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Western economies, up or out?


03/08/2017

The tide is rising for Western economies. When they could easily rule the world market with their production capacities, just a few decades ago, or with their hegemonic technological advance, they have been forced into frantic development and much higher risk-taking, by the rise in competition's capacities around the world. Relieving the pressure on their R&D departments would quickly give their competitors, already hot on their heels, an opening to take over the global markets.



One could wonder, given the almost-instantly open access to information and technology, why it is that the West has stayed economically ahead of the rest of the world for so long. Whatever western companies invent will be quickly produced by non-western companies, which use their western counterparts as field-testers: if the products fail to hit the market, then the loss is for the original company. If it does succeed, the non-western copycat will be close in its wake to get a share of the profits. So, rising economies seem to be just as able to produce as western ones. But the competitive edge of the West doesn't rely on production; it relies on productivity, and large efforts in R&D.

One market on which the phenomenon can be studied is the automobile sector. Starting in the 1960s and 1970s, the Asian market started structuring itself and producing low-grade vehicles. Asian vehicles were either bound to their national market, or were so incomparable in quality with western vehicles, that American and European companies didn't care. But that changed at the end of the century, and a modern-day European or American who buys a Toyota Prius will not buy a Chevrolet or an Audi. The game has changed. So where is salvation point for Western carmakers? The only one they have found is constant, intense, innovation. Tesla and Google can probably be the spearhead of that forward escape route. The next generation of cars, as any press-reader now knows, will be self-driving. Companies with the best R&D strategy – not only spending – will grab the gigantic market ahead of others. On such a market, each month of head start means billions in profits.
 
In fact, any company that spends above 5% of its revenue on research & development can be considered highly innovative. And the West has many of those. Michael Mayberry, from Californian chipmaker Intel, sums it up “Complexity drives cost”. Every 18 months, his company doubles the computing power of his units, at levels his competition can merely copy, with months of delay. Intel reaches record highs in R&D expenditure, with nearly a fifth of its revenue reinjected into technology-digging, yielding the Intel Core M, a new-generation chip so powerful that only professionals can assess them – private users can't see the difference with the previous ones anymore. "Intel excels in creating customizable computing platforms optimized for data-intensive computation," he says, "our researchers are some of the leading lights in the field of domain-specific computing”. By pressing so hard into its R&D expansion zone, Intel has secured its partnership with Apple, whose quality demands are so high that doing business with them places Intel automatically as a world-class player, let alone the enormous profits channeled.

Spending a large chunk of its revenue in R&D is therefore the cost of survival, and has enabled companies following that rule to become successful global players. R&D spending is one of the first things customers observe when choosing their secure document suppliers: “we spend about 5% of our cash flow on R&D. We regularly register patents to cover the technologies we use” and “we don’t only work on the surface and structure; we also work in depth, on the fabric”, says Oberthur Fiduciaire CEO Thomas Savare. Oberthur Fiduciaire is a global key player in secured printing, producing banknotes for central banks and other unforgeable documents. In this market, aggressive innovation is key, not only because of normal competition, but also due to counterfeiting. Banknote design is a race, in which Oberthur Fiduciaire comes up with a new design and counterfeiters try to master the new technology in time to produce counterfeit bills before the company changes the design again – in which case they have to start all over.
 
China is trying to heave itself out of the copycat segment, and compete on quality, productivity, and innovation levels with the West. But to no avail: the western companies which have never let up on their tedious and costly R&D expenditures seem to have wisely placed their bets. For instance, the German company Covestro is launching a new concept electric car, destined to the Chinese market, but using German technology, advanced on every field. Using 3D printing for many of its parts, holographic film capacity for future driverless motion systems, and a new CO2-to-plastic conversion method, Covestro is opening a new market in Asia using technologies no Asian country possesses. "We work with every Chinese car manufacturer," said Patrick Thomas, Covestro CEO. "[The Chinese car companies] are the least conservative. They can do more innovation more quickly and try our innovation. The fastest growing electric car market is in China." But again, Western companies offer quality levels which none of the Chinese competitors can match, for now.

Globalization is a recent process, and a mighty one. In just a few years, it has completely changed the way the world works. A century ago, whoever was on the spot owned the place, hence the business expression: location, location, location... Nowadays, anyone in the world, wherever they be, can market their goods worldwide. And with the Asian knack for reverse engineering, developing economies have invaded a substantial share of the global production market, not just the cheap and lower-quality tier.
 
If anything, these new world players will increase their capacities and quality levels over the next coming years, not let them recede. This means that players such as Europe and the US have only one way to maintain their positions: constantly upgrade their economies and strengthen their technological advance. Whatever comes out of Western factories, yielding big bucks, will roll out of Brazilian, Chinese or Vietnamese ones just a few years later, for 50 cents on the dollar. The cash-cow is stuck in the R&D department for a bit longer – at least as long as the Western innovation & productivity model remains relevant, as it still is today.