Industrial intrigue: China's industry 4.0

“I have visited numerous highly automated factories in China, but in terms of Industry 4.0, it’s all still theory,” says David Levy, a China-based independent manufacturing consultant and also general manager of GlobTek, a technology-driven start-up. “I haven’t seen much happening.”

Industry 4.0 is a buzzword that almost defies definition. To many, though, it is inextricably tied to two characteristics: automated manufacturing and smart communications channels that integrate supply chains, leveraging data to achieve greater operational efficiency.

Leading manufacturers mainly focus on the first aspect. General Motors (GM), for example, prefers the term “smart manufacturing” where emerging technologies such as collaborative robots and predictive machine maintenance are installed in its plants. “We’ll apply [industry 4.0] where it works best, and is needed most,” says Dan Grieshaber, GM’s director of global manufacturing integration.  

The reason is obvious: no single company can unilaterally upgrade its supply chains to a level where they qualify as industry 4.0. They prefer to start with what they can control, explains How Jit Lim, a senior director at Alvarez & Marsal.

The China-US trade tensions have made it even harder for those with complex or high-value sourcing models to be globally interconnected. 

Some investors go so far as to question the validity of industry 4.0 in a China context. “Industry 4.0 is a false proposition,” one tech-focused GP tells AVCJ. “The demand is not there. Leading manufacturers generally have stable orders of large volumes. They don’t need to invest in the supply chain interaction.” 

Fabric first

However, one area in which the phenomenon does appear to be taking hold is textiles, which is among China’s largest and most fragmented industries. In 2018, the dollar value of textile exports grew 8.1% to $119 billion, but overall capacity is falling due to industrial consolidation and the relocation of manufacturing to Southeast Asia. Cloth and yarn production fell 21% and 27%, respectively last year from their 2016 peaks, according to the National Bureau of Statistics.

Against this backdrop, Smart Fabric, which is seeking to digitize the textile industry, recently received a $100 million round from investors such as Tencent Holdings, Sequoia Capital China, and Vision Plus Capital. 

The company started out as a software provider, but now it oversees China's largest weaving and dyeing operation. Smart Fabric has leveraged its technology to bring together 2,000 small-scale textile manufacturers and serves 200 domestic and global brands, including H&M, Walmart and Calvin Klein. 

“We have built China’s first cloud-based factory. We provide a connected ERP [enterprise resource planning] and MES [manufacturing execution systems] solution to our member factories – they are normally disconnected – so that the orders are linked automatically to production.” Charles Fu, Smart Fabric’s founder, tells AVCJ. “When we receive an order, we dismantle it into dozens of procedures, match these procedures with specific machines in our network, and issue production orders to different factories.”  

While it takes large textile factories 30-45 days to turnaround an order, Smart Fabric claims to have shortened its process to 7-14 days. While a large facility has many machines, only 10 might be customized to work with a specific fabric. Reaching out through the cloud, Smart Fabric can find the capacity to fulfill the order quickly. “With orders involving several different fabrics and multiple manufacturing procedures, it’s difficult to arrange all the machines in the most efficient way and deliver on time. I can take care of that,” Fu adds. “My goal is to keep machines working on the same product  nonstop. We use algorithms to realize that.”

Textiles has become so automated that most manufacturing plants only have three or four staff. Smart Fabric adds a “supply chain brain” that coordinates these activities more efficiently, notes Qi Wang, a partner at Vision Plus Capital. As such, it fulfills the two basic functions of industry 4.0. Baibu, a B2B trading platform for textiles and fabrics, is moving in the same direction. The company is said to be aggressively building out a network of small manufacturers and a new funding round currently underway will support these efforts. Baibu raised $100 million as part of its Series C last November. 

Imperfect transposition

Applying this model to other industries is not straightforward. Wang of Vision Plus claims it will only work where an industry is automated and standardized with little human interruption and there is an opportunity to offset inefficiencies through better supply chain management. These conditions can be contradictory.

Computer numerical control (CNC) manufacturing - using automated machining tools and 3D printers to produce samples for mobile phone cases and circuit boards - is a possibility. Ruiting Zheng, a vice president at Yunqi Capital who focuses on manufacturing, observes that sample production is a large and fragmented industry. However, for now it lacks standardization. 

The broader question posted by Smart Fabric is whether industrial digitization can be achieved solely through software. Fu gives an unequivocal no – small and medium-sized enterprises, and some large manufacturers, are simply unwilling to invest in IT. This view is echoed by Yipin Ng, a co-founder of Yunqi: “You talk about industry 4.0 but some manufacturers are still in 1.0. Why would they invest heavily in technology upgrades when they could move to Vietnam or Cambodia next year?”

Nevertheless, some third-party solutions providers targeting industry 4.0 upgrades have attracted VC investment. In June, RootCloud, an industrial internet-of-things platform incubated by Sany Heavy Industry,  received a $500 million Series B round from the likes of Hejun Capital, Zw Ventures and Matrix Partners China. Meanwhile, Xreacloud – which came out of the state-owned heavy industry manufacturer XCMG’s incubator – listed on the New Third Board last year. Not everyone is optimistic about their prospects.

“All automated manufacturers in heavy industries have their own standards. There are already a dozen mainstream contracts and countless add-ons for different scenarios. Getting on-site data is a labor-intensive process,” says one investor. “Some service providers have responded by changing direction and going into supply chain finance or selling machines.”

Xreacloud, which is in the process of delisting, is one of them. Although it claims to be the first Chinese industrial internet platform to go public, most of the company’s revenue comes from providing services and selling goods to its parent – XCMG – and related subsidiaries.

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• Topics
• Greater China
• Industrials
• Technology
• China
• manufacturing
• Vision Plus Capital
• Yunqi Partners