SIEMENS

During the Industrial Revolution, spinning frames and steam-powered looms turned clothing manufacture into a highly mechanized process. These innovations made northwestern England the world’s leading center for the production of textiles. It also caused the decline of India’s textile industry, which could not compete against the mechanical systems’ higher efficiency. Today, 250 years later, the industrial landscape in England has completely changed and many world-famous brand icons from the UK are owned by foreigners. The most prominent examples of this are Land Rover and Jaguar, both of which belong to the Indian company Tata Motors.

The global economy is changing in a process that economists describe as creative destruction. Innovations are making new business models possible and old ones redundant. Most of these changes are hardly noticeable on their own, because they consist of minor improvements to production methods, accelerated or more cost-effective transportation systems, and increasingly efficient communication systems. But when taken together, these steps amount to major trends.

They have an effect on where products are manufactured as well as how and by whom they are consumed. They also define where wealth is created and where it is destroyed. And finally, they determine where the next big idea will be generated to propel the global economy forward in its continuing process of creative destruction.

The overall effect of all of these small steps is so huge that the global economy is continuously changing its appearance. Who could have predicted China’s rapid rise 30 years ago? Or the collapse of the Soviet Union? And who would have thought that much of the mass production manufacturing sector would migrate from Europe and the U.S. to Asia? Or that people today would be using the Internet to conduct logistics operations — including the ordering of pizza — quickly and cost-effectively?

“It has become obvious that the structure of the global economy is undergoing profound changes,” says Dr. Tom Kirchmaier from the Financial Markets Group at the London School of Economics (LSE). “In the future, conventional industrial sectors will primarily grow in today’s emerging markets. For highly developed countries this means that they will have to generate even more innovations in order to achieve growth.”

Due to their global organization, multinational technology companies such as Siemens can benefit from both of these trends. In wealthy countries, these companies selectively invest in extremely high-quality manufacturing industries as well as in research and innovation projects. One example of this is Siemens’ production of cutting-edge gas turbines in Charlotte, North Carolina.

Global companies also characteristically establish production facilities in developing countries and emerging markets. In addition to fulfilling important supplier functions, these facilities optimally meet the needs of local markets. Manufacturing and production networks are now being strengthened and made more efficient worldwide in order to handle increasing complexity (see article Information Lifelines and Sweet Spot Science). The importance of manufacturing for national economies is emphasized by Professor Dani Rodrik, an economist at Harvard University, who says, “Manufacturing creates comparatively well-paid jobs, encourages private-sector investment, and paves the way for the economy’s further diversification. That’s where you have to begin in order to systematically generate employment.”

Colombia is a case in point. Although it is not a major emerging market such as Brazil, Russia, India, or China (the BRIC countries), Colombia has great development potential and is sufficiently large to become an increasingly attractive market for foreign investments. In 2011 foreign direct investments in the country rose by 56 percent compared to the prior year. Siemens, which has been operating in this Latin American country since 1954, defines Colombia and other nations such as Turkey and Vietnam as Second Wave Emerging Countries (SEWECs).

These countries are not only experiencing economic growth that is well above average but also seeing the emergence of new markets and profitable sites for local production operations. The new Siemens facility in Tenjo near Bogotà, for example, has an extremely efficient manufacturing system and meets all of the latest environmental standards. The plant specializes in a number of products, including distribution transformers for renewable sources of energy, in particular for large wind farms and solar plants in the U.S. and Canada. The transformers were developed by Siemens engineers in Colombia.

Innovation is increasingly taking place in emerging markets, largely because there is a growing need to adapt products to local requirements. As awareness grows that each market has its own needs, a “one-size-fits-all” approach is becoming a thing of the past. In the future, large corporations will have to further decentralize their structures and processes and operate in a “multi-local” fashion so that they can be at home and innovate in several places at once. For example, Siemens is currently investing around €40 million in a research and development center near Moscow. The facility will become part of the Skolkovo Innovation Park. The Russian government is set to invest approximately $2.8 billion in the project during its first three years.

One of Siemens’ long-term aims in investing in emerging markets is to increase the number of S.M.A.R.T. products in its global portfolio. In this context, “S.M.A.R.T.” stands for “Simple,” “Maintenance-friendly,” “Affordable,” “Reliable,” and “Timely to market.” In other words, S.M.A.R.T. products are entry-level products that are perfectly tailored to the needs of specific market segments.

Such products include the SOMATOM Spirit CT scanner. Due to its relatively low price, the scanner will enable many hospitals to offer computed tomography examinations for the first time. In countries such as China, the device will benefit people with access to smaller hospitals only, e.g. in rural areas. Until now, hospitals in such places were rarely equipped with CT scanners. Economic growth and cost-saving innovations are thus giving millions of people access to high-quality medical care for the first time.

In Chiapas, Mexico’s poorest state, Siemens has supplied hospitals with 44 ultrasound systems, which have helped to reduce child mortality in the region by around five percent over the past two years. The inhabitants of the village of Adjuntitas Dos in the Mexican state of Querétaro have seen their quality of life improve for a completely different reason. In 2011 Siemens installed decentralized solar panels throughout the village, enabling residents to operate electric lamps without any power outages. As a result, children find it easier to do their homework in the evening, and better education lets them improve their long-term income outlook as well.

Controlled Globalization. Stories like these provide hope for the future. However, the world as a whole is obviously still characterized by great disparities in wealth. Although prosperity is steadily increasing, so is the gap between rich and poor. At the same time that increasing numbers of people are rising above the poverty line, more and more people are being born into relative poverty due to high birth rates in developing countries. How should the global economy be organized so that such disparities can be reduced? Do we need more globalization — or less?

Perhaps the question should be posed differently, as the problem may not be the level of globalization, but the methods for regulating it in order to make better use of its advantages and minimize its drawbacks. The recent financial crisis has highlighted the risks of insufficient regulation, showing how the inherent dynamics of complex systems can turn the world upside down in unpredictable ways — and with unexpected speed. “We are just beginning to understand the disadvantages of an insufficiently controlled globalization process, such as the upheavals it can cause in financial markets. Although markets are a great thing to have, governments need to get them back on track now and then. Financial markets in particular are inherently unstable,” says Rodrik.

Until the most serious consequences of the financial crisis are behind us, trust and strong partnerships will therefore be indispensable when dealing with financing issues. Siemens is responding to this challenge by offering customized financing solutions. A lot will depend on whether regulatory organizations can create rules to help tame economic processes. If this is possible, emerging markets might achieve growth that is more sustainable and less susceptible to setbacks. At the same time, wealthy nations might find ways to remain prosperous in spite of shrinking populations.

Innovation remains the most important key to success in highly developed nations and emerging markets alike. During the Industrial Revolution, steam-powered looms achieved incredible efficiency increases. Today, similar productivity potentials can be exploited through even better access to global networks by means of computers, communications, and Internet technologies. Productivity could also be increased by restructuring global energy and economic systems in order to better protect the environment and conserve resources. This development has just begun, and the required innovations are being designed by highly skilled experts.

Creating a Climate for New Ideas. Tomorrow’s talented workers are a company’s greatest asset. Excellently trained engineers have become scarce all over the world. But even though the market value of these individuals is increasing, the pressures they face are rising as well. Many of these jobs therefore come at a personal price in the form of overwork and exhaustion, which can lead all the way to complete burnout. But there is an economic dimension to this development as well. Too much work and stress at the workplace reduces employees’ individual performance and causes them to miss work. The Hamburg Institute of International Economics estimates that this results in losses of around €364 billion in Germany alone, or about one sixth of the country’s gross domestic product.

That’s why companies are increasingly striving not only to make the most of their best employees’ capabilities but also to make sure that those capabilities are maintained at a high level. As a result, work will probably be organized very differently in the future than it is today. Experts predict that there will be more project work, more freelance employment, and more freedom, but also more individual responsibility. Companies will create a climate in which it will be easier to put new ideas and innovations into practice than was the case in hierarchical systems. The result could be a flood of ideas and innovations that will cause the global economy to boom.

In 1926 the Russian economist Nikolai Kondratiev formulated a theory that the economy develops in decades-long cycles or waves that progress from one period of technological innovation to the next. Such paradigm shifts open up new opportunities and boost efficiency, thus increasing prosperity. Unfortunately, they also encompass transitional periods in which painful adjustments need to be made. “There are many indications that we are once again in the midst of such a transformation,” says Tom Kirchmaier. “Small, agile companies are suddenly appearing in the former centers of North America’s heavy industry. While the father may have stood at the assembly line in Detroit, his son now programs apps that are in demand worldwide.” The global economy is changing and enabling new success stories in the process. These are success stories for entire nations, as well as for individual companies and individual people. They can be found in Mexican hill settlements like Adjuntitas Dos and at Detroit’s brownfield sites. In both cases, this success was due to innovations whose time had come.