Schroders: How smart manufacturing could lead to an industrial renaissance
Leiter Research für globale und internationale Aktien
The history of industry is one of constant innovation. The industrial revolution that began in the late 1700s was enabled by the advent of water and steam power. This allowed the start of mechanical production. Then, electric power and assembly lines heralded the era of mass production in the early 20th century. The late 20th century saw the development of IT systems that could enable a greater role for electronics and automation in industry.
I think we are at the start of another wave of innovation that will bring about a new industrial renaissance. Innovations in hardware, software, and materials are converging with digitisation to help companies become more productive and efficient, while also reducing the carbon footprints of their supply chains and products.
This is a theme that I think will dominate for many years to come, and it has been accelerated by the Covid-19 crisis.
What is the smart manufacturing revolution?
The next industrial revolution, or Industry 4.0, is already here, and, as ever, is driven by innovation. This could be innovative hardware, such as 3D printing or advanced robotics.
It could be software that enables the huge amount of data now being generated by these industrial machines to be analysed to improve operations, or to predict when maintenance is needed.
It’s also about innovative materials; this could involve the development of completely new materials such as graphene, or new applications for existing materials such as carbon fibre.
Where could all these innovations end up? I think they will lead to a collaborative, integrated manufacturing system that responds in real time to meet changing conditions and demands of the factory, in the supply chain, and in customer needs. Those innovations being adopted on factory floors, warehouses & supply chains, or in other industrial assets in the field, such as tractors or container ships.
Why is smart manufacturing set to take off?
There are numerous reasons why we expect this to be a powerful theme of the next few years. Digital technology is crucial as an enabler of the smart manufacturing revolution. Devices and equipment increasingly have software installed or embedded in them which connects them to the internet. In fact, there are well over 40 billion devices connected to the internet now. Each of these generates an enormous amount of data.
Currently, estimates suggest around two-thirds to three-quarters of enterprise level data goes unused. But advances in storage and big data analytics are starting to change this.
A key consideration for industrial companies is what that data can tell them in terms of improving their productivity, and in certain cases to help prevent costly downtime. A typical manufacturer suffers 15 hours of downtime a week; reducing that could make a significant difference to productivity and therefore profitability.
Improved communication networks and standards are another crucial element to this. Industrial networks are increasingly being standardised so that one piece of industrial kit can communicate with any other.
On the hardware side, robots have been used in industries such as car manufacturing for a long time now. But they have largely been fairly basic machines with a minimal range of applications, and are kept apart from employees for safety reasons. Increasingly though, collaborative robots (or "cobots") have been developed that are more agile, have a wider range of capabilities, and can work alongside humans. This opens up the robotics potential into new end markets like electronics and food and beverage production.
Perhaps most crucially, at the same time as these developments are being made, costs are starting to fall due to economies of scale and rising adoption, making it economically rational to adopt these new innovations. The attractions are further bolstered by the fact that manufacturing wages are rising in many parts of the world (notably China), and manufacturing productivity has been stagnant.
What does smart manufacturing mean for employees?
Rising wages are an important reason for companies to switch to automation. But higher wages are also symptomatic of the fact that fewer people want to work in factories. Better-educated workforces are demanding more flexible and varied job roles. It makes sense for machines to step in and do the work that would be potentially dull, or even dangerous, for a human to do.
The fear that new technology will steal our jobs is as old as the first industrial revolution. Worries about robots displacing existing workers are understandable but largely misplaced. What has instead tended to happen is that entirely new jobs are created, as the new technology opens up further innovation and previously unthought-of opportunities.
And let’s not forget the demographic angle. Many countries around the world, including industrial leaders such as the US and Germany, are facing the challenge of an ageing population. Fewer people of working age could result in a substantial hit to productivity and economic growth, and therefore living standards.
In the US, one of the most flexible labour markets in the world, manufacturing job openings remained near 20-year highs at the start of 2020, despite strong wage growth, highlighting these issues. But increased use of automation can fill the gap.
Smart manufacturing can protect the environment
Another key part of smart manufacturing is the environmental impact. Take innovative materials: chemical and manufacturing innovations are generating cheaper and stronger composites, which are then used in vehicles and aircraft.
According to the US Department of Energy, if one quarter of cars in the US switched to using lightweight components and high-efficiency engines, then more than five billion gallons of fuel could be saved annually by 2030. Planes have also become more fuel-efficient as composite materials have risen to 50% of the weight of an aircraft, up from 10% in the 1970s. This percentage is still increasing, paving the way for further fuel savings.
New manufacturing techniques such as 3D printing, and laser cutting and welding, also save a significant amount of material compared to traditional machining and milling machines.
Connected devices also have huge scope to improve energy efficiency, for example in the fields of metering or detection. Smart meters can help households and businesses control their energy use, for example, while detection software can accurately and swiftly detect water leaks.
What does Covid-19 mean for this theme?
The current crisis is starting to accelerate the adoption of these trends. I see three specific areas where this is particularly the case as the manufacturing industry seeks to increase its resilience to future similar events.
Firstly, the desire and need to digitise industry and improve wireless communications has become paramount. The crisis has shown that digital technologies have largely enabled remote working, and manufacturers are showing strong interest in driving more remote monitoring of their assets and supply chains.
Secondly, with lockdowns preventing people from being physically present in factories, the use of automation in industry looks set to rise sharply. Even as people return to workplaces, the ongoing need for social distancing calls for greater automation.
And thirdly, the crisis has shown the fragility of some global supply chains, which were already starting to shift due to the US/China trade tensions last year. A switch to smart manufacturing will be required as supply chains are reconfigured, or brought back onshore. This will require increased efficiency in order to keep costs down.
Smart manufacturing innovations drive efficiency gains and more resilient production processes. Covid-19 has already been a catalyst for accelerated adoption.
The start of a long-term investment opportunity
Brought together, all of the above illustrate why we are now seeing a rethinking of how businesses design, engineer, sell and service products. We think this means that costs will fall, downtime and wastage will be reduced, and product innovation cycles will shorten - all of which will benefit customers.
Companies in the industrials, materials and information technology sector are likely to be the leaders of this trend, as they are the innovators that can monetise the potential. Smart manufacturing will be a long-term theme for these sectors, but the majority of company analysis focuses on just the next two or three years at most. This offers an opportunity for investors prepared to think about the decades to come. We are only just at the beginning of this smart manufacturing revolution.
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