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A decade ago, the Trends editors were among the few forecasters proclaiming the coming of the Fourth Industrial Revolution; we called it the Deployment Phase of the Fifth Techno-Economic Revolution.
Today, it seems almost every consulting firm, technology vendor, and think-tank has discovered this new era and is eager to help guide us through it.
In fact, the Fourth Industrial Revolution was the main topic discussed by the world's business elite when the World Economic Forum met this year in Davos, Switzerland. CEOs, policy makers, and entrepreneurs increasingly understand that it represents the latest in a series of game-changing "industrial revolutions" centered around improvements in automation and connectivity.
- The First Industrial Revolution, as defined by the World Economic Forum, introduced basic industrial automation through machinery and then boosted intra-national connections through the building of bridges and railways. As explained in Ride The Wave by Fred Rogers and Richard Lalich, this period from around 1771 to 1870 actually represents two Techno-Economic Revolutions: the Machine Revolution and the Railroad Revolution.
- According to the World Economic Forum, the Second Industrial Revolution began when automation fostered more efficient production and connectivity via the division of labor that enabled mass production, mass markets, and mass media. In this era, economies of scale were crucial to success. As the Trends editors have demonstrated, this revolution, which ran from roughly 1870 to around 1970, actually encompassed two techno-economic revolutions: the Steel Revolution and the Mass-Production Revolution.
- The Third Industrial Revolution was propelled by the rise of the Digital Age, which created even more sophisticated automation and connectivity based on microprocessors and the Internet. This revolution began around 1971 and only recently lost momentum in the past ten to fifteen years, as the low-hanging fruit was picked and mass production institutions impeded progress. In this era, economies of scope and network effects were crucial to success. As the Trends editors have shown, the Third Industrial Revolution represents only the first half, or "Installation Phase," of what we call the Fifth Techno-Economic Revolution. In the Installation Phase of every techno-economic revolution, the big profits are made by the technology companies, whether we're talking recently about chipmakers and software companies or the railroad companies, in an earlier era.
- The Fourth Industrial Revolution is being driven by a new wave of extreme automation and connectivity. As explained in prior issues, this revolution is synonymous with the Deployment Phase of the Digital Techno-Economic Revolution. This revolution is enabled by practically free computing and practically unlimited bandwidth. It will be further enhanced by the unprecedented implications of widespread artificial intelligence. In the Deployment Phase of every techno-economic revolution, the big profits come from companies imaginatively using the core technology rather than those creating it; in the Fourth Technology Revolution, that means companies harnessing digital technology in industries ranging from healthcare, to agribusiness, to professional services will be the big winners.
The painful period we've been in since the dot-com bubble burst in 2000 represents a predictable transition. It's like the Great Depression-a period when economic institutions are fundamentally reshaped to meet the demands of the new revolution: Just as the Great Depression had market crashes in 1929 and 1937, the so-called Great Recession had them in 2000 and 2008.
As in every prior revolution, the winners of the prior era want to hold onto the security of the past. Much of the political turmoil we see comes from the challenges people face in dealing with the disruption of the current era.
- Donald Trump has tapped into the anxiety of those who yearn for the return of the Second Industrial Revolution, when well-paid, lifelong jobs in manufacturing were plentiful.
- Bernie Sanders has tapped into those who imagine an "unlimited social safety net" protecting them from the discomfort that always comes with revolutionary change.
These people are no different than the Luddites who wanted to smash all the job-killing machines, or the Marxists who dreamed of a "workers' paradise." Fortunately, these economic counter-revolutionaries were, for the most part, sidelined by history. The twentieth century experiments that took place in Eastern Europe and elsewhere show what happens when they aren't.
On the contrary, as each revolution built upon the previous one, Americans and most inhabitants of the EU have seen their real GDP per capita rise roughly twenty-fold since the late eighteenth century. And unless the process is derailed by irrational forces, we can expect it to rise another 60 percent over the next fifteen to twenty years. Industry 4.0 refers specifically to the transformation of manufacturing taking place within the context of the broader industrial revolution. McKinsey and BCG have been closely tracking Industry 4.0 for several years now and proactively helping firms identify and respond to its threats and opportunities. McKinsey and Company defines Industry 4.0 as the next phase in the digitization of the manufacturing sector, driven by four disruptions:
Industry 4.0 represents the next stage in the major upheaval in modern manufacturing that started in the 1970s and was part of the Installation Phase of the Digital Revolution. The first three stages were:
- The astonishing rise in data volumes, computational power, and connectivity, especially new low-power wide-area networks.
- The emergence of analytics and business-intelligence capabilities.
- New forms of human-machine interaction, such as touch interfaces and augmented reality systems.
- Improvements in transferring digital instructions to the physical world, such as advanced robotics and 3D printing.
According to McKinsey, Industry 4.0 will build on these three foundational layers with four new capabilities:
- The lean revolution of the 1970s
- The outsourcing phenomenon of the 1990s
- The wave of automation that took off in the 2000s
- Big data
- Advanced analytics
- New human-machine interfaces
- So-called digital-to-physical transfer
How will these technologies transform real-world manufacturing?
First, consider big data. An African gold mine found ways to capture more data from its sensors. New data showed some unsuspected fluctuations in oxygen levels during leaching, a key process. Fixing this problem increased yield by 3.7 percent, worth up to $20 million annually.
Second, consider advanced analytics. Stronger analysis can dramatically improve product development. One automaker uses data from its online configurator together with "purchasing data" to identify options that customers are willing to pay a premium for. With this knowledge, it reduced the possible combination of options on one model to just 13,000-three orders of magnitude fewer than its competitor, which offered 27 million possibilities. Development time and production costs fell dramatically. Most companies could improve gross margin by 30 percent within twenty-four months using this approach.
Third, let's talk about human-machine interfaces. Logistics company Knapp AG developed an "order picking technology" using augmented reality. Pickers wear a headset that presents vital information on a see-through display, helping them locate items more quickly and precisely. And with both hands free, they can build stronger and more efficient pallets, with fragile items safeguarded. An integrated camera captures serial and lot ID numbers for real-time stock tracking. Among the many benefits, error rates are down by 40 percent.
Finally, take a look at digital- to-physical transfer technologies. A company called Local Motors builds cars almost entirely through 3D printing, with designs crowdsourced from its online community. It can create a new model from scratch in a year, far less than the industry average of six years. Fiat and GM, among others, still bend a lot of metal, but also use 3D printing and rapid prototyping to minimize their time to market.
At Davos, Klaus Schwab, Chairman of the World Economic Forum, gave attendees a copy of his new book titled, The Fourth Industrial Revolution. In it, Schwab forecasts 21 events the WEF identifies as tipping points, or milestones, for the revolution that will occur between now and the end of 2025. These milestones are not really new; they were identified previously in Trends. However, the significance of this list is that the WEF provided its own probabilities and timing assessments. More importantly, it positioned these forecasts front-and-center at a conference attended by the world's leading "movers and shakers." This matters because what's on the to-do list of these CEOs and heads of state will soon become "action items" for their subordinates who directly control the world's financial, information, and manpower resources.
Given this trend, we offer the following forecasts for your consideration.
First, the institutional transformation necessary to unleash the full potential of the Fourth Industrial Revolution will take place at an accelerating pace as one breakthrough leads to another.
The collapse of energy prices triggered by the North American Energy Revolution is transferring an average of $2 trillion per year from energy producers to energy consumers. Digital Globalization, as described in the next segment of this issue, is creating enormous value by delivering information where and when it is needed. Ubiquitous networked intelligence, genomics-enabled bio-engineering, and service robotics including autonomous vehicles are poised to dramatically raise standards of living, creating a new global middle class. Even government bureaucracies are adapting to the economic realities of the new digital paradigm as they compete to adapt regulation, taxation, and litigation to the needs of the new economy.
Second, policymakers will increasingly have to address the challenges that accompany this new reality. In a recent report, the global financial firm UBS highlighted some of the broader implications of the Fourth Industrial Revolution.6 Consider just four:
- Polarization of the labor force is likely as low-skill jobs continue to be automated and this trend increasingly spreads to middle-skill jobs. This implies higher potential levels of inequality in the short run, and a need for labor market flexibility to harness Fourth Industrial Revolution benefits in the long run. As previously highlighted in Trends, up to 47 percent of existing U.S. jobs could be subject to disruption.
- Greater returns will accrue to those with existing financial assets. In the short run, this could exacerbate inequality via relatively lower borrowing costs and higher asset valuations.
- As the issuer of the world's reserve currency, sitting at the heart of the Fourth Industrial Revolution, America's competitive advantages could increase.
- Because of the increased reliance on computing and networks, the Fourth Industrial Revolution is likely to increase the magnitude and probability of risks related to cybersecurity and geopolitics.
Third, many of the winners in this new era don't exist today and many of the winners of the third industrial revolution will be big losers in the decade ahead.
Consider these three insights from UBS.
- "Flexibility" will be key to success in the Fourth Industrial Revolution; economies with the most flexible labor markets, education systems, infrastructure, and legal systems are likely to be relative beneficiaries.
- Developed economies are likely to be relative winners at this stage, whereas developing economies face greater challenges as their abundance of low-skill labor ceases to be an advantage and becomes more of a headwind.
- Emerging markets in their demographic prime may find that extreme automation displaces low-skill workers, but that their limited technology infrastructures do not allow them to reap the full benefits of extreme connectivity.
Fourth, the most successful investors will be those who are on the lookout for signs of impending breakouts and failures.
Consider just four examples.
- Given current assessments of relative competitiveness, emerging markets may be less well placed to profit from Fourth Industrial Revolution benefits, relative to developed markets. The United States has a particular advantage because of its combination of geography, capital markets, natural resources, and demography.
- Watch for further disruption of traditional industries from extreme automation and connectivity. Health care, government and financial services are ripe for disruption.
- Expect firms to benefit from big data in three primary ways:
Block-chain applications could benefit firms that use them to automate processes securely, to cut out costly intermediaries, and to protect intellectual property.
- Harnessing big data to cut costs and target sales.
- Automating big data analysis to drive better and faster decisions.
- Integrating internal and external data to create a competitive advantage greater than the sum of the parts.