KDI FOCUS Smart Policies for Smart Factories 2019.11.20
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- Under the manufacturing innovation strategy, the government plans to build 30 thousand smart factories by 2022. So, how smart are the factories in Korea? To answer this question, KDI surveyed around 1000 manufacturing plants and found that, when smartization was gauged by the level of data utilization and system integration, the overall level of smartization was low and there was a large disparity between factories. In addition, an analysis of the impact of smartization on the performance of factories revealed that the effects vary in terms of productivity, efficiency and product variety according to the type of production process. Also, daily output, an indicator of the overall performance, increased in all three types of production process. Specifically, if the level of smartization in the bottom 10% factories was raised to the median level, productivity would improve by roughly 9%p. Then, what are the effects on employment? The impact of automation, which replaces human labor with machines, and smartization, which organically integrates the manufacturing system, on employment differ. The demand for all occupations will decrease as automation proceeds. On the other hand, as production-stage is smartized, the demand for production and office workers will decrease while that for process management technicians will not. If the firm takes on an overall smartization of its organization, there will be no negative effects for any occupation. So, what makes a factory smarter? A direct determinant of smartization is the adoption of technologies, but its effect varies with the management practices. Notably, factories become smarter when worker incentives were tied to the use of new technologies. Other determinants include the CEO’s interest in and understanding of smarty factories and the presence of an ICT department and related experts. In all, due to the complementary relationship between the technical and organizational factors, the level of smartization cannot be improved through just one element. (Interview with the author) (Sunghoon Chung, Fellow at KDI) In as much as good reference materials do not make students smarter, not all factories become smarter because they have the latest digital technologies. In order to enhance the effectiveness of policies that are related to smart factories, not only must firms be given support in terms of adopting new technologies, they must also be provided with assistance to ensure that the adopted technologies are well aligned with the organizational environment and management practices. For this, firms should have access to more systematic consulting and training services before new technologies are introduced and for a certain period of time after. (Minho Kim, Fellow at KDI) Smartization does not only apply to firms but also to government support systems. For example, the government could provide recommendations to match firms seeking to smartize with appropriate smart-technology suppliers. It will be difficult to effectively respond to the technological change in the Fourth Industrial Revolution era with the current governance system. Rather, an innovative shift to a network-driven platform is preferred where various interest groups come together to develop strategies. This public-private-academic network can not only formulate road maps but also provide more specific guidelines in various fields, including technical standards, security, labor, and law. Importantly, rather than merely serving as counsel, the network must be given actual authority to implement its strategies for it encourages interest groups to voluntarily gather to resolve problem areas.
□ Smart factories have been found to enhance the productivity of the overall production process, proving to be an appropriate policy as a key strategy for domestic manufacturing innovation. However, to maintain its effectiveness even when the scale and recipients of policy support are expanded, there should be improvements in the policy details and action plans. Above all, making factories smart requires not only the adoption of relevant technologies, but also proper management practices and organizational operations necessary to utilize the new technologies. The government should place the policy priority on helping firms to align workers‘ incentives with the technological change. It is also necessary to smartize the governance system of the overall manufacturing innovation strategy which include smart factories.
- The scale of the smart factory fostering policy, a key element of Korea's manufacturing innovation strategy, is gradually expanding. It is time to check the effectiveness of the policy.
- This study provides policy implications by measuring the level of smartness at the factory-level, analyzing economic effects from enhanced smartiziation, and examining factors that can facilitate the smartization.
- Smart factory is a factory in which workers and equipment exchange information and thus can make better decisions.
- Recent technological progress is drawing much attention to smart factories, but adopting the technology is a way of helping factories become smarter, and not directly transforming them into a smart factory.
- The level of smartization in a factory can be measured based on their levels of system interconnection and data sharing and utilization.
- According to the analysis, the level of smartization in Korean firms is low overall with a huge gap between factories.
- Smartization is found to have varying effects on factories’ performance depending on the type of production process, but in general, smartization helps to significantly improve productivity.
- The US-China trade conflict could directly/indirectly reduce Korea's exports, which in turn, could lead to a fall in GDP.
- The nature of smartization is a fundamental transformation of the manufacturing system, using data as a proxy, and not replacing human labor through automation.
- Automation is likely to curtail labor demand while smartization is found to have different effects on different occupations. In particular, the demand for technicians specialized in process management is not expected to decrease.
- Responsive measures should be developed to support occupations that will likely experience a contraction in employment amid factory smartiziation.
- The adoption of technologies for smartization can be helpful only when it is well aligned with workers’ incentives.
- Technological and organizational factors that determine the level of smartization are complementary, meaning that it would be difficult to smartize by focusing on just one factor.
- To make the policy work more effectively, companies should be provided with management training and consulting support so that they can prepare for technological change. It is recommended support programs for consulting, training and human resource development are systemized.
- The government’s support system needs to be smartized to enhance the efficiency of support and to provide companies with more practical information.
- Effective educational and retraining programs should be provided, targeting occupations that will likely face a decrease in demand, through cooperation between large enterprises and SMEs and between suppliers and users.
- A public-private-academic network platform holding real authority should take the driving role in developing manufacturing innovation strategies and responding to the coming changes.
Ⅱ. Concept of a Smart Factory and Measuring the Level of Smartization
Ⅲ. Effects of Smartization on Performance
Ⅳ. Effects of Factory Smartization on Employment
Ⅴ. Determinants of Smartization
VI. Conclusion and Policy Suggestions
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