Digital urban production: how does Industry 4.0 reconfigure productive value creation in urban contexts?

ABSTRACT

Enabled by Industry 4.0, new forms of productive value creation emerge in urban spaces. But how the value creation of new digital urban production (DUP) differs from that of incumbent manufacturing and how it benefits from urban contexts remain unclear. Closing this gap, we study DUP firms in selected cities of North Rhine-Westphalia, Germany. Results indicate that DUP integrates production and design, and it displays circular problem-based value creation to develop complex production-related solutions. At urban locations, DUP draws particular advantages from proximity to customers, employees and knowledge – conducive context qualities which outweigh the ‘footloosening’ powers of digital tools.

KEYWORDS:

• digital urban production
• Industry 4.0
• problem-based value creation
• North Rhine-Westphalia
• Germany

JEL:

• O14
• O31
• O33
• R11

INTRODUCTION

Heralding a ‘Fourth Industrial Revolution’, recent debates have labelled digital technological change in manufacturing as Industry 4.0 (Kagermann et al., 2013). Industry 4.0 comprises several information technology (IT) process and product innovations that digitally coordinate manufacturing and related services (De Propris, 2016). Regional studies increasingly discuss spatial implications of digital technological change in manufacturing (De Propris & Bailey, 2020), putting them on the research agenda (Harrison et al., 2020). One stream of research focuses on cities, first, as centres of innovation and early adoption (Clark et al., 2018; Florida et al., 2017), and second, because Industry 4.0 is assumed to foster the emergence of new forms of productive value creation especially in urban spaces (Acatech, 2015; Kagermann et al., 2013). The term ‘urban production’ indicates the potential of Industry 4.0 for re-integrating manufacturing into cities, possibly counteracting urban deindustrialization (Acatech, 2015) and facilitating ‘socially sustainable production’ (Matt et al., 2020) in the ‘city of the future’ (Läpple, 2016).

Industry 4.0 debates have primarily centred on technology potential and visions (Pfeiffer, 2017), leaving two major blind spots. First, we lack understanding of how Industry 4.0 technologies actually change value creation patterns of newly emerging producers in urban contexts. While a growing stream of research explores how digitalization changes value creation in urban maker movements (e.g., Anderson, 2012; Bellandi et al., 2019; Lange & Bürkner, 2018), the issue how it transforms value creation in urban manufacturing remains unstudied. A critical analysis of ‘real and speculated effects’ (Pfeiffer, 2017, p. 108) of Industry 4.0 on urban production seems due. We engage in a concise conceptualization of value creation in digital urban production (DUP), highlighting distinctions from conventional urban manufacturing.

Second, we still insufficiently understand in which respects DUP benefits from urban context qualities, while digital tools rather support footloose industrial activities (Haefner & Sternberg, 2020), entailing changing spaces of production (Gress & Kalafsky, 2015). In theory, IT could enable (creative) companies to locate anywhere, not binding them to urban spaces (Brydges & Hracs, 2019). Knowledge-intensive firms may also prosper at rural locations that offer adequate facilities (e.g., Lafuente et al., 2010). Yet, urban spaces continue to attract knowledge-intensive (digital) production (van Winden et al., 2011), providing skilled labour, favourable ecosystems (Reynolds & Uygun, 2018) and customer demand (Glückler, 2007). The distinctive qualities of digitally supported production, though, and the role of socio-spatial contexts for DUP are still understudied. This paper therefore asks: How do selected Industry 4.0 technologies reconfigure value creation patterns of urban producers, and which urban context qualities matter for these DUP firms?

Tackling these questions, we draw on qualitative empirical research in nine cities of the German Federal Land of North Rhine-Westphalia (NRW). Our study covers upcoming production firms that have adopted Industry 4.0 technologies. This research delivers two major empirically grounded insights. First, we further clarify the notion of DUP and its conceptual distinction from conventional manufacturing, indicating more integrated activities of DUP and shifts towards problem-based value creation. Second, these findings help us develop a conceptual model of DUP that explains the continued importance of certain urban context qualities.

In the following, we first review debates on Industry 4.0 and urban production, revealing shifting conceptions of innovation and value creation through digital technologies. We then outline our qualitative research methods and case selection procedures, before presenting findings on major characteristics of DUP actors locating in the studied cities. Discussing these insights, we then attempt at refining conceptual understanding of value creation and socio-spatial context requirements of DUP. Finally, we conclude by highlighting academic contributions and policy implications of our study, reflect on research limitations and recommend future research directions.

LITERATURE REVIEW

Industry 4.0 and urban production

Regional studies and economic geography scholars have been studying the spatial implications of technological change and digitalization for decades (e.g., Fromhold-Eisebith, 2018; Haefner & Sternberg, 2020; Leamer & Storper, 2001). Furthering this tradition, also more investigations into spatial perspectives of Industry 4.0 have been postulated (Harrison et al., 2020). First introduced as part of the German ‘High-Tech Strategy’ in 2011, Industry 4.0 comprises four main components of digitally enhanced manufacturing: cyber-physical systems, Internet of Things, Internet of Services and smart factories (De Propris, 2016; Fuchs, 2020). Often further technologies are also named, such as additive manufacturing (or 3D printing), big data analytics, artificial intelligence or autonomous robots (Balland & Boschma, 2021; Gress & Kalafsky, 2015; Strange & Zucchella, 2017).

While engineering-dominated debates on Industry 4.0 rarely consider its socio-spatial implications, that issue is particularly interesting from a conceptual angle – especially concerning urban contexts. Research on clusters and Industry 4.0 shows, for instance, that ‘the interactive character of learning and peculiarities of knowledge creation introduce geographical space as necessary dimension, which must not be neglected even in the era of Industry 4.0’ (Götz & Jankowska, 2017, p. 1639). Overall, the increasing knowledge-intensity of production nurtures a growing importance of urban spaces for manufacturing-related innovation and value creation (van Winden et al., 2011), which leads us to accentuate urban contexts.

Regarding the role of cities for innovation, Florida et al. (2017) propose that radical innovations, like Industry 4.0 tools, require cities as platforms that combine urban diversity (relating to Jacobs, 1969) with urban business opportunities (Glückler, 2007). Jacobs’ theorizing meets Schumpeterian entrepreneurship theory, connecting diversity externalities and disruptive innovation opportunities. Assumptions by Florida et al. (2017) thus deviate from Marshallian externalities (Marshall, 1890), which emphasize advantages of specialized agglomerations that offer specialized labour markets, supportive services/suppliers and knowledge spillovers, and resonate Jacobs externalities that stress benefits arising from urban diversity (Storper, 2013). Other studies emphasize the importance of embedding production into local urban innovation systems (Reynolds & Uygun, 2018), summarizing: ‘while the city continues to offer key strategic locational advantages, it is its role as a source of talent and innovation that will drive manufacturing to locate in and near cities’ (Reynolds, 2017, p. 26). Conceptual propositions like this one underscore the relevance of further regional studies on Industry 4.0 enhanced production and urban embedding.

Among other perspectives, the notion of ‘urban production’ has fairly early added an inherently spatial dimension to the technology-focused Industry 4.0 debate: ‘Industrie 4.0 [sic] will address and solve some of the challenges facing the world today such as resource and energy efficiency, urban production and demographic change’ (Kagermann et al., 2013, p. 6, emphasis added). As a particularly interesting facet of these challenges, Industry 4.0 is expected to raise production efficiency and reduce emissions, thereby enabling a harmonious coexistence of production and living in cities (Acatech, 2015). Consequently, Industry 4.0 technologies potentially let new forms of DUP emerge besides conventional manufacturing in cities, which could counteract urban deindustrialization trends.

The deindustrialization of western urban economies has been a research subject for decades (e.g., Martin et al., 2016), mainly in the context of globalization. Fallen trade barriers and advanced transport technologies have triggered global industrial dispersal, in particular to exploit cost economies (Dicken, 2015). Considering industrial production as a linear value chain process (Porter, 1990), conventional (urban) manufacturing was marked by specialization and disintegration of ‘business processes into progressively finer slices’ along the chain (Mudambi, 2008, p. 704). The relocation of production stages has driven a drastic deindustrialization of urban economies in Europe in the past decades (Birch et al., 2010), driving a transition of western urban economies ‘from an industrial model of economic growth and employment to one dominated by services activities, particularly knowledge-intensive services’ (Martin et al., 2016, p. 294).

Industry 4.0 now promises an interesting technology-induced reversal of this trend. Engineering scholars propose that ‘bringing the factory back to town’ would be ‘made possible because of two features of Industry 4.0: diminishing lot sizes and the promotion of environmentally-friendly integrated “urban production”’ (Acatech, 2015, p. 8). While reasoning acknowledges the ‘numerous bottlenecks and necessary urban and regional framework conditions’ required for installing urban production (p. 8), mainly technological solutions are discussed: vertical factories (Rappaport, 2017), or decentralized production structures in combination with Industry 4.0 technologies, such as additive manufacturing (Matt et al., 2020). Yet, besides envisioning technological potential (Pfeiffer, 2017), research on urban production has not yet empirically investigated ongoing changes. Our study therefore reaches beyond exploring the technological feasibility of producing in the city. We investigate the causes for changing digital urban value creation and the relevance of certain urban advantages.

Our reasoning builds upon recent advances in studying new forms of urban production in the digital age, which hint at particularities. Prominent features are small batch sizes, miniaturized production and smaller production sites than those qualifying conventional large-scale manufacturing (Stiehm, 2017). Well-developed digital infrastructure and high-skilled IT experts should be available for urban production, too (Mühl et al., 2019). These propositions relate to research on ‘smart workers’ who are essential for local economic development in the age of digital change (Barzotto & De Propris, 2019). Attracting this talent does not only depend on lifestyle factors of the ‘creative class’ (Florida et al., 2017), but also on ‘traditional’ location factors, such as proximity to related industries and transport infrastructure (Duvivier et al., 2018). Further, studies on changing urban crafts-oriented production reveal the advantages of a closer integration of, and temporary proximity to final customers (Butzin & Meyer, 2020).

While those findings offer first tentative insights into how newly emerging DUP deviates from conventional manufacturing in urban areas, evidence is still fragmented. A more comprehensive and conceptually informed understanding of DUP is needed, concerning both productive value creation and the role of urban context qualities, especially in light of potentially ‘footloosening’ powers of Industry 4.0 technologies. Consequently, we attempt at developing a conceptual model of DUP which emphasizes organizational and socio-spatial characteristics.

Spatially informed conceptualization of technology-driven value-creation changes

To collect building blocks for a conceptualization of transformed value creation in DUP, we can draw on key aspects currently debated in regional studies. They relate to (1) technology-driven reconfigurations of value chains, (2) territorial servitization and (3) urban maker movements. These debates offer ideas on how new IT options reconfigure patterns of value creation and socio-spatial contexts of production. The considerations outlined below seem most relevant for our own conceptualization of DUP:

1. Industry 4.0 has been connected with potential value chain reconfigurations. Scholars hardly expect large-scale Industry 4.0-enabled reshoring of manufacturing activities from less-developed countries back to core economies (Dachs et al., 2019). But when some reshoring takes place, it probably favours local innovation and new product development linked to Industry 4.0 (Ancarani & Di Mauro, 2018). This insight relates to analysing Industry 4.0 in connection with ‘home-sourcing’, which is preferred by firms in order ‘to allow the spatial recoupling between manufacturing and innovation tasks’ (Bailey et al., 2018, p. 1572). We can therefore assume a strategic co-location of innovation and production activities triggered by Industry 4.0.

2. Co-location has also been discussed in debates on territorial servitization (Lafuente et al., 2019), a term referring to the spatial convergence, hence ‘symbiotic recoupling between services and manufacturing with a bounded spatial dimension’ (De Propris & Storai, 2019, p. 388). As many Industry 4.0 activities incorporate a range of services (Bellandi et al., 2019), territorial servitization can be associated fairly well with Industry 4.0 debates (De Propris & Storai, 2019). As this trend may facilitate more small-scale ‘micro-manufacturing’, it can be expected that production activities require integrating ‘manufacturing functions with advanced digitally enabled services that allow for a continuum of co-innovation solutions between firms and customers and the sharing of information between machines and people’ (Bellandi et al., 2019, p. 205f). Accordingly, the functional integration of product conception, including design or research and development, and manufacturing creates conducive conditions for localized innovation especially under urban conditions (De Propris & Storai, 2019, p. 394).

3. Functional integration is addressed in debates on urban maker movements, too, as makers ‘reconcile innovation with production’ (Bellandi et al., 2019, p. 208). Here the focus is on the spatio-functional integration of conceptual design and production, also in open creative labs termed ‘maker spaces’ or ‘FabLabs’. They represent novel places of urban production and digital experimentation, for instance, as extensions to university labs. Value creation processes in these places do not follow linear chain logics, but take the form of problem-based circular value shops (Lange & Bürkner, 2018). The value shop framework was developed to explain value creation logics of service firms in contrast to linear production value chains (Stabell & Fjeldstad, 1998) and has also supported prior analyses of urban professional service firms (Glückler, 2007). In value shops, resource alignment and process activities take place specifically ‘in response to client problems’ (Bathelt & Glückler, 2018, p. 184). This approach more adequately expounds value creation by service firms in cities, because ‘problem-solving activities cannot be produced in locations other than where they are actually delivered’ (Glückler, 2007, p. 950).

Problem-based logics of value creation at the intersection of production and conception are particularly relevant for our reasoning; we therefore look closer at the value shop framework. The tasks performed in value shops follow iterative logics, forming a continuous loop rather than discrete (value) chain segments (opposing Porter, 1990). The circular loop process inhibits the spatial ‘slicing’ of tasks, which is why value shops cannot exploit scale economies through a geographical division of labour (Bathelt & Glückler, 2018). Conceptually, the iterative problem-solving cycle comprises five – potentially repetitive – stages: (1) identifying the problem, (2) conceptualizing problem-solving activities and/or alternative solutions, (3) choosing between the previously created solutions, (4) executing a problem-solving strategy and (5) controlling/evaluating the executed strategy (Stabell & Fjeldstad, 1998, p. 423). One cycle run either solves the initially posed (client) problem or initiates another iteration after step 5, including adaptions to steps 2–4. Small-scale urban production displays hybrid properties of both service and manufacturing firms (Busch et al., 2020). We thus assume that the flexible, problem-specific value creation logics of the value shop framework suit particularly well for conceptualizing DUP.

Summing up, Industry 4.0 is expected to let emerge new forms of DUP. It can be assumed that the relative importance of urban locations for manufacturing firms rises due to the innovation system qualities of urban spaces and their specific resource endowment in terms of skills and infrastructure. Driven by technological change, a recoupling of production and services increasingly marks urban economies. This trend produces new forms of urban makers, which undergo digitally induced change and already display reconfigured value creation patterns following problem-based logics. Advancing recent debates, we now explore in more detail how using digital technologies reconfigures value creation of new DUP, supported by urban contexts. In the next section, we depict which methods have been employed to empirically analyse DUP.

RESEARCH METHODOLOGY AND CASE SELECTION

We have employed an explorative, qualitative research design to capture crucial features of new DUP. Only a qualitative approach seemed appropriate given the novelty of the studied phenomenon (Schoenberger, 1991) and the inductive research interest (Vanclay, 2015). Our case study approach (Eisenhardt & Graebner, 2007) regards production firms in their urban context as the central unit of analysis. Firm-level research designs are increasingly used in regional studies (Liu et al., 2019), predominantly in socio-spatial innovation studies (Butzin & Widmaier, 2016). Going beyond the ‘factory gate’ (Maskell, 2001, p. 330), our inductive approach allows to unveil firm characteristics, while concurrently investigating relevant urban context qualities.

The empirical fieldwork (2016–18) included actors from nine cities in the German state of NRW. Figure 1 summarizes sampling procedures and the rationale for selecting (1) the region of NRW within Germany, (2) the cities within NRW and (3) the production firms within these cities.

1. Germany represents an expedient case for analysing DUP due to its leading role in Europe concerning servitization and digitization of manufacturing, indicating ongoing transformation (Vendrell-Herrero & Bustinza, 2020, p. 38). And recent empirical studies suggest growing shares of production activities in German cities (Gornig & Werwatz, 2018). Within Germany, NRW state suits particularly well for analysis because of its long-lasting industrial tradition (Birch et al., 2010) and – as the most populated German state – its large manufacturing sector (DESTATIS, 2020). In NRW that sector accounts for 20.4% of total employment; the three largest subsectors are ‘manufacture of basic metals and fabricated metal products’ (23.7% of all manufacturing employees), ‘manufacture of machinery and equipment’ (15.6%), and ‘manufacture of rubber, plastics and non-metallic mineral products’ (10.2%) (WZ 2008 classifications, data for 2018; Koch et al., 2019, pp. 26f.). NRW also hosts the highest share of publicly funded research projects on Industry 4.0 in Germany qualifying as an important hub of digital production technologies (BMBF, 2020).

2. The nine cities chosen for in-depth studies share the commonality of a strong industrial heritage, but display also some diversity and represent emblematic examples: (1) Cologne and Düsseldorf are industrial cities with high shares of creative industries; (2) Aachen is a high-technology city with industrial traditions; (3) Dortmund and Duisburg are heavily industrialized Ruhr area cities undergoing restructuring; and (4) the ‘Bergisch cities’ (Remscheid, Solingen, Velbert and Wuppertal) specialize in metal processing. Overall, these cities are fairly characteristic of urban industrialization in Germany, despite of their heterogeneous spatial and structural characteristics (which are left out of the picture for our reasoning in this paper).

3. The production firms selected for case studies had to fulfil four criteria: (1) an urban location in the cities’ core areas; (2) manufacture of physical goods – contrasting, for example, to software development; (3) application of digital production technologies, such as 3D printers, laser cutting, robots or multi-axle CNC milling machines; (4) self-ascription as Industry 4.0 cases. The first three qualities reflect the socio-spatial (urban), organizational (production) and technological (digital) constituents of DUP and allow us to capture actually relevant cases. The fourth ‘4.0-self-ascription’ criterion helps gain a broader perspective on what firms themselves perceive as Industry 4.0 application.

Figure 1. Case selection procedures.

Source: Authors.

In detail, primary data were acquired through interviews with actors in the nine cities in a two-stage process. First, 25 interviews conducted with public stakeholders (Table 1) served two purposes: compiling primary data on the urban level and – through a snowball sampling procedure (Atkinson & Flint, 2001) – identifying suitable firm cases for the DUP focus. Snowball sampling seemed adequate because of the novelty of our research focus and lack of other sources for systematically selecting DUP firms. Through four workshops with professional experts and academic scholars, we could identify additional firms and discuss tentative findings.

Table 1. Overview of the interviewed production firms and public stakeholders by groups of cities.

Interviewed organizations	Cologne	Düsseldorf	Aachen	Dortmund	Duisburg	Bergisch cities	Total
Abbreviations (used for quotations)	C	D	A	Do	Du	R, S, V, W
Production firms (Case n)	4	2	3	2	2	5	18
Chambers of commerce (Com)	1	1	1	1	1	1	6
Chambers of crafts (Cra)	1	1	1	1			4
Trade unions (Un)	1	1	1	1		1	5
Economic development (EDev)	1	1	1	1	1	3	8
Further stakeholders^a		1	1				2
Total	8	7	8	6	4	10	43

Note: ^aFurther stakeholders: Research Institute; and Association of German Engineers (VDI).

Second, interviews with executives of 18 urban production firms provided primary data on the firm level (average length of 60 min). The semi-structured interviews had three focus themes: the use of digital technologies in production, the impact of digital technologies on the organization, and the perceived supportive qualities of the urban context. All interviews were transcribed and analysed using qualitative content analysis (Mayring, 2000), additional to secondary data sources. Wherever possible, corporate interviews were complemented by firm visits. Table 1 displays details of the interview sample. While all acquired data (i.e., public stakeholder and corporate interviews) equally contributed to our study, our reasoning in this paper mainly takes up company related information. For the illustrative interview quotes displayed below, German answers were translated by the authors.

RESULTS: DIGITAL URBAN PRODUCTION IN NORTH RHINE-WESTPHALIA

We now aggregate empirical evidence from the interviews and analyse new forms of DUP in NRW. After outlining general characteristics, we analyse reconfigured value creation and urban advantages for DUP firms. DUP examples could be found in all studied cities. From the 18 included production firms at urban locations, 10 fully complied with typical DUP characteristics and were selected for in-depth analysis (Table 2). Most of these DUP firms were established between 2010 and 2018 and engage in small-scale or micro-manufacturing, growing up besides incumbent urban manufacturing plants. Within each city, the studied DUP firms are located in urban core areas, that is, in residential, commercial or mixed-use areas. Concerning business models, the DUP firms were formerly production or engineering oriented and now tend towards amalgamating production and services, mainly solving complex production-related problems.

Table 2. Information on investigated digital urban production firms.

Case	City	Year^a	Employees	Urban location	Business description
1	Cologne	2010	18	Urban core; mixed-use area	Development and production of complex objects
2	Cologne	2013	3	Urban core; residential-use area	Scanning and production of digital objects
3	Düsseldorf	2015	15	Urban core; commercial-use area	Development and prototyping of Internet-of-Things devices
4	Düsseldorf	2015	12	Urban core; mixed-use area	Development and production of Industry 4.0 devices
5	Aachen	2015	4	Urban core; residential-use area	Production of laser-cut objects
6	Aachen	1964^b	10	Urban core. residential-use area	Production and prototyping of electronic retrofit solutions
7	Dortmund	2018	13	Urban core; residential-use area	Development and prototyping of Internet-of-Things devices
8	Duisburg	2010	6	Urban core; residential-use area	Development and production of custom-made prototypes
9	Wuppertal	2013	17	Urban core; mixed-use area	Production and prototyping of custom-made shapes
10	Remscheid	2016	4	Urban core; industrial-use area	Development and production of custom-made solutions

Notes: ^aYear of establishment.

^b In the 2000s, case 6 restructured, relocating to an urban core location; it was therefore included in the sample.

Sources: Interview data and published firm data (as of 2018).

Reconfigured value creation of DUP

Industry 4.0 tools support the trend of DUP firms to converge manufacturing and service delivery: they combine process elements of traditional crafts production, such as carpentry or metalworking, and engineering. An interviewee points out how this integration constitutes the firm’s competitive advantage: ‘The “real” craft production merges with engineering-heavy jobs because you simply do a lot of design, too. Where design is not needed, industrial manufacturing can make it cheaper’ (case 1). Another interviewee specifies how technical advantages help integrate production steps:

I see my business as a connection between traditional craftsmanship and digitization. …  That means I have all of my components digitally available on the computer. …  I can first print the things  …  as a prototype using the 3D printing process.

(case 10)

Compared with traditional crafts production, DUP firms can obviously develop more sophisticated products.

Consequently, products of DUP firms are highly specialized. Some companies, for example, deliver engineering services and produce prototypes or small-scale series. One interviewee summarizes:

The interplay of various technology fields, such as laser cutting, 3D scanning, reverse engineering and 3D printing, enables us to be a one-stop shop for our customers. When we develop auto parts, we scan the coachwork directly, then digitally develop the products with the customer and bring out prototypes via 3D printing, and also produce the first sample series that our customers can directly test on the market.

(case 8)

Specific customer orders require to combine different digital technologies, as another interviewee explains:

We do not manufacture our own products and sell them on the market, but our customers ask us to manufacture a product. These are always very unusual things that you cannot get in a normal carpentry. For example, we have a prototype for which a mold had to be made. A unique shape made of a very special material, and we reproduce this material in wood, to have a very individual product. …  For us, this is simple because we also have a [3D] scanner. So, we can scan such shapes and then reproduce them.

(case 9)

It becomes clear how important digital technologies are for DUP firms to develop individually tailored products.

Some interviewees openly tell that conventional manufacturing firms fail to fulfil specific demands: ‘When the customer has a requirement for a special solution, all of the large companies drop out’ (case 10). And complementary activities are needed:

Industrial manufacturing means: conception or manufacturing. …  But in our projects, we notice that one cannot work without the other. You either need to have experience or just say that it could be either way. Then I will report again in two hours and go to the workshop to roughly test-build the product and see what works.

(case 1)

DUP firms obviously occupy a market niche, tackling production-related customer problems beyond standardized solutions. Interviews suggest that the problem-based value creation by DUP firms follows circular processes that contain several interdependent production and conception iterations.

To create specific solutions, DUP firms rely on frequent communication with their customers. The quote of a laser-cutting firm underscores these logics of collaboration:

A customer comes in,  …  describes his request. We take our iPad and directly create a Kanban card with the customer information. The next step is the design process, which of course also happens fully digitally.  …  When we get the okay from the customer, the file is loaded into the laser and the product is produced and shipped.

(case 5)

How important customer feedback is for the problem-solving process steps is supported by this statement:

First, we sit down with the customer. They describe their product idea to us.  …  Then we think about implementation proposals. …  We then present the final proposals to the customer. …  Then we wait for the feedback and the customer’s decision. Then we go straight to implementation.

(case 8)

This clearly evidences the customer’s decisive role in the iterative value creation by DUP.

Interviewees further clarify in which regards DUP creates ‘solutions’ rather than ‘products’: ‘As an engineering office, we are someone who sells solutions. I call it an electronics tailor shop’ (case 6). Rapidly developing these solutions forms a key competitive advantage of DUP firms, as an informant from an economic development agency explains:

The main motivation is to quickly convert thoughts into products. You can quickly develop a very high-quality product and then sell it as a prototype or as an expensive unique item. The idea is building prototypes on site in the office.

(EDev-Du)

Further underscoring the specific skills of DUP firms, this informant also reflects on the role of urban location: ‘They [DUP firms] did not ask themselves: How can I produce in urban space? They asked themselves: How can I solve a problem?’ (EDev-Du). This quote proves the technological feasibility of producing in cities, and it also guides us to closer examine DUP firms’ benefits from their urban location.

Conducive urban context qualities for DUP

In line with communication needs, a specialized customer base forms an important location advantage for DUP. There are both private customers – looking for individualized products – and corporate ones, such as industrial manufacturers, design studios, architects or creative agencies. Especially local incumbent manufacturing companies constitute important customer groups for DUP firms, such as large automotive or heavy industry players, as one interviewee summarizes: ‘We have the best conditions here [in Duisburg] because there are large industrial enterprises. …  These companies are grateful that we can help them with digital maintenance and provide spare parts to reduce their costs’ (case 8). DUP firms generally perceive NRW as a growing market:

The metal industry is very strong in NRW, and they are now expanding in terms of digitization. And it’s really nice when you only need to drive half an hour to the next company when you have to implement something there.

(case 7)

This statement shows that DUP firms can interpret customer proximity as also relating to the wider region.

Customer proximity matters for DUP especially under time pressure. The interviewees perceive spatial proximity as clearly beneficial for interaction, despite of ‘space shrinking’ digital tools:

The closer you are to your customers, the easier it is to implement projects. …  Everything happens digitally, except for the first customer contact.  …  But to discuss a project, it is always more helpful to be at the customer's site. People appreciate this, because not everyone always wants to have a [video] conference. Customers want you to be on site with them.

(case 8)

Proximity preferences can relate even to co-locating in the same urban neighbourhood. Here, the interviewees realize benefits from matching local specific demand with the firm’s problem-solving capabilities: ‘We perceive this neighbourhood as a place where a lot of customers with a creative background are located: they already know which problems laser cutting can solve’ (case 5). This informant adds that, while the location in a creative neighbourhood is ‘nice to have, but not essential for private customers’, this looks different for inter-firm relations due to the required fast lead times: ‘For business customers, it is certainly important to be local because of the close coordination of orders, the time pressure.  …  It is much appreciated that distances are short’ (case 5). DUP firms thus appreciate flexibility and proximity advantages particularly for business-to-business interaction in the problem-solving process.

The value creation patterns of DUP raise demand for skilled labour, which constitutes a critical factor in problem-based processes. Labour especially matters for quality control and decision making in production, as one interviewee emphasizes:

You always decide yourself whether you agree with the result or not and intervene again in the process. …  We have extremely high machine performance in the CNC and 3D printing area, but nevertheless the employee decides independently whether the quality that we produce meets the [customers’] demands on the product.

(case 9)

Accordingly, labour qualification needs to combine technical and practical skills as well as engineering knowledge: ‘It makes sense that our employees have more manual skills,  …  but everything we do is always digital, and we couldn't use anyone who couldn't handle CAD’ (case 7). DUP firms thus require a specific combination of digital and manual employee skills.

As a crafts chamber representative formulates, specialized skilled labour is strongly associated with urban spaces: ‘Talking about urban production, it is of course easier to attract skilled workers there. In this respect, I see advantages and opportunities for urban production’ (Cra-Do). DUP firms echo this view: ‘Of course, I need software developers and good people who are familiar with 3D printing technologies. And if my location were 80 km from the city, I would not get them’ (case 7). Another interviewee corroborates:

We have software developers and hardware developers. They like to live in the city. I think if I told them we were moving to the countryside, they would quit the next day. Because a software developer can work anywhere these days.

(case 4)

These statements confirm how crucial urban labour markets are as supportive context quality for DUP firms.

Although digital communication technologies support footloose DUP to some extent, an interviewee highlights the drawbacks of ‘working anywhere’:

It only works in theory: working from home and sending in the finished code. …  You need to have people on site at best. These short distances are so important to discuss something, and it makes things a lot easier when people are on site.

(case 7)

This statement also reiterates the problem-based logics of value creation in DUP. Another informant highlights advantages of living close to the workplace:

When a problem gets stuck and you need a solution for it, I don't stop thinking on Friday afternoon – I keep thinking. Sometimes, I go over [to the workshop] to measure and try again. Then I'm completely relaxed on Monday because I've solved the problem [in the meantime].

(case 6)

Apparently, DUP firms in particular value workplace proximity relating to the problem-based processes that form the heart of their business models.

Urban contexts support problem-based value creation in DUP also in terms of nearby universities, research institutes and local design associations that provide fertile grounds for creative ideas. One interviewee stresses why proximity matters beyond online communication: ‘Sure, you can do everything digitally. But the collaborations really come about because we have people around here’ (case 3). Another interviewee compares the entire urban creative environment to a FabLab, including the presence of like-minded people: ‘I think that small urban production locations are great  …  because there are many people who achieve something together. I know that from the FabLab’ (case 1). Actor diversity thus forms an important component of urbanity advantages fostering DUP firms.

New institutionalized networks inspire exchanges between manufacturing companies, too. One emblematic example in five of the investigated cities – the ‘digital hub’ – connects incumbent IT-based firms with start-ups. A chamber of commerce representative explains the network objectives: ‘There are IT companies, but also manufacturing companies. The manufacturing companies hope to enter new business areas in exchange with each other’ (Com-A). These networks are perceived as supportive urban assets, as another chamber of commerce executive stresses: ‘Networking is of course better in urban areas.  …  We actually benefit from two “digital hubs”; in Duisburg and Düsseldorf. And we have made it a priority to be a matchmaker for start-ups, medium-sized companies, corporations and universities’ (Com-Du).

The creative synergies arising from collaborations are especially fostered by chambers of commerce:

One of the topics we promote is networked thinking. …  But you have to see that networking is not just cooperation with one another, it also means creative collaboration. It is becoming more and more important to also work together with a competitor to secure your own place in the market.

(Com-D)

In conclusion, one interviewee sums up the most crucial urbanity advantages, perceiving the city as a:

know-how city  …  where we can find the appropriate knowledge, can find somebody we can work with, in order to give us knowledge on automation. We have the ‘digital hub’ here. Without that, in a non-university city, it would be more complicated.

(case 5)

This statement underscores the conducive combination of certain urban context qualities that play a decisive role for local DUP. It also helps understand in which regards urban areas offer required advantages for DUP that cannot be found in non-urban spaces.

CONCEPTUAL DISCUSSION

Now we want to blend our empirical findings into a conceptual model of DUP. We first juxtapose the conventional linear value chain conception of production (Porter, 1990) to the value shop framework (Stabell & Fjeldstad, 1998). In linear chains, goods manufacturing follows after design and conception activities (Figure 2a). Through vertical disintegration, value chain steps are spatially separated to exploit internationally and inter-regionally differing location factors (Dicken, 2015). In the course of a ‘slicing’ of the value chain, knowledge-intensive activities remain in western (urban) economies, while production-related tasked are relocated to low-wage countries (Martin et al., 2016). Figure 2(a) highlights the propensity of conventional manufacturing to vertically disintegrate several value chain steps. By separating design from production and marketing activities, the value chain potentially stretches over various locations according to differing local factor conditions (Mudambi, 2008).

Figure 2. Conceptual juxtaposition of (a) the linear value chain organization of traditional manufacturing; and (b) circular productive value creation of digital urban production.

Sources: Figure 2(a) is partly adapted from Mudambi (2008); and authors.

In contrast to linear production chains, DUP tends towards executing all value creation stages at a single location (Figure 2b). Our empirical study clearly evidences the convergence of formerly (crafts) production-oriented firms and engineering service firms towards integrated DUP companies, enabled by Industry 4.0 technologies (detailed in Figure 3). DUP involves in-house combinations of value creation activities that were previously taken over by different types of businesses. Initially production-focused crafts firms now vertically integrate backwards towards earlier product design and conception stages of the value chain. Conversely, once service-focused engineering firms use digital tools to vertically integrate forward, incorporating also manufacturing activities. While the previously engineering- and crafts-oriented firms differ in terms of their direction of vertical value chain integration, there is remarkably little variation concerning digital production technologies applied in both company types.

Figure 3. Integrated conceptual model of digital urban production.

Source: Authors.

Figure 3 depicts our integrated conceptual model of DUP. The smallest inner circle signifies the convergence of manual-creative activities of digitally enhanced production (A) and design related activities of digital conception (B). In DUP, the distinctions between these formerly separated activities are increasingly blurred through functional integration, which manifests in the focus of all studied firms on tailoring product-related solutions for customer problems that require combining knowledge-intensive services with goods production. According to our findings, employing iterative value creation logics for problem solving significantly distinguishes DUP from conventional production. We therefore propose to adopt the value shop framework (Stabell & Fjeldstad, 1998) for our model, which refers to earlier research on (solution-oriented) urban professional services (Glückler, 2007) and urban makers (Lange & Bürkner, 2018).

The five-step circle of our concept (Figure 3) suggests how the value shop approach can be amalgamated with the problem-solving cycle of DUP, relating to a certain sequence of activities. After completing problem definition (customer order) for specific technical tasks in step 1, the next steps 2–4 each forms part of a circular process. In step 2, potential alternative solutions are scrutinized. Then in step 3 – possibly after repeated cycles – a suitable solution is selected from these alternatives, which leads to actually implementing the chosen product variant in step 4. Finally, step 5 contains the evaluation of the result and manufactured output. The cycle ends when the outcome satisfactorily solves the initially posed customer problem. The model also shows that Industry 4.0 applications of the inner circle (A–B) functionally interact with the steps of the outer problem-solving cycle (1–5). Multiple iterations of the digital production and design steps may take place before a final solution is found.

We separate the technology-driven sub-cycle (A–B) from the problem-solving cycle (1–5) because they may have altering frequencies of solution iterations. As incorporated in the model, digital design and production technologies of Industry 4.0 allow product conception and manufacturing to converge by simplifying certain operational tasks. Consequently, convergence facilitates the iterative-circular character of value creation and problem-solving in DUP. Digital technologies both accelerate production speed and increase the frequency of solution iterations, which helps tackle increasingly complex tasks in profitable ways. The continuous loop of sequential interactions along the problem-solving cycle makes virtually impossible to clearly discern different value-adding steps. Yet, all problem-solving stages need to take place at the same location, which prevents a functional disintegration and spatial fragmentation of these stages (Bathelt & Glückler, 2018). Our research finds that the most suitable and favoured location type for new Industry 4.0 based DUP are core areas of cities, because only the urban context offers all of the required assets simultaneously.

Figure 3 specifies which context qualities in particular support a strong embedding of DUP firms into urban localities. While we have not discerned how variations in direct neighbourhood characteristics (i.e., residential, commercial or mixed-use areas) influence the operations of studied DUP firms, our research indicates the major relevance of especially three typically urban assets. First, urban customers – private, industrial (e.g., larger manufacturing enterprises) or creative customers (e.g., agencies and artists) – represent just the sizeable and versatile market demand for tailor-made solutions that is catered to by DUP. As our analysis reveals, customer links connect new DUP firms as suppliers also to the incumbent urban manufacturing base. Second, highly qualified employees (with skills to use and adapt digital technologies) form a major backbone of DUP firms’ problem-solving capabilities. This employee type often prefers living in urban spaces, which requires adequate urban housing and transportation facilities. Third, the knowledge assets concentrating in urban areas, often circulating in networks like the ‘digital hub’ and created in local research institutions or FabLabs, are crucial for DUP development. In conceptual terms, Figure 3 depicts these three categories as important local framework conditions for DUP firms, also using two-sided arrows for indicating mutually interactive and interdependent relationships between corporate and urban assets.

Finally, Figure 3 depicts additional urban location factors called meta conditions. Digital infrastructure, which is still better developed in urban agglomerations than rural areas (Salemink et al., 2017), forms another requirement for thriving DUP. These firms also need appropriate, affordable and attractive production locations. For example, historical factory buildings offer appealing urban brownfield options in many traditional industry towns, usually combining supplies of office space and production halls in central urban areas. Policies and legislation need to permit production in urban spaces and to set limits for emissions (pollutants, noise or smells). The depicted factors show up in our conceptual model because they have frequently been articulated both in our empirical research and other studies (Haefner & Sternberg, 2020; Mühl et al., 2019). They are classified as meta conditions since they do not originate from, or exclusively apply to urban areas (in line with Stiehm, 2017). However, to which extent these conditions can also qualify rural locations remains elusive (and may be taken up in further research, e.g., inspired by Lafuente et al., 2010). Anyway, Figure 3 names only the most prominent urban context qualities identified in our analysis. Our project may have left other advantages undiscovered, which offers further empirical research potential for the future.

CONCLUSIONS

We now sum up in which respects our research can enrich academic debates on Industry 4.0 influences on regional economic actors and urban industrial spaces. We compile insights mainly with regard to academic contributions, but also to policy implications. We conclude with some critical reflections on limitations of our study and further research needs.

Academic contributions

This paper advances debates on the role of ongoing digital change for regional development (Fuchs, 2020; Haefner & Sternberg, 2020), exploring how Industry 4.0 technologies reconfigure value creation patterns of DUP and how respective firms are supported by urban context factors. Employing a qualitative interview approach, we have analysed selected DUP firms in nine cities of the state of NRW, Germany – industrial spaces for which also other studies observe an increasing importance of urban production and digital transformation (Balland & Boschma, 2021; Gornig & Werwatz, 2018; Vendrell-Herrero & Bustinza, 2020). Our results offer refined insights into how DUP firms progressively integrate production and conception for developing tailored solutions to specific customer demands. These demands can only be fulfilled when DUP firms pursue problem-based and iterative logics of value creation in production. Due to the continuous dynamics of the problem-solving cycle, subtasks cannot easily be divided among different operative locations, but must all be executed at the same site (Bathelt & Glückler, 2018). This argument, which was first validated for urban professional service firms (Glückler, 2007) and urban makers (Lange & Bürkner, 2018), is now proven to also apply to typical work procedures of DUP manufacturing firms.

Our research shows as well how the use of digital tools promotes a functional synthesis of production and design/conception activities and enhances the specific problem-solving capacities of DUP, significantly facilitated by spatial co-location (similar to findings on urban makers). We can confirm for DUP that a spatial separation of value creation activities is fairly unlikely, also due to the trend of digital technology firms towards small production sites and smart micro-manufacturing (Bellandi et al., 2019). DUP firms therefore need to expediently co-locate all problem-solving and value creating cycle steps in order to create comparative advantages. This finding substantiates that Industry 4.0 supports the emergence of new types of producers that substantially deviate from conventional manufacturers with their often functionally and spatially fragmented linear value chains.

Evidently, DUP benefits from certain urban context qualities that firmly and simultaneously embed the firms in urban space. Our empirical analysis corroborates the importance of three major assets: urban customers, urban employees, and urban knowledge. These factors, or agglomeration and urbanity advantages, have been considered crucial for a long time (e.g., Jacobs, 1969; Marshall, 1890; more recent contributions are Florida et al., 2017; Glückler, 2007; and Reynolds & Uygun, 2018). Yet, it is somehow surprising that these urban location factors continue to play a crucial role also for Industry 4.0 related production activities. We can add the insight that DUP strongly relies on certain technologies, though, as new digital tools facilitate problem-based value creation. Despite of potentially ‘footloosening’ digital technologies, spatial proximity and place embedding keep on influencing the location behaviour of new creative producers (Götz & Jankowska, 2017).

Three propositions can be stated that elucidate the three most important urban advantages relevant for DUP, connected to their typical business model. First, looking at customers, our research shows that DUP firms primarily serve as suppliers of individualized products in niche markets. This quality distinguishes them from other documented examples, such as urban food or artisanal production (Butzin & Meyer, 2020; Lange & Bürkner, 2018). The studied DUP firms mainly – although not exclusively – cater to the needs of business customers who demand high quality tailor-made solutions. Consequently, the problem-solving cycle of DUP is often initiated by repeatedly reflecting a customer problem, which propels continuous feedback loops with that business partner. The interactive relationship only ends when the customer accepts the final solution. These process qualities clearly explain why spatial customer proximity is so important for DUP. The relevance of proximity, though, probably differs between kinds of DUP firms, depending on applied technologies or offered services. Overall, spatial proximity and continued communication with customers are strongly connected with the problem-solving routines prevailing in DUP, marked by circular processes and iterative feedback loops. It is just this business model which diminishes space-shrinking effects of digital communication technologies, but requires productive direct business interactions on the spot. The Industry 4.0 technologies applied in DUP allow for easily designing several product variants on the computer and to test-build them via rapid prototyping or 3D printing; processes which continuously involve the customer. We therefore state:

Proposition 1: The circular problem-solving approach of DUP increases the importance of spatial proximity to customers despite of digital communication tools.

Second, our study accentuates the crucial role of high-skilled employees for DUP. ‘Smart workers’ (Barzotto & De Propris, 2019) are required to purposefully combine engineering precision, IT competences and hands-on production-related knowledge. The company interviews reveal how important it is to let skilled people freely choose their place of work and follow their preference to live in larger cities, where they can enjoy urban lifestyles and short distances between private home and workplace. We can therefore corroborate findings by other scholars on the growing importance of urban context qualities for high-skilled employees (Duvivier et al., 2018). While our research on DUP feeds into debates on the ‘city of short distances’ (Matt et al., 2020), it enriches the argument that production relocates closer to places of final consumption by another one: Jobs need to locate closer to skilled employees to enable complex problem-solving, no matter which other options are offered through new technologies. Once again, it is mainly the circular problem-solving business mode of DUP that nurtures the relevance of proximity to skilled staff. These experts need to be present especially for conducting highly demanding tasks, inconsistent to assumptions that some activities in the digital age (such as applying software tools) make co-presence redundant. Working directly on the spot is also required for manual production steps integrated in the problem-solving process of DUP. Let us summarize these research insights in the following statement:

Proposition 2: DUP firms’ growing focus on problem-solving increases their need to locate in proximity to urban pools of specifically skilled people, also for employing IT experts.

Third, our results confirm that well-developed urban innovation (eco)systems are particularly beneficial for DUP (in line with Florida et al., 2017; Reynolds & Uygun, 2018). This urban quality favours knowledge spillovers to DUP firms and offers institutionalized network relationships to other digital firms as business partners or to prospective customers. Informal linkages can easily turn into creative and profitable cooperation alliances, for instance, between design agencies and production firms in problem-solving processes. Research institutes and FabLabs offer further local platforms for creative exchange; they connect DUP firms with skilled workforce and deliver the knowledge needed to incrementally improve problem-solving and production routines. Together these urban advantages help establish the DUP firms’ central comparative advantage: creating individualized solutions. Therefore, we state:

Proposition 3: DUP firms’ capacities to deliver tailor-made problem solutions increase with their proximity to urban knowledge institutions, which cannot be replaced by digital means.

In synthesis, our integrated model on DUP brings together all major conceptual elements that mark the nature and local embedding of this new company type in the digital age. It highlights the role of some Industry 4.0 technologies as enablers of converging production and conception activities. This merger, in turn, is manifested in circular iterative value creation, which, in principle, impedes a spatial division of process steps and causes a strong reliance of DUP firms on three major urban assets. The revolving problem-solving cycle depends simultaneously on all these location factors, which keep DUP firms embedded in urban space. Our findings can convincingly explain why DUP firms tend towards favouring urban locations and can hardly thrive in more rural areas (which, however, may look different for other types of Industry 4.0 driven production, such as Smart Factories that demand larger premises and less qualified workers).

Policy implications

Concerning policy recommendations that can be drawn from our study, we refer first and foremost to major location requirements that must be provided to enable the genesis and growth of modern DUP. As these firms apparently thrive on a functional urban innovation (eco)system, this asset must be shaped to fulfil the requirements of smart small-scale micro-manufacturing. Second, the paramount role of well-functioning digital infrastructure and IT-oriented education should be regarded, while it is critical to provide both essential IT facilities and people’s talent for DUP. Third, since DUP firms creatively combine service and production, we echo Harrison et al. (2020): instead of concentrating policy support either on services or manufacturing, regional strategies should inclusively address both sectors, enriched by a focus on digital skill formation for creatively applying cross-cutting Industry 4.0 technologies. Fourth, we agree with Balland and Boschma (2021) that regional approaches should explicitly target to improve localized absorptive capacities for Industry 4.0. Fine-tuned Industry 4.0-related innovation policies should thus be preferred over high-level general-purpose strategies.

Limitations and future research directions

Eventually, we must point out some limitations of our study, which also offer ideas for further research on relevant regional development interdependencies in the future. As our research on new forms of Industry 4.0 enabled DUP is of an explorative rather than deeply analytical nature, we had to rely on qualitative methods for studying just a few selected examples. While this approach has helped understand the new value creation logics that drive DUP, contrasting to conventional production, our findings on the influence of urban context qualities may still be considered fairly vague and incomplete. We therefore strongly encourage further, also quantitative research that can expand and test our location related propositions and the relevance of urban qualities for different elements of the value creation cycle. This research should especially look at different dimensions of proximity beyond the geographical variant, such as cognitive, social, organizational and institutional proximity, linked to seminal economic geography debates (Boschma, 2005).

As we have primarily encountered production-oriented (tangible) Industry 4.0 tools in our DUP study (e.g., 3D printing), we must concede that other, more software-focused Industry 4.0 elements (e.g., Artificial Intelligence) potentially imply differently organized production models. And while we have diligently documented our interview results, issues of interpretation (for instance, concerning technology-related expertise) may still challenge the validity of our findings. The inevitable bias that emerges from selecting and motivating firms for interviews may also have impaired our correct perception and understanding of the DUP situation. Knowledge gaps should thus be reduced by more interdisciplinary research on DUP that combines geographical and technology-oriented engineering perspectives. Joining these forces would allow for techno-spatial analyses that can even better reveal the impact of various, also software-focused Industry 4.0 technologies on the relevance of customer proximity or other local assets.

Finally, while single region research designs are common in regional studies, and we have thoughtfully selected the city and firm examples for our empirical study, our findings may still be valid mainly for the state of NRW and Germany. More research engaging in cross-regional DUP comparisons seems due. In this vein, further studies also need to explicitly explore to what extent new forms of digital production emerge outside urban agglomerations (Lafuente et al., 2010). Another interesting research issue is how DUP activities possibly reflect intra-urban location differences relating, for instance, to differently specialized industrial districts or urban neighbourhoods. Wherever future research on DUP may venture, we hope that the theoretical and empirical cornerstones provided in this paper pave ways to even more conceptual clarity.

ACKNOWLEDGEMENTS

We thank all the interviewees involved in this research project for sharing their experiences with us. Furthermore, we are grateful for the comments of three anonymous referees and the editors of this special issue, Lisa De Propris and Marco Bellandi. Additionally, we thank Anne Wegner for linguistic assistance. Finally, we also thank the participants of the IGU-CDES conference in Budapest, Hungary, and the German colloquium on Industrial Geography in Wiesbaden, Germany (both 2019) for valuable comments on earlier versions of this work.

DATA AVAILABILITY STATEMENT

The data that support the findings of this study are available from the corresponding author (H.C.B.) upon request.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the authors.

Additional information

Funding

This research was supported by the Ministry for Innovation, Science and Research of the state of North Rhine-Westphalia (Germany) through the Forschungsinstitut für gesellschaftliche Weiterentwicklung FGW [grant numbers 005-1605-0015 and 005-1605-0016].