Economies around the world prepare for the opportunities and challenges of the next industrial revolution

The global economy is entering the Fourth Industrial Revolution (4IR), or Industry 4.0, based on the application of new digital and automated technologies in production processes and service delivery. These changes are presenting emerging markets with opportunities such as improved productivity, as well as risks, namely reshoring and the displacement of human labour by automation. Wealthier emerging markets, such as the Gulf states, that have the resources to invest in new technologies. Meanwhile, other regions have shown signs of so-called premature deindustrialisation. In particular, Latin America and Africa seem more vulnerable to threats arising from technological changes and at greater risk of being left behind. To avoid such a fate, they need to adopt new innovative strategies that will allow them to leapfrog existing stages of industrial and infrastructure development.

Background

Klaus Schwab, founder and executive chairman of the World Economic Forum (WEF) and author of the book The Fourth Industrial Revolution, states that the world has already gone through three industrial revolutions. The first involved water- and steam-powered mechanisms, followed by electricity-powered mass production. The third industrial revolution is referred to as the digital revolution.

Schwab argues that the world is currently entering the fourth industrial revolution, which is “characterised by a fusion of technologies that is blurring the lines between the physical, digital and biological spheres”. There are a number of emerging technologies expected to play significant roles in the upcoming revolution, including robotics, artificial intelligence (AI), the internet of things (IoT), machine-to-machine (M2M) communication, virtual reality and 3D printing, among others.

Robotics

Arguably the most consequential area of 4IR-related technology in terms of its impact on labour markets and manufacturing jobs is robotics and other automated processes. Klaus Prettner, professor of economics at the University of Hohenheim in Germany, told OBG that the use of robotics and automated processes in manufacturing started to take off in the 1990s and has been expanding rapidly, posting annual growth rates of around 12%. “Until recently robots were used largely for work that was too dangerous or difficult for humans, but now the technology is improving and becoming more cost-effective, allowing it to be used for an ever-wider range of applications,” Prettner said.

While robots have generally struggled to work with smaller parts that made them less suitable for other industries, this is now starting to change, and so-called lights-out manufacturing factories that can operate without human presence are already in existence, namely in North-east Asia.

3D Printing

Also known as additive manufacturing, 3D printing is the computer-controlled production of three-dimensional objects from digital models. The technology is now widely used to create a range of products, from prototypes to highly customised mechanisms, in a manner that is more efficient and increasingly more cost-effective.

An example is the manufacturing of hearing aids, which need to be individually moulded to the ear of the wearer. “Hearing aids used to be produced manually, which was a complicated process, but now manufacturers can simply scan the ear and use a 3D printer to make the product,” Prettner told OBG. As a result of such useful applications, 3D printing has witnessed a significant boom since 2008. However, as the technology matures, growth rates will likely level off.

Virtual Reality

Similar to the use of 3D printing for prototype production, virtual reality is particularly useful for the process prior to actual production, allowing designers to explore and interact with virtual renditions of their products and to identify any design flaws and safety issues. This is particularly valuable in industries producing large, complex and expensive goods. The technology is already being used for such purposes in the aviation manufacturing industry, for example.

AI, IoT & M2M

AI, IoT and M2M communication are at an earlier stage of development than robotics, making their impact on industry harder to gauge.

AI is not as widely deployed in the service sector as anticipated; nonetheless, it could have numerous applications in manufacturing and related activities, such as in the field of autonomous vehicles, which combines AI and IoT technologies. “Autonomous vehicles, should they take off, have enormous potential to drastically change logistics and supply chains,” Prettner told OBG. He forecast such vehicles would be available on a large scale in 10-15 years. IoT can also enable machine parts in industrial components and consumer products to automatically send alerts when they malfunction or need replacing, further improving industrial efficiency.

Pace of Change

While Schwab has argued that technological change is taking place at an exponential and unprecedented pace, other observers differ in opinion regarding the likely extent to which 4IR will transform the international industry and the speed at which this will happen. Prettner told OBG that the impact of 4IR-related technologies would be felt gradually. “There won’t be a real revolution in the foreseeable future,” he said. “While such technologies may work to reverse the decline in productivity growth that has been witnessed in recent decades, this will probably not bring them back to the levels seen in the mid-20th century.”

Some observers argue that change could be even slower. US economist Robert Gordon observed that there are major barriers to designing robots that can take over many roles currently performed by humans, and that the pace and impact of change was much higher between 1980 and 2005 than it is today.

Efforts to automate industrial processes have not always gone smoothly. In April 2018 Elon Musk, CEO of electric car manufacturer Tesla, told local media that the company had engaged in “excessive automation” at its facilities, and that this partly contributed to its failure to meet production targets.

Risks

For emerging markets, one of the most prominent risks posed by automation is the reduced need for lower cost and unskilled labour, making it less attractive for industry to outsource production away from their main consumer bases. This runs the risk of exacerbating a trend that is already under way in some regions towards what economist Dani Rodrik has referred to as premature deindustrialisation.

The process has been driven by various factors, including rising competition from China; however, increased automation in developed economies also appears to be a contributing factor. A March 2018 report by the Overseas Development Institute (ODI) found that operating robots in the US could become cheaper than paying workers in Kenya by 2033. Prettner cited new highly automated production facilities built in Germany by Adidas for the manufacturing of trainers – a product generally produced by low-wage workers in Asia – as an example of Industry 4.0-enabled reshoring.