The Emergence of Industry 4.0

Over the past few years, Industry 4.0, - aka the 4th Industrial Revolution, - has been the subject of several articles, studies, and surveys, as well as a book published earlier this year by Klaus Schwab, founder and executive chairman of the World Economic Forum (WEF).  They all attempt to describe and put a name to the disruptive changes taking place all around us within the context of the past 250 years.

“Industrial revolutions are momentous events,” said A Strategist Guide to Industry 4.0, - a 2016 article in strategy+business.  “By most reckonings, there have been only three.”  The First Industrial Revolution, - starting in the last third of the 18th century, - introduced new tools and manufacturing processes based on steam and water power, ushering the transition from hand-made goods to mechanized, machine-based production.  The Second starting a century later, brought us steel, cars, chemicals, petroleum, electricity, the telephone and radio while creating the age of mass production.  The Third, - following World War II - saw the advent of computers, digital technologies, the IT industry, and the automation of process in just about all industries.

There’s general agreement that the 4th Industrial Revolution is primarily driven by a fusion of once separate technologies that when joined together are integrating the physical and digital worlds.  But, there’s a spectrum of opinions as to the scope of its impact, some arguing that Industry 4.0 applies primarily to manufacturing technologies and industries, while others argue that it’s profoundly transforming our economies and societies.

The WEF has taken the broad-scope view, having chosen The Fourth Industrial Revolution as the central theme of its January, 2016 annual meeting in Davos, Switzerland.  “We are at the beginning of a revolution that is fundamentally changing the way we live, work, and relate to one another,” wrote Dr. Schwab in his 2017 book.  In its scale, scope and complexity, what I consider to be the fourth industrial revolution is unlike anything humankind has experienced before…”

“Consider the unlimited possibilities of having billions of people connected by mobile devices, giving rise to unprecedented processing power, storage capabilities and knowledge access.  Or think about the staggering confluence of emerging technology breakthroughs, covering wide-ranging fields such as artificial intelligence (AI), robotics, the internet of things (IoT), autonomous vehicles, 3D printing, nanotechnology, biotechnology, materials science, energy storage and quantum computing, to name a few.  Many of these innovations are in their infancy, but they are already reaching an inflection point in their development as they build on and amplify each other in a fusion of technologies across the physical, digital and biological worlds.”

On the other hand, McKinsey takes a narrower, more focused view in Manufacturing’s Next Act.  “Industry 4.0 is more than just a flashy catchphrase.  A confluence of trends and technologies promises to reshape the way things are made.  Mention ‘Industry 4.0’ to most manufacturing executives and you will raise eyebrows.  If they’ve heard of it, they are likely confused about what it is.  If they haven’t heard of it, they’re likely to be skeptical of what they see as yet another piece of marketing hype, an empty catchphrase.  And yet a closer look at what’s behind Industry 4.0 reveals some powerful emerging currents with strong potential to change the way factories work.”

As its title implies, in Industry 4.0: Building the digital enterprise PwC views Industry 4.0 as being primarily about the digital transformation of the whole enterprise.  “In this report, the term ‘Industry 4.0’ stands for the fourth industrial revolution.  Other related terms include the ‘Industrial Internet’ or the ‘Digital Factory’, although neither takes as complete a view.  While Industry 3.0 focused on the automation of single machines and processes, Industry 4.0 focuses on the end-to-end digitization of all physical assets and integration into digital ecosystems with value chain partners.  Generating, analyzing and communicating data seamlessly underpins the gains promised by Industry 4.0, which networks a wide range of new technologies to create value.”

In PwC’s view, Internet 4.0 is driven by three major forces:

  • The full digitization of a company’s operations, including the vertical integration of processes across the entire organization, and the horizontal integration across the entire value chain.
  • The digitization of product and service offerings by adding smart sensors, communication devices, and data analytics tools to create smart digital products and smart services.
  • Digital business models, including integrated digital solutions, data-driven services, platforms and ecosystems, and mass customization, where every product and service can be created as a batch of one.

The PwC report includes the findings of its 2016 Global Industry 4.0 Survey based on the responses from over 2,000 participants in nine industrial sectors and 26 countries.  The survey aimed to assess the progress companies are making towards becoming truly digital enterprises.  It identified eight key findings:

From Talk to Action:  “The buzz around Industry 4.0 has moved from what some saw as PR hype in 2013 to investment and real results today.”  A third of the companies surveyed say that they’ve already achieved high levels of digitization, while almost three-quarters expect to do so by 2020.  First movers, around 4% of the survey population, expect to outpace their competitors based on their more advanced digital capabilities and greater levels of investment.

Digitization drives quantum leaps in performance.  “Companies that successfully implement Industry 4.0 no longer need to choose between focusing on a better top or bottom line. They can improve both at the same time.”  Over the next five years, companies expect to increase revenue by around 2.9% per yer, while reducing costs by 3.6% per year.

Deepen digital relationships with more empowered customers.  “Customers will be at the centre of the changes to value chains, products and services.”  72% of companies expect to use of data analytics and other Industry 4.0 applications to significantly improve customer relationships and to build a more customer-focused supply chain.

Focus on people and culture to drive transformation. “Industry 4.0 has massive implications for the nature of how a company chooses to organize itself and its delivery model.”  50% of companies said that their lack of digital culture and skills, not technology, is their top challenge in making their operations more digital.

Data analytics and digital trust are the foundations.  “Data fuels Industry 4.0 and successful data analytics is the pre-requisite for successful implementation of digital enterprise applications…  As digital ecosystems expand, so does the importance of establishing strong levels of digital trust, backed up by transparency and non-repudiation.”  50% of companies said that data analytics are of high importance today, while 83% said that it will be of high importance in 2020.  They also expressed a wide range of concerns around data security, with operational disruptions due to cybersecurity breaches at the top of their list (50%).

Robust, enterprise-wide analytics requires significant change.  The companies surveyed understand that there’s still a long way to go before reaching the data analytics capabilities that are needed to really drive Industry 4.0 applications.  Only 18% said that they have advanced data analytics capabilities today; while 52% rate them as medium, 22% as poor, and 8% rely on external partners.

Industry 4.0 is accelerating globalization but with distinct regional flavors.  “As the fourth industrial revolution binds companies and countries ever more tightly together - through worldwide supply chains and data networks - it will increasingly promote globalization.”  Companies in Japan and Germany are the furthest along in digitizing their internal operations and in developing digital supply chains as they seek gains in operational efficiencies, cost reduction and quality assurance.  The focus for US companies is more on digital revenue growth and disruptive business models.

Big investments with big impacts.  “Industry 4.0 investments are already significant and our research suggests that global industrial products companies will invest over US$900 billion per year through 2020.”  But the benefits may be even more impressive, as survey respondents anticipate that those investments will lead to almost $500 billions in annual additional revenues, in addition to gains in efficiency and reductions in costs.

“Don’t buy the hype.  Buy the reality,” adds the report in its Executive Summary.  “Industry 4.0 will be a huge boon to companies that fully understand what it means for how they do business.  Change of this nature will transcend your company’s boundaries - and probably the national boundaries of the countries where you do business.”

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