value chain. We have to work with more partners when it comes to electrical engines and

the car of the future. That changes our world from having everything under control, having the data that is generated from

manufacturing under our control, to having that data

outside the company. The complexity will

dramatically go up. I think it’s more challenge than

opportunity in the context of manufacturing.”

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D I G I T A L W O R K S H O P

are deterred from entering collaborative platforms by “the degree of clean up needed before they can take that step, in terms of having information and data classified and structured in one place, and having basic infrastructure security in place.” He believes “there’s lots of homework that needs to be done before you can go into an open but secure collaborative platform business with a high number of changing participants.”

Yet several delegates noted progress on this front. Working with startups, to leverage their culture of innovation, has helped some major

manufacturers foster a more collaborative atmosphere. “With the traditional big industry players you have a lot of ambiguity [about IP]. But when you talk to startups you have to get rid of that, otherwise there’s no conversation,” one attendee explained. Another said that the concern that “openness means insecurity” is fading. “By means of today and tomorrow’s technology… you can create open architecture… and do it in a secure way that protects the information that needs to be protected, and shares the information that needs to shared.”

Towards open innovationAnother participant agreed that “the problem is uncertainty”, and said: “In the past, lots of things have been predictable. Now customers are not focused on a specific product or service, they want a solution end-to-end. And we are not able to do that entire solution without partnering with someone, and the value generation is in collaborating. And this is an uncertain area for many companies, they don’t know what’s going to happen or what their role is. As soon as they realise that collaboration is better for all the partners in the ecosystem, they will open up.”

One said that some companies

Digital workshopFollowing the roundtable, participants formed teams to assess company case studies, and develop solutions to digital transformation challenges. They suggested various ways to digitise industrial processes, ranging from automated condition monitoring for compressors, to the use of digital platforms and blockchain technology in car part production.

One team observed that

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D I G I T A L W O R K S H O P

“an important precondition to this new business was connecting all systems inside the manufacturer”. It noted that “the future business could become more complex if we know more about our customers and we have more services.” Another found that if technology vastly improved user experience, then consumers might be willing to absorb higher costs. “If your customer gets a spare part next week not in half a year… the customer will almost for any price come back to you again and again if you’re the only one who can do that. It’s a quantum leap in user

experience.”

One benefit was the sharing of experience between representatives of a range of major industrial companies. “We mixed this discussion very strongly with the cases our participants brought,” one team leader noted. “There was a very interesting idea from [a participant] who told us that when his company are creating products, they are challenging their old business. They have people who try to kill the old business in a discussion, to find out how weak the old business is, and what could happen in the future.”

An important precondition to this new business was connecting all systems inside the manufacturer

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