Hype or History in the Making?
Baird Capital's Industrial Solutions Team Considers the Implications of Industry 4.0 on Mid-Market Industrial Businesses
ANDREW DYERINVESTMENT MANAGER
When discussing catalysts for change in today's global industrial marketplace, Industry 4.0 is a term that looms large. This concept encapsulates the end-to-end digitization of the production and sales processes within businesses. It envisages a world in which physical assets talk to each other, sales pull demand through the supply chain and manufacturing and assembly processes are highly automated.
IS IT HERE YET?
In truth, many elements of Industry 4.0 have been present in high-tech manufacturing for a number of years. There are anecdotes about consultants pitching Industry 4.0 concepts to automotive manufacturers only to be told they have been utilizing them for years. But a truly connected digitized industrial supply chain does not yet exist in 2016. The level of integration required to create a fully networked industry requires a number of missing components to come together.
PIECES OF THE PUZZLE
Manufacturing technology, cost and availability. If you know where to look, groundbreaking manufacturing technology is already out there. Manufacturing simulation in "3-D" caves of virtual process and manufacturing lines is already used by aerospace OEMs. A single machine that uses automated inspection to identify damage to an alloy turbine blade, perform high-speed machining to remove the damaged area and replace the missing material using laser cladding technology won an industry award over three years ago. The machine in question could replace several manufacturing cells in a factory or even several subcontractors in a supply chain. Net-shape hot isostatic pressing can already create complex shapes in exotic (and expensive) alloys with less that 10% of the waste of conventional forging and milling techniques. Today these technologies are hard to find and prohibitively expensive, but the savings that could be achieved in manufacturing processes and supply chains will get harder to ignore.
Advanced manufacturing and systems integration capabilities. Many of the skills required to design, plan and implement Industry 4.0 are hard to find today and can only be found in isolation. For this future of manufacturing to become a reality, intellectual capital is needed that stitches together a diverse range of disciplines such as material technology, engineering and design, systems integration, robotics, software telecoms and ERP. For now, this piece of the puzzle is missing.
Network connectivity. Connectivity remains a barrier for many manufacturers in implementing many aspects of Industry 4.0. Mobile data coverage remains patchy and data speeds vary. Existing manufacturing sites weren't designed with the need for data connectivity in mind. To enable reliable connectivity between different locations, different machines and business systems, we are waiting for the rollout of 5G globally from 2020.
Leading the charge. Large OEMs have the most to gain from the benefits of Industry 4.0, and with larger capex budgets and greater potential opex savings they have been (and will continue to be) first movers. However, many smaller mid-market businesses have already been instrumental in helping the OEMs achieve this, from consultancies and technical service providers to spin-outs from research-led institutions. But for your average mid-market entrepreneur, we are just at the tip of the iceberg in terms of the changes that will impact their businesses. Even in less-structured supply chains outside of automotive and aerospace, shorter product lifecycles and more demanding end customers will drive the need for both increased production flexibility and reduced cost throughout the supply chain, something Industry 4.0 promises to deliver.
OPPORTUNITY OR THREAT?
Industry 4.0 will not happen overnight. The key pieces of the puzzle are not yet in place. There will be trial and error along the way. Progress will be slow, punctuated by meaningful steps forward as the technology, intellectual and integration resources, and data connectivity become available.
Mid-market businesses engaged in the manufacturing of goods face a dilemma as to when to invest – wait for existing capital equipment to reach the end of its useful economic life, or invest early to get ahead of the competition? The risks are inherent – invest in unproven technology and potentially suffer disruption, delays and cost overruns in implementation, with lower-than-forecast savings. Invest too late and risk business failure as the competition is able to lower prices, increase choice and improve customer experience.
In the end, the biggest hurdles for Industry 4.0 for the mid-market will be expertise, capital availability and appetite for risk. The rewards for the bold and the brave who are well-funded and who have access to the right resources could be as dramatic as those achieved in the last Industrial Revolution. Given the challenges and potential rewards, private equity should be able to spur the confidence for middle-market firms to innovate.