The third SML International Week took place from 18 – 20 April 2016. A highlight was the evening symposium on Wednesday, featuring a keynote presentation from Jan Jenisch, the CEO of Sika AG. Topics included: Is Europe still an interesting place to produce? Do its manufacturing and service industries have a future? What are the effects of near and offshoring on Europe, especially Switzerland?
Dr. Daniel Seelhofer, Vice Dean and Director of the Department of International Business, opened the symposium by presenting the perspective of Switzerland as an “export nation”. In medieval times, Switzerland’s major export were mercenaries, who fought in every major European war; even back then, Swiss exports were renowned for their quality. Nowadays, Switzerland is best known for watches, chocolate, and cheese; at least that is the common perception. In reality, the most important exports are pharmaceuticals and machinery, while in the food sector, chocolate and cheese do not even rank among the top exports: “It’s actually coffee, thanks to Nespresso”, Daniel Seelhofer explained. But producing in Switzerland is often too expensive (due to high wages, the strong Swiss franc, etc.). Therefore, many companies are forced to offshore production. Doing so, they bring down costs but often face the challenge of maintaining quality. The latter is particularly crucial in China, which used to be an Eldorado for offshoring. However, many companies who moved production there have been disappointed. So is Europe the answer? It is much closer, there is less cultural difference and companies can rely on a highly trained workforce.
Encouraging Role Model Learning is Key
So how attractive is Europe? This question was addressed by Florian Keller, Head of the Center for European Business & Affairs. In 2014, Forbes Magazine claimed that the sick man of Europe is the whole of Europe. But are things that bad? Fortunately, in 2015, all European countries except Greece found their way out of the worst recession in 80 years. The end of the financial crisis came at a cost, however: loss of competitiveness. Europe’s productivity is currently lagging behind that of other developed economies such as the US or Korea. Also, current austerity policies have caused Europe to lose its leadership concerning infrastructure. European companies in the technology sector (e.g., Nokia) are losing their competitive advantage. Finally, European markets are less dynamic than others, and venture capital investments are small, making them less attractive for entrepreneurs. However, every study which treats Europe as a single entity is bound to fail. Europe is a complex combination of different political and economic systems. Florian Keller argued that this diversity is also an advantage. “Europe has the tools, but they are not used as effectively as they could be. Role model learning is not strong enough, and European institutions could do more to encouraging it.” So is Europe really the future place to produce? He gave a typical academic answer: “it depends – on where you want to produce what”. By comparing the most important production factors, he showed that Poland or Romania can easily compete with China or India. Finally, according to a 2015 report by Ernst and Young Western Europe is seen as the most interesting investment location by senior executives of international companies.
Lessons from the Big Mac Index
Jan Jenisch, the CEO of Sika AG, presented the perspective of a truly globalized company operating over 170 factories in 80 countries. For Sika, the sales share of the emerging markets increased from 9% in 1990 to 37% in 2015. Countries are becoming easier to access; borders are opening up, and policies increasingly favor business operations. As Jan Jenisch admitted: “If we hadn’t heavily invested in emerging markets, our company would be much smaller. Without economies of scale, we might not even exist anymore.” He is a fan of the Big Mac. “It’s tasty, and it’s manufactured in the same way globally. As a result, the Big Mac index is a reliable benchmark, not only for the cost of living but also for the cost of production.” It highlights the great cost differences between Western Europe and Asia. The lowest costs, however, are found in the Ukraine and Russia, with Poland not far behind. According to Jenisch, “the biggest challenge is speed. Trends and developments have accelerated in recent years, and companies have to adapt.” In Vietnam, for example, Sika can build a factory within 12-18 months while their new office building in Zurich took five years to complete. “If you operate at this speed in emerging markets, you don’t stand a chance.”
Wish List for More Competitiveness
Florian Keller hosted the panel discussion. According to Dr. Eliza Przezdziecka, Assistant Professor at the Warsaw School of Economics, CBRTP, big improvements have occurred in Poland: “The result of foreign investment significantly fosters our competitiveness and service quality. However, there are still traditional production companies unfit to compete internationally, who only survive with the help of state subsidies.” Sika still produces in Europe, and even in Switzerland. “Here, we manufacture complex chemical products. These operations are not easy to move elsewhere,” Jan Jenisch, the CEO of Sika AG, said. “Production costs are only one part of the package, and factors like skilled labor or proximity to R&D need to be considered as well.” As for innovativeness, there were different views: Manuele Fumagalli, SML alumnus and founder of Workspace2go, felt that the fragmented European market makes it hard to compete with US companies. For Michaela Trapp, Regional Manager of the Swiss-Italian Fincons Group, this diversity is an opportunity. Can European IT companies compete with Indian outsourcing giants? She believes there is room for both: “We can’t compete for scalability; but for projects requiring more creative and problem-solving skills, European companies are often preferable.” Marco Eberhardt, CEO of NSM Engineering, a software company offering near-shoring in Serbia and Romania, confirmed this. “Demand for talents is huge, and we compete with US companies. Therefore, we moved to largely untapped markets to find the experts we need.” He added: “Diversity might make things more complex in the short term, but in the long run it will be a great asset for Europe if we use local advantages to specialize.”
To round off the discussion, Florian Keller asked participants how they would foster competitiveness in Europe: Manuele Fumagalli suggested encouraging investment in startups while Marco Eberhardt hopes for the establishment of a European Silicon Valley. For Michaela Trapp, the key would be to continue to harmonize regulations, e.g., for work permits. Jan Jenisch and Eliza Przezdziecka, finally, would welcome more government investment in education. The evening ended with a buffet reception that clearly demonstrated Europe’s ability to produce great food.
For more pictures of SML International Week, visit the SML Gallery.
Contact: Florian Keller, International Management Institute