FOCUS
ECONOMIC CHANGES
Industry 4.0:
Putting an end to the myth
of reindustrialisation
SEPTEMBER 2016
The industry of the future will not allow for the reindustrialisation of our economies. Making factories
more productive, more efficient and closer to their customers will not reverse the natural trend toward
more services. Therefore, by exaggerating the expected results of this 4th industrial revolution, there is
a risk of disappointing — or worse — of discouraging people. This would be serious because its impacts
promise to be at least as powerful as those of previous revolutions. Digital technology could transform
industry to an unprecedented extent, at least since the days of Henry Ford.
Jean-Luc Biacabe
Chief economist
@biacabe
10'
Reading
time
Industry 4.0 is the stuff of dreams. It
gives those that missed out on the previous revolution — through automation
— a chance to catch up. Launched by
the Germans in 2011, the aim of this
4th industrial revolution is to transform
industry through digital technology.
All of the major industrialised countries
are preparing for this upheaval, which
they expect to cause a shake-up among
producers and redistribute value
throughout the links of the chain. In
France, companies, professional federations, local authorities and researchers
have joined together in the Alliance for
the Industry of the Future to support
2 000 companies and help them modernise by digitising their processes.
Because the stakes for this project are
so high, there is a great temptation to
use and abuse superlatives. Some
people are seeing it as a chance to repatriate production that was relocated to
Asia and low-cost countries two de
cades ago. Others are dreaming of reindustrialisation or even of a reversal of
the industrial employment curve in the
old industrial countries.
Industry 4.0 : definitions
- "The industry of the future is a technological revolution that offers new opportunities in production methods and provides a response to the new challenges
facing French industry"1;
- "The 4th industrial revolution concerns digital technology. It is the fruit
of the convergence of two technological trends born at the same time
as the Internet: the dematerialisation of a growing number of activities and the interconnection of absolutely everything, which allows the
entire world to be converted into data"2. In other words, "the digital
revolution seeks to marry the current production systems with big data and
connected objects in order to optimise the operation of industrial assets”3.
The digital revolution is therefore a synonym for the 4th generation of industrial
revolution.
1 "Industrie du futur : concepts et états des lieux", Les Synthèses de la Fabrique, no.3, february 2016.
2 "Transformer l’industrie par le numérique", White Paper by Syntec numérique, April 2016.
3 E. Galland, Les Echos, 13 June 2016.
But these hopes are illusory. They
misjudge the deep-rooted causes of the
decline of industry in our economies.
Above all, they lead us to neglect the
real contribution of Industry 4.0. It is therefore essential, and indeed vital, for us
to commit to this revolution, but not for
the reasons mentioned.
Industry 4.0 as revealed by economic analysis
The economic analysis used to describe a company’s production activity uses
a Cobb-Douglas type production function consisting of two production factors
combined in variable proportions: Y = f(K,L). The increasing digitalisation of
production facilities is interpreted as a rise in the proportion of the Capital factor
and a transformation of the Labour factor that is more favourable to qualified
jobs than unqualified posts.
By dividing the different terms of the function by L in order to obtain "per
capita", data, we obtain: y = f(k), with y (Y/L) being the productivity gains and
k (K/L) the capital intensity. As the latter will increase with the transition to
industry 4.0, the productivity gains are therefore likely to rise. Without a rise in
production, the quantity of labour mobilised will be lower.
Share of industrial added value
in total economic added value
THE DIGITALISATION OF
INDUSTRY WILL NOT CREATE
MORE GROWTH…
A major technological breakthrough.
Great uncertainty surrounds what
Industry 4.0 is about to deliver. Thanks
to digital technology, production facilities will become more competitive and
provide a better response to an increasingly personalised demand for goods.
Industry 4.0 will be more capital-intensive and will include a higher proportion
of qualified and highly qualified jobs. But
the manner in which big data, the
Internet of Things and artificial intelligence will be combined will also depend
on the magnitude of the predicted rise
in quality.
The digital revolution in
the automotive industry
The autonomous car is the new frontier of the automotive sector. In practice, the essence of the autonomous
car will no longer be the vehicle
but the on-board software. Another
radical prospect for the sector is the
transition from possession to leasing.
The consequences of this change of
business model are hard to predict:
there are those that announce a
30 to 40% drop in vehicle sales,
while others suggest that a greater
use of vehicles could reduce their
life span. The outcome of these
upheavals in 10 to 20 years’ time will
certainly be a higher fleet turnover
rate, with a greater proportion of
intangible components in vehicles.
1 R.Davies, "Industry 4.0: digitalisation for productivity
and growth", European Parliamentary Research
Services, Briefing, September 2015.
Unconvincing quantitative estimates.
To date, few studies have set out to
quantify the spin-offs from this digital
revolution. Reindustrialisation (cf. supra),
relocation, and even net creations of
jobs are commonly mentioned, without
evaluating their extent in concrete
terms.
The Boston Consulting Group2 has made
an effort to do just this and estimates
that in Germany’s case, Industry 4.0
could generate additional annual growth
of 1% over 10 years, allowing for the
creation of 350 000 jobs (+5%). This kind
of estimate, however, raises two types of
problems: on the one hand, the productivity gains seem low in light of the
expected upheavals (approximately
0.5% per year), and on the other hand,
most of the employment is created outside industry.
Industrie 4.0 : putting and end to the myth of reindustrialisation
The European Parliament recently hinted
at the possibility that, thanks to Industry
4.0, the share of industry in GDP could
increase from 15% in 2014 to nearly 20%
in 20201.
rise in production would need to be
envisaged in order to obtain net creations of jobs in industry. This appears
highly improbable in view of the historical trends in developed economies.
An underlying decline of industry in
GDP. In all "industrialised" countries,
including the most competitive, the
share of industry is declining. The post-industrial economy is characterised by a
rise in the proportion of services, either
because tertiary functions have been
outsourced, or because the productivity
of industry is traditionally higher than
that of services3.
To these already long-established processes can be added a new movement
that sees the value created by productive phases shifting towards the largely
tertiarised upstream and downstream
phases (cf. the box on the automotive
In fact, although the gains in efficiency
are expected to be high, a significant
2 "Man and Machine in Industry 4.0 : how will technology transform the industrial worgforce through
2025 ?", BCG, September 2015.
3 Numerous explanations have been proposed for
this "natural" tertiarisation of economies. For an
analysis applied to the French situation, see:
Guillaume Ferrero, Alexandre Gazaniol, Guy Lalanne
"L’industrie : quels défis pour l’économie française?"
Trésor-éco no. 124, February 2014.
2
industry). In the end, no Western country
has managed to "reindustrialise" itself.
The best outcome has been to stabilise
the share of industry in GDP.
Even a country like Germany, which
stands out as an exception among
Western countries, does not escape this
trend towards deindustrialisation. In this
way, the changes in the level of industrial
production reveal a tendency to stagnate since the start of the 2010s. The
financial crisis of 2008 was clearly a
turning point.
A movement accentuated by the rise of
the emerging countries. A large proportion of the deindustrialisation observed
in the OECD countries can be attributed
to the transfer of global industrial production to emerging countries, primarily
China4. This process has been marginally
the result of relocations (of the production sites of Western companies to
China) but is mainly due to Western
producers being replaced by Chinese
producers (or those based in China). The
significant differences in labour costs
have been widely suggested as the reason for these transfers. This argument
must now be supplemented (or replaced)
with the size of the final markets. With
the Chinese motor vehicle market being
three times bigger than the European
market, the shifting of the centre of gravity of the global automotive industry
can no longer be solely explained by
production costs alone, but by the need
to move closer to the final customer.
4 Dani Rodrik, "Premature deindustrialization", Journal
of Economic Growth (2016) 21:1–33.
Deindustrialisation goes hand-in-hand
with the rise of services. Finally, the
drop in the share of industry in GDP
reflects the concomitant rise in spending
on services in GDP as society’s standard
of living increases. There is no denigration of industry in this observation; it is
simply a reflection that the development
of society calls for a higher consumption
of health, education, recreational, and
housing services, etc., none of which are
products of industry.
Re-industrialisation is not therefore a
credible prospect. Envisaging a turnaround in the share of industry in GDP
amounts to ignoring the long-term
movements at work in the economy. A
more efficient industrial process would
not be sufficient to compensate for the
tendency to consume fewer goods and
more services. A repatriation of certain
activities could be envisaged, but the
movement will remain limited.
Above all, this prospect does not take
account of the fact that growth in the
demand for industrial products will be
massively located in the emerging countries. More than ever, satisfying the
needs of these new markets will imply
the need to produce in proximity to the
places of consumption.
…AND YET IT IS ESSENTIAL…
The implications of this new industrial
revolution are nonetheless considerable.
At least three categories of consequences can be identified at the economic level:
Restoring the price competitiveness of
industrial units situated in Western
countries: This is without doubt the
most powerful impact. While it might
not actually create industrial employment and allow for the repatriation of
previously relocated units, this new way
of producing by reducing the costs per
units produced and reducing lead times
will satisfy more of the domestic demand
and help to maintain industrial activity in
France and Europe.
Not only will this maintenance of industry favour the development of upstream
and downstream activities in which an
increasingly large proportion of the
value is concentrated, and which
threaten to follow the exodus of manufacturing production (as is the case for
R&D), above all, it will allow for the emergence of a whole new range of highly
qualified jobs that are essential to
Industry 4.0.
Industrie 4.0 : putting and end to the myth of reindustrialisation
Germany
Industrial production
Improving non-price competitiveness:
In making industry more "agile" by bringing it closer to its domestic market and
by allowing it to satisfy an increasingly
individualised demand, it will improve its
non-price competitiveness, i.e. everything that contributes to the choice
made by the customer excluding the
price.
The most powerful impacts on this
aspect should be generated by the
exploitation of customer data. By satisfying market demand locally, by personalising it (e.g. by 3D printing), by joining
forces with the masses5 thanks to the
power of social networks and big data,
and by meeting expectations with
regard to durability and sustainability,
Industry 4.0 could allow Western companies to regain market shares.
Furthermore, although proximity to the
final market (on a BtoB or BtoC basis) will
limit the ability to repatriate productions
that were previously relocated to emerging countries, this same proximity
should provide ample opportunities for
domestic producers in Europe and the
United States.
5 According to the expression coined by H.Verdier
and N.Collin.
3
Producing individual units at accessible
prices. By liberating companies from the
tyranny of economies of scale, Industry
4.0 could reduce the incentives to
pursue strategies of consolidation and
constant expansion. Small units could
once again become competitive which,
combined with their greater responsiveness, could make all the difference in
relation to large organisations.
There is no doubt that this could be one
of the most "disruptive" dimensions of
Industry 4.0, which could lead to a break
with Fordism. The paradigm of mass production designed to satisfy mass
consumption and offering prices within
everyone’s reach, thanks to low production costs made possible by economies
of scale, could be replaced by a new
paradigm with individualised offerings
and accessible prices thanks to
automation.
While economies of scale formerly
required large production units, a universally accessible offering made possible
by new production methods could therefore favour smaller and more locally
based units. Does this mean that the
movement of industry towards consolidation could become obsolete6 ?
This is not what we are seeing today,
given the importance of so many other
factors such as transport infrastructures
and the capacity of a country or region
to provide the required competencies.
Nevertheless, the return of industries to
the heart of large urban centres could be
envisaged.
6 The effects of this departure from Fordism would
not just be felt in the production system. A large
number of institutions governing the labour and
housing markets or responsible for financing the
social protection system are directly derived from it.
The re-creation of new institutions is without doubt
one of the biggest challenges of the decades to
come.
CONCLUSION
The prospects revealed by Industry 4.0 are the stuff of dreams, fuelled by promises of exciting futures heralded by the arrival
of digital technology in factories. New solutions to insoluble problems become apparent, and irreconcilable goals now become
compatible. Above all, innovation in business models promises to be just as abundant as these new technologies
themselves.
However, Industry 4.0 also has a dark side: its impact on employment. Although new types of jobs are sure to emerge, they
will not be sufficient — at least initially — to compensate for the continued destructions of jobs in industry, not just because
of technical progress, but because the demand for goods on mature markets will not increase quickly enough to absorb the
gains in productivity. The debate on the impacts of these technological breakthroughs on employment already promises to
be heated, as it was during the time of the Canuts in Lyon (1831) or the Luddites in England (1811).
Therefore, it is important to avoid raising vain hopes, on the one hand, but also to refrain from pointless scaremongering. In
the words of J.Immelt, President of General Electric, "the key issue is not to create employment in itself, but to be sufficiently
innovative and competitive to launch new products and services in response to customers’ needs. In the end, this will lead
to the creation of jobs"7.
7 Le Figaro, 16 June 2016.
Industry 4.0: Putting an end to
the myth of reindustrialisation
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Author : Jean-Luc Biacabe
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Industrie 4.0 : putting and end to the myth of reindustrialisation
Finally, Industry 4.0 should help to
improve the efficiency of production
processes, which will reduce defects
and help to ensure zero-defect quality.
This increase in the "effective turnover"
will have major impacts on profitability
and consequently on the ability to invest.