Manufacturing Digitalization: Extent of Adoption and Recommendations for Increasing Penetration in Korea and the U.S.

Whether it’s called “Industry 4.0,” as in Europe, the “Industrial Internet of Things (IIoT),” as in the United States, or simply “smart manufacturing,” information and communication technology (ICT) is in the midst of reshaping modern manufacturing. This digitalization of manufacturing will transform virtually every facet of modern manufacturing, from how products are researched, designed, fabricated and produced, distributed, and consumed to how manufacturing supply chains integrate and factory floors operate. But it’s still early days in the smart manufacturing revolution: for instance, 77 percent of small U.S. manufacturers still lack plans to implement Internet of Things applications over the next three years. This report examines the extent of smart manufacturing adoption by U.S. manufacturers and offers policy recommendations to increase smart manufacturing penetration in the United States, Korea, and beyond.

Smart manufacturing enables manufacturers to converge the physical and digital worlds, combining sophisticated hardware with innovative software, sensors, connectivity, and massive amounts of data and analytics to produce smarter products, more efficient processes, and more closely linked customers, suppliers, and manufacturers. The digitalization of modern manufacturing holds the potential not only to restore once-robust manufacturing productivity growth, but also to reshape the landscape of global manufacturing, bolstering the competitiveness of the most innovative and most rapidly technology-adopting companies while eroding the advantage of enterprises—and nations hosting them—that have specialized in low-cost, low-tech, labor-intensive manufacturing activities. That’s because digital technologies hold the potential to reduce the labor-input cost of manufacturing; to facilitate cost-competitive manufacturing closer to end users; and to place emphasis on speed, adaptability, mass customization, and the ability to orchestrate and synchronize supply chains, all of which erode the competitive advantage of the old global supply chain model premised on locating mass production in low-cost regions and shipping to the rest of the world.

To remain competitive, regardless of the sector, manufacturers will need to combine the efficiency of mass production with a buyer-oriented focus on customization; that is, the agility to cost-effectively produce in small lot sizes. This in turn means that each part or product built essentially represents a new product introduction, which thus requires an extraordinary degree of confidence and operational efficiency in every decision made across the product lifecycle—from product definition to design, manufacturing, sales, distribution, operations, and maintenance to the product’s end-of-life. That can be best accomplished by manufacturers leveraging smart, cyber-physical systems that combine model-based definitions (MBD), an end-to-end digital thread, modeling and simulation, the Internet of Things (IoT), artificial intelligence (AI) and machine learning, and seamless supply chain collaboration. In other words, robust technology adoption and the digitalization of manufacturing processes will be required to keep manufacturers, small and large alike, competitive in this rapidly changing environment. And if governments do not want their enterprises to fall behind and lose competitive edge they will need to support their countries’ manufacturing base in making the transition to the coming smart-manufacturing era.

This report first defines digital manufacturing technologies. It then assesses the potential productivity and economic benefits smart manufacturing can produce. It next examines the extent of manufacturing digitalization in the United States. It finds first that data on the topic is sporadic, incomplete, and at this point primarily survey-based. Second, it finds that, for all manufacturing digitalization’s promise, U.S. manufacturers—especially small- to medium-sized enterprises (SMEs), the 250,000 of which account for 98 percent of all U.S. manufacturers—have been particularly slow to adopt digital manufacturing practices, with most companies remaining just at the initial stages of smart manufacturing technology adoption. After examining the available data on U.S. smart manufacturing adoption and investment (in both fixed and digital assets), the report turns to an analysis of how the U.S. federal government and leading states are enacting policies and programs to facilitate manufacturers’ digital transformation journeys. The report concludes by proposing additional policy recommendations that go beyond the current state of practice in the United States and then focuses on how Korea can echo these.