Being one of the main pillars of the European economy, the manufacturing sector in the European Union accounts for 2 million enterprises, 33 million jobs and 16% of overall European GDP, as highlighted by the European Commission. Europe’s future competitiveness highly depends on this sector’s ability to deliver innovative products and increasingly so, services too.
While Industry 4.0 is by no means a novelty any more, a new wave of next-generation digital technologies has emerged, including robotics, 3D printing and Artificial Intelligence, all of which are no longer hype but now reaching the shop floor, and enabling the creation of more personalized, diversified and mass-produced products, as well as agility to react to market change.
While European industry has already demonstrated strength in digital sectors such as for instance electronics for automotive, telecom equipment and sensor technologies, European manufacturing is not immune to competition from other parts of the world. Particularly vulnerable are traditional sectors and SMEs who are lagging behind with their digitization efforts. The latter have started causing a polarization effect, namely a growing gap between digitally-enabled manufacturers and those who are digital laggards.
This calls for action to support industrial competitiveness by revitalizing regions, providing smart technologies and empowering SMEs as well as citizens across Europe. The European Commission is currently investing in a number of major initiatives and ‘soft interventions’ to help drive this growth.
Business management procedures
Only 29% of European manufacturers in 2018 consider managing regulatory compliance and geopolitical issues a business priority
A multitude of regulations
From device tracking, to health & safety, local label translations, and food quality inspections, the European regulatory demands on the manufacturing sector are considerable and must be taken seriously, otherwise companies could face significant fines. And just as diverse as the manufacturing sector is in terms of sub-industries, so are the regulations, directives and recommendations surrounding it.
Among the notable and well-established examples of manufacturing-specific regulations include:
- Clean Air for Europe (CAFE) initiative and the Directive
- Since the early 1970s, Europe has been working on trying to improve air quality to minimize the level of harmful substances in the air. The Clean Air for Europe (CAFE) initiative was established in 2001 to define a long-term strategic initiative to tackle air pollution. Over the years a substantial amount of legislation has been introduced to improve air quality in European skies, and the Directive (2008/50/EC) of the European Parliament merges the former directives, including new air quality objectives for PM2.5 (fine particles) and the possibility to discount natural sources of pollution when assessing compliance against limit values.
- IoT technologies can certainly contribute in supporting Manufacturers in the compliance with these regulations, and this is widely recognized. For example, recently, EU Science Hub published a brochure highlighting which types of sensors are currently available and giving an overview of their advantages and disadvantages.
- Emission Trading Scheme (EU ETS)
- The most innovative measure pursued by the EU has been the Emission Trading Scheme (EU ETS). This is a measure designed to help EU Member States meet their Kyoto 2020 protocol commitments. According to the European Commission, it operates in 31 countries (all 28 EU countries plus Iceland, Liechtenstein and Norway), it limits emissions from more than 11,000 heavy energy-using installations (power stations & industrial plants) and airlines operating between these countries, and it covers around 45% of the EU’s greenhouse gas emissions.
Under the scheme, every EU country has reduction targets in the protocol and can allocate, in a National Allocation Plan (NAP), permits to industrial plants, allowing companies to trade carbon credits, thus providing financial incentives to lower emissions.
In addition, the Industrial Emissions Directive (2010/75/EU of the European Parliament and of the Council of 24 November 2010 on industrial emissions (integrated pollution prevention and control) is designed to control and reduce the impact of industrial emissions on the environment through an integrated approach whereas polluters pay to assign the cost of the updates to the plant based on the best available technology (BAT).
- These regulations apply to all manufacturers, but according to IDC they hold particularly relevance to asset-intensive sectors such as oil and gas, utility, transport, and several manufacturing industries: pulp and paper, petrochemicals, cement and glass, iron and steel, among others.
- The key IT applications that IDC see as being particularly relevant to scheme are risk management, emissions inventory management, scenario planning tools, data retrieval, reporting, auditing, and management tools.
- Restriction of Hazardous Substances (RoHS) 1 and 2
- The RoHS directive 2002/96/EC (amended by 2008/35/EC) bans the use of six chemicals in almost all electronics products (including toys), with the exception of military and medical systems as well as some big telecommunications products. The RoHS 2 directive (2011/65/EU), which improves regulatory conditions and adds legal clarity, replaced RoHS 1 and took effect in 2013.
- RoHS could have the strongest effect on the electronics industry since virtually every product on the market now uses lead-based solder to secure chips to print circuit boards.
- Most the technologies needed for the compliance to this directive support traceability, and reverse logistics, such as Inventory management, SCM, and supplier relationship management tools.
- Food Track and Trace
- The introduction of the new EU food regulation No. 178/2002 relates to all stages of production, processing, and distribution. The law aims to prevent fraudulent or deceptive practices in the food trade that result in misleading information to the final consumer. The new regulation EC (R) 178/2002 took effect in January 2005 and requires all food and feed business operators to have in place systems and procedures that allow complete tracking and traceability of products through the supply chain. In particular, Article 18 requires food business operators to keep records of food, food substances, and food-producing animals supplied to their business as well as other businesses to which their products have been supplied. In each case, the information shall be made available to competent authorities on demand. Article 19 requires food business operators to withdraw food that does not comply with food safety requirements if it has left their control and recall the food if it has reached consumers. In April 2004, the EU also introduced its Trade Control and Expert System (TRACES). To create and operate a central database to track and trace movement of pets and livestock within the EU and from third countries.
- Food, Beverage and Tobacco sectors are those which are mostly affected by these regulations.
- Key technologies to comply with these regulations are related to manufacturing software (Track&Trace, Manufacturing Execution Systems), advanced warehouse management, logistics management, and in general SCM, PLM, inventory management.
These examples showcase European manufacturers’ uncompromising responsibilities to ensure their products meet EU safety, health and environmental protection requirements.
Regulation however is not necessarily a top business priority for European manufacturers. According to the latest IDC European Vertical Markets Survey, only 29% of European manufacturers in 2018 consider managing regulatory compliance and geopolitical issues a business priority, and this sentiment is trailing far behind the top priority, which is innovation.
Digital Single Market Strategy
To support European companies with innovating openly, the European Commission launched the Digital Single Market (DSM) Strategy. The strategy, a comprehensive package of policies and measures, aims to open up digital opportunities for people and businesses and strengthen Europe’s already well-respected positioning in the global digital economy.
Below is a selection of these policies and how they affect the manufacturing sector:
- Digital privacy: Common EU rules have been established to ensure that personal data can only be gathered under strict conditions and for legitimate purposes. Currently, the two main pillars of the data protection legal framework in the EU are the ePrivacy Directive (Directive on Privacy and Electronic communications), and the General Data Protection Regulation, adopted in May 2016. The European Commission has reviewed the Directive to align it with the new data protection rules.
Business process impact: Manufacturers, just as any other industry in the EU, need to map out their current data processing activities and then re-evaluate internal business processes. An essential element of this process is to get the involvement from the company’s highest level of management and consider the appointment of a Data Protection Officer.
- 5G: In 2013, the European Commission signed a landmark agreement with the ‘5G Infrastructure Association’ major industry players, to establish a Public Private Partnership on 5G. This is the EU flagship initiative to accelerate research developments in 5G technology. Furthermore, the European Commission also allocated a public funding of €700 million through the Horizon 2020 Program to support this activity.
EU investment in 5G research and standards is also an essential factor in reinforcing EU know-how and leadership in the field of advanced broadband. It is not only necessary to support increasing traffic volume but also to boost networks and Internet architectures in emerging areas such as Machine-to-Machine(M2M) communication and the Internet of Things (IoT)
Business process impact: 5G can prove to be a transformative technology as it enables to handle transmission of big-data streams and improves communication and business speed. As such it helps realize the concepts of the connected factory and connected products, and therefore to participate in connected value chains. In the automotive industry, for example, this can enable new opportunities for analytics in real time, delivery of high-definition video content, overlay of AR information. 5G also enables supporting very large numbers of nodes generating high traffic volumes, and that will be instrumental in the future to carry signals for controlling vehicles directly, handle situations requiring guaranteed network performance (e.g. emergency response) as soon as the network coverage will be large enough to guarantee consistent connectivity.
For the moment, SMEs will have to rely on publicly available 5G infrastructures as they do not have the budget and skills to self-instrument areas such as for instance factories and warehouses. If countries fail to provide publicly available 5G infrastructures, it will compound the divide between digital leaders and laggards even more.
- Digital Skills & Jobs: The European Commission estimates that there will be 500,000 unfilled vacancies for ICT professionals by 2020. In 2016 the European Commission published a new Skills Agenda for Europe, to strengthen human capital, employability and competitiveness. The new agenda sets out to improve the quality and relevance of skills formation, to make skills and qualifications more visible and comparable and advancing skills intelligence, documentation and informed career choices. The mid-term review of the Digital Single Market strategy, published in May 2017, focuses on digital skills-oriented actions, aiming to manage digital transformation of European society and economy.
Business process impact: The majority of the jobs that will be required by the digital economy are in the making and not exactly known yet. This issue will be compounded by the loss of skills caused by the retiring baby boomer generation. Rather than just rely on the job market and how it develops, manufacturers’ HR teams should consider investing in partnerships with schools and universities to expose young talent to their technology and incentivize not only learning but also innovation challenges.
Brexit, the elephant in the legislation conversation
One cannot have a conversation about legislation without addressing Brexit, as it represents a new strategic risk for businesses, and particularly manufacturing yet. IDC anticipates European Manufacturing to be affected in the following areas:
EU countries are significantly important trade partners for the UK. According to the Office for National Statistics, in 2016, about 43% of the UK’s goods and services were exported to the EU, while 54% of U.K. imports came from the EU
- Trade. EU countries are significantly important trade partners for the U.K. According to the ONS (Office for National Statistics), in 2016, about 43% of the U.K.’s goods and services were exported to the EU, while 54% of U.K. imports came from the EU.
Between 1999 and 2016, the total trade volume between UK and Portugal was £7.6 billion. However, the amount of goods that UK imports from Portugal has always been higher and it has been widening in the recent past.
Post Brexit, with potential market barriers, the import success of the Portuguese economy is likely to face challenge. SMEs are most vulnerable to this changing geo political scenario and given the complex legal and trade environment they are likely to be impacted more than the organized sectors.
- Currency. The fall in Sterling makes exports cheaper, potentially making U.K. manufacturers more attractive to overseas businesses.
- Labor/Talent. The potential restrictions on the movement of people in the EU could create issues with the sourcing and retention of labor in factories and other parts of the manufacturing supply chain. This could have a detrimental impact on a sector that is already experiencing a scarcity of talent.
- Geography. Manufacturers with physical presence only in the U.K. are currently considering moving aspects of their plant or operations abroad. Those not physically located in the U.K. may lose certain access rights.
- Impact on Digital Transformation. The cost of doing business with the UK might increase for the SMB sector, as those companies will have to re-create their IT infrastructure. For instance, a Portuguese SMB with footprint in the UK will have to replicate its IT infrastructure like cloud /data center, security, trained personnel etc. once the UK moves outside the EU. Small IT vendors based out of Portugal, on the other hand, must address personnel issues, contract language and, the impact of the falling British pound.
To deal with competitive pressures, European factories will need to incorporate new technologies, applications and services. Digital industrial platforms address this need by providing the means to integrate different technologies, extract data from the shop floor and the supply network, make it accessible to monitoring and control applications, and allow the development of complementary applications, even by third parties.
Manufacturing facilities will need to be digitally connected with external partners in the value chain
Therefore, data will play a key role in the transformation of manufacturing, but it also poses significant challenges in terms of security, especially for SMEs.
Manufacturing facilities will need to be digitally connected with external partners in the value chain, so it is important to guarantee an adequate level of security without limiting the capability to exchange data and information both on the manufacturing floor and beyond the factory.
As part of the Digital Single Market Strategy, the EU Commission is providing a host of digital solutions to manufacturers, with the aim to support especially SMB entities on their digitization journeys. Some of these are:
Factories of the future: ‘Factories of the Future’ Public-Private Partnership (PPP) is a joint initiative where the European Commission and the private sector join forces to help EU manufacturing enterprises, in particular SMEs, to adapt to global competitive pressures by developing the necessary key enabling technologies, such as for novel industrial handling of advanced materials. Specific R&R objectives include:
- high-tech manufacturing processes, including 3D printing, nano- and microscale structuring
- adaptive and smart manufacturing equipment and systems, including mechatronics, robotics, photonics
- customer-focused manufacturing: linking products and
- processes to innovative services
ICT Innovation for Manufacturing SMEs: The EU initiative ICT Innovation for Manufacturing SMEs connects SMEs, startups and mid-caps with European digital innovation hubs who help them to test and adopt the latest digital technologies. Being one of the European Commission’s key initiatives, it focuses on the following technology areas:
- HPS cloud-based simulation services and data analytics
- Laster based applications and additive manufacturing, and
The initiative offers technological and financial support to SMEs to experiment with different ICT enabling technologies, Industry 4.0 processes and innovative business models. The funding enables cross-border experiments of short duration.
The digital innovation hubs provide their knowledge and support, helping SMEs to resolve the competence gap who in turn become early adopters of new technologies and accomplish their digital transformation. However, innovative technology suppliers also participate in these experiments, where they can mature their existing technologies and ultimately open new markets and services.
Digital Industrial platforms: The European Commission considers digital industrial platforms key for placing Europe in the lead of the digital transformation. As already mentioned, they can take data from assets on the shop floor, make it accessible to monitoring and control applications, and then allow third parties to develop applications based on the data, which, in turn, can connect different users and applications developers. Equipped with the right business models, these digital platforms are instrumental in the creation of ecosystems of technology suppliers, partners, service providers and end users, and enable innovative products and services.
For the period of 2018-2020, the EU has invested around EUR 300 million to reinforce its support to next-generation platform building and piloting through large scale federating projects. In manufacturing, these investments will predominantly concentrate on platforms for smart factories, but much of that investments is allocated to other sectors, focusing on for example smart hospital platforms, smart construction, and agricultural digital integration platforms.
AI ecosystems in Europe: The sharing of experiences in Member States could improve formulating new AI policies and proposals which could be scaled up and adapted to the European context. In January 2018, DG CNET (Directorate General for Communications Networks, Content and Technology), in collaboration with EurAI, the European Artificial Intelligence Association, organized a workshop, with the purpose of gathering evidence about academic, industry, and governmental initiatives that are shaping the AI landscape across Europe.
Within Europe, core AI ecosystems have developed at different intensity across the member countries. In fact, a mapping of the European core AI industry conducted in 2017 indicates that the United Kingdom leads as the strongest AI ecosystem in Europe (with 121 companies), followed by Germany (51), France (39) and Spain (31). Certainly, Portugal needs to develop more pro-active AI policy and framework to facilitate the AI related development and research.
Having said that there are green shoots of upcoming local AI firms like Visor.ai. It has participated in ‘The Journey’, an accelerator program linked to the tourism industry. The project was dedicated to innovating the travel and tourism (dominated by SMB players), focusing on making it more sustainable and, at the same time, optimizing the user experience. Started in 2016 Visor.ai has made incredible progress in supporting local businesses, including SMB sectors, in their AI journey.
A Perspective on Portugal
According to Eurostat, of 67,000 manufacturing companies in Portugal in 2016, 96% are below 50 employees, and contribute to about 40% of the total production value. This illustrates the strong economic contribution of SMB manufacturers in Portugal. On top of that, 25% of SMB employers in Portugal are in the manufacturing sector.
Portuguese companies are therefore actively exploring funding initiatives provided by the EU. One of them is the BEinCPPPs (Business Experiments in Cyber Physical Production Systems) Innovation Action, a project which aims to create and experiment with a CPS-oriented Future Internet-based machine-factory-cloud service platform in 5 European regions, with Portugal being one of the regions initially targeted.
The first prototype of the technology is already being deployed at KYAIA’s shoe factory in Portugal. Among the benefits KYAIA sees from the cloud-based solution are:
- Decreased downtime of footwear manufacturing plants
- Increased productivity in terms of number of produced shoes
- Real-time visibility on the production system.
The technology offers great potential for European SMEs as it collects data from the factory and analyzes it through predictive machine learning, providing workers with real time information and potential risks of failures. The final aim of this Innovation Act is to improve the adoption of Cyber Physical Production Systems all over Europe by creating and nurturing CPS-driven regional innovation ecosystems, made of competence centers, manufacturing enterprises and IT SMEs.
Implications on Portugal
To secure viable competition for SMEs, governments have to undertake different types of measures for intervention. Going forward, IDC suggests that the Portuguese government identify an optimal mix of industrial policy measures (business, financial, investment, etc.) that are deemed necessary to create a favorable framework for the development and uptake of digital transformation applications by European SMEs, so they can gain a fair share of the expected economic growth triggered by digital transformation.
However, such initiatives can go only go so far, and the aim is to ensure that the SMB segment becomes sufficient enough over time to turn the investments received into profitable outcomes to keep going along the digital transformation journey. And this may mean building consortia or other forms of collaboration with other SMEs, as well as of course, larger enterprises who can benefit from the distinguished value proposition of an SMB.