Timo Nikinmaa: Networking production creates growth opportunities

Finnish companies in the mechanical industry have been very successful in the global market. Their success has been down to skilled subcontractors that have been able to expand their own operations in the wake of the main suppliers. As a result of the global recession, the sector’s prospects in the near term are not as good as we would hope. However, in the longer term, subcontractors and component suppliers in the mechanical industry will again have promising growth opportunities, even if they will soon encounter new challenges as well.

In order to improve their competitiveness, the main suppliers have increased their procurement from countries with a lower cost level. They may continue to grow as companies in the mechanical industry are expanding their own operations, for example, in India and China and are creating new business relationships with local suppliers. On the other hand, components and groups of components requiring a high level of competence are acquired for domestic production – and partially for production taking place in Asia as well – primarily still from Finland.

Subcontractors can also combine Finnish know-how and the procurement of less demanding components from countries with a lower cost level in the same way as many main suppliers do now. Subcontractors can also take advantage of the international operations of main suppliers by expanding their own operations abroad. Main suppliers naturally want to exploit the opportunities offered by local markets for cheap procurement, but many factors support the use of familiar suppliers, whenever possible.

It is not easy to find suppliers of all components and systems in developing markets. Developing quality and security of supply also takes time. A Finnish supplier developing international operations can speed up the launch of the main supplier’s production and reduce its risks in the process, if it expands its own business operations. However, subcontractors should consider the fact that main suppliers do not want their suppliers to be dependent on them in either the home market or abroad. For that reason, subcontractors planning to invest abroad should consider at the preparation stage how they can increase their customer base and business in the new location.

Networking production offers completely new kinds of opportunities for subcontractors to grow and develop their businesses. Many major key suppliers are to an increasing extent striving to focus on their core competence. Their hope is that the most important subcontractors, as systems suppliers, could take responsibility for greater areas of the process and contribute to research and product development. If the parts in the network specialise in what they do best, the performance of the entire network increases and the business operations of all its parts can expand.

In order for the main suppliers to be interested in developing a partnership with systems and component suppliers, these suppliers must, of course, have something to offer. Business can best be increased by presenting a plan on how the main supplier could develop with the supplier a new competitive product, or a calculation of by how much the main supplier’s expenses would be reduced if it starts to use the component or process offered. Presenting the concrete benefit is the easiest way for the supplier to be able to acquire new partners from outside the traditional customer base.

Timo Nikinmaa
Project Director
The Research Institute of the Finnish Economy, ETLA