Sector Spotlight: The Future of Manufacturing
Industry 4.0, Smart Factories, and Advanced Manufacturing are all terms you may have come across in recent years that share a common theme: a label for the technologies that will shape the future of manufacturing. While these terms have floated around for some time, I believe that the current environment presents an opportune time to re-examine these topics under the backdrop of recent advancements in AI, post-pandemic supply chain learnings, inflation, and government incentives driving support for North American manufacturing.
A Cornerstone of the Canadian Economy
Contributing $174 billion to the GDP, manufacturing makes up approximately 10% of the Canada’s total economic output. This sector is also a significant employer, directly providing jobs to 1.7 million people and indirectly supporting an additional 3.6 million through related supply chain activities. Together, these represent around 30% of all economic activity in Canada, underscoring the sector's pivotal role in both economic growth and job creation1.
The manufacturing landscape in Canada is diverse, encompassing a variety of subsectors that contribute to its overall impact. However, as shown in the chart below, there is a dominance of low-technology and low-value-added industries such as food production, petroleum, metal, and wood products. This is in contrast to nations like Germany, Japan, and South Korea, which are distinguished by their high-value-added sectors like automotive, consumer electronics, machinery, and advanced chemicals.
The Fourth Industrial Revolution: A Digital-Physical Convergence
Industry 4.0 or the Fourth Industrial Revolution (FIR) marks a transformative chapter in manufacturing following the past three revolutions which were characterized by steam-powered machinery, electricity-fueled mass production, and digital automation.
Unlike its predecessors, the FIR is defined by a seamless integration of the digital and physical worlds. Key technologies driving this integration include:
Digital Twins: Virtually simulates, optimizes, and predicts performance to enhance real-world manufacturing outcomes.
Robotics and Advanced Automation: Increases production speed and precision, reduces human error, and improves safety.
Internet of Things (IoT): Connects and monitors manufacturing equipment to optimize operations and reduce downtime.
Artificial/Virtual/Extended Reality: Trains workers and designs products with immersive simulations, improving quality and efficiency.
Additive Manufacturing (3D Printing): Allows for complex, customized production on-demand as well as faster prototyping.
Big Data and Analytics: Enables predictive maintenance and optimized resource management through data-driven insights.
Cloud Computing: Provides scalable, flexible manufacturing resources, enabling cross-facility collaboration and innovation.
Artificial Intelligence and Machine Learning: Enhances decision-making and adapts operations dynamically.
Today, more than ever before, these technologies are converging to create a new generation of smart factories that help to address the current challenges faced by manufacturers, including labor shortages, energy transition, supply chain disruptions, and inflation.
According to a recent Deloitte study:
“A striking 86% of surveyed manufacturing executives believe that smart factory solutions will be the primary drivers of competitiveness in the next five years. According to another recent survey, manufacturers anticipate that the industrial metaverse could lead to a 12% gain in labor productivity, which might help address the ongoing labor shortages.”
Implications for Canadian Manufacturing
The World Economic Forum runs an initiative called the Global Lighthouse Network which aims to identify and showcase a community of manufacturers that demonstrate leadership in using Industry 4.0 technologies to “transform factories, value chains and business models, for compelling financial and operational returns.”
The Lighthouse Network was launched in 2018 and there are currently 153 Lighthouses. Notably, there is not a single one in Canada.
This gap underscores the need for strategic action to harness these technologies fully, as advocated by Canadian Manufacturers & Exporters (CME). The organization shared a recent report calling for policy changes to stimulate innovation and technology adoption within the sector. The 22 recommendations were categorized under four pillars, two of which involve expanding and upskilling Canada’s manufacturing workforce and stimulating innovation, investment, and adoption of advanced manufacturing technologies.
The COVID-19 pandemic has prompted a critical reevaluation of global supply chains, highlighting the growing trend towards nearshoring. This presents an significant opportunity for Canada to re-position itself as a premier manufacturing hub. Our geographical proximity to the United States, the world's largest consumer market, combined with our access to a highly skilled labor force and a well-established reputation for safety and quality, uniquely positions us to win. While Canada may not compete on labor costs, we can instead adopt a strategy akin to Germany's focus on high-efficiency, high-quality production. By emulating this model, Canada can benefit from the growing demand for sophisticated products such as electric vehicles and batteries, and aspire to become the "Germany of North America."
The Smart Manufacturing Landscape
To better understand the Smart Manufacturing landscape, I like to categorize startups according to the core functions they enhance within their customers. This approach aims to keep the focus on the application and integration of these technologies into existing operations. These core functions and a sample of applicable Industry 4.0 technologies are illustrated below:
We see immense potential for disruption and innovation across the manufacturing sector globally and in North America especially. As investors, our goal is to propel the pace of adoption forward by investing in the technology startups that make this revolution possible as well as the manufacturers leading the way in leveraging these tools.
Canada is home to a number of early to mid-stage companies innovating across all core functions in addition to several new-age manufacturers who utilize these technologies to disrupt traditional industries. Our non-exhaustive Canadian Smart Manufacturing Landscape aims to showcase some of these players.
We’ve only scratched the surface thus far and I’m excited by the prospect of putting Canadian and North American manufacturing back on the map. If you think we missed highlighting a company or if you are in the Smart Manufacturing space, please reach out - we’d love to chat!
Some suggestions for further reading below:
About Maverix Private Equity:
Maverix seeks to make significant minority investments in disruptive companies with proven business models who have potential for rapid growth. We seek investments primarily in Canada and the US with a focus on the Consumer Retail, Healthcare & Wellness, Financial Services, Transportation & Logistics, and Work, Live, Play & Learn sectors. Our investment size ranges from US$20mm to $100mm+.
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