Hannover Messe 2016 Europe Gears Up for Digitalization

The European Union aims to boost the digitalization of industry with money, legal safeguards and better transnational coordination. But smaller companies lag behind.
Industry 4.0: time to look to the future.

Industry lobbyists have long been pushing hard for the European Commission to do more for the digitization of industry, often labeled “Industry 4.0.” And now the Commission looks set to deliver, just in time for the annual Hannover Messe, the world’s most important industrial trade fair.

In April, policies are planned to fuel European coordination, lay out clearer legal standards and pump up to €500 million (about $560 million) into the development of digital innovation centers. The new measures, explained in a paper entitled Europe’s Strategy for Digital-Industrial Leadership seen by Handelsblatt, are soon to be unveiled by Günther Oettinger, the European Commissioner for Digital Economy and Society.

“Oettinger’s message points in the right direction. It could be the trigger we’ve wanted for an internal E.U. market for Industry 4.0,” said Thilo Brodtmann, head of the German Association of Machine and Plant Manufacturers, or VDMA. But this would only be the first step in a long process, he added.

Delayed digitization of European industry threatens Europe’s long-term industrial competitiveness. E.U. Report on the Digitization of Industry

“Industry 4.0” refers to merging industrial production with information technology, a trend that experts say has huge economic potential. According to a study by management consultants Roland Berger, a thorough digitization of industrial production could increase annual E.U. gross domestic product by up to €250 billion in the medium-term. But Europe’s companies still lag far behind their international competitors in the United States and Asia, warns the Commission’s report. “Delayed digitization of European industry is a threat to Europe’s long-term industrial competitiveness, with significant impact on general social well-being,” it wrote, underlining the need for speed.

According to the E.U.’s plans, member states should meet twice a year with industry representatives to exchange ideas on Industry 4.0. “If Europe wants to win the race for digital-industrial leadership, it is crucial to have an E.U.-wide approach to the introduction and coordination of digitization, covering both national and regional levels,” said Mr. Oettiger’s expert report. Progress here is long overdue: “There is total fragmentation in this area, with over 30 separate national and regional initiatives,” said Reinhard Bütikofer, the E.U. parliamentary spokesman on industrial policy for Germany’s Green Party. “This narrow parochialism is endangering future competitiveness,” he warned.

What European companies really need is a predictable environment which will guarantee they can market cutting-edge technologies across the whole of Europe. Above all, machine tool manufacturers and the car industry are making substantial progress in Industry 4.0. The European Union cannot afford a patchwork of 28 national legal frameworks in this area.

It is hard to predict the impact of rapid digitization of product networks and added-value chains. It is already shaking up areas including data security and questions of legal liability, as well as revolutionizing training and certification. Now Brussels is looking to clear up the numerous legal gray areas that have arisen.

For machine tool and plant manufacturers – alongside carmakers, these are most prominent Industry 4.0 sectors – the challenges are above all about data security, for example in remote maintenance and data analysis across national boundaries. These processes currently tend to run on the cloud servers of large U.S. companies like Apple and Google. According to the E.U. report, the Commission is preparing a robust legal framework in this area.

The Commission also wants to bring in safeguards on liability in automatic systems, for example with drones or self-driving cars. To encourage developments in the industry, Brussels is pressing for the introduction of regulatory “experimental areas,” for example, a factory using machines or robots, which don’t yet have criteria for legal validation.

In the next five years, €500 million will be pumped into the development of digital innovation centers. In addition, some €20 billion of European money is earmarked for digital projects run by public-private partnerships.

In Germany, the Fraunhofer Institute and the industry association Bitkom estimate that by 2025, digitization across the mechanical engineering, car making, electrotechnical, chemical, agricultural and communications sectors could feed productivity gains worth €78 billion.

Given this, the German government has set a clear goal: to usher the country into the world of fully networked industry as quickly as possible. Sigmar Gabriel, the federal economics minister, whose center-left Social Democratic Party forms part of Angela Merkel’s coalition government, wants to bring this about through a rapid expansion of broadband and by specific pilot projects. In spite of their export strength, German companies are lagging badly behind in industry standards, broadband expansion, software and IT use, as well as in secure data analysis. These are all seen as key factors for the sucess of future markets.

Moreover, small and medium-sized businesses have the most catching up to do, the very firms which are described as the backbone of German industry. Large companies like Siemens may be well on the way to digitization, employing large numbers of computer and software engineers. But smaller companies are falling behind.

On its own, a technically perfect product will no longer be enough for long-term international competitiveness. PWC report on Industry 4.0 in Germany

According to a new study by management consultancy Deloitte, only a quarter of small and medium-sized companies invest between €5 million and €10 million a year in digitization projects. For 70 percent of smaller companies, the figure is less than €5 million. This is far too little, says Lutz Meyer, the head of Deloitte’s small and medium business unit: “To achieve maximum potential and turn this to strategic advantage, the sector should be investing around 10 percent more.”

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There is no doubt that digitization has enormous potential for productivity gains: a recent survey by another consultancy, PwC, suggested that German industry expects Industry 4.0 to bring an annual efficiency gain of 3.3 percent and cost reductions of 2.6 percent. But even in sectors with advanced digitization, like machine tool making, only 60 percent of companies are working on networked production systems. That level may be double that of manufacturing industry, but it is still not enough. “On its own, a technically perfect product will no longer be enough for long-term international competitiveness,” concludes PwC.

Experts point to another weakness: small-to-medium sized German businesses are failing to integrate digitization into their corporate strategy. “The initial difficulties are obvious,” said the Deloitte study. “Data collection and analysis are areas with considerable room for improvement, especially with respect to Big Data,” it concluded.

 

Thomas Ludwig is a Handelsblatt correspondent in Brussels. Martin Wocher is an editor with Handelsblatt, focusing on the mechanical engineering and steel industries. To contact the authors: [email protected] and [email protected].