Improving Factor Conditions

The Case of Manisa Electrical and Electronic Appliances Cluster

Important Notice

Launched in March 2007, “Development of a National Clustering Policy” is an EU-funded technical assistance project (the Project, hereinafter) that seeks to contribute to elaboration of a national clustering policy, through development of a “whitepaper” on clustering. The Project is being implemented by the Undersecretariat for Foreign Trade (UFT) with the technical assistance of an international consortium, contracted by Central Finance and Contracts (CFCU).

The methodology, deployed for the development of this and other Roadmaps reflects the key priorities of the DCP Project. Therefore, it, on the one hand aims at developing a roadmap that demonstrates how the cluster can be more competitive, and on the other, serves the key purpose of informing the process of cluster policy-making and development of policy-level and institutional recommendations. The Roadmap for Manisa Electrical and Electronic Appliances Cluster has been developed with direct involvement of a broad range of stakeholders: enterprises, governmental and non-governmental organisations, academic and research organisations, and other relevant cluster actors. Cluster roadmap itself, is the strategic plan of cluster development that includes the cluster vision, definition of its strategy, key factors for its successful development and the skills, competences and capabilities which are required for ensuring that the success factors are in place. Roadmap report then proceeds to the analysis and recommendations related to the cluster governance and outlines specific cluster activities in the form of pilot project fiches that should be implemented in short-, medium- and long-term.

Improving Factor Conditions

The Case of Manisa Electrical and Electronic Appliances Cluster

1.1. Vision

The process of globalization has a strong influence on recent trends in the electrical and electronic appliances industry, in general and household appliances industry, in specific. The most significant influences, from the point of view of the development of Manisa EEA Cluster, are (a) the emergence of a “second wave” of developing-country multinational enterprises (aka Emerging Market Multinational Enterprises or EM-MNEs), and (b) outsourcing of R&D activities by the first wave multinationals to the emerging regions.

A recent OECD working paper points out that this is an industry where latecomer status can be an advantage:

“Haier (China), Mabe (Mexico) and Arçelik (Turkey) emerged as multinationals in the large home appliances (so-called “white goods”) industry. The recipe for the success of these firms seems to lie in their ability to treat global competition as an opportunity to build capabilities, move into more profitable industry segments, and adopt strategies that turn latecomer status into a source of competitive advantage. At the same time, their experiences show that there are many strategies and trajectories for going global, consistent with a pluralistic conceptualization of globalization.”[1]

Due to its favourable factor conditions Manisa became a home for the second largest multinational producer of home appliances in Europe (i.e. Indesit) and an emerging Turkish multinational, Vestel, in addition to numerous suppliers to these firms and SMEs in this sector[2]. However, sustainability of competitiveness of Manisa EEA Cluster is under attack. Cluster’s low labour costs and proximity to Europe are not more advantageous than those enjoyed by other locations (clusters) in Eastern Europe (for example, Lodz, Poland). Moreover, Old Europe (the main destination of Cluster’s products) itself is a relatively mature, saturated market; while the CIS countries and the Middle East, with far lower saturation and high growth rates, are far more attractive. However, in these markets, competition from the East and South Asia is stiffer. Thus Manisa EEA Cluster needs to define a more sustainable source of competitive advantage.

In order to develop this Cluster Roadmap, three workshops were facilitated with active participation of cluster working group members. The working group members developed the vision based on the following concepts, which were widely discussed during the cluster workshops:

• It is important that in the future both multinationals (i.e. Vestel and Indesit) will move part of R&D functions to their companies in Manisa (Vestel employs around 300 engineers in Manisa that are involved only in design, but not in research);
• It is important to attract other multinationals as well, which would also eventually move much of their R&D to the region; and
• To create and sustain competitive advantage, the Manisa EEA Cluster should have a critical mass of innovative SMEs among suppliers and supporting industries.

The participants in the cluster meetings were unanimous in their endorsement of this approach – it is their ‘preferred future’. By the end of the first two meetings, the group had adopted the following vision statement:

1.2. Strategy

A number of issues came up during the working group discussions that were related to operational deficiencies handling logistics and transportation in this region. Being the part of the global value chain, it is the basic requirement for Original Equipment Manufacturers (OEM), as Vestel and Indesit in Manisa are, to achieve high standards of operational effectiveness. Many multinationals are looking to locate their production units in the places where the factor conditions contribute to higher company performance compared to the competitors in other locations. However; “from a competitive standpoint, the problem with operational effectiveness is that best practices are easily emulated. As all competitors in an industry adopt them, the productivity frontier - the maximum value a company can deliver at a given cost, given the best available technology, skills, and management techniques - shifts outward, lowering costs and improving value at the same time. Such competition produces absolute improvement in operational effectiveness, but relative improvement for no one”[3].

Strategic positioning for the companies of Manisa EEA Cluster would be to achieve sustainable competitive advantage by having a very dynamic environment inside the Cluster for R&D development and innovation, which in turn would result in shorter lead times in new product development.

The working group agreed that for the development of the Manisa household appliances cluster the overarching strategy would be the following:

The goal is to build up local R&D capabilities so that companies with operations in Manisa will be able to conduct increasingly significant portions of their product design and development functions in the Cluster.

This strategy has the advantage that not all of the investments in R&D capabilities need to be made by existing Cluster actors (companies, universities, government); these entities only need to make the initial investment. Subsequent R&D investments would be made by companies currently not located in Manisa, which are to be attracted to the Cluster in order to reduce their R&D costs, much as Bangalore, India has benefited from outsourcing of software programming from around the world.

A similar strategy was implemented in the state of Chihuahua, Mexico, a centre of both electronic appliances and automotive clusters. There are several lessons that can be drawn for Manisa.

Chihuahua is situated on the border between Mexico and the United States, and in 1992, it had several large factories assembling televisions and similar appliances for Philips and Panasonic, as well as brake systems, wire harnesses, and other automotive components, for export to the U.S. These factories had driven the unemployment rate in the region for unskilled and semi-skilled workers down to 2%, which was considered a great success; however, the region also had several good quality universities, and the unemployment rate for engineering graduates was around 30%. The factories did not require a large number of engineers, and the cluster leaders began looking for strategies that would also employ this very crucial segment of their work force.

The strategy they adopted was to focus on expansion of services that could complement the manufacturing process in the region. One of the key services they identified was product design – a key and increasingly expensive step in the overall value chain. They felt that Chihuahua had several key attractions as a centre for product design, such as quality of life, proximity to the U.S., and excellent labour force, but manufacturers needed a demonstration of the feasibility of locating research-oriented facilities in the region before they would make a major investment.

Therefore, the cluster leaders decided to attempt to attract a national, Mexican research centre to Chihuahua first. They targeted a national Request for Proposals to locate a $30 million applied research centre for advanced materials somewhere in Mexico. The main candidates for this centre were the three largest cities in the country: Mexico City, Guadalajara, and Monterrey. Chihuahua had never before managed to attract such an investment, and had no significant technical research centres of its own. However, the focus of the proposed centre was a good fit with local clusters, and two of the major universities in the region, Universidad Autónoma de Chihuahua and the Tecnológico de Monterrey, Campus Chihuahua (ITESM) were very supportive.

Since Chihuahua’s bid was a long shot for this research centre, they decided they would have to ‘sweeten’ their bid, making it far more attractive to the funding authorities than any other location. Instead of proposing a budget where the national authorities would be funding the land, building, equipment and the staff (which was the approach taken by all the other candidate cities), Chihuahua offered to provide both the land and the building for the project. The state (provincial) government donated the land, strategically located between the university area and the industrial park zone, and a handful of private sector companies donated the cost of construction of the research centre – an unprecedented offer at that time in Mexico. This meant that all of the $30 million allocated by the federal government to the project could be used for the true purpose of the centre – attracting talented researchers and top notch equipment.

Chihuahua’s bid was accepted mainly because of the high degree of coordinated local commitment to the project. As predicted, the Advanced Materials Research Centre (Centro de Investigación en Materiales Avanzados, CIMAV) has become one of the most successful publically funded applied research centres in the country, because the private sector companies, who had a high stake in the project from the beginning, understood its purpose, and commissioned significant amounts of contract research at the centre. The linkages between the Centre and local universities were also strong, again due to the high level of engagement of the cluster, which was embedded in the university system.

This success led to more investments in applied research on the part of the private sector, most notably the Technical Centre built by Delphi Automotive Systems, which today employs 2,400 Mexican engineers in CAD applications for designing automobile components such as sensors, solenoids and brake systems.

Several lessons for Manisa EEA Cluster can be drawn from this case:

• Cluster leaders should try to attract to Manisa a variety of research centres and institutions for collaboration (IFCs), in order to demonstrate to global appliance makers the suitability of Manisa as a location for applied research
• Rather than trying to maximize the ‘subsidy’ from the national government (for example, asking national government to donate the cost of the land), local cluster leaders should seek to maximize the local investment and involvement in a demonstration project of this kind, making Manisa the most logical and attractive location from the point of view of TUBITAK
• Local companies must maximize their usage of local research institutions, demonstrating to global appliance makers that they would not be the only ones utilizing the local IFCs, but that opportunities to collaborate and innovate on pre-competitive research will be available

1.3. Key Success Factors, Requisite Skills and Capabilities

Below table lists the key success factors, which need to be in place for the cluster to implement its strategy, and progress towards achievement of its vision. It also includes the range of skills, competences and capabilities at the cluster level that are required for successful cluster development (in the short-, medium- and long-term).

Key Success Factors and Requisite Skills and Capabilities

1.4. Cluster Governance

The kinds of transformations proposed in this document are substantial, and will take a long-term commitment of a type that has no historical precedent in Manisa. The Manisa Organized Industrial Zone is by all accounts an excellent, well organized area for manufacturing, but the only real candidates in the region for R&D are clearly in Izmir[4] – which suggests that the cluster’s governance should have significant representation from institutions based in Izmir as well.

Manisa EEA Cluster is almost entirely[5] contained within the Manisa Organized Industrial Zone, and has a similar industrial structure to most industrial zones – a handful of large, internationally successful appliance producers (e.g. Indesit, Vestel) and a multitude of smaller local and foreign suppliers.

The cluster’s governance is evaluated at three levels:

• institutional capacity and autonomy of the cluster organization (representativeness, resource mobilization, financial autonomy)
• cluster governance (key drivers, self-financing rates)
• strategic orientation (mission, focus, activities)[6]

At this point in time, there is no specific ‘cluster organization’, so the participants in the cluster workshops have recommended the formation of a Cluster Advisory Board to make initial decisions about governance of the cluster. Suggested positions on the Cluster Advisory Board included senior representatives from:

• Larger companies
• SMEs
• Municipal government
• Exporter’s Union
• Universities
• Applied Research Centres
• Port of Izmir
• A logistics planning agency
• Manisa Organized Industrial Zone

The Board would be directing the activities of a professional manager/team, which would act as staff for the cluster organization, assisting in the implementation of initiatives approved by the Cluster Advisory Board.

1.5. Cluster Actions

The following list of Cluster Actions defines the specific steps that can be taken to achieve the Key Success Factors and make the Manisa EEA Cluster more competitive. Each of the key success factors has been matched with a specific cluster action, as shown in the following table.

Key Success Factors against Cluster Action

CA1: Establish Cluster Advisory Board and Cluster Management Team

The cluster working group has determined that the first implementation step is to establish a cluster advisory board with a fairly broad representation (about 14 members) which will have the authority to act in the name of the cluster and coordinate the other 5 cluster action initiatives. Over a period of a year, while taking leadership in managing cluster activities, this Board would determine its longer-term institutional structure. Meanwhile, a dedicated staff of at least two professional managers with relevant experience should take the lead on implementation under the direction of the Board.

CA2: Establish Network of Applied R&D Institutions

This action targets sustainable growth of the Cluster in Manisa through creation of collaborative applied research projects between private companies, research and academia for development of nano/microelectronics and embedded systems for household products with new industrial design. At the current stage there are no applied research projects that the cluster would benefit from. There are several reasons for that:

• The human resources are scattered in the region and the companies, as well research institutions are unaware of the each other needs and capabilities;
• The motivation system that would stimulate the concentration of expertise and knowledge in this geographical area is non-existent;
• There are no education programs at the universities that would meet the modern requirements of the industry;
• There is very low level of social capital and willingness for collaboration among the cluster actors.

Currently the region does not have a competitive advantage for attraction of R&D activities. In order to sustain the competitive pressure from other regions (Poland, Czech Republic, Greece) there is a need for a cluster to convey a sense of urgency to the public, government, Academia in order to upgrade education system and develop research and product design projects by creation of institutions for collaboration (IFCs).

CA3: Upgrading Attraction Programs to for Global Value Chain Players

Currently, Manisa has an industrial attraction program, but it is not especially focused on household appliances. A new unit for promoting the cluster’s diversity within the existing organization (or perhaps in a separate organization) should start by visiting facilities of market leaders and understand their methods and priorities, with an eye to creating attractive conditions for them to locate new facilities in Manisa (Indesit, Electrolux, Bosch, Kirby, Haier, Krup, and Siemens are a few of the candidates). After understanding their goals and forecasted behaviour, seek to attract relevant facilities and functions to Manisa. The unit should be active in international fairs, and host at least one major fair in Manisa each year.

CA4: Establishment of the Center for Entrepreneurship and Enterprise Development (CEED)

A requirement for the overall strategy to succeed is to encourage and assist engineers, students and researchers from the region and outside of it in developing viable enterprises that are capable of competing in the global business and industry. The training should be conducted by people with appropriate business expertise, attitude and motivation. At the same time the Celal Bayar University would contribute significantly with introduction of graduate and postgraduate programs in Science and Technology Entrepreneurship. Four main approaches in developing entrepreneurs can be adopted:

• Inculcating entrepreneurial values to students through academic programs enriched with internships in companies from the Manisa cluster;
• Enhancing the capabilities of new and existing entrepreneurs through the entrepreneur development and enterprise development programs;
• Assisting entrepreneurs in establishing new business, developing and maintaining their enterprises through business advisory and consultancy services;
• International exposure of students and entrepreneurs to University programs, entrepreneurial companies, peoples and surroundings in foreign countries. Along with cluster leaders from the Cluster Advisory Board, some selected candidates from this program should also accompany study tours.

CA5: Implement Comprehensive Environmental Overhaul

The Cluster will address environmental issues with a comprehensive, system-wide approach for all Manisa, bringing environmentally friendly philosophy & values to work, residents & government. The municipality, the provincial government and the OIZ will need to form a “triple helix” partnership with companies and universities to collaborate on more environmentally friendly products and processes, which reach far beyond the factory to product utilization and disposal, as well as penetrating the city of Manisa and how people live, get to work, and energize their homes. Market trends are demanding increasing levels of eco-sophistication, and this will not come from a workforce without a high, consistent level of environmental consciousness in all occupations and walks of life. If the Cluster can become a trend-setter instead of a trend-follower in this crucial area, its international profile will be further enhanced.

CA6: Engagement with Transportation Upgrading Projects

The Cluster companies themselves will not be making extensive investments in major new infrastructure projects, especially in ports, rail, and intercity highways. However, key business leaders will engage with transportation and logistics planners, showing the standards that competitors have reached and insisting that the same or better standards be applied in Manisa/Izmir. At least two representatives from Manisa should sit on the board for the new port management, and cluster leaders and staff should similarly work closely with transportation and logistics planners for the expanded rail system and establishment of a multi-modal hub in or near Manisa.

The activities that need to be fulfilled within each cluster action, along with indicative budgets are presented in the annexes. Although most of the proposed actions should be launched as soon as possible, the establishment and staffing of the Cluster Advisory Board is a priority and a prerequisite for the others. The following chart presents the actions that need be pursued over the 5-year period between 2009 and 2013, and critical milestones.

A Roadmap for Manisa Electrical and Electronic Appliances (EEA) Cluster.rar

Cluster Development Timeline