Prof. Göran Roos. In advanced economies, manufacturing will continue to drive innovation, exports...
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Prof. Göran Roos. In advanced economies, manufacturing will continue to drive innovation, exports and productivity growth…As long as companies and countries
In advanced economies, manufacturing will continue to drive
innovation, exports and productivity growthAs long as companies and
countries understand the evolving nature of manufacturing and act
on the powerful trends shaping the global competitive environment,
they can thrive in this promising futureTo win in this environment,
companies and governments need new analytical rigor and foresight,
new capabilities, and the conviction to act. McKinsey (2012)
Manufacturing the Future: the next era of global growth and
innovation, McKinsey Global Institute, London, p. 1 Undoubtedly the
capability to innovate and to bring innovation successfully to
market will be a crucial determinant of the global competitiveness
of nations over the coming decade. There is growing awareness among
policymakers that innovative activity is the main driver of
economic progress and well-being there is a realisation that a co-
ordinated, coherent, whole-of-government approach is Required
Innovation and Growth - Rationale for an Innovation Strategy ,
OECD. Little benefit accrues to a country from its investment in
innovation, unless the subsequent manufacturing of product or
realisation of infrastructure is undertaken in country. Gran Roos
2014
The OEMs The OEM Supply Chain The Aftermarket Gran Roos
2014
Slide 5
is the only remaining large-scale, complex complete
manufacturing ecosystem in Australia with an estimated production
volume of just over 200k as compared to just over 400k 10 years
ago. has extensive and deep linkages to the wider economy. It is
both a purchaser and supplier of services and manufactured goods.
is the industry that is under the highest pressure to continuously
increase its productivity and hence have not only achieved [and is
achieving] astonishing results but is also the industry that has
originated most of the tools and techniques used throughout
industries [including services and public sector organisations] to
achieve productivity improvements. As a consequence companies
linked to the global automotive industry have adopted productivity
improving tools and techniques to a higher extent than general
manufacturing. Leading to an annual productivity improvement for
the automotive industry in the range of 2.5% - 9% depending on the
study, the specific definition of productivity and the time period
studied. Gran Roos 2014see e.g. Kim, 2010; Chen, 2011; Garca-Castro
et al., 2013
Slide 6
During the past six years, Ford Australia has invested more
than $1.9 billion in its Australian product development operations,
including $340 million in 2013. Ford Australia is the industrys
only full-service product development hub, and one of four such
operations globally, capable of designing, developing and testing
Ford vehicles. For the average $150 million GMH received in each of
the past 13 years, it generated $2.7 billion of economic activity,
mainly among those 200-odd component-making companies and service
providers If the total ATS fund of $3.35 billion were allocated
over the decade to 2020, taxpayers would likely receive a return of
up to 400 per cent on their investment, and that's just based on
likely income tax payments. The loss of car manufacturing in
Australia is a setback for Australias capacity to innovate.
Australia will exit the club of OECD nations that have an
automotive industry and will hence not benefit from any of the
associated spillover effects. When the automotive sector is closed
down, there won't be new streams of income tax to replace those
lost when the car industry leaves, only new costs in the form of
social welfare. Gran Roos 2014
Slide 7
The Australian automotive manufacturing industry, including
parts manufacturers, employs around 55,000 people. About 17,000 of
these are directly employed by the three OEMs: Ford, General Motors
Holden and Toyota (DIISRTE 2013b). Combined, the industry
contributes over $2 billion to GDP (IBIS World 2012a) and plays a
significant role in the economy, supporting a number of associated
industries and intermediaries. The distribution is: around 80% for
the inputs into the industry and 20% for the value add in the
industry Gran Roos 2014
Slide 8
The automotive industry have Capital investment about A$750
million a year. For every dollar invested in capital an estimated
$4.39 is spent on labour (IBIS World 2012a) and this will continue
to decrease The time-lag between investments and productivity
improvements in the automotive industry seems to be 3-4 years
[based on Swedish data] R&D spending with outside parties of
about A$100 million a year. Internal R&D spend of around A$700
million a year. The industry at large is far greater than the
manufacturing component and employs over 260,000 people across more
than 20,000 enterprises across the supply chain. This includes
businesses upstream in the supply chain (e.g. parts manufacturers),
as well as downstream (e.g. car dealers, maintenance and repair).
The automotive industrys share of the economy is 1.52 per cent
(IBIS World 2012b) whereas its share of the manufacturing sector is
around 29 per cent by employment. Gran Roos 2014
Slide 9
Automotive is important due to the balance between the
multiplier effects of different types of manufacturing and the
geographical structure of their supply chains. Research shows that
while advanced manufacturing at its highest level may be exactly
what a nation must pursue to achieve greater prosperity [hence the
very visible focus on high-tech], the local value-added of a
geographic region may be better served with medium-tech
manufacturing that lends itself to the creation of geographic
clusters of like companies and suppliers in close proximity [this
necessary focus is easily forgotten]. Low-tech manufacturing, on
the other hand, is easily superseded in terms of value-added to a
geographic region by medium- and high-tech manufacturing because of
the higher level of skills required and wages paid, as well as the
overall level of business and public investment made into the
region, which is typically much greater for high- and medium- tech.
Additionally, the multiplier effect of medium- and high-tech
manufacturing can be greater as robust supplier networks often
co-locate in the region to further enable just- in-time
manufacturing processes, as in the automotive industry. As the
product becomes increasingly sophisticated and complex, requiring
unique or specialized suppliers contributing complex subsystems and
access to advanced global supply networks, as occurs in the
aerospace industry, the importance of close proximity of supplier
to manufacturing or final assembly facility location often
declines. The critical requirement of access to specialized
suppliers and unique global supply networks not located in close
geographic proximity takes priority. The value-added to the
geographic region may actually be less, if clusters of like
companies and their supply base are not formed in the region as a
result of the need to access highly specialized and advanced
suppliers in other parts of the world. Gran Roos 2014
Slide 10
Automotive Low tech High tech Medium tech Multiplier Effect
Local Share of Multiplier Effect 100% 90% 80% 70% 60% 50% 40% 30%
20% 10% 0% 15:1 10:1 5:1 1:1 Gran Roos 2014
Slide 11
The figure below that shows Average US Weekly Earnings in
Manufacturing and Non-manufacturing, Controlling for Worker and Job
Characteristics, 2008-2010 Analysis of combined Current Population
Survey outgoing rotation groups for 2008-2010, conducted by Mark
Price of the Keystone Research Center.Gran Roos 2014
Slide 12
Moavenzadeh et al., 2013b.Gran Roos 2014
Slide 13
Slide 14
The accumulation of capital drives economic growth and
technological change has minimal impact Mandel (2004) note that
neoclassical economists are capital fundamentalists who believe
that savings and investment in physical capital and (sometimes)
human capital are the only forces driving growth. [They] generally
ignore or minimize the role of technology. For the most part,
therefore, neoclassical economists remain profoundly ambivalent or
even hostile toward most areas of technologyThey grudgingly
acknowledge the importance of technological change, but they dont
understand it or trust it. In the famous Solow growth model,
technological change was interpreted as being represented by the
unexplained residual. It was often pointed out this meant that
technological change was important but exogenous and fell like
manna from heaven. Economic growth is achieved by maximizing
allocative efficiency. Allocative efficiency is the market
condition whereby resources are allocated in a way that maximizes
the net benefit attained through their use; and the quantity of
goods produced is that which is most beneficial to society.
Allocative efficiency revolves around the responsiveness of
economic agents firms and consumers to price signals (Gjerding,
1998). Consequently, neoclassical economists tend to rely on
mathematical models rather than on actual studies of how
businesses, industries, and national economies work. The economy
tends to equilibrium. Gran Roos 2014
Slide 15
Innovation is a much larger driver of growth than capital
Productive efficiency and adaptive efficiency are much more
important to economic growth than maximizing allocative efficiency
The economy increasingly doesnt tends to one equilibrium.
Equilibrium systems by definition are in a state of rest, while
growth implies change and dynamism (Beinhocker, 2006). Individuals
and firms are not necessarily rational actors. Behavioural
economics is finding that, in real life, people consistently make
what are at least from the perspective of economics irrational
decisions all the time. Beinhocker (2006) explain that peoples
decisions are affected by a host of problems, including framing
biases, difficulties judging risk, superstitious reasoning, and
other human biases. Often, for example, people tend to overestimate
the likelihood of low probability events. Research on the process
of organizational change and innovation increasingly shows that the
process is path dependent, location specific, and institutionally
shaped. Gran Roos 2014
Slide 16
TechnologyDevelopment ForcesDrivingActivityDispersion
ForcesDrivingActivityConcentration Consumer and Customer Behaviour
Manufacturing Gran Roos 2014Roos, G. & Kennedy, N. (eds.).
(2014). Succeeding in a High Cost Operating Environment, IGI
Global. Hershey. PA
Slide 17
Gran Roos 2014Roos, G. & Kennedy, N. (eds.). (2014).
Succeeding in a High Cost Operating Environment, IGI Global.
Hershey. PA ICT including Big Data & Big Data Analytics
Additive Manufacturing with specific focus on metal producing
systems Industrial Biotechnology with specific focus on microbial
consortia engineering including synthetic biology
Internet-of-things Photonics Advanced Materials. Nanotechnology
Advanced Manufacturing Equipment with special focus on industrial
robotics. Micro and Nanoelectronics. Production Systems targeted at
high cost operating environments: Individualised Production,.
Virtual Production Systems Hybrid Production Systems
Self-Optimising Production Systems Wage Cost Drivers Operating
environment for business i.e. a well functioning institutional
setting (i.e. easy interface, clarity of rules and predictability
of any changes in the regulatory and institutional environment)
Changing Importance of Economies of Scale for Production The
complexity of products has increased which increases the advantage
of the developer if development and production is co- located. When
the relative wage differential declines, outsourcing becomes
appropriate only for a small and shrinking area of medium tech. The
average life cycle for a given product has shortened resulting in
decreased time-to-market. The cost differential needed to justify
offshoring is on an upwards trajectory. Changing Need for
Interaction with Customers and Input Providers Increasing
requirements for co-location to extract the benefits of untraded
Interdependencies grounded in trust and a common institutional
framework. Firms that are members of agglomerations have higher
productivity as well as higher productivity improvements than firms
that are not members of any agglomeration Changing Needs for Skills
in the Manufacturing Workforce Presence of many broad and deep
industrial commons together creating a high economic complexity.
Maximise the total value for money delivered at any one time by
understanding the customer and consumers value perception and by
using all three value dimensions: instrumental, intrinsic and
extrinsic Technology DevelopmentDispersing and Concentrating Forces
Continuously Changing Customer Behaviour
Slide 18
Gran Roos 2014
Slide 19
Slide 20
The NPV of the Automotive industry amounts to $23 billion
measured as a loss of consumption expenditure if the industry was
to disappear or $1000 per capita This is to be compared with a NPV
of $360 per capita of any subsidies provided The largest impacts
may not be where you expect it 1000 jobs lost in automotive
generates total job losses of around 1400 of which the following
are examples of losses in other industries [Swedish data]: 324 in
Retail 306 in Business Services 144 in other vehicle and
transportation production 90 in Transportation 90 in other
manufacturing 72 in Hotel and Restaurant 70 in Construction 70 in
Other private services Data from Sweden SCB Gran Roos 2014
Slide 21
Allen Consulting Group, 2013, The strategic role of the
Australian Automotive Manufacturing Industry, Report to the Federal
Chamber of Automotive Industries Gran Roos 2014
Slide 22
Approx 4000 jobs estimated to be lost in the Automotive Tier 2
Supplier network (indirect materials and services) Distribution of
likely employment vulnerability of automotive supplier network by
postcode - estimated Number of Jobs vulnerable PPS Global Pty Ltd
2013 the estimated employment impact by postcode in South Australia
only Gran Roos 2014
Slide 23
Several studies show that one of the many challenges for
Australian industry is managerial competence. In these studies (see
e.g. Green et al., 2010) Australia is identified as a second tier
nation when it comes to managerial competence. One of the benefit
of global value chains operating in highly competitive markets is
that they develop exceedingly competent managers, from which the
rest of the economy benefits The fewer global supply chains present
in the country the higher the benefit from those that are present
and in Australia there are very few as exemplified by the economic
complexity Index of Australia which is lower then most other
countries AustraliaBrazilCanadaDenmarkFinlandFranceGermany Economic
Complexity Index-0.3210.2440.5711.2671.7151.4731.985 Hong Kong
(China) India Netherlan ds New Zealand NorwaySwedenUSA Economic
Complexity Index1.0230.2471.0440.2870.7771.8591.447 Gran Roos
2014
Slide 24
An example grounded in convenience sample complemented with the
observation of a natural experiment have provided the grounds for
the following calculation of the value for the Australian economy
of the Automotive value chain managerial competence spill over:
Assuming 16,000 employees (43,000 in the complete system) and
assuming that 15% have acquired high managerial competence or
expert competence in e.g. lean thinking, this leaves us 2,400
individual (6,450 in the complete system). Assume 5% personnel
turnover annually that departs for other industries (a low number)
this would be 120 individuals (322 in the complete system). Assume
a low number for the turnover of the firms that employ these people
of A$5 million per year. Given that these individuals are able to
increase the contribution line of these firms by 5 percentage
points this equals A$0.25 million per year. This does not sound a
lot but under the assumption that it happens every year in
perpetuity and using a 5% annual cost of capital this equals a net
present value of A$12bn (A$32bn using the complete system) for the
rest of the economy. This is a serious underestimation since we
know that on average increasing the managerial competence in a firm
by 17% is equal to increasing the available labour hours by 25% or
increasing the available working capital by 65%. Gran Roos
2014
Slide 25
1700 manufacturers, distributors, wholesalers, importers,
mechanical repair & modification services and retailers of
automotive parts and accessories, tools and equipment in Australia.
On the manufacturing side this includes: Products used to modify,
maintain or enhance the performance of vehicles, including
modifications for rough terrain, speciality products, safety,
comfort, appearance, functional performance and body components.
Products that are replaced regularly throughout the life of the
vehicle as a result of normal wear and tear e.g. filters, tyres,
wiper blades, batteries and brake pads. The automotive aftermarket
is not dependent upon local vehicle assembly and hence despite the
announced closure of assembly and engine manufacturing plants, the
aftermarket segment remains stable and profitable Export represents
12.4% of sales Weighted average profitability at the EBIT level of
15.4% Biggest challenge is regulation Gran Roos 2014
Slide 26
REDARC is the 2014 Telstra Business of the Year - a program
that has celebrated brilliant Australian small and medium
businesses since 1992 Based in Lonsdale, South Australia, Redarc
has over 30 years experience in the research, design, development
and manufacture of a range of electronic voltage converters and
associated products including inverters, power supplies, battery
chargers, CANBus modules, turbo timers, glow plug timers, trailer
braking products and customised electronic modules. Essentially,
Redarcs products are attached to any moving vehicle that uses
battery power including cars, boats, rail, trucks, mining
equipment, bus and emergency vehicles. Redarc's goal is to ensure
that the Redarc product and service is the benchmark by which the
competition is measured. 3% export with a strategic focus to
increase Higher than average profitability 20% average annual
growth rate A$30m turnover 2014 High R&D Spending Gran Roos
2014
Slide 27
Smaller regions and countries will have to specialise in
components, sub- systems or parts of the production process in
which they can excel within a global network e.g. Sweden is
specialising in Safety, Low environmental impact, ICT and High tech
components. Alternatively a specialisation in niche vehicles that
can be produced in low volumes at high margins moving towards the
order-build-personalisation agile manufacturing system business
model Alternatively diversify all sub-suppliers in the supply chain
and accept closure of the primes this will take 5-10 years. Gran
Roos 2014
Slide 28
Low Volume private label production Local production of global
platforms Automotive sub-assemblies or sub-systems 1. Knee Airbag
2. Steering Wheel 3. Driver Airbag 4. Passenger Airbag 5. Thorax
Sidebag 6. Frontal Seat Belt System Load Limiters Buckle
Pretensioners Move to alternative production using existing
capability base Gran Roos 2014
Slide 29
The impact of the Automotive Industry on the Australian
industrial landscape is higher the generally understood This
dependency have to be reduced but this is a 5 [diversification]+2
year journey [building new global supply chains] if done in
parallel and we do not have this time so the impact will be very
large The key question is if we as a country want to be in
Automotive or not and if yes in what long-term viable form Gran
Roos 2014
