Lisbon Agenda and Industry Migration from West to East Dr' Klaus Heinzelbecker Director Strategic Pr

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Lisbon Agenda and Industry Migrationfrom West
to EastDr. Klaus HeinzelbeckerDirector
Strategic ProjectsBASF, Germany
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We dont make the product you know but we make
the products you know better
Helping Make Products BetterTM
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BASF Group Sales by Region in 2004
Million (change compared with previous year in
percent)
Europe (10.4)
22,482
8,165
Germany (8.1)
15,216
North America (NAFTA)(13.2)
5,157
1,733
Asia, Pacific Area,Africa(19.8)
South America(17.7)
By location of company
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The Challenges for EuropeStructural Shifts

• Transformation from Industry Society into Service
  Society
• Changes by Information and Communication
  Technologies
• Demographic Trends
• Sustainable Development
• Global Competition
• EU Enlargement
• EU Governance

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Slow Demand Growth in Europe
Demand Forecast by Industries (EU-15) (in p.
a.) 2003/ 2015
Ø 2,2
Elec- tronics
Pack- aging
App- lian- ces (big)
TV- Sets
Sport- ing- Goods
Auto- motive
Car- pet
Food
Tex- tiles
App- lian- ces (small)
Pharma
Paper
Office- Equip.
Fur- niture
Chemi- cals
Quellen OECD Weltbank
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Structural Shift from a Manufacturing Society to
a Knowledge Society
Employees by Sectors

120
100
2
2
2
13
15
20
-2 Mio. Jobs in Production
80
60
2 Mio. Jobs in Services
Jobs in Agricultur
85
83
40
78
Jobs in Manufacturing
20
Jobs in Services
0
Germany 2003
USA 2003
Germany 2015e
? Increasing importance of industrial services
Source BCG-Analyse
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Demographics and Ageing
EU 25 Population Development
Economic Implications? Political Options?

• Increment of 74 mn people via new EU 10
• 2004 EU 25 455 mn people
• Turning point around 2013 with shrinking
  population

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Global Competitiveness Ranking Massive Gap to
US and within Europe North-South-East
Global Competitiveness IMD Europe Ranking 2004
Using 4 broad factors 1) Economic
Performance 2) Government Efficiency 3) Business
Efficiency 4) Infrastructure
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Lisbon Strategy for Economic, Social and
Environmental Renewal
In March 2000, the European Council in Lisbon set
out a ten-year strategy to make the EU the
world's most dynamic and competitive economy
Priorities
Structural Indicators/KPIs

• eEurope an information society for all
• Internal Market improving under-performing
  sectors
• Financial Services Integration
• Enterprise Europe developing European
  entrepreneurship
• European Research Area
• Review of Financial Instruments

• General Economic Indicators
• Innovation and Research
• Employment
• Economic Reforms
• Social Cohesion
• Environment

Reality check Kok-Report 2004
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Measures for a Competitive Europe(Kok Report
November 2004)

• "The Lisbon strategy is even more urgent today as
  the growth gap with North America and Asia has
  widened, while Europe must meet the combined
  challenges of low population growth and ageing.
  Time is running out and there can be no room for
  complacency. Better implementation is needed to
  make up for lost time."
• On current trends, the potential growth of the
  European economy will halve over the coming
  decades and reach just over 1 per year

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Lisbon and Reality

• Per capita economic output in the US in 2003 was
  37,600, more than 40 percent higher than the
  26,600 average for EU-15 nations.
• Real economic growth in the U.S. over the last 10
  years has been more than 50 percent faster than
  EU-15 growth in the same period, 3.2 percent
  average growth compared to 2.1 percent average
  growth. The gap has become even larger since the
  Lisbon Strategy was announced.
• The unemployment rate in the U.S. is
  significantly lower than the EU-15 unemployment
  rate, and there is a stunning gap in the
  percentage of unemployed who have been without a
  job for more than 12 months 11.8 percent in the
  U.S. versus 41.9 percent in EU-15 nations.
• Living standards in the EU are equivalent to the
  very poorest American states, roughly equal to
  places such as Arkansas and Montana and only
  slightly ahead of the two poorest states, West
  Virginia, and Mississippi.

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The Future of Europe
Whatever else people disagree upon in Europe
today, they at least agree on one point Europe
is in the midst of a profound debate about its
future.
Tony Blair Speech to EU Parliament, 23 June 2005
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Migration of the European ManufacturerBase to
Low Cost Countries
Import Share LCCs (2003)
90
TextilesLeather
Toys
80
Computer Parts
60
TV, Video, Radio
Shaver
40
Semiconductor
Refrigerator
20
Furniture
Cars/Car seats
0

• Migration of Industries is no new phenomenon but
  the speed has increased during the last 5 years

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Speed of Migration has AcceleratedImports from
LCCs Doubled in Past Six Years
United States
Germany
U.S. industrial goods imports from LCCs
Germany manufacturing imports from LCCs
CAGR ()
CAGR ()
B
B
207
Mexico
15
Russia
-0.1
102
Indonesia
1
Poland
10
Thailand
5
Indonesia
3
India
3
Czech Republic
19
Malaysia
5
India
8
Brazil
3
Thailand
1
Hungary
17
Hungary
14
Brazil
18
Russia
8
Malaysia
7
103
53
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Poland
14
Mexico
Czech Republic
18
China
21
China
14
4
10
3
6
Share of LCC imports
Share of LCC imports
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Who is driving the Migration of
Industries?Entrepreneurs or Consumers or both?
2 0 0 4 / 2 0 0 5
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Sourcing in China?
Even public utilities source in China if
there is a small price advantage and dont
care about safeguarding employment in
Europe. Price first, nothing else!
Heinrich von Pierer Siemens AG, May 2005
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Labour Cost Difference about 15 18 will last
for the next 10 15 years!
Historical Labour Costs
Expected Development of Labour Costs
per hour

• Labour costs in
• High Cost Countries 2002 2015

Future Differnce
Germany 23,4
20022015
Difference Today
USA 22,1

• Labour costs in
• Low cost countries 2002 2015

Korea
Hungary
China
20022015
Time (in Years)
Time (in Years)
Korea (1980 2002)
Hungary (1990 2002)
USA (1975 2002)
China (1994 2002)
Standardisierte Lohnkostenkurve
Sources U.S. Bureau of Labor Statistics Chinese
Statistical Yearbook BCG-Analyse
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Drivers and Barriers of Migration
Drivers
Barriers

• Labour costs
• Energy costs
• Access to Market
• Subsidies
• Taxes
• Regulations

• Transport costs/Logistics
• Product Quality
• Country Risks
• Customization
• Employee Qualification
• Productivity

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Cost Advantage AnalysisExample TV Sets
Costs Germany versus China
Share of Exports by Chinese Producer


251
Other(1)
190
Wages
Parts
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Material
TCL/ Schneider
Moto- rola
Philips
Sam- sung
Nokia

• Consumer Trend Get a Snip

(1) Logistics, Customs, Admin-, RD
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Similar Migration Trends for other EE Products
Key Products
Cost advantage
Refrigerator (big)
Washing- Machine
Other Products
Dryer
lt 5
Shaver Head
Memory Chip
Products staying in HCCs
Refrigerator (medium)
515
Products with medium migration risk
Refrigerator (small)
Shaver
Cable
Electrical Installation Material
TV
PC
gt 15
Printer
Mobile Phone
Vacuum cleaner
E-Motor (small)
Products with high migration risk
Micro Wave
High
Low
Business mobility
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Electronics Manufacturing Services Focused on
Outsourcing to Low Costs Countries

• Celestica
• Flextronics
• Solectron
• Jabil
• Plexus
• SCI Systems
• Manufacturing Services (MSC)
• Arimasoft
• China Electronics Corporation (CEC)
• MITAC
• Synnex

• Do you know the companies behind the brands?

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Large OEMs Plan Expansions in Eastern Europe and
ChinaBut no Substantial Capacity Reduction in
Home Markets
1000 units/year
6500
No increase of capacities, but also no
reductionMarginal growth in demand expected
5000
Constant capacities no growth of local market
Germany
Increase of capacities to satisfy growing local
demand
Only marginal increase, still overcapacities of
current sites
Other EU 15
Eastern Europe
No increase at present significant
overcapacities
Mexico
Brazil
Capacity increase to 2 millinion units in 2010
China
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Cost Advantage AnalysisExample Car
Manufacturing
Cost Advantage versus Germany

• Slow development of supplier market in China
• Long delivery times hinders car exports from
  overseas
• Western production with economies of scale
• New investments in East Europe
• Longterm risk of migration

Ungarn
China

4.100
3.500
1.500
0

• Built up new factories for new models in East
  Europe

(1) Mid-sized car
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Automotive Manufacturing inWestern Europe under
Threat?(Study Ernst Young 2004)

• One in two suppliers planning production shifts

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Delocalization of Automotive Componentsin
Western Europe by 2015
Favorable for
China
Electric adjusting motors
Air condition
Sun visor
Battery
Steering wheel
Tires
Head/arm rest
Airbag
Cable harness
Lighting system
Seat belts
Wind- shield wiper
Cooling System
Cost Advan.
Eastern Europe
Door systems
Seat parts
Out door mirror
Air intake manifold
Roof system
Bumper
Helper spring
Carpets
Connectors Buttons Switches Fasteners Housings
Seat system
will remain in W. Europe
Instrument panel

• Mobility
• Highly customized
• Lead time on critical path
• highly quality sensitive

high
low
Business mobility
Assembly
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Changes in the Automotive Value Chain
Parts, e.g.injection moulded
Components, e.g. steering wheels/ airbags
Systemes, e.g. seats/ dash boards
Car Producers
Imports from Low Cost Countries (in )
2004
11
8
2
2
Driving Forces
Low percentage of wages
High percentage of wages Standardized Product
Just in Time necessities compensate wage
disadvantages
Assembly costs and supply chain management Cost
advantages not before 2010 High exit barriers
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Patriotism?
The German Automotive Industry enjoys stable
employment not dispite but because 40 of our
export value depends on imports.
Gottschalk, President VDA Automobile Forum,
Stuttgart, May 2005
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Migration of Western European Industries to
Eastern Europe and Asia
Low
Low Migration Risk
Detergent Industry
Construction Industry Food Industry
lt 5
High Migration Risk
Wood Industry Packaging Industry Machinery
Industry
Glas and Ceramic Industry
Cost advantages in Eastern Europe and Asia
5 15
Automotive
Chemical Industry
Paper Industry
Semiconductor Industry Apparel Industry
Furniture Indust
Consumer Electronics
gt 15
High
High
Low
Mobililty to Low Cost Countries
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BASF is supporting global Xbox production for
Microsoft at Flextronics in Mexico, Hungary and
China

• Flextronics says it will increase its
  manufacturing capacity in China by over 40 over
  the next 12 months because of growing demand for
  electronics equipment.
• The company says it will add 2.1 million square
  feet of extra capacity over the next year. It
  currently has about 5.2 million square feet of
  manufacturing capacity at its Chinese facilities.
  Flextronics makes cell phones and video game
  systems in China.
• About 60 of Flextronics' Asian production
  capacity is in China. The rest of its Asia
  production is in Malaysia, Japan and India.

• Follow the trend for outsourcing with global
  production

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Global Players are also Moving RD Activities to
LCCsExample RD Activities in China by MNCs
Company
Description

• Opening GE global research center in Shanghai in
  2003 to serve its global business units
  plastics, silicones and lighting in particular
• Will be only third global research center, after
  U.S. and India
• 47K M2 size, 400 employees
• Acquired Avansys Power Co. primarily to obtain
  530 engineers in China (343 with Masters
  degrees)
• Sees China as their key global center for RD
• Currently have 1,000 RD staff in China expect
  this to reach 3,500 by 2006
• Developing some of Motorolas most advanced
  products
• Currently has twelve training centers in China
• Announced plans to spend 250M on three Asian
  research facilities by 2003
• Shanghai
• Beijing
• Singapore
• Has an established research laboratory in
  Shanghai
• Plans to develop a design center at the same
  site expects 80 of new investment in China to
  be devoted to RD

• China extending its low-tech manufacturing basis
  to RD based high-tech capabilities

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Automotive Manufacturing in Western Europe under
Threat?(Ernst Young 2004)
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Offshoring Services The next wave

• McKinsey Actual offshore employment will reach
  4.1 million jobs worldwide in 2008

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BASF Shared Services Europe
BASF Services Europe, Berlin

• Targets
• - Improve service efficiency by centralizing
  administrative activities
• in accounting, finance and human resources
  from more than 100
• legal entities all over Europe
• - Increase Customer Satisfaction by
  harmonizing different standards
• - Reduce administrative costs by 33
• Implementation
• - Despite significant labour cost advantages
  in Eastern Europe it
• was decided to install the service centre
  in Berlin with more than
• 500 employees

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General economic consequences of industry
migration
EU25 (2003- 2015)
3,0
2,5
2,5
2,0
-1,0
1,5
1,5
1,0
0,5
0,0
Demand Growth p.a.
Net GrowthProduction p.a.
Migration
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The Industrial Base in Western Europewill
ShrinkExample Germany
2,1
? - 2,5
Number of Employees (in Mio.)
7,8
- 1,4
? 6,0e
Additional jobs by economic growth (2,2 p.
a.)(1)
Employees in Production Industries 2004
Employees in Production Industries 2015e
Job losses by increasing productivity (2 3
p. a.(2) ? 2,5 Mio.)
Job losses by migration (ca. 1,5 p. a.)

• Competitiveness
• of industry
• Domestic demand
• Incentives for
• industrial clusters

• Structural reforms

• Competitiveness
• of industry

Driving Force
?

• Additional Risk for Offshoring of Services

(1) Source OECD Weltbank (2) Source
Prognos Source BCG-Analyse
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Public OpinionImports from Low Cost Countries
Risks for the Economy? (Representative Poll
Allensbach 2004)
Germany
UK
France
Big Risk
Low Risk
Don't know

• Highest risk awareness in France

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France National effort against outsourcing

• France to launch a national effort against
  outsourcing
• Posted Sep 18, 2004
• France will offer companies tax breaks and other
  incentives ( worth more than one billion euros
  ) to encourage them to keep jobs in the country,
• Prime Minister Jean-Pierre Raffarin said that 20
  competitiveness zones would be designated in
  which companies would be offered reductions in
  corporate tax totalling 250 million dollars a
  year for three years if they guarantee not to
  move jobs abroad. Economy Minister Nicolas
  Sarkozy is to announce other measures, including
  the waiver of social charges, when he presents
  the 2005 budget next week. Additional benefits
  will raise the incentives on offer to a billion
  euros, Raffarin told reporters.

• Will this hinder outsourcing to favorite
  destinations like Senegal ?

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Measures for a Competitive Europe(Kok Report
2004)

• Urgent actions across five areas of policy

Knowledge society
Making R D a top priority
Internal market
Free movement of goods and services
Business climate
Reduce the administrative burden
Labour market
Balance flexibility and security
Environmental sustainability
Spread eco-efficiency
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How to improve the competitiveness of
Europe(BDI-Position)

• Focus the implementation of the Lisbon agenda on
  Growth and Value added
• Higher priority in the EU budget on Research and
  Development
• Support the competitiveness of companies by a
  future oriented Industry Policy
• Limit the number of Regulations and check the
  impact on employment and economy first
• Open up the Markets for energy, transportation
  and other services
• Ensure a stable Euro
• Maintain a functioning Infrastructure

• Full willingness to change

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Challenges for BASF in Europe

• Continue programs for increasing productivity at
  all European production sites
• Streamline administration and install shared
  services center in Europe
• Refocus European strategy on industries,
  applications and customers which stay in Europe
• Ensure the transfer of BASF businesses from
  Western Europe to Eastern Europe and Asia
• Establish early warning system for monitoring
  further customer moves
• Support politics to reduce total labor costs and
  increase labor flexibility, reduce bureaucracy,
  increase budgets for R D and education, open up
  regulated markets and maintaine up to date
  infrastructure

• Growing above the market by innovation and
  progressive marketing

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Change as Opportunity!

• Who moved my cheese? (Spencer Johnson)