1. Knowledge Economy Forum IV Logistics and Integration into Global Supply Networks Global Industrial Context Prof. M.J. Gregory Institute for Manufacturing

2. Overview Industrial ideas Global context Emerging capabilities Working in networks Implications

3. Industrial Ideas Products – ARM – Microcircuit design Production – Zara – Fashionable clothes Distribution – Dell – Personal computers Services – Rolls-Royce – Aero-engines

4. ARM designs used in 75%of mobile phones Close to global customers and OEMs ‘Fabless’ business model Substantial process knowledge ARM – microchips marketing>design>production>distribution>service

5. Zara - clothes marketing>design>production>distribution>service Spanish clothes maker Zara owns all production capability Products in own shops change every 2 weeks Production can be flexed to respond to demand Competitors can’t follow!

6. Dell – personal computers marketing>design>production>distribution>service Dell pioneered large scale direct selling. Their model allows on-line customisation of products Production and delivery status can be tracked by the customer On-line diagnostics and after sales service minimise support costs

7. Rolls-Royce – Aeroengines marketing>design>production>distribution>service Responding to customer needs Rapid growth in market share ‘Totalcare’ service model ~60% of revenues Implications for design and production

8. Innovation, Value Chain & Business Models Innovation can occur within and between each stage along the value chain Marketing>Design>Production>Distribution>Service but the stages often have different ‘owners’ and the interfaces and interdependencies between them are often poorly understood.

9. …and the context is changing rapidly Global demand for products is rising ‘Disintegration’ of stages in some value chains Value-adding opportunities at each stage BUT Globalisation is changing industry configurations Industrial capabilities are evolving rapidly

10. USA – they say… Growing economy Strong in research and some production Emphasis on education BUT Falling share of production Economic imbalances

11. Europe – they say… Increasingly ‘high-tech’ Spectrum of large and small businesses Good global connections BUT Some countries thought to be inflexible Intense competition

12. Japan – they say… Continuing strength in production Capable global networks New investments in local production BUT Ageing population Rigid structures

13. India – they say… Growing capability in software Highly educated population Growing interest in manufacturing BUT Infrastructure limited Production has not been a priority

14. China – they say… Growing production scale and capability Dominant position in some products Growing R&D BUT Imbalance between production and services Shortages of energy

15. Globalisation – the case of China China is emerging as an industrial powerhouse It has received massive inward investment Industrial development has been systematic ‘High-tech’ capabilities are increasing rapidly Growth impacts global industrial structures

16. Growth Average annual growth rate was more than 10% between 1980 and 2004 Source: Chinese National Statistics Annual Report (2005)

17. Foreign Direct Investment Source: http://www.china.org.cn Billion US Dollars

18. New Workshop of the World - Pearl River Delta 70% of the world’s photocopiers 60% of the world’s microwaves 160,000 people in single factory for running shoes

19. New Workshop of the World - Yangtse River Delta 30% of the world’s ties 70% of the world’s lighters fastest growing car production location

20. Domestic appliances - Galanz Largest microwave oven production base in the world Annual production capacity of 15 million units 11,000 employees. Turnover $700m 70% of China market, 40% of global market.

21. Clothing - Meters/Bonwe Virtual company in Garment Industry Grown dramatically from a shop into a regional brand and into the leading national brand Over 1000 retail outlets in China Sales of US$250 million in 2003.

22. So how do they do it? Cheap labour Foreign Direct Investment Natural resources But also Systematic development of infrastructure Strategic development of industries Increasing focus on innovation and service!

23. So what are the underlying patterns? Attraction of ‘service-oriented’ business models Networks a source of innovation* Competition increasingly between networks rather than firms Increasing role of ‘contract’ production!*...all of which require new skills and capabilities

24. Networked Innovation – P&G Entrepreneur spotted a rotating sweet!! Healthcare professionals designed the product Production outsourced Leading P&G brand Crest distributes.

25. Contract Production - Hon-Hai marketing>design>production>distribution>service Global electronics production capability Developed strongly from component production Value capture through economies of scale and flexibility Moving to design and service

26. ..and is extending its scope For example Hon-Hai’s strategy reads: ‘Focus on global logistic capabilities …’ ‘Expand production capacity …’ ‘Achieve further vertical integration …’ ‘Maintain technologically advanced and flexible production capabilities…’ ‘… will leverage off its manufacturing expertise and continue to move tirelessly into new areas of related business’

27. and as for brand… We have no brand but, our quality is the “brand” our technology is the “brand” our people are the “brand”

28. ..and then the ODMs… Original Design and Manufacturing businesses Execute the whole manufacturing cycle Ask you (the brand owner) if you would like some Sell the surplus under their own brand and Develop proprietary design, product and process technologies!

29. QCI - Quanta computer Inc. Established - May 1988 Market Cap - US$7B Revenue (04) - US$ 10.14B Employees - 25,000

30. Strong and diverse customer base

31. Modern manufacturing involves “The full cycle from understanding markets through R&D, product design, production, supply and services within an economic and social context” and is increasingly Global, Connected, Multi- partner, Multi-business

32. B&Q China B&Q is the leading DIY chain in China It commissions designs, outsources production, distributes, sells and services These activities are orchestrated from the UK

33. Implications for emerging economies Need to Understand the ‘maps’, capabilities and trajectories of key industries Identify points of entry – potentially via major multinational businesses Anticipate local demand and changing global context

34. which needs need a better understanding of Value creation and appropriation – which requires knowing what it is and how it can be captured Partner identification and evaluation - which requires sophisticated ‘due-diligence’ Production ramp-up - which requires sophisticated technical capabilities Management of dynamic relationships - while making sure they don’t eat your lunch!

35. Conclusions The structures and dynamics of global industries are changing rapidly Product supply chains rapidly evolving to networks of knowledge and services Many opportunities to access global networks BUT Visibility of capabilities & trajectories essential Product-service systems an emerging theme