Germany s Global Companies Innovation for Emerging Markets Fujitsu Research Institute, Economic Research Center Dr. Martin Schulz schulz@jp.fujitsu.com 2011.06.13
Outline German Global Companies are leaders in globalization but they are not well-known as innovation leaders German companies focus on mid-tech innovation through global product services, customer innovation Emerging Market Challenge: Innovation at the top and bottom of the Pyramid 1
Why are German Experiences Relevant for Japan? German Global Companies are Leaders in Globalization are Re-focusing on Emerging Country Growth 2
Germany s Growth Engine: Global Companies Exports 55 50 45 40 35 30 25 20 15 10 Germany GDP Components (% GDP) 60% 60% Consumption Exports Investment 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 55 50 45 40 35 30 25 20 15 10 Japan Consumption Investment Exports 2010 Source: CEIC; National Statistics (2011) 3
New German Focus: Exports to Emerging Countries 40 35 30 Bn USD German Exports by Region (Bn USD) Bn USD (EU) 160 140 120 Emerging & Developing Countries 25 20 15 10 Emerging & Developing Countries 100 80 60 40 EU (right hand) Advanced Countries (ex. EU) Dev. Asia 5 0 20 0 U.S. 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Emerging countries have become Germany s major growth market Source: FRI 2011. Data: IMF (2011) 4
Japan: Emerging Countries even more Important 40 35 30 25 20 15 10 5 0 Bn USD Japan Exports by Region (Bn USD) Emerging & Developing Countries Bn USD (Advanced C.) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 160 140 120 100 80 60 40 20 0 Emerging & Developing Countries Dev. Asia U.S. Advanced Countries (right hand) Emerging countries are Japan s only real growth market Source: FRI 2011. Data: IMF (2011) 5
Why is Germany not Known as an Innovation-Leader? Most German Global Companies are Mid-Size and Mid-Tech 6
Germany is not an Obvious Innovation Leader OECD Innovation Indicators for Germany & Japan Japan Germany Average Corp. R&D as % of GDP Science & Tech. Empl. /Employment Venture capital as % GDP New Science & Engineering degrees Triadic patents per million population Researchers/Employees Scientific articles per million population Patents with foreign co-inventors Corp. collaboration Index New-to-market product innovations Corp. non-technological innovation Source: FRI 2011. Data: OECD (2010) A New Approach to Innovation.
German Global Companies are Mittelstand German Global Companies are Mittelstand German Global Companies are often privately-held SMEs ( Mittelstand ) German Global Companies ( Hidden Champions ) are half the size of Japanese Global Companies (Japan: 2000 employees and 40 Bn yen revenue) German Global Companies are Specialized Industrial Goods Exporter (70%) Business Services (11%) Narrow markets/segments require global strategies German Global Companies are Short on Capital Privately held companies depend on banking finance R&D needs to be financed by cash flow R&D and innovation are structured around existing products 8
and German Products are Mid-tech 50 45 40 35 30 25 20 15 10 5 0 High-tech, Mid-tech Share of Exports & Value Added (%) Percent Germany High-tech / Export Japan High-tech / VA US Mid-tech / VA Germany has only few hightech industries High-tech industries are highly R&D intensive (around 10% of sales) Globally leading industries are Bio-Tech, Semiconductors, Pharmaceuticals, IT Germany is strong in mid-tech industries Mid-tech industries focus on complex products such as capital goods Globally leading industries are machinery, cars, chemicals Source: FRI 2011. Data: OECD, IMD. 9
How did German Global Companies Succeed? Cost Control & Continuous Innovation Global Customer Innovation 10
Japan vs. Germany: Product vs. Customer Innovation Structure Focus Japanese Firms Keiretsu Firms Production Segmentation Volume Markets Product Innovation Process/Segment Innovation Knowledge Export German Firms Mittelstand Product Specialization Customer Markets Customer Innovation Contextual Innovation Knowledge Application Strategy Cost-Performance Value Added Emerging Markets New Products International Supply Chains Growth Markets Middle of the Pyramid Product Services Management Internationalization Global Markets Top/Bottom of the Pyramid 11
Growth Comes from Old Industry Innovation Germany Productivity Contribution to Value Added Growth (2003-2006; % Average) All Industry Manufacturing TFP (Innovation) Chemical Electrical Transport Equip. 9.2 Wholesale & Retail Transp., Com m. Finance Government Education Health Labor Input Labor Hours Quality Worked Labor Quality ICT Investment ICT Capital Service Non-ICT Investment TFP (Innovation) Non-ICT Capital Service TFP -5.00-3.00-1.00 1.00 3.00 5.00 7.00 9.00 Total Factory Productivity (TFP Innovation) German Old Industry increases productivity by trading & value added services Source: FRI 2010, Data from EU KLEMS Database. 12 All Rights Reserved, Copyright 2011 Fujitsu FUJITSU Research RESEARCH Institute INSTITUTE 2010
and not Investment as in Japan Japan Productivity Contribution to Value Added Growth (2003-2006; % Average) All Industry Manufacturing Chemical Electrical Transport Equip. Wholesale & Retail Transp., Com m. Finance Government Education Non-ICT Investment Labor Input Labor Hours Quality Worked Labor Quality ICT Investment Capital Service Non-ICT Investment TFP (Innovation) Non-ICT Capital Service TFP 13.3 Health -5.00-3.00-1.00 1.00 3.00 5.00 7.00 9.00 Non-ICT Investment Japanese Old Industry increases productivity by investing in production processes Source: FRI 2011, Data from EU KLEMS Database. 13
Japan is a Leader in Global Knowledge Export Royalties & License Fees Trade 8.0 7.0 Bn USD 6.0 5.0 Japan 4.0 3.0 2.0 Export Import Import 1.0 Germany 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Knowledge Export Export Domestic R&D and (Product) Innovation Export to Global Supply Chains (Knowledge Exploitation) 14
Germany is a Leader in Global Knowledge Application Professional Services Trade (Trade Service, Technical Service, Engineering, Leasing, Consulting, R&D) 16.0 14.0 12.0 Bn USD Germany 10.0 8.0 6.0 Import Export Import 4.0 2.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Global Knowledge Application Japan Export Global (Customer) Support and Product Service Trade of Service, Knowledge, and Innovation with Global Customers 15
Strengths of German Global Companies Competitive Advantage of German Firms (Simon: Hidden Champions) Importance Price Delivery Flexibility Product Quality Economy On-time Delivery Advice Service Closeness to Customers System Integration German Hidden Champions focus on Global Customer Demand Multi-National Corporations focus on Global Product Segmentation Distribution Cooperation with Vendors Patents Advertising Made in Germany Weaker Stronger than the Strongest Competitor Competitive Performance Note: Ranking based on German Company Customer Surveys.Source: Simon (2010) Hidden Champions in the 21 st Century. 16
German Global Companies in Emerging Markets Following the Customer 17
Siemens: Focus on Mega Trends & Value Growth Siemens in China 90 JVs, 43,000 Employees 16 R&D Centers, 4,000 Staff 15% of Global Revenue, 20% Growth 40% of Orders from Environment Portfolio Focused Portfolio: Industry, Energy, Healthcare Siemens Global Base Medical-Imaging MRI Scanner 90% Made in China 60% Export from China Wind Power Evolving Global Base Source: Siemens Corporate Presentation (2010). 18
Siemens: Innovation in Emerging Markets Siemens S.M.A.R.T: Simple Maintenance friendly Affordable Reliable Timely to market Siemens in India Operation Room X-Ray Scanner Strong demand for low-cost X-rays Indian engineers replaced high-end analog camera with simple digital cameras Image & resolution enhancement by software Software interface improvement Higher value at 1/3rd the price Technology transfer to high-end models (Reverse Innovation) 19
German Companies Innovate for India s Tata Nano German Parts in Tata s Nano Ventilation Behr (Ventilator, Aircon) Mahle (Filter) Brakes Bosch (Main Cylinders) Undercarriage FAG (Bearing) ZF (Torque Rod) Freudenberg (Sealing) Gear System INA (Shift Elements) Freudenberg (Sealing) Denso (Wiper) Electric System Bosch (Starter, Alternator, Body Electric Parts) Engine Bosch (Injection System) Mahle (Camshafts, Filter) Vibracoustic (Engine Mount) Conti (Fuel Pump, Fuel Sensor) Freudenberg (Sealing) 20
Bosch: Tata Nano Project for Prestige, Relations, Learning Cheapest Car, Newest Technology New approach to reduce complexity based on advanced technology World class environment standard (Euro IV) Reengineering Direct injection technology developed for Mercedes and BMW Bosch production line, looking exactly the same as in Germany or Korea Re-engineering by global team including 350 newly trained Indian engineers Replacing high-end parts with good enough parts Development in close coordination with Tata Motors (Bosch India Board Member) Exporting Technology Employing a rapidly expanding Software Center of 3,500 Developers Tata Nano project software solutions used globally Production technology exported to Vietnam and rolled-out to Southeast Asia 21
Bosch Ltd. (India): Results 90 80 70 60 50 40 30 20 10 0 Sales (90% Automotive Products) Mn INR 2003 2004 2005 2006 2007 2008 2009 2010 35 30 25 20 15 10 5 0 ROC (Heavy Investment; 25% R&D) % 2003 2004 2005 2006 2007 2008 2009 2010 9 8 7 6 5 4 3 2 1 0 Overseas Sales (Automotive) Mn INR 2003 2004 2005 2006 2007 2008 2009 2010 (India) Directors (further India Affiliations) (D) A. Hieronimus (MindTree; Outsourcing) (D) B. Bohr (ZF; Steering Systems) (D) B. Steinruecke (FAG; Bearings) (I) B. Muthuraman (Tata; Industries) (I) R. Karnard (Housing Devel. Finance Corp.) (I) P. Chandran (BASF; Chemicals) Source: FRI 2011. Data from Bloomberg; Corporate Report. 22
Rational: Automatic Steam Ovens for Catering Professional Steam Ovens (Self-Cooking Centers) 350 Mn Euro Revenue, 1058 Employees 8.5% 5Y YoY Growth, 34% ROC 84% Overseas Sales, 54% Global Market Share Business Model One customer group: Chefs One product line: Food Heating 23
Rational: Global Process-Oriented Management Innovation Process All-Segment Customer Innovation Service Process All-Segment Engineer, Chef On-site Service Integrat. Innovation Process Service Process Customer Process Seminars After Sales Process Sales & Marketing Process Kitchen Planning Product. & Supply Process Product Training, Product Optimization Certified Engineer Support On-site Support from Chefs Customer Planning & Training Product Optimization Sales Process After Sales Process 200 Rational-Chefs Communicating with Customer Chefs Product Process Manager as Process Contractors 24
Summing Up: German Innovation for Emerging Markets Demand for German Mid-tech Machines is booming in emerging markets Companies innovate by Following the Customers augmenting products and adapting services In emerging countries, opportunities are seen at the Top and the Bottom of the Pyramid Quality, service and green technology at the (high-price) top High-end technology application for the (low-price) bottom Emerging Market Innovation (R&D, process innovation) feeds into global products and operations 25
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