Production and Consumption in the Fourth Industrial Revolution (Summary)

Ministry of Science and ICT Committee of Future Preparation, KISTEP, KAIST Report of Future Strategy Production and Consumption in the Fourth Industrial Revolution (Summary) 2017. 4

Production and Consumption in the Fourth Industrial Revolution Introduction In January 2016, the fourth industrial revolution was discussed at the Davos Forum held in Switzerland. The forum defined the current industrial shifts as another industrial revolution and remarked on the necessity for innovation. A few months later, Korea was shaken by professional Go player Lee Sedol s loss to the AI machine, AlphaGo. Many saw this as a sign of an impending economic and social cataclysm, as technology surpassed human ability in a game that was formerly in the human domain. It should be noted that the fourth industrial revolution does not only involve changes in the production area. The way we consume goods and services in our daily lives are also expected to be affected, accelerating our transition into an intelligent information society. The results from a 2015 analysis1 on future issues revealed that concerns relevant to the manufacturing revolution had the largest correlation with the principal technologies, including intelligent information technology. These findings are particularly important for devising any future strategies, as intelligent information technologies are expected to increase the world s connectivity, and the entirety of production and consumption changes beginning with manufacturing as objects become intelligent. The production and consumption revolution is the wording used to approach this topic, as we examine current changes and establish a strategy for the future. Figure 1 Manufacturing revolution: Correlation between future issues and principle technologies, Future Issues of Korea (2015) 1 The Future Preparatory Committee analyzed the major issues that Korean society will face in the future and published Future Issues of Korea in July 2015. 1

I. What is the Production and Consumption Revolution? The meaning of the production and consumption revolution The production and consumption revolution refers to revolutionary transformations where intelligent information technologies expand, and in which the entire production and consumption process is made intelligent and closely interacts. Intelligent information technologies, such as the Internet of Things, big data, and artificial intelligence, create smart and hyper-connected platforms, which allow the converging of the entire production and consumption processes (see Figure 2). Producers will be able to meet consumer demand in real time, and customers will be able to receive goods and services upon request. The nature of the value chain is also transforming. As the added value of the manufacturing process began to decrease in the 2000s, the value chain assumed a u-shaped curve (Figure 3). Advancements in intelligent information technology allow the entire value chain s added value to increase, restating the importance of the manufacturing process. Multinational corporations in developed countries have routinely relocated their production facilities to emerging economies to cut costs. The recent phenomenon of reshoring, in which facilities return to their countries of origin, can also be understood in this context. Figure 2 A definition of the production and consumption revolution Figure 3 Transformation of the value chain due to the production and consumption What is the Production and Consumption Revolution? 2

II. The Outlook of Production and Consumption Drivers of the production and consumption revolution Technology advancements lead changes in production and consumption. As the steam engine and electricity in previous industrial revolutions, intelligent information technology, which can be referred to as general purpose technology (GPT), is causing these changes. Automation: The role of machines is more than a mere replacement for physical labor. Their function will drastically expand into intellectual labor, capable of decision making, optimization, and communication. Datafication: Data is evolving into an important resource for production and consumption, as our ability to acquire and utilize available data increases. Increased connectivity: As the person-object/object-object relationship becomes closely connected, production and consumption are optimized, and small-scale business operators become able to exercise substantial influence. Social, economic, and environmental changes cause transformations in production and consumption because of the new technology s influence. Changes in the population structure: The meeting of diverse urban populations will become the epicenter of new trends, and the aging population will rely on automation to maintain productivity. Climate change and resource shortage: Climate change and resource scarcityare expected to threaten the future of humanity and call for responsible production and consumption. Low economic growth: Low global economic growth continues, competition between countries and corporations is growing fiercer, and the consumer culture of maximum satisfaction at minimum cost is spreading. Globalization s acceleration and the appearance of neo-protectionism: Cooperation between countries is becoming widespread and is increasing the transfer of money, human resources, and information. However, after the global financial crisis, countries are reacting to globalization with measures aimed at protecting their national economies. Figure 4 Drivers of the production and consumption revolution The Outlook of Production and Consumption 3

Major trends in the production and consumption revolution As technological advancements become interlinked with social, economic, and environmental transformations, production and consumption undergo rapid and farreaching change. This process can be primarily classified as the diversification and convergence of production and consumption. First, there will be a diversification in the approaches to production and consumption. In the future, there will be an emphasis on individual demand, which will rapidly change. To sustainably satisfy this demand, production and consumption will meet in an ecofriendly manner. Expansion of personalized production: There will be an increase in the production of goods and services that will be optimized to meet individual demand. This entails the rise of an on-demand economy that can satisfy even the smallest needs. Rapid transformations in consumer trends: Technology and society will rapidly change, and the life cycle of goods and services will become shorter. The production process will evolve to promptly and flexibly respond to these changes. Rise in eco-friendly production and consumption: Production and consumption will transform to survive this revolution. Improvements in regulations and consumer consciousness need to be accompanied by efforts from the production side to innovate goods and processes. Besides, as existing boundaries are expected to collapse, production and consumption domains will converge. A convergence that transcends manufacturing-services, humansmachines, and country-country will take place, as large value and opportunities emerge. Combining manufacturing and services: Trends that combine goods and services to create high added value will intensify. As a result, producers will be able to keep creating value while engaging with consumers. Smart production and consumption: Production and consumption will take place with smart cooperation between humans and machines. Producers will utilize data to flexibly operate processes, and customers will base their consumption on the information obtained through various channels. Convergence of global processes and reshoring: In spite of a global dispersion of production systems, production will be carried out through closely interacting systems. Meanwhile, competition between countries will intensify as they attempt to take over the high-added-value domains in the global value chain. Figure 5 Major trends in the production and consumption revolution The Outlook of Production and Consumption 4

Cases of innovation in future production and consumption Changes in future production and consumption can be classified into the six abovementioned trends: customization, swiftness, eco-friendliness, fusion, intelligence, and connectivity. Industrial sectors will continue to actively converge in the future. Despite this, we will produce some relevant examples from each sector to give a more detailed picture of the changes to come. Based on reports such as those from the World Economic Forum (WEF) and the International Institute for Management Development (IMD), we divide these sectors into 1automobile, 2 transportation, 3 energy, 4medical care, 5 retail, 6 knowledge service, 7 food, and 8resource. Professional workshops were also held to predict specific examples of future innovations in production and consumption, and the expected effects of these changes. Figure 6 Representative cases of innovation in future production and consumption The Outlook of Production and Consumption 5

III. Korea s Place in the Wave of Production and Consumption Change The status quo in Korea In the fourth industrial revolution, Korea is facing competition from both developed and developing countries. However, a 2016 report 1 from the UBS (Union Bank Switzerland) ranked Korea as 25th in terms of preparedness for the fourth industrial revolution. While Korea ranks high in categories such as skill level (23rd), innovation (19th), and infrastructure (20th), the country is vulnerable in labor market flexibility (83rd) and legal protection (62nd). The catch-up of Korea s economic growth has been successful, but its limitations have already been exposed. Changes in Korea s industrial structure are slow compared to the global industrial landscape. Korea s economy is still heavily reliant on its existing key industries, which prioritize exports and manufacturing. A study was carried out as part of this report in collaborating with domestic industry-academic experts from each sector. The study addressed the perception of 1 the degree to which Korea will be impacted by future changes, 2 the level of industrial preparedness, and 3 the level of regulatory and systemic preparedness in regards to the future production and consumption revolution. The results showed differences in the detailed figures from each sector. However, all sectors were lacking industrial, regulatory, and systematic preparedness despite the substantial effects of the production and consumption revolution. Korea has the potential to make giant leaps in the fourth industrial revolution in spite of these shortcomings. New industries in Korea, such as biotechnology and software development, are experiencing high rates of growth. The country has also built an excellent digital infrastructure, which will become the foundation of future production and consumption. Bloomberg has given a high ranking to Korea s innovation capacity for the past several years, and the country has recently been focusing on innovative activities and capabilities. Figure 7 UBS Evaluation of Korea s 4th Industrial Revolution Preparedness Figure 8 Preparedness Level of Korean Industry by Sector 1 B. Baweja et al., Extreme automation and connectivity: The global, regional, and investment implications of the Fourth Industrial Revolution, UBS White paper for World Economic Forum, 2016. Korea s Place in the Wave of Production and Consumption Change 6

The Present state and outlook of major industries by sector We have surveyed the future of production and consumption by industry sector and assessed Korea s current situation. In line with the future innovations of production and consumption examined earlier, industry sectors were divided into 1automobile 2 transportation, 3energy, 4medical care, 5retail, 6knowledge service, 7food, and 8 resource. Figure 9 The Present state and outlook of major industries by sector Korea s Place in the Wave of Production and Consumption Change 7

Ⅳ. Future Strategies to Lead the Era of the Production and Consumption Revolution If Korea wants to become a leader in the production and consumption revolution, the country needs to revolutionize its entire economic and social systems. Transformations in production and consumption entail extensive changes in human life. Therefore, we need a strong and forward-looking approach, which takes into consideration industry, technology, labor, culture, and even human relations. We explored innovation strategies to prepare for the future of production and consumption in four areas, including business model, innovation capacity, systems and infrastructure, and society and culture. Figure 10 Future Strategies Leading the Era of the Production and Consumption Revolution Future Strategies to Lead the Era of the Production and Consumption Revolution 8

Building a futuristic business model Business models help companies create value, deliver such value to their customers, and leave room for profit. Innovating business models is even more important today as production and consumption are radically changing. Companies need to innovate their processes accordingly. Digital technologies allow firms to execute operations swiftly and organically. Planning, research and development, manufacturing, and marketing can also benefit from the following methods. By conducting data centered planning, companies can implement diverse approaches to research and development, and fulfill customer demand faster and more accurately. Firms can also maintain permanent relationships with their customers and create higher value by combining software in manufacturing and utilizing a variety of media platforms in their marketing efforts. Figure 11 The direction of innovation in production and consumption processes Companies must also secure a leading role in the Platform Economy. Platforms that mediate the increasing number of network participants have become an important tool for production. Platform businesses such as Google, Amazon, Apple, and Facebook have experienced rapid growth. If Korean companies want to improve their position in the Platform Economy, they must provide customers with the value they expect by establishing a long-term vision. Companies must also be proficient in setting up strategies that exploit existing platforms if they have their sights set on the global stage. Future Strategies to Lead the Era of the Production and Consumption Revolution 9

Enhancing capacity to create innovations in production and consumption To create high added value in the future global market, Korea should cultivate its ability to innovate. The core added value in the global economy has shifted from labor and capital to innovation capabilities. Korea should develop a system in which creative ideas lead to the realization of goods and services. Such a system should develop efforts to support talented individuals who can achieve these innovations. First, Korea should improve technical skills to foster intelligent information and create an environment conducive to active open innovation. To acquire strategic intelligent information technologies and improve its position in the global market, Korea must develop standardization and intellectual property rights by establishing a long-term plan. Open innovation is an essential methodology for creating value by combining existing technologies and markets with new technologies and markets. Korea needs to create an open culture to foster open innovation. Meanwhile, the government should introduce policies aimed at expanding joint research between industry and academia. We must also foster a talented workforce, which can lead production and consumption innovations. As intelligent information technology advances, machines will substitute humans in performing simple and repetitive tasks. In this scenario, creative talent will be needed to redefine problems and create value. We need to innovate the elementary, middle, and high school curricula to enable individuals to develop their abilities. In fostering professional talent, it is important to reconcile the gap between education and research within science and engineering graduate schools. Resolving reallife problems with digital technology and understanding the social and cultural principles of operations in new technologies are essential abilities in a future society driven by technology. Future Strategies to Lead the Era of the Production and Consumption Revolution 10

Establishing systems and infrastructure The government should also establish systems and infrastructures in support of the future of production and consumption. Current systems and infrastructures are operating under existing production and consumption processes. This could become a limitation to advancements in production and consumption. Changes in these fields are necessary for production and consumption to take place in an orderly manner, allowing the smooth management of resources. First, the government needs to establish a system that allows new industries to benefit from technological advancements, while also minimizing their adverse effects. Innovations in production and consumption should not be excessively constrained by regulations and should facilitate social cooperation so that no threats are posed to the safety and order of society. We need to modify the regulations regarding personal information protection, which represent obstructions to companies that utilize data to innovate their business. The government should also develop standards for safely operating drones and self-driving cars. We also need to prevent unfair trade that can occur when large corporations operate large platforms and modify the system to accommodate the creation and protection of intellectual property. We also need to develop infrastructures in which data can be used without obstruction. As intelligent information technology advances, data emerge as a critical element of value creation. We need to strengthen communication networks and establish a management system that allows us to collect and utilize data. We also must acquire key technologies in smart factories, which will take the place of product production, and spread those technologies throughout the entire industry. Critical technologies linked to international standardization need to be developed, and large and small businesses should cooperate for building these technologies. Future Strategies to Lead the Era of the Production and Consumption Revolution 11

Establishing new culture and ethics We need to establish culture and ethics that allow everyone to enjoy the benefits of production and consumption. Production and consumption take place within a society and significantly affect its culture. While production and consumption transform societies and cultures, these, in turn, change the process of production and consumption. Following these transformations, we need to change the economic activity and our daily lives. We should create a culture of trust and cooperation to maximize value creation in the future production and consumption processes. Trust must be the foundation for proactive interactions between producers and consumers and is essential for the success of personalized services in the digital economy. Accordingly, in the same way as companies meticulously manage customer data we must recognize that culture is created when each of us makes efforts to maintain trust. We need to achieve a culture of cooperation to cultivate a digital network. Even if the act of helping others does not immediately result in a reward, many people can enjoy the benefits of collective knowledge when an atmosphere of voluntary collaboration is created. We also need to establish environmental ethics to overcome the threat of climate change and resource depletion and to achieve sustainable growth. We should transform the system into a circular economy in which resources are reused and recycled. The circular economic system is based on the producer s efforts to increase the lifespan and recyclability of goods, the consumer s efforts to use goods for a long time or purchase eco-friendly products, and the government s efforts to develop infrastructures and rules. For this to happen, businesses that share goods or sale services must be revitalized, and the government must upgrade its systems for managing resources. Future Strategies to Lead the Era of the Production and Consumption Revolution 12

Concluding Remarks Catch-up growth, which Korea has successfully employed, will no longer be sufficient in the imminent production and consumption revolution. The vertical integration structure, which revolves around Korea s large companies, has reached its limits. Intelligent production and consumption, and the convergence of these phenomena through the expansion of intelligent information technology, have completely revolutionized the competition paradigm. To confront the future production and consumption revolution, we should develop forward-looking strategies with a holistic view. Increasing labor and capital investment through hard work and frugality and importing overseas technology may have worked in the past; however, these strategies are inadequate today. We should develop an enterprise system that supports innovative business, an innovative system that fosters creativity and technical skills, a government system that operates new systems and infrastructures, and a social system that supports culture and ethics. To this end, it is important to establish strategies with a broad perspective and eliminate all potential obstacles. Manufacturing innovation, the Internet of Things revolution, the zero-marginal-cost economy, the fourth industrial revolution, and the intelligent information society are all parts of the production and consumption revolution that is currently underway. If this change surpasses a critical threshold, communities that are not prepared will be negatively impacted once this new paradigm reaches the stage of rapid expansion. We must be cautious in our approach to the production and consumption revolution, and we should continue active discussions because, only through this process will Korea achieve an appropriate response. 13