Globalization 2.0: A Roadmap to the Future from Leading Minds

Globalization 2.0

Raschid Ijioui Michael Ceyp

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Heike Emmerich Jochen Hagen

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Editors

Globalization 2.0 A Roadmap to the Future from Leading Minds

Editors Dr. Raschid Ijioui RWTH Aachen University Computational Materials Engineering Center for Computational Engineering Science Mauerstr. 5 52056 Aachen Germany [email protected]

Prof. Dr. Heike Emmerich RWTH Aachen University Computational Materials Engineering Center for Computational Engineering Science Mauerstr. 5 52056 Aachen Germany [email protected]

Prof. Dr. Michael Ceyp FH Wedel - University of Applied Sciences Feldstraße 143 22880 Wedel Germany [email protected]

Dipl.-Inform. Jochen Hagen, MBA Am Bonner Graben 3 53343 Wachtberg Germany [email protected]

ISBN 978-3-642-01177-1 e-ISBN 978-3-642-01178-8 DOI: 10.1007/978-3-642-01178-8 Springer Heidelberg Dordrecht London New York Library of Congress Control Number: 2009933120 # Springer-Verlag Berlin Heidelberg 2010 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMXDesign GmbH, Heidelberg, Germany Cover Image provided by Dr. Hans Jochen Ceyp and modified by Dr. Raschid Ijioui and Dr. Ju¨rgen Hubert Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)

Preface

. . . Eat not up your property among yourselves unjustly except it be a trade amongst you, by mutual consent . . . and help you one another in righteousness and piety. . . (Al-Hadid 4:29; Al-Ma’idah 5:2)

There cannot be any doubt that the current financial crisis, which began in the US, has gone global. This realization has fuelled the fire of debate over globalization. Today’s globalization is no longer the globalization that Theodore Levitt, a former professor at the Harvard Business School, described in 1983 in his world famous article ‘‘The Globalization of Markets.’’ Although, in old days, Levitt and his successors had not seen globalization as an utopian state free of problems, nowadays globalization has been reshaped completely. Therefore, in the perception of the editors it is justified to use the phrase ‘‘Globalisation 2.0’’ for the range of effects interpenetrating global economic arrangements. Globalisation 1.0 will never be restored again. Since the subprime crisis made its way to the global arena in the year 2008, companies and managers are confronted with the breathtaking speed of global, regional, and local changes. It is more than a provocation to divide developments into cause and effects. Forecasts in strategic management are no longer valid even for the moment they are published. Uncertainty occupies the driving seats in global, regional, and local oriented companies. How to cope with this? The global crisis we are facing right now is unprecedented in its origin and communication intensity. Action must be taken but on the other hand overreaction can be detrimental. I am of the opinion that against all confusion, complexity and misjudgement, common sense and standard business principles may work best in the absence of a proven recipe, we all know there is no business without a risk anyway. However we need to apply a new consciousness in risk assessment.

Burckhard Schneider (President & CEO) Interturbine Group of Companies Often global cooperation and trust between companies become both a blessing and a curse in short order. Yesterday’s winners become today’s losers – will they be gone tomorrow? In this harrowing scenario, managers all over the world crave orientation. Managers are called upon to do something that ensures viability. But v

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there are no simple recipes. Addressing the problems presented by Globalisation 2.0 requires expertise – the kind of expertise associated with vision and implementation power. Management decisions have large distributive consequences for all shareholders of the company. They could accelerate or slow down crisis at a global and an individual level. Therefore, managers need to be sensitive and should give immediate consideration to reforming their strategies and market plans. Against this background the nineteen articles in this book try to encourage managers in every country and any industry to find their own robust way to overcome the drawbacks of Globalisation 2.0 and to benefit from global change. In an age where the Internet rules, splendid isolation is no durable alternative to Globalisation 2.0. For this reason, we showcase how leading managers from e.g. the automotive, aviation, energy, telecommunication, and media industries, as well as the fields of politics, logistics, consulting, and headhunting perceive the current crises and the future of globalization. We offer trendsetting answers, solutions and a roadmap for the roadblocks facing future economic growth disclosed by leading minds from world-leading companies. We thank the contributing companies, Dr. Hans Jochen Ceyp, Chair for Computational Materials Engineering (RWTH Aachen), Mrs. Dr. Martina Bihn, Mrs. Irene Barrios-Kezic, Mrs. Kay Stoll (Springer Publisher), Mr. A. Kumar, Ju¨rgen Hubert, Robert Prieler and Helmut Vor for their support. Dr. Raschid Ijioui Prof. Dr.-Ing. Heike Emmerich Prof. Dr. Michael Ceyp Dipl.-Inform. Jochen Hagen (SVP)

Contents

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Globalizing Action on Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Dieter Ammer

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Globalization and Growth: A Macroeconomic Perspective . . . . . . . . . . . . . . 5 Michael Bra¨uninger and Henning Vo¨pel

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A New Age Dawning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Kasper Rorsted

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Globalization for Growth in the Aviation Maintenance Repair and Overhaul Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 August Wilhelm Henningsen

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The New Face of Globalization: Seven Key Trends and the Critical Need to Innovate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Michael Tra¨m

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An Agenda for Phase 4 of Globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Henrik Mu¨ller

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Globalization and Demographic Change – A New Age for Human Resource Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Tiemo Kracht and Erik Bethkenhagen

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The Industrial Revolution of Information Technology . . . . . . . . . . . . . . . . . . 99 Raschid Karabek

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Service Providers and Their Ecosystem in Globalization 2.0 . . . . . . . . . 109 Uwe Lambrette, Thomas Renger, and Scott A. Puopolo

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Mastering the Globalization Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Roland Schwientek

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Power to the Workers: Out with the Capitalists . . . . . . . . . . . . . . . . . . . . . . 137 Uwe Zirbes

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Globalization Considered from the Point of View of Thomas Hobbes’ ‘Image of Man’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 Ulrich Rass

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Mercy for Those Realizing Global Opportunities Through Offshoring and Outsourcing Effectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 Alexander Martin

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Globalization in the Automotive Industry–Impact and Trends . . . . . . 177 Ralf Bechmann and Martin Scherk

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Manage Energy Better . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 Ad van der Meys

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Globalization? Not Without the Logistics! . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 Ju¨rgen Hess

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Metamorphosis of Telco Architecture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 Martin Deeg

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Communications – One of the Basic Global Utilities, Bringing People Together? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 Thomas Rambold

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Afterword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 Thomas Landschof

Sponsors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

Globalizing Action on Climate Change Dieter Ammer

Dieter Ammer, born in 1950, is a qualified political economist, skilled auditor and co-founder of Conergy AG. After his training, which was internationally orientated, he has held numerous top management positions within the German economy. Born in Bremen, Ammer has held the positions of chairman of the board of Zucker AG and chairman of the management board of the Beck & CO brewery as well as chairman of the board of Tchibo Holding AG in Hamburg.

Introduction Globalization! A new word – a process as old as the wheel. Ever since concepts of organized agriculture first began emanating from the Middle East 80,000 years ago, borne by traders on the world’s first carts, new ideas have sprung up across the planet, and over time become globalized. There has been Christianity and Islam, mathematics and science, trade and colonialism, industrialization, democracy and globalization itself. This has been a constant process throughout history, with both positive and ill effects, and as the world faces up to perhaps its first truly global challenge – that of climate change – it remains to be seen how this increasingly interdependent world will respond. Global greenhouse gas emissions rose 70% from 1970 to 2004 (IPCC 2007a), of which there has been a 25% increase since 1990 (IEA 2006). The effects now appear obvious to even the ordinary citizen: 11 of the warmest years since 1850 occurred between 1995 and 2004, glaciers are in retreat, there are increased drought and storm events (IPCC 2007a). Despite the warning signs, the rate of emission increase has actually accelerated since 2000, with 74% of the growth coming from booming emerging markets (Field 2007). Globalization has made its contribution: one study found that 23% of China’s greenhouse gas emissions were emitted producing product for western consumption (Tyndall 2007), with the rest coming from changing land use and rapidly rising domestic energy consumption by the country’s burgeoning urban population – itself a product of this export-led boom. Wealth transfer is one of the great benefits of Globalization, and we cannot begrudge R. Ijioui et al. (eds.), Globalization 2.0, DOI 10.1007/978-3-642-01178-8_1, # Springer-Verlag Berlin Heidelberg 2010

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the extraordinary rise of these economies. But we must all recognize that Globalization means emissions can be exported, something that now requires action beyond the traditional industrial powers who signed the Kyoto Protocol. All eyes will be on Copenhagen this December when the parties to the UN Framework Convention on Climate Change aim to negotiate a treaty to replace Kyoto. Negotiations are already underway to expand the scope and power of a new agreement, which, given the capital expenditure requirements and competitive issues surrounding emissions reduction, is essential for genuine progress to be made in fighting emissions globally. While a new administration in the White House augurs well, current uncertainties surrounding the global economy will ensure national governments fight tooth and nail to protect their interests. This is to be expected. Reducing emissions sounds easy on paper but the ramifications of action for individual countries vary tremendously. Just as some regions of the world benefit from large resources of hydrocarbons – Ghana is the latest country to have discovered a large oil field – some have excess renewable power capacities – Brazil with ethanol, Iceland with geothermal, Southern Europe and North Africa with solar, and Argentina and Scotland with wind, tidal and wave. Some countries have large carbon sinks, such as forests or lakes that can soak up carbon dioxide, while others, particularly in the West, are more amenable to emissions controls, having de-industrialized. Closely linked to these national characteristics are Globalization’s trade flows – Asian wealth has grown considerably through the export of low-cost goods to the west, and it is uncertain how attaching a premium to carbonemitting goods and services will affect their economies. Equally, while the West’s companies could be expected to benefit from stricter global controls on the manufacture of and energy efficiency of goods, the lifestyles of their large, wealthy populations could be impacted by higher costs of more advanced goods and services. More important, across national borders, some regions of the world are expected to be more greatly affected by climate change than others: less developed low-lying areas such as the Pacific Islands and Asian megadeltas will be most severely threatened by rising sea levels, Africa will suffer most from water stress and reduced farmland, and East, South and South-east Asia most by disease from drought and flooding (IPCC 2007b). Some regions may in fact benefit for a time from increased crop yields, though long-term, overall effects are expected to be negative. Copenhagen will be a delicate balancing act, and one that could conceivably impact the balance of power in the world for decades to come. So should it be. The world has quietly moved towards a consensus of restricting global warming to two degrees above pre-industrial levels. This has occurred, not because of the will of one nation or a single interest group over another – but simply, because it is right. The French writer Michel Houllebecq described changes in the way people think as follows: ‘Once a metaphysical mutation has arisen, it moves inexorably towards its logical conclusion. Heedlessly, it sweeps away economic and political systems, ethical considerations and social structures. No human agency can halt its progress – nothing, but another metaphysical mutation’. (Houllebecq 2000) It is my belief that the world is experiencing one such “metaphysical mutation.” It is no longer seen as

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acceptable for a man or woman to power his or her home using hydrocarbon-fired electricity, so that a South Sea Island fisherman must abandon his flooded village. It is no longer acceptable, because he or she has a choice. The sun and the wind are free and abundant. They know no national barriers or trade agreements. As such, they are perhaps the most powerful globalizing force in the battle against climate change. Far-sighted individuals and companies have already made strides to enable mankind to reduce emissions today. In the power sector, there are ever more efficient wind turbines and solar panels, tidal and wave power. In transport, there are more efficient fuels, combustion and hybrid engines, and better management of transport logistics, such as ships lowering engine speeds. In the home, CHP and better insulation, efficient air conditioning and energy-saving appliances are becoming more affordable. Industry is inventing new processes – developing new biotech-based plastics, carbon capture and storage facilities, electric batteries, fuel cells and second-generation biofuels. Energy systems analysts are reviewing the designs of creaking, inefficient national grids, and planning new distributed energy architectures, while urban planners are considering environmental effects in new housing and public transport projects. The ‘metaphysical mutation’ is already taking place and President Obama’s vision of the ‘green collar’ worker may well lead the world out of recession. It is my belief that decarbonization of the global economy is not only possible, but will occur, simply because it is desirable for the vast majority of the citizens of the world. The global economy will swallow the five to six percent of annual global capital expenditure estimated by McKinsey (McKinsey 2008) to maintain global warming at two degrees – money that would likely otherwise be spent on renovating our existing energy infrastructure. Just as emerging markets are building the coal-fired power stations that fuelled industrialization in the west a hundred years ago, over the coming years, the developed economies will design the wind turbines, the solar cells and concentrated solar power plants, the CHP units and electric cars, to power responsible consumption in the century to come. As Sheikh Yamani once said, the Stone Age did not end because of a lack of stones, nor the Bronze Age because of a lack of bronze. So too, the hydrocarbon economy will not end because of a lack of fossil fuels, but because of the gradual globalization of superior, alternative technologies. This century, Globalization will ensure new technologies and new brands are attractive the world over, and transfer to the world’s emerging markets. Lower emissions and climate change abatement will thus be secured not only through the will of decision makers at Copenhagen this winter, but as an unintended benefit of twenty-first century consumption.

References IPCC (2007a). Synthesis report – summary for policymakers. http://www.ipcc.ch/pdf/assessmentreport/ar4/syr/ar4_syr_spm.pdf IEA (2006). CO2 Emissions from fuel combustion – 2006, IEA ! This book has since been updated with a 2008 version. http://www.mnp.nl/en/dossiers/Climate change/TrendGHGemissions1990-2004.html

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Chris Field (2007). Alarming acceleration in CO2 emissions worldwide, Carnegie Institutions Department of Global Ecology, Proceedings of the National Academy of Sciences, May 21–25 Tyndall Centre (2007). Made in China: Who is responsible for China’s rapidly rising CO2 emissions when a quarter is from exported goods to industrialised nations? http://www. tyndall.ac.uk/media/press_releases/tyndallpress18Oct07.pdf IPCC (2007b). 4th Assessment report – WG 2 impacts, adaptation and vulnerability. http://www. ipcc.ch/ipccreports/ar4-wg2.htm Houllebecq, M. (2000). Automised: Heinemann, London, Original: Les Particules e´le´mentaires. McKinsey (2008) Pathway to a low carbon economy (analysis published by McK).

Globalization and Growth: A Macroeconomic Perspective Dr. Michael Bra¨uninger and Dr. Henning Vo¨pel

Dr. Michael Bra¨uninger is head of the research programme Economic Trends at the Hamburg Institute of International Economics (HWWI) and Professor at the Helmut-Schmidt University Hamburg. Michael Bra¨uninger studied at the Universities of Mu¨nster, Edinburgh and Hamburg. He earned his Ph.D. in economics from the University of Hamburg for an empirical analysis of factor markets. After that he worked as a postdoc at the Helmut-Schmidt University Hamburg, where he obtained his habilitation in 1999 for a thesis on social security. In 2005, Michael Bra¨uninger joined the Hamburgisches Welt-Wirtschafts-Archiv (HWWA). The focus of his work was on public sector economics. The research areas of Michael Bra¨uninger are business cycle and long-term developments. He leads the HWWI business cycle forecasts and different studies on long-term global trends and their impact on the German economy. Dr. Henning Vo¨pel is a senior economist in the research programme Economic Trends at the Hamburg Institute of International Economics (HWWI) since 2006. His research interests lie in the fields of business cycle, the economic analysis of trends and markets as well as in the economics of sports and health care. In addition he holds a lecturership in economics at the Hamburg School of Business Administration (HSBA). Henning Vo¨pel received a diploma in economics from the University of Hamburg and earned a Ph.D. in economics in 2004. His professional career started as a research assistant at the University of Hamburg. Later, he worked as a self-employed management consultant for 2 years.

Effects of Globalization The increasing trade liberalization between nations and the rising degree of openness of national economies are often branded with the term “Globalization”. In many economies, gains from specialization and trade advantages have arisen as a result of this process. Due to different factor endowments and production possibilities, national economies produce a variety of goods at different relative costs. R. Ijioui et al. (eds.), Globalization 2.0, DOI 10.1007/978-3-642-01178-8_2, # Springer-Verlag Berlin Heidelberg 2010

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An exchange of these goods can be beneficial for both the participating economies (trade advantage). Furthermore, economies can also specialize in the production of the goods for which they have a comparative production advantage (specialization advantage). Both effects lead to a higher level of overall welfare. However, there are winners and losers when it comes to globalization. According to the Samuelson–Stolper Theory, with their given factor endowments, an economy specializes in the production of those goods that require for their manufacture the factors which the country possesses in relative abundance. Economies with comparatively high capital resources specialize in capital-intensive goods, those with comparatively high labour resources in labour-intensive goods. This has implications for the functional distribution of income: in the country that specializes in capital-intensive goods, the capital income will increase and the labour income will decrease; in the land where the labour-intensive goods are produced, the labour income will rise and the capital income will fall. Similar effects result for high- and low-skilled workers. Here, a reallocation of the factors of production due to globalization can likewise cause a redistribution of factor income. In the industrialized nations, high-skilled workers, relatively strongly represented in these countries, also profit from migration movements, while low-skilled workers are poorly positioned. It has often been said that lower social standards have resulted due to a mix of these processes and a competition-induced “race to the bottom”. Indeed, workers in emerging nations are more willing to accept lower wages and social security than in the industrialized countries. But this “race to the bottom” is less a consequence of globalization than a catching-up process for developing and emerging countries. As soon as a higher income level has been reached, social standards will increase and costs of adjusting will increasingly move from the industrial nations to the others. With increasingly deregulated capital markets and with exchange rate regimes turning from fixed to more flexible rates, capital flows have become more and more global, leading to a marked increase in capital mobility. Cross-border capital movements have significantly increased in importance, by far surpassing the value of commodities trade. It has often been put forward that this is proof of the dominance of the capital markets over the commodities markets, destabilizing them. In fact, it is not only trade in commodities that is being mirrored on the international capital and foreign-exchange markets, but also expectations and risks being dealt with. Capital has moved especially to regions where there was little, and so generated high yields. Above all, this has happened in the so-called emerging markets. The process not only affects the level and direction of net capital flows, but also the total amount of worldwide capital movements (see Table 1). To an extent, contrary to the capital exports in the emerging markets, there has been a slowdown in the increase of capital stocks in the industrial countries. In the Euro Zone, the average yearly growth rate for capital stocks slowed from 4.8% during the period from 1960 to 1974 to 2.3% between 1980 and 2003 (see Table 2). Moreover, not only the growth rate of Gross Domestic Product, but also the

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Table 1 Private capital flows in emerging marketsa, in Billion $US 1980–1989 1990–1999 2000–2007 2006 2007c Gross inflow of which 15.6 173.8 542.6 902.4 1,440.2 FDI 12.2 102.2 267.3 354.4 530.3 Gross outflow of which 14.5 86.4 409.7 769.0 1,001.3 FDI 2.6 24.6 115.6 216.0 261.6 1.1 87.4 132.8 133.5 438.8 Net flowb Current account balance 16.4 23.3 244.1 451.0 542.7 Increase in reserves 11.6 61.9 364.6 515.2 940.4 Source: Turner 2008 a Argentina Brazil, Chile, China, Columbine, Czech Republic, Hungary, Hong Kong, India, Indonesia, Korea, Malaysia, Mexico, Peru, die Philippines, Poland, Russia, South Africa, Taiwan, Thailand, die Turkey und Venezuela b with exception of official capital flows c preliminary

Table 2 Average yearly growth rate for gross domestic product and the input factors, in % 1960–2003 Structural breaks Before break Between breaks After break Real GDP 3.1 1973 5.1 – 2.2 TFP 1.6 1973 3.2 – 1.0 Labour input 0.5 – – – – Capital input 3.2 1974, 1980 4.8 3.3 Source: ECB 2005

contribution to growth by capital was significantly higher in Eastern Europe than in “old” Europe in the past decade (Burda and Severgnini 2008). The same applies to technological advancement, which is measured as an increase in the “Total Factor Productivity” (TFP). It can be shown that free capital flows lead to an increase in welfare even though capital accumulation, and therefore growth in industrial countries declines in the course of the opening for capital movements (see Fig. 1). Capital is most productive in places where it is relatively the scarcest. Such places are where the available capital per head of workforce is at the lowest. Figure 1 illustrates the welfare effect of capital movements: without capital mobility there are high interest rates abroad (r0A left axis) and low domestic interest rates (r0D. right axis). Capital flows from outside into a country after the opening of the border for capital mobility. In the process, interest rates fall abroad while it rises domestically. This process continues until the domestic interest matches the interest rates abroad (r1). A net-welfare increase arises for both countries corresponding to the level of the blue-shaded area. Despite the increasing significance of international capital flows, the independence between investment and savings has not been given so far. Empirically, we see a home bias concerning domestic investment, which is known as the Feldstein–Horioka Puzzle (see Feldstein and Horioka 1980). This implies that investors pass up higher returns internationally in preference for domestic investments. A rationale for the observation that savings primarily finance domestic investments could lie

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8 rA

rD

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Fig. 1 Marginal productivity and capital flows source: HWWI

in the better knowledge of domestic markets. Another one may be that domestic savings are correlated to other domestic wealth-building strategies, particularly human capital, for example. This is particularly important in the Asian economies, in which the savings rates as well as the portion of income spent on education are very high. International capital movements have to be further differentiated into direct investment and portfolio investment. While portfolio investments typically have a short term and, therefore, are much more volatile, most of the time there is a longer-term motivation behind direct investment. Alongside the longer-term capital exports, particularly with foreign direct investment, it is often the case that capital-linked technological advancement, management knowledge and know-how, etc. are also transferred. Increasing international competition, furthermore, leads to dynamic efficiency gains. Competition takes place not only in the markets, but also between production locations.

Developments and Perspectives World production has increased by about six times since 1960 (see Fig. 2). Asia in particular has registered high growth. The reasons for this dynamic development are diverse and, to a great extent, interdependent. On the one hand, developing and emerging countries are demonstrating a more significant catch-up process compared to industrialized countries. This is strengthened through trade and specialization advantage as a result of increasing trade liberalization and the opening of economies. Technological advances arise and are spread faster due to free capital flows and new information technologies. The high economic growth in Asia is due to high domestic savings and capital imports, which led to high capital

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Billion US $ 45000 Europe

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35000 30000 25000 20000 15000 10000 5000 0 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

Fig. 2 Development of world production in real terms Source: Penn World Tables 6.2, 2006 140

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accumulation. This development was interrupted temporarily when the Asian crisis hit in 1997. The crisis was caused by scarce foreign currency reserves, fixed exchange rates and a weak domestic banking system. After steps towards monetary and currency policy stability were undertaken, the dynamic growth process was resumed again, continuing at a nearly unchanged rate. On the one hand, the similarly strongly increasing rate of international trade can be seen as a result, partly also as a cause, of world economic expansion. Besides structural adjustments, economic growth of given regions is a central determinant of the trade between those regions. And so, analogous to the strongly rising world economic production since the 1990s, world trade has also increased; it has nearly doubled since 1985 (see Fig. 3). In addition to the growth-driven effect on trade since 1985, trade liberalization and the opening of many economies have led to a structural change. In so doing,

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Fig. 4 Growth rates of world trade and world production Source: IMF 2009 Table 3 Bilateral trade growth per year until 2030, in % Latin South East Asia Sub – Near East & TransforAmerica Asia & Pacific Sahara North Africa mation countries Latin America 8.5 9.7 10.5 8.7 8.0 8.1 South Asia 10.9 11.8 9.9 9.2 9.3 East Asia & 12.6 10.7 10.1 10.1 Pacific Sub – Sahara 8.9 8.2 8.3 Near East & 7.6 7.6 North Africa Transforma7.7 tion countries Industrialized countries Source: HWWI 2008

Industrialized countries 7.2 8.4 9.2 7.4 6.7

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they overlay and strengthen each other. This is why the growth rate of world trade is, as a rule, higher than the growth rate of world production (see Fig. 4). However, it is important to notice that world trade shows more volatility than production. World trade falls more than production in crises, but also recovers more quickly and is able to grow at a disproportionately high rate in boom-times. According to the HWWI forecast, the bilateral trade between the regions will continue to increase strongly until 2030 (see Table 3). The trade outlook is based on the growth forecast for the region as well as its trade structure as the most important determinants for bilateral trade. Due to the strong growth in the region, trade with Asia will see the highest growth rates in all regions. The current financial and economic crisis will not fundamentally change this forecast. Although a deep, but temporary, slump in world economic expansion will

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take place, in the long term the most important economies are expected to return to the “old” growth trend. A simulation of the current financial and economic crisis has shown that, although this temporary setback in growth will create a “plateau” effect (a slight one, in the long term), world economic expansion will resume at about the same level. Figure 6 shows a simulation where it is assumed that the growth rate for world production in 2009 and 2010 shrinks by 3.5 and 2.0 percentage points, respectively. Then the growth of world production resumes at a rate of 4.1%. This rate represents the average rate since 2000. Obviously, this simulation presents a very stylized and simplified picture of the current financial and economic crisis. The actual development will certainly differ from that which is assumed here. The actual development is dependent upon how the crisis is dealt with in the various regions of the world. There is reason to believe that the industrialized nations will suffer from this crisis much longer than the two years assumed here. As a result, the growth rate would be below the long-term average for a longer time. On the other hand, past crises have shown that catch-up processes have accelerated growth afterwards. As long as this was the case, the long-term growth trend would be reached sooner. A meaningful interpretation of Fig. 5 is, however, that growth interrupted for 2 or 3 years is relatively insignificant for development over decades. The future growth trend on the supply side and the demand side will be determined by the demographic development. Population growth drives the development of demand, the need for infrastructure and the supply of labour. Figure 6 shows the world population growth according to the UN forecast. Accordingly, the world population will increase to more than nine billion by 2050. Alongside population, technological progress and investment in physical and human capital are the driving forces for growth. These lead to an increase in productivity and so to higher per-capita income in the future. Innovation and growth will primarily be driven by science and research-intensive industries in Billion US$ 70000 60000

world without financial crisis world with financial crisis

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Fig. 5 Expansion trend with and without financial crisis, in billion US-Dollar. Assumptions: Growth Rate: 4.1% p.a.; with Financial Crisis: -3.5 percentage points in 2009 and –2.0 in 2010 Source: HWWI Calculations

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12 Billion 10 9 8 7 6 5 4 3 2 1 0 1990

2000 Africa

Asia

2010 Europe

2020 Latin America

2030 North America

2040

2050 Oceania

Fig. 6 Growth of world population by region Source: UN population projection 2009

future (see Barro and Sala-i-Martin (1995), e.g. for the Endogenous Growth Theory). Nanotechnology, biotechnology and genetic engineering could provide basis innovation, which leads to boosts in growth, particularly in the fields of climate, energy, and health as well as mobility, transport and logistics. Simultaneously, a high potential for demand arises in precisely these fields in light of population growth and increasing per-capita income.

Goods, Capital and Asset Markets Goods, capital and asset markets are directly related. Income can either be saved or spent. Savings signify wealth accumulation. Individually, the wealth accumulation can take the form of higher real capital stocks or monetary assets. However, economy-wide wealth accumulation can take place only with investment or with capital exports abroad. In this way the investments increase the capital stock, and the capital export increases the net current account position towards other countries. In the past, considerable amounts of tangible assets as well as monetary assets were accumulated in Germany (see Table 4). Domestic production capacity is increased through the expansion of capital stocks and capital income arises from foreign assets. The accumulation of foreign assets means that domestic wealth accumulation surpasses capital accumulation. By contrast, foreign investment may be higher than the local savings. With perfect capital mobility the rate of investment would be independent of the rate of savings (see Fig. 7). Whether wealth is kept in real or in financial capital is a portfolio decision, with due consideration of individual preferences concerning yield, risk, liquidity provision and investment horizon. Economically, a close substitution relationship arises between the two investment types: portfolio adjustment takes place until the yields

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Table 4 Wealth accumulation in Germany, in billion euros 2003 2004 Wealth creation Real capital accumulation 53.4 49.4 Private households 37.4 33.8 Non-financial companies 19.9 23.2 Government 2.8 5.4 Financial sector 1.1 2.2 Net credit to the rest of the world 44.8 98.5 Total 98.2 Savings Private households 162.4 Non-financial companies 9.8 Government 90.1 Financial sector 16.0 Total 98.2 44.8 Net monetary asset accumulationa Source: Bundesbank 2008 a Identical with Net credit to the rest of the world

2005

2006

2007

47.8 30.9 26.1 6.5 2.7 105.8

73.0 37.0 43.3 5.1 2.2 121.8

97.3 46.3 56.6 3.5 2.1 167.6

147.9

153.5

194.8

264.9

167.2 43.1 88.9 26.6 147.9 98.5

174.6 40.1 82.1 21.0 153.5 105.8

175.8 43.8 42.4 17.5 194.8 121.8

179.8 70.1 3.3 18.2 264.9 167.6

50 Albania

investment ratio

40 China

30

20

10 Eritrea

Malawi Nigeria 0 –20

–10

0

10

20 30 saving ratio

40

50

60

70

Fig. 7 Saving ratio and investment ratio Source: Penn World Tables 2006

have equalized. Nevertheless, several asset markets are segmented by certain characteristics, so that an outright equalization of the yields never occurs. In particular, the expectations that private and institutional investors have about inflation, economic cycles and long-term developments in individual sectors can be very heterogeneous. For an open economy, it holds that the level of domestic investment represents the sum of the domestic savings and the net capital import (negative trade balance). Interest and yields on foreign capital can be seen as international transfer payments. Labour productivity grows as a result of increasing capital intensity, so that the overall welfare effect of a capital import is positive.

M. Bra¨uninger and H. Vo¨pel

14 15 Venezuela 12 9 Growth rate

Albania 6 3 0 0

5

10

15

20

25

30

35

40

45

50

–3 –6 Investment ratio

Fig. 8 Investment ratio and growth rate Source: World Penn Tables 2009 50 Korea

Investment ratio

40

Singapore

30 Luxembourg 20 10 0 0

20

40

60

80

100

120

140

Productivity in 1.000 US $

Fig. 9 Investment ratio and productivity Source: IMF 2009, World Penn Tables 2006

Higher rates of investment have two positive effects on growth (see Fig. 8): on the one hand the capital stock rises, whereby the production capacity increases. On the other hand investment implies a technical renewal of capital stocks. An increase of per-capita income, measured in terms of productivity (see Fig. 9), can be achieved through higher capital intensity and technological advancement. In the process, technological advancement can be linked to new capital (capital-embodied technical progress), tied to labour (increase of efficiency) or take the form of increased overall factor productivity. The “ultimate” sources of higher per-capita income are higher capital intensity and technological advancement. An economy can invest in both of them. Within the framework of endogenous growth theory, the “production” of technological advancement is determined by learning and investment in research and development. Globalization has far-reaching implications for international capital flows and investor behaviour. The opportunities for temporal and spatial risk diversification and the term transformation between savers and investors have been raised through worldwide economic integration and the increasing size of capital markets. The

Globalization and Growth: A Macroeconomic Perspective

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worldwide integration can, however – as in the current financial crisis – lead to more intransparency, increased contagiousness and systemic risk, and the destabilization of capital and goods markets. Economic cycles synchronize and expectations reinforce each other. Out of this, the danger of herd behaviour and the development of bubbles increase and distributing and diversifying risk over various phases of different business cycles might become more difficult. Over the long term, however, globalization offers favourable prospects for the spatial and intertemporal allocation of capital. On top of this is a world economic environment characterized by high growth in developing and emerging nations. This offers new markets in the fields of climate, energy, and health, as well as transport and logistics. The financing of the economic development and new technologies is of particular importance in this environment. It is not currently foreseeable, to what extent this will lead to stronger regulation of international capital markets and financial transactions. The “second phase” of globalization will be less characterized by capital movements, outsourcing, technology transfer and growth convergence in developing and emerging nations, rather more by even closer integration and synchronization of production, trade and logistics. Global supply chains can be synchronized on a “just in time” basis and their logistics chains will be optimized. Additionally, stronger trade in services will occur, such as in the area of health care.

Growth and Inflation The growth trend of a national economy is determined by real and fundamental variables, such as capital accumulation, technology and so forth. Monetary policy has, at best, short-term stabilizing effects on production and employment during the business cycle. The “neutrality of money” applies here over the long term. In the long term, monetary policy cannot increase employment and production beyond the level established by potential growth. In this case, the monetary impetus merely acts upon price levels by way of the transmission channel of relative prices. Relative prices, and therefore the allocation decisions of economic actors, remain unchanged by monetary policy in the end, only the price level changes. An increased growth rate of money, then, leads to a higher rate of inflation. The effects of inflation on growth, however, are ambiguous. In particular, very volatile rates of inflation may lead to a less accurate anticipation by the economic actors. In general, the higher the rates of inflation are, the more volatile they are. In this case, high and volatile rates of inflation lead to changes in consumption and investment decisions. Investment behaviour changes as well. The attractiveness of nominal fixed values, such as demand deposits and government bonds, sinks when inflation rates are high and volatile. On the other hand, there is an increase in the attractiveness of tangible assets whose prices rise with inflation, so offering a kind of protection against unexpected inflation. Productive capital then tends to be more attractive, which can lead to more investment and increased growth.

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In any case, when inflation rates rise the attractiveness of saving is lowered, since savings often take the form of money, which loses value with inflation. Wealth and capital accumulation, and therefore growth potential, decrease in the process. If inflation is a result of a cyclical economic overheating, it will be increased even more. The worldwide rates of inflation have retreated over recent decades (see Fig. 10). In developing and emerging economies, the reason for this often lies in increasing stability of monetary policy. But in recent years the inflation rates in the industrialized countries of the G7 and the Euro-Zone have also been lower and more stable than in the past (see Fig. 11). The disciplining effect of monetary and exchange-rate policies can best be seen in the experiences of Italy and Greece, for example. Cost reductions as a result of the international division of labour have had a restraining effect on inflation. All in all, as a result of the lower % 140 World 120 Industrialized countries Emerging and developing countries

100 80 60 40 20 0 1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

1994

1996

1998

2000

2002

2004

2006

Fig. 10 Development of inflation rates Source: IMF 2009 % 14 Euro zone 12

Leading industrialized nations (G7)

10 8 6 4 2 0 1980

1982

1984

1986

1988

1990

1992

Fig. 11 Development of inflation rates in industrialized countries Source: IMF 2009

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and less-volatile worldwide rates of inflation, household and corporate investment and planning security has increased – with positive effects on growth. Often, the fall of rates of inflation is attributed solely to increased monetarypolitical discipline. This is justified also by the use, by firmly stability-orientated central banks, such as the Deutsche Bundesbank, of a money-supply target. Although a correlation between money-supply growth and inflation can be established (see Deutsche Bundesbank, Monthly Report January 2005), a causal relationship between the two variables is in no way certain. The money supply is not exogenously directed in parts by the central bank, but determined endogenously on the basis of an elastic banking system and through demand for money and credit, among other things. Added to this, complex motivations give rise to portfolio switching between money-supply aggregates, which largely avoid monetarypolitical direction in the short term. In this respect even the influence of moneysupply growth on inflation is insignificant. In addition, increasing labour and raw material costs, unrelated to money-supply expansion, lead to rising commodity prices. For this reason, central banks have switched from money-supply control to inflation targeting. The European Central Bank follows a two-pillar strategy that binds both aspects together. Over the last decade, the rate of inflation in the USA has remained at a very moderate level, although the money supply in the USA has expanded drastically. The reason for the expansion was the struggle against the economic crisis in conjunction with the terrorist attacks of September 11, 2001. However, the expansion of the money supply was not ended as the economic situation improved. The fact that the commodity markets showed no inflation was critical for the monetarypolitical controls to remain uninvolved. Instead, the increased liquidity flowed into asset markets and, in so doing, contributed to the real estate bubble. It is clear that tangible assets offer some protection from increasing commodity prices, but are not protected from becoming part of a price bubble themselves. This has been very impressively demonstrated by the developments on the American housing market. In the course of the current financial crisis, the worldwide money supply has been expanded to a great extent. In the beginning, this was to compensate for the idle interbank trade: because the banks were no longer making loans to one another, the central banks stepped in and made loans to the banks. In this respect, the central banks have only balanced the lower money multiplier and kept the liquidity provision for trade upright. This could become a problem if interbank trade resumes and the money multiplier rises again. If the central banks do not reverse their loan extension quickly and firmly, it will lead to a further significant expansion of the money supply. The necessity of an about-face in monetary policy becomes even stronger when the economic situation improves. The money supply has been significantly expanded in order to fight the current crisis. The danger of increasing inflation lies in the current expansion of the money supply. Increasing rates of inflation in the area of consumer goods also lead to increasing wages. If these fail to materialize, there will be good reason to believe that the readily available liquidity will flow into investments and create new bubbles.

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Forecast Globalization is a complex economic process, which is interdependent with social and political developments in the individual countries. It is often said that politics has largely lost primacy over the structure of economics and society due to globalization, because capital has become globally mobile and can avoid national regulation. Many social ills that are seen as arising from the context of globalization, or even as a direct consequence of it, are, however, not attributable to the opening of national economies and the liberalization of goods and capital markets, but to the large differences in levels of income between countries. The distribution effects resulting from globalization are unusually high and cause economic, but also societal and political, adjustment costs. Although globalization is beneficial for the participating countries and represents a net welfare increase, the globalization process can be associated with social and political acceptance problems due to the distribution effects on the factor income. Indeed, in accordance with the Kaldor–Hicks criteria, policy can redistribute net welfare increase in such a way that everyone is better-off, with worldwide mobile capital; however, the political redistribution is limited due to the possibility of avoiding it. The acceptance and legitimation problem of globalization must be resolved in a different way than making the “median voter” a winner of globalization. In the emerging and developing countries, the pressure to adjust owing to globalization dwindles or even reverses with increasing income levels and higher social standards. Globalization can be different in various “phases”. In the “first phase”, we see the trade and specialization effects that were described here. The distribution effects related to labour and capital income as well as between high and low-qualified workers come about from change to comparative production advantages. These adjustments are not past, but are mostly concluded. The next phase of globalization will bring a further, more qualitative strengthening of the worldwide specialization of labour, in which the production processes and logistics chains will increasingly be optimized. The current financial and economic crisis will not be without consequences for the regulation framework of globalization. World economic integration, the integration of markets and the segmentation of supply chains across many national borders unarguably have brought high growth potential and efficiency improvements. Admittedly, the dangers of contagiousness and systemic risk have also been increased by the crisis. The future depends on the development of an international financial architecture that on the one side provides more stability to the capital markets while making them less susceptible to systemic risk and, on the other side does not undo the advantages of international capital mobility, labour distribution and the movement of goods. Meaningful regulation creates a balance between opportunities and risks, as well as the costs and benefits of globalization. International currency funds could take on an important role in this, insofar as they indicate aberrations in a timely fashion and lessen the consequences of crises. In addition, reinforced monetary and fiscal policycoordination between countries must be undertaken. For this the large emerging and

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developing nations, such as in the framework of a G20, must be included as well as the industrialized countries. This is inevitable in any case in the face of global problems, such as climate change, that require an international solution. Given the varying costs and benefits, the bargaining positions of the various countries with regard to both climate protection and the regulation of international capital markets are very heterogeneous and mutual agreement is anything but simple.

References Barro, R. J., & Sala-i-Martin, X. (1995). Economic growth. New York: McGraw-Hill. Burda, M.C., & Severgnini, B. (2008). TFP growth in Old and New Europe, Working Paper. European Central Bank. (2005). Assessing potential output growth in the euro area. A growth accounting perspective, Occasional Paper Series, Nr. 22. Deutsche Bundesbank. (2005). Monatsbericht Januar 2005, Frankfurt a. M. Deutsche Bundesbank. (2008). Ergebnisse der Gesamtwirtschaftlichen Finanzierungsrechnung fu¨r Deutschland 1991 bis 2007, Statistische Sondervero¨ffentlichung 4, Frankfurt a. M. Feldstein, M., & Horioka, C. (1980). Domestic saving and international capital flows. Economic Journal, 90, 3124–329. HWWI. (2006). Maritime Wirtschaft und Transportlogistik, Hamburg. IMF (2009): Online Statistics. Turner, P. (2008). Financial globalization and emerging markets capital flows. In Bank for International Settlements, BIS Papers No. 44. Heston, A., Summers, R., & Aten, B. (2006). Penn World Table Version 6.2, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, September 2006. UN Data. (2009). World population prospects: The 2006 Revision.

A New Age Dawning Kasper Rorsted

Kasper Rorsted was born in Aarhus, Denmark in 1962. Rorsted started his professional career in the American software companies Oracle und Digital Equipment. From 1995 he worked for Compaq in various management functions. In 2001, he was responsible for the Compaq business in the EMEA region. In 2002 Compaq was acquired by Hewlett Packard. Until Rorsted left HP in 2004 he led the European business of the company and was responsible for more than 40,000 employees and sales of around 20 bn euros. In April 2005 Rorsted joined the German Dax and Fortune Global 500 company Henkel as Executive Vice President, responsible for Human Resources, Purchasing, Information Technologies, and Infrastructure Services before he was appointed Vice-Chairman of the Management Board in 2007. Since April 2008 he has been CEO of Henkel. Kasper Rorsted is married with four children.

Introduction The term “globalization” is probably one of the most misused of its kind. Everyone appears to interpret globalization differently. This uncertainty of definition is one of the reasons why innumerable fears are associated with the concept. People talk of the end of the nation state, of the ever-widening gulf between rich and poor, of an economy that ignores state boundaries, of the impotence of politics, of a loss of order. The negative picture of globalization is being stubbornly retained in many minds. International corporations were already operating on a global scale long before anyone coined the term “globalization.” They traded and otherwise pursued their business interests, although admittedly not with the same intensity or to the same extent as companies do today. Globalization in its most immediate and neutral form represents the rapid increase in economic interrelationships worldwide – and how these are affecting movements of capital, investment strategies, and migration (Di Fabio 2008). Of course, no one in their right mind would deny that globalization also brings with it numerous risks: As we are R. Ijioui et al. (eds.), Globalization 2.0, DOI 10.1007/978-3-642-01178-8_3, # Springer-Verlag Berlin Heidelberg 2010

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currently experiencing, due to the international interdependence of the financial markets, the danger of a world economic crisis can essentially never be eradicated. However, while the risks of globalization are undeniable, so are the opportunities that it brings. And these opportunities are also open to us, although, unfortunately, they are all too frequently overlooked. International corporations have to accept their role as scapegoats for an apparently unjustified loss of jobs, coupled with people’s greedy desire for ever higher returns – but they are also in a position to make globalization a success for everyone associated with them, their suppliers, and their people. My own attitude is to regard globalization as a unique and highly promising opportunity to improve the lives and circumstances of everyone involved in the process. In the following study, I will endeavor to outline the challenges of globalization and changing market conditions with which international corporations such as Henkel are confronted. Important issues in this regard are corporate responsibility, sustainability, diversity and training, and education. Those companies tackling these issues with enthusiasm, conviction, and social awareness will be able to successfully participate in the globalization project, a process that is as inexorable as it is necessary.

The Challenges of Globalization The monetized economy and the trade process have never – not even in ancient times – been restricted solely to individual countries or continents. The Greek polity spread throughout the entire Mediterranean and even reached the shores of Asia. Even in the case of the kidnapping of the beautiful Helen described by Homer, and the Trojan wars that ensued, what was at stake was not injured pride or vanity but rather economic interest. The Romans too were assiduous business people who maintained trading contacts as far afield as China. Later, the Fuggers, a dynasty of German merchants, covered large parts of Europe with a network of contacts (Di Fabio 2008). And in embarking on his voyage of discovery, Columbus was not just looking for a new world but also new and faster trading routes. So entrepreneurs have, since time immemorial, always been interested in expansion. And Henkel too has constantly pursued an expansionist course since its establishment in 1876. While the first sales and purchases were initially undertaken exclusively in the domestic market, today’s globally active company began looking at foreign markets by – at the latest – the birth of its product “Persil” in 1907. Today’s “multinationals” are a driving force for globalization. They have at their disposal enormous technical and financial resources, and their share of world trade is extraordinarily high. Just 30 years ago, there were around 17,000 international corporations. Today, the number has risen to substantially more than 70,000, accounting for around 700,000 subsidiaries in total (Bundeszentrale fu¨r politische Bildung 2009). Unfortunately, for many people it is the international players that are the cause for everything that is going wrong with globalization. Many of these corporations are richer than most of the developing countries. Because they are rich,

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they also wield influence and frequently even political clout (Stiglitz 2006). Naturally, corporations want to generate profits – and not distribute gifts. There is no doubt that the current globalization process is still giving rise to an imbalance in those profits. But it is also having an increasingly positive effect on general prosperity. And something which is unfortunately also frequently overlooked is that international corporations have made a substantial contribution to the benefits that are accruing to large parts of the third world as a result of globalization (Stiglitz 2006), for example through textile exports. In Europe, jobs are being lost, while in India and Bangladesh people are delighted to have acquired this means of gainful employment. As experience shows, globalization initially leads to simple, poorly paid jobs, and then to better and better rewarded employment. A poor country becomes a developing country, then an emerging nation and ultimately it approaches our standard of living – as we have seen in the cases of Singapore, Malaysia, Taiwan, Korea, and growing parts of China. The prerequisite for this kind of positive development is, however, the introduction of a market economy. Without a functioning free market, there can be no real economic progress (Di Fabio 2008). The differential between poor and rich is indeed becoming ever larger – not because of globalization but because the poor in these countries are not participating in the benefits that it brings. Money is a big incentive for these corporations. And the desire to make money can also work toward the general good. Large corporations can mobilize enormous resources. It is precisely such multinationals that have opened up a way into the markets of the industrial countries for goods from the developing countries. Customs barriers, restrictions to trade, and foreign currency limits have become significantly less inhibiting around the world (Di Fabio 2008). It has also been of great advantage to the developing countries to know what precisely the demands of the international consumer are. International corporations serve as conduits for the very latest in advanced technology, enabling the associated expertise to be transferred from the industrial to the developing countries. They help to bridge the knowledge differential between these countries and exponentially increase the number of available markets. Multinational companies procure or provide training posts and jobs for people in developing countries, and with these comes economic growth. Today’s corporations hold all the cards to liberate globalization from its poor image and to carry the worldwide process of economic integration to a successful conclusion. Corporations are very much to be regarded as a “pars pro toto” of the world community. Companies are themselves communities in which people work together in order to realize a common goal – the manufacture of a product or the provision of a service. And this cooperation has the effect of making them care for the well-being of their people, that of the localities in which they operate, and that of the wider community, the world in which we all live. International corporations bear international responsibilities – something that is also very much in their own interests. Good behavior can pay dividends in business terms, while poor conduct can give rise to expensive litigations and image damage (Stiglitz 2006). Social responsibility is integral today to good business policy. It is a moral and an economic imperative.

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Efficiency in business is achieved by companies taking into account the consequences that their decisions have for their employees, for the environment and for the communities within which they operate. Corporations that are socially responsible profit not only from the absence of negative headlines but also invariably from the high motivation of their employees and an improved work ethic: their people are likely to prefer working for a company that shows social responsibility rather than a company that causes social degradation and practices resource overexploitation (Stiglitz 2006). Naturally, globalization must accept some of the criticisms leveled against it, because many arguments of its detractors are justified. Corporations that allow production practices involving child labor, forced labor, and extremely low wages, which blight the environment and which devour resources indiscriminately have much to answer for. These sorts of things should simply not happen. It is also absolutely deplorable that, with many corporations active on a global scale, classic civil values such as personal responsibility, reciprocity, the merit principle, wealth creation, education, and professional qualification appear to have been lost. Critics of globalization speak particularly of the unpredictability of developments on the stock exchanges and complain of the lack of democratic control over the financial markets. They point to the fact that money can change hands on the stock exchange within a matter of seconds, the magnitude of which far exceeds that attributable to the so-called productive sector. The world’s stock exchanges, which are becoming increasingly interdependent due to advancing integration are, say the detractors, dominated by gigantic funds. They have become the venue of hostile takeovers that, it is claimed, are no longer about productive expansion but rather increasing share prices and the spectacular cannibalization of companies, all driven by the forces of greed which, when the speculative bubble bursts, are to be absorbed by the public purse (Di Fabio 2008). All these scenarios are extremely topical, but to now yet again claim that the specter of a soulless, mechanical capitalism has risen is far too extreme. People today are not powerless in the face of the unrestrained forces of globally networked hedge funds. We have long left the Middle Ages behind – the period when poor peasants suffered brutal plunder at the hands of powerful bands of raiders is gone. It is not the managers and corporations alone who are always the perpetrators and culprits. Every investor and every private individual also need to take a good look at how they themselves act within their private spheres. If honest, they too will find that they often completely ignore social and ecological criteria and instead – when it comes to selecting a bank or insurance company – look just at the charges or the level of interest payable on their deposits. Many bank customers profit from transactions that have serious effects on people and the environment, albeit without knowing that this is the case. There is no doubt that many people have a real fear of India and China. These two countries, once very poor and economically isolated, are today integral parts of the world economy (Stiglitz 2006). Many fear the competition that these giants represent, particularly as they have at their disposal almost unlimited labor resources working under low-wage conditions.

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But no one expressing such fears appears to ask how these apparent giants of today fared during the midtwentieth century when the situation was very much reversed. In the 1960s, underdeveloped countries such as China and India were just as afraid of the future because all they had were masses of undernourished workers, while having to compete with rich countries that had at their disposal better fed workers, better education systems, and better infrastructures (Bhagwati 2008). China and India have meanwhile shown how poor countries can turn their economies around and become competitive. The rich countries of today are far better placed than the poor countries of earlier times. However, these rich countries have to rediscover their self-belief and, with courage and commitment, ensure that they are able to withstand this new competition. In particular, they need to look to their innovation capabilities – an area in which they still enjoy a lead. However, the industrialized countries will only be able to retain this advantage by being flexible and investing quickly in new markets and technologies. Many German companies are making good progress on this front, and there is good reason why many midsized enterprises can regard themselves as winners in the globalization stakes. Year after year, they ensure that Germany regularly retains the title of world export champion (Hartmann 2008). Many people in Germany are also worried that, through outsourcing, thousands of highly qualified jobs will be exported abroad, particularly to China or India. This is only correct to a very limited degree. In India, only 12% of people in the relevant age group pursue a course in higher education, and of those, only a few can speak the kind of English that is comprehensible to the average American. The fear that China is producing more engineers than the rest of the world put together is also exaggerated because the kinds of qualifications that they acquire also have to be considered. A majority of Chinese engineers are not in sectors relevant to trade but rather in the maintenance of bridges, roads, or buildings (Bhagwati 2008). So it is not the exporting of jobs or the ascendance of India or China that is the problem presented by globalization for the western world. Europe’s prosperity and that of its people is more likely to decline if, 1 day, it were to lose its current competitive advantages on the high-tech front (Frankfurter Allgemeine Zeitung 2008). Until now, we have not been in a position to properly understand globalization and effectively manage its economic consequences. We have grown together economically more quickly than we have been able to learn to live together in peace (Stiglitz 2006). In order to render globalization fair for everybody, we also have to think and act more globally. There are still far too few people today who have any awareness of their global identity. The gap between local political focus and global orientation is also a cause for the dissatisfaction and skepticism that globalization attracts. If we want to make society fair, we must commit to the adventure of globalization. The same applies to globalization as applies to the market in general: neither stands in the way of a free and fair society, and both are, rather, a necessary precondition for its establishment. Fairness exists where a society encourages each individual to fulfill his or her potential and where people enjoy success through their hard work and commitment – or at least can look forward to the prospect of future success for themselves

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and/or their children. Prosperity is the result of people’s diligence and capabilities, their inventive spirit, and scientific curiosity. Prosperity also ensues when a society encourages education and promotes personal responsibility. Prosperity is likewise generated by making the most of the opportunities that derive from the international division of labor and the mobility of financial assets, both of which should primarily be regarded as a blessing.

Changing Market Conditions Germans tend to be regarded as rather safety conscious – an attitude that is difficult to reconcile with a globalized world that is constantly and rapidly changing. The new competitors with their global ambitions are driven by enormous appetites and a tough determination to thrive and prosper. They are hungry and willing to do almost anything in order to achieve success. Western enterprises need to adopt a new way of thinking in order to identify at a sufficiently early stage the changes in the rules and structures affecting their markets. Those clamoring for the economic barriers to be raised in these difficult times, meanwhile, are likely to fall behind and relinquish any lead that they may have had. One thing is sure: companies that adopt a global approach will quickly understand that there are more potential buyers for their products and services than just their immediate neighbors around the corner. With the right strategies, enterprises will be able to reach the rapidly growing global middle class. According to the World Bank, by the year 2030 this category will include 1.2 billion people from the emerging markets, and this enormous customer grouping will have a purchasing power of between 4,000 and $17,000 per capita per year, able to afford far more than at present: holidays, high-value consumer goods, a better education (The International Bank for Reconstruction and Development/The World Bank 2007). For this global middle class, it will no longer be relevant where such products and services come from. Companies wishing to be globally successful need to adapt to their requirements and demands. Consequently, enterprises today need to be flexible and able to react quickly (Hartmann 2008). A decade ago, Henkel was only present in half of the countries in which we are active today. Yet we know that we have to become even faster in our ability to get new products into the marketplace. This does not mean, however, that we have to change our short-term planning simply because we need to respond urgently to some change or other in the world. Such an approach has never been part of the Henkel strategy, nor will it be in the future. We do, however, want to become leaner and, in the future, to dispose of those activities that do not belong to our core business. We must make sure that we carefully review and adapt our structures on a continuous basis. This is nothing new in the history of Henkel and is something that applies to all our business units: in years gone by, Henkel has regularly divested businesses and acquired new operations as appropriate. Strategic acquisitions are necessary in

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order to successfully compete on a global level. For example our purchase of the adhesive businesses of National Starch has secured a leading international position for Henkel. Adhesive bonding is the technology of the future and all the world’s major manufacturers use our adhesives. Through the purchase of the National Starch businesses, we have been able to strengthen our Chinese operation. We anticipate that, by 2010, China will count among our five most important markets in sales terms. We are not only investing in the worldwide expansion of our adhesive business, but also in our service centers in Eastern Europe and Asia, and also in Germany in new production facilities, and research and development. Growth is largely coming from Central and Eastern Europe and Latin America and those are the regions where we need to invest. Our business in the growth regions accounts for around 30% of our total sales and has expanded by a double-digit percentage in each of the last few years. We have to realign our brand portfolio. Above all, we intend to strengthen our global brands such as Persil, Pattex, Loctite, or Schwarzkopf and dispose of our noncore activities to enable us to respond more effectively to any future dramatic changes that may befall the world economy. A large part of economic growth is no longer coming from the saturated markets of Western Europe but increasingly from Asia and Eastern Europe. The emerging markets and developing countries are likely to remain the main drivers of economic development in the coming years. In order to meet the differing demands encountered worldwide, we pursue a mix of brand strategies aligned to the prevailing market situation: if the requirements and expectations of our customers and consumers are uniform, we offer globally uniform products. Examples include the internationally standardized demands made on instant adhesives or our industrial adhesives. Where consumer demands, income levels, or the infrastructure of our markets are different, we adapt our pack sizes or distribution channels to these local conditions in order to make our products and services available to as wide a population segment as possible. Consumers in the lower income bracket, for example, purchase small units as soon as they have enough money left over to afford them. We take this into account in the planning of our pack sizes and selling prices. For example, in 2007, we launched our hand dishwashing detergent Pril in India in the form of single-wash packs. We did the same with our detergents Mr. White in India and Mas in Mexico. In the South American market, we offer deodorant creams and shampoos in small sales units of 10–20 mL. These different regional conditions also sometimes necessitate changes in product formulation. In North Africa and Latin America, for example, water is a scarce and valuable resource. Consequently, Henkel has launched onto the Egyptian, Tunisian, and Mexican markets fabric softeners for hand-wash laundry with special ingredients that facilitate a more rapid rinsing-out of the conditioner suds. Cultural differences are also taken into account in our product development work. In many countries of North Africa and India, there is a tradition to wear white apparel. Our detergents Nadhif and Isis for the North African market and Mr. White for the Indian market therefore contain ingredients which produce a particularly radiant white.

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Business Ethics Business directors and managers have a rather tattered reputation – high salaries, exotic trips with all expenses paid, employee surveillance, electronic eavesdropping targeted at customers and the media, balance sheet manipulation, insider trading, golden handshakes, tax evasion. . . Little wonder, then, that anticapitalist voices are getting louder than we have seen for a long time. Anyone making a profit is almost instantly regarded as a criminal. Naturally, these criticisms are exaggerated. The vast majority of entrepreneurs and managers in joint stock companies are decent people who act in a responsible manner. What is a company actually responsible for? Within the context of a stable industrial society, companies used to be more or less responsible for what they themselves did. At the beginning of the 1990s however, things began to change, with companies coming under pressure because of increasing human rights infringements in production facilities transferred to Asia. The call for state intervention in order to resolve such situations has become ever louder in recent times. Yet to prescribe a moral code by law would simply serve to muddy the waters even more. Nations endeavoring to regulate every aspect of business life just become choked in a bureaucracy that prevents spontaneity. The latest ethics research indicates that pragmatism is the way forward with ethical corporate responsibility embedded into the entire value chain of a business enterprise. No longer does corporate responsibility merely mean doing good. Companies also have to respond correctly to the consequences of social change. Corporate integrity does not begin with the arrival of the input materials on site, but rather in the country of origin. Only an integrative approach to value creation can ensure the absence of ethical shortcomings. Companies need to understand the systematic interrelationships that exist between their own decisions and social and ecological problems, and must contribute an appropriate share to their solution. Assigning responsibility to the state is inappropriate and cannot work in global value-adding processes. Corporate responsibility goes much further than merely abiding by the law. Indeed, the opposite may be true, because where companies operate in the zones of influence of repressive regimes, abiding by the law of the land may actually be the opposite of corporate responsibility. Communities can only function if all their members are prepared to accept responsibility – state authorities and corporations as much as individual citizens. The role of the state in this regard may indeed be to enter into internationally binding agreements, for example with respect to the global priorities for sustainable development or the protection of human rights. Whether such measures actually make any difference remains to be seen. Whatever the case, globally active corporations must be prepared to become effectively involved in this process. They must assume specific responsibilities within their field of influence and contribute on a global scale to the implementation of viable solutions. This is an approach that Henkel has, for many years, been putting into practice. As a visible indication of its engagement and commitment, the corporation joined the Global Compact of the United Nations in July 2003. Henkel sees the Global

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Compact as a network in which experience and instruments aligned to sustainable development can be exchanged and partners can learn from one another. At the national level, Henkel is also an active member of the German Global Compact network – joint projects are initiated within this community and it also serves as an effective means of information exchange with other companies. The principles of the Global Compact are already firmly anchored at Henkel in our Vision and Values. The associated corporate maxim in this case reads: “We are dedicated to sustainability and corporate social responsibility.” The corporate ethics derived from this commitment are laid down in standards applicable throughout the world and also within a Code of Conduct that is binding on each and every employee of the company. Hence our accession to the Global Compact constitutes a further indication of the significance we attach to ensuring high standards in all our activities worldwide.

Corporate Social Responsibility Many rankings and numerous awards received are evidence of Henkel’s position as one of the leading global corporations in the fields of sustainability and corporate social responsibility (CSR). The company has, for decades, been committed to such concepts and is dedicated to working on solutions to the problems of our times – such as the advent of climate change. Henkel’s response has been to optimize all our brands and technologies in three phases: in research and development, in their production, and in their usage. The limited availability of water, energy, and other resources represents a global challenge. It is essential for the future of a detergent, adhesives, and cosmetics manufacturer such as us, that the problems associated with these resources be fully and carefully taken into account. In the last 70 years or so, worldwide water consumption has increased sixfold. This is due to the combined effect of a tripling of the world population and a doubling of average per-capita water consumption. Globalization is increasing water usage due to the economic growth that it has engendered and the permeation it has promoted of more consumption-aligned lifestyles. In addition, freshwater resources are dwindling due to climate change and contamination. Each day, around 2 million metric tons of waste is discharged into so-called receiving water courses, that is to say water resources into which effluent discharge is permitted. Even if the reliable data available are incomplete, estimates indicate that global wastewater production amounts to some 1,500 km3 per year. Assuming that 1 L of wastewater contaminates 8 L of freshwater, the current wastewater burden could amount to 12,000 km3 worldwide. In the worst-case scenario, 7 billion people in 60 countries may be suffering from water scarcity by the middle of the twenty-first century, and in the best-case scenario the numbers are still 2 billion people in 48 countries. Despite the lack of water availability, many opportunities for saving water – improved irrigation technologies, cultivation of appropriate agricultural produce, better consumer awareness, and avoidance of the

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usage of drinking water in the agricultural sector – remain woefully underutilized (Bundeszentrale fu¨r politische Bildung 2009a). It is not only our duty to look after our resources responsibly, but it is also beneficial for companies to do the same. Globally active corporations responsible for ecological destruction or ruthless exploitation are exposing themselves to the danger of massive public criticism voiced by their various stakeholders, by nongovernmental organizations (NGOs) and through the media. Consumers seek assurance and reliability in brands and labels. Customers who are willing to spend their money on brand-name products, generally – albeit tacitly – expect that these are also ecologically and ethically sound. Future expectations are also traded on the financial markets. So-called sustainability leaders able to offer a credible future at more than just the economic level are being rewarded. How a company generates profits and whether it exhibits corporate social responsibility in doing so have become key criteria in this regard. Companies can, through their sustainability report, communicate their commitment to social responsibility and to involvement in finding solutions to global problems. Sustainability reports should not be published as products of marketing departments. Rather, a management system has to be established which enables sustainability-relevant factors to be integrated and implemented within the company. For Henkel, it is important to act responsibly along the entire value chain. Our integrated focus on the fields of energy and climate, water and wastewater, materials and waste, health and safety, and social progress, accompanied by the implementation of related solutions within consumer-relevant innovations, serve to strengthen our brands and also the reputation of our company. With this, we create an important basis for the trust invested in our brands and technologies, without which those products simply cannot be successful. Sustainability is an integral part of Henkel’s DNA. Economic, ecological, and social objectives need to be harmonized. Back in 1972, our then CEO Dr. Konrad Henkel warned at the Hanover Fair: “Companies that only think in profit terms will soon find that they are rapidly losing ground.” This template of a company inherently aligned to generating profit while at the same time embracing ecological and social dimensions in its approach to business and fulfilling internal, social obligations as an employer has been imposed on the top management and indeed the company as a whole by the members of the Henkel family as the majority shareholders. We regard this tradition as a particular characteristic and a competitive advantage. In recognition of its exemplary sustainability management performance Henkel has only recently received the accolade of “Germany’s Most Sustainable Brand.” Our basic alignment to sustainable and socially responsible development is illustrated by many examples. Henkel began to concern itself with environmental issues and civic demands early on, and to take social expectations seriously. In the course of our more than 130-year corporate history, we have continuously demonstrated our commitment to environmental protection and also the protection of the health and safety of our customers and employees. One of the focal points in our sustainability approach is, for example, that of the “Future of Washing.” Washing laundry with less energy, that is to say at lower

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temperatures, and with less water in order to generally reduce water consumption, is becoming increasingly important. It is a global issue. Billions of people are giving rise to increasing demand for clothing and other textile products. The effects on the production of textiles and the types of textiles manufactured are huge. For ecological reasons alone, it is likely that manmade fibers will be used more and more in the future to meet demand. Such developments bring certain requirements with respect to fabric care and, above all, the provision of additional functions such as elasticity, breathability, and temperature regulation. For detergent manufacturers, the challenge lies in further reducing the energy and heat requirement and finding formulation ingredients that will not damage such functional textiles. The manufacturers of washing machines and dryers need to develop equipment that operates with exceptional energy efficiency and intelligence, which offers automatic laundry care programs that differentiate between textile types, colors, washing temperatures, and other properties while avoiding errors in treatment. Five years ago, consumers paid little attention to these ecological aspects. Today, however, there is a distinct movement away from powder and toward liquid detergents in concentrate form. Instead of dragging 8 L bottles home, people are buying 2 L bottles. This brings volume advantages both for retailers and consumers – in Asia, for example, where smaller apartments often allow no room for large pack storage. At the center of our sustainability policy lies not only improved cleaning performance with ever smaller dosages, lower temperatures, and less water consumption. At our Cosmetics business sector, products offering good tolerance and application safety are equally essential to enduring success. Here, efficacy is just as important as health-related and environmental compatibility. By using renewable and natural raw materials, Henkel is able to make a contribution to resource conservation and climate protection while addressing a growing consumer requirement. We lead the world with our adhesives and sealants – technically, ecologically, and with respect to health and safety. Innovative system solutions offer industrial customers advantages in the field of environmental protection, and significant savings with respect to their energy, water, and waste costs. And our surface treatments protect against corrosion and extend the service lifetime of products.

Diversity In times of globalization, a company will be able to understand its customers better if its make-up reflects the many faces encountered in the different countries of the world in which it is active. Opening up an organization to the concept of diversity is an enriching experience, because embracing other cultures and other points of view encourages us to examine ourselves and also to ask ourselves new questions. At the corporate level, diversity is a trump card that can be converted into a decisive competitive advantage, the more globalization progresses. Diversity is a major lever when it comes to encouraging the performance, motivation, and commitment of employees, and also for enhancing the image of a company. Moreover, diversity

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delivers a decisive competitive advantage in terms of its effect on innovation. The innovative process is the result of many forms of education and different talents, male and female ideas and creativity, and also the many different career paths taken by employees. In Germany, the positive message and the profit-generating importance of diversity does not yet appear to have been properly understood. There are hardly any foreigners in the management executives that run our national businesses. The average proportion of foreigners on DAX management boards is rather low at a current 25%. In the year 2000, moreover, it was just 13%. Despite the steadily growing importance of Asia, there is hardly a single director from that region in Germany, and for nine out of the 30 DAX companies, the executive board consists entirely of Germans (Appel and Lo¨hr 2008). Yet it is vitally important that companies seek and engage more managerial talent from around the world, that it is to say become truly global corporations. The guiding principle should read: the more colorful and varied, the better the composition (Appel and Lo¨hr 2008). Naturally, increasing globalization is also reflected at Henkel by developments in our personnel make-up. The number of employees outside Germany has, over the last 5 years, significantly increased. Today, there are over 55,000 Henkel employees operating throughout the world. Henkel is already very international in its composition. We generate over 80% of our sales outside of Germany; and around 83% of our employees operate beyond Germany’s borders. Our management board of five includes three members who are non-Germans. I myself am Danish. At the next management level down, 15 out of 25 are nonGermans. So the German company Henkel is now a thing of the past. Henkel has long been a global corporation with German roots. This is a great advantage. Essentially, I believe that a company expanding from a European base is likely to be more open to other corporate cultures. In the majority of the significant US corporations, the management executive boards contain virtually no foreigners whatsoever. The non-American managers may perhaps occupy the position of the Asian or Eastern European general manager, but that is usually where it stops. It would certainly be a good thing to change this management approach, because new perspectives bring new thoughts and often also more understanding for complicated market situations. At Henkel and also in many other German and European companies, many foreigners are right at the management helm. This is a strength. On the one hand, it facilitates a better understanding of markets and on the other, it is also important for a company to reflect the make-up of its cliente`le. Otherwise it will never be possible to mobilize that company’s full potential. If such board compositions can be created, the companies concerned have an enormous advantage. In selecting our employees, we need to realign our focus to achieving more diversity. There is no doubt that the global battle for top talents is tough and going to get tougher. For good reason, there is a current boom in the business of headhunting, with the agencies concerned receiving enquiries from all over world – and operating on a worldwide basis. It is difficult to find good candidates, abroad as well as in Germany. There are many reasons for this. One is the fact that more and more highly qualified Germans are emigrating, leaving a hole in the candidate pool.

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Of the 160,000–180,000 people each year who leave the country, 85% are academics (Prognos 2008). Moreover, the competition has become tougher due to the global nature of business, and many international corporations are increasing their effort to find suitable candidates in all the recruitment markets around the world. In order to truly get the top people worldwide in the future, management cannot leave the important search work solely to the human resources departments and recruitment agencies. It must be involved itself. Diversity enriches. So why not also have Russians or Chinese on the Henkel board? Henkel in America is already headed up by an American and in other countries, we are also putting our reliance more and more in managers from the country concerned. We must ensure that nationality, age, and gender no longer play any role in the selection procedure. We should not be afraid to stir up the mix. Of course, management is not getting any easier with intercultural barriers and language difficulties abounding. But here too, the watchword has to be “tolerance” – maintained to the maximum extent possible. Diversity relates not only to age and gender but also to the origin and skills of an employee. We sell our products to all corners of the world and if many women are among our customers, why do we not reflect this in our management team? In the past, we did not place any particular value on such a notion. In Germany, for example, we are still in part very old-fashioned when it comes to the role of women. If Henkel today has a new post to fill, one of our requirements is that one of the last three candidates available for selection must be someone who fulfills our diversity criteria. This does not mean that we intend to allocate jobs according to positive discrimination. The best candidate will always get the job. The question ultimately always has to be: who is best qualified for the post? And one thing is sure: it is unlikely to be always and automatically men who know best what a new hair care series for women should offer. We also have to commit to this diversity from the top down.

Training and Education There is no future without education. This word, perhaps the most often cited in political debates relating to the successful development of society, has long been of existential importance for companies faced with global competition. Education is the key not only for further development in the social sphere, but also for business success and innovation. Such virtues are the product of capable, welleducated, well-trained employees. The competitiveness of Germany’s economy requires a high level of per capita labor productivity which in turn demands of employees a thorough technical or professional training combined with plenty of creativity. Hence, educational institutions need to promote certain qualities which are becoming increasingly important on the global market: the ability to work in a team, flexibility and, not least, knowledge of foreign languages, English above all.

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Given that today’s market conditions are changing quickly and often unpredictably, employees are often required to respond flexibly and expertly even to unusual problems as they arise. Henkel’s success is based on people who are open to new ideas. People who, with their pioneering spirit, are constantly on the look-out for new ideas for our innovative brands and leading technologies – in over 125 countries around the world in which customers have learned to trust our promises. Our employees are our capital, assets in whom we invest through internal training courses, assistance with further education, with continuous professional development and management programs or through cooperations with universities. By encouraging the transfer of knowledge and technologies, we promote the sense of personal responsibility among our employees and customers in all parts of the world. The central issues in this regard include the propagation of modern management methods and the introduction of safe products and production processes. Aside from the technical and professional further education and training programs for our employees, we also promote crosscountry job rotation programs through which employees are sent to certain international subsidiaries. With a special training program, we educate our production personnel around the world in hazard recognition, risk assessment, and the introduction of remedial measures. A further important element in our knowledge transfer process is the training of our customers. In Central and Eastern Europe, for example, Henkel has now established 140 training centers for craftsmen. Working together with local education ministries and state-run vocational colleges, we are gradually introducing new quality standards in training and further education. In a similar vein, the “Academy Schwarzkopf” (ASK) scheme run by Schwarzkopf Professional has to date trained over 220,000 hairdressers in 52 countries – in cutting techniques, styling advice, and management skills. With this world-leading approach to knowledge transfer in the hair salon business, we are making a particularly important contribution in Asia and South America to the initial establishment of binding training standards for hairdressers. In the competition for the best candidates, we need to make our company as attractive as possible through our educational offerings, so that applicants in the skilled labor market are more interested – and feel they can gain more benefit – in coming to us rather than going to our competitors. It is undeniable that training schemes and educational offerings increase the attractiveness of companies. Hence, further education constitutes a strategic undertaking. The demands that we as a global company place on our management today include the requirement that the managers of tomorrow should commit to and help to promote diversity. Only in this way will they be able to identify and utilize on behalf of the company the very valuable creative potential that lies within the diverse talents of a multicultural workforce.

Conclusions International corporations play an important role in promoting the process of globalization. They therefore also bear a great responsibility. There is no doubt that, due to the socially irresponsible actions of some corporations, globalization

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has given rise to a great many grievances. This has to change, because we cannot stop globalization and we also do not want to stop it because globalization offers opportunities for everyone. Therefore, we have to accept it and shape it anew – even though doing this to the benefit of all will be no easy matter. Economic forces alone will not be sufficient to successfully manage the consequences of globalization. This requires active political action and the commitment to provide people of whatever age with the skills and qualifications that they need in order to participate in the market. Political and world economic reforms are required, and these will need to be implemented gradually, with great care and circumspection. Such reforms should be based on a clear and comprehensive appraisal of the errors made in the past and the deficits that currently prevail. Companies will need to be aware of their social responsibility as part of this process. Through their economic influence, they have enormous power, and this they need to use to promote the prosperity of the majority. The responsibility lies most of all with managements. Companies should not respond solely to the demands of their consumers. They have to act responsibly not only with respect to their customers and shareholders but also in their usage of resources and their treatment of their employees. Corporate social responsibility, if extended in all directions, can ensure that this globalization project can be kept on track and moving in the right direction. I am convinced that then the people in both the developing and the industrialized countries will be able to gain enormous benefit from globalization.

References Appel, H., & Lo¨hr, J. (2008). Die Multikulti-Offensive. In Frankfurter Allgemeine Zeitung (p. C1). Frankfurt/Main. Bhagwati, J. (2008). Die Globalisierung hat ein menschliches Gesicht. In Handelsblatt (p. C3). Du¨sseldorf. Bundeszentrale fu¨r politische Bildung (2009). Globalisierung – multinationale unternehmen – anzahl multinationaler unternehmen. Online im Internet: URL: http://www.bpb.de/wissen/ 3MGD0S,0,0,Anzahl_Multinationaler_Unternehmen.html. Bundeszentrale fu¨r politische Bildung (2009a) Globalisierung – energie/ o¨kologie, wasserverfu¨gbarkeit. Online im Internet: URL: http://www.bpb.de/wissen/ VGPF7A,0,Wasserverf% FCgbarkeit.html. Di Fabio, U. (2008). Kann Globalisierung gerecht sein?; In Frankfurter Allgemeine Zeitung (p. 8). Frankfurt/Main. Frankfurter Allgemeine Zeitung (2008). Abwanderung von Jobs ha¨lt sich in Grenzen (p. 16). Frankfurter/Main. Hartmann, M. (2008). Vom Dorf in die weite Welt. In Frankfurter Allgemeine Zeitung (p. B8). Frankfurt/Main. Prognos, A.G. (2008). Gru¨nde fu¨r die Auswanderung von Fach- und Fu¨hrungskra¨ften aus Wirtschaft und Wissenschaft – Studie im Auftrag des Bundesministeriums fu¨r Wirtschaft und Technologie. Basel. Stiglitz, J. (2006). Die Chancen der Globalisierung, Siedler Verlag. The International Bank for Reconstruction and Development/The World Bank (2007). Global economic prospects. Washington, DC.

Globalization for Growth in the Aviation Maintenance Repair and Overhaul Industry August Wilhelm Henningsen

August Wilhelm Henningsen, born on November 16, 1950, is Chairman of the Executive Board of Lufthansa Technik AG (LHT). Prior to assuming this position on January 1, 2001, Mr Henningsen was in the Board responsible for the LHT product and services activities. He had become a member of LHT’s Executive Board on April 1st, 2000. Mr. Henningsen started as a systems engineer with Deutsche Lufthansa in 1979. Before he took over the LHT aircraft cabins and systems department in Hamburg in 1989, he had already worked in different management functions. In 1991 he became head of the Boeing 737 overhaul line at the Lufthansa Berlin base. From 1993 to 1997 Mr. Henningsen lead the LHT aircraft components services division in Hamburg before he became General Manager of AMECO in Beijing, a joint venture between Deutsche Lufthansa and Air China. Mr. Henningsen studied mechanical engineering with focus on aeronautics at Brunswick Technical University.

Introduction The globalization of aviation is one of the most impressive developments in the economic environment that we are living in. Global mobility of people and goods with almost no restrictions as to time or distance enables many companies to become global players in their industries. Most of these industries achieve growth through globalization. This growth drives the rapid development of the aviation industry, as more people fly and more goods are transported. This study considers how Lufthansa Technik has developed in the light of globalization and which mechanisms have had an impact on the company’s strategy within the Maintenance Repair and Overhaul (MRO) industry, which includes all the services relating to the technical operation of the aircraft as a system. To identify the relevant effects and developments, we have to consider a rather long period of time, as the key drivers for developments in aviation, are the long technological development cycles in aircraft design and global economic trends. This is the reason that we start the R. Ijioui et al. (eds.), Globalization 2.0, DOI 10.1007/978-3-642-01178-8_4, # Springer-Verlag Berlin Heidelberg 2010

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journey some years back in time. Lufthansa’s MRO activities in Hamburg started at the beginning of 1953 with the order of four Convair Metropolitan short- to medium-range aircraft and four Lockheed Super Constellation long-range aircraft. These airplanes were the nucleus of the new Lufthansa airline which commenced operation April 1st 1955. Lufthansa’s technical division began accumulating in-depth knowledge of aircraft maintenance from that point. The first engine monitoring diagnostic methods were even developed at that time. Professor Gerhard Ho¨ltje, the member of the board of Lufthansa responsible for the technical division, specified the requirements for the technical division of the new airline. The investment in maintenance hangars and shops based on Ho¨ltje’s vision laid the foundation for the further development of this division. By the end of 1955, the Lufthansa technical base in Hamburg had 651 employees, and only 5 years later that number had grown in parallel to the rapid growth of the airline to 2,460 engineers, technicians, and support staff. In 1960 Lufthansa entered the jet engine powered aircraft sector with the Boeing 707. This aircraft with intercontinental range revolutionized air travel by reducing the trans-atlantic flying time by 50%. The introduction in 1964 of the Boeing 727, which took over all the European and Middle Eastern destinations from older propeller-powered aircraft, had a similar impact. The advent of these new aircrafts presented major challenges to the maintenance organization. Due to undeveloped communication lines, manufacturer support was limited. Every airline had to develop highly qualified in-house experts on its own. They were the backbone for safe and reliable flying operations. Drawing on this early experience, Lufthansa made a significant contribution to the design and layout of the Boeing 737, a shortrange jet-powered aircraft. A logical consequence of this was that Lufthansa became the launch customer for the 737 in 1967. Without Lufthansa, the 737 would very likely have remained a design study. In this way, Lufthansa began contributing technical knowledge and in-depth engineering effort toward the development of aircraft and their maintainability right from its earliest days, and to this day the ability to make valuable contributions of this kind remains one of the assets of the present Lufthansa Technik AG. The ability to discuss and define technical details with manufacturers based on first-hand operational data and experience and the willingness to find solutions in a mutually trusting, joint approach remains an abiding theme throughout the development of Lufthansa Technik AG in a globalizing market. The importance of the aviation industry for the global economy is based on the development of aircraft like the Boeing 737. Flying became faster, safer, more affordable, and above all more common. As of October 2008, 5,857 aircrafts of the B737 had been produced. When a new aircraft like the B737 was introduced into the market in those days, the top priority of any technical division was to provide a reliable and safe aircraft to its operator. Cost aspects played a much smaller role than today. Reliability figures for the technical aircraft system were significantly lower than today and accidents were much more common. Lufthansa specified a lot of commonality with the 707 and 727 into the design of the 737, and this enabled flight operations and the technical division to gain synergies out of this standardization. Demand for air travel in the

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1960s increased steadily. At the beginning of the 1970s, new, high-capacity widebody aircraft like the Boeing 747, the McDonnell Douglas DC-10, and the Airbus A300 entered the aviation market. By today’s standards the amount of maintenance work per aircraft was very high, but the number of aircraft per airline was small. The increasing cost and the need to generate scale effects required a rethink on how to handle the challenges presented by these new widebody aircraft. This resulted in the foundation in 1969 of the ATLAS partnership between Lufthansa, Air France, Alitalia, Sabena, and Iberia, under which maintenance work and material availability were pooled and shared amongst the member fleets. JT9 and CF6-50 engines were maintained by Lufthansa, the 747 body was maintained by Air France and Iberia, the DC10 by Alitalia, and the A300 by Lufthansa. The ATLAS maintenance pool generated significant savings, but the partnership was terminated in 1994 as it no longer served the interests of all its members. One of the reasons for founding ATLAS had been the small size of the fleets operated by its members, but in the interim, some of the airlines had grown significantly, making it feasible to achieve technological scale effects within their own fleets. This motivated some of the airlines to take work in-house and develop an in-house maintenance capability themselves. The focus was still on reliability and safe operation. One of the airlines to achieve such scale effects was Lufthansa. The workforce in Lufthansa’s technical division was well trained and experienced. Therefore the technical abilities existed and Lufthansa’s technical division was in a position to realize the scale effects of its own growing fleet. The checks that have to be carried out on an aircraft are determined by so-called maintenance schedules. These schedules have to be approved by the aviation authority of the country in which a given aircraft is registered. Execution of the checks is audited by the authorities on a frequent basis. In addition to the checks there is a constant need to upgrade the aircraft systems or its individual components. Failures or malfunctions of system components which impair aircraft reliability are continuously analyzed and modifications are implemented accordingly. Engine maintenance is the subject of a second schedule with its own rules and times for maintenance inputs as described earlier. But the timing of an engine overhaul is independent of the airframe. As aircraft maintenance is determined by predefined maintenance intervals, the flow of work is not steady over the year. This resulted in periods when the technical staff of Lufthansa had less work, and there was spare labor and hangar capacity available. As other airlines asked Lufthansa to perform checks on their aircraft, Lufthansa started offering the available slots to these operators. It was at this point that Lufthansa entered the third-party market. The reason that other airlines approached Lufthansa was its existing technical know-how, expertise, and ability to develop repairs working with the manufacturers. The good reputation of Lufthansa’s fleet in terms of reliability and safety was and still is a key value for Lufthansa. The first real technical product for Lufthansa was developed in connection with the 707. Already in the late 1960s the 707 experienced structural problems on the upper wing surface. Boeing developed a Wing Life Extension (WLE) program together with a repair kit that strengthened the surface of the wing, but many airlines had

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problems with leaking fuel tanks after implementing the WLE program. Lufthansa engineers developed a repair procedure with hydraulic plungers that ensured that the wing was not exposed to strain during repair. Several airlines like PIA, Qantas, and Varig asked for Lufthansa’s help in overcoming the problems. Kurt Ihssen, manager at Lufthansa at that time, sent out a marketing letter to several airlines known to be experiencing the same difficulties with their aircraft. It was at this point that Lufthansa actively started to provide MRO services and products to other airlines. The turnover and man-hours spent on this kind of business were still very minor, but the experience gained as a result was very important. It enabled the young organization to work for many different customers at the same time rather than exclusively for one customer. In the highly regulated aviation industry, the requirements regarding documentation and adherence to certified procedures are very demanding. To reconcile these with the needs of individual customers is an additional challenge. The aviation authority audits ensure that only a company with complete and full knowledge and understanding of the technology of aircraft, in all the areas in which it works, has the possibility of being certified by the authorities for third-party business as well. These first positive experiences of Lufthansa at successfully marketing spare capacity combined with the customer satisfaction achieved, laid the foundation for the third-party business of the future.

The New Lufthansa Group Structure and Product Segmentation at Lufthansa Technik The experience gained over many years in the MRO business and its increasing positive economic impact on Lufthansa applied to other business areas as well – cargo, IT services and catering – not just the technical division. This was uppermost in the mind of several managers looking for a new company structure for Lufthansa after several economically difficult years in the early 1990s. The Lufthansa restructuring team of Ju¨rgen Weber, Wolfgang Mayrhuber, and others developed the idea of forming the Lufthansa Aviation Group as it exists to this day. The Aviation Group consists of the airline Lufthansa Passage, the cargo airline Lufthansa Cargo, the IT specialist Lufthansa Systems, the catering specialist LSG, and Lufthansa Technik. Following the foundation of the Aviation Group, the individual divisions became separate legal entities. As one company out of this group, Lufthansa Technik AG (LHT) now became a fully owned Lufthansa subsidiary, but business-wise it was an independent, separate company. The vision was to develop LHT as the technical service provider for the Lufthansa Group, generate growth in the market, and become a cost-attractive player in the MRO sector which would generate value and profit for the whole Group. This included the full package of technical services covering every aspect of the aircraft across every commercial aircraft type. LHT took over all the material and assets like engines, landing gears,

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and components that are not installed directly on the aircraft. It acquired all the technical staff, workshops, and tools and as such was fully operational on its own. A strategic partnership and transparent contract ensured a trusting and open relationship between Lufthansa the airline and Lufthansa Technik. When LHT started out on 1 January 1995, it already provided services for 230 customers and managed three operative companies: Shannon Aerospace in Ireland, LHT Aero Alzey in Germany, and AMECO Beijing, the JV in the technical sector with Air China. To understand the ensuing globalization steps and underlying rationale, it is important to examine the different segments of the MRO industry. The technical work packages relating to an aircraft throughout the life cycle are generally broken down into four segments: – – – –

Line maintenance Base and heavy maintenance Engine overhaul Component overhaul

These together cover all the technical systems of an aircraft and all the work packages in the maintenance schedule agreed between the airline and the authorities. This means full-service coverage. LHT provides this for all commercial aircraft types, in other words that LHT has the full capabilities required to handle Boeing, Airbus, Embraer, and other manufacturers’ aircrafts. As most airlines operate different aircraft types in their fleet, this ensures that if they are supported by LHT they have fewer interfaces to deal with and fleet maintenance is less complex. These four segments were transferred 1:1 into the newly created LHT company structure. For LHT the set-up in these four product segments generates cost transparency for the individual segment and allows a management structure that is tailored to the business in question. To facilitate understanding, it is appropriate to briefly describe the individual segments: – Line Maintenance: This covers the daily and routine checks performed at relatively short intervals, ranging from preflight, daily to fixed flying hour intervals (tire pressure, oil check, deicing, etc.). Almost anyone who has entered an aircraft has seen line maintenance mechanics at work because they also perform the technical hand-over to the crew directly before the flight. This segment is mainly driven by man-hours as 70–90% of the turnover is manhour related and the work is performed directly at the airports or hubs from where a given airline operates. – Base and Heavy Maintenance: Base checks are required at intervals of 18– 24 months. The layover time is about 3–6 days. The man-hours vary according to aircraft size and age and range from 2,000 to 5,000 man-hours per event. The heavy check interval is between 4 and 6 years depending on aircraft type and age. The layover time is between 30 and 60 days, depending on the scope of the work found to be necessary, so that the labor required varies between 20,000 man-hours on a narrowbody aircraft and 60,000 man-hours on a widebody aircraft. The main task during base and heavy checks is to inspect the primary

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structure and its main components. To do this it is necessary to dismantle the whole aircraft down to the basic structure, which is the reason for the high number of man-hours. Like line maintenance, this segment too is mainly driven by man-hours, as 70–90% of the turnover is man-hour related. The location for performing this kind of check is more flexible. For more man-hour intensive work packages the leverage of man-hour cost increases. In most cases an increase of the aircraft downtime is a second effect. As aircraft do not generate revenue during downtimes the duration of the check is a very important cost driver for the airline. – Engine Overhaul: Engines are the biggest single component of an aircraft and can easily cost $10 million per engine. The overhaul schedule is driven by fixed hard times of single engine components which have life limits. These are defined by the OEM and/or authorities. The second reason for an overhaul is based on the engine condition. The schedule is not aligned with the maintenance schedule for line and base maintenance of the aircraft. Every single engine is monitored by a highly sophisticated engine condition monitoring program. When the performance (specifically the exhaust gas temperature ratio, the EGT margin) of an individual engine falls below a given limit, the engine will be removed from the aircraft for overhaul. Engine overhauls take place every 15,000–30,000 flying hours depending on the engine type, type of operation, and the performance condition of the engine in question. This segment is mainly driven by material as 50–70% of the turnover is material related. The rest is man-hour related. – Component Overhaul: “Components” covers everything else, i.e., all the pumps, brakes, computers, valves, cylinders, etc. that are installed in the aircraft. These parts are exchanged on the basis of hard time, during line and base or heavy maintenance checks, or of condition if they fail during operation. The spectrum ranges from the navigation computer in the cockpit to wheels and brakes, to very small components like switches or sensors. This segment is mainly driven by material as 50–70% of the turnover is material related. This is an average number as it varies widely from one component to the next (10–90%). High investment in test equipment for the large number of different components is also relevant for this segment. The company structure described enabled LHT to provide a full-service aircraft package which also generated cost transparency for the life cycle of the whole aircraft. Now that it had this ability, a change in perspective took place: before the company became independent, the main focus was on the technical side of aircraft maintenance. The aim was to maximize reliability and safety. With the launch of the financially independent company and its product segment structure, financial considerations moved much more strongly into focus, but without compromising further improvements in reliability and safety. To understand how LHT was able to develop into such a strong company despite having a large part of the operation in Europe, with its high labor costs, we need to examine the MRO industry more closely.

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Industry Comparison and Airline Cost Drivers When one considers the entire value chain of passenger transport by aircraft, the number of players and supplier groups exposed to high operational risks is concentrated mainly among the airlines. Looking into the average profit percentages of each supplier group in aviation history it can be seen that in monopolistic markets (aircraft and engine manufacturer, airports, leasing companies, reservation systems) the margins are above 15–20%. Airlines and MRO are only barely positive as the market is much more fragmented for them. It can be seen that consolidation and scale effects have already been achieved in a wide area of the industry, with only two major aircraft manufacturers and two major leasing companies. In the aircraft OEM sector the cost of entering the market is high due to the high development cost of new aircraft. However, in the past 2–3 years, the number of OEMs appears to be increasing again slightly, as aircraft manufacturers which started in the regional aircraft sector are starting to build bigger aircraft with the aim of entering the market for commercial airplanes from below. For long-range aircraft, no change in the dominant role of the two suppliers is in sight. The airline industry in principle has a structure comparable to other industries, as shown in Fig. 1. The fragmentation in the airline sector is similar, for example, to that found in the pharmaceutical or hotel industry. The developments in monopolistic market structures are known to all of us in daily life. It is extremely unlikely that we will see consolidation of the airline market on the same scale as that which has occurred in many other industries (i.e., reduction to only 10–15 airlines worldwide). Global alliances like oneworld, Star Alliance, and a few others consolidate the market by offering seamless network travel mainly on long-range intercontinental flights. Industry consolidation by branches Marketshares in % (by Turnover) Coca Cola 78 AT&T 65 GM 54

Top 5 producer-

Largest producer

DELL 50 Wallmart 42 Merck 27

50

16

15

AMR (American) 25 24

Marriott 15

Alcoa 13

17

12 8 9 6 4 3 Soft Telecom Car* PC Retail Pharma- Airlines Airlines Hotels*** Steel Drinks Hardware Hardware food cy** Intertotal national *) Sold Units **) Medical ***) Hotelrooms

Fig. 1 Industry consolidation by branches Source: LHT

Source: Donaldson, Lufkin& jenrette, LH 2002

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What remains in addition to these alliances is a large number of airlines that operate in overlapping market catchments in the short- and medium-range market. Given this state of affairs, the airlines will continue to be under pressure from the market. Customers still have a choice as to which airline or alliance they use to fly from A to B. Aviation is known as a cyclical industry that follows global economic developments like the crisis which followed 9/11 or the financial crisis of 2008/09. But the impact of even regional economic dips such as the Asian crisis or SARS is also felt immediately. At such times, people travel less and/or fewer goods are transported. Cyclical dips can last from several months to several years and therefore require airlines to react quickly. Beyond that, the airline industry is a low margin industry. Both factors – cyclicality and low margins – require a very high awareness and transparency of costs and the ability to influence costs as a function of the actual economic situation. Given that this is the case, it is beneficial to convert as many fixed costs as possible into variable costs. It is also important to have a big lever on purchasing power so as to keep upward cost pressure under control. Due to the very high investment in aircraft, the saving potentials are large. Purchasing power consists of two major aspects: volume and a choice of supplier. In aviation, a third cost-sensitive aspect has to be considered. As the product life cycle of the aircraft is 15–25 years and the value of an aircraft is extremely high, life-long support for the technical product has a significant cost impact. Ignoring the costs associated with the flightcrew, airport charges, finance, and fuel, the maintenance costs are in the region of 7–12% of all the costs. This means that airlines have an interest in a competitive environment for the lifetime support of the technical aircraft system. The aircraft OEMs are increasingly seeking to play a major role in lifetime support. This would eliminate or at least limit the number of independent MRO organizations in the market, making it more difficult for airlines to secure low, competitive, and transparent MRO costs. From the perspective of an MRO provider it is important to challenge costs to stay attractive and competitive for its customer airlines. In today’s market, competition in the individual segments of line maintenance, base and heavy maintenance, engines, and components is very high as the number of service providers is very large, and there is more than enough MRO capacity in the market. Airlines have no problems in getting prospective suppliers to tender for all kinds of services: they will always find 5– 10 companies interested in the business. This means there is a buyer’s market for the airlines which ensures competition and lowers the unit cost for the airline. For an airline it is extremely valuable to have an MRO provider with full-service coverage which is in a position to identify cost drivers on the life cycle timeline, especially if this MRO provider is also able to modify or repair these cost-driving elements cost effectively. Such a provider can challenge the technical advice of the manufacturer and advise how parts are repaired and where there is scope for improving reliability. This is extremely valuable to the airlines worldwide. The cost transparency over the life cycle of an aircraft that MROs provide is an important asset. It can also help airlines with purchasing decisions for new aircraft, as they can estimate the maintenance life cycle costs from the daily operational experience the MROs deliver.

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For airlines which lack access to these MRO data this information is often not transparent and a purchasing team could easily underestimate the leverage of certain decisions made. The cost pressure of the airlines is fully transferred to the MRO companies. This means that the airline as a customer benefits directly from a full-service capable, high-quality, and cost-efficient MRO provider. We will now examine how this influenced the development of global work sharing in the MRO industry and in particular how it drove developments at Lufthansa Technik.

Main Drivers for Globalization in MRO for LHT The overview given earlier shows that there must be different mechanisms for globalization of MRO on a per segment basis. They can be separated in the four segments of MRO and can be categorized under three headlines: – Cost advantages – Local presence as a means of achieving proximity to the customer – Enlargement of market catchments We now consider how Lufthansa Technik developed its global presence and how these three main drivers impacted the business development of the four Lufthansa Technik product segments. The individual product segments use different criteria to make decisions about regional/global work allocation, i.e., potentials in cost reduction/process optimization and qualified work force. Hence each product division at LHT designs its own organization to suit its own needs regarding business development, efficiency, and profitability.

Line Maintenance As we have already seen, the main factor in this segment is man-hour related because 70–90% of this business is generated by labor. The material consumption is on demand and the smart use of material does not directly influence the cost of this segment. The aim is to keep the man-hours required for the work packages at or below the levels defined in the maintenance schedule. This is a matter of experience (the experienced mechanic finds the problem quickly) and efficiency. An efficient troubleshooting process has the effect of reducing the man-hours spent. The line maintenance product is delivered directly on the aircraft between flights within a time frame of 20 m to several hours combined with an overnight stop. This requires the workforce to be at the airport where the aircraft is positioned. This location determines the local labor costs. What are the options available for improving efficiency?

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– To maximize the value of the line maintenance team, the airlines concentrate their overnight stops at a small number of stations. The maintenance schedule reflects this as well. These measures guarantee a smooth and efficient load allocation for the workforce. – Spare capacity can be sold to other airlines. LHT optimized its maintenance system and implemented dedicated shift systems so as to have mechanics on-site when they are needed most (mainly during the night). LHT has many other airlines as line maintenance customers in Frankfurt and Munich besides Lufthansa. In January 2009 LHT founded a separate line maintenance company, Lufthansa Technik Maintenance International (LTMI) that focuses on all its non-Lufthansa customers. The Lufthansa operation is handled by the LHT parent company. (Together with the line maintenance organizations of Lufthansa Technik Philippines and Ameco Beijing, LHT has a strong workforce in the three core markets of Europe, Asia, and China). The foundation of LTMI was another important step toward the globalization of LHT’s product portfolio. Many airlines, especially new start-ups, need line maintenance support to accelerate the build-up of their operation. LHT offers this service with the support of a small number of maintenance experts. These experts establish the maintenance stations, select a qualified local workforce, and operate as chief mechanics at the same time. With this know-how, the newly established maintenance organization can operate at a very high quality level right from the start. This product can be provided worldwide with very few experts in the maintenance and quality assurance organization. The main workforce in the home market of the customer can now be locally grown to take over the maintenance operation step by step. At the same time work like engineering, planning, etc. can be handled by a small team at the LHT maintenance management center in Germany and does not need to be set up individually at every airline. Communication, planning data, and engineering orders are handled

Fig. 2 Lufthansa Technik’s global line maintenance presence Source: LHT

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electronically. It is appropriate in this context to mention the LHT manage/m system as an important quality driver. The internet-based application manage/m is the front end of a huge database that contains the maintenance schedule and a list of all the parts installed on the aircraft of all LHT customers. With manage/m, the mechanic and the engineer can see all the information they need and they have the actual built condition of the aircraft on hand as well as the work planning data. By this means, engineering and maintenance planning become geographically independent without any loss of quality, safety, or speed. Airlines are increasingly asking MRO specialists to support them at their main base (hub) and perform the maintenance on-site. This keeps the airline lean in its own processes and workforce. Today the LHT line maintenance organization has a worldwide presence with a significant market share (see Fig. 2).

Base and Heavy Maintenance The main driver in this segment is again man-hours. The material consumption is mainly predictable. The aim is to accomplish the work packages defined in the maintenance schedule in as few man-hours as possible but without jeopardizing quality or safety. This segment has two separate strategic paths to follow. As described earlier, base maintenance events only last 2–3 days. For this time period the aircraft is not available to the airline operation. To minimize the total time that the aircraft is out of service, it is not feasible to have a long ferry flight, that is, the flight from the hub to the location where the work is performed. But if there is a location with lower man-hour rates within 2–3 flying hours, a ferry flight might actually lead to cost savings. This assumes that the efficiency of the workforce in the hub and the location where the base maintenance is performed are identical. The strategic evaluation of possible locations therefore considers soft skills as well. The location needs to have an education system that supports English language skills (THE language in aviation) and delivers sufficient technically highly skilled manpower locally. During an evaluation process all these factors have to be considered as well as the cost of a hangar (new, used, cost of rental, etc.). Given the complexity involved, clearly these facilities are only worth building if they will be operated for many years and not just for 2–5 years. Such reasoning lay behind the rationalization within the base maintenance segment. If we consider Frankfurt the main hub of Lufthansa, then we are looking for a lower-cost base in the greater European area. Accordingly, LHT set up its first base in Shannon, Ireland, and several other locations followed later: one in Budapest and one on Malta. These companies perform base maintenance checks and have several hundred employees (100– 500). Another important factor should be mentioned as well. As smaller aircraft like the A320 or Boeing 737 have an operational range of only a few thousand miles, the heavy maintenance is also performed within these operational limits. To understand this better, we now examine the second strategic path. The second strategic path is for heavy maintenance. As the downtimes are significantly longer

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the distance between the location and the hub plays a less significant role. Again the same soft-skill factors as in base maintenance need to be considered, but the leverage of man-hour cost becomes higher. Therefore Lufthansa founded the first Asian joint venture between Air China and LHT in Beijing – Ameco Beijing – back in the 1980s. Its second JV was founded in 2000 with Philippine Airlines in Manila. As the specific skills required by Boeing and Airbus are different, Ameco Beijing concentrates on Boeing and Manila on Airbus. As the work packages specified for heavy maintenance are much bigger than in base maintenance, the workforce of these companies differs: Ameco Beijing has more than 2,000 staff in base and heavy maintenance and Manila over 1,500. This shows that the availability of qualified staff is even more important in locations where heavy maintenance is performed. The hangars are even more spacious due to the long overhaul time, and the number of additional workshops also increases with the size of the work package. These locations are especially used for long-range aircraft like the Boeing 747, Airbus A340 or A330 and customers from around the world fly their aircraft to these locations. Customers from the USA, England, Europe, and the Middle East take advantage of the leverage of lower man-hour costs. As the mechanics have the skills required to also perform base maintenance, the heavy maintenance locations also provide base maintenance in the regions in which they are located. This allows the workload to be smoothed over the entire year and enlarges the customer catchments. Figure 3 shows the regional demand for base and heavy maintenance, the worldwide supply, and the directions in which work is imported or exported. I mentioned earlier that it is important to have efficient processes and an efficient workforce. The cost of the total sum of man-hours spent is simple: Cost of work = man-hours spent  cost/man-hour: If we compare two locations, the cost of work is the critical parameter to be compared, not just the cost/man-hour. Efficiency can be influenced and is strongly related to the quality system. As in other industries, the quality expectation is

Fig. 3 Supply and demand in base and heavy maintenance Source: LHT

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identical worldwide. Everybody expects a Coca Cola to taste the same regardless of where you buy it. For many global players this is vital to success. Lufthansa Technik achieves this through its integrated quality system IQ-Move. This is a web-based platform that includes all the processes performed in the company, from hiring staff to the qualifications that the workers need to perform work package A or B. The work package itself is provided by the manage/m system,1 described earlier. Identical processes allow support to be delivered in difficult cases where a problem arises that the local staff have never encountered before. Somebody within the Group might have the experience and as he can trust in the quality system the work was performed under, he can give immediate advice. Together with the manage/m System the basis for global line, base and heavy maintenance is set. It follows from this analysis that developments in IT and the establishment of the Internet played an important part in LHT becoming a global player. Without these new standards, today’s global performance in MRO as regards quality and reaction time would be impossible. As we have seen, the three drivers for the globalization of LHT also apply to base and heavy maintenance. The companies in all the regions have developed strongly and have increased their workforces by at least 50% due to an increased customer base and a common quality system worldwide. I am sure this will develop further and we will see similar developments in other parts of the world within the LHT network as well. Having taken a close look at the two segments that have man-hour rates as the most important driver, we now turn to the remaining two, engines and components.

Engine Overhaul In engine overhaul the impact of material is strong and as a result the rationalization for globalization is different. It is important to mention that the market structure within the engine manufacturers is similar to the market of the aircraft or better airframe manufacturers. There is a very limited number of manufacturers (OEMs) in the market. Due to the high amount of material involved, these OEMs became involved in the MRO part of their product early on, as the sole material supplier. There simply were not enough companies in the world capable of carrying the investment and which also possessed the technical know-how required to perform full overhauls on engines. This helped the OEMs to break into this market. From its earliest days Lufthansa Technik benefited from technical analysis and know-how built up in engine overhaul and, as such, it has been the largest non-OEM or independent shop in the world for many years. Engines are large and heavy and therefore transportation is a task which has to be considered. This is important for the location of an engine shop as the runways must 1

http://www.manage-m.com/managem/page/websuite/portal/_nfpb/true/_pageLabel/managem_ page_home/internalCall/true (13.03.2009)

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be suitable for the transporting aircraft to land there. An engine shop needs space, a strict process-oriented layout, and a test cell. But as the engine needs to be transported anyhow, the site selection depends on the availability of enough cheap space and reasonable man-hour costs. These shops are not therefore located directly at the very large airports but at medium-sized airports where labor costs are lower.

Material The OEMs enjoy a monopolistic position in relation to their individual engine types and are able to dictate the costs of the material. Material price increases of 3–6% a year are common in aviation, and in order to keep the cost affordable Lufthansa Technik started to challenge this situation. In-depth expertise coupled with the operational experience gained from the line maintenance organization have enabled the engine segment to reverse engineer and fabricate parts which have been identified as cost drivers. These parts have to be certified by the aviation authorities of course, and are at least as good if not often even better than the OEM parts. In 1997 Lufthansa Technik therefore bought a 20% stake in HEICO Aerospace in the USA, a manufacturer of high-value engine components. Over the last decade the OEM prices for “originals,” especially of parts that have been developed under PMA (Parts Manufacturer Authorization) approval, have fallen by 30–50%. This illustrates the leverage that nonmonopolistic structures provide for the airlines. The globalization of engine overhaul focuses on the technical aspects in order to challenge the material cost impact. This can be done on a centralized basis and is still performed outside Germany. But the leverage of man-hour costs is still significant, accounting for around 30%, and shipping and transport costs also have to be considered. It was such considerations that underlay the decision to have a shop in Ireland and smaller shops in Manila and Australia. This keeps transportation times and costs low and means that man-hour intensive elements of an engine overhaul can be transferred closer to the “origin” of the aircraft engine. As the overhaul of some engine parts is real mass production, LHT formed a JV with MTU, a German competitor in this segment. The JV is located in Malaysia and overhauls airfoils. Every engine has several hundred of them. Proximity to the customer is important but very seldom the exclusive decision criterion for globalization in the engine overhaul segment. But the market catchments that can be realized with regional shops are still significant.

Component Overhaul In the component support segment, complexity is very high due to the huge spectrum of different part numbers and different technologies.

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The workshop structure is based on technologies and not on aircraft types. As the Lufthansa Technik Component Services product covers not only the repair of components but also asset management for the valuable components, the strategic development and globalization efforts within this segment follow different principles. We have seen this already for base and heavy maintenance. The repair side requires heavy investment in test equipment, workshops and of course in engineers and highly qualified and experienced mechanics. Within a given workshop, efficiency can be increased significantly if the flow of components of a specific part number increases. The same is true for parts within the same technology group. LHT has around 50 different workshops within the component segment which cover all the technologies and aircraft types. The scale effects that are possible in this segment are considerable, as illustrated by a few figures. In 2008, the number of components overhauled was 650% higher than in the year 1995, yet the number of mechanics had only increased by 60%. This growth took place within the existing workshops: the number of workshops was not increased, only the number of mechanics within the individual workshop. The consequence for global development is that component workshops have a more centralized structure. With the strong spread of labor intensity for the individual technologies, it pays to transfer very labor-intensive components to an environment with attractive man-hour costs, but it is seldom economical to run an independent company just for this limited number of parts. Synergies and shop efficiency more than compensate for global transportation costs in this segment. The second element of the component support segment, asset management, is a separate product in its own right. Airlines do not have the time to wait for a dedicated part to be repaired. The line maintenance mechanic therefore exchanges the failed component between flights in a couple of minutes, thus ensuring that the aircraft can make the next flight on time. This means he needs the tested and certified exchange part on-site immediately. Asset management is all about making sure that the right part is in the right place at the right time. LHT holds parts to the value of over a billion euros to provide this service to its customers. Typical numbers for the different part numbers involved in asset management are: 737 CL: 787 PN

737 NG: 889 PN

A320: 1.016 PN

The three driving parameters in developing a successful component asset management business are the purchase price of new components, scale effects based on component utilization, and the time the components are available in airworthy condition (reliability).

Purchase Prices Different vendors and a nonmonopolistic market have a positive impact on prices. The availability of used parts (surplus) also helps to lower costs.

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Scale Effects The leverage of statistics for the required investment is tremendous. The per aircraft investment for two or three aircraft is more than three times the amount per aircraft of a 25-aircraft fleet. This effect continues for larger fleets with a less dramatic impact. Despite all the developments in technology, markets, and business attitude, the average number of aircraft per airline is almost stable: – 1955: 119 a/c operated by 8 operator (mean = 15 a/c) – 1990: 8,649 a/c operated by 504 operator (mean = 17 a/c) – 2008: 15,492 a/c operated by 861 operator (mean = 18 a/c) Basis: civil, noncargo aircraft with more than 50 seats This means that for almost all operators it pays to outsource this material asset investment, as a vendor like LHT can realize scale effects across the markets which are impossible for a single airline. We call this product “Pooling.” Unlike the situation in the workshop, in this case aircraft type plays the dominant role, as the part numbers can only be installed on one specific aircraft type.

Availability of Components in Airworthy Condition The components are available in the material pool and are used within the customer fleets. When a part is exchanged, it needs to be transported to the repair workshop, has to be repaired, held in the warehouse as an available component, and sent to the next airline on demand. During the entire time, this component is not available for installation on an aircraft, which means it increases the total volume of investment in material that is required to operate an aircraft. Here we find a link between the workshop and asset management. The amount of investment in material also depends on how fast the workshops can repair the components and especially on how reliable the components produced by the workshop are in operation. Only in combination can the team of asset management and workshop guarantee a competitive product for the airlines. It will be apparent from the foregoing that the attractions of globalization are less obvious when it comes to pooling than they are for the workshops. Local pools in markets with a strong customer base allow LHT to minimize transportation times (including customs). What it needs is a homogeneous fleet of a single aircraft type. In 1995 LHT provided this service for around 450 aircraft. By the end of 2008 this number had grown to 1,800. It was only in the last couple of years that the regional approach to pooling became beneficial to LHT and its customers. In 1995 the structure of the components segment was very simple: all the shops and services were provided out of Hamburg. Figure 4 illustrates how this had changed by 2008. That local presence is perceived as an advantage by some customers is obvious and strengthens the relationship. The increased market catchments and close customer relations play a stronger role in the components segment than in most of the other segments. The motivation for globalization therefore is a strong combination of economics and customer relationship.

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Fig. 4 Local presence of Lufthansa Technik component shops and services Source: LHT

The Full-Service Provider Approach We have seen the different mechanisms for globalization for an MRO provider. The principles for each individual segment were illustrated and apply to all MRO suppliers in the same way. In this section I would like to illustrate how the “FullService Provider approach” of LHT combines the different products and allowed Lufthansa Technik to gain many positive advantages from globalization. Every day customers come to us wanting solutions for their technical, logistics, or financial problems. They operate different aircraft types on regional and/or global networks, but apart from a very few they do not have the individual size and regional structure to achieve the same scale effects that a full-service provider like LHT can offer. Even the present trend toward consolidation in the airline segment will not make this possible. This means that consolidation in the airline industry will have an impact on MROs, but it will not affect the basic set-up and principles of the MRO providers. Airlines are stepping up their efforts to concentrate on their core business and outsource MRO work to a larger extent. As the MRO market is a very competitive market with hundreds of suppliers for individual products, LHT’s strategy is based on the experience that many airlines want to keep down the number of vendors that they deal with and have only one competent partner. Such an MRO provider needs a wide range of capabilities, global reach, technical expertise, and financial strength. Modern aircraft often do not offer the choice of two different engine types, different brake systems, or different avionics equipment in the cockpit, as was commonly the case 20 years ago. This is both an opportunity and a threat. It means that once the selection of an aircraft has been made, the market structure for servicing the aircraft has a significant impact on the potential costs

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that arise. To decrease this dependency and avoid the full burden of the capital cost, many airlines lease 100% of their fleet or a significant portion of it. We have seen the same trend in aircraft components. Unlike aircraft financing, which is mainly done by banks, LHT finances the component investment itself. Since 2000 the MRO providers have succeeded in lowering the price of typical component services for a Boeing 737 NG from €97 to less than €75 per aircraft flying hour in 2008 through higher efficiency. At the same time the manufacturers have increased their material prices on average by 4.7% per year. As this example demonstrates, the importance of competition and globalization for MRO services is very beneficial for the airlines. As a result of these efforts, Lufthansa Technik has succeeded in increasing its customer base from 230 airlines in 1995 to over 630 airlines in 2008.

Globalization and Long-Term Commitment The trend described earlier is the logical consequence of what the airline industry is asking for. The complete structure of service providers shows a wide spectrum of vendors that all fall into the one or other category of local, regional, or global supplier, with specialized products ranging from single part numbers to single aircraft types, technologies or engine types, to full-service providers. Lufthansa Technik’s group of companies is formed out of fully owned subsidiaries, JV’s and strategic partnerships with operators. These airlines like Air China, Philippine Airlines, Air Malta, and others are partners in the daily operation and therefore bring a lot of value to the LHT companies. The constant exchange of operational requirements, developments, and the demand to reduce costs and turnaround times without compromising quality or safety ensure a prosperous and long-lasting relationship due to the fact that, despite all discussions and negotiations, the basic interests are identical. The continuous development of capabilities and production methods and the increase in the customer base have ensured that these companies have all been successful in the market. This sustainability is essential for the MRO business. The overall investment in hangars, workshops, and especially in the education and training of engineers and mechanics is enormous. LHT has successfully developed since 1995. We have seen this development in the main world regions of Asia, Europe, and the Americas. The “Full-service provider” approach has also allowed LHT to grow in its home country, Germany, in turnover, workforce and customer base: Turnover: Customers: Workforce:

1995: EUR 1.3 billion 1995: 230 1995: 12,000

2008: EUR 3.2 billion 2008: 630 2008: 26,000

Companies that have successfully remained in the market have a sound technological background and a large anchor fleet. They view investment in time frames of 10 and more years related to the life of an aircraft in service. There are several

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Fig. 5 Supplier groups in the MRO industry Source: Airbus/LHT AG

global players in different areas of the aviation industry but only very few have kept pace with the growth Lufthansa Technik has achieved in the MRO sector. Companies like SRT in Switzerland, Air France Industries, or Singapore Technologies have successfully extended their business with a different focus and products as well, but following ideas similar to those described for LHT and based on the same market principles Fig. 5. To be successful in the MRO sector it is necessary to be able to access the global market. This is proven by the business models of LHT and others. OEMs are increasingly interested in controlling the nonmonopolistic MRO industry. It is up to the airline managers and the MRO companies to ensure that competition in this market is preserved and that airlines have control over the lifetime of their fleet. I have explained the development of an MRO company in a global industry and the major driving factors behind this. In my view the two fundamental values that have allowed LHT to become a global player are the technical expertise of its employees and the ability to adapt to customer requirements with personal attitude, products, and services.

References LHT (2008). http://www.lufthansa –technik.com Lufthansa Technik Connection. (2009). http://www.manage-m.com/managem/page/websuite/ portal/_nfpb/true/_page Label/managem_page_home/internalCall/true

The New Face of Globalization: Seven Key Trends and the Critical Need to Innovate Dr. Michael Tra¨m

Dr. Michael Tra¨m is the Global Chief Executive Officer (CEO) of Arthur D. Little. A lawyer by training, Michael has a long and prestigious background in consulting, having previously held senior positions in A.T. Kearney and Celerant Consulting. Michael has written a number of books including The Value Growers, After the Merger, Spearheading Growth and The 100 day Myth. Michael started his career in 1986 as a Junior Barrister before joining A.T. Kearney in 1989. By 1997 Michael had been promoted to Vice President and became a member of the Global Strategy team. His professional expertise includes the development of growth strategies, post merger integrations, and restructuring assignments. In 2000 he had been promoted to Managing Director for Central Europe and became a member of the firm’s Global Senior Leadership Team. By 2003 Michael had been appointed as the Managing Director Profit Center Greater Europe (EMEA) and a member of A.T. Kearney’s Global Operating Committee holding multiple managerial and client development responsibilities. During those years Michael had also been a supervisory board member of EDS Germany. In 2004 Michael left the firm to become Executive Vice President for Celerant Management Consulting before leaving to join Arthur D. Little as Global CEO. Michael is a committed member of several organizations supporting humanitarian aid, community life, international understanding and education. Michael is married with two children and lives close to Du¨sseldorf.

Introduction In previous recessions, there were always regional and niche economies less adversely affected by the downturn. Now, for the first time in history, the world is facing a truly global and nearly concurrent economic downturn. In this study I would like to discuss what we at Arthur D. Little see as this crisis’ seven key trends, and how businesses can best respond to them in terms of innovation, so that they can emerge from this enormously challenging period R. Ijioui et al. (eds.), Globalization 2.0, DOI 10.1007/978-3-642-01178-8_5, # Springer-Verlag Berlin Heidelberg 2010

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stronger than their competitors. In the first phase of globalization, the key industrial players exported production to countries where labor was much cheaper. Unfortunately, many of these companies also reduced their investment in research and development, and quality recruitment. As a result many of these internationalization strategies failed. Particularly erroneous was the unquestioned belief that one had to “go global” at any cost. In China, for example, many companies learned the hard way that copyright infringements were a problem and that quality was difficult to achieve with a constantly shifting workforce. In our consultancy work at Arthur D. Little, we have helped numerous companies navigate their way through these dramatic changes. We believe the following seven trends will be key to a company’s survival and success in the coming years.

Shifting Demographic: Boom and Bust If we assume society to be the foundation of all business activity, then the demographic changes that we now see will likely have a critical impact on future economic development. We at Arthur D. Little see two basic trends shaping the future.

Decline in the West and Former Eastern Block In terms of population, the developed world has been in a continuous state of stagnation or decline for many years. Even the United States, which leads developed nations in birth rates, shows anemic figures when compared to the developing world. Consequently, these nations’ populations are quickly aging. If it were not for their ability to lure immigrants from the former Eastern Bloc nations, many West European countries would show an even more severe population drop. The decline in the former Eastern Bloc is even more dramatic: The Ukraine alone sheds roughly 400,000 inhabitants a year.

The Developing World’s Baby Boom As the developed nations contend with a shrinking and fast-aging population base, the world’s population is growing exponentially, with the biggest increases expected in Asia and Central Africa. But even this development is projected to come to a halt. By 2050, annual global population growth is projected to drop to 0.25%, as compared to its current 1.25% growth rate (International Monetary Fund 2006). When combined, these two factors make it quite clear that migration will continue to be one of the major forces shaping the world. The developed world must fill the gap in their workforces due to its aging populations, and there remains a steady supply of eager immigrants from other nations. In some developed countries, this has already led to a solid base of

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migrating workers. In Germany, there are 2.18 migrant workers per 1,000 inhabitants; in the U.S., that number is 3.31 per 1,000 (laenderservice.net, 2008).

The Way We Work: New Patterns of Mobility Travel and mobility used to be a privilege of the ruling class, but beginning roughly in the 1950s, greater numbers of people could share in their benefits. Similarly, the mid-1990s witnessed the democratization of communications, with the introduction of mobile phones and the Internet in every day lives. Mobile communications have created entirely new possibilities for labor performance and collaboration. Many jobs can now be performed from just about anywhere in the world, and global teams can now work on assignments 24/7. An online project might begin in Tokyo, be handed off to team members in Central Europe, and then the United States. Businesses can achieve much more in a far shorter time than ever before. Creative collaboration is also much easier, with mobile communications enabling globally diverse teams to effortlessly share research and development ideas. Mobility leads us to a workplace that is less about location and more about flexibility. The role of the corporate headquarters, once the icon of industrialization, is quickly changing, with companies now recognizing that they must grant more flexibility to regional units (Study by German “Trendbu¨ro” for RMS).

State of the Nations: The Role of Government The 1980s marked the beginning of an era of intense market deregulation and government privatization, as embodied by the economic reforms of Prime Minister Margaret Thatcher and President Ronald Reagan. The fall of the Iron Curtain in 1989 led to another landslide liberalization of the markets, with the AngloAmerican alliance once again on the forefront of this development. Given this backdrop, it was all the more surprising when the Credit Crunch swung the pendulum severely in the other direction, forcing governments to once again play a central economic and regulatory role, with many nations now considering the nationalization of financial and automotive firms. Keynesian economics are back in full force at a time when no one thought it possible, particularly in the UK and the US. Economists around the globe seemingly have little idea how to remedy the current crisis, thus providing ample room for politicians and governments to step up to the plate. And yet, there is one question no one can answer: When and how are governments going to pay for the massive injections of capital used for today’s financial bailouts? But the credit crunch is just one piece of the overall change in the global economic system. Also of interest is what direction the BRIC countries will take. And although they are often lumped together, these nations must also be viewed independently. China, for example, may be leading the way economically, but India

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and Brazil are the foursome’s only two democracies (judged by Western standards). Meanwhile, Russia’s sheer mass of resources puts the country back on the map of World powers, even though its production output by no means measures up to Chinese standards.

The New Middle Class The criteria for what constitutes middle class are rapidly evolving. Whereas in the developed markets, “middle class” means households with a median annual income of US $45,000, the middle class in emerging nations comprises households with an annual income of just US $5,000–$15,000 (Arthur D. Little 2008). By 2030 the economies of Brazil, Russia, India, and China will account for 50% of all global incremental GDP growth, whereas North America’s, Europe’s, and Japan’s combined share will only amount to 26% (Arthur D. Little 2008). Given the sheer size of their populations, their new middle classes will soon be comparable in size to those of some developed nations. And yet, these middle classes will still be small when measured against the vastness of their nations’ burgeoning populations. The offering of locally tailored products that address the customers’ buying criteria will be absolutely critical. Western companies should not commit the fatal mistake of assuming that these new consumers share the same wishes and desires as their counterparts in the West. Their needs must be catered to along the lines of their unique cultural values. For example, the definition of middle-segment products in emerging markets is different from that in developed markets, with the so-called value proposition interpreted as “value for money” as opposed to “good enough.” By fully localizing product design, sourcing, and production, companies will naturally simplify their offerings to meet local design and price expectations (Arthur D. Little 2008). Growth in the consumer markets of developed nations has been anemic since the 1980s. In these countries, companies need to develop more refined ways of luring tech-savvy consumers into buying their products, particularly when many of these consumers know how to shop for better prices on the Internet.

Climate Change and Sustainability Let there be no doubt: People around the globe are concerned about carbon emissions, as well as a host of other environmental whammies, such as overpopulation and water shortages. New car sales are dropping despite the recent drop in oil prices, because few expect oil to remain cheap. People are also simply more aware of the environmental impact of automobiles. Environmental protection has moved out the niche of “eco-freaks” and into the mainstream with the Hollywood jet set establishing popular trends that will alter

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this landscape for good. The market share of organic food in developed nations has continued to grow for many years. It has already been projected that there is not enough arable land in Western Europe to satisfy local demand, which leads us to this interesting conundrum: Is it more eco-friendly to buy organic food that needs to be transported thousands of kilometers to reach consumers, or is it be better for the environment to continue buying “locally produced” industrial food products? The big question now is how companies can turn sustainability into business opportunities. We believe that, when it comes to sustainability as a business opportunity, it is best to approach it in small steps, as opposed to seeking out a “big bang” solution. The production of emissions control systems to help reduce pollution in cities is an example of adding to a company’s bottom line while pursuing sustainable solutions.

The New Political Landscape Politically the BRIC countries will come out much stronger than the developed countries. The economic development of China and India has been spectacular, and both nations will continue to gain in global political influence. This is particularly significant given that much of the US debt is funded with Chinese money. Brazil on the other hand, is set to become a political leader in South America, and Russia is fast regaining its former status as a world power. The Western nations, which have become accustomed to wielding tremendous clout, will have to learn to share power. The US government has been overspending for 30 years – a reality which is entirely unsustainable. Meanwhile Europe treats its EU as a world power without acknowledging that the alliance is living on borrowed time, with issues regarding its internal power structure remaining largely unresolved.

The New Face of Innovation and Technology All these developments leave businesses with an uncertain outlook on where to go from here. Companies the world over must open their eyes to these unprecedented changes and react quickly. The example of the middle class in the BRIC markets or the growth of the organic food niche show: there still is ample room for growth and development, the world still has not come to an end. I would particularly like to point out here the matter of innovation and technology as they are the fundamental forces driving the development into another direction, namely towards the development highly profitable products. Innovation: The biggest impact on all these things will come through innovation. But here the question is how companies can set up the right environment for innovation thus enabling it to really bear fruit? So all these trends leave us with a fundamental question, namely: what to do next? What should companies do given all these developments? And how can they step up their efforts in innovation? I will

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come back to this quickly and tell you how a strategic approach can help companies reach good results much faster. Technology: Another means of greatest importance is the growing importance of technology. Luddism certainly is the wrong kind of mindset at this stage. Take the environment for example: here technology is the only tool that can help us find a solution for the survival of the world. It will not be enough to venture into the “econiche” and become sustainable only, but we need technology. In science we have the new developments in nanotechnology and medical science. I am very optimistic that we will see them fuse over the coming years into hitherto unthinkable new developments. Just think: email started as a tool for lazy scientists in the MIT who just wanted to quickly converse with their colleagues in the building. Why should n’tt we be able to see this again?

Aggressive Innovation Critical to Long-Term Success With credit in acutely short supply, most industries across the world are taking rapid action aimed at reducing costs to generate positive short-term cash flows. But when it comes to reducing costs, many companies still fall into the trap of focusing solely on cutting R&D projects and resources. The starting point for a more successful response is to realize that R&D is inextricably linked to the product and technology portfolio. Ultimately, it is the product and technology portfolio and roadmap that defines how a company chooses to compete over time, how much should be spent on R&D, and which core competencies need to be built. It is our opinion that in order to survive in today’s challenging environment, multinational corporations must strengthen their innovation efforts. If multinationals first concentrate on managing their innovation portfolios, they will have a much better idea of where and how to cut costs, as well as where to target increased investment. This can vary from intensification in known markets and technologies, to global enlargement and adoption of new technologies. Companies must be careful to restructure their portfolios based on a rigorous criterion, including the competitiveness of a product, its impact on R&D cash flow, and its effect on workload and core competencies. This will reap considerable savings, which we strongly advise be at least partly reinvested in reducing time-to-market, product costs, and the realization of new growth opportunities. If carried out swiftly, an aggressive approach can yield quick wins.

A Strong Offense Always Beats a Weak Defense Approaches to R&D cost savings can be either defensive or aggressive. Companies using the defensive approach identify the least urgent projects, and then either cancel or delay them, thereby reducing the R&D spending in the short term. It is all

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too easy for companies to default to a purely defensive approach when facing a crisis, or in survival mode. Typically, funding for R&D projects is cut on the basis of a simple prioritization, the main advantage being that the analysis can be done quickly. However, a key drawback to this approach is that it focuses on R&D spending for the current or the next budget period rather than on the total pipeline – meaning that the organization may have to redo the prioritization for every subsequent budget cycle until the business environment has dramatically improved. An aggressive approach also focuses on restructuring product portfolios to save money in the short term – but it is equally focused on medium- to long-term corporate strategy. Some of these savings are then reinvested in a highly targeted manner, with a concentration on such issues as time-to-market, and lower production costs – thus better positioning the company for an eventual upswing in the economy, with increased sales and better margins. Rather than sacrificing one’s competitive position to save cost, we vigorously recommend that companies restructure their R&D portfolios with a coherent strategy. This will also result in savings – savings, which can then be smartly reinvested in strengthening one’s position for better days to come. We call this Restructure & Reinvest.

Step 1: Restructure In normal times, a well-run company is usually pleased with the logic of its product portfolio organization because it is carefully thought out in a relatively stress-free environment. But in a downturn, one often loses sight of this, and the pressure to reduce R&D spending forces companies to hastily revisit their portfolio strategy to reflect reduced expectations. The key questions to consider during such a restructuring are: – Which elements of the product and technology portfolio (existing products, products in development, and anticipated projects) should be kept and reinforced by the company, and which can or should be eliminated? – How to deal with associated and residual costs? – How to avoid the loss of know-how and staff critical to the successful implementation of your product strategy? R&D reduction needs to be based on a rational and holistic audit of a business’s entire product portfolio plan. When choosing which projects to delay or cancel, one should analyze a project’s overall importance in relation to its impact on: – R&D cash flow. – Overall workload and related competencies. – The competitiveness of the entire portfolio in the upturn. In comparison to a strict and defensive project prioritization (“slash and burn”), a truly strategic analysis takes more time and effort. Immediate short-term cost savings are likely to be lower; however, there is the high probability of realizing additional savings in the medium- and long term. Furthermore, given that the

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projects are analyzed in relation to a longer time horizon, there is far better chance that one will not kill or delay the wrong project, thus causing less harm. The redirecting of resources in support of future growth and innovation has other specific advantages, such as the avoidance of “salami-slicing” cuts and the resultant loss of critical know-how.

Step 2: Reinvest Restructuring and reducing R&D spending will free up resources that in an aggressive approach can be leveraged to improve efficiency and reduce the time-to-market of prioritized projects, thus saving additional monies. It also offers a company the opportunity to strategically overhaul its R&D organization, something that may be needed regardless. Such an overhaul also provides companies with the chance to exploit the weakness in competitors by looking for new innovation and growth opportunities. Reductions in time-to-market (essentially “time-to-cash”) are achieved, by eliminating waste and other inefficiencies that delay delivery. This is done by analyzing: – – – –

Time inefficiencies Organizational weaknesses Process deficiencies (waste) Lack of resources (skills, numbers)

The potential lead-time gain is calculated on real activities, realistic assumptions, and identified changes that must be implemented to reach lead-time reduction targets.

Reducing Product Cost Reducing product costs is, of course, something that every company needs to be mindful of, regardless of the business climate. There are several approaches that can be applied, each with a slightly different time horizon and a variance in potential. Arthur D. Little helped a leading global filling- and packaging- machine manufacturer reduce product cost by 20% through the analysis of design and customer requirements (such as supplier integration or competitor product analysis). We call this “Design-To-Cost.” It is particularly useful when a given company believes its product design is not optimal from a cost perspective, and they feel the necessary urgency to analyze and institute a major redesign of a product, or its key components. Another approach that yields substantial dividends is the modularization of a product portfolio, which reduces the costs associated with complexities. Modularization determines which products can be standardized and which require variances. This is particularly useful when calculating the cost benefits of existing or proposed projects. A simpler and quicker approach is what we call “Idea-to-Cost” in which savings are achieved by generating and circulating cost reduction ideas throughout

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a structured process with increasing levels of confidence and maturity. This approach enhances the creative process in the company as it manages the flow of ideas up to the implementation stage. Idea-to-Cost is useful when the possibilities to reduce costs come from many sources, e.g., design, production, purchasing.

Overhauling R&D Redesigning the R&D organization altogether can take many forms, each with varying employee impact. The key questions to be considered in a redesign are: – How should R&D be set up in order to optimize efforts? – Is the existing structure of R&D operations capable of efficiently reaching strategic goals? – When the upturn comes, does the company have the right people and right competencies in-house? – What are the company’s core competencies that must necessarily be overlooked in a downturn? – Which should be focused/kept in-house in a possible lay-off? – How can the company best achieve access to needed competencies to increase speed, share the risk and cost of investment, and fill gaps in competencies? – How can relationships with important suppliers and strategic partners be secured during the downturn, so that these relationships can be once again leveraged in the coming upturn? – Is the allocation of R&D resources consistent with the downturn/upturn strategy? – How do we best staff R&D projects to fulfill set priorities?

Pursuing Innovation for Value Innovation for Value (i.e., getting the most value out of innovation activities) implies focusing on the quality of innovation management in a way that reflects a clear understanding of the type of value a company is trying to create (top-line growth, bottom-line optimization, or shareholder value) – in the context in which the business actually operates. We differentiate between three different kinds of innovation. A. Sectors in which innovation is largely driven by idea management (e.g., consumer goods) In this situation, the “single funnel” concept is appropriate. The funnel addresses the upstream portion of the innovation process by incessantly winnowing ideas with a mindset entirely focused on picking one potential winner. Further downstream, successful innovation is development driven, with a very strong execution mindset centered exclusively on getting a product to market.

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B. Sectors where innovation is largely research driven and downstream innovation has very large technical uncertainties (e.g., pharmaceuticals, or oil and gas exploration) These situations are best suited to the “double funnel” concept. In the upstream phases of the innovation process in pharmaceutical development, tens of thousands of ideas are reduced to a few, with the emphasis on picking potential winners. The second funnel deals with the downstream phases of innovation (e.g., bringing a few selected candidate drugs to market), but due to a naturally high attrition rate, very few will make it to market regardless. At this stage, the most effective mindset is to kill as many candidate products as possible, and as soon as possible, to avoid unnecessary development and manufacturing investment costs. C. Sectors with assembled product types, where innovation requires analytical thinking across several lifecycles (e.g., automotive, telecom equipment, manufactured goods, medical technologies, or software companies). The “mixed funnel” concept works best here. Upstream activities are driven by product strategy and planning. A relentless focus is maintained on the transitioning of enhanced ideas into complete products. The mindset here is more complex than in other cases, and includes the picking and developing of winning ideas, and the planning and management of a portfolio of products. Further downstream, the innovation effort is focused on taking the product to market faster, and more profitably, than anyone else.

A Profitable Future If done intelligently, an aggressive approach will yield both quick wins and an increased probability of long-term success. Restructuring will yield direct improvements in cash flow. Investing in efficiency and cost position improvements are one-off investments that will increase the R&D spending slightly during the first year but can then be brought down to a lower level once the improvement initiatives are completed. In addition, freed-up resources can be used to implement other cost reduction initiatives. R&D spending can remain at this lower level until it is prudent to increase it again after the upturn has returned. The reinvestment will pay off in increased sales and profit margins as soon as implemented. If a company with €4 billion in revenues, €2 billion in COGS, and an R&D budget of €200 million targets cost savings of 20%, then the R&D spending needs to be reduced by €40 million. If €10 million is reinvested in improving one’s competitive position and product cost reductions, a conservative estimate of 2% increased sales in the upturn and a 2% product cost reduction would yield €80 million per year in increased sales (€4 billion  2%) and €40 million per year in increased profit (€2 billion  2%). This is substantially more than the initial €10 million investment. In conclusion, it is abundantly clear to us that the potent combination globalization and technology will continue to forever alter the way we conduct

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business. Given the seemingly irreversible trend toward ever-faster tools of communication, these game-changing developments will only increase in rapidity. At the very core of our business, is the belief that companies must plan for the future by investing in the right kinds of innovation; otherwise, they will be left behind. The current financial crisis has only intensified this reality, forcing companies to snap out of complacency and focus ever more carefully – and quickly – on these critical issues. After all, the future has not been canceled – it has only been delayed.

References Arthur D. Little (ADL), 2008, “The BRIC battle”, Report, p.1, 7, 15. International Monetary Fund (2006). The global impact of demographic change. Prepared by Nicoletta Batini, Tim Callen, and Warwick McKibbin, p. 6. Migration Rates (2008). http://www.laenderservice.net/laenderdaten/bevoelkerung/migrationsrate.asp. Zukunftsmarkt Mobilita¨t: Eine Studie von Trendbu¨ro im Auftrag von RMS, (year unknown), p. 14.

An Agenda for Phase 4 of Globalization Dr. Henrik Mu¨ller

Dr. Henrik Mu¨ller, born in 1965, is the deputy editor-in-chief of Manager Magazin, the leading business monthly in the German-speaking countries. Mu¨ller studied economics at the University of Kiel, got a doctor’s degree from Helmut Schmidt University (formerly University of the Armed Forces Hamburg) and graduated from the German School of Journalism in Munich. He has been an analyst of globalization and European integration for more than a decade. He has written several books; his latest one, “Die Sieben Knappheiten” (“The Seven Scarcities”), published in the fall of 2008, deals with the intertwining trends of globalization, demographic change and climate change.

Introduction The future of globalization will be quite different from its past. Or it will not be at all. It could remain just an episode, like other phases of opening and integration in history that ended in crisis, struggle and chaos. Globalization, this has become evident even before the global recession that started in 2008, provokes counterforces that are able to outplay productive economic forces. Like other eras of international integration that have gone before, the current phase would be ended by its antithesis – it could even turn into its opposite. The notion of re-nationalization is not fetched, unfortunately. It is noteworthy that, while it lasted, the nineteenth-century liberal world order too seemed to be spreading around the world unstoppably – until it broke down in the battles of World War I. Efforts to reanimate the open international regime in the 1920s were not successful: In the course of the Great Depression of the 1930s, national governments gradually closed the borders – the trade war, which amplified the global depression, turned out to be the prelude to World War II, the great man-made catastrophe of the twentieth century. These changes are driven by a historical pattern, warns Harold James, a historian at Princeton. “All of these previous globalization episodes ended almost always with wars.” Globalization never was a one-way street but could regress anytime. R. Ijioui et al. (eds.), Globalization 2.0, DOI 10.1007/978-3-642-01178-8_6, # Springer-Verlag Berlin Heidelberg 2010

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James opposes the popular view which claims that an open economy would lead to world peace quasi-automatically because economic openness, mutual cultural fertilization and the peaceful resolution of international conflicts would reinforce each other.1 Peace, freedom, prosperity – this accord may resonate in some historic phases, but eventually ever louder dissonances will disturb the formerly prevailing harmony. However, this is the lesson history teaches, and history certainly does not necessarily repeat itself. In the early twenty-first century, globalization has entered into a delicate phase which raises doubts about its stability. There are plenty of symptoms of stress. At this point I mention only four of the gravest: – The great credit crisis that started in the US real estate market in 2007 and that has widened to a full-scale global recession – The rise of terrorist groups whose destructive potential brutally knocked on global conscience with the attacks on the New York Twin Towers on September 11, 2001 and who have committed a chain of bloody assaults (Madrid, London, Mumbai, and elsewhere) – The public’s loss of confidence in state institutions, even in the well-established democracies of the West, that articulates itself in cynicism, nonparticipation in elections, the rise of radical or populist parties and rioting youths2 – The hunger revolts in many emerging economies and the bottlenecks in the supply of energy and raw materials in the course of the speculation-enforced resources crisis in 2007 and 20083. All these developments have the potential to result in truly catastrophic scenarios. It is not far-fetched anymore to imagine stable Western states going bankrupt by the dozen, nations shattered by internal struggles over the distribution of wealth and by external conflicts. The world is a risky place in the early twenty-first century. It does not bear much resemblance to the peaceful, civilized planet that Francis Fukuyama envisioned back in 1990: “The end of history4” has not materialized; instead, the eternal historical mechanism of thesis and antithesis struggling with each other is still shaping the world forcefully. And currently it is certainly causing a destabilization of the world order. Rethinking globalization? It is high time to do so indeed. Big countries’ governments, globally active companies and international institutions must develop new strategies, cultivate time-tested virtues and work towards a new consensus. Rescuing globalization certainly is worth the effort – the alternatives are all too grim. This chapter is structured in three parts: The first one deals with the process of globalization in the narrower sense, the period since 1990 when the Iron Curtain was lifted.

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See Harold James (2008), Globalization, Empire and Natural Law. International Affairs 83:3, 2008. 2 See Wolfgang Hirn/Henrik Mu¨ller: “Auf der Kippe”, in manager magazin 3/08. 3 See Henrik Mu¨ller/Ulric-Torsten Papendick: “Die Hunger-Hausse”, in manager magazin 6/08. 4 See Francis Fukuyama (1992): The End of History and the last Man. The Free Press.

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Three distinct phases of globalization are identified and the factors that are bound to threaten the open world order in a future phase four, are analyzed. The second part of this chapter looks at the strategies applied by international corporations in the past phases of globalization. How have companies operated so far? Why are these approaches hitting politico-economic limits now? In the third part, I sketch a way out of the dilemmas that afflict globalization: seven virtues – an ethical canon for the twenty-first century citizens, governments and businesses.

The Three Phases of Globalization – and an Outlook at Phase 4 Phase 1: The Early Years’ Euphoria (1990–1994) When in 1989/90 the Iron Curtain was removed and the Berlin Wall fell, the process of international economic integration sped up considerably. Until then, international ties had developed rather slowly; during the first decades after World War II only the West participated in world economy: a club of rich, democratic countries that shared common values. Around 1990, this scenario changed radically: Entire continents, which had been isolated in autarky, some of them authoritarianly governed, integrated themselves into the formerly Western-dominated global economic system. The Soviet Union and its successors opened up to trade. Communist China accelerated its reform efforts that had started in the late 1970s. India and Latin America turned away from the doctrine of “import substitution” and emulated the example of the “Asian Tigers” that had achieved remarkable prosperity by applying a strategy of export-driven growth. Europe and North America were opening up further too: The member states of the European Community created a common market and agreed upon establishing a single currency. The USA, Canada and Mexico established the North American Free Trade Area (Nafta). The Uruguay Round of the General Agreement on Tariffs and Trade (Gatt) was completed, freeing trade in manufactured goods, liberalizing the markets for textiles gradually, establishing rules for the opening of service industries. Barriers to free capital flows were eliminated, a process that had begun in the 1980s and was now pushed forward. In these early years, nobody seriously questioned the notion that free trade and global capital flows were a good thing. Globalization was a promise – for the rich countries that were looking for new sales markets as well as for the poor countries that sought knowhow and capital to escape the vicious cycles of poverty and underdevelopment.

Phase 2: From the Tequila Crisis to the Millennium Boom (1995–2000) The early years’ euphoria ended in the winter of 1994/95 with the Mexico crisis. For the first time, this event gave a – faint (from today’s perspective) – impression

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of the vehemence a chain reaction in global financial markets could have. Shortterm capital left Mexico pushing the country to the brink of insolvency. It took a multi-billion Dollar loan from the International Monetary Fund (IMF) to stabilize Mexico’s balance of payments. Still, the “Tequila effect” spilled over to other markets: The US dollar plunged. European monetary relations were effected too – even some Euro aspirants were caught by international investors’ flight from weaker economies; Spain and Portugal were forced to devalue their currencies, while the German Mark appreciated significantly. Even in Europe the Tequila effect caused some pain in economies that were still recovering from the 1993 recession. The situation calmed down quickly though, and the next stage of globalization was ignited. In Asia several economies entered a period of rapid growth that also caught poorer countries like Indonesia and Thailand. Overvalued currencies enabled them to import cheap capital from the West – a seemingly foolproof short-cut to prosperity. But this game was finite. Starting in Thailand, the economic tensions unwound in a gigantic capital flight from emerging markets. First Asia including the highly developed South Korea, later Russia and Latin America – in 1997/98 a series of currency and balance of payment crisis shook the world economy. These tremors too were ebbing rapidly. Now there was a new growth story in the West: America invented the “New Economy.” The Internet age promised virtually endlessly rising productivity growth. A new economic thrust and lower interest rates in the USA and in Europe debauched global investors to engage in a mega stock market rally. Enter the millennium boom: Not only was a new century about to begin, but nothing short of the reinvention of the entire economy, or so it seemed back then. Globalization, networks and digitalization would pave the way to ever more prosperity. This was the zeitgeist at the end of the changeful twentieth century. But dissonances were already arising. The world trade summit of Seattle in 1999 was the first such event that ended in chaos and violent demonstrations. In March 2000 the stock market bubble popped. And so the first global downturn began.

Phase 3: Twin Towers, Record Growth and Financial Crisis (2001–2008) After all the hopeful developments of the 1990s now came a highly symbolic bang: The attacks on New York City and Washington DC on September 11, 2001 made clear that the globalized world was not as peaceful and friendly a place as most people had assumed. The “war on terror” began. Stock markets crashed world trade growth ground to a halt. When in March 2003 the USA government ordered troops to invade Iraq, severe differences within the West and among EU member states appeared; France and Germany formed an antiwar coalition with Russia while the United Kingdom, Poland and others followed America.

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The rift revealed losing of the ties that had bound the Western nations together since the end of World War II. Since the consensus about the common enemy had vanished, the common cause withered away. Still, the great crisis did not occur. The world economy was pushed forward by big booming emerging markets, notably China, and by central banks that applied a lose policy stance. In the years 2004– 2007 global growth rates reached record highs of almost 5%. Global trade increased rapidly. More and more people, who had formerly lived in remote and isolated regions on earth, were now being integrated into the global division of labor; according to some estimates the number of people participating in global trade has doubled since the early 1990s – by more than two billion persons. The two mega-nations China and India achieved growth rates of 10 and 8% respectively, for several years. The big drivers of globalization were still intact, but social, political and economic tensions grew: Questions of income distribution became prominent on national agendas. Many people came to feel that the chances and risks of globalization were distributed unevenly and that it was pure chance that drew the line between the winners and the losers. At first these conflicts were dampened by economic dynamism and the corresponding welfare gains, but social side effects became more visible as economic tensions grew. The year 2007 marks a historic turning point: In the summer the credit crisis erupted – all of a sudden banks stopped lending to each other; central banks stepped in and secured the liquidity supply in the major economies. A series of shock waves – IKB, Bear Stearns, Lehman Brothers, AIG, the list of casualties could be extend ad libitum – caused the virtual break down of the private banking industry. States came to the rescue with guarantees and infusions of capital. The financial crisis that originated in the USA horrified bankers and business people, ordinary people and policymakers alike: It undermined the already fragile trust in the markets’ sanity. While the banking crisis gathered pace, the markets for raw materials saw an unprecedented boom in 2007 and 2008 that, at its peak, made food unaffordable for poor city dwellers in developing countries. Hunger revolts broke out in more than 30 countries. States were brought to the brink of failure. In the West too, rising energy prices caused resentment – in the first few months of 2008 the price for crude oil climbed to $160 per barrel. Just half a year later the worst seemed to be over: The prices of raw materials normalized, albeit on a higher level than before the crisis. Still, sky-rocketing prices and their very real effects left a mark in collective memories.

Phase 4: The Future of Globalization – or Its End? The recent history of globalization reveals the critical points that threaten the future course of global integration. 1. Slower growth ahead. In the decade ahead huge private and public debts will have to be dealt with. The process of de-leveraging will dampen growth as credit

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will be scarce. Furthermore the global economy is facing an even more fundamental transformation: The world has achieved a level of prosperity so high that annual growth rates of 5% will not be achievable for many years to come. Almost seven billion earthlings now use vast amounts of resources – energy, food, water, soil – putting natural limits on the traditional, manufacturingretentive development process. The still prevailing paradigm of globalization loses much of its persuasive power: Rapid industrialization of ever more economies associated with rising demands for natural resources is not feasible anymore, at least not at speed levels experienced recently. The political fall-out of the crisis – rising state influence, more red tape, more inefficiencies, protectionism – are likely to dampen growth, too. The era of sustainable rapid, noninflationary growth has come to an end. For the years to come a potential growth rate around 2% looks like an optimistic scenario. 2. Increasing conflicts and political destabilization. The crisis and, for a protracted period, slow growth is likely to lead to social and political disruptions. Some countries may fail to stabilize the economy. When the crisis will be over at some point in time, states will have piled up huge public debts from rescuing banks and other companies, leading them to a restrictive policy stance: Governments getting closer to bankruptcy will be forced to cut back government spending. Temptations will be great to engineer higher inflation so that the real debt burden will be eased.5 These developments entail a considerable potential for social and political turmoil: Rising inflation and austerity along with slow growth and high unemployment will cause public protests that have the potential to destabilize entire states – the violent protests that started in Greece and spread across European cities within days in late 2008 provide a foretaste of coming conflicts. 3. The diffusion of power on the international level. The orderly world of the Cold War era – two blocks with a hegemonic power in each center (the USA in the West, the Soviet Union in the East), even the nonaligned nations tending to lean towards one side – this orderly world has turned into a vast and unclear landscape. Well-established states and companies are challenged by newcomers from emerging nations. Markets and positions, that seemed to be set in stone, are now disputable. USA and the EU are competing with China, India, Brazil and Russia. America, for decades the undisputed hegemony of the West, has lost parts of its power. Democracies are being challenged by capitalist–authoritarian hybrid systems: economically dynamic, but unfree. A static structure has turned into a dynamic one – a big global river with whirlpools’, shallows and unexpected bends. One can attribute the end of the American-Western monopoly of power as a big progress; one can embrace the new multipolar international system sympathetically. But these developments entail a problematic downside: The diffusion of power creates a scarcity of order. Who solves international 5

See for example Joachim Fels/Manoj Pradhan/Spyros Andreopoulos: Could Hyperinflation Happen Again? In: Morgan Stanley Global Monetary Analyst, Jan 28, 2009. For the impact of financial crisis on public finance, see Kenneth Rogoff/Carmen Reinhart: The Aftermath of Financial Crisis, NBER Working Paper Dec 19, 2008.

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conflicts? Who leads? Who develops visions? And who is able to translate big plans into practical actions? Who keeps the global trading system open? Who contains and calms down armed conflicts in different regions? Who makes sure that the states of the world agree upon fighting climate change? Questions that remain unanswered and that have the potential to disrupt the international system. These conflicts must be solved if the open world order is to last. I will get into this in more detail in part three. There is an urgent need for progressive institutionalization on the international level. In this context, the European Union, for all its flaws, can serve as a role model: The EU is the ultimate solution for a continent that has endured centuries of struggle for supremacy among powers of equal strength. Since there was no pacifying hegemony, the Europeans finally agreed to create institutions that allow a peaceful, rules-based resolution of conflicts. There is nothing comparable in the global realm yet. However, in the course of the financial crisis the Group of 20 (G20) has evolved as a supreme proto-organization for global cooperation – an economic security council of sorts. Within nation states, it will be important to cushion individual risks that come with globalization. Otherwise protectionist tendencies will rise to levels where they become a serious threat to the existence of open trade regimes. In USA, this effect has become quite visible in recent years. In contrast, the continental European welfare state provides more effective, albeit not necessarily efficient, transfers of individual risks keeping protectionism at bay in Europe so far. If the common market will be kept open in the course of the current economic crisis, remains to be seen. Before we turn to these large-scale questions in more detail, some thoughts on multinational companies’ strategies and their contribution to the conflicts globalization.

Companies Strategies in the Era of Globalization During the hitherto three phases of globalization the production capacities have overtaken the imagination, fantasy and abilities of men. This is one reason why globalization is stuck in dead-end street currently. Distributional conflicts, political destabilization and scarcity of natural resources are not just consequences of anonymous market processes but of corporate decisions. During the first one and half decades of globalization, companies concentrated – for comprehensible reasons – on two strategies6: l

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Global expansion. Existing business models were escalated globally. Companies penetrated new markets by acquiring other firms and by building up capacities for production, distribution and sales. The general goal was to realize economies of scale of one kind or another.

See also Henrik Mu¨ller: Die Sieben Knappheiten, pp. 216 ff. Campus Verlag 2008.

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Locational arbitrage. Companies, even mid-sized ones, engaged in locational arbitrage, in order to avoid high costs in rich countries off-shoring more and more processes to lower-cost locations. The focus was on labor costs, but also on environmental standards or energy taxes.

Because many companies around the world applied these strategies, the process of globalization gained speed. The increasingly internationalized division of labor was realized to a large extent within global companies, they were the drivers of the process. But now these strategies are no longer viable. The patterns of globalization, that have been dominant so far, have resulted in the replication of perpetual sameness – the expansion of existing businesses and products to ever greater parts of world population, more of the same for more and more people produced at ever lower costs. The consequences are awkward: In many industries capacities have expanded so fast in recent years that now over-capacities are crippling profitmargins. The availability of cheap capital in the years to the outbreak of the financial crisis sped up this process tremendously. Since globalization in its hitherto form means the replication of existing (or, worse, outdated) structures of rich countries in poorer ones, the process of development in emerging markets leans overly towards manufacturing, making intensive use of resources and energy. Within a single generation, some emerging nations have undergone a development process comparable to what took more than a century in Europe and North America. This modernization in fast-forward mode has hit bottlenecks now, as it affects the availability of resources, environmental quality, social and political stability. In emerging countries, even in authoritarian China, the resistance to environmental destruction, hazards to health and economic uncertainty is growing. Unemployment is on the rise. Off-shoring for the sake of purely exploiting cost-differentials runs into public and political resistance. From a company perspective, these repercussions imply that international activities and their implications become less and less predictable. Moreover, in the course of the economic crisis, many companies have to rely on government support of sorts, and some firms may remain reliant for a longer period of time. The return of the state as a major economic player promotes a new policy paradigm that is characterized by a distinct skepticism towards markets and large corporations. Companies must face these currents that can be observed all over the world. They need political allies, wherever they do business, but most of all in their home country. Furthermore, tight financial and overall economic conditions will force companies to create their own growth. With capital being scarce and acquisitions of other companies and technologies hard to finance for the foreseeable future, firms have to foster their internal growth potentials. That means first and foremost: innovation – the development of new products and new processes. The behavioral patterns of a creative firm on the one hand and of a company that is focused on cost-driven locational arbitrage differ fundamentally: The creative company is built for the long term and, in many cases, it strives for independence from capital markets. Most of all, this type of company is characterized by its reliance on the accumulation of knowhow; it needs stable staff with a high degree of industry- and

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firm-specific knowledge. Only after years of intensive preoccupation with matters within the respective organization are workers able to be creative and innovative. The existence of “social capital” – team spirit, trust, willingness to cooperate, culture, openness – is a basic precondition for innovative firms: New ideas are born neither in solitude nor in a climate of fear. So far the creative element of the economy remains rather dim. Globalization suffers from a severe scarcity: a scarcity of mind, intellect and creativity. There are all those huge extra capacities that were built up in recent years, there are all those people and cultures that participate in global transactions these days, but really fascinating new things have rarely emerged from this. At the beginning of the third millennium, mankind is lacking content: True originals and fundamental inventions are scarce – globalization has remained stunningly dull so far. As a consequence, the world is stuffed with cheap products. Consider what is bound to happen if the world advances on this path: If all those billions of people who do not yet participate in the world economic game also start doing ever more of the same, but at ever lower costs, prices and real wages will continue to deteriorate further. This is an unsatisfying situation – workers may suffer a further decline of real incomes while companies will see their profits shrink. To escape this downward spiral, global competition has to switch to a new playing field: upgrade intellectually to become more creative. Since economic agents generally tend to react to scarcities, it is worth noting what the really scarce factor is: new, exciting ideas. In phase four of globalization, companies will have to shift to more brain-focused growth process resulting from their own internal resources. By doing so, they contribute to the mitigation of social and political conflicts that jeopardize globalization all together.

Ways Out of the Dilemma: The Seven Virtues Rethinking Globalization – so let us think about how to make the open world economy sustainable in the long term. What are the forces that have lead to the current economic breakdown? And what are the behavioral patterns and social norms that will help to overcome the crisis? What should businesses, societies and governments do to keep the world open, free and prosperous? Here is a proposition: In the new era a new set of values is needed which I call the “Seven Virtues.” Together they form a canon for the twenty-first century economy.7 These are as follows: 1. Work. The basis of all progress. In recent decades, work has become a more and more marginal aspect of life. For many people it fitted into a relatively small niche of their time budgets. Not working became an acceptable way of life in European societies. Generous government transfers offered an attractive alternative to employment. Many people retired early or spent long periods on the 7

See also Henrik Mu¨ller: Die Sieben Knappheiten, Chapters VIII ff. Campus Verlag 2008.

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dole looking for attractive jobs – state budgets paid for it. But these days are over. The joint forces of globalization and demographic change create stiff competition between societies with different age structures. To stay ahead, the aging nations of the West have to include as many people as possible in the labor market. In the future solely a tiny minority of the very wealthy will be able to afford not to work. And such an attitude will not be looked at sympathetically by fellow citizens. Able people leading leisurely lives will not be socially acceptable in the decades to come. 2. Thrift. The fundamental cause of the financial crisis is opulence. In parts of the Western world, the period of cheap money, starting in the beginning of the 1990s, led to the notion that it was hopelessly old-fashioned to save money. Savings rates dropped dramatically in Anglo-Saxon countries such as USA, Britain, Australia and Canada, but also in Denmark and Finland, South Korea and Japan, Greece, in the Czech and the Slovak Republic8 – all these nations have pretty much given up saving money. Insanely, Anglo-Saxon nations were portrayed as role models whom the more cautious continental Europeans should follow. Economists admired high growth rates in USA and Britain. Politicians elsewhere, particularly in Germany, complained about their domestic “Angstsparer” (“angst savers”). Only if people went out to spend lots of money, these economies could experience proper upswings, the argument went. The financial crisis has shown drastically that a solid national supply of capital is of great advantage as it prevents big global imbalances. And it is an insurance against being blackmailed by foreign suppliers of capital – sovereign wealth funds or governments of surplus countries – whose intentions may not be solely based on economic rationality. Furthermore, a steady buildup of savings helps to mitigate demographic change. The more money active generations save today, the easier it will be for them to cope with the aging of the population two or three decades from now. But saving is not just about money. It is an attitude towards life in general: the prevalent hedonism that encompasses the senseless consumption of superfluous things. Instead of saving money, many people indulge in buying dispensable, transient goods. No generation before has devoted itself to such a mindless, unsustainable way of consumption. 3. Create. Work is the foundation of prosperity but to keep this process alive, workers will have to be more creative in the future. The postindustrial “knowledge society” is a reality. Knowledge is ubiquitous in the age of the Internet. Memorizing plenty of facts is not enough anymore. Now it is the transformation of existing knowledge that counts: to find new and surprising connections and combinations, to come up with new ideas. At present, the world is running the danger of turning into a boring place that is deserted by a streamlined, meaningless mass culture – the underlying cause of the current crisis. The next stage of globalization will have to be all about fertilizing the world with true innovations.

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See OECD Economic Outlook 83, December 2008, Table 23 in the Annex.

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The prospects are not that bad at all. We are entering a large-scale experiment: Never before have so many people been so highly educated. Demographic change implies that many people will be able to work, learn, accumulate knowledge and experience for longer years than any generation before. Consequently, the potential for innovations will be broader than ever before. Contrary to conventional beliefs, it is very well possible that aging societies will experience a boost of their creative performance. Put another way: If young nations were the most innovative as it is often assumed, then why are the youngest ones on earth, particularly in Africa, not known for breakthrough innovations? Here is the answer: Where life expectancy is low, people only have short periods of time to accumulate knowledge, to stay active and to be creative. Seen from this perspective, demographic change could well bring huge gains of prosperity. 4. Solidarity. Globalization causes change to a degree that it seems unbearable for individuals, because there are increased risks to individual livelihoods. These risks can be born more easily if they are hedged by societies and families. The answer to these risks and uncertainties is – solidarity. People, who feel that they are facing this big, turbulent world all by themselves, are bound to be overwhelmed by fear. This angst has to be countered by insurance strategies: the nation and the welfare state on the large scale – the family, friends and neighbors on the small scale. The virtue of solidarity complements the virtue of openness (see below). Both belong together: Societies are able to open up to the rest of the world, only if they cling together, if they are able to cope with the corresponding changes collectively, if their common identity is strong enough to enable them to esteem – and not fear – all those alien things, people and ideas they are encountering. Openness to other cultures, to men and women from all around the world, cannot be achieved without the virtue of solidarity, without a sense of belonging together as a group. In recent decades, when life seemed to be ever safer in Western societies, solidarity was of marginal importance. But the consequences of globalization and the world economic crisis are changing this attitude. 5. Openness. It is an ide´e fixe which has regained popularity in recent years: We have to shelter ourselves from all the turbulences out there; we can withdraw from the world and halt change; let us retreat to the coziness of the nation and the region, no matter what is going on elsewhere. One can hear this tune all around the world. Protectionism – keeping away goods, people and capital from abroad – apparently comes from an age-old reflex. When times get tough, closing the borders is one of the first options that is considered. But in most cases, protectionism aggravates prevalent problems instead of solving them. In truth, protectionists’ agendas are more about keeping competitors at bay. Openness is a virtue, especially in an epoch of economic, social and ecological stress. Openness boosts the proliferation of new ideas and alleviates the scarcity of mind. It speeds up the ability to solve universal problems in an era when there is no time to be wasted. And it helps to secure the supplies of ever scarcer energy and other natural resources.

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6. Cooperation. Elites will have to learn to stick to new rules and institutions under new circumstances, nationally and internationally, but in any case voluntarily. The dilemma of globalization results from increasing interdependencies while at the same time there are no authorities to align interests and solve conflicts. The era of capitalist–communist antagonism with its clear-cut blocks is long over; America’s role as the sole remaining hegemony is diminished – where in former decades there was a concentration of order-producing power, the diffusion of power resulting from globalization has left a vacuum. This is a dangerous constellation. Transnational conflicts and problems create a huge demand for coordination. The international agenda is full of explosive issues: the global recession, climate change, scarce energy supplies, protectionism, erratic exchange rate fluctuations, waves of refugees fleeing hunger, drought or flood, to name just a few. But the world is not equipped yet with adequate mechanisms and institutions to ease these problems. And in times when no country commands the necessary means to exercise power and to form a world order according to her interests, there is either chaos – or the vacuum is being filled with cooperation, with the peaceful balancing of interests. This is no trivial task: A multitude of players have to align themselves, big and small nations, democracies and authoritarian states, rich and poor economies, multinational corporations from different industries and countries, sovereign wealth funds, nongovernmental organizations, each one with its own agenda. Global cooperation is difficult business, but it is the only viable option for the future. 7. Originality. When knowledge, capital and highly qualified people are mobile, locations – cities, regions, countries – must be able to attract and to keep these mobile factors of production. There is more to it than just money: cultural ties and a sense of common identity, that hold societies together and bind the highly capable to the less lucky – a collective spirit is needed that encompasses and drives society, constituting its visibility and distinctiveness that in turn helps to draw mobile factors from outside. Each nation needs an idea about its identity, its strengths and what distinguishes it from other nations. Is not this the standard advice of classic trade theory – when barriers to trade are lifted, each nation should specialize in what it can do better than others? When conditions change, every society must be able to develop new comparative advantages for itself. Even in the age of globalization the world is not “flat” as Thomas Friedman’s often-cited book suggests.9 To the contrary, it is quite mountainous. But the global economic geography has the property of eroding mountains quickly while elevating hills elsewhere. Mobile factors of production settle where they find the most attractive environments. Societies need to keep and to bind them, possibly the greatest challenge of all.

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See Thomas Friedman: The World is Flat. New York 2005.

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Conclusion Globalization has run into a dead-end street. A tendency of dissolution is already apparent. The global financial crisis, followed by a world economic crisis, impressively shows how global chain reactions can interact in destructive fashion. To hinder history to repeat itself – retreating to protectionism, aggression and war – the goals and methods of globalization need to be redefined. This is a challenge particularly for the elites. Statesmen and stateswomen have to adopt new forms of cooperation, they have to install new institutions for the resolution of international conflicts. The business elites, for their part, have to assume a view of the world as a borderless space of ideas, instead of a variety of locations, characterized mainly by labor cost differentials. The three phases of globalization have put into place the hardware of the global economy: infrastructure, global corporations, and global markets. The future challenge – and the historic chance – will be to fill these structures with intelligent and original content.

References James, H. (2008). Globalization, Empire and Natural Law. International Affairs, 83, 421–436. Hirn, W., & Mu¨ller, H. (2008). Auf der Kippe. Manager Magazin 3/08. Mu¨ller, H., & Papendick, U-T. (2008). “Die Hunger-Hausse,” Manager Magazin 6/08. Fukuyama, F. (1992). The end of history and the last man. New York, NY: The Free Press Fels, J., Pradhan, M., & Andreopoulos, S. (2009). Could hyperinflation happen again? In Morgan Stanley Global Monetary Analyst, Jan 28, 2009. Rogoff, K., & Reinhart, C. (2008). The aftermath of financial crisis. NBER Working Paper Dec 19, 2008. Mu¨ller, H. (2008). Die Sieben Knappheiten. Frankfurt am Main, Campus Verlag. Friedman, T. (2005) The world is flat. Farrar, Straus & Giroux, New York. OECD Economic Outlook 83, December 2008, Table 23 in the Annex.

Globalization and Demographic Change – A New Age for Human Resource Management Dr. Tiemo Kracht and Erik Bethkenhagen

Dr. Tiemo Kracht is the Managing Director of the Kienbaum Executive Consultants GmbH. Previously, Dr Kracht was a Managing Partner at the internationally renowned personnel consulting companies Heidrick & Struggles and Ray & Berndtson and was also a member of their international Management Committees. Dr. Kracht has worked within the Executive Search focussing on Financial Services/Finance (Industry) and Public Sector for 13 years. His main focus is on executive search for executive and managerial positions as well as other key positions including management audit. Dr. Kracht studied Economics and Social Sciences at the universities of Kiel, Penn State (US), and Bratislava/Slovakia (Comenius University) and completed his degree with a diploma and a PhD. During his PhD, he also lectured for 3 years at universities in the US. Erik Bethkenhagen is the Managing Director at Kienbaum Communications GmbH and Head of Press Office at Kienbaum Consultants International. He is an expert in PR, employer branding and change, and works for small and medium-sized enterprises, as well as international companies. Prior to his commitment with Kienbaum, Erik Bethkenhagen was a Consultant for Germany’s leading communication consultancy KohtesKlewes (today PLEON). Before that he worked as a journalist for the newspaper Bonner Rundschau. Erik Bethkenhagen studied Political Science at the University of Bonn.

Introduction “What is currently happening is comparable with the discovery of America. Under the flag of happy-go-lucky modernisation, we set sail for “India” and we got to the One-World society where a deterritorialised socio-spatial order still remains unchartered – including its new transnational power games, ways of life and lifestyles, cultural landscapes, elite management, contrasts, cross-border social movements and ways of governance beyond the national state. In the meanwhile, we are R. Ijioui et al. (eds.), Globalization 2.0, DOI 10.1007/978-3-642-01178-8_7, # Springer-Verlag Berlin Heidelberg 2010

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all global players in some sense, according to the sociologist Ulrich Becker who described the phenomenon that had its first entry in an English dictionary under the term: globalization. If the discovery of America introduced “modern times” in historical and geographical terms, then globalization is a dramatic socio-economic break. It poses new tasks, particularly for the strategic management. It is a synonym for the integration of national economies into a shared global economy with intensive transnational trade-offs regarding goods and services, capital, knowledge, and people as well as the often-cited “War for Talents”. However, in contrast to the common perception, this is not merely the continuation of an internationalisation process, but instead a completely new phenomenon as national economies, societies, value systems as well as political regulation frameworks are deeply affected, if not erased. “The key challenge for humankind will be the capability to manage global interdependence”. This concise statement by Professor Klaus Schwab, Executive Chairman of the World Economic Forum, addresses the challenge of globalization faced by business management. The skill to influence new global connections and dependencies will be of absolute importance for modern HR management.

Less and Less and Always Older In addition to globalization, another sociographic development of historical singularity emerges which poses a hereto unknown challenge for HR management. The demographic change hits Germany hard. HR management is facing a completely new situation. Today business strategists must not only think, plan and economise regardless of national boundaries but also keep long-term perspectives for HR dimensions in mind. Population is in decline and keeps ageing. The reproduction rate in Germany has fallen below the factor 2 long ago and looks like falling even further. According to recent forecasts, by 2050 the population figure in Germany will drop from currently 82 to between 69 and 74 million. At the same time, the average age of the German population will increase sharply. There are approximately 50 million inhabitants of working age between 20 and 64 years in Germany. If the unemployed and self-employed are deducted then only approximately 33 million people will pay into the pension funds. According to the German Federal Statistical Office, by the year 2050 this figure will decrease by 22–29%. In 1995 the dependency ratio was still 37, 100 people of working age provided for 37 people of retirement age. In 2001 the dependency ratio was at 44, by 2020 it will almost certainly increase to 55. Simultaneously the proportion of the 60-plus generation of the total population will double from currently 20 to nearly 40%. Between 2015 and 2025 companies will see the large-scale retirement of the Baby Boomer generation. At the same time the number of university graduates will drop. The demand for new employees will thus increase sharply at the time when the number of possible candidates is declining. This thus leads to an additional controversial “cluster risk”.

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The divide between (top) personnel available on the market and the demand for it will be huge and have a heavy impact on companies. To express it very clearly: we are heading towards a unique demographic situation. The number of the over 100-year-olds will multiply by 100 within this time, the number of the over 90-year-olds by 80, the number of over 80-year-olds by 60 etc. If in the past societies were on an average young, dynamic and reproduction rates at a steady level, we can now already identify a dangerous “population mushroom” which will replace the population pyramid of the past – as last seen in Germany in 1910. This will cause a breakup of the social contract in Germany and its current social systems. A society will emerge based overwhelmingly on benefit recipients. One of the basic requirements for growth and prosperity is particularly the growth of population which will not be the case in the near future. Consequently the welfare state and the affluent society are being undermined. For active players within management who do not “have problems” but face “challenges” with determination, the demographic development is an extremely unusual lesson. Their scope for action is limited and new facts cannot be generated. Failures of the past 40 years regarding demographic policies cannot be easily rectified. This also applies to politics that did not counteract or intervene during the seventies while this development was unfolding.

The Country Needs Brains The consequences of the demographic change will intensify dramatically with the migratory trend. In 2007 the number of emigrants was higher than ever before. According to the Federal Statistical Office, approximately 165,000 Germans emigrated. In addition, these statistics do not include the number of emigrating pupils and students, who temporarily go abroad to profit from different education systems and do not return to Germany but compete on the international labour market. Experts believe that out of 165,000 emigrants every second person is highly qualified. It is certain that the overwhelming majority of emigrants are of working age. According to an analysis by the Federal Ministry of Economics and Technology, this concerns mainly the age group between 20 and 40 with an academic education or a vocational training. A study by the research body Prognos states that for the majority the lack of career possibilities, followed by low income and looming unemployment are the prime motives for emigration. Following research and surveys by the World Economic Forum (Davos) the same reasons that cause emigration also prevent the immigration of qualified personnel. The lack of attractiveness of the location is caused by (1) high taxes, (2) a complex tax system, (3) an overregulated labour market and (4) a complicated bureaucracy and administration. In short: Germany is not necessarily the breeding ground where entrepreneurial initiative, creativity, responsibility and risk taking thrive as well as respect for key players and suitable income differences. On the contrary, there is latent and open sympathy for a state economy.

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Switzerland tops the list of destination countries, followed by the US, Austria and the UK. Doctors head for Scandinavia, England, North America, or Australia/New Zealand. The emigration rate currently lies at 70% per graduating year. Engineers are attracted to centres of global growth and emerging industries; top academic researchers leave for the US where today more than 400,000 European scientists are employed, among them many Germans. We therefore do not need to look far or watch television shows on emigration in order to find attractive societies that make people want to stay. These obviously seem more attractive for skilled labour and executives than the German model. The reasons participants gave in the Prognos study for permanent emigration were understandably the high tax burden as well as the situation at German universities. The federal education system with its negative PISA results was also a major incentive. These statements are also further proof that it is not only the low-skilled workforce that turns its back on the German labour market. On the other hand there is the population growth through migration. For quite some time the German government has attempted to lure qualified migrants to the labour market. Not always were these attempts successful. The BA (German Labour Agency) announced that by the end of 2007 19 additional engineers had come to Germany due to the forced opening of the labour market to foreign engineers. From 2005 to 2008 only a few hundred highly qualified workers have settled in Germany, a devastating figure given the size and importance of the national economy and its dependency on the “knowledge” commodity. The current lack of skilled labour and executives is already a sign of the imminent blow to the German industry and its society structure. It will cost the national economy more than 15 billion euro and the costs are forecast to rise. For example, there is a shortage of more than 70,000 engineers and approximately 40,000 experts in the information technology sector. However, in general Germany is in the top group of the most important immigration countries worldwide. Approximately 15.3 million people of a migratory background live in Germany. According to the Federal Statistical Office, only 7.3 million are foreign nationals as the other 8 million people have been nationalised. The majority of this population group, namely 96%, live in the former Western states and in Berlin. 62% of the migrated citizens come from Europe. Turkey tops the list followed by Russia and Poland. The Federal Statistical Office reported that immigrants often are (significantly) less qualified than German citizens and also less than the above-average qualified German emigrant. Around 10% do not have any school leaving certificate and 51% have not completed any vocational training compared to 1.5 or 27% of the rest of the German population. In this respect we currently experience immigration from educationally deprived under classes placing a burden on the welfare state. The economic benefit – to say the least – is limited. Immigration based on Germany’s multiple interests, as in Switzerland or Canada, has not yet been achieved. Yet it is the 11th hour. It is not only engineers from other countries that blatantly avoid Germany, the former emerging land of economic miracles. And even if Germany grew annually by 200,000 qualified immigrants, according to the forecast by DIW (German Institute for Economic Research, Berlin), there will still be a deficit of 4 million people until 2050. Researchers and statisticians

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may argue about certain developments within society, the cluster of globalization, demographic change and emigration creates an enormous pressure wave and constitutes a dramatic turning point for HR management. However, a study by Kienbaum reveals that there still is a disastrous lack of perception: there are huge differences between many major enterprises, those who at least are aware of the problem (63%) and 43% who realise that the “turn of an era” keeps management busy at the highest level. Globalization is given more media coverage than demographics, although sadly more in a negative light than a positive light. Daily events and other “secondary arenas” tend to dominate the media.

HR Goes Global? Regarding globalization one has to distinguish between exogenous and endogenous levels. Up to now the exogenous dimensions result from companies operating nationally who react to external globalization forces. The competition encourages presence on new foreign markets. This leads to an internationalisation of turnover, the pressure on suppliers to follow suit abroad increases and thus a globalization of acquisition occurs. This all happens to the tune of externalising company units to countries where low wages are paid. It is the globalization of personnel. The endogenous dimensions of globalization include proactive action by companies in order to be prepared for future challenges of globalization. Regarding company policies, medium- and top-level management with an international background especially facilitates balanced allowances for prospects and interests in different regions. By relocating decision-making authorities to international organisational units, decentralised decision bodies can develop and in turn further enhance subsequent management levels where top personnel is indeed in demand. HR management thus becomes a complex multidimensional task within an international context which needs to provide answers to arising questions. There is an urgent need for action. Unfortunately analysis of the problem does not automatically lead to resolute solutions. Most companies still react to this problem with orthodox measures. Many rely on their good reputation, traditional HR marketing and a “normal” HR department. But their HR management also remains nationally bound and anachronistically oriented. What strategic implications for HR management can be drawn from developments regarding globalization, demographics and emigration? What would a catalogue of countermeasures include?

Our Employees: Ageing Workforce One recommendation for HR management is to analyse objectively the demographic “trouble spots” with a detailed study. The HR department can then forward the results to allow for corresponding measures and to establish its position as a

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business partner and integral part of the company’s strategic planning. As a first step, a demographic map can provide information regarding the company’s internal development of the age structure in 5–10 years. With relatively basic means reliable forecasts can be made based on the present HR administration system, the average fluctuation as well as the division into functions and professional categories. The result will clearly identify future “trouble spots”, professions and categories where important skills may become scarce and no sufficient replacement is available either through the application market or company internal options. There are basically two approaches for consequential action: the external application market and the internal market within the respective company. Under the term “Ageing Workforce” strategies for a more efficient use of employees’ potential and keeping senior employees competitive have been assessed during the last few years. Many studies on intellectual ability have shown that there are no significant differences between the productivity of senior and junior employees. In addition, companies benefit from senior employees through important specific characteristics, namely experience, reliability, loyalty, discipline, expertise and a general sense for what is doable. Some social scientists speak of “seizing the treasure from within the company”. In some areas these characteristics are indispensable. For example, enterprises can never send a junior manager to China to perform managing tasks. He will find very little acceptance. On an individual level, productivity during one’s professional life as well as learning aptitude depend largely on knowledge and education acquired during previous stages. New studies also prove that learning aptitude and willingness to learn among senior employees can be sustained through measures such as job rotation and regular complementary training. According to research by IW (Institute for the German Economy, Cologne), the common platitude of “lifelong learning” is unfortunately a myth. The truth is that most enterprises invest particularly in junior employees and this commitment very quickly ceases once the development of young talent is completed. It is important to create some continuity within further training and for once pursue with the notion of “lifelong learning”. Experts give explicit recommendations for action on this subject: seminars specifically targeting senior employees should be offered; job rotation should also occur and further training should be an integral part of target agreements.

The Older the More Flexible? The ageing of our personnel will definitely put an end to the rule of seniority. Even if performance-based income is more and more common, the decoupling of income from age has not yet quite occurred. Ultimately the nearly automatic income increases or promotions in line with seniority were a huge incentive for early retirement. Only the continuous retirement of personnel at the top of the pay roll and the employment of relatively low-paid newcomers allowed companies to keep

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their average income to some degree stable. Enterprises will need to put an end to this practise and focus on a performance-based approach in the income system.

Management of Generations and Heterogeneous Personnel The same applies to management: it will increasingly be more likely that a growing number of junior executives supervise senior employees. There will be enormous challenges for executives to demonstrate their social competence and repertoire of management skills. They must be able to bridge the gap between junior and senior employees. Junior management can – as well as the working conditions – quickly become a bone of contention for senior employees. Besides, through globalization the workforce can become extremely mixed. The manager of the future needs to possess intercultural skills as highly heterogeneous workforces at various locations will be working to achieve the same targets.

Retention: Against the Fluctuation In the past – and indeed to a lesser extent today – the issue of how to discharge employees in a socially acceptable manner has been widely debated. In the future, however, the question will be how to push for employee retention. During phases of reducing the workforce the redundancy of employees with key skills was too readily accepted. A more professional management approach for the retention of employees is demanded. It is expected that the “War for Talent”, which we have in the meantime come to experience, will let fluctuation rates increase. Therefore it will be necessary for HR management to study methods employed by colleagues in the product management department. This term is coined loyalty management by Customer Relations Managers. Similar to the given practise of spending vast amounts of money to acquire new customers and giving existing customers the cold shoulder, the same also happens with long-term employees. If these employees, who make significant contributions, felt appreciated and had a glimpse of clear perspectives, they would develop a stronger bond. Under specific circumstances many of our senior employees can probably picture themselves working beyond the retirement age. Especially if the activity is not threatening to health and weekly hours are reduced.

Career: Follow New Paths An important keyword regarding the retention of employees is career opportunities. This may lead to promotion problems in the classical management career as, due to the increased life expectancy, the working life will definitely go up. Some

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enterprises contemplate developing programmes for senior employees. By doing so senior managers can give way to junior candidates and take over as consultants within the company so that their experience is not lost. Inevitably this will cause conflicts as senior executives must be prepared to do without part of their income and influence. This will probably be even harder to implement nowadays as we are used to reaching the top of a career towards the end of a working life. But if this was introduced as a rule at the very beginning of employment it would allow people to be mentally prepared. Careers for project managers or heads of departments can possibly be further expanded. These functions require an above-average and detailed expertise in order to complete complicated tasks. Heads of departments have authoritative powers and bear a lot of responsibility for the company. They could earn a satisfactory income which is adequate for an executive. The primary difference to the job description of an executive is that employees are not subordinates either to the project manager or to the head of department.

Transfer of Know-How through Rotation BMW launched a pilot scheme with various mixed age groups. The results showed that the transfer of know-how between young and old during modules related to practise was successful because senior employees learn best when they can contribute their experience. The transfer between young and old at BMW even continued beyond these pilot projects. According to the experience at BMW, the learning process of mixed age groups was, however, crucial for employees who had been doing the same job for 20–30 years. Once quality requirements change it is difficult to motivate these people for further learning. BMW concluded that after 3–5 years employees should take on a different job to maintain their readiness for constant change. It is sensible to have senior employees’ coach junior employees or take on functions such as internal consultants or know-how managers. I would like to stress here that particularly the introduction of know-how managers will prove beneficial as the know-how transfer from predecessor to successor and senior to junior often does not work and resources in turn are used inefficiently.

The External Perspective: Find the Way We can observe today that already the demand for academics has increased faster than the market allows for – even if the effects of a crisis might decelerate this process temporarily. The KFW bank group monitors the business climate of German small and medium-sized enterprises. By collecting data from 5,600 enterprises they identified that in 2006 for the first time after 6 years the number of expanding small and medium-sized enterprises has surpassed the number of

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enterprises reducing their workforce. The companies registered in the Dax, the German stock market index measuring the performance of the 30 largest German companies, also created 12,000 jobs in Germany in 2006, but at the same time downsized their workforce by 55,000. They are steadily transforming to become global employers. Only a third of them still retain the majority of their employees in Germany. At the same time companies with a distinct reputation as employers, having recruited large numbers for years, have come to the conclusion that competitor employers “fish” among their target groups leading to multiple job offers for potential candidates. In the medium-term Germany will be caught essentially in the education trap, not only in a quantitative but also in a qualitative manner. The OECD has shown that Germany is falling behind the international trend of higher qualification. Whereas countries like Korea today train many more future employees at their universities, Germany no longer holds a medium rank but now is among the bottom third of the OECD states. This is not due to a reduced number of university graduates but rather to an accelerated increase in student numbers abroad. And what will the future hold regarding university education once China follows the Korean model? Germany is not only competing with countries offering low qualification at low costs, but also with countries like China and India where demand for top qualified personnel is increasing. This has an immediate impact on the labour market. Germany is currently investing too little. In relation to the GDP the expenses for educational institutions is below the OECD average. This applies to both schools and universities where learning conditions are not as good as in the US. In Germany the expenses per student equal half of those in the US. It is also striking that German expenses for education have increased at a considerably lower rate compared to most OEDC states. In Germany expenses have risen by 14%, whereas on the average they have grown by 46% in OECD states. In 2006 expenses in relation to the GDP have decreased compared to the year before. The implication of this is that Germany is missing out on the benefits of an educational boom. Not only in quantitative, but also in qualitative terms. However, Germany must transform to a knowledge society. In a world of global competition Germany has to provide innovative ideas. This was its reputation during the Wilhelminian era as well as during the Weimar Republic.

Employer Branding: End of Number Crunching What can we do in order to have a sufficient number of qualified personnel available? Obviously employers with a good reputation on the labour market and an elaborate communication concept will find it easier in the future to cover their demand in comparison to those who have never engaged in employer branding campaigns. Employer branding refers to a company who has kept a good profile as an attractive employer in the eyes of potential applicants and employees. One thing is for sure: being an attractive employer will no longer have the box “nice to have”

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ticked for expanding enterprises. Instead it will constitute a necessary requirement in order to survive the competition for an increasingly scarce resource, namely labour. The end for number crunching within HR marketing is imminent. Many media agencies will need to change their practise of focusing on quantity. It will no longer be important to merely place job advertisements in newspapers with high circulation numbers. The quality of the target groups and the information will be the only crucial factors. All print media where advertisements were placed have seen a reduction in circulation in the last few years. This also is down to the demographic change. Eventually small and medium-sized enterprises will need to reconsider their attitudes. This will lead to a fundamental break, a change of mentality. At the bottom of it lies the following rationale: only by presenting my own profile among target groups will I be taken notice of. Even with incredible return figures and a successful and innovative policy all attributes of success will be useless unless it is communicated to potential candidates. A transparent and continuous PR strategy is the main pillar to succeed in the “War for Talents” in the future. Employees are expected to be mobile. This not only makes sense in a microeconomic but also in a macro-economic context. Above all, we do not only need to demand regional mobility but also global mobility in a globalised environment. However, certain target groups, such as engineers, are not extremely mobile. The question of “Where is the company located?” rather than “What kind of company is it?” seems more relevant to specific groups. This trend will get worse. In the future employees with multiple job offers will be more hesitant to relocate and leave home behind for career purposes. The shrinking population figure as well as the decreasing mobility will shed new light on the issue of location. According to the demographic monitor for Germany by the Bertelsmann Foundation there will be a considerable depopulation by the year 2020, merely 13 years down the line. Half of all communities with more than 5,000 inhabitants will see their population shrink significantly until the year 2020.

Think Global – International Search The demographic change in Germany is the most radical. No other European country will be going through similar tribulations. Due to the shortage on the German labour market the recruitment of young talents in the European market is a very likely strategy. In the future our road shows will take us inevitably more and more abroad. However, most enterprises still need to familiarise themselves with HR marketing laws of other countries and adapt professionally to international labour markets. Most organisations still recruit at a decentralised level and knowhow regarding national markets is not centrally accessible. A centrally oriented mindset does not yet prevail. In the coming decades Germany will obviously need to step up its efforts to raise the potential creativity within society and to tap the full potential of our labour market. Women play a decisive role as they definitely are the most qualified resource on the labour market which has not been fully exploited.

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Per age cohort we have nowadays more girls than boys who take the final secondary school examinations. And these young women are also more successful at university than their male counterparts. Improving the conditions for female employment in our enterprises or elsewhere is imperative. For years now the cross-border mobility of employees in Europe has only been at 2% and all endeavours on behalf of the EU to promote an increase of mobility have been in vain. Why should the attitude of foreign employees, to work in Germany, change within the next years to such an extent that it triggers a realistic alleviation for the labour market? Also: hardly any other political issue has caused as much controversy as the critical control of immigration – with the panic of foreign infiltration on the one hand, and the multicultural dream visions on the other hand. The newest development regarding this debate is the fact that definitions are made as to what kind of immigration is in our interest. Clear distinctions between two groups of immigrants are made: the host state needs the one group, the migrant labourers, for “selfish” reasons and the others, the asylum seekers and refugees, depend on the host state for humanitarian reasons. Regarding the latter no new fundamental questions arise. Immigration cannot be an instrument to curb the demographic trend, especially not within the framework of a meticulous demographic policy. Trying to keep the population figure at the same level until 2050 would require the immigration of 17.8 million people. By doing so, just the population figure would stabilise but not necessarily the age group composition. Scientists calculated in order to reverse the population pyramid, 188 million immigrants will be needed until 2050. On average this would signify 56 times more than during the last years. In other words: we need to deal with the consequences of our “reproductive behaviour” ourselves. Immigration on a huge scale is neither realistic nor viable.

Seniors: Look to the North Worldwide strategies known as Active Ageing are up and coming. In countries such as Finland, where Active Ageing strategies are employed, incentives are provided for a prolonged working life and early retirement is made more difficult. Employment of senior employees is encouraged and a positive image of age and work is supported. At the moment, most enterprises are highly reluctant to employ senior employees. The income demands of senior employees as well as the rigid right of termination are often given as primary reasons. Another barrier is the management of senior employees by junior executives. Given the enormous shortage of engineers it seems absurd that approximately 42,000 engineers in Germany are unemployed. Almost half of them are older than 50 years. It is a fact that in Germany – in contrast to Scandinavia – even the 40-plus generation is picked upon ruthlessly despite the General Equal Treatment Act. Globalization and the demographic

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change have not only severe consequences for the labour market but also for the welfare system, financial markets and consumers’ behaviour: Although it can be averted, there is a danger that in the next decades the pressure on the state might intensify. Consequently a study by Deutsche Bank said “a dwindling population does not reduce the costs of social care to the same extent”. In fact, scenarios have been elaborated foreseeing a significant increase in debt until 2050 as the rate of tax payer to benefit recipients will continuously deteriorate until the year 2020. Consequently people with children on an average income will most likely need to make higher contributions for the financing of the state’s key tasks. It is expected that fees for kindergarten or all-day schools will augment to a maximum limit in relation to income. This way especially the middle classes, the supporting pillar of the state in financial terms, will carry the burden, they being the group that more children are expected from. The state will attempt to finance the increased expenses through more credits. In order to prevent the state being sucked into a debt spiral the Bertelsmann Foundation demands an obligatory budget control based on the Scandinavian model. Sweden has to achieve a budget surplus in the near future. These surpluses will cover expenses caused by demographic change. However, Berlin seems far off from such a financial policy. The welfare state can withstand the demographic challenges. But the time to act is now. Germany’s welfare state must adapt to the demographic change and the debt policy in Germany must be moderated. The consequences of ageing cannot be met with reforms. But what might be successful is to distribute the burden more equally across all generations and in a way so that growth is stimulated. In the near future politicians will proclaim that “Pensions are safe!” But according to the economic expert Bert Ru¨rup, the social pensions which can be afforded will just provide basic security. Only very few people react by holding private capitalcovered retirement provisions. Therefore Ru¨rup advises that the private retirement pension supplement must be made obligatory in the future. Politics does not have any patent remedies. Society must become involved. For when we speak of the new “War for Talent” and our “Ageing Workforce” it must be clear that we are talking about employees and families who l l l l

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are highly qualified, have preferably international experience when immigrating, but are young and willing to have children while staying in the job or with just a short interruption and thus raise their offspring simultaneously, are willing to have a large share of their income deducted for the elderly and many others who cannot or do not want to work, the benefits recipients of which there are already 42 million, look after us if social insurance runs out of money, and at the same time are internationally mobile.

And there is also the question what these people might demand from their employers? Will they not at some point demand from their employers that they partially carry the burden of the demographic change?

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We got used to the fact that enterprises balance deficits within society, the welfare state, families or the educational sector through their own initiatives: whether it is campaigns for literacy and preliminary courses for apprentices so that these are prepared for the apprenticeship; or campaigns for drug prevention and xenophobia; or the offer of debt counselling for employees. These external effects cause enormous costs but it is a concession to the survival capability of Germany and at the heart of it are higher interests. It is obvious that whether in Asia, Eastern Europe or anywhere else in world external effects requiring counteraction always have an impact, no matter if it is white-collar criminality or gang-related crime, instability within the welfare state or the legal system of the respective countries.

Conclusions The demographic development in Germany as well as in Europe, Japan and the US cannot be stopped. But it is in the hands of the enterprises whether it becomes a problem or an opportunity. One of the main tasks for HR management in the future will be to establish a strong employer brand or to maintain it. Furthermore, the mix of young and old must be managed in a constructive way. The strengths and weaknesses of the different age groups must be taken into consideration so as to integrate the given qualifications correctly and to form effective teams. However, it does not suffice if globalization and demographic change merely remain issues within the HR departments. Instead others in key positions must also analyse the position of the respective enterprise in the face of globalization and demographic change. This will give room to preventative counteraction.

Remember 1. Not only national enterprises compete for top personnel but also attractive employers from abroad. The increased competition will raise the costs and amplify the efforts for recruitment. Solutions must be looked for actively – also with professional assistance – and investments must be sustainable. 2. Increasingly all enterprises will need to employ immigrants as the national labour market no longer provides the required number and quality of future employees, e.g. the Danish employers’ association regularly goes on promotional tours across Germany. Denmark requires 50,000–100,000 people from abroad per annum. Immigrants get a rebate of up to 75% on income tax. 3. The HR departments must be adapted to the new mechanisms and requirements of recruitment and build profound knowledge of talent markets abroad. Therefore qualifications of HR managers have to be reassessed.

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4. Politics must enhance the attractiveness of location by undertaking essential structural tax reforms, a redesign of the social protection systems, an amendment to the employment law and drastically dismantle the bureaucracy. Furthermore national resources and investments must flow into the education and science sector. 5. Germany must be a country of immigration and organise immigration in accordance to its short and long-term interests – even with target-oriented incentives. 6. A climate within society must develop where entrepreneurial initiative, motivation, creativity, risk-taking and responsibility are acknowledged. Differences in wealth and income must be a natural phenomenon of an open society. 7. Germany must create an international distinguished education system and a competitive science sector second to none in order to fully exploit the potential for creativity within society and attract the “brightest heads” from all over the world. Germany must promote careers in German research establishments and enterprises. 8. Enterprises in Germany must adapt to the challenges of globalization, demographics and campaigns for better education. Furthermore flexible solutions must be available to sustain the competitiveness by ensuring innovation, employing top personnel as well as a modern flexible HR management, building a strong employer branding and a lasting retention. 9. Concerning the economy, science, and culture Germany must instil a more international culture into its “DNA” and develop strong global outlooks, train international sought-after personnel and be well prepared for globalization. 10. As Henry Ford correctly noted, in the history of mankind there have been more capitulations than failures. Therefore we should brace ourselves and take up the fight for global top-positions.

References Becker, Ulrich: sociologist Bertelsmann Foundation. www.bertelsmann-stiftung.de/cps/rde/xchg/SID-1A029D58-71360676/ bst/hs.xsl/nachrichten_17266.htm; http://www.bertelsmann-stiftung.de/cps/rde/xchg/SID90DA355D-431BF0D0/bst_engl/hs.xsl/nachrichten_49895.htm Bundesagentur fu¨r Arbeit (German Labour Agency). www.arbeitsagentur.de/zentraler-Content/ Veroeffentlichungen/Mobil-in-Europa/Mobil-Europa-Your-Job-in-Germany.pdf BMW, http://www.demographicchange.info/solutions.asp#bmw Deutsche Bank. www.dbresearch.de/PROD/DBR_INTERNET_DE-PROD/PROD0000000000044180. pdf, p. 7. DIW (Deutsches Institut fu¨r Wirtschaftsforschung, German Institute for Economic Research, Berlin), www.diw.de/deutsch/99_42_1/30567.html#HDR1 Federal Ministry of Economics and Technology. www.prognos.com/Detailansicht.436+M599256 dfc95.0.html Ford, Henry

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German Federal Statistical Office. www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/ EN/Content/Publikationen/SpecializedPublications/Population/GermanyPopulation2050, property=file.pdf, p. 21. http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Presse/pm/2008/05/PD08__ 185__12711.psml www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Content/Publikationen/Querschnittsveroeffentlichungen/Datenreport/Downloads/Datenreport2008Bevoelkerung,property= file.pdf , p. 18f. www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Content/Publikationen/Querschnittsveroeffentlichungen/WirtschaftStatistik/Bevoelkerung/NeuzuwandererDeutschland, property=file.pdf, p. 1144. IW (Institut der deutschen Wirtschaft, Institute for the German Economy, Cologne), www. iwkoeln.de KfW Bankengruppe. www.kfw.de/DE_Home/Research/KfW-Indika17/German Priv77/Ergebnisse_2006.jsp www.maschinenmarkt.vogel.de/themenkanaele/mmmaintainer/management/betreibermodelle/ articles/51088/ Kienbaum Management Consultants. www4.kienbaum.de/shopweb/index.aspx? action=show_ product_detail&product=151, p. 31. OECD. http://www.oecd.org/dataoecd/22/0/39317132.pdf, p. 4. Professor Schwab, Klaus: Executive Chairman of the World Economic Forum. www.wiwi.uniaugsburg.de/pdf/fast%20forward_07.03.08.pdf, p. 33. Prognos. www.prognos.com/fileadmin/pdf/publikationsdatenbank/Prognos _Studie_Fachkraeftemigration.pdf, p. 23f. Ru¨rup, Bert: economic expert. http://www.ruerup-altersvorsorge.de/ World Economic Forum (Davos). www.weforum.org

The Industrial Revolution of Information Technology Dr. Raschid Karabek

Dr. Raschid Karabek has been responsible for BT Germany’s Strategy and Business Development department since October 2005. Prior to this position, Dr. Karabek was in charge of the portfolio strategy of T-Systems’ Network Services division for three years. Other milestones in his career include positions held in the areas of corporate strategy, venture capital and management consultancy. All told, he thus has more than ten years of experience in telecommunications. In 1998, Raschid Karabek was awarded his doctorate after three years spent as a guest researcher at PHILIPS Research in the discipline of computer science, with data communication as his chosen field of specialisation.

Introduction The IT industry is about to experience a fundamental change. Within the last two decades, IT has revolutionised marketing and production for virtually all conventional industries and created entirely new markets and services. The IT industry has become, in many regards, a substantial driver for efficiency gains and growth of the world economy. Without the new possibilities of communication and computer-controlled production opened up by Information Technology, globalization and the “economic supercycle” – as well as the current financial crisis – would be hardly conceivable. It is, therefore, somewhat surprising that the “IT Industry” itself is not really industrialised. Regarding its procedures, processes, and production models, the IT Industry is actually at a pre-industrial stage. Why this is the case, why this phase rapidly approaches its end, and how the industrial revolution of the IT industry is happening, are described in this study.

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Outsourcing Reloaded Outsourcing, that is, relocation of processes and responsibilities to a third party, is certainly a reasonable idea: the office building where the headquarter of BT Germany – my employer – resides, for example, is not owned by BT. Facility management, cafeteria and security services are provided by specialised third parties. This makes sense, because no matter how well BT would realise, for example, facility management, the core products of BT – networks and IT services – would hardly benefit from proficiency in building management. To put it another way, building security does not belong to the core competencies of BT – it is not part of our core business. Obviously, it makes sense to outsource areas of activity that do not have a strategic relevance for the core business of an enterprise and thus can be handed over to third parties, which can deliver the same task at least the same level of quality and at a favourable price.

IT Outsourcing If outsourcing is a good idea for business areas that are of no strategic relevance to the core business of an enterprise, this would also apply to the internal IT, right? The implementation of an IT infrastructure and the operation of IT servers would not be of strategic relevance to, for example, a logistics company, where the core business is the transportation of goods. Seems clear enough, does it not? Not really. Although the IT industry convinced a lot of companies in the past that management and operations of their IT do not belong to their core business, it has become evident that essential innovation in a company’s core business is very often and increasingly driven by IT. To stick to the example of the logistics industry, Business innovations such as RFID packet tagging or track-and-trace systems were clearly driven by IT. This applies to almost every industry: corporate IT drives innovation and flexibility, and thus the capacity to compete in the long run. Even within my favourite counter-example, the forestry industry, the fate of a single tree today is determined by computers and databases. In other industrial sectors, such as the finance sector, modern portfolios have become entirely unthinkable without corporate IT. The complex financial products that caused the current banking crisis have proven this impressively. Today corporate IT is certainly of strategic relevance to the core business of almost any enterprise. It has become an essential business tool. Losing control over this tool means risking the loss of direct control of an essential element of corporate management. Outsourcing corporate IT has a negative impact on the ability to innovate and to swiftly adjust to changes in market environment. It leads to dependencies, which produce long-term risks that are not to be underestimated: As internal IT and process know-how is lost, the dialogue with the outsourcing partner becomes increasingly difficult.

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Even from a cost perspective – often the main driver for outsourcing activities – the financial savings in many cases are not really attractive in the long run. Usually there will be some cost reductions in the first years. During the course of the contract the services provided by the partner will have to be modified as changes in the market environment demand changes within the IT. Such adjustments of a running outsourcing contract are usually difficult to negotiate, tedious and potentially very expensive. After a couple of years companies often find themselves in a critical situation, which can only be resolved by in-sourcing, that is, by moving the corporate IT from the outsourcing partner back into the direct control of the enterprise. In recent years, a number of such cases have become prominent. In all these cases, this process has been highly complex, risky and very expensive.

IT Does Not Equal IT Does that mean outsourcing of enterprise IT is an entirely fallacious idea? Not at all. However it is important to differentiate between elements of the corporate IT which should remain under direct control of the company and elements which do contribute little or not at all to the enterprises ability to compete successfully. The latter can usually be provided by a third party at higher quality and better cost. Corporate data networks for example are already very well standardised and regarding their quality easy definable and measurable. Here “do-it-yourself” will usually provide no innovation and flexibility advantage for the core business. Thus, corporate networks can be regarded as “outsourceable”. This is also the case for standardised network-related IT services like mail, firewall and directory service. As IT standardisation advances this applies to more and more systems and applications. Network-based mass storage (network attached storage), database and archive systems are already standardised to such an extent, that they also offer no real means of differentiation. This increasingly applies to complex standard industry applications supporting, for example, procurement and human resources. The second part of this study will focus on standardisation issues in more detail. In addition to these more or less standardised (or “standardisable”) IT systems, there are usually dedicated applications which represent the specific know-how relevant to success of a company. Here the competitive advantage gained by full control over systems and applications is much more pronounced. Often this advantage cannot be preserved in conventional outsourcing approaches, as the IT moves increasingly into the core of the business model. Therefore the related “strategic” know-how and system knowledge has to stay within the company.

Even More Differentiation But the distinction between “strategic IT” versus “standard IT” is not the only criterion of differentiation concerning sourcing decisions.

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A differentiation between application management and infrastructure management is also helpful. Also dedicated, “strategic” company-specific applications, which have a fundamental influence on the ability of a company to compete, barely differ from other applications in their operation and to a lesser extent in their implementation.

The New Outsourcing? Outsourcing is a good idea, not only for facility management but also for the corporate IT. However we have seen that this does not hold true for the entire IT landscape of an enterprise. To preserve sustainable flexibility and competitiveness driven by IT within the core business, it is often vital to fully control this strategic part of the corporate IT. The difficulty is obviously to identify the strategic corporate IT on the one hand and on the other hand to find a sourcing model for the remaining IT environment that guarantees maximum flexibility at optimal cost for the enterprise. At the end of the day no enterprise has to literally own its IT equipment. What is really required is access to applications and information at anytime and from anywhere. Today this is essentially realised through owned IT and an IT partner within an outsourcing model. In the future a large part of the IT landscape will be standardised and flexibly obtained from one or multiple suppliers – as industrialised IT service – almost like electricity. BT calls this approach Networked IT and regards it as the centre of its corporate strategy. However, this form of flexible, standardised out-tasking implies a fundamental paradigm shift within the IT service industry.

The Industrialisation of the IT The industrialisation of IT is one of the “buzzwords” within the industry. Actually the word industrialisation is quite appropriate, especially if taken literally. The conventional IT services production model appears indeed quite pre-industrial. Despite all attempts to structure, organise and standardise the software development and operations, the established production model of IT services is not based on automated production platforms but largely on the work of individual professionals. In the self-evaluation of the industry this process is often considered to be closer to craftwork than to modern industrial production.

From Server to Service The fact that enterprises operate their own IT infrastructures, even though their core business is not IT, but for example the production and sale of clothing, shows the lack of industrialisation within our industry sector.

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A century ago large enterprises had their own power plants for power generation at their disposal. Today this service is provided by specialised utility providers. This makes sense as the production of energy will rarely have a strategic influence on the core business of the respective company. Still companies own physical server farms. Usually this should be highly undesirable as IT hardware with its rapid loss in value burden the balance sheets, quickly become obsolete and are not scalable to suit the current demands of the enterprise. Not only in regards to the “Green IT” discussion the latter point gains more and more importance. Scalability does not only provide the required flexibility to react on fluctuations of demand; it is also the basis for sustainability. In a time where energy efficiency moves into the foreground of economic and environmental discussions, a CPU utilisation of the average server well below twenty percent – as it is typical today – is wildly inefficient and cannot be sustained in the long term. A centralised IT infrastructure which simultaneously serves a high number of end-users offers the possibility to maximise utilisation and thus to drastically reduce hardware investment and the overall energy demand. Dedicated, local IT servers have to be gradually substituted by virtualised IT services, which are deployed centrally by IT service providers and are delivered via network infrastructures. For many companies this is a somewhat remote vision for the future – current IT environments are too heterogeneous and standardisation difficult to realise. Nevertheless – virtualisation, not only of servers but also of storage and clients belong to the dominant trends of the coming years.

Centralisation, Standardisation and Virtualisation As stated earlier the production model in which IT infrastructures are operated today is basically pre-industrial, as functionally standardised systems and applications are still essentially dedicated and deployed locally. This is true despite the massive consolidation of data centres and centralisation of IT systems in recent years. However this is only the first step and one fundamental precondition for the industrialisation of IT. The next vital step – the extensive standardisation of corporate IT – is much more difficult to achieve. In the area of IT infrastructure there are already de facto standards: The dominant fraction of server hardware is covered by the x86 server architecture, Intel and AMD share the major part of the CPU market and Microsoft and Unix/Linux distributions already cover more than three-quarters of the operating systems market. Standards and de facto standards are also evident in the world of software applications. Database systems and office applications show a high degree of factual standardisation through market dominance. Standardisation activities are evident in sector-independent business applications such as human resources management, customer relationship management, supply chain management, enterprise resource planning, etc. Nevertheless the standardisation of specific corporate IT landscapes proves to be quite difficult in practice.

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Usually it is not technology issues or lack of standards, but business models and self-perception of the internal IT that obstruct these developments. The IT department of a company is traditionally seen as a cost centre. It has an annual budget at its disposal which is used to meet the demands of the business as far as possible: The business defines an IT-related requirement and the IT department implements a solution, with little regard for existing systems and business drivers. Thus the development of the corporate IT is very rarely subject to a consistent architecture model, which could stipulate a stringent degree of standardisation of the IT environment. Over time very heterogeneous system landscapes emerge – with different software versions and diversified, inefficiently utilised hardware platforms. In such an environment licence-, hardware- and maintenance-cost rise exponentially. Usually it is not obvious to the business how much effort and cost is related to the operation of individual software-islands, whose actual benefit may be in stark contrast to its cost. The lack of transparency between the business’ IT requirements and the related cost as well as the lack of consultation of internal IT know-how in decisions determining the IT architecture do not support standardisation. Furthermore the corporate-IT often fails to communicate their capabilities as a coherent and comprehensive portfolio of know-how, services and applications which can support business decisions. The trend to turn IT cost centres into profit centres, to generate profits with their services in a third party market is also counter-productive for standardisation, since a relationship customer/supplier turns the focus to single projects of tactical importance instead of long-term strategic IT architecture decisions. Corporate IT has to re-establish itself as strategic IT consultants to the business and see itself as an integral and relevant factor of the enterprise. Only then will IT efficiency and strategic architecture considerations move into the foreground. In such a scenario, the standardisation of IT services becomes part of long-term IT architecture design. The third step of industrialisation of IT is the actual virtualisation of infrastructures and applications through central, scalable IT production platforms. This delivery of IT services as Networked IT throughout the network is far easier to achieve than standardisation, despite current technological obstacles.

The Telecommunications Industry is Ahead of the Game It is interesting to observe that the telecommunications industry, which is in many cases seen as antiquated and outmoded by the IT industry, has largely completed the process of centralisation, standardisation and virtualisation. Obviously it is rarely efficient for an enterprise to build its own network infrastructures. The limited opportunities of differentiation within the core business of the customer on the one hand, and the advanced standardisation of telecommunication systems on the other hand, justify the use of specialised service providers with their regional or global network platforms. Since in the era of IP and Internet the boundaries between IT and telecommunications frequently blur, the actual industrialisation of IT within

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network service providers has already begun. These players already offer networkrelated IT services such as network security (firewalls, etc.) or mail services. Here the IT server has already been transformed into an IT service as the following example illustrated: A corporate substitutes its 25 firewall servers situated at its 25 global subsidiaries with a single (redundant), flexible firewall service provided through the network. The mail server with a fixed capacity of 500 mailboxes is substituted by the mail service which provides exactly the currently required number of mailboxes. In the next step the deployment of server infrastructures and (standardised) application-environments will be realised in the same manner. Existing heterogeneous server environments will be substituted by virtual servers, with exactly the performance and capacity currently required by the enterprise, provided by a service provider as an IT service through a network. Infrastructure-asa-Service (IaaS), IT-as-a-Service (ITaaS) and Software-as-a-Service (SaaS) are the buzzwords for this development.

Production Models Industrial IT requires fundamental changes to the production model within the IT industry. Today’s classical project-driven “professional services” business model does not deliver the efficiencies and scale effects that standardisation can provide. A platform-oriented production model, with respective investments into the production-platforms, is required to deploy virtualizes IT landscapes efficiently. This development will have dire consequences for the IT industry with its enormous headcounts. Considering this, labour arbitrage, that is, the fashionable off-shoring of IT tasks towards low-wage countries, regarded by the IT industry as essential to reduce cost, will play a minor role in the long term. Some of these “geographically relocated” tasks will return as strategic architecture-tasks to their origin markets, as they are seen as vital to the success of the core business. Other operative tasks will cease to exist and will be substituted by standardised, industrially produced Networked IT services. This is a unique opportunity for traditional network service providers as their production model already fits the new requirements. Furthermore they are the only ones able to provide network and IT services out of one hand and can guarantee the availability of applications at the desktop.

“Partly Cloudy” However, the network providers will have to hurry, as new players push into this market. Web-based companies like Amazon and Google have not only fully embraced this new production model; they are already widely deploying highly standardised IT production facilities. Amazon, initially an internet bookstore, today offers scalable virtual servers at remarkably low price levels. Amazon customers are able to order virtual servers with flexibly configurable performance-parameters

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(number of CPUs, memory, operating system, etc.) out of the so called Amazon elastic compute cloud (E2C) and use them via the Internet. This service, referred to as cloud computing, is billed for example on the user’s credit card. This somewhat unexpected, new business field of the successful online store has a logical explanation if you contemplate the business model and IT landscape of Amazon. A vast part of the annual revenue of Amazon is brought in between Thanksgiving and Christmas. The geographically distributed server farms of the company are designed for this peak load. Furthermore Amazon has an excellent cost structure, due to its sheer size and the homogeneity of IT resources. Therefore virtual server offerings can be produced on already existing, cost-effective IT infrastructures. Here Amazon efficiently uses existing resources for new products. In addition to pure server power Amazon offers mass storage and a database service. Google selected a different approach. Just like Amazon the search-engine provider has enormous homogeneous, structured, distributed computing-resources at its disposal, which are now made available to the end user. With its so called Google App Engine, Google offers a software development environment, which allows customers to develop and operate their own web applications on Google resources. Business customers see risks in the adoption of these offers for critical applications. Especially the use of the Internet as delivery channel between actual IT and user creates security concerns. After all, the Internet as open public network does not even remotely provide the level of security that the closed private networks infrastructures used by large business customers offer. Such Virtual Private Networks (VPNs), provided by network providers, are not accessible from public internet and therefore inherently offer a much higher level of security. The use of the Internet also carries a higher risk of network outages, bandwidth degradation and loss of data than VPN-based solutions. Especially the danger of so called denial-of-service attacks through third parties poses serious business risks for corporate users. Such attacks onto the path of communication between company and IT supplier can interrupt data transmission entirely. Hacker attacks onto virtual servers, almost impossible within the private VPN world, carry the risk of industrial espionage. Despite these constraints, Google & Co provide an interesting alternative to owned IT for small and medium enterprises as well as for less critical applications. While the Web 2.0 world certainly has become a driver a catalyst for the industrialisation of corporate IT, large enterprises and corporations will look toward established network and IT service providers for secure and highly reliable private cloud computing solutions.

Summary and Outlook The industrial revolution of information-technology is finally happening. IT servers are increasingly replaced by IT services, which are delivered through the network and can be dynamically and flexibly adjusted to the particular requirements of the enterprise.

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Networked IT services are cost efficient for both enterprise and provider, as they are shared between customers and produced in an industrialised fashion on scaleable IT infrastructures – just like private corporate networks are produced on global backbones in the telecommunications industry. This new approach offers enterprises the possibility to treat their internal IT in differentiated way and to outsource selected IT services, while strategic IT know-how and IT systems remain within the company. Such out-tasking approaches have already begun to substitute the traditional full IT outsourcing strategies. Alternative market entrants such as Google and Amazon accelerate this trend with their commercially attractive, internet-based cloud computing services. The underlying industrialisation of IT services offers established network providers an opportunity to extend their portfolios into the area of IT services. They compete with traditional IT service suppliers with costefficient standardised IT offers. In the long-term, large-scale centraliation, standardisation and virtualisation of IT systems offers the only realistic chance to reduce energy-demand and -cost (as well as related carbon emissions) drastically by maximising the utilisation of IT resources. This development will also have an impact on the private customer. The industrialisation of IT leads to a migration of computing power, content and applications into the network. In a way, end devices will also be virtualised, that is, they will become terminals for services provided through the network. Only when, our data, operating system, our applications and processing power are located in the network, our private computing worlds can be accessed from any device. Whether mobile device, television, game station (or bathroom mirror with integrated LCD screen): The digital desktop, the holiday snapshots or mp3collections are accessible from anywhere, where network access is available, without the need to boot up a personal computer. Phrases like “personal computer” and “booting up” will then hopefully vanish from our vocabulary.

Service Providers and Their Ecosystem in Globalization 2.0 Dr. Uwe Lambrette, Thomas Renger and Scott A. Puopolo

Dr. Uwe Lambrette is a Director of the IBSG Service Provider practice. Uwe specifically concentrates on the area of NGN Transformation, developing successful migration strategies to help SP’s accelerate their evolution toward “All-IP” business models. Prior to joining Cisco, Uwe was a Principal in the Telecommunications practice at Booz & Co. Uwe’s background covers extensive work in Europe, Emerging Markets, and the U.S. As a consultant, he has also worked for telecom standards bodies and institutions. Uwe holds PhD and Master’s Degrees in Electrical Engineering from RWTH Aachen University in Germany, and completed additional engineering studies at University of Stuttgart and London Imperial College. He lives with his wife Giovanna and their four children in central London. Thomas Renger is with Cisco Systems where he is a Director in the European Service Provider Practice within the Internet Business Solutions Group (IBSG). He has over 15 years of experience in various positions in the telecommunications and IT industry. Prior to joining Cisco, he was with Mannesmann Eurokom where he was overall responsible for the international technology strategy and network planning supporting the successful expansion of the group’s European footprint in wireline as well as mobile markets. Mr. Renger holds a Dipl.-Ing. degree with distinctions from the University of Stuttgart in Germany. He is a member of VDI and the IEEE. Scott Puopolo is the Vice President in charge of the global service provider practice in the Internet Business Solutions Group. He works with Service Providers and Media companies around the world on strategies and new business models for economic growth. Mr. Puopolo’s career includes private equity, as well as a 14 year career with Accenture, where he oversaw its North American Telecommunications Strategy Practice. Puopolo received his undergraduate degree cum laude from Harvard College, and his M.B.A. from the Wharton School of the University of Pennsylvania.

R. Ijioui et al. (eds.), Globalization 2.0, DOI 10.1007/978-3-642-01178-8_9, # Springer-Verlag Berlin Heidelberg 2010

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Service Providers in the Face of Globalization These are interesting times for service providers (SPs). They are undergoing a huge internal transformation toward an increasingly IP-based production environment. Additionally, they are aspiring to capture the benefits of globalization by providing communications services in emerging and mature economies, and by optimizing their supply chain across the globe. This is Globalization 2.0 – the concurrent change of expanding their footprint and the adaptation of the underlying product portfolio, as conceptually shown in Fig. 1. The key difference between Globalization 2.0 and Globalization 1.0 is that the evolution of product portfolios across different geographies has progressed and is more diverse. Because of this, the individual service provider will not be in a position to control or steer this market transition. As the transition arises, many SPs will find embedded opportunities and will aspire to capture benefits in the area of cost and revenue. They must, however, prepare to do so successfully.

Globalization 2.0 in the Service Provider World Most of the predominant service provider challenges can be summarized in four simple actions, each of which can be optimized in the face of Globalization 2.0: 1. Attract new customers and retain existing customers. 2. Stabilize or, better, grow revenue per customer. Globalization 2.0 - Conceptual View -

All IP

Service Provider Portfolio

Legacy

Geography Lower GDP Higher POP / GDP Growth

Fig. 1 Key dimensions of globalization 2.0 Source: Cisco, IBSG Analysis, 2009

Higher GDP Lower POP/ GDP Growth

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3. Control and optimize costs (both CapEx and OpEx). 4. Maintain regulatory and public policy alignment. With respect to Point 1, Globalization 2.0 offers SPs a significant opportunity to broaden their customer base on a global scale, and many SPs have followed this strategy. Particularly, players in the mobile communications industry (such as Vodafone, Orange, and T-Mobile) have been leading this trend by replicating the same business models across a number of countries. Furthermore, European incumbents (such as Telefo´nica and Telenor) and stable, maturing players from emerging countries (such as MTN and Orascom) have adopted this strategy as well. Yet, with respect to Point 2, Globalization 2.0 requires enabling the right services. Commonly (and the authors do not intend to challenge this), these services are seen as IP enabled – connecting any device to any service capability, including video and advanced messaging, and providing access to suitable applications. Given market, technical, and economic realities, however, the transition toward this portfolio will occur at different speeds in different countries. As SPs go through this transition, portfolio complexity will greatly increase, placing stress on the portfolio and increasing self-cannibalization. Portfolio stress will also challenge the SPs’ ability to innovate, as internal complexity takes an ever-greater share of managerial attention. Furthermore, SPs will have to think about business models, which are independent of pervasive backbone and local-access infrastructure as no single SP will be able to build a globally pervasive network. With regard to Point 3, this leads to a significant cost and complexity challenge. SPs will have to bear the brunt of and manage the cost of complexity as they go through the transition. Clearly, they can use scale and supplier diversity and specialization to help optimize their cost position. They can also apply learning from one geography and scale them across their footprint (best practices or center-of-excellence strategies). Regarding regulatory and legal challenges (Point 4)), complexity and risk increase further as the network and virtual footprint broaden. Our main conclusion is that SPs will need business model and value propositions that are a “fit” for the joint challenges of portfolio and geography. Let us first provide some detail and validation for these assertions.

Attract New Customers and Retain Existing Customers On the revenue side, there is a huge growth upside to tapping into less-developed markets and adapting a proven, simple business model to the lower-ARPU environments of emerging economies. Presence in multiple geographies enables SPs to segment markets, trial, select, and replicate proven innovation. SPs will also be able to benefit from risk diversification. In engaging in India and Turkey, Vodafone could tap into markets where revenue growth can still be achieved with basic connectivity and voice services. Telefo´nica and Portugal Telecom, to a lesser extent, have broadly expanded into Latin America, hoping for similar growth and

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benefiting from linguistic and cultural similarities. Not all these engagements are based on a controlling interest, but they always seek to add scale and scope by bringing in existing SP experience. Upside opportunities for SPs, however, are not just limited to developing countries. Accelerated through the current, difficult economic climate, governments around the globe have identified the strategic relevance of a high-performance broadband infrastructure for competitiveness and wealth. Service providers might benefit not only from the various stimulus programs being put into place, but also by playing a crucial role in transforming and monetizing in sectors such as education, healthcare, and public administration. All in all, broadening the national footprint greatly increases opportunities for SPs.

Stabilize/Grow Revenues per Customer To offer compelling services at a reasonable price point, all SPs will have to (and currently are) undergoing a transformation toward an All-IP environment, in which any device linked through any access networks can use any IP-based service anywhere. The speed of this transformation will be moderated by economic considerations, technical capability, and the time it takes to transform large organizations. Finally, market and competitive dynamics shape this transformation. Economic and technical drivers can enable rapid adoption of this new environment. Let us consider economic drivers for enterprise and consumer. Enterprise customers aspire to higher levels of flexibility to increase the diversity of their supply chain and to take out remaining inefficiencies. They will also move toward more environmentally friendly operations. The current economic climate will further catalyze and accelerate this development. As a consequence of cost pressure, for example, many companies have significantly increased their virtual meeting and collaboration infrastructure, a move that benefits both SPs and the environment. Vertical industries such as healthcare are beginning to benefit from new means of longdistance collaboration to deliver better, more affordable health treatment. Urban areas will strive to better network various communal functions like security, or energy management in buildings to cope with the ever-growing urban population1. For consumers, online shopping and business transactions help simplify daily life and make it more cost efficient already. On-demand, real-time access to large video libraries, and home telepresence applications will further increase benefits for the networked home. All these economic drivers make networked business operations – and similarly the networked private life – much more attractive and provide new business opportunities for SPs. Clearly, SPs anticipating these trends will require a solution for investing in the underlying infrastructure, be it through 1

Press Release: Cisco Unveils “Intelligent Urbanization” Blueprint, 13.2.2009 (http://newsroom. cisco.com/dlls/2009/prod_021209b.html)

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financing, from their own cash flows, or through a variety of sharing models. These models can include collaborating with public-private partnerships, with public organizations such as municipalities, with other sectors such as utilities, with other competing SPs, or with suppliers. Technology enables this vision. Ubiquitous mobile devices will provide a pervasive level of basic connectivity. Semiubiquitous broadband connectivity, offered by multiple wired, fiber, and wireless networks, will enhance the overall user experience and enable new services and applications with rich visual characteristics. Mobile devices will retain their highly optimized end-to-end design, partly because they are not only technical devices, but also have roots in the fast-moving consumer goods industry. Beyond mobile devices, we will see a further delayering of the lessconstrained portable (Laptop, etc.) or fixed device. Much of the software will run on standardized thin clients. Computing requirements will move back into the network, be it on shared infrastructures (the much-hyped “cloud computing”) or in private, consolidated data centers. An intelligent IP network and its associated management functions will provide secure and tailored connectivity when and where it is needed. As a shared resource, it will offer the required amount of flexibility. Resources will be provided on demand where their scarcity makes an on-demand allocation effort viable. Clearly, transitioning to an all-IP environment is a complex effort; as a stand-alone subject, it goes beyond the scope of this study. While the transition to an all-IP environment seems almost linear, market and competitive forces will add complications. Competing players, using different technologies, will drive down broadband pricing and ultimately commoditize broadband access. In many emerging countries, and in some European countries such as Austria and Denmark, mobile technology has emerged as a key broadband enabler, absorbing a high share of new broadband connections. This is forcing incumbents to deploy media and content offerings to retain customers and increase service revenues compared to cable players. As incumbents implement these offerings, they are required to move to an IP environment to deliver these services cost effectively. Conversely, some markets with less-disruptive competition will allow incumbents to exploit a TDM infrastructure for longer periods and at higher prices and cost points. Service providers will also want to avoid risks in the areas of revenue and churn caused by special termination clauses, which apply to any service modification in some countries.

Control Your Cost Portfolio Stress: The Increasing Cost of Complexity Service providers must address customer and revenue opportunities by adjusting their Service Portfolio. Doing so, however, comes at a price. In short, the challenge for SPs is to manage the increasing complexity internally, externally, and across the portfolio. Addressing a wider portfolio of national markets requires SPs to address

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a wider range of development stages and speeds. Latecomers to the market usually evolve faster than first movers. A mature market will go through an extensive phase of legacy enterprise transport connections – like X.25, Frame Relay, and ATM – before the portfolio gradually converges toward Ethernet and IP/MPLS. Emerging countries can leapfrog from “nothing” to advanced technology, deploying in a cost-efficient greenfield scenario that requires a much narrower portfolio. In addition, emerging markets often have a greater variety of customer needs; customers require very low ARPU propositions, as well as very high-end offers for the highly affluent national elite (reflecting the typically much broader spread of wealth across the population). Moscow, for example, enjoyed a high penetration of 3G handsets before any 3G network was launched because affluent customers wanted to own the latest handset designs. Yet, average ARPU in Moscow is much lower than it is in mature markets, and the vast majority of customers require inexpensive and simple tariff packages. India is in an even more extreme situation, with larger parts of the population having very low income. As products and services develop faster and portfolios increasingly diversify, SPs will face fundamental challenges as they transit to an all-IP portfolio in various geographies along different timelines. Stress on their portfolios caused by Globalization 2.0 is depicted in Fig. 2.

Impact on the Value Chain While maintaining an integrated vision – any network, any service, any device – will have become easier, mapping this onto a coherent strategy is tremendously Portfolio Innovation

Service Provider Portfolio Stress - Conceptual -

All IP Unified Computing

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3G Broadband Mobile Telephony

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Portfolio Breadth Market Transition to All IP (Time)

Fig. 2 Portfolio stress during an all-IP market transition Source: Cisco, IBSG, 2009

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more difficult because the globalized business system needs to operate at different cost points and different speeds. An SP may find situations where different markets require competing products (legacy versus new transport) or delivery systems (cloud computing versus IT outsourcing) that challenge the coherence of internal operations. It is highly likely that legacy technology – both network and IT – differs structurally in terms of suppliers and business processes. While SPs can benefit from having a global supplier base, enforcing supplier policies across a fragmented empire of local operations presents a broad challenge. Globalization also enables new ways to control costs across an SP’s value chain. A global business architecture offers SPs a wealth of cost-optimization opportunities, including aligning closer with suppliers (outsourcing), with competitors (network sharing), and with national subsidiaries (internal consolidation and harmonization). Service providers can aim to replicate both a lean emerging market business model in mature countries and proven business practices from one country to another, as, for example, Telenor did by replicating a mobile business model in, for example, Pakistan, Bangladesh, and Malaysia. Service providers can also consolidate operations between adjacent countries, and optimize their supply chain across geographic boundaries. For some elements, they can choose a centralized supply model to realize scale. For example Vodafone did this for its 3G rollout. For others, they can attempt to decentralize procurement but share best practices (e.g., for blue-print architectures or for base-station real estate.) They can choose suppliers who are based in lower-cost countries or who employ different business models. Suppliers in India, for example, have developed basestation designs in which water tanks cool equipment during power failures, and less back-up battery power is required. Service providers can also take advantage of the benefits of a more diverse, multicultural workforce. And finally, by applying their technology internally, SPs can use technology to improve their own internal processes. The complexity of combining the discussed cost reduction approaches, and working against the challenges, may easily foster an inward-looking attitude that dilutes customer focus and, hence, market success. Given that a unified strategy might not be available universally, succeeding requires strong leadership skills and a strong leadership team. This may lead to “negative scale effects” in which the cost of complexity outweighs the benefits of scale. Each globally operating SP will have to build the right “operations cocktail” to capture Globalization 2.0 benefits without suffering too much from its drawbacks. Innovation may also suffer from a complex business model. The complexity of the underlying business model forces SPs to rely more on partnering in innovation. As a side note, innovation is also limited by constrained market reach and scale – a device manufacturer or over-the-top player can achieve global reach with much greater ease. Likewise, SPs’ “DNA,” which focuses on “big-bet innovation” through standards bodies, may be challenged with the breadth and pace of innovation in an all-IP world. Another consequence is that globally operating SPs may be outpaced by smaller and more nimble competitors in specific market segments. Figure 3 provides examples of the effects caused by the combination of geographic diversity and portfolio stress.

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Portfolio Stress

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Products/ Services

• Too large • Excessive • Multiple Mobile Standards portfolio increases platform complexity complexity • PSTN and Broadband connectivity • Different countries have different legacy

• Local customization

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• • • •

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• Varying Legacy • Varying legal requirements

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• Agents unaware of all product features and challenges

• Difficult to • Sales unable to focus marketing give equal on big bets and attention to have customer all products impact

• Different Language and Support models

• Stretch between • Different global brand countries have and different sales local approach competitive challenges

Hard to sustain a global strategy Longer product introduction times Higher cost base – negative scale effects Difficult to sustain innovation lead – focus on managing the base

Fig. 3 The effects of globalization 2.0 on the value chain Source: CISCO IBSG, 2009

Once the portfolio transition has been completed and all geographies have gone through the transition, value-chain stress will decrease dramatically. SPs will no longer be required to offer, for example, both a legacy PBX service and a parallel, scalable, hosted central unified communications solution. Country transformation will have provided a forklift-upgrade to network infrastructures in emerging countries. The cost challenge resulting from Globalization 2.0 will diminish over time if managed properly.

Maintain Regulatory and Public Policy Alignment Realizing global scale and scope benefits is increasingly challenged by local legislation, regulations, and practices. Regulators, for example, are often required to keep customer data in the country, with a varying degree of flexibility. Local authorities may also require different forms of legal interception, while trade unions and employment laws require adaptation of certain business processes. Countries that overcame ethnic challenges in the past may put additional ethnic workforce legislation in place. Overarching this is the need to retain customer data protection and integrity, both in a legal and competitive sense. In our experience, these combined issues often are the limiting factors to realizing global scale and scope.

Resulting Business Models Service providers will have to look for business models that align well with all the four actions imperatives discussed. Initially, a move to an emerging economy offers to replicate access-driven business models such as selling minutes or bandwidth.

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Yet, the very different price points will require operationally adjusting and simplifying proven practices. While the basics of the business model replicate from mature to emerging markets, its operational refinement travels in the opposite direction. As evolution progresses, SPs will have to reinvent their business model as their legacy service portfolio, mainly based on access, is commoditized either by market forces or regulatory intervention. Vertically integrated business models will no longer guarantee differentiation and success. In many cases, they will become unsustainable. Only a few, if any, SPs will own a pervasive network, and many virtual, partial, or broker models will arise on a global and national scale. One example is the acquisition of U.K.-based Vanco Plc (a managed network services provider) by Reliance Communications, Inc. (India’s second-largest mobile operator) in May 2008. Financial constraints may accelerate the build-up of such constructs, as these usually favor large, integrated operations with a “long” balance sheet, putting stand-alone virtual operations at a disadvantage. Another example is in Latin America, where an integrated media/SP is investigating how to expand into new markets by offering its high-definition web video service independent of network infrastructure to television customers in other markets, using a set-top box and standard broadband connection. The attractiveness of specific value chain elements will differ by market and geography. Specific attractiveness of the service creation value chain step can, for example, give rise to the virtual SP model, which is particularly interesting if an SP seeks to rapidly increase adoption of innovative IP services2. Virtual provider models such as MVNOs and FVNOs have developed broadly, with Vanco being a good example. Service brokers will aim to establish international connectivity, and over-the-top players such as Amazon and Google will specifically address consumers and businesses satisfied with best-effort, low-cost service needs. In all cases, controlling the differentiating elements of the value chain will remain the source of value, while nondifferentiating elements can be sourced relying on wholesale agreements. As a result, cooperation among players in the value chain will become more important as well, creating new business-process interfaces (this might be referred to as “business-process peering”) as well as technical interconnection solutions. (We cover two key dimensions of the resulting business model, namely network integration and IT and outsourcing elsewhere3.) It will be essential for SPs to have the right business processes and a suitable collaboration infrastructure in place to manage and steer their international activities. To benefit from centralization, Orascom has a requirement to process local requests centrally within 72 h; otherwise, national subsidiaries can proceed with 2

The Business Case for Virtual Service Providers, Solution Overview, Cisco Collateral The Emerging Service Provider Network-IT Factory–Smart Sourcing Strategies, The Converged Network-IT Factory: Part I: Deciding Strategy and Portfolio, Part II: Eight Rules to Build a FutureProof Integrated Network-IT Strategy (Cisco IBSG 2009, in preparation – will be available on www.cisco.com)

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their national proposal without central approval. Vodafone has centralized procurement in a tax-optimized location in Luxembourg. Telefo´nica tries new and smart sourcing models in a small geography prior to rollout. All these companies have deployed extensive virtual meeting facilities and collaboration tools to enable rapid and effortless interactions, including handling supplier complexity more efficiently. In summary, succeeding in the transition to all-IP requires having a business model that is robust, agile, and flexible enough to deal with the challenges brought about by Globalization 2.0. At the same time, the business and operating model must still enable leadership to define and enforce the required transformations. Succeeding also requires following local developments and timing service roadmaps to respective local needs.

The New Service Provider Supply Ecosystem It is obvious that the trends and market dynamics discussed in this chapter will dramatically change the current ICT industry landscape and its established ecosystems. SPs have a strong desire to expand into adjacencies in order to compensate for commoditization pressure on their own core business. As tightly integrated vertical business models disintegrate, this opens the opportunity for new players to insert their areas of expertise and differentiation, thereby attracting value from others.

SP Requirements to Global Supplier Base In executing the required transformation, and as complexity grows, SPs will have to rely on global supplier partners to fulfill an expanded set of expectations. While known criteria such as a highly competitive product portfolio and quality, customer intimacy, and global reach will remain important, additional criteria are arising and becoming increasingly significant. For example, in the light of recent economic events, suppliers’ financial backing and stability have become another key selection factor. Furthermore, innovation and replicable joint go-to-market models are of high importance when entering or creating new markets. The pace of innovation will become even more important in the future in order to stay ahead of the commoditization curve and to maintain sustainable differentiation. In a world of open standards and horizontal business models, being first through continued innovation is not just a nice attribute but also a matter of survival.

Cisco: A Global Supplier Partner As a supplier/partner to the SP industry, Cisco1 has adopted many of these practices. Reflecting successful globalization, Cisco has developed operating

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models that cope with rapid innovation and portfolio stress. As such, we aspire to qualify as a partner of choice for SPs facing Globalization 2.0. In recent years, Cisco has made strong efforts to evolve its business model from being a company with a global footprint to becoming a truly global player. This has been driven by opportunities in emerging countries and new markets, as well as by a reaction to some of the globalization trends described in the first part of this chapter. In order to strengthen our footprint and presence in emerging markets such as China and India, Cisco opened a second headquarters in Bengaluru, India. Rather than being just a satellite facility to our main headquarters in San Jose, California, this location takes ownership of different lines of business (including all the service business), and a large number of senior executives are operating out of Bengaluru. In conjunction to this footprint and transformation presence, Cisco has demonstrated a commitment to developing a global, diverse workforce. As Cisco expanded its product portfolio and entered new adjacent markets, it evolved its business model away from a centralized command-and-control culture to a complementary collaboration and teamwork culture by working collectively in cross-functional teams to further evolve the business. Main decisions are now made in respective councils and boards, while decisions are executed in a traditional command-and-control manner to ensure effectiveness. To enable global collaboration, Cisco benefits from employing its own collaboration technologies such as Unified Communications, TelePresenceTM, and WebExTM, as well as employing Web 2.0-based principles for knowledge and information sharing using wikis and video blogs. Use of these tools has grown massively over the last few quarters, a sign they are being adopted by the entire workforce on a broad scale. Benefits are clearly noticeable. While Cisco’s senior management had previously been able to focus only on three top initiatives per year, the company can now successfully execute on more than 20, translating into a significant acceleration of Cisco’s evolution. Through virtual meetings and the use of collaboration tools, the company has been able to reduce its travel expenses per employee by more than 20% and to cut its carbon emission footprint significantly. Because innovation is the key enabler of Cisco’s success, the company fosters creativity by providing employees with tools to share or submit their ideas. For example, the Emerging Technologies Group has been set up as an internal incubator that draws on new ideas early on and provides the opportunity to implement them within a large corporation. This unique model has already created significant innovation such as the well-known TelePresence technology and product suite. Finally, external growth through targeted acquisitions has always been, and will remain, one of Cisco’s core strengths. The company not only possesses processes and approaches to identify suitable companies and associated technologies, but also uses all its process and technology capabilities to successfully integrate these acquisitions. Technologies, developed or acquired, may in many cases succeed products that have reached maturity, highlighting Cisco’s successful approach to managing portfolio stress in a large corporation. To further increase Cisco’s relevance and impact on local markets across the globe, the company is continuously evolving its go-to-market strategies and models. This allows for a focused approach to address

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the main issues that are specific to a local market. As an example, a few years ago, Cisco formed the Emerging Markets Theater and built a dedicated go-to-market strategy centered on country transformation. This model is now being refined and will give even more focus to specific high-priority countries such as India, China, Mexico, Brazil, and Russia. Besides product innovation Cisco is also expanding into new business models. With the acquisition of WebEx, Cisco has begun to utilize SaaS (software as a service) business models. Cisco plans to further increase its activities and capabilities in this area going forward.

Conclusions Globalization 2.0 offers major rewards to SPs, provided that they remain true to their basic strategic challenges and implement a business model that is flexible enough to steer the business through portfolio stress as the markets transition toward all-IP. Such a business model must offer a much greater variety of virtual and process interconnection points. Furthermore, the model should offer, address, or pursue over-the-top propositions, as no SP has a pervasive global infrastructure. As SPs implement this vision, Cisco aspires to be one of their preferred global partners, relying on its own broad innovation capabilities and virtualized, flexible business model.

References Cisco Unveils “Intelligent Urbanization” Global Blueprint, 13. Feb. 2009 (http://newsroom.cisco. com/dlls/2009/prod_021209b.html) The Business Case for Virtual Service Providers, Solution Overview, Cisco Collateral The Emerging Service Provider Network-IT Factory – Smart Sourcing Strategies, The Converged Network-IT Factory: Part I: Deciding Strategy and Portfolio, Part II: Eight Rules to Build a Future-Proof Integrated Network-IT Strategy (Cisco IBSG, 2009, in preparation – will be available on www.cisco.com)

Mastering the Globalization Challenge Roland Schwientek

Roland Schwientek is a Partner in Roland Berger’s Munich office. He studied business administration at the Gerhard-Mercator University of Duisburg. He joined Roland Berger in 1997 after working several years in various functions in the industry, lastly as a manager at Bosch automotive division. Manufacturing footprint design, procurement/purchasing, supply chain management, and working capital optimization are some of his focus issues. He drives projects in many different industries under the action title “best practice transfer”: What can we learn from leaders and leading industries? In addition, he supports global acting enterprises and private equity-owned companies in performance improvement and sustainability strategies. Schwientek is the author of a number of studies in the series “Operations Excellence.”

Globalization: Necessary, but Hard to Navigate As far as the world economy is concerned, it is interlinked. Kurt Tucholsky

Despite cyclic, economic, and structural financial crisis, the globalization of the value chain is an unstoppable fundamental mega-trend with bright future perspective. But, the rules are constantly changing. As troubles in financial markets spread around the world, accelerating economic downturns on three continents, antiglobalization activists could well have felt vindicated. But, the doomsayers have got it wrong. Globalization is here to stay. What’s more, the financial meltdown actually might be a catalyst for the globalization process. As the German writer Kurt Tucholsky said early in the twentieth century, the world economy is all interlinked. It is not just the banking sector that was brought to its knees. The financial market crash struck at the heart of the real economy too. Industrial

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Fig. 1 Pros and cons toward globalization Source: German Marshall Fund, USA, 2007

production in all pockets of the world was cut, as companies expected lower trade and exports. In some cases, this accelerated layoffs, taking more pay checks out of the economy. As a result, consumer spending is in the basement. Few would have predicted this scenario a year ago. If nothing more, the financial meltdown highlights one of globalization’s hallmarks: change. The rules of the globalization game are not set in stone, they are constantly in flux. Doing business is complicated in a globalized world. While it is just got a whole lot more complex, it was tricky to navigate before late summer 2008 too. This becomes plain when we take a step back to a time just before the financial tsunami hit, when the world felt like a safer place. Asked by the German Marshall Fund of the United States if free trade is necessary, citizens in industrial countries were almost unanimous in their answer back in 2007 (Fig. 1). More than 70% of Europeans said “yes,” as did 75% of US Americans, and a whopping 83% of Germans nodded their heads in agreement. But even back in those halcyon days, people had their reservations. When asked “how worried are you about losing your job considering global competition?” 50% of Europeans and 59% of US Americans said they were concerned. Complicated as the business world has suddenly become, there is no opt-out clause for companies in today’s globalized world. Even entertaining such a thought is absurd. Especially in today’s tough business environment, companies cannot afford to waste time and resources deciding whether globalization will be an important part of their strategy. It is already. Far more sensible is then for managers to devote brain power to the harder questions, to consider “how” to unlock the secrets of global value creation, to decide what share of operations their company can afford to keep close to home and which parts should be outsourced. Time should be spent considering which steps in the value chain will take place and where in the future. This means asking “Where will value be created in the future?” Foreseeing companies will also ask themselves how they can help employees and citizens keep up with the rapid change; which risks can we manage and how can we take political and legal frameworks into account in our company strategy in a profitable manner?

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Fig. 2 Reasons for outsourcing and off sharing activities Source: Kinkel, Steffen, Germany, 2000; Roland Berger’s CEO survey, Germany, 2006

Unfortunately, there are no easy answers. There is no cookie cutter strategy for each company to follow at all times. Take outsourcing for example, long considered the golden path to global value creation. CEOs, when asked by Roland Berger 2006 about their motives for outsourcing parts of their value chain to other countries, responded in the following way: Eighty-two percent with “lower factor costs,” 42% with “entering markets,” and 25% with “closeness to the customer.” (Fig. 2) For a long while, shifting operations to overseas sounded like good business sense; it solved lots of problems. But there is no magic bullet in today’s business world. Many companies are beginning to turn their backs on outsourcing and bring production home. CEOs who have shifted production back home or plan to do so soon would say they did so because of a lack of flexibility (75%), unsatisfactory quality (55%), or excessive steering and oversight costs (32%). Research carried out by the Fraunhofer Institute 2008 also shows that year-by-year these monitoring and steering costs gain in importance. More and more companies are jumping off the off-shoring bandwagon. Until 2008, procuring at least 50% of goods from the so-called low cost countries was the goal of the automotive supplier and mechanical engineering company ITT. Not anymore. It has rethought its internationalization strategy and now plans to source a significant amount of goods from Europe and the United States. Especially, the coordination costs, specific risks, and overcapacities drove this decision. ITT is not alone: Porsche announced to relocate its production from Finland to Austria and Krones, and a German producer of beverage filling machines, as well as the insulin producer Sanofi-Aventis, decided to invest significantly in the high cost country Germany. The allure of lower costs that drove many companies to produce and source offshore is losing its charm. This off-shoring reversal is reflected in the manufacturing sector’s share of gross value addition in developed countries. According to the de-industrialization index compiled by Prognos, a leading market research institute, manufacturing’s share of gross value addition in the European Union increased 6% points to 26% between 1995 and 2008 (Fig. 3).

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Fig. 3 Share of production related business to GDP and share of F&E investments in different countries/companies Source: prognos.com, Germany, 2006; Roland Berger think:act content, Germany, 2008

Holistic Value Creation People who have “low cost” or “cheap is cool” impregnated in their minds when visioning global value creation misunderstand the motives shaping this mega-trend. While low cost might have motivated companies a while back, a seismic shift has occurred. If low cost were the only factor, Burkina Faso and Burundi, two countries with some of the lowest labor costs on the planet, would rank high on the list of most attractive places to do business (Fig. 4). But this is not the case: neither country is known for attracting direct investment or for exports. Low cost is no longer the only compelling argument for distributing value chain activities throughout the world. A factor companies are looking at more is the productivity of the workforce in the country they are investing in – how much productive value are they getting per invested dollar. Taking this productivity into account reduces the gap in labor costs between the so called “high-cost” and “lowcost” countries significantly. Taking into account other (hidden) costs like transportation, quality issues, and coordination costs puts a whole new twist on low cost country sourcing (Fig. 5). Managers today face some tough questions. Can the internationalization of value creation: l l l l

l

Make a valuable contribution to your business? Mitigate and spread out current financial, currency, product and supplier risks? Achieve sustainable tax advantages over the long term? Produce capital and labor cost advantages and help your company tap into innovation and knowledge potential that will be useful over the long term? Contribute positively to environmental sustainability and improve human rights standards?

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Fig. 5 The effects of labor productivity on the labor cost gap Source: Total Economy Database, USA, 2009; Economist Intelligence Unit (EIU), UK, 2008

To be effective, successful managers create a roadmap that integrates global value creation into their overall business strategy. They can thus direct their capital and talent toward the most profitable and sustainable growth opportunities. A holistic value creation strategy does not just focus on short-term cost reductions. Companies with a positive value creation ledger entrench within their business strategy acceptable working conditions for all employees, a respect for social and political frameworks, and a promise to protect the environment – irrespective of how far the company’s footprint spreads out across the globe. The prognosis for responsible business is upbeat when times are bad, especially as the public mood is toward more accountability and regulation, not less. If business leaders think now is the time to save money by cutting ethical or

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environmental corners, they should think again. With public pressure increasing, who wants to be confronted with the fact that their products are made by impoverished children, that their company’s prosperity rides on the back of slave labor, or that the company’s CO2 emissions are disproportionately higher than those of competitors? The anger today is very real. Business leaders should be mindful of the rising public anger at the use of public money to buttress the business of highearning bankers and should not use weaker economic conditions to shake off their global responsibilities. Acting responsibly will help companies prosper. Customers who are not convinced that a company creates value in a positive way are less likely to purchase their products and services. Recast in a positive light, this means that companies that convince buyers that their goods create value “doing good” will have no difficulty unloading them. They will win customers and thus be able to expand their market share. Rather than scaling back sustainability plans in response to the current economic crisis, world leaders are pushing for a green solution like never before, hoping it will pull the global economy out of its slump. Thirteen influential trends drive the global deconstruction of each company’s value creation There is no infallible recipe to securing value creation over the long term in a globalized world. Successful companies of the future need to keep reassessing their strategy and keep their eyes on frontline topics and trends that are pushing globalization along. Not all of these trends will affect companies to the same degree. Companies need to concentrate on understanding the value creation drivers within their own business and within the broad markets in which they compete. 1. Global Total Value With an eye firmly focused on sales markets, companies need to evaluate the real costs of risks, both known and unknown. Costs that are inherently difficult to quantify because they involve quality or reputational aspects will play an even more important role tomorrow and the day after. Estimating the real cost of risks for all events and eventualities that could occur in the future is a tricky undertaking. But working out such scenarios is necessary. To ensure Global Total Value, companies must create a holistic global footprint that respects new principles of sustainability and is backed by strong corporate ethics, looking at the consequences of environmental pollution or corruption. The collapse in confidence in bankers and banking institutions highlights how quickly reputations can be ruined. Almost all banks are reeling from reputational damage, especially as it becomes clear that the industry’s skewed incentive structure – bonuses passed out on the basis of gains almost irrespective of the risks the institutions incurred – was a key cause of the unfolding financial crisis. Policymakers and average consumers are calling for bankers who took irresponsible risks to be punished and greater accountability is being demanded at the institutional level. The reputation of Chinese suppliers of everything from powdered milk to mobile-phone batteries has been shot to pieces over the

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past couple of years. Although the Chinese government has started an ambitious program to improve food safety and crack down on its lax safety standards, it will be hard to salvage companies’ reputations. But it is not just the suppliers that have been hit hard by insufficient safety standards. Toy maker Mattel for example struggled to curtail the damage done following its widely publicized recall of a number of products in 2007. After trying to assign blame to its Asian suppliers, management had to admit that at least some of the recalled products had a faulty design. Other toy parts were retracted as they failed to meet Western health and safety standards. Experts predict a number of costly lawsuits. 2. Globalization Factor Each company needs to work out what its core competencies are, figure out how much of its business it wants, and can afford to keep close, and what can be done elsewhere. There are a number of valid reasons for staying in higher-cost locations or sourcing close to home. These may become less compelling over time. U.S. automaker Ford has decided that 65% of its manufacturing costs should come from low-cost countries by 2010. Around 20% of this, managers feel, should be sourced from China. Ford’s competitors, too, have stepped up their game. Germany’s Daimler sees around 55% of the parts for the new Mercedes C-Class coming from low-cost countries. Unlike its American counterpart, Daimler plans to bring these in from Eastern Europe, which accounts for 80% of its sourcing target. Companies in the same industry in other parts of the world are hedging their bets on another strategy. Member states of the Southern Common Market (i.e., Argentina, Brazil, Paraguay, and Uruguay) have agreed that 60% of automotive parts must be sourced from other member countries. To enforce the use of locally-made products, import duties of 35% are added to the price of imported cars. But managers throughout the industry know that these types of goals cannot be set in stone: They are forever chasing a moving target. Flexibility and the ability to adapt quickly are just as crucial as setting sourcing targets (Fig. 6).

Fig. 6 The mature industrial countries are still the largest recipients of FDI Source: World Investment Report 2008, USA, 2008

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Fig. 7 Globalization has gone beyond mere trade relations – foreign direct investments grows stronger than global GDP and exports Source: EIU, UK, 2008

3. Global Footprint Design Figuring out the appropriate shape and spread of the global footprint will continue to be a major concern for managers. While each company has to design its own unique footprint, there are some common features of success: Footprint must be flexible enough to adapt to changes in the business environment (Fig. 7). It should be on the basis of a topdown understanding of the strategic drivers that force a company to expand or redesign its footprint globally. And it should assess the feasibility of expanding the manufacturing and sourcing network at the operational level, paying close attention to cost structure and risks. An example: Fragrance and flavorings manufacturer Symrise reduced the number of its worldwide production locations from 26 to 17. The general shape of its footprint changed as it closed down locations in wealthy European countries and expanded capacity in Asia and Eastern Europe. The choice was preceded by a thorough examination of its business model from a cost-to-serve and cost-to-innovate perspective; facing an area of overcapacity we see in the beginning of 2009 a strong global trend to use flexibility in terms of insourcing production quantities. The most favorite countries that benefit of these current trends are the countries with high labor costs combined with high productivity: the mature industrial countries are back – at least temporarily. 4. Global Sourcing Companies have never had so much choice when it comes to purchasing opportunities. But like a finely tuned orchestra, sourcing strategies must fit perfectly with the global footprint selected by a company. Firms must make decisions about who will be responsible for buying important strategic commodities and product groups. Imagining just how complex sourcing has become is hard. Consider the IT and technology company IBM: It has a global sourcing volume of around USD 36 billion in more than 80 countries spread

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Quantity of shipped containers 2001–2007 and 2011e [Million standard containers1)] 2001 2003

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Fig. 8 Shipping volume has been steadily increasing – forecasts estimate continued growth despite impact of crises in 2009/2010 Source: Avierinos, Frederic, Global Insight, USA, 2007

over 400 locations. Of its 7,500 purchasing employees, 3,000 are active in North America; it has 500 buyers in South America, roughly 2,000 in Europe, North Africa and the Middle East, and a further 2,000 in Asia. Almost 10% of its human resources capacity is dedicated to buying from third parties and managing these relationships. Thanks to IBM’s global presence and increasing competition, which has forced the firm to tap new procurement sources, this sort of concentrated action has now become part and parcel of doing business. Clearly coordinating such a vast array of products and services, but also commodities is no small feat: Transparency is paramount. To remain viable in the long term, IBM is aware that is has to commit itself to a sustainable global sourcing strategy and live by this pledge. The number of shipped containers is an appropriate indicator for globalization movements. The show stopper of the financial crisis in 2008/2009 turns this trend – temporarily (Fig. 8). 5. Make Better use of Tax and Import Technicalities Tax regulations are in constant flux. Companies need to keep a close eye on developments and act quickly to use tax “opportunities” in a way that can create long-term advantages. In the absence of a harmonized tax base in Europe, Danish pharmaceutical company Nycomed decided to manufacture its blockbuster drug Pantoprazole in Ireland in 2004. German company Haniel moved the sourcing activities of some of its business areas to Switzerland – because of a favorable tax climate for that specific arm of its business. Competitive wages, a skilled workforce, and massive investment in the years since German reunification have certainly played a role in luring solar energy companies to Eastern Germany, but tax incentives offered by eastern German cities were the most crucial aspect in the creation of “solar valley.” (Fig. 9) 6. Subsidies, National and Supranational Economic Development Aid Companies should spend time in identifying attractive aid and include these in investment and location decisions. Japan’s automaker Suzuki shifted a

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Fig. 9 Corporate tax rates selected countries in [%] Source: Corporate and indirect tax rate survey, Netherlands, 2008

significant part of its own production to Hungary in 2003, encouraged by considerable investment grants. An attractive property deal also sweetened the deal. Meanwhile, Eastern Europe is humming with auto factories built since the collapse of communism by global car manufacturers, often with generous support given in the form of national and EU grants for structurally weak regions. In a similar vein, Thyssen-Krupp, the raw material producer, is building a new steel factory in Alabama in the Unites States and received 800 million dollars in aid. For building a production factory for mid-size cars in Tennessee, VW received a 600 million-dollar investment allowance on a total investment volume of one billion dollars. VW cars will start running off the production ramps in 2011. 7. Service An abundance of intellectual capacity is likely to be the driving thrust behind the trend toward off-shoring commodity-like administrative service functions. The U.S. automotive supplier Visteon relocated its accounts payable department to India, and other service functions should move soon too. Visteon is in good company. While in the past, it was just manufacturing and assembly operations that were relocated, research and design, administrative overhead functions, and design tasks are increasingly being shifted abroad. Cost reasons are definitely a factor, but not the dominant one. Caterpillar has installed service points around the world in order to ensure its customers an above-average reaction time. Customers also benefit from dealing with service staff who is acutely aware of cultural norms and has a deep understanding of local preferences. 8. Innovation/R&D “Follow the knowledge” will drive the trend toward relocating and expanding research and development centers in emerging markets. In an attempt to

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Fig. 10 Internationalization of enterprises is fostered by a high number of cross-border mega M&As – slowdown of activities 2008 Source: World Investment Report 2008, USA, 2008

capture business opportunities and market share, technology leaders such as GE, Oracle, Lucent, Nokia, Procter & Gamble, and Panasonic are building up R&D capacity in Asia to the tune of roughly USD 300 billion. These companies are keen to make use of an extremely skilled workforce. Countries like India and China are no longer a place just for low-end work. As time goes on, increasingly sophisticated processes will be steered locally. In addition to off-shoring parts of production, many leading pharmaceutical and biotech companies are falling back on Contract Research Organizations (CROs) – especially in India – to move ready-for-market processes along as well as to reduce costs. Around USD 75 million were invested in India for clinical research in 2005. Within five years, this investment is expected to climb to USD 300 million (Fig. 10). 9. Managing the Entire Value Chain Managing the entire value chain of a globally-active company is a challenge. Understanding how different parts of the chain impact on other links will become increasingly critical to cost management and sustainable value creation. Managers have to continuously balance sourcing, transportation, manufacturing, and labor issues – and a whole host of other matters too – on the basis of sometimes competing and counterintuitive information. Key to managing the entire value chain also involves winning the global war for talent, even in countries where demand for skilled labor is high. At the Dutch consumer electronics company Philips the share of transport costs for a television has shrunk from 20% of total costs in 1960 to less than 1% today. This does not look too remarkable until you realize that 90% of the parts needed to make the television set are produced in low-cost countries now, compared with 20% 40-odd years ago. As the business environment becomes more complex and dynamic, managers must increasingly guide different sources of information through the supply chain. To remain at the top of their game, top managers must master the complicated, global network of in-house production activities, manage procurement from external vendors, safeguard R&D innovation, take care of distribution and transportation, and ensure high service standards (Fig. 11).

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1)Average costs of transportation and harbor costs 2)Average turnover per passenger and mile 3) Costs for a three minute call New York-London

Fig. 11 Drivers of globalization – continuous decreasing costs of transportation and communication Source: Kinkel, Steffen, Germany, 2000

10. Curbing Product and Technology Transfer Every time a company launches a business in another country, it runs the risk of technology and product transfer. Companies need to weigh up the threat of losing their technology-based competitive advantage to a potential competitor firm. In many cases, for instance when companies want to do business in China, FDI is coupled with technology transfer. Companies still need to take steps to protect themselves from product piracy and patent theft using organizational, legal, and structural measures. One simple option is to select noncore products or noncore engineering processes for business deals that need to take place in potentially treacherous regions. The avenue taken by the steel and technology conglomerate Thyssen-Krupp is familiar to many European-based companies. It continues to develop innovations in process engineering within Europe. Thyssen plans deals with Asian and South American partners in minute detail before entering production partnerships. While some companies might not be able to afford this trade-off, Thyssen has found it to be one of the more effective means of safeguarding its business in a complex environment. 11. Managing Currency, Commodity, and Supplier Risks Volatile fuel prices have badly hurt airlines and other fuel-dependent companies over the past few years. At the time of writing, the cost of oil had subsided to about USD60 a barrel, after peaking on July 11, 2008 at USD147 a barrel. With jet fuel a primary operating cost, airlines in 2008 struggled to maintain profitability and more than two dozen smaller carriers ceased operations. Many

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of these simply failed to purchase adequate fuel-hedging contracts. Currency exposure usually does not even-out over time, despite the tenacity with which this myth holds. Currency and commodity risks have to be kept under control and companies need to take steps to minimize their risk exposure. Companies can lower dependency on one currency region by signing contracts in international or country currencies, using hedging strategies. It’s a difficult call for companies. Who would have thought that the US dollar would be so robust considering that the global financial meltdown was brought about by the U.S. sub-prime mortgage collapse. By the way, one classical working capital lever has a great revival, as the supplier credit the Roland Berger “Working Capital Excellence” Study proved. In 2007, the global DPO (days payable outstanding) was roundabout 50 days on average, while in 2009 85 days on average, 70% increase in one year! This means not only a risk sharing to the supplier market, but is also an early indicator for significant insolvency risk and a true challenge for procurement heads. Although companies have been using individual financial levers since the late 1990s to reduce dependency on a currency area, this process stands to be improved in many cases. Companies have an array of options at their disposal. Some companies split currency risk between manufacturer and supplier. Another option is the crosscompany netting of medium to long-term transactions in different currencies in individual value steps and business units. The U.S. DIY chain Home Depot, which sources more than 80% from Asia, evaluated its currency risks in 2005. Once aware of the threat stemming from its dependence on the Chinese Yuan Renminbi, the company started to make strides into Eastern Europe. Supplier and currency risk management is one of the hottest business issues of 2009 (Fig. 12). 12. Talent Wars As the number of companies shifting more sophisticated activities into emerging markets increases, labor costs and turnover among highly skilled

Fig. 12 Exchange rates risk Europe in relation to USA, China, Brazil and Russia Source: oanda.com, Cascade IA, 2008

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workers in these regions are rising as well. Successful companies are realizing that they need to customize their HR policies to local realities. The roughly 400 newly employed workers which the Swiss pharmaceutical company Novartis recruited for its new technology park Zhanjiang in southern China – the majority of which are developers – receive an incentive package that contains accommodation subsidies, vehicles, and other benefits. Offering a wide range of benefits, companies hope, will prevent high fluctuation rates common among well-educated and skilled workers in the developing world, where competition for labor is high. Developing local staff and fostering loyal talent that can act as corporate role models to generate the desired value creation in locations far from a company’s headquarters are parts of the challenge facing managers of multinational companies today. Getting this right will undoubtedly be the key to unlocking the profitability of emerging markets. 13. Manage Sustainability Risks Companies need to identify, evaluate, and continually monitor risks that could arise as a result of human rights abuses, corruption, or sustainability issues. It goes without saying that an economic downturn will mean tighter budgets and fewer resources for CSR and “green” activities, but in the long term companies that show a commitment to corporate sustainability in tough economic times will earn respect. Business leaders would be wise not to see economics and sustainability as an either/or proposition. The business case for CSR is sound. The World Bank’s 2007 study “Cost of Pollution in China,” which measured the cost of industrialization on health, drew wide attention. About 460,000 Chinese die prematurely each year from breathing polluted air and drinking dirty water. The economic damage is estimated at around USD 100 billion, which corresponds to 6% of China’s GDP. According to a 2008 study from the Blacksmith Institute and Green Cross of Switzerland, as much as 40% of the world’s deaths can be attributed to some form of pollution. It’s not just bad environmental practices that have a hefty price tag; the cost of behaving badly is high too. Public anger over ethical scandals preceded the Wall Street banking bonus fiasco. UBS, the Swiss wealth management and investment bank shut down their US offshoring business in 2008 as a result of practices of tax evasion. Corruption charges against members of VW Group’s workers council in 2007 shook the company’s reputation to the core. The electronic giant SIEMENS had to calculate a cost impact of more than 3.5 billion Euro as a consequence of its corruption affair in 2007/2008 (Fig. 13).

The Trend is Your Friend, when Managed Responsibly Value creation is increasingly becoming a global endeavor. As this mega-trend gathers speed, the necessity of establishing a global brand that is truly convincing increases too. Companies need to overcome the “made in . . ..” mindset. It simply no

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Belgium Canada Netherlands Switzerland Germany Japan UK Australia France Singapore US Spain Hong Kong South Africa South Korea Taiwan Brasil Italy India Mexico China Russia

8.8% 8.8% 8.7% 8.7% 8.6% 8.6% 8.6% 8.5% 8.1% 8.1% 8.1% 7.9% 7.6% 7.5% 7.5% 7.5% 7.4% 7.4% 6.8% 6.6% 6.5% 5.9%

Fig. 13 Corruption in the growth BRIC countries is still an important factor Source: Hodess Robin, Riano Juanita, Transparency International, Germany, 2008

longer reflects reality. Outsourcing value creation without a holistic value creation balance is being negligent. Regularly checking all value creation steps is a sign of acting responsibly. There’s no denying the fact that traversing this shifting landscape is clearly no easy task for managers. The difficulty lies less in their lack of navigational instruments and more with the environment in which they conduct business. It is changing almost continuously below their very feet. Managers need to orchestrate a global network which may span continents efficiently and effectively. Part of that job is to limit and spread the risks arising out of globalization. To understand how to create value, CEOs have to listen to their (technical) experts – whether in production or purchasing – and combine this information to make the right choices for the organization. Economic-based decisions made in isolation cannot generate balanced value creation. All relevant legal, social, and environmental aspects have to be part of an overall business picture and have to become a serious aspect of the overall company strategy for a successful enterprise future.

References Avierinos, Frederic; A Global and Caribbean Trade Outlook and the Port Strategies to develop Transshipment, Global Insight, S.10, USA, 2007 Corporate and indirect tax rate survey, KPMG, Netherlands, 2008 EIU – Economist Intelligence Unit Database, UK, 2008

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Hodess Robin, Riano Juanita; Bribe Payers Index 2008, S.7, Transparency International, Germany, 2008 Key Indicators of the Labor Market, International Labor Office, Switzerland, 2007 Kinkel, Steffen; Manche gehen, manche kommen wieder: Produktionsverlagerungen und Ru¨ckverlagerungen im deutschen Verarbeitenden Gewerbe, RegioPol: Zeitschrift fu¨r Regionalwirtschaft, S. 27-37, Germany, ISI-P-171-08, 2000 oanda.com, Cascade IA, 2008 Perspectives on Trade and Poverty Reduction: A survey of public opinion Key Findings Report 2007, German Marshall Fund, USA, 2007 prognos.com, 2006 Roland Berger’s CEO survey, Germany 2006 Roland Berger’s think: act content 03/2008, Germany, 2008 Schwientek, Roland; Schmidt, Axel; Operations Excellence, Palgrave Macmillan, UK, 9780230217805, 2008 Schwientek Roland, Working Capital Excellence, Roland Berger Strategy Consultants, Germany, 2009 Schwientek, Roland; Hollmann, Thomas; Grimm, Robert; Purchasing Excellence, Roland Berger Strategy Consultants, Germany 2009 The Conference Board, Total Economy Database, USA, 2009 World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge, United Nations, USA, 9789211127553, 2008

Power to the Workers: Out with the Capitalists Uwe Zirbes

Uwe Zirbes, 1963 – CIO of hunting heads Executive Search International (www. huntingheads.de) – started his career in international sales. In 1997, he founded the internationally active executive search institute hunting heads and expanded it to become one of the largest businesses active in this field in Europe. In the Federal Republic of Germany, he became primarily known for his consulting services for the industry, government, and administrations. In 2006, he was given the position of Economic Senator for the Europa¨ischer Wirtschaftssenat e.V. (EWS). Furthermore, in 2007 he founded the racing stable Hummer Racingteam Europe, which after only 18 months, was able to attain the title of the German ‘Offroad Rallye Meister’.

Introduction The criticism of a system, which is getting out of hand, has its reasons. Some people believe that they can plunder entire economies. Speculations of every form were hardly subjected to restrictions. Global coherences and their deficits have become extremely transparent since the financial crisis. Investment and real estate speculators have not been the only ones to be shaken; on the contrary, it has affected all of us in some way or another. Globalization, the merger between the global economy and the global capital, has made this possible. Mr Marx had prophesied 150 years ago that ‘the entwinement in the net cast by the global market and with it the international character of the capitalist regime is what is in store for us’. But with all respect for Karl Marx’ analyses, we do not want to have the spectre of communism back. Our social market economy needs to be organized so that it takes on a more social form once again. This is better than the old dream of nationalization as a panacea, which is being dreamt of at some universities and which is again being warmly recommended to some politicians. Our current economic crisis is overshadowed by dozens of negative economic news items and that, every day. That is not all we Germans seem to enjoy wallowing in these R. Ijioui et al. (eds.), Globalization 2.0, DOI 10.1007/978-3-642-01178-8_11, # Springer-Verlag Berlin Heidelberg 2010

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negative headlines and complaining. Instead of seeing a crisis as also being a chance, one merely complains together with the masses. Many people repeatedly make demands on the state. The demand that the state should support the majority of the ailing companies is wrong, however. We should beware of interfering in the free and social market economy in a regulatory manner. It has always been the case that the wheat always separates from the chaff in such a situation, and this will result in a healthy and future-oriented adjustment. Those who have worked well and kept house throughout the years, those who make use of globalization and those who use modern business processes will remain successful – even if the markets are slightly weaker at the moment. We have often faced situations in the past when sales have plummeted, whatever the cause, and up to now, successful companies have found their way out of the crisis by adopting clever measures such as new product developments or sales marketing or product portfolio expansions or by making structural changes. Themes such as lean management, supply chain management, or outsourcing are what are needed here. Lean management is the responsibility of the managerial staff. It is, however, the case that things are frequently simplified with this theme and this catchphrase is then used as a reason for staff reductions. However, lean management means an increase in economic viability so that the customer can be provided with the service that he really wants and which is worth something to him. It is an avoidance of unnecessary internal processes. A fundamental constituent is the permanent questioning of existing structures, and that is the problem which many companies have. Processes that have been started are not permanently monitored and adapted. Lean management is then merely an alibi phrase for covering up of the staff reductions . Lean management should actually be orientated towards the company’s own strengths, an ongoing learning process that ensures the quality of the products and the directness of the organization, in addition to constantly perfectioning it. Our experience has a head-hunter who has shown that there are real specialists on the second and third managerial levels who would be able to provide the company with the required orientation. The supply chain management is also still a problem in many companies. Often, the supply chain manager does not have a lobby in the shark tank. In this regard, supply chain management means analysing of a value creation chain and the optimization of the logistics. This is, therefore, a very positive field for a company which has to be worked on. It is our experience as a head-hunter that this professional group is under-represented at the middle and top management levels. The logistics supply chain is a network of organizational units which produce a product or provide a service as a result of their direct cooperation. The focus is on comprehensive processes which describe how products or services are created, transported, and ultimately delivered to the customer. Companies within a supply chain have to face increasing challenges. Customers expect the supplier to meet their demands flexibly. It is important to them that they can order at short notice, receive their order quickly and that changes are made in a flexible manner and promises and deadlines are kept Modern logistics chains and

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logistics management have to repeatedly allow themselves to be measured up against this, and they have to adapt themselves to the changing demands – and that, along the entire cross-company supply chain. From the point of view of a customer, this has to do with the optimization of this intra-company logistics chain. The company therefore considers all of the upstream and downstream processes from the procurement of raw materials to the ultimate customer. All of the activities which are oriented towards this can be summarized with the term Supply Chain Management (SCM). Globalization is a positive factor in this case. The demand for outsourcing is growing strongly in the current crisis. In the difficult situation that exists at the moment, even those companies that in the past were sceptical with regard to outsourcing are now giving consideration to outsourcing processes and services. The decision for outsourcing is also being made much faster. In the past, almost 1 year passed before a contract was signed. Clients hereby selected projects which reduced costs quickly in addition to increasing the efficiency and amortizing fast. Outsourcing can provide financial leeway in the crisis. The outsourcing providers can assist outsourcing companies with liquidity management in that they keep the monthly payment instalments to the service provider low in the start phase and then increase them later. The classic outsourcing approach is now forced open by various developments. Nowadays, the clients expect that together with the outsourcing, the related business processes are also adapted and optimized. This mainly holds true for the IT segment. Globalization also helps here. The advantages of a world which is increasingly shrinking are made clear here. A fundamental and especially critical aspect is the management of companies. Entrepreneurs or managers play a pioneering role here. They have to think and act in an entrepreneurial manner. There are nowadays many managers who protect themselves from all sides, delegate the making of decisions but do not make any themselves. This is frequently the result of being afraid to make mistakes or of losing their job, which would be the end of their career. Thinking in the short term is also the order of the day. The opinion used to prevail that a manager is a good manager when the majority of the decisions he made proved to be the right ones in retrospect. Mistakes could also be made. It would appear that this is no longer the case, presumably because not only the share prices have increased, but also the transparency is greater. It is therefore only natural that many managers hide behind the popularity ratings when it comes to business confidence. True to the motto – look, everything is bad, it is not our fault. I am only too pleased to reiterate that it is a fact that we are in an economic crisis, but there are enough markets whichthat are either not affected at all or are only slightly affected; there are also enough companies which have a problem they have caused themselves and which is not caused by external influences. Why are we as a head-hunter receiving just as many queries as before the economic crisis? Because there is still a demand for skilled and managerial staff. Because good companies also think in the medium term and long term? Or perhaps it also has to do with them using the crisis to replace ‘less successful’ managerial staff? Have we also not made the mistake of allowing a ‘young craze’ to break out in our companies?

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Young people who complete their school and studies in a record time, obviously with excellent grades and are then able to get an idea of the professional world by spending 2 years with a famous managing consultant, would be the suitable candidates for managerial positions. But where are the soft skills? The experience of also being able to overcome crises? The experience of being able to correctly assess the clients and their wishes? They still have to gain this experience and it is often the case that companies have to regain the experience and relearn due to the replacement of an older, experienced manager with a young one. This has often cost the company money, staff was not motivated, and clients have gone elsewhere. Why was this the case? Because decision-makers often do not make their decisions based on their gut instincts, but have to or wish to go with the flow. A trend to reverse this has manifested itself in the meantime. Why else has the market for the so-called interim manager become so large? The old stagers who show the young ones how it works are in demand again. As a head-hunter, we have for many years attempted to dissuade our customers from participating in the ‘young craze’. Many companies would nowadays be pleased and thankful if they had listened to us. Decisive mistakes have been made as far as the financial world is concerned. Instead of concentrating on the core competencies, this being the making of the required capital available to the industry, it was frequently the case that attempts were made to make money quickly with high returns. Everybody knows that high returns also mean high risks. The banks have also with European legislation (I am thinking of Basel II here) made it more difficult for companies to acquire the funds they require. An additional aspect which is caused by the state which has developed negatively over the years is the educational policy. When I see the poor quality of many of the job applications which we receive everyday in our capacity as a head-hunter, then I am not surprised that management is weakening in total. This is also a reason why globalization is necessary. Globalization is a process through which the markets and production in various countries are becoming increasingly independent from each other – thanks to the dynamics of trade with goods and services and the movement of capital and technology. Especially the liberalization and deregulation of many international markets were important requirements for today’s globalization. The starting signal for the current globalization was given by the fall of the iron curtain. Global trade was then provided with the opportunity of being able to develop in the current form. It is nowadays with transporting down-market products over long distances, examples being plastic products from Asia to Germany. The communication also developed at a breathtaking pace at the same time as the transportation development. It is now the case that the sending and receiving of large quantities of data via the Internet is a matter of course. The communication with people who are a long distance away is no longer a problem and it is also the case that no time is lost. The communication costs have also fallen to a very low level. The development in the field of communication and the transportation of goods means that it is no longer a problem whatsoever when one shares work processes and coordinate these on various continents.

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The price differences especially lead to large quantities of goods being transported to Western Europe and the USA due to it not being possible to manufacture them there at comparative prices. Due to globalization, the job market is often no longer national or regional, but global. This means that there is an enormous increase in the jobs on offer. The cost of living is often only a fifth of the cost of living in Western Europe in many parts of the world. The difference between the wages and salaries is therefore accordingly large. This means that the factor work is therefore much less expensive in many parts of the world than in Western Europe. This means that a German employee is not only in competition with other German employees in the job market, but also with the many employees throughout the world who are able to offer their manpower for much less money. This wage gap between Western Europe and many other parts of the world is the reason why many companies transfer simple production activities to low-wage countries. The only possibility of not being in competition with millions of low-wage employees is to be well qualified. That is exactly what we have to achieve here in Germany with a corresponding educational and vocational training policy. This is clear when one observes the German job market: whereas many companies have a demand for well-trained employees, many poorly qualified people are standing on the streets and are unemployed. These poorly qualified people are unable to offer their work for the (global) market price as this would not suffice to support a German standard of living. It is to be assumed that higher qualified work will also be outsourced to low-wage countries in the future. One example for this is IT companies which employ programmers in India, for example. Great efforts are also being made in China to improve the qualification of the workers: every year, many more students complete a technical course of studies in China than in Germany. This is obviously also due to the much larger population. The offer on the job market has drastically increased on a global scale. The capital which is being offered has hardly grown, however. Work and capital are the fundamental production factors. As far as capital is concerned, this means that a stagnant capital offer but a heavy increase in the work offer results in an increase in the price of capital. The price of capital is made up of the interest or returns on investments. Each investor can invest his money anywhere in the world. He will choose the possibility which provides the largest profit. This is a reason why many German companies invest abroad. The companies assume that the invested capital will generate a higher profit than in Germany. The consequences for the capital market are therefore a higher interest on the investment capital. This is also a reason for the profits of many international companies which have been subjected to a strong increase. On the other hand, the capital markets are subjected to a relatively small amount of regulation so that the door is open for ventures. The current crisis was caused by speculators in the capital markets and plummeted entire regions into the crisis. There are companies which profit from globalization and companies which suffer from globalization. Nowadays, a company has to think and act more globally than was the case just a few years ago. Foreign countries also have to be taken into consideration when making investments. The capital market demands high returns and many companies are

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therefore forced to transfer production abroad. The decision to relocate abroad is not only based on cost reductions and returns on investment however. Internationalization can also pursue the achievement of sales targets or a limitation of exchange rate risks. On the other hand, the growth in the global economy which results from globalization also brings great environmental risks with it. It is especially the case in newly industrialized countries that the necessity of environmental protection has not yet been recognized and the industrial plants pollute the environment. The environmental risk therefore results from the growth in the global economy which was enabled by globalization. The change in the job market is often a serious problem in industrial countries. Many poorly trained employees are unemployed. This causes social problems and too high costs for the social security systems. The job markets have changed fundamentally and many professions have little future. Only professions which cannot be outsourced have a good chance, for example, motor vehicle mechanic. Cars cannot be taken from Germany to Hungary to be repaired, for example. The companies, however, profit from a large capital stock which results in high returns and large global sales possibilities. It is especially difficult to explain this gap to the general public. The companies are making record profits whilst many people are unemployed. This especially opens up problem areas for the politics as the extent of consideration and the effect possibilities are normally restricted to a national level but the companies have been thinking globally for a long time now and display little patriotism when it comes to concern profits. Whether globalization is fair is almost a philosophical question. The fact is that the gap between poor and rich is very large. In the past, the world’s richest people were by far not as rich as today’s richest people. Contrary to this, the number of poor people has remained almost unchanged. Hunger is still a serious problem in many parts of the world. It can therefore be determined: the world’s riches have not been distributed fairly. There can therefore be no mention of everyone in the world having the same chances. A person who is born into a poor family has less chance of a good education which could provide him with an improved standard of living later. The world is also not fair as far as this is concerned. The question is therefore: does globalization result in less justice in the world? Answering this question is much more difficult as there are obviously regions and nations which profit greatly from globalization. The economy was on the path to sustainable growth in India, China, and Brazil, for example. Many have succeeded in escaping from total poverty and becoming the world’s richest people. These possibilities exist therefore: globalization makes this people. The gap between rich and poor is still growing, however, despite this. The globalization critics point various aspects out which lead to protests. Especially the injustice of the distribution of wealth is repeatedly denounced. An additional point of criticism is the strong focussing on the economy, so that environmental protection, human rights, and democracy often fall by the wayside. The very liberal economic policy of many countries, especially the USA, is also being subjected to criticism. The lack of authority of bodies such as the G8, on

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which important decisions are made for the entire world, is also being criticized. Developing countries hardly participate in the making of these decisions. The supporters of globalization see the chances offered by globalization first and foremost. Many countries can participate in global trade and profit from this. The global economy is expanding continually. There is the possibility of communicating with the entire world. The liberal orientation of global handle is supported as the opinion is often that this is the most effective form to coordinate the economy. Ideally, adaptations are controlled by the market so that the best distribution is ensured. It is also determined that globalization is something which cannot be avoided. Globalization provides an opportunity for international trading. The entire economic performance and prosperity can be increased as a result of division of labour. Countries and regions now have the best chances of selling their products and promoting the economic development. This increases social prosperity. There are obviously tangible advantages: one can eat fresh fruit in Germany all through the year, purchase inexpensive goods from China, and tea and coffee are also available. Without globalization, one would not be able to buy these products or these would be much more expensive. You can travel almost anywhere in the world and communicate with each other on a global scale. At its current speed, globalization is overtaxing the flexibility of many people. Many employees in the Western industrialized countries are facing unemployment or are already unemployed. Especially older employees are finding it difficult to adapt themselves to the new situation and retrain. This means that an entire generation of workers is falling into a deep crisis. Many people in the developing countries have a feeling that they are not able to participate in the prosperity. The poor countries are in receipt of a little but this is being unfairly distributed. There are extremely rich people on the one hand but on the other, many very poor people who live in slums. It is not actually globalization which should be subjected to criticism. The criticism should in fact be aimed at mistakes which companies like to make repeatedly. Our attitude within the German population also has to be questioned. The famous half-empty or half-full glass – what is it then? The arrogance of some of the managers who are in the public eye is just as difficult to explain as politicians with a civil servant background who do nothing and who simply like to hear the sound of their own voice and force themselves into the limelight in front of every camera – for their own sake. Another aspect which should not be ignored is the expectations of the financial world when it comes to corporate returns, this going hand in hand with the corresponding share analyses of the analysts. A German PLC can no longer afford to make positive announcements every calendar quarter. Then the rates falls and large sums go up in flames. Let us take a US company as an example. The company generates a turnover of approximately sixteen billion per calendar quarter and thereby makes a net profit of around four billion in a calendar quarter. A great result. The ‘crisis’ now forces the company to cut more than 5,000 jobs as the turnover forecast for the next quarter is of a drop in turnover of around 6%. This means that the result is similarly lower and is ‘now only’ around 3.7 billion. We should not

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forget that this figure is for a quarter. This is actually still a good result. The 5,000 jobs are cut, however, so that positive announcements could be made to the financial analysts. The savings in labour costs (averaging USD 5,000 per person/ month) are however not higher than 75 million per quarter. The real question here is whether it is worth making 5,000 families unhappy in order to save what are a few ‘peanuts’ in this case? Thanks to the analysts, the share price has still fallen by 6% – there was a ‘profit warning’ after all. This results in many investors losing a lot of money at the stock exchange, although the company is still in great health and the market for its products still exists. The questions as to whether that makes sense should each of the readers decide for themselves.

Globalization Considered from the Point of View of Thomas Hobbes’ ‘Image of Man’ Dr. Ulrich Rass

Dr. Ulrich Rass, born in Trier in 1955, is the managing partner of Rass Solutions s.a.r.l. based in Mertert, Luxemburg. After studying legal sciences in Wuerzburg and completing his doctorate, Rass became Assistant to the Management Board in the family business Rass Stahl AG in Trier in 1986, with responsibility for the steel production and steel processing divisions. Rass joined the Executive Board of Rass Stahl AG in 1991 and took over operative management of the Group’s industrial, trading and freight forwarding companies in 1995. Following his departure from the Group, Rass and his brother took over the logistics company Speralux S.A. in Munsbach, Luxemburg, in 1998. The Rass brothers purchased the bankrupt MSW 2002 Moselstahlwerk GmbH steelworks and rolling mill in 2002 and, after farreaching modernization, continued to manage the works under the name TSW Trierer Stahlwerk GmbH. Rass sold his holding in TSW GmbH in 2008 and shifted his activities to Rass Solutions s.a.r.l. (formerly Steel and Logistic Services s.a.r.l.) in Luxemburg. Rass was a member of the Executive Board of the Luxemburg Transport Association from 1999 to 2005 and, until 2008, an honorary member of the Executive Board of the German Steel Federation in Duesseldorf.

Global Opportunity Versus Human Inadequacy ‘Homo homini lupus’ – the image of man according to Thomas Hobbes (1588– 1679), described in detail in his famous political/philosophical work ‘Leviathan’ (1651), basically states that mankind is bad by nature. While this statement was already the subject of debate at that time, opinions on this undoubted philosophical provocation remain just as varied and irreconcilable. But is Hobbes’ claim that mankind is by nature materialistic, deterministic, thirsty for glory, greedy, egotistical, resentful and cruel really such a provocative hypothesis, or does this theory actually gain in significance given the current financial and economic crisis – which, until recently, most people would have believed impossible? R. Ijioui et al. (eds.), Globalization 2.0, DOI 10.1007/978-3-642-01178-8_12, # Springer-Verlag Berlin Heidelberg 2010

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Does it perhaps help us better understand why the world could apparently ‘come apart at the seams’ from 1 day to the next, no longer appearing to be the same as it was not long ago, and why we have been rudely awakened from our most beautiful dreams of ‘the best of all worlds’? What on earth has happened during recent weeks and months? It was all going so well with the blessings of globalization! The elimination of all economic borders, the free exchange of goods, freedom of action wherever one looked, consistently wonderful growth rates: the world is becoming one – affluence for all! Continuously falling unemployment levels worldwide (even the prospect of full employment), rising tax revenues, dwindling national debt – it was not just populations and companies that enjoyed the sunny sides of the ‘globalization’ drug; the state recovered, and its proud politicians announced that the times were changing – thanks to globalization. Was everyone just flying blind? Unrestricted euphoria while all early warning systems were switched off? Brainless and uncomprehending belief in the future? Or just a more or less insignificant setback, a minor industrial incident on the way to paradise? The fact is that for us all – governments, companies, economic ‘experts’ and simple citizens – the unimaginable has indeed happened worldwide. Regardless of whether in the satiated, and thus sedate, industrial nations of the western hemisphere, the up-and-coming threshold nations (the large and small ‘BRICs’) which, bursting with self-confidence, believed that they could uncouple themselves from every negative development – naturally – or in the poorest of the poor countries, which must again put off all hopes of participating in (what remains of) western prosperity until Judgement Day. Where, less than 6 months ago, one merely smiled weakly about the first signs of the crisis (although these had already ignited their destructive fuse) long before, and called those who aired their dire warnings incorrigibly unrealistic pessimists and cynics, there is now an atmosphere of sheer horror. Where, trusting in the invincible power of the market, growth and increasing capacity was priority number one and nothing appeared too expensive – regardless of whether raw material prices, investments, corporate acquisitions or mega-fusions, all naturally instantly financed (as short term as possible) – the assurance of liquidity is now the first commandment of the hour. Where bank employees (not bankers of the old school) carelessly granted credit – pleasing the whole world (while appearing not to have forgotten their own pockets either: multi-million bonuses per year on Wall Street alone, no, that really is perverse!) with ‘innovative’ financial products, naturally eliminating (or ignoring?) all possible risks, removing all the risks from their balance books with the toleration of the state – the calls for rescue from the state are now thunderous! One cannot trust anything anymore. Nobody knows what risks are still slumbering amongst Wall Street’s colleagues. Unadulterated panic! Where nations had already considered the consolidation of state finances achieved in their calculations on the basis of gushing tax revenues (even Germany’s Finance Minister Eichel at one time intended to manage without any new debts!), there is now unrestrained treatment of the citizen’s money. No rescue or fiscal

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stimulus programme is too expensive, newly suffering sectors are supplied with vast amounts of money in a monthly rhythm, regardless of the causes of the crisis faced by the companies demanding liquidity. The competition amongst nations to come up with the most expensive fiscal stimulus package is well underway. The end of the world? A new era? The end of globalization? It is also true that the world has triggered an emergency stop. After setting everfaster lap records on the racing track of the globalized world, the drivers of the world’s economy are standing on the brakes with both feet and, despite the racers having meanwhile come to a stop, are still unwilling and/or unable to take their feet off the brakes and move into first gear in order to slowly resume motion. The thrill of speed seems to have a lasting effect, and it is not yet clear whether the former superstars of this racing circus will in future ever again dare take to the road or whether the racing track has had to be permanently closed due to irreparable damage. Undoubtedly, a less-than-satisfactory variant. But maybe it is still possible to improve the track so that a relatively skilled driver could sometime reach the end of the race at a moderate speed – and thus give the track another chance as the venue for the globalized races of the future, though in heavily revised and horsepower-reduced vehicles. How could all this happen? What really caused the unarguably worst economic crisis since the 30s of the last century? And we come back again to the philosopher Thomas Hobbes, mentioned at the start, and his negative image of man, whose theory states that mankind in its natural state, that is, when not exposed to any discipline, is naturally bad. When state forces fail to constrain mankind, when there are no laws, directives and clear rules, his base destructive drives are given free rein. When one considers the causes of the current crisis in detail there is much to be said for this philosophical approach, whether we like it or not. Let us reflect on how it could actually come to this disastrous financial and economic crisis, and why almost nobody believed that a calamity of such dimensions was possible. When the ‘iron curtain’ existed and the world was divided into rich, developed capitalist states; repressive communist countries; and the developing nations of the third world (Asia, Africa and Central America), when the information and communication society was only rudimentary, we had to live with these fixed blocs with largely isolated markets. There was, of course, world trade even in those days, though only on the conditions forced through by the strong and economically superior nations, which could therefore further develop at the cost of the less prosperous nations – as if they were in a cocoon. In those days, at the height of the western industrial nations, while not all that glittered was gold the world did appear to be in balance, though this cannot be considered the same as the ideal situation of prosperity equally distributed amongst all the nations of the world community. The highly developed industrial nations and their populations enjoyed these times of unbridled economic growth with constant increases in affluence, characterized by rapid technological progress in all areas of life and a permanent improvement in the living conditions of all strata of society. Of course, this phase of economic upswing was due to the fact that after years of war and destruction, millions of people created the foundations of affluence with diligence, enthusiasm

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and unrestrained dedication with their own hands. Political stability, economic models, and states that guaranteed the maintenance of social order provided the framework that actually made this development, and the blossoming of people’s initiative and positive strengths, possible. The reward was affluence, a life lived in freedom, and the victory of the capitalist system over communism and state socialism. The victory of a free way of life over state restrictions. Naturally, even during this period, there were people in the rich economies who did not participate in the economic success of their fellow citizens, who existed at the lower end of the ‘prosperity ladder’ despite this phase of permanent upswing. However, these people were either very often responsible for their own lack of social improvement or they believed that the industrial states could afford to feed this segment of the population via their generous social security systems. Unfortunately, there were also drawbacks during this increasingly prosperous phase. Spoiled by the successes of the post-war years, a higher-ranking social network, and – particularly in Europe and especially in Germany – used to an easy life in this land of milk and honey, people slowly but steadily began to change. Blood, sweat and tears was no longer the order of the day, and the virtues that were responsible for this meteoric improvement became less and less the focus of attention. One could afford to take one’s foot off the accelerator a bit more – and still the car accelerated as usual. As this seemed to work well at the beginning, this way of thinking and living became natural and many of the citizens, companies and nations fell into a self-perpetuating downward spiral without noticing the looming dangers posed by this behaviour. Convenience, conformity, demands and trust in the blessings of the social state increasingly gained the upper hand where, in the past, enterprise and initiative had been the predominant features of those participating in political and economic life. Laziness and complacency became widespread where, in the past, ambition and hard work had been the driving force on the path to the top. When considered critically and logically, one cannot help but note that these creeping changes – based on the unstoppable rise up the economic success ladder – had to lead to a reverse development, at some particular point in time, which would threaten everything achieved with so much effort. It is not difficult to recognize in this pattern of behaviour particular human traits that provide evidence supporting Hobbes’ theory as probably valid. Leaning on the proverb ‘Pride cometh before a fall’, individuals cut back their efforts to retain and safeguard, or improve upon, what has been achieved and consider it quite natural that the wonderful times can no longer be followed by worse times. Negative traits gain the upper hand when the compulsion to exploit positive virtues has gone. One becomes blind to the lurking hazards and is increasingly employed in jealously and enviously watching the success of others, moaning about life, complaining about general and particular injustices, and relying on someone else to sort everything out, believing that external help will be forthcoming in compliance with some kind of natural law. Unfortunately, the nation that has become spoiled with success is also unable to avoid the attractions of success dwindling. The forecasts, both by economic research institutes and governments, assumed and assume an

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unbroken upward economic development, at most interrupted by minor phases of decline, assumptions regularly confirmed by the development of the post-war years. So the governments of the prosperous industrial nations bathed in their successes, failing to see the lurking dangers in the ever more rapidly changing world and became increasingly sluggish. During the good times the state lived well beyond its means in all regards, instead of making maximum efforts to balance the nation’s budget, for example, and thus preparing the country for more difficult times, reducing new debts or, in particular, rethinking spending policy and bolstering the citizens’ own responsibilities. That this could only function in the long run if the upward spiral remained intact in the future was ignored – with the result that all defence mechanisms seem to be failing in the current serious crisis and those with responsibility are reacting helplessly and without an overriding plan. Clearly stated: the success-spoiled human, the successful company and the prospering nation became immune to the risks of changes which, however, inevitably require the wide-ranging application of all positive virtues in order to master the present challenges and to be able to successfully and permanently defend the peak that has been climbed. It is a somewhat different prospect to reach the summit or permanently occupy it, fending off a large gang of highly motivated climbers who would miss no opportunity to expel the possessor of this domain from his top position with all the power at their disposal. What had functioned in a cut-off world, at least for a while, according to the laws of the past – when the world was divided into fixed blocs and the firmly cemented differentiating features of the nations ‘rich or poor’, ‘free or repressed’, ‘capitalist or communist (state socialist)’, ‘free market or planned economy’ and ‘industrial nation or developing nation’ were central components of the world’s economic order – has merciless consequences in times of globalization-led change. Globalization (i.e. increasing international interrelationships in all areas of business, the financial world, politics, the environment, communications, etc. and on all levels of individuals, corporations, societies and states), in the form of a giant tsunami wave – triggered by the unstoppable technical progress of the last 30 years (particularly in communication and information technology), whereby the world became completely networked and information spread around the globe in seconds, also fired on by the liberalization of world trade, and supported by the achievements of transport technology – which has washed over mankind and completely changed the landscape worldwide, posing unbelievable challenges for people and governments on all sides of the continent. Whether we like it or not, nothing will remain the same as it used to be – for better or for worse. Whether we accept and cope with the coming changes or not – there is no going back. Globalization is a one-way ticket! The wave (assisted by the collapse of the totalitarian states and the removal of borders) that has already hit us with full effect continues its unstoppable progress, changing everything that gets in its way. And no power in the world will be able to stop it, at least not at a price that is acceptable for a civilized world. It is regrettable and fateful that this event surprised and overcame us in the western world while we were fast asleep. Before we were fully awake and had understood what a revolutionary event had occurred, others had quick as a flash

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recognized the dimensions of the changes triggered by globalization and are eagerly (and sometimes with great success) repositioning themselves for the completely revamped world. The fact that globalization can lead to deeply biting upheavals with a new generation of winners and losers may be regrettable from the point of view of the leading industrial nations but it is not yet in itself tragic. It has always been the case that, in the course of civilizations, times of prosperity in individual countries and regions alternated with times of deep economic and cultural darkness. So it is logically not unusual when in times of a globalized world the relationships shift and young, up-and-coming democracies or even autocratically ruled countries such as China should, in the course of time, emerge as the winners of the current shifts. This would definitely not be a unique process in the history of man, which has always seen empires rise and fall. One only has to think of the rise (and fall) of the Roman empire, the heights of the Byzantine and Chinese empires, or the British empire as the world’s largest colonial and trading power of its time. What remains of them today? Why should there not be a time when the industrial states of the western hemisphere depart the peak of the world stage for a change? No one can seriously maintain that this eventuality is beyond any reality. On the contrary, many factors speak for this thesis, above all the unarguable fact that all experience shows that faith in one’s apparent invincibility generally already carries the roots of defeat within it. This is not solely to be learnt from history, but is based in man’s disposition, who, inspired by his overflowing self-confidence, loses any feeling for the boding dangers and is inevitably dethroned. Much worse, however, are the accompanying negative effects of the ‘new worldwide freedoms’, discussed in greater detail below, that were actually able to seriously endanger the success of the globalized world and become the cause and trigger of the current financial and economic crises that are shaking the world to its foundations. Globalization, as we know and experience it today and as has taken over the world during the last 20 years with increasing rapidity, undoubtedly offers enormous opportunities, hitherto deemed impossible, for successfully shaping the future and really does have the means to offer large swathes of the world’s population – and particularly the nations and classes of inhabitants that were cut off from affluence in the past – an opportunity to catch up with the rich industrial nations and their already sated citizens in the future. It gives national structures and entire sectors – and thus also people worldwide – a unique opportunity that one would not have dared dream of during the times of bloc-building in the world and an absence of technological prerequisites. Prosperity no longer seems to be reserved solely for the rich industrial nations. No, globalization as a trailblazer for equal opportunity, the extinction of poverty, economic affluence and a ‘western’ standard of living is palpably near. As already mentioned, the catalysts were the worldwide international interweaving of technical progress in the form of the communication and information revolution, the drastic improvement in transport possibilities, and in particular, of course, the political decisions taken on liberalizing world trade, which largely created the essential political framework after borders were removed and the collapse of the communist

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system. The aim of globalization certainly was to distribute prosperity in the world, generate growth, and conquer the gigantic world market with its enormous potential (based on the differing living standards of the individual nations) by exploiting the possibilities opened up by technological progress. In the heads and plans of the world architects, decades-long continuous growth seemed a fixed constant as a result of the enormous underdeveloped markets in eastern Europe, Asia, South America, Africa, etc. and naturally only today’s already rich countries could primarily become the winners of this growth and globalization rally. Hardly any respected politicians in the western world could be dissuaded from their conviction that, on the one hand, the blessings of globalization would ensure lasting growth and affluence and, on the other hand, the current ‘world powers’ of America and Europe would principally profit most from this movement. Only those with the above-mentioned faith in apparent invincibility can explain why such high-ranking politicians and successful corporate leaders, astute analysts and intelligent institute lords could fall prey to this delusion so naively and without reflection. They all were, and still are, blind when it comes to perceiving the realities. Regardless of which warning signs are clearly and unambiguously visible, they will not, or do not want to, recognize this early warning system and continue, unaffected and completely unrealistically, to proclaim their thesis of the obvious success of the ordinations of globalization for their clientele. Whereby it is so easy: compare the removal of borders and walls, and the associated opening up of the communist world, with the destruction of a dam reuniting a river that had been divided into upper and lower waters. It would be wonderful if in this case the lower water gradually rose until it had reached the level of the upper water. But does this reflect reality? In exactly the same way that the water finds its own level by both rising and draining after the collapse of a dam, following the removal of borders that had previously successfully separated states from one another, the prosperity gradient also equalizes in such a manner that the nations that need to catch up economically grow over-proportionally and the prosperous nations exhibit a ‘withdrawal of prosperity’. The length of time in which this takes place is impossible to predict, the intensity of the adaptation is uncertain and dependant on the reactions of those affected – that it happens, however, is an inescapable fact. Because how should the rich industrialized countries with their prosperous nation mentality seriously be able to compete with states whose inhabitants are hungry, hardworking and not yet spoiled by a life lived at the highest level and who exhibit precisely those virtues that characterized us when we rebuilt our destroyed cities, and laid the foundations upon which our success and wealth are based? However, the inescapability of this development trend is not in itself the end of the world. There are, of course, mechanisms that could mitigate these shifts in the world and ultimately make globalization advantageous for all participants in this ‘decision-making game’. Fundamental changes in the rules, and the trainers of the teams involved radically changing their tactics, however, would be necessary in order to really be able to achieve this best of all results. Though, to a great extent, the individual players on the field would have to understand that this is an alldeciding team game and egoistic solo efforts would mean certain demotion from

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the Champions League! And thus we have now come to the core problem of globalization which, despite initially ideal conditions, is currently forcing the world to the edge of the precipice. The tragedy – in the form of the current financial and economic crisis which imperils the achievements of the industrial states, threatens the catching-up process of the threshold and developing nations, frightens those who are prosperous, leads to panic reactions among governments, exposes speculators and gamblers, and touches a raw nerve in the world – is self-inflicted. And is by no means over yet! The fundamental idea of a world growing together with gigantic opportunities for all (for some more, for others less) is brilliant in theory; the implementation of this idea and its actual execution is proof of Thomas Hobbes’ thesis! ‘Homo homini lupus’ – man is bad by nature. Materialism, greed, egotism, insatiability, ruthlessness – the seed for the awful, daily worsening, fiasco on the international world markets lies in Thomas Hobbes’ philosophical image of man. Industrial states with their ignorant governments, companies with their highhanded corporate movers and shakers, credit institutes with their self-satisfied and egoistic bankers, rating agencies with their gullible analysts who are out of their depth, naive populations in rich countries – they all made the creation of the globalization bubble possible with their behaviour and now, after the explosive bursting of the bubble, in all their facets face the ruins of globalization stunned. What went wrong? How could one still dream of unending growth in mid-2008? Seldom has an armada of forecasters been so wrong as when estimating economic development at this time! And this despite the signs being unmistakeable for critical contemporaries, dismissed as incurable prophets of doom. The credo of those who unreservedly supported globalization was the absolute, boundless freedom of all those involved in economic activities. A liberal view of the world – arguing for maximum elimination of state and social interference and regulation, and thus permitting maximum freedom of activity for individuals and businesses – was the measure of all things. Unrestricted growth was the maxim – at any price. Unarguably, the globalization machinery seemed to run like clockwork at first. Although interrupted by temporary and regional crises (e.g. the Asian crisis of 1997/1998, the crash of the ‘New Economy’ in 2000), the world economy repeatedly recovered incredibly quickly and rose to undreamt-of heights, rushed from record to record. High global growth rates, a drastic increase in world trade, the creation of millions of jobs worldwide, growth in prosperity in the threshold and developing nations, and rising demand for money, raw materials, products and property took place in tandem with increasing levels of debt, an explosion in raw material prices, scarcity of almost all available goods and a dramatic increase in property prices in selected world regions. Unnoticed by governments, companies, banking institutions and populations that were uncritical and blinded by their belief in eternal growth, the world slowly but surely started to get out of control. All over the world, but particularly in the growth locomotive of the United States of America, one started living beyond one’s means and without the least moral scruple. Immoral, unbridled capitalism, covered by politicians who gave those

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involved in business every freedom without barriers, spurred on by a policy of cheap money that immediately strangled at birth every larger, or even smaller, setback in this growth storey by pumping the economy full of liquidity, led inexorably to rapidly growing bubbles, to a world turning increasingly rapidly, to excesses that had never before been considered possible and, ultimately, to increasing imbalances and injustices both between the nations involved in this competition and within individual countries and economic blocs. Companies, trusting in this ‘XXL’ world, began to expand their capacities to this size. Investments were made in new plant without even the slightest corporate care or long sightedness, and every little workspace, regardless of how old, was brought up to scratch. The consequence was that, in addition to price explosions for the necessary machinery and plant, the suppliers were fully booked for years in advance and any price seemed justified in order to achieve capacity expansion as quickly as possible. The concept of balancing supply and demand thus moved totally into the background. How else can one explain that, for example, having lost a takeover battle with Mittal Steel over the Canadian steel producer Dofasco, ThyssenKrupp happily declared that they would instead build a new steelworks in Brazil with an annual capacity of five million tonnes, which would in fact also be cheaper than paying out the very high price offered for Dofasco? Despite dozens of articles across all media during this time, not once was it mentioned that construction of the new steelworks in Brazil would place an ADDITIONAL five million tonnes of steel on the market which, in order to be delivered to customers, would naturally have to be deducted from another steel supplier’s sales. This is clear proof of the complete misjudgement of market rules and an absolute absence of realistic thinking regarding the future development of the world economy. Another exorbitant, thoughtless expenditure policy – whether through the financing of unnecessary, and in any case questionable, wars; whether through subsidies fought for by the horde of lobbyists for every conceivable clientele; whether through excessive acts of charity in order to achieve a life of luxury as comfortable as possible – made its inevitable contribution. We now observe the consequences of this unbridled and ungoverned globalization process with incredulous astonishment and boundless horror. All limits were exceeded during the final phase of this divine growth story, no warning light in the cockpit registered any more, every red traffic light was ignored at top speed, inconsiderately and happily hooting the horn. How else can one explain that any mechanisms, which in normal times would have led to an immediate stop of the growth rally, no longer had any effect? Would it have been imaginable 3 years ago, that an increase in raw material prices of several 100%, particularly those of crude oil and energy, triggered absolutely no braking operation? The explosion in property prices in certain regions of the world did not lead to any slowing or fall in demand – on the contrary, the bull market fed the bull market. World markets reaching ever-greater record levels did not lead those involved in this gambling to any more moderate restraint and caution – as if saying: ‘I’d give the world. . .’, the betting continued (without any hedging of the bets) in order to conquer many more peaks.

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The banks, investment institutes and especially the private equity companies and hedge funds, which also paid such astronomical prices for their new acquisitions with the money and securities of the companies already taken over, played a particularly wicked and damaging role in this apparently endless success story. Nothing was too expensive. The fact that many thousands of employees lost their jobs – in order to allow the desired profits (of unbelievable magnitude over time) to be made – naturally played no role and was indeed justified, unchallenged, with the otherwise lacking competitiveness in the globalized world. Having unrestrainedly provided every company and every citizen with credit – entirely independent of whether or not they were creditworthy according to the usual banking principles – as if on a conveyor belt, the banking institutes produced new and strange financial products that nobody could understand anymore, bundled them together and placed them on the worldwide capital markets, where they were purchased by profitgreedy credit institutes and investors without inspection. This infernal stuff spread around the world at whirlwind speed in the form of a snowball system and, after this bubble burst, destroyed all trust in a functioning financial system worldwide. The world on the fast lane, no borders could stop the forward march of the monster globalization! Despite the dramatic worldwide increase in debt; despite the global explosion in prices for raw materials and property; despite the increasingly large prosperity gap between rich and poor – there was no stopping it. All the rules were rescinded, leading to a merciless selection process. The victors of globalization, driven to want more and more by greed, played their deadly game to excess while the losers could only watch helplessly and struggle to avoid falling beneath the wheels of this juggernaut. Whether governments, which were exclusively concerned with the well-being of their populations and only operated a world trade policy in their own interests; whether politicians, who would stop at nothing to assist just their own clientele; whether companies, which operated for maximization of profits without moderation and thereby increasingly neglected the needs of their employees; whether corporate raiders, who bled dry, shattered and irretrievably destroyed many thousands of jobs at the healthy companies they took over for purely, entirely excessive, profits; whether investment bankers, who only had eyes for short-term profits and earned billions in annual bonuses; whether credit institutes, which ignored all the precautionary measures usual in banking for the sake of their profits and forced millions of people into financial ruin; whether simple citizens, who, driven by the success of neighbours, wagered ruthlessly – all had something in common: THEY WERE DRIVEN TO EVER-GREATER EXCESSES BY GREED! The conflict between, on the one hand, the potentials of globalization and, on the other hand, the badness of people (according to Thomas Hobbes) whose greed was given increasingly free rein without any state regulation, turned out to be a deadly cocktail that drove the political and economic stability of the world community to the edge of the precipice. Ethics, morals, modesty, moderation, consideration, social behaviour – all absent! Hobbes sends his regards! The result is well known. The collapse had to come sometime. There had to be a payback for having thrown all doubts and caution overboard – the tab had to be picked up sometime. After years of laissez-faire, the call for the regulatory and

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assisting hand of the state – as the helper in our hour of need – was now raised from all over the place. As if by magic, all liberal and economic axioms have been forgotten, no state measures can be dirigiste enough, and where in the past all state restrictions were scorned, hands are now held out from far and wide. No funding is now ruled out by the new all-powerful states: excessive rescue packages for banks and companies, bulging fiscal stimulus packages (long live John Maynard Keynes), escalating state indebtedness, even forced nationalization of banks and companies is seriously being considered. Out of the frying pan and into the fire! Did it really have to get so bad? How could this foreseeable failure of globalization have been prevented? What can be done to ensure that the brilliant founding idea and aspiration of globalization is implemented for the benefit of all in future? The following example is intended to draw a parallel to an equally revolutionary epoch that only achieved its positive blossoming for all mankind after decades of spurious development and resultant human tragedies. Compare globalization today with the industrial revolution of the nineteenth century! Then, as now, the world was confronted by a revolutionary upheaval which brought with it gigantic effects for all earth’s citizens. Then, as now, both the industrial revolution and globalization had the potential to be a blessing for mankind. Then, as now, this monstrous potential not only remained unused during the first decades of the existence of this movement, but was actually abused, and threatened to destroy the world order as a curse on mankind, and to sink into oblivion as a grandiose failed experiment. Then, as now, Hobbes’ mankind was the greatest threat to the victory march of this revolution for the benefit of all. But finally, after years of increasing injustice and the impoverishment of large masses of the population caused by the absence of legislation, regulation, directives and regulatory bodies, after an ever-greater gap between the winners and the losers of industrialization – triggered by the desire for, and unrestrained addiction to, profits on the part of the owners – there was an aboutturn. Industrialization changed from being a curse for countless people into a blessing for many subsequent generations. Pauperism – generated by the lack of restraint of rulers and owners, who without moderation, uninhibited and greedy, mercilessly and relentlessly, egotistically only had an eye for their own advantage and profits, and who thus massively promoted widespread poverty – led to resistance by the suppressed, civil war, strikes and walkouts. Child labour, the absence of social security, insufficient protection against unlawful dismissal and catastrophic working conditions were the breeding ground for the creation of social legislation, the formation of unions, employee organizations and political parties, which accepted all those in need of help. Over the course of years this curse gradually transformed into a blessing! ‘Homo homini lupus’ – mankind is bad by nature. Man needs clear rules, he needs guidelines, and he needs a defined framework within which he can move. As a result of his character traits, he is unable to develop positively without state organization and in the absence of any limits leaves behind him, for his successors and generations to come, a shambles. The current crisis demonstrates this in a remarkable and horrifying manner. Let us draw the correct conclusions from the

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experiences of the industrialization phase of the nineteenth century in order to thrust globalization onto the right path – a blessing for mankind. Let us learn from the damaging and disgraceful mistakes of the past and accept the human failings that necessitate a regulatory hand. But let us not throw out the baby with the bathwater by allowing the state to take the place of the business and financial world and over-regulating all entrepreneurial activity. Let all regions of the world benefit from the advantages of world trade subject to clear rules and let us not take the route of isolating markets by means of nationalistic protectionism. Let us give the financial world – in future to be regulated and controlled – another chance, because in the long term the state will not be the better banker and entrepreneur. But let us stop rank growth and robber baron activity. Let us prevent globalization withering in world history as a failed experiment. The history of the creation of the industrial revolution and its stony, but ultimately successful, path to the benefit of mankind should act as both a warning and an example to help us take the right path. It is 5 min to 12. Curse or blessing? The direction we choose to take is in our hands. Let us not give the Hobbes in us any chance!

Mercy for Those Realizing Global Opportunities Through Offshoring and Outsourcing Effectively Alexander Martin

Alexander Martin is the principal and management consultant of A.T. Kearney’s Strategic IT Practice. He has worked for A.T. Kearney for more than 9 years for large and mid-sized companies on both national and international levels, helping them primarily in the strategic aspects of information technology. His expertise covers a broad range of functions including outsourcing and off shoring. He helped clients in their make-or-buy strategies, outsourcing and off shoring of IT and business processes. In addition, he helped outsourcing and off shoring services providers in optimizing their sales and delivery strategies. Recently, he has supported countries in positioning them globally as service provider locations. Prior to A.T. Kearney, Alexander Martin worked for J.P. Morgan and Daimler.

Introduction Globalization is certainly one of the greatest achievements of the human race. Today’s global connectivity and collaboration provide extensive chances for companies and every single being. Especially, the proliferation of new technologies like Internet and e-mail, and the arrival of new services like software maintenance and development, have boosted global trade in the last decades. In 2008, the value of global IT service offshoring amounted to ca. USD 30 billion and further growth is still predicted. Leveraging today’s global delivery capabilities provides significant benefits for companies and allows cost savings of up to 40%. Although global sourcing and offshoring is already common practice for many companies not all organizations are using it today. Sooner or later, all companies will have to practice it in order to have a competitive edge. Today it is possible to leverage the world wage gap even for high-skilled jobs. Those who manage the global network successfully will be the prosperous companies of the future and many of them will come from the emerging markets.

R. Ijioui et al. (eds.), Globalization 2.0, DOI 10.1007/978-3-642-01178-8_13, # Springer-Verlag Berlin Heidelberg 2010

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The History of Globalization The history of globalization mainly went through three phases (Martin Walker, 2007). Its development can be seen as one of the greatest achievements of the human race. Inventions in transportation, communication, and regulations over the years enabled global trade to flourish. Some historians argue that the first true globalization phase came in the nineteenth and early twentieth centuries and ended by the World War I. During these years massive waves of about 40 million Europeans migrated to North America and millions more to South America and Australia. Britain led global trade due to its maritime mastery and by 1914 it was exporting capital equivalent to 9% of its GDP and amassing global securities worth 140% of its own annual economic output. In total, trade accounted for as much as about 10% of global GDP and through world trade cheap food from the Americas and the Ukraine came to Europe,which was exporting its manufactured goods. The next major phase of globalization took place at the end of the World War II when the victorious British and American allies represented by Lord Keynes and Harry Dexter White planned the post-war economy. In 1944 at the three-week conference at Bretton Woods in New Hampshire they developed a new area of globalization. They devised and planned mechanisms for the crucial institutions that created the structures through which globalization flourished, from the World Bank and International Monetary Fund to the International Organization for Standardization and the OECD (Organization for Economic Cooperation and Development). GATT, the General Agreement on Tariffs and Trade, was an important factor for the next phase of globalization. The driver then was modern and open rules and regulations. The Western countries applied these but the Soviet Union and its client states denied the participation in “open door” trade. That may have been the single decision that doomed the Soviet Union to defeat in the Cold War. While the West boomed on the revival of world trade, it was able to afford all kind of goods while the Soviet Union could not. Through self exclusion of the East the Western States dominated globally trade, finance and investment. In these year’s trade accounted for about 20% of global GDP. A new impulse and the start of the third phase in continuing globalization was the end of the cold war with the fall of the Berlin wall. At the latest the accession of China to WTO membership on December 11, 2001 marked the start of the third phase. In this new era the West does no longer set alone the rules for world trade, since each of the 151 memberstates now has a vote in the World Trade Organization. For example in November 2004, China’s president pledged investments of $100 billion in Latin America over the next 10 years in the course of a long tour of the continent. Today China and India are by population the two largest consumer markets. While the West accounted for more than one-quarter of the world’s population in 1950, today it accounts for barely 15% and declining birth rates suggest that this share will fall further. China and India combine today more than 2.5 billion people and more then hundreds of millions in China and India have been hauled out of abject poverty than ever before.

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They have jobs and savings, and can think about investing in the education and the future of their own children, and about a more comfortable old age. They can afford to have dreams as well as possessions and to think of the future with some confidence rather than dread. The speed and impact of the surging growth of these two most populous countries is so powerful that it will be a rather odd historian who does not describe the period of the last two decades as the Age of Globalization. Through modern communication as Internet and email the emerging countries shifted global trading patterns by getting access to high-skilled educated jobs. China established itself as the manufacturing country including high-tech productions and India benefits of the global boom in software. Today’s globalization has been described as the Beijing model of state ownership, state-led industrial strategy, currency controls and authoritarian politics. Nowadays the percentage of global trade in relation to the global GDP is about 50. In the coming years with new innovations in biotechnology, nanotechnology, artificial intelligence, computer science and alternative energy sources to tackle climate change, the West has an opportunity to stay in the front-line of future trade and development. Nevertheless all countries will increase global trade to manage a competitive cost position and to get access to global markets.

Globalization Drives Offshoring and Outsourcing With the progression of globalization new sourcing and business models like offshoring and outsourcing got established. – Offshoring: Exporting IT or Business Process Services to remote, lower cost locations. While the export to an own (captive) center is pure offshoring the export to third party vendors would include outsourcing. – Near-shoring: Export of IT or Business Process Services to proximate lower cost countries, typically to Canada, Mexico from USA, to Ireland from UK or to East Europe from West Europe. – Outsourcing: Handing over IT or Business Process Services that your own employees would perform to another company. This act can include the transition of employees and/or assets to the new partner. These standard business models of today were mainly driven by the development of new communication channels like Internet and e-mail. The classical trade theory essentially follows the argumentation of David Ricardo (1817) and sees the main advantage of trade that countries specialize their production in what they can do best (their comparative advantage), export their surplus output and import all other goods. By focusing on comparative advantage, their productivity rises, for only the goods that show the highest productivity differential are manufactured in the domestic market. Typically, the form of specialization is geared to the resource endowments: countries with a large supply of capital and skilled labor will tend to specialize more

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in capital and knowledge-intensive goods; countries with a shortage of skilled workers will tend to focus on low-skill activities. The result of the theorem is that over many years the emerging markets with their low labor costs conducted tasks which have been formerly done in the West while these picked up more skilled tasks. The emerging countries had always a time delay in conducting qualified jobs. Today outsourcing is a key management tool for improving organization efficiency and performance within both private and public sectors alike for over 20 years. Its general acceptance, widespread application and endurance, compared to other management tools, can partly be explained by its compelling proposition of both cost reduction and service improvement. The former is achieved through the transfer of company assets and overheads to a third-party often in exchange for an immediate cash infusion and the promise of ongoing cost savings. The latter is achieved by the service operator having lower overall operating costs, consolidating services, and eliminating inefficiencies. The organization can then refocus critical resources on its primary business goals and more value-adding or strategic activities. In a study about the top reasons why companies are offshoring services the main driver with 93% is still cost reduction but already 64% are expecting improved productivity, 42% see enhanced service quality and 30% expand their skills and capabilities (Fig. 1). The objective of reducing the costs is achieved by many companies. A.T. Kearney’s project experience shows cost savings in the order of 15–49%. While an important lever is the global wage gap further levers are gained benefits of scale and process efficiency. Offshore centers are usually used as shared service center which mean they serve several countries, products and/or clients. This bundling of

93%

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Cost savings1) 100% 49%

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demand realizes economies of scale. In most case with the establishment of an offshoring service these gets optimized. Best practice processes and information technologies get usually applied. The investment in such projects has in general a fast pay back. Typical benefits are shown in graph: offshoring benefits. These are taken from 35 companies after the implementation of an offshoring strategy (Fig. 2). The benefits have already been used by companies for many years. First companies came from the Anglophone countries, which are also today the leading countries in offshoring services. From the global offshoring demand in 2007 61% came from the USA and 18% from the UK. Central Europe on the other side is for many cautious offshoring services through language barriers. Today’s language offering especially in near-shore locations and the implementation of English as standard language in many firms further drive the demand. In general, offshoring services are used by all kind of industry sectors. The finance sector is leading by far. For example more than 40% of the Indian Offshore services in 2007 were demanded by financial institution. This lies in the nature of the business which is about managing information. Many business processes beyond the IT services can be executed in offshore locations (Fig. 3). Offshoring can be done captive which means that the company opens its own offshore center, recruits local employees and transfers the service provision. Many companies combine offshoring with outsourcing. They only transfer the services while the new business partner takes care about the location as well as the recruiting and training of employees. Many Western outsourcing companies established offshore centers many years ago to save costs. It is thus not surprising that companies like Accenture with 170,000 employees, HP and EDS with about 270,000 employees and IBM with about 380,000 employees are not only

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Fig. 3 Indian offshore services by industry, 2007 (in %) Source: NASSCOM, 2008

dominating the outsourcing service market but also are the largest offshore services providers. In addition, the main offshoring destinations established their own companies. Especially the Indian market has brought out major companies like TCS, Infosys and Wipro that serve already international clients and account for 46% of the country offshore service volume. In comparison, the top three Chinese companies are still small but growing fast. The market is still very fragmented and the top three providers: Neusoft, Chinasoft, and VanceInfo combine only 15% of the market volume (Deutsche Bank Research, 2008). However, this is a disadvantage as clients prefer larger providers with a broad service spectrum. The origin of outsourcing services based on local spend is still mainly the USA followed by the EU 25 countries. In 2007, India was in third position only. Surprisingly, Japan provides many outsourcing services. Today China is mainly a service provider for Japanese and Korean customers. The top three Chinese providers generate 80% of their revenues with clients of this region.

Service Outsourcing An important question in the outsourcing process is: which services should be outsourced or off shored and what is the right strategy? Outsourcing services are continuously undergoing a generational shift as companies re-evaluate the role of outsourcing in their organization, in terms of its scope and significance, and the type of relationship they want to forge with service providers. In the early 1990s the focus of outsourcing and offshoring was mainly on nonbusiness critical services, for example, desktop support or network maintenance. Compare graph: development of outsourcing services (Fig. 4).

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Outsource Inbound direct sales Data center management Issue resolution Investment management

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Offshore Captive Selected call center Claims management Custom software developement Fraud analysis

Offshore Outsource Software development Help desk Select transaction processing Accounts payable

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Fig. 5 Outsourcing and offshoring opportunity matrix

Over the last years the focus of outsourcing and offshoring services has shifted towards business critical and business-specific services. Since the late 1990s the outsourcing of business processes like HR payroll, financial administration with bills payment and claim processin, and purchasing is standard among the enterprises. Since the start of this century, companies are also feeling comfortable and see advantages in transferring knowledge or core processes and the spectrum of services by the providers is growing constantly. In defining the right scope of services to be outsourced and off shored, a typical approach is to define the strategic importance and location dependency for all services. The result can be visualized in an outsourcing and offshoring opportunity matrix represented in the next graph (Fig. 5). Those services which are assessed as non-core, and require proximate service provision, are ideal outsourcing candidates and those which can be provided remote, can be even off shored. At strategic services the benefits of offshoring can be applied for those rated remote. Interesting is that the assessment of the services according to this matrix shifts over the years. Services that were rated

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strategic and proximate years ago evolved to non-core and remote. This change over the years realizes a generational shift of outsourcing and offshoring services. In the past the traditional low-skilled jobs were associated with getting off shored but today, this is not universally valid anymore. Many high-skilled jobs (radiology, accounting) can be off shored today while many low-skilled jobs (taxi driving, friendly restaurant waiter) will never be. The service providers offering is progressing more and more towards up skill. The next graph shows the evaluation of services from existing over recent towards emerging. Some companies are already using emerging services. All services can be clustered along the categories: Human Resources, Finance, and Accounting, Customer Service, IT, and Applications, Procurement and Value Added Services. The emerging service in all areas is mainly research activities. Some companies have already off shored main parts of their research and development activities which is part of their strategic core business.

Research & information services in HR General/Open book accounting Program oversight & delivery training

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Product engg, design. Dev&testing Paralegal Research & consulting analytics Medical content & consulting services

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Vendor Bills/payment Employee sourcing processing communication Vendor IT spend negotiations Claims/cheque Tax mgmt. processing Freight mgmt. Contracts allocation Programming payment Mortgage & maintenance Transportation processing Pension/welfare Commodities processing services mgmt. benefits admin. determination Warehouse/invenSecurity Loan proTreasury & risk tory mgmt. services Logistic cessing/ mgmt. trade mgmt. servicing Order Multi Recruitment Customer mgmt. vendor IT infra& selection interaction mgmt. structure Order mgmt. Customer mgmt. analytics Help desk Captive offshore IT application

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In that case the company primarily defines the customer needs, the direction in which research shall be executed and judges the research results for further steps. In this context, it is important to define the processes and its interfaces across partners and/or countries. The concrete selection of the services that should be transferred depends on many factors. Key factor is the financial improvement but others as access to skilled employees need to evaluated, too. One additional advice is not to start with extreme cautiousness and too small. It is good to aspire for a larger scope which can be reached through several steps of transfer. This approach sets a clear target and provides higher benefits from the beginning (Fig. 6).

Outsourcing Models There is not one single outsourcing model. Differentiated outsourcing models are emerging to support the trends underway in the outsourcing marketplace. While many tried and tested models are still available and appropriate, new and innovative models are also being introduced in recognition of buyer sophistication, a wider scope of services, and the increasing specialization of service requirements. We are seeing organizations now adopting one of four strategic choices when it comes to outsourcing, each differing in the extent to which suppliers are involved (A.T. Kearney, 2006): – – – –

In-source – keeping or bringing back an operation in-house. Outsource – services are provided by a third party. Co-source – services are provided by one or more providers. Contest – services are contracted to multiple suppliers at the same time.

Within these four strategic choices eight different outsourcing models offer organizations a wide range of alternatives that need to be evaluated as service providers become more creative in developing solutions and deliver a broader range of services (Fig. 7). High

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Fig. 7 A.T. Kearney strategic outsourcing framework

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Model 1. Full In-Source This model refers to bringing back in-house, or ‘back sourcing’, services that were previously performed by a third party, such that the organization takes over the control, management, and improvement of all associated people, processes and technology. The rationale for adopting this model can be to replace an underperforming service provider, to improve data confidentiality and service control, or to coincide with internal readiness – albeit at the risk of scaling costs and inefficiency.

Model 2. Virtual Service providers provide their own staff, either through onshore or offshore mechanisms, on a contract basis to supplement existing teams. The organization in this case is primarily sourcing for specific expertise or capacity, including managerial capabilities that may be scarce or overstretched internally.

Model 3. Multi-Vendor The Multi-Vendor model recognizes the need for organizations to manage a portfolio of outsourcing arrangements that enable service unbundling, an increase in flexibility and responsiveness, and a greater specialization of services selected for outsourcing. As a consequence, the organization manages a myriad of relationships with both large and small service providers. The multi-vendor model gives an organization the benefits of outsourcing together with greater autonomy and flexibility in contracting, albeit at the expense of a high governance overhead to manage more relationships and interdependencies.

Model 4. Managed Vendor One success factor of outsourcing is the relationship between the organization and the service provider, which, however, can be costly to initiate, cultivate and administer. In the Managed Vendor model, these costs of outsourcing are passed onto a carefully appointed intermediary who provides professional outsourcing management expertise. In this arrangement, the intermediary is not directly involved in the service delivery or integration – their responsibilities are limited to the sourcing, facilitation and management of the service provider network to ensure the organization’s outsourcing objectives are achieved. This model resolves

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some of the disadvantages inherent to the Multi-Vendor model that relate to the complexity (and therefore costs) of governance and control.

Model 5. Shared Entity The Shared Entity model is a proven and future proof outsourcing model familiar to many organizations. It represents a Joint Venture (JV) between the service provider and contracting organization, with functional experts transferring to the shared entity from both parties. The ownership of this entity is usually split 50–50, such that risk and reward are shared equally.

Model 6. Consortia In a consortium a selected group of providers enters into a commercial arrangement with the buying organization, each party contributing a specific skill set to an overall pool which satisfies the organization’s requirement. It is increasingly popular as it is a concentrated ‘best-of-breed’ approach to services delivery. One of the most important implications of the consortium model is that many service providers will need to retool and develop competencies for working in consortium arrangements.

Model 7. Plural Supply As public services are reformed through contestability and commissioning, a number of service providers start to compete for the same service on the premise that market forces will drive service efficiency. The contracting organization in a plural supply model focuses purely on policy and protocol definition. An intermediary firm is typically appointed by the organization to regulate the market and license suppliers. Its role is to monitor supply capacity, ensure contestability effectiveness, monitor supplier compliance, and performance to standards, and ensure the organization’s service objectives are being achieved.

Model 8. Full Outsource The Full Outsource model is another existing and proven model in which one service provider is assigned the role of the lead or prime integrator with overall responsibility and accountability for integration. In order to define the most appropriate outsourcing model for an organization it is essential to define its

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Fig. 8 Outsourcing model represents a distinct configuration of six levers

requirements. The requirements can be described by configuring the six levers scope and market maturity, partnering approach, operating model, commercial arrangements, governance and performance (Fig. 8). Each outsourcing model addresses the six levers in a specific pattern. While governance in the full outsource model is very well defined and “high” it is in the virtual model quite loose and “low”. Based on the organizations requirements along the six levers the most appropriate model can be applied.

Right Offshore Location Some could argue that in case of outsourcing services the country of service provision is not important as long as service levels and pricing are beneficial. Reality is that most companies want to know exactly from where they receive their services. Especially for the companies which build their own/captive offshore center the selection of the right offshoring location is one of the most important questions. Countries can be evaluated along various factors. A.T. Kearney Global Services Location Index (Johann Got, 2007) rates the countries by a weighted combination of relative scores on 43 measurements, which are grouped into three categories: financial attractiveness, people and skills availability, and business environment. Along these measurements a company can define very well what they require from their future location (Fig. 9). In regular intervals, A.T. Kearney evaluates offshoring destinations based on these criteria. The results of the 2007 study are shown in the graph Global Service Level Index 2007. Compared to the last study many countries changed their ranking. India and China were the leading countries of the GSLI 2007, and were

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Sub-category

Financial attractiveness (40%)

Compensation costs

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Metrics Average wages Median compensation costs for relevant positions (call-center representatives, BPO analysts, IT programmers and local operations managers) Rental costs Commercial electricity rates International telecom costs Travel to major customer destinations

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Relative tax burden Corruption perception Currency appreciation or depreciation

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Relative IT and BPO sector growth and unemployement rates

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Investor and analyst ratings of overall business and political environment A.T.Kearney Foreign Direct Investment Confidence IndexTM Security risk Regulatory burden and employment rigidity Government support for the information and communications technology (ICT) sector

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Overall infrastructure quality Quality of telecom, internet, and electricity infrastructure

Cultural exposure

Personal interaction score from A.T. Kearney Globalization Index

Security of intellectual property (IP)

Investor ratings of IP protection and ICT laws Software piracy rates Information security certifications

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Fig. 9 Global service level index metrics parameters Source: A.T. Kearney

also ranked first and second in the GSLI in 2005. While the financial attractiveness decreased by higher wages in many countries that decline was completely overcompensated by the increase in people and skills availability. Most countries are fostering an education program addressing offshore provision. In addition, the business environment in many countries has enhanced. Another finding is that the relative cost advantage of the leading offshore destinations has declined almost universally. Nearly every country in the Index, even those that fell in the rankings, improved their absolute scores, thus confirming that competition among low-cost countries is intensifying. Increasingly, simply maintaining current performance levels is no longer sufficient for countries that want to attract (and retain) the fast-growing remote services business (Table 1). India and China are the two leading countries today. Offshoring is not only attractive to far away countries, near-shore locations, primarily located in East Europe for West European countries or South America for the USA, are also valid alternatives. Companies should not blindly follow the herd to India or any other popular destination. Many other markets are also highly attractive, and as the offshoring industry matures, various destinations are emerging that offer suitable solutions depending on an off-shoring company’s particular requirements. In evaluating potential locations it is important to recognize the relations between the various factors. For example, countries with lower wages have often lower education or infrastructure. The rating of countries is not steady and it is changed through many influencing factors, but the offshoring industry has become an essential part of many countries’ economies and it is highly appreciated. Many of them are actively investing in positioning their country as offshore service destination. The production of IT and business process services is clean, requires limited amount of

170 Table 1 A.T. Kearney global service level index 2007 Rank Country Financial People and skills attractiveness availability 1 India 3.22 2.34 2 China 2.93 2.25 3 Malaysia 2.84 1.26 4 Thailand 3.19 1.21 5 Brazil 2.64 1.78 6 Indonesia 3.29 1.47 7 Chile 2.65 1.18 8 Philippines 3.26 1.23 9 Bulgaria 3.16 1.04 10 Mexico 2.63 1.49 11 Singapore 1.65 1.51 12 Slovakia 2.79 1.04 13 Egypt 3.22 1.14 14 Jordan 3.09 0.98 15 Estonia 2.44 0.96 16 Czech Republic 2.43 1.10 17 Latvia 2.64 0.91 18 Poland 2.59 1.17 19 Vietnam 3.33 0.99 20 UAE 2.73 0.86 21 USA (tier two) 0.48 2.74 22 Uruguay 2.95 0.98 23 Argentina 2.91 1.30 24 Hungary 2.54 0.95 25 Mauritius 2.84 1.04 26 Tunisia 3.03 0.90 27 Ghana 3.27 0.90 28 Lithuania 2.60 0.83 29 Sri Lanka 3.18 0.96 30 Pakistan 3.23 1.00 31 South Africa 2.52 1.18 32 Jamaica 2.83 0.96 33 Romania 2.88 0.87 34 Costa Rica 3.00 0.86 35 Canada 0.77 2.09 36 Morocco 2.92 0.90 37 Russia 2.61 1.38 38 Israel 1.97 1.27 39 Senegal 3.19 0.82 40 Germany (tier two) 0.46 2.19 41 Panama 2.88 0.75 42 United Kingdom 0.50 2.16 (tier two) 43 Spain 1.18 1.71 44 New Zealand 1.53 1.12 45 Australia 0.89 1.69 46 Portugal 1.59 1.14 47 Ukraine 2.76 0.98 48 France (tier two) 0.45 2.07 49 Turkey 2.06 1.31 50 Ireland 0.40 1.54

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Business environment 1.44 1.38 2.02 1.62 1.47 1.06 1.93 1.26 1.56 1.61 2.53 1.79 1.25 1.54 2.20 2.05 2.00 1.79 1.22 1.92 2.29 1.54 1.26 1.98 1.56 1.50 1.25 1.98 1.22 1.11 1.60 1.49 1.53 1.36 2.30 1.33 1.16 1.86 1.05 2.40 1.40 2.35

Total score 7.00 6.56 6.12 6.02 5.89 5.82 5.76 5.75 5.75 5.73 5.68 5.62 5.61 5.60 5.60 5.57 5.56 5.54 5.54 5.51 5.51 5.47 5.47 5.47 5.44 5.43 5.42 5.42 5.36 5.34 5.30 5.29 5.28 5.22 5.16 5.14 5.14 5.10 5.06 5.05 5.02 5.01

2.06 2.25 2.31 2.11 1.09 2.27 1.41 2.29

4.95 4.91 4.89 4.84 4.83 4.79 4.78 4.18

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natural resources and is more flexible than the heavy industry. It provides attractive career and salary opportunities for highly qualified citizens of which more getting trained for the labor market. The example India demonstrates that Offshore Services for foreign countries is an essential source of income. In 2007, the offshoring services income was above USD 40 billion and 80% for export. Beside the financial benefits it is an important factor to gain competence and global image. Key for success of the countries is qualification. Most of the emerging countries are spending high investments in their education system. In China, ca. 4 million students leave the universities each year and the number is still rising. As communication with customers is an important factor China identified the need to invest in the English capabilities of its citizens. English has become standard in the elementary school level. Today China predominately delivers IT services for their home market which includes foreign companies that have affiliates in China. Those companies are enhancing their global IT operation by a local partner. China realized already the importance of the IT many years ago and invested in it. At the beginning focus was on hardware production; new initiatives like the 1000-100-10 program of the state shall now grow the service industry. Until 2010 the program shall realize 1,000 potential offshore providers and 100 multi-national providers shall settle in 10 selected countries. The measures include education, investment support, marketing, quality management and an improved intellectual property protection. Over the years with growing country wealth the wage gap factor reduces. Thus offshoring becomes less attractive. In parallel other location benefits like qualified employees, excellent infrastructure and an attractive investment climate get improved. Through this evolution an offshore country becomes a competence and value creation center. What is the strategy of offshore leaders to tackle changing country conditions? The leaders design a global footprint with a number of centers around the world. For larger companies a “cluster” footprint with operations located in different regions is recommended. Such an offshore strategy is globally coherent and stress tolerant which means it can withstand a decade or more of cost and wage increases and other changes.

Successful Offshoring Companies have been offshoring and outsourcing IT and business process services already since the 1980s and comprehensive know-how and expertise have been developed. A recent A.T. Kearney study that analyzed the success of 35 companies found out that only a few ones are really successful. Success was determined by savings plus seven operational performance metrics: capacity, flexibility, capability, revenue performance, process, maturity and service level. All surveyed companies realized cost savings but only a few once reached to improve their operational performance. The best performers exceeded the others by realizing savings and performance scores above the average (Fig. 10).

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Performance score across the six metrics

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What differentiates the best performers from the others and what are the factors to be successful? These companies share certain behaviors across five areas: operational performance, management team and governance, communications and change management, supplier selection (for those who outsourced) and transitioning. These five factors are the keys to successful offshoring: 1. Winners focus less on saving money and more on operational performance and in so going, they save more money. 2. Unsurprisingly, companies that invest more in managing the offshore program achieve a markedly better performance. 3. Communicate openly to the organization and culturally sensitize it to the offshore operations. 4. When selecting a supplier, do not focus too much on price, but on the supplier’s domain expertise, culture and management. 5. Calibrate ramp speed to the level of your offshoring experience and send your people overseas.

Focus on Operational Performance, not Savings Offshoring has traditionally been viewed as a cost-reduction effort: moving staff overseas to generate savings from the labor arbitrage. The best performers, however, look at the issue differently. They focus less on saving money and more on improving operational performance, and in so doing they save more money. That is, the surveyed companies that struck the right “balanced” focus on improving operational metrics achieved the largest cost savings. For example, surveyed companies that improved on three or more operational performance measures

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saved an average of 44%, whereas companies that improved on two or fewer measures saved only an average of 30%.

Invest in the Management Team and do not Outsource Ownership Companies that invest more in managing their offshore program achieve markedly better performance. They treat the offshore program as an investment instead of as a pure cost-reduction exercise. The best performers have CEO commitment, a strong offshore management team with centralized, dedicated resources and a detailed implementation plan. Although the program’s operational activities may be moving halfway around the world, the accountability for performance must stay at home. The best performers invest in a centralized, dedicated on- and offshore team and link compensation directly to the offshore operation’s performance. They invest in bigger teams, locate more of their management resources at the offshore location to ensure successful knowledge transfer and strong cultural integration and, as appropriate, they move onshore leaders offshore via expatriate package. Not only during the transition but also afterwards a dedicated offshore team is beneficial. This function is dedicated to managing the offshore operations and will need to be appropriately sized to handle the workload with the right balance of on- and offshore resources. Long-time expatriates, especially for captive offshore operations, have proved a worthwhile investment.

Mitigate Common Problems by Communicating Openly The two most frequently experienced issues in offshoring are internal resistance to change and cross-border culture and communication issues. Hundred percent of the

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top offshoring performers address these issues very openly and actively as shown in graph: offshoring issues (Fig. 11). The two issues are intrinsically linked: Internal resistance to change and crossborder cultural and communications issues lead to reluctance to partner and effectively communicate with the offshore team. This in turn leads to ineffective knowledge transfer and offshore skills issues, which ultimately result in lower service levels and increased customer complaints. Successfully avoiding these pitfalls requires a thoughtful communication and change-management plan. Some companies avoid communication breakdowns by establishing dedicated vendor management organizations focused solely on offshoring. This ensures that onshore and offshore teams receive the same information, remain engaged and have the same expectations about work performance and project timing. To address cultural communication both national culture and corporate culture are relevant. For the corporate culture a good understanding of the own and the partner firm is required. The best combination is not always a pair of equals, sometimes differences can be fruitful. Aligning two cultures does not mean making them as similar as possible. Rather, the goal is to harmonize them and address cultural differences consciously throughout the relationship. It is a lifecycle-long endeavor.

Supplier Selection Surveyed companies that employed a third-party operating model showed clear differences in the main criterion they used to select suppliers. The best-performing companies focus on supplier capability – domain expertise, culture and management – whereas poorest-performing companies focused on supplier price. Culture is an important criterion when selecting a service provider. Manage culture as a true partnership. The most successful offshorers treat their service providers as close partners rather than keeping them at arm’s length. They establish a visible governance structure with active participation. Ironically, the companies that focused less on price saved twice as much. This relates back to the business objectives key. The best performers focus less on the transaction itself and more on what comes afterward: migration, joint process improvement, a reward- and risk-sharing agreement, and a collaborative partnership.

Transition: Calibrate Ramp Speed to Experience and send Staff Overseas Transitioning workload to the offshore operation involves two key decisions: how fast to do it and how many resources to send overseas to transition the know-how.

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Speed will ultimately be a function of the company’s transition experience, the transition stage and the program size. Executives in the early stages of offshoring often either try to ramp up too fast or too slowly. Going too fast can result in operational performance issues, such as poor levels of service and lower-quality staff. Going too slowly, conversely, not only delays savings realization, but also unnecessarily prolongs the transition period and any associated changemanagement risks. The full-time employee ramp speed varies dramatically across companies. Some companies hire as few as one FTE per site per month, some as many as 150. Across the survey, companies that ramp up at a rate of 25–50 FTEs per month per site achieved the best average performance.

Outlook Companies continue to aggressively pursue offshoring – moving selected functions or processes to places in the world where they can be conducted at lower cost, either by third parties or by an own, newly built captive center. They do because their leaders know the wider realities of offshoring. They know that although it may be a risky game, offshoring offers potentially great rewards: It helps companies compete in a global age, creates value for their shareholders and improves their operational performance. Was the global offshoring market in 2007 about USD 80 billion some are forecasting it is doubling in the next 5 years.

References A.T. Kearney, Globalization 3.0 by Martin Walker 2007. Offshoring nach China – Von Werkbank zu Backoffice by Deutsche Bank Research 2008. The Offshore Cultural Clash Marcy Beitle, Arjun Sethi, Jessica Milesko, Alyson Potenza published in A.T. Kearney Executive Agenda 2007. Next Generation of Outsourcing Trends and Challenges by A.T. Kearney 2006. Global Service Level Index by Johann Got 2007. IT and BPO market data by www.nasscom.org.

Globalization in the Automotive Industry– Impact and Trends Ralf Bechmann and Martin Scherk

Ralf Bechmann was born in 1967 in Munich. After completing his studies in mechanical and industrial engineering, his career started at Roland Berger Strategy Consultants in the Competence Center Operations Strategy. He joined MBtech Consulting in 2004, and is now heading the Global Center of Competence Purchasing & Supply Chain Management as the responsible Director. In an additional role, Ralf Bechmann is also responsible for Strategy Consulting within MBtech Consulting. Martin Scherk was born in 1971 in Vienna. He studied Business Administration and Innovation and Technology Management at LMU Munich and Sloan School of Management, M.I.T. He joined Daimler Benz AG in 1997 and his latest position is Head of the Department at DaimlerChrysler Research and Technology in India. Since 2006, he is heading the Practice Emerging Markets within the Global Center of Competence Purchasing & Supply Chain Management at MBtech Consulting.

Introduction Since the 1980s, the automotive industry has evolved out of a strong drive towards globalization. With further ongoing globalization, the automotive industry faces even more complex issues across the world, with far reaching consequences for its future position. The current worldwide financial crisis has resulted in – Decreasing global market demand – Vast production overcapacity – Volatile raw material prices In addition, the global automotive companies will enter new markets, thus dealing with new local policies and import regimes that will play both restrictive and enabling roles. Further, the automotive industry must cope with personal mobility, which is becoming increasingly differentiated across the globe.

R. Ijioui et al. (eds.), Globalization 2.0, DOI 10.1007/978-3-642-01178-8_14, # Springer-Verlag Berlin Heidelberg 2010

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Fig. 1 Globalization in the automotive industry

At the same time, the global Automotive Industry must reduce emissions and meet the globally increasing demand of mobility. This chapter, by MBtech Consulting, highlights solutions for automotive OEMs and suppliers to better position their companies in global markets. Global players must develop sustainable products and alternative mobility concepts using Green Technology. Technology and designs must “Fit to the Market” for the fragmented and volatile future automotive markets. Organizations should be prepared to move their company into global competitiveness by adapting processes and tools to meet the new challenges (see Fig. 1).

Globalization Drives New Automotive Markets in the Global Automotive Industry China, India, Russia, and Eastern Europe are examples of new markets in the Automotive Industry. In these markets, the demand for mobility is increasing sharply: China, the second largest automotive market in the world, has already reached sales of 7 million vehicles in 2006. By 2012, automotive sales in China are expected to reach 13 million units (Source: Global Insight 2008). Two Chinese carmakers are already in the world’s Top 10 list for their output (Chery: Number 5; Changan: Number 6). In terms of purchasing power, India ranks number four in the world today. At its current rate of growth, India will pass by Japan within the next 10 years. By 2025, India’s economy will reach 60% of the size of the US economy. As a result of this growth, passenger car sales are expected to hit the 2.7 million units mark by 2015 in India. By 2027, Indian automotive sales are expected to reach 7 million units (Source: Global Insight 2008; India Brand Equity Foundation (IBEF) 2008).

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In Russia, the passenger car market is estimated to grow from 2.4 million units in 2007 to 5.2 million units in 2012. However, the share of the traditional domestic Russian Automobile Industry is expected to drastically decline to about 600,000 units in 2012. Localized products of new domestic manufacturers all placed above USA, Japanese, South Korean, and German carmakers are expected to be at 1.6 million units (Source: Ernst and Young 2008). The growth pace of New Automotive Markets is influenced by various factors, such as domestic industrial policy and demographic development, as well as factors such as infrastructure, global outsourcing of technology or the influence of global markets on their economy. New markets drastically differ from mature automotive markets. Even the effects of the financial crisis are not expected to have a long lasting impact on market growth in the medium. But they show the volatility and fragility of the local industry especially in times of economic slowdowns. On the whole, the importance of upcoming countries in the new markets has a strong impact on the Automotive Industry of today.

Local Automotive Policies and Import Regimes Play a Restrictive and Enabling Role in the New Automotive Markets Free flow of goods and services, especially in a connected world, is strongly supported by the World Trade Organization (WTO). However, in today’s Automotive World, a high heterogeneity in terms of duties, fees, local automotive policies, and homologation procedures can be found between countries and regions all over the world. Emerging markets like Indonesia, India, Mexico, and Malaysia have high import duties and fees with inclines of up to 100%, depending upon which country the vehicle is imported from and if preferential agreements between countries exist. Additionally, strong local policies, such as China’s Joint Venture Policy for Automotive OEMs, can affect the formation of companies. Conversely, there are several other countries in the Middle East (e.g., Saudi Arabia, UAE) or Australia and New Zealand that have very limited trade restrictions. Local changes of import regimes are varying from country to country and can be highly dynamic, especially in times of economic slowdowns and instability. For example, Russia’s import duties were increased to 30% for imported vehicles with strong effect on foreign Automotive Companies gaining less market share on the local Automotive Market in the second half of the year 2008. Often as part of import regimes, Local Content and Automotive Policies including Local Decrees like investment incentive programs play an important role to reduce import tariffs or investment costs for non-domestic companies. All in all, Import Regimes and Local Automotive Policies strengthen the competitiveness of the local producing industry against foreign companies importing (not taking into account possible grants of subsidies of importing companies in their home countries).

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Globalization Means Market Entry Challenges for Global Automotive OEMs Due to the rising importance of New Automotive Markets and saturated home markets with small growth rates, Global Automotive Companies are investing heavily in new market regions with high potential. Import regimes as a whole have a strong impact on the strategy and tactics of possible players for market entry. For example, a market entrant needs to consider investments for local assembly or production against the import of vehicles or automotive parts with higher prices due to duties and fees. Hence, achieving respected local shares of market depends on the company’s ability to build up a “localized” product portfolio for entering new markets. Furthermore, a company has to build up strong competences to use local policies (including connecting to governmental organizations), establish local production sites, advance in local sourcing and combine these efforts with local market knowledge on product positioning, homologation, and design. The control of Intellectual Property (IPR) is a key factor in countries where design or technology is imitated or copied. Localized production generally results in smaller lot sizes and a more fragmented international production network with possible effects of high costs in production and coordination. In addition, global sourcing compared to locally sourced parts loses leverage: lower volumes in local sourcing reduce the ability of the company to optimize on overall group’s procurement prices. This event additionally leads to high supplier management and tooling costs. On the other hand, international suppliers may follow OEMs into markets with high import regimes (or even were there before them) and use these production facilities to export globally from low-cost countries.

Globalization Means New Market Players, Overcapacity, and Cut Throat Competition for OEMs Surprisingly, few experts in the end of the 1990s had forecasted that companies like Tata, Chery, or BAIC would play a role in the top league of the industry today. These Automotive OEMs are realized today as a strong competitive factor in their own local markets, and have entered the established players’ global Automotive Markets. The establishment of a strong local market position, as well as a global presence, was enabled by various factors. For example: – Influx of know-how and experience to local companies cooperating with leading Automotive Companies both on the OEM and on the supplier side. – International Automotive suppliers shifting the production to emerging markets with cost-effective labor to export parts and modules. – Automotive companies moving processes and technology to global outsourcing centers. This is evident in India with companies like Tata Technology or WIPRO.

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– Creation of a high number of well-educated engineers and managers. This is possible only with investments in education with technical universities and management schools. – Partly weak IPR protection in local markets, enabling companies to reproduce or imitate existing technology or products of other automotive companies. – Simple and easy to repair products with a high fit to the local mass market. Concurrently, the creation of strong dealer and after-sales networks with numerous small repair centers. – Building up strong home turfs with Local Automotive Policies and Import Regimes (also market protection and local incentives). – Global expansion strategies through acquisition. This is evident in the case of Tata Motors buying Jaguar or Daewoo’s truck business. – Additionally, the rise of these companies was partly neglected by leading Automotive Companies around the world due to local market players’ regional activities, their clear positioning in low-cost or market niche segments or initially weak image producing at low-quality levels. However, market entry barriers in the USA, Western Europe, and Japan for newly rising international companies of emerging markets are still high. Establishing a brand, refining marketing and public relations, and developing overseas distribution and service networks are challenging tasks. In addition, global automotive standards, for example, in safety and quality have to be met. Hence, expansion is starting in the areas of the company’s core competency and regional nearness with low-cost products in Africa, Middle East, South Asia, or Russia at first step. With increasing attractiveness of low-cost vehicles all over the world including the Triad (see Fig. 2) new market players are estimated to get a footprint in the Triad markets in the near future. At the same time established car makers are expected to further expand globally with local production and localized products in Emerging Markets. Thus

Fig. 2 Market for low-cost cars in Mio units, worldwide Source: Bloomberg, Center for Automotive Research 2008

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globalization is a multi-way street. Each player is aggressively defending his home market and exploring new niches as a market entrant. Additional capacities are built up. Markets are becoming more global and more segmented at the same time with a wide range of cars from the low-cost Tata Nano to flagships like the legendary S-Class of Mercedes-Benz. As a matter of fact, high competitive pressure and further overcapacities in the worldwide automotive markets are expected. In order to deal with this situation, Automotive OEMs or suppliers should have a close look at positioning their company in the Emerging Markets of the Automotive Industry with a long-term strategy. They should gain transparency on the competitive set with possible new market entrants entering their existing market. For market positioning they should use trend research to take a close look at differentiation from established and new players in global and local markets. Automotive companies should organize themselves to penetrate local New Markets along their overall value chain and through cooperation and networks. International companies must have or develop the availability to make best use of local policies in order to take long-term decisions, open up restrictive markets, and successfully operative in them.

Globalization Means Supplier Market Between Consolidation and Numerous New Entrants The supplier market in the Triad was characterized by heavy consolidation with mergers and acquisitions by suppliers to strengthen their competences and expand into additional international customers, new technologies, or regions. The global consolidation process is estimated to go on in the future, also due to the effects of the worldwide financial crises. Automotive suppliers started to globalize their activities early in the 1980s. One reason for internationalization of their business was to build design and production centers near their increasingly international OEM customer base. Today, the suppliers’ globalization is less driven by shifting production sites to regions with cost-effective labor (e.g., Eastern Europe, Mexico, China, North Africa) or to countries with specific competences (e.g., Taiwan for electronics). Rather, investing in new markets or near global customers, sourcing at lower tier suppliers, and putting up design and technology centers in low-cost regions with qualified staff are intensified. All above-mentioned activities have resulted in high direct investments in the respective markets. In order to be winners in coming years, suppliers need to capture value creation from their customers and move further up the value chain. By 2015, their share of value addition will reach approximately 77% per average vehicle (Source: Mercer 2004). This means, they have to constantly increase their innovation rate to provide modules and systems and invest in cutting edge technology. Selling state-of-the-art products to a diversified international customer base is a must to balance risk and amortize high development cost. Standardization and commoditization are to be

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183 Global First Tier Supplier E.g. Amtek Limited, Bharat Forge Limited

Indian with global footprint E.g. Motherson Sumi Systems Limited, Pricol Limited, TVS Group, Amalgamations Group

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Fig. 3 Example: Internationalization stages of Indian suppliers

avoided since these are more and more becoming strengths of low-cost suppliers in best cost countries for global export goods. Similar to the OEM market, numerous new players are arising outside the Triad (e.g., Eastern Europe and Emerging Markets). Domestic business is still predominant for the majority of local suppliers in emerging markets since these home markets (e.g., China, India, Russia) offer enough development space for growing at a double digit figure. Export of parts and modules is still seen too complex a task, for example, in terms of winning international customers, product delivery and worldwide logistics, high-class product quality, standardized and IT supported processes, product change management, as well as financing of global operations. However, the supplier structure in these markets is heterogeneous in terms of maturity and international presence of suppliers as shown for Indian suppliers in Fig. 3. Strongly qualified suppliers are successfully managing their business and are (further) expanding with clear growth strategies like the following: – Increasing content per car operating at a higher complexity of vehicles (also by building modules and systems). – Developing new products and establishing development centers near international customers. – Setting up new Joint Ventures or technological partnerships with international suppliers or OEMs. – Growth in international customers, move to new segments. – Mergers or Acquisitions giving access to a new customer base and technologies, for example, Mittal Group taking over Arcelor. Companies like Bharat Forge practice dual shore manufacturing concepts by having technology foot-holds in the developed world and manufacturing foot-holds in the low-cost destination. This strategy combines the advantages of low-cost country sourcing and small geographical distance to customers in the Triad. Since core

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Does the suplier meet our expectation ? OSA results, supplirer plan

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(LOI, contract)

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Fig. 4 Best-cost country sourcing

products of the enterprise can be manufactured at two or more globally distributed production sites, know-how is multiplied into several markets, leveraging market expansion and technology into multiple markets and strengthening the innovation rate of the company. New players are facing the challenge of quickly coming up and operating consistently at global standards. International OEMs are not willing to accept minor quality or old-fashioned product technology due to pressure on profit margins and increasing productivity in their plants. Local OEMs are moving up to global markets increasing their product standards. On the other side, established international suppliers have gained access to their traditional customers and marketing technically superior products with high customer orientation, international networks, and expertise. As a matter of fact, a strong consolidation of the supplier markets in these new markets is expected with at the same time new global international players emerging out of these countries. International and local OEMs benefit from this trend in their local and global sourcing activities. Finding best-in-class suppliers, developing the capabilities of best cost suppliers, as well as optimizing and keeping control of their global supply chains are key competence in global procurement and logistics (see Fig. 4).

Globalization Drives Worldwide Growth in Personal Mobility and Freight Transport Sectors Over the past few decades, worldwide mobility has increased at a constant rate; however, the pattern of this growth in each region is quite distinct. Despite decreasing birth rates in industrialized regions, population continues to grow

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globally. By 2050, the worldwide population is expected to increase to nearly 9 billion people. About 95% of that population growth is expected to be seen in developing and newly industrialized nations, with India bypassing China as the world’s most populous country (www.worldometers.info/population/). These trends are leading to a sharp increase in transport demand in these countries. However, individual low-cost cars (see also Fig. 2) will only be a temporary solution for those countries, especially for urban regions, as insufficient infrastructure will not be able to keep up with booming individual mobility needs. Increased traffic congestion will lead to a strong need for effective mass transport systems and intelligent traffic control systems. Transport and logistics are fast-growing businesses in nearly every region of the world. Transport sector growth rates continue to rise, that is, up to 5% p.a. for industrialized countries and between 5% and 8% in emerging regions (Source: DB Research 2008). Global transport demand is believed to further increase in the coming years as established Automotive OEMs accelerate their sourcing initiatives in best-cost countries. Increasing levels of exports from automotive suppliers manufacturing in low-cost regions will lead to a higher “one way” transports to Triad markets. This trade imbalance will continue to occur, in spite of increasing exports of intellectual property protected systems and high-technology components from the Triad to new automotive markets. Consequentially, green supply chain management is becoming more of a focus. The bundling of transport volumes (also by cooperating with competition), local consolidation hubs, and supply chain optimization are means to lower costs with positive ecological effects. Even suppliers which are based near automotive OEM plants can achieve these cost savings. Supplier which provides a large volume of components or assembled modules can utilize logistics concepts such as cross-docking as an efficient means to achieve savings and improve customer service levels.

Markets Segments are Becoming Increasingly Differentiated Globally In industrialized countries and emerging markets, rising personal independence and increasing education levels have improved an individual’s choices regarding job selection, working schedule, recreational activities, and lifestyle. Reviewing regional differences the economic and social stability of the middle class is under pressure and often declining in developed countries. However, in some newly industrialized countries like China and India, the middle class segment is steadily increasing. In both industrialized and emerging regions, a person’s social status, wealth, or power is evident in the selection of one’s means of transport. This fact alone is providing huge opportunities for automobile marketers in growing emerging markets (as long as suitable local traffic infrastructure is available). An individual’s level of education can vary in various regions of the world. This variation has shown to be a key factor in purchasing decisions. Affluent, highly

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educated persons are the ideal customer of companies that produce innovative and premium products. Conversely, individuals with limited education opportunities, lower income possibilities, and living in less industrialized regions, look for mobility options with a strong “price value consciousness.” In addition, the plurality of lifestyles is widening as a result of increasing individualization and is strongly affecting consumer choices. Value systems are often influenced by global and local trends. For example, environmental awareness is an increasingly important factor in the value system of industrialized societies. This awareness is also apparent in well-educated segments found in developing countries. In some urban areas, this fact can be seen in the sale of niche products, such as electric vehicles sold in India and China. Due to the number, complexity, and intensity of different trends inside and across regions, personal mobility demands are becoming increasingly differentiated. However, even with the continuing dispersion of wealth across the globe, class behaviors are expected to remain uniform and consistent. Elitist and highly educated people will show similar behavioral and purchasing patterns around the world. Localized influencers (e.g., infrastructure spending, population density) can often create distinct value imbalances between buyer wants and capabilities. For example, in Western regions, premium transport mobility is often countered by high market saturation and ever increasing costs of mobility. Conversely, low-cost mobility options are often restricted by limited infrastructure and resources. As a result of the interplay that exists between primary economic forces (consumer demand behavior, infrastructure spending, etc.), product requirements (especially in the automotive industry), and mobility Automotive Concepts will have to change significantly in coming years. New mobility genres, financing options, service offerings, and product branding, especially also for small cars, will prove the true competitiveness of global Automotive Companies.

New Local Mobility Concepts Around the Globe The suburbanization of the automotive buyer has resulted in new behaviors such as long commuting distances. This trend is the result of the ready availability of costefficient individual mobility solutions (as can be seen in the USA) or public transport systems in industrialized nations (e.g., Western Europe, Japan). However, in many areas, more and more people are deciding to move back or live in cities. This trend is due to rising transport costs, living near work, environmental consciousness, and increasing popularity of inner cities among young people and aging population. In regions with increasing population, “Megacities” (e.g., Mexico City, Mumbai, Sao Paulo, or Shanghai) are further exploding due to high number of migrants looking for job opportunities. These large cities are already facing enormous transport and emission problems, as local infrastructure has not kept pace with the sharply rising number of cars and buses, older vehicles with high emission levels, as well as poor or failing infrastructure.

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As a result, access to inner cities is either becoming more and more uncomfortable, untimely, and restrictive. Examples like Beijing (eligibility of number plate), German cities (prohibitions on emission norms), or London (transport fees) show the trend towards restricting or channeling individual mobility towards cities. Thus, stricter emission norms and innovative mobility concepts will play a key role in improving transportation options in cities. For example, “Car to Go” is a transport concept by Daimler AG to meet individual mobility demand in cities. “Car to Go” enables people to easily locate, use, and pay for short-term rental cars in urban zones. Programs to create “Fast Bus” and “High Occupancy Vehicle” lanes enable more efficient mass transportation options to cities that do not have underground or elevated rail systems. Conversely, rural areas in developing countries consist of mostly lower income segments. A large number of households with rising mobility demand can also be found. Low-cost vehicles, shared taxis, transporters, or buses with baggage room are important means of basic transportation in these regions.

Sustainability and Green Technology are a Must for the Global Automotive Industry The discussion on sustainability and green products started in the first oil crises and with the Club of Rome’s report on the Limits to Growth in 1972. As a result, air pollutants and harmful substances in materials were significantly reduced over the last decades by leading Automotive Companies. The recycling rate was also improved. However, investments in green technology (e.g., hybrids, fuel cells, or lightweight materials) have not yet had a lasting effect on the overall reduction in CO2 consumption in worldwide traffic. Potential energy savings have been negatively impacted by factors such as higher vehicle weight, more comfort, and higher driving performance of cars and trucks. In addition, the overall increase of vehicles around the globe, strong demand for economic mobility in Emerging Markets with partially poor infrastructure, and traffic hold-ups offset efforts in lowering CO2 emissions with advanced technology. Additionally, the production of cars and trucks follows a complex value addition process with global supply chains and an often worldwide distribution of vehicles. Transport and logistics are fast-growing businesses. In 2008, the fear of Global Warming, as well as the sharp increases in raw material and oil prices, rang the bell for the Automobile Industry. Customers all over the world have started to change their consumption patterns and are looking for more ecological intelligent products. Since green business is always a global business – pollution and global warming has no frontiers – Sustainability & Green Products is a fundamentally stable trend affecting all vehicle producers worldwide in their near and long-term strategy. Thus, leading automotive companies should position themselves with superior “green” concepts and lasting or regenerative

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product design. They should offer alternative mobility concepts, integrate ecologically intelligent processes into their business practice, and create ecological and social responsibility as well as economic value. The concepts should include further investment into zero or low-combustion technology (e.g., hybrids, fuel cells, electric vehicles) as well as into lightweight material technology. Product designs should be built to eliminate the concept of waste over the product life cycle. Factories should be optimized not only for manufacturing but also for reutilization. Materials management should focus on smart supply chains with optimized packaging, reusable container concepts, minimum transport energy consumption, as well as sustainable input material, for example, characterized by humane labor practices in the factories of their global suppliers (without children labor).

Despite Globalization, Local Products with “Fit to the Market” Technology are Needed As seen in previous sections, the Automotive Market is a segmented worldwide market with growing demand in Emerging Markets for low cost or mass mobility, localized products, and a widely fragmented customer base. At the same time, there is an urgent need for ecological friendly products around the globe. Product design and technology have been a key factor for differentiation in the Automobile Industry over the last decades. However, differentiation through product technology has become more difficult due to evolutionary innovation patterns, industry maturity, established product standards, and technology sharing between different OEM and suppliers. Nevertheless, saturation of markets, individual product preferences, and price sensitivity have become widely distinct across varying consumer segments and regions in the last years. For instance, millions of Indian middle class families are looking for the shift from a motorcycle to a low-cost car for around 1,000 US dollars. On the other hand, affluent consumers are willing to pay a premium for a second or third car to stand out from the crowd with a hightechnology luxurious product. This results in diverse technology strategies for Automotive OEMs and Suppliers based on their overall brand strategy, global product positioning, and marketing approaches. An automotive OEMs’ positioning plays an important role as to whether or not they are specialized in their portfolio or are a volume producer. As a global volume player, OEMs have to integrate a wide spectrum from lowcost to high-class technical requirements into their products to stay competitive in each respective market. They have to flexibly modularize and construct their overall vehicles to serve individual demands within an efficient cost range. Mega players have to make sure that their products are state-of-the-art, as well as designed to be produced in local markets with a high localization rate and cost-effective local production (and available technology). Local emission norms (e.g., Zero or Low Emission Vehicle standards), different fuel quality in specific countries, local

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legislation, and regional customer behavior must be considered simultaneously across the globe with highly adaptable designs and technologies. The institution of global, strategic program management over the entire product life cycle is increasingly important to achieve control over technology, design processes, and cost. For example, Volkswagen follows the strategy to develop global product platforms. These platforms guarantee large volumes for standardized modules across a variety of products or regions. They are constructed with an open architecture, to allow for adaptation to local market requirements for different brands, products, legislations (homologation), localized parts, or special market requirements. Utilizing a worldwide Sourcing Committee, Procurement is levered globally via high purchasing volumes and competitive bids to Best-Cost Countries. Additionally, sourcing and vehicle platforms are open to local sourcing in markets with strong Automotive Policies or high customs duties. The use of last generation or decontented platforms for “second wave” products in low-cost markets is to be considered as well. Technical architecture, innovation, and design can be changed only in a very limited scope for second generation products. Hence, these platforms or products might find low acceptance with young and trendy buyers, since these groups are often prone to purchase state-of-the-art designs and actively compare international products. In addition, aging platforms introduced by foreign manufacturers into upcoming markets have to compete against concepts with strong local brand images, and/ or low-cost designs like the Tata Nano. These designs are especially constructed with cost-effective technology and a high share of manual or standardized production methods. Conversely, second wave products can be face-lifted with low investments (e.g., through transferring fabrication tooling, total vehicle assembly lines or body in white welding equipment) and serve market segments with high utilization rather than trendy environments. Possible markets for these products are transporter, truck, and bus markets or passenger vehicles for rural areas in developing countries. The strategy is suitable for short-time brand positioning or quick market entries. Another approach for global product programs is to manufacture in highly standardized product lines from worldwide low-cost production hubs. These socalled “world products” (e.g., Hyundai’s Santro) can be produced in low-cost locations or “easy to shift” manufacturing sites from supplied parts or modules. This strategy proves effective for vehicle brands with lower brand positioning, noncritical intellectual property coupled with the use of efficient labor in low-cost countries. Global automotive suppliers follow this strategy and have positioned themselves in cost-effective regions to export parts and components globally. Global luxury or specialist brands have to similarly adjust to local environments equally like volume producers. However, high-class manufacturers face limitations to leverage their production figures over multiple countries. Small lot sizes limit the possibility of variations in design for regional markets. Nevertheless, market research and product clinics before the launch of localized products into regional markets are a must to meet specific customer demand. Product design has to be open for changes in visible areas of customers. For example, remote controls

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located on the rear seats for Air Conditioning and Multimedia Systems, as well as a longer wheel base are important differentiators in many regions. Furthermore, the architecture of products has to be build in order to integrate localized parts and modules to meet regional specific localization policies. Local assembly competence, as well as regional purchasing, is vital and is to be coordinated well with main worldwide development and production sites. For all players coming up to speed with next generation products, entering new markets and market segments, meeting and reacting quickly to changes in local requirements, and at the same time reducing cost are key success factors. Cooperation, such as Joint Ventures and working closely together with competitors, is increasingly important. Building up global supplier networks and technology (outsourcing) centers as partners for local product development and sourcing becomes vital. Protection of Intellectual Property is critical for all companies holding patents or specific key competences in certain technology fields. “Fit to the market” technology and design support the competitive strength of each player, but add complexity for globally active companies as can be seen in the next section.

Globalization: Control of Complexity and Organizing for Global Automotive Business Complexity has already increased significantly in the Automotive Industry over the last decades. New technologies, multiple market or customer segments, high level of task partitioning along the automotive value chain, rapid product creation life cycles in an environment of fierce competition are to be kept under control for companies in the Automotive Market. Acting as a global player, Automotive OEMs and Suppliers have to handle a heterogeneous set of additional requirements.

Fig. 5 Ten measures to reduce the complexity for global markets

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Specification for new markets are integrated into product Creation process from start on Globally standradized processes in product creation in global project organization

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At par organizationl units Spcific market experience

Contingency Uncertainty in market Legend

Module strategy with regionally spcific components and products Globally product creation with self sufficient organizational units/leads

= Market spcification

= Triad product

= New Market Product

= Triad Component

= New Market Component

Fig. 6 Steps of maturity of global automotive organization

Reduction of complexity is a means to improve the degrees of freedom for acting as a global business. Some measures to reduce complexity in global activities are illustrated in Fig. 5. An additional measure to cope with complexity is establishing a clear internationalization strategy. After setting objectives for internationalization, the right market candidate regions for market entry are to be selected and timed. The timing for market entry is primarily decided by windows of opportunities in the respective market, the financial strength of the company, and also the form of market entry (e.g., acquisition of a foreign company vs. exports of goods) the company has chosen. Sufficient resources and organizational support for worldwide projects are to be guaranteed. With increasing internationalization, global activities in product creation (e.g., design, development, sourcing, logistics, quality management) and operations are to be standardized within the overall organizational framework (see Fig. 6). For highly globalized companies, product creation and international operation should take place in self-sufficient organizational units around the world with specific market, legislative and design know-how. Activities in the product creation process are then led by local market research, design, and sourcing centers, in coordination with their respective units around the globe. Modularization of products and components for local markets and local sourcing enables the organization to execute regional products within a global product frame. However, taking control of global operations in dynamic and volatile markets is expected to remain a challenging task. Therefore, the role of international management and specialized local staff is gaining importance. Leaders of global companies have to understand local requirements, be aware of intercultural differences, manage local staff, and at the same time, see the big picture. Decision-making with uncertainty and with trust to local staff and organizations is increasingly important. Values, a strong corporate culture, a high willingness to learn new things, and flexibility are the winning assets for globally competitive organizations in the future.

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Conclusion Globalization has left a strong impression upon the Automobile OEMs and suppliers. The authors believe that globalization in the industry will further accelerate due to the following: – Upcoming importance of growing new automotive markets outside the Triad. – Emergence of new players in the global Automotive Industry (e.g., Chinese and Indian companies). – Increase in global sourcing in a consolidating supplier market. – Increase in mobility and goods transport around the globe. Increasing globalization is expected to trigger further growth in the Automotive Industry on a mid- to long-term basis despite the decline due to financial crises. Albeit growth, overcapacities result in high levels of competition for all players in the market. Additional traffic is leading to further environmental strains. As a matter of fact, automotive OEMs and suppliers must innovate for their survival through the following: – New local mobility concepts. – Green technology as a must to reduce emission and sustainable products. – Information acceleration and trend research to grasp the needs of regional target groups. – “Fit to the Market” technology for differentiated products across customer segments and regions. – New dynamic and flexible organizational forms for global automotive businesses. – Efficiency and lean concepts to save on costs. If company leaders manage to position their enterprise in the global automotive market, build worldwide brands in an effective organization with highly motivated staff, the Globalization of Automotive Industry bears enormous chances for future success and fascinating products.

References Bloomberg, Center for Automotive Research (2008). DB Research (2008). Logistics in Germany; Infrastruktur Indien. 450 Mrd. Gru¨nde, jetzt zu investieren. Ernst, & Young, (2008). Automotive market in Russia and the CIS. Global Insight (2008). Asian Automotive Industry Forecast Reports. IBEF India Brand Equity Foundation (2008): Automotive Market & Opportunities. Mercer, F. (2004). Future Automotive Industry Structure (FAST) 2015. World Population Clock — Worldometers. (www.worldometers.info/population/)

Manage Energy Better Ad van der Meys

Ad van der Meys, 46, is a Dutch national. He started his career in financial services with American Express and then joined ABN AMRO. He later held senior management positions with Deutsche Telekom and then British Telecom before joining Landis+Gyr as Executive Vice President Landis+Gyr EMEA in May 2008. He lives with his wife and two daughters in Munich, Germany.

Introduction Why smart metering? In today’s world, the answer is simple: smart metering helps reduce information costs and it helps everyone at every level to manage energy better. With information more readily available at increasingly competitive prices and an energy resources base that is fast depleting, the face of the world is changing rapidly. This chapter looks at the concept of the collapse of information cost (COI) and how it has affected and shaped a once traditional industry that is undergoing a huge shift – metering. If you are reading this, it is likely that you have a good idea about the concept of globalization and how it directly affects you as an individual (your clothes are designed in the USA, assembled in Asia and finishing touches are given in Europe), and how it affects your business (production has been outsourced to Asia, and you regularly hold video conferences with your colleagues around the world). Globalization is a loose term used to describe the context of many changes within our world. But have you ever thought about the factors, whcih drive globalization? Have you heard about the COI? The COI, articulated by Gordon E. Moore, and called Moore’s law, refers to the long-term trend in computing hardware. The idea is that technological development, such as processing speed and memory capacities, is not only increasing rapidly but exponentially, and that this influences the usefulness of digital electronics in nearly every segment of the world economy. The result is that information at every level is more readily available and the face of the world as we know it is changing forever – and at a speed beyond expectation. It also means that, when it comes to business, traditional business R. Ijioui et al. (eds.), Globalization 2.0, DOI 10.1007/978-3-642-01178-8_15, # Springer-Verlag Berlin Heidelberg 2010

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models are no longer an option – the dawn of disaggregated value chains began long ago. So how can we cope with this new world order? It is clear that we are experiencing a marked shift between the old and the new world that will see many players left far behind and, on the short- to mid-term, out of the race. Clearly, the objective is to remain in, and hopefully ahead of, the race. For the metering industry, which stands on the verge of vast change, the COI is a key driver. It is influencing the development of the industry as a whole. The winners are the ones who will be able to be flexible, to be able to adapt at a moment’s notice, and to be able to forecast future trends. This, however, is easier said than done.

The Global Context “Be prepared.” This simple motto used by Scout and Girl Guide groups for generations the world over holds wisdom for businesses at every level in today’s world. For, as the pace of global change quickens, there are factors at work that can unravel the most powerful of enterprises overnight. For the first time in history, even the most successful and established businesses are subject to one of the greatest challenges – the challenge to be continuously dynamic and forward looking against a backdrop of global change that is throwing up new challenges and competitors at every turn. The key factor lying at the heart of this challenge is the COI. As markets grow and others liberalize and the threat of competition from all sides intensifies, the COI is silently taking shape. The power and diversity of communications technology is growing, giving way in particular to the rise of the Internet, meaning that the buyer and seller are being brought ever closer together, and the shape of international business is changing forever. The result is a heavily networked world in which the number of real time information channels is constantly multiplying, thereby causing information to become readily available and leading the cost of information to collapse. Traditional business models are no longer an option – the dawn of disaggregated value chains began long ago, meaning that those who identified the changes that lay ahead and took action to address this tilting balance are prepared. However, those who failed to act, potentially paralyzed through fear, face an uncertain future in an increasingly complex environment. COI presents business opportunities for those who are ready, willing and able to embrace a world in which your partnerships with competing companies are key to driving the overall development of demand. It represents opportunity for those who are able to understand the importance of, and keep one step ahead of, the challenge of accelerated and continuous innovation.

Collapse of Information Cost One of the key drivers for shifting economics in metering is the COI for transmitting, storing and processing energy data. Gordon E. Moore’s Law states that the

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number of transistors on a chip will double about every two years. This allows for continuous innovation of technology. Continuous innovation in information technology has transformed our way of business, as well as our way of life. In order to remain competitive and keep abreast of technological development, companies are building partnerships and outsourcing various parts of the value chain all over the world. This is made possible with advanced technology connecting people all over the world, and is providing energy management companies with many opportunities for growth. Almost every measure of the capabilities of digital electronic devices is linked to Moore’s law: processing speed, memory capacity, even the number and size of pixels in digital cameras. All of these are improving at (roughly) exponential rates. This has dramatically increased the usefulness of digital electronics in nearly every segment of the world economy. Moore’s law describes this driving force of technological and social change in the late twentieth and early twenty-first centuries.

Collapse of Information Cost and Energy Management For energy management companies such as Landis+Gyr, world leaders in energy management systems, the COI cost is an enabler. With the ability to identify upcoming changes and challenges, the Company is going from strength to strength as it takes advantage of the new world order. This ability to identify, predict and profit from trends is not something that can be easily developed. Landis+Gyr has developed this carefully over the last century. Today, the company continues its strong tradition of excellence while at the same time further developing its portfolio: it is helping to shape the future of metering and energy management through providing innovative solutions that not only meet current market demand, but also go one step further by predicting future needs. The company is marrying traditional products with state-of-the-art technology, thereby producing some of the most forward-looking and yet future proof systems available on the market. Operating in 30 countries across five continents, and employing over 5,000 people, the energy management company is ready and able to act fast and effectively, even in times of rapid political and economic change and uncertainty. The company’s objective is to help utilities the world over empower their customers to manage energy better.

How the Metering Industry has Changed and Thrown up Opportunity Across the developed world traditional metering was rolled out and the industry suddenly grew: Armies of “meter men” were sent out by utilities once a year to read

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a meter that ticked away in a household cellar or on business, commercial or industrial premises. Accurate billing was unheard of – annual estimated bills were the only trend. There was no unrest regarding prices: Electricity was supplied by state-run organizations. Fast forward to the end of the twentieth century, however, and issues such as the price of electricity was on everyone’s agenda. Markets were liberalizing, meaning for the first time the consumer could choose an electricity provider. Energy providers started to compete for customers. Within a few years, the energy industry became a business. During these changes, raw materials for electricity production were a hot topic as it became clear that fossil fuels, mankind’s preferred and main energy source, were becoming scarce – and their use polluting our environment. Electricity consumption was climbing as the industrialized world transformed into a platform for multi-national businesses and industry, and the individual end consumer was exposed to energy-intensive lifestyle choices and activities. These factors, coupled with market liberalization meant electricity became a competitive and prized commodity within a short space of time. In order to attract and retain customers, utilities were faced with the challenge of not only supplying electricity at a competitive rate, but also realizing the need to provide their customers with accurate billing information and all-round customer service. Predicting this shift, metering companies such as Landis+Gyr began to develop ways in which to help their customers become successful players on an increasingly complex and competitive world stage. First of all, it was clear that electricity prices were set to increase. This helped push the development of the industry towards serving the customer, the utility. Furthermore, by realizing that the individual end consumer’s need and desire for real-time access to accurate, individual energy consumption information was significant, Landis+Gyr began to create solutions that would enable utilities to offer new options to their customers. As a result, personal energy management devices and PC software today give the individual access round the clock to information regarding their consumption patterns and what it is costing. Empowering the end consumer in this way marks a revolutionary step in the way forward in energy management. Identifying the importance of accurate billing and energy measurement against a backdrop of spiraling costs, Landis+Gyr developed and introduced complete intelligent solutions for energy management. This has led to the rise of a key driver for shifting economics in metering: the COI for transmitting, storing and processing energy information. It is clear that we are living in exciting times, that the energy industry is developing at a rapid pace and the market is very dynamic. As a result, Landis+Gyr is in a transforming phase and no longer just sells products. It is becoming a total solution provider, whereby it offers utilities IT solutions and systems across the entire metering value chain. These systems have revolutionized the metering industry, bringing a once traditional product business into the fast paced and multifaceted realm of IT. The marriage, or better described as fresh affair with a view to a solid marriage, between the worlds of metering and IT is one that is taking shape as we speak. It is brimming with opportunity and potential – for dozens of parties.

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Collapse of Information Cost is an Enabler Recognizing market trends long ago, energy management companies moved away from solely producing traditional metering products to developing and offering fullscale energy management solutions and components, integrating emerging IT software and sales services. It is clear to see that it is increasingly important to supply solutions that help maximize efficient energy use in a world that has a decreasing resource base. Simply put, energy management companies that are forward-thinking know that electricity, like gold, is a precious commodity and a long-term investment. The COI enables energy management companies to look to developing its foothold in emerging markets. China, for example, with its huge potential for development in residential metering, offers a new market for development. It also offers the possibility for cost-effective production, made possible thanks to highly developed and cost-effective global communications infrastructure. Committed to the development of its service portfolio, Landis+Gyr is actively moving towards the development of separate system parts that are compatible with items produced by its partners. This means that the choice, type, complexity and compatibility of metering hard- and software on the market is growing, demonstrating the high levels of current development activity in the energy measurement industry. Furthermore, energy management companies are developing partnerships with technology providers, thereby enabling it to offer its customers the most innovative metering technology available. Landis+Gyr sees that communication technologies are proliferating and the need for a one-stop-shop communications solution will increase. Existing technical solutions may be displaced and there is significant technical innovation taking place in metering communications systems. These new channels are making information for the metering industry more widely and quickly available than ever before, thereby pushing the COI further forward by the day.

Future Drivers Taking all factors into consideration, it is clear that the metering industry is turning into a competitive landscape which is becoming increasingly dynamic, and demanding innovation from those companies wishing to stay ahead. Metering is an industry that, until recently, underwent very little change for almost a century; it is now migrating to smart metering, which enables utilities to manage grids in a highly efficient manner – even the individual will be empowered to switch on their washing machine using their mobile phone in the not too distant future. For this reason, energy management companies such as Landis+Gyr are embracing the COI and the opportunities it offers. Most importantly, there are some key drivers that are driving industry development. These include emerging new

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customers and their needs, existing customers and their evolving needs, new business models, new product applications, and new technologies. All these mean one thing: emerging obsolescence. The faster the market develops so the need to be forward-thinking and innovative grows. This means that the race against time to produce and bring products and solutions to market before the next wave of new technology and trends takes hold is developing at an unprecedented rate.

Turning Opportunity into Innovation Although these changes are taking shape, the COI cost is an opportunity for energy management companies that are ready and forward-looking. For example, the cost of information collapse is the enabler that Landis+Gyr could set up a development center in India. It means the company can communicate very cheaply with the global development center, moving large amounts of data back and forth easily. This center, which employs technology specialists, works closely with all areas of Landis+Gyr to cost-effectively develop and produce solutions and products for the global and local markets. This has only become possible thanks to the exceedingly high level of telecommunications and IT infrastructure available on the market today.

Fast Capital Flows for Future Investment As is mankind’s nature for innovation and development, venture capitalists are always looking for investment opportunities. The rise of the Internet means that venture capitalists have the opportunity to access up-to-the-minute, reliable information quickly. Moreover, capital flows can be moved around easily, securely and at the touch of a button. Recognizing the significance of the metering industry, investors are eager and interested in the opportunities that lie ahead. At the present time, there is an increasing level of energy–technology venture capital funds available in the USA, which is one indication of the growing interest in the sector. For energy management companies such as Landis+Gyr this opens a new world of opportunity, and paves the way for it to become increasingly involved in projects and ideas in areas of innovation and future thought. The investments that Landis +Gyr is making in its future ensure that it will become a world leader in smart metering, and therefore an attractive source for investment. The company will increase its ability and knowledge in communication technologies for the metering industry, helping its customers to manage energy better – and providing opportunity for future investors.

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The Customer Perspective As mentioned, forward-looking energy management companies are in a dynamic space. They recognize that there are many different external value drivers impacting the business. This leads to the next question: What about the customers of energy management companies? What is their situation? Today’s “smart” meter is a technically advanced solution to energy management concerns. Smart meters operate through two-way communication between the meter and the utility. Developments in technology allow for automatic meter reading which reduces manual labor, measurement errors and allows for clear and accurate billing. Accurate billing enables end-customers to make more informed energy consumption choices. This means that smart meters allow utilities to extensively analyze energy data thereby optimizing energy generation, distribution and consumption. However, as technology develops, so do the upgradeable communication units within a smart meter. These communication units allow the meter to communicate with different energy meters such as gas, water, heat/cold meters, as well as communicating with meters from other utilities.

The Smart Grid and the Customer Ron Chebra, Director of AMI Practice, believes that “As the nation moves toward an increasing focus on renewables, utilities are looking at how to deploy smarter grids to interact with these new resources. Modernizing the grid often may be viewed as an internally focused effort that enhances reliability and provides a means to future support. Often this has indirect customer benefits. Smart Metering, which is an integral part of Smart Grid efforts, is generally viewed as a more customer-centric function that provides the customers with the ability to interact with the grid, which would necessitate certain levels of grid sophistication. Smart Meters and Smart Grid have their respective price tags which are significant. Regulators are concerned about the financial impact these services have on rates. Given the current opportunity to leverage stimulus funding, regulators and utilities are looking to meet both of these objectives with a net impact that is palatable to customers.1”

Complex Utility Purchasing Decision Driven by the advent of smart metering, meter system purchasing is set to become increasingly complex. Traditional meter purchasing meant a metering department 1

Chebra, Ron, Personal Interview, January 2008.

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made decisions on its own, in isolation. Today, solution purchasing involves collaborative decision-making among many functional experts in a utility. When making decisions, utilities need to take into account important factors such as future development of technology, expected faster innovation cycles and steeper price declines. This all hinges on the COI. There is clearly opportunity to be had. However, the opportunity can only be profited from if the power industry moves towards an open energy market. This would mean meters of different manufacturers could communicate with each other – they would be interoperable. “From a strategic point of view we do not want to invest in a proprietary system,” said Nicolas Arcauz, from Spanish utility IBERDROLA.2 “The time of proprietary systems is coming to an end. We are moving to standardization and open standards. The timing is difficult to call though. We see meters as just another sensor in an IT network,” said Wes Frye, from network company Cisco.3

Evolution of Utility Business The reason interoperability is so important is because, as markets liberalize, the traditional structure of a utility’s value chain is changing. In order to remain competitive, utilities are unbundling the value chain. Furthermore, utilities have recognized that their products will have more success in the market if they are interoperable with products and solutions produced by competitors and partners. A hurdle, however, is that utilities have aging assets, meaning that they are not technically ready to embrace the future. There seems to be a slower move towards smart meters than expected, mainly because it is an expensive investment. Yet to compete in the energy market, utilities need to offer price flexibility and ensure customer retention. In a move to pave the way forward, many of the larger utilities across Europe are adopting interoperable smart meters, highlighting the importance of communication networking. This means that there is now the possibility to have better customer relationship management and wireless technology, which reduces costs on all fronts.

Standards Migration Open standards are being developed continuously for various systems across the metering value chain. Most new and emerging metering and communication

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Arcauz, Nicolas, Personal Interview, May 2008. Frye, Wes, Personal Interview, January 2008.

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technologies meet the national and international standards developed by the power industry. Open standards allow interoperability between devices of different manufacturers and systems, thereby aiding the growth of new markets and reducing investment risks for utilities, allowing them to buy different products from different manufacturers. Interoperability is a key issue; however, not many open standards have been introduced in metering systems. The US DOE has been raising awareness of interoperability among market participants. Utilities have very different understandings of the need for open standards. The advanced thinkers are all for open systems. Energy management companies such as Landis+Gyr are involved in numerous workgroups and projects all designed to lead the effort of broadening the use of open standards use in the energy industry. Landis+Gyr, along with other leading technology providers, has been working with open standards in countries such as Spain, France and the Netherlands, underscoring the company’s commitment to providing interoperable energy management solutions to the market. By supporting open standards and a liberalized energy market, it can grow business in new markets and segments and remain ahead of the development of this dynamic market. Landis+Gyr is working closely with IBERDROLA, one of the largest electricity and gas utilities in the world, in the development of PRIME, an open and public power-line communication method supporting smart metering and smart grid applications. The open standard will allow interoperability between devices of different manufacturers and systems, thereby aiding the growth of new markets and reducing investment risks for utilities. Additionally, Landis+Gyr represents metering providers in the management committee of the IBERDROLA-led Open and Public Extended Network (OPEN) meter project. The project will define and develop open standard telecommunication protocols and data formats for smart metering.

Collapse of Information Cost and Our Environment Our environment is under threat. As a result, environmental concerns and interest in energy efficiency have increased, most significantly over the last few years. Energy management companies that recognize the importance of protecting the environment are prepared for the future. Landis+Gyr has introduced tools for utilities and end users which contribute to energy conservation. Individuals can now monitor their energy consumption in real time with applications including in-home displays and/or PC-based applications. These applications have been shown to change consumer behavior and reduce energy consumption by between 4% and 18%. Devices for home energy management could potentially be deployed for all households with smart metering electricity meters, creating a market of an estimated Euros 750 million per annum. There are many forces driving meter access through the home and common carrier network. These include fixed-line broadband penetration rates, which are growing at high double digit rates. There is also increasing

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interest among US households in online home automation, in particular for optimizing home energy consumption.

Smart Grid: Demand Response The term “smart grid” refers to a grid which delivers electricity from supplier to consumer using digital technology to save energy and cost. This emerging electricity network is being promoted by governments worldwide as a way of addressing energy independence or global warming issues. For example, if smart grid technologies made the USA grid 5% more efficient, it would equate to eliminating the fuel and greenhouse gas emissions from 53 million cars.4 This demonstrates how much the smart grid, or smart metering, can contribute to preserving our environment. New decentralized power sources must be efficiently linked to the smart grid (power and communications/control) in order to be adequately utilized. The need for measuring, conditioning and controlling decentralized power generators is therefore rapidly increasing. The number of commercial renewable generators is increasing very rapidly with annual growth rates between 14% and 61%. Combined heat and power installations are projected to contribute the most to future distributed electricity generation in the USA and Europe. Supply response enables distributed generation capacities to generate power when needed most, and sell it at a higher price per kWh. Although there are many benefits to the smart grid, one of main deterrents is cost.

Electrical Power Metering: Car Market Growth Approximately 50% of all new vehicle sales could be equipped with plug-in functionality in North America by 2025. Utilities regard plug-in hybrid vehicles (PHEVs) as a technology that will be commercialized in the foreseeable future. The adoption of plug-in hybrid electric vehicles will place much higher demands on electricity generation, delivery and, above all, the metering industry. The long-term success of PHEVs is driven by several key benefits but there are still a number of large hurdles that require intelligent solutions. Even though the PHEV will reduce overall primary energy consumption, it will drive the need for electricity. In Europe, this will mean the return of nuclear power. Hydrogen is too expensive and fuel cells need hydrogen. Carbon capture storage is a major engineering challenge. The infrastructure requirements of PHEVs, however, present multiple challenges. These challenges could provide potential opportunities for energy 4

p. 12, 6.1, Litos Strategic Communication (under contract for the US Department of Energy) (2008-09-10) (pdf). The Smart Grid: An Introduction. United States Department of Energy. p. 7.

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management companies such as Landis+Gyr, but participation in current pilots and trails is a prerequisite to participating in the market. The recent movement across blue chip companies as well as venture-backed players confirms the strong interest in building PHEV infrastructure. The infrastructure and equipment needs for PHEV cars could create a market of around Euros 2.2 billion for one-time infrastructure build-up and Euros 0.8 billion per annum for operations.

Collapse of Information Cost Offers Business Opportunities Asia is the largest and fastest growing meter market in the world. Landis+Gyr’s objective is to pre-empt other developed country suppliers in, for example, the Chinese market while securing access to low-cost “China-price” meters for the future. China has over twice as many electricity meters as the USA and Canada combined, offering large potential for economies of scale. Asia as a whole is growing fast both in terms of population and in terms of economic wealth. The residential segment has particularly high and long-term potential in China and India. It is forecast that Chinese meter companies will eventually enter western markets just as they have done in telecommunications. “I lived in Asia for 12 years. Much of the world there is unmetered and does not have services delivered at all. As electricity gets deployed to a larger, growing middle class, this will have to be metered. I think there is a massive opportunity, and it will be a first time build. Unlike Europe and North America they will probably do it right. However, they will be very price sensitive. China will support the development of a first class infrastructure,” said Barbara Finemore, NRDC.5

The Smart Metering Solution Open standards and emerging technologies have changed the face of the energy industry for both utilities and technology providers. Energy management companies with vision have developed strategies to work closely with business partners in order to provide utilities with end-to-end energy management solutions along the entire metering value chain. This is referred to as the smart metering consolidator model. This represents additional value for utilities facing a shortage of skills and deployment resources. The economics of the smart metering consolidator model work especially well for small utilities which cannot or do not want to pay for integrating smart metering components themselves. The consolidator model is estimated to represent 30% of the market (Euros 0.7 billion). The smart metering solution value chain requires a wide portfolio of products and skills, some of which 5

Finemore, Barbara, Personal Interview, May 2008.

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Landis+Gyr alone cannot provide. For example in situations such as local development, the company can never be as good as local experts. In other cases, it must be part of a consortium or go as the general contractor. Successful partnering will become increasingly important in this dynamic smart metering market.

Best-in-Class: Smart Metering Requirements An Internet Protocol-based metering solution would address many of the risks and concerns that utilities have about implementing smart metering. Meter communications systems are the only remaining proprietary standards in smart metering systems. German utility EnBW has implemented an Internet-based solution for the premium customers of all their retail brands. It is commonly agreed that because of the broad array of forces, meter data collection eventually will adopt open standards. There is a strong and increasing need for a standard-based solution to future-proof smart metering investments and enable interoperability. A competitive Internet protocol-based solution addresses the entire smart metering market for meters, and communication. “Utilities are really trying to figure out where the industry will finally end-up with standards. The idea of internet protocol compatibility means that you are jumping on a totally established standard, rather than some proprietary protocol, or something that might not be around in the future,” said Wes Frye, Cisco.6

One-Stop-Shop Technologies Communications technologies for smart metering are proliferating. In the future, they will co-exist but will need to be optimized, based on specific application requirements. This means that the need for a one-stop-shop communications solution will increase. There are many drivers behind this type of smart metering communications solution. What is clear is that it will remain an area of differentiation and uniqueness, despite open protocol standards. There is significant technical innovation taking place. Existing technical solutions may be displaced, and costs for communication technology for smart metering solutions vary significantly both for initial set-up and for annual operating costs. The advanced metering communications one-stop-shop addresses the entire smart metering market for communication modules, infrastructure as well as installation and logistics. “The communication link needs to be a combination of technologies, such as PLC and GPRS. It will depend on the interoperability and which technologies

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provide the biggest value and benefits in particular situations,” said Dr. Gerhard Neubauer, Energie Steiermark.7 “I am wondering how long it will last until Motorola or Nokia plan to build a meter with GSM. As soon smart metering will turn into volumes this will surely be a topic. For a company as Nokia it must be easy to build a smart metering system. If I were a meter vendor I would hope that they do not come up with this. They are better positioned in many parts of the value chain, everything else can be acquired,” said Dr. Gerhard Neubauer, Energie Steiermark.8

Data Management Smart metering produces a great volume of data that needs to be processed by utilities. This will undoubtedly drive the need for utilities to purchase and install new data management systems. Currently, few utilities have such systems and if they do, then they are likely to upgrade their systems with third party software. The meter data management market is being addressed by traditional metering companies as well as by established utility software companies. Itron and eMeter are currently leading the meter data management space in the USA. Achieving scale will be a key factor for driving profitability in this market. Expenditures on software are estimated to represent between 6% and 8% of total smart metering project costs.

Conclusion As we go to print, world markets and the global economy are undergoing unprecedented change. Although recovery will eventually come, it is unclear how the shape of the world, and the balance of power, will emerge. Whatever happens, it is clear that humanity will continue to evolve and the demand for electricity will continue to grow and its application will develop. This coupled with a depleting energy resources base, constantly evolving business models and practices, and the quickening pace of technological development mean that the ability for companies active in energy management to be innovative and forward-thinking is more important than ever before. But as much as the situation challenges, it also throws up opportunity. The vast landscape that metering covers, from setting up residential metering infrastructure across the developing world to personal energy management and the advent of the electric car in the developed economies means that millions of people form the customer base of the not too distant future. Those players in energy management looking to take hold of the opportunities recognize 7 8

Dr. Neubauer, Gerhard, Personal Interview, May 2008. Dr. Neubauer, Gerhard, Personal Interview, May 2008.

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that smart metering is the way of the future. They see that the ability to offer increased empowerment to the end-user and to benefit the environment are key factors to win confidence, and ultimately a loyal customer base. Companies such as Landis+Gyr are committed to this way of thinking, and for this reason, the company is committed to helping everyone, wherever they may be, manage energy better.

References Arcauz, N. (2008). Personal interview, May. Chebra, R. (2008). Personal interview, January. Finemore, B. (2008). Personal interview, May. Frye, W. (2008). Personal interview, January. Litos Strategic Communication (under contract for the US Department of Energy) (2008-09-10), p. 12, 6.1, (pdf). The smart grid: an introduction. United States Department of Energy. p. 7. Neubauer, G. (2008). Personal interview, May.

Globalization? Not Without the Logistics! Ju¨rgen Hess

Ju¨rgen Hess (Dipl.-Wirt.-Ing.), born in 1964, studied Industrial Engineering and Management at the TH Darmstadt. In 1992, he started working with Miebach Consulting as Business Unit Manager in Frankfurt am Main. In 2001, he attained the positions of “Chairman of the executive board Miebach Consulting Deutschland” and in 2003 he also became the Managing Director of the Miebach Consulting Holding. Some of his projects included working with Ford Motor Company, Volkswagen AG, Toyota Deutschland, Neckermann Versand AG, Adolf Wu¨rth KG, and Merck Eurolab.

Introduction Ever since the end of the 1990s, the buzzword “globalization” has given the cause for lively discussions. In the course of these discussions, scientists from various disciplines, journalists, and politicians keep on coming up with new theories as well as new insights about the actual origin of the term, the true definition of the word, predictions about the future, etc. At the same time, opinions diverge as to whether it was the Chinese, the ancient Egyptians, Vasco da Gama, Columbus or even Theodore Levitt, in his essay “Globalization of Markets,” who ushered in the age of globalization. However, these questions only play a marginal role in the following chapter. My approach is based on the theory that there exists a symbiosis between globalization and logistics; and although both profit from each other, logistics still serves as the foundation of this relationship. At this point, I consciously still opt for the term “logistics,” because “Supply Chain Management (SCM)” implies a much more complex level of interlinking between producers, suppliers, and consumers, which will be explained in more detail later on in the scope of this chapter. The aim of this chapter is to show that globalization and logistics initiate each other and, accordingly, one of them would be unthinkable without the other. Furthermore, the fundamental role of communication using IT is discussed as well. R. Ijioui et al. (eds.), Globalization 2.0, DOI 10.1007/978-3-642-01178-8_16, # Springer-Verlag Berlin Heidelberg 2010

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Globalization and Logistics in Context Logistics is the process of planning, implementing and controlling the efficient, effective flow and storage of goods, services and related information from the point of origin to the point of consumption for the purpose of confirming to customer requirements. (Council of Logistics Management in BVL, 2003)

Although there is no universally applicable definition for logistics (or globalization, for that matter), nevertheless, the suggestion quoted above includes all essential aspects. Thus, if we distribute individual or even several process steps among at least two countries, we would automatically enter the globalization era. And, this immediately brings us to the famous problem about the chicken and the egg: did worldwide logistics render globalization possible or was it flourishing globalization that required new logistic concepts? It is left to the reader’s discretion to decide which assumption is true. One thing, however, is of fundamental importance: nowadays, more than ever, both depend on each other. This is because logistic planning in the twenty-first century is no longer defined only by the identification of solutions for transportation problems; nowadays, logistic planning – especially for foreign countries – also requires an accurate analysis and knowledge of the respective administrative, but also cultural conventions. Other developments include the increasingly individual requirements of customers as well as the demand for more flexibility. One must consider the predominant globalization trends in addition to these general requirements of the market. One of the factors behind these trends is that the world market is to be regarded both as a “supplier” and a parallel “labor market” (global sourcing and global production); another relevant factor is that the production processes of many companies now take place all over the world (global

Fig. 1 Key influencing factors on logistic and supply chain processes Source: Miebach Consulting

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selling). These influencing factors are described concisely in the following diagram (Fig. 1).

Definition of the SCM Approach Although it may seem obvious to use logistics and SCM as synonyms, this is not correct according to recent research. Expressed in very simplified terms, logistics comprises the flow of materials as well as a large part of the corresponding flow of information. As a rule, this definition usually does not include the planning of the overall process and manufacturing. These two processes are assigned to SCM, which also includes all interactions between a company, its suppliers and customers. Ergo, we can say that SCM addresses and fully optimizes a complete system, while logistics only represents one aspect of this complete system (Fig. 2). Supply Chain Collaboration (SCC) is a suitable alternative or addition for the optimization of the value chain. It is difficult to offer a universally applicable definition for this term as well – all the more since this method has not established itself to such an extent as SCM due to various reasons. The concept of SCC is based on the understanding that the new structures that are constantly required for SCM with regard to processes, system worlds and business organizations cannot be realized from one day to the next. Moreover, SCC assumes that cooperative collaboration is much more efficient than a central control system, which is the common system used for the implementation of SCM. The four most important characteristics of SCC may be summarized as follows:

Material Movement Customer

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Fig. 2 Supply chain and logistic processes Source: Miebach Consulting

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The cooperation between the process partners is done on a purely voluntary basis. The breadth and depth of cooperation depends on the potential for optimization of service, quality and costs that can be achieved by the respective participants in the process. The high flexibility of this collaboration is guaranteed by similar or even the same process and interface standards. The prompt provision of information that is relevant for planning from all elements of the supply chain is the basis of success.

SCC is based on the idea that all participants in a supply chain have direct access to planning, sales and inventory information and can, thus, promptly integrate this information into their own concept. In addition, the planning of the supply chain should be done according to the principle that the implementation of a particular task is assigned to the partner, who is able to carry out this task in a totally optimal way. The main problem blocking the way to a wide-ranging realization of the SCC process is actually human nature. This is the case because the transparency of planning required by SCC is not acceptable for most companies. Thus, for example, suppliers in the automotive industry or in the ship building/aircraft construction (or suppliers for mechanical engineering industries as a whole) rarely receive the complete forecast for a project and, therefore, cannot optimize their planning. An example: Company X procures components for mechanical engineering from supplier A. If X informed its partner in time about how many devices of what types are scheduled in the scope of its forecast planning for the entire business year, then A, without being pressed for time, could organize its planning, procurement and production based on this forecast and coordinate terms with company X. If, in addition to that, planning changes related to realtime sales information were provided by both parties, then both companies would be able to optimize their manufacturing processes and reduce their supply chain costs. Company A could reduce its procurement costs, pre-produce a part of the products and be able to accept further orders for the rest of the year. At the same time, company X would benefit from lower pre-production costs and shorter delivery times. Unfortunately, as is well known, things look different in the real world, above all if the situation involves foreign suppliers, who are not appropriately integrated with regard to the exchange of information. This example also makes it clear that globalization can only be implemented with obstacles and restrictions if there is no functioning SCM and, most of all, if there is no cooperative collaboration, which includes the necessary information transparency. Accordingly, the available potentials can only be used inadequately. Moreover, in extreme cases, globalized production structures would then lead to supply bottlenecks, expensive express deliveries by air with their respective ecologic consequences.

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Management of the Global Flow of Commodities with SCM Tasks of SCM One of SCM’s main tasks is to continuously re-define itself and to adapt to the current requirements of the market. This is because the constant interaction of the markets imperatively necessitates a well-organized management of the flow of commodities in order to fulfill customer requirements with regard to delivery dependability, individual product wishes and, above all, flexibility. These challenges call for innovative solutions and holistic optimization so that the desired service aims are achieved and the possibilities of globalization are optimally used. With its integrated planning and management, SCM ensures that costs, quality and service objectives can be completely satisfied. In this regard, logistics and the costs associated with it are of considerable importance. Decisions for global “sourcing” or production frequently only take into account production costs, while ignoring the total cost of ownership from the upstream supplier to the customer. In extreme cases, this can overcompensate the cost benefits of purchase and/or personnel costs. SCM considers the whole supply chain and, thus, all costs. This results in a supply chain with optimal service and optimal costs, which can still be managed with the relevant IT solutions despite its increased complexity.

Aims of SCM First and foremost, SCM sets the goal of achieving an integrated optimum with innovations in the area of “green logistics,” cost reductions through “intelligent” planning, the use of synergies in the supply chain as well as the adaptation of technology and software to suit the existing requirements. These measures simultaneously serve to reduce costs, minimize the input of raw material, improve quality assurance as well as satisfy the requirements of the market and customers. The necessary infrastructural, organizational and, above all, informational adjustments have to be considered in the scope of supply chain planning.

IT – A Driving Force or an Obstacle? It is not just the requirements of companies that change in times of rapidly changing global circumstances, but also the general conditions for the IT sector. Information technology has thus developed into a decisive factor of progress. After all, the processing of the constantly increasing amounts of data would be inconceivable without the help of today’s programs and computer hardware.

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For this reason, one could even go as far as to describe IT and, above all, the Internet as an “enabler,” which paved the way for many innovative concepts and processes in SCM. Of course, there is still room for optimization in certain areas. Thus, standard software, for example, could provide more leeway for individual courses of action. Such possibilities are currently only being provided by the developers of taylor-made software. However, many companies do not realize the possible relevance of such a product or are put off by the high purchase costs of such individual solutions. It is often forgotten that globalization clearly increases the complexity of processes as well as data exchange and that potentials can only be tapped with innovative approaches, which require appropriate informational/IT support. Therefore, such expenditures ought to be evaluated as investments in the future with their corresponding payback. As revealed by Miebach Consulting in the scope of the staff requirement study that was conducted last year, cost savings of up to 15% could be made through more intelligent processes and the application of the relevant IT solutions with regard to personnel planning. The core elements of a functional and integrated SCM are a central order entry system as well as a basic supply management system, which ensure that the demand and supply are visible to all process participants. In this way, one can optimally organize the production and distribution of commodities in a global environment. However, the obvious deficits of standard software packages prevent the implementation of such a system; customized SC software, on the other hand, is too expensive and only attractive for larger companies. As far as SCC is concerned, the IT component and, above all, e-Business, electronic portals and marketplaces are crucial for the high flexibility of the cooperation. This is the case because an open cooperation is possible only if it is supported with data provided in real time, formatted information and integrated tools.

Trends and Developments in SCM If we disregard the budget cuts due to the financial and economic crisis at the end of 2008, the most prominent trends clearly include – besides the classic service and costs goals – the aspiration toward more security as well as heightened environmental awareness. The latter development is not only beneficial for the environment, but also beneficial for companies’ cash registers. Yet a clear trend in the future development of SCM cannot be determined. Although it is generally evident that more and more companies speak of SCM, this primarily concerns internationally active medium-sized businesses, which still only take into account procurement and possibly the production aspect of the whole thing. In doing so, these companies partially ignore the storage and distribution aspects. In this respect, the potentials of SCM that are possible nowadays in the scope of globalization remain inadequately used. Sometimes the restriction to the procurement side may even counteract and lead to higher production and distribution costs.

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The increasing competitive pressure as well as the negative first experiences with the global procurement and production orientation should lead in the medium term to companies starting to regard their supply chain in a holistic manner and confront the topic of SCC more openly than in the past. In addition to service and costs aspects, we can also increasingly observe ecologic aspects in the reflections of companies. This development could be described as a mega trend in SCM. As evidenced by the Miebach studies on the development of transport costs and globalization as well as on energy-efficient storage planning (Sect. 2 in chapter “A New Age Dawning”), efficient processes (fleet management, optimization of the SC, etc.) and economical incentives (energy recovery, fuel cells, etc.) pay off – especially when oil prices are rising.

Discussion Chances and Risks of Globalization with Regard to SCM Generally speaking, given the elimination of obstacles for free trade and the integration of national economies, globalization harbors the potential to be of use to many people. However, this assumes that all countries and nations have similar starting conditions. As history and, unfortunately, the present, repeatedly show us, this kind of world order politics belongs to a distant future named utopia. This is because, regrettably, the very nature of man blocks the way for such a system. There are too many fears of the new, the unknown, but also fears of one’s own downfall that prevent us from pursuing alternative paths. If, regardless of the above, we still chose to observe globalization through rose-tinted spectacles, we would discover a series of chances, which are worth examining in more detail. Speaking very generally, globalization opens the possibility for all countries and nations to sell their products worldwide and, thus, to tap new sales channels. In this way, the dependence on national demand can be reduced, foreign currency flows into the domestic economy and the additional tax income could help advance infrastructural, education and research projects. In addition to that, the networking of markets also allows companies a significantly greater choice of location. In this way, new jobs can be provided and the transportation routes to customers can be reduced. In turn, this has a positive effect on the energy consumption of manufacturers, which is a desirable development from an ecologic point of view. The free exchange of resources, technologies and knowledge is also encouraged with the removal of the shackles of restricted national and regional markets. Thus, structurally lagging areas could also profit from the know-how and prosperity of industrialized countries and to catch up with them in the long term; this could solve the pressing poverty issue of the Third World. Globalization, as seen from this admittedly quite optimistic perspective, harbors a high potential in the areas of production, sales, research and development and

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many others. This potential would benefit the entire world population and it must be used. On the other hand, there are a number of risks associated with globalization, which have attracted severe criticism from its opponents. The causes for these risks are mostly rooted in the strong individual interests of nation states as well as in their different political, economic and social starting situations. Nonetheless, the pursuit of profit maximization and personal enrichment, which are inherent to humans, are also partially to blame for thwarting the chances presented by the globalized market. Typically, third-world countries are the most disadvantaged from the unregulated world. Here, companies from industrialized nations increasingly find new sales markets for their manufactured goods, with their own domestic markets being simultaneously blocked with high protective duties. In this way, they prevent, for example, the predominantly agrarian African economy from exporting products in return, which further intensifies the imbalance between poor and rich nations. In the meanwhile, the protectionism of industrialized nations is being justified with arguments related to food security or ecology. Another unfavorable development for economically weaker nations is the exploitation of their natural resources by companies from non-member countries. This is the case first and foremost in areas where regional governance structures do not permit the participation of the local population due to ambitions for power or profit interests. The technology, the personnel and the know-how for the extraction of raw materials often come from richer foreign countries, with a large part of the profits flowing back to these countries. However, the risks are not associated solely with rich industrialized nations. In particular, the growing importance of the so-called “low-wage countries” poses great challenges for companies. The mounting pressure to produce goods more and more cost-efficiently in order to stay competitive causes companies to relocate their production sites to far-off locations abroad, with the lower safety and ecological standards there as well as state subsidies representing additional incentives. The flip side of the coin is the considerable additional logistical expenses and the corresponding ecological follow-up costs as the goods have to be subsequently distributed worldwide. This is because the production sites that are most financially attractive are sometimes located further away from the subsequent sales markets or further processing industries. Considering the increasingly urgent problems of climate protection as well as the looming worldwide energy crisis, it is only a matter of time before more importance is attached to the issue of transportation distances. Another phenomenon in the selection of a production site may be termed as “production relocation tourism.” In accordance with this, the selection of many sites is considered neither reliable nor stable, but rather, it is continuously scrutinized by companies. Once wage levels rise or other incentives disappear, they just quickly move their production to another low-wage country. A further problem that numerous countries consider themselves exposed to is the displacement of the resident population from the national labor market by immigrating foreign specialists. A frequent reaction to this is the sealing of domestic labor markets, which, however, simultaneously stops the know-how transfer. One clear conclusion may be derived from this summary consideration of the chances and risks of globalization: The only ones to profit so far are essentially

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individual, very advanced industrialized nations. And within these countries, the main winners of globalization are the large corporations, which have already been active internationally for a long time and which are, thus, able to cope with the requirements of the globalized market. Still, it would be dangerous to demonize globalization as a whole in view of recent developments. The emphasis should rather be placed on enabling as many nations as possible to use the potentials of globalization.

Will the Global Economic Crisis Stop Globalization in 2009? Although this question may sound quite far-fetched and radical, one should not dismiss it right away. After all, with the beginning of 2009, the media is already reporting almost daily about companies which have to suspend production temporarily or even lay off staff. These measures as well as the banks’ lack of preparedness to grant credit have already cost the identity of quite a few small companies and supply firms. Indeed, fuel costs have dropped in the course of the last six months; however, the gas dispute between Russia and Ukraine and its political implications clearly showed us how fast circumstances may change. A recent study of Miebach Consulting dealt with the question of whether rising oil prices could obstruct or even stop globalization. The results are as follows: – The increase in oil prices clearly causes a rise in transportation costs – in the approximate ratio of 5:1 (a 50% rise in oil price corresponds to a 10% rise in transportation costs). – Imports will be substituted with national products. – Outsourcing trends will not be reversed and centralized distribution structures will continue to exist. If the value of a commodity rises, this causes a reduction in the percentage of transportation costs. That is, increased oil prices affect different business branches in completely different ways: thus, fruit merchants and carriers, for example, are affected more than electronics manufacturers. – In the future, decentralization or centralization processes will be determined less by energy costs and much more by factors such as the following: l l

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The gradient of manufacturing costs. Varying personnel costs, market proximity, and the qualifications of employees. A total increase in transportation costs (road charges, taxes, energy, etc.). Taxes and subsidies conclusion: Deficits in infrastructure hamper the global movement of goods currently to a larger extent than an increase in oil prices.

It is probably not acceptable to make a general statement on the subject of globalization based on these results. However, there are other indicators, which suggest that globalization cannot be stopped by any crisis – be it economic or ecologic – in its long-term development. The reasons for this statement are that the world is

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increasingly converging informationally via the Internet and that despite intense cultural differences, needs tend to adapt rather than differentiate that globalization enables worldwide procurement, production and distribution and, if this subject matter is not reduced to mere Best Cost Country Sourcing and production relocation, with sensible planning and use of the potentials, costs and energy consumption can be reduced and quality and service can be secured. The SCM described ensures the use of potentials even under changed basic conditions.

Summary SCM acts as an enabler in the era of globalization. SCM helps organizations to optimally use the possibilities and requirements provided by the globalization. No particular set-up of basic conditions is assumed for SCM – rather than that, it enables the use of potentials in a constantly changing global world. The technical prerequisites in the area of data processing are available and continue to develop. Beyond that, the concept of SCC provides opportunities of being even more successful through collaboration. Globalization cannot be stopped in the long term; it is the mega trend of our age. Its characteristics will change and the focus on tapping the potentials will further intensify the need for an integrated observation of networks. Dramatically, rising energy prices will indeed change the global population’s consumer behavior. This may give rise to unforeseeable developments in world trade, for which SCM provides suitable planning, organizatorial and management solutions.

References Bundesvereinigung Logistik (BVL) (Eds.), (2003). Finanzierung – eine neue Dimension der Logistik. Ergebnisse des Arbeitskreises Logistik und Finanzen, S.5. Erich Schmidt Verlag.

Metamorphosis of Telco Architecture Dr. Martin Deeg

Dr. Martin Deeg (1964) started his career after a doctorate in Theory of Physics at the University of Bayreuth. He was working with Rank Xerox GmbH in the area high volume printing until he joined Deutsche Telekom in 1997 to take over the technical department in a branch office of DeTeSystem GmbH. With the foundation of T-Systems, he assumed responsibility for the pre sales and project management area of Service Line Network Services. Since 2003, Martin Deeg was in charge of product management for network and IT solutions, which was integrated in T-Systems Business Services GmbH in 2005.

Introduction Telecommunications- and IT-industry are in a phase of alteration which is caused by the convergence of both worlds. Highly developed network services on the one hand and IT-applications on the other hand permit communication and access to applications independent from time and place. Telecommunications (TC) service providers offer IT-Services whereas software producers enter the classic TCdomains. At the same time, once complex individual services turn to increasingly competitive mass products, leading to a significant decline in prices. The need of the users for common administrative services throughout all communication channels and standardized value added services is growing steadily. These are for instance authentication, directory, voice mail, presence-information, e-mail, calendar, as well as complex applications. At the same time, service providers strive to launch new services and applications and aim for a considerable reduction of production costs. The speed of the market plays an increasing role caused by consumer demand for constant innovation or the necessity to be able to react fast enough to unexpected incidents. To be a sustainable market leader, the company has to ensure appropriate performance in this area. To meet the demands of customers and providers, different obstacles have to be overcome, which will only be possible with fundamental renewal and migration into new architecture.

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Basic technology barriers impede this development up to now. For decades a great variety of networks for different branches such as public telephone network, mobile network, data network platform, or dedicated networks for business customers were generated. The offered applications were also planned and implemented closed, which led to the development of redundant elementary components (e.g., communication interfaces, security mechanisms, directory services, data bases, device management). The interoperability for providing convergent products and solutions normally has to be implemented individually. So, it is not possible to effectuate synergies by using common resources. The “end-to-end” control by architecture boundaries is to be realized only with difficulties. The grown technical structure is also called “stovepipe-architecture.” The whole functioning of service providers, such as architecture, processes, and decision structure, reflects the stovepipe-architecture in wide areas. Development processes as well as fulfillment processes for sales, provision, and operations are often service- or product specific. They represent, in addition to the technical world, a further important field of action. In many cases, the decision structure and the basic architecture are not yet prepared to support convergence and interoperability of service offers optimally and with the necessary speed.

Purpose of Introducing the Next Generation NetworkArchitecture The “Next Generation Network” (NGN)-approach pursues the integration and availability of a multitude of services by a homogeneous packet oriented network which is structured in clearly defined layers and provides common used resources and central services for different services. Supported by corresponding governance structure and enterprise processes in this architecture, product development, sales, and operations are taking place. Driving forces of the migration into the NGNarchitecture are: – Cost efficient production by reduction of operational required elements and the use of highly developed technical management tools. – New innovative services , e.g., video communication and broadcast of television programs (IPTV) as well as the availability of presence-information and integration of applications. – New interoperability of services- in particular seamless communication by fixed network -, mobile network and internet as well as the common use of administrative components and value added services while supporting the optimal data stream through the network for applications (intelligent network). – Reduction of time to market the optimization of innovation management and fast reaction to unforeseen events. The NGN is able to deliver convergent, seamless services which are provided by different access technologies and devices, and handled equally.

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The users are identified uniquely by a central service and are enabled to use most different services. From the view of the customer this means the use of not only interfaces, but also of most applications by a universal access. The provision of netcentric applications – e.g., voice services, communication center, security, e-mail, groupware, CRM, ERP, SCM – in the service layer or “Service Delivery-Platform” (SDP) plays a central role. As a result, certain intelligence of the network is required which has to be able to differentiate applications corresponding to the importance for the user and prioritize accordingly. This is ensured by a service-oriented network architecture. Through a homogeneous architecture, the management of the services gets a new quality, which can be given to the customer as QoSparameter (Quality of Service) in Service Level Agreements directly. While customers find different quality levels today and standardization is almost impossible, NGN offers the possibility of realizing a standardized QoS-concept for all offered products and providers. Through correspondence of architecture, governance, and working method, an optimal support is offered. So it is possible to be faster as the competitors to reach market leadership as well as having flexibility for reaction to surprising changes.

The Principle of the NGN and the Service Delivery Platform (SDP) According to ITU (International Telecommunication Union) [ITU-T Recommendation Y.2001; ITU-T Recommendation Y.2011] the “Next Generation Network” (NGN) is a packet-based network which offers users telecommunications services on broadband basis, Quality of Service (QoS)-compliant transport technologies and service-related functions. These services are independent of underlying transportoriented technologies. The network provides free access even to other networks and thereby offers mobility and consistent universal provision of services. This principle is realized in a clear separation of transport layer and service layer. The transport layer as well as the NGN service layer which is called “Service Delivery Platform” (SDP) deals with the following management functions – – – – –

Performance management. Fault management. Configuration management. Security management. Accounting management.

Control functions also belong to the service layer as well as to the transport layer. Service control functions are, e.g., – User authentication – User identification.

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NGN Serviceschicht (Service Delivery Platform)

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Fig. 1 Service delivery-platform

– Service access control. – Application server functions. Transport control functions control the transport network, e.g., by – Network access control. – Network-resources and policy-control. – Dynamic interfaces provision. The SDP is the application or service layer of the NGN. It consists of the “Central Functions” (CF) and “Service Cluster” (SC) (Fig. 1):

Central Functions The central functions layer forms a functional environment which consists of services which can be used by all service clusters. The clusters which can use them depend on the concrete implementation. For the definition of the central functions, the functional units in different service cluster types which are necessary for production of services are analyzed. As a result, these can be summarized in central functions. Functions which are the result of general demands to a service cluster architecture but are not in direct context to the services within a service cluster type will also be covered by central functions. The consolidation of the central functions reduces the total expenditure for management and error analysis and leads to optimized operating costs.

Service Cluster The respective service clusters depend in number and variation on the underlying market- and product-requirements. A special challenge here is to integrate an available product portfolio into a new or modified production landscape.

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Products are built by a hierarchical structure of functions and services. – Functions are amongst others settled in the field of central functions and the basic elements which are also required for generating services are built. – Services use the central functions to build a service as function bundle with additional specific functions. – Products consist of single services or service combinations. Services produced in SDP can be drawn from the network by customers who are connected to the NGN by the transport layer. This net-centric architecture is applicable for production of voice, web, and application services. Examples are collaboration applications, communication center, e-mail, groupware, CRM, ERP and SCM. The access to the services is transparent and independent from the access technology.

Requirements of a Service Delivery Platform The requirements of an SDP depend on business models, products, and the product environment and represent functions which are necessary for the implementation of these products. During the building of the NGN target architecture, the following items are defined which have to be considered for planning and building a consistent architecture: – Service provisioning has to be cost efficient and “simple” which is also significant for a large service portfolio in which individual services can be used. – The flexibility of the production environment has to resist the requirements caused by changes in the service portfolio and the requirements caused by adjustment of market requirements. – Time-to-market has to be reduced from months to weeks on account of the changed competition situation. – The target architecture has to be planned in a way which allows modular integration of services and migration of available products in a simple and cost efficient way. This is an increasingly important necessity to withstand competition. – 3rd party-integration models have to be included in the architecture. – The service architecture has to be highly available, redundant, and scalable and should support multitenancy. – Multilingualism for users and operators is to be guaranteed, as well as Open interfaces to operational and business management interfaces. – The integration of legacy systems is to be planned. Therefore it is also necessary to use data from the previous network and avoid double collection of data. A gentle migration is to be guaranteed. – An intelligent distribution of the function blocks into central and distributed elements has to be feasible in order to be able to share resources.

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Functional requirements are derived from product and service planning. Important examples are presence, location, authentication/authorization, centralized user and profile management, identifier management, addressing (user interface adoption), security, building and consolidation of billing data, network connections, quality of service management, error recovery management, provisioning (device and bearer capabilities), customer service portal, reporting interface to 3rd party applications, G 10 (telecommunications supervision regulation, legal interception). These are described, e.g., in (Berbner et al. 2007) and referred references in detail. The service cluster idea launches necessarily new services and products which would have been impossible with previous structures. By using multi-network central functions of so-called enabling capabilities, user-specific status and further client-specific information can be provided for all services.

NGN- Target Architecture In order to get a target architecture illustration the elements of transport and service layer are summarized in a model which also reflects the SDP-architecture in detail (Fig. 2). A service cluster covers a group of products/services with similar technical requirements or strong functional dependencies which can be administrated profitably on one platform if they are clustered. To guarantee cooperation with other service clusters and 3rd party-products, central functions are developed as

Fig. 2 NGN-Architecture with focus on SDP

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interfaces by which the communication between service clusters and central functions can take place. Every service cluster uses defined central functions. Besides the use of a central storage unit (databases, directories, etc.) this also includes the connection to the enabling capabilities in which, e.g., information about user profiles and presence/location data are stored. A detailed description of the SDP architecture can be found in reference. (Berbner et al. 2007).

Demand Management It has to be assured that all necessary requirements at a current point in time have been included. It is necessary however to pass through this process continuously as advancements within the portfolio generate constant new demands which change existing demands toward single products, services ,and functions. We use the term demand management for this process (Fig. 3). Demand management assures that product requirements which concern the platforms find respective consideration. Additional tasks are: – Incorporation of the requirements of the service-management. – Develop a common understanding of requirements regarding customer benefits and internal conversion possibilities. – Evaluation and classification of requirements according to: ready for service, complexity, responsibilities, cost/benefits. – Point out re-usabilities toward the management and compilation of suitable solutions. – Canalization of the requirements toward the platform operators.

Product Responsibility Concept of service modules Functional requirements

Produkt-definition Product features Demand Management

roadmap synchronization, process harmonization, workflow transparence, budget responsibility, implementation management Implementation Monitoring of implementation and operations Production

Fig. 3 Demand management process

Functional specifications Technical concept

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– Monitoring of implementation-planning and respective implementation of the supplier. – Indemnification of the implementation of all requirements (with respect to PMviews, e.g., cost of production, technical functionality, process-orientation). – Conduct a release-planning for all modules, i.e., accompany all requirements, starting with their definition all the way to the point of RFS-release. – Consultancy regarding the overlapping of modules with each other. – Comprehensive supplier-management. – Production-module-consolidation across all suppliers. – Supplier-comprehensive monitoring of the production-modularization. – Benchmarking of production. – Avoidance of parallel productions. – Supporting product-management during product-modularization. – Support during the conversion of product and module specifications into production-specifications. – Market and technology observation to generate cost and/or utility benefits for ourselves as well as for the customer. – Surveillance of the technology-portfolio across all suppliers. The demand-management will be equipped with the authority to establish guidelines and will be integrated via a governance instance into the overall process. This would be an independent organizational or functional unit bearing the competence for guiding principles.

Governance The governance assures the NGN- and SDP-conform product- and productiondevelopment, while examining and releasing these standards by means of product and service requirements as well as realization plans of the suppliers. Service governance is a crucial success factor during the conversion of a service delivery platform. Service governance is, thus, understood as a central task of “productresponsibility,” which contains the control of services with a technical, organizational, procedural, and economical view. This is supported by current best-practices (ITIL, COBIT). Service-governance is not only determined by the IT-strategy, but is also directly dependent on the corporate governance and thus indirectly on the (overall) corporate-strategy. IT-processes are also deducted from the IT-strategy as well as from the operational business processes. It is the central task of the service governance to organize and exactly steer these coordination-processes. The necessity for a service-governance beyond the (technical) management becomes especially apparent within a business service cluster. The goal is to implement the governance on the following levels: – Governance on technical level aims at the management of the quality of service (QoS) of involved architectural components. Among Quality of service-criteria

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within the service environment are nonfunctional requirements, such as availability, efficiency, and frequency of error occurrence. These will be described in so called service level agreements (SLAs). An SLA is concerned with the contract between service-supplier and service-user, and who specifies the parameters of the respective service-performance and quality to be supplied. From a procedural view, services which are deployed are at different stages of their lifecycle combined to products and processes. Thus, steering-mechanisms have to be deployed which on the one hand allow monitoring of the processes, e.g., via dashboards and on the other hand are capable of reacting to deviances or at least advising the user on those. From an organizational view, services which are deployed are provided by different suppliers (service providers). Therefore the governance from an organizational view requires guidelines for a supplier-management. From an economical view, the origin-based allocation of cost generated by the usage of services is first and foremost of relevance. Additionally, characteristics for the value contribution of the respective services have to be defined across their lifecycle and respective measurement procedures have to be developed. The decision-structures which steer the implementation and development within the frame of a business plan have to consider service-hierarchy and –ownership. The service- or function-development within different service clusters respectively and areas of responsibility will be planned as a “master-roadmap”. Quality will also be safeguarded and released by the demand-management. Budgets and resources will be provided consistent to the implementation plans.

Summary The fundamental change within the architecture of public networks has been initiated by changing customer needs and the progression in technology development. Circuit switching networks will be replaced by packet switching networks. These support all means of communication: voice applications and multimedia – for fixed as well as for wireless access. The NGN-compliant service delivery platform provides modular produced services, which use – as far as possible – shared functions, which are bundled as central functions. Related services with similar functions will be consolidated through the creation of so called service clusters. This principle avoids to a large extent the redundant build-up of functions and secures maximal possible interoperability of services. The following benefits are of importance on account of the migration toward a NGN-architecture: – – – – –

High protection of investment and cost-savings. The possibility of outsourcing of services and/or business processes. Reduction of complexity. Effortless expandability. Technology- and supplier independence

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– Reduction of operational risk. – Reduction of time to market. NGN offers the possibility to modularize the service-portfolio. Therefore it is possible to put cost-advantages with a concurrent increase in flexibility into effect. A constant advancing development of the enterprise is fundamental for the successful introduction of a service-oriented-architecture. The mode of operation and the processes have to accompany the architecture of production- and supportsystems. A continuous demand-management as well as effective governance, which secure the functionality permanently after the initial implementation and allow a high degree of innovation simultaneously is essential for successful and sustainable implementation.

References ITU-T Recommendation Y. (2001). (12/2004) – General overview of NGN. ITU-T Recommendation Y. 2011 (10/2004) – General Principles and General Reference Model for Next Generation Networks. Berbner, R., Steinmetz, R., Grebe, G., Zo¨ller, R., Feil, A., Deeg M. (2007). Architektur der Service Delivery Plattform als Serviceebene im Next Generation Network (2007, TU-Darmstadt, T-Systems Business Services GmbH, unpublished).

Communications – One of the Basic Global Utilities, Bringing People Together? Thomas Rambold

Since 2000 Thomas Rambold is a well-known global Industry Analyst for Telco/IT/ SW/Next generation networks (NGN) and the Media (movies, video, music, advertisement and gaming). In his role he is specifically known to be at the front of business structures and technology, helping to transform the role and structure of the service providers (mobile, fixed, cable, satellite). He is the CEO of a global consulting company, being the “external network architects and business strategists” for service providers in the three major regions of APAC, EMEA and the Americas. Before that he started at Siemens in 1972, being engaged in semiconductors, data processing, enterprise communication and service provider communications. He founded Unisphere in Burlington, MA in 1998/1999 and was the CTO of the Communications Group of Siemens ICN until 2000. Before joining Siemens, he was part of the Olympic Organising Committee for the Olympic Games in Munich 1972, was assistant professor at the Eidgeno¨ssische Technische Hochschule in Zu¨rich, Switzerland after he finished his studies in Elektrotechnik at the Technical University in Munich, Germany with the Diploma summa cum laude.

Introduction For more than 100 years, communication was known as reliable voice communication. Everything was focused around the voice and to extend the reach of voice communication globally, on an automated basis, in every country in the world. When electronic switching was introduced, the Software age started, and contributed highly to the flexibility of the systems; feature richness and functional differentiation became the key. Much later, as a separate network, data communications started in various forms and every type of data network was a specific type of network, with its own features and functionalities. Data communications became quite expensive, so it was mainly applied in business, government and military networks, all nicely separated from each other (Fig. 1).

R. Ijioui et al. (eds.), Globalization 2.0, DOI 10.1007/978-3-642-01178-8_18, # Springer-Verlag Berlin Heidelberg 2010

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Fig. 1 Next generation networks – collapsing environments and converging architectures Source: DESS GmbH & Co.Consulting KG

Only a couple of years ago the Internet was introduced on a large scale and this was the beginning of a complete Broadband revolution, which turned the communications industry upside down, eliminating existing barriers on technical, regional and political bases and helped create new types of companies, on a global basis. The way people were working, thinking and acting, changed.

Why? It was possible to use a single stack of SW protocols over a defined HW implementation, which was under the “TCP/IP”, standardised globally from the beginning and people could transfer, in principle, voice, video and data, over the same, simple network. Of course it took a longer time until it was economically feasible and reliable enough to convert the existing networks, but this led to huge cost savings. Instead of having 30–40 different networks, which needed to be maintained and operated, service providers could work with one single carrier network and even connect to other service providers, and the Internet companies. Everybody who was connected to the Internet could be reached . People having access to the Internet could connect to any website, and obtain any information . Stable and reliable broadband connections became the new basics. More and more people rely on it, whether at home, at work, or travelling . It no longer mattered where this information was located, there was a key to find it, the search was born and companies like Google, Yahoo!, etc rely on it even today. But at the same time, the costs for the carriers were lower, the prices fell even further and some service providers were using the fascinating word “free” of cost. This turned the pressure and attention even more on the Internet and with the dramatic increases in bandwidth per user, the massive increase in “Broadband connections”, the use of worldwide mobile data and internet will soon reach

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Fig. 2 Traffic growth Source: Verizon, Ovum RHK

many more than the one billion Internet users today. At the same time, the broadband explosion happened in a fixed environment, the mobile voice world opened towards the IP (internet) based world and the mobile data exploded in bandwidth as well, although being constantly a step behind the fixed network bandwidth. Due to common standardisation worldwide and the costs for mobility in the handsets, the networks as well as the increasing services and applications rapidly shrank, so that countries and people in the underdeveloped areas in the world could find ways to use mobile communications, which made their lives easier (Fig. 2–4). Today many people are able to share a mobile handset, share different services and “pay as you use” in a sub 1 $ areas. This alone has changed the world and many lives in areas where people never had this type of communication. Due to standardisation, higher flexibility, lower cost and easier handling, it is to be expected that in a few years, four billion people on earth will use a mobile handset and that we will see many more people than the one billion of today, using the Internet. The bandwidth explosion is shown in figures 2–4. This, combined with the number of people using the networks, has resulted in an extent of communication that was unimaginable with the earlier technologies and would have never been affordable. So the Internet and its underlying low cost technology, the simplicity of its use and global standardisation have made it possible to follow the explosion of bandwidths. To begin with, the users were reached with the Internet and IP communication. Then the residential fixed line communication was developed and finally, mobile communication, which is all about using IP. This led to a massive change in the communications industry. Size mattered and due to the availability of Internet based communications, carriers (mobile and fixed) started the consolidation of their landscape. It nearly reversed the breakup of the monopoly of AT&T in the US and

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Fig. 3 Access technology and media bandwidth Source: Verizon

Fig. 4 Converged content delivery networks Source: Verizon

resulted in five major carriers. The communications vendor industry was hit hard as the decreasing prices were not compensated by the increasing volumes. So for the last ten years, the vendors’ revenues are shrinking and they are trying to find a baseline for a growing business. Also, the vendors entered a consolidation phase and recent events show that the consolidation has not yet reached an end, with new Chinese entrants stimulating the reduction of independent vendors. Shortly after Internet 1.0, there was Internet or

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Web 2.0, which again changed the behaviour of people . Now people use the Web for personal reasons, to express themselves in the Web and share personal information through videos and pictures, and store it in social networking companies (Facebook, Myspace, YouTube, Flickr. . .). With new mechanisms like Blogs and Ajax, people share information and communicate in a new way. Young people today treat WEB 2.0 as a part of their lifestyle, expecting that Internet BB connections will always be on and always there. A new element was started with the huge success of search. Web sites, Video and online information were used to get advertisement, oriented toward personal preferences and likes , where the probability of purchasing success for the individual brands is much higher than in a broadcast, anonymous advertisement, as in the current TV scenario.

Current Situation With these changes, the service providers are under massive pressure of change. There are progressive SP, who will make the change; however, those who are not able to follow the needs of the market, have financial limitations or other restrictions, will definitely fall behind and will be acquired by or integrated into other SPs as part of the ongoing consolidation. Although SPs create enormous cash every year, the current financial crisis could influence the transformation of the communication industry. Currently it seems that the SPs will continue the investment in strategic programmes, while the nonstrategic programmes are heavily cut and sometimes cancelled. The strategic programmes are based on the following directions: – Convert the communications networks to an all IP basis for voice, data, Internet and video/TV if you have home networks, enterprise networks, fixed networks, mobile networks, cable networks or satellite networks. These networks represent a general transportation layer for additional functionality. – Additional, specific features and functionality are added by creating a services structure on top of the transport network, with an underlying control mechanism based on the TCP/IP protocols. – To support those services ( and applications) it has become obvious that there is a need for enabling servicesnear activities and features, which need to be placed within the network itself. – For the creation, execution and orchestration of services and networks, there has to be the IT landscape, which has been somewhat independent so far, to be integrated with the Telco business processes, which are becoming the new baseline. – The transformation of the SP into this new world, and the use of Service oriented Architecture, are combined into the so-called NGN initiative and allow a major cost reduction of the total SP assets as well as reaching an unknown agility and speed for adapting to new conditions via a modularisation of functions, products, production areas, back offices and services.

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However, even with these huge investments, with all IP standard networks and the SP-owned services, the SPs has not achieved a major differentiation among themselves, so the main competition has been based on price, which has constantly led to an erosion of profit and to the end of revenue in most cases. Only those SPs who were able to acquire new markets by acquisition of other SPs or opening up new markets, were able to fight against this collapsing trend. Parallely, the Internet or WEB based companies like Google, Yahoo!, Microsoft, EBay etc, and new devices from companies like Apple (iPhone, IPod, etc.), Google (Android G1) and Nokia, were no longer pure telephones, but included all necessary functions. Applications being chosen and downloaded individually created a certain additional threat to the SP so that they needed to open up their networks to third party services, offering new application areas. “Over the Top” service offerings have increased this trend even more.

New Business Models This has again changed the world, and the change is reflected in new business models. While up to now every revenue came from the customers/subscribers (Fig. 5), the new models are based on the following new facts: – The customers are becoming more complex in their structure, as even a home subscriber is at one time a member of a company, at another a father, a member of one of the social networks, and a member of a sports club or any other community. Therefore there is the need for different features/services and the necessity for different tariffs as well. – This makes the SP aware of the different user profiles, however protected by privacy, where the end user has the power to reveal the user profile. Only the SP can access these protected user profiles and must protect them.

Fig. 5 The “Core Telco” business model today is “one-sided” networks Source: STL partners

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Fig. 6 Supply chain logistics: Physical world Source: STL partners

– At the same time, the service providers coming to the end users via the SP have no knowledge of the user profiles and the contacts of the end users (friends, colleges, family, relatives, company members, etc), so they need a Broker . This brokerage service is a to-be-paid element and the service providers are normally happy to pay that. – The SP is then able to offer the additional enabling service to the service provider, such as billing, AAA, flexible bandwidth, etc. which are similar to the additional services FEDEX has built up over the years in addition to the normal logistic items to send a package from point A to B (Fig. 6). – The services owned by the SP need to compete against those of the other external service providers. The SP is however also enabled to create “bundles, blended services and mash ups” across different offerings or use SaaS services (all are Web 2.0 mechanisms) to expand its reach and offers, providing an agreement to the appropriate service provider. The consequence for the SPs is, technically, that the service providers as well as the customers expect an on-demand reaction from the network. This has serious consequences for the back office structure, which uses a considerable time to communicate. On the other hand, this enables the SP to tap into completely new and much bigger revenue streams of nearly 400 billion $/year, , which had been denied to SP community.

Communications – A New Global Utility? With this in mind, the communications industry is on the verge of becoming a global utilityfor a majority of industries and businesses, because of its flexibility,

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robustness, openness and reliability. People will be enabled to use information at any time, at any place. Therefore, the communications industry will play an important role in increasing the GDPs of nations, as it will enable new possibilities of making businesses and lives easier. There is proof that communication/information investments correlate with the growth of GDP. This is something that will touch all people globally, to the last edges of the world. Communication and information handling the basic needs of mankind. It is clear that those SPs who wish to handle that, need to grow rapidly and become global SPs, as size matters and covering the regions is very important. This will definitely lead to a shrinking of the numbers of SP and probably a shrinking of the number of vendors as well. This means that only the progressive SP’s and vendors will survive and those who are falling behind will be part of the consolidation process. It is anticipated that the remaining SPs would work together in alliances, as the airlines have successfully proved for decades now. So we will see in future “Star Alliances” in the Communications and Informations Industry.

Who are the Losers and Who are the Winners? There will be losers in all industries who cannot cope with the trend. Those industries which are based on different platforms on different principles will disappear. They will not be able to compete with the communication and information platforms that the SPs are building right now. So it is an urgent matter to follow the growth of this new global utility area , to educate our young people accordingly, guide them to the new and vast possibilities and help those who want to merge and transform into the new world. All those who insist on sticking with the old paradigms will be washed away by that communication and information “tsunami”. Change and constant learning will be our guiding principles, now more than ever.

References Dess GmbH & Co. Consulting KG, Thomas Rambold (CEO): Picture 1, Presentation “Future strategies and structure in the telecom carrier” in Technical Symposium November 2003, Munich. Verizon, Mark Wegleitner (CTO): Pictures 2–4, “Ahead of the evolution”, Luncheon speech, Nxtcomm 2008, Chicago. STL partners, Simon Torrance (CEO): Pictures 5–15 “A $ 350 bn + Growth Opportunity ?” TMF Leadership Summit Nice, 19 May 2008.

Afterword Thomas Landschof

Thomas Landschof Global Strategy Consultancy operates as a personal discreet strategy consultant for decision makers and celebrities. He is an active member of various national, international and bilateral institutions and associations. Organizers of international conferences and seminars utilize his global professional experience acquired over more than 30 years for conglomerates and renowned consulting firms in Europe, USA and Asia. What people say about Thomas: is not restricted by conventional ideas and attitudes, sees opportunities where others write things off, a great advocate for change and innovation, pushes the boundaries, is honest, succinct and to the point, possesses integrity of the highest order, is reliable and trustworthy, has (my) complete trust. He continues to live his personal vision of creating peace, prosperity and growth for human mankind and future generations.

You and the Future of Globalization Thank you for taking the time to read these lines, because YOU will be able to shape the future of this planet. The world needs YOU to drive global critical projects within your area of expertise and within your sphere of influence in the future. After many years of working in a global context,my mind has observed that the global collective mindset is in no way different from any individual, country or any other collective network mindset. If you as a reader of this text do not take action now and start driving change from within, nothing will happen, and we will collectively approach a very unstable future. There is no secure place to escape, to hide, or to live on your own on the planet. If you ignore the reality, major new problems will result. We have been conditioned to compete, and competition has its advantages, for example, driving innovation and motivation. We have two choices. Either we suffer through a new world war, or we decide on a gradual peaceful transformation of our global societies. We have been wasting global resources for centuries now. Energy resources that Earth has created over millions of years have been depleted within a R. Ijioui et al. (eds.), Globalization 2.0, DOI 10.1007/978-3-642-01178-8_19, # Springer-Verlag Berlin Heidelberg 2010

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very short period of time. But it will not be an easy task for everyone, as negative forces are a reality of creation. We need to strive for a proper balance in every aspect of our lives. What we need now are genuine global, individual, and collective initiatives with real measurable action plans, and not just lip service to new ideas. Future scenarios must be made visible in all their consequences to motivate individuals and human networks to meet them. As if we do not have enough to deal with from natural disasters (such as floods, hurricanes, tsunamis, food shortages, earthquakes, etc.), we go about creating unnecessary complementary issues (such as environmental, financial, etc.) ourselves based on limited systems or selfish thinking as well as dysfunctional and anti-social behavior. With dysfunctional minds smart enough to buy nuclear warheads and chemical weapons that we never needed, we did not foresee that these deadly weapons might fall into the hands of people who should not have access to them. We need to act fast. We created the problems for mankind ourselves, and now have to live with them and solve them. If we had not developed these destructive elements, we would not have had this problem today. Intelligences, energies and resources must be brought into areas like global, environmental, and energy solutions, rebalancing education, wealth of nations as well as fair trade and many other sectors, always on the basis of fair sharing. Every imbalance will immediately create tension within our Global Communities. It would be naı¨ve to believe that these imbalances would be without negative consequences in the future for those who create them. Furthermore, education of global cultures, the implementation of a common Global Language to allow for and to ensure intercultural sensitivity and understanding should be obligatory in all countries to reduce the level of misunderstandings and misperceptions. Together, we need to change our way of thinking, and we must act on new individual and collective paradigms for the benefit of all future generations. The possibilities and opportunities are endless if only we change our individual and collective mindsets from limitation to collective exploration, and just do everything we love to do. As always, transition and transformation will be challenging and painful for many of us, but they are unavoidable if we truly want to use the power of our individual and collective intelligence and if we are really interested in the wellbeing of our species and our future generations. We know the answers to the future of globalization. We have always known them. The only thing we have to do now is do what we think is right. Listen to your heart.

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