CSC recently surveyed 900 managers and decision-makers in Austria, Germany, and Switzerland on the topic of Industry 4.0.
Our findings were pretty much in line with what I hear when I talk to our clients: People find Industry 4.0 very relevant and intriguing but they aren’t sure what exactly it is. There seems to be a significant lack of information, which we need to address.
The term “Industry 4.0” was coined in 2011 by a working group of public and private organizations brought together by Germany’s Federal Ministry of Education and Research. It refers to the fourth phase of the Industrial Revolution. In my experience, the most prominent misconception is that Industry 4.0 is about technology. It is not.
Saying that Industry 4.0 is about technology is like saying the first industrial revolution was about steam. It wasn’t. The first industrial revolution was about making manufactured goods available and affordable to a previously unknown extent. Steam certainly enabled that. But if we look at what happened as a result, we see that steam powered an immense array of other innovations.
Transformation came not only in technological advancements but also in terms of new business models and dramatic changes to the economic landscape: A new concept of organizing production processes on the factory floor emerged, new players entered the market and others left.
The steam powering a new revolution
Electricity and the conveyor belt drove the second industrial revolution, computing took automation to the next level in the 1970s, thus triggering the third. Industry 4.0 will result in yet more automation and smarter interconnected products and processes. But unlike those other technologies – each of them revolutionary in their day – the driver of today’s revolution is not a single technology, let alone a new one. What we see instead is a number of tried and tested technologies becoming ever more intertwined.
Enabling new business models
Take, for instance, additive manufacturing, which is another word for 3D printing. To many people, this sounds like a fairly innovative technology. But that’s just because we’ve been reading more about it lately as 3D printers are now becoming available as household appliances. In fact, the technology was first patented 30 years ago, and additive manufacturing has been used on an industrial scale for at least 20 years.
Cloud computing, which is another technology closely associated with Industry 4.0, first appeared as a term in 1996. The first true ancestor of an RFID device, which enables auto-identification of things in the process of manufacturing, goes back as far as to 1973. The only thing that’s really new about the technology behind Industry 4.0 is the accelerated improvement of individual technologies as more components fall in place and impact each other. Now in combination, they open up a vast universe of new possibilities of what manufacturers and service providers will be able to make and offer.
So in one sentence: Industry 4.0 is all about integrating technology to eliminate traditional process barriers and enable new business models.
We’re already seeing these changes today. In the past, you’d talk to your bank about a loan, then you’d go see a car dealer to buy a car, and you’d get your insurance from someplace else. Nowadays, car dealers offer the whole package at the point of sale.
What do automotive companies really sell?
With further integration of systems and technologies across entire value chains, more and more services and offerings will be added to that package.
Perhaps, 10 years from now, you won’t go buy a car anymore. Instead you’ll book an all-in-one mobility package at a monthly flat rate. Imagine your job has you commuting between somewhere outside Cologne and your office in the Rhine-Main region: your train ticket will be included in that package. You won’t own a car; instead, each time you arrive at a train station or an airport, a car will be waiting for you. All this without paperwork; your mobile app will handle it.
Of course, cars will still be made by the automotive companies; train service will still be run by railway operators and insurance will still be provided by an insurance company. Whether all these belong to the same holding or just form a strategic alliance doesn’t matter: your customer experience will be that of one-stop shopping.
Each provider will have to modify its portfolios, though. For the business traveler described, insurance coverage will need to be priced differently than for a traditional car buyer. But car makers too might have to adjust the types of model they offer.
Today, many customers buy ‘family’ cars, most of which are by definition a compromise: appropriate for the weekly groceries shopping (which will be home-delivered in the near future anyway) and for the odd holiday trip with two children, but massively overdone for just Dad driving to work. If you have the option to always choose the type of car that serves your actual purpose best, more small cars will be built, with less total fuel consumption, CO2 emissions and the need for parking spaces.
Preparing for the transformation
What do we need to do to prepare for this transformation? I advise all of my clients to rigidly review today’s and tomorrow’s business models before even thinking about technology, let alone making investment decisions. Call it a curse or a blessing, but it is a fact of life that pretty much anything that becomes possible becomes a necessity soon thereafter. Manufacturers and service providers won’t have a choice; they’ll simply have to provide what their customers demand. The more successful among them do that before their customers actually know what they will be looking for tomorrow.
We’re not talking divination or rocket science: There are a couple of useful indicators of the direction we’re headed. If you closely look at what is changing the world right now, it more or less boils down to a handful of trends that will have an impact on the business models of the future. I call them transformation momentums: external drivers that exert pressure on businesses while at the same time offering great opportunities – if only you’re able to adapt.
- Everything as a Service. Customers – consumers and businesses alike – increasingly tend to lease rather than own, whether it’s commodities, facilities, technology or other assets. So whatever you make: check if you can make your product or service suitable to be let rather than sold. And who you can team up with to deliver.
- Service transformation. In the same course of events, be prepared that you’ll be making money not with your original product itself but with the services that go with it. Even today, 6 out of 10 cars are sold at a no margin – the real profit is generated in the aftermarket.
- Individualization. Both consumers and business customers are becoming ever more demanding in that they insist on ‘one-of-a-kind’ products. The Airbus A380 has 6 million configurable items as we’re speaking, making the number of actual configuration options impractical to calculate. The same goes for consumer products. Even for a modern compact car such as the Opel Adam, the number of configuration options is by far larger than anybody (including the manufacturer) cares to quantify. The customer of the future will no longer put up with off-the-shelf solutions, and you’d better prepare for it.
- Hypercompetition. The name of the game is: if you don’t constantly innovate and deliver, somebody else will. It’s as simple as that. And you’ll see competitors popping up where you never expected them. With the new seamless integration across value chains, anybody will be able to partner up with anybody else to attack you in your very own established domain. Furthermore, your seller’s market is not your only battleground. You also need to fight the war for raw materials and, last but not least, the war for talent.
- Digitalization. In the future, virtually everything from your spectacles to your outdoor jacket to your television will be connected to the Internet, feeding in on a huge, universal body of data. Make sure that a) your products participate in this trend and that b) you are able to tap into that data. If you can do that, you won’t have to predict what your customers want anymore. You’ll know in real time.
Futuristic cows and more industry disruptions
The manufacturing industry is most certainly the sector that is feeling the transformation right now and most severely. But look at retail, for instance. Large retail chains have been using IT for years, but with the rise of the Web, IT has irreversibly transformed the entire retail business model.
Ultimately, this phenomenon will pervade all industries and in fact all segments of life. It’ll help solve previously unsolvable problems from healthcare to traffic management to agriculture.
In the dairy farm of the future, the cattle will be allowed to move freely in and outside the stable. Whenever a cow wants a massage, she will visit the massage robot. When she wants to be milked, she’ll go to the milking machine. The cow being chipped, the machine will know which animal it is treating, and it will be able to perform an instant milk analysis. Milk carries a lot of health data. So the farmer (or maybe just the feeding machine) will be aware of specific individual nutrition or medication needs, which in turn will render the currently practiced generous prophylactic administration of antibiotics obsolete.
The Internet of Things will also help prevent traffic jams, protect the elderly in the case of accidents so they can stay longer in their homes unassisted, and enable refrigerators to adjust groceries online orders against their owner’s health data generated by the bathroom scale – or wearable fitness device. What we call the Sharing Economy is ultimately also a nephew of Industry 4.0.
Implications for our society
Like all revolutions, the fourth industrial revolution will cause massive disruptions temporally and locally. There’s no way denying that. Industry 4.0 will extinguish a lot of traditional jobs, as have previous industrial revolutions. Before the first one, 7 out of 10 of people worked in agriculture. Today, 4 in 100 do. Those for whom it is too late to adapt to the new situation will suffer.
We can’t ignore the fate of entire cities where local main employers close down their factories. The future will see a lot less manual labor. But in turn, new jobs will emerge, many of them less dangerous and with fewer health risks than are common today. Professionals across all industries will need different skill sets, and our educational systems will have to cater for that demand.
Like in every revolution, a lot of money is to be made for those who know how to. The resulting gold rush atmosphere will give rise to business models that may be undesirable according to accepted ethical standards. The Sharing Economy seems to be a good idea, but not all of its expressions are exactly uncontroversial. Certain business models challenging the traditional taxi and accommodation service providers are causing heated debates even today. Government regulation is in high demand.
Today, most of us consider it normal to go to work in the morning and return home at night. Tomorrow, many people may do most of their work at home and appear at their workplaces only when their physical presence is required. Today, in the Western world, we consider eight working hours per day the unquestioned norm. Tomorrow, there may not be enough work for the majority of people to work eight hours. At the same time, Industry 4.0 will generate considerable additional wealth. If we manage to distribute that wealth reasonably, working no more than four hours a day might become the norm (as was in pre-historic hunter-gatherer societies), leaving more time for social interaction and creative pastimes.
There’s no turning back
That’s why I’m saying that not only enterprises will have to review their business models. Entire business regions will have to, as do authorities, municipalities and states; as does each and every individual and even society as a whole. The earlier we accept that, the earlier we’ll reap the harvest of progress.
We cannot turn the clock back. And why should we? Looking back into history, I find that each previous industrial revolution has eventually made the world a better place, even if in their day, they brought about hard times for some.
If you ask me, I’m really confident that the future is bright.