Industry 4.0: Opportunities and Threats for Foreign Direct Investment (FDI)

Industry 4.0, a German buzzword for the digitally enabled advanced industries, has created world wide attention. Industry 4.0 at first glance is another „made in Germany“ success story, perfectly befitting a country with a proud engineering tradition and worldwide investments. However, the ideas relating to Industrie 4.0 mark a dramatic change in how the world produces its goods, and force a similarly dramatic rethink in FDI circles.

In order to assess the implications of Industrie 4.0 for Foreign Direct Investments, I will

  • Outline pertinent issues regarding Industrie 4.0
  • Evaluate the current status
  • Discuss the implications for FDI.

Industrie 4.0

Industrie 4.0 (because of its provenance I maintain the German spelling) basically refers to a tight, digitally enabled meshing of production, supply and delivery chains as well as services. This emerging industrial world is conceived as being adaptible, flexible, self-healing, fault tolerant, risk managing, sensor based, with real time production.

Germany, with its plethora of small and medium sized innovative suppliers is ideal for these ideas. Years ago, in my book, Challenges between Competetion and Collaboration: The Future of the European Manufacturing Industry I had foreseen ever tighter networks of excellence, based on a human capability to collaborate. With the advances in technology, human capability is now enhanced and often replaced by so-called cyber physical systems. This applies not only to services and industries but to our whole environment, tourism, energy, transport and homes included.

In Industrie 4.0, production capabilities are no longer linked to specific products, instead, production plants can be reconfigured swiftly and networked globally for different products, making very small runs possible.

Industrial plants will also become service providers, i.e. they will offer (e.g. in auctions) their capabilities in open markets rather than closed supply chains, and will therefore have to make their capabilities, capacity, knowledge leverage, engineering basis, market development capabilities much more comparable. New company types will emerge, e.g. agents who will replace the older style OEMs, in the form of platforms, networks, agent companies, aggregators, logistics provider. Some of these emerging companies – whose names we don`t even know yet – will be the new integrated global production giants.

These emerging giants will become important drivers of persistent global changes such as continuing (smart, intelligent) urbanisation, accelarating digitalisation and innovation, and an informatisation of all of our lives. Truly, as Marc Andreesen famously stated, software is eating the world.

The societal and economic impacts of this emerging world are little understood, and even more rarely discussed openly by political leaders. We all understand, however, that a new generation of digital natives is emerging, that smart phones enable new business models on a daily basis, that new organizational forms are already emerging, that network power changes all traditional hierarchical relationships, and that new working styles are emerging (working nomads, transactional workers, problem solving experts).

Business 4.0, as a consequence of industrie 4.0, will change the global work distribution once more. Standardaization on the one hand will increase, to enable the data flows, yet production runs can become very small; also aided by the new 3D printing capabilities. The emerging hyperconnectivity of all business forces us to think about reputation, lifelong learning, innovation and new business models, as much as about cyber security.

Having a large workforce may no longer be an advantage in itself. Age is not relevant in the virtual world (a trend called downaging). People will be „always on“, and the war for talent will be de-nationalised. New cooperative structures and forms will have to be found by the digerati and by the general public, in order to make a living. In a rapidly changing world, the only job security is to embrace change.

Management and leadership, more than ever, need to create impact, enable collaboration and partnering, share visions and purpose, transfer knowledge and technology, deal with conflicts and crises. That`s the management skills curriculum for Industrie 4.0.

 Current Status

Industrie 4.0 has so far not been a safe haven for German industry that it was proclaimed to be. Yes, academics and research institutions have benefitted greatly. True, in one area, Ostwestfalen-Lippe (OWL) about 150 companies have come together as a giant test bed. True, the German ideas have excited experts and politicians world wide, and apparently several books have already been written about Industrie 4.0 in China.

German developments, however, have slowed down in discussions about standards, while others, noticeably North Americans helped by their powerful IT firms, have powered ahead with their digital enterprise ideas. Experimentation is a way of life in North America, and Industrie 4.0 requires fast failures and also swift successful innovations.

China has been learning at a rapid pace, and already quantity is turning into quality, long encouraged by a very critical consumer public. While China was synonymous with mass production in the past, focussed and highly flexible production of specialized goods is already an astonishing reality, as anyone who orders among the traders on Alibaba can testify.

New global hubs (near East, India, China, South America) are emerging, and an entire international „silk road“ is being promoted: logistics too will change globally Africa is catching up fast: nearly 50 percent of all mobile phones in Kenya are already smart, and the mobile payment system Mpesa is a model world wide.

India remains a very important market and has a lot of talent in information technologies. Jugaad is the Indian word for frugal innovation, i.e. production without over-engineering. Because of the size of the market, Indian companies are learning fast, ranging from solar cooking pots for the masses, optimised medical operations to operating 600 million bank accounts at minimum cost. However, the current government`s rallying call „Make in India!“ may not hold up well in the face of Industrie 4.0.

Intercultural empathy has not so far figured in the discussions yet is an absolute must for anyone in Industrie 4.0 – we are talking world wide! Firms and individuals active in Industrie 4.0 need to understand their customers more than ever.

Finally, finance. Helped by pervasive IT, new financial business models and firms (so called fintecs) are emerging, all vying to make systems obsolete or to improve on the processes and results of the current financial industries. Industrie 4.0 will accelerate this, and financial instruments will emerge to cater for advanced digital production, with finance built right into the machine to machine interaction.

Implications for Foreign Direct Investment

There`s no time to lose. Old style FDI with an offer of abundant cheap labour, building sites and tax breaks is not sufficient. Anyone seeking FDI will have to present themselves in the light of Industrie 4.0, i.e. organisational capability, integrated logistics, specialized knowledge, management skills, specialised finance, all of this for a world market of nine billion people, including the poor.

FDI needs to respond to the world`s concerns, not so much the intrinsic internal needs for cash of a country, i.e. become sustainable Also, FDI will become a much more dynamic issue, dependent on the political, economic and societal themes of the day. Our FDI agencies need to change their mind set accordingly and constantly re-make their offerings, find a renewed sense of urgency and agility. A new FDI dialogue is needed to create awareness and promote capabilities.

We typically overestimate what we can achieve short term, and we underestimate the long term impact.

Industrie 4.0 welcomes innovators and doers. Every country however small can seize the opportunity and enter the race for the global markets of tomorrow.