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ICT manufacturing industry

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Dec. 2006, pdf, 1.7 MB

Scope of the study

The ICTM industry, as defined for the purposes of the study (2006), comprises of two sub-sectors defined according to the NACE Rev. 1 classification. First, the ICTM I sub-sector produces office machinery, computers and computers’ peripherals. Second, the ICTM II sub-sector produces electronic intermediate goods and telecommunication equipment.

e-Business activity

The ICTM industry emerges as the one with the highest overall use of ICT and e-business among the ten sectors studied by e-Business W@tch in 2006 . There are structural reasons, such as the prevalence of large companies, intensive competition, frequent product changes and production dispersion, which drive the adoption of ICT and business practices. Nevertheless, the level of e-business activity differs with firm size. e-Business arrives in SMEs with a slight delay, compared to large enterprises. Additionally, the ICTM I sub-sector is a more advanced user than the sub-sector ICTM II.

Most important findings regarding ICT diffusion and e-business activity in the ICTM sector are the following:

  • Significantly more employees, on average, in ICTM companies have access to the internet at their workplace compared to other sectors.
  • Despite the high ICT endowment, a large share of companies in the sector plan to increase ICT investments.
  • Not sufficient use of standards causes interoperability concerns.
  • Companies in all size-bands exhibit similar patterns with respect to internet adoption as a selling/procurement platform.
  • Online auctions play a minor role: It is said that companies in the ICTM sector were resistant to join trading networks, perceiving them as a means intending to restrain competition and a way to drive down prices.
  • Enterprise resource planning (ERP) or supply chain management (SCM) applications are characterised by large-scale effects and used by large firms.
  • Companies engaged in cross-border trading automate document and payment flows more often than firms that trade locally.
  • The pressure to electronically integrate the supply chain comes from the bottom of the value chain.
  • Barriers to e-business may also lie outside of the IT-using industries: Complaints regarding the lack of reliable IT providers, interoperability and high technology cost might be a sign of restrained competition in the IT market.

e-Business trends and implications

An analysis of specific ICT-related revealed various topics that were found to be particularly relevant to the sector. The issues include:

  • Convergence of broadcasting, telephony and computing: Technological developments have resulted in the convergence of infrastructures and services, which have had some implications for the ICT industry. First, incumbent ICT producers were late in adapting to the convergence trend. Thus, companies might find themselves locked in old technologies. Second, the success of the ICTM sector depends on users’ acceptance of new technologies, which in turn depends on consumers’ skills and complementary products. Lastly, regulation has an impact on the speed of development and diffusion of new telecommunication services, which indirectly also affects the ICTM industry.
  • Networking enterprise: According to the e-Business Survey 2006, changing economic conditions force ICTM companies to enhance their competitiveness by joining efforts with other companies within the sector. This has implications for the competitiveness of companies in the ICTM sector. First, as the optimisation of information and goods flow reduces cost of inventory and improves production planning, inter-organisational integration has a positive impact on profits. Second, inter-firm cooperation gives companies access to competitive resources and information and enables them to spread the cost and risk of R&D projects. This eliminates the problem of efforts duplication and maximises the likelihood of introducing major innovations. Third, as large companies frequently initiate the process of supply chain integration and force their interests and requirements down the value chain, the economic position of SMEs might be weakened. Lastly, common standards facilitate supply chain integration. Thus, it is necessary that SMEs’ interests are taken into account during the stand­ardisation process.
  • ICT and industry transformation: The ICTM sector is characterised by a large extent of international specialisation. The use of ICT allowed companies in the ICTM industry to disperse the production different countries according to their comparative advantages. The results of the e-Business Survey 2006 confirmed the substantial impacts of ICT on the ICTM industry. First, because companies implement standardised ICT solutions and business processes, company design in the ICT industry seems to match the architecture of its products, i.e. firms are adopting modular organisational structures. This makes cooperation between firms even easier. Second, the ICTM I sub-sector, in particular the PC industry, has mastered the use of ICT tools to streamline the information exchange along the value chain and intern the benefits of technological and organisational innovations. Third, the main benefit of ICT deployment stems from the substitution of inventory flow with information flow. Finally, a common infrastructure and set of standards enables companies to benefit from the potential of ICT without investing in private networks. However, insufficient standardisation still hampers the electronic integration of the complete supply chain.
  • Who benefits from e-business? The e-Business Survey 2006 confirmed that ICT is an important driver and enabler of innovation. However, not all e-business technologies offer equally attractive payoffs. Firm and industry factors also influence the final outcomes. First, though large firms use ICT to innovate and increase profitability, SMEs exhibit greater R&D intensity. As both strategies yield equally positive returns, it can be stated that an aggressive ICT strategy is not the only source of competitive advantage. Second, out of all ICT applications, computer networks facilitating inter-firm collab­oration and e-procurement have the greatest impact on company performance. Third, start-ups enjoy higher returns on ICT compared to mature firms. As they are not locked into inflexible organisational structures and have better ICT-skilled workforce, they might be perfectly suited to exploit the full potential of ICT. Also, ICT investments in service activities exhibit higher ICT productivity gains compared to manufacturing activities. Last, innovative technologies adopted by companies in an industry are gradually becoming commodities and ICT-driven growth tapers over time.

Business impact

The ‘intensive use - positive performance’ paradigm seems to hold true in the ICTM industry. Thus, companies in this sector are well positioned to benefit from ICT. By combining new tools with adjustments in their product and marketing strategy, they have found ways to offset the negative effects of some technologies on company productivity and increased their competitiveness. For instance, unlike other industries, the ICTM sector exhibits positive impact of online sales on firm performance. The main observations on ICT use and impact observed in the ICTM sector include:

  • ICT transforms organisational structure and design of business processes.
  • Outsourcing and off-shoring affects employment and skills requirements.
  • Companies in the ICTM sector do not expect that the role of ICT and its impact on the way they work will lose any significance. In particular, they anticipate that ICT will affect accounting, logistics and customer relationships.
  • ICT intensifies competition in the industry. The gravity of these changes has been greater in markets in which SMEs operate.
  • There is a pattern in the ICTM sector in the way ICT and competition interact: more competition forces companies to use innovative ways of doing business, increase efficiency and productivity. ICT helps them achieve these aims while also increasing the pressure to stay innovative. The final outcome seems to be positive since companies operating in the industry become more efficient, productive and competitive on a global scale.

Policy implications

The e-business study (2006) revealed some policy implications relevant to the development of e-business in the ICTM industry:

  • Emphasise the necessity of co-inventions: Greater market transparency and lower transaction costs resulting from increased ICT use benefit companies that procure online and hurt firms that sell online. Since the introduction of new processes, products and applications, adjustments in the product and marketing strategy can offset negative effects, it is important to emphasise "co-inventions" that accompany ICT implementation. For instance, ICT enables firms to ‘leapfrog’ the value chain to their final customers, reduce intermediaries and appropriate some part of their value added.
  • Role model of the public sector: The share of government to business (G2B) transactions conducted with companies from the ICTM sector remains low. The use of ICT, internet and e-business applications in the public sector can spur active use of these technologies in the private sector.
  • Interoperability more important than ever: Despite the wide diffusion of ICT applications in the sector, there is still potential for further productivity increases through supply chain integration. This potential currently remains underutilised due to interope­rability problems. Public bodies might help firms to overcome the market failure resulting form the co-ordination problem.
  • Competition in the IT market: Markets for advanced IT applications are usually dominated by a few companies. Hence, competition might be restrained. The potential lack of competition in these markets might have serious implications not only for the IT-producing sector, but also for the IT-using sectors and e-business development in general. This issue calls for closer examination and, possibly, competition policy measures securing competition in the IT markets.
  • Customised innovation policies: Incumbents and start-ups follow various innovation and ICT strategies. Thus, the evolution of technological trajectories in the ICTM sector together with the ICT development patterns pose a challenge for policy makers to customise innovation policy for diverse company groups.
  • Networking for innovation: Networking organisations get access to new competencies lying within or outside of the industry enabling them to build resources that are difficult to acquire otherwise. The policy challenge is to encourage companies to support industry dialogue and knowledge sharing.
  • Regulation of telecommunication markets: Telecommunication regulation has significant impact on companies operating in the ICTM industry. Thus, regulatory initiatives should take a comprehensive approach and account for externalities affecting other sectors. For instance, if accepted, the new regulation on roaming fees would reduce prices and increase the demand for mobile services, which in turn could increase the demand for networks capacities.

Reference to earlier sector studies

The sector was covered as part of the "Manufacture of electronics & electrical machinery" in sector studies of 2004

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