With the advent of Industry 4.0 – also commonly referred to as the 'fourth industrial revolution' or 4IR – FDI in manufacturing is moving away from a low-cost labour model towards destinations that can accommodate the requirements of smart factories, including automation, artificial intelligence (AI), skilled labour and customer proximity, to name a few.
Regions at the forefront of the smart factory wave, particularly Europe, are therefore set to become even more attractive destinations for foreign investment in manufacturing.
Simply put, Industry 4.0 is the fusion of traditional industry with technology. Underpinning it is the Internet of Things (IoT), which enables continuous data exchange between connected devices such as the latest phones, cars, factory machines or any other electronic device that has software, sensors, actuators or internet connectivity.
Europe's early lead
The smart factory is the poster child of Industry 4.0, but what makes it smart? As well as IoT, smart factories adopt a combination of robotics, AI, big data and more, while operating with semi- or complete autonomy to react quickly and flexibly to both market and product changes.
The sectors that are early adopters of smart factories tend to be those built up with strict modularity, such as packaging and assembly line plants, followed by automotives and then hard industry – steam crackers and steel mills – according to professor Detlef Zühlke, founder and chairman of the board of the SmartFactory-KL, which in 2004 became one of the first organisations to set up a smart factory.
According to the World Economic Forum’s (WEF's) recent list of the world’s top nine smart factories, five are based in Europe and three in China. The WEF says these two regions lead the way in terms of technological applications to manufacturing at scale, adding: “While Europe may have struggled to produce its own homegrown internet giant, the region remains a powerhouse when it comes to applying advanced technology to manufacturing.”
The strength of European manufacturing more generally is shown by the fact that Europe has received 32% of the world’s greenfield investment projects in manufacturing since 2009, while in Asia-Pacific the figure is 32% and in the US 14%, according to fDi Markets, a data service from the Financial Times.
More than half of Europe's share went to emerging countries such as Hungary, Poland and the Czech Republic, which combine cheaper production costs with a solid technical and engineering knowledge base tracing back to the Communist era.
At a country level Germany is at the front of the smart factory knowledge pack, according to Mr Zühlke. Its leadership is reflected by the fact the term ‘Industry 4.0’ was coined by one of its many state-led initiatives in 4IR. Moreover, five of the WEF’s top nine smart factories are from companies headquartered in Germany, while three are from the US.
Beyond Europe, Mr Zühlke is sceptical about China’s technological edge. “I’ve been to one of these WEF showcase factories in China, and I can report that this is not a smart factory at all. [Similar to the US], China gives the most money to smart factory funding, but it is not a knowledge leader,” he says.
Beijing is eager to close the knowledge gap and is urging domestic companies to gain access to the latest industry 4.0 technologies through aggressive, and often controversial, acquisition campaigns abroad.
In 2016, Chinese appliances manufacturer Midea shelled out €4.6bn to acquire Kuka, a leading German manufacturer of industrial robots, sparking a backlash in Berlin, but not one big enough to derail the deal.
As things stand, the most advanced country in Asia for smart factory development is South Korea, followed by Japan, thanks to the likes of Mitsubishi, according to Mr Zühlke.
Although it is not yet a top destination for smart factories, the US is putting huge sums of money into Industry 4.0 research, largely thanks to the ‘Manufacturing USA' programme set up by then-president Barack Obama, according to Mr Zühlke.
“The US’s problem is that, 20 years ago, it decided to move production abroad, so it lost its knowledge, except in aerospace and semiconductors, so it has fewer skilled workers. [Due to this knowledge shortfall], our biggest market for smart factories will be the US because many [investors] want to extend US relations, but [president Donald] Trump is not happy,” he says.
That said, each country has different specialisms vis-a-vis smart factories, according to Chris Hazlewood, senior manager of promotion factory automation at Mitsubishi Electric. “For example, the US side is highly [IT driven] and ‘data centric’, collecting large volumes of data, making data analytics on crunching numbers” while European countries “excel in different types of machine knowledge”, he says.
The development of Industry 4.0 technology, which requires skilled labour and highly developed infrastructure, is incentivising advanced manufacturers to ‘nearshore’ production, setting up new factories closer to customers, thereby bucking the decades-old trend of moving manufacturing to low labour cost locations.
Meanwhile, as online shopping and e-commerce continue to flourish, mass customisation and high-speed delivery are becoming the norm. For example, in 2017 Adidas set up its ‘speedfactories’ in Germany and Atlanta – not Asia – to provide ‘next-hour’ delivery for customised products.
Fellow sports apparel giant Nike has also joined the race. “We are in the early stages of what is a tremendous shift within our supply chain. We’re digitising our end-to-end supply chain and creating a model with shorter lead times. Our goal is to provide same-day service in all of our key cities around the world,” Eric Sprunk, Nike’s chief operating officer, said at the company’s investor day in late 2017.
“We’re creating a vertically integrated and responsive onshore and nearshore network, enabling closer-to-market manufacturing, embellishment and responsiveness capabilities.This will allow us to serve our largest geography, North America,” he added.
In another example of nearshoring, Germany’s Sennheiser relocated part of its production from China to Romania, in 2018, in order to reduce delivery time and the total cost of ownership, according to the EU’s European Reshoring Monitor.
The move towards nearshoring will not be a rapid one, however, though the long-term future in certain areas of manufacturing seems to lie in regional factory networks closer to consumers. Nearly 25% of apparel-sourcing executives responding to a study by McKinsey and Germany’s RWTH Aachen University said that more than half of the clothes they source in 2025 will come from ‘nearshoring’, which is currently a minority source.
“In the case of Europe, the backshoring movement is the consequence of a strategy to move from resource-based manufacturing to knowledge-based manufacturing, and from mass-produced single-use products to new concepts of higher added value, custom-made, eco-efficient and sustainable products, processes and services,” says professor Paulo Jorge Da Silva Bartolo, chair in advanced manufacturing at the University of Manchester.
Local production will also grow in popularity as climate change penalties increase, hiking up the price of long-haul transportation. However, due to supply chain limitations, not all industry can be easily relocated. An example here is mineral processing, which is done close to the point of extraction due to high transportation costs.
On the talent trail
The greatest challenge for Industry 4.0 investors is, according to many in the market, talent availability. “In the past, you were looking at low labour cost. Automation will require different kinds of skills and workers who can operate smart equipment and maintain the factories. This is increasingly a factor in the minds of manufacturing investors,” says Susana Gonzalez, president for Europe, Middle East and Africa at industrial automation and IT provider Rockwell Automation.
When Procter & Gamble sets up a smart factory, as it did in Czech Republic recently, it leverages local talent and sets up collaborations and partnerships with the ecosystem of local universities or start-ups, says Fares Sayegh, P&G’s vice-president of European supply chains and global business services.
Indeed, as well as the right digital infrastructure for smart factory development, a country needs triple-helix co-operation between industry, applied sciences and basic sciences, [and the government], as is the case in Germany, says Mr Zühlke.
Smart factory investors will also consider a country’s 5G development and readiness and development, as well intellectual property (IP) protection and cybersecurity, he adds. Many hi-tech manufacturers are withdrawing from Asia, especially China, due to poor IP protection, difficult government regulations and an increasing cost of labour, contends Mr Zühlke.
Disaster on the horizon?
Backshoring hi-tech manufacturing poses a huge threat to low-cost locations across the world, especially those in Asia-Pacific, where 32% of all greenfield FDI projects in manufacturing went between 2009 and 2019, according to fDi Markets.
“The need for skilled labour will limit the kind of manufacturing that some developing markets can do. Developed countries are ahead, however, the challenge will be for all countries and companies. Those entities that can reskill their workforce fast will succeed. For those countries who are further behind, governments need to [update] education, [infrastructure and] attract FDI from multinational corporations,” says Ms Gonzalez.
While doing this may not be easy, Siemens’ investment in Vietnam in 2018 provides a positive example. The German conglomerate invested $4.8m in Ho Chi Minh City to create a training centre focused on automation, digitalisation and Industry 4.0.
“There are fewer and fewer young people wanting to go into manufacturing as a career compared with banking, for example, or other desk jobs,” says Mr Hazlewood.
A recent report from the Manufacturers’ Organisation found that UK manufacturing companies need more production-related technical skills and almost 50% will need staff with advanced IT skills. And when it comes to the belief that automation is replacing human work, Mitsubishi Electric's Mr Hazlewood is of the opinion that it is in fact complementing it or creating new types of jobs. “Yes, factories employing 5000 employees may disappear, but the same companies might swell to 7500 employees on a distributed basis,” he says.
With even the most advanced economies feeling the pressure to recruit skilled workers and keep pace with technology, the challenges and opportunities presented by Industry 4.0 are both global and substantial.