Future of Manufacturing: Innovation Economy

Chuck Pharris
Manufacturing Solutions Marketing

Future of Manufacturing 20+ Years

We should all be concerned about the future because we will
have to spend the rest of our lives there."
-- Charles F. Kettering

Future of Manufacturing?
50 years of predictions*
Fifties
n  Improvements in mass production developed during World War II
n  Computerization and quality processes are future

Sixties
60’s n  Focused on automation and its limitations.
n  Emphasis on globalization and the future proliferation of multinational corporations.
n  ** “Automation could actually increase operating expenses due to loss of flexibility, increased risks,
and time-consuming changeovers.”

Seventies
n  Rise of the microprocessor on shop floor. Debate - “deskill the workforce or result in more creative and complex work”.
n  Labor-intensive nature of software development costs predicted to increase with absolute costs of software.
n  *** Multinational firms moved manufacturing and assembly to less developed countries for lower labor costs.

Eighties
n  Rise of strong Europe and even stronger Japan
n  Foreign competition moved from low cost labor to technology adoption and manufacturing techniques
n  New materials, computerization of shop floor, computer integrated manufacturing (CIM), quality based practices

Nineties
n  http://www
n  Race to adopt Japanese management notions into new business and product alternatives
n  Technology taxonomies, manufacturing unit processes, industrial ecosystems, corporate merger strategies, outsourced/
contracted R&D, and off-shore workforce tactics.

2000’s
n  Globalization, geo-political
n  Low-cost competition drove technological forecasts
n  New product development technologies, sustainable manufacturing, knowledge management practices, nanotechnology

* Advanced Technology and the Future of U.S. Manufacturing Georgia Tech Policy Project on Industrial Modernization 2004
** Automation: Its Impact on Business and People, Walter Buckingham (1961)
*** Pavitt, Keith (1973), Technology, International Competition, and Economic Growth: Some Lessons and Perspectives, World Politics, Vol. 25, No. 2. (Jan., 1973)
©  SAP AG 2009. All rights reserved. / Page 2

Economics & Manufacturing

Economics = production, distribution, and consumption of goods and services.

Macro – Employment, Interest, and Money < ------ > Micro – Economic behavior of agents

Adam Smith David Ricardo John M. Keynes Milton Friedman 20+ Years

Production of Income Land vs
Investment Needed Shortage of Money
Different
Labor & Capital

Agriculture Mercantile Industrial Services

Micro-Economics & Manufacturing

Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise


Raw Materials - Historical


Historical Perspective
n  Key determinant of national wealth
n  Drove colonialism, mercantilism, and wars
n  Only source of wealth of undeveloped countries

Economics of Raw Materials
n  All new potential wealth, the foundation of all prosperity, comes
from the earth. You can either harvest something or mine
something to create new potential wealth.
n  Human labor produces raw materials to create jobs and
incomes. This consolidation of human labor producing raw
materials enables the economic cycle that manifests new wealth.
n  The economic cycle emerges through the structure of trade. This
structure of trade must manifest a sufficient level of wealth to afford
all finished goods and services or it becomes unsustainable due
to growing debt.
Factors of Production


Raw Materials - Trends


Current Trends
n  Intangibles – Intangible value exceeds tangible
n  Sustainability Focus
n  Energy – China surpassed US (< per capita)

Intangible vs Tangible Value
WSJ – China Tops US in Energy – July 18, 2010
Source: Global Intangible Tracker – 2007, BrandFinance


Raw Materials - Future


Case for Traditional Role
n  Hoarding – China acquisitions (Canada/Ven/Russia/Australia)
n  Localization – Saudi Arabia diversification – naphtha, aluminum
n  Money – Factor of Production? (end of mainstream economics?) Per Commodity
n  Geo-politics – Afghanistan minerals

Case for New Role Hoarding Self-sufficiency
n  Self sufficiency Localization New materials
n  New Materials Money - FOP Intangibles (+)
n  Increase in non-natural resource wealth creation (services,
intangibles)

Conclusions: Impact on Manufacturing
n  Strategic risk role of procurement
n  Increased emphasis on manufacturing innovation/product design
n  Drives localization of manufacturing capability vs mass transfers
n  Crude oil valued as raw material vs energy furthering pressure
on shift of transportation fuels


Machinery


Historical
n  Enabled industrial revolution
n  Key to increased productivity in agriculture and industry

Future – Dramatic Revolution in Mfg Machinery
n  Self Assembly
n  Nanotechnology
n  Bio-inspired manufacturing
n  Opto-electronic materials
n  Specialized synthetic membranes

n  Multi-disciplined – not just engineering
n  Reduce need for scale / micro-factories / make to order
n  Manufacturing production machinery will become increasingly agile,
flexible, and sophisticated.
n  Need for international standards in new production machinery.

Genetically Engineered Materials


Labor
Outsourcing and offshoring


Outsourcing – Not Manufacturing Decline Productivity Increases

Source: Comparisons & Analysis of U.S. & Global Economic Data and Trends, SRI Intl. - 2004

Labor
Productivity


Productivity and GDP

Comparison of labor costs in the clothing industry


Labor


Historical
n  Low cost labor IS current key competitive differentiator of manufacturing
n  Automation perceived/concerned as de-skilling
n  Full employment is key economic goal

Future
n  Current developing countries reach relative parity
n  Specialization increases as productivity increases
n  Geographic diversity increases as knowledge component increases

n  Increased manufacturing productivity in developing countries is correlated in increased personal income levels which drives
increased education and skills
n  Localization of manufacturing returns without cost advantage
n  Value focused on IP vs ‘brute force make’ – shifting skills
n  Outsourcing productivity benefits replicate in larger role of componentization
n  Instead of deskilling, automation continues to retain productivity with shift of resource focus


Capital


Future
n  Deleveraging – Growth in Int’l Equity -> Shifts availability to developing
countries
n  Equity is more fluid, but more volatile -> caps multi-national
consolidation growth
n  Equity capital follows innovation (Apple vs Msoft).

What Are Intangibles?
Human Capital n  Employees’individual professional expertise and skills, social skills,
entrepreneurial engagement, ability to innovate and respond to changes

Relationship n  Customer capital (brands, customer relationships, relationships with
marketing and distribution partners etc.), other business partner capital
Capital
(supplier relationships / supplier network, contract manufacturers etc.)

Structural n  Businessinfrastructure/processes, working methods, information systems,
databases, intellectual property (patents, copyrights, trademarks),
Capital
organizational design, location advantages, corporate culture


Land


Historical
n  Drove migration, geopolitics, and wars
n  Thomas Malthius - ‘population checked by famine, disease, and widespread
mortality’

Future
n  Absolute scarcity of land won’t change –
§  Other types of ‘land’ (e.g. frequency spectrums, orbital patterns) can be
enhanced through technology and substitution (e.g. digital TV)
§  Demand decreases with increased productivity and technology
§  Scarcity is not in absolute terms but in secondary usage resources; water,
access, environmental capacity.

n  Sustainability reaches rapid adoption due to fundamental inherent scarcity
n  Continued marginalization of importance of raw land due to shifts in economy (ag->ind->svcs) enabled by technology
sustaining and increasing productivity levels
n  Enables developing countries to accelerate parity with diminished importance on land as scarce item. Enables them to find
competitive differentiator without this inherent constraint weighing on them.


Enterprise – (Entrepreneurism)


Innovation
1.  There are innovations that sustain things that already exist: they make things
better, they make business models stronger.
2.  Then there are innovations that disrupt what is there: they create markets that
didn't exist or they transform markets that do exist by doing things
fundamentally differently.

Future
n  Rapid pace of innovation/design
n  Globalization – In innovation vs financial
n  Componentization/Specialization

Impact on Manufacturing
Korea Patents Awarded
n  Globalization (failed from financial point of view), but continues to thrive from the
innovation point of view. Big push for diversity in large corporations is trying to
capture this (not EEOC).
n  Increased product cycle times and make to order capability
n  Close integration with customer to realize innovation
n  Must capture value of human, relationship, and structural capital


Summary Global Parity
Shifting Competitive Differentiators

Traditional Competitive Differentiator Future Trend
n  Shift to intangibles
n  Raw material export for wealth creation n  Sustainability
n  Consumed internally
n  Machinery n  Fluid equity markets
•  IP & Capital were barrier n  Manufacturing microtization
•  Mass production/scale n  Make to order (mass customization)
n  Educational and per capita income parity
n  Low cost unskilled labor in underdeveloped
n  Collaborative knowledge worker
countries
n  Increased specialization

n  Fluid equity markets
n  Capital availability
n  Equity capital follows innovation (intangibles)

n  Marginalization of land with technology
n  Land – ultimate scarce item
n  Global sustainability is required

n  Globalization is now in innovation
n  Globalization & multi-national consolidation
n  Parity, microtization, and componentization drive localization
necessary for growth
n  Componentization and specialization de-emphasize scale
n  Developing countries established R&D
n  Innovation n  Realization of intangible value (IP/brands)
n  Componentization enables de-scaling and localization of
•  Restricted access to IP manufacturing
n  Consumer driven innovation


Summary
New Innovation Economy
Innovation Economy
Agriculture Mercantile Industrial Services

Characterized by
n  Hybrid mix of products and services
n  Hybrid manufacturing process focused on componentization
n  Rapid product design, delivery, and make to order Why Humans Succeed:
n  Core competency of manufacturing: To capitalize on competitive differentiation of
Collective Intelligence
innovation economy:
n  Exploitation of Intangibles….human, relationship, and structural
n  Return to physical localization of resources, labor, and manufacturing execution, but still
globalized in innovation processes
n  Focus on innovation and customer/consumer intimacy neutralizes dependency on efficiency of
scale in corporate size and geographical consolidation of manufacturing types. WSJ – May 22, 2010

“I can make a whole lot more money skillfully For this vision,… second the successful launching of new
managing intangible assets than managing business models by optimizing intangible assets at the
tangible assets” maximum level; …
Warren Buffet, CEO Berkshire Hwang Doo-yul
Hathaway Vice Chairman & Executive Officer of SK Corporation
Korean Refiner – 45B Assets, #51 of Platts Top 250


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