By Annalisa Primi, Head, Structural Policies and Innovation, OECD Development Centre
To learn more about countries’ strategies for economic transformation, follow the 10th Plenary and High-Level Meeting of the OECD Initiative for Policy Dialogue on Global Value Chains, Production Transformation and Development in Paris, France on 27-28 June 2018
Not all factories are the same. Today, their differences are bigger, more impressive and carry far-reaching implications for development in developing economies. Since the 1970s, industrial production has been organised in complex, multi-country networks of suppliers and providers. The conventional expectation was that this trend would be conducive to growing homogeneity, with converging techniques of production, salaries, standards and business organisation in the “world factory” system. However, as things do not often go “by the book”, manufacturing today encompasses far different realities. China has become the world’s leading manufacturing country. Early industrialisers have built complex value chains, delocalising non-core manufacturing activities to developing economies with relatively lower labour costs and growing domestic markets. The result: manufacturing is a collection of deeply different systems. And differences exist even within the same sector. Just look at the textiles industrial parks in Ethiopia that manufacture for and export fast fashion brands, such as Spain’s Zara. Or look at the robot-powered, fully automated smart factory of Adidas in Germany, which has been making customised mass production of textiles a reality in Europe since 2016. Consider the artisanal, luxury, on-demand, tailor-made production of Lamborghinis in Emilia Romagna, the highly automated export-oriented Audi production in Mexico, and the vertically integrated, only partially automated, domestic market-oriented BYD electric vehicle factory in Shenzhen, China.
While many in the 1990s had bet on the “death of manufacturing” and the “servitisation” of the economy, digital technologies have ushered in a “manufacturing renaissance.” Some countries, notably Germany, the United States and China, identified in the combination of digital technologies and manufacturing a new source of competitiveness. In the era of industry 4.0, big data, automation and artificial intelligence (AI), the competition for industrial leadership is wide open.
Understanding the potential of industry 4.0 is an imperative for developing countries. The ones that have installed manufacturing capacities, like Mexico, Malaysia and Vietnam, need to identify how to transform their economic systems to unleash the potential of digital technologies and to minimise the risks of losses due to re-shoring. For other countries where industrialisation never really took off, it will, by default, happen in an industry 4.0 landscape. For these economies, hyper-connected smart factories are far away, but these realities need to be factored into government and business strategies to avoid growing marginalisation. After the ECLAC-DIE meeting on industry 4.0, I came away with three takeaways for development policy in the digital economy:
First, the next “big thing” could come from anywhere. The Internet of things, automation and AI are redefining global value chains and business opportunities. Installed manufacturing capacities could be a new source of comparative advantages. AI applications need to be tailored to specific factory needs, and proximity to manufacturing clusters could enable rapidly developing and prototyping new smart devices. This is happening in Shenzhen, where AI start-ups are flourishing thanks to a pro-start-up policy environment and to the possibility of providing innovative, cost-saving and efficiency-enhancing solutions to traditional industries, from textiles to the production of batteries and medical devices. First, the manufacturing base acts as a precondition to identify digitally enabled innovations. Barilla has recently set up a partnership with CISCO to pilot a digital traceability system through blockchain, starting with its industrial tomato-sauce cans. Second, proximity to users and consumers could be an important driver of localisation for smart and customised manufacturing. In Panama, a start-up entrepreneur and engineer by training hit the market with a smart, sensor-equipped work uniform for Panama Canal operators. And third, scientific and research capabilities, coupled with prototyping and manufacturing capabilities and venture capital, can enable the development and testing of new devices, from medical instruments to self-driving cars. These competences need, at a certain stage in the process, to come together to generate value. They can either be located in the same district, such as the biomedical pole in Emilia Romagna, where the territory hosts scientific, technological and manufacturing capabilities; or they can be articulated in international networks, where research actually takes place in a given location, prototyping and testing in another, and manufacturing for market distribution in yet another place. This is how Hax, an accelerator and venture capital fund, operates: its base in Shenzhen facilitates the development of AI and digital innovative solutions for global manufacturing, leveraging local supply chain ecosystems.
Second, trade and investment agreements are DEALS. If a positive side exists to recurrent and fearful headlines about potential trade wars between the United States and China and growing uneasiness with the current multilateral system, it would probably be a reminder that trade and investment agreements do not respond to universal, “right” values but, rather, are time- and context-specific results of negotiations. They are “deals.” And deals, by definition, assume that two or more parties have clear objectives that cannot be reached in isolation and that require the parties to sit at a table to find the best acceptable solutions. This reminder might seem trivial, but it is not. At a time when major trade agreements are under renegotiation and others are being negotiated, developing countries need to create a vision and a position on what their interests entail regarding digitalisation and industry 4.0. Current and future trade and investment agreements will need to address these issues, and developing countries will need to position themselves in negotiations with a clear vision of what is at stake. Many developing countries, especially in bilateral negotiations, will not be in a position to force their full visions onto final agreements, but having a clear a prioiri stance is a precondition for better deals.
Third, only shared choices will ensure that impacts are positive and not purely disruptive. The ongoing digital transformation can have far-reaching, deeper and faster impacts on our lives than what we think. To ensure positive impacts, it is important to debate what shared values should steer collective action and experimentation. While the EU and US media debate, for example, is shaped by discussions on job-automation and potential job losses, impacts are broader than that. They can involve not only all aspects of work – what jobs will be remunerated and how, from where will we work, and for whom and with whom – but also about social life and identify – from web-identity management to communications, entertainment, culture, spatial planning, organisation of societal and economic relations, teaching and learning methods, services provision, and healthcare. One does not need to be a futurologist to foresee that in coming decades we will live in a world with multiple systems and technologies overlapping and co-existing. It is important to define a playing field that safeguards experimentation and remains open to newcomers. Developing countries need to be proactive in these debates and ensure that discussions and decisions are brought forward at the multilateral level.
The future of manufacturing is in everybody’s interest. It will determine our jobs, our consumption patterns, the quality of services we will provide and access, and it will define societal organisation for future generations. Growing and intolerable inequalities have been the dark side of modern capitalism. The future could be different. How industry 4.0 unfolds will determine how we create more inclusive, sustainable and people-centred societies. At the other end of the spectrum is what science fiction shows us: machines controlling humans and alienation. And this is not the future we want.