What's new?

Christoph Loch, who teaches innovation, technology and operations management at INSEAD, a business school near Paris, thinks Europeans underrate the ability of European companies to survive globalisation. He reckons that although places such as Silicon Valley may get more attention, European companies such as Siemens have quietly been innovating and going global for decades.

Siemens systematically uses low-cost countries for making components for products that are assembled in Europe or America. But it goes further than mere offshoring of low-value-added work. It owns whole businesses, factories, service centres and distribution networks around the world, and also does much of its research and product development abroad. For instance, a lower-cost version of one of its expensive medical body scanners, tailor-made for the Chinese market, was initially developed jointly at its headquarters in Munich and in China, where it is also being manufactured; but the latest version was developed entirely in China. This Chinese Siemens product is now sold in developing countries round the world.

Klaus Kleinfeld, who became chief executive of Siemens in early 2005, says that customers are happy to buy budget scanners from Siemens rather than from, say, a start-up Chinese producer, because they know they can upgrade to the company's more sophisticated products and can stay with the same software. “They want to deal with a company that understands the future,” he says.

Mr Kleinfeld, who comes across as a rather Americanised capitalist boss, arouses strong feelings in Germany. “He is not a proper German CEO,” snorts one German manager. His public-relations staff flinch at the Rolex watch adorning his wrist. He thinks that much of the high-value development and design work in Germany will remain in Germany, but a growing part of it will join production and service facilities in countries such as India and China. He points out that India is the key to trade with much of the Middle East. “When we sell power transportation [locomotives] in the Middle East we do it through India.”

Beautifully simple

Philips, too, is moving upmarket to survive in a world where most basic products can be made in China. Its chief executive, Gerard Kleisterlee, says that improving design across all its products is crucial to its ability to compete. Four years ago the company appointed its first marketing director for the whole group, Andrea Ragnetti, who was given the job of refreshing the company's brand to compete with cheaper products from China and South-East Asia. The idea was to concentrate on advanced products that were well designed and easy to use. Philips is well aware of consumers' growing irritation with devices that require a voluminous book of instructions.

PLI, the Belgian firm Philips acquired in November, makes sophisticated lighting systems, using LED solid-state displays. They are, well, light years away from the simple incandescent bulbs the Philips brothers made when they started the business back in 1891. LEDs offer flexible lighting that can change in intensity and colour. Philips thinks such lighting will become part of interior design. One recent Philips product, called ambilight, will even change the feel of your room lighting to suit the film you are watching.

As well as moving upmarket, Philips, like Siemens, is also making ever more of its products, or at least parts of them, in China. Its new acquisition has its headquarters in Belgium but does its manufacturing in China and Hungary. Philips itself has a long Chinese history, having first opened its doors there in the 1920s. One of its first exports to China was a personal X-ray machine for the use of the last emperor which was only recently discovered in a storage room in the Forbidden City.

These days Philips is one of the largest Western multinational companies in China, with 20,000 employees and sales of €6 billion, over half of which go for export, either as finished products or as parts for use elsewhere. Two years ago the company set itself the target of doubling sales to €12 billion this year. Some of the €2.6 billion a year that Philips spends on R&D will also go to China, where it has 15 centres employing about 900 staff. In a speech three years ago Mr Kleisterlee said that “in some ways we consider ourselves a Chinese company.” Recently he went further, saying that “for us China is not just a workshop or a marketplace—it's a centre of innovation for new products and services with global application.”

For those Europeans who think of China as no more than an inexhaustible source of cheap labour these may be chilling words, but Mr Kleisterlee points out that three-quarters of the company's R&D is still carried out in Europe—even though over half of all Philips's manufacturing has moved abroad. He reckons that things like medical systems or fancy headlights for cars will continue to be made in Europe. But such ideas can change rapidly. In that speech three years ago Mr Kleisterlee also spoke of his company's semiconductor facilities in Hamburg and Grenoble as one of the pillars of the group. Now a majority stake in them has been sold.

Howard Read

Feb 8th 2007 From The Economist print edition

Read again to do the assignments that follow.

II. Vocabulary

2.1. Give Russian equivalents for the following terms and expressions all found in the article above.

Low-cost manufacturing; to move mass production to Asia; high-value-added products; low-value-added work; to retain the redundant workers; widespread bribery; a continuing recovery; domestic appliances; consumer electronics; a net profit; acquisitions and disposals; a private-equity buy-out; a majority holding; a majority stake.

2.2. Give English equivalents (all found in the text above) for the following Russian terms.

Объединить свой бизнес с ...; нести серьезные потери; недооценивать возможности европейских компаний; сети распределения продукции; разработка продукта; сделанный специально, на заказ; начинающая компания-производитель; передовые разработки; обновить брэнд компании; исследования и опытные разработки / научно-исследовательский отдел.

2.3. In the text, find terms corresponding to the following definitions.

a) movement by a manufacturer or trader into a wider field of products;

b) a type of process in which high volumes of identical, or very similar, products are made in a set sequence of operations;

c) a strategy designed to reverse the decline in profitability of a firm or subsidiary, enabling to achieve a viable and sustainable future;

d) a fixed, indirect cost of doing business, i.e. one that does not vary with the volume of goods produced or services supplied;

e) the value added to goods or services by a step in the chain of original purchase, manufacture or other enhancement, and retail.