Making, Reengineering, and Reinnovation–among them, which strategic option is more attractive than others. It depends on the way each of them is exploited and the progression path is followed through. Although making is the easiest entry path, however, it has been losing its attractiveness. On the other hand, in the absence of reinnovation, reengineering does not lead to a profitable journey. Hence, these strategic options demand a synergistic approach for entering and developing the industrial economy.
Making, reengineering, and reinnovation are three windows for developing the industrial economy for many countries. Make in India is India’s flagship program for developing the industrial economy. On the other hand, Japanese and Korean are known for the success of reengineering—followed by reinnovation. After being the world’s factory through making, China has embarked on a reinnovation strategy to strengthen its global industrial economy position. What they do mean and what are opportunities and challenges to succeed in these strategies are often not clear.
Acquiring making capability is not enough to succeed in the industrial economy
Once a product is developed, the making of copies of the product proceeds. For making each copy, we need components, machinery, and labor. The simplest form of making begins with assembling. For developing countries, this is often the entry point in the industrial economy. They import capital machinery and all the components. Labor is the major local input for assembling those imported components. Very high wage differential offers the incentive to developing countries of sourcing local labor in assembling imported components. The next phase of making could be to manufacture some of the components. As a result, local value addition increases. However, is it a profitable proposition? How far is it feasible to produce profitable revenue by producing an exact replica of imported finished counterparts? Does it offer a scalable and sustainable path of growth of the industrial economy?
Local assembling does not offer a profitable option
At the assembling stage, the complexity of producing the exact replica is very much low. The needed skill requirement is within reach, through skill development training. For many products, both components and capital machinery to assemble them are commercially available. Many reputed brands like Apple or Toyota do not produce most of the components. In fact, Apple sources all the components of its iPhone from 3rd party suppliers.
However, once a local brand produces replicas by assembling imported components, value extraction suffers. Customers are willing to pay 20 to 30 percent less than they are willing to pay for products carrying reputed foreign brands. Often the markup charged by the foreign brand is less than 25 percent. Hence, the profitability in the making locally faces hurdles due to significantly low willingness to pay. On the other hand, labor contribution in assembling most of the products has fallen to less than 10 percent of the total cost.
Hence, there appears to be no profitable proposition in the making locally by assembling important components, provided there is no tax differential. Moreover, made locally compels even foreign brands to extract far less value than made in advanced countries. Even if the quality remains the same, the country’s brand value makes a difference of 20 to 30 percent in willingness to pay.
Making each of the components does not offer much opportunity for uplifting profitability, either. In making most of the components, there is a very high capital cost. Often domestic market does not offer a needed scale advantage. Moreover, the labor requirement in manufacturing components with imported capital machinery is also very low. Furthermore, domestic component manufacturing, invariably, leads to quality degradation.
Making based import substitution is suffering from the erosion of competitiveness
Over the decades, developing countries have been offering incentives and protection for the making of foreign products locally. To facilitate it further, they are also condoning intellectual property issues. This is broadly known as the import substitution strategy. However, it has not succeeded in developing a sustainable industrial base in most developing countries. Moreover, due to the decreasing role of labor in assembling and the high economy of scale effect, this strategy has been losing steam day by day. The recent mega failure of the uprising of local mobile handset makers in India underscores this strategy’s weakness further.
To overcome the economies of scale effect, the proposition could be to go for the export market. However, for practicing making strategy, often, developing countries condone intellectual property infringement issues. But once local firms attempt to export, they face IP barriers. Hence, making strategy does not offer a much profitable strategy for developing countries to profit from the industrial economy.
Trading labor-based services to the global value chain
Instead of developing local brands, the strategy could be to trade labor in offering making services to the global value chain. Yes, there is a scope. Some countries have made a success. Notable ones are China, Malaysia, and Vietnam. In fact, the success of Bangladesh in RMG is due to offering manufacturing services to foreign brands. However, as labor requirements in the making are constantly falling, such an option of trading labor in the making does not offer a scalable growth path to profit from the industrial economy. Besides, it does not open the path for increasing value addition and generating higher per capita income.
This review indicates that making strategy does not offer a scalable growth path in developing the industrial economy. Unfortunately, many developing countries have been still trying to use making as the stepping stone to creating an industrial economy.
Reengineering demand a strong technology base—however, that is not sufficient to generate profit
The next option is reengineering. Instead of making an exact copy, steps are taken to redesign components and the overall product to produce an imitation of the original products. Invariably, the reengineered version is of inferior quality. However, as there is no R&D cost, there is a possibility that the imitated version would cost far less. As imitation is of lower quality, customers will be willing to pay far less than the locally assembled one. At the price that customers are willing to pay, it’s often difficult to make a profit.
There have been two major trends working in against the reengineering strategy for profiting from the industrial economy. The first one is that labor requirement is falling. The second one is about the increasing complexity of the capital machinery for performing the precision operation. Due to the lack of precise process technology, often the quality of the imitation suffers.
Furthermore, the original products’ innovators are on a relentless journey in making their products better and cheaper by adding ideas. Hence, the quality gap between the reengineered immitted version and that of the original one keeps growing. On the other hand, the cost gap keeps shrinking. Hence, the reengineering strategy of producing imitation is losing its ground. There is no denying that reengineering requires strong engineering and technology capability. However, the success in reengineering is not sufficient enough to develop a sustainable industrial base.
Reinnovation leading to a creative wave of destruction offers a sustainable industrial base
This is the next step to reengineering. To succeed with reengineering, making the imitation better and less costly to produce begins. The strategy is to add an idea as opposed to just relying on labor cost differential. However, to leverage the reinnovation strategy, the underlying technology core should be amenable to progression. Subsequently making the imitation better and also cheaper. Moreover, it requires a huge R&D engagement to leverage such an opportunity. Furthermore, technology core matures, slowing down the incremental progression, thereby, reinnovation.
Reinnovation strategy also may target to change the technology core to create a profitable opportunity. For example, the Japanese Nichia corporation wanted to enter into the light bulb industry. Neither reengineering nor making offered a profitable opportunity. Particularly, reinnovation around the mature technology core of the light bulb was not a feasible option. Hence, Nichia attempted to change the technology core of the light bulb. However, reinnovation of the light bulb with LED technology core led to primitive emergence. Hence, Nichia had to undertake a serious R&D effort, which led to Nobel Prize-winning scientific discovery and technological invention.
Similarly, Sony created success in reinnovating cameras with a new technology core—solid-state image sensor. Similarly, Japanese sharp created a similar success story in microwave ovens. At present, Tesla has been desperate to reach a sustainable, profitable state out of reinnovated automobiles using battery technology core. In fact, at the core of the Japanese successes in building a thriving industrial economy has been turning reengineering journey into a relentless race of reinnovation. Often, they created success by changing the technology core. Among other countries, Korea has been showing performance in this strategy—although mostly in incremental advancement.
Making, Reengineering and Reinnovation—Samsung’s journey all the way through
In 1969, Samsung entered into the electronics industry through making. It started offering making services to Japanese brands like Sanyo. However, within 10 years, Samsung embarked on reengineering electrical and electronics products. It started the journey of reengineering with the Microwave oven. In order to edge up the competitiveness, Samsung embarked on acquiring reinnovation capability. So far, Samsung’s reinnovation has been unfolding as incremental innovation. Already, Samsung has created a significant success in mobile handset through its reengineering leading to reinnovation capability.
Failure of developing countries to traverse through making, reengineering, and reinnovation
Despite significant state-level supports, however, India, Bangladesh, and many other developing countries could not turn their making and reengineering entry into a reinnovation success story. Hence, protection and other measures were not sufficient enough to develop a sustainable industrial base. At present, China has been desperate to create success in reinnovation. Hence, they accelerated R&D investment in producing patents and publications. However, China’s success in reinnovation out of a record number of patents and publications yet to show profitable stories. Hence, it’s time to look into thoroughly exploiting making, reengineering, and reinnovation strategies in a synergistic manner.
