Industry 4.0: How digitalisation will kill traditional manufacturing

The days of the large overseas export-oriented plants in low-cost countries are numbered. and the nature of the workforce is also changing fast

Arindam Bhattacharya

The World Economic Forum’s annual event in Davos is a place where one can get to meet all kinds of people from different walks of life and get into a very engaged discussion on all manner of topics. This year was particularly an interesting one because of the opening speech by prime minister Narendra Modi with his endorsement of multilateralism and globalisation, and the closing speech by US president Donald Trump on his vision of re-setting the world trade order, which he perceived to be highly unfair to the US. And, between these two contrasting geo-economic positions ran the theme of the fourth industrial revolution, threatening to transform global supply chains with its threats of large job losses and fundamentally re-shaping the future of work, irrespective of whichever geo-economics prevail.

These swirling ideas were brought to life for me when I got into a lengthy discussion with a board member of one of the world’s largest industrial conglomerates on my question of how shifting geo-economics (and the rising economic nationalism) and digital technologies are impacting their global supply chains. What he described not just gave an insider view on the massive transformation underway, it also throws up some fundamental questions for developing countries, like India, as they develop their future industrial policies.

This transformation can be divided into four parts. The first is shift in the fundamental nature of global supply chains, which had evolved in the last three decades as large manufacturing capacities shifted to developing countries to take advantage of low-labour costs. Industry 4.0 and greater robotisation is changing the cost structures of plants and ‘flattening scale curves’, making large export-oriented plants in low-cost countries much less competitive, and making it more attractive to set up smaller, highly automated and flexible plants that provide greater customisation closer to the consumer with shorter delivery times. In his view, this transformation into ‘multi-country’ plant networks will only accelerate as the impact of the changing geo-economics start kicking in.

To my question on whether they were seeing a drastic fall in employment in manufacturing as they implement Industry 4.0 technologies, he replied in the negative, which surprised me, given job losses was one of the top themes in Davos. He, however, went on to qualify by saying that while there were significant losses in the traditional jobs, these were mitigated by their business growth (and setting up of new plants) and growth in new jobs. The more critical point was the dramatic change in the nature of the people employed in these plants—he refused to call them workers (blue or white). These plants needed data scientists, computer engineers, supply chain experts, maintenance experts, etc. He also added that these skills were in short supply everywhere, and whichever country could develop them faster would gain significant competitive advantage.

The third point he made was an interesting one. The definition of what constitutes a ‘plant’ was undergoing a change, at least for them, into what he called ‘high-tech facility’, where they are increasingly co-locating their engineering teams with manufacturing to be able to respond to shortening product cycles and increasing customisation of orders. Plants could not be viewed any more as low- to medium-tech facility with lots of labour mass producing industrial products, but as facilities providing customised engineering solutions to the consumers.

His final point was equally transformational. With the increasing merger between the digital and physical space, the nature of the ‘product’ sold to customers was changing dramatically, with value shifting more and more to services sector that is becoming the fastest growing revenue stream for many industrial companies. He used a term that I heard for the first time—’manufactured services’—akin to manufactured goods, and went on to add that the supply chain in terms of both the hard and soft assets that delivers this ‘manufactured service’ is dramatically different from the one that delivers the physical product.

These shifts in the nature of manufacturing and global supply chains have profound implications for policymakers. I would like to highlight three of them. First is the emerging paradigm of ‘industrialisation of services’ (I like this term better than ‘manufactured services’) as a big driver of growth for an economy. This, in turn, raises a question on how should we define ‘industry’ in the emerging paradigm, and should the institutions dealing with traditional definition of industry and services be revisited? The second implication is the huge challenge to reskill our workforce if we want to compete in this new scenario of changing global supply chains. This has to be a national priority, as critical as setting up hard infrastructure, and we need to think through how to synergise our efforts that are today fragmented between the different ministries and departments. My last point is that this transformation in global supply chains is accompanied with a shift of labour-intensive manufacturing capacities from China to other low-cost countries as China adds more and more automation and robots in its plants due to the rising wage costs in the country. However, the window of opportunity to attract these capacities into India is shrinking fast, and we have to move quickly to address the well-known challenges to create jobs for millions of our low-skilled people in the short term.

This vision for the 21st century global supply chain is still at a nascent stage and it will play out over the next few decades. It will surely lead to the emergence of new development models, particularly, for developing countries that are historically dependent on growth in labour-intensive, low-cost manufacturing and exports, as digitalisation becomes the biggest driver of progress in the 21st century as industrialisation was in the 20th. Surely, it is in India’s interest to lead the development of this new paradigm as the first large economy that will transition from low income to middle income in the new century.