The Rise of the Internet of Goods: A New Perspective on the Digital Future for Manufacturers >> HOME
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.
Consider, for example, Tony Stark’s iconic Iron Man armor from the Marvel Cinematic Universe. To achieve $7 billion in global ticket sales—the total revenues from Marvel movies featuring Iron Man—the filmmakers only had to be concerned with projecting a believable two-dimensional image on a screen. That is a difficult but doable task.
By contrast, actually building a flying suit of armor in real life would require a combination of metallurgy, robotics, and microelectronics that currently doesn’t exist. Digital objects—including even the most complicated software programs—are simple compared to the requirements of fully digitizing even the simplest of real-world objects.
Manufacturers have taken the first step towards digitization by putting sensors into existing products such as turbines and tractors and using the resulting data to improve performance. The goal is to turn data collection and analysis into a new revenue stream.
But data monetization is only one possible application of the Internet of Things to manufacturing, and perhaps not the most effective at creating sustainable new markets. After all, it’s not clear how much customers are willing to pay to have their data sold back to them.
The cautionary tale here comes from GE, which bet huge sums on the industrial internet and the development of a software platform called Predix that uses data to help customers monitor and improve the performance of their equipment. GE Digital collected a sizable $4 billion in revenue in 2017. Nevertheless, a perceived shortfall in the performance of GE Digital relative to expectations led to the CEO being replaced and the stock price dropping by 50% over the course of a year. As of June 2018, GE was removed from the Dow Jones Industrial Average and replaced by Walgreens. At the time, the committee in charge of the Dow Jones explained its decision this way:
“General Electric was an original member of the DJIA in 1896 and a member continuously since 1907… Since then the U.S. economy has changed: consumer, finance, health care and technology companies are more prominent today and the relative importance of industrial companies is less.”
While manufacturing remains a very dynamic and essential part of the U.S. economy, most people have stopped looking at the industrial sector as a jobs and growth engine. Eleven out of 19 major U.S. manufacturing industries are producing less than they did in 2000, including the iconic machinery and electrical equipment industries.* Eighteen out of 19 major manufacturing industries have fewer employees than they did in 2000, with the one exception being food manufacturing. Across the country, the number of manufacturing facilities employing more than 500 people has dropped by 35% since 2001, according to Bureau of Labor statistics data.
Domestic manufacturing productivity rose only 0.3% in the year ending in the first quarter of 2018, and is actually down from its 2013 peak. Real domestic manufacturing operating profits are stalled at their 2007 level, with the latest figures from the U.S. Bureau of Economic Analysis (BEA) actually showing a decline in recent quarters. Moreover, the price of domestic manufactured goods is rising faster than the price of Chinese imports, as measured by the U.S. Bureau of Labor Statistics (BLS), reducing competitiveness.
A recent report from the McKinsey Global Institute observes that U.S. manufacturing has experienced two “lost decades.“ The report goes on to say that “significant productivity gaps have opened up between large firms and small and midsize producers that are unable to invest in new equipment and technologies.”
* Measured as change in real gross output, 2000-2017, based on Bureau of Economic Analysis data released as of April 2018