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Industrie 4.0

The Machine Construction Paradox

A VDMA Impuls study diagnosed decreasing productivity while at the same time confirmed the WEF’s Competitiveness Report showing Germany in the lead in terms of innovation. Are these outcomes truly inconsistent? It pays to take a closer look at the studies.

17 Oct. 2018
Prof. Volker Banholzer
Industrie 4.0
The Machine Construction Paradox: Industrie 4.0 Has Not Increased Productivity.

Are digitalization and Industrie 4.0 descending into a trough of disillusionment from a peak of inflated expectations as described by the Gartner Hype Cycle? This is suggested by a joint study between the Center for European Economic Research (ZEW) in Mannheim, and the Fraunhofer Institute for Intelligent Analysis and Information Systems (ISI). The study was conducted on behalf of the IMPULS-Stiftung of the German Association of Mechanical Engineering (VDMA). According to this, machine construction productivity has fallen since the turbulent period of the financial crisis in 2008/09 even though the workload and the number of employees have increased dramatically. At the same time, the latest Global Competitiveness Report by the WEF gave Germany the top spot in competitiveness and even the number one spot in innovative ability. These apparently contradictory results require a closer look at the approaches used in the studies.

Researchers at ZEW and Fraunhofer see a bundle of factors that mutually reinforce and affect the productivity paradox. Large initial investments in digitalization will see a return a later date. Added to that, according to the study, are statistical effects caused by machine construction’s expanding globalization, and a growing number of services in the sector dealing with the new products and methods. Plus, official statistics have the tendency to overestimate inflation and thereby underestimate productivity developments. The realization that introducing a new technology at first creates more operational expenses than rationalization effects and the expectation that new business models immediately return a profit is nothing new. The first wave of digitalization, the introduction of computers in administration and production, provoked extensive research to explain the productivity paradox at the time. In 1987, Robert Solow pointed to the lack of, or even a negative correlation between investment in IT and the increase in productivity and cost-effectiveness in a company.

Like every scientific conclusion, the productivity paradox has been criticized and challenged. The paradox was declared a so-called statistic illusion by suggesting that changes in input and output were not measured sufficiently. At the beginning of the 1990s, Erik Brynjolfsson, coauthor of the bestseller The Second Machine Age, described three additional reasons for the existence of the paradox, but also qualified its significance. Firstly, a lag exists between the initial application of technology and its effect; secondly, profit was redistributed between companies; and finally, management mistakes frequently limited the use of technological capability. All in all, Brynjolfsson’s conclusion at the time was positive: investment in information technology is clearly more productive than traditional investments. This analysis sounds more conciliatory and puts lagging productivity, also in terms of Industrie 4.0, into perspective.

Germany: Master in Innovation

Each year, the WEF uses various categories to evaluate the competitiveness of global economies. These categories include machine construction and other sectors. Among the twelve indicators are innovation capability, the stability of the financial system, the educational system, macroeconomic stability, infrastructure, and the healthcare system. The WEF certifies that German companies have adapted well to digitalization. In international comparisons, German companies rank number four. The top spot as the most competitive country is based on an evaluation of the number of registered patents, academic publications, and customer satisfaction with German products. For Rolf Najork, Chairman of Bosch Rexroth, retaining contact to customers is the key. According to him, customer intimacy is the industrial sector’s advantage in having Germany as a location for business. It also allows German companies to be one step ahead of customers in order to anticipate their needs.

Germany’s extremely positive performance in the WEF’s Global Competitiveness Report remains astonishing. One needs only recall that Peter Altmaier, the Federal Minister of Economics, said at the Machine Construction Summit in Berlin that he must “apologize on behalf of the Federal Government” because the implementation of digital infrastructure was so far behind. The truth probably lies somewhere in the middle. On the one hand, sectors such as machine construction can look back on a successful track record. On the other, as Najork from Bosch Rexroth states, the world of mechatronics is in the process of transforming itself into a world of software. This brings new business models, new notions of quality, and greater speed. With these three things in mind, Najork called for industry representatives at the Machine Construction Summit to embrace digitalization and exchange a micrometer philosophy for one that focuses on time to market. Productivity will then increase, and Germany will repeat its excellent rankings in the WEF’s Global Competitiveness Report.