Industry 4.0 – Evolution, revolution or something else?

It may sound like a Windows update, but Industry 4.0 is the fourth industrial revolution, which is badly needed to revive stalled productivity growth in the G7 economies.

In the latest issue of Nordea On Your Mind, Johan Trocmé, Director of Thematic Research, and analyst Viktor Sonebäck take a look of what Industry 4.0 will entail, what can be done to refine manufacturing processes as well as the biggest changes likely to come from business model innovation.

A new industrial paradigm is needed to revive stalling productivity growth

In the G7, annual productivity growth has collapsed in the past decade, halving from the levels of 1970-2010. This has lowered G7 GDP by USD 2tn, or 0.5 pp per annum since 2010. GDP growth in this period has been driven by more hours worked (falling unemployment). Going forward, a new wave of productivity growth will be needed to avoid GDP growth being stuck below long-term trend levels. And it will need to be of a similar magnitude as in Industry 1.0, 2.0 or 3.0.

A new source of upside: Usage-based business models

One potential productivity driver falling under Industry 4.0 is a shift from buy-own-operate business models to paying for actual, measured usage of equipment or services. Internet connectivity and technological development is opening up new possibilities to pay for only what we need and actually use, which can eliminate a lot of inefficiency. There are many concrete examples – from replacing compact discs with streamed music to cloud computing. As an illustration, we take a closer look at car sharing. Having an effectually fixed cost of typically one-third of a car owner's disposable income for owning a vehicle that sits idle 95% of the time can be replaced by using smartphone apps to locate nearby cars which can be used at a charge by the minute, hour or day, as needed. The potential savings from improved capacity utilisation are substantial, and such business models can also be applied to commercial and industrial equipment.

Banks have a role to play in continuous payments

When companies start operating accurate digital representations of their entire business value chain by using sensory data, banks need to join them in this transformation, or risk seeing them circumvent a transaction-banking model that has not seen radical evolution for decades. Banks are already involved as payment providers in subscription-based models in e-commerce and could ultimately move forward to solutions such as instantly settled machine-to-machine payments between two companies, where the bank is a trusted partner and provides the legally binding contract between them. This will require more advanced virtual account structures and the construction of a contract engine. Digital payment processing is a regulated activity, and most existing financial institutions should be in a good position to continue to provide these services in the future.