The digital transformation of European industry

Topics
Industrial Internet, Internet of Things, IoT, industrial revolution, Industrie 4.0, Finland, Germany

Last autumn I moved back to Finland after spending five years in the UK and Germany, building our international offices. The Finland I returned to was a very different economy from the one I'd left - no more AAA rating or Nokia phones. The startup boom is hot, thanks to mobile gaming, AaltoEs and Slush, but it takes a long time to fill the gap in Finland’s total productivity, which is now lower than it was during the big crisis in the mid-90s.

The new government will have challenging four years trying to find new growth. Finland is a country of industrial manufacturing and high technology skills, but with a rapidly changing environment. It's a small country hit hard by a couple of major changes inside a short period of time: iPads ate the markets of two economic cornerstones, Nokia and the paper industry, the Russian export business declined rapidly and the population is aging at an alarming rate.

Yes, it's difficult, but Finland can have a strategy.
 

History

The first industrial revolution started in Great Britain, towards the  end of the 18th century, when machines replaced hand production. To increase productivity, work was moved to factories and boosted with new technology.

The second revolution was led by Germany and the USA. Electricity, engines and cheaper railways played a central role in this revolution, creating new gigantic corporations like General Electrics.

The third and digital revolution instigated a change from a national and analogue economy to a digital and global one. Manual factory work was either automated or moved to lower cost countries. The new information technology enabled global value chains. USA has taken a significant role in the digital revolution.

According to Steve Blank, Silicon Valley development was actually driven by the threat of Germany during World War II. US military technology research, with a focus on microwaves and electronics, made Stanford University the “MIT of West” and the new ecosystem gave birth to new digital-era companies. Hewlett-Packard and Google were both set up by Stanford graduates in Californian garages. 
 

How are European governments reacting to the fourth industrial revolution?

If the Silicon Valley ecosystem, as we know it, was born as a perhaps unintended result of government-driven military investment, should European states also be proactive rather than reactive? As recently as ten years ago, Europe was leading the telecommunications industry, but currently most of the high-tech innovation is happening elsewhere.

Last year China and the USA accounted for 87% of the total growth in patent filings

Germany, like Finland, is getting older and has an economy built on industrial manufacturing and a high level of engineering skills. Industrie 4.0 is a German vision that could help bring manufacturing back from Asia and allow Europeans to focus on work with high added value. 

With the lead of Angela Merkel, the German government is very visibly driving its Industrie 4.0 program. At this year's Hannover Messe, the largest industrial fair in the world and the place where the term was coined a few years ago, every German company was talking about it like it was in common usage all over the world and having a sensor or two on your product was enough to trot it out. 

​Industrie 4.0 at IPH​
​Industrie 4.0 at IPH

Industrie 4.0 means cyber-physical systems, integrations of computation with physical processes. Traditional hierarchical automation structures are being replaced by decentralized, partly self-organizing networks that enable mass customization, among other things. Besides factory automation and robotics, cheap sensors and internet connectivity enable remote diagnostics and predictive maintenance.

“Obviously, Silicon Valley is all over this, but I think they are missing the point. They are creating some gadgets, but they aren’t thinking about systems.”

- Tim O’Reilly about IoT in VentureBeat 

To me, the Industrial Internet means completely new business models, where data analytics and software applications, combined with intelligent machines, play a crucial role. 

Given the industrial background, ICT & engineering skills and developed environment, Europe could lead the fourth revolution by focusing on business innovation, in addition to factory automation.
 

Should government have a role or stay out of business?

The relationship between the state and private economy is worth discussing. If one extreme is an extremely lean public sector, with the state providing only basic services and leaving the running of business to companies, how do you create ‘unfair advantage’ against other countries? Other than by lowering the tax rate?

Inspired by German Industrie 4.0 vision, the Finnish Government published a research paper and a 2020 vision in which Finland could become the Silicon Valley of the Industrial Internet – an agile environment where regulation, the tax system, education and infrastructure would all support experimentation with new business models by domestic and foreign companies.

Switzerland of Data Centers is a related vision. In it Finland would be a European alternative to fill an increasing need for data storage, supported by reliable energy, cyber security, a cool climate and a politically stable environment, as well as a soon-to-be-built submarine optical fibre cable between Finland and Germany. German Hetzner Online AG announced their data center investment, citing these reasons. Oxford Research suggest that the total economic impact of foreign data center investments for Finland could be up to 50 000 years of employment within a decade. 

Just like companies, countries, too, need to attract talent and build an environment conducive to success. A government can have a strategy and vision and it should refrain from doing things aiming for economic development that is not in alignment with the strategy and vision.

Industrie 4.0 as a vision has clearly inspired many German companies. This is, in and of itself, a major achievement for the German government and a good start for a larger transformation.