Globalisation opportunities for R&D in capital intensive industries

1. Globalisation opportunities for R&D in capital intensive industries Presentation at the 6CP workshop on Internationalisation of R&D in Helsinki, June 17, 2004 Kari Ebeling

2. 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 R&D in various types of industries • Development of new processes • Situation in UPM- Kymmene Corporation • Conclusions

3. 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

5. Sitra’s 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. That’s 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 R&D 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.

6. Special characteristics of innovation in low tech and high tech industries

7. Effect of industry type on intensity of R&D • At least the following three inputs affect the volume of R&D 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 R&D input, and its capabi-lity to take research results into practice needs to be better than average • Profitable companies can afford higher R&D intensity as can less capital intensive branches

8. Examples of various type of industries and their adaptabilityto distributed international R&D Business strategy Telecommunications Utilities Electronics Pharma High Auto Aviation ROCE Fast moving con- sumer goods Low Process industry Low High Capital Intensiveness of Business

9. Kari Ebeling, 20.6.2002

10. 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 R&D 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

11. 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 R&D 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

12. 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

13. Sitra’s 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 R&D spending to turnover tells nothing about the nature of R&D. 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.