I hope you're right, DSRaider. Faction differentiation is really needed badly in Elemental. Personally, while the stat differences are important, the biggest thing in my opinion is the lore. What is the difference between the Trogs and the Wraiths? They both are just grayish looking humans to me. The distinction, if there is one, is moot. What's the difference between Altar and Capitar? One likes red, and the other likes purple? There are some hints in their faction descriptions, but these distinctions really don't come to life. Of prime importance, I think that each faction needs a defined theme, and that theme ought to manifest itself throughout the game. As a guy who hasn't read the novel or gone in-depth into the campaign, I would offer the following suggestions:
Altar: Adventurous men of the land. Altar should have a hardy, "outdoorsy" feel. (Think: Log cabins, Horses, pastures, farms and windmills.)
Capitar: Paragons of the old order. Well armored, the most "civilized" in a city/industrial sense. Above all, Capitar should give off the sense of a powerful kingdom desperate to look unaffected by the events of the Cataclysm. (Think: Stone and marble structures, ornate swords and flags with crests upon them).
Gilden: Mountain warriors, rich with gold. Gilden's theme should be Iron, Gold, Mountains, and Tunnels. (Think:Iron axes and crossbows, buildings reinforced with sturdy pillars and entrances to basements and cellars, mountain-esque fortresses decorated with gold and jewels).
Tarth: Hunters of the wildlands. Tarth's theme should be "outdoorsy" as well, but in more of a forest/jungle/swamp sense than the hills and pastures of Altar. (Think: huts built around trees, walls of uncut boulders covered in moss, vine canopies decorating Tarth's buildings).
New Pariden: The magic adepts of the humans. New Pariden's theme should be magical elegance and knowledge (think: rune decorations, flowing robes, glowing magical crystals built into New Parident's structures)
Now, just looking at the humans, how do these themes translate into the game? Stat differences become quite clear. For example, off the top of my head, mounted Altar units gain extra dexterity, Capitar swordsmen gain extra armor when garrisoned in a city, Gilden axemen gain extra attack and defense when defending from rocky or elevated positions, Tarth archers gain extra movement through swamps and forests, and New Pariden swordsmen have improved resistance to magic attacks. These themes could also translate into global differences, with different buildings giving off extra resources based on the faction theme (IE, extra mana for New Pariden arcane labs, or extra production from Gilden's Mining Guild). The AI for each faction could also be tailor-made to these specific themes, enabling each faction to act in a unique kind of way.
Plus, I think that it would be a huge help if each faction had their own unique building designs. A Tarthian workshop should look quite different from a Capitar one, even if they perform a the same function. It would dramatically help with immersion.
Anyway, that's my main thrust. I agree with you all that there should be mechanical differences between the factions, but the #1 issue, in my opinion, is immersion and lore. If you work on that, so that the kingdoms and empire truly feel different, then you'll have achieved your goal.
As a post-script, these are my suggestions for the Fallen factions, as well as Fallen races (note: the correlation between factions and races is all me. I'm not sure of the actual race to faction ties, if there is one in particular):
Kraxis: Amoral and ruthlessly pragmatic humans. Their theme should be a distortion of the Kingdom styles (think: Jagged black walls, tamed scorpions, gleaming scimitars, a fallen, twisted Capitar/ Altar mix).
Resoln: The most magically attuned of the fallen. A nation of wraiths, sorcery should be their main theme (think: ominous fog, magical runes and orbs, a fallen New Pariden. Wraiths should look more ghostly to fit this theme, and to distinguish them from the other fallen).
Umber: The Umber are of Quendar stock, power-mongers who pride themselves in their Volcanic origins. Umber's theme is Volcanic, Mountain, Lava, and Fire (Think: open fires, seething steam, stone maces, rock towers and walls lined with lava pots).
Yithril: A nation of Urxen, burly creatures who thrive in the swamp lands. Yithril's theme is Swamp and Survivalist (think: Wooden walls protected by swamp trenches, strewn logs tossed about Yithril houses, game carcasses on makeshift racks, a fallen Tarth).
Magnar: A nation formed by the Trogs, ambitious creatures who wish to build mighty monuments to the heavens. Magnar's theme is majesty (Think: Ornate pillars, monuments, statues, verandas. Crowns, tiaras, and swords encased in silver and emerald. A fallen Capitar).