Products and services must be developed in line with customer needs

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?”

Jyrki_Poikkimaki_2Jyrki Poikkimäki

Senior Scientist

Do we still need the manufacturing industry?

A decade ago China became the country on everyone’s lips. It was to become the cradle of the world’s manufacturing industry. Other countries need not apply. “Would this role be enough to even satisfy China?” “What if China takes it all?” At the same time, Finland was going through a mobile technology and software development boom. Traditional manufacturing became known as a smokestack industry. This term changed people’s image of the manufacturing industry. A representative from a major organisation and a member of a Finnish innovation system caught me off guard with the following question: ”Will there be a need for traditional industries in Finland in the future?” Having recovered from the initial shock, I began to understand what led the representative to ask this question. What I couldn’t understand, however, was the conclusion. With populations that represent 20% and 0.1% of the global population respectively, China and Finland battle in very different leagues. On the other hand, one good 0.1% can be the equivalent of several per cent.

Traditional industries play a major role in providing welfare services in Finland even today. The number of people employed either directly or indirectly in the industrial sector is around one million. What’s more, the industrial sector employs people from different educational backgrounds more equally than many other sectors. Despite the fact that collectively Finns are highly educated, not everyone can work in an engineering or specialist software position. We need jobs for everyone. The proportion of service and health care sectors has increased due to the changing population structure. We cannot rely on either of these sectors to support the national economy alone. We need them both. Just as we need many other sectors.

The Finnish innovation system has been praised around the world.  It has saved Finland from several recessions and hardships, and so has the perseverance and imagination of Finnish companies. However, the times are clearly changing now. One of the positive changes of the past few years is the increase in cooperation. Enterprises and research institutes have engaged in mutually beneficial partnerships.

Unfortunately, the needs of companies went largely ignored in the overhaul of the higher education system in favour of academic merits. Doctorate degrees are awarded on an industrial scale. When a friend of mine defended their doctoral thesis, it was one of three public defences on that day. I suspect the three lecture halls had never before seen that much defending in one day. On the flip side, we have come closer to the way research is conducted on an international level. A doctoral thesis is no longer a record of a researcher’s life work but clearly a “licence to research” for a young researcher. However, as highly-educated numbers increase, graduate unemployment is likely to increase too, rendering many graduates unable to find jobs matching their qualifications. This is a waste. Many small companies run without having a single formally educated engineer on their payroll, not to mention IT experts. There’s also room for improvement in the language skills. Starting an export business without the adequate language skills takes a lot of effort. I’m hoping that younger generations will take the language skills of companies to a whole new level when they enter the workforce.

When I was a student in the 1980s I asked my more experienced friends about the reputation of this restaurant by a bridge in Tampere. ”The typical client of that establishment is an educated person who formulates carefully considered thoughts into perfect sentences while sipping wine. Their discussion partner then replies with an equally well-constructed sentence, and in the end nobody knows what the topic of the discussion is.” Today, research projects sometimes dismiss the industrial sector and a as a consequence a mutual understanding is not reached. With the help of up-to-date applied research projects and partnerships, companies can gain a few years’ head start compared to their competitors. This may not sound like much, but in today’s world a few years is a massive advantage. Therefore I strongly encourage academics and enterprises to find a common language.

Research institutes and universities can help small and medium-sized industrial enterprises. More and more companies can go global and develop or implement new technologies. We need the export industry. I want to see the proportion of SMEs in the export sector to increase from 15% to 25%. This requires companies to increase the share of R&D to somewhere between 3% and 4% of their revenue. It is important to turn newest research results into start-ups, and it is equally important to make older research results available for current companies. Thanks to strides made in research, a research result from five years ago can today give a company a major competitive edge.

We have several wonderful companies who have the potential to succeed in the international markets. In the field, however, the approach to business operations is divided. Some companies rely on bigger companies too much which has led them to neglect their own expertise or products. If the bigger companies then move their operations elsewhere, the smaller companies quickly become economically unsustainable. The most substantial opportunities for SMEs are in the niche markets. They reward the companies for their know-how with a major market share as bigger companies turn their attention to other markets. Project-based one-off deliveries, superior working methods, specialised machinery and equipment as well as products and services combined into a smart product for the Internet of Things are just some of the examples of the keys to success.

VTT’s newest spearhead programme, For Industry, examines the pros of the manufacturing industry both academically and from the business world’s point of view. From the business world’s point of view this means that different research results are examined with the help of applied research methods, activation and innovation to evaluate their potential for increasing a company’s operations. Using the results of this research is promoted by using different operations models in small and medium-sized industries. Academic results enable us to maintain and develop our role in the global research market. Like before, we’ll get through this recession too with the help of research and innovations. And hard work. We don’t want to dismiss anyone. Let’s build a solid foundation for the future.

Risto KuivanenRisto Kuivanen

Business Development Manager