industry 4.0 finale

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THINK ACTINDUSTRY 4.0

The new industrial revolution

How Europe will succeed by

Roland BergerStrategy Consultants

March 2014

Distributed on the occasion of

International Conference

The next industrial revolution Manufacturing and Society in the XXI Century

Turin, November 14 – 15, 2014Industrial Village

in cooperation withFCA

Italian Ministry of Economic Development

Aspen Institute Italia thanks for their contributionCassa Depositi e PrestitiCompagnia di San Paolo

eniRoland Berger Strategy Consultants Italia

The Aspen Institute US thanks for their contributionBison Gear and Engineering

Deloitte


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INDUSTRY 4.0 The new industrial revolutionHow Europe will succeed

MARCH 2014

BEYOND MAINSTREAM

POTENTIALISTSFRONTRUNNERS

TRADITIONALISTS

HESITATORS


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ROLAND BERGER STRATEGY CONSULTANTS2

THINK ACT INDUSTRY 4.0

40%is the share of worldwide manufacturing (a total of EUR 6,577 bn) held byemerging countries. They have doubled their share in the last two decades. As part of traditional industrial economies, Western Europe has lost over10% of manufacturing value added, from 36% to 25%

p. 4

1,350 bn To assume a leading role in Industry 4.0, Europe will have to investEUR 90 bn a year over the next 15 years – a total of EUR 1,350 bn

p. 15

20% Traditional industrial policy will not provide enough support for valuecreation in Europe. To reach the goal of 20% industrial value added(from 15% today), we propose a new agenda for shaping a vision ofIndustry 4.0 in Europep. 19

RBIndustry 4.0Readiness

Indexp. 16

THE BIG3

1

2

3


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ROLAND BERGER STRATEGY CONSULTANTS

three main factors. Firstly, the major productivity gainsachieved in mature economies over the last few de-cades. Secondly, the loss of market share to newly

emerging competitors. And thirdly, outsourcing ofactivities such as logistics, facility management, main-tenance and different types of professional services tothe service industry. This outsourcing often resulted inthe relocation of the activity. With this outsourcingtrend now coming to a close, increased productivityand international competition are the main drivers ofthe decrease in industrial employment. But while sometraditional industrialized countries have adapted tothis new situation, others have not.

THE FIRST FRACTUREappeared with the rise ofemerging countries. This incursion was led by BRIC(Brazil, Russia, India and China), but European coun-tries such as Poland, Romania and the Czech Republicsoon followed. Between 1990 and 2011, manufactur-ing value added saw robust growth, up to aroundEUR 6,577 billion. Over that period, the traditional in-dustrialized countries saw their average manufacturingvalue added increase by 17%, while in the emergingindustrial countries it increased by 179%. The emerg-ing countries now represent 40% of the total manufac-turing value added worldwide.

A SECOND INDUSTRIAL FRACTURE recentlyappeared among the traditional industrialized coun-tries. A few have retained high industrial value addeddespite the significant decline in jobs: Germany, Italyand Switzerland have kept their industrialization rate(manufacturing value added as a percentage of totalvalue added) around 20% over the past 10 years. Oth-ers, however, saw both industrial employment and valueadded fall. This is the case for France, whose rate of in-dustrialization has decreased from 15% in 2001 to 11%in 2011. Spain and the UK followed the same trend. B

These two fractures cut right across Europe, mak-ing the continent's industry extremely diverse. And re-garding the future strategy for industrial value creation,Europe seems to be drifting apart as opposed to mov-ing in one direction.

Traditional industrialized countries such as Germa-ny, Sweden and Austria capture important value added

A

FIRST FRACTURE: THE RISE OF THE EMERGINGECONOMIES AS INDUSTRY PLAYERS

Manufacturing value added1)

1991EUR 3,451 bn

2011EUR 6,577 bn

1) UNCTAD data in constant 2005 USD,converted into EUR (2005 exchange rate)

Traditional industrial economies Emerging economies

Other developedcountries 2%

WesternEurope 36%

Japan 18%

NorthAmerica

24%

Russiaand Eastern

Europe 4%

Asia excl. Japan 8%

South America 7%Africa2%

Shareof emergingeconomies:

21%

Other developedcountries 1%

WesternEurope 25%

Japan 11%

North America22%

Russiaand EasternEurope 2%

Asia excl. Japan 31%

South America 6%Africa1%

Shareof emergingeconomies:

40%

1


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sectors are closely intertwined. Manufacturing createsvalue in the service sector (e.g. product-related ser-vices such as maintenance, business-related services

such as accounting, or restaurants, hotels, etc.). 40%of jobs in the European manufacturing sector are ser-vice-related, and on average, services make up abouta quarter of all inputs bought by EU industry. On theflipside, new services, e.g. in the cloud economy, arechanging manufacturing and adding more value in thesector. Deindustrialization in some European countriesis therefore a cause for concern because it affectsmore than just industry – it could impact Europeancompetitiveness as a whole.

An industrial imbalance creates a rif t in trade poli-cies. Ultimately the growing gap between Europeancountries in terms of industrial performance has animpact on European international trade relationships.On one side of the gap are countries with a strong in-dustrial sector, which are dependent on exports andkeen on open borders, and on the other side, countrieswith a weak industrial sector that are more inclined toput up barriers to protect themselves.

Innovation, automation and sophisticated process-es are at the root of industrial success strategies andhave proven to be critical in maintaining a leading po-sition. Therefore, looking toward the future is critical.Reindustrialization needs to be much more than simplyrebuilding structures of old-fashioned manufacturingthat vanished some time ago. Imitating the successfulbusiness models of countries such as Germany, Swe-den or Austria is not a viable solution for the rest ofEurope either. A successful approach to reindustrial-ization should take into account the changing environ-ment and align processes, production and products tothe new situation. And Europe's industrial future has tobe envisioned and designed to cross borders.

in key sectors. But Europe also has several industrial-ized countries on its eastern side, such as Poland, Ro-mania and the Czech Republic, where industry's role in

the economy has always been strong (over 20% of thenational value added). Their main advantage used tolie in low-cost manufacturing, and the value added per

job is still lower than in traditional industrialized coun-tries. But recently established plants in these territo-ries are brand new, highly automated, and will enablethe rapid development of high value-added activities.Meanwhile, France, the UK, Spain and Belgium are fac-ing considerable decline in industrial employment andvalue added.

Europe is now at a crossroads. Countries clearlyneed some industry. But Europe as a whole has to de-termine what the new pattern of industrializationamong its member states should be.

2. Why does Europe need industry?

Industry is a core element of the value chain. Whenplants move to a new location, they often take withthem expertise and employment in high value-addedsectors: development (product and process design),sales and marketing. To maintain high-quality servicesin an area, an innovative and creative manufacturingindustry is critical. The trend toward deindustrializationin some European countries puts Europe at risk of los-ing high-value activities.

Industry is critical to ensure a balanced labor mar-ket and skills pyramid. The ratio of skilled jobs is higherin industry, whereas the production of services is oftencharacterized by a concentration of highly skilled jobs(engineering, consulting, information technology, re-search, etc.) or, conversely, low skilled jobs (tourism,distribution, etc.). Deindustrialization weakens the Eu-ropean middle class, because it moves the focus awayfrom mid-salary jobs. The structural change will causea mismatch of supply and demand on the labor mar-ket. In the long run this polarizes society.

Industry and services are two sides of the samecoin. Although some argue that services may eventual-ly replace manufacturing, this is unlikely as the two


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EU2)

AVER AGE:

15% SWEDEN

17%

20%

1) Excluding electricit y, mining and quarrying 2) EU 27, 2011

POLAND

18%16%

GERMANY

23%22%

ITALY

16%20%

FRANCE

11%

15%

UK

11%

15%

INDUSTRIAL 1) SHARE OF VALUE ADDEDIN SELECTED COUNTRIES

2001 2011

EUROPE– A DIVERSE PICTURE

GREECE

10%11%

SPAIN

14%17%

Source: UNCTAD

MANY LOSERS, FEW WINNERS

CZECHREPUBLIC

24%26%

B


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Since the beginning of the 21st century, we have beenexperiencing a digital transformation – changes asso-ciated with innovation in the field of digital technologyin all aspects of society and economy. Some expertssay that what we have seen so far accounts for a tenthof what is still ahead. This trend is also affecting theway goods are manufactured and services are offered.

1. The fourth industrial revolutionand Industry 4.0

Western civilization has already witnessed three indus-trial revolutions, which could also be described asdisruptive leaps in industrial processes resulting in sig-nificantly higher productivity. The first improved effi-ciency through the use of hydropower, the increasinguse of steam power and the development of machinetools. The second brought electricity and mass pro-duction (assembly lines), and the third and most re-cent further accelerated automation using electronicsand IT.

The four th industrial revolution is already on itsway. However, while some areas will see fast and dis-ruptive changes, others will change slowly and steadily– a more "evolutionary" pace. In either case, there isno going back. This time, physical objects are beingseamlessly integrated into the information network.

The Internet is combining with intelligent machines,

systems production and processes to form a sophisti-cated network. The real world is turning into a huge in-formation system.

"Industry 4.0" provides the relevant answers to thefourth industrial revolution. It has to be differentiatedfrom smaller concepts such as the "Internet of things","maker movement" or "factory 4.0". Industry 4.0 em-phasizes the idea of consistent digitization and linkingof all productive units in an economy. Let's take a lookat the key characteristics of the new industrial land-scape:

CYBER-PHYSICAL SYSTEMS AND MARPLACE. IT systems today are already at the heart ofthe production system. In Industry 4.0, those systemswill be far more connected to all sub-systems, pro-cesses, internal and external objects, the supplier andcustomer networks. Complexity will be much higherand will require sophisticated marketplace offerings. ITsystems will be built around machines, storage sys-tems and supplies that adhere to a defined standardand are linked up as cyber-physical systems (CPS).

These can be controlled in real time. The plants andsystems of the future will have clearly defined, similarinterfaces. Using these technologies will make it possi-ble to flexibly replace machines along the value chain.

This enables highly efficient manufacturing in whichproduction processes can be changed at short noticeand downtime (e.g. at suppliers) can be offset.

The fourth industrial revolution is

already on its way.Revolutions are fast,disruptive and destructive. And there isno going back. Industry 4.0 will be ananswer to the challenges lying ahead.


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part production unit in three days – as opposed to thethree months it requires today. Virtual plants can bedesigned and easily visualized in 3D, as well as how

the workers and machines will interact. C FACTORY 4.0 gives an overview of the firm asan interconnected global system on a microeconomiclevel. Our graph depicts the key factors: outside thefactory we see a 4.0 supplier network, resources of thefuture, new customer demands and the means to meetthem. Inside the factory, we envision new productiontechnologies, new materials and new ways of storing,processing and sharing data.

2. Industry 4.0: What is changing forcompanies?

We are describing the big picture of a profoundly trans-formed industry landscape. Will it be a threat or anopportunity? Both, as it turns out. Manufacturing com-panies in the traditional sense will surely remain in themarket. But established players will undoubtedlychange their organizations, processes and capabilitiesin whole or in part during the industrial revolution. Andthere will be new competitors with radically new indus-trial business models. New transforming technologiessuch as the Internet or mobile phones have not beensuccessful just because they were new, but becausethey were also followed by a societal transformation.

The Internet as a technology did not invent social net-works, but social networks developed thanks to theInternet, and also enabled it to develop further. Thesame thing will happen with Industry 4.0, by bringingnew functionalities that will change the rules of thegame for the industry players.

The development will proceed at different rates indifferent industries. Here we have tried to identifysome cross-industry implications:

OUTPUT: PERSONALIZED, LOCAL PROD TION AND MASS CUSTOMIZ ATION. Industry 4.0brings more freedom and flexibility into the productionprocess. So it will become possible to create productstailored to segment-by-one customer needs at rela-tively low marginal cost. Also distribution processes for

physical things will be linked to their data footprint.Production with interconnected machines becomesvery smooth: one machine is immediately informed

when the part is produced in another machine, as wellas the conveyor or the logistic supply robot. Machinesautomatically adapt to the production steps of eachpart to manufacture, coordinating almost as in a balletto automatically adjust the production unit to the se-ries to be manufactured. Even the product may com-municate when it is produced – via an Internet of things– and ask for a conveyor to be picked up, or send ane-mail to the ordering system to say "I am finished andready to be delivered". Plants are also interconnected inorder to smoothly adjust production schedules amongthem and optimize capacity in a much better way.

ENERGY EFFICIENCY AND DECENTRALIZA- TION. Climate change and scarcity of resources aremegatrends that will affect all Industry 4.0 players.

These megatrends leverage energy decentralization forplants, triggering the need for the use of carbon-neu-tral technologies in manufacturing. Using renewableenergies will be more financially attractive for compa-nies. In the future, there may be many production sitesthat generate their own power, which will in turn haveimplications for infrastructure providers. In addition torenewable energy, decentralized nuclear power – e.g.small-size plants – is being studied as a way to supplybig electro-intensive plants, thus providing double-dig-it energy savings.

VIRTUAL INDUSTRIALIZATION. There is nothingmore difficult than launching a new plant or a newproduct in an existing plant: hours of adaptations, tri-als, pre-series testing requiring a high-caliber launchteam and numerous unexpected cost overruns. A daylost through a standstill of production means a hugerevenue loss for many businesses. Industry 4.0 will usevirtual plants and products to prepare the physicalproduction. Every process is first simulated and veri-fied virtually; only once the final solution is ready is thephysical mapping done – meaning all software, param-eters, numerical matrixes are uploaded into the physi-cal machines controlling the production. Some initialtrials have made it possible to set up an automotive


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FACTORY 4.0C

CLOUDCOMPUTING

THE FULLY CONNECTED WAY OFMAKING THINGSIndustry 4.0 is based on new andradically changed processes inmanufacturing companies: Factory4.0. In this concept, data is gatheredfrom suppliers, customers and thecompany itself and evaluated beforebeing linked up with real production.

The latter is increasingly using newtechnologies such as sensors, 3Dprinting and next-generation robots.

The result: production processes arefine-tuned, adjusted or set updifferently in real time.

SENSORS> Zero default/deviation> Reactivity> Traceability> Predictability

Plant of the future

CYBERSECURITY

LOGISTICS 4.0

ADVANCEDMATERIALS> Smart value-added products> Technical differentiation> Connectivity

Suppliers

3D PRINTING/ ADDITIVEMANU-FACTURING> Scrap elimination> Mass customization> Rapid prototyping

> Stronger protectionfor Internet-basedmanufacturing

> Technology productswith longer lifecycles

> Fully integratedsupply chain

> Interconnectedsystems

> Perfect coordination


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ADVANCEDMANUFACTURINGSYSTEMS> Cyber-physical systems (CPS)> Numerical command

– Full automation– Totally interconnected systems– Machine-to-machine communication

MASS CUSTOMIZATION> Customer and marketing intimacy> Flexibility> Perfect match of customer's

needs with mass productionefficiency

> On-demand manufacturing

INTERNET OF THINGS> Object tagging > Internet-to-object communication

via low-power radio> Real-time data capture> Optimized stocks> Reduced waste

BIG DATA

Customers

ROBOT > Real-time autonomy/

productivity> Full transparency (contextual-

ization, comprehensiveness,collaborative robot) on datareporting

RESOURCESOF THE FUTURE(WIND, ALTERNATIVE/

NON-CONVENTIONAL, SOLAR,GEOTHERMIC)

AUTONOMOUS VEHICLE> Flow optimization> Increased security> Lower costs

> Making senseout of complexity

> Creativity> Collaborative

manufacturing

> Clean and renewableenergy everywhere

> Energy storage> Alternative raw

materials


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restructure their value chains new challenges in regardto cost and profit ownership arise. Where will the highmargins be in the future? In the design, in process

handling or in customer data exper tise? New businessmodels could also be created if the "long tail" philoso-phy that was brought up by the Internet can be extrap-olated to the Internet of things.

COMPETITION: CONVERGING FRONTIE Traditional industry boundaries are becoming blurred,as are the boundaries between industrial and non-in-dustrial applications. Going forward, the focus will beon industrial working methods, including the reproduc-ibility not only of identical products but also of ser-vices. Services can be mass-produced too. High-qual-ity digital (outsourced) services and a fail-safe,comprehensive digital infrastructure are becoming thefundamental prerequisites for successful Industry 4.0.And there will be even closer dovetailing between IT/telecommunications firms and traditional manufactur-ing companies. The former might in some cases be-come the new industry leaders. The most recent exam-ples: Facebook is aquiring a stake in the dronesbusiness and Internet giant Google is entering the bio-tech sector and researching new methods of combat-ing age-related diseases. In Industry 4.0, the supplierhierarchies/pecking orders are likely to change. Today,physical machine and tooling suppliers harvest thebiggest margins with their industry clients. But in a cy-ber-physical system world, these suppliers will loseimportance. Instead, suppliers of sensors, IT and soft-ware might take their place in Industry 4.0, while ma-chine and tooling companies shift down to tier 2.

SKILLS: INTERDISCIPLINARY THINKINKEY. The dominant technologies of Industry 4.0 will beIT, electronics and robotics. But it will also embraceother knowledge areas such as biotech and nanotech.It is to be expected that businesses in Industry 4.0need both enhanced social and technical skills. Therewill be a shift toward design thinking instead of pro-duction thinking. Corporate cultures with continuoustraining and development in the workplace and lifelonglearning are becoming a core competency. A lot of col-laborative and cross-cultural competencies will be re-

spare parts or not too complex customer goods mightget easier, if nothing but data has to be transferredwhile the physical production can be done locally. This

becomes visible in the broadening of 3D printer usage: The market for 3D printers and related services rose toEUR 1.6 billion in 2012, and is estimated to rise toabout EUR 4.4 billion annually by 2017. This approachcan become a game changer if you think about pro-ducing in a high- or a low-cost country. A 3D printingplant can become economically viable and competi-tive in a high-cost country, by being less sensitive tolabor cost while still providing the proximity necessaryfor affordable personalization.

PROCESS: NETWORKED MANUFACTURING AND CLUSTER DYNAMICS. Businesses will operatein dispersed locations, drawing on skills spread acrosstheir empires. Groups of suppliers concentrated insmall areas help ideas flow more freely. One of the op-portunities lies in a phenomenon called "industrial de-mocracy", meaning that the blurring frontiers betweenthe information and physical worlds may lower entrybarriers for smaller or more specialized companies. Insome areas, the distribution of power between multi-nationals and SMEs or very focused market playersmay shift. The challenge for business lies in the as-sumption that the complexity of production and supplynetworks will grow significantly. This type of approachcould lead to "mobile manufacturing units": small andautonomous manufacturing cells that could be shippedin some countries to locally develop production for thelocal market without building a full plant. This type ofgame changer could modify the approach of industrialforeign direct investment with regards to emergingmarkets and localization needs.

BUSINESS MODELS: FRAGMENTATION OF THE VALUE CHAIN. In a complex and intertwinedmanufacturing network, the roles of designers, physi-cal product suppliers and the interfaces with the cus-tomer (contractor) will change. The first step is thefragmentation of the value chain. We have seen thisbefore in monolithic industries like music or the media:After fragmentation, countless small entrants havelower barriers to entry. As business leaders rethink and


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quired to be able to work in network environments sus-tainably. On the technical side: connecting the networkwill mean a lot of standardization. Therefore, the tech-

nical competency profile will be rather T-shaped andinterdisciplinary than specialized. Analytics special-ists, engineers and programmers will have to be ableto think across business models, production process-es, machine technology and data-related procedures.New job titles will emerge such as data scientist andcyber safety guards.

GLOBALIZATION: LIGHT FOOTPRINT. The orga-nization of the future will concentrate on selectedhotspots, rather than a comprehensive global pres-ence. There will be open production sites ("maker-spaces") and clusters. Firms will not necessarily haveto sustain huge production sites to operate cost-effi-ciently. Sometimes it will be cheaper to transfer dataand produce locally on a small scale. Organizations willbe set up in a much more decentralized and flexible way.

3. How much does Europe have to

invest?Industry 4.0 is an opportunity to change the economicrules of the industry, especially to overcome the dein-dustrialization trends faced by some European coun-tries. In the current industry setup, there are ways tomaintain Europe's competitive edge compared to lowlabor cost countries: selecting high added-value prod-ucts or activities, having modern and automated pro-duction units with critical size and implementingmanufacturing excellence practices. With Industry 4.0the demand for highly qualified services will increaseactivities to support this more complex industry.

From an economic point of view, if industry wantsto offer incentives to investors it has to go about it in adifferent way due to its risk profile. We assume inves-tors expect a return on capital employed (ROCE) of15% as an average for European industry. In the box"Traditional Industry" on the horizontal axis (see figureon page 14), we find countries achieving this with ac-tivities that require low capital intensity and low value-added products. The countries here with low labor costs

INDUSTRY 4.0 DATA SPOTLIGHTS II Top and bottom positions 1), 2012

Patentapplications(per 1,000population)

Value addedper employee(EUR '000)

Exportsof goods(% of GDP)

Portugal

0.6

Nether-lands

69

UK

19

Denmark

88

Poland

21Source: World Bank, UNCTAD

Germany

59

1) Analysis of the 15 EU countries with the highest GDP


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are leveraging a labor-intensive workforce and moremanual processes. Those are rare in Europe. Neverthe-less, this box contains France, Spain and the UK. Due to

underinvestment over the years, their industrial assetshave progressively lost their value. At the same time, la-bor costs are high. Therefore, profitability is decliningand competitiveness is decreasing. D

In the box "Industry 4.0", we find countries with state-of-the-art production processes. They are more compet-itive (due to automation and scale effects) and can af-ford higher margins, which pay off their capital needs.

The graph on the right shows the positioning of Eu-rope in general as well as France and Germany in2012. Germany is positioned with an even higher ROCEthan 15%. Therefore, the profit generated will help thecountry to invest its employed capital in the future in-dustry technologies. By contrast, France currently earnsmuch lower margins from its industry, preventing it frominvesting and thus eroding the capital employed.

If the European economy can achieve a strong po-sition within Industry 4.0, divestment is no longer athreat. Industry 4.0 requires investments. But Industry4.0 also substantially increases capital productivity,as mentioned above with the potential benefits (masscustomization, networked manufacturing, etc.) whichoptimize the way capital is leveraged. Europe's econo-my will be able to move upward along this curve –meaning firms that invest more capital will be moreprofitable.

Europe has to act now. In 2012, the EU Commis-sion set the goal of boosting manufacturing's share ofGDP in Europe from 15% to 20% by 2020. This objec-tive is quite challenging, because advanced manufac-turing economies such as Germany, Poland and Austriawill not be able to boost their shares much more. Evenin China, manufacturing only accounts for 30% of theeconomy – and this figure is declining. Against thisbackdrop, reaching the 20% goal in Europe wouldmean that countries such as the UK and France, whichfor decades have been shutting down their industriesand are now at around the 10% mark, would have toreestablish manufacturing on a huge scale in less thanseven years.

D

INDUSTRY 4.0 WILL INCREASE PROFITABILITYAND CAPITAL INTENSITY

Dimensions of economic impact

1) EBIT as % of value added;margin: Low = below 5%, High = above 20%

2) Capital employed/value-added;margin: Low = below 0.5, High = above 1.3

3) ROCE = profitability x capital intensity

CAPITAL INTENSITY 2)

PROFITABILITY 1)

Low High

Europe2012

Germany2012

Low

High

TRADITIONALINDUSTRY

Return expectedby investors

(ROCE)3) = 15%

France2012

Europe2030

INDUSTRY 4.0


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E This target is certainly not achievable consideringtoday's situation (Industry 3.0). Instead, it can only beachieved by taking part in the fourth industrial revolu-

tion. Reaching 20% means that Europe has to createEUR 500 billion in value added and 6 million jobs (pro-vided current GDP growth and inflation remain thesame). These figures look huge, as this amount isabout double the size of the French industry. However,looking at the bigger picture and including all value-added services generated by Industry 4.0, the objec-tive could be achieved by 2030. More concretely, itdoesn't mean that a product currently manufactured inChina will be manufactured by a European worker: itwill be manufactured by a European robot or machine,which is programmed by a European engineer. Oppor-tunities for new jobs could be: working in engineeringcenters, IT centers, virtual laboratories, big data cen-ters, or in a control tower of a plant network, but prob-ably not inside a plant.

2 How much investment does Industry 4.0 re-quire? As shown below, the calculation of the objectivein terms of ROCE and profit helps in evaluating the in-vestment amount. Currently, the industrial investmentlevel in Europe is EUR 30 billion lower than the level ofdepreciation, meaning that assets are slowly losingvalue. Therefore, in order to achieve the goal by 2030,European firms must keep investing about EUR 90 bil-lion per year to generate the necessary additional val-ue added. This would add up to EUR 1,350 billion overthe next 15 years. This amount is not so large at theEuropean level, and is far below numerous investmentactivities of European politics, such as the bailout pro-grams for indebted member states.

E

THE GAP THAT NEEDS TO BE BRIDGED1)

Industry share as a % of total value added

Germany 5.3%

Italy2.3%France 1.9%

Other 5.5%

2011 Target2030

15%

20%

Gap

5%

Industrialemployees

(million)

25 31

Industrial value added

(EUR bn)

1,500 2,000

6

500

HOW MUCH EUROPE NEEDS TO INVEST Capital in EUR bn1)

Renewalinvest-ment

1) Constant depreciation assumed

2,900

Depre-ciations

Preservationinvestment

Net capitalemployed

~1,700

260

230 906030

Invest-ment inIndustry

4.0

Totalinvestment

Source: UNCTAD; Eurostat; Roland Berger

2011 Target2030

x 19 years

Yearly amounts


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1) 1 = low, 5 = high 2) Adjusted for outliers Cyprus, Latvia, Luxemburg, Romania, Greece

RB Industry 4.0Readiness Index 1)2)

Manufacturing share (% of GDP; index)1)1 2 3 4 5

1

2

3

4

5Germany

Ireland

Austria

Sweden

FinlandBelgium

Netherlands

Denmark

UK

France

CzechRepublic

Slovakia

Hungary

Lithuania

Slovenia

Italy

Estonia

Poland

Bulgaria

Croatia

Portugal

Spain

FRONTRUNNERS

TRADITIONALISTS

HESITATORS

POTENTIALISTS

The RB Industry 4.0 Readiness Index is represented on the vertical axis. We calculated it as follows: first we bundledproduction process sophistication, degree of automation, workforce readiness and innovation intensity into a categorywe called "industrial excellence". Then we combined high value added, industry openness, innovation network andInternet sophistication into a category we labeled "value network". Each category was measured using a 5-point scale,with "5" indicating that a country is excellently prepared for the Industry 4.0 landscape. The combination of these twocategories determines a country's position in the RB 4.0 Readiness Index. The horizontal axis represents the traditionalindustry measure – the manufacturing share.

READINESS CHECK FOR EUOUR ANALYSIS REVEALS FOUR DIFFERENT CLUSTERS

F


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3. Is Europe ready? The RB Industry4.0 Readiness Index

We have shown that industrial (r)evolution will changethe game for industrial users, infrastructure suppliersand technology providers. New aspects need to beconsidered: how open is the economy? Will it be ableto adapt to converging industries? How excellent areinnovation networks? How qualified, flexible and inter-disciplinary are employees in order to trigger Industry4.0 within their companies?

To gain some initial insight into these questions, wecreated an "RB INDUSTRY 4.0 READINESS INDEX" for the EU's key industrial countries.

The matrix roughly divides the European econo-mies into four major groups. The Frontrunners are char-acterized by a large industrial base and very modern,forward-looking business conditions and technologies(Sweden, Austria and Germany). Ireland is a specialcase: several big pharmaceutical producers contributeto the country's relatively small GDP, which makesthem manufacturing champions. Ireland also has alarge IT service sector (readiness).

The Traditionalists are found mainly in Eastern Eu-rope. They still thrive on their sound industrial base,but few of them have thus far launched initiatives totake industry into the next era. The third group, theHesitators – a mixture of southern and eastern Europe-an countries – lacks a reliable industrial base. Many ofthem suffer from severe fiscal problems and are there-fore not able to make their economies future-proof.

The Potentialists are an interesting cluster. Theirindustrial base has been weakening over the past fewyears. Here we find countries such as France and theUK, which looked somewhat desperate in our analysison pages 4 and 14. That may be true when looking atall the historical data. But in the corporate sector, wefind indications of a modern and innovative mindset.

They just have to find the right way to tap their potential.

4. A look at best practices ofIndustry 4.0

We have identified three groups of players: Industry4.0 technology suppliers, infrastructure providers andindustrial users. Technology suppliers such as Sie-mens, Kuka or Dassault provide key production tech-nologies like collaborative robots or telemaintenancesystems. Infrastructure providers such as telecoms orSAP deal with supporting structures and services – forexample cloud computing, big data storage and pro-cessing. Industrial users are traditional global manu-facturing firms such as VW or BASF. They use technol-ogies like rapid prototyping or energy-smart buildingsto optimize their production processes.

Those groups of players are essential for makingIndustry 4.0 happen. As they move into Industry 4.0,companies have to be able to respond more quicklyand flexibly to customer demand and fast-changingcustomer specifications. This change is clearly visiblein logistics, for example. But companies in mechanicalengineering, medical engineering and engine produc-tion are also taking their first successful steps towardsetting up intelligent production processes and cus-tomized products.


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TRUMPF German toolmaker Trumpf, an Industry 4.0 supplierand worldwide market leader of laser systems, has putthe first "social machines" to work. Each component is"smart" and knows what work has already been carriedout on it. Because the production facility alreadyknows its capacity utilization and communicates withother facilities, production options are automaticallyoptimized. Customers can receive pictures of the ma-chines in real time during the production process andhave the chance to provide feedback very early on,which can help to build even better machines.

SIEMENSGerman manufacturing giant Siemens, an industrialuser, is implementing an Industry 4.0 solution in med-ical engineering. For years, artificial knee and hip jointswere standardized products, with engineers needingseveral days to customize them for patients. Now, newsoftware and steering solutions enable Siemens toproduce an implant within 3 to 4 hours.

Several enterprises have developed innovative ideas to shift the activities of their business units to Industry 4.0.Many others are expected to follow. Below are some examples from different countries that show how they turnproduction into a smarter, more vir tual, more connected and more decentralized system.

PIONEERS OF INDUSTRY 4.0HOW THE NEW MANUFACTURING LOGIC IS GAINING GROUND

ROLLS-ROYCEBritish aero-engine manufacturer Rolls-Royce, an in-dustrial user as well, is gearing up to use 3D printingtechnology to produce components for its jet engines.Some of these parts have very long lead times due tothe tooling process involved, and it can take 18months to fill an order. 3D printing would shorten thisprocess considerably, and also make it possible tomanufacture more lightweight parts.

DASSAULT SYSTÈMESFrench software provider Dassault Systèmes is push-ing the integration of product development and pro-duction. This initiative's core is a 3D platform designedas a common work environment for the company,where designers and engineers can, for instance, sim-ulate new products jointly and in real time. The con-nected 3D environment can also be used via cloudcomputing.


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The target for Europe to reach 20% manufacturingshare of GDP for its industry is sending the messagethat Europe's future depends on manufacturing. Thisvision of a new industrial Europe is precisely the rightone. We think that in the future, quickly switching overto Industry 4.0 will be a major competitive advantagefor an economy over its global competitors. Europe asa whole is in better shape to embrace the new industrialworld than many people think. Besides its solid industri-al base, many countries are in a good position (equip-ment, knowledge, expertise, networks) for converting toIndustry 4.0, as our RB Readiness Index shows.

European companies have a chance to develop acompetitive edge here. The US has deindustrialized toa great extent and moved toward a service and high-tech economy. China has invested a lot in Industry 3.0.

The country is busy rebalancing the economy towardsmore sustainable growth. But it is heading toward In-dustry 4.0 as well: The Chinese government recentlyformed the China 3D Printing Technology Industry Alli-ance. Japan is probably the most advanced country inthis field, especially in robotics and automation. A pilotplant operated by a mechanical engineering companyin Yokohama employs humanoid robots with 80% ofthe productivity of a human worker. The fact that thecompany has not laid off staff members is a clear sign

that Japan is moving toward automation in response tothe rapid aging of its population – 40 million peoplefewer in 2050. However, it is important for all Europeanplayers – governments and industry alike – to set off forthe new era at the same time.

G THE "NEW" INDUSTRY IS A KIND OF ECSYSTEM. It will be difficult to manage the processcentrally, but there will be reinforcing effects if the rightlevers are applied by the players in the system. There-fore it is crucial to communicate the idea that playersin the corporate sector (technology suppliers, infra-structure providers and industrial users) and Europeangovernments will profit the most if their Industry 4.0initiatives go hand in hand.

As shown in the chart below, Industry 4.0 will beadopted if all parties are focused on a common objec-tive: policy makers and politicians, public and privateexperts, industry associations and large group infra-structure providers and of course end users. As op-posed to industry in the last century, it is not possibleto make a 4.0 industrial policy, in the sense that gov-ernments or the EU would decide what to do in thisfield, which technology to use, how much money tospend and who will be the future champions. This top-down era is over because complexity is too high, inno-vations come from bottom-up approaches, markets

Europe is in better shape to embrace

the new industrial world than manypeople think.Our roadmap for Europelays the groundwork for an Industry 4.0environment. Here's how companies andpoliticians can contribute.

3


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are risky, uncertain and volatile, and the winners oftoday can easily become the losers of tomorrow.

Therefore, to put the 4.0 industrial ecosystem in place,all parties need to align and move in the same direc-tion, but with an open approach, promoting entrepre-neurship, risk taking, innovation and agility.

1. Set the conditions for the 4.0ecosystem

A shared vision for policy makers and governments isneeded. Industry 4.0 must be understood by govern-ments and policy makers, and promoted as a priorityfor Europe. A political and economic agenda that fo-cuses on old industrialized policies will not work for

Europe's "new" industry. Depending on the country,this type of policy includes strong protectionism, sub-sidies for business champions and industry-friendlytendering policies, to name just a few. In Industry 4.0we try to think more systemic. European and govern-ment policy makers' role is to establish the framework,basically: transform the idea of Industry 4.0 into a Eu-ropean idea. This requires a common understandingof European industrial policies. Industry 4.0 must beprioritized and coordinated. To do that successfully,Europe needs a roadmap equipped with incentivesand actions to support communication of the vision ofEurope as an Industry 4.0 hotspot. Legislation shouldcreate an "infrastructure" for promoting entrepreneur-ship.

G

NEW INDUSTRY 4.0 ROADMAPIndustry 4.0 will be implemented in three steps involving all players

3. PROMOTEFAST ADOPTION ASCOMPETITIVE LEVER

1. SET CONDITIONS FOR THE 4.0 ECOSYSTEM

European and state policy makers

STEP ACTION PLAYER

Promote Industry 4.0as a European idea

2. BOOST INDUSTRY4.0 OFFERING

Public and private partners, forming collabo-rative networks and/or innovation clusters

Accelerate innovation

Develop future champions Equipment and infrastructure industryplayers and associations

Establish a dynamic digitalenvironment

Infrastructure providers and financing

Progressively transition to 4.0 Industrial users (pharmaceuticals,automotive, aerospace, manufacturing, etc.)


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ble through mergers and acquisitions. We expect sig-nificant consolidation among the Industry 4.0 players.Sometimes the partners in a collaboration will come

as a surprise: who would have thought that Googlewould buy Nest (thermostatic sensors for home appli-ances)? Like Google-Nest, many traditional playersthat produce tangible products will move into intangi-ble new technology fields and buy software start-upsor Internet companies. Or vice versa, with engineeringand CAD/CAM firms buying machine equipment firms.

This type of move will reshuffle industry segmentationwhich is organized by physical sectors (machine &tooling, electrical equipment, software, engineeringservices).

It might be helpful to organize new Industry 4.0 as-sociations to support the development of a strong of-fering. Last but not least, we need some pragmatism inthe field of antitrust policies. European companieshave to gain a strong competitive position in compari-son to the US and Asia. It may be wise to let somestrong players emerge and consolidate based on a ro-bust European market.

ESTABLISH A DYNAMIC DIGITAL ENVIRMENT. The digital aspect has become mission-criticalfor many products and services. Therefore, Europe's"new" industry needs a competitive environment thatfosters dynamic telecommunications and Internet us-age. Infrastructure providers can contribute in thisfield, not only by providing structures for power andtelecommunications supply, but also by developingstandards for data transfer and security procedures.Key fields to consider include cyber security, energy,telecommunications and the cloud. Pan-Europeandigital infrastructure initiatives will be needed, to bemanaged by industry players or associations.

But Europe also needs a service infrastructure. It'snot only digital services that are suffering from frag-mented and nationally focused offerings in Europe, butalso the key areas of energy, transportation and fi-nancing. This roadmap must be supported by a specif-ic financing plan. This might include incentives for in-dustrial users to invest in the transition to Industry 4.0or funding for infrastructure development.

2. Boost Industry 4.0 offering andassume leadership

Developing leaders in Industry 4.0 solutions requiresthree success factors: ACCELERATE INNOVATION.Industry 4.0 en-

compasses a broad set of technologies with a hugefield for innovation and creative solutions. Pioneeringbusiness models will create new opportunities for add-ing value, but those will depend on breakthrough inno-vations for technology and the ability to bring themto market. This is an area where public and privatepartners have to collaborate closely. Pan-Europeancollaborative networks or innovation clusters can beset up between countries, universities, research insti-tutes and businesses, combining public and privateresearch. Companies must regularly review theirstrategic alignment, which will result in new methodsof entering new stages of the value chain. Basedon this review, they can identify missing links insideand outside the company, foster elaboration of tech-nology roadmaps across Europe and set up researchcommunities.

Consistent investment in R&D programs is alsocrucial. Companies should identify cross-border part-ners (corporate and science) and collaborate withthem on research projects. Supported by pan-Europe-an initiatives, innovative start-ups will profit from thenew opportunities. The role of those Industry 4.0 in-novation clusters would be to design best practicesof Industry 4.0 solutions, technology concepts, de-velop technology roadmaps and enhance start-updevelopment.

DEVELOP FUTURE CHAMPIONS. There aremany European companies that are very well posi-tioned as leaders in the various fields of Industry 4.0.However, technology is evolving rapidly. The danger isnot keeping up with technologies required to offer inte-grated solutions. A champion in machine-tooling thatdoes not build up Internet-of-things technologies willnot be able to develop the new machine generation.

Therefore, players must develop a technology strategyand close the gaps. Sometimes this will only be possi-


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tremely specific: 4.0 in the automotive industry won'tbe the same approach as in the railway or aviation sec-tors, simply because the production factors are funda-

mentally different. Companies will also have to allo-cate special investment for the transition, for example,by setting up phased programs to facilitate site recon-figuration. It will also be necessary to build up newskills, possibly by initiating special recruiting actionsand training programs. Companies may want to con-sider incentivizing the launch of pilots as well.

Conclusion

The next industrial revolution lies directly ahead, andwill likely prove to be a source of huge opportunities forEuropean countries. Moving toward Industry 4.0 fitsquite well with the European model: it makes it possi-ble to preserve a sustainable industry, develop quali-fied employees, support energy transition and adapt tolarge-scale customization. It will also allow Europe tocompete successfully with other regions in the worldand promote the emergence of future European cham-pions. But speed is of the essence – the time to moveforward and capture this opportunity is now.

Besides infrastructure, this dynamic digital environ-ment also needs to foster new talent. Unsufficient ed-ucation policies and a lack of mobility in some coun-

tries mean Europe cannot fully capitalize on its skillspool. The new competency fields required by Industry4.0 need to be embedded in education. This includesfields such as software programming, data analysis orscientific computing.

3. Promote fast adoption as a com-petitive lever

There are two ways to move into Industry 4.0: trans-forming existing (legacy) plants or making greenfieldinvestments. Both require a strong change manage-ment approach. Industry 4.0 will probably penetratethe quickest through greenfield investments, comingeither from new business opportunities. Also repatria-tion of manufacturing from developing countries to Eu-rope could be a trend in Industry 4.0. But it will requirea different setup. Fostering relocation of activities is agood lever to enhance transition to 4.0, create valueadded in Europe and develop qualified jobs. This mayrequire investment programs or incentives.

The other approach is to progressively adapt thelegacy manufacturing footprint. Transforming a legacyplant into a modern 4.0 factory has a significant socialimpact and requires a competency shift and new waysof working and manufacturing. Numerous actions arepossible, but have to take social aspects into account.For instance, the French Robotics Association haslaunched its "Robocaliser" program. Since Frenchunions still perceive robotization as a job killer, theprogram promotes the idea of using robots as a way toavoid delocalization.

Companies should consider seizing the opportunityto use 4.0 technologies by developing tailored manu-facturing strategies that best leverage the new tech-nologies. Industrial users that share European Industry4.0 knowledge and build best practice communitieswill be key to a successful transition. This is a goodopportunity to establish 4.0 tech shows in all end-userindustries because the overall solutions will be ex-


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ADDITIVE MANUFACTURINGSTUDY

The market for additive manufactur ingsystems, materials and service is ex-

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ROLAND BERGERSTRATEGY CONSULTANTS GMBH

Operations Strategy Competence Center(OpS CC)

Mies-van-der-Rohe-Str. 680807 MunichGERMANY +49 89 9230-0www.rolandberger.com

Editors

ANNE DUJINDR. CORNELIA GEISSLERDIRK HORSTKÖTTER

The authors welcome your questions, commentsand suggestions

MAX BLANCHET Global Head OpS CC, Partner +33 1 [email protected]

THOMAS RINNGlobal Head OpS CC, Partner+49 711 [email protected]

GEORG VON THADENPrincipal+49 89 [email protected]

GEORGES DE THIEULLOY Principal+33 1 [email protected]

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