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Home Opinion Industrial strategy and the ‘fourth industrial revolution’
Manufacturing • Technology • Innovation

Industrial strategy and the ‘fourth industrial revolution’

Eoin O’Sullivan - 13 February 2015

The old 20th century model whereby technological innovation is driven by a small number of countries is rapidly disappearing. In this context the UK needs a ‘national advanced manufacturing strategy’

Manufacturing is changing. New technologies are radically altering not only how we make things, but how we innovate. As manufacturing systems, technologies and innovation activities become more complex, distributed and interdependent, a coordinated industrial strategy will be essential for UK to compete in what many are calling a ‘fourth industrial revolution’.

The increasingly complex ‘systems-nature’ of manufacturing poses a significant challenge to policymakers. Modern manufacturing cannot be understood by simply analysing individual sectors or technologies alone. Many of the most valuable manufactured products are themselves complex systems, made up of multiple technological components, produced by advanced ICT-enabled process technologies, and relying on diverse, interdependent supply networks. Furthermore, these systems are shaped by powerful social and economic drivers (eg changing demographics, climate change, energy security) and rely on the availability and combination of factors that are vital to the rest of the economy (labour, knowledge, natural resources, capital).

Not only are high-value production activities distributed throughout international supply chains, but product and process innovation activities are also increasingly dispersed and interdependent. Without strong connections between the research base and manufacturing, countries risk losing the ability to translate new technologies into production. To compete effectively, national economies require industrial-innovation systems that can respond to emerging high-value opportunities with the right combinations and clusters of skills, technological R&D, finance and infrastructure.

Shrinking ‘windows of opportunity’ to exploit new science and technology

As emerging economies acquire the capabilities to develop advanced manufacturing systems and high-tech products, high-wage western economies can no longer rely on the strength of their science and technology base to compete. The old 20th century model whereby technological innovation is driven by a small number of countries – those which are home to leading research universities and global R&D-intensive corporations – is rapidly disappearing. The pace of technological innovation and increasing competition means western economies no longer have comfortably long ‘windows of opportunity’ to translate new knowledge from research into manufacturing, or for supply chains and skills portfolios to reconfigure around high-value opportunities from emerging science- and technology-based products.

In this new era, the quality of a nation’s technological R&D base will not be enough to compete. The capability to rapidly translate novel emerging technology R&D into manufacturing, and the ability to coordinate the complex manufacturing systems into which these technologies diffuse may become the critical factors for capturing high-value from manufacturing-based industries.

The ‘fourth industrial revolution’

The task of developing policies for modern manufacturing may be extremely challenging, but it is also becoming urgent. Radically disruptive new technologies – notably additive manufacturing and the ‘internet-of-things’ – are likely to have an enormous impact on the organisation and management of manufacturing.

In particular, embedded software and sensors are making components, machines and factories ‘smarter’. Devices and production systems are sharing data, optimising processes, and identifying bottlenecks in real-time. These ‘intelligent’ systems are increasingly coordinated via the internet throughout entire value chains, allowing rapid development of new products, more efficient logistics, and more customised products and services. Furthermore, advanced production methods – notably 3D-printing, nano- and bio-manufacturing – are offering new ways of designing and developing products, introducing novel materials and functionalities, and (re)distributing high-value manufacturing activities.

In order to compete in this ‘fourth industrial revolution’, economies will require radically new skills, infrastructure, and R&D priorities. There will be greater need for technical and operational competences related to software engineering, automation and embedded systems. There will have to be significant government support for enabling technologies, innovation infrastructure, and the development of new standards to underpin the digital networking of firms. Some leading manufacturing economies are already implementing major policy initiatives – most famously, Germany’s ‘Industry 4.0’ strategy.

Faced with the challenges and opportunities of modern manufacturing, many countries are re-examining the role of government in nurturing the configuration and capabilities of national manufacturing supply chains. In particular, there is growing interest in the potential to enhance linkages between manufacturing and the research base, and to maintain a more forward-looking national skills portfolio.

Whether called ‘industrial strategy’ or not, there appears to be emerging international consensus around the importance of three key policy approaches: first, more careful coordination of manufacturing-related policy measures (especially related to R&D, production skills, and financing); second, partnership with industry in designing manufacturing-support programmes (not least to gather reliable evidence on the longer term competitiveness challenges facing firms); and finally longer-term planning to ensure that efforts to nurture industrial ‘ecosystems’ are appropriately aligned with the longer term strategies of industry (and hence attractive for strategic corporate investment).

The recent UK approach to industrial strategy is an appropriate response to the systemic changes in key manufacturing sectors. In particular, the coordinated development of skills, technology capabilities, and access to finance – and attention to the institutions which deliver them – should strengthen the flexibility and competitiveness of the UK’s manufacturing networks.

Furthermore, many of the key flagship initiatives associated with industrial strategy – notably the Advanced Manufacturing Supply Chain Initiative and the Catapult network of intermediate R&D centres – have the potential to significantly enhance critical linkages throughout the UK innovation and manufacturing systems, accelerate the diffusion of knowledge from research into manufacturing, and help (re)allocate skills into those competencies which underpin the highest value-adding industrial activities.

The need for a National Advanced Manufacturing Strategy

A key element of UK industrial strategy is its attention to individual sectors of importance to the economy. The growing interdependencies between manufacturing supply chains, advanced production technologies, and R&D capabilities, however, means that industrial strategies will increasingly have to look beyond traditional sectors boundaries. Real-world manufacturing ‘ecosystems’ do not correspond to the (product-based) ‘sector’ categories of the national accounts. Sustainable high-value manufacturing requires inputs from an extended set of actors: small- and medium-sized enterprises providing high-value components, specialist engineering consultancies, R&D service providers, and advanced equipment manufacturers. It is the ‘health’ and competitiveness of these broader manufacturing ‘ecosystems’ that must be focus of industrial strategy.

Furthermore, the interdependence of manufacturing value chains and experimentation by different sectors with transformative manufacturing technologies (eg 3D-printing) increases the likelihood for disruptive new technologies and business innovations to cross between sectors.

An effective overarching UK industrial strategy should, therefore, systematically scan across all manufacturing sectors to better identify and understand cross-cutting manufacturing challenges and opportunities, common innovation infrastructure requirements, emerging skills needs, technological R&D priorities and competing demands for resources. In short, the UK needs a ‘national advanced manufacturing strategy’ – a strategy that informs and is informed by all the individual sector strategies. A strategy that can help prepare the UK to compete effectively in the ‘fourth industrial revolution’.

Eoin O’Sullivan is director of the Centre for Science, Technology and Innovation Policy

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The Policy Network Observatory promotes critical debate and reflection on progressive politics. It is centre-left orientated but determinedly challenges social democracy. It is pro-European but restlessly questions EU institutions and practices.

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