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Industry 4.0

Paper type: Essay
Pages: 11 (2729 words)
Categories: Business, Industry, Manufacturing
Downloads: 16
Views: 4


Over the last number of years, there has been a broad discussion in relation to Industry 4.0. The concept of Industry 4.0 combines elements such as the internet, cloud computing, social media, Artificial Intelligence and robotics, and applies these elements in a way to assist to the production, distribution and use of physical goods (Liao et al, 2018).

Chips are inserted in to manufactured goods that connect them to the internet, which in turn creates a cyber-physical system and big data is generated and applied so that a network of communicating machines is created (Lasi et al, 2014).

The debate of Industry 4.0, has been of major importance in Germany, featuring numerous government reports, investments, research projects and the formation of the industry interest group, Plattform Industrie 4.0.

As a result, a national strategic initiative has been set up to utilise Industry 4.0, so that digital manufacturing can be driven forward through increasing digitalisation, as well as interconnecting products, value chains and business models (European Commission, 2017).

This paper observes the current status of Industry 4.0 in Germany, identifying potential opportunities and threats, as well as providing the possible policy implications that follow.

Industry 4.0 in Germany

From a government view, it is apparent that Industry 4.0 plays an integral role in the future prosperity of the German economy. The German strategy for Industry 4.0 will be undertaken over a 10 to 15-year period and was formulated off the back of Germany’s High Tech 2020 strategy.

Subsequently, Industry 4.0 has now become institutionalised with Plattform Industrie 4.0, which is now the central point of contact for policy makers.

In addition to this, government bodies such as the German Federal Ministry of Education and Research and the German Federal Ministry of Economic Affairs and Energy have provided significant funding of ˆ200 million to German industry and research, in order to prepare for the transition to digitalised manufacturing (Drath et al, 2014) (European commission, 2017).

The German Federal Ministry for Economic Affairs and Energy (2018) firmly believe in taking advantage of the potential of the digital revolution. Through Industry 4.0, it is forecast that the German economy could experience ˆ153 billion worth of growth by 2020. The way that they plan to unlock this potential is through ˆ40 billion planned annual investment in to Industry 4.0 applications by 2020 (Geissbauer et al, 2014).

When observing data in regard to value added by activity, it becomes increasingly more apparent as to why Germany are allocating large resources towards implementing Industry 4.0 strategy. Figure 1 (see appendix) displays the percentage of value added attributed to the manufacturing sector for the manufacturing sector for Germany, the UK and the U.S. from 1997 to 2017, while Figure 2 (see appendix) displays the percentage of value added attributed to finance and insurance over the same time period for the same countries.

It is clear that while the U.S. and the UK have begun to build a more finance-based economy over the last twenty years, Germany have remained heavily reliant on their manufacturing-based economy, with their economy being far less financialised. Germany simply cannot compete with the U.S. and the UK in regard to the internet economy.

For Germany, Industry 4.0 means creating new digitalised technologies that contribute towards their competitive advantage within the manufacturing sector and compete with major companies such as Google.

Opportunities from Industry 4.0

Improved Resource Productivity and Efficiency

One of the primary goals of Industry 4.0 is implement manufacturing processes that deliver the highest output possible from a fixed number of resources. This has been an issue which has stressed many German companies, as the pressure of creating higher output with the same resources and less energy has increased in recent years.

Zhang et al (2014) find that German manufacturing SME’s lack accurate and consistent data in relation to the usage of their own resources, which prevents them from obtaining a high level of resource efficiency.

Proactive SME’s tend to deal with this issue through digitalising their manufacturing data in order to ensure high quality data, limiting information asymmetry, as well as optimising demand, reducing failure and increasing productivity (Muller et al, 2018) (Flammini et al, 2009).

The creation of cyber-physical systems will also alter manufacturing processes significantly, allowing processes to be optimised on a case-by-case basis across the value network (Kagermann et al, 2013).

This process allows a more efficient value creation for SME’s within their own manufacturing site. Production processes will no longer have to be halted, as systems can now be upgraded during the process so that less resources and energy are used. Geissbauer et al (2014) analyses a survey conducted by the market research institution TNS Emnid, where 235 German industrial companies were asked to identify the opportunities and threats that Industry 4.0 may pose for them in the future.

The companies surveyed expected efficiency gains of up to 18 percent over a five-year period, with the digitisation of processes and value chains playing a key role in the reduction of redundancies in processes, the minimisation of quality losses and improving the overall manufacturing process to enhance flexibility and coherence.

Cost reduction in the medium to long-run

As stated previously, Germany heavily rely on their competitive advantage within the manufacturing industry. However, high labour costs and the lack of an end-to-end digital value system preventing the manufacturing sector from being highly profitable within Germany. As of 2015, the German manufacturing sector’s share in total wages stood at 25 percent, while it only contributed to 19.6 percent in total profits (Fuchs, 2018).

Industry 4.0 can present significant cost savings for German companies, mainly through the digitalising the horizontal and vertical value chains. In terms of horizontal integration, digitalisation optimises and integrates the flow of information and goods from the customer through their own company to the supplier.

Companies must ensure that appropriate systems are in place, so that all internal departments work in unison, as well as including external value chain partners that are essential in satisfying customer requirements. For vertical integration, a consistent flow of information and data from sales through product development to manufacturing and logistics is essential (Dalenogare et al, 2018).

Costs are reduced through improving manufacturing systems, reducing system failures and enhanced analytical abilities. Companies must maintain flexibility, through preparing IT systems that are able to configure a structure for a manufacturing process on a case-by-case basis, as opposed to being fixed and predetermined.

Should this be successful, an end-to-end digital system will be created. Not only will internal costs be reduced significantly, but companies also stand to gain from higher sales. Geissbauer et al 2014 note that German companies are expecting to save an additional 2.6 percent on top of the usual cost savings, should all partners within the supply chain succeed in reducing their costs and pass them on.

Higher sales should also be expected, as digitalising the value chain will not only allow companies to engage with a larger market, but also allow them to be flexible with suiting customer demands, increasing customer satisfaction and potentially loyalty (Kagermann et al, 2013).

Employment development and Qualification

Industry 4.0 signifies a major change in industrial labour. As technology changes within an industry, new qualifications and competencies for different work processes will be essential. As a result of digitalisation, professional profiles will become increasingly demanding and interconnected, which will result in a demand for a more highly-skilled workforce.

Skills such as information management, documentation, reading skills and data analysis will be essential, as well as interpersonal skills due to the rising importance of project work and teamwork (Schroeder, 2016).

The German government should readjust training programmes, so that they are in line with these new requirements (Ittermann/Niehaus 2015). The overall aim of the government should be not only to create employees that are suitable for working in the new environment created by Industry 4.0, but to redirect and retrain affected employees so that labour market opportunities are promoted to them.

Ultimately, this will be up to the Trade Unions, who must use their co-determination right to enhance the education and training opportunities afforded to the affected employees. Schroeder (2016) and Gesamtmetall et al (2016), observe the social partner agreement between the employer associations of the metal industry and IG Metall, where training professions created in the area are upgraded jointly.

Should an agreement like this be put in place, then Germany could see high potential within their labour force. More opportunities for affected workers will then lead to skill enhancements, which could prove prosperous for not only German industries, but for the German economy as a whole.

Threats from Industry 4.0

Slow Adaptation by German SME’s

Despite the German government formulating a comprehensive plan for Industry 4.0, companies within Germany have been slow to adopt positive measures towards a more digitalised manufacturing sector. In 2006, Stefan Groschupf, owner of company Datameer, offered his experience in Data Systems to German industrial companies in order to assist them create a more digitalised industry.

This offer was refused by the German industries and he subsequently went to the Silicon Valley, where he assisted Apple and AT&T to build Big Data analytic systems (Chazan, 2017). In the eyes of Groschupf, German companies are far too risk averse and bureaucratic, leading to them falling behind in terms of innovation.

SME’s within the Mittelstand do not tend to change their mindset in regard to industry, and this resistance to change is of serious concern to many experts. Roman Friedrich, the managing director of the consultancy firm AlixPartners, predicts that many German firms will fail to transition in to a more digitalised environment, as a gradual transition simply isn’t sufficient for a change of this magnitude (McGee, 2017).

The high costs associated with implementing Industry 4.0 measures is also deterring many companies. Not only are IT systems expensive to implement and maintain, but they also take time to implement, which disrupts business proceedings in the short-term (Zhong et al, 2017).

It is critical that companies within the Mittelstand wake up to the idea of Industry 4.0 if they are to maintain their competitive edge in industrial engineering. German industrial companies must match the ambition of the German government, in order to ensure that this transition is smooth and successful.

Big Data and Security

A lack of data security poses a severe threat to German firms. German SME’s who have embraced technological change are increasingly worried as to the risk of misappropriation of their accumulated knowledge and information in digital-interconnected cooperation structures, which then threatens to stall their progression in terms of digitalising their value chains through horizontal and vertical integration.

The common nature of cyberattacks has raised doubts, meaning that industrial security is becoming an obstacle to interlinking devices and machines and their integration in to external networks globally (Gausemeier et al, 2016). Should a business fall victim to a potential cyberattack, their data may lose confidentiality and integrity, meaning that their data could be corrupted or modified (Lezzi et al, 2018).

This would lead to a company losing efficiency, productivity and competitiveness. Not only would there be a reduction in the production rate, but product quality would also suffer significantly, resulting in the company becoming less profitable (Kobara et al, 2016) (Ren et al, 2017).

However, despite these challenges being identified, there has been no convincing data security solution offered in Germany. The only viable solution has come through a two-factor interconnection strategy, with the first step concerning the sharing of data in a closed network, followed then by interconnecting external systems.

Inherent flaws of Capitalism

If Marxist theory is applied to Industry 4.0, the outlook for the labour force within Germany appears to be bleak. Marx notes the influence that technological progress had on the employment rate as time went on. Technology begins to displace workers, and as technology grows in importance, the reserve army of unemployed individuals also grows (Godfrey, 1977).

Unemployment then becomes cyclical, so if a firm is threatened with overproduction and falling profits, they will seek to lower their wage bill. If this is not properly governed, real wages will begin to stagnate as a result of this industrial transition. Evidence can be seen from the U.S. in the 1970’s, where real wages began to stagnate as workers began to be displaced by computers (Wolff, 2010).

A severe conflict of interest could arise between the employers and the labour force, where the employers strive to lower labour costs and maximise profits, and the employees yearn to achieve working conditions which allow them to have a decent standard of living.

Ultimately, this conflict of interest could eventually lead to either alienation or technology-induced unemployment, where digitalisation becomes dominant in the production process, leaving many employees redundant. Should this come to fruition, then a business crisis is inevitable for Germany.

Policy implications of Industry 4.0

While Germany have made encouraging steps towards creating a more digitalised manufacturing, an evaluation of their Industry 4.0 strategy showcases some significant gaps for policy makers to tackle in the future. The priority of the German government should be to actively combat the slow take up within the country of Industry 4.0 practices.

One solution for this, as suggested by Kagermann et al (2016) is for the German government to take a more international view of this strategy. Should the German government begin to network internationally, it has the ability to entice SME’s to open up to Industry 4.0, which in turn would make them take greater steps to become more compliant with its requirements.

Kagermann et al also argue that a top-down policy would help promote the norms of Industry 4.0, which would allow it to become standard in German business. As a result of this process, Germany would have reliable, valuable international infrastructure, which would deliver a significant boost in the medium to long-run

There has been widespread criticism as to Germany’s strategy being far too focused on developing mechanical engineering and smart factories. While it is known that these areas are essential to Germany’s comparative advantage, some experts feel that the development of these areas are taking attention away from other high-potential areas, such as platformisation (European Commission, 2017) (Gausemeier et al, 2016) (Bitkom, 2016). Lopez-Gomez et al (2017) highlights that Germany have not yet created value through either improving their infrastructure or enhancing their knowledge management and analysis.

In order to combat the threat of cyberattacks, legislation will need to be altered in order to account for the new environment that Industry 4.0 brings. Improvements to existing legislation will not only assist in reducing the threat that cyberattacks bring, but will also clarify potential liability issues, as well as sufficiently regulation the use of personal data.

However, as well as this, the government must go beyond legislation, potentially through offering businesses services such as guidelines and model contracts or promoting self-regulation measures such as audits (Kagermann et al, 2013).

Finally, in order to preserve the confidence of the workers, it is pivotal that the employers, as well as the government take important steps in order to train employees for the transition in to the digital world. As eluded to earlier, Industry 4.0 will bring a significant change in the competencies demanded of workers. It is vital that training plans are updated so that the workers are reskilled to be fully competent for the new industrial environment.

Working processes will also change significantly, so for employers, it is essential that they offer workers the opportunity to handle more responsibility within the workplace, as well as enhancing their own personal development. This will involve employers designing work in which learning is encouraged, work that creates lifelong learning and allows the workers to reach their full potential.

These types of policies will leave Germany with an exceptionally high-skilled workforce, one that will help them to thrive in the new industrial environment.


It is evident that Germany are making significant strides towards creating a more digitalised industrial environment. If they implement their Industry 4.0 strategy in the right manner, then this area could be invaluable in terms of profitability for firms, and growth for Germany.

However, effective policy must be in place to not only encourage SME’s, but to counteract the threats of cyberattacks and exploitation. Industry 4.0 is the future for Germany, and once it is implemented, it will not be long before they are world leading innovators once more.

Cite this essay

Industry 4.0. (2019, Nov 29). Retrieved from https://studymoose.com/industry-4-0-essay

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