Manufacturing is going digital—but it isn’t easy.
Domestic manufacturers employ 150,000 software developers and programmers, according to the Bureau of Labor Statistics. Seems like a hefty number, right? But 120,000 of those tech experts, or 80%, are concentrated in only two industries: computer and electronics manufacturing; and transportation equipment. These are also the industries that have been buying the great majority of robots. Indeed, roughly two-thirds of the industrial robots sold in North America go to the automotive industry.
Across the rest of manufacturing, most executives are cautiously inching rather than sprinting towards digitization. The slow progress shows up in the productivity statistics. For example, labor productivity actually declined in 15 out of 21 3-digit manufacturing industries in 2017.
Why the slow progress? Partly the key enabling technologies are still under development. As I wrote in a recent paper done for the Progressive Policy Institute and the Manufacturers Alliance for Productivity and Innovation:
For all of the catchphrases about Industry 4.0 and the fourth industrial revolution, the truth is that digitizing manufacturing is a long and difficult slog. The issue is that engineers in manufacturing and other physical industries have to manipulate and fit together real-world materials in ways that are consistent with the laws of nature and the limitations of current technology. Software developers in digital industries like entertainment and finance—where the final product is reduced to bits and bytes—have a much easier time.
A bigger problem, though, is imagination. Most manufacturing executives are still only thinking about how technology can improve productivity within the four walls of their factories. That’s important, but it’s not enough.
In fact, successful digitization of manufacturing requires new business models as well. For example, the cost of distribution accounts for roughly half of the price of most consumer goods. Digitization can help manufacturers capture a larger share of the final price, by moving away from commodity products delivered through retailers, and embracing customized and locally-designed products delivered directly to customers through ecommerce fulfillment centers.
As the saying goes, “it’s the network, stupid!” Not the networks of bits and bytes that we have all become familiar with, but the physical networks of raw materials, intermediate parts, and finished goods that connects our entire production/distribution system–the Internet of Goods.
With the arrival of the Internet of Goods, executives will have to rethink their answers to key questions: Should production be centralized or pushed to the edges? Will large industrial companies operate their own factories, or will their value be increasingly generated by their role as industrial platforms? Will manufacturers locate near fulfillment centers to speed up their shipping to consumers? Will distribution companies become manufacturers?
Finally, what will the Internet of Goods mean for jobs and inequality? The answer to that question will tell us a lot about the future of America.