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The 4th Industrial Revolution | ITEK

Industry 4.0

The use of technology to facilitate productivity gains is nothing new, it began in the 1700’s with the use of mechanical devices, railroads and steam power. Tasks previously done laboriously by hand in hundreds of weavers cottages were brought together in a single cotton mill, and the factory was born. 

Then the arrival of electrical power in the 1870’s enabled Henry Ford to create the moving assembly line, ushering in the age of mass production. The introduction of computing in the 1960’s led to automated production and sophisticated electronics in our everyday lives has led to further productivity gains, while enabling the production of smaller batches of a wider variety. The creation of the internet has led to a number of remarkable technologies converging, leading to the development and use of big data, artificial intelligence and robotics which is, in turn, driving the fourth industrial revolution and consequent rise in productivity. 

The fourth industrial revolution is defined by the internet of things, smart manufacturing, cyber-physical systems and digital transformation. It encompasses the digitalisation of the horizontal and vertical value chain, innovation in new products and services and the creation of new business models. The key drivers of which are improving customer experiences, increasing speed to market and reducing costs. In the words of the World Economic Forum:

“We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before… The possibilities of billions of people connected by mobile devices, with unprecedented processing power, storage capacity, and access to knowledge, are unlimited. And these possibilities will be multiplied by emerging technology breakthroughs in fields such as artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3-D printing, nanotechnology, biotechnology, materials science, energy storage, and quantum computing.” [1]

The transformative potential of industry 4.0 is generating significant investor attention. To meet the needs of investors seeking diversified, global exposure to the companies catalysing industrial and technological change, HANetf launched the HAN-GINS Global Innovative Technology UCITS ETF in October, 2018. The ETF tracks an index of leading companies that are driving innovation through the provision of disruptive technologies, including Robotics & Automation, Cloud Computing & Big Data, Cyber Security, Future Cars, Genomics, Social Media, Blockchain, Augmented & Virtual Reality. 

This paper will examine the economic impact of previous industrial revolutions and draws on several of the above themes and delves into new industrial and technological sectors to examine their expansion, their applications, their potential and their inter-connectedness. 

The Four Industrial Revolutions

Each revolution has been evident in corporate earnings over the last 150 years, with each paradigm shift in technology there has been a marked rise in profitability. The third industrial revolution saw corporate earnings growth rise to 1.9% above the annual rate of inflation, and although it’s still early days, earnings since 2011 have been rising by 3.6%. The industrial revolution 4.0 is already having a positive effect.

Each revolution has had a broad benefit for society but as an investor, it is important to identify those industry sectors that are likely to benefit the most and avoid those that are vulnerable. Many of today’s jobs brought about by the evolution and dissemination of information in the “industrial revolution 3.0” stage such as – software developers, network architects and web developers could not have been dreamt of a decade ago. 

The Impact of Technology Across Industry Sectors

Innovations create new industry sectors that grow rapidly just as the Industrial Revolution 4.0 will do, and we are beginning to see the emergence of these new industries which we detail below. What is particularly unique about Industry 4.0 relative to its predecessors is its impact across so many parts of our lives, impacting not just the products we buy but the way in which we can improve our personal productivity.

Using recent research from a combination of companies, McKinsey & Company, PWC, Roland Berger and the Smart Manufacturing Leadership Coalition, the predicted business benefits can be estimated, including: 

Emerging Industries

Industry 4.0 is made up of the following emerging technologies which we go into detail along with industry examples

  • Mobile solutions
  • Cyber-physical systems
  • Cloud Computing
  • The Internet of Things (IoT)
  • Cyber Security
  • Big Data analytics
  • Advanced manufacturing technologies 

 

Mobile Solutions

Large enterprises are now building mobility solutions; allowing their employees to do business wherever they work best. 

Companies are also building applications to enhance customer engagement and employee productivity.

An emerging mobile solution is augmented reality, which uses smart glass technology to display text, pictures and holograms to workers.

The workers use voice, gaze and gesture to interact, creating a totally hands-free interface. This technology connects the workforce to the digital world, improving productivity, efficiency and safety in the workplace.

Cyber-physical Systems (cps)

Cyber-Physical Systems are the integration of computation, networking, and physical processes. Embedded computers and networks monitor and control the physical processes, with feedback loops where physical processes affect computations and vice versa. 

CPSs are often important components of robotics where automation and feedback on the work that they are doing is required.

The economic and social potential of such systems is vastly greater than what has been realised, and major investments are being made worldwide to develop the technology. CPSs can be deployed in many different contexts and application areas such as; improving efficiency and safety in homes and offices, for example by monitoring and controlling heat and humidity.

Supporting elderly people living alone, for example by detecting problems (such as illness or accidents) and raising the alarm automatically, using nonintrusive wearable sensors or detectors installed in the house. In agriculture, optimising crop yield and reducing pesticide/fertiliser use, by using CPSs to identify and deliver them only where they are needed. 

Cloud Computing

 

Put simply, cloud computing is the delivery of computing services over the internet. Most everyday tasks over the internet are now made possible through the cloud, such as email, online banking, file storage and backup, social media and online shopping.

It has become popular because it provides benefits to consumers and businesses, such as lower costs, ease of access globally and higher reliability. A significant majority of companies are already planning, testing or live with cloud-based solutions, as the chart following illustrates.

Public Cloud Adoption

Case Study: Innovation Convergence | Celgene

Celgene is an American biopharmaceutical firm that manufactures drug therapies for cancer and inflammatory disorders. To better support the needs of its researchers, the research team wanted to improve its high-performance computing (HPC) capabilities. In particular, the company’s on-premises HPC system created a bottleneck for computational researchers. It would often take months to process large research jobs, slowing down their time to results.

Celgene also needed to enable secure collaboration between its own researchers and academic research labs. The company works with a number of highprofile academic institutions, who need access to their HPC resources for early-stage drug discovery. It can take 10 or more years to create a drug, and if data is compromised, intellectual property may be lost, putting future medicines at risk.

To enable collaboration, Celgene created a cloud environment based on Amazon Web Services (AWS). Instead of engineers needing to manually build and deploy individual computer nodes, collaboration researchers can now use the AWS environment to self-provision using pre-approved company templates. Celgene IT still manages the tools, security, and other standards, but researchers have the power to create and access resources at will. They store hundreds of terabytes of genomic data on AWS, helping keep storage and security costs low. The benefits were evident, Celgene scientists have dramatically reduced the time it takes to complete HPC jobs needed for cancer drug research, having been reduced from months to hours in some cases [2]. Celgene’s sales have risen strongly, in part due to strong R&D processes. And Celgene continues to increase its research & development spend.

The Internet of Things (IoT)

The IoT is a growing ecosystem connecting more and more systems, sensors, devices and assets connected to the internet through both wireless and wired networks. These devices include everything from mobile phones, coffee makers, washing machines, headphones, lamps, wearable devices and almost anything else you can think of. This also applies to components of machines, for example, a jet engine of an airplane or the drill of an oil rig.

Practically this means that for an individual it can help make life easier when for example you are on your way to a meeting and your car could have access to your calendar and already know the best route to take. 

Commercially the IoT is already being extensively used. Rolls Royce, for example, has embedded IoT sensors across its product lines, generating vast amounts of live data that are aggregated and analysed in the cloud. This data provides Rolls Royce with unprecedented insight into the live performance of its products, helping predict equipment issues and maintenance requirements. Furthermore, it’s helping them provide their customers with valuable aftermarket services that range from showing airlines how to optimise their routes to helping keep a survey ship in position in heavy seas. 

It helps with safety too, the company’s civil aircraft availability centre is continuously monitoring data from 4,500 in-service engines to support customers and reduce maintenance costs - the company’s engine-related revenues have thus benefited from the application of smarter user data.

Rolls Royce Engine & Service Revenues £m

Cyber Security

It has become imperative for organisations globally to defend themselves against the widespread economic, operational and reputational damages caused by cyber-attacks. 

As the chart following shows [3], no industry is immune to the threat of cyber-crimes but the most costly breaches occur in Financial Services and Utilities companies.

Cybercrime is likely to expand into robotics, artificial intelligence, 3D printing and industrial biology. The growth of the Internet of Things (IoT) allows nearly every car, airline, home appliance or office equipment to be virtually connected, exposing further critical loopholes for hackers to exploit. 

Cyber Security

The requirements for securing the IoT are not straightforward and organisations would need to use a blend of approaches rather than rely on a single solution, it also highlights how essential cybersecurity is for the success of Industry 4.0.

The financial consequences of cyber crime have also grown more significant over time. According to the 2017 Accenture Cost of Cyber Crime Study4 the average cost to a business from of a cyber attack has risen from ~$7 million in 2013 to over $11 million in 2017. 

Consequently, cybersecurity spending is rapidly rising, with spending on course to exceed US$124bn by 2019 [5]. 

Worldwide Security Spending by Segment, 2016-2018 (Millions of US Dollars)

 

Segment  2017  2018  2019 
 Application Security 2,434 2,742 3,003
Cloud Security 185 304 459
Data Security 2,563 3,063 3,524
Identity Access Management 8,823 9,768 10,578
Infrastructure Protection 12,583 14,106 15,337
Integrated Risk Management 3,949 4,347 4,712
Network Security Equipment 10,911 12,427 13,321
Other Information Security Software 1,832 2,079 2,285
Security Services 52,315 58,920 64,237
Consumer Security Software 5,948 6,395 6,661
Total  101,544 114,152 124,116

 

Source: Gartner (December 2017). 

There is a burgeoning risk from quantum computing as current 128-bit encryption used for most online transactions would be able to be cracked within minutes. If it scales as expected then we are in a race against time to deploy post-quantum cryptography before quantum computers arrive. Within 20 years, the expected time for viable quantum computers to be operational seems like enough time to be prepared. However, it is estimated it would take at least 10 years to modify existing cryptographic infrastructure. This entails modifying all existing systems that use public key cryptography, which includes most electronic devices that connect to the internet. We are already beginning to see initiatives employed by the ETSI (European Telecommunications Standards Institute) that are attempting to standardise the approach to post-quantum cryptography. Other initiatives will have to be developed to modify existing connected devices, develop the architecture for new quantum safe devices and software. At present, quantum computers pose a burgeoning threat to internet security that could have significant detrimental economic consequences to organisations that do not begin to act now to mitigate the risks. 

Big Data Analytics

The concept of data analytics has been around for years. Most organisations understand that by capturing data that streams into their business, they can analyse and get significant value from it. The new benefits that big data analytics brings are speed and efficiency, helping identify insights for immediate decisions, cost reduction and the development of new products and services. At General Electric the use of big data analytics has allowed the company to identify the trend of customers wanting to optimise inspection, maintenance and repair processes of their machines. This has spurred the decision to enable the machines to communicate with one another and generate sensor data. For example, sensors collect signals on the health of blades on a gas turbine engine to show things such as stress cracks. The blade monitor can generate 500 gigabytes per day per turbine. Where the real-time big data analytics becomes so powerful is when this analysis is applied across their 12,000 gas turbines in operation. The value in integrating all the sensor data onto a big data platform can reveal patterns on when blades break, allowing GE to tune its manufacturing and repair process before a break occurs. It also gives GE the ability to alert clients of any dangers and advise on any adjustments that could improve efficiency. 

In 2017 big data revenues totalled US$35bn.[6]

Advanced Manufacturing Technologies

Advanced Manufacturing Technologies (AMT), involves the use of technology to improve products and services. This is nothing new, the use of steam power to power a loom would have been described as innovative or cutting edge at the time.

It is the rate of technology adoption by companies and the ability to use that technology to remain competitive that adds value. Today’s advanced manufacturing technologies are Robotics, Augmented Reality, Composite materials, Additive Manufacturing and Laser Beam welding.

As an example of AMT, an Airbus component (pictured below), shows the old part and the much lighter weight new component made using advanced manufacturing.

Aerospace has been quick to recognize the huge potential of AM for designing parts with advanced materials and unique geometries. AM can also be used to make lattice structures, especially within the fuselage, which reduce weight and help dissipate heat. AM is also an excellent way to create a single part that replaces many multiple parts, which reduces the number of possible failure points and simplifies assembly.

Robotics

Part of the reason for the sudden surge of robotics and automation in manufacturing lies in the skill gap. According to a survey conducted by Deloitte and the Manufacturing Institute [7], up to 2 million manufacturing jobs will be left unfilled over the next decade due to improperly trained talent or a lack of individuals interested in careers in the manufacturing space.

Few US manufacturers have actively invested in upskilling their labour forces, so manufacturers will need to begin looking at technology to remain competitive. The biggest fear for corporates is the cost of investing in robotics. But even companies in countries where manufacturing booms are causing significant rises in wages and companies face growing unionisation risks are investing. Particularly in China where the robotics market remains very underpenetrated and manufacturing wages have more than doubled since 2008 [8].

Robot workers are also falling in cost - the unit costs of robots are converging with the cost of an average manufacturing worker, assuming that a robot works 24 hours a day [9].

Robotics remains under penetrated globally. On average, there are only 74 robotic workers for every 10,000 human employees, although penetration rates vary widely by country [10].

Installed Industrial Robots Per 10,000 Employees

Conclusion

Industry 4.0 is transforming our manufacturing world, providing consumers cheaper and greater choice whilst providing businesses with unrivalled insight into their manufacturing processes, machines they operate and services they provide. As throughout history, there are those that choose to adapt and embrace new technology and those that don’t. Industry 4.0 will help those willing to embrace new technology to stay ahead of the curve while delivering a material difference in their bottom lines.

ITEK: Accessing The Fourth Industrial Revolution

Identifying and investing in companies that are involved in the fourth industrial revolution can be an onerous and challenging research task for investors. That’s why HANetf created the HAN-GINS Innovative Technologies UCITS ETF (ITEK) - a UCITS compliant Exchange Traded Fund domiciled in Ireland which tracks the Solactive Innovative Technologies Index (Net Total Return). 

It seeks to provide exposure to a diverse basket of companies poised to benefit from the fourth industrial revolution. The index includes world-changing companies from developed and emerging markets whose products and services are driving innovation, transforming industries and changing lifestyles across the world in emerging industries including:

  • Robotics
  • Genomics
  • Blockchain
  • Cyber Security
  • Future Cars
  • Cloud Computing & Big Data 
  • Social Media 
  • Augmented & Virtual Reality 

 

HAN-GINS Innovative Technologies UCITS ETF (ITEK) is issued by HANetf and listed on London Stock Exchange, Borsa Italiana and Deutsche Boerse XETRA with a TER of 75bps.

Exchange  B'berg Code/Ticker  RIC  ISIN  CCY 
London Stock Exchange ITEK LN ITEK.L IE00BDDRF700 USD
London Stock Exchange ITEP LN ITEP.L IE00BDDRF700 GBP
Borsa Italiana ITEK.IM ITEK,MI IE00BDDRF700 EUR
Deutsche Boerse XETRA T3KE T3KE,DE DE000A2N5XE0 EUR

 

Fund Partner

The ETF has been created in conjunction with GinsGlobal Investment Management, a multi-billion-dollar asset management company, founded in 2000 with operations in North America, Africa, Middle-East and Asia-Pacific. 

Download the full whitepaper "The 4th Industrial Revolution" here.

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