German engineering companies have long been known for products that combine sturdiness with highly engineered and adaptable technology.
Now, they are stripping parts of their product portfolio off its “engineered in Germany” label to make them more suitable to the needs of emerging markets.
A growing number of industrial companies, from Siemens to Bosch and Trumpf, are strengthening research and development efforts in emerging markets in an attempt to move downmarket and better tap local demand.
Siemens, for example, says it will spend the bulk of the €500m ($698m) increase of its 2011 R&D budget on localised engineering in emerging markets. Europe’s largest engineering group has been a trailblazer in the growing trend to adapt western base technology to emerging market needs by simplifying them and selling them at a lower price.
Its Somatom Spirit, an entry level CT scanner, has been developed in China and has been produced there since 2005. Today, more than 80 per cent of the scanner’s sales are outside China.
In the wake of the global economic crisis, a growing number of medium-sized German industrial companies are following Siemens’ example.
Engineering companies such as Trumpf, Heidelberger Druckmaschinen and Bosch Rexroth often have long-established production facilities in emerging markets such as China. Now, they are also investing heavily in local development of mid-priced products geared towards the needs of emerging markets.
Trumpf, which produces laser cutting and welding machines, medical equipment and machine tools, says it has stepped up local development to enter China’s low-cost market with easier to use and cheaper machinery.
The company has spent €10m on an almost doubling of its production capacity at its Taicang plant close to Shanghai.
Bosch Rexroth is another example. The company, a subsidiary of German engineering and car parts conglomerate Bosch, has developed the controls for machine tools that can satisfy Chinese demands of easy-to-use machines for mass-production.
Karl Tragl, Bosch Rexroth’s chief executive, says that the machine tools are being built on the same platform as the German ones, because Chinese industrial customers increasingly want high-quality machines.
But the machines are being adapted by removing some of the flexibility. “German companies need maximum flexibility – as many products on the same machine in as many variances and different volumes as possible. What China needs is high volumes, less flexibility and simple operability.”
Industry experts say that for some companies, a move into low – to medium-priced products is essential if they want to keep growing and to withstand emerging Chinese competition.
Georg Tacke, chief executive of Simon Kucher, a management consultancy, says some companies risk being sidelined in their high-tech niches if they do not move downmarket.
“Is the top of the pyramid going to grow or not? Nobody can answer this question at the moment but it could well be that the low-price segment will come back to the west and that the top of the pyramid will shrink,” he says.
“We already see some of that happen in areas where the usage of a product is more important than the brand. These are core areas for German industry such as machinery and mechanical components. For such producers, I would urgently advise them to adapt to the low-cost trend.”
This engineering push into emerging markets is often eyed with scepticism in Germany, where employees fear that it comes at the expense of domestic R&D jobs.
However, executives are adamant that this is not the case. “We will keep significant parts of our strategic core knowhow in Germany. We have been often criticised for that and we accept that, but this is a vital strategic point for us,” Joe Kaeser, Siemens’ chief financial officer, tells the Financial Times.
Data on German R&D spending support his claims. In spite of pushing deeper into emerging markets, the country’s companies are expected to expand its domestic R&D spending by more than 4 per cent to almost €61bn this year, research by Stifterverband, an industry association that promotes science, shows.
More than three-quarters of that spending comes from the core industrial sectors of automotive, machinery, electrical engineering, chemicals and pharmaceuticals.
Mr Kaeser says employee fluctuation in China of 20-30 per cent would prevent Siemens from bringing its latest research knowhow to the country. “In the foreseeable future, we will keep our industrial innovation power and core research knowhow in regions where employee fluctuation is rather low,” he says.
While German engineers are often proud of working for their company and would never dream of leaving voluntarily, stories of Chinese engineers taking essential technology to rivals for better pay has frightened executives.
Some companies even shy away from bringing any R&D to Asia. SKW Metallurgie, a speciality chemicals maker, is one example. “We have very loyal employees in our western operations. But in Asia, the risk that someone wanders away and takes the knowhow with him is far too big,” a SKW executive says.
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