The global economy is entering the Fourth Industrial Revolution (4IR), or Industry 4.0, based on the application of new digital and automated technologies in production processes and service delivery. These changes are presenting emerging markets with opportunities, as well as risks. Wealthier emerging markets, such as the Gulf states, that have the resources to invest in new technologies, and those with better established manufacturing sectors, such as the countries in Southeast Asia, appear best placed to reap the benefits of the 4IR. Many of these economies are putting in place strategies to manage and encourage the transition towards Industry 4.0. Meanwhile, other regions have shown signs of so-called premature deindustrialisation. In particular, Latin America and Africa seem more vulnerable to threats arising from technological changes and at greater risk of being left behind. To avoid such a fate, they need to adopt new innovative strategies that will allow them to leapfrog existing stages of industrial and infrastructure development.
Background
Klaus Schwab, founder and executive chairman of the World Economic Forum (WEF) and author of the book The Fourth Industrial Revolution, states that the world has already gone through three industrial revolutions. The first involved water- and steam-powered mechanisms, followed by electricity-powered mass production. The third industrial revolution is also referred to as the digital revolution.
Schwab argues that the world is currently entering into the fourth industrial revolution, which is “characterised by a fusion of technologies that is blurring the lines between the physical, digital and biological spheres”. A number of emerging technologies are expected to play significant roles in the upcoming revolution, including robotics, artificial intelligence (AI), the internet of things (IoT), machine-to-machine (M2M) communication, virtual reality and 3D printing.
Robotics
Arguably the most consequential area of 4IR-related technology in terms of its impact on labour markets and manufacturing jobs is robotics and other automated processes. Klaus Prettner, professor of economics at the University of Hohenheim in Germany, told OBG that the use of robotics and automated processes in manufacturing started to take off in the 1990s and has been expanding rapidly, posting annual growth rates of around 12%. “Uptake of robotics is very high and there is currently no sign that it will level off any time soon,” Prettner said. “Until recently, robots were used largely for work that was too dangerous or difficult for humans, but now the technology is improving and becoming more cost-effective, allowing it to be used for an ever-wider range of applications.” Use of the technology is concentrated in several key industries, notably automotives, electronics and electrical equipment, and machinery production. While robots have generally struggled to work with smaller parts that made them less suitable for other industries, this is now starting to change, and so-called lights-out manufacturing factories that can operate without human presence are already in existence, namely in North-east Asia.
3D Printing
Also known as additive manufacturing, 3D printing is now widely used to create a range of products, from simple prototypes to highly customised mechanisms, in a manner that is more efficient and cost-effective. An example is the manufacturing of hearing aids, which need to be individually moulded to the ear of the wearer. “Hearing aids used to be produced manually, which was a complicated process, but now manufacturers can simply scan the ear and use a 3D printer to make the product,” Prettner told OBG. As a result of such useful applications, 3D printing has witnessed a significant boom since 2008. However, Prettner told OBG that the technology is now starting to mature, and that growth rates will likely level off.
Virtual Reality
Similar to the use of 3D printing for prototype production, virtual reality is particularly useful for the process prior to actual production, allowing designers to explore and interact with virtual renditions of their products, and to identify any design flaws and safety issues. This is particularly valuable in the case of industries producing large, complex and expensive goods. This technology is already being used in the aviation manufacturing industry, for example, allowing designers to explore not only the interiors of aircraft, but also of complex individual components.
AI, IOT & M2M:
AI, IoT and M2M communication are at an earlier stage of development than robotics, making their impact on industry harder to gauge. AI is not as widely deployed in the service sector as anticipated, according to Prettner; nonetheless, it could have numerous potential applications in manufacturing and related activities, particularly in the field of autonomous vehicles, which combines AI and IoT technologies. “Autonomous vehicles, should they take off, have enormous potential to drastically change logistics and supply chains,” Prettner told OBG. He forecast such vehicles to be available on a large scale within 10-15 years. Additionally, IoT can enable machine parts in both industrial components and in consumer products to automatically send alerts when they malfunction or need replacing, further improving industrial efficiency.
Pace of Change
While Schwab has argued that technological change is taking place at an exponential and unprecedented pace, other observers differ in opinion regarding the likely extent to which 4IR will transform the international industry and the speed at which this will happen. Prettner told OBG that the impact of 4IR-related technologies would be felt gradually. “There won’t be a real revolution in the foreseeable future,” he said. “While such technologies may work to reverse the decline in productivity growth that has been witnessed in recent decades, this will probably not bring them back to the levels seen in the mid-20th century.”
Some observers argue that change could be even slower. US economist Robert Gordon observed that there are major barriers to designing robots that can take over many roles currently performed by humans, and that the pace and impact of change was much higher between 1980 and 2005 than it is today.
Efforts to automate industrial processes have not always gone smoothly. In April 2018 Elon Musk, CEO of electric car manufacturer Tesla, told local media that the company had engaged in “excessive automation” at its facilities, and that this partly contributed to its failure to meet production targets. He added that salaries for engineers to maintain robots could sometimes outweigh the savings involved in their use.
Risks
For emerging markets, one of the most prominent risks from automation is the reduced need for lower cost and unskilled labour, making it less attractive for industry to outsource production away from their main consumer bases. This risks exacerbating a trend already under way in some regions – notably in parts of Latin America and Africa – towards what economist Dani Rodrik has referred to as premature deindustrialisation. The process has been driven by various factors, including rising competition from China; however, increased automation in developed economies such as the US, which lessen the attractiveness of cheaper labour in developing countries, also appears to be a contributing factor. A March 2018 report by the Overseas Development Institute (ODI) found that even in the relatively low-tech furniture manufacturing industry, operating robots in the US could become cheaper than paying workers in Kenya by 2033. Prettner cited new highly automated production facilities built in Germany by Adidas for the manufacturing of trainers – a product generally produced by low-wage workers in Asia– as an example of Industry 4.0-enabled reshoring.
South-East Asia
Of the emerging markets covered by OBG, Thailand is arguably leading the way in terms of technological development, thanks in large part to its already high level of industrial growth. For example, it is the sixth-largest vehicle producer in the world.
In 2016 the government launched the Thailand 4.0 strategy, with the goal of developing innovative and high value-added industries in order to achieve high-income status. The strategy includes the development of technology clusters and start-ups based around 4IR technologies such as robotics, IoT and biotechnology, and overlaps with the Eastern Economic Corridor strategy to create growth hubs in three eastern provinces.
4IR-type activity is already developing rapidly in Thailand. In 2014 it shipped 2646 multipurpose industrial robots, up 13% on the previous year, according to the “Executive Summary World Robotics 2017 Industrial Robots” report by the International Federation of Robotics. The figure is expected to increase to 5000 in 2020. A 2016 study by Citi GPS found that the payback period for investment in robotics in the country fell from around five years in 2013 to three years in 2017, further encouraging the trend. Thailand hosts at least four robotics research centres, and is home to the Institute of Field roBOtics, which offers robotics and automation engineering degrees.
Although Thailand is actively working on its transition into an increasingly digitalised world, more still needs to be done to ensure that the country maximises its potential. “There will always a threat from technological disruption, but as we move into Thailand 4.0, the manufacturing sector that has underpinned Thailand’s growth will benefit from a stronger competitive edge,” Porametee Vimolsiri, former secretary-general at the National Economic and Social Development Board, told OBG. “However, in order for Thailand to upgrade its economy, further foreign direct investment is needed, which will require additional efforts to link multinationals with domestic innovators and local firms.”
A key requirement for any country transitioning to the 4IR will be reforming education and training systems to provide workers with skills that are still valuable under the new paradigm, such as the ability to programme, and maintain and interact with automated systems. “We are pushing for change to education to develop digital manpower, such as AI and cybersecurity specialists, among others,” Nuttapon Nimmanphatcharin, CEO of Thailand’s Digital Economic Promotion Agency, told OBG. “Universities are also developing curricula focused on topics such as AI, though there will also be a need for more informal and on-the-job forms of training, and an important step will be to encourage educational institutions to work with multinationals.”
Other countries in the region are also following suit. In April 2018 Indonesia launched its 4IR-oriented strategy, Making Indonesia 4.0, which the government expects will help boost annual GDP growth by one to two percentage points. The strategy focuses on five priority sectors, namely food and drinks, automotive, textile, electronics and chemicals.
The Philippines’ Inclusive Innovation Industrial Strategy (i3S) is also aimed in part at preparing the country for Industry 4.0. Ramon Lopez, secretary of the Department of Trade and Industry, told OBG that the authorities were aiming to prepare the workforce for technological change. “This may be done through strengthened education modules that would align with Industry 4.0, enhanced faculty training on innovation and entrepreneurship, and government subsidies for university research and extension,” he said.
Gulf States
The UAE has repeatedly demonstrated its desire to remain at the forefront of technological advances and has put in place a raft of initiatives regarding 4IR-related technologies. In September 2017 the country launched the UAE Strategy for the Fourth Industrial Revolution, which outlines 18 strategic areas, four of which focus on manufacturing. These include open additive manufacturing, 3D-printed construction, intelligent grids and intelligent supply chains. In January 2018 the government and the WEF also agreed to establish the Centre for the Fourth Industrial Revolution to promote technology and developing a generation of experts and protocol to regulate the field.
The federal government and individual emirates are also launching initiatives targeting specific 4IR technologies. In March 2018 the national authorities formed the Artificial Intelligence Council to identify government sectors in which the technology can be implemented and spur the development of required infrastructure. The previous October, the government of Dubai launched a three-year IoT strategy that aims to build the world’s largest IoT ecosystem.
Neighbouring Saudi Arabia, which is seeking to develop its manufacturing sector as part of its Vision 2030 plan, is also starting to look at various 4IR technologies. For example, officials from state energy company Saudi Aramco, speaking at a local symposium on 4IR in May 2018, said that the Kingdom could soon see the introduction of around 11,000 robots to carry out specialised industrial and technical work.
Latin America
Latin America has been one of the principle regional examples of premature deindustrialisation. Specifically, Mexico has historically been a prominent beneficiary of industrial offshoring trends and is therefore arguably at particular risk from aspects of 4IR that could reduce its competitive advantage. Nevertheless, Mexico is one the countries leading the charge towards Industry 4.0 in the region, with the government currently in the process of drawing up a legal framework to regulate the transition. The state of Nuevo León, the country’s pre-eminent hub for advanced industry and manufacturing, is the centre of 4IR-focused activity in the country. In 2016 the state government launched the Nuevo León 4.0 programme, which aims to build an advanced industrial base centred around innovative and automated technologies, alongside the development of a number of research and development centres. In the private sector, the vehicle, aerospace and electronic appliance segments are the main centres of 4IR activity, with IoT the most advanced technology being utilised.
Africa
Of all the emerging regions worldwide, Africa is perhaps most at risk of being left behind by Industry 4.0. The continent is poorly industrialised and many of its countries lack the resources and financing to invest heavily in new technologies. This is underscored by the region’s negligible share of international robot purchases – 0.2% of world sales in 2015, according to the latest ODI figures. Infrastructural deficiencies in many countries, such as shortages of reliable electricity supplies, risk further hindering the transition. Nevertheless, there are some signs of 4IR-related development, particularly in the eastern and southern regions.
According to “The Future of Jobs and Skills in Africa” report published by the WEF in 2017, while Kenya has a relatively high capacity to adapt to future jobs, it is more immediately exposed to disruptions of the 4IR. South Africa, one of the continent’s main manufacturing hubs, is also highly exposed to such future trends. There is growing interest in using 4IR technologies to improve the safety and efficiency of the country’s mining industry. One of the main themes of the 2017 edition of the AfricaCom conference, held in Cape Town, was exploring the path towards Industry 4.0.
The potential embedded in 4IR for countries to leapfrog previous development stages is one of the most promising aspects for Africa. Infrastructure deficiencies could even help to speed up such development in some respects, as was the case when the continent leapfrogged to mobile communications without first investing in costly fixed-line infrastructure. Prettner told OBG that the absence of a fixed-line telephone network in Africa actually facilitated and accelerated the uptake of mobile communications and related technologies such as mobile banking, and suggested that this could also be the case with some 4IR technologies.
The advent of 3D printing, for example, offers the opportunity to establish manufacturing bases without having to go through expensive and traditional infrastructure-intensive industrialisation. It could also help to avoid importing capital goods from developed countries at a high cost. This could be a boon for African countries located far from ports, particularly given the continent’s under-developed land transport infrastructure. “It could be easier for a central African country to produce something locally with a 3D printer than to ship it from the US, for example,” Prettner told OBG.
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