Innovation in the steel and metal processing industry challenges for medium sized companies and the entire value chain

Transcription

1 Dipl.-Ing. Ulrich Galladé Präsident des WSM Galladé Group Im Esch Witten Es gilt das gesprochene Wort Innovation in the steel and metal processing industry challenges for medium sized companies and the entire value chain Speech held at METEC InSteelCon 2007 June 12, 2007 in Düsseldorf (Folie 1) Ladies and Gentlemen, Thank you very much for allowing me the pleasure of addressing you today, as the President of the Federation of Steel and Metal processing Companies in Germany.

2 2 We have chosen a challenging topic: Innovation. This topic is already quite challenging. A lot of literature has been published recently and a lot of political action has been taken to encourage innovation. This is shown, for example, in the context of the Lisbon agenda I would like to further develop some thoughts with you. One of these is Innovation as a challenge for SMEs and for the entire supply chain. This is appropriate for our morning session, as we have with us three representatives from the steel processing supply chain in Germany; presidents form the steel industry, from mechanical engineering and from the steel and metal processing sector. I am inclined to say therefore that this gathering represents an important cross section of the supply network. (Folie 2)

3 3 Let me start by presenting to you the steel and metal processing sector in Germany, which is represented by my federation, the WSM. I will then discribe the role of SMEs in Steel processing Supply Chains. This will bring us to the importance of Innovation. Finally I will draw some conclusions. (Folie 3) Steel and Metal processing in Germany is carried out by some companies. More than employees produce an annual turnover of about 72 billion Euros. This figure has risen in recent years because of the massive increase in steel prices since the year In 2003 we calculated an annual turnover of around 65 billion Euros. It is important to realise that the majority of these companies are family owned. Hardly any of them are listed on the stock exchange. The business culture is family based. I will return to this fact later.

4 4 The steel and metal processing Companies which belong to our sector are members of 24 associations, all of which are politically represented by the WSM. (Folie 4) The steel and metal processing industry is focused and dependent upon the entire supply chain. Our companies produce semi-finished products and components, often for the automotive industry, but also end products, which are sold directly to the consumer. We also represent industrial service providers, such as heat treatment and hardening specialists. There are many supply relationships in our sector, and we in WSM have come to regard ourselves as supply chain experts. (Folie 5) On my next slide I have listed some examples of sub-sectors within steel and metal processing, which

5 5 you may want to read by yourselves. You know most of these sectors and processes. They include cold forging, steel and iron wire, plates, sheets, cold drawn steel and sections. There are products which serve as components and end-products at the same time. For example, fasteners, chains, tubes, springs, wire products of many kinds, tanks and vessels, pressed and drawn parts and many products from powder metallurgy. Most of these are supply goods. I have already mentioned industrial treatment and service providers, which also belong to WSM. All of these companies and sub-sectors represent great diversity and some people say, that they are heterogeneous. (Folie 6) But there are also some important core characteristics and the common ones are the reason why these companies and associations have been combined into one federation, the WSM.

6 6 Almost all the companies experience high material costs. The cost of Steel and Metal, as a primary material, amounts to 60% or more of the total cost. Of course, some companies have material costs of no more than 20%, but that is the exception. On average, material costs are significantly high for all our member companies. For this reason, we have tried to communicate to the suppliers, the importance of spreading increases in steel prices throughout the whole supply chain. I have already said that most companies in our sector are SMEs. This is a core characteristic, too. I will give you some data on the size of such companies in a few moments. The number of SMEs in our branch is the reason why we analyse and promote economic policies which focus on such companies. These policies include Tax, Competition, Energy, International Accounting and Innovation policies. It is Innovation that is our topic today. Furthermore, many companies in our sector feel rather squeezed between two sectors with great mar-

7 7 ket power, in highly concentrated markets. These are the steel industry on the one hand and the automotive industry on the other. We often speak of being in a sandwich-position between suppliers and customers. (Folie 7) Before I elaborate on market pressure in supply chains, I will give you some Key Data and historical changes of this Data within our sector. Let me first show you the development of companies in the last 10 years. Please take note of the scale, which starts with companies on the bottom line. We had an average of companies in the last decade. In the year 2002 Germany suffered from the attraction of Eastern European countries. Go east was the advice often given by advisers at that time. (Folie 8) And yet, the number of people employed in the last 10 years in Germany in this sector has steadily risen

8 8 from below employees to some employees in The latest figures show that the steel and metal processing sector has created more than jobs in the first quarter of Of course, our sector benefits largly from a well working economic cycle, which has taken hold of all industry in Germany. (Folie 9) Even more impressive is the steady rise of turnover in the last decade from below 50 billion Euros 10 years ago to more than 70 billion Euros last year. Obviously steel and metal processing "is still", or should I say is again competitive in Germany. At the same time we must not confuse turnover with profits. This would be a dangerous mistake, which would detract from the difficulties experienced in our sector. Although many companies have increased their turnover, they have had great difficulty transferring this increase into profits. Market pressures from companies with strong buying power

9 9 and hard international competition, often reduced the annual results to a dangerous level. However, the increase in turnover in recent years clearly shows that the supply network of steel and metal processing in Germany is still working well. We should maintain this network carefully. We should ensure that the supply chain remains intact and is not torn apart by unhealthy pricing politics from either side. (Folie 10) This remark leads me directly to the important role of SMEs in the steel and metal processing supply chain. I will not dwell too long on the question: what is a small and medium sized entity? The expression Small and Medium sized Enterprises originates as a technical term from EU-state aid-law. Certain subsidies to smaller companies are exempt from the EU-Treaty s state aid provisions. Hence, the Commission has the task of distinguish-

10 10 ing between small and medium sized companies on the one hand and larger companies on the other. You all know that SME in its technical European sense is any company with up to 250 employees and an annual turnover of not more than 50 Mio.. We as Company Leaders have always drawn a much wider picture for SMEs. This is reasonable, because the notion SME influences much wider political spheres. We have always said that any family business is likely to be an SME. The Business culture is more important than its size or company figure. However, the steel and metal processing companies have an average of 100 employees per company and some 15 million Euros turnover per year. There are much larger companies, but there are even much smaller ones, too, most of them run by the ownerfamilies themselves. In these companies sustainable value management is more important than short term profits. (Folie 11)

11 11 I have already mentioned the importance of market pressure, felt by many companies in our supply chain. On my next slide you see the important factors of high pressure. The steel industry on the one side is highly concentrated in Germany and in Europe. The level of concentration is alarming, although the steel industry points out the global character of the steel market. As we are talking about Innovation today and not about the steel industry s level of concentration, I will not make any further remarks. The automotive industry especially has great power, with strong demand. We should also not forget the large trading corporations, which exert their power of demand on our companies. Of course market pressure also comes from competitors, not only in Germany or Europe, but from all

12 12 over the world and especially from countries where costs are comparatively low. (Folie 12) From all of this we can derive the main challenges for SMEs in the steel and metal processing supply chain in Germany. Firstly our companies must differentiate themselves from their competitors. Many companies find niches for their products, but it is only in exceptional cases that there are no other companies able to produce similarly. Therefore every company must strive for excellence in price, quality and service. Secondly, cost-efficiency is vital. In our market with highly volatile basic materials, which make up more than 50% of total costs, a company can only survive if it manages to cut costs radically! This starts with Materials, then energy, then personnel and finally other costs. If cost cutting does not happen, orders will very soon be transferred to competitors.

13 13 Thirdly, in order to remain innovative - I will come to that point in a moment SMEs have to be attractive for young academics and skilled people and they must try to incorporate fresh thinking from universities. Finally, we are all working in a globalized environment. Our customers are producing world wide and so are many of our suppliers. Thus, our partners will be spread around the world to an increasing degree. (Folie 13) Innovation for SMEs is a way of meeting different challenges. Of course, successful innovation will differentiate a company from its competitors. This is not only true for the development of new products, but also the process of production must be looked at carefully and must be improved at all times. We in WSM have collected many examples in a brochure, which we have called Innovations Val-

14 14 ues Growth. It was published last year and you will find it on our website: Our companies have told us that they have succeeded in cutting costs significantly by innovations in the production process. Many have increased their productivity by introducing more and better machines. The continued improvement of the machine driven production process is necessary, in order to remain competitive in the long run. Finally, I have mentioned innovation as a means of attracting skilled people. Innovation changes the atmosphere in SMEs and vice versa. A creative environment in a company with young, talented, energetic and curious academics fosters innovation on all levels of the company and subsequently increases its competitiveness. (Folie 14) But how do companies become innovative in the sector of steel and metal processing?

15 15 Only in very exceptional cases can SMEs develop innovations in fully-fledged research and development departments of their own. Cooperation of all kinds is very important to achieve appropriate results from activities in innovation. Our companies, first of all, cooperate along the supply chain. In our sophisticated markets we have to draw our attention to the needs of our customers. We cannot afford to play trial and error. If we do not seek to satisfy the needs of our customers in the first place, we might work into the wrong direction. It is also important to integrate the knowledge of our suppliers. The steel industry must produce high quality basic material. Only then will we be in a position to appropriately transform the steel into the products that our customers need. Because research and development activities cost a great deal of time and money, also many competitors work together in order to combine R & D resources.

16 16 We have set up institutions attached to our federations that help our companies to cooperate horizontally. The FSV ( Forschungsstelle Stahlverformung ) in Hagen and the GAK ( Gemeinschaftsausschuss Kaltformgebung ) in Düsseldorf are examples. These institutions help to reduce the bureaucratic burdens of SMEs. They prepare the application for public financial support for innovation activities and at the same time keep good contact with universities and research laboratories. They discuss the latest technical developments and help to transfer and disseminate the latest thinking and technologies to our member companies. The most efficient means of transferring technology is through the exchange of talented academics from universities to companies. As SMEs cannot afford and would not want to exchange their skilled personnel, it is important that they be integrated into networks of innovation. These networks also enhance the creative atmosphere in which innovations will eventually appear.

17 17 Let me make one remark about the role of public financial support for innovations in SMEs. I strongly believe that public financial support is much more important in SMEs than it is in large companies. In large companies, innovation is already a part of the company structure and public money is often little more than a means of cost recovery. In SMEs the problem is different. Here, companies with their limited ressources cannot afford to invest in innovative research where the outcome is uncertain. In SMEs my feeling is that innovation is less strategic. It is a structured process, but more oriented toward the solution of specific problems or specific ideas. Thus, public money is better invested in SMEs if one wants to achieve the maximum value from the transfer of technology. A process which leads to the creation of value added, growth and jobs. (Folie 15) We have analysed some important shortcomings of innovation in steel and metal processing.

18 18 I will come to the lack of political incentives in a moment. Obviously most of us suffer from a lack of engineers. It is common knowledge that we rely on talented engineers and that there are not enough of them available. I will not go much deeper into this problem now. But, I would like to elaborate a bit more on the problem that there is a lack of financial ressources. Innovation is costly. In SMEs the equity ratio is often too low. Private Capital is bound in material. Because of strong market power on both sides, the revenues from the market often do not even cover capital costs sufficiently. I mentioned that problem earlier. And if companies do invest in innovation, the outcome may not be booked as an asset in a companie s balance sheet. In the books, investments for innovation appear as expenses only, not as value added, not as an assett. And finally, let me mention the bureaucratic burden of public financial support. It is commonly accepted

19 19 that public financial support for research and development is justified in SMEs for the reasons that I mentioned before. But many companies cannot afford to wait as long as it takes for the government s commitment for financial aid. Again, there are important differences between large companies and SMEs. Large companies can apply a mixed calculation for the financing of their research and development departments. In SMEs, as I said, companies have to and want to solve specific problems. The competitive advantage of an idea may be gone, if one has to wait a year before being able to even start an innovation project. Bureaucracy hits SMEs harder than large companies. (Folie 16) Having said all this, how can we now improve innovation in the steel and metal processing sector? My first point is quite general, but at the same time very important:

20 20 If we want to attract young academics and skilled personnel and if we want to draw talented people into our sector in order to increase the transfer of technology, we must advertise our sector of indutry much better than we have done in the past. I must admit that the steel industry did a very good job some years ago by embarking on massive media campaigns. By the way, this needed lots of money from the steel industry, which the SMEs in the steel and metal processing sector would not be willing to pay. But anyway, together, we should find ways to promote our industry. My second remark is the following: We can only make innovation sustainable and attractive for companies, if we direct all innovative activities towards the needs of the consumer. It is not abstract ideas, but the specific improvement of products and procedures step by step, that help to generate competitive advantages in a globalised and highly competitive world. Hence, the steel industry must continue to work hard on the improvement in the quality of steel, and our Customers must be pre-

21 21 pared to pay adequate prices for innovation and know-how. The Government must set better initiatives for the transfer of technology. In Northrhine-Westfalia, the Government has recently introduced more freedom for universities. That was a good step, but so far, there seems to be insufficient competition between universities. Competition was to be encouraged by the so called Forschungsprämie, a premium, which is paid to universities and research labaratories, if they supply innovation activities for SMEs. Unfortunately this instrument has not worked properly yet. The reason for this, in my view, is that horizontal projects are not yet allowed to apply for the premium. I think that should be changed. And finally, consideration should be given to the idea of universities being constituted as non-profit scientific service providers for industry. I sometimes feel that our governments do not try to encourage excellence, but try to find ways of reducing financial support for universities. In my opinion, uni-

22 22 versities should compete among each other for excellence. But they should not compete with companies for the highest price or remuneration available. If universities become company-like intitutions, they will neglect the most important task of educating young engineers and of transferring technology into practice. And finally, we should concentrate on reducing the bureaucratic burdens for the application of public financial support for SMEs. (Folie 17) At the end, let me draw some conclusions: Steel and metal processing is an innovative sector of industry, which is characterised by SMEs. Together, we should show examples of innovative practices, to explain to young academics the challenging tasks lying ahead of us. Innovation is an important requiremant for the entire supply chain. I propose concerted advertisement for

23 23 innovation in the supply chain and in our supply networks. Innovation activities must be payed for better and separately. During my speech I have not gone into the difficult field of intellectual property protection. But in any event, we have got to make it clear to the customer, that quality and innovation has its price. The steel industry, together with the steel and metal processing companies, must focus on downstream demands. If we are not competitive in the supply chain as a whole, none of us will remain competitive in the long run. And finally, I will cut the message short. "Better regulation in innovation policy will focus on providing better incentives for the transfer of technology, especially to SMEs. Thank you very much for your attention!