The rise of the internet of things is an opportunity to revolutionise manufacturing, says expert

However, research reveals that many manufacturers are unprepared to harness the potential of the IoT and address the legal and commercial challenges raised by the increased connectivity it will bring.

We could see dramatic change from smart manufacturing in the next three to four years and manufacturers, especially those with a number of large sites, need to be prepared. Companies without the clear focus on the detail of contracts, risk management, and legal frameworks for this new connected world will find their ability to develop hampered, and face a very real risk of being overtaken by their competitors.

Experts at Pinsent Masons, the law firm behind Out-Law.com, will be discussing the implications of the IoT for manufacturers at the Financial Times Future of Manufacturing 2016 event in October.

Smart manufacturing made possible through connectivity of devices

The IoT promises a revolution in manufacturing.

Machines and equipment in production plants will become devices capable of transmitting and receiving data over communications networks and will be able to link with existing systems and even those belonging to suppliers.

In practice it will mean manufacturers will be able to better monitor how machines and employees are performing and make adjustments to processes to improve logistics and other operational efficiencies. It will also let manufacturers better anticipate machine faults and plan maintenance programmes.

Products themselves will become connected devices too, capable of informing manufacturers about the way their goods are used and shaping future enhancements, customised offerings and more service-led opportunities.

According to Bosch (11-page / 2.11MB PDF), "the next paradigm shift in manufacturing" will stem from "connecting manufacturing operations across the value chain". It said manufacturers "will not only need to connect their plant equipment and supply chain, but also their demand chain", utilising machine-to-machine (M2M) technologies.

"If an enterprise is connecting the assets it creates, it can gain powerful insights into its customers, business processes, distributors, maintenance requirements, product warranties and much more," Bosch said.

The economic potential of the IoT to the manufacturing sector is enormous. McKinsey has estimated that the IoT could deliver economic benefits of between $1.2 and $3.7 trillion a year for factories by 2025, for example through improvements to workflows and the ability to engage in "predictive maintenance".

However, not all manufacturers appear to be planning to adapt to the IoT age.

According to a 2015 survey of 350 manufacturers in the US by The MPI Group, 64% of manufacturers believe the IoT will have some or significant impact on their business. However, more than two thirds of those businesses admitted to having either no or limited understanding of the IoT and few said they have a dedicated IoT strategy in place.

The survey (10-page / 2MB PDF), which was sponsored by Rockwell Automation, QAD and BDO, found that 34% of manufacturers have no plans to develop a strategy for applying IoT technologies in their processes. Just 11% of manufacturers have such a strategy in place and have implemented that strategy. Most of the respondents said they plan to develop a strategy or have done so already but just not implemented it.

Similarly, just 12% of manufacturers surveyed said they have implemented a strategy for embedding IoT technologies in their products, while 37% of respondents signalled they have no plans to develop such a strategy.

Legal implications of the IoT for manufacturers

An increasingly interconnected manufacturing process might alter the way risk and liability is accounted for. For example, if data is not transmitted on time or is incorrect it might cause consequent failures in products. The question arises, however, as to who would be responsible for that failure, as it might be a fault with supplier software, hardware, the telecommunications network or potentially the way the product is used.  Accordingly, traditional contracting models will need to be reviewed and manufacturers will need to ensure that their contractual arrangements with all elements in their supply chain are clear and robust enough to allow for liability to be passed back in the event of these failures.

Risks will be harder to control and manage. They may also be harder to insure, not least because the insurance industry has not yet fully developed its own response to the IoT. It might be that small technology suppliers are required to take on the risk of the manufacturing process and the damages in case of interruptions and outages under contracts with manufacturers.

The proliferation of data in the new interconnected world will also subject manufacturers to potential data privacy risks that they have, to-date, only had limited exposure to.

Because there is so much data being generated and ever-more powerful analytics tools available for organising and reviewing the information, there is a risk that data that might not be immediately obvious as personal data may nevertheless fall subject to data protection rules.

In 2014 data protection authorities (DPAs) from across the world signed a declaration in which they said that data generated by devices in the IoT age should be "regarded and treated as personal data". The watchdogs said it is "more likely than not" that such data can be attributed to individuals.

Where businesses process personal data they are subject to data protection laws. Manufacturers could therefore find themselves having to implement new privacy policies and ensure they process IoT data fairly, potentially with customer consent, and that they put in place security measures to ensure the data cannot be read and used by those not authorised to access it.

Among the other issues that smart manufacturing will raise include potential health and safety law issues stemming from the anticipated rise in use of robotics in interaction with human employees. Robot workers might take on some functionality performed by people currently. It will therefore be important for manufacturers to accord with employment law if looking to automate processes and cut labour costs.

It is perhaps easy for manufacturers to see the potential in a more connected manufacturing world and be focused on acquiring the technology and skills to adapt to the opportunities. However, it is vital that manufacturers understand their legal and regulatory obligations to be able to take advantage of the changes in the sector.

Addressing changes to positions of risk and liability, new data privacy and security issues, protection of intellectual property, health and safety compliance and the demands of employment law is an urgent issue for any manufacturer that wants to succeed in the new interconnected world of the IoT.

Nicole Livesey and Sarah Cameron are experts in advanced manufacturing at Pinsent Masons, the law firm behind Out-Law.com. Experts at Pinsent Masons will be discussing the implications of the IoT for manufacturers at the Financial Times Future of Manufacturing 2016 event in October.