In his 2016 policy address, Hong Kong Chief Executive CY Leung identified a number of future-focused industries - robotics, elderly care and financial technology - as potential growth drivers for Hong Kong in the years ahead.

He also singled out the process of re-industrialisation, which would appear to be more connected with Hong Kong’s past than its future. In the 1980s and 1990s virtually all of Hong Kong’s manufacturing moved to the Mainland as costs rose locally and China’s economy opened up. Is it realistic to expect factories to return and manufacturing to once again play a major role in an economy now based almost entirely on services?

The answer, according to one expert in emerging manufacturing trends, is a qualified yes. Kay Matzner is an international research and project manager with the Munich-based Fraunhofer-Gesellschaft (FhG), Europe’s leading applied research organisation. He has worked with the Hong Kong Science and Technology Parks Corporation (HKSTP) to conduct training and presentations on ‘Industry 4.0,’ the catch-all term for a range of ‘smart’ manufacturing techniques and technologies that have been applied in Germany with considerable success. He believes Industry 4.0 “makes the revival of Hong Kong’s manufacturing sector conceivable, up to a certain degree.”

Industry 4.0 applies the connectivity and digitisation that have transformed industries such as retail and financial services to manufacturing - enabling greater customisation, automation of key processes and improved efficiency. Examples include using real-time monitoring to predict inventory or parts shortages before they occur; analysing data to identify inefficiencies in the production process; or using an interface to control a robotic arm during a cleaning operation.

Industry 4.0 also encourages a modular approach where production lines can be quickly and efficiently rejigged to meet changing requirements. Taken together, these kind of enhancements in theory allow companies to ‘do more with less’ in terms of space and manpower, eliminating some of the pressures that led to the hollowing out of Hong Kong’s industry decades ago.

“Labor costs are losing significance as an element of production costs in the working worlds of Industry 4.0,” says Matzner. However, even cutting-edge technology can’t contend with Hong Kong’s notoriously high property prices. Fully-automated production lines will continue to require a fair amount of space, so “a return of pure manufacturing operations from China to Hong Kong will most likely remain the exception,” Matzner explains.

Where reindustrialisation in Hong Kong could succeed, Matzner believes, is with the fully automated manufacturing of highly-customised products - such as made-to-order clothing - in limited quantities, for rapid delivery to local consumers. Smart manufacturing can also extend to the optimisation of delivery schedules and shipping costs, particularly in a relatively small, highly-connected market, bolstering’s Hong Kong credentials as a base for specialised manufacturing operations.

Hong Kong’s more liberal data laws also give it an edge over the Mainland because so much of Industry 4.0 depends on data capture, sharing and analysis. Manufacturers may therefore prefer to locate some of the strategic or more technology-driven aspects of their supply chains, such as data processing, in Hong Kong while the bulk of actual production takes place elsewhere, Matzner says. A more predictable legal environment, highly developed financial sector and better access to international know-how add to Hong Kong’s attractiveness as a base for the higher value-added aspects of manufacturing, such as research and development, sales and fund-raising.  

The German government’s 2025 digital strategy identified several challenges to the adoption of Industry 4.0 by the private sector. Matzner, through his conversations with local companies, believes that the issues for Hong Kong will be much the same. The key challenges include the large investment in technology required, uncertainty about the economic benefits and an inadequately prepared workforce.

Government support will be critical if Industry 4.0 is to flourish, meaning “the involvement of every relevant stakeholder, such as industry, research, academia (and the) unions,” Matzner says.

Germany has responded by establishing centres of Industry 4.0 excellence and model factories, and has also subsidised the planning of Industry 4.0 rollouts for SMEs and smart manufacturing research to some extent. Matzner advocates a similar approach in Hong Kong. “By pooling and passing on (companies’) know-how, publicly-funded entities such as centres of Industry 4.0 excellence have an impact on minimising the expenditures required (for companies) to modify operations.”

“The government will need to create incentives that make it interesting for companies to set up (Industry 4.0-driven) operations and activities in Hong Kong,” he adds. “These might include the availability of properly trained staff, access to information on relevant technologies or funding options for essential investments.”

The government’s recent policy address outlined several promising steps in this direction, including the construction and repurposing of industrial space and fee exemptions on testing and certification facilities in industrial buildings.

For all the technology at play in what some are referring to as the ‘fourth industrial revolution,’ software and robotics alone will not revolutionise the modern factory, and Matzner notes it is vital for markets like Hong Kong to pay close attention to the development of a new blend of skill-sets if they want re-industrialisation to thrive. Factory workers won’t necessarily be displaced by automation, but they are likely to see their roles change significantly with more technological interaction. 

“The boundaries between the disciplines of computer science, mechanical engineering and electrical engineering blur in a ‘smart factory,’ and engineers work at the interface between hardware and IT,” he says. “This means that knowledge of IT -- software, programming and electronics -- will become indispensible in the future.”

Companies, and SMEs in particular, should also bear in mind that “there aren’t any off-the-shelf approaches to implementing Industry 4.0,” Matzner says. Major German manufacturers have established internal research and consulting units to advance Industry 4.0 implementation, but smaller firms with more limited resources typically rely on outside consultants.

However it’s tackled, FhG advocates a road to Industry 4.0 adoption that includes extensive training to bring responsible executives up to speed on the solutions, strategies and technologies available, as well as internal workshops that connect all these to the overall corporate strategy. Ideally it’s only after such a process, Matzner says, that "technologies and solutions are tested, business and implementation plans are devised, and the necessary investments are budgeted and made.”

© 2016 The Economist Intelligence Unit Ltd.  All rights reserved. 
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