The U.S. Economy and the Industrial Internet

by Reihan Salam

Back in October, we discussed Eli Dourado’s optimism about the potential of what he calls “kinetic computing,” i.e., computer-based products that enhance the efficiency of physical processes. Last week, Marco Annunziata, the chief economist of General Electric, published a brief summary of his recent research on the “industrial internet”:

In a recent report (Annunziata and Evans 2012), my co-author Peter Evans and I have looked at the productivity-enhancing potential of the ‘industrial internet’, a network that binds together intelligent machines, software analytics and people. The declining cost of instrumentation is beginning to enable a much wider use of sensors in machines ranging from jet engines to power generation turbines to medical devices. Software analytics can then leverage the enormous amount of data generated in order to optimise the performance of individual machines, fleets and networks. This means, for example, having a better insight in the performance of a jet engine and being able to anticipate mechanical failures so that maintenance can be performed in a pre-emptive way, minimising the delays that occur when the problem emerges shortly before take-off. It means being able to track the exact location of medical devices in a hospital and whether they are in use or idle, so that patient admissions and medical procedures can be scheduled more efficiently, yielding better health outcomes to more patients at lower cost.

The potential benefits are sizeable. Just a 1% gain in fuel efficiency over fifteen years would yield $30 billion in savings in aviation and $66 billion in the power generation industry, while a 1% efficiency gain would yield $63 billion in the healthcare industry and $27 billion in the rail industry. Our study focuses on the sectors where General Electric has a strong presence, because those are the sectors we know best and where we are seeing these gains materialise. But the industrial internet has the potential to impact a much wider range of industries, as well as services. [Emphasis added]

Annunziata tentatively suggests that the productivity-enhancing impact of industrial internet technologies might match that of the first wave of internet technologies. Dourado maintains that the potential of kinetic computing writ large might be substantially greater.

Over time, one assumes that industrial internet technologies will diffuse across economies, and indeed that the most successful will diffuse quite quickly. But consider the following from Charles Fishman’s recent article on insourcing in The Atlantic:

* Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.

* The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)

* In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.

* American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.

* U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore. 

These factors will interact with industrial internet technologies in a number of ways, e.g., U.S.-based firms might be somewhat more inclined to deploy energy-intensive applications than firms based elsewhere, yet firms in countries with high energy costs might be more inclined to deploy energy-saving applications. The flexibility on the part of labor Fishman describes might facilitate the kind of organizational innovation that will allow firms to make the best use of industrial internet technologies, but firms in countries with more fractious labor relations or more rigid labor practices might embrace labor-saving innovations more readily. It will be very interesting to see how this plays out.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.