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McKinsey Industry 4.0, May 2015 - how to navigate a changing industrial landscap

McKinsey & Company released a report today analyzing the fourth industrial revolution (Industry 4.0), which pertains to the implementation of the Internet of Things (IoT) in traditional industries.

To compute the effects of the fourth industrial revolution, the report, “Industry 4.0 - How to Navigate a Changing Industrial Landscape,” used exclusive market research. More specifically, the report analyzed the attitude, impact, and level of preparation for the U.S., German, and Japanese markets. The survey featured 300 respondents, all of which are employed by companies with 50 or more employees.

"We invested dedicated experts and full time resources over more than four months into the research in this area," said Dominik Wee, a leader in McKinsey's Semiconductors Practice in EMEA. "This is one of the top priority investment areas for McKinsey and its Advanced Industries practice, since it will fundamentally change the business model of our industrial customers. Being thought leaders on industry-shaping trends is a top priority for us and part of our value proposition."

Read more: Accelerate Your Path to the Internet of Things

The fourth industrial revolution will have a higher impact and require less implementation of new equipment, according to McKinsey & Company’s research. In fact, just 40 to 50 percent of the current equipment is expected to be replaced. Those figures signify an obvious advantage over the previous industrial revolution (industrial automation), which had an 80 to 90 percent rate of replacement.

"A significant amount of the value will come from upgrading existing systems to ensure interconnectivity for data collection, analysis and executing commands, e.g., by retrofitting sensors or even without changing the hardware, just by adding additional intelligence and interoperability in the software, assuming the electronics hardware capabilities (processing power and speed, storage/memory functionality) and actuation devices are sufficient or can be upgraded," said Hans-Werner Kaas, senior partner and head of the McKinsey Automotive & Assembly practice.

According to the report, “Industry 4.0 is enabled by disruptive digital technologies that are expected to change the manufacturing sector by 2025 through significant innovation.” The report identifies those technologies as data, computational power, and connectivity; analytics and intelligence; augmented reality; and 3D printing.

Among Industry 4.0’s biggest winners are global companies. The report reasons that expected success of global companies will result from labor effectiveness, which is “driven by digitization of knowledge work, quality by advanced analytics, and development time by touch operation/interfaces.” The report also suggests that digital enablement of processes gives way to high quality information gathering, the prompt processing of information and data, and the opening of commands for enhancements.

"Next to global companies, it will also benefit startup companies in the industrial space or small or medium-sized companies with the respective capabilities, that are driving the underlying technologies, advanced analytics and software solutions of Industry 4.0," Wee said.

The report predicts that there will be a 30-55 percent drop in knowledge work (healthcare, IT, legal, finance) between 2010 and 2020.

Cyber-security will become even more vital in Industry 4.0, because it is so needed in digitization. According to the report, “Digitization requires an effective implementation of cyber-security measures across the whole enterprise: prioritize protection, integrate into processes, engage management and employees, and safeguard technology.”

Though Kaas said the transition to Industry 4.0 has already started, he claims the revolution won't go into full swing overnight due to the longer innovation cycles in industrial contexts.

Kaas added, "But we are already seeing examples of companies that are successfully piloting individual Industry 4.0 technologies such as 3D-printing or digital enabled manufacturing control, in some cases extended to their supply base."