Industry 4.0: A new definition of manufacturing?

The “post-information” age of augmented reality, big data, “clouds” and other technologies is upon us, reimagining everything we thought we knew about manufacturing, and offering countless possibilities.

• Underlying Industry 4.0 trends include digitalization, big/small data, energy harvesting and interactive systems/artificial intelligence
• “Winners” like automotive sector prepared for “Internet of Things”; “Losers” like retail are not
• Social, workforce and business consequences exist – but opportunities more numerous
• Digital products can carry with them a potential upsurge in technical and litigious risks

The underlying trends driving "IoT" and Industry 4.0 can be found in four key areas: digitalization; big and small data; energy harvesting (where energy is captured from natural sources and stored in small autonomous devices); and interactive systems/artificial intelligence (AI).

Since the 1970s, when computers were first introduced, there has been a 90,000 times increase in computer power and speed – two important factors for computing applied to industrial applications, explains Bruch. The end cost of digitalization is increasing speed and affordability to end-users. The "IoT" has been forecast to result in over 50bn devices being linked by 2020¹.  

According to a 2015 McKinsey Global Institute study, The Internet of Things: Mapping the value beyond the hype² for Industry 4.0 to deliver its maximum potential, the cost of basic hardware, low-power sensors, radio-frequency identification (RFID) tags and battery power and storage systems must continue to drop.

One of the major outgrowths of digitalization is data – big and small. Most companies do a good job of gathering data, but far fewer companies actually analyze and learn from the data. Data quality is more important than data quantity. It is important that small, precise data be excised from larger data pools to drive sensitive, delicate industrial tasks, says Bruch. Analysis is key.

Energy harvesting to power autonomous wireless and portable devices is an important component to industrial interconnectedness and may hold the key to efficiency gains as ambient power sources that replace batteries and minimize operational maintenance and costs are introduced³.

Since the 1970s, automatons have been used in factories. Artificial intelligence (AI) technology has progressed, however, so that now humans and machines flawlessly interact, as machines do with other machines. Talking products, armed with voice recognition software, even communicate with the production system. Manufacturers are reducing the cost of production, as well as enhancing speed and performance, by introducing even more sensitive “smart products” and “smart factories”.

AI is the wave of the manufacturing future and industries that employ it and similar digital technologies will be the “winners” of tomorrow’s marketplace. Clearly, however, not every sector will find the transition easy. Nor may the average factory worker.

In early 2015, a Chinese firm in Dongguan specializing in precision technology set up the world’s first fully automated, unmanned factory in a facility that formerly employed 650 people. A small technical staff of 60 human beings (soon to be reduced to 20) monitor everything through a central control system. Defective products dropped from over 25% of production to less than 5%⁵. It is a given that digitalization will take its toll on certain jobs.

“Essentially, any job that one can imagine as being digitalized will likely become a victim,” says Bruch. He explains that a recent Oxford University study found that the 10 most likely jobs to be automation victims include telemarketers, insurance underwriters, claims adjusters, watch repairers and accountants’ clerks. Growth in field services, asset management, robotic maintenance, remote diagnostics and analytics expertise will offset job losses due to digitalization⁶.

Industry 4.0 will impact labor strategies as well. Despite fears that automation will replace workers, however, actually highly skilled labor demand will increase. A Deloitte study⁷ predicts that Industry 4.0 might slow incidences of offshoring in developed economies as global competitiveness, minimized relocation initiatives and the opening of more production locations in Europe and North America become the norm.

Digitalization relies on the adaptation of new technical skills, notably in the case of operating activities and mechanical working processes in production, purchasing, and warehousing and logistics. In some cases, retraining or further training in new applications will be needed. In future, companies will pay more attention to developing the competencies of their employees.

To benefit from exponential growth, companies must organize around digital power, tap external knowledge pools, combine assets, gain better market and industry knowledge, learn customer preferences, focus on learning new skills, and innovate much faster than in the past. Companies will become learning organizations, so as to make full use of the new technologies inherent to digital transformation.

Where is the value potential of Industry 4.0 to business? The McKinsey report reviews its potential impact on nine “settings” and predicts a total impact to the global economy of between $3.9trn and $11.1trn. Total industrial economic impact on businesses (commerce, transportation and logistics, factories, retail environments, and worksites) will be between $2.33trn and $6.68trn.

Industry 4.0 is positively impacting businesses in many fundamental ways, all of which impact top line profitability. Among many other benefits, enhancements are realized by eliminating inefficiencies and product defects; by reducing machine downtimes and anticipating maintenance schedules; by automating work; by increasing forecasting accuracy; by lowering emissions and waste, while more sustainably using resources; by reducing inventories-on-hand through just-in-time manufacturing; by significantly reducing losses from human error; by delivering highly customizable products; by greatly decreasing worker injuries; and by enhancing the customer experience.

There are a multitude of examples as a result of becoming digitalized – and the list is growing. Automation greatly enhances quality production output, as seen in the Dongguan, China, example above. And in London, the Oyster Card, which gives travelers access to trains, subway lines and buses, also serves as a “smart” alert mechanism for the Greater London Authority for train malfunctions, delays, and so on.

With opportunities come risks. Aside from the direct benefits to industries, Industry 4.0 benefits the entire supply chain. The chain is better monitored, more predictable and visible and improved tracking brings more efficiency, better alignment and collaboration, and reduced losses due to spoilage or expiration. These are definite positives, says Bruch. However, security flaws built into embedded software code is difficult to detect. The more connected devices, the more entryways for hackers. The current security level of smart hardware is rather low. Cyber security is a real concern. Most businesses are woefully ill-prepared for cyber-attacks. Federal Bureau of Investigation (FBI) Director, Robert Mueller, predicts that cybercrime will soon eclipse terrorism as the main industrial worry.

Digital products despite their convenience or efficiency also carry with them an upsurge in technical and litigious risks. Liability claims may be leveled against the developers and vendors of predictive maintenance software in cases where injury or death occurs. Many legal ramifications follow in the wake of digitalization, but risk management is also impacted.

How will traditional risk solutions offered by insurers be impacted? Risk managers will see a shift of their risk portfolio which will impact traditional insurance solutions and stimulate the need to innovate new risk mitigation solutions in areas of intangible risks (for example, brand, intellectual property, cyber).

With inventory optimization, however, and difficult supply chain risks, as well as more complex claims, insurance demand and cyber threats could impact covers like marine cargo, property damage, and BI , conceivably causing an increase, says Bruch. With health and safety issues, covers like workers compensation and general liability could be impacted, as sensors and autonomous machines would prevent accidents and limit toxic exposures.

And with cyber risks, covers like cyber, BI and intellectual property might increase, as more prevalent risks would exist due to devices being potential entry points for data breaches and interconnectivity being able to spread the damage quickly and significantly. The accumulation potential of shutting down complete infrastructures would also significantly impact future claims scenarios.

To push digitalization forward, there has to be some connection to and cooperation with the end-client. Demands are no longer traditional – like coverage for a company’s factory – but intangible, like cyber or reputational risk. Refining existing and developing new risk services beyond the traditional is key and is best accomplished with innovation, product and business model research and development, creative exploitation of data and risk patterns, and movement away from traditional to digital interfaces. But in the end, insurers must engage with their clients to benefit jointly from the next industrial revolution.