A study on industrial synergies between two friends: Suzhou & Baden-Württemberg

A study on industrial synergies between two friends: Suzhou & Baden-Württemberg Prof. Dr. Steffen Kinkel Head of the Institute for Learning and Innovation in Networks (ILIN), Karlsruhe University of Applied Sciences Opening Ceremony KIT China Branch Suzhou, China Friday, May 16th, 2014 Prof. Dr. Steffen Kinkel 1

ILIN Competences Institute for Learning and Innovation in Networks (ILIN) (Prof. Dr. S. Kinkel, Prof. Dr. A.P. Schmidt) Innovation in Networks Open Innovation Global Innovation, Production and IT Local Innovation and Production Networks; Integrated Value Chains Production-IT-Linkages Networked Learning and Knowledge Development Enterprise 2.0, Social Technologies in Industry Knowledge Maturing and Transfer Agile Methods Ambient Assisted Living Prof. Dr. Steffen Kinkel 2

Our Partner wbk Institute of Production Science wbk Production systems Machines, equipment and process automation Manufacturing and materials technology GAMI - Global Advanced Manufacturing Institute Suzhou, China AMTC - Advanced Manufacturing Technology Center Shanghai, Jading Campus at Tongji University, China wbk, Fasanengarten, KIT wbk, Ehrenhof, KIT Gebäude 276, KIT Campus Nord Tongji University, GAMI, China Prof. Dr. Steffen Kinkel 3

The study Structure and main topics of the study Portrait of Suzhou Portrait of Baden-Württemberg Industry in Suzhou Size and sectoral structure of companies; special focus on machine tools, automotive and e-mobility Innovation efforts and outcomes Specialization patterns: sectors and technologies Differences and similarities between domestic and foreign companies (with a special focus on companies from Baden-Württemberg) Industry in Baden-Württemberg Specialization patterns: sectors and technologies Special focus on machine tools, automotive, e-mobility Innovation efforts and outcomes Identify matches and synergies Practical guide to start a cooperation Experiences of cooperators Success stories Prof. Dr. Steffen Kinkel 4

Evidence we can build on Leading German companies production and innovation strategies in China Investment and production activities offshoring and backshoring of German companies in China Patent activities and specialization of German and partially Chinese and Baden-Württemberg companies Innovation and cooperation behaviour of automotive suppliers and machine tool companies in Baden-Württemberg Prof. Dr. Steffen Kinkel 5

Data and methodology Methodology Semi structured expert interviews, each 2-3 hours, 14 days in May/June 2011 Covered regions: Beijing area incl. Tianjin, Shanghai area incl. Nanjing Sample of interviewed enterprises (n = 18) 5 Automotive sector (OEM and supplier) 4 Mechanical engineering, plant construction 4 Electrical engineering, automation, metrology 3 Chemical industry 2 White goods & other Size of the enterprises: 5 < 1000 EMP, 3 < 2000 EMP, 10 > 2000 EMP A total of 115.000 employees in China, about 30% of all employees of German enterprises in China, about 45% of all local turnover of German enterprises in China Prof. Dr. Steffen Kinkel 7

Manufacturing strategy: Spotlights on main results Production in the market for the market If exporting, then within Asia Rarely re-imports to Europe, almost no offshore factories Cost reduction becomes less important; wages increase 10-25% p.a Global standards for production technology, quality level Process innovations in German lead plants Copy and paste, partly local adaption Patterns of foreign companies in Suzhou? QUOTATIONS Machine building: The cost advantages of China compared to Germany are diminishing more and more. Chemical industry: The production technology we use in China complies with international standards. Patterns of local companies in Suzhou? Prof. Dr. Steffen Kinkel 8

R&D and innovation strategy: Spotlights on main results Cost-driven relocation of R&D to China has yet no relevance Establishment of local R&D: application engineering / product adaptation; sometimes technology scouting gap in real innovation see competence profile Cooperation with universities focused on recruiting and scouting Fight for experienced talents; competition by local enterprises (Top 5 employers); Finding and binding people is key Patterns of foreign companies in Suzhou? Patterns of local companies in Suzhou? QUOTATIONS Plant construction: Despite of the big local capacities in R&D, 80% of the research topics are still set by our parent company. Automotive supplier: In the long run we aim for developing products for the global market in China. Metrology: Chinese enterprises become more and more attractive at this stage are five of the most popular employers in China national enterprises. Prof. Dr. Steffen Kinkel 9

Local Competence Level Level of competencies for product innovations Chinese gap Product Innovation 5 4 3 2 1 Technology Monitoring/ Scouting Basic Research Applied Research Basic Innovation/ Development of new Products/ Technologies :: Singular pilot activities :: Common competence level Enhancements/ Reengineering/ Improvements Adaption/ Application of Products/ Technologies on local Requirements Prof. Dr. Steffen Kinkel 10

low Site competence high Strategic roles of foreign factories (Ferdows 1997; Kinkel/Zanker 2007) Lead Factory Source Factory Contributor Factory Offshore Factory Outpost Factory Server Factory Cost Reduction Resource Seeking Strategic Objective of the site Technology/ Knowledge Seeking Market Seeking Vicinity to Key Customers Prof. Dr. Steffen Kinkel 11

low Site competence high Strategic roles of foreign factories (Ferdows 1997; Kinkel/Zanker 2007) Lead Factory Which strategies and factory roles are companies from Suzhou and BW pursuing? Source Factory Contributor Factory Advanced Server Factory Offshore Factory Outpost Factory Server Factory Cost Reduction Resource Seeking Strategic Objective of the site Technology/ Knowledge Seeking Market Seeking Vicinity to Key Customers Prof. Dr. Steffen Kinkel 12

German FDI (foreign direct investment) stocks in China Year Value (Mio. ) Diff. to prev. year Source: Deutsche Bundesbank, own calculations Rel. diff. to prev. Year (%) 2011 34.955 7.554 28% 2010 27.401 6.220 29% 2009 21.181 2.460 13% 2008 18.721 4.272 30% 2007 14.449 2.210 18% 2006 12.239 1.837 18% 2005 10.402 2.235 27% 2004 8.167 1.184 17% 2003 6.983 618 10% 2002 6.365-569 -8% 2001 6.934 1.193 21% 2000 5.741 1.467 34% Almost 35 billion Euro investment of German companies in China Strong dynamics since 2000, short slowdown in 2002/03 Even growth in the global crisis (2009), when global FDI flows were going significantly down Chinese FDI in Germany approx. 1/10 of German FDI in China Approx. 5000 German companies active in China, approx. 900 Chinese companies in Germany BW FDI in Suzhou? Suzhou FDI in BW? Which activities are performed? Production? R&D? Prof. Dr. Steffen Kinkel 14

Global distribution of German international companies production capacities EE beyond EU 3% North-/ Latin America 7% Asia 8% South America 1% RoW 1% 20% of foreign production capacities in Asia BW production activities in Suzhou? Suzhou production activities in BW? R&D? EU 21% Germany 61% German Manufacturing Survey (GMS) 2012, Fraunhofer ISI Prof. Dr. Steffen Kinkel 15

Share of companies (%) Production relocation and backshoring activities over time (German metal and electrical industry) 30% 20% 17% Verlagerung Relocation in in the den zwei Jahren two years vor before... realisiert 27% 26% 19% Rückverlagerung Backshoring in in the den zwei Jahren two years vor... before realisiert 25% 19% Lowest relocation level since mid 90s Every 4 th relocating activity is followed by backshoring; ca. 400 backshoring companies p.a. Dynamics in BW and Suzhou? 12% 10% VG 11% 4% 6% 6% 4% 3% 3% 2% 0% 1995 (n = 1.305) 1997 (n = 1.329) 1999 (n = 1.442) 2001 (n = 1.258) 2003 (n = 1.134) 2006 (n = 1.011) 2009 (n = 817) 2012 (n = 820) German Manufacturing Survey (GMS) 2012, Fraunhofer ISI Prof. Dr. Steffen Kinkel 16

Target and source countries for production relocation and backshoring activities (2010 to mid 2012) Source countries of backshoring activities (n = 32) Target countries of relocation activities (n = 154) New EU 12 China Other Asia Main backshoring reasons: Quality Flexibility / Ability to deliver Patterns in BW and Suzhou? EU 15 North America Other Eastern Europe South America RoW Share of reloc./backsh. companies (%) Prof. Dr. Steffen Kinkel 17

Trends in foreign R&D and global innovation networks (GINs) Increasing but slowed down trend to locate R&D in emerging countries Market-seeking motives (e.g. need to adapt products to local markets, support foreign production) remain most prominent Knowledge-seeking motives gain importance High demand and growing (lead) markets at foreign locations primarily foster the establishment of local Development and design activities Foreign Research activities are particularly driven by local skills/talent and the quality of the research system Multi-hub networks of centres of excellence, stepwise assigned with global R(&D) mandates Localization of D globalization of R!? Patterns in BW and Suzhou? Prof. Dr. Steffen Kinkel 18

Number of transnational patent applications for selected countries (1991-2011) Prof. Dr. Steffen Kinkel Source: EPO PATSTAT; Fraunhofer ISI caculations 20

Shares of hightech at total patent applications for selected countries (1991-2011) Source: EPO PATSTAT; Fraunhofer ISI caculations Prof. Dr. Steffen Kinkel 21

Technology specialization of Baden-Württemberg and Germany in transnational patent applications (RPA 2008-2010) RPA Revealed Patent Advantage: + Machines, machine tools + Motors, Transport + Precision instruments + Electrical equipment - Basic and organic chemistry - Plastics and materials - ICT - Biotechnology Source: EPO PATSTAT; Fraunhofer ISI caculations Prof. Dr. Steffen Kinkel 22

Technology specialization of Baden-Württemberg and Germany in transnational patent applications (RPA 2008-2010) RPA in Baden-Württemberg: + Machines, machine tools + Motors, Transport + Precision instruments + Electrical equipment - Basic and organic chemistry - Plastics and materials - ICT - Biotechnology Frequencies in Suzhou: + Material analysis, chemical & physical properties + Measuring, testing, controlling microbiological processes + Semiconductors + ICT, digital transmission RPA in Suzhou? Complementary competences? Source: EPO PATSTAT; Fraunhofer ISI caculations China Invention & Patent Prof. Dr. Steffen Kinkel 23

Countries shares at EPA applications in technology fields relevant for E-Mobility (2000-2007, % of all applications per technology field) Internal combustion engine GER BaWü US JP KR FR IT CN 28 17 13 36 0 8 4 0 Hybrid Drives 16 11 36 32 0 7 1 1 Electric Motors 28 14 13 33 2 7 2 0 Mobile Fuell Cell 15 3 11 48 7 6 2 0 Batteries for E-Mobility 11 5 17 42 12 5 1 3 Break Energy Recovery 10 10 20 20 0 30 0 0 Heating / Cooling 44 0 4 19 0 26 4 0 Emission Reduction 9 2 9 68 0 7 0 0 Patent activities of companies from Suzhou? Prof. Dr. Steffen Kinkel Source: EPO PATSTAT; Fraunhofer ISI caculations 24

Competitive strategies of BW and NRW machine tool and automotive supplier companies Machine Tools BaWü 19 16 38 8 18 Machine Tools NRW 20 25 23 11 22 Price Quality Innovation/Technology Short delivery times Flexible adaption of products to customer req. Car suppliers BaWü 37 29 16 6 13 Car suppliers NRW 47 23 9 4 17 0% 20% 40% 60% 80% 100% Erhebung Modernisierung der Produktion 2006, Fraunhofer ISI Strategies and patterns of Suzhou and BW companies? Prof. Dr. Steffen Kinkel 26

Potentials of co-operations for innovation performance 30% Sales with new products Machine tools Car suppliers 20% 20% 19% 18% 16% 20% 19% 18% 17% 10% 0% R&D co-operations with research institutions No R&D co-operations with research institutions R&D co-operations with other companies Erhebung Modernisierung der Produktion 2006, Fraunhofer ISI No R&D co-operations with other companies Innovation and co-operation activities and potentials of Prof. Dr. Steffen Kinkel Suzhou and BW companies? 27

The study Methodology of the study Analysis of existing regional studies and data Patent analysis Expert interviews (5-10 in Suzhou and Baden-Württemberg) Online company survey (core element 100 domestic companies and 50 foreign companies in Suzhou 150 companies in Baden-Württemberg Questions on: Competitive strategy, use of technology, product innovations, R&D activities, co-operation activities (within and between Suzhou and BW), foreign production and R&D activities, important location factors, personnel structure Interviews with successfully cooperating companies 3-5 success story profiles Interviews with partners from Suzhou and Baden-Württemberg Please help us to make it a success! Prof. Dr. Steffen Kinkel 28

Contact Prof. Dr. Steffen Kinkel Faculty of Computer Science and Business Information Systems Karlsruhe University of Applied Sciences Moltkestr. 30, 76133 Karlsruhe Tel.: +49 721 925-2915, Fax: -2965 steffen.kinkel@hs-karlsruhe.de Prof. Dr. Steffen Kinkel 29

Backup Prof. Dr. Steffen Kinkel 30

Procurement / SCM strategy: Spotlights on main results STATUS QUO Efforts for a high share of local sourcing in China, ranging quantitatively (# parts) from 30% to up to 90% of the inputs But on a value basis considerably less local source; complex parts are still mostly imported Partly already high-performing local suppliers, but long development time: 10-15 years until 80% local source ongoing high efforts for support and supervision lower level of variant flexibility of local SC (but high volume flexibility) QUOTATIONS Metrology: The lack of competence of some of the local suppliers is a problem for changes in products or processes. This needs to be checked consistently, otherwise the local procurement can be even more expensive than the import. IN THE FUTURE: Challenge: Build-up and maintain local SC-structures Prof. Dr. Steffen Kinkel 31

Site Competence Pathways of strategic roles of offshore plants in China Global hub role for product and/or process knowledge Lead Factory Supply of global markets Testing ground for new (basic) process technologies and products Local product and process development (no basic innovation) Choice and development of suppliers Source Factory Contributor Factory Advanced Server Factory Procurement Production planning and process changes Product customization and redesign Product and process improvement recommendations Server Factory Local logistics Technical process maintenance Production Collect information Offshore Factory Technology Scouting Outpost Factory Access to low-cost production Access to skills and knowledge Strategic Reason for the Site Proximity to market Prof. Dr. Steffen Kinkel 32

Four guiding principles for the future development of Chinese factory sites 1. Production: From cost orientation with focus on wage costs also opportunities for German mechanical engineering firms 2. Sourcing : From selective supplier development in single source to systematic development of strategic local suppliers in a dual source approach 3. Innovation: From product adaptation mode and partly technology scouting to Bottom-up design of products/ solutions focusing on functional and cost requirements and strategic research co-operations with technical universities 4. HR: From curbing employee fluctuation to establishing systematic personnel development concepts and career paths Prof. Dr. Steffen Kinkel 33

Risk management and relocation to China Procurement risks Financial/fiscal risks Production risks Manpower risks Sales/distribution risks Locational risks R&D risks Risks through loss of know how or product piracy no production relocation production relocation elsewhere production relocation to China 4% 17% 6% 15% 11% 21% 47% 58% 66% 49% 56% 64% 57% 61% 73% 28% 30% 32% 39% 45% 52% 35% 39% 43% 0% 20% 40% 60% 80% Risk management is more important for firms relocating production activities to China Particularly important for Chinese activities is considering Production risks Know-how risks (IPR) (Procurement and financial risks) Prof. Dr. Steffen Kinkel 34

Number of transnational patent applications from Baden- Wuerttemberg and Germany Prof. Dr. Steffen Kinkel Source: EPO PATSTAT; Fraunhofer ISI caculations 35

Specialization profile of BW and Germany in selected technology fields (RPA 2008-2010) Sustainable Mobility Climate Change and Energy Resource efficiency / protection of environment Life Sciences / Health ICT Baden-Wuerttemberg Germany Prof. Dr. Steffen Kinkel Source: EPO PATSTAT; Fraunhofer ISI caculations 36

Innovation performance of BW and NRW machine tool and automotive supplier companies 25 Sales with new products [%] 20 20 Time to market [Months] 20 21 17 17 17 15 15 15 10 5 0 Car suppliers NRW Car suppliers BaWü Machine Tools NRW Machine Tools BaWü Erhebung Modernisierung der Produktion 2006, Fraunhofer ISI Performance and patterns of Suzhou and BW Prof. Dr. Steffen Kinkel companies? 37

Process innovations 80 genutzt, geringes-mittleres Potenzial 70 60 genutzt, hohes Potenzial 25 23 50 40 34 29 27 30 51 53 20 25 10 20 18 22 17 25 0 6 7 AZL MB AZL MB AZL MB AZL MB Bildverarbeitung Prozessintegrierte Industrieroboter PPS/ERP-System Qualitätskontrolle 8 Erhebung Modernisierung der Produktion 2006, Fraunhofer ISI Patterns of Suzhou and BW companies? Prof. Dr. Steffen Kinkel 38

Factors supporting Re-localized Manufacturing Advantages of cost-based relocation activities to low-wage countries diminish, market related expansion investments in emerging markets gain importance New strategic imperative of local manufacturing in the market for the market the end of the era of cost-focused GVCs!? Supporting factors: Complexity of global supply chains (up to 30-40 stages) Vulnerability of global supply chains (e.g. Fukushima) Individualized consumption and production modes Massive market shifts (e.g. China as market for German car manufacturers already bigger than whole Europe and still growing) Rising labour costs in LCC and reduced relevance of production-related labour costs for total costs due to further automation (< 10% of total costs) Innovative ICT and manufacturing technologies supporting individualization and automation: 3D Printers/ Additive Manufacturing: Individualization for free vs. low EoS Industry 4.0: Cyber-physical systems and internet of things Prof. Dr. Steffen Kinkel 39