The Fourth Industrial Revolution1 and emerging technologies—such as the Internet of Things, artificial intelligence, robotics and additive manufacturing—are spurring the development of new production techniques and business models that will fundamentally transform production. Both the speed and the scope of technological change, combined with the emergence of other trends, add a layer of complexity to the already challenging task of developing and implementing industrial strategies that promote productivity and inclusive growth. Further, recent changes put the competitiveness paradigm of low-cost manufacturing exports as a means for growth and development at risk. Countries need to decide how to best respond in this new production paradigm vis-à-vis their national strategies and their ambition to leverage production as a national capability. This requires countries to first understand the factors and conditions that have the greatest impact on the transformation of their production systems and then assess their readiness for the future. Subsequently, governments—together with industry, academia and civil society—can take suitable policy actions to close potential gaps related to their readiness for the future of production.
The data-driven Readiness for the Future of Production Assessment 2018 analyses how well positioned countries are today to shape and benefit from the changing nature of production in the future. Readiness is generally regarded as the ability to capitalize on future production opportunities, mitigate risks and challenges, and be resilient and agile in responding to unknown future shocks. As shown in Figure 1, the assessment is made up of two main components: Structure of Production, or a country’s current baseline of production, and Drivers of Production, or the key enablers that position a country to capitalize on the Fourth Industrial Revolution to transform production systems.
Figure 1: Readiness Diagnostic Model Framework
The 100 countries and economies included in the assessment are assigned to one of four archetypes based on their performance in the Drivers of Production (vertical axis) and Structure of Production (horizontal axis), as shown in Figure 2.
Figure 2: Country Archetypes
The assessment is comprised of 59 indicators across the Drivers of Production and Structure of Production components. The end of this report includes detailed Country Profiles that can be used by policy-makers, business leaders and others to identify specific opportunities and challenges for individual countries as they navigate the future of production.
Definition of Production
Production involves a broad spectrum of economic activity related to manufacturing products and goods. A full end-to-end appraisal of what it entails reveals the following sequence: Design-Source-Manufacture-Assemble-Distribute-Service-End of use-cycle. Advanced manufacturing refers to the use of innovative technology to improve processes and products, while traditional manufacturing relies more on the use manual or mechanized techniques.
The Readiness Assessment is a mid-level analysis focused on production. This means the assessment does not comment on the balances across different sectors in the national economy (e.g. services or agriculture), nor does it analyse country positions in specific sub-sectors or industries within production (e.g. textile or automotive). The assessment is forward-looking in that it measures readiness for the future, rather than performance today. It measures average national readiness—meaning it assesses the entire country on average, not just the highest-performing areas within a country. Thus, the assessment does not look at sub-regional differentiation within a country (e.g. Northern Italy compared to Southern Italy, coastal China compared to rural China, etc.).
The framework was applied to conduct analysis of 100 countries, as shown in Figure 3.
Figure 3: Global Map of Readiness Assessment Results 2018
This assessment reveals numerous insights derived from the quantitative assessment as well as more in-depth engagement activities conducted in India, Mexico, Japan, Republic of Korea, Russian Federation, South Africa, and six ASEAN countries.
- Global transformation of production systems will be a challenge, and the future of production could become increasingly polarized in a two-speed world. Of the 100 countries and economies included in the assessment, only 25 countries from Europe, North America and East Asia are Leading countries, or in the best position to benefit from the changing nature of production. These 25 countries already account for over 75% of global Manufacturing Value Added (MVA) and are well positioned to increase their share in the future. Furthermore, approximately 70% of robot sales take place in China, Germany, Japan, Republic of Korea and the United States. Germany, Japan and the United States dominate the landscape of high-value industrial robots, while China serves as the most rapidly growing market.2 Approximately 90% of the countries from Latin America, Middle East, Africa and Eurasia included in the assessment are classified as Nascent countries, or the group least ready for the future of production. Across all countries, bringing Micro, Small and Medium Enterprises (MSMEs) along in the journey is a global challenge, as these companies have varying levels of awareness, understanding and ability to invest. Global solutions and significant investment will be required to bring countries at different stages of development and MSMEs along in the transformation journey.
- Different pathways will emerge as countries navigate the transformation of production systems. Not all countries may seek to pursue advanced manufacturing in the future. Some countries that are next in line as low-cost labour destinations may still seek to capture traditional manufacturing opportunities in the near term under the current paradigm. Other countries may pursue a dual approach, with some areas pursuing advanced manufacturing and other areas pursuing traditional manufacturing. Advanced countries may seek to focus primarily on advanced manufacturing. Some countries may prioritize other sectors in the national economy over production. It will be important for each country to differentiate itself, capitalize on competitive advantages and make wise trade-offs in forming its own unique strategy for the future of production and its broader economy.
- All countries have room for improvement. We are at the beginning of the transformation journey, and no country has reached the frontier of readiness, let alone harnessed the full potential of the Fourth Industrial Revolution in production. Compared to the ideal score (10), Japan has the strongest Structure of Production score (8.99), and the United States has the strongest weighted average Drivers of Production score (8.16) across all six drivers. While there are early leaders to learn from—including China, Germany, Japan, Republic of Korea, Singapore, the United States and others—these countries are also still navigating the early stages of transformation. Even the most advanced and complex countries are not strong in every part of their country, as different sub-regions have different levels of readiness. Furthermore, every country has a specific industry footprint today (e.g. food and beverage, automotive) and no country covers all industries. The specific industry footprints of each country may be challenged in the future under a different production paradigm.
- There are common challenges within each archetype. Leading countries need to convert readiness into actual transformation and push the frontier by designing, testing and pioneering emerging technologies. Legacy countries need to avoid getting squeezed between more advanced Leading countries, which can offer more advanced manufacturing, and Nascent countries that can offer lower cost labour. This starts with improving the institutional framework, investing in human capital and boosting technology platforms and innovation capacity—the three areas where Legacy countries perform the worst, on average. High-Potential countries and economies have capabilities that can potentially be converted to strengthen their Structure of Production and further diversify their economy. Their key challenge will be to find the right balance across sectors when determining priorities for the national economy (e.g. how much to focus on developing industry compared to services) and to then choose which industries to develop. Nascent countries are an eclectic group with varying levels of industrial development. Their key challenge will be to determine whether to pursue advanced manufacturing or traditional manufacturing, and to what extent, as part of their overall economic strategy. Nascent countries seeking to accelerate readiness need to improve performance across all Drivers of Production, starting with improving the institutional framework. Attracting global investment will also be critical for knowledge and technology transfer.
- As the new technological paradigm brings forth a cluster of new industries, there is potential for leapfrogging, but only a handful of countries are positioned to capitalize. New technological paradigms serve as a window of opportunity for lagging countries to catch up, since they can enter emerging industries at a later stage without the legacy costs of being locked into existing technologies. The opportunity exists with emerging technologies related to the Fourth Industrial Revolution. But are countries ready? While short cuts are attractive, a minimum level of capability is needed to leapfrog. High-Potential countries and economies, such as Australia and the UAE, and Nascent or Leading countries closest to the High-Potential archetype border, are likely in the best position to leapfrog in this new production paradigm. These countries do not have a large current production base, but have the resources and potentially the right combination of other capabilities to capitalize on leapfrogging opportunities in the new production paradigm. However, countries still need to identify which options are most promising and have an effective strategy for capturing these opportunities. Countries need to make investments—either broad investments across drivers, focused investments in a set of specific areas, or both—to improve readiness and their ability to leapfrog.
- The Fourth Industrial Revolution will trigger selective reshoring, nearshoring and other structural changes to global value chains. Inertia is one of the biggest obstacles to changing global value chains, as it is so costly in most industries to move production from one location to another.The adoption of emerging technologies will change the cost-benefit equation for shifting production activities and, ultimately, impact location attractiveness. When a value chain is newly defined, countries will have opportunities to gain position or lose share. For example, countries that have been outsourcing activities for the last several decades may now be able to reshore or nearshore these production activities to be closer to their consumer base. The future of production will require certain skills and capabilities at each stage of the global value chain. It is critical for countries to enhance readiness and develop unique capabilities that make them an attractive production destination within global value chains. If countries cannot build capabilities and connectedness quickly, then they may lose out fast.
- Readiness for the future of production requires global and regional, not just national, solutions. Countries seeking to compete in the future of production need to invest in enablers and develop a strategy to capitalize on future opportunities and build or transition their production base. However, there are some enablers that cannot be developed in isolation to unlock the full potential of the future of production. For example, globally connected production systems require not only sophisticated technology, but standards, norms and interoperability across a diverse set of systems. Regulations and legal frameworks for emerging technologies developed at the sector level—versus independently by each country—can result in tremendous efficiencies and improve the ease of doing business across global value chains. Regional cooperation can also help countries leverage their collective strengths to compete on a global scale.
- New and innovative approaches to public-private collaboration are needed to accelerate transformation. Every country faces challenges that cannot be solved by the private sector or public sector alone. Legacy and Nascent countries, in particular, can accelerate readiness and transformation by utilizing the private sector more actively in tackling macro level challenges. Leading countries, such as Germany and Japan, also involve the private sector in the development and implementation of strategies, such as Industry 4.03 and Society 5.04 strategies. Traditional public-private partnerships have historically had varying levels of success. However, new approaches to public-private collaboration that complement traditional models can help governments effectively and quickly partner with industry, academia and society to unlock new value.
The Readiness for the Future of Production Assessment is intended to stimulate discussion and advance further research. There are two key hypotheses and working assumptions that are fundamental to the assessment’s framework that will be tested and researched over time. The framework will be updated as the future unfolds.
- The most important drivers of future readiness are Technology & Innovation, Human Capital, Institutional Framework and Global Trade & Investment. These drivers have the strongest correlation with economic complexity. The needs within each driver will evolve as we shift from current to future production paradigms, but the overall drivers will remain significant.
- Scale is not a prerequisite for future readiness. Economic complexity is more important than scale for readiness for the future of production. The ability to gather, combine and use knowledge embedded in people and technology to create a range of unique products will become an increasingly important competitive advantage. Thus, small countries such as Switzerland or Singapore are not necessarily at a disadvantage against global giants with larger scale.
This report analyses and presents the results of the first edition of the Readiness Assessment, which evaluates how well positioned 100 countries and economies across all geographies and stages of development are to shape and benefit from the changing nature of production. Given that the future is uncertain and hard to predict, the framework and methodology will continue to be updated as the future unfolds. Furthermore, engagement activities, such as multistakeholder workshops, and country as well as regional in-depth analyses, will be conducted in select countries to catalyse multistakeholder dialogue and action, and complement quantitative findings with qualitative insights. Lastly, the World Economic Forum has commenced work on a new transition framework to help governments design new strategies in collaboration with the private sector, civil society and academia. While the assessment is intended to serve as a diagnostic tool, the transition framework will support treatment of the diagnosis.