“Virtual Manufacturing” in the 4.0 Economy

Paul W. Bradley
5 min readAug 30, 2020

Manufacturing has rapidly evolved over the past two centuries, but the greatest transformation is now underway in the Industrial 4.0 economy. At the early stages, industrial production provided an opportunity to automate human activities through assembly lines combining labor with machinery, supported by water and steel (e.g. Andrew Carnegie Steel Plants). At the second stage production was empowered by electricity creating mass production of products supported by labor (e.g. the Ford automobile assembly lines). As technology further enabled the manufacturing process, digitisation of manufacturing created heavily automated production centers minimising human contribution. In this scenario, workers minimally interact with the production process which is driven by technology and smart algorithms (e.g. Elon Musk’s Tesla Battery Factory in Nevada). Within the past decade, the Internet of Things (IOT) and the Internet of Everything (IOE) has further transcended the production process to a new stage where smart factories allow machinery to interact with itself and make modifications internally without human intervention. Advanced algorithms are being superseded by Artificial Intelligence based on machine learning. We are only at the start of the 4th Stage of Manufacturing Driven by the Internet of Things and AI. The impact on manufacturing and future supply chains will be dramatic.

Contract Manufacturing Versus “Virtual Manufacturing”

In the traditional manufacturing model, a company produces its own unique products through its own factories, buying raw material as needed based upon consumer demand forecasts, and locating factories where they are geographically optimal. These decisions require large infrastructure investments and are committed on a long term basis and these fixed assets are depreciated over decades. As global market forces have become more competitive, some manufacturers have decided to maintain production of core products and to outsource partial production of secondary tier products to other external factories in order to free up production at their plants for priority products and optimal efficiency.

Product manufacturers who own their own brands and products would start with a single factory, then expand to factories close to key consumer markets or even country markets and once they reach global sales levels, they would establish manufacturing centers of excellence for specific products in regional production hubs in order aggregate volumes and focus on specialisation across the assembly line. The costs of these fixed factories include land, building construction, equipment, advanced technologies and labor. The depreciation is usually over 15 to 30 years. However, in the new Industry 4.0 economy, production needs to shift and adapt to rapidly changing market forces such as labor costs, foreign currency exchange risks, political issues and natural disasters. The company that can shift its production rapidly has a distinct advantage. This has created new opportunities for visionary “neutral network orchestrators” to create a new model called “virtual manufacturing”.

Li & Fung Creates the Virtual Manufacturing Model

Dr. Victor Fung and his brother Dr. William Fung transformed a traditional Chinese trading company founded in 1906 by their grandfather into the first global virtual manufacturing network starting in 1976 up to the present. Dr. Victor Fung was a professor of Finance at Harvard University and envisioned a new model for manufacturing. He and his brother returned to Hong Kong, acquired all of the shares in the family business, restructured the company and launched a new concept, which ultimately evolved into the worlds largest “virtual manufacturing” network and creating a multi-billion dollar family enterprise.

The Li & Fung Group started with a narrow focus on the garment and textile industry, then toys and ultimately almost every category of consumer goods. L&F works with some of the largest Fortune 500 clients as well as major midsize companies. They build specialist teams by client to protect confidentiality and assist with initial product design. L&F leverages excess capacity and fixed commitments on capacity at specialist factories across the globe. They can then neutrally cross aggregate the demand of raw materials on behalf of multiple clients in similar brand categories to obtain the lowest price for raw materials which feed to the designated factory networks. Utilising specialist teams and advanced technology, L&F can then orchestrate the conversion of aggregated raw materials into finished products and disperse them to the clients preferred destination. They can even rapidly shift production centers to other geographic locations if required. The supply chain and manufacturing process cross aggregate resulting in consistently high quality products delivered at the lowest price. It’s clients then compete in the market against competitors based on marketing, branding, channels of distribution, etc. The product brand is always the clients, but L&F is providing the “virtual manufacturing network and expertise”. Today, Li & Fung operates over 15,000 factories over 40 countries for more than 7,000 major retailers and brand owners. Yet business disruption will ultimately impact every company, so Li & Fung is currently reorganising the company into a more nimble entrepreneurial structure and has committed hundreds of millions of dollars to develop new technologies for AI, Virtual Reality design studios (to dramatically reduce product design and production lead time) and has set an aggressive plan to digitise the global supply chain.

Foxconn Dominates Neutral Contract Manufacturing for the Electronics Industry

The Taiwanese based Foxconn Technology Group (Hon Hai Precision Industry Company) has adapted L&F’s neutral aggregation model, but with primarily its own mega manufacturing facilities to become the worlds largest contract manufacturer for the electronics industry. Foxconn’s first manufacturing plant in China was established in 1988, produced Intel motherboards in 2001 and expanded aggressively from 2007 producing products for Apple, Sony, Amazon, Acer, Huawei, Xiaomi, Blackberry, etc. It’s factories have expanded to more than 12 countries with a new facility being built in the United States. Foxconn has become a super aggregator focused on consumer electronics supporting major global clients through ownership of its own manufacturing infrastructure with the benefit of cross aggregating multiple clients raw materials. Foxconn is now the 10th largest employer in the world with approximately 1.2 million workers. However, the company is introducing new AI and robotics across its factory network with plans to significantly reduce the number of factory employees through advanced robotics in the future.

Summary

Manufacturing has transformed across 4 stages during the past two centuries, but the biggest adaptation has been in the past few decades with massive disruption anticipated in the future as AI, Robotics, IOT, VRL and Digitisation redefine what manufacturing becomes.

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Paul W. Bradley

Chairman and CEO of Caprica International. Vice Chairman, Supply Chain Asia Community. Global Business Thought Leader.