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How Industry 4.0 can help India escape the Western labor-productivity paradox

In many of the largest advanced economies, labor productivity rates have stagnated for years. India can’t afford to repeat that experience—but Industry 4.0 may provide the way out.

Industry 4.0 offers India the opportunity to solve one of the great puzzles of economics—one that for 50 years has stumped business and policy leaders in the developed economies of North America and Western Europe: Why has labor productivity growth so often stagnated since the boom of the 1960s, despite massive advances in technology and automation?

It’s imperative that India find the answer. With 300 million people expected to enter India’s workforce over the next 20 years—swelling the total number to nearly 1.1 billion, or more than the US and Western Europe combined—higher productivity will be required in order to provide this vast pool of increasingly well-educated workers with rewarding jobs. Without it, India’s economy simply won’t grow fast enough to fill the need.

But one of the great advantages of this fourth industrial revolution is that it doesn’t require the significant capital expenditure of the third industrial revolution. Then, businesses needed to replace traditional tooling equipment with expensive (and often bespoke) automated machines. Now, companies across all sectors can plug their existing machines into the new cyberphysical systems at the heart of Industry 4.0, at a much lower cost thanks to rapid advances both in technology and in standardization. These systems use the latest advances in robotics, artificial intelligence, Internet of Things (IoT) and machine learning to make enterprise-wide transformations possible.

Industry 4.0 will thus provide quick and significant wins in productivity and profitability for a modest capital outlay. We estimate that in some cases, a relatively small capex investment could translate into a substantial increase in operating profit, if implemented and supported properly.

This payoff is not a one-time deal. One of the great challenges of this new, improved age of digitization is that it needs ongoing and continuous support if the benefits are to stick. But the discipline this requires provides the opportunity to lock in and build on the gains. For example, connecting business assets and processes together across the whole value chain can create feedback loops in which machines and their human masters use advanced data analytics, end-to-end process digitization, and lean management to identify ever more opportunities for improvement.

Breakthroughs may come through focused improvements, such as detecting quality problems more quickly, optimizing supply chains, or saving on maintenance costs through predictive tools. The continuous, incremental improvements that result can add up to annual returns in the vicinity of 2 to 3 percent—which, compounded year-on-year, add up to a major competitive advantage.

The power and potential of Industry 4.0 can be difficult to comprehend. Cyberphysical systems will generate huge new datasets that can be crunched with ever-more-powerful data analytics tools, generating insights capable of driving everything from tactical decision-making to organization-wide transformations for developing and exploiting whole new business models. Everything is ripe for disruption and the spoils will most likely go to the early adopters.

The prospect of being left behind should drive real fear into the hearts of any organization that wants to be among the best in its field, or for countries that want to get the most out of their industries and provide rewarding jobs for their people.

Take an Indian factory producing 10 million tonnes of its core product per annum. The company found that implementing Industry 4.0 could boost the plant’s bottom line by more than US $300 million per year, at a capex cost of less than US $100 million. That's both a startling rate of return, and a truly scary outcome for competitors.

If that factory tried to capture the same return using existing business models, it would need to boost capacity by an estimated 20 to 25 percent or more, requiring a significantly larger capital outlay. Depending on prevailing market conditions, that extra capacity could actually represent a diminishing return on investment. All else being equal, it makes more sense to improve the profitability of existing assets before looking to scale up.

India has been steadily strengthening its position as a global manufacturing leader in recent years, but manufacturers still lag their global peers across a range of metrics covering technical systems, management infrastructure, and mind-sets and capabilities. Indeed, annual manufacturing labor productivity is just US $6,000 per employee, well behind China at US $63,400. The same is true across other sectors.

Industry 4.0 gives India the opportunity to close that gap with its giant neighbor, and to avoid the productivity paradox that has so flummoxed developed nations over the last half century. But it won’t be just machines driving this transformation. Ongoing investment in human capabilities will be critical, and we’ll look at this in our next post.

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