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09-10-2020 14:21

Industry 4.0 – Evolution, revolution or something else?

The first three industrial revolutions were propelled in turn by steam power, electric power and programmable logic. The rise of the internet, with connected humans, devices and factories, has set the scene for Industry 4.0.
robots working in warehouse

It may sound like a Windows update, but Industry 4.0 is the fourth industrial revolution, which is badly needed to revive stalled productivity growth in the G7 economies.

In the latest issue of Nordea On Your Mind, Johan Trocmé, Director of Thematic Research, and analyst Viktor Sonebäck take a look of what Industry 4.0 will entail, what can be done to refine manufacturing processes as well as the biggest changes likely to come from business model innovation.

A new industrial paradigm is needed to revive stalling productivity growth

In the G7, annual productivity growth has collapsed in the past decade, halving from the levels of 1970-2010. This has lowered G7 GDP by USD 2tn, or 0.5 pp per annum since 2010. GDP growth in this period has been driven by more hours worked (falling unemployment). Going forward, a new wave of productivity growth will be needed to avoid GDP growth being stuck below long-term trend levels. And it will need to be of a similar magnitude as in Industry 1.0, 2.0 or 3.0.

A new source of upside: Usage-based business models

One potential productivity driver falling under Industry 4.0 is a shift from buy-own-operate business models to paying for actual, measured usage of equipment or services. Internet connectivity and technological development is opening up new possibilities to pay for only what we need and actually use, which can eliminate a lot of inefficiency. There are many concrete examples – from replacing compact discs with streamed music to cloud computing. As an illustration, we take a closer look at car sharing. Having an effectually fixed cost of typically one-third of a car owner's disposable income for owning a vehicle that sits idle 95% of the time can be replaced by using smartphone apps to locate nearby cars which can be used at a charge by the minute, hour or day, as needed. The potential savings from improved capacity utilisation are substantial, and such business models can also be applied to commercial and industrial equipment.

Banks have a role to play in continuous payments

When companies start operating accurate digital representations of their entire business value chain by using sensory data, banks need to join them in this transformation, or risk seeing them circumvent a transaction-banking model that has not seen radical evolution for decades. Banks are already involved as payment providers in subscription-based models in e-commerce and could ultimately move forward to solutions such as instantly settled machine-to-machine payments between two companies, where the bank is a trusted partner and provides the legally binding contract between them. This will require more advanced virtual account structures and the construction of a contract engine. Digital payment processing is a regulated activity, and most existing financial institutions should be in a good position to continue to provide these services in the future.

Nordea On Your Mind is the flagship publication of Nordea Investment Banking’s Thematics team, which produces research for large corporate and institutional clients. The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance. Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year. The publication’s themes vary widely, and many are selected from suggestions by clients. Examples of covered topics include artificial intelligence, wage inflation, M&A, e-commerce, income inequality, ESG, cybersecurity and corporate leverage.

Viktor Sonebäck, Associate, and Johan Trocmé, Director of Nordea Thematics

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Industry 4.0 may sound like a software update, but it is a German-invented name for the next big industrial revolution, after steam power, electric power and programmable logic.

It is also the topic for Nordea's latest report of Nordea On Your Mind. In this podcast, Johan Trocmé and Viktor Sonebäck talk about findings from their report, like how productivity growth has collapsed in the G7 economies in the past 10 years, and a new industrial paradigm will be needed to drive growth going forward.

Internet connectivity is the big game changer, and we believe much of the new efficiency upside will come from business model innovation.

Get the report

Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year.

If you are a corporate client and want to access the full Nordea On Your Mind report, please contact viktor.soneback [at] (Viktor Sonebäck)

Nordea On Your Mind