The Brazilian Industry in the Face of Digital Transformation: What to Expect for the Next 10 Years

David KupferGIC-IE/UFRJ

Challenges of Upgrading to the Digital Economy: Policy DirectionsBrazil- China Innovation Dialogue 2018 / IBRACH / Rio de Janeiro / November 14th 2018

Advanced Manufacturing / Industry 4.0

• Highly digitized production systems• Integrating real and virtual elements - cyberphysical systems

• enabling M2M (machine to machine) communication

• linking decision-making processes into management systems

• Two axis in digital transformation• Focus on Society = putting “the Internet into Things” – The US (Advanced Manufacturing)

• Focus on Industry = putting “Things on the Internet” – Germany (Industry 4.0)

• Focus “on everything” = both – China (Made in China 2025 + Internet Plus)

• Impact of innovations:• in robotics and embedded electronics = supercheapening of flexible automation

• in product design and additive manufacturing = “implosion” of the limits of productive fragmentation of CGV

• in cloud computing, big data analytics, artificial intelligence = “explosion” of personalisation

Disruptive technologies

• Not because it is based on radical innovations - it is rather based on emerging technologies (pipeline, recently introduced or initial stages of diffusion)

• Because it disrupts the determinants of competitiveness• SOCIAL and ECONOMIC phenomenon, rather than a SCIENTIFIC and TECHNOLOGICAL one

• restructures production systems, contest market positions, displaces market leaders, open spaces for new entrants.

Why is digital transformation disruptive?

Competitive drivers

Efficiency and precision along value chains

Product personalisation

Cost PLUS Differentiation

Market Structures

Changes in leadership

Vulnerable to entries: newcomers, cross-entries

and startups

Blurring of market boundaries

Business models

Integration, Interconnection,

Intelligence

Servitization: Goods Plus Services

That’s why, depending on one’s point of view, disruptive innovations associated with digital transformation represent either a threat to incumbents or an opportunity to new entrants.

The question is: which side are you on?

How countries are positioning themselves

Horizontal: R&D/GDPVertical: researchers per million populationCircle: Volume of R&D expenditures

Source OECD & World Bank

How countries are positioning themselves

Production catch up to 2025; intermediate industrial power to 2035; industrial power to 2049

2017 R&D expenditure: US$ 279 bi

Long term plan. Focus in advanced manufacturing (Industrie 4.0)

2017 R&D expenditure: US$ 105 bi

Maintain STI leadership; recuperate advanced manufacturing

2017 R&D expenditure: US$ 533 bi

2018 public budget for STI : US$177 bi (+12,8% s/2017)

STI leadership; evolve towards a super-intelligent society

2017 R&D expenditure: US$ 202 bi

Source: I-2027 Project

✓ Highest political priority

✓ Priorities built around a long term vision of the future

✓ Public-private concertation

✓ Stability of resources

Mission Oriented National Strategies

Brazil: Indústria 2027 - project scope & development

Project developed by IE/UFRJ and IE/UNICAMP between February 2017 and May 2018, involving 75 consultants, international partners (like OECD) and a survey to Brazilian firms

http://www.portaldaindustria.com.br/cni/canais/industria-2027/

Technology assessment & foresight

Industry analysis: evaluation of changes & impacts

Private and Public policy Implications

Concepts for technological evaluation and prospection

Source: I-2027 Project

Map of technology clusters

Source: I-2027 Project

Impacts of Technologies on Production Systems

In up to 10 years, all industries will face

disruptive technologies

Source: I-2027 Project

Industry 2027 Survey (with Brazilian industrial firms)

Basic Framework: Timeline of Digital Generations

• First generation (G1) - rigid production: use of digital technologies for a specific purpose (CAD, Inventory, Accountability)

• Second generation (G2) - lean production: flexible or semi-flexible automation using digital technologies with partial integration between areas (CAD-CAM, PLC)

• Third generation (G3) - integrated production: use of digital technologies with integration and connection in all business functions (ERP)

• Fourth generation (G4) - integrated, connected, and smart production: use of digital technologies with information feedback in the operation and to support decision-making processes (Big data, AI, M2M, CPS)

1950’s

1970’s

1990’s

2010’s

Source: I-2027 Project

Project I2027 Survey (with Brazilian industrial firms)

Generations of digital technologies in organisational functions of an industrial firm (*)

Generation Supplier relationship

Product development

Production management

Customer/client relationship

Business management

G1 Manual

transmission of orders (e.g. fax)

Stand-alone computer

aided design -CAD

Stand-alone computer aided manufacturing -

CAM

Spread sheet registry of contacts

Information systems by

area/department

G2

Electronic transmission of

orders (e.g. email)

CAD - CAM Partially or fully integrated CAM

Automated devices to

support sales

Enterprise resource

management in few areas

G3

Digital system for processing

orders, stocks & payments

Integrated data product

system

Process execution

automated system

Internet based support for

sales & after services

Integrated platform to

support decision making

G4 Real time web-based relation

Virtual modelling

Machine to Machine -M2M

system

Client relationship

based on line monitoring product use

Business management

supported by big data analytics

(*) For the formulation of questions and guide respondents´ answers, DT generations were specified with the support of production engineers. Source: own elaboration based on Indústria 2027 survey. Source: I-2027 Project

Characterization of the panel of respondents

Source: I-2027 Survey

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G4: Integrated, connected, and smart

Brazil: adoption of digital technologies in industrial firms

G1: Stand alone digital technologies

G2: Digital technologies in few areas

G3: Integrated platforms

2017 2027

N= 753

Source: I2027 Survey

% respondents

1.6

22,8

38,8

36,8

23,9

36,9

25,1

14,1

Adoption of digital technologies in industrial firms by company size – 2017 x 2027 (in % of respondents)

High or very high probability of generation 4 to be dominant in their sectors, in the future, in different organisational functions - % of respondents

Source: Own elaboration based on the Indústria 2027 Survey

N= 753

Source: I2027 Survey

Probability of G4 technologies becoming dominant in the company’s business sector

Total for industry and production systems (in % of respondents)

N= 753

Source: I2027 Survey

Activities executed by companies in 2017, in preparation for the next digital technology generation

High degree of inertia

Most firms are not taking any action or just making initial studies

N= 753

Source: I2027 Survey

Final Remarks

Digital Paradigm: When?• “Most of the impact is yet to come”

• The impact of such technologies will be disruptive in the short term only in a few manufacturing sectors, such as artificial intelligence in capital goods.

• There is time to prepare, as in most manufacturing sectors digital transformation will be a gradual process.

• Good news for those who plan: there is time to experiment and define strategies

• But attention: To evolve from G2 or G3 to G4, major organisational changes!• Going digital is far from trivial, as it requires:

• improvements in manufacturing, production and management • well-structured enterprise architectures • cross-functional / cross-departmental actions within the firm• clear, straightforward action plans and synchronization in their execution

• Bad news for those who just imitate: “there are no recipes”

Digital Paradigm: How to get there?

• Digital challenge: there are no recipes

• There is no such thing as “Androidism” (as once there was “Toyotism” and “Fordism” – being digital is NOT a labour process)

• There is a big difference between Path Creating and Catching Up• For countries aspiring at being at the global innovation frontier (US, Germany, China) = Advanced

Manufacturing / Industry 4.0 is an intermediate goal – a way of projecting international leadership • So, it is possible to control the pace of introduction of new digital technologies and to reconcile their adoption with new

policies aiming at mitigating their negative social effects

• For countries pursuing catching-up strategies (developing economies) = Advanced Manufacturing / Industry 4.0 is a final goal: an imperative of modernization under penalty of loss of international competitiveness and the consequent interruption of the catching-up process. • The development paradox – to pursue the goal of reducing inequality by adopting technologies that

deepen it.

• Brazil (and many other developing countries): very heterogeneous manufacturing structure, with a few firms/sectors closer to the technology frontier and others at different distances from it

=> National strategy – take care of both

Implications for Brazil (and other developing countries)

Evolve with the technological frontierForging ahead

Catching up Follow international best practices

Lagging behind Shorten distances to the production frontier

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Modes of evolution Direction of evolution Challenges

Engage in tech convergence; co-lead

innovation ecosystems

Integrate & digitalise value chains. Expand engineering & R&D

Digitalise business ambiance

Digital Paradigm: How to get there?

Mix all ingredients to speed-up the adoption of digital paradigm

• Enhance already established sector-related innovation systems (in Brazil, such as in agriculture, healthcare, oil, bioeconomy, and aeronautics, among others)

• Implement a comprehensive digital ecosystem with startups, R&D centers, professional formation centers, and technological service providers

• Create accessible, trustworthy and wide communication and broadband networks

• Initiate a major mobilization programme

• Create financial support programs aimed to develop and introduce new capital goods

• Craft a new legal / regulatory framework encompassing the digital environment

Technological convergence REQUIRES institutional convergence