The Blog

Industry 4.0: A Driver of Innovation for Europe

If Europe wants to get a good start in this future market, it has to lay the foundations now, and become active first and foremost on three fronts: in infrastructure, in education, research and development, and in the support and financing of startups.

The advance of modern information and communications technology (ICT) is unstoppable - even in the manufacturing sector. Smart, networked manufacturing systems are fundamentally changing the way companies produce: Industry 4.0 is the fourth great industrial revolution after the steam engine, mass production and automation. The Fraunhofer Institute for Labor Economics and Organization expects there to be 50 billion networked appliances by the year 2020. Machines will communicate with each other and their users, digitally and in real time. Factory processes will become visible and controllable in virtual space. ICT will dominate future business models.

The development toward Industry 4.0 is a huge opportunity: a powerful high-tech sector can become an engine of innovation that Europe is in desperate need of in the face of global competition. After all, with the exception of SAP, Europe has almost no more ICT companies worthy of mention. From Internet companies like Google and Facebook, to PC and smart phone manufacturers such as Apple and Samsung, from software houses the likes of Microsoft and Oracle to network operators like AT&T and China Mobile: non-European enterprises today dominate this field, especially the USA and Asia, with China, Japan and South Korea. Only eight of the world's top 100 high-tech companies have their head office in Europe, and Microsoft's takeover of Nokia spelled the end of the Continent's last maker of mobile phones.

But ICT is only one side of the Industry 4.0 coin. The other is its use in the industrial sector and the utilization of the benefits that it brings to the value chain. Here, Europe has the best prerequisites, because industry still plays a central role in Europe's economy: its share of the EU's economic performance is 15%, in Germany around 24% and in the USA only around 12%. With this pronounced competence in industry - and to some degree also in industrial information technology - we can attract new ICT companies and use our "traditional" manufacturing technology as the launching pad to become the innovation leader in Industry 4.0.

This is an opportunity we have to make the most of, because the networking and digitization of industry and economy will change the balance of power in the world. The pattern is known to us from the third industrial revolution. When electronics and computers made their way into industry and further increased the level of automation, the (production and cost) factor labor lost significance. As a result, for example Germany benefited as a whole as an industrial venue in global competition, even though jobs were lost in some industries: new ones were created in others. The fourth industrial revolution will be even more comprehensive, encompass more industries and be more complex. Industry 4.0 is all about innovatively joining together big data, plant-specific software and the "hardware" of manufacturing technology.

Already today, every production plant continually generates data. Using these data efficiently provides a considerable competitive advantage. For example, a big-data based diagnosis tool can precisely monitor machines and give early warning when damage occurs to them or servicing is required. This reduces downtimes, enables more accurate planning and thus reduces unit costs. Another example: If process data are prepared intelligently, parts of the production process that consume too much electricity can be identified and eliminated. Applications of this kind can give companies a cost benefit of up to 80%. Taken to its logical conclusion, Industry 4.0 creates the vision of an entirely networked production landscape, in which orders manage themselves throughout entire value chains, book processing machines and material and organize their delivery to the customer.

If Europe wants to get a good start in this future market, it has to lay the foundations now, and become active first and foremost on three fronts: in infrastructure, in education, research and development, and in the support and financing of startups.

Firstly let us consider infrastructure. Slow Internet connections are a locational disadvantage, just as are poor roads or a poor electricity supply. In Switzerland, 91% of all Internet connections use fast broadband technology. In South Korea this figure is 94%. In contrast, Germany, France and Italy come in with just 75, 69 and 57% respectively. In order to modernize and develop the European infrastructure, both the traditional and the Internet access, we have to invest at least a trillion euros. That money could come from the around 170 trillion euros of private capital for which investors are searching for investment opportunities around the globe. To achieve this we need framework conditions that are reliable and free of ideology, and that facilitate private investments in infrastructure. In addition, we also have to create a true, pan-European domestic market for infrastructure services, because as of today, this market is severely fragmented compared to the USA (for example, we have 55 mobile telephone networks. In the US there are just five!). A single domestic market would promote the consolidation, cut costs and significantly increase the attractiveness for investors.

Secondly, education and R&D: Europe cannot compete with other regions when it comes to costs of labor, especially not with Asia. So it has to further increase its head start in know-how intensive industries. Europe still invests only 1.9% of its GDP in R&D - around one percentage point less than the USA and 1.6 less than Japan. These budgets have to be increased, both in the private economy and in the public sector, and investments in research and development have to be fostered by means of tax benefits. We also need more university graduates in the MINT subjects (mathematics, informatics, natural sciences and technology): In Europe, only 17% of tertiary students study in these subjects, whereas in South Korea it is 29% and in China and Taiwan even 31%. The success of the ICT industry in these countries attracts young people to it, while in Europe, technology is often considered to be boring or even dangerous. That image has to be improved.

We also need more startups in Europe, in order to establish new ideas, companies and business models. A glance at the age of the most innovative companies shows: in the USA, 22% of them were founded after 1965, and only 56% before 1925. In Europe, 2% were founded post-1975 and 86% pre-1925! The financing possibilities for startups have to be improved, for example by providing tax benefits for venture capital: In the USA, around 20 billion dollars are invested here per annum. In Europe the figure is a mere four billion dollars. So it comes as no surprise that Silicon Valley attracts innovative company founders, while Europe is becoming less and less attractive for such entrepreneurs. Speaking of Silicon Valley: Europe needs more clusters where startups and established companies can network, collaborate and together build up Europe-wide value chains. Here too we can learn a lot from America! Furthermore, the image of companies and company founders has to be worked on. In Europe the fear of failing is widespread, which is why far fewer people here start a company. And that although startups are per se innovation drivers! So we have to support the willingness to take risks, do away with the taboo of failing and establish successful entrepreneurs as role models.

This three-pillar program has to have a long-term scope. The political, economic and scientific sectors, trade unions and investors have to work together. Then Europe has the best prospects of making good use of the innovation motor that is Industry 4.0.