Forget the War, focus on the Ammunition makers!
Machine Economy that runs the world and how Sri Lanka may be better off with a slice of it
Countries and firms are on a war to build the next iPhone for the perceived benefits and the prestige that flows in as a result. But only a few would look beyond final product, to the components. And the ones who would wonder further more, as to how the components, that make iPhone an “iPhone” are made, might only be a handful.
Let’s get started with a story (or a Case Study if you are a fan of management terminology)
ASML Netherlands, you would not recognize the name of the company similar to, say Apple, Intel, AMD, Qualcomm or Nvidia. But the these companies may have a hard time if it is not for ASML to produce their cutting-edge chips and other products that power thousands of items all over the world. However the company take pride of their lack of popularity through their self-proclaimed tag line “The most important tech company you’ve never heard of”
What do they make? Lithography systems, the machines that make microchips. To be exact, these are the machines that are used to make the patterns on silicon chips, on a mass scale, and they have been making such machines for over 35 years now, 28,000+ employees and in over 60 locations around the world. Pandemic may have made their existence more valuable, due to the world wide chip shortage that caused as a result of the supply chain constraints, that in turn lead to production stoppage of products ranging from watches to airplanes.
Takeaway? making high tech products are important, but making machines that make components for such products may be more important.
Manufacturing in Sri Lanka
In 2020, Manufacturing accounted for only around 15% of the GDP of Sri Lanka, given the prominence in the Service sector (Around 60%) as the country is moving towards a more knowledge based Economy. Yet the exports are mostly dominated by traditional sectors such as Apparel, and Agri-based products rather than high end manufacturing exports. Due to the tendency towards traditional manufacturing, hardly any Foreign Direct Investments (FDIs) received by the manufacturing, specially machinery and components.
As the competitiveness of the traditional exports may seem the fade away, Sri Lanka is aiming for the self-proclaimed “Technology Hub” status that would be lead by IT/BPO sector, which is possible by all means, given the capacity of the Human capital. However in this process the country may be overlooking the potential to re-think the manufacturing policies, which could be complementary for the grand vision for as the Island of Ingenuity.
And Sri Lanka had the fair share of opportunity to build the presence as a Manufacturing Hub in Asia right after the 1977 economic reforms. As the openness to the global economy and trade, provided the possibility to attract FDI and was even successful in bringing two prestigious companies, Motorola and Harris Corporation, that aimed to set up assembly plants in the country. But the notoriously frequent socio-political instability was successful in driving the investments away, and as a consequence the country is yet to attract the interest of a major global manufacturer, unlike the competitors such as Vietnam.
It is true that the main focus of this article is the Machinery and Tool manufacturing rather than assembly. However the assembly plants would have brought about valuable resources, technical know-how, technology, reputation and research & development capabilities, that would have provided invaluable foundation to kickstart a successful manufacturing industry that would have made the Sri Lanka, the Germany of Asia.
Despite missing one nexus, still it is possible that Sri Lanka can deviate some attention towards developing the machinery industry, given the outlook for the global economy and value chains, which would be driven, not only by the intangible technologies such as AI and Machine Learning, but also the tangible hardware, such as the machines made by ASML.
To win the war, start with a battle
Sri Lanka has the advantage of not requiring to start from scratch as the country already have a strong component (electrical, electronic and automotive) manufacturing sector with around 42 companies and around 20,000 workers. (interestingly lesser than the no. of workers of ASML) A recent article by Mckinsey, that highlights the rise of Nordic manufacturing companies, lays out several characteristics of these companies, that can be sever as a guidance and followed accordingly in the Sri Lankan context.
- Identifying and targeting a “sizable” and a “niche” markets — Sri Lanka does not need to imitate ASML and enter the microchip industry, despite the vast market size. Instead it can focus on one or two industries first (due to the nature of the sector) that have a sufficient demand in the 4th Industrial Economy, yet have only a few competitors.
- Performance Culture — The companies require high focus and performance due to the advance technical demand of the end customers. Therefore to ensure the quality and consistency, the companies need to have managers and executives who are accountable and responsible for the performance and the growth of the company. This would be essential at the start, in order to attract reputable customers and fulfill their requirements accordingly to ensure long term relationships.
- Mergers and Acquisitions (M&A) — To capture the best talents and the technologies, the companies can aim at conducting strategic M&As which would not only help to drive growth, but also long-term competitive advantage and sustainability which would be essential in the future.
- Strong Business Models — The companies not only need to provide the Hardware or the machines that may well cost thousands of dollars, they also need to make sure that the “aftermarket” and service businesses are also part of their business strategy. The importance of such a cohesive model has been emphasized during the pandemic.
- Talent, Talent and Talent — Due to the highly advanced nature of the sector, the Human Capital plays a vital role for the companies. And as emphasized in the Mckinesey report, it is not only important to recruit the best people but also to allow them to move “across and within companies” that would enable knowledge and know-how spillovers. Sri Lanka has a talented workforce that is well capable to drive the industry and that can be complemented through the recruitment of experienced foreign individuals, who will have the knowledge to prepare the strategy in this somewhat nascent industry,
- Highly standardized and modular products — Essential for a niche market strategy is the ability to develop “standardized but customizable” products that would be agile enough to accommodate the specific and highly technical requirements of the buyers. It will also ensure that the country would be perceived not as a mass factory, but also the go-to place of ingenuity with unique and expert capabilities.
Government will have a vital role to play in transforming the advance machinery and tool sector of the country, which would be covered or complemented by the already introduced National Export Strategy (NES) as it has recognized the importance of the Electrical & Electronic components as a key focus industry. Setting the required macroeconomic environment with the socio-political stability, will support the private firms to attract the required investments and progress towards capturing the markets of handpicked key industries of the future.
Furthermore the government can also become a pioneer through the already existing R&D institutions such as Sri Lanka Institute of Nanotechnology (SLINTEC) which already work with private and public firms to drive advance innovations, and will be further assisted by the proposed science parks and Special Economic Zones (SEZ). And the recent developments around value addition to local graphite by SLINTEC through a patented technology may be a sign that the country is well capable and positioned to provide the ammunition makers to a global war, if only we act now!
Originally published at https://www.linkedin.com.
