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News & Events

15 August 2019

Econ 4.0: Is manufacturing the mantra?

This article first appeared in Enterprise, The Edge Malaysia Weekly, on August 5, 2019 – August 11, 2019.

Engineers envision the world a tad differently. For example, most optimists will say the glass is half-full and most pessimists will think it is half-empty. But hard-core engineers will be more precise and note that the glass is twice the capacity of its contents.

A world without engineers would be like a car without wheels. Engineers toil to make sense of what works, how to make it work and how to fix things when they do not work. In ancient times, people who sacrificed their sleep, family, food, laughter and other joys of life were called saints. Today, they are called engineers.

The temple of engineering is manufacturing. Globally, manufacturing continues to be a critically important sector in the developing and “developed” worlds. In the former, manufacturing continues to provide a path from subsistence agriculture to rising incomes and living standards. In the latter, it remains a vital source of innovation and competitiveness, making outsized contributions to R&D, exports and productivity growth.

Manufacturing, like all other industries, is undergoing tectonic shifts, thanks to the paradox of high demand on the one hand and slowing growth on the other.

“Currently, most established players — such as original equipment manufacturers, automation-device makers and machine-control suppliers — are working on strategies to cope with shifting growth patterns and the mix of unexpected high demand and declining growth in more mature technologies. They are also preparing to claim a share of the additional value that will be created by digital manufacturing solutions, which we estimate will double to €32 billion (RM150 billion) worldwide by 2025,” says a McKinsey study.

One technology that is at the heart of manufacturing is robotics, especially industrial robots. Manufacturing firms are set to spend a whopping US$129.4 billion on robotics and associated services by 2022. That is three times more than the total spend last year, says IDC.

The hot spots? Asia-Pacific ex-Japan will see the largest market share for robotics applications, with the US in second place and Japan in third.

“To survive the escalating competition, Asia-based manufacturing companies are putting robotics as their top priority for technology investment. While the uncertainty of the trade war between the US and China is likely to dampen the market growth in the near term, we expect growth to pick up from 2020 onwards,” says Jing Bing Zhang, IDC’s global research director for robotics.

Both discrete and process manufacturing sectors will see investments in robotics (including drones), accounting for more than 58% of the overall spend this year. “Largely, welding and assembly in discrete manufacturing and pick-and-pack and bottling in-process manufacturing are driving the robotics spend in 2019,” says IDC.

“Customer deliveries, vegetable seeding and planting are some drone use cases. Expect these to grow at a five-year compound annual growth rate of more than 100% between 2017 and 2022.”

As expected, China will lead in both manufacturing and robotics. The country will have the largest market share in the Asia-Pacific robotics (including drones) market. Its spending on robotics is set to reach US$80.5 billion by 2022, representing an overwhelming 62.2% of Asia’s total spend.

Malaysia’s mantra

Manufacturing is a major component of Malaysia’s economy and contributes about 23% to its GDP. Up to 98% of companies in the manufacturing sector are small and medium enterprises (SMEs), mostly Malaysia-focused but with great potential for export.

“While Malaysia is abundant with natural resources, it is the manufacturing sector that has played a key role in turning Malaysia into a major player in the global value chain, apart from rapidly turning the country into an industrialised nation,” Prime Minister Tun Dr Mahathir Mohamad stated in the foreword to the National Policy on Industry 4.0 white paper.

“In recent decades, the manufacturing sector has seen rapid evolution. From mass production through the use of intensive labour force in production lines to the use of robotics to increase efficiency, the manufacturing industry is constantly evolving with more and more infusion of automation. The next phase of evolution is referred to as the Fourth Industrial Revolution or Industry 4.0,” he added.

Malaysia’s manufacturing sector employs 17% of its workforce, eclipsed only by the services sector at 62%. That is natural, given that services need a huge human component while manufacturing requires a major capital outlay. So, the key question is: Is Malaysia ready for Industry 4.0?

Last year, the World Economic Forum and management consultancy A T Kearney ranked 100 countries on their ability to manufacture for the future. The rankings took into account factors such as technology, human capital, global trade and networks and reliable institutional frameworks as key drivers for Industry 4.0. Malaysia and China were the only two non-high-income countries in the “Leader” quadrant. Why? Because of their current strong production base and ability to transition to the smart manufacturing factories of the future.

Being in the “Leaders” category is both a reward and a risk. “On the one hand, it underscores Malaysia’s strong current manufacturing position and its readiness for Industry 4.0,” the national policy document notes.

“On the other hand, it also highlights the economic value at stake if Malaysia is not able to transform itself in an accelerated manner. The gap to global leaders like Japan, South Korea, Germany, Switzerland and China is still significant and other countries in the region have aggressive plans and are moving fast in their implementation.”

A major plus point? Investments in manufacturing continue to flow in. In 1H2019, Malaysia saw RM53.9 billion in gross investments, including RM25.4 billion in the manufacturing sector — up a resounding 127% year on year — leading to an additional 23,000 jobs being created.

The top five investors? The US (RM11.5 billion), China (RM4.4 billion), Singapore (RM2.2 billion), Japan (RM600 million) and the British Virgin Islands (RM500 million). These five account for 95% of the total approved foreign direct investments in manufacturing.

“These projects are expected to generate strong multiplier effects, which include the growth of domestic companies or supporting industries, cluster development, local sourcing, strengthening of R&D and human capital development,” says the Malaysian Investment Development Authority.

Two notable investments from the US, both in high-tech, are Micron Technology and Jabil Circuit. They want to expand their manufacturing operations in Penang, which has been a leader of high-tech manufacturing in Malaysia.

Last year, a bold plan called “Penang 2030” was launched to ramp up investments in manufacturing. The goal? To adopt 4IR (Industry 4.0) technologies to get Malaysia’s manufacturing sector to contribute US$30 billion by 2030.

“As one of the key manufacturing hubs in Malaysia, it is imperative for Penang to lead the way in 4IR efforts. I am confident of incorporating 4IR technologies to prepare for the next era of human-machine collaboration and to realise our vision for a digital future,” Penang Chief Minister Chow Kon Yeow said in April.

A key challenge? A shrinking base. “The contribution of the manufacturing sector to GDP dropped from 32.3% in 2000 to 30.1% in 2007, and to 24% in 2008. It has remained stagnant at 23% since 2013,” Soh Thian Lai, president of the Federation of Malaysian Manufacturers said last October.

What can be done to revitalise it? Soh listed four action items — clean governance, a more business-friendly environment, moving up the value chain with high-tech production and supporting a “buy Malaysian” campaign.

Automation ahead

The future is automation and automation works best with the Internet of Things (IoT). Gartner forecasts that 8.4 billion connected “things” will be in use worldwide this year, up 31% from 2017, and will reach 20.4 billion units by 2020. Total spend on endpoints and services will touch US$2 trillion this year.

Factory automation using IoT has great potential and can transform the industrial face of a country. It can also be a great competitive advantage. This is especially true for Malaysia’s manufacturing sector, which accounted for 81.5% of total exports last year, according to Malaysia External Trade Development Corporation. The manufacturing sector directly employs 1.03 million people, out of a total labour force of 14.65 million.

Are there any megatrends in the manufacturing sector that can make a big impact in the near future? McKinsey says three technological megatrends are key drivers of a digital transformation in production — connectivity, intelligence and flexible automation. The consulting firm calls these frontrunner production sites “lighthouse factories”. Lighthouses serve as real-world evidence that dispel myths and misunderstandings that are often seen as obstacles to the adoption of innovative technologies at scale.

Here is an example. China-based commercial vehicle maker SAIC Maxus offers online ordering by linking its customer-configuration tool to the production plant, suppliers and the sales and distribution network. Customers can choose from more options, get their vehicles faster, and cheaper. The result: SAIC Maxus has grown 25% faster than the market.

Another glowing example? India-based Tata Steel. It cracked the code for implementing predictive maintenance on 50,000 different machines. A team of just seven people identified 25 types of equipment that can use the same models and technology so that a new plant with a mostly low-experience workforce could accelerate ramp-up and reduce cost while also improving customer delivery — all of this in a sustainable manner.

“These cases mean that 4IR has passed the hype stage. We are ready for impact at scale and speed. We need to be agile, to bundle use-cases, empower our workforces and continue to collaborate in the new spirit of coopetition. The willingness of organisations to open doors to others and share best practices will speed the adoption of the fourth industrial revolution and the value that manufacturers can create,” says McKinsey.

The bottom line: 4IR rests on manufacturing, manufacturing rests on engineering and engineering rests on STEM (science, technology, engineering and mathematics).

What is the difference between science and engineering? Scientists dream about doing great things; engineers do them. Elon Musk says engineering is the closest thing to magic that exists in the world. Manufacturing can be the mantra that can make magic for Malaysia.

Raju Chellam is vice-president of new technologies at Fusionex International, Asia’s leading big data analytics company


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