Growth Engine Smart Manufacturing Sparks Public Debate in Germany

03/25/2015 09:09 am ET | Updated May 25, 2015

It felt like an attention grabbing aside in the long speech given by German Chancellor Merkel to the top managers of numerous corporations at this year's World Economic Forum in Davos. It was an unambiguous warning of urgency to Europe's economic elite:

We have to tackle the fusion of the Internet world with the industrial production world posthaste, otherwise those who are leading the way in the digital sector are going to seize industrial production.

She most likely had a bitter confrontation with a recently published survey. The industry association DIHK (The Association of German Chambers of Commerce and Industry) ascertained that two-thirds of decision makers running their own companies are lacking digital skills, mid-sized enterprises, in contrast to corporations, see more risks than opportunities, and almost everyone is concerned about their data. The results of another study provide even greater cause for concern: about only one in two of decision makers know where to begin with the term Smart Manufacturing, which demonstrates the interconnection of those value chains! And then there's the new Industrial Internet Consortium founded by American tech giants like IBM, AT&T, Cisco, GE and Intel. Within months, they managed to gather together 136 companies with an aim to create standards.

Smart Manufacturing

Value chains digitalize and connect. Everyone is talking about the Internet of Things, the digitalization of production, Smart Manufacturing or as it is called in Germany: Industry 4.0, and even Economy 4.0. Concealed within these terms is a combination of Cyber-physical systems, the Internet of Things and the Internet of Services.

According to the evaluations of experts, the tenets of this "new" Industry 4.0 will be established in the next few years. So the clock's ticking.

The potential for change through the digitalization of production can be compared to electrification. The availability of data, information and knowledge will accelerate. This data and its real-time processing will become one of the most important raw materials for corporations and nations.

Tsunami of change

The dimensions of this revolution should be clear to everyone thanks to the sensational study The Future of Employment: British researchers analyzed the up to 80 percent possibility of displacement effects on over 700 professions in the USA over the next 20 years. The researcher Jeremy Bowles came up with a value of 54 percent for Europe. With such tremendous potential for change it is clear that politics must come into play. Politicians in Germany these days have been discussing how to organize this so-called fourth industrial revolution. The concern: is Germany's wealth generator in danger of stalling? What has to happen for Germany to remain a driving force? What role can and should politics and the economy play?

Really? We can just laugh it off...

Many people in Germany argue: we are a country of skeptics and have to ease into alarmism a bit. Shouldn't we be prepared enough for a future with Industry 4.0/Smart Manufacturing given our tradition of production excellence? We already offer smart services. German mid-sized enterprises have already weathered a few storms; they'll manage the digitalization of production, too. In fact they're probably already doing it. They're just not talking about it. Mid-sized companies like Festo make huge profits with industrial automation. Are we better than some think?

Automobile manufacture as a flagship of German industry recently made a real impression at a tradeshow in Las Vegas by showing how far advanced Audi and Mercedes are when it comes to autonomous vehicles and alternative energies. Since last fall a marked trust in the automotive future of alternative American electric car manufacturer Tesla could be measured.

These kinds of thoughts are widespread. They are the expression of the industrial society structural conservatism that is dominant in Germany, and they distract from the matter at hand. Because: Where will the added value happen? With the hardware, in this case the vehicles, or the software? Is German industry ready for that? Is innovation fast-paced enough? Things are just getting started.

Changes lead to big debate

These developments are not reason to lapse into a fatalistic state of shock. We should analyze how digitalization can be practically structured with a view to internationally standardized processes, according to the prudent. But the discussions continue: What opportunities are there for Germany? Are German companies, often mid-sized, not too small to be playing with global players? How might a cooperation with the US look? Are American companies not already far ahead? Is it worth pushing new standards there or would it be better to cooperate? How high is the threat of connected machines becoming a target for hack attacks and cyber spying? What have we learned from Stuxnet? Could a hacker make sure that BMW only manufactures yellow cars, or even paralyze operations?

Complex processes will lead to a different mode of working and will necessitate different qualifications. What role can politics even play? Is it relegated to the position of observer because it can not operate at an international enough level? Are transnational companies more powerful than national governments?

Is German society ready for Industry 4.0 / Smart Manufacturing

And the basics are also under scrutiny: Is it possible that Germany in fact has the necessary innovation skills, but that these new startup ideas are increasingly being purchased by foreign countries and exported because of a lack of absorptive capacity on the part of local companies? (Since 2001 Google has spent $20 billion acquiring over 170 companies. Many in the US, but also some German.) How can the nation incentivize?

Much of German prosperity is based on evolution. However, Industry 4.0 makes more than an improvement of the value chain possible. Do we posses the maverick innovation culture needed to exploit these possibilities? Or do we have to think beyond, about an even greater change in a country whose education system is still aligned with the classical Industrial Age?

What risk does the rise of automation hold for the job market? Will the future see the maintenance of machines made in Germany being taken over by service providers in Asia? Or are there far more positive effects of Industry 4.0 for Germany?

What direction must we take?

Is Germany's unique education system still adequate? And continued education? In 2011, 45 percent of those unemployed in Germany did not have a degree compared to 14 percent of the workforce that did not. That is one of the reasons why the German Council of Economic Experts already called for an improved education and continued education system in the context of an expert report in November 2013. Since then, little has been done.

Learning from India?

Perhaps Germany should learn from India: following World War II, India established special math and business universities, the Indian Institutes of Technology. The long-term effect has been huge. A good 20,000 graduates emigrated and many have made their way to the top ranks, like Google's Android Head Sundar Pichai. On top of that, Math and Business Professorial positions at American elite universities have their fair share of Indian experts.