The Four Ts of an Effective Strategy for the Industrial Internet of Things

October 26, 2017

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Sophisticated information technology systems, enabled by the Internet, have transformed modern engineering, manufacturing, and production processes. These connected systems, referred to as the Industrial Internet of Things (IIoT), present opportunities to make countries’ economies more globally competitive. However, to best harness the opportunities presented by IIoT, the United States (like all countries) needs a national policy strategy. An effective national IIoT strategy should address what ITIF calls the 4 Ts: Talent, Technology, Tax, and Trade.

Talent, developed through education, is the first key to a national IIoT strategy. The only long-term, sustainable source of a country’s comparative advantage is its education system. Yet Accenture estimates that 80 percent of America’s current manufacturing workforce lacks vital skills to remain competitive in a smart manufacturing (i.e., IIoT-enabled manufacturing) environment. Moreover, by 2018, the United States will face a shortage of up to 190,000 workers well-educated in data science and 1.5 million managers and analysts able to use data to make better decisions.

One way to address this challenge is by turning our universities into engines of innovation. One reform that can help foster such talent development is the Manufacturing Engineering Education Grant Program (MEEGP), which Congress recently passed a pilot of (and will fund at $20 million in FY 2018) to help America’s universities revamp their engineering programs toward curriculum, degree offerings, and certificates more relevant to industry. We also need to focus on the skills of both the current and future workforce, especially when the United States invests just one-sixth the amount of its OECD peers in active labor market retraining programs and one-twelfth as much as leaders like Finland and Sweden.

The second key to a national IIoT strategy is to invest more in Technology, including for IIoT research. Unfortunately, federal government R&D investment as a share of GDP has sunk to pre-Sputnik levels. In fact, if the federal government invested as much in R&D as a share of GDP as it did in 1987, we’d be investing at least $65 billion more per year. Additionally, a national IIoT strategy should redouble investments in university research. But, lamentably, among the 39 OECD nations, the United States ranks just 24th per-capita in government funding of university R&D and 27th in business funding thereof.

Further, a national IIoT strategy should redouble investments in programs that bolster America’s industrial competitiveness. The Manufacturing Extension Partnership (MEP) is one of the most impactful and successful programs in the federal government. But, by comparison, Germany invests approximately 20 times as much, and Canada 10 times as much, in their related small-medium sized enterprise (SME) manufacturing assistance programs. Worse, the program was zeroed out in President Trump’s FY 2018 budget. This is not the way to Make American Manufacturing Great Again.

The third key to a national IIoT strategy, Tax, means that it’s well past time for the United States to have a globally competitive tax code. U.S. manufacturers pay a corporate tax rate 39 percent higher than Asian manufacturers, and the United States is the only OECD nation not to have reduced its statutory tax rate since the year 2000. So, while corporate tax reform talk in Washington is promising, it’s imperative that we not let a “broaden the base, lower the rate” framework prevail; in which we lower the rate but eliminate incentives for firms to invest in R&D, new capital equipment and machinery, and workforce training. This matters especially because U.S. businesses’ investments in new capital equipment, software, and structures grew by just 0.5 percent annually from 2000 to 2011—just one-tenth of the 5.2 percent growth rate experienced in the 1990s. Worse, corporate spending on training fell by 30 percent as a share of GDP from 1999 to 2015. For this reason, ITIF has called for Congress to pass an Innovation and Investment Tax Credit (IITC), which would provide a more generous incentive for firms’ investments in R&D, capital equipment, and workforce training.

Finally, a national IIoT strategy must support Trade. There is a battle being fought right now for the soul of the global trading system, and countries like China are working to re-write the rules. For example, China’s “Made in China 2025 Strategy” aims to achieve 70 percent local content production across 10 key strategic and emerging industries (SEIs) by 2025. Essentially, China wants a protected local market so its companies can achieve economies of scale and then have a better chance to compete in global markets.

The United States must push back against this, as well as other policies such as indigenous technology standards or data localization requirements that preclude cross-border data flows. The free movement of data across borders will be vital if the vision of Industry 4.0, or IIoT-enabled manufacturing is to be realized. Moreover, we need to strengthen our current system to create the conditions in which IIoT-enabled manufacturers and supply chains can innovate in the most effective way possible.

The Four Ts—Talent, Technology, Tax, and Trade—are the key tenets of a national IIoT strategy. Without an IIoT strategy, businesses will be at a disadvantage in the global marketplace. For example, companies in a country slower to adopt this technology, through no fault of their own, will be forced to compete with comparatively sluggish supply chains. Moreover, America’s leading competitors have put IIoT strategies in place. Germany has dedicated $550 million for Industry 4.0; South Korea is investing $5 billion over five years; the European Union Horizon’s 2020 fund allocated $23 billion over the seven years from 2013-2020 to “leadership in deploying key enabling and industrial technologies.”

Put simply, America’s peers are fiercely competing for IIoT-enabled manufacturing leadership by making substantial investments, building their talent and knowledge bases, and empowering and incenting their enterprises to adopt these technologies. America risks being left behind in the smart manufacturing revolution if it fails to display an aggressive attentiveness to the challenge and respond by making thoughtful strategies and investments.