Globalisation%20opportunities%20for%20R

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Globalisation opportunities for RD in capital
intensive industries

• Presentation at the 6CP workshop on
  Internationalisation of RD
• in Helsinki, June 17, 2004
• Kari Ebeling

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Table of Contents

• Description of capital intensive industries
• Typical features of capital intensive industries
• Differences in innovation characteristics of low
  tech and high tech industries (Sitra 1999)
• Globalisation opportunities for RD in various
  types of industries
• Development of new processes
• Situation in UPM- Kymmene Corporation
• Conclusions

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Capital intensiveness of various industries
4
Typical features of CII

• Fragmented small share of market capitalisation
• Basic mfr. technology is often available to all
• Huge investments are needed to generate
  reasonable sales volume (overall vs. investment
  per unit production)
• Customers are not very loyal sales price is
  an important quality argument, and usually global
• Products are often industrial intermediates
  bulk (commodity) products
• CII tend to be highly cyclical in price and
  volume profits are roller coasting
• Tend to be process driven more than product
  driven
• Recently plenty of mergers and product
  rationalisation to increase profitability

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Sitras study of Innovation in Finland, published
in 1999

• Sitra (The Finnish National Fund for Research and
  Development) published in 1999 a 15 volume series
  about INNOVATION in FINLAND. In Volume 7
  Transformation of the Finnish innovation system
  a network approach written by Schienstock, G.
  and Hämäläinen, T., the sixth chapter (p. 95
  -103) focuses on the Innovation Process in low
  tech and high tech industries.
• The then chairman of the Board of UPM-Kymmene, Mr
  Tauno Matomäki, summarized this chapter by saying
  that innovation in high tech industries is
  peanuts today, because the modern chips are so
  powerful and advanced, that no matter in which
  order one positions them on the circuit board one
  always gets a new innovative product.
• On the other hand, in capital intensive industry
  - once you have put the steel into the ground -
  you have to live with it for tens of years. Then
  the innovation becomes a challenge how you make
  the same product day after day with better
  properties and with lower cost. Thats what
  innovation in the low tech industries is all
  about.
• I personally feel that many of the government
  research authorities as well as the EU RD
  authorities are not aware of this difference.
  They consider all innovation to behave like
  innovation in high tech industries. Low tech
  industries are not welcomed to EU FP 6 and 7.

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Special characteristics of innovation in low
tech and high tech industries
Low tech industry High tech industry
Competition criterion price/quality innovation
RD intensity low high
Patenting low high
Innovation focus process ("product") product
Scale of innovation incremental fundamental
Source of innovation Information already available in other areas self (in co-operation) searched new information
Type of knowledge tacit practical, codified
Type of learning learning by using searching, exploring
Co-operation customer - producer university - producer
Skills and competencies Practical knowledge skills theoretical knowledge cognitive skills
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Effect of industry type on intensity of RD

• At least the following three inputs affect the
  volume of RD and its distribution between short
  term research and long term (strategic) research
• general profitability of the business area
• capital intensity of the business
• strategic position selected (business vs.
  technology)
• If the company wants to be one of the leading
  companies in the branch, it probably needs a
  higher than average RD input, and its
  capabi-lity to take research results into
  practice needs to be better than average
• Profitable companies can afford higher RD
  intensity as can less capital intensive branches

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Examples of various type of industries and their
adaptabilityto distributed international RD
Business strategy
Telecommunications Utilities
Electronics Pharma
High
Auto Aviation
ROCE
Fast moving con- sumer goods
Low
Process industry
Low
High
Capital Intensiveness of Business
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Kari Ebeling, 20.6.2002
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Situation at UPM- Kymmene

• UPM- Kymmene is volume wise the 3rd largest paper
  and board producer in the world
• Company is the largest producer of magazine
  papers
• The annual turnover of the paper business is
  about 7 billion Euros.
• Out of the total production of paper (11.9
  million tons/a) about 48 is produced outside
  Finland
• The annual RD for the paper business is about 21
  million Euros, out of which less than 20 is
  carried out abroad (Germany, USA, China)
• In the foreseeable future the new process
  development will stay in Finland because of
  advantages provided by the Finnish Forest
  Industry Cluster

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Conclusions I

• Capital intensive industries, i.e. many of the
  traditional process industries, are considered
  low tech and non-innovative
• Many of the government and EU authorities on RD
  and on innovations seem not to understand the
  differences in the innovation process of the
  traditional process industries vs. modern high
  tech industries like electonics,
  telecommunications and biotechnology
• Due to the tough economical situation that many
  of the traditional process industries are, i.e.
  lack of patient money, there is very little
  interest in these companies to do significant
  long term innovative process development
• Therefore the public support for innovative new
  process development and piloting is crucial

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Conclusions II

• Due to the basic nature of the capital intensive
  industries the innovations in process development
  and product development tends to be incremental
• Based on the advantages derived from closeness of
  business strategy and technology strategy, on
  importance of proper piloting, and on the long
  time required as well as the high amount of money
  involved, it is probable that radically new
  process development in CII will not be
  internationalised to the same extent as product
  development or product adjustment for local
  market needs

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Sitras study of Innovation in Finland, published
in 1999

• Innovation by Mature Businesses and in Difficult
  Times
• Introduction
• Prof Kari Ebeling, the Chairman, introduced the
  subject of the Round Table, emphasising the
  global environment in which mature businesses
  must compete. Given that investments for
  production facilities are usually very heavy,
  competitive advantage stems not so much from the
  newest technology installed but from know-how on
  how to run mills or other plants and from cost
  leadership. If a cost leadership position is out
  of reach, the two alternatives on offer are
  either specialisation in high value end products
  or modernisation. If both of these alternatives
  are unrealistic, the company will probably see no
  alternative but to leave the served market sector
  altogether and re-orient radically. Kari Ebeling
  presented also some recent findings by SITRA on
  innovation in low and high tech industries from
  Chapter 6 of its recent Vol 7 publication
  (http//www.sitra.fi/Julkaisut/raportti7.pdf)
  (see also extract on EIRMA web-site). SITRA is
  the Finnish National Fund for Research and
  Development, an independent public foundation
  under the supervision of the Finnish Parliament,
  which aims to promote Finland's economic
  prosperity by encouraging research, backing
  innovative projects, organising training
  programmes and providing venture capital.
• Sitra finds that there is an unfounded perception
  that innovation is restricted to high-tech
  industries you find them in both high- and
  low-tech industries, but role and type are
  different. In order to activate the innovation
  process in the different industries, the
  characteristics, requirements, and circumstances
  must be understood. The ratio RD spending to
  turnover tells nothing about the nature of RD.
  Whilst products from low-tech industries are
  perceived as low-tech products, their
  manufacturing process often involves high-tech
  ICT. Low-tech industries often belong to the
  group of mature industries, where the scope for
  value creation through novel technology is
  limited. Technological progress is incremental
  and focuses on production processes far more than
  on products, which can be copied easily and have
  little patent protection. In mature industries
  amortisation of plant takes many years and as we
  have to live with this equipment for a long time,
  innovation focuses on improving the production
  process and the quality of the product that is
  manufactured with this equipment, not on new
  products that would require new plant. This is
  very different for high-tech products, where for
  example new combinations of high capacity chips
  and other components allow the creation of new
  products on flexible production lines.
• Today, this Round Table explores ways of breaking
  out of the incremental process oriented
  innovation model in mature businesses, such as
  specialisation, solution orientation, customer
  orientation, lean manufacturing, paradigm change,
  alliances, etc.