How Different the Factory of the Future Will Be?

Why Now?

  • The declining cost of data and computing;
  • The declining cost of components;
  • A pending explosion in the capabilities of industrial wireless connectivity (5G);
  • Significant advances in automation technology like robotics.

Why Does This Matter?

  • It provides new revenue streams: Predictive maintenance is valuable to the customer through increased uptime and reduced repair time. Supplying software-as-a-service (SaaS) for product and process design mutes the traditional cyclicality of industrial hardware sales. For software offerings, advanced analytics and machine learning can be put to work operating on data in managed services scenarios and significantly boosting the value of these already high-margin offerings. There are also whole new markets; industry research firm IoT Analytics puts the software industrial IoT market at $1.7 billion in 2018 growing to $10 billion by 2023, including both the contribution from the Industrial Internet of Things (IIoT) and Augmented Reality/Virtual Reality (AR/VR).
  • Manufacturers are demanding it: Often through lower production costs and shorter development times. One major industrial player estimates development times for aircraft can be reduced from six years to 2.5 years using digital tools, and that machine commissioning times can be cut by 25%.
  • It is defensive in a period of technology disruption: In the past, Germany has lost its leadership in sectors such as consumer & communication electronics or carbon materials. Against a backdrop of technology disruption, the German government has promoted ‘Industrie 4.0’ to retain leadership in industries like automotive, medical devices, and more. China is also promoting this shift. Geopolitical forces alongside technological advancements can accelerate the desire to localize or re-shore production closer to the end market, which is far easier when the process is digitized.
  • It is happening during a period of heightened trade tensions: This may mean multinationals will need to reduce the concentration risk in their operations away from China. In the May 2019 joint survey of member companies, the American Chamber of Commerce in Shanghai and China found almost 41% of respondents were considering relocating — or have already relocated — manufacturing facilities outside of China, versus only 18% of respondents who have indicated the same in an earlier 2018 survey.
  • There is an increased focus on data on waste and resource usage: Analysis by McKinsey, as part of a study with the Ellen MacArthur Foundation found material cost savings worth up to $630 billion per year by 2025 in EU manufacturing sectors by increasing resource productivity. In the U.S., a study found benefits of 250–350mn metric tons of CO2 equivalent and $2 trillion in annual U.S. revenues could be generated from circular manufacturing. These points suggest that a move towards more circular manufacturing is likely to reduce costs for manufacturers.

We Can See This as a Secular Growth Theme Against Recent Cyclical Weakness

What is the Factory of the Future?

  • Flexible: Mass personalization (the ‘batch of one’) requires fully automated production and supply chains. On-demand production and supply chains become key enablers. Rather than a world of fixed products created offshore, this is a world where everything exists in design or cyberspace, where the customer creates the product they really want, and that product ends up being produced locally due to new advances in robotics and fabrication processes.
  • Digitalized: Design, production, and service have to be digitally driven. To this end, companies talk of three ‘digital twins’ for manufactured products a virtual version in design, in production, and in use. Key themes here include the data from connected devices the IoT and the convergence of software and hardware. Digitization becomes a key enabler of distributed manufacturing, with ‘digital twin’ designs sent to and produced in fully-automated factories around the globe. Worker productivity can also be boosted by virtual and augmented reality devices to bridge the digital world and the real world in production, training, and service.
  • Zero-waste manufacturing: This not only refers to energy (and other resource) efficiency but also the concept of ‘circular manufacturing’. The United Nations Sustainable Development Goals highlight the need for responsible production.

Who Are Likely to Be the Disruptors?

  • Optimizing the process through ‘vertical software’: ‘Vertical software’ is designed and used for a very specific industry, and is already one of the largest and fastest-growing software end-markets. The widespread adoption of connected devices creates a virtuous circle as more data collection allows for more advanced analytics, and so further product and manufacturing process improvement through software. Vertical (i.e., industrial) software companies are increasingly competing with traditional industrial players, and while domain expertise (i.e., industry and application-specific knowledge) is key, we see this as an area of increasing competition.
  • Owners and interpreters of data: It is too simplistic to say that data is the new oil; industrial data is valuable but not a commodity. Much industrial data is not readily available by default — the vibration of a motor is analog by default and needs to be interpreted and digitized. Domain expertise and an installed base are both keys to collecting and contextualizing this data. We see industrial companies with large installed bases as having an advantage here.
  • Suppliers of advanced manufacturing systems: While the penetration of robots in the automotive industry is quite high (>90% for some tasks), the penetration in the general industry is far lower. The adoption of collaborative robots (cobots) to work alongside humans is still in its infancy. For years, robots have supported human activity in difficult, dangerous, and dirty tasks. Increasingly more capable robots that are able to adapt, learn, and interact with humans and other machines at semantic levels will create new jobs, improve the quality of existing jobs, and buy us time.
  • Suppliers of connectivity: High reliability and low latency are key for connected industrial components, and I see enablers of connectivity (the suppliers of connectors and sensors, as well the enabling communication technologies) as benefiting, although the adoption of 5G presents its own risks of disruption for incumbents.
  • Cloud infrastructure is the backbone of the IoT: IaaS (Infrastructure as a Service, the ‘bare bones’ of servers, storage, and networks) and PaaS (Platform as a Service, to additionally include operating systems and databases, etc.) are key building blocks for Industrial IoT platforms; while industrial companies had moved towards PaaS models, the requirement for scale and technical expertise (rather than industrial expertise) is arguably beneficial to the cloud players here. Collaboration rather than competition between tech and industries seems the most likely outcome here.

Who Is Likely to Be Disrupted?

Flexible Manufacturing

  • Reduction of inventory and transport times;
  • Diversification of the supplier base;
  • Optimizing industry capacity / lowering fixed assets ;
  • Differentiated experience for the end customer.
  • The disruption of traditional labor markets;
  • The disruption of supply chains;
  • The challenges of regulatory enforcement in industries where facilities may need to be certified (for example by the FDA);
  • The ‘land grab’ — both organically and through acquisition — to build IoT platforms and access data may not always create value for every player; a small number of big winners may emerge.

Digital Manufacturing

  • Manufacturing produces more data than any other sector in the U.S. economy;
  • 40% of manufacturing security professionals said they do not have a formal data security strategy;
  • There is a five-year lag-time in IoT adoption in factories due to cybersecurity concerns;

Green Manufacturing

  • Better product design: More durable products with replaceable parts “the circular economy”.
  • Fewer resources in production: German Auto manufacturer Daimler intends to cut CO2 emissions at its new ‘Factory 56’ by 75% as compared to its existing S-Class production facility, including by having a CO2 neutral energy supply.
  • A focus on by-products and waste: One in which all waste products are productively reused and as such, there is no absolute waste burden.

New Technologies Are Defining Industrial Policy

It All Started in Germany…

… with China as the Driver

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Mr. Economy

Mr. Economy

Economic researcher and institutional investment manager