Industry 4.0 Seize the Digital Moment

Despite what the critics say, the German economy and labor force can thrive on the back of digitization. But the government needs to quickly revisit its education and technology policies to embrace the opportunities.
Germany's car industry is ripe for further digitization.

Germany has benefited from globalization more than most other countries.

During the many years of rapidly growing world trade and the industrialization of many emerging economies, German-made luxury cars and high-quality durable equipment were in greater demand worldwide than ever before. The strong industrial sector, largely shaped by small and mid-sized businesses, has turned Germany into a magnet for foreign capital and workers.

But the global economy has lost momentum since the economic crisis in the winter of 2008/09, and globalization is now on hold. No one knows whether and when this hiatus will end.

Some economists believe that the digitization of economic life is rendering cross-border trade obsolete. More and more tasks performed by humans until now are being translated into a language readable by machines, to be performed by interconnected and communicating computers and robots.

This unstoppable fourth phase of industrialization – after mechanization, mass production and automation – will undoubtedly have massive consequences for the international division of labor, consequences that have been difficult to discuss. There is a risk that many jobs will be eliminated in the future because they are performed by "intelligent" machines.

Digitization puts many traditional business models of companies and even nations up for negotiation.

On the other hand, there is a chance that, as the importance of labor costs in production decisions declines, production will be brought back from low-wage countries to the established industrialized countries. This would noticeably temper the dynamism of world trade, three-quarters of which currently consists of industrial goods, and diminish the growth prospects of many emerging economies and developing countries.

No one today can seriously gauge whether "Industrie 4.0," as this phase is known in Germany, will ultimately lead to an expansion of employment that increases affluence or to mass unemployment. It is clear, however, that the factors that determine a business location's competitiveness and attractiveness will change significantly. The political world needs to prepare for this, because its supreme goal should be to maximize the general standard of living. And its most important parameters are the income and employment of the population.

Today the most important factors that determine the attractiveness of a business location are the costs and qualifications of the labor force, the quality of the infrastructure and the underlying legal and institutional conditions. Unit labor costs and the rigidity of protection against lawful dismissal are often key variables. This will change. Short-term project work and the ability to make working hours and forms of employment more flexible will become more important.

The math and science competency of the workforce is also gaining in relevance. An education system fit for the future must teach ways to apply knowledge in problem-oriented ways. In evaluating the effectiveness of infrastructure, the transmission rates, reliability and safety of data networks will outstrip the classic transportation systems.

In addition, the speed and efficiency of bureaucratic processes will become even more important factors in determining the relevance of a business location, because the digital age will be characterized by a rapid succession of technical innovations and new business models. For this reason, very strict rules to protect intellectual property will also likely become an increasingly important location factor.

Digitization puts many traditional business models of companies and even nations up for negotiation. Today the German industrial economy is globally successful, with products consistently characterized by individualization, modularization, promptness of delivery and high quality of service.

That's why Industrie 4.0 does not constitute a general threat for German industry. Instead, digitization provides an opportunity to repatriate value-added steps and product lines that have been outsourced to countries with lower wage costs.

The condition, however, is that politicians and corporate leaders do not treat digitization as an issue of tomorrow but as a challenge of today. This is why the political world must revisit its infringement investments and quickly adjust education and technology policy to satisfy the new requirements. Companies must constantly scrutinize their products and production methods, so as not to eventually become nothing but suppliers to the likes of Apple, Google and Tesla.


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