Why innovative manufacturing and circularity are key for a resilient manufacturing industry post-COVID-19

Why innovative manufacturing and circularity are key for a resilient manufacturing industry post-COVID-19

By Teresa Domenech, Lecturer in Industrial Ecology and the Circular Economy at University College London (UCL), and Smeeta Fokeer, Research and Industrial Policy Officer at the Department of Policy Research and Statistics (PRS) of UNIDO. 

May 2020

This opinion piece is part of a series of articles by UNIDO's Department of Policy Research and Statistics.

Key Messages

  • The resilience of a country’s industry and its ability to perform and adjust to shocks hinges on its diverse, dynamic, innovative and collaborative capacity, which emerges from its industrial commons (e.g. tacit knowledge and capabilities that develop through industry interactions).
  • Recovery packages for a post-COVID-19 manufacturing industry must establish the basis for disruptive change towards inclusive and sustainable industrial development.
  • A more resource efficient circular manufacturing model needs to replace the current linear production systems, which are highly wasteful and polluting, by enhancing the symbiotic relationship between local consumption and production cycles to achieve sustainable production and consumption.
  • Local and regional manufacturing networks, spatial organization of manufacturing into eco-industrial park, green scalable digital technologies and I0, and policy frameworks supported by global policy commitments can act as catalysts to spur the transition.

The COVID-19 crisis has revealed and exposed both the significance of and the risks associated with our current manufacturing systems. Shortages of medical equipment and disruptions of essential commodities have raised awareness of manufacturing’s pivotal role in both advanced and developing economies. These shortages and supply disruptions have also exposed the drawbacks of relying primarily on a globalized structure of production with complex supply chains, the division of innovation and manufacturing, and just-in-time production. While there is no denying the benefits generated by globalized production systems for both developed and developing countries, they have led to an increasing fragmentation of knowledge along the supply chain, where the design of the product and its production become two detached processes, eroding the connections resulting from ‘learning by doing’ and reducing the understanding of the resource implications of final products. Not only has this disconnection become problematic during the pandemic, the consumer’s detachment from the manufacturing process also has severe implications for both innovation and the environment.

The importance of innovation in manufacturing

Innovation does not occur in a vacuum but rather builds on existing skills and products. In the context of rapid technological change, a firm’s competitive advantage is highly dependent on its dynamic capabilities. (Teece, D., Pisano, G., Shuen, A., 1997) This refers to the interaction between the competences internal to the firm and those generated by the context within which the firm’s activities take place. Industrial commons (Pisano, G. and Shih, W., 2012) refers to the knowledge and capabilities resources (technical, design and operational) that are shared within an industrial sector, such as “R&D know-how, advanced process development and engineering skills, and manufacturing competencies related to a specific technology”. Industrial commons tend to have a geographical component as a result of people (skills) and tacit knowledge moving from one firm to another within a region, or collaboration between firms in a supply chain. This can be clustered within a specific sector as well as across sectors of activity. The outsourcing of parts of firms’ production can lead to a progressive erosion of industrial commons to the extent that their entire design and manufacturing capability is lost as knowledge embedded in production emigrates to a new region. Once lost, the industrial commons are nearly impossible to retrieve.

A manufacturing system that relies on a high degree of specialization in the manufacturing process (super-specialization) along supply chains creates divisions within manufacturing between R&D, design activities and assembly. Many firms have offshored major parts of their production, but attempted to retain high value production activities such as design and research. This leads to a progressive deterioration of countries’ and firms’ industrial commons and may compromise their ability to create and innovate. Industrial commons are relevant to incremental sector-specific innovation, but also to cross-sectoral disruptive innovation, morphing across sectors in a way that is difficult to predict. (Hill, Adrian V (ed.), 2020) By separating manufacturing from the rest of the value chain, we risk losing out on the transfer of important tacit knowledge, thereby damaging any prospects of unexpected and the most radical innovations.

The COVID-19 crisis has exposed the fragility of the idea of separating R&D and manufacturing processes. Where manufacturing is embedded in local and regional networks, economies have been able to respond faster and adapt to the new realities created by the pandemic, particularly regions with businesses that have been able to transfer skills to the production of different goods. Take the example of the production of personal protective equipment (PPE). Manufacturers in countries such as Turkey and China have been able to adapt better because they developed industrial commons with a combination of manufacturing capacity, access to raw materials and importantly to knowledge, as well as quality assurance and standardization capabilities.

The pandemic has highlighted the enhanced resilience of those economies with a more balanced industry mix and uncovered new opportunities offered by local and regional manufacturing. Manufacturers, grassroot initiatives and fab labs have consolidated their technology and know-how to develop PPE, components and COVID-19 clinical care equipment, such as mechanical suction pumps and ventilators. Such firms have the capacity to innovate, to respond to changes fast and furthermore demonstrate that collaboration is not a zero sum game but a positive one, where interaction across extended networks spurs innovation and adapts technology and resources in new extraordinary ways.

The importance of the environment in manufacturing

The current global manufacturing model tends to still rely on linear production systems, which are highly wasteful and polluting. The dissociation between production and consumption systems has also had profound environmental consequences, shifting burdens of consumption towards production and extraction centres and blurring the understanding of the implications of current consumption patterns. The negative impacts of manufacturing, referred to as ‘externalities’, are rarely fully appreciated by consumers since the consequences, which often occur in developing countries and emerging economies, remain both out of sight and out of mind for western consumers. Global production chains make it highly problematic to trace the manufacturing process from resource extraction to processing of raw materials, the transport of goods and the final product. While new technologies such as blockchain may provide a cost effective and reliable solution, their use is still far from mainstream. The environmental and social impacts associated with each of the phases of the process, especially when manufacturing takes place in unregulated environments or under laxer conditions, is even more difficult to account for. In addition, since primary resource industries give rise to environmental impacts that are disproportionate to the associated added value (Clift and Wright, 2000) , it further strengthens the case for shorter value chains and for re-use and recycling of manufactured goods. In conclusion, the dichotomic model of manufacturing creates divisions between production and consumption, which reduces the visibility and (socio-economic) traceability of consumption. All of this has major global implications.

Manufacturing has earned its place as a mainstay of the recovery strategies of post-COVID-19 economies. The new normal requires us to rethink the way we produce and consume and to shed more light on manufacturing and its role in resilient diverse economies. In fact, a symbiotic relationship between consumption and production cycles will be key to a sustainable future. We propose four main enablers for diverse, resilient and sustainable manufacturing in a future post-COVID-19 world centred around innovation and circularity. 

Contribution of local and regional manufacturing networks to resilient economies

Nurturing industrial commons hinges on strengthening the role of local and regional manufacturing networks. While many companies continue to contract their production offshore, or simply import semi-finished and finished manufactured goods, a new wave of manufacturers is nurturing the connection with the local and regional industrial fabric. Recent years have seen a wave of re-shoring of activities in developed economies, which may account for as much as 15 per cent in the UK and one in three companies in Germany. (Adamson, G., 2018). The reasons for this have been attributed to a combination of factors including: quality standards, lead times, intellectual property, links between design and manufacturing, research and development, skills and knowledge, better social and environmental conditions and threats associated with regime change or trade policy. For developing countries, enhancing the links to knowledge, research and development through local and regional networks can positively disrupt current manufacturing models which focus on shifting labour and resource-intensive activities towards higher value activities, ensuring that manufacturing is fully connected with local networks, and providing spaces for experimentation and innovation, which can then be generated through manufacturing.

Reinforcing the connection between local, regional and global supply chains is also consistent with principles of the circular economy and business models oriented towards the preservation of the value of resources, which motivates new investment activities such as reuse, repurposing, remanufacturing and recycling. Closer linkages between production and consumption cycles and their connection with demand-led innovation, driven by locally relevant problems and solutions, set the foundation for more sustainable consumption and production patterns (SDG 12).

In line with SDG 9 (Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation), we propose a paradigm of co-evolution where research, design, development and manufacturing are closely knitted into innovative networks that understand local needs and are mindful of ecosystem boundaries. This requires setting the conditions for business eco-systems to emerge and to allow for a sharing of resources, exchange of knowledge and materials (including energy and heat), and the promotion of circular models where products, components and materials are recovered within productive cycles, fulfilling the goals of SDG 12 (Ensure sustainable consumption and production patterns). This model should still be globally connected but should ensure close interlinkages with local and regional networks of production and consumption, leading to high social and environmental standards, opportunities for the circular use of resources, and better fulfilment of local needs. For developing economies, this translates into nurturing high value processes and innovation within local networks and minimizing negative externalities through socio-technological innovation.

Spatial organization of manufacturing facilities is key to performance

The role of strategic planning is to spatially integrate production, innovation and technology to activate the circular economy potential and transition to new forms of sustainable manufacturing. Regionally connected networks play an essential role in mobilizing and ensuring safe re-utilization of recovered resources. 

Global players in manufacturing engage across multiple supply chains at global, national and regional levels. The spatial distribution of such global manufacturing hubs depends on a number of factors, including access to raw materials, labour, technology, skills and networks of infrastructure. Strategic spatial planning is essential in securing a connected and spatially balanced business ecosystem, which enhances collaboration along and across supply chains, promotes innovation and ensures compatibility with local ecosystems. Eco-industrial park initiatives such as those in China, India and Morocco and UNIDO’s global eco-industrial park programme in developing and transition countries, have the potential to combine these aspects in spatially integrated systems. In an eco-industrial park, companies typically collaborate and benefit at three main levels: a) physical exchange of materials, energy, water and by-products, b) sharing of infrastructure, thereby leading to the creation of shared economic opportunities as well as improved environmental performance and ecosystems, and c) learning from each other by exchanging knowledge and innovation. Networks of eco-industrial parks can form the fabric of new manufacturing facilities, ensuring compatibility of economic development, innovation and environmental protection. This new manufacturing system builds on smart infrastructural networks covering the following dimensions: 1) spatial connectivity through the provision of efficient and optimized inter-modal physical transport networks and cloud infrastructure promoting tighter digital connections; 2) access to green and digital technologies, coded knowledge but also tacit knowledge; 3) circular economy practices and infrastructure that may include material recovery and consolidation facilities, spaces for secondary material storage and remanufacturing, development of take back systems and reverse logistics.

Green, circular, scalable, customizable technologies and Industry 4.0

The beauty of manufacturing but also its main challenge comes from its intrinsic materiality, i.e. it plays a major role in how resources are transformed and managed. The combination of processes and technology highly influences its desired outcomes (products) but also its externalities (waste or undesired outputs). 

Beyond arguments about the origin of the pandemic and its possible linkages with biodiversity loss, post-COVID-19 economies have an opportunity to rethink manufacturing and the industrial metabolism riding a new wave of technology, which is “green” (and meets net zero or even positive carbon commitments); circular through systemic innovation; scalable; can be contextualized rapidly; enables mass customization of products; is highly adapted to specific local needs, and builds on digital technologies and big data to enhance the traceability of processes and materials, visibility and opportunities for distributed manufacturing. 

New forms of dynamic liaisons between universities and research centres but also across traditional sector boundaries are prompting the emergence of new forms of demand-led innovation. Wider uptake of blockchain technologies may enhance the traceability of manufactured products and enable the introduction of instruments such as ‘product material passports’ and comprehensive environmental product foot-printing by providing details of materials and processes in real-time, and through non-alterable records that offer information confidence to ensure high environmental and social standards throughout complex supply chains, all of which reinforce firms’ application of circular economy practices. Other traceability technologies, such as the use of sensors, are also instrumental in supporting the development of secondary material markets and help realize the benefits of a more circular use of resources. 

Mission oriented policy for manufacturing to recover from COVID-19

It is evident that public authorities will be essential in helping to shape recovery in the post-COVID-19 world. The EU has already announced a recovery package that will incorporate the European Green Deal and digital transformation. Manufacturing should lie at the core of strategic recovery of post-COVID-19 economies to ensure greater resilience and response capacity, and mobilize research and design capabilities globally by empowering local and regional networks in their connection with global supply chains. In this context, it is important to ensure greater ambition of, and instil confidence in, governments so they can define the parameters of recovery and engage stakeholders across supply chains to raise the manufacturing sector’s profile, using climate change commitments and circular economy practices as opportunities to develop a new paradigm of industrial production. 

Moving away from a linear manufacturing system to a circular one requires global policy commitments but also enforcement, building capacity both in the private and public sector and encouraging technological and spatial transformation in line with the above. More importantly, it requires new sets of policies, regulations and voluntary agreements that ensure that recovery packages are not simply used to return to ‘business as usual’ but that actually transform and create the conditions for a new manufacturing sector. They must establish the basis for disruptive change towards sustainable and inclusive industrial development, combining outstanding environmental and social conditions for all and new regenerative ways of creating value.

Regenerative manufacturing needs to build on the following pillars: 1) green technology; 2) integration of social and environmental implications along the whole life cycle; 3) a rethinking of productive cycles to move away from cradle to grave to cradle to cradle (with essential design and technological features and end of life interventions to ensure that products, components and materials are recovered at the end of their useful life, i.e. circular economy practices); and 4) better matching between societal, local and regional needs and value creation for all. Policies are instrumental in bringing about change in all these areas. Recovery policy packages may include a combination of the following instruments: 1) incentives to mainstream the introduction of tracing technologies, including blockchain with details of material and processes from the initial extraction of raw materials to finished goods in the form of material passports; 2) incentives for the introduction of resource-efficient and carbon neutral or carbon positive technologies to substantially reduce manufacturing’s environmental impacts; 3) extended producer responsibility schemes covering the entire supply chain and favouring business models centred around life extension, remanufacturing and the recovery of products, components and materials; 4) incentives to develop knowledge and innovation activities and the creation of local R&D capabilities, building on skills, knowledge and inter-industry collaboration; 5) support to the development of technology hubs, innovation clusters and fab labs that build on local and regional capabilities and provide access to training and digital technologies; 5) promotion of eco-industrial parks and sustainable business areas to promote physical and knowledge experience across activities and the sharing of pollution preventing and remediation infrastructure.

The role of international organizations, such as UNIDO, in this transition is essential to help build partnerships to create innovative international cooperative frameworks and mechanisms for a sustainable future. An international roadmap for sustainable manufacturing could set the stage for enhanced reconciliation between SDG goals and help unleash local and regional creativity and ingenuity into innovative forms of manufacturing connected to local needs, mindful of social and environmental conditions, and responsive and responsible in a globally integrated world. 

Disclaimer: This opinion piece provides information about a situation that is rapidly evolving. As the circumstances and impacts of the COVID-19 pandemic are continuously changing, the interpretation of the information presented here may also have to be adjusted in terms of relevance, accuracy and completeness. The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).