production and consumption in the fourth industrial...

Production and Consumptionin the Fourth Industrial Revolution

(Summary)

2017. 4

Report of Future StrategyMinistry of Science and ICT

Committee of Future Preparation,

KISTEP, KAIST

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.

1　‌‌The Future Preparatory Committee analyzed the major issues that Korean society will face in the future and published

『Future‌Issues‌of‌Korea』‌in‌July‌2015.

| 1

Figure 1 Manufacturing revolution: Correlation between future issues and principle technologies,Future Issues of Korea (2015)

Production and Consum

ption in the Fourth Industrial Revolution

Introduction

What is the Production and Consumption Revolution? | 2



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.

■ The meaning of the “production and consumption revolution”

Figure 2 A definition of the “production and consumption revolution”

Figure 3 Transformation of the value chain due to the production and consumption

I . What is the Production and Consumption Revolution?

The Outlook of Production and Consumption | 3



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.

■ Drivers of the production and consumption revolution

Figure 4 Drivers of the production and consumption revolution

II . The Outlook of Production and Consumption




As technological advancements become interlinked with social, economic, and

environmental transformations, production and consumption undergo rapid and far-

reaching 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 eco-

friendly 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, humans-

machines, 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.

■ Major trends in the production and consumption revolution

Figure 5 Major trends in the production and consumption revolution




Changes in future production and consumption can be classified into the six above-

mentioned 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

these‌sectors‌into‌①automobile,‌②‌transportation,‌③‌energy,‌④medical‌care,‌⑤‌retail,‌

⑥‌knowledge‌service,‌⑦‌food,‌and‌⑧resource.‌Professional‌workshops‌were‌also‌held‌to‌

predict specific examples of future innovations in production and consumption, and the

expected effects of these changes.

■ Cases of innovation in future production and consumption

Figure 6 Representative cases of innovation in future production and consumption

In the fourth industrial revolution, Korea is facing competition from both developed and

developing countries. However, a 2016 report1 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

experts‌from‌each‌sector.‌The‌study‌addressed‌the‌perception‌of‌①‌the‌degree‌to‌which‌Korea‌will‌

be‌impacted‌by‌future‌changes,‌②‌the‌level‌of‌industrial‌preparedness,‌and‌③‌the‌level‌of‌regulatory‌

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.

1　‌‌B.‌Baweja‌et‌al.,‌「Extreme‌automation‌and‌connectivity:‌The‌global,‌regional,‌and‌investment‌implications‌of‌the‌Fourth‌

Industrial‌Revolution」,‌『UBS‌White‌paper‌for‌World‌Economic‌Forum』,‌2016.

Korea’s Place in the Wave of Production and Consumption Change | 6



Figure 7 UBS Evaluation of Korea’s 4thIndustrial Revolution Preparedness

Figure 8 Preparedness Level of KoreanIndustry by Sector

■ The status quo in Korea

III . Korea’s Place in the Wave of Production and Consumption Change

Korea’s Place in the Wave of Production and Consumption Change | 7



■ 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

and‌consumption‌examined‌earlier,‌ industry‌sectors‌were‌divided‌into‌①automobile‌②‌

transportation,‌③energy,‌④medical‌care,‌⑤retail,‌⑥knowledge‌service,‌⑦food,‌and‌⑧

resource.

Figure 9 The Present state and outlook of major industries by sector

Future Strategies to Lead the Era of the Production and Consumption Revolution | 8



Figure 10 Future Strategies Leading 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.

Ⅳ . Future Strategies to Lead the Era of the Production and Consumption Revolution

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.

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.




■ Building a futuristic business model

Figure 11 The direction of innovation in production and consumption processes




■ 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 real-

life 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.




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.

■ Establishing systems and infrastructure




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.

■ Establishing new culture and ethics

| 13



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.

Concluding Remarks

production and consumption in the fourth industrial...

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