Excerpt from “A Bat Sneezed and the Economy Collapsed; How Did We Become So Fragile?” Conference Proceedings of the American Institute of Aeronautics and Astronautics National Conference 2020
Leaders today are ushering in a new age of industry and economy that we have not seen since Henry Ford first built a mass-produced automobile (the Second Industrial Revolution). In the midst of our 6th, and by far most impactful, pandemic of this century (with likely more to come), we are entering in to a decade of transformation; by its end we expect we will see a strong advancement into the Fourth Industrial Revolution, which will be every bit as impactful as the Second. Although times seem uncertain, we are at the cusp of a major change, not seen in a century – this should drive hope and excitement.
As 2IR led to globalization, 4IR will lead to Environment, Social, and Governance and “Triple Bottom Lines.” Notably, the fourth revolution will impact the future of supply chains, including:
- A need for transparency and availability will lead to reshoring and automation
- Companies must actively focus on workforce development in advanced manufacturing
- The industry for automated disease monitoring will exponentially grow
- Firms will accelerate toward Digitalization
Industry and economies in the past century increased both societal value and the human footprint, but we are now overlapping with viral ‘reservoirs’ found in the former wilderness. The next century needs a new industrial revolution to continue prosperity and measures of economic success which reflect the impacts on people and the planet.
Mass-Producing a Pandemic Age
A century ago, Henry Ford saw inefficiencies in an automobile industry which produced only two thousand vehicles per year. Through interchangeable parts and assembly lines, his company increased volume to two million per year; while in parallel, Alfred Sloan of General Motors increased financial efficiency using “bottom-line” metrics like revenue, earnings, market share, and inventories. After World War II, Taiichi Ohno recognized inefficiencies in the Ford/Sloan approach, leading to Lean methods and the Toyota Production System.[i]
We will broadly combine ‘Mass Production,’ ‘Single Bottom Line Metrics,’ and ‘Lean Management’ under the umbrella of the “Second Industrial Revolution,” and state that the 2IR brought substantial societal value based on the metrics measured. However, this revolution did not address the impact placed on the things not measured, notably the environment and society. We now, unfortunately, have a new set of metrics: infections, unemployment, and fatalities.
In the latter-third of the 20th century, labor costs in industrialized regions increased, leading manufacturers to “off-shore” component production to a ‘tiered’ supply chain in the world’s less-industrialized regions. This global value chain now supplies the world’s consumption of not only automobiles but also (as we have recently learned) ventilators, masks, personal protective equipment, and the raw materials needed for virus testing and pharmaceutical manufacturing.
In 1978, China’s Deng Xiaoping introduced economic reforms which opened that country to world markets.[ii] Over four decades, Chinese exports increased from $10 billion to $2.2 trillion in 2017[iii] thanks to advances in manufacturing, freight technology, and the world-wide web, which allowed for simplified information and monetary flows across borders.[iv] An example of the benefits to Chinese citizens can be found in Hubei province, with its business center in Wuhan.
Prior to the 21st century, Wuhan was largely agricultural, but since 2004 has been a focal in the “Rise of Central China Plan,” which aims to build less-developed inland economies into hubs of advanced manufacturing… The automobile industry is dominant in the region. There are 5 car manufacturers, including Dongfeng Honda, Citroen, Shanghai GM, DFM Passenger Vehicle Dongfeng Renault and Dongfeng-Citroen… By 2016, Wuhan attracted foreign investment from over 80 countries, with 6,000 foreign-invested enterprises injecting $22.45 billion in investment.
Wuhan grew to serve the needs of U.S., Japanese and French automakers as they searched for inexpensive labor and a new source of customers. In turn, the physical footprint of its population expanded to accommodate this growth.
A Highly Mobile Virus can now halt global economies
The region of southern China, Vietnam, Myanmar, and Laos are home to bats which for millions of years have hosted ‘reservoirs’ of coronaviruses, including SARS (now called SARS-Cov-1, which jumped to humans near Guangdong in 2003), and SARS-CoV-2, the Wuhan-originating virus which causes COVID-19. In just this region, there are hundreds of millions of people only a thousand kilometers from highly mobile bats which travel hundreds of miles in a year[v]. This is an environment ripe for overlap between humans and viruses.
In previous centuries, such viral incursions were limited to a few thousand square kilometers and died out as humans built resistance, but modern humans now travel between continents in just hours. Wuhan and Guangdong have large international airports and high-speed rail systems, meaning COVID-19 could jump to humans in December and infect the world’s continents by March. It has even jumped to house pets and zoo animals around the world, and there are studies in Colorado to see if the virus has jumped to North American bats.
There are millions of viruses. Only a few thousand have been studied, and COVID-19 is the sixth pandemic of this century. As human and viral populations converge, we can expect recurring viral incursions at a more frequent pace. We should expect the 21st century to be a Pandemic Age.
A New Economy is being created from the Fourth Industrial Revolution
Economic growth spurred by the Second Industrial Revolution led to human population growth into viral reservoirs. The world is on the cusp of another revolution, with a corresponding change in economic values.
Klaus Schwab, head of the World Economic Forum (WEF), posits that we have already entered a Fourth Industrial Revolution. In his view:
- The First used water and steam power to mechanize production,
- The Second used electrical systems to enable mass production,
- The Third saw the introduction of electronics and information technology to automate production, and now
- The Fourth is “blurring the lines between the physical, digital, and biological spheres.” [vi]
To date, there is no easy means to measure these important functions of ESG / Triple Bottom Line, but interested parties are beginning to align. In August 2019, 181 CEOs belonging to the Business Roundtable (including Fortune 50 companies like GM, Boeing, and Bank of America) signed a corporate governance agreement that “moves away from shareholder primacy and includes a commitment to all stakeholders.”[vii] In January 2020, the WEF’s International Business Council issued a similar statement to encourage discussion of proper metrics:
“…it is important to consider environmental impacts along the full value chain (or ‘lifecycle’) of products or services. Individual businesses often operate in a small section of the overall value chain … but they rely on the continuing commercial viability of all upstream and downstream parts of the chain to sustain their own commercial success.” [viii]
The COVID-19 pandemic highlights that upstream and downstream risks cross industry boundaries in unexpected ways. While Wuhan’s economy is driven by the automotive value chain, a virus originating there creates existential risk for all industries and opportunities for other industries and companies like Amazon, Microsoft, and Zoom. This pandemic is an example of a systemic risk, in that established industries interconnect in ways unimaginable to their founders. We have but one planet, and we are competing for the same resources of clean air, water, and virus-free environments.
Institutional investors such as BlackRock, Vanguard, State Street, and CalPERS, with trillions under management, recognize they are too big to avoid systemic risk. They reflect this in their directions to the corporations whose shares they own. Over 3,000 investment firms, representing over $80 Trillion in assets under management are signatories to the UN-backed Principles in Responsible Investing Initiative, which “acts in the long-term interests of the financial markets and economies in which they operate and ultimately of the environment and society as a whole.” [ix], [x]
Expectations are changing for 21st Century Supply Chains
This is a large topic and will be the subject of many future discussions, however, one can imagine the following trends:
- Supply chains will become more transparent: Top-tier multinational corporations addressing ESG issues prior to the pandemic found themselves stymied through both a lack of consistent corporate goals and inadequate visibility into the lower tiers. Expect governments and consumers to demand higher levels of ESG responsibility as a requisite for an economic recovery.
- Unavailable components will drive necessary change: The $20 Trillion U.S. economy imported $3.1 Trillion worth of goods in 2018[xi], much of this as componentry into larger goods, like automobiles and aircraft. Travel frictions as countries invoke lockdowns and quarantines will negatively impact U.S. manufacturing. An automobile has 20,000 parts and an airplane has a million; a delay in any one part holds up everything else. Travel restrictions become sand in the gears of the worldwide economy.
- The importance of Automation and Reshoring will be highlighted: As import frictions rise and the cost of U.S. labor drops due to high unemployment, the cost-benefit of off-shoring production will recede. Seric and Winkler of the UN’s Industrial Analytics Platform discuss this in “Managing COVID-19: Could the coronavirus spur automation and reverse globalization?” [xii] If you are keeping up with the US elections, we are already seeing this as a key point on candidate platforms.
- Companies will actively focus on workforce development in advanced manufacturing: A 2018 study by The Manufacturing Institute[xiii] shows that (based on pre-pandemic assumptions) U.S. manufacturing will need 15 million workers, only 10 million of whom are working today. With the half-life of knowledge skills at 5 years, 75% of what they currently know will no longer be relevant in a decade. Further, of the five million new workers needed, less than half of those positions are likely to find qualified employees. The businesses who survive will actively focus on creating and improving skills in their future and current workforce. Tuition burdens will shift from students to employers (e.g., apprenticeships).
- The industry for automated disease monitoring will exponentially grow: Pathogens follow exponential growth and constraining that growth early can have dramatic positive effects (see New Zealand). Look for automated monitoring of body temperatures, blood-oxygen levels, and even in sewer lines for disease monitoring, to name a few.
- Firms will accelerate towards Digitalization: Digitalization will be a key element for firms to compete. We imagine roles for blockchains in supply transparency, robotics (both physical and virtual) in automation, just-in-time learning for workforce development, the broad expansion of the Internet things, as well as more mature artificial intelligence to undoubtedly impact the future of supply chains and manufacturing.
Availability and visibility are easiest when supply chains are short, and this will increase interest in reshoring production to be close to consumption. However, the U.S. does not currently manufacture many of the components in its finished products, implying a need for automation and upskilled workforces.
It is time for a new revolution
The Second Industrial Revolution has now reached the century mark. It was exactly what was needed at the time, but it has become a victim of its own success, and we need a new revolution. The human population has quadrupled in the past 100 years, and the wilderness has decreased. Humans and coronaviruses could peacefully coexist because we rarely overlapped, and if we did, humans moved slowly compared to our modern age and the virus did not get an opportunity to spread. The global value chain reversed and is now a global virus chain.
The Fourth Industrial Revolution gives guidance for the world’s future through connectedness, automation, digitalization, and through new measures of economic success. We need a triple bottom line incorporating People, Planet, and Prosperity even if we do not know how to measure the first two-thirds of it. But the societal need is here, the measurements will come, and the organizations who thrive will get on board early.
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CGS Fellow Patrick Hillberg, PhD is an expert at Product Life Cycles, Industry 4.0 and Workforce Development. He has a Ph.D. in Systems Engineering and teaches a graduate course in engineering management at Oakland University. He likes to look at the events which happen around us and think about how they fit into larger systems.
- [i] The Machine That Changed the World, Womack et., al.
- [ii] https://en.wikipedia.org/wiki/Deng_Xiaoping
- [iii] http://www.chinadaily.com.cn/business/chinaecoachievement40years/index.html
- [iv] The Butterfly Defect, Ian Goldin and Mike Mariathasan, Princeton University Press, 2014. Ch. 3.
- [v] https://www.smithsonianmag.com/science-nature/scientists-hunt-viruses-animals-before-strike-humans-180975081/
- [vi] https://www.foreignaffairs.com/articles/2015-12-12/fourth-industrial-revolution
- [vii] https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans
- [viii] http://www3.weforum.org/docs/WEF_IBC_ESG_Metrics_Discussion_Paper.pdf
- [ix] https://www.investopedia.com/terms/u/un-principles-responsible-investment-pri.asp
- [x] https://www.unpri.org/signatories/signatory-resources/signatory-directory
- [xi] The U.S. Trade Deficit: How Much Does It Matter? Council on Foreign Relations.
- [xii] Managing COVID-19: Could the coronavirus spur automation and reverse globalization? United Nations Industrial Analytics Platform.
- [xiii] https://www.themanufacturinginstitute.org/research/2018-deloitte-and-the-manufacturing-institute-skills-gap-and-future-of-work-study/