Breaking the mould: How Industry 4.0 is modernising the way manufacturers do business

The technologies that are driving the fourth industrial revolution are becoming increasingly familiar. In fact, many of them have been around for some time. What, then, makes Industry 4.0 revolutionary? According to industry experts, getting on board requires transforming manufacturing business models. David Loneragan writes.

The federal Coalition, which once again won government, has also won for itself the task of driving forward innovation in Australia’s manufacturing sector. During the election campaign, prime minister Scott Morrison announced a $50 million Manufacturing Modernisation Fund, which he said would stimulate “at least $160 million” worth of business investment in new technologies and processes. The Fund is to reportedly provide grants to small- and medium-sized manufacturing businesses to help them modernise, grow and employ more workers, and has a particular focus on manufacturers in regional and outer-suburban Australia. The funds will co-fund capital investments that help them scale-up, invest in new technologies and develop new high-value products.

In a statement put out by the Liberal Party in the leadup to election day, the incumbent government indicated that it expected the $50 million in public money to be bolstered with a further $110 million in investment from private industry. It stated that $20 million would be provided for matched grants of between $50,000 and $100,000 for smaller- scale technology and efficiency investments, while $30 million would be provided for larger-scale grants of up to $1 million, with a $3 co-contribution from industry for every $1 from government, to support more transformative investments in technologies and processes.

This push towards “modernising” the Australian manufacturing sector builds on the government’s investment of $100 million in the Advanced Manufacturing Fund, its creation of the Advanced Manufacturing Growth Centre (AMGC), and its $40 million in funding for the Innovative Manufacturing Cooperative Research Centre (IMCRC).

At this year’s National Manufacturing Week (NMW) in Melbourne, representatives from both the AMGC and the IMCRC gave their thoughts on the state of manufacturing in Australia and, in particular, the drive towards Industry 4.0.

Forgoing the technology fixation

The aim of the IMCRC is to enable manufacturers to get on board with the transformations being wrought by technological innovation and development. David Chuter, IMCRC’s CEO and managing director, an experienced communicator of these issues and a passionate advocate for advanced manufacturing, spoke about why Industry 4.0 is so important for small-to-medium manufacturing companies in a competitive market environment. “Trust me, if you are a manufacturer and you are not on the Industry 4.0 journey, there are companies out there well ahead of you and they are investing in research and development (R&D) and technology to create fantastic new business models,” Chuter told the NMW audience.

In fact, the major theme of Chuter’s presentation was less the importance of adopting new technologies than the necessity of transforming business models in response to technological innovation: in other words, the old way of doing things is holding manufacturing companies back from what they could be achieving. Chuter said that it would be wrong to think that the rate of change in industrial developments is linear. Rather, as Gordon Moore stated in his “law” regarding the speed of semi-conductor development, technological change is exponential and ever-more rapid in its transformations. The period of time between the beginning of the first industrial revolution (based on steam) in the late eighteenth century and the beginning of the second (based on electricity) in the late nineteenth century was approximately 100 years. The advent of the third revolution, involving computers and robotics, began in the latter half of the twentieth century. And now, said Chuter, with the developments in digitalisation that have been unleashed, we are already in the midst of the fourth industrial revolution. “We’re not sitting here in 2070, are we? We’re sitting here in 2019 – we’ve got there is less than half the time.”

IMCRC’s David Chuter said that forward-thinking manufacturers need to focus on innovating their business models.

According to Chuter, the exponential surge in technological innovation is driving transformations in the way businesses and industries need to react and adapt to stay ahead. And there is plenty of money being thrown into this right now.

The development of the Internet of Things (IoT) is seeing the connection of 5.5 million devices to the internet every day. And companies like Cisco are now forecasting that there will be 200 billion connected devices by 2020. According to Chuter, this massive expansion is a massive opportunity for manufacturers to innovate and get ahead. And those companies that don’t get involved will be left behind.

“If you’re not talking the language of IoT in your business, you’re missing out on a really big opportunity. When you look at the emerging technology trends (and not just in manufacturing), you’ll find that IoT is the single biggest business investment opportunity out there,” said Chuter. “It is forecast to be a $1.5 trillion business within two years, and a $6.5 trillion business within five years. Once again, that is an exponential curve. So, if IoT is not part of your discussions in your business, you’re missing out on a trick.”

The second largest investment trend, Chuter said, is in robotics. “These is not the old-fashioned robots that sit behind cages; these are collaborative robots, or cobots, that can work with and alongside people. That is what Industry 4.0 really is: the meshing of humans and machines to do things that neither of them could do on their own.”

Moving up the smiling curve

However, Chuter stressed that the most important theme in the Industry 4.0 journey was not technologies, but about new ways of doing business and new ways of creating value. “It is not about the technology. There is a lot of shiny stuff out there, which is exciting, but the most important thing is what you choose to do with it. Think about a company like Airbnb. They haven’t created new technology; they have combined existing technology with a smart business model to become, in effect, the world’s largest hotel company,” Chuter said.

“In the manufacturing sector, also, it is about how you can drive improved efficiencies, extract value, drive lower costs, create new business models and give such exceptional value gains to your business that banks will be jumping out of their seats to loan you money to invest in further growth. This is what technology can do, not about the technology itself.”

Chuter said that IMCRC, AMGC and CSIRO were all pushing for manufacturers to move beyond being simply producers of physical commodities. “Economic research shows that if you are only producing things, you are likely to be competing solely on price or cost. What we are all trying to encourage is for companies to move up what is called the ‘smiling curve’ and get involved in services, linking R&D, design and preparing products for manufacturing all the way through to marketing, sales, and even dealing with the products at the end of their life,” he said.

The “smiling curve” model contends that the two ends of the value chain, R&D/design (left) and sales/marketing (right) add higher value to products than the manufacturing process (middle).

And this is another area in which IoT is transforming the landscape, with business models moving from the mere production and sale of products to those also based on contracts situated around performance and outcome. “This is springing open the concept of services enabled by production,” Chuter said. “I am not one to say, ‘Close down your manufacturing plant and become a design house.’ What I’m really looking for are those companies that can say, ‘I’m already a great manufacturer – what else can I do to create a strategic lock-in with my customer and get out into the world and start exporting, not
only products, but services as well.’”

CSIRO research indicates that investments in the key enabling technologies of Industry 4.0 – such as sensors, data analytics, advanced materials, smart robotics and automation, additive manufacturing or 3D printing, and augmented and virtual reality – are also key in encouraging companies to adopt and drive into their businesses and supply chains new ways of doing things.

And that is what IMCRC is encouraging. Chuter said that the most important aspect of Industry 4.0 is not the technology, but what companies do with the technology to deliver real-world manufacturing and commercial outcomes. “There is no point in doing innovation if you’re not going to make money from it – that is, if you can’t sell it to a customer,” Chuter said. “We’ve had this technology in manufacturing for decades now. What we are seeing is a fantastic opportunity for manufacturers to take up new approaches on the basis of these. There is not a sector in Australia that is not looking for people that know how to implement technologies, automation and smart systems.”

Associate Professor Nico Adams has also been heavily involved in promoting the benefits of Industry 4.0 to manufacturers, having previously worked as Industry 4.0 and digital transformation program lead at IMCRC and as a senior research scientist and product manager at CSIRO’s Data61 Business Unit. He is now director of Swinburne University of Technology’s Factory of the Future. Located at the university’s Advanced Manufacturing and Design Centre (AMGC), the facility is made up of a cluster of specialist studios that enable collaboration between industry and researchers for the design and development of prototype advanced manufacturing methods and products.

Like Chuter, Adams is adamant that the technology of Industry 4.0, while important, is less important that the business models that utilise and incorporate that technology. “I want to reinforce that Industry 4.0 is not about technology. The technology – and I’m saying this as someone who runs an engineering facility – isn’t all that interesting. What really is interesting is what you do with the technology to innovate your business model,” Adams said.

“When businesses come to us at Factory of the Future and ask, ‘How can I get into Industry 4.0?’ what they tend to think is that Industry 4.0 is this weird collection of technologies that cost a lot of money and for which they don’t have the skill sets to utilise. They’ve heard of the technology, and now they’re trying to fit a business problem to technologies,” Adams said. “Typically, when that happens, what we try and do is change the conversation and move it away from talking about the technology.”

Adams said that the individual technologies that make up Industry 4.0 have been around for at least 10-20 years. “There’s nothing fundamentally new about them. What is new is what happens when we bring these pre-existing technologies together and profoundly change the way in which we create and capture value,” he said.

Like Chuter, Adams sees Industry 4.0 as a way for manufacturers to transform their business model in order to respond effectively to changing customer needs. “In the classical paradigm, if I was, for example, a manufacturer of air- conditioning units, my fundamental business model is that I make an air-conditioning unit, I send it to the customer, and, if it breaks down, I’ll fix it – that is, more or less, the end of our interaction. In a digitally-enabled paradigm, I will make a contract with the customer that I will keep their house at a certain temperature. To do that, I’ll come into the customer’s house, install the sensors that I need to understand the temperature of the house, install insulation, and then, finally, install the air- conditioning unit, which I continue to manufacture,” Adams explained.

The technologies are certainly not irrelevant, Adams said, but they are only relevant insofar as they deliver on providing the total service. “In this example, the customer is paying me for the service of keeping their house at a certain temperature. Now, as a value proposition, as a business model, I will of course need the technologies associated with Industry 4.0 – sensors, data analytics, IoT, and so on – but they are just there as a means to build a business model and bring it out into the marketplace,” he said.

Shifting the balance

The Australian Industry (Ai) Group has long emphasised the need for companies to keep up with innovations to stay competitive in the marketplace. The peak industry organisation has also done valuable work to keep tabs on how manufacturing is progressing across Australia. In his presentation on day one of NMW, Mark Goodsell, the NSW head and national lead for manufacturing of Ai Group, said that the changing structure of manufacturing was altering the balance of the sector between the states. “Twenty or so years ago, when you thought of manufacturing, you would have thought of Victoria and South Australia,” Goodsell said. “For quite a while now, the standing of manufacturing in NSW and Victoria has been about the same – the difference is that NSW has actually got more manufacturers, but they tend to be a bit smaller, while Victorian industry is being driven very much off the automotive supply chain, so it is structured differently, and tends to be slightly larger companies, though there are fewer of them. Queensland has held its own, and it is now a real centre of manufacturing alongside Victoria and NSW.”

Indeed, in her recent state budget speech, Queensland Treasurer Jackie Trad asserted that Queensland was emerging as the nation’s “advanced manufacturing state”, citing in particular securing of the $5.2 million Land 400 contract with Rheinmetall. The Palaszczuk government’s Queensland Advanced Manufacturing 10-Year Roadmap and Action Plan, launched in 2016 and updated in 2018, has set its sights on attracting large companies via contracts such as these, particularly in defence and aerospace.

In Victoria, the manufacturing sector employs more people than in any other state – over 270,000 jobs. It contributes over $30 billion to gross state product, and annual exports of manufactures are valued at almost $20 billion. Speaking at NMW, Victoria’s Minister for Jobs, Innovation and Trade, Martin Pakula, said that manufacturing was still the cornerstone of the state’s economy.

“It is a major driver of innovation, of productivity improvement, and I think it is going to remain that way for a long time to come. We lead the nation in business expenditure on R&D, in expertise in design and engineering across the sector. The transition to advanced manufacturing continues to drive demand for high-skilled professional, vocational, scientific and technical jobs. As a government, we are intent on continuing to support the manufacturing sector,” Pakula said.

NSW produces approximately one third of Australia’s total manufacturing output, which generates around $33 billion. The sector in NSW also employs about 253,000 people, invests about $6.7 billion annually in R&D and exports products worth around $2.4 billion. The NSW government and the federal government are now developing an Aerospace and Defence Industries Precinct, which is to be situated adjacent to the new Western Sydney Airport and will provide a hub for advanced manufacturing in the state. In 2018, the NSW government released its NSW advanced manufacturing industry development strategy, which is targeting the development of high-value, high-skills services in the state’s manufacturing sector, particularly in pre- and post-production processes such as R&D and design.

A panel session on Industry 4.0 in NSW was a major feature of the second day of NMW. The session was chaired by Kylie Bell, the executive director of Industry Trade and Investment at the NSW Department of Industry, and included Mark Goodsell, alongside Michael Sharpe, the NSW and ACT state director of AMGC, Professor Chun Wang, the head of the School of Mechanical and Manufacturing Engineering at the University of NSW, and David Fox, the general manager of LA Services.

AMGC’s Michael Sharpe said that companies need to focus on collaboration to realise the potentials of Industry 4.0.

According to Sharpe, manufacturers in the state have been embracing the shift towards advanced manufacturing and Industry 4.0. “Certainly, NSW is leading the way with manufacturing, and it is experiencing its largest expansion in manufacturing since 2005 – the sector really is on the move across the state. When you see what is happening in the Industry 4.0 space, and what it entails, it makes you think about how far industrial development has come,” Sharpe said. There are companies in NSW that he said have been around for over 100 years, and which are now at the forefront of the fourth industrial revolution. “They are still around, but they have completely transformed the way they do things.”

Goodsell pointed to the challenges that needed to be overcome in what is in many respects a traditionally minded sector. “Industry 4.0 is an opportunity and a challenge for manufacturing because manufacturers, traditionally, are very much rapt in the physical world: they make things that you can pick up, turn over, look at, and, of course, sell. The challenge of Industry 4.0 is that it introduces the digital world: it is the integration of cyber and physical environments,” Goodsell said. “That requires certain technologies and an approach to technology, but it also requires a different way of thinking about business.”

Goodsell said that manufacturers who are succeeding in their embrace of that frontier are changing the
way that they think about their business and starting to think about the opportunities presented by data and the cyber world. “For instance, while a traditional manufacturer wanted to be out on the floor crawling among the machines, feeling them, listening to them, a business owner I spoke to recently said to me that when he is looking for people to work in his factory, he is looking for people who can run a factory off a smartphone. This points to the need to start trusting data as manufacturers may not have done in the past.”

Overcoming tradition: collaboration in the digital age

One of the ways that businesses are changing in the era of Industry 4.0 is in their attitudes towards collaboration. Sharpe said that among the main task of AMGC is enabling closer collaboration between companies and between companies and researchers. “From the perspective of AMGC, we are really building this new ecosystem of manufacturers right across this state and right across Australia. Membership is free, and we encourage manufacturers to join because we are stronger together,” he said.

“Collaboration is key in becoming an advanced manufacturer. We need more Australian companies working together, big and small. And we also have to work with our world-leading researchers – we have some of the best researchers in this area and we have to tap into this resource. There is certainly a real growth opportunity for companies to collaborate and work stronger together.”

Goodsell agreed that collaboration was necessity and could open up hitherto unseen potentials in the sector. But establishing those connections, he said, means finding ways of establishing trust – with universities, suppliers, customers – in an environment that traditionally has not been particularly trusting or open. “It is a real challenge for not only how you structure your business, but how you think about your business, particularly in a very traditional sector like manufacturing. The starting point of this collaboration story is that it is hard. And it is hard because the Australian business culture in the past has not valued it,” he said.

“One of the things we have discovered about the Australian business psyche is that we have tended to value rugged individualism; our economic model was very inward-looking, without much focus on exports; the competition was down the road and you didn’t easily collaborate with them because they would rip you off. So, if you find that your early attempts to collaborate are difficult, there is a reason for that.”

And nor have universities been encouraged to collaborate. Goodsell said that the issue here has been that, for the institutions and, especially, for individual academics, status comes from publishing information, not giving it to someone else to monetise it. “We’re therefore coming to this collaboration from historically different viewpoints. The good thing is that it is changing, and we know it is changing because we are finding it hard; and we are only finding it hard because we are trying to do it,” he said.

Goodsell said that Ai Group, AMGC, and other bodies have been trying to make collaboration easier by linking manufacturers to research institutions. “Trust usually comes from experience. But there is a lot of learning going on. Go visit your local university, find out what they are doing, find out what the funding models are, find out whom to talk to – and keep pounding away,” he said.

“Companies need to have an innovation strategy – you need the discipline of knowing the problem-solving areas that can make the biggest difference to your business and focus there – and don’t get too diverted buy the bright, shiny technology. But once you have that focus, don’t be afraid to try some difficult things and get involved in collaboration.”

 

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