During the era from the beginning of the 19th century to the middle of the 20th century which was driven by negative nationalism and was marked by hostility to other countries and struggling to establishing superiority over them, state-centred protectionist economies and the understanding of input-based domestic product was dominant. From 1950s, this understanding gradually left its place to an output-based approach with open economies due to the globalisation of the economy and the world becoming virtually a single market as a result of the development of information and communication technologies and the demolition of the protective customs barriers. In the past, domestic goods meant goods that are made within the boundaries of the country by domestic workers and engineers using domestic parts. Also, national or domestic firms were the ones that produced goods by using domestic parts and labour as much as possible. The goods or firms that realised this at the highest ratio were labelled as the most domestic goods or firms.
However, as can be seen from the Apple and iPhone example, there has been a paradigm shift in the definition of domestic products and domestic firms with the spread of globalisation. Now companies see the whole world as the potential production sites, suppliers and markets; they may even establish their headquarters in other countries. People from all over the world purchase stocks of publicly traded firms, and become shareholders of world’s giant companies. A national company of a country today may become part of a company of another country tomorrow. Large companies often take over other companies, license technology and even merge with companies from other countries. Even rival companies initiate joint R&D programs to gain competitive advantage in global competition by reducing the cost of technology development.
The definition of domestic product should not be associated with domestically produced parts. And strategies for domestic parts should be developed independently by considering global market conditions. Parts that are competitive in the global market by their quality, cost and certifications will surely be preferred in domestic goods due to these attractive qualities. Forcing the use the parts that do not have these qualities just because they are domestic means promoting products that lack global competitiveness due to low quality and high cost. In addition, employment and developing/producing high value added products should not be mixed with each other. The way to increase employment is to make domestic and foreign companies prefer to build their production facilities in the country by making the climate of manufacturing in the country more attractive.
The universal criterion for the welfare and wealth of a country together with the level development is the gross domestic product GDP, which is the total value of the goods and services produced by that country’s economy in a year, and the per capita income, which is calculated by dividing GDP by the population of the country. It is obvious that the more a country produces goods and offers services, the higher its GDP will be. For this reason, countries continually try to increase domestic production and thus GDP by producing the highest value-added goods and offering the highest quality services.
Benefits provided by domestic goods and services other than enrichment by increasing gross domestic product can be listed as follows: job creation, skills (know-how) accumulation, continual technological development and leadership in technology, derivative product potential, establishment of a powerful information ecosystem and innovation chain, reducing foreign dependence on technologies, especially in critical ones, and increasing the ratio of self-sufficiency, full control over products and ability to use them without imposed restrictions, secrecy and national security, high prestige and moral superiority, strengthening national pride, increase in the sense of belonging to the country and greater enthusiasm for work, improvement in the current account balance by providing foreign currency input, using domestic goods as an economic weapon, etc.
What is desirable for countries is for the people to meet their needs by buying domestic goods and services and thus to contribute to the gross domestic product. Individuals love themselves and their interests first and naturally prefer the goods and services that provide them maximum benefit and whose value/cost ratio is high; that is, those with high quality and low cost. In today’s individual-oriented world, persons turn to products with high value/cost ratio since the feeling of self-interest usually come before the sentiment of national interest. Consequently, countries resort to the use of tax weapon to force people to buy domestic goods and they build high tariff walls around the country. When this protectionist approach exceeds reasonable limits, it turns into a mechanism that provides unfair advantage to an elite minority in the country and that dooms the majority to low quality products, which adversely affects the development of the country. Since there is no environment for fair competition and no pressure to compete globally in protectionist economies, it is difficult for these societies to come up with globally competitive products. That is, those who protect domestic production with high tariffs, thinking that they are doing a good thing, actually break their country off the global race unknowingly.
A common way of leading people to domestic goods and services is cultural, and to affect the shopping habits of individuals by using the mechanism of education in favour of domestic products. However, in today’s individual-oriented world where the whole world has virtually become a village and humanity has moved from the age of childhood to adulthood, these sorts of state-centred approaches usually backfire. The contemporary approach is to device and execute mechanisms that will enable domestic products with high value/cost ratio that could compete all over the world to be produced by domestic companies. This can only be possible by improving the environment of entrepreneurship and innovation in the country and to make it globally competitive.
Unlike animals, human beings are social beings and they need to live together and help one another. For, to be able lead a life worthy of human dignity, man needs hundreds of things from food, clothing and shelter to electricity, means of transportation and communication. Since man can produce only a few things on his own, he must exchange goods and services with other fellow human beings. This is also so for communities and countries as well. Countries, like communities, also need to work in cooperation and exchange goods and services to lead a life of high standard at a reasonable cost. High efficiency and competitiveness requires focusing and developing expertise.
In an ideal world that will provide the most benefit to all humanity, each country determines a limited number of areas in which it can reach critical mass, and maintains a competitive position of global scale by directing its limited resources to those areas. A country that tries do everything through its own manpower and national resources with a protectionist motive by isolating itself from the other countries to avoid purchasing foreign goods and services and to reduce foreign dependence to zero will not be able to achieve a competitive position in the world. Further, in this age of information when everything changes and improves at a fast pace and product life is shortened, it will predestine its people to the outdated products at high cost and low quality and go backward. North Korea is a case in point.
A country is dependent on countries whose products it needs to import no more than the country that needs to export its products for income is dependent on the importing countries. Even the USA and China, the world’s two largest economies, are dependent on other countries to sell products/services. It is clear that, if a city or region in a country resorts to protectionism and tries to produce everything it needs itself to avoid buying products from other cities or regions, that city or region will soon turn into economic ruins, and everybody will look for opportunities to leave that city or region.
The wise approach is to rid itself of blind protectionist instincts and to accept the fact that countries always need one another and that they will meet their needs by becoming trade partners. With this realisation, a country needs to take its place in this global race, with international cooperation if necessary, after carefully assessing the areas of highest potential in global competitiveness. Maintaining hope and optimism are essential as they add grit to life and enhance enthusiasm. Fear and pessimism kill enthusiasm and the joy of life. Policies should be determined based on the scenario of peace and friendship, not hostility and war. The contrast between North and South Korea, which is the embodiment of these two approaches, constitute a striking example.
In today’s world with everything changing rapidly, it is essential to display an output-based approach by freeing oneself of the prejudices of the past and by adopting the sciences and the mind as a guide when policies are determined and decisions are made in an institution, company or country. It is important to analyse objectively in the light of the latest information the kinds of fruits born tomorrow by the seeds of ideas planted today, and to make decisions accordingly. In this rapidly changing dynamic environment, it is essential to be flexible, to make quick decisions and to take calculated risks for competitiveness. This means, effective advancement movements can be realised only by the private sector, not by the state. Therefore, the state should establish a suitable environment for the development of new products and, if necessary, initiate support mechanisms, but it should not embark on the adventure of developing competitive products under the category of ‘national projects’ itself.
It should not be kept in mind that a product which is not competitive in the global market will not be on demand in the domestic market.
Most truths are relative, not absolute. That is, they depend on the realities and necessities of time. When conditions change, so do the judgements, and many truths suddenly become false. The truths that are outdated also disappear in time.
To judge things only with reference to similar things and occurrences in the past without considering the requirements and realities of the current time and to generalise that judgment over all times and places is to bypass the mind and reason, which brings about bigotry and confining the mind. This is more so in this age when everything is changing very fast and is so intertwined.
Many undisputed truths of yesterday are becoming myths of today by the change of circumstances. Therefore, it has become necessary to develop an effective weighing mechanism by which changing conditions and especially paradigm shifts are assessed meticulously in the light of sciences and on the scales of reason and logic and profit-loss analyses are made carefully. So, it is no accident that developing the critical thinking skill is a top priority in modern education systems. This basic skill played a crucial role in the converging of the old continent from medieval bigotry and darkness to enlightenment, and the transformation of yesterday’s continent of wars into today’s land of peace.
Old paradigm in domestic product and job creation
In this age of knowledge, reason and logic, the goods and services produced in a country should be judged based on ‘benefit output’ rather than ‘domestic input’ by considering the benefits provided to the residents of that country. Yet, some countries still judge the manufactured goods by the percentage of domestic parts and labour input, and determine incentives by this criterion. The ratio of domestic contribution is calculated by dividing the cost of the final product after the cost of imported inputs is deducted by the cost of the final product, including the cost of imported inputs. The cost of the final product consists of costs like domestic and imported materials, labour, energy, rent, and depreciation. Licenses, patents, royalties, consultancy services, etc. received from abroad are included in the context of imported input costs.
This ‘input’ based approach for parts and labour would have made sense in the pre-1950 era, when production was based on assembling and when the added value on the assembled product was not great. However, this approach is not incompatible with the realities of time in this knowledge age when knowledge is the most significant input and routine manufacturing tasks are left to robots. We should face the reality that the whole is bigger than the sum of its parts and that the value of the whole is much higher than the sum of the values of its parts. We need to focus on the whole, not the parts, because of the multiplier effect and the added value in the whole. For example, Turksat 4A and 4B satellites, which weighed 7,700 kg and which were produced by Japan’s Mitsubishi electric company for Turkey cost $571 million. That is, the unit price of $74,000/kg for the satellite is higher than that of pure gold, which is about $50,000/kg. Considering that the materials used in the production of satellites are not expensive, the true value of the satellite comes from the knowledge and skill to manufacture it.
The real value of a product for a country is not related to the percentage of its parts produced in that country or the percentage of the domestic labour, and such approaches should be abandoned. The modern approach necessitates viewing the product, manufacture of parts and employment separately and avoiding artificial impositions that may harm the balance in the market. A country should aim to manufacture products in a way that will ensure the highest added value and competitiveness by using the best parts available in the world market without making the percentages of domestic parts and labour an issue.
If a country is to manufacture parts, it should do so by thinking big to gain a significant share in the global market instead of thinking small to save the money spent on imported parts. It should also form the infrastructure to improve the parts constantly with necessary R&D investments and to remain competitive. For example, GE, CFM, Pratt and Whitney and Rolls-Royce firms do not manufacture aircraft; but they manufacture almost all the jet engines of commercial aircraft and they share the market of $25 billion a year.(1)
Also, the US aerospace company Boeing whose 2015 revenues were $96 billion, imports most of the parts used in the assembly of its aircraft from other countries, and yet nobody feels bothered by it.2 Instead of trying to manufacture all components domestically, Boeing and other US aviation companies focus on the parts that they can remain competitive globally and retain this competitive edge through continuous innovation. As a result of focusing, the US exports of aircraft parts reached $56 billion in 2014 (DOT, 2016).
The start of new businesses and the creating of jobs is a desirable thing for a country both socially and politically. But job creation should be considered separately from manufacturing domestically. It should be remembered that the best production site is often the closest suitable place to the largest market. Therefore, domestic companies should not be forced to manufacture goods in the native country to enhance job creation. Instead, with skilled workforce and proximity to major markets, the country should be made more attractive for foreign companies to invest in and build manufacturing facilities. For instance, the Japanese Mitsubishi decided to build a plant that will produce 500,000 air conditioners annually and that will employ 400 people in Manisa, Turkey.(3)
Some major Turkish manufacturers like Arcelik built manufacturing plants in some Eastern European and African countries for the same economic reason that non-Turkish companies like Toyota, Honda and Bosch built plants in Turkey.
We should not scuff companies with high technology but low employment. When the popular photo-sharing company, Instagram was sold to Facebook for $1 billion in 2012, for example, it had only 13 employees. But Kodak, which could not foresee the change in the market and went bankrupt in 2013, had 145,000 employees at some point.(4)
A case study: Apple and iPhone
The most striking example representing the shift from the input-based approach of the past to the output-based approach of today in the definition of domestic product and domestic company is Apple whose headquarters is in the Silicon Valley, USA.
As it can be seen from the label ‘Designed by Apple in California; Assembled in China’ behind the iPhones, product designs and software are developed by Apple in California, but the phones are manufactured by Foxconn company in China. Most parts used in the production of iPhones come from countries outside the USA. For example, processors and chips come from Samsung (South Korea) and TSMC (Taiwan), batteries from Samsung and Huizhou Desay Batteries (China), cameras from Sony (Japan), screens from Japan Display, Sharp (Japan) and LG (South Korea), flash memories from Samsung and Toshiba (Japan), mixed-signal chips from NXP (Netherlands), Gyroscopes from STMicroelectronics (France, Italy), semiconductors from Texas Instruments, Fairchild and Maxim Integrated (USA), accelerometers from Bosch (Germany) and Invensense (USA), RF modules from Win Semiconductor (Taiwan) and Qualcomm (USA), and touch ID sensors from TSMC and Xintian (Taiwan).(5) Also, many of the parts supplied by US companies are manufactured in Asian countries.
The production cost of Apple iPhone 6S Plus (16GB) is $236, but its sale price is $749 – that is, more than three times the production cost.(6) Likewise, the additional production cost of the extra capacity 64 GB model is only $17, but the mark up on price of the phone is $100 – that is five times more than the cost of the part. Apple is the leading company in the world in terms of market value ($700 billion) and brand value ($120 billion). Its 2015 revenues were $234 billion, which is larger than the exports of all countries except 20 countries, and the amount of cash it has is $203 billion. It employs 115,000 worldwide.(7)
Now with an output-based rational point of view, let us ask these questions:
- Is the technology giant Apple, which has its products manufactured in a foreign country by a foreign company with parts most of which made in foreign countries, but which is a source of envy in terms of its prestige, brand recognition and high profitability, a domestic company for the US that needs to be cherished by the USA?
- Should products whose domestic-part contents are low other than the design and software like the iPhone in the USA be viewed as domestic products to take pride in or as foreign products due to the low rate of made-in-USA parts?
- Are the ordinary US citizens or the US government happy that the Apple company was founded in the USA, or are they bothered by it?
- Is the iPhone known as a product of USA or China?
- Do the citizens of a country wish to have a company that is a technology leader in the world like Apple even if it manufactures its products in a foreign country with foreign parts, or, do they want to have a company that manufactures its products in their country using a high percentage of domestic parts even if it is not competitive in the global arena?
- Suppose a non-US investor bought the Apple company, moved its headquarters from Silicon Valley to the capital of his country, changed the company language from English to his native language, moved its manufacturing facilities to his country, and went even further to change the company’s name to something in his native language and ordered to use a certain fraction of domestic parts in the products. Should this person be applauded by his countrymen as a great nationalist, or should his sanity be questioned? What if he did this with loans guaranteed by his government?
The current state of the once world’s leading cell phone manufacturer of Nokia and Blackberry, which were a source of pride for Finland and Canada, show that it is indeed difficult to reach the top, but it is even more difficult to remain at the top, which requires a close follow of the market place and the competition. If Apple had insisted on domestic parts and refused to use the touch screens developed by Japanese and South Korean companies in their smart phones, would it have dethroned Nokia?
The questions raised above about Apple in the US can also be asked for the AirTies company of Turkey which resembles the Apple model in the field of home networks. AirTies has its R&D and product design in Turkey, but it has its products manufactured in China like Apple. Founded in 2004, the company has sold 15 million devices so far and 90% of its revenue comes from exports. AirTies also entered the US market and began to install wireless in-house Internet technology. Midcontinent communications, which has over 300,000 subscribers in the US, started using AirTies products.(8) Just like Apple, AirTies follows the global developments related to parts, and designs its products by integrating the most innovative and competitive parts in the global market, regardless of their origin and focuses its resources on integration and software development. This way it strives to remain progressive and competitive in the global markets.
As another example, the Legend electronics company, which changed its name to Lenovo in 2003, was founded in China in 1984 with a $25,000 investment. It became Asia’s largest computer seller in 1999. After purchasing IBM’s PC unit for $1.8 billion in 2005, Lenovo instantly became the 3rd largest computer vendor in the world. Lenovo bought Medion, the German electronics company, for $800 million in 2011, Digibras, the Brazilian electronics firm, for $148 million in 2012, and IBM’s server unit for $2.3 billion in 2014. Entering the mobile phone market in 2012, Lenovo bought Motorola Mobility, the mobile phone unit, from Google for $2.9 billion in 2014. 58% of the shares of Lenovo, whose headquarters is in the US and whose official company language is English, belong to individual and institutional investors. Lenovo operates in 60 countries and has 60,000 employees. With revenues of $45 billion in 2015, Lenovo is the world’s largest PC maker and China’s largest mobile phone vendor.(9)
National projects and domestic version products
In some developing countries like Turkey, a move has started to produce almost everything domestically to reduce the current account deficit and to keep the hard currency paid for imported goods in the country. As the saying goes, the difference between medicine and poison is the dosage. There is nothing wrong with entering the market as a new comer with existing products like refrigerators, cars and wind turbines and trying to capture a market share. But this should be done after a careful analysis of dominant dynamics and the global markets, the existing relevant infrastructure, resources to be allocated, and the required human capital in areas where critical mass can be achieved, sustainability of global competitiveness is possible and chance of success is reasonable. Even in cases with promising outlook, it is important to prepare a sound business model with detailed plans from product development to achieving targeted market share, a roadmap with clearly marked milestones, indication of financial resources, realistic sales projections, assessment of competition environment, R&D dimension and even the possible national and international cooperation. And the targeted market should be global, not just local, since the true value of a product can be seen when it competes against similar products in the global market. Otherwise, issues of credibility and realism will be raised.
A football team that constantly plays defence to prevent its opponent from scoring cannot win a game. A team without the courage to play offensively in mid field cannot be a contender and can never rise to a higher league. Similarly, a country with a protectionist policy that aims to keep imported goods from entering the country or to decrease their amount instead of being a contentious player in wisely selected areas of global market and competing globally, will not go anywhere. It will slip backward instead of leaping forward in GDP rankings. Moreover, this protectionist approach that dwells on arousing nationalistic feelings rather than common sense and reason, and which is closed to criticism because it is associated with the love of country, is open to all sorts of abuse. Such approaches that ride on emotions usually benefit not the country, but the individuals or institutions that seemingly promote nationalism but in reality, look after their own interests. It can even be said that a ‘national product’ that has no chance to compete in the global arena with its price or quality cannot even be deemed a ‘national product’ since it will not be embraced by the nationals of that country.
For a country to attempt to produce everything domestically without a rational plan by isolating itself from the rest of the world with a protectionist approach by declaring war on imported goods is unwise, and its result is self-damage. Close the eyes to the realities of the world with such irrational approach will result in the waste of resources and harming the national pride.
As if technology and technological products have nationality, some countries promote national project aimed at producing national products with 100% original native engineering and domestic parts and domestic manufacturing. Despite the flattering names that appeal to blind national pride, these projects imposed from the top do not seem to have much chance of success when compared to the alternative practices in the developed world. In today’s highly competitive environment, global cooperation has become a common practice regardless of religion and nationality due to high R&D costs and fierce competition in new technology development. It is very naïve to think that a national product developed in an isolated environment by a homogeneous group of people with limited resources in a long time will be competitive when it is introduced to the market. Considering the fast pace of technology development and the ever-shorter product life, the newly developed national product will be outdated before it is completed.
Even the most technology savvy countries and technology giant companies are racing with each other in recruiting the best talented people and acquiring the most promising start-up companies without putting forward any national reference. In fact, they establish their research centres in places such as Silicon Valley where the most creative brains are and add more power to their brain power. For instance, the dominance of Samsung in the global markets is the dominance of South Korea in the consumer electronics market. And, the nationality of those who design or manufacture Samsung products is irrelevant – just like the nationality of the players in a football giant being unimportant. So, many bright and expensive brains from the USA to India, and from China to Turkey, design the future products of Samsung in its R&D centre in Silicon Valley.
It is understandable to attempt to manufacture domestically some military equipment and strategic parts whose purchase and use may be subject to severe restrictions even when they it may not be economical to do so. However, under well-established free market conditions at global scale, it is not understandable to attempt to manufacture competitive commercial products like wind turbines, solar PV cells and electric car batteries as ‘national product’ from scratch using only native resources.
Case study: two different approaches to developing wind turbine technology
The difference between the approaches taken by Turkey and China to acquire wind turbine technology is striking, and the results of the two approaches are very instructive. Turkey started a ‘national wind turbine project’ (MILRES) in 2007 with the goal to develop a 2.5 MW wind turbine, using totally native and domestic resources. To gain experience and to develop expertise, it was decided to develop and build a 500 kW wind turbine first.(10) The goal of the project was to build the infrastructure necessary for the establishment of a native and globally competitive wind industry with Turkish design and technology, and to rank among the top five in the world in wind turbine design, manufacture and sales. Also, it was planned that 25% of the projected 20 GW installed power for the first 10 years would come from domestic turbines. However, as of 2017, Turkey’s total installed wind power capacity reached only 6 GW during this 10-year period, and the planned 2.5 MW wind turbine is non-existent. The only tangible output of this aggressive national project has been a 500 kW turbine prototype whose future is uncertain. During those ten competitive years, wind power technology has developed even further, the 2.5 MW turbines are replaced by much larger ones, and the installation of off-shore wind turbines of up to 9 MW is spreading.
During the same period, China took a fundamentally different approach. It did not make the mistake of starting from scratch with domestic resources only and without giving in to the temptation to the ‘domestic native design’ trap. Realising that there is no point in reinventing the wheel, China formed cooperation with the existing wind turbine manufacturers, transferred technology and eventually produced its own turbines and began marketing them in a competitive manner throughout the world. Today, China has become number one wind turbine manufacturer in the world with the highest market share, leaving the USA, Germany and the Netherlands behind. Judging from the result that Turkey is non-existent in global wind turbine market while China is a giant, it is easy to see which approach was more rational and which country is enjoying a national pride. Then, the following questions need to be asked about the ‘domestic native design’ approach as a model of innovation:
For products that have reached commercial maturity, how realistic is it to think that, globally competitive products can be develop by starting from scratch and working in a closed circuit while being limited with native brainpower and resources? Is it not a wiser approach to start one step ahead by forming international cooperation or by purchasing a company that has already developed technology and patented it? Was it worth spending 10 years to make a prototype of the native version of a globally available existing product that improves continually in this age of knowledge economy where continuous development is the rule and shorter and shorter product life is a reality?
It is interesting that, at the time it was possible to purchase companies that had already developed wind turbines from for instance Germany with the fraction of the project budget, and to have the technology and expert manpower right away. It is wise to learn lessons from this experience and to examine critically the ‘national project’ approach as an innovation model for global commercial products.
Developments in the automotive industry and national car projects
The automotive technologies in the world have a history of over 100 years and have reached a certain maturity, but major transformations are still taking place in the industry. For example, according to the projections of The Institute of Electrical and Electronics Engineers (IEEE), 75% of vehicles in traffic will be driverless in 2040 (Newcomb, 2012). Driverless cars being developed by Google and several automotive firms will be standard in the middle of this century, and the infrastructure is expected to be changed accordingly.
More modest innovations are constantly being made. For example, small incremental improvements like replacing the vehicle side mirrors, which create air drag and generate noise, with digital mirrors (video systems) connected to the camera system save fuel by up to 7%. They also improve traffic safety by eliminating blind spots and make parking easier (Quain, 2016).
Each of the world’s leading automotive companies like Toyota, General Motors and Volkswagen tries to maintain their competitiveness in global markets with an annual R&D budget of about $10 billion. Still, they have difficulty in maintaining their profitability. Many world brand automotive firms have faced bankruptcy by losing their competitiveness or have been sold (such as Sweden’s Saab and Volvo) or merged by joining forces (such as Japanese Nissan and French Renault).
Electric vehicle market offers opportunities for new players in the sector since it is still in the development stage and has a high growth potential. For example, the publicly traded Tesla Motors, which was established in Silicon Valley in 2003 and produced its first vehicle (the Tesla Roadster) in 2008, rose to the leading position in the electric vehicles market, thanks to its several pioneering and innovative approaches. The 360-hp model S with 400 km range, whose production started in 2012 and was sold in more than
40 countries, became the first car that received 100 points out of 100 with its impressive performance in the road testing of the consumer reports magazine, which has 7 million subscribers. Model 3, the electric vehicle which Tesla will begin to produce at the end of the 2017, has created an attraction with its 340 km range and $35,000 price. 400,000 people preordered the car by paying a deposit of $1,000 each.
Nissan Leaf, which is the first electric car mass-produced by standard automotive companies, with a 170 km range and whose batteries can be charged to 80% within 30 minutes with the rapid charge system from the grid, has sold an average of 50,000 electric vehicles annually since 2010 when it started to manufacture them. Hybrid vehicles, which have a 40 km or lower-capacity battery with a small gasoline engine, offer alternatives to fully electric vehicles with their long range. However, the failure stories like the one Renault experienced when it started to produce its electric car Fluence in Turkey with an annual sale target of 20,000 vehicles but later topped production because it sold only a few hundred cars a year should be examined carefully and the necessary lessons should be learned.
As it can be seen from the student projects in universities, it is not difficult to make electric vehicles. The challenge is to produce a vehicle that will be in a competitive position in the global market with its design, style, performance, cost, brand recognition, service and sales network, and customer satisfaction and that will retain its charm with continuous innovation (which necessitates serious R&D infrastructure and a big budget).
Almost all leading players in the automotive industry are planning to expand their product range with electric vehicles and take part in the global race in the near future. For example, Audi aims to start mass-producing its 500 km range electric vehicle that can be charged in one hour in 2018.(11) BMW plans to increase the capacity of i3 electric vehicle in 2017. Chevrolet is preparing to introduce its 350 km range Bolt EV model.
The governments of some developing countries entertain the idea of developing their own brand of national car. Yet, the industrialists who are well-aware of the challenges of the highly competitive environment and the difficulty of new players entering the global automotive market and capturing a market share. They view this undertaking as a ‘commercial suicide’ because of the high development costs involved and the challenges that lie ahead. Fully electric or hybrid cars seem to be more attractive for these potential new comers since they are still emerging. In that case, developing a battery technology becomes a focal point since batteries have a wide range of applications at the global scale. But the ambitious R&D programs in batteries in the world involve broad-based international partnerships and multi-billion dollar budgets. Efforts to develop batteries with limited domestic human resources and modest budgets at a national level appears to be at disadvantage.
A person who forms a football team from the youth in a neighbourhood of a city with a limited budget and claims that he will challenge the football giants of the world may fancy the people in the neighbourhood who are unaware of the global competition in football, but nobody with a sound mind will take this claim seriously and raise hope or invest in this neighbourhood team.
Despite the advantages of superior performance and low energy costs of the electric vehicles, their main disadvantage is battery related limitations: charge capacity per unit volume, charge time, battery life and battery unit costs. Therefore, the focal point of research on electric vehicles is the batteries in which electric energy is stored. As Notebook users may have noticed in the first few years, lithium-ion batteries undergo a loss of capacity after about 5,000 charge-discharge cycles. New research shows that the number of cycles can be increased to over 100,000 through innovative designs (Thai et al., 2016). Other research shows that the battery capacity per unit volume and hence the distance that can be travelled with a single charge can be increased by up to seven times.(12) The results of the research at a laboratory environment that enable batteries to be recharged in seconds instead of hours causes the industry view the future with optimism.(13)
Figure 1 Cycle stability for up to 200,000 cycles for symmetrical δ-MnO2 nanowire capacitors (see online version for colours)
Source: From Thai et al. (2016)
Samsung, which is one of the world’s leading battery manufacturers, is not content with its own research; it follows the innovative developments at the global level and makes the moves that it regards necessary. For example, Samsung invested $18 million in StoreDot, an Israeli start-up company that develops ultra-fast charging batteries by using bio-organic technology. The goal of StoreDot is to make phone batteries that charge in 30 seconds and electric vehicle batteries that charge in five minutes.(14) As can be seen, it is a strategic move for Samsung to invest in this company, which has the potential to transform battery technology.
In 2012, the US Department of Energy gave a five year ‘super-efficient battery’ development project with a budget of $120 million to a consortium whose annual R&D budget is around $1 billion, consisting of four national laboratories under the coordination of Argonne national lab, five leading universities like the University of Chicago, and four large industrial partners that are known for their innovativeness like Dow chemical.(15) In addition, it allocated a budget for the participation of 120 researchers about the development of battery technology in the project on a regular basis.
The energy consumption of a vehicle is proportional to its weight, and one of the most effective ways of driving longer distances with the same amount of fuel is to reduce the weight of the vehicle. This necessitates reducing the battery weight for the same amount of charge in electric vehicles. Acting upon this principle, the US Department of Energy launched Battery500 project, with a five year term and $50 million budget, in a consortium led by Pacific Northwest National Laboratory (PNNL) including five national laboratories and five universities, with Tesla Motors and IBM in the advisory board. The objective of the project is to increase the specific energy per kilogram of the battery from the current value of 170–200 Wh/kg to the value of 500 Wh/kg, that is, almost triple it, and, to enable the production of smaller, lighter and cheaper (under $100/kWh) battery packs. In a parallel work, with a similar consortium with broad based participation, a 350 kW direct current fast-charge project that will enable the battery with 360 km range to be charged fully in less than 10 minutes continues (Hall, 2016).
To give an idea about the global competition in electric vehicle that is taking shape: Mercedes-Benz plans to spend $4 billion annually on the development of green technology, including electric vehicles. Mercedes plans to introduce its 500-km-capacity electric vehicle this year, and aims to sell 100,000 electric vehicles per year in 2020.(16)
Ford plans to spend $4.5 billion in the next five years on hybrid and fully electric vehicle R&D (Naughton, 2015). In this context, the 250 km range Ford focus that can be charged in 30 minutes will be developed, and 13 new electric and hybrid models will be added to its fleet. Even rival automotive giants Toyota and BMW collaborate in the development of next-generation battery in order to obtain an advantage in international competition. Such cooperation disturbs only the rivals.(17)
Unlike other national projects, it is a correct step to start work by purchasing design and intellectual property rights from a company of global brand and by abandoning the idea of ‘domestic and original design’ in the domestic car project; and this approach is a better and more accepted model. However, design is only one stage of the process of having a successful commercial product; if not all stages are completed successfully, all efforts will be wasted. In this regard, China’s approach to be a global brand in the automotive industry instantly by purchasing an existing global brand is much better than to start from the scratch or to purchase just designs of some vehicle models. China’s Geely Automotive company purchased Volvo car company of Sweden, which is well-known for building sturdy cars, in 2010 for $1.8 billion. This way, Volvo, which has been a Swedish national brand since 1927, suddenly became a Chinese brand.(18) Thus, China did not only own the design and patents of the vehicles, but also active production plants, skilled labour, accumulation of years of engineering as well as manufacturing know-how, brand recognition, sales network and customers. In addition, Geely also set up three new factories in China and started to produce and market Volvo in China. Meanwhile, it is designing a new sports utility vehicle (SUV) with its current engineers for the US market. China bought several automotive companies along with Volvo in Europe with the same approach.
Malaysia started the Proton brand ‘national car project’ adventure in collaboration with Japan’s Mitsubishi company in 1983. Countries that aspire for a national car should study the national car experience of Malaysia carefully with its pros and cons and the burden this national project placed on the state to avoid costly mistakes. The high cost brought on the people of Malaysia who wanted to own cars due to the high taxes imposed on imported vehicles and their parts so that Proton would succeed in the domestic market should also be investigated. Despite all protective measures that violated the free market conditions, the sales of Proton plummeted, and it was unable to pay its debts to parts suppliers as of March 2016, Proton was at the brink of bankruptcy and it is trying to survive with the $500 million bailout package given by the Malaysian government on condition that it would develop a new convincing business model and it would renew itself.(19)
Instead of taking a pride in their national car, today Malaysia is discussing whether Proton, whose weekly sales dropped by 95% from 4,000 to 200, should be continued to be supported by the taxes paid by the people. To avoid a similar discussion years later, countries that aspire for a national car should make careful calculations and objective analysis before entering the automotive sector since even the world’s best known brands often come to the brink of bankruptcy. Instead of committing themselves to a specific sector for emotional reasons, they should also consider sectors with a higher chance of success – like Taiwan which has become a global player in electronics today by entering and investing in the semi-conductor and electronics industry years ago, and India which focused on software and virtually became the world’s software house.
With internet-of-things, everything from electric grids to household appliances, and even cities, are becoming ‘smart’, and the automotive industry is no exception. World automotive giants who clearly see how the future is shaped are in a tight race worldwide to hold the competitive edge in the future automotive market of smart self-driving cars. Therefore, they are recruiting the best researchers in the field of artificial intelligence, robotics, sensors, control systems and software which form the infrastructure for smart vehicles. They also purchase the appropriate start-up companies, establishing research centres, entering partnerships and forming strategic alliances worldwide.
For example, Toyota does not limit itself to the R&D infrastructure in Japan regarding driverless vehicles. It virtually scans the world with radar continuously monitoring all developments in this field and makes strategic moves when it deems necessary. In this content, Toyota established an advanced projects laboratory in 2015 in Silicon Valley where most creative minds in the world are, with a budget of $1 billion to accelerate the R&D in the areas of driverless vehicles and artificial intelligence. After working together with Stanford and MIT, two leading technical universities in the USA, Toyota entered collaboration with the University of Michigan in this area and expanded its R&D base.(20)
Further, Toyota hired all employees of Jaybridge Robotics, an MIT-based spin-off company in the field of artificial intelligence in the US, which equipped Toyota with a huge accumulation of knowledge to be used in driverless vehicles. Other automotive companies are doing similar things. It is clear that an automotive company that does not follow the developments in the world and that cannot position itself strategically, will not have a place in the world of the future.
Domestic parts and products in aviation industry
Brazil’s Embraer company, which is the world’s third largest aircraft manufacturer after Boeing and Airbus and which is in tight competition with Canada’s Bombardier company in the medium size regional aircraft market, was founded in 1969 by the Brazilian government. The company that was privatised in 1994 employs 19,000 people.(21) The total revenues of Embraer, which also sells aircraft parts and provides ground services, was $6.2 billion in 2013 (DOT, 2016). The Embraer-based aviation manufacturing sector of Brazil has a wide range of products, and its revenues reached $7 billion in 2013.
Embraer’s main rival in the regional aircraft market is the Bombardier Aerospace company, which was established in the Canadian province of Quebec in 1989. Its revenues were $10.5 billion in 2014 and it employs 34,000 people. Bombardier entered the aircraft manufacturing sector in 1989 by purchasing Northern Ireland’s Short Brothers aircraft manufacturing company, which was in bankruptcy, and Learjet company, which produced business jets in Kansas in the USA and was also in bankruptcy, in 1990. Then, it purchased de Havilland Aircraft of Canada, which was the Toronto unit of the Boeing company in 1992. With these strategic purchases of companies, Bombardier became a world brand in the aviation sector in a short time with already certified wide-ranging products, patents, skilled manpower, brand recognition, production plants and sales network. It has sold about 2,500 regional airplanes and 3,500 business jets so far (DOT, 2016). Learjet continued its production in its plants in the USA after being acquired by the Canadian Bombardier.
The first Bombardier C-Series airliner with 110–135 passenger capacity, whose certification was received after a long and expensive ($4.5 billion) development process that started in 2004, was bought and put into service in June 2016 by Swiss Air. However, the competition in this passenger capacity range experienced with Boeing 737 and Airbus A318 models causes the aircraft to be sold below cost which makes reaching profitability difficult.
106 of the total of 172 medium size commercial aircraft in service in Canada in 2014 were made in Canada and the remaining ones were made by the Brazilian competitor Embraer, which shows the global character of the aircraft market. Similarly, out of the total 5,300 aircraft the European-based Airbus company sold to the whole world, it sold
2,000 aircraft to North America, where a world aerospace leader like Boeing is located. Taking into consideration the size of the market, Airbus established a factory with an annual production capacity of 50 aircraft with an investment of $600 million in Alabama, USA. It delivered the first A321 aircraft manufactured there to American Airlines in May 2016.(22)
70% of the parts used in Embraer regional aircraft are of the US origin. The ratio of the US origin parts in Airbus aircraft is 40% (in some models of A380 models with a capacity of 530 passengers, it is 51%).(23) That ratio is 53% in Canada’s Bombardier C-Series aircraft. When the parts imported from other countries are considered, it seems that the ratio of the domestic parts in the aircraft that are a source of pride for those countries is a small fraction. But not much attention is paid to this ratio, and the aircraft manufacturers view the number of supplying companies and their global diversity as a ‘wealth of resource’. Most parts used in Boeing aircraft (for example, 65% of the parts used in Boeing 787) come from out of US. However, this does not overshadow the fact that Boeing with annual revenues of $96 billion and 160,000 employees is a US company and Boing aircraft are US products.(24) No matter where Boeing aircraft are manufactured and no matter from which countries the aircraft parts come from, Boeing’s success and prestige are regarded as the USA’s success and prestige. Likewise, the Airbus aircraft produced in the USA will be recognised as a European brand and the success and prestige of these aircraft will belong to Europe despite the label ‘made in USA’ on them. This is like it is not important how many foreign players there are in a football team that becomes a champion in an international tournament. After all, the cups the team wins and the pride it brings in belong to the entire country.
Given that Boeing 787 has 2.3 million parts, the importance of having a broad domestic and foreign supplier chain for the aircraft companies can be appreciated better. Boeing works with 5,400 suppliers for commercial aircraft and buys 750 million parts from them annually. This supply chain employs 500,000 people.(25) The competition among parts suppliers feeds innovation, and enables the aircraft manufacturers to obtain higher quality innovative products at lower costs. Thus, a significant proportion of R&D costs and risks are undertaken by the parts manufacturers, and this enables the aircraft companies to focus on integration of competitive products. In addition, international agreements are signed to maintain a fair competitive environment at global scale among parts manufacturers, and domestic subsidy programs that may lead to unfair competition are closely monitored.
The quest of HondaJet, the seven seat private business jet that belongs to the Japanese automaker Honda that makes Honda Accord, which is among best selling cars in the USA and has good brand recognition and trust, is a highly instructive example that needs to be studied carefully by those who plan to enter a global competitive market with a new product.(26) The HondaJet adventure started 30 years ago and received the production certification from FAA (US Federal Aviation Administration) in July 2016. HondaJet stands out with competitive features like being the fastest, quietest and most fuel-efficient in the small-cabin business jet class in the annual $6 billion market that includes Cessna (USA) and Embraer (Brazil).(27) 60% of the demand for this type of aircraft comes from the USA and Canada. Honda Aviation Company was founded in 2006 in the US, not in Japan, due to the strategic advantage provided by being close to the market. The work started at Mississippi State University in the USA with a model built under the leadership of an engineer who was sent from Japan in the 1980s. It continued with the first test flight in 2003 and certification was received from the EASA in Europe in May 2016.(28) The business jet lists for about $4.5 million and has already received more than 100 orders. HondaJet plans to produce 60 aircraft annually. Honda formed a joint venture with GE Aviation, a manufacturer of aircraft engines in the USA, to build small jet engines. These engines also are being sold to retrofit jets by other aircraft-makers.
Cobalt Aircraft company, which was started in Silicon Valley in the USA in 2005 by an aircraft engineer and entrepreneur who was born in France, is developing 350-hp single-engine, five seat small aircraft for private and business trips. The Co50 Valkyrie model whose list price is $595,000 is expected to be launched in 2017. This private aircraft, which appeals to amateur enthusiasts of flying and whose flight range is 2,650 km can fly at a speed of 460 km/h.(29) The aircraft has already received pre-orders worth $50 million from enthusiasts in the USA and many other countries.(30)
As it can be seen from HondaJet, Co50 Valkyrie and similar experiences, the first priority in entering the market with a new product in aviation is to analyse the market well and to be in the closest position to the market by giving people confidence. Of course, it is important in marketing for the new product to have competitive features that distinguishes it from others. To be close to global certification organisations like FAA and EASA and to be in work together with them at every stage from building the production plants to the flight tests provides an advantage in the global market to instill confidence.
The human body is composed of food that the person eats; and the saying ‘a person is what he eats’ is true to a certain extent for the body. However, the real value of a person is indexed on the value of what he does, not the value of his body itself. A Japanese person with a Japanese ID is a 100% native citizen of Japan even if all his food and drinks come from abroad. All achievements of this person (the Nobel prizes he receives, the championship trophies he wins, the patents he owns, etc.) are also credited to Japan, not to the country where his food comes from. The achievements of a person who has relinquished his citizenship and became the citizen of another country will belong to this country. Einstein and many other scientists of European origin who migrated to the US made significant contributions to the scientific and technological development of the US. Bulgarian-born Naim Süleymanoğlu, who became a Turkish citizen and competed on behalf of Turkey in weightlifting won gold medals for Turkey.
The first thing that needs to be done to increase the welfare and wealth in a country, to elevate its prestige and to make the people of that country take pride in their country is to adopt reason and science as the guides and to act in accordance with the necessities and realities of time with a critical point of view instead of epic feelings that are closed to criticism. It is necessary to establish a mechanics in this context and always to keep in mind the following general principles:
- Self-sufficiency is a utopia for a country and insistence on this dream brings about inefficiency, poor quality, decline in competitiveness, and impoverishment. Countries need one another to maintain their welfare and to improve it further. Even the USA and China, the world’s two largest economies, are dependent on other countries to sell products/services. This is so much so that a product or service boycott (as Russia applied against Turkey) can be used as a weapon which can cause serious damage to the economy of the boycotted country.
- A product that cannot be competitive in the global market with its price and quality cannot remain competitive in the domestic market either, and it will disappear from the market in time. Therefore, to attempt to manufacture all products domestically will not bring about making the market domestic; but rather, it will hand over the market to foreign products since domestic products will no longer be competitive.
- Imposing high tariff walls to support domestic production and thus to force people to buy domestic goods is to doom people to high-cost and low-quality products and to rid the higher standard of living they deserve. This will erode the sense of belonging of the citizens to the country, increase xenomania and inferiority complex, and compel people to seek a better life in other countries.
- In this age when products do not know national borders and technology advances in dazzling speed, it is necessary for a country to determine the areas/products/services for which it can be competitive in the global arena after a careful analysis, and to focus its activities in those areas instead of attempting to manufacture everything domestically. Effective and efficient use of existing resources and being competitive necessitate this. Those who try to do everything cannot do anything economically, and cannot become competitive in anything. Also, they cannot improve and sustain what they do since they cannot allocate sufficient resources.
- In an environment in which technology advances rapidly and product life decreases just as fast, R&D has a vital importance. R&D is a global phenomenon, not a national phenomenon. As in football, the best R&D is carried out with the best brains regardless of nationality and in the best R&D environment in the world. An R&D program that is not sustainable and competitive at a global scale is like no R&D program since a technology that is not on par cannot develop competitive products or services. Even if it does, it cannot sustain them.
- Science, technology and technological goods have no nationality. For a country to isolate itself from the world to develop competitive ‘fully native and original technology is simply to lose contact from reality, which will probably result in a waste of time and resources. It is important to be output-based rather than input-based. Technology belongs to the firm that owns its intellectual property IP, no matter who develops it, and to the country that the firm belongs to (until it is purchased by a firm in a different country). The same is valid for products and services.
- Alternative innovation approaches like buying companies instead of developing a product from the scratch, taking part in international cooperation and even opening R&D centres in foreign countries have become necessary to maintain the competitive edge in the globalised world. The closed nationalist model used in some countries to develop national products should be reexamined critically based on outputs, and should be made more effective and efficient by utilising alternative innovation approaches. Trying to reinvent the wheel causes only a loss of time and resources.
- There is no such thing as 100% domestic parts in products in the globalised world. To force manufacturers to use a minimum certain percentage of domestic parts in a product is to inflict a heavy blow to the global competitiveness of that product and to impair its marketability. The strategies of developing/manufacturing parts by a country should be developed independent of the domestic products by considering the global market conditions. The parts that are competitive in the global market due to their quality, cost and certifications will be preferred in domestic products anyway.
- Job creation and developing/manufacturing high-technology products should not be mixed with each other and should not be put into the same basket. Domestic and foreign companies can be persuaded to build manufacturing facilities in a country and create jobs by making manufacturing attractive in that country. High-tech firms can manufacture high added value goods with a small number of employees. The economy should be allowed to flow in its natural course. Imposing direct or indirect conditions for the creation of certain amount of jobs or the use of certain percentage of domestically manufactured parts may close the door of the country to high tech companies and lose them to other countries.
- The most domestic or national product of a country is one that is made by a company belonging to that country and provides the highest benefit to the people of that country regardless of the ratio of the domestic parts used and the country in which it is developed or manufactured. Likewise, the most domestic or national company is the one that belongs to that country and provides the highest benefit to the people of that country regardless of the ratio of the domestic parts it uses and the country where the manufacturing plants and research centres are established. The benefits provided to the people covers a wide range from increasing the gross domestic product to know-how development, from decreasing the current account deficit to contribution to the innovation ecosystem, and even overjoying the people with national pride as the world leader in a product or technology, like world championship in football.
(Source: Int. J. Research, Innovation and Commercialisation, Vol. 1, No. 2, 2017)
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