Revenue in the mechanical engineering sector saw a fragile recovery in 2014, but there is still some way to go to return to the peak figures of 2008. The sector’s business environment has changed radically over the last decade. Asia’s rise has continued and China is becoming the global leader in mechanical engineering. The China syndrome continues to gather momentum, with key functions following production in the move to China. A key trend can be seen in diminishing demand for high-end products, while demand for middle-range products is accelerating, particularly in developing countries. So has Finland focused on making products for which demand is falling, while there is demand around the world for Finnish products which cannot be made profitably in Finland?
Exports by the Finnish mechanical engineering sector have typically involved a small group of large companies. SMEs’ share of exports has clearer lagged behind that of competitor countries. It is estimated that Finland is home to around 500–700 mechanical engineering firms which have the potential to grow and internationalise.
VTT has started up the For Industry programme, focusing on the development and implementation of new business models and technologies for the manufacturing sector. A key challenge lies in identifying the business models and technology solutions based on which Finnish SMEs can succeed in export markets.
Reaction times measured in hours rather than days
Traditionally speaking, Finnish mechanical engineering firms have been engineering-oriented, with business creation being product and technology-led. While good and durable products have always found customers, listening to the customer and product prices have never been our competitive trump cards. However, in the last decade the markets have changed faster than we can adapt to them. Developing countries have become more important, both as markets and manufacturers. The mechanical engineering markets have also segmented and fragmented in our key markets such as western Europe.
Operators in export markets need to know the business environment and its requirements inside out. Products and solutions do not always need to be state of the art – instead, they should take account of the needs of customers and end users. In many cases, the decisive factor is the price of the product or service and customers need to be served on a 24 by 7 basis, since reaction times are measured in hours rather than days.
Deficiencies in SME strategy work
According to key employees in SMEs, the key future business challenges lie in developing long-term competitiveness, rationalising your own product and service portfolios, and sharpening up strategic planning and decision-making. SME’s view internationalisation as unavoidable. In this regard, the key challenges lie in the product portfolio, distribution channels and the choice of target market. Although SMEs have identified sectoral megatrends and transitions, they are unable to react to change quickly enough. Their time is frittered away on everyday operational issues, while long-term strategic planning takes a back seat.
A strong grasp of customer needs is a must
The customer – who wants to be served 24 by 7 – has taken centre stage in place of the product or technology. Even customers and end-users operating in different customer segments, let alone those acting in different markets, have diverging needs. Lifecycle services developed around products are becoming more critical, regardless of the market or segment in question. The onset of the industrial internet is broadening the required scope and diversifying and complicating the development of business models. In the words of a director in charge of the service operations of a certain Finnish company: “Sure, we can manage the technology, but how on earth do we turn services into a profitable business?”