Why the UK must invest in smart factories

Indus­try 4.0, or the fourth indus­tri­al rev­o­lu­tion, describes a new age of dig­i­tal­ly enabled man­u­fac­tur­ing where­by com­put­ers can con­trol auto­mat­ed pro­duc­tion lines. The vision of the poten­tial div­i­dends is com­pelling.

Arti­fi­cial intel­li­gence will mon­i­tor and improve the phys­i­cal process­es of the fac­to­ry, even antic­i­pat­ing prob­lems before they occur. New prod­ucts and process­es will be test­ed vir­tu­al­ly so real-world pro­duc­tion can begin seam­less­ly. A net­work of hub fac­to­ries around the world will be con­trolled and upgrad­ed remote­ly with lit­tle need for local human labour.

In short, nations and com­pa­nies that forge ahead stand to ben­e­fit from giant strides in their pro­duc­tiv­i­ty from Indus­try 4.0, alter­na­tive­ly known as the smart fac­to­ry.

While the UK, cur­rent­ly the world’s ninth largest indus­tri­al nation, has world-class man­u­fac­tur­ers in the likes of Air­bus, Glax­o­SmithK­line and Rolls-Royce, there are con­cerns that reluc­tance among many com­pa­nies to invest means the nation risks falling behind.

The UK’s share of cap­i­tal invest­ment in out­put has been low com­pared with key com­peti­tor economies for many decades.

The last annu­al sur­vey by EEF, the man­u­fac­tur­ing trade body, in Octo­ber warned that invest­ment in plant and machin­ery dropped to 6.5 per cent of turnover in 2017 from 7.5 per cent dur­ing the pre­vi­ous year.

Despite a slight improve­ment in recent years, the UK is also still lag­ging behind Ger­many and France when it comes to man­u­fac­tur­ers invest­ing in intel­lec­tu­al prop­er­ty, for exam­ple.

In this con­text, Hen­nik Research’s last annu­al man­u­fac­tur­ing report paint­ed a rel­a­tive­ly opti­mistic pic­ture of readi­ness for the smart fac­to­ry. It found that a quar­ter of man­u­fac­tur­ers are already mov­ing to imple­ment Indus­try 4.0 in their facil­i­ties, while 62 per cent are plan­ning to do so. Two-thirds had made invest­ments in automa­tion in the pre­vi­ous 12 months.

How­ev­er, Mike Thorn­ton, head of man­u­fac­tur­ing at audit, tax and con­sult­ing firm RSM, says: “Among our own mid­dle-mar­ket clients, we notice there’s a lack of under­stand­ing and appre­ci­a­tion of what Indus­try 4.0 can offer, and how this is going to rev­o­lu­tionise the mar­ket. This is a key fac­tor that’s hold­ing back invest­ment.”

Derek Cum­mings, a direc­tor at Pro­tiv­i­ti, a glob­al con­sul­tan­cy firm, is con­cerned that Brex­it could tem­porar­i­ly place the UK at a dis­ad­van­tage in the race for Indus­try 4.0.

He says: “Unfor­tu­nate­ly, until Brex­it nego­ti­a­tions are con­clud­ed and there is a clear­er path for­wards in rela­tion to trade deals and poten­tial trade bar­ri­ers for UK com­pa­nies, it is dif­fi­cult for most man­u­fac­tur­ers to under­stand their abil­i­ty to invest in new plant, equip­ment, capa­bil­i­ties and tech­nolo­gies.”

The government’s indus­tri­al strat­e­gy not­ed last year that the UK is already a world leader in arti­fi­cial intel­li­gence and it wants to pro­vide help for indus­try to apply these inno­va­tions.

How­ev­er, Mr Cum­mings believes rival nations have a clear­er vision. For exam­ple, Chi­na is focused on invest­ment in robot­ics and recent­ly over­took Japan as the world’s largest indus­tri­al robot mar­ket.

“Recent esti­mates sug­gest that the increased use of indus­tri­al robot­ics is like­ly to reduce man­u­fac­tur­ing labour costs in Chi­na, Ger­many, the US and Japan by 18 to 25 per cent by 2025,” he says.

Mr Cum­mings believes com­bin­ing the inter­pre­ta­tion of indus­tri­al data with the UK’s con­sid­er­able strengths in ser­vice indus­tries is the way to get ahead in Indus­try 4.0.

But where is the cap­i­tal for man­u­fac­tur­ers to upgrade going to come from?  Since the sig­nif­i­cant amounts of cash are need­ed to upgrade facil­i­ties for Indus­try 4.0, equi­ty risk cap­i­tal will have to play an impor­tant role. Man­u­fac­tur­ing attract­ed 17 per cent of all pri­vate equi­ty in 2016, accord­ing to the BVCA, the indus­try body, up from 11 per cent in 2014.

How­ev­er, the inher­ent com­plex­i­ty of the trans­for­ma­tion may mean the UK’s short­age of “patient cap­i­tal” could prove prob­lem­at­ic.

David Petrie, head of cor­po­rate finance at the Insti­tute of Char­tered Accoun­tants in Eng­land and Wales, explains: “The issue is not around the num­ber of busi­ness­es sup­port­ed, rather that there is a gap in financ­ing where a prod­uct can­not be deliv­ered with­in five to sev­en years. Invest­ment with a longer time span than the typ­i­cal three-to-five-year bench­mark used by pri­vate equi­ty and ven­ture cap­i­tal funds is lack­ing.”

The key to get­ting more invest­ment in inno­va­tion will be from gov­ern­ment and pri­vate sec­tor part­ner­ships

Mr Petrie says the pro­posed state nation­al invest­ment fund should play a role as a cor­ner­stone investor in inno­v­a­tive man­u­fac­tur­ing projects, which should in turn help seed pri­vate invest­ment fur­ther down the line.

“The key to get­ting more invest­ment in inno­va­tion will be from gov­ern­ment and pri­vate sec­tor part­ner­ships,” he says. “For exam­ple, there must be an effort to sup­port the pro­vi­sion of finan­cial advice to com­pa­nies rais­ing expan­sion or scale-up cap­i­tal.”

Idin­vest Part­ners, a pan-Euro­pean pri­vate equi­ty and ven­ture cap­i­tal firm with €8 bil­lion under man­age­ment, says insti­tu­tion­al investors them­selves may have to inno­vate to play a greater role. Syl­vain Makaya, part­ner at Idin­vest, says this is what the firm has tried to do with its SME Indus­tri­al Assets (ISIA) fund.

The unusu­al, spe­cial­ist struc­ture aims to finance the mod­erni­sa­tion of pro­duc­tion equip­ment for small and medi­um-sized man­u­fac­tur­ers. The €250-mil­lion fund was raised because Idin­vest believes the kind of man­u­fac­tur­ers that could most ben­e­fit from improved machin­ery and process­es often strug­gle to find the right finance.

Instead of pur­chas­ing stakes in the man­u­fac­tur­ers, the fund buys assets to be leased back to the com­pa­nies, which are respon­si­ble for their man­age­ment and main­te­nance. “It allows com­pa­nies to opti­mise their cash man­age­ment, while ben­e­fit­ing from the lat­est gen­er­a­tion of tech­nol­o­gy and machin­ery at a rea­son­able cost,” says Mr Makaya.

John Stokoe, strate­gic devel­op­ment advis­er at Euro­pean com­put­er-aid­ed design com­pa­ny Das­sault Sys­tèmes, agrees that inter­est from ven­ture cap­i­tal and pri­vate equi­ty will be key to ready­ing indus­try for the smart fac­to­ry rev­o­lu­tion. “Pri­vate equi­ty invest­ment will grow when increased gov­ern­ment invest­ment is realised, espe­cial­ly when gov­ern­ment active­ly encour­ages part­ner­ships with acad­e­mia, indus­try and the investors,” he says.