How Does Globalisation Affect Local Production and Knowledge Systems? the Surgical Instrument Cluster of Tuttlingen, Germany

INEF Report

Institut für Entwicklung und Frieden der Gerhard-Mercator-Universität Duisburg

How does globalisation affect local production and knowledge systems? The surgical instrument cluster of Tuttlingen, Germany

Gerhard Halder

Heft 57 / 2002 Gerhard-Mercator-Universität Duisburg

0. Abstract The recent discussion of the winners and losers from globalisation has given prominence to regional development and industrial clusters in the global organisation of production and know-how. Tuttlingen, in southern Germany, is the recognised world leader in the global surgical instruments industry. However, price competition from emerging low-cost locations in South and South/East Asia and Eastern Europe, and rapid technological developments in medical engineering pose new challenges for the Tuttlingen cluster. In the past, institutional joint action was one of the pillars of the cluster’s success, but there are doubts as to whether such institutions can face the new challenges. New public-private initiatives suggest a way forward, but it is too early to gauge their impact. In the past there were important examples of small and medium sized firms coming together in joint marketing, production, and research and development efforts. While they continue, local competition has become more intense, making inter-firm co-operation more difficult. Some firms do, however, co-operate with suppliers further down the value chain, particularly those in Pakistan and Malaysia. The new challenges are also leading to further differentiation, both amongst firms as well as between producers and traders within the cluster. The most radical forms of product and functional upgrading are being concentrated in the cluster’s leading large firms. Innovation seems to be linked to close ties with end-users, the concentration of knowledge in medical engineering, and changes in surgical practices and health care delivery. Thus, the cluster while the ‘big fish’ in its own pond of surgical instruments, is having to come to terms with being a ‘small fry’ in the larger sea that constitutes the global health care sector.

Gerhard Halder, Fellow of the Institute of Geography, University of Stuttgart, Germany; [email protected]

This paper is an output of the research project „The interaction of local and global gover- nance: implications for industrial upgrading“. This project, which is funded by the Volkswa- gen Foundation, is a joint initiative of the Institute for Development and Peace of the Univer- sity of Duisburg, Germany, and the Institute of Development Studies at the University of Sussex, Great Britain. 1

Summary

1 Introduction ...... 3 2 The Tuttlingen cluster of surgical instruments ...... 5 2.1 Historical development of the Tuttlingen cluster...... 5 2.2 Brief overview on the Tuttlingen cluster...... 7 3 Production, distribution and upgrading in the cluster...... 13 3.1 Product differentiation and the production system ...... 13 3.2 The distribution systems...... 16 3.3 The knowledge system ...... 19 4 Does local joint action promote upgrading?...... 22 4.1 The weak ground for co-operation: historically seized and socially constructed mistrust ...... 22 4.2 Examples of joint action through private initiatives ...... 24 a) int action in reaction to earlier crisis: the Medicon and Martin example – consequences for upgrading ...... 24 b) rudimentary examples for joint action at the firm-level...... 25 4.3 Joint action established by public or public-private initiatives...... 26 a) BBT – building the local knowledge base by training ...... 26 b) Forum Medizin-Technik – Transferring knowledge on innovation...... 27 c) Initiatives on promotion and diversification of craft firms...... 27 d) The role of public institutions on standards compliance...... 29 4.4 New initiatives to meet future challenges ...... 29 a) The competence-centre – joint action for future success...... 29 b) Technology park “Take off”: Attracting new firms in complementary technological fields ...... 30 4.5 The significance of local joint action to promote upgrading ...... 31 2

5 Does co-operation in value chain ties promote upgrading? ...... 33 5.1 upgrading in value chains...... 33 5.2 Value chain ties in the production system...... 34 5.3 Value chain ties in the knowledge and innovation system ...... 35 a. small producer – large producer – customer...... 36 b. producer-trader-wholesaler-customer...... 37 c. producer-buyer-customer ...... 37 5.4 Functional upgrading in value chains and buyer concentration...... 38 a. Functional upgrading of small firms...... 39 b. Functional upgrading of large firms ...... 40 5.5 The significance of co-operation in value chain to promote upgrading ...... 41 6 The local cluster in the global value chain...... 44 6.1 Upgrading prospects in the cluster and value chain context...... 44 6.2 The interaction of global and local linkages ...... 46 7 Concluding remarks...... 48 8 Literature ...... 51

THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 3

1 Introduction see MARTIN & STUNLEY 1996). Tut- The small town of Tuttlingen in South- tlingen is very much a cluster, but it is ern Germany has occupied an unrivalled also part of a global value chain. In position in the international surgical many ways it is the focal point within instruments industry. It now faces unre- the global chain. What the paper analy- lenting price competition from producers ses is how links at the cluster and chain in low wage countries and more exacting level affect the ways in which Tuttlingen demands from increasingly powerful confronts the challenges it currently customers. Together, these factors are faces. These challenges relate to produc- forcing prices down and quality up. tion (competition from cheaper labour Consequently, Tuttlingen firms have had producers) and knowledge (innovations to re-assess their position in the tradi- and new technology, changes in health tional surgical instrument industry. At services in general and surgery in par- the same time, additional pressures have ticular). These pressures underline that arisen due to the emergence of new while Tuttlingen may be the big fish at products, notably instruments for mini- the level of production within the mally invasive surgery and surgical boundaries of the surgical instrument implants. Furthermore, emerging tech- value chain, within the framework of the nologies including biotechnology, robot- wider medical engineering value chain it ics and micro-technology are transform- is a relatively small fry. ing the classical art of surgery – at least Consequently, this paper goes be- in the major markets in North America, yond local linkages and examines the Europe and Japan. This paper examines linkages between producers and custom- if and how the cluster has responded to ers in different markets (Germany, US, these challenges. and other markets). In the international In the academic literature, there are literature, such forward ties have been several theoretical approaches that cap- analysed in studies on global value ture the success of regional economies. chains (e.g. GEREFFI, 1999). In accor- While some general patterns seem to be dance with that literature, this study on unquestioned, like the positive effects of the surgical instrument sector finds that external economies through agglomera- these linkages are changing. In some tion, there remain areas of debate. The chains, changes in the organisation of the literature on industrial clusters (PORTER hospital sector are leading to a gradual 1990, 1998, ENRIGHT 1996) emphasises power shift towards the customer. How- the stimulating effect of competition, ever, the chains do not (as yet) have the whereas the industrial district approach characteristics of Gereffi´s buyer driven leads us to look in particular at the po- chains. This is mainly because Tut- tential gains from co-operation and the tlingen has retained the capacity to importance of knowledge spill-over and innovate. This capacity to innovate is of socio-economic features (e.g. BRUSCO central concern to this paper. 1990, BECATTINI 1991, PYKE & In line with HUMPHREY & SCHMITZ SENGENBERGER 1992, for a comparison, (2000), the paper distinguishes between

4 GERHARD HALDER different types of upgrading. It examines at the local level? This paper provides if, and how, internal and external link- evidence that many parts of the produc- ages strengthen or undermine upgrading tion chain are located within the Tut- by local producers. This is a difficult tlingen cluster of surgical instruments undertaking because – contrary to the and, moreover, that different market common image of European industrial channels increase external ties. Thus, districts – there is no unified community both local cluster governance and global of producers. The Tuttlingen surgical value chain governance occur simulta- instrument cluster is extremely hetero- neously in Tuttlingen. Nevertheless, geneous, ranging from one-man enter- other parts of the value chain are located prises to the local lead firm which em- outside the cluster: wholesalers and large ploys about 2,000 people locally and buyers, and constitute the link to end over 6,000 worldwide. Section 2 illus- producers in many channels. trates that this unevenness is borne out in This leads us away from the cluster the production statistics. A feature not for the moment to consider the changing apparent in these statistics, and possibly environment the cluster has to react to. more significant, however, is the fact Since health care service has taken an that concentration in the knowledge increasing share of the national income system is significantly higher than in the during the last decades, national health production system. The paper clarifies care systems in most countries are under these concepts in later sections, but it increasing financial pressures. Efforts to must be noted from the start that the save costs have had a big influence on financial and human resources for up- health provisioning. In the German grading are distributed very unevenly in health-care sector, small single hospitals the cluster. have joined together to form hospital Despite the cluster’s heterogeneity, associations in an effort to economise on there is mutual dependence and econo- costs (see: KNAPPE et al. 2000). In the mies of agglomeration continue to be United States, hospitals are one step powerful. There are a number of ques- ahead, uniting as “power-shopping” tions that will affect whether or not this associations, in order to bulk buy at small town can retain its leading position better rates.1 This favours large suppliers in the global surgical instrument market: who are able to use scale economies to Can it cope with the challenges outlined supply instruments at lower prices. above? What upgrading opportunities Another approach to saving costs is to are available for firms through collective support operation techniques that mini- efficiency at the local level and through mise a patient’s stay in hospital, for engagement in value chain ties? What is example, through minimal invasive the scope for local upgrading strategies surgery. This leads to a further push in where producers operate in global value chains? Finally, in what ways may dif- 1 In power shopping associations consum- ferent types of value chain governance ers – in this case hospitals – make joint effect or influence upgrading strategies purchases, thereby receiving a higher dis- count with larger orders. THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 5 research and development for new appli- two firms in the former cluster of surgi- cations of this technology. A third con- cal instruments in Sheffield, UK. sequence is a greater level of specialisa- Section 2 introduces the Tuttlingen tion as hospitals become “centres of cluster, presenting its main actors and excellence”. This maximises the utilisa- explaining its specific features. Section 3 tion of specialised, sophisticated and describes the material and knowledge expensive equipment. flows within the cluster. The heterogene- At the same time, progress in sur- ity of the cluster and the complexity of gery is fast and intense. This is mainly distribution are introduced at length in driven by cross-section of technologies order to clearly illustrate the structures like micro-electronic, bio-technological both at the cluster level, as well as within and new-materials research. Future the value chain. Section 4 examines surgical innovation is expected particu- whether joint action in the cluster pro- larly in fields where different technolo- motes upgrading, whilst Section 5 poses gies interact, such as robotics in surgery, the same question in relation to value image regulated endoscopies, re- chains. Drawing on the findings of the absorbable implants, tissue engineering, previous sections, Section 6 discusses laser surgery and many others (see: the implications for the interaction of GRÖNEMEYER 2000). While adding to global chain governance with local existing technologies and techniques, cluster governance. Finally, Section 7 these innovations force producers and provides concluding remarks and con- traders to react. They force big firms to siders further prospects for the cluster. increase their knowledge bases, either through their own efforts or through 2 The Tuttlingen cluster external cooperation ties and acquisi- of surgical instruments tions. This section introduces the Tuttlingen The findings of the paper are rooted cluster, presents first the cluster’s roots in primary field-research, conducted and historical specificities. It then goes during the Spring and Summer of 2000. on to an overview of the cluster, intro- A total of 64 interviews were carried out, ducing the cluster’s structure and main including 18 qualitative interviews with actors. institutions and key-informants. Thirty- five manufacturing firms and 11 trading 2.1 Historical development of firms were surveyed using a semi- stan- the Tuttlingen cluster dardised questionnaire. Additional in- The initial clustering of surgical instru- formation was obtained through the ment production was a result of specific author’s participation in a consultancy locational factors that provided benefi- study for the Steinbeis Foundation, as cial geographical resources, such as iron- well as visits to the sector’s leading ore and wood around Tuttlingen and international trade-fair, “Medica”, at transportation along the river Danube. Düsseldorf in November 2000, and to These locational factors led to the growth of a craft-based industry at the

6 GERHARD HALDER end of the 17th century, centred around surgical instrument sector, and locates the iron-work of the Duke of Württem- the sector as a sub sector of precision berg.2 The first product specialisation of mechanics. Moreover, the census’ ad- these metal-based firms was in nail and ministrative boundaries have changed knife forging. In the latter product Tut- several times within the last century. To tlingen competed against Solingen in the trace the development of the cluster it is Ruhr-area, Germany’s most important thus necessary to combine carefully centre of stainless steel products. In several sources. The early development 1800, there were over 20 knife- and nail- of the cluster is shown in table 1. It forging firms, and 50 years later, at the shows the number of surgical instrument beginning of the Industrial Revolution in firms, in both craft and industrial sectors, Germany, there were over 100 firms within the city of Tuttlingen. Census (DOLD 1920). Three of these labelled enumeration was discontinued due to the themselves specifically as “firms for disruption of World War I and the eco- knife-forging and surgical instruments”. nomic depression in the 1920s. The first The move from knives to surgical in- count for the county of Tuttlingen was in struments came out of the superior per- 1939 and identified 39 small firms em- formance of Solingen, forcing Tuttlingen ploying 130 people (the city of Tut- to seek its own market niche. Gottfried tlingen was not included). Jetter who, in 1867, founded Tut- In terms of employment and total tlingen’s current leading firm in medical production, industrial firms have played engineering, Aesculap, took the initial an important role in Tuttlingen ever steps towards specialisation and intro- since: “Most outstanding of all is the duced modern machines such as steam Corporation for precision mechanics engines. In subsequent years, other firms (...), which formerly employed over followed, pooling know-how from all 2,000 people. With 2,500 people, the over Europe, especially Paris, which was [surgical instruments] industry of Tut- then the world’s leading centre of medi- tlingen [city] accounts for over two- cal knowledge and surgical instruments. thirds of total German production.” Soon after the beginning of the 20th (FORDERER 1949:242, translation G.H.). Century the increasing number of in- In the early years after World War II, the strument types led to further specialisa- development of the sector in the county tion, enabling craftsmen to reduce the of Tuttlingen was estimated by production time of each single instru- HILZINGER (1956:43) using data of the ment and obtain economies of scale. surgical instruments manufacturers The historical development of the association (table 2). It shows a steady cluster is reflected, albeit poorly, in increase in firm numbers and employ- official data. This distinguishes between ment. In 1955, the city of Tuttlingen industrial and craft firms within the housed a total of 149 firms employing 3013 persons (table 3). In the following years, the industry expanded steadily 2 The successor firm is still alive (Schwäbi- sche Hüttenwerke) THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 7 both in terms of firm numbers and em- The sector has historically been ployment. concentrated in Tuttlingen. In 1999, 87.5 % of all surgical instrument craft firms

in Germany were located in Baden- Table 1: Development of the sector in the city Württemberg, almost all in Tuttlingen. of Tuttlingen As table 4 shows, in 1956, 84 % of the industrial craft craft firms engaged in manufacturing year firms firms surgical instruments in Baden- 1901 3 77 Württemberg were in the county of 1906 3 79 Tuttlingen. In 1995, this share had risen 1911 4 80 to 89.6 %. This concentration exempli- 1920 6 64 fies the importance of clustering within 1928 8 108 the sector. Internationally, there is only 1936 9 71 one other cluster of note, in Sialkot, 1948 8 66 Pakistan. Clusters of surgical instrument Source: REINERT 1951: 69 manufacturing were formerly found in Nogent-sur-Marne in France, in Shef-

field in England, and to a certain degree, Table 2: Development of craft firms in the in Solingen in Germany. All of these Tuttlingen country clusters are today, by and large, extinct year no. of firms employment with only a handful of firms surviving. 1945 105 n.a. In addition, a large firm in Debre- 1946 127 n.a. cen, Hungary, was set up to supply 1947 132 n.a. former socialist states of Eastern Europe, 1948 137 n.a. while there are an extensive array of 1949 142 283 medical engineering (including surgical 1950 154 284 instruments) firms to be found in Swit- 1951 157 340 zerland’s “Mittelland” and along the 1952 162 555 East Coast of the United States. Never- 1953 165 624 theless, firms in these latter locations Source: HILZINGER 1956: 43 compete with Tuttlingen producers not in surgical instruments but in other segments of medical engineering. Table 3: surgical instruments: firms and employment in the city of Tuttlingen in 1955 2.2 Brief overview on the no. of firms employment* Tuttlingen cluster craft 126 326 The Tuttlingen cluster of medical engi- firms neering consists of a core of about 300 industrial 23 2687 producers of all size, who manufacture firms complete medical devices, either as total 149 3013 individual craftsmen or as industrial * without firm owners firms. Together, they achieve an annual Source: Tuttlinger Blätter 1956: 182

8 GERHARD HALDER

turnover of about Euro 1 billion. Within Figure 1 shows the product range of a wide production range, surgical in- the Tuttlingen cluster.3 The cluster’s

Table 4: Development of craft firms in surgical instruments Baden-Württemberg County of Tuttlingen year no. of firms employees turnover in no. of firms employees turnover in Mio. Euro Mio. Euro 1949 125 441 1,17 n.a. n.a. n.a. 1956 175 1279 7,53 147 992 5,16 1967 193 1262 24,23 n.a. n.a. n.a. 1977 201 1826 80,12 n.a. n.a. n.a. 1995 307 3791 370,94 275 n.a. 326,89 Source: Statistisches Landesamt Baden-Württemberg: Handwerkszählung, different years

struments are by far the most popular origin was in the production of surgical products in medical engineering pro- instruments. During the last decades, duced in the cluster. Besides classical some of the larger firms have started to surgical equipment, new minimally enter into other fields of medical engi- invasive instruments are also produced. neering, requiring different technologies

Figure 1: Products of the cluster of medical engineering

Other products include various types of and skills. Diagnostic instruments and implants, as well as medical and elec- endoscopes have required a move away tromedical apparatus, although these are from metal working, whereas the pro- limited to a few large firms.

3 In figure 1, the size of the circles reflect an estimation of the scale of the distinct seg- ments. THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 9

duction of implants has led to a higher The producers in the cluster are sur- stage of metal based production, using rounded by 200, often very small, proc- titanium and sophisticated alloys. For ess specialised sub-contracting firms. most small firms this shift has led to a About 30 firms supply manufacturers growing local market for minimally with inputs, including two specialised invasive instruments, which in most die-making and forging firms. Two other

Table 5: Medical engineering in Tuttlingen: number of firms and workers engaged in manufacturing in 1999 (by firm size, WZ 3310) 1: firm-size-class 0 1 to 19 20 to 99 100 & more total no. of firms 208 233 34 8 483 share of firms 43.1 % 48.2 % 7.0 % 1.7 % 100 % no. of employees 0 1,065 1,157 4,001 6,223 share of employees 0 % 17.1 % 18.6 % 64.3 % 100 % average firm-size 0 4.6 34.0 500.1 12.9 Source: Statistisches Landesamt Baden-Württemberg, Landesarbeitsamt Baden-Württemberg.

cases require similar technologies to that die-making firms are located at Sol- used to manufacture classical instru- ingen. A number of turning firms pro- ments. vide the cluster with semi-finished 4 While many firms producing classi- goods. A few specialised retailers offer cal instruments are also engaged in the other input supplies like machinery and production of minimally invasive in- industrial equipment for smaller produc- struments, the production of endoscopes ers. Suppliers of specialised machines, as well as diagnostics equipment and for example machine-tools, are not implants are limited to larger firms in the located within the cluster, but many are cluster. Some larger firms engaged in the based near Tuttlingen. Finally, some 20 new segments (implants or endoscopes), firms provide a range of producer ser- however, are producing special instru- vices to the cluster, ranging from spe- ments to handle with their main products cialised software, to translation offices, in surgery. logistics and transportation. The cluster’s success during the last The size structure of the core manu- 20 years is linked to its ability to diver- facturing firms in medical engineering is sify and expand into segments beyond shown in Table 5. Most firms in the classical surgical instruments. Some cluster are very small. Over 90 % of 5 firms have emerged as recognised suc- firms employ less than 20 persons. cess stories, becoming leading firms, both in terms of size as well as techno- 4 These firms mainly work for other end- logical advancement, despite starting as markets, especially the auto sector, but to avoid dips in business cycles also supply to small craft firms. other sectors like surgical instruments. 5 20 employees is the cut-off point in official German statistic for manufacturing firms.

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However, the total employment effect of According to official statistics, there this large group of firms is only about 20 are 76 traders with a total of 636 em- % of the work force (including firm ployees. There are definitional problems owners). with the official statistics. Many produc- ing firms also trade instruments, while In contrast, eight large firms account retaining their main field in production. for 64 % of the cluster’s manufacturing According to a 1993 postal survey, 27.3 employees.6 This asymmetric structure is % of producers were also engaged in even more pronounced when one con-

siders that the two largest firms in the trading (MEKELBURG 1994). Other cluster employ about 50 % of the total producers have completely changed their production firms’ employees in the main activity to trading, although they cluster. Thus, it is easy to see the “hub often continue to describe themselves as and spoke“ structure in terms of size producers to enhance and protect their (see: MARKUSEN 1996).7 reputation. In a functional sense, there- fore, trading activities at Tuttlingen are much more significant than official 6 Within employment data of producing statistics suggest, and are increasing firms administrative and support staff is al- every year.8 so included. Thus this data is sensitive to firm-size. 7 We will see in the following sections, that the underlying hub-and-spoke relations ha- ve changed within the last years. THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 11

Of the range of private firms and are engaged in vocational training and public institutions, some emerge as main inform firms of the different technologi- actors. The largest firm in terms of cal development programmes at regional employment is Aesculap, which employs and interregional levels. Moreover, they about 2,000 persons locally and over provide a link with regional economic 6,000 worldwide. This firm is engaged interests and act as an intermediary with in many fields of medical engineering. actors at the federal state level as well as Its priorities are shifting away from the regional level.9 surgical instruments into other segments, At the local cluster level there are a particularly implants. Aesculap itself is number of key institutions. Associations owned by an even larger German com- of craftsmen play an important role in pany, which, while located outside the ensuring high quality advanced training cluster, is also engaged in the broader with common rules and testing stan- medical products industry. The next firm dards. The FORUM Medizintechnik, in size is Karl Storz, with a staff of provides an institutionalised platform for nearly 1,000 employees. This firm spe- technological learning through lectures cialises in endoscopes and is a world- on innovation, research and develop- wide technological leader. Besides these ment, partly funded by local govern- two large firms, there are two organisa- ment. Finally, the local government tions, Medicon and Gebrüder Martin, provides infrastructural support, includ- which are made up of 25 mainly small ing site development. Since soft location producing firms with about 900 employ- factors are regarded as an important ees in total. Figure 2 provides a model of issue to attract highly educated employ- the production system of the Tuttlingen ees, local government investment also cluster of medical engineering. It esti- contributes to the local economy. mates the structure and size of distinct sub-sectors and production steps. It The local government is currently shows how in-house production and involved in a major project to attract new subcontracting is inter-linked within the technologies and skills to the cluster. cluster. The most important local institution is the BBT (Berufliches Bildungszentrum Although the centre of medical en- Tuttlingen), which provides basic and gineering, the city of Tuttlingen is not advanced training for metal workers. the regional capital, either in terms of Since this is the only place in Germany administration or population. Important to learn the profession of a Chirurgie- institutions related to the cluster are not mechaniker (mechanics in surgical situated in Tuttlingen, but at the geo- instruments), it forms the pillar on which graphical border of the cluster, such as the cluster is build on. One of the main the Chamber of Industry and Commerce gaps in the cluster is the lack of research in Villingen-Schwenningen or the institutions. Nevertheless, the cluster Chamber of Crafts in Konstanz (figure benefits from the dense research land- 3). The chambers provide market infor- scape and variety of technical transfer mation and statistics to their members, institutions within Baden-Württemberg

12 GERHARD HALDER as a whole. Baden-Württemberg has 11 A central feature that a cluster pro- Max Planck Institutes for fundamental vides for local firms are external econo- research, 13 Fraunhofer Institutes for mies, and Tuttlingen is no exception. applied research, 20 Industrial Contact The gains of pooling the labour market, Research Institutes, 220 Steinbeis Foun- the emergence of specialist suppliers and dation technology transfer centres for technological and knowledge spill-over SMEs, 9 Universities and 39 Polytech- (often referred to as Marshallian external nics (see: COOKE & MORGAN 1994:99, economies) remain important for the HEIDENREICH & KRAUSS 1998:229). The cluster’s success. The Tuttlingen cluster most important clinical research institu- generates a number of external econo- tions for Tuttlingen are the surrounding mies for its firms: University Hospitals in Freiburg, Tübin- • First, traditional production knowl- gen and Ulm, which are all within 90 edge in the manufacture of surgical minutes drive of the cluster. instruments. This is formalised and Of special importance are the poly- embedded into the vocational train- technic schools at Furtwangen, Konstanz ing system of the BBT. This provides and, again, Ulm. The latter houses the production knowledge and facilitates Institute for Applied Research in Medi- innovation in production technolo- cal Engineering (IAF), which is the only gies. institute with a specific focus on the • Second, specialist suppliers in the industry segment. Although the sur- fields of material inputs, software rounding research landscape and tech- consultancy, material testing as well nology transfer system is impressive, as translation offices and business pure numbers do not imply effective consultancy are located in, or nearby, delivery of technical advice (see: the cluster and are specialised to meet the cluster’s idiosyncratic HEIDENREICH & KRAUSS, 1998:230). needs. Most research institutions are small in size and focus on a particular techno- • Third, the cluster of specialised small logical field, and are thus unable to scale firms are able to deal with provide comprehensive consultancy small batches to fulfil customer re- services. Thus, they are passive actors, quirements. Neither large firms on requiring “very precise demands on the their own nor dispersed production would have been able to deal with part of the company. The ability to find the variety of small batches required innovative questions for the transfer at uncertain times. Thus, clustering centres is not something that can neces- leads to economies of scale and sarily be taken for granted, especially scope. among smaller (...) companies” (ibid: 230). As a result, technology transfer is • Fourth traders and distribution staff of larger firms have acquired market only used by a limited group of compa- knowledge in particular national nies, and effectively strengthens techni- markets. On the other hand, their cally stronger firms. knowledge about the Tuttlingen pro- duction facilities, quality and produc- THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 13

tion specialities enables them to ad- This could influence future upgrading of just orders to customer’s require- the participant firms. ments. • Fifth, geographical closeness facili- 3 Production, distribution tates information flow about new and upgrading in the processes, new products and mar- cluster kets. These flows of information and This section details the production and learning processes through exchange knowledge system of the Tuttlingen and interaction, both formal and in- surgical instrument cluster. It shows formal, are largely unintended and how, traditionally, instrument manufac- often unreflected by the actors. turing was a craft activity, involving a • Sixth, relevant local and regional huge range of different types of instru- institutions further support the eco- ments and small batch production. nomic base of the regional economy. Moreover, this section introduces the As such, several initiatives have concept that differences in the knowl- helped promote the cluster. edge system can be a critical resource for • Seventh, the Tuttlingen cluster has upgrading. The section is divided into acquired a world-wide reputation for three subsections: product differentiation quality with firms from abroad seek- and the production system and the dis- ing to enter into joint ventures or es- tribution system, are about material tablishing plants at Tuttlingen. flows and particularities in production These advantages of clustering lead to a and distribution, the knowledge system is reduction in transaction costs for indi- concerned with knowledge flows. vidual firms and to external economies. The outcome of external economies is 3.1 Product differentiation and visible in the dense clustering of the the production system surgical instrument sector. There are To understand the production system, it examples of firms that have relocated at is necessary to first look at the specific Tuttlingen due to the geographical prox- facets of the manufactured products, and imity to forward and backward linkages. then consider their implications for the This agglomeration effect has further- production system. Surgical instruments more led to the re-location of a range of were developed from a rudimentary traders and wholesalers, even from knowledge of surgery at the end of the abroad. The main strength of this unique 19th century. Starting from a few types of labour market is its generation of spill- instruments they have increased in num- overs. The passive gains of clustering ber along with the knowledge of medi- (NADVI 1999, pp.1609) – the “Marshal- cine and surgery. It is estimated that over lian trinity” of labour market pooling, 30,000 instrument types are currently specialised suppliers and technological produced in Tuttlingen.10 The large and knowledge spillovers (see: MARTIN variety of instruments is due to two key & SUNLEY 1996) – can therefore be factors. observed in Tuttlingen. To participate in active gains, joint action is required.

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First, with the constant refinement In the cluster we find both product of medical knowledge, there is an in- specialisation as well as process speciali- creasing number of operation techniques. sation regardless of firm-size. To start Surgeons often seek to improve proce- with, a craft firm in Germany is only dures by refining their medical equip- allowed to engage special skilled per- ment. Often there are incremental im- sons, called Meister (instructor). This provements, from changes to the instru- rule seeks to ensure the best level of ments’ form to functional adjustments. product quality. Meisters are proud of Since the art is so heavily dependant on their skills and try, whenever possible, to the surgeons, there is little resistance to a produce an “individual” product which surgeon’s insistence on an adjustment in includes as many production steps as the development of new specialist in- possible. For this reason, most craft strument that promise better results. firms are highly specialised in a small range of products. Nevertheless, single Second, new surgical methods do production steps are often outsourced. not necessarily substitute existing tech- These are either capital-intensive proc- niques. In many cases, traditional tech- esses, like heat treatment or laser- niques are used under special circum- working, or labour intensive processes, stances. 11 Moreover, according to differ- like polishing. ent surgery traditions, the equipment varies between different national mar- A widespread practice for large kets. These factors, combined with firms is to use both in-house capacities varying financial capabilities of custom- as well as outsourcing to deal with un- ers in different countries explain the steady demand. Of the firms visited that huge and increasing range of instruments mainly produced surgical instruments, being produced at Tuttlingen. 87 % outsourced some production steps to other firms. These included all of the As a result, there are a number of larger firms12 market niches in which firms can spe- (20 employees and more) cialise, either producing a single product interviewed. Usually subcontractors or a small range of products. The Cham- work for several firms but irrespective of ber of Industry and Commerce estimates this, production ties are generally long- that there is an annual production of standing. The subcontractors visited had about 15 to 20 Million single instru- ties with their three main buyers that had ments and about 30,000 types of surgical lasted over 15 years, on average. Al- instruments in the county of Tuttlingen. though changing supplier, or buyer, is This would mean an average batch of not the rule in the production system, 500 to 660 pieces of a single instrument there are shifts in volume according to per year. This explains much of the changing demand for orders. More than persistence of small craft firms, for it is 51 % of the production firms inter- difficult for industrial firms to deal with viewed had increased outsourcing in the such small batches and uncertain de- last five years, mostly due to growing mand. orders. On the other hand, most firms stated that even in recessions they THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 15 would, where possible, outsource a straints, the higher requirements in guaranteed minimum level of work to product regulations (mark III products subcontractors as a safeguard, because according to the European CE-standard), the survival of contractors was crucial to and the higher degree of automation. the producers’ performance during Furthermore, in the case of implants, boom-times. Small suppliers, who felt customers’ traceability and punctuality relative safety under these circum- requirements lead to direct control of stances, confirmed such patriarchal production processes. behaviour. Nevertheless, the general Surgical instruments are usually loyalty of larger firms has declined in produced in three distinct steps (for more recent years, especially in relation to detail, see NADVI 1996). The initial steps home-working, which is an old, but include forging and related processes. dying characteristic of the local supply Metal turning can also be counted as part chain in Tuttlingen. At the beginning of of this step. The second step includes the th the 20 century, DOLD (1920) wrote, that main process of metal working, like workers at Tuttlingen often preferred to milling, fitting, filing and grinding, up to produce at home instead of at the firm, heat treatment. It could be asserted that although good workers were allowed to all the steps that ensure the basic func- do so. Those home-workers produced tion of the instrument are included at this only for one single firm, which provided stage. The final processes include sur- them with input materials, whereas the face-treatment, polishing, labelling, equipment belonged to the individuals. cleaning and inspection. The division While this practice still exists, it is de- into three main phases of production is clining. The two largest firms, Aesculap important, especially in understanding and Karl Storz, have reduced home- how production is being restructured in working dramatically in order to gain the wake of globalisation. internal flexibility in the use of work- force. They have asked most home- Input suppliers in Tuttlingen under- workers either to return to the factory or take the initial steps, the few exceptions to leave. Another reason for the decline being made by large firms. Surgical in homeworking is the steady leakage of instrument manufacturing firms at Tut- capacities, as many home-workers be- tlingen usually begin work at step two - came independent producers over the that is, drawing on forged materials or years, competing against their former turned steel. In addition to traditional employers. equipment new, sophisticated machines are common in the cluster. This is only Subcontracting also varies accord- partly an issue of firm-size: all larger ing to product segments. Firms engaged firms use CNC-machines, as do many of in endoscopy/minimally invasive surgery the small firms (although others work in and especially in the implant sector have a more traditional way). Having the fewer subcontracting ties, although they experience of many years, product qual- also tend to be bigger in size. This is ity of the latter is not usually far behind rooted mainly in technological con- the former, but there is a difference in

16 GERHARD HALDER production speed. Although a few of the the labour intensive medium steps of larger firms also work with robots, a production. To ensure quality, the prod- high level of automation is not the norm, ucts are brought back to the Tuttlingen especially as batches are small and cluster for the final steps (job process- different manual skills often lead to ing). better results. According to key- As a result, new types of firms have informants, experience is such an impor- appeared in Tuttlingen. Besides the tant factor for product quality that even classical producers and traders, as dis- the market leader was forced to re- cussed earlier, the traditional trading employ some old workers after their system led to a third type of firm, the retirement. Younger scissors-makers producer who also trades. During the last were, at that time, not able to attain the decade, a fourth type, the trader who also required quality. As a rule, it is said that produces, has appeared. This last type an instrument maker in Tuttlingen re- has specialised in job processing with quires ten years post-apprenticeship firms in low-wage countries. The firms experience to be recognised as a skilled are usually owned by multi-skilled instrument maker. For the highest level people who are able to combine produc- of skill it takes many years of experi- tion knowledge with market knowledge ence. developed through previous employment Subcontracting ties with firms by larger firms in Tuttlingen. Although abroad are playing an increasingly im- many of them are called traders, they portant role. In the early 1970s, produc- also have either direct or indirect pro- tion was transferred for the first time to duction capacities to ensure acceptable developing countries to benefit from product quality. These linkages with lower factor costs. The lead firm estab- lower waged production sites have led to lished a manufacturing facility in Malay- a steady shift of production away from sia. Other large firms at Tuttlingen Tuttlingen. followed, starting production ties par- ticularly with Sialkot in Pakistan (see: 3.2 The distribution systems NADVI 1996). The last decade has led to The distribution structure of surgical a new step for two reasons. First, the instruments is even more complicated entrance to the market of Hungary and than the production system. This section Poland after 1989 led to new prospects describes the cluster’s distribution struc- for firms, as cheaper labour was now ture, we will also return to this in Section available within a 10 hour car drive of 5 in the context of production chains. Tuttlingen. Second, small Tuttlingen firms also started subcontracting ties The total world market for medical with foreign locations (mainly Sialkot engineering products in 1998 was esti- and Debrecen in Hungary).13 The usual mated to be about US$ 113 billion (F&O way has been to start job processing,14 1999). The US accounted for about 47 % particularly with Sialkot firms. This of this. After the US market, markets in means that products are outsourced for Europe as well as Japan were the next largest. Other than these three major THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 17

markets, 20 % of exports are divided Gebr. Martin (particularly in some Euro- across many single markets, of which the pean markets). Wholesalers located newly industrialised countries in South- outside the cluster still play a central role East Asia as well as Brazil are most in the European market. The strength of significant. In principle, there are three the wholesalers is explained by their modes of distribution for production huge, well-skilled staff that provides firms. These are integrated with the three service and advice. This is an important main markets (Table 6). feature for hospitals and surgeons who do not have an overview of the full range Large US-firms are the most impor- of products available. tant buyers for small and medium sized firms in Tuttlingen. These health-care The German market only accepts giants15 are usually involved in most high-quality re-usable goods and has segments of medical engineering, both in been, until now, generally willing to pay production as well as in sourcing prod- higher prices for the perceived safety of ucts from all over the world. Firms in the brand-name products. This practice has Tuttlingen surgical instrument cluster been challenged in recent years through usually act as OEM-manufacturer, pro- changes in the health-care system, par- ducing complete instruments ready for ticularly through moves to save costs (as sale, with the exception only of label- seen in most industrialised countries). ling. Tuttlingen’s leading firms are also Tuttlingen trading firms fight for a share trying to get better access to the US in “external” markets and are generally market through alliances with US retail- specialised in one or several national ers. A few of the large Tuttlingen firms markets (in Africa, Latin America, the also have subsidiaries in the USA, most Middle East and the Far East). Firm of them engaged in marketing, but some owners are often former employees of also engaged in production. larger firms in Tuttlingen, specialised in one or a few countries, who use their The European market is mainly oc- contacts and market knowledge to be- cupied by a few brand-name firms, come independent. The successful sale especially Aesculap and Medicon (par- of surgical instruments to most other ticularly in the German market) and

Table 6: Importance of market channels for manufacturers

The number of signs reflects the importance of market channels.

large firms small firms Euro other Euro oth US- US- pean markets pean er market market distribution by market market markets own distribution +++ ++ + o o o wholesalers and ++ + ++ +++ +++ ++ traders + other producers o o + ++ +++ + as intermediaries* * producers in their respective domestic markets source: own investigations

18 GERHARD HALDER parts of the world requires market One of the features of Tuttlingen is knowledge and an understanding of that distribution is divided into three specific cultural particularities and re- distinct systems. The first is a distribu- quirements. tion system, organised in the usual way from producer to traders, via wholesal- In addition to distribution to specific ers, to customers. In the case of larger countries, traders in Tuttlingen fulfil producing firms, the chain may be another important function in the cluster. shorter. The second distribution system, Not all instruments are available at all which might, at the cluster level, be times. On the demand-side, this leads to called the traditional one, is for buyers cyclical and episodic phenomena. New (wholesalers, large foreign firms, etc.) product lines experience an initial boom, who travel directly to Tuttlingen in order and consequently face a sharp fall in to source directly from the small and consumption after market saturation (as medium-sized firms. This kind of distri- in the MIC-field in the early 1990s) bution was portrayed by DOLD and/or a return to traditional operation (1920) as techniques, which are eventually proven common practice for many years. A third to be better than some over-hyped novel- distribution channel is for small firms to ties. Additionally, national decisions sell directly to larger firms in the cluster, about how to regulate health-care sys- who themselves either sell on to whole- tems can significantly influence market salers or directly to end-customers. The demand. For example, the surgical in- Tuttlingen producers are usually en- strument industry of Sialkot collapsed in gaged in all three systems simultane- 1994 due to regulatory changes in the ously, although the third system has declined significantly in importance (see US market (see: NADVI 1999, pp.1606). Sections 5 and 6). Of the producers On the production side, an expected visited, only 3 stated that their main minimum batch of 10,000 pieces per buyer is another producer (without a type of instrument is necessary to cover larger distribution department). 14 pro- the costs of die-making in Germany. ducers stated that their main buyers are Die-ownership, patent protection of dies traders and wholesalers, of these 11 and availability of instruments according firms have their own brand. A further 15 to market expectations (average batch firms stated that their main buyers are size of 500-650 pieces per year com- directly engaged at all levels: from pared with the required 10,000 pieces to production, distribution and branding, to start die-making) are constraining factors maintaining R & D facilities. Although for producers. This can be exemplified far from providing precise quantitative by a statement of a surveyed trading data, these findings can, nevertheless, be firms: “If there is a big project, such as a seen as an indication of the significance new hospital to establish, I can get 70% of the three distribution systems. of the products easily, but have a costly and frustrating time with the rest” (I In Tuttlingen, trading has seen the 36).16 most impressive growth in all fields of firm activity according to interviews THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 19 with key-informants and firms. This is ALBU 1999:1723). Later they distinguish also borne out in official statistics. between knowledge-using and knowl- Whereas 76 traders were counted in edge-changing elements and open and 1999 with a staff of 640 employees, this closed knowledge systems. Knowledge- was an increase of 27 % in firm number using elements refer to the work in- and 36 % in employment since 1993. volved in maintaining (or even expand- Additionally, a number of interviewed ing) given modes of production, like the firms report a shift towards trade and training of workers in established con- other non-production activities in recent ventions, the imitation of production years. techniques etc. This usage of knowl- edge-using thus includes incremental Figure 4 provides a model of the efforts in product and process upgrading. distribution system of the Tuttlingen This is in accordance with the observa- cluster of medical engineering. It esti- tion “that upgrading – while important – mates the structure and size of distinct rarely changes knowledge in more than distribution systems and distribution an incremental way” (HUMPHREY channels according to the different mar- & 17 kets (European market, US market, other SCHMITZ 2000:20) at the cluster level. markets). It shows how different produc- This section is directly concerned with tion systems are linked with different knowledge changing elements and will end-markets. It also exemplifies the investigate how knowledge is changed in complexity of the distribution system. the context of cluster. This will be done To fulfil large orders, producers and both for product and process upgrad- 18 traders can purchase potentially from ing. any other firm, which produces a special The decentralised system of tech- product or holds a stock of it (fuzzy nology transfer in Germany and espe- exchange of products). cially in Baden-Württemberg promotes process innovation and its diffusion 3.3 The knowledge system (HUCKE & WOLLMANN 1989). For proc- In their article on technological dyna- ess-upgrading at Tuttlingen, many re- sources are therefore available both mism in industrial clusters, BELL & within and outside the cluster. Sophisti- ALBU (1999) emphasise the need to distinguish between production and cated machinery and technical consul- knowledge systems. As “the production tancy services are easy to access, and system can be understood to encompass new methods diffuse quickly. Moreover, the product design, materials, machines, a high quality labour market distributes labour inputs, and transaction linkages process know-how, although there are involved in production”, the knowledge often shortages of labour in boom-times. system “encompasses those flows of However, this is pertinent to the general knowledge and organisational systems development of technological know-how involved in generating and managing in Germany and does not reveal any changes in the products, processes and special features specific to Tuttlingen. organization of production” (BELL &

20 GERHARD HALDER

THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 21

In the surgical instrument sector, for The lead firm in Tuttlingen employs both radical and incremental product- more than 200 employees worldwide in upgrading, direct contact with customers R & D, and annually develops 500 to is vital. This is important for developing 600 new products. To emphasise the instruments for new applications as well stark differences in size within the clus- as improving existing instruments. Con- ter, we see that the lead firm’s R & D sequently, access to customers is a pre- department is almost as large as the third requisite for successful innovation. largest firm’s total staff. As the second Customer requests may lead to design largest firm in the cluster is engaged modifications, or to the creation of mainly in the technologically advanced entirely new products. An example of field of endoscopes, it is expected to the latter can be seen in the miniaturisa- have a similar research capacity, even tion of instruments. A significant major- though the firm is smaller in size than ity of adjustments, however, are incre- the lead firm. To draw a conclusion, the mental. Technologically, these im- difference between the two lead firms provements are mostly limited to the and the cluster’s spoke is even higher in field of metal working and often include the field of knowledge than it is in the the use of sophisticated materials such as field of production. titanium, and a range of alloys. To emphasise the third distinction, In contrast, knowledge-changing BELL & ALBU (1999: 1726) have pro- capacities require the management of posed, “open” versus “closed” knowl- innovation processes and the search for, edge systems, which act in different selection and adoption or assimilation of directions. Firms attract external knowl- new product or process technology edge which is then distributed by “gate- (BELL & ALBU 1999). If we consider keepers”, such as large firms or techno- firm-size, this radical upgrading in terms logical support firms. The latter are of completely new products, for example mainly engaged in a specifically focused through engagement in the production of field of knowledge. Large firms might instruments for new operating tech- therefore provide access to a broader and niques, is limited to larger firms which more systematic view of research outside have the capacity to be engaged in this narrow domain. This, however, steady product development. Not more requires a commonality of interest be- than 40 firms are estimated to have such tween the lead firm and the cluster. In capabilities in Tuttlingen. Even within Section 6, the openness or closeness of these 40 firms, innovation capacity is the knowledge system is discussed in very uneven. It is expected that only a more depth. This explores the interaction handful of firms, or groups of firms, are of cluster dynamics with those of the engaged in research in a knowledge value chain. The next sections however changing way. Again, the hub-and-spoke illustrate that, for small firms, knowl- structure is crucial, but this time it di- edge may derive from several sources. vides firms even more sharply. Critical knowledge may be acquired through joint action with other firms

22 GERHARD HALDER within the cluster, or through ties with degree does joint action take place in the external partners. Hence, the importance Tuttlingen cluster? of joint action for industrial upgrading, Most producers in Tuttlingen recog- in relation to the value-chain as well as nise their individual strengths and weak- through cluster-activities, needs to be ness. Much of the weakness originates interrogated. from typical problems of small-scale industries. These include: a small non- 4 Does local joint action production staff, a dependence on buy- promote upgrading? ers, and a narrow technological knowl- One of the main objectives of this paper edge base which is limited to metal- is to examine the roles of local versus based technologies. Joint action might be global linkages in the generation of new a way to reduce these disadvantages. knowledge. This section is concerned However, joint action as a form of co- specifically with local linkages, in par- operation between actors requires trust, ticular with the role of local joint action “defined as the experience-based expec- in upgrading. Cluster theory developed tation of co-operative and benevolent in the course of the 1990s attaches a behaviour” (SEMLINGER 1995:274) or at great deal of importance to joint action least mechanisms to avoid opportunistic (see for e.g. BRUSCO 1992, SEMLINGER behaviour, when trust is absent. In con- 1995). This includes joint action versations (interviews), both positive and amongst private actors, and between negative examples were discussed, public agencies and private enterprises although the latter prevails. Neverthe- and organisations. At this point it is less, despite these collective failures important to assert that upgrading re- some remarkable successes have oc- quires substantial investment curred, emerging from a socially con- (HUMPHREY & SCHMITZ 2000). At the structed weak background for collabora- local level, the resources for upgrading tion, which shall be introduced first. can come either from individual large local firms, joint private initiatives or 4.1 The weak ground for co- public-private initiatives. These three operation: historically seized sources are not mutually exclusive. On and socially constructed mis- the contrary, we have seen that success- trust ful clusters have often managed to com- This sub-section seeks to examine the bine these sources (see for the case of weak socio-economic ground for joint many Italian districts during 1980: action in the cluster. Given the intensity BELUSSI 1999). This section is therefore of local competition, it underlines how driven by the following questions: What difficult joint action is to achieve. upgrading opportunities are opened Being asked about partnership, co- through collective efficiency at the local operation and collective forms of prob- level in Tuttlingen? What types of up- lem solving, most actors in Tuttlingen, grading do joint actions address? What both private and public, stated spontane- efforts are made for joint action and ous somewhat like “you won’t find that upgrading at the local level? To what THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 23 in Tuttlingen”. Competition is high, and improvements are incremental. Thus trust is a joke. While peeling away the firms often seek to avoid costly patent- ostensible discourse in attempting to ing procedures. Additionally, large firms understand the lack of inter-firm co- suffer from the departure of skilled operation and joint action, it is necessary workers, who leave to start an independ- to consider the roots of the cluster, ent firm when a specific patent is run- which trace back to the beginning of the ning out, or where patent protection is 20th century. At that time, instrument missing. In turn, small firms lament the manufacturing in Tuttlingen was in copying of their improvements by large many ways similar to what ALTENBURG firms. This steady leakage of earnings – and MEYER-STAMER (1999: 1695f) call a and even more crucially – of know-how survival cluster. The manufacturing of and skilled workers is a basic source of instruments in Tuttlingen was already potential confrontation between small widespread, but product differentiation and large firms even now. In fact, the was not highly developed. Specialisation mutual mistrust between large firms and was low, and most firms produced small firms prevented the success of the roughly the same products as their re- most ambitious initiative started by the spective competitors. Buyers were thus head of the regional government at the able to go from house to house, bartering end of the 1980s. prices down. The situation was so des- Both oral history and social practice perate for the craftsmen that the gov- in Tuttlingen have influenced Tut- ernment of Württemberg was forced to tlingen’s workers and firm owners’ set minimum prices for instruments on acculturation, as the stories of past times two occasions in order to avoid hunger- heard from grandparents or even parents riots. Additionally, as specialisation was are still remembered. Tuttlingen field- low, and technical knowledge not differ- work participants told many anecdotes entiated within the cluster, firms and that gave an impression of the level of buyers would actively search for or mistrust within the cluster. While this request information to enable either seems odd to an outsider, the narrative imitation of new products or generation about local mistrust is clearly more than of product improvements. a myth when it is told seriously and The lack of patenting or protection frequently by interviewees. The follow- of design is a big issue in the cluster, ing response gives some idea of this: which provides often “innovation for “There are five instrument manufactur- free” for copying firms. This problem is ing firms right here in this street. Each of also one of the main tensions in the us has its own vacuum heat treatment relations between small firms and large unit, which we use once or perhaps twice firms. There are three reasons (which a week. If we worked together, we could operate both together and in isolation) as save over a hundred thousand dollars per to why many innovations are not pro- year. But no one does, and we refuse to tected by patents: production consists of do so either” (I 10). The story was told small batches, the firms are small and proudly, providing a clear demonstration

24 GERHARD HALDER of how embedded the limits of private 4.2 Examples of joint action joint action are in the cluster. A conse- through private initiatives quence of this behaviour is the isolation Despite local mistrust, some efforts have of small independent firms, as illustrated been made, both in the past and at pre- by a firm owner’s statement: “If I have a sent, to overcome rivalry and mistrust. problem, I really don’t know who I While a promising way to reduce rivalry should turn to” (I 12).19 has arisen during the 1990s, the most Discussion about agency or behav- successful joint action at private level, iour of firms implies also a discussion associations of independent firms, have about agency or behaviour of members their roots in history and have proved to of firms as socially embedded individu- be successful for many years. als. There are indications, however, that previously such ties did not play a role. a) interaction in reaction to earlier Family members were excluded, and crisis: the Medicon and Martin example – consequences for upgrading older people at Tuttlingen still avoid discussing the firm as a result of this past Despite sharp competition between culture. Some of the long-established firms, there are a few remarkable exam- manufacturers have stated that they ples of collaboration linking small might have reluctantly helped one or single producers together in a way that “maximum two” colleagues, under the they are able to compete in markets even understanding of a reciprocal exchange against the lead firm. The two associa- of information, if they had a limited tions, Gebrüder Martin and Medicon, problem, but there has been no resulting bring together a number of independent long-term collaboration from these firms who market their products jointly. interactions. The legacy of previous Both trace their histories back to times of circumstances is, however, fading. The difficulty, when new challenges forced personal relationships between firm firms to find new ways to compete. This owners and the relational ties of ex- has been so, when at war times or post tended families, which permeate the war crisis large markets were lost, or firms’ fabric, nowadays leads to a degree inflation in the domestic market has of collaboration and problem-solving. In forced firms to search for markets contrast to the last generation’s reti- abroad. Thus, these associations were cence, the younger generation, especially formed when firms faced the choice of within larger firms, often adopts a more unit and survive or die. Nevertheless, as modern and open style: “The younger the associations have been successful, management team know each other very they have kept their organisational form well - both from schooldays and from even when the crisis receded. our vocational training - “so we talk to Gebrüder Martin was founded in each other a great deal. We even discuss 1923 by seven producers as a conse- (...) issues our bosses should not hear!” quence of the post-war crisis. Including (I 38). the producers, Martin today employs about 650 staff locally. The size distribu- THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 25 tion of the member firms is uneven and strong members often try to bypass rules ranges from over 200 to under 20 em- for their own benefits. Group strategies ployees. The group together produces as well as the distribution of earnings over 12,000 different types of products, have led to disagreements. In one case, with about 70 % of production exported. this has resulted in the exit of the most The Medicon e.G., founded in 1941 by powerful member firm from one group. six firms, consists currently of 18 craft The search for a successor firm to keep firms with about 350 employees. To- the group alive in the early 1990s is an gether the group produces over 20,000 indicator to show the importance of the different products. The firm structure is associations for the member firms. In unequal within the group, including one- contrast, the firm that exited while still person firms as well as larger firms growing and successful, has not been which employ up to 40 employees. able to reach fully the predicted superior performance on their own. In both cases, Medicon and Martin, production arrangements have been The foundation of similar associa- negotiated internally within the group, so tions or cooperatives have been tried that each product is produced exclu- several times in the cluster history sively by one member firm. As a result, (REINERT 1951: 62). Examples of failed the member firms have achieved the core initiatives have been the approach of the objectives of their collaborative efforts: “Vereinigte Chirurgiemechaniker Tut- economies of scale, specialisation and tlingen“ in the 1920s, the “Chirurgie- decreasing competition. An other advan- Union e.G.mbH”21 prior to World War tage has arisen over time: Both Medicon II, and the “Vereinigung der Hersteller and Martin are recognised brand names, Chirurgischer Instrumente (VHC)” post which are leading to positive effects at World War II.22 Of the surveyed inde- market (see: KAPLINSKY 1998). Because pendent producers, two told of their own of their joint size, both groups are able to experience with co-operations linking a offer a full-size program for hospitals.20 few firms together in a synergy creating This is important in cases, when custom- way. Both examples failed due to per- ers require a full range of instruments, ceived opportunistic behaviour of mem- e.g. if a new hospital has to be estab- bers. Thus, the positive example of lished. An other advantage for member Medicon and Gebrüder Martin is not firms is their enhanced innovative capac- sufficient to overcome mistrust and ity, thanks to the steady contact their opportunistic behaviour as long as busi- marketing departments retain with sur- ness for most firms runs well. geons and their development depart- ments and laboratories. b) rudimentary examples for joint action at the firm-level Nevertheless, such co-operation is far from being conflict-free. The ine- Further examples of joint action at inter- quality between the firms within the firm level are worth mentioning. Twelve group has resulted in differing levels of years ago, the ACIG, a private organisa- development over time. In both cases, tion, was established as a forum which

26 GERHARD HALDER offered a meeting point and guide for 4.3 Joint action established by specialised purchasers related to the public or public-private traditional trading system. In offices of initiatives 400 m2, about 100 firms currently par- In this section, initiatives to promote the ticipate in a permanent instruments cluster are introduced and their outcome exhibition and contribute to a printed briefly discussed. Most initiatives are annual guide to give buyers an impres- limited in size and scope, and formal sion of the product range of small firms. institutions are essential in mediating In addition, twenty small firms have such joint action in order to overcome been offered the opportunity to partici- competition and mistrust. As shown in pate, at low costs, in the MEDICA, the the cluster-map, a range of public and world’s leading trade-fair on medical private institutions are concerned with engineering. As a result of co-operation the medical engineering cluster. Those through ACIG, a programme (“cracker- institutions provide regular services for barrel”) has been established to enable their clients, but are also engaged in firms to meet regularly and discuss news special initiatives to promote the cluster and problems. This forum currently in order to either solve problems or attracts about 20 member firms regu- prevent them. As medical engineering is larly. Since some traders are also mem- a key industry for the region, they are bers, discussion does not refer to func- engaged in improving this sector in a tional upgrading. Nevertheless, ACIG is variety of ways. One of the key con- an remarkable step in overcoming small straints for many small firms is their lack firms isolation, given the “atmosphere” of own distribution and marketing chan- mentioned above. As the ACIG fulfils nels and, related to that, low levels of obvious needs for the cluster and its direct producer-customer contact that success is noticed, there has been grow- could help induce innovation. Since the ing participation over the years. It should mid 1980s, several efforts have been be made clear, however, that its aim and undertaken to reduce this weakness. outcome is not comparable with the Some other ways to promote the cluster Medicon or Martin example. have been tried, with different outcome, as shown below. Some other efforts have been made to overcome limitations of the individual small firms’ constraints at a collective a) BBT – building the local knowledge base by training basis. Those efforts have led to several problem centred initiatives, most of them The Berufliches Bildungszentrum Tut- conducted as a co-operation between tlingen (BBT) is the centre of basic and pubic and private actors. advanced training for metal industries. Founded jointly by the Chamber of Industry and Commerce and the Cham- ber of Crafts, the BBT has offered theo- retical and practical courses since 1977. Although the BBT concentrates on various different sectors, special impor- THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 27 tance is given to the surgical instrument business economics, legal issues and sector. The training to become Chirur- business management issues. Thematic gie-Mechaniker - the main qualification topics are drawn from general informa- for a surgical instruments manufacturer - tion rather than an attempt to provide is offered nowhere else in Germany.23 solutions to recent problems and chal- The Chirurgie-Mechaniker training is lenges of the cluster. The Forum Mediz- integrated into the German dual voca- intechnik struggled initially due to low tional system. This involves a one year levels of firm participation but is now theoretical and practical course at the well developed. Initial difficulties in BBT, followed by a two and a half years coordination and development emerged of training with dual instruction in the- from the wide differentiation in the ory at public vocational schools and cluster regarding firm-size and techno- practical training within enterprises. logical know-how. The most significant Skilled workers may continue their reason for initial reluctance to participate training to become a Chirurgiemechani- reflects high levels of local competition ker Meister (supervisor/instructor), (VOLKERT 1992, pp. 61). This was re- which is offered by the BBT and is a vealed during the fieldwork by key- pre-requisite to manage a surgical in- informants and firms. Discussion within strument craft firm in Germany. More- the Forum being limited by the reluc- over, the BBT offers modules that com- tance of participants to reveal in public panies often cannot provide, such as meetings their firm’s actual or perceived training on all kinds of mechanical or weakness or difficulty. It is worth notic- electronic machines, on computer sys- ing, that the government of Baden- tems and software as well as basic busi- Württemberg was willing to pay a sub- ness management. A staff of 20 teachers stantial fund to establish a research and and 80 specialised external lecturers marketing institute for the Tuttlingen offer a wide programme of courses. medical engineering sector at the end of the 1980s. The project stopped after both b) Forum Medizin-Technik – Trans- the small and large firms lamented the ferring knowledge on innovation opportunistic behaviour of each other Established in 1990, the Forum Medizin- and refused to join the initiative. The technik aims to provide professional much less ambitious Forum Medizin- development for firms in several fields. technik was subsequently established in It is a joint programme, which includes the wake of these plans. the Chamber of Industry and Commerce, the Chamber of Crafts, the Landesin- c) Initiatives on promotion and nung Chirurgie-Mechanik Baden- diversification of craft firms Württemberg, the BBT and the REFA- • Firms in other metal-based branches Bezirksverband. Additional funding is in Germany are often engaged in contributed by the state government of more than one field to enable sur- Baden-Württemberg. Information is vival during cyclical crises. One provided on medicine, medical engineer- concern for small firms in the Tut- ing, production technology as well as tlingen cluster is the absence of a

28 GERHARD HALDER

second product range to diversify spiration and admiration from its into. Due to this limitation, the visitors. Chamber of Crafts began an initia- • In order to overcome innovation gaps tive to promote diversification. In of small craft-firms, the Chamber of collaboration with the Landesgewer- Crafts has arranged several visits to beamt Stuttgart and the Department University hospitals for firm em- for Product & Industry Design of the ployees. Viewing surgical operations School of Arts, Stuttgart, small firms first-hand enables personnel to see and specialist designers actively instruments in action and generate searched for new products in other ideas for new functional or ergo- fields. Twenty firms initially ex- nomic adjustments. Surgeons and pressed an interest. Out of these, nine producers may then be brought into firms have developed partnerships to direct contact later on, enabling the explore new products. In terms of its communication of further needs and innovative results, the project was a possibilities for instrument’s manu- success, producing some remarkable facturing. Surgeons are often too new products (e.g. a phono-arm for busy to engage in feedback with record players ensuring high quality small firms, so this is a unique performance). However, the project chance for firms to gain vital infor- has failed on economic grounds, as mation. Although mainly focused on small firms were unable to produce incremental product upgrading, this at higher volume and at acceptable process is of considerable impor- prices. Here, the difference between tance for such firms. industry and craft firms is obvious. • The latest limited initiative has been Another initiative is a one-day trade • related to research on the sterilisation fair, Products Seeking Producers, of instruments. The aim was to de- based in Spaichingen. This is partly velop knowledge and capability in funded by the Federal state and or- making complex instruments safely ganised in collaboration with the re-usable after due and proper sterili- Steinbeis-Technology-Transfer Cen- sation. The approach was to improve tre Infothek of Villingen-Schwen- the reputation of all instruments by ningen. The fair exhibits new prod- testing the most complicated and ucts, prototypes and other products sensitive product lines. The intention in the field of medical engineering was to reduce the burden of proof in and precision mechanics, as well as the case of legal claims, especially in multimedia products that are linked the US-market, arising from post- to the health-care sector. Its objective operative complications. In that case, is to link new product inventions about 20 firms, craft firms as well as with producing firms and traders to industrial firms, research institutions enable distribution. Founded in 1997, and specialised external suppliers the initiative is now an institution, engaged in the production of sterili- and is running in its fifth successive sation apparatus contributed to the year. Additionally, key informants study. This joint action was limited revealed that it is a useful public re- to this specific purpose (exoneration lations exercise, which generates in- from legal liability through the inves- THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 29

tigation of sterilisation safety issues) firms in the sector about ISO 9000, and and was terminated after its success- also offered solutions that firms adapted ful conclusion. with the help of consultant firms. How- ever, the joint venture between the d) The role of public institutions on Chambers and a certifying firm was not standards compliance as successful as initially anticipated. At the beginning of the 1990s, the This may have been because Tuttlingen Chamber of Crafts started to prepare firms preferred assistance from external, firms for imminent compliance with the rather than cluster-based, service firms ISO 9000 standard. At the beginning of which may have also been engaged in this process, small firms refused to serving competitors. engage with this issue due to cost and time constraints. This changed as buyers 4.4 New initiatives to meet requested compliance as a precondition future challenges for further trade. The BBT and Forum Actors in Tuttlingen are noticing further Medizintechnik provided assistance and challenges to the sector, from above and links to professional guidance. More- below. There is increasing competition over, the Chamber of Crafts and the from low-wage producers who cut into Chamber of Industry and Commerce the traditional product lines in mature started a consultancy firm in public- surgical instruments. The speed of inno- private-partnership to offer the knowl- vations taking place in several techno- edge required to meet ISO 9000 at firm logical fields, which have the power to level. Despite this, most firms have change health care and surgical prac- undergone the certification process alone tices. In order to accelerate innovation, or with the assistance of external profes- new initiatives have started within the sional consultant services (79 % of firms cluster to help push it forward. stated these services to be “very impor- tant”). In contrast, firms view the rele- a) The competence-centre – joint vant public institutions (Chambers) as an action for future success unimportant part of the process of com- In 1999, Germany’s Ministry of Re- pliance (90 %). Know-how about this search and Education began an initiative process has been derived from the litera- to promote eight centres of competence ture on certification and, in the case of (Kompetenzzentren) in specific fields of subsidiaries, from the parent firm. As medical engineering in order to acceler- key informants stated, cluster firms often ate innovation. In response to the initia- prefer to get consultancy services from tive, the Chamber of Industry and Com- outside, for example to introduce “inde- merce, the University Hospital of Tübin- pendent” firms or institutions who have gen and a host of other private and pub- not been involved in the cluster before. lic partners successfully submitted a bid What can be learned from this ex- (against 56 other regions across Ger- perience? It seems that the Chambers did many) to develop a “Competence and play an initial role in informing the small Technique Centre for Minimally Inva-

30 GERHARD HALDER sive Surgery for Tübingen-Tuttlingen As mentioned in Section Two, only 40 MITT”. The proposal was submitted to a firms are expected to be able to contrib- fund which will spend Euro 3,7 million ute substantially to the MITT-initiative over the next five years in order to with their own knowledge-intensive stimulate and accelerate basic research innovation capabilities. Other firms are prior to competition. Part of the fund’s not expected to have the necessary re- remit is to establish a structure to facili- sources (knowledge, capital, staff) to tate joint projects (Verbundprojekte) engage more deeply in research. Joint between research institutions and firms action might open up some possibilities, in basic research. Additionally, a central but this would require a great ‘leap of aim is to ensure the sustainability of the faith’. Competence-Centre after the five-year funding ends. To this end, any existing b) Technology park “Take off”: resources and competences in this field Attracting new firms in comple- will be incorporated into a central net- mentary technological fields work (BMBF 2000). Moreover, the The second new initiative for the cluster establishment of specific co-operation is the new Technology park, “Take off”, conditions will reduce small firm disad- at Neuhausen (south of Tuttlingen), vantages. A special feature is that the where the “Competence Centre” will MITT is forming a network consisting of open its offices. “Take off” is located at a University Hospital, two polytechnic a former German army airbase that was schools and seven materials and process- converted in the early 1990s after the ing-orientated research institutes, based military cut-backs that followed the fall at the Universities of Stuttgart and of the “iron curtain”. The project will Karlsruhe. This is expected to make a mainly focus on start-up firms in the considerable contribution to the sector, medical technology sector. Additionally, which suffers from the absence of a the restraints on Tuttlingen’s industry specifically dedicated research unit. enlargement, such as the Danube Val- Thematic issues on the agenda of MITT ley’s topographical limitations, will be are overcome by allowing firms to relocate. - the visualisation of minimally inva- “Take off’s” agenda is to build an inno- sive surgery (MIS) through the fu- vative environment based on three pil- ture development and integration of lars: first, the provision of services at ultrasonic and magnetic resonance “house seven” including testing labora- systems, tories for common use; second, an acad- - the development of agile MIS sys- emy to link medical research with pro- tems, duction, through a lecture series; and - miniaturisation of MIS systems for third, to provide a venture capital fund new applications (e.g. endoscopes in for start-up firms. It is expected that the neurologist surgery), project will attract firms within techno- - multi-functionality and systems- logically complementary fields, giving integration. the historically metal-based industry a diversifying push. THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 31

The main actors behind “Take-off” 4.5 The significance of local are the city of Tuttlingen and the city of joint action to promote up- Neuhausen ob Eck, on whose land the grading former airfield is situated. Further sup- As discussed above, despite intense local port is expected from the government of competition, joint action does take place Baden-Württemberg and the local credit in Tuttlingen, although under special institutes. To ensure the success of the conditions. First, the grounds for joint two projects, they need to be interlinked, action has to affect all firms in a similar which requires the integration and syn- way, and the costs of individual reaction ergy of all actors. To some extent, how- to problem-solving has to be prohibi- ever, governance problems have already tive.24 Second, there is a need for public appeared, since one main actor sought to institutions to mediate joint action in establish the Competence Centre office order to overcome local rivalry in Tut- at the BBT in order to strengthen its tlingen. existing institution. Since both initiatives The aim of public institutions in have only just begun, their future success promoting the cluster can be summed up is uncertain. It depends on the participa- as “creating the preconditions for com- tion and co-operation of both the firms petitiveness and success”. This includes and the project administrations. Without training of workers, access to modern the firms’ participation and once public technologies and, more limited in scope, promotion runs out, both the “Compe- different kinds of information (e.g. tence Centre” as well as “take off” could markets, laws and regulations). In this easily burn out rather than flourish. respect, the various initiatives are suc- Although 18 firms have joined the initial cessful and can be seen as one pillar on proposal for the “Competence Centre”, which the cluster is built. Joint action there has been a limited reaction from a has been successful in terms of enabling high proportion of firms so far. Of criti- firms to upgrade their processes (al- cal importance is the question of whether though focusing less on product im- or not the leading local firms will join: provement). This is mainly a result of their strategies involve vertical as well as the forms of learning passed on through horizontal linkages with actors outside the efforts of the BBT or the Forum the cluster and would therefore be ex- Medizintechnik. Second in line of impor- pected to make positive gains for the tance has been problem-specific joint regional industry as a whole. Local action initiated by other actors, which linkages with other actors in the cluster have had differing levels of success. All play merely a complementary role and initiatives and measures related to actual are important for their production sys- technical improvement or those concern- tem, but not for their knowledge system. ing technical norms – which can be used for product upgrading – have some degree of success. From the individual firm’s perspec- tive, the combination of the typical

32 GERHARD HALDER limitations faced by the small firms, with detail SEMLINGER 1995), the basic firm over-arching regional mistrust, prevents behaviour seems to be quite different deepening engagement in private joint from what we find at Tuttlingen. action. Thus the main constraint is the It is worth noticing that the cluster lack of private joint action, particularly of Tuttlingen has been very successful the unwillingness of private firms to up to now, despite the absence of trust engage in co-operation to overcome the within the firms. Moreover, at certain limitations of their small scale. But is points in history, for some firms it was this too ambitious? Competition always able to overcome mistrust and form both enables and limits further success. successive associations which enabled PORTER (1990) regards competition as a their members to compete even against key to innovation, and strong competi- the cluster’s lead firms. The question tion in clusters as a motor to push the arises, under what conditions does such cluster ahead. We know from various close co-operation emerge? Here it is studies, that local competition can be important to notice, that all, both suc- intense (for the instrument sector: see cessful and failed, co-operative initia- NADVI 1999). To gauge the degree of tives that aim to form associations, (like competition at Tuttlingen, we have to Medicon or Martin), were established in look at an example of successful joint times of difficulty for the cluster as a action overcoming local rivalry in a whole. Thus, one can argue, where cluster right next to Tuttlingen. The extreme external pressure is lacking, Heuberg area around Gosheim, 20 kilo- local competition prevails hindering metres from Tuttlingen, houses a cluster proactive solutions that could offer of about 400 metal turning firms. As the synergy effects for all. Thus, the ques- products are more or less standard, the tion arises whether joint action to pro- fear grew at the beginning of the 1990s mote the cluster is sufficient to withstand that this industry might be lost as a result future challenges. These challenges are of increasing globalisation. Nevertheless, in the areas of new technological oppor- the cluster managed to establish a Stein- tunities on the one hand and price pres- beis Transfer Centre for Quality Man- sure on the other. Additional innovation agement offering quality management, efforts are required in the face of the material testing services, vocational limited ability to decrease costs in the training and mediating measures for craft-based sector without exploiting the further co-operation (SEMLINGER 1995: workforce.25 The current initiatives of 278ff). The main difference compared the competence centre and “Take off” with the Tuttlingen case are that a pri- might be a way forward, but their suc- vate firm initiated the process, assisted cess would require greater participation by local institutions including an asso- by private firms than has been seen in ciation of private firms founded to pro- the cluster up to now. mote this initiative. This private institu- tion grew from 40 to 160 member firms within a few years. Although this proc- ess was not conflict free (see in more THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 33

5 Does co-operation in 5.1 Upgrading in value chains value chain ties promote upgrading? In recent publications, the concept of the value chain is transferred from a descrip- The significance of value-chain linkages tive, heuristic, to an analytical tool for upgrading has been emphasised in whose elements consists of dynamic several studies (e.g. NADVI 1996, rents, governance structure and systemic SCHMITZ & KNORRINGA 1999, GEREFFI efficiency (KAPLINSKY 2000, see 1999). It has recently been asserted that GEREFFI 1999). This paper refers mainly the prospects for upgrading through to governance structures to estimate the engagement in value chains is distinctly upgrading prospects of chain members. differentiated, since different types of The chain members’ interactions reflect chains have different outcomes the co-ordination of distinct economic (HUMPHREY & SCHMITZ 2000). Section activities. In this field of research, sev- three has shown how value chains in eral attempts have been made to capture Tuttlingen’s surgical instruments cluster the relationships and hybrid forms “be- feed into the general structure. In this tween” hierarchy and market (e.g.: section several other questions are asked: WILLIAMSON 1979, SYDOW 1992). The What upgrading prospects arise from the term governance is defined as co- cluster’s internal and external ties? How ordination of economic activities are i) different value chains and ii) dif- through non-market relationships. With ferent segments of the value chain gov- regard to value chain studies, erned? Are different chains governed in HUMPHREY & SCHMITZ (2000) distin- different ways? What kind of informa- guish between hybrid forms by introduc- tion and/or know how is transmitted ing i) the “quasi hierarchy” concept to within the chain? In which ways does describe asymmetrical vertical chain this promote upgrading? What types of relations, and ii) the “network” concept upgrading are promoted by co-operation to describe horizontal relations that in the value chain? These questions will appear even within the value chain, be answered mainly by drawing upon when power and influence are balanced interviews with key informants and – to by complementary know-how or re- a lesser extent – deductive conclusions sources. Thus, related to quasi-hierarchy from the work of HUMPHREY & SCHMITZ is (a minimum of) independent decision- (2000). I look first at value chain ties in making power in contrast to hierarchy, production. I then turn to value chain ties where direct ownership excludes bar- relating to the knowledge and innovation gaining power. The fourth case, “arm’s- nexus, focussing on the three distinct length market relations” describes mar- distribution systems in the cluster. Then, ket transactions that keep a distance the role of buyer concentration in value between two economic actors, where chains and its impact on functional mutual learning is limited to market upgrading is discussed, before ending signals. These distinct types of co- with a discussion of the findings. ordination of economic activities can be used as categories to describe different governance patterns of value chains. In

34 GERHARD HALDER order to identify the governance pattern 5.2 Value chain ties in the in the Tuttlingen cluster, several indica- production system tors are used in Table 7. In the following By far the most pervasive form of for- discussion we will see that there is a ward-linking chain governance are arm’s distinction between relations and gov- length market relations, regardless of ernance in ties both within the produc- whether it is in relation to buyers, trad-

Table 7: Indicators of governance in value chains Indicators Chain Governance • No collaboration in product definition (standard product or product definition is established by the supplier) Arm’s length • Product requirements easily met by the supplier market relations • Producer’s Reputation implies a low risk for the buyer

• Co-operation between more or less ‘equals’: Joint product definition. Network • Complementary competences and innovation capacities on both sides.

• Buyer has high degree of control over supplier and defines the product. • Buyer incurs losses from suppliers’ performance failures. Quasi-hierarchy • Doubts about the competence of the supplier. Buyers invest in specific suppliers and seek to tie them to their chain. • Buyer takes direct ownership of the operations. • The buyer carries out product definition, which may involve Hierarchy proprietary technology. • Quality is used as a brand attribute of the buyer. Source: HUMPHREY & SCHMITZ 2000: 16 (table 4), own adaptation. tion-distribution context and ties within ers, wholesalers or large producers. In the knowledge-innovation context. the field of surgical instruments, the KNORRINGA (1999) for the Indian foot- value chain deals with the production of wear-sector and TEWARI (1999) for the mature goods and even small producers Indian woollen knitwear industry have a reputation for high quality in- showed that different types of govern- struments, making them relatively reli- ance can co-exist within the same sector able and low risk partners. Moreover, and that firms can be engaged in differ- most types of products are made by ent chains at the same time. several producers, which offers a choice In this case, the same actors assume for buyers to keep prices down. In fact, different positions depending on whether many firms stated that it has been impos- a transaction is geared towards daily sible to raise prices since the mid of business or towards innovation and 1990s, despite increased production upgrading. costs. The daily business of traders and buyers, collecting products by visiting producers - or just sending an order message in the case of regular ties - THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 35 show that this form of governance pre- workers. While small firms send staff for vails in daily business. regular visits to Sialkot to instruct work- ers and maintain quality, larger firms Backward-linkages to subcontrac- have also invited Sialkot workers for a tors are somewhat different. We need to stay at Tuttlingen for instruction. The distinguish between backward linkages firms stated that it would not be easy to with local suppliers, and those with change subcontractors because of the foreign suppliers. In Tuttlingen, there are investment or effort they have spent subcontractors with good reputations, either directly (through capital) or in an where normal market relations can exist. indirect way (through time and/or know- Indeed, there are also relations in which how) to raise the subcontractors product doubts about quality lead to quasi- quality and process performance. Rapid hierarchical governance, with regular changes of subcontractors would also instructions on specification and final affect the ability to meet purchase orders inspection by the producer.26 There are of their buyers punctuality and the re- examples both from producers and quired level and product quality. In these subcontractors. One producer reported cases, the upgrading efforts through reducing subcontracting, as the costs of forward-linked firms may have an influ- instructing and controlling some of his ence on power relations and negotiation subcontractors remained high. Subcon- positions. Backward-linkages to subcon- tractors complained about the meticulous tractors in low wage countries are gov- inspections undertaken by their custom- erned differently compared with most ers, and increasing reject rates arising Tuttlingen subcontractors, at least partly from higher quality demands. because of quality deficits. Tuttlingen In the case of subcontracting ties firms maintain a high degree of control with low-wage countries, quasi- by quasi-hierarchical chains or share hierarchical relations are much more direct ownership by joint ventures. The common. Up until now, producing firms uni-directional knowledge flow as well in Eastern Europe and particularly in as bi-lateral material and product flows Pakistan have not been able to produce are lead to quasi-hierarchical relations goods that easily meet required stan- between Tuttlingen firms and their dards. As a consequence, Tuttlingen subcontractors in Pakistan and Hungary. firms have substantially assisted these firms. All of the interviewed firms that Although there are some differences had a considerable share of products27 in chain governance regarding the pro- duction system, in the case of the knowl- originating from those countries claimed edge system they are even higher. to have provided substantial aid to their subcontractors (10 firms including trad- ers). Eight (out of ten) claimed to be 5.3 Value chain ties in the mostly responsible for the increase in knowledge and innovation system quality of Sialkot products. This aid consists of production know-how, ma- In Section 3, three distinct distribution chines, input supplies and training of systems for the Tuttlingen cluster of

36 GERHARD HALDER

surgical instruments were introduced. In Tuttlingen’s larger players are by no the following section, their implication means limited to the region or even the for the knowledge system is examined. region of Baden-Württemberg. They Table 8 provides characteristics of the maintain R & D contacts on a German-

Table 8: Distribution systems in the Tuttlingen surgical instrument sector Distribution system Specifics regarding information and knowledge flows. 1. Small producer-large producer- • market information through short chains customer • direct marketing neither necessary nor possible

2. Any producer-trader-wholesaler- • market information through long chains customer • direct marketing necessary to find new customers

3. Any producer-buyer (= large • contact with end customer through short chains external producer)-customer • little marketing necessary, for buyer visits producer regularly

distribution systems with regard to wide and even world-wide basis. To information and knowledge system.28 establish these contacts, steady observa- tion of the innovations made externally Innovation in the field of surgical are necessary. This requires participation instruments has historically required at conventions and symposiums to keep close interaction between surgeons and abreast of new trajectories, methods and manufacturers. In the case of Tuttlingen, techniques. With this in mind, it is easy this is exemplified by the various visits to see how this world has been closed to of the famous Professor Sauerbruch in th smaller firms. the early 20 century, who travelled from Switzerland to Tuttlingen to im- prove instruments and develop new a. small producer – large producer – customer ideas. As previously mentioned, larger firms still have direct contact with sur- Up until the 1970s, a “network of mutual geons. commitment” characterised relations between the lead firm and small produc- These firms are not only engaged in ers, who produced instruments as OEM- inventing new instruments, but also in suppliers for the former (FINKE 1998: developing new operation techniques, 80). The second firm in size acted in a including new instruments, implants, and similar way (I 26). As a result, many other equipment. Therefore, besides pure SMEs were integrated to the production technological knowledge, they need system of the large firms, in a way doctors and surgeons among their staff MARKUSEN (1996) characterised as hub to interact with external specialists and and spoke. Moreover, the small firms to evaluate internal progress. The re- were integrated into the lead firm’s search and development contacts of the knowledge system through regular meet- THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 37 ings. Product improvement and modifi- customers and producers.30 Through cations of instruments were jointly these actors, knowledge gaps concerning developed, according to market needs product improvement and partly con- perceived by the lead firms. As a result, cerning new products can be closed. many small firms were also integrated Traders maintain contacts with nearly all into the lead firm’s knowledge system. major national markets. Through traders However, on being merged with a large information about new products, or external company, the lead firm changed specific adaptations and improvements its strategy. In addition to its plants in national markets may be transferred to abroad, the firm is increasing its produc- small Tuttlingen producers. On the other tion capacity in Tuttlingen, in order to be hand, as the chain increases in length, able to produce all articles itself (see: information takes longer to disperse and FINKE 1998). This is conveyed in the it is therefore subject to distortion. Addi- firm’s marketing phrase that it has “all it tionally, the direction of information needs to operate”. This has led to in- flows are often uni-directional, so inter- creased competition in production, as the action is not very common because market leader enters into direct competi- information mainly moves upwards tion with its former subcontractors through the value-chain. These limita- (ibid). Another consequence is that tions are a result of the care traders take subcontractors have been forced to open to avoid bringing producers into direct new distribution channels as well as new contact with their customers,31 but also innovation channels, as ties with the lead reflect the communication problems that firm have broken down or at least dimin- lie between surgeons and traders, and ished.29 According to FINKE (1998), the surgeons and small producers. Neverthe- former “network of mutual commit- less, traders and other buyers are often ment” has disappeared. In a similar way, the main source of knowledge leading to the second largest firm in Tuttlingen has product innovation for the small produc- lowered its number of subcontractors ers today. and reduced contact with subcontractors to market transactions, which necessarily c. producer-buyer-customer excludes knowledge flows (I 26, I 15). For small producers, the traditional Nevertheless, although these large firms trading system in Tuttlingen, where have reduced relations to small firms, buyers order products directly, is still of and arm’s length relations now prevail, considerable importance. Under such large cluster-based firms remain an circumstances, buyers fall into both important distribution channel for small categories: wholesalers and large foreign producers. producers. The activity of wholesalers in the knowledge system is largely limited b. producer-trader-wholesaler-custo- to incremental improvements according mer to the proposals or requirements of end- Since ties with large firms have become customers. Large foreign producers that weaker, traders have developed an im- use Tuttlingen firms as OEM-suppliers portant role in mediating between end-

38 GERHARD HALDER provide greater knowledge input. In such importantly, are able to implement new instances, ties become co-operative product ideas, a feature firms located when new products are being developed. elsewhere often lack.33 Moreover, even The forward linked firms either provide small Tuttlingen firms are able to add direct knowledge by inserting their own their own ideas due to their long experi- specialists into the process, or act as ence with materials and designs. This mediators between end-customers and change of governance, from arm’s length the OEM-producer. In some cases, large relation to co-operation, is reversed overseas-based producers have bought however once the product has been Tuttlingen firms outright. This was invented and the individual project is happening with a few larger Tuttlingen concluded. For small firms, the devel- producers in the implant sector. Their opment of new products merely punctu- production line was of strategic impor- ates daily production, and arm’s-length tance to their buyers to be able to make a market relations dominate. contingent offer to end-customers. In this case, the production knowledge of 5.4 Functional upgrading in the Tuttlingen firms was crucial for the value chains and buyer decision to “buy” instead of “make”. In concentration the meantime, vertical integration has As mentioned above, forward ties within led to hierarchical ties with their buyers the value chain play a central role in and their knowledge is interlinked. Thus, product upgrading. Access to surgeons further product upgrading derives from and hospitals is key for both incremental the interaction of the subsidiary with the and radical innovation in this field. The mother firm, either through direct con- latter especially requires close co- tact or through mediation. In such cases, operation with surgeons because it is the focus of R & D has shifted from the often related to new operation tech- Tuttlingen plant to the main location niques.34 In this sense, product upgrad- outside the cluster. Moreover, ties with ing is also interlinked with marketing, other Tuttlingen firms have been reduced for surgeons promote new techniques in to a minimum.32 As they are no longer scientific literature and through lectures actively linked to the cluster, these cases at conventions. Furthermore encouraging are reminiscent of firm relations de- scholarly practise at University hospitals scribed in MARKUSEN’S (1996) satellite- has similar effects. The following sub- platform model. section thus examines, what prospects In general, new products and, more for functional upgrading are emerging frequently, adaptations of products from interaction within value-chain ties. appear which necessitate a closer col- Since functional upgrading is aimed laboration than market relations permit. at repositioning a given firm at a higher Ties in these cases become co-operative level of the value chain, forward (and for specific projects because Tuttlingen possibly also backward) linkages are firms are able to provide a high degree affected. If a buyer sees a backward- of competence in production, and, most linked firm’s tasks as one of its own key- THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 39 competences, it will see the impending their average number of buyers by 16 % threat to its competence through a func- on average. In general, the degree of tional upgrade and thus make an attempt buyer concentration decreases with to impede it. On the basis of their study increasing firm-size. Nevertheless, on on the shoe sector of the Sinos-Valley in this findings, ties between producers and Brazil, SCHMITZ & KNORRINGA buyers in Tuttlingen can considered to (1999:19) stated that “buyers helping be very strong. This finding accords with their producers with this kind of upgrad- the revelation by nearly all the inter- ing risk making themselves redundant” viewed small producers that it is difficult (ibid). This may lead to a breakdown of to find new buyers – a result, of course, business ties. Producers who wish to of the strong ties which have a lock-in upgrade functionally are faced with high effect. risks if they are reliant on a few buyers Under such conditions, functional who account for a high share of turn- upgrading is not easy for small produc- over. The risk also increases if the pro- ers. Nevertheless, of the sampled firms, ducer is dependant on a buyer’s knowl- two have made attempts at functional edge or information. SCHMITZ upgrading. The first, a skilled Meister (1999:1648) considers buyer concentra- who produced three different kinds of tion to be a key to understanding surgical instruments with a few employ- whether functional upgrading occurs or ees, tried to move into trading activities not. In the following part of this paper, with one of his products. This led the buyer concentration and the persistence biggest buyer to break overall contact of producer-buyer relations shall be with the firm which in turn almost had to examined. close. The only way forward was a radical shift in products. The owner was a. Functional upgrading of small firms able to concurrently produce and also This sub-section deals with prospects for improve an instrument within another functional upgrading of small Tuttlingen segment (micro-surgery), and has found producers. To estimate buyer concentra- new buyers for this product. But he no tion, producers have been asked about longer considers trading his products: “If the share of their turnover which is this happened to you once, you wouldn’t depending on their three main buyers. do it again”. The other example is that of Excluding firms with over 100 employ- a small manufacturer, which recently ees, the three main buyers of the produc- began to build ties with an overseas ers interviewed account for an average medium-sized producer. He had been of 65.5 % of firm turnover. Compared asked to establish a dependence, within with 66.2 % five years ago, buyer con- Tuttlingen, on the external firm. For this centration has remained at a high level. reason, he has begun trading in the same Ties of small and medium sized produc- market-segment as his main buyer. As ers with their main buyers last over 15 this is a recent development, it is too years on average. Within that period, early to assess its impact, although the producers have been able to increase

40 GERHARD HALDER firm states that it expects to lose this are not necessarily noticing the trading buyer. activity undertaken by the producer.35 As indicated through interviews with firms and key informants, func- b. Functional upgrading of large firms tional upgrading of small producers is In this sub-section the prospects for rare. Additional constraints include the functional upgrading for large firms are nature of the craftsmen as Meister of the examined. It is driven by the question, profession. The long tradition of surgical how future challenges might be met by instruments manufacturing must be large firms, being pushed by restructur- considered with reference to its specific ing of health care services and pulled by requirements for highly skilled manual innovations in the medical field. producers. There exists a strong degree As introduced in section one, price of self-restraint in the knowledge that pressures and cost saving efforts of their strengths are based on the shop- hospitals and surgeons at the one side, floor: “I am a craftsman. I don’t want to and fast technological innovation on the sit in the office for hours and hours. I other side, are forcing large firms to prefer to work with my hands. I don’t react. First, there are new opportunities want my firm to grow because then I of size, while expanding globally. At the will be bound to the office.” (I 17). same time, scale economies are gaining If there is a kind of functional up- new importance in the light of increasing grading of small firms at Tuttlingen as competition according to the restructur- such, it derives from the traditional ing of public health care in major mar- trading system, where buyers and whole- kets. Second, the direction of the fast salers from abroad tend to change prac- technical change requires systems inte- tice. Recently, they have tended to make gration in so far alien fields of a particu- bigger purchase orders. This is far from lar firm. Third, new rents may be devel- single-sourcing, but combines some oped under the new conditions men- similar products to reduce the complex- tioned above (see: KAPLINSKY 1998). ity. However, this leads to the need for As a result, we have seen many small producing firms to buy from other mergers and acquisitions in the medical small producers in order to fulfil re- field in recent years.36 But there are also quirements for larger consignments. reactions at the level of the individual Although some producing firms can firm. One reaction of large producers has survive on the earnings derived from been to enlarge services for end- trading activity when (own produced) customers. There are examples of large instruments prices are low, this trading firms who are providing full instrument activity is limited in volume and not services to hospitals, including sterilisa- reproducible outside the chain. For that tion, repair and replacement of instru- reason, I might call this practice passive ments. The service involves a computer- trading to distinguish it from active ised tracking system that enables close trading in the market. It offers small monitoring of each individual instrument producers a profit incentive, for buyers (e.g. age, frequency of usage, state). This THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 41 leads to an optimal usage of instruments new equipment.38 Here, again, the differ- and lowers costs for the hospital. Ac- ence between the market leader and the cording to conversations with key infor- cluster of small firms becomes evident. mants, there are signs that, in near fu- Other larger firms are hot on the tail of ture, hospitals may rent, or lease, instru- the lead firm, restructuring production ments from producers instead of buying and making efforts in innovation, but them. In this development, large US- they are unable to upgrade functionally firms are prime movers. Large Tut- in the same way. Well aware of this, tlingen firms are seeing themselves as some of Tuttlingen’s large firms have being forced into this direction.37 decided to rest at the current position of a technological advanced OEM supplier. The offer of full supply to hospitals In this respect, the ability to constantly requires, apart from anything else, a upgrade product is key for future suc- substantial investment in logistics. With cess. this prospect, gaining access to end- customers might be more difficult for other firms. Large producers are thus 5.5 The significance of co-ope- seeking to expand, in order to reduce ration in value chain to pro- mote upgrading costs, and increase purchasing and bar- gaining power and will become more Section five aimed to answer the ques- concentrated. As a consequence, the new tion, whether different forms of upgrad- fields of activity of large producers have ing are promoted by value chain ties and to be seen as functional upgrading, its links with governance patterns. It can increasingly bypassing wholesalers and be asserted from the analysis in this traders. Given the state of stagnating section that the production system and markets, any estimated growth of large the knowledge system perpetuate, and producers will lead to competition for necessitate, different forms of govern- markets, and to further concentration at ance within the same value chains. In the end of the value chains. relation to product upgrading, arm’s- length market relations in the production In the case of Tuttlingen, the lead system evolve into co-operation. In this firm also undertakes upgrading efforts in field, upgrading is supported through the aforementioned way. As a result of value chain linkages, especially through being bought by an even larger company forward linkages to surgeons. Regarding external to the cluster it offers a com- small producers, upgrading in most cases plementary product range that includes a is mediated through traders, wholesalers full package programme of instruments and large external producers. In the case for hospitals, and includes servicing, of external traders and wholesalers, ties maintenance and logistics. A special with small firms at Tuttlingen were built feature in Tuttlingen is a conference up because of their production perform- facility developed by the lead firm, ance in relation to process knowledge called the Aesculapium, where medical and thus considered a precondition. conferences and congresses take place, Functional upgrading through value presenting new operation techniques and chain engagement in Tuttlingen is

42 GERHARD HALDER largely hindered through buyer concen- ence. This increase in quality poses a tration. Nevertheless, a certain kind of challenge to Tuttlingen for low wages upgrading is common through a buyer’s complement increasing quality, although shift to content purchasing. I refer to this it will take more time to become directly as a passive trading system or as “trading comparable in quality. Nevertheless, the on demand” to distinguish it from active price-quality ratio has changed. trading in the market, which requires The ability to innovate in this situa- specific know-how and resources and tion will thus be a key factor for the which affects ties with forward-linked future success of the Tuttlingen cluster. firms. During field research, firms were asked During the Tuttlingen survey, there about their upgrading success, along were limited indications that value chain with changes in turnover. Of the inter- contacts led to process upgrading. As a viewed firms, 23 (out of 33) had devel- result of relatively short chains in pro- oped new products in the last five years. duction, many of the forward linkages Of these, 20 firms had also raised turn- lack specific know-how in processes over in the same time. Of those who (traders and wholesalers). Such cases, were not able to develop new products where producers buy from other produc- (10 firms), only three had been able to ers it is because they have specialised on increase turnover, while three had suf- the manufacturing of particular instru- fered a decline. Future expectations ments, maintaining specialised process reiterate this development: While all knowledge.39 So contrary to the findings firms producing in the minimally- in relation to product upgrading, process invasive or implant field expect further upgrading through the value chain is increases of turnover, only 11 out of 23 rather exceptional at Tuttlingen. This is firms on the “classical” instrument- in line with a buyer’s paradigmatic producing firms side expect such in- statement in another research context: creases. These findings are sensitive to “At the end of the day we cannot own product segments within medical engi- their problems and they cannot own ours neering. All (six) firms whose main but we share problems” (citation of a products are implants and four out of six buyer in SCHMITZ & KNORRINGA 1999: firms engaged in minimally-invasive 19). This is the main reason why process instruments or endoscopes experienced upgrading plays – in contrast to product an increase in turnover. In the field of upgrading – almost no role within for- “classical” surgical instruments, only 14 ward ties of Tuttlingen is producers. out of 22 have been able to increase turnover. In conclusion, firms mainly Producers in low-wage locations, producing classical surgical instruments particularly Sialkot have made big ad- tend to be less innovative than those vances in product quality - as com- engaged in the other segments like mented on by all interviewed traders minimal invasive instruments or im- who are engaged in Sialkot. This is the plants.40 result of the engagement of Tuttlingen firms as well as from increasing experi- THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 43

As a result, the innovativeness of interesting to explore why the lead firm cluster firms is clear. Yet, at the same decided to ignore Sialkot and build new time, most product upgrading has in- plants in regions without an existing volved minor improvements (21 out of surgical instruments cluster. This is 33), and only five of the interviewed particularly significant as it is the only firms claimed to have made big im- firm that has managed to supply ready- provements in this field. All of these made products at best quality from its were either engaged in segments other plants abroad.41 than instruments, or are larger firms. It is Further business developments in not easy for small producers to make the Tuttlingen will be in the value-added shift to radical product upgrading in segments of medical engineering, such higher value segments. This is particu- as implants and minimal invasive sur- larly true for the implant sector, where gery. This requires resources and an advanced materials are used and intense increase in knowledge. Thus, the high clinical testing has to take place prior to road of technological improvement is obtaining permission to enter the market. limited to larger firms, or associations of Capital is therefore required, in addition small firms, which have capital as well to know-how in order to survive and to as technological know-how to maintain a innovate. Thus, there is a marked shift steady programme of research and de- from labour intensive to capital intensive velopment. The lead firm in Tuttlingen, production. Nevertheless, some of the for example, states in its annual reports small firms are trying to enter this field that 25 % of their products were devel- by, for example, specialising in a single oped less than three years ago. The firm product. is engaged in many segments, maintain- The most impressive upgrading has ing joint ventures with external leading been done by large firms. In the field of firms in complementary technologies. A production, large firms increasingly new unit is currently being built for concentrate themselves on rent rich implants, called the benchmark factory, products like implants and minimal which will lead to a 25 % reduction in invasive surgery (instruments and endo- production costs.42 Additionally, Euro- scopes), while passing their mature pean logistics will be co-ordinated from classical equipment away to their plants Tuttlingen. Logistics are of special or joint ventures in Sialkot, Malaysia, importance in the implant field, where Poland, Hungary or Mexico. The lead short delivery times are required. More- firm for example, employs about 2,000 over, the lead firm has improved its people at Tuttlingen, and a further 4,000 services to become a full supplier for in Poland, Malaysia and Spain, most of end-customers. That means that it will them engaged in production. The plants offer full content contracts including the abroad have been grown steadily both in sterilisation, repair and replacement of number and employment in the last 20 instruments and an “all it needs to oper- years, while in Tuttlingen employment ate” approach (firm slogan). As a result, has only grown minimally. It would be it is predicted that end-customers will

44 GERHARD HALDER eventually lease, instead of purchase, particular upgrading prospects that instruments and medical equipment engagement in both the cluster and value while outsourcing the complete facility chain provides. While the contrast is management to service firms, in which made between large producers and small large producers may have influence producers, in most cases medium sized through direct ownership or chain gov- producers have to varying degrees char- ernance. The question arises, what will acteristics of both. It is similar in the be the position of a cluster consisting case of the associations, Medicon and mainly of small firms in the future? To Martin, where member firms are still consider this, in section six the upgrad- responsible for processes, while product ing prospects of both chain and cluster upgrading and functional upgrading are are combined. interlinked with the group. Traders are only considered in respect to functional 6 The local cluster in the upgrading. If they have their own pro- global value chain duction units, their process and product This section first gives a view on the upgrading capabilities are akin to those upgrading prospects mentioned in the of small firms. earlier sections. It then asks, how global Small firms are able to enter into and local governance interact: Does process upgrading through cluster exter- engagement in value chain ties under- nalities (i.e. the labour market) and, in mine firm’s engagement in cluster activi- particular, through joint action promoted ties? Or, alternatively, do linkages in by institutions. In contrast, cluster exter- value chain ties enhance cluster-wide nalities are less important for large efforts in upgrading? Which upgrading producers, whilst attracting external prospects are deriving from engagement knowledge is crucial. In this area, value in value chains and which from engage- chain ties play virtually no role. Process ment in joint action at cluster level? In upgrading in Germany instead plays a which are both interacting? The first sub large role in national industrial policy, section seeks to provide a synthetic view which is intended “to build up a pre- of upgrading prospects, whereas the condition for competitiveness and suc- second subsection seeks to unravel the cess”. interaction of local and non-local link- The roles of cluster gains and value- ages. chain gains seem to be inversed in rela- tion to product upgrading. Joint action 6.1 Upgrading prospects in the cluster and value chain regarding product upgrading has so far context had only limited results at the cluster level. Nevertheless, an important advan- For specific groups of firms, Table 9 tage of the cluster concerning product provides a comparable view of the ad- upgrading is the imitation of products, vantages and disadvantages of the clus- stimulated by cluster-bound information ter’s engagement in value chain ties. The flows. table measures, according to the discus- sions of the preceding sections, the THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 45

Engagement in the value chain, Contrary to the variety of possibili- however, plays a major role in product ties mentioned in Table 9, functional upgrading. Access to end-customers, upgrading is limited to a few examples. made possible by intermediaries further Besides the past work of associations, up the value chain, is crucial. Again, for example, in achieving functional

Table 9: Upgrading in the Tuttlingen cluster of surgical instruments and medical engineering

process upgrading product upgrading functional upgrading through: through: through: small 1. cluster externalities 1. other producers as buyers 1. partly through traditional system: passive producers (former system, extinct) trading 2. joint action (direct or 2. buyers (lasting traditional 2. assistance from firms outside the cluster indirect activity of system) 3. own efforts (virtually not existent) institutions) 3. traders (new trading 4. joint action (associations: examples of the system) past, some recent examples failed for net- 4. joint action (associations: work failure reasons) Medicon, Martin) 5. passive functional upgrading through 5. joint action (limited result) enlargement of the production chain large 1. external knowledge 1. own resources 1. own resources: extending own activities producers 2. cluster externalities 2. direct contact with end- 2. strategic alliances, mergers & acquisitions (lower importance) customers 3. passive functional upgrading through 3. direct contact with research enlargement of the production chain institutes outside the cluster medium mix of small and large producers capabilities and strategies sized firms Passive functional upgrading traders through enlargement of the production chain

italic: upgrading through cluster gains; underlined: upgrading through chain gains

large firms are not necessarily included upgrading through joint action, classical in this assessment, for their scope and network failures have resulted in the strength enables them to innovate in failure of more recent efforts. Once certain segments, whilst direct contact again, we find that large firms are in a with customers and specialists facilitates different position, as they are able to product upgrading in others. It is too upgrade functionally. The resources early to judge the most ambitious joint required for this derive from their own action approaches, the “competence strengths (capital, know-how) as well as centre” and the “Take-off” technology from those of their partners, which are and firm founding park. However, if built up or maintained (co-operation, they succeed, it will change the role of strategic alliances, acquisition, mergers) cluster-bound joint action significantly. over time.

46 GERHARD HALDER

Both producers and traders are able cluster activities? And, finally, under to functionally upgrade through the what conditions is this the case? enlargement of the production chain. We have seen in the sections above They are able to build up ties with sub- that, in several fields, cluster governance contractors – particularly those in loca- and value chain governance interact. tions with low wages – further down the This is so when firms extend their activi- chain. In the case of Tuttlingen produc- ties with chain members (vertical) at the ers (and traders) which have maintained expense of (horizontal) cluster activities. high production capability this has It also occurs where activities within the proved to be the case, at least concerning chain are undermining the cluster. This mature standard instruments. While the is particularly so when initial and final production steps are carried out in Tuttlingen further, the • small producers’ efforts in functional medium steps are transferred to low upgrading are hindered by forward- wage locations, thus the chain increases linked firms in length. Of importance in this case is • both producers and traders establish not only, that sourcing locations have subcontracting ties with firms abroad shifted, but that this shift is accompanied • large firms in the cluster are upgrad- by a change in chain governance from ing functionally and favour ties with arm’s length market relations to quasi- external specialists hierarchy. Hence, the governance shift • large external firms buy technologi- itself might be seen as a kind of upgrad- cal lead firms of the cluster. ing, for the different influence of a par- In the first case, tensions between pro- ticular firm over an other part of the ducers and their buyers have long been chain may strengthen its competitive- present in Tuttlingen. This seems to be a ness. typical problem of a multi-functional cluster, housing several steps of the 6.2 The interaction of global and local linkages production chain at the same time. In a dynamic sense, cluster governance is This sub-section is driven by the ques- unaffected, as this is not related to clus- tion, whether changes in value chain ties ter activity or to local joint action. affect local governance. It builds on the findings from the previous sections. As We have seen above, that products seen in Tuttlingen, spending resources in which were formerly sourced from ties with external specialists may viewed Tuttlingen suppliers by larger firms are as more efficient by lead firms than nowadays increasingly sourced from low engaging in cluster joint action. Thus the wage suppliers, or the firms’ own plants following questions arise: What benefits abroad. Here, the activity of particular do large firms obtain from being in firms cut into other firms’ wealth, push- Tuttlingen? In what kinds of value chain ing them forward to innovate or fail - activities are such firms concentrating increasing the competition game. As their efforts? Does this lead to a passive long as outsourcing firms do not rely behaviour by such firms concerning solely on such trading rents, but try to THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 47 innovate simultaneously in other seg- competitors. Such firms usually have to ments in Tuttlingen, this chain activity shut their R & D activities outside the would not weaken the cluster as a whole, cluster. In these cases, while the produc- nor would it necessarily affect their tion unit stays in the cluster, the firm’s efforts at joint action at a cluster level. interests in the cluster are reduced to Nevertheless there are signs, that many passive externalities. As a result, value firms are relying on trade rents. chain ties are pursued at the expense of cluster activities. In the field of innovation, the lead firms maintain ties with external special- This outcome leads to a general ists, both private firms and public re- consideration of the inter-linkages be- search institutions. This is, on the one tween cluster advantages and the advan- hand, due to the lack of advanced public tages promised by interaction in value- R & D institutes in Tuttlingen. On the chain ties. This consideration lies in the other hand, it is due to the new opportu- dynamic of technological change, which nities emerging from different new is discontinuous over time, and the technologies, which were developed in upgrading prospects that derive from different locations outside the cluster. As this. Where radical technological innova- a result, it is important to note how tion is limited, the fast assimilation of important actors of the cluster are in- incremental innovation is the key to creasing their ties with external actors. competitiveness for producers. One of This is by no means a negative sign for the main features of clusters is the fast the cluster. Radical innovations in Tut- flow of knowledge. It leads to a rapid tlingen have always come from outside. spread of innovations, but usually of an Nevertheless, there are differences in incremental nature. Thus, cluster firms terms of the circulation of knowledge, as may gain competitiveness by joining well as the ability to adapt and to im- cluster initiatives. However, in times of prove external knowledge. In contrast to radical innovation, value chain ties to the past, complexity of knowledge has external specialists may be more promis- increased dramatically, which inhibits ing. As resources are limited, cluster most cluster firms from participating in activities of firms may decline at the this process. This is especially true of expense of activities in value chains. new knowledge changing elements, This may partly explain the success of which are exclusive by virtue of their the Italian industrial districts during and complexity and interaction with other after their difficult years in the 1990s. In technological knowledge. Thus, knowl- the case of the medical engineering edge will not circulate within the cluster cluster of Tuttlingen, new technologies at the speed it has in the past, and relating to robotics, micro-systems knowledge systems will become more technology, bio-technology, optics, and closed (see: BELL & ALBU 1999). advanced materials are pushing large Tuttlingen firms towards external part- A similar effect for the cluster oc- ners. curs, when important firms within the cluster are bought by large external

48 GERHARD HALDER

An other argument leads to the ini- became an issue of joint action. If this tial and main strength of the Tuttlingen were upheld by other studies, a sudden cluster, the production of high quality death of clusters facing new challenges hand held surgical instruments. This has would not be the consequence, but, its roots in the high quality of the train- rather, a creeping death resulting from ing system and in the tacit knowledge of the insidious effects of increasing het- the workers. As low-cost competitors erogeneity and deterioration through a increasingly cut into this area, and cost lack of common interests. pressures lead to declining rents, large firms diversified their product range to 7 Concluding remarks advanced products, in collaboration with This section takes stock of the paper’s research facilities external to the cluster. findings, and provides additional re- Thus, the main competitive advantage of marks and questions. The previous Tuttlingen is fading, as shown by the sections have shown the range and inter- decreasing importance placed on the nal heterogeneity of the Tuttlingen cluster by large firms. This is proven by cluster as well as its historical develop- Aesculap’s decision on where to estab- ment in surgical instrument manufactur- lish its new Benchmark Factory for ing. Having experienced some economi- 43 implants. cally outstanding decades, recent chal- The fact that firms may regard ef- lenges to the Tuttlingen cluster necessi- forts in value chain ties as more efficient tate major changes to sustain the cluster's than joint action at the cluster level may competitive edge. As we have seen in lead to a conflict of interest, whether to Section 4, joint action at the local level support cluster activities or not. More plays a crucial role, particularly in build- crucial for cluster governance would be ing the cluster’s knowledge base through a second step, changing the passive vocational and advanced training. Since behaviour to active opposition. This may co-operation between private firms is be the case, if direct competitors for lead limited, institutions are important in firms are to be found locally. Thus lead promoting and mediating joint action. firms would not wish to help their com- This is a necessary undertaking, for petitors through joint action. This private actors often mistrust each other. seemed to be the case, when the planned Nevertheless, it is worth mentioning, that research and marketing institute in Tut- two private associations, Medicon and tlingen was stopped by the lead firms. It Martin, allow some small producers to might also be the destiny of the Compe- compete even with the cluster’s lead tence Centre. From the Tuttlingen exam- firms. ple, it is obvious that joint action occurs Regarding upgrading, local joint ac- when there is a common self-protective tion in Tuttlingen promotes in particular reaction, unifying or otherwise, to exter- process upgrading by distributing tech- nal changes or pressures. This occurred nical knowledge through training and when Martin and Medicon were founded special lectures. Inducing product up- and when the sterilisation of instruments grading is usually not the central aim of THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 49 such activities. In contrast, joint action products. These segments are taking through value chains leads to product different trajectories. While the new upgrading. Here, process upgrading fields are primarily driven by radical emerges as the exception. For all firms, innovations, the classical segment of co-operation with end-users is the main handhold surgical instruments are much source of product innovation. Moreover, more price driven, with competitive a solid reputation, effective advertising pressures increasing in recent years. and the catchment of future customers Large Tuttlingen firms have built plants can be obtained by linking famous sur- abroad, to gain from cheap labour costs. geons to product development initiatives Other Tuttlingen firms have established and technique-promotion at university production ties with producers abroad. hospitals. However, only the larger Those ties are governed in a quasi- firms, with the resources and the reputa- hierarchical way and offer a way to push tion to attract famous surgeons, are able price pressures further down the chain. to develop in this way. Small-scale firms This practice has recently been adopted are mainly dependent on their buyers as by traders, who have become the most mediators for information. This leads, important actors in transferring know- first, to inconvenient and sometimes how to other locations. As a conse- distorted and delayed information flows; quence of price pressures, rents are and, second, to incremental improve- shifting increasingly from production to ment rather than radical innovation. trade, logistics and services in general; Functional upgrading is not common at and from the manufacturing of surgical Tuttlingen, for ties are strong and stable instruments to advanced products like over time. The value chain, therefore, implants and endoscopes in particular. enables neither upgrading nor joint Thus, the instrument manufacturing action at local cluster level. There are, sector in Tuttlingen is declining, while however, three examples of successful other segments are growing. Within this functional upgrading. Firstly, where development, the tacit knowledge of outside assistance occurs. For example, a surgical instrument manufacturers will large firm entering into a joint venture decline in importance, and the location with an upgrading firm. Secondly, in the factor specific to Tuttlingen will fade. two cases of the trade associations, As the majority of the cluster’s which emerged from joint action of the firms consist of small instrument manu- past. And thirdly, in the case of the lead facturers, this finding is of considerable firm, which was not driven by chain importance. If the cluster’s small firms frictions in the same way because of the are unable to adopt new skills and tech- strength of its own resources. nologies, they might be undercut by low The Tuttlingen cluster was able to wage competitors in the long run. It is diversify its product range from classical unclear whether this would affect large surgical instruments to implants, endo- firms, for cluster advantages may fade scopes and minimally invasive instru- with this development. On the other ments, as well as some electro-medical hand, emancipation of large producers

50 GERHARD HALDER from the declining instrument field, may A promising way to strengthen the clus- also lead to the view that the conse- ter might be the new initiatives, the quences of such decline for large firms competence centre and the business would be of minor importance. Although founding park, aimed at promoting small firms account for many incre- innovation in Tuttlingen. It would be of mental innovations, the high share of decisive importance for the cluster employees in large firms would suggest whether firms join with substantial effort that big losses of small firms would not or not. Nevertheless, with the shift from have a strong effect on Tuttlingen’s surgical instruments to other products, economy as a whole. the ‘big fish’ in the surgical instruments pond may need to choose different tra- Entering new fields means compet- jectories to swim in the large sea of ing against new locations and firms, and health care delivery. in the larger sea of medical engineering, Tuttlingen is but a small fry. Thus, the main challenge for the cluster can be seen in the assimilation and internalisa- tion of external knowledge, to combine it with passive and active cluster advan- tages. The cluster still contains innova- tive SMEs, a reputation for high quality products and highly skilled workers. THE SURGICAL INSTRUMENT CLUSTER OF TUTTLINGEN, GERMANY 51

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