Putting innovation to work: global challenges and Industry 4.0 Martin Porter is Executive Director of Industrial Innovation for Competitiveness (i24c) Given how often it is being cited, you might be forgiven for thinking that we are all clear about what is meant when we refer to ‘Industry 4.0’. But scratch beneath the surface and it appears to be much less clear. Is it a description of a technological revolution across all of our industrial sectors, defined chiefly by the new technologies emerging in information and communications, big data, life sciences, artificial intelligence and robotics? Or, slightly more ambitiously, is it plan for how to exploit and further develop these technologies to achieve ‘smart’ economic growth? In fact, if it is to mean anything, it should be the heart of a new industrial strategy that delivers ‘green’ and ‘inclusive’, as well as ‘smart’ growth. It could and should be an exemplar of a wider economic strategy aiming at ‘high road’ competitiveness, addressing the profound social, economic and environmental challenges facing modern European societies in a truly systemic and integrated fashion. This is not as big a leap to make as all that, in fact. As was evident at both the annual meeting of the World Economic Forum in Davos this January, and last year’s European Business Summit, the challenges and opportunities presented by the latest industrial revolution are clearly front of mind for the world’s policy, business and NGO leaders, and many worried about the possible social consequences. The digital revolution and its fusing with related advances in robotics or life sciences clearly has a technological dimension, but rather than primarily fret about the potential negative implication, we should consider how these advances can be harnessed and scaled to meet urgent global challenges where a much wider ‘socio-technical’ 
innovation is essential. Take the transition the fossil-fuel free economy that world leaders agreed on at COP 21 in Paris last December. Decarbonisation of our economies is one of the biggest challenges we face. Only deep, rapid and probably disruptive innovation will enable us to hold global average temperature increases well below 2°C while enabling the European economy to remain competitive. Indeed, by focusing on ‘breakthrough technologies’, the launch of Mission Innovation, and its private sector counterpart led by Bill Gates, is missing this wider point, however welcome their endeavour is as a signal that the time to act is now. By harnessing the technological innovation promised by Industry 4.0 to the grand challenges faced by society, such as climate change, resource scarcity and the dangers to social cohesion threatened by changes to advanced economies, we have the potential to deliver not only long-term competitive advantage, but also economic, social and environmental resilience and flexibility. But for the industrial technological revolution to have social benefit on the scale required, we need to consider how systemic innovation can be successfully fostered at the same time. Innovation is happening in Europe Innovation is, of course, constantly underway in Europe, across all industrial value chains, and even in parts of the economy that are the most mature and resistant to change. Take the construction value chain. Here, there is enormous potential offered by the industrialisation of the manufacture of prefabricated building elements for the renovation market. The digital revolution plays an essential role, coupled with other innovations: robotics, 3D scans and simulations allow existing buildings to be accurately measured, allowing the customisation of prefabricated elements – bringing dramatic cost reductions to the deep energy retrofits needed to meet long-term climate goals. One Dutch initiative, Energiesprong, demonstrates how this innovation can serve both competitiveness and decarbonisation objectives. The initiative was born out of the willingness of the Dutch government to seek cost-effective solutions to make up to 6 million homes energy neutral. While retrofitting one’s home brings obvious gains in the medium term (delivering up to 60-90% energy savings), the upfront costs and the disruption caused currently deter uptake. To solve this issue, the Energiesprong initiative combines a revolutionary business model with an innovative industrial process. Housing associations invest €40-70,000 per property, at no cost to the tenant, who continues to make the same rent and energy payments. However, the benefits of the dramatically lower energy costs are passed on to the housing association to repay the investment. The initiative is based upon collaboration between manufacturers, installers and housing associations, whereby the renovation is tailored to each building using software, components are manufactured off-site, and are installed in only 10 days per building, minimising the inconvenience for the tenant. While this innovation can have significant climate benefits, its economic potential is also substantial. Research undertaken by the Buildings Performance Institute Europe estimates the potential value-add from prefabricated renovation modules at around €200 billion/year in Europe, creating up to 2 million construction sector jobs plus a ripple effect of 5 million additional jobs in the wider economy. The potential for transforming the construction value chain is immense, and deep retrofits are only a small part of it. Innovation in how buildings are integrated with modern, distributed low-carbon energy systems, or how developments in building automation and advanced insulation materials are applied, hold the promise of driving economic growth and competitiveness. Second, in the automotive value chain, the electrification of vehicle powertrains, if combined with clean energy sources, could be one of the most significant contributors to lowering transport CO2, air pollution and noise. Transport accounts for almost a third of EU carbon dioxide emissions, and is also a significant source of health-damaging air pollutants. The sector is predominantly powered by oil, almost all of which is imported from overseas. For each €100 spent on fuelling the average vehicle, €43 leaves the European economy to pay petroleum suppliers. By helping Europe shift from imported oil to domestically produced electricity, the EU’s energy trade balance and economic resilience would be improved. However, the transition is not simple: it requires a shift to an entirely new mobility ecosystem, creating risks for incumbents and opportunities for new entrants. In particular, new openings are created for companies that are outside the automotive sector and specialise in integration with related sectors, such as electricity; the infrastructure to distribute it; and the ICT to ensure it is smartly managed. The electronics industry is key to this opportunity. European car manufacturers are well placed to profit from this transition due to their competences in vehicle production and engineering and their skilled workforces. BMW and the Renault-Nissan alliance are at the forefront. But in addition to the car-makers, automotive component suppliers, which generate 75% of the value in a car, stand to benefit from innovation in this area. Companies such as Valeo and Bosch are already competing strongly on hybrid systems. Beyond manufacturers, opportunities for innovation are emerging – and are being seized – in e-mobility infrastructure, shared mobility, connected vehicles and lightweight materials. However, these examples, while promising, do not mean that current levels of innovation are equal to the challenges facing society, and that the market should be left to its own devices. Industrialising innovation should be a political priority Quite the opposite. What these examples show is that innovation need to be nurtured and accelerated if its potential is to be tapped. This is particularly the case at the deployment phase. Indeed, while there are a lot of technologies available already, it is their market uptake that is most problematic: help is needed to get them across the so-called ‘valley of death’. There are still many barriers hampering the uptake of innovative technologies: financial risks for businesses, regulatory hurdles, immature or non-existent markets etc. Strong political will and action are needed to overcome them. It is wrong to consider oppose innovation capacity and regulation in opposition. They are not necessarily incompatible and, indeed, regulation can drive innovation, even if businesses are not so keen to acknowledge it. For example, the introduction by the EU of the GSM digital mobile telephony standard in the late 1980s helped stimulate disruptive technology development in Europe. There is growing recognition among EU member states and within EU institutions that a re-imagined approach to industrial policy is needed to deliver and direct this next wave of industrial innovation. For example, Germany has adopted the term ‘Industry 4.0’ for its new industrial policy, which has echoes in France’s ‘Future of Industry’ policy plan. Yet, these plans are not necessarily the right ones or sufficient on their own. They don’t amount to a vision and strategy. This is where the EU has to come in. It needs to give a sense of direction and show that industrial innovation is a priority. Recognizing today’s industrial realities An effective strategy to unlock low-carbon industrial innovation requires starting with a firm recognition of a number of new realities, which the latest policy thinking is not consistently clear about. For example, industry is no longer primarily about heavy manufacturing but also about services. Not only have advanced economies pivoted from manufacturing to services, those manufacturing sectors that have prospered are increasingly ‘servitised’ – that is, integrated with the service sector, using technology and automation to respond more dynamically to customer demand. And encouraging innovation is not just about technology but also about mindsets, business models and processes. Advances in technology may underpin business model innovations such as servitisation and the sharing economy, but they are as much about new approaches to conducting business. And encouraging innovation is also the key factor in longer-term competitive advantage in a modern industrial economy; indeed, innovation is the single largest driver of competitiveness, accounting for at least 30 to 40 percent of competitiveness. The need for a systemic European industrial strategy fostering innovation So, how then should today’s leaders seek to broaden their understanding of what a modern industrial innovation strategy can deliver beyond the many ‘4.0’ initiatives? A modern industrial strategy that fosters innovation should meet some of the following requirements: Innovation needs to be a means to an end – the end being public interest The ultimate objective of innovation policy is not to pick winning technologies, but to tackle societal ‘grand’ challenges. This should be the role of public authorities, be it at local, national or European levels. Decarbonisation is perhaps the most pressing such societal challenge, but inequality and immigration are also at the front of mind for voters and policymakers. The redevelopment of HafenCity, in Hamburg, is a case in point. A former port area, measuring 157 hectares, is being transformed into a city district with living, working and leisure space, in a challenge-led process that clearly set out strong sustainability goals, but which allowed for flexibility and innovation in how they were met. Cooperation as the key to innovation Innovation does not happen in a vacuum. Neither the private or public sectors alone hold the key to make systemic innovation happen. For that we need cooperation between public and private actors, and in the context of industrial ecosystems. Silicon Valley is not the only ecosystem that can give birth to industrial innovation. In Europe we already see good examples. For instance, the development of the Autolib shared electric car scheme in Paris was driven by a clear mission, launched by the city of Paris, and tendered to industrial groups such as Bolloré. Manage the implications of these innovations for workers Innovation, and the disruption it brings, has losers as well as winners. Jobs will be destroyed. Skills will become obsolete. It is one of the roles of government to support those whose ability to earn a livelihood is eroded by new technologies and business models, particularly with retraining, but also by ensuring the maintenance of social safety nets. Germany’s experience with the Ruhr is a case in point: economic diversification away from coal mining and steel was managed by regional and federal governments working together, assisted by an industrial relations culture which emphasised workers’ participation. Scaling solutions to tackle the societal challenges we face, such as climate change, will require changes in business models and processes, and citizen-consumer and public institutional behaviour, which a focus on technology alone misses. If we want the European industrial economy to be able to reap the benefits in terms of international competitiveness, domestic employment and economic value-add, we need a much bolder strategy for how such broad, deep and rapid innovation sits at the heart of our approach to modern industrial policy, and to Industry 4.0.


We need a much bolder strategy for how such broad, deep and rapid innovation sits at the heart of our approach to modern industrial policy, and to Industry 4.0