Industrial Revolution - Essay Example

International Trade

Executive summary

Industry 4.0 or fourth industrial revolution has significant impact the small and medium sized manufacturing organisations. Its extensive digital transformation has a significant impact on the global business and international trade. Value chains must be agile and flexible. Therefore, in order to successfully implement advanced technology, it is required to be organised in a fragmented manner. The small and medium scale businesses have never received such opportunity to trade in international business. Hence, to successfully trade on international grounds, the organisations must ensure efficient manufacturing networks, partnership and cooperation within the field of production technology and innovation. This can be facilitated with the industrial revolution or industry 4.0. This report emphasizes on the challenges faced by organisations while addressing such transformations at an early stage. Moreover, the inevitable changes that are faced by contemporary organisations regarding cooperation with the business partners in terms of sale and purchase have been discussed in detail. The report aims to provide an in-depth overview regarding the possible course of actions required by the organisation so as to position itself in the international trade as well as achieve success in the future.

Table of Contents

Introduction4

Challenges (Threats)5

General findings10

Concerns related to operational effectiveness10

Concerns related to business models and competitive landscape10

Concerns in respect to organisational readiness11

Concerns in respect to implementation barrier11

Challenges imposed for industry 4.014

Investment15

Security and data ownership15

Legal issues16

Standards16

Skill development and Employment16

Investment on Industry 4.0 related initiatives17

EPRS17

Conclusion18

Reference List20

• Introduction

The fourth revolution, better known as industry 4.0, refers to the current trend in data exchange or automation in manufacturing technologies. This system is composed of cloud computing, internet of things (IOT) and cyber-physical systems (Brettel et al., 2014). The aura of fourth revolution is characterised by four significant features:

• Vertical networking is used in ‘smart’ production systems, that is, smart products or smart factories. Vertical networking of smart logistics means that the operations are done so as to fulfil the needs of the customers. These include marketing, production and smart services.
• New generation of global value creation network is integrated by means of Horizontal integration (Fuchs, 2016). This process keeps ensures that the horizontal integration of business partners and customers, teamwork and new business models are used in various continents.
• The overall value-chain is diagnosed by means of engineering that not only considers the production process, but also considers the end-product encompassing overall product life cycle.
• The system is accelerated through exponential technologies such as the computing power of technologies. Consequentially, the size and cost of mass-market application has decreased at an unprecedented rate.

The trend of customization has spread globally and mainly across the manufacturing industry (Gabriel and Pessl, 2016). The customers are becoming increasingly anxious to know how their products are being configured and manufactured in order to provide inputs to the process of development and production at a very early stage. The 4.0 industry offers excellent opportunities for the manufacturing industry to trade internationally and make their products more extensive, intelligent and efficient. However, the major challenge imposed by industry 4.0 is the difficulty of managing large quantity data that are being generated during the various stages of manufacturing process. For instance, the analyzing of the production data and coordination of findings with the information systems of consumers is very difficult to achieve.

The Western civilization has experienced three industrial revolutions which are also viewed as disruptive leaps in the industrial process resulting in a substantially high level of production.

• Challenges (Threats)

Industry 4.0 distorts the value chain and stimulates companies to reinvent various ways of conducting business (Lee, Bagheri and Kao, 2015). In order to trade internationally, the companies should digitally transform their business with the aim of successfully positioning themselves in the international market. The five pillars which are critical for digital transformation are:

• Firstly, the companies are required to establish their own digital capabilities. Development of the digital platform requires hiring technical experts and set-up of cross-functional governance and monitoring.
• Secondly, the companies should emphasise on enabling collaboration with the eco-system. In order to attain this, companies are required to be involved in the demonstration of standards and cooperation across various companies by means of strategic partnership, alliances and mutual cooperation within the communities.
• Thirdly, data management is an essential part of business process for ensuring crucial control points (Lee, Kao and Yang, 2014).
• Fourthly, companies while trading internationally are required to manage cyber-security with the aim of protecting proprietary data and digital shop-floor operations.
• Lastly, the companies should implement two-speed data architecture to differentiate the quick-release cycles from critical applications which have longer turnaround time.

The key challenge for companies is to launch the new automation plants which include hour adaptations, trials, phase of pre-series testing requiring a higher-calibre launch team as well as huge cost overruns (Monostori, 2014). Each of these processes requires simulation and virtual verification before the physical mapping is started. This means that all software, numerical matrices and parameters have to be uploaded in the physical machine so as to control production process. Traditional manufacturing companies do not follow such processes whereas established players tend to change their business model, capabilities and processes during the industrial revolution.

(Opportunities)

The introduction of industry 4.0 brings forward versatile opportunities to transform the economic rules of the industry, especially for combating the threats of de-industrialisation faced by European countries (Schuh et al., 2014). Currently, industrial set-up has various means of maintaining a competitive edge in European countries. In contrast, the low labour cost countries with modern and automated production units have critical size with implemented manufacturing practices. With industry 4.0, the demand for highly qualified practices will increase the activities and hence support the complex industries.

From the economical point of view, industries want to offer higher returns to the investors. The countries with low labour cost are leveraging labour-intensive workforce and extensive manual labour in the production processes. Such cases are rare in Europe as well as international trading in France, UK and Spain (Sommer et al. 2015). Over the years, the industrial assets have lost their values due to underinvestment. Consequentially, the profitability and competitiveness are declining whereas the cost of labour remains considerably high.

It has been observed that Industry 4.0 countries follow state-of-the art production processes. These countries are more competitive and can afford higher margins to compensate their capital requirements.

Fig: 1. ROCE

(Source: Stock and Seliger, 2016, p. 540)

The graph shown above highlights the position of Europe in 2012. It also indicates the expected return on capital employed (ROCE) of Germany and Europe in 2030. Germany is settled with ROCE higher than 15%. The generated profits will assist the international countries to reinvest the capital in industrial technologies. Contrarily, France earns a significantly lower margin from the manufacturing industry which prevents it from investing in industrial technology.

The process of divestment will no longer be a threat if the European economy is able to attain a stronger position within Industry 4.0 (Stock and Seliger, 2016). The execution of Industry 4.0 requires investment. However, it substantially increases the capital productivity along with potential benefits such as network manufacturing, mass customization, etc. which in turn optimises on the capital leverage. The European economy is moving up the curve showing that the firms having the ability to invest more capital will trade internationally and consequentially earn more profits.

Most of the manufacturing companies trading in the international countries mentioned above have undertaken a disruptive approach to implement a new and unknown technology, which is considered as highly risky for the organisations. Industry 4.0 forms the core of most manufacturing processes and it significantly influences the critical steps in the value chain (Kolberg and Zühlke, 2015). The production costs downtime per day is high and therefore the manufacturing companies have to face the possible risk of introducing newer technologies for reliability process.

Unlike the previous industrial revolutions, implementation of industry 4.0 is not just related to the replacement of existing assets with newer technologies. Rather, implementation of industry 4.0 requires skills to master the managerial challenges that are posed by disruptive technologies along three varied dimensions namely,

• The horizon of operational effectiveness
• New business models which are a result of shift in value pools
• The company should lay a foundation for the digital transformations.

Recent statistics reveal that primary research has been conducted to identify the significant threats and challenges experienced by leading industry thinkers. The survey has been conducted on 300 participants from three different countries – Japan, USA and Germany.

This portion of the report will highlight the example of McKinsey Industry 4.0 Global survey:

The global industry 4.0 survey was carried out by McKinsey with the participation of 300 experts from relevant industries (Li et al., 2015). The B2B panel was held in Japan, Germany and the US in 2015 where around 100 companies per country took part with a minimum of 50 employees. The industries that participated in the survey were automotive suppliers, consumer goods, automotive OEM, software, industrial equipment, transport and logistics, healthcare, chemicals and semi-conductors. Industry 4.0 technology manufacturers and suppliers formed the key part of the survey. The main questions included within the survey were:

• Whether industry 4.0 is viewed as an opportunity or risk?
• What is the level of relevance for industry 4.0 disruptive technologies such as Internet of things, Big data, augmented and virtual reality (Mosterman and Zander, 2016)?
• What is the impact of industry 4.0 on business models trading internationally?
• Competitive landscape, competitiveness, revenues, investment decisions and potential of industry 4.0 value drivers.

The findings from the survey are discussed in details below:

• • General findings
• The industry 4.0 has significantly high impact on the cost of little replacement of equipments within next 10 years. (About 35-45 percent of the installed base).
• Corporations in Germany are still concerned about the investment in Research and development in regards to the Industry 4.0. The industry makes up for 19% of the total revenue.
  • Concerns related to operational effectiveness
• While trading internationally, companies consider quality, labour and development time as the key areas of improvement. These improvements are driven by the digitisation of modern analytics, knowledge work, along with touch interfaces and operations (Posada et al., 2015).
• Companies implement industry 4.0 to augment their productivity and revenues by 26 percent and 23 percent respectively.
  • Concerns related to business models and competitive landscape
• Most companies expect that the new competitors will enter the market as there is a huge difference between technology manufacturers and the suppliers.
• Approximately 46% of the German companies expect new competitors, against 92% of US companies and 63% of Japanese companies
  • Concerns in respect to organisational readiness
• Only 48 percent of manufacturers and 76 % technology suppliers are ready for the industry 4.0 (Shafiq et al., 2015).
• There are significantly large regional differences highlighting the extent of the companies to implement industry 4.0.
  • Concerns in respect to implementation barrier
• The biggest obstacle faced by organisations is contemplating to trade in Germany, including factors like the control over knowledge of employees, data security along with safeguarding systems, end-to-end connectivity through the wireless networks as well as a uniform standard of data transfer (Sheu, Chae and Yang, 2004).The last three characteristics are related to connectivity, thereby making data security an essential challenge for the organisations trading on international platform.
• Organisations have become reluctant to use the foreign IT providers of industry 4.0 due to cyber security concerns, since the outsourcing of IT is viable only for 57 percent of German traders.

Manufacturing companies trading internationally will face consistent pressure for a higher margin level. For instance, automotive OEMs are initiating the process of optimisation of products to realise each euro that can be saved from the cost of material processing (Jazdi, 2014). Industry 4.0 will search for operational efficiency after the implementation of lean concept, off shore movements and labour automation (Venkatesh and Brown, 2001). However, industry 4.0 and digitization are proliferating new cost saving processes that have remained untapped so far.

Fig. 2: Digital Thread

(Source: Wang et al., 2016, p.7).

The industry 4.0 shows a shift in paradigm from the optimization of physical assets to the optimization of data information, which is leveraged during the product lifecycle. Optimization of digital thread can be done by making the best use of information (Castellani, Serti and Tomasi, 2010). The technology of industry 4.0 is similar to the way it leverages data so as to unlock its potential. For instance, digital construction of data converts tangible work piece through 3D printing techniques. The information attained is turned to output through advanced analytics which in turn helps in the decision-making processes. In contrast, predictive maintenance is used to schedule the ideal maintenance time by accurate capturing of data (Wang et al., 2016).

The oil and gas industries have revealed that international trading companies are losing as much as 98 percent of data due to the leakage of information. However, none of these results can make a decision based on the analysis of remaining 2 % data. Hence, the key to capture new opportunities require active management of information along the digital threads to avoid any leakage of information (Brettel et al., 2014). Such leakages are identified in the digital thread significantly where the information is not lost. However, it could have been valuable for the stakeholders within the value chain as information leakages cause inefficiency.

Inventories - High inventory ties up the capital leading to loss of capital. Reduction in excessive stock supply can minimise the situation. The levers of industry 4.0 targets numerous drivers of the excessive inventory including inaccurate stock numbers, which in turn increases sludge, and planning of unreliable demand. This consequentially demands for safety of stock and overproduction of goods and services (Fuchs, 2016). For example, technology of intelligent cameras is used to capture the actual fill-up level of supply box, so as to determine whether or not it has been transferred to the production line or stored on the shelf. Thus, Industry 4.0 can typically reduce the inventory costs by holding 20 to 50 percent of stocks through its levers of real-time supply chain optimisation.

International market - Tapping the international market with new products creates additional value in the form of increased revenues and potential early moving advantages. Therefore, Industry 4.0 leverages and speeds up the development processes of rapid experimentation or concurrent engineering, which not only helps in creating a prototype but also drives the value (Gabriel and Pessl, 2016).

The example of local motors suggests that car manufacturers produce cars with 3D printing designs sourced from online community. As a result, they would be able to waive off the developmental cycle from the industry to one year from an average of six to seven years. This helps them to minimise the huge cost of Research and development (Lasi, et al., 2014).

After sales services - The total cost of operation is driven by the machine downtimes (for the unexpected incidents) and service cost (that includes maintenance and repair). Companies tend to offer software solutions for allowing the technicians to develop a secure connection to control the remote industrial equipment to carry out a diagnosis without even visiting the site. Hence, it is evident that more than half of the issues can be resolved remotely. Consequentially, there could be around 15- 45 percent of cost reductions that can be achieved through predictive or remote maintenance.

• Challenges imposed for industry 4.0

Not all organisations are convinced about the value that will be added by the industrial revolution technology. Some of the organisations feel that the concept of industry 4.0 is defined with exaggerated expectations whereas, some believe that fully digitalised products and value chain is still a “pipe dream” (Lee, Bagheri and Kao, 2015). The technologies associated with Industry 4.0 (such as big data, IoT, machine-to-machine communications, and smart robots) are said to have inflated expectations. According to the global survey conducted in 2013-2014, most of the respondents have revealed that they could not comprehend the underlying business models of IoT and its significant implications on the industry.

Development of a complex network is evident to manufacture and distribute products in a flexible manner (Deloitte, 2014). In order to do so, the organisational management must ensure to invest and form an alliance with the partners such as with technology companies, infrastructure suppliers of telecom and internet service providers (Lee, Kao and Yang, 2014).

• • Investment

Huge amount of investment is mandatory for companies who are willing to make a move to industry 4.0. This is projected to be approximately €40 billion annually for Germany alone until 2020 and €140 billion annually for Europe. These investments are significantly attractive for the medium and small sized enterprises, which are willing to adapt to digital marketing (Monostori, 2014). The overall progress has been highly cautious so far, as Germany being the leader has estimated that one out of every five companies makes use of interconnected IT systems with the aim of controlling the production processes and half of them actually execute the intention.

• • Security and data ownership

A large amount of data needs to be collected and shared among business partners in the value network. The confidentiality is essential to ensure that the data generated are not used by the competitors or collaborators. Hence, to be precise, the smart services are significantly based on data generated from the smart devices during the time of manufacture and usage (Schuh et al., 2014). For instance, the car-manufacturers are hesitant to share the data being generated during manufacture process of cars, with the fear of getting a squeeze in profit by the competitors who are digitally active. The set of European rules on data storage, privacy and copyrights maintains a balance between trust and protection of data. Hence, it is considered as a necessary step in gaining European competitiveness while trading on an international basis.

• • Legal issues

Advanced manufacturing technologies raises critical questions on various legal issues related to liability of products, intellectual proper and employee supervision. Smart Glove, for example, presents data that not only guides but also documents the functioning of workers, which in turn can be used for the purpose of monitoring and evaluation of employees (Sommer, 2015). Moreover, it is difficult to determine the responsible network, if an autonomous system produces dangerous and defective products. The legal proceedings call for a balance between innovation stimulation by protecting the sharing of knowledge and IP, which forms the main sources of progress.

• • Standards

Standards are signs that an accurate exchange of data between machines, software and systems within the network value chain is ensured, while a product transforms from the “smart factory” to completion. Alternatively, a commonly agreed and independent international standard communication protocol interfaces and data formats will ensure interoperability across the varied sectors of different countries (Stock and Seliger, 2016). Such a scenario encourages the extensive adoption of industry 4.0 technologies and thereby makes sure to open worldwide markets for the European product manufacturers. Statistics from Joint Research centre emphasizes on the need of standard requirements for the organisations to accelerate their development in International countries.

• • Skill development and Employment

Employers require their workers to be ICT experts as well as having the skills of creativity, personnel management and decision-making. The labour market of the Europe Union could be short of 825000 ICT professionals, whereas this shortage will be more pronounced in the settings of advanced manufacturing, where the requirement of cyber security experts and big data analysts are high (Kolberg and Zühlke, 2016). Hence, organisations must undertake various initiatives to encourage the acquisitions of “e-skills”. Only 14% of the young adults in Germany look forward to join ICT industry, despite the fact that this sector offers best job prospects.

• • Investment on Industry 4.0 related initiatives

The EU supports the smart use of ICT and the integration of SME into the digital value chains as a significant part of their promotion for a digital economy (GTAI, 2014). The Horizon 2020 will advance the industrial pillar with an aim of investing €80 billion on Research and innovation of Industrial revolutions across the globe. Moreover, the program will finance the demonstration and prototype projects. Additionally, factories of the future, which is a public private partnership launched centres on smart, digital, advanced collaborative, customer-oriented and human-centred manufacturing processes whose indicative budget is €1.5 billion. The seventh framework initiative of ICT innovation and manufacturing of SMEs, aims to help the mid-size and small scale manufacturing companies to master the digital transformation in areas like robotics, simulation, cloud computing, etc.

• • EPRS

The high-value manufacturing centres known as “Catapult centres” are well-known for assisting the business organisations to access research and expertise in the specialised areas of process innovation and advanced manufacturing. Such centres have received around £200 million from government funding, which in turn doubles the contribution of manufacturing GDP.

Apart from Europe, France has also launched the plan for Factory of Future in April, 2015 to develop the demonstration centres, in order to present new products and services (Li et al., 2015). A significant emphasis has been laid on aid to medium and small sized enterprises, by providing them with loans up to €1 billion, so that they can start energy efficiency projects, robotics and transform to digitization. This significant new plan, along with six other industrial support programs, has been clustered into a larger framework, known as the “Industry of Future”. This focuses on specific products such as the electric airplane and energy efficient car.

• Conclusion

The companies trading internationally have to combat with several challenges while attaining the position of a digital 4.0 champion. The key challenge lies in the requirement of high level investment and solution for vague business cases for the development of new industrial applications of the internet. Moreover, while trading internationally, companies must ensure sufficient skills to meet with the requisition of the digital world. The manufacturing activities are shifting to programming from manual labour, so as to control the high performance machines. Employees having inadequate skills are ineffective unless they are retrained. However, organisations trading internationally should make the transition to Industry 4.0, in order to acknowledge a greater economy and less arduous work. The findings of this study suggests that trade and competition is expected to suffer only if the data and communication protocols are recognized nationally and hence commonly agreed international standards are preferred. Also, the organisations must ensure the confidentiality and ownership of data during international trade. Some critics often expressed their concerns regarding the fact that such technologies are highly expensive, oversized and unreliable. They have further added that the implementation of Industry 4.0 approaches is significantly being driven by the equipment manufacturers rather than the demand of customers. However, companies while trading internationally may implement industry 4.0 to cooperate with the competitors, in order to establish and use standard that allows exploitation and transmission of huge and valuable data. The paper showcases the various requirements needed for the implementation of industrial 4.0 to thrive in international business, which include the changing business models, investment and funding, data security and privacy, legal issues and liabilities, intellectual property, as well as the mismatch of skill and standards.

• Reference List

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