CPA INSIDER

How Industry 4.0 will change accounting

Here’s what CPAs need to know about the next industrial revolution.
By Lea Hart

History class teaches us about the Industrial Revolution of the late 18th century, when steam power revolutionized industry.

But some may not realize this wasn't our only industrial revolution. As this Deloitte video explains, a second occurred in the 19th century, when electricity and assembly lines led to mass production, and a third in the 1960s, when advances in computing allowed us to program machines and networks.

Today, we are on the verge of a fourth industrial revolution, dubbed Industry 4.0.

"Industry 4.0 is the next evolution of automating processes, making them smarter and better," said Brian Heckler, CPA, U.S. leader of KPMG's Industrial Manufacturing Sector.

So just what does that mean? And why should CPAs care? Heckler and others discuss Industry 4.0, the financial impact across industries, and why CPAs need to prepare for those changes.

"The most important thing is just being on top of this," said C.J. Skender, clinical professor of accounting at the University of North Carolina's Kenan-Flagler Business School. "If you're not on top of it, you're falling behind, and then somebody takes their business elsewhere."

What is Industry 4.0?

Industry 4.0 began in Germany several years ago as a strategic initiative to provide advanced manufacturing solutions, Skender said.

To fully understand Industry 4.0, it's important to understand the internet of things, said Walter Merkas, senior manager in WithumSmith+Brown's cloud solutions and management consulting practice.

The internet of things includes anything with an on-off switch that's connected to the internet and/or other internet-enabled devices, as this article from Forbes explains. It includes devices such as computers and cellphones but also things like coffee makers and parts of machinery.

The internet of things and that communication between devices is part of what's made Industry 4.0 possible, Merkas said.

KPMG's 2016 report The Factory of the Future describes Industry 4.0 as the full integration of information and communication technology and automation technology in the "factory of the future."

Everything in the factory is on a network that also includes sales partners, suppliers, equipment manufacturers, and clients, the report said.

The results will be numerous. Devices will not only communicate, but also use information and data analysis to drive future actions, according to Deloitte.

One such result will be the evolution of the "digital twin" in manufacturing, which allows new ways to optimize product design and functionality, Heckler said. Using artificial intelligence, machine learning, advanced analytics, and more, companies will be able to build a product in the digital world that allows more advanced views and smarter design than ever before. This allows companies to do more rapid prototyping than with physical products, experiment with new designs at a lower cost, and improve communication with the extended supply chain.

Deloitte's video also points to decreases in downtime on the production floor, ensuring manufacturers never start work that can't be finished with the materials and labor on hand and providing an opportunity for manufacturers to grow new sources of revenue, such as a data business that can become as large as their product business.  

Merkas shared a specific example of how manufacturers might sell data in addition to products: A tractor manufacturer builds a tractor that can transmit data. The tractor tracks a farmer's seed and fertilizer habits, which the tractor manufacturer can sell to seed and fertilizer companies, which can in turn market their products to individual farmers based on their particular usage and needs. "It may be that they sell more data than tractors," Merkas said.

What the future holds

Many argue we're only on the verge of Industry 4.0, Merkas said.

"The introduction is here in the theoretical arena," he said. "Companies will start to experiment more with the internet of things."

In large part, companies for now are testing the internet of things in small ways, rather than making across-the-board changes. As those connections grow, manufacturers will build a collection of data, he said. In that same vein, workers are still learning to convert that data to knowledge useful in decision-making, Merkas said.

"In five years, I think we'll likely be looking at new business models," he said. "That will include quicker speed to market and the ability to respond more rapidly to customers."

Heckler calls the deployment of Industry 4.0 an "evolution, not a revolution," in that it will be difficult to see exactly when it starts and when it stops. And it may vary from company to company.

"Some companies say, 'We absolutely have to be connected,'" Heckler said. "But some companies say, 'We see that, but we're not sure it applies to our customers or is something we can monetize to extract value.'"

That second group of companies tends to believe they have cemented a competitive advantage by doing business in a certain way, he said. However, those companies may face problems if a competitor finds a way to provide the same product with increased value or better customer retention.

"You see that happen in other business models," Heckler said. "Look at the retail sector being disintermediated by Amazon."

How CPAs can help

Changes brought forth by Industry 4.0 will impact the financial side of these businesses.

An investment analysis will need to take place, Heckler said, as industries look at the cost of change and weigh that against potential future profits.

"How well is finance really able to predict the profitability impact and the return-on-investment analysis?" Heckler said. "If we buy this new equipment, if we invest in new technology, can we predict and quantify its impact with a similar degree of comfort as we can with traditional investments?"

CPAs can help companies with pricing analysis when a product improves in functionality, helping to determine whether the company can charge more for filling a customer's need, he said. Or they might examine cost savings. If production is more effective and efficient, what will the company save in costs?

With this new connectivity among machines also comes new risk, Heckler said.

CPAs can help their clients analyze the risks that will arise, he said, including liability for product misuse or unintended use, as well as risks related to being more connected within a factory or outside the enterprise. As recent ransomware attacks have shown, connected devices have a level of vulnerability, Heckler pointed out.

"The enterprise risk-management process has not really caught up to assessing the unique new risks that might arise due to this connectivity," Heckler said.

Contract management, terms and conditions, and responsibilities and boundaries will all see changes, and CPAs can help, he said. Companies will need to address frontiers such as ownership of data and standards for transmission, according to Heckler.

Finally, CPAs will be crucial in helping companies understand new value streams and new business streams coming from the transmission of all that data, Merkas said.

"If you specialize in manufacturing, information is going to come from a sensor—how are we going to use the data to make better decisions?"

Lea Hart is a freelance writer based in Durham, N.C. To comment on this article, contact Chris Baysden, senior manager of newsletters at the AICPA.

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