Investigation of the Machinery Sector in Styria

Second draft of the scientific report for IKINET

Michael Steiner

Michael Ploder

Sandra Leitner

JOANNEUM RESEARCH Institute of Technology and Regional Policy Elisabethstrasse 20 8010 Graz IKINET 2 TABLE OF CONTENT

1 SUMMARY AND INTERPRETATIONS...... 5 1.1. The evolution of the “Cluster”...... 5 1.2. Attributes of the cluster reflected by the internal structure of the participating Firms ...... 6 1.3. Innovation processes...... 7 1.4. Relationships with local actors ...... 8 1.5. Relationships with national and international actors ...... 8 1.6. Policy intervention and support for innovating firms...... 9 2 INTRODUCTION - APPROACH AND REGIONAL CONTEXT...... 10 2.1. The approach...... 10 2.2. Description of the region in the national context and the historical regional economic background with respect to the project IKINET ...... 12 2.2.1 The R&D-location Styria...... 13 2.2.2 Overcoming historical structural problems ...... 15 2.2.3 Sectoral specialization patterns ...... 18 3 EXCURSUS: DIFFERING AND CHANGING RULES OF INTERACTION ALONG THE VALUE-CHAIN IN THE MACHINERY SECTOR ...... 23 3.1.1 Original Equipment Manufacturers resp. System Integrators ...... 26 3.1.2 Local tier 1 system suppliers ...... 26 3.1.3 Extended workbenches of international Tier 1 system suppliers ...... 27 3.1.4 Firms with a strong focus on toolmaking ...... 27 3.1.5 Firms in the field of Plastics Technology with a strong focus on tool- making ...... 28 3.1.6 Firms in the field of Hardening and Surface technology ...... 28 4 BUSINESS SERVICE FIRMS AND THEIR PROFILE: ...... 29 5 R&D-INSTITUTIONS AND THEIR PROFILE: ...... 31 6 POLICY-AGENTS AND INTERMEDIATES AND THEIR PROFILE: ...... 34 7 FINANCIAL SERVICES AND THEIR PROFILE: ...... 38 8 THE EVOLUTION OF THE SECTORAL NETWORK ...... 40 8.1. Buyer supplier selations – the dimension of physical exchange...... 42 8.1.1 Condensations in the field of automobile suppliers industry ...... 43 8.1.2 Condensations in the field of polymer and plastics processing...... 45 8.1.3 Condensations in niches beyond large volume automobile industry in the field of racing parts...... 46 8.1.4 Familial networks and strict division of labour along the knowledge value chain in the field of measuring ...... 46 8.2. Linkages between industry, engineering services and science ...... 47 9 ATTRIBUTES OF THE CLUSTER REFLECTED BY THE INTERNAL STRUCTURE OF THE PARTICIPATING FIRMS...... 50 9.1. Employment and qualification...... 50 9.2. Organization and management style...... 53

IKINET 3

10 INNOVATION HISTORY AND PROCESSES OF INNOVATION ...... 55 10.1. The industrial firms and Their R&D and Innovation profile...... 56 10.1.1 R&D and innovation in Magna Steyr Fahrzeugtechnik...... 56 10.1.2 R&D and innovation in Magna Powertrain ...... 57 10.1.3 R&D and innovation in Anton Paar ...... 58 10.1.4 R&D in Pankl Racing Systems ...... 59 10.1.5 R&D and innovation in firm A ...... 60 10.1.6 R&D and innovation in firm F ...... 60 10.1.7 R&D and innovation in firm H ...... 60 10.2. The Business service Firms and their R&D and Innovation profile...... 61 10.2.1 R&D and innovation in firm O ...... 61 10.2.2 R&D and innovation in firm S ...... 61 10.2.3 R&D and innovation in firm R...... 62 10.2.4 R&D and innovation in firm Q ...... 62 10.2.5 R&D and innovation in the Laboratory for measuring technologies of firm P...... 62 10.3. General chacterization of innovation in the cluster ...... 63 10.4. Future innovation...... 64 10.4.1 Financing of innovation ...... 65 11 RELATIONSHIPS OF LOCAL ACTORS ...... 67 12 RELATIONSHIPS WITH NATIONAL OR INTERNATIONAL ACTORS ..... 70 13 POLICY IMPLEMENTATION: IMPRESSIONS FROM A POLICY AND INTERMEDIATES PERSPECTIVE ...... 72

IKINET 4

FIGURES Figure 1 Regional Map of Styria and its Districts...... 13

Figure 2 Regional R&D-Rates (GERD/BRP) in Austria in 2002 ...... 14

Figure 3 The Styrian Participation in the 6th Framework-Program...... 14

Figure 4 The Unemployment-rate of Styria compared to the Austrian average ...... 16

Figure 5 Share of turnover by “young” products and services resp. market novelties in Styria...... 17

Figure 6 Per capita GRP in Styria compared to the Austrian and the EU-Average...... 17

Figure 7 Economic Growth (GRP) in 2004 in Styria and other Regions in Austria ...... 18

Figure 8 Sectorial Structure of the Manufacturing Sector in Styria...... 19

Figure 9 Significance of employment in Manufacturing industries for the regional economy of Styria...... 20

Figure 10 Share of technical Engineers in total Employment (Index: Austria = 100) ... 21

Figure 11 Share of Styria in total Austrian exports of goods in different sectors ...... 22

Figure 12 Direct linkages between selected players in Policy, Science and Economy.. 34

Figure 13 Buyer Supplier Relations among the industrial firms in the investigation ... 43

Figure 14 Institutionalized Relationships between industrial firms, engineering-services and .the knowledge infrastructure in Styria...... 48

IKINET 5

1 Summary and interpretations

The machinery sector in Styria as a network of firms linked by various activities does not have a determining centre in the nature of a leading firm overruling external demand. To make allowance for the entirely different types of vertical supplier networks which have been observed in the first round of qualitative interviews four main discussion-partners have been chosen for IKINET: Magna Steyr Fahrzeugtechnik (MSFT), Magna Powertrain1, Pankl Racing Systems, Anton Paar GmbH These firms belong to different sub-sectors of the machinery sector and culti- vate different supply-chain and innovation-strategies. Nevertheless common suppliers exist especially in the field of material and surface technology. Despite this the latter point is not decisive for the inclusion of an enterprise into the group of investigated firms. The investigation of the Styrian Machinery Sector and its network and cooperation structures (which are evidently developing und continuously rearranging) might be a good exercise to find policy implications beyond idealized Clusters following the Porter-Diamond and tense buyer-supplier relationships. The evolution of sectoral networks and clusters in Styria has been accompanied by a consequential advancement of the institutional landscape and the portfolio of policy measures during the past years

1.1. THE EVOLUTION OF THE “CLUSTER” At the first glance the machinery sector in Styria seems to be dominated by the automobile sector. Since this activity exhibited the highest growth rate in the recent past - as an organized cluster – it received most attention. A closer analysis of the history of economic activities brings up an entirely different picture. The automobile sector has been a vehicle of structural change and economic growth in the machinery sector, nevertheless, the common dimension of technological identification might be seen in the field of material competences. Most of the firms analysed are independently oriented towards the export- market. From the perspective of the regional market they established small niches, which turn out to be highly competitive at the international level. Clusters following the traditional idea of industrial district as well as cluster completely fulfilling the Porterian model are non-existent in Styria. Actually closed value chains of this magnitude disappeared with the break down of the nationalized industry and subsequent structural change in Styria.

1 Renamed from Magna Drivetrain to Magna Powertrain in July 2005

IKINET 6

In the sample of the machinery sector in IKINET four (sub)-networks or economic resp. condensations can be identified, where relatively stable value- added-chains are evident. • Concentrations in the field of automobile suppliers industry • Concentrations in the field of polymer and plastics processing • Concentrations in the field of racing parts in niches beyond large volume automobile industry Familial networks and strict division of labour are to be found along the knowledge value chain in the field of measuring. Physical linkages in between these sub-networks are weak but intersections based on co-operative R&D and R&D-infrastructure, qualification and informal exchange are evident. Despite the evident sectoral concentrations, direct links to the science base as well as the local availability of human capital seem to loom larger as binding factors than long term supplier networks.

1.2. ATTRIBUTES OF THE CLUSTER REFLECTED BY THE INTERNAL STRUCTURE OF THE PARTICIPATING FIRMS Concerning the qualification structure, there are significant differences between OEMs, systems suppliers or suppliers with R&D-units on the one hand and basic technology providers, extended work-benches or third party subcontractors on the other hand. Especially firms in rural or more or less isolated areas like firm D, firm E or firm G refer to very local labour markets, binding traditions and low mobility of employees. Small and medium sized supplier firms show familiar sometimes inter- generational tradition structures. Compared to German or Italian regions with considerable weight of the automobile and machinery sector a lower inter-organizational mobility and fluctuation of employees has been pointed out by several firm-partners. A considerable high share of the interviewed firms is part of a firm group. Except for two green field investments (local workbenches of international tier 1 suppliers), all firms which are part of a foreign firm group exhibit indigenous roots (take-overs). Due to the immobility of the local labour-force and the restricted capacity of the regional labour-market most of these firms had the chance to hold the key- personnel resp. competences and the regionally integrative potential of the personnel.

Styrian firms in the machinery but also in the material based supply- industries benefit from the regional universities who provide the labour-market with highly qualified engineers.

IKINET 7

The large centres of the German automobile-industry are too remote and the wage level in Styria is too low to participate in this internationally specialized labour-pool. On this account, MSFT revealed to be debarred from an important source of knowledge transfer which is facilitated by natural fluctuation.

The observed business service firms operate at very different levels in the sectoral innovation systems. Firm O for instance is a first class technology provider with an export rate above 95% but a considerable anchorage in the regional innovation system, where participation in cooperative competence centres will be accentuated. Firm R GmbH is an export oriented (100%) business service firm embedded and active in the AC-Styria with however a lacking regional key- customer base. Firm Q is an engineering service firm with industrial customers in the field of plastics products and composite materials integrated in a network of scientific partners and characterized by a pro-active strategy of integration into the regional science community. Firm S, a supplier to MSFT or firm O, is a small Slovenian service firm which got direct support from MSFT during the past years. Finally, firm P is a close partner of Anton Paar.

1.3. INNOVATION PROCESSES A massive structural change of the Styrian regional innovation system was observable between the mid-eighties and the mid-nineties. High degrees of diversification and broad unspecified clienteles have been reduced to market niches and technological specialization, and higher lot sizes and a higher integration of functions (sourcing of basic materials, construction, tool making) maintaining flexibility by leaving scope for automation. Technologi- cal upgrading (including the introduction of quality and measuring standards) also opened doors to new clienteles. This has been accompanied by extended responsibilities for tool making or sourcing capabilities as well as by shifted quality and price responsibility from clients to suppliers. Innovation in this loose and open cluster seems to be determined by specialized knowledge in the field of materials, tooling and processing techniques, or very specific problems in the machinery segment. For firms already active in R&D, a shift from demand pull driven to science push driven R&D seems to be evident.

For the majority of SMEs innovation is not driven by R&D-activities. In that respect, innovations in the machinery sector exhibit an investive character. SMEs are not able to intensify advanced development resp. pre-competitive research. “SMEs are not seeking for questions, they want to have fast answers to their concrete problems” Most of the firms try to boost their R&D-engagement (a te- dious process with threshold-effects).

IKINET 8

Large firms like MSFT want to intensify their cooperative R&D partnerships with highly innovative SMEs and benefit from their creative potentials.

1.4. RELATIONSHIPS WITH LOCAL ACTORS The cluster may be characterized as an individualistic open system which is based on particular informal linkages. The regional outreach of the cluster is restricted by personal contacts but not by buyer-supplier relations, respectively transportation or logistic costs. Particularly players with internal R&D-capacities have direct access to the regional science base and are co-operating resp. participating in the same research institutions or co-operate in research projects. This is amplified by a favouring configuration of the university and public research sector with an obvious orientation towards technical fields of research. Since the late nineties several co-operative research institutions at the edge of science and industry have been established in the machinery sector. One primary target of such so called Competence Centres is to co-operate with third party firms, which are not partners or share-holders. While the core-partners of the ACC - one of the 15 competence centres in Styria - are large R&D-players (MSFT, firm O) in the automobile sector, their third party project partners are medium sized firms in the non-automobile machinery-sector. A considerable role is played by private engineering services, e.g. firm O, firm P, the Austrian Foundry Research Institute, firm Q or APE. In the automotive sector a formal cluster was established in the mid-nineties which became a widely accepted instrument for presenting regionally cu- mulated competences in the field of the automobile industry. Most interviewed partners stressed the benefits reaped from qualification and information events.

1.5. RELATIONSHIPS WITH NATIONAL AND INTERNATIONAL ACTORS The majority of the output of the Styrian machinery sector is exported with Ger- many as the most important export market. The internationalization of suppliers has not directly been fostered by the relationships to leading firms but in a lot of cases occurred in a self-reliant way instead. The new Eastern European countries are interesting markets for future expan- sion and growth especially for small medium sized firms. Most of the supplying partners of the regionally leading firms can be found in Germany and Italy. Nearly all firms stressed the significance of their first contacts with firm-partners in the new member states and the strong need for intense interaction at the initial stage. A frequent mode of interaction refers to either co-operation with or investments in a firm in the new member state which already has established ties to firms in

IKINET 9

Western Europe. Some of the firms have established mutually dependent economic ties or long time partnerships. Some of the firms (e.g. firm E or Magna Powertrain) reduced their engagement, however.

1.6. POLICY INTERVENTION AND SUPPORT FOR INNOVATING FIRMS As an outcome of long-term division of policies between the national and the regional level Research, Technology, Development and Innovation Policy (RTDI) is implemented in both governance levels. Cluster policy is a matter of the regional level in Austria. While regional governments mostly have regional foci, firms necessarily have national or global foci. Therefore pressing need with respect to a strengthening of interregional cooperation of cluster policies is evident. Local lobbies intensified their intermediary role between science, policy and industry for the last decade in the field of technology and innovation policy. During the past years a broad range of measures which should help to integrate SMEs into the regional innovation system as well as adduce to and enable SMEs to access regular R&D-funding-offers have been designed, discussed, tested, implemented, adapted and also rejected. Based on an extensive analytical framework the policy action has been accompanied by a process of policy learning.

IKINET 10

2 Introduction - approach and regional context

This paper examines how the challenges of structural change, globalization and technological upgrading have been supported by different forms of interaction in loose cross-sectoral networks based on a deepened co-ordination and syn- chronization of science, industry and policy during the past 5 or 10 years.

2.1. THE APPROACH The paper is based on interviews with 18 industrial firm partners which have been carried out from December 2004 until April 2005. It also draws on 11 short additional interviews which have been carried out in a pre-phase in November and recent surveys of the Styrian R&D-system. In a second wave 5 business service firms and 7 R&D institutions (4 cooperative research institutes, the Technical University of Graz, one public applied R&D-organization and a polytechnic with several faculties) have been involved. In the case of policy and intermediates the research team tried to focus on public and semi-public organizations with obvious integrative or catalytic roles for the development of the sectoral innovation system during the past 10 years.

To allow for the diversity of vertical supplier networks observed in the first round of qualitative interviews four discussion-partners have been chosen for IKINET: Magna Steyr Fahrzeugtechnik, Magna Powertrain2, Pankl Racing Systems and Anton Paar GmbH.

These firms belong to different sub-sectors of the machinery sector and culti- vate different supply-chain and innovation-strategies. Nevertheless, particularly in the field of material and surface technology said firms avail of common suppliers, a fact that is not decisive for the inclusion of an enterprise into the pool of firms analyzed.

The project IKINET is intended to provide recommendations for the policy de- bate on the appropriateness of alternative regional innovation strategies in different regional contexts targeting a more intensive integration of actors in lagging or peripheral regions in the European Research Area. The investigation of the Styrian machinery sector and its network and cooperation structures (which are evidently developing und continuously rearranging) represents an excellent opportunity to identify policy tools that go beyond idealized clusters following the Porter-Diamond and tense buyer-supplier relationships.

2 Renamed from Magna Drivetrain to Magna Powertrain in July 2005

IKINET 11

Local inter-firm networks as well as ties between companies and local organizations outside the supply chain provide a framework for intraregional learning and knowledge transfer (Lazonik W. 1993)3 However, some of the participating firms do not seem to cluster in a material sense (i.e. via input-output-linkages) but rather through direct, more often indirect channels of knowledge transfer and creation. Indeed Magna Steyr Fahr- zeugtechnik is a first-tier supplier of the European automobile industry operating in the value-chain position of an OEM (Original Equipment Manufacturer) from a functional perspective. Because of the indirect OEM-responsibility autonomous decision making of supplier-partners is significantly restricted since customers dictate their traditional and trustworthy suppliers to Magna Steyr Fahrzeugtech- nik.

A potential challenge points at identifying a list of factors that help differentiate successful from unsuccessful regional R&D and innovation systems. Based on the regional context and social structures, the project IKINET should therefore provide useful recommendations towards realistic setting of goals, handling of trade-offs and consciousness for viscous evolutionary processes. The following questions need to be addressed: How are different forms of knowledge spatially but also institutionally embedded in the economy? Which forms of integration of the knowledge generating system are observable? What specific forms of networks provide a creative environment that enable in- teractive innovation and knowledge creation and exploitation? Does the policy system or the institutional conditions promote processes of knowledge creation?

In the course of the application of the conceptual of qualitatively oriented case studies approach the following challenges had to be faced. One basic methodo- logical problem (which can not be negotiated) refers to the appropriate qualitative measurement of knowledge flows without losing the essence of knowledge. The inability to overcome this measurement hurdle without loss of information probably represents one fundamental inference. The strengths of a case study approach with its narrative nature lies in the “qualitative” dimension. Therefore, any attempt (albeit desirable for questions of comparability) to quantify information results in a reduction of information gath- ered and “value” added. The challenge to transfer the research question to the interview-partners - a prerequisite for a successful analysis - may not be underestimated given the

3 Industry Cluster versus Global Webs: Organizational Capabilities in the American Economy, in: Industrial and Corporate Change, 2 ,pp. 1-24

IKINET 12 firms’ inability to speak the researchers’ language, to see the (abstract) problem and to be aware of its relevance. And even if a common base and understand- ing is given, answers are predominantly anecdotal and rarely “systematic” in nature. The extensive approach of the analysis necessitating repeated contact with the partner-firms entailed non-negligible resistance from the side of the partner-firms which had to be contacted several times and to be confronted with similar questions for at least three times.

2.2. DESCRIPTION OF THE REGION IN THE NATIONAL CONTEXT AND THE HISTORICAL REGIONAL ECONOMIC BACKGROUND WITH RESPECT TO THE PROJECT IKINET The area of the region of Styria expands to 16 388 square kilometres which correspond to 19.5 % of Austria. The area of settlement is restricted to 4 957 square kilometres. Styria has 1.18 Mio inhabitants which correspond to 15 % of the population of Austria, ranking fourth among all federal regions. They live in 543 communities and 17 districts (of which 240.000 are to be found in the capital city Graz). 68 % of the Styrian population is aged 15 – 64.

The share of the population with secondary education (83.3 %) is above the EU-25 average of 78.7 %, while the share of the population aged 25-64 with tertiary education (22.2 %) and of the population aged 25-34 with tertiary education (19.8 %) lie below the EU-25 average of 22.2 % and 27.8 %, respectively. The Austrian education system with its very popular secondary level colleges might help explain this peculiarity. Similar forms of educational levels do not exist in the other European regions. With respect to participation in life-long learning, the Styrian population aged 15-64 ranks above the EU-25 average.

IKINET 13

Figure 1 Regional Map of Styria and its Districts

The total employment amounts to 470.000 people which stand for a gross regional product of 25.5 billion € (which is 12.7 % of the Austrian gross domestic product). Graz, the capital city of Styria is Austria’s second largest city. It is home to three universities and numerous large firms (>250 employees). More than 40 % of the Styrian GRP is created in the city of Graz and its periphery. Apart from Graz and its periphery industrial activity is concentrated in Ost- und Obersteiermark (East and Upper Styria), a partly restructured old industrial region. The border region of Südoststeiermark (Southeast Styria) can be classified as a rural peripheral region with tourism growing in importance.

2.2.1 The R&D-Location Styria Styria has five universities (University of Graz, Technical University of Graz, University for Metallurgy and Metals, Medical University, University of Arts) and a number of polytechnic colleges with more than 40.000 students enrolled. JOANNEUM RESEARCH is a public research organization owned by the government of Styria with more than 360 researchers. During the last 7 years 16 competence centres (co-operative temporary R&D-centres) have been established. In 2002, Styria exhibited the highest R&D-rate in Austria with a striking role of R&D in the higher education sector and large leading companies (e.g. Magna Steyr Fahrzeugtechnik, firm O). Recent numbers point to an R&D-rate (GERD/GRP) of 3.67 % for 2002 which is considerably above the R&D-rate for 1998 of 2.53 %. Both rates are far above the EU-25 average of 1.93 %. The R&D-rate for Styria in 2002 also exceeds the rate for the region Ile de France (3.4 %) in the Eurostat Database.

IKINET 14

Figure 2 Regional R&D-Rates (GERD/BRP) in Austria in 2002 Gross Domestic Expenditure on Research and Development

4,0

3,5

3,0

2,5

2,0

1,5

1,0

0,5

rg d na yrol erg tyria T lan S ien ustria lb ustria V alzbu A en AUSTRIA Carinthia S er-A Vorar urg pp B U Lower-

Public Sector (incl. Higher Education Sector) Business Enterprise Sector

Notwithstanding these impressive numbers it is worth stressing that R&D- expenditures are concentrated in a relatively comprehensible group of large firms. A remarkably high share (42 %) of R&D in the Business Enterprise Sector is financed from abroad signifying a strong foreign demand for Styrian competences. The following figure shows the Styrian participation in the 6th Frame- work-Program.

Figure 3 The Styrian Participation in the 6th Framework-Program

- 5 10 15 20 25 30

LARGE

SME

HES

REC

submitted projects PUBLIC rate of sucess

TOTAL

In general, the analysis of regional patent-data is contaminated with problems of individual and industry specific patent application strategies or the affiliation to a firm-group or the location of headquarters. Notwithstanding, patents are still popular for comparative regional analysis. According to the Eurostat-database,

IKINET 15

173 EPO-patents are accounting for 1 Mio. inhabitants in Styria. This approximately corresponds to the Austrian average of 175 patents per inhabitant (EU- 25: 134). Hamburg (236.5) and the Ile de France (312.9) are considerably exceeding this value. When it comes to High tech Patents Styria as well as Aus- trian fail to match or approximate the EU-25 average.

2.2.2 Overcoming historical structural problems Since the beginning of the 1980s Styria was confronted with considerable structural changes. Coming from the status of a lagging region characterized by the collapse of the public industries at the end of the eighties on the one hand and the fall of the iron curtain in the former East, the machinery sector in Styria has been confronted with a problematic regional economic situation. The 1980s and the beginning of the 1990s were characterized by a low level of growth of the regional output, a tightened labour market and structural problems such as an insufficient rate of firm foundations. This gap compared to other regions had mainly been caused by the crisis of the steel industry in Upper Styria and by the generally unfavourable geographical position of Styria in the periphery of Western Europe, close to the iron curtain. In particular, the problems of the steel industry in Upper Styria turned out to be the major bottleneck for economic development in Styria in the time preceding the development of clusters. This region was dominated by large state owned firms that were highly vertically integrated and had lost their headquarter functions in the 1960s and 70s to Vienna. In most cases, planning, R&D and marketing/distribution tasks, i.e. those responsible for the monitoring of markets and technology, have been lost. At the end of the 80ties large firms were re-privatized and down-sized. Firms needed to learn to collaborate and to develop potentials to innovate as a strategic resource. While Styria has been faced by very high unemployment rates during the eighties the unemployment in Styria actually amounts to 3.9 % - with substantial dis- parities within the region itself – and fell below the national average (4.2 %) in 2002. 4

4 In the past few years, the younger, older and long-term unemployed have seen their numbers decrease.

IKINET 16

Figure 4 The Unemployment-rate of Styria compared to the Austrian average

Unemployment Rate in %

10 9 8 EU25 7 EU15 6 Austria 5 4 Styria 3 2 1 0 2000 2001 2002 2003 2004 Source: Eurostat, WiBIS Styria

Through the opening up of the middle- and eastern European countries and the integration of Austria into the EU, the position of Styria suddenly shifted from the rim to the centre of Europe. The globalisation of economic activity and the increasing international division of labour called for the formation and implementation of new strategies. Immediately after the fall of the iron curtain Styria was still a periphery border region, but cross-border activities significantly increased during the last decade. With respect to destination countries for Styrian exports, Hungary ranks 3rd and Slovenia ranks 10th out of 240 export-countries. Prox- imity to (and the EU-integration of) Hungary, Slovenia and Slovakia represent invaluable opportunities for SMEs’ internationalization on both sides.

Regional industrial restructuring as well as regional innovation capabilities building have to be seen as long term processes which require a bottom-up or demand-driven approach (in particular where SMEs needs are well understood) and cooperation and permanent communication with national policy actors. The successful catching-up process in Styria is reflected by innovation data in all sectors. Approximately half of the firms had engaged in innovation activities between 1998 and 2000, corresponding to similar rates in Finland or UK.5 Styrian firms generate a high share of turnover by “young” products and services (younger than 3 years.) In this sense, Styria is a very interesting example to dis- cuss the core-issues of IKINET. Styria exhibits a remarkable growth and development history has however so far not reached its goals.

5 Based on regional data for the third Community Innovation Survey.

IKINET 17

Figure 5 Share of turnover by “young” products and services resp. market novelties in Styria

33,4%

23,6%

35,0%

13,2% 30,0% 17,2%

6,2% 25,0% 4,6% 9,4% total: Styria 11,6% 20,0% Austria 6,6% 10,3% 15,0% large firms: Styria Austria 9,2% 2,8% 10,0%

middle sized firms: Styria 2,7% 5,0% Austria 5,7%

0,8% 0,0% small firms: Styria 1,3% Austria share of turnover share of turnover generated w turnover generated with „market novelities“ turnover generated with „young“ products

Despite the positive development, the GRP per employee only stood at 94.2 % of the EU average in 2002 (Austrian average 109.8). The per capita GRP represents 108.2 % of the EU-25 average (Austrian average 127.5).

Figure 6 Per capita GRP in Styria compared to the Austrian and the EU-Average 200 180 160 140 120 100 80 60 40 20 0 EU25 Styria Upper Lower Tyrolia Vienna Austria Austria Austria Salzburg Carinthia Vorarlberg Burgenland Source: EUROSTAT 2002 2000-2002 EU25

IKINET 18

Compared to other Austria regions, the per capita GRP in Styria is below the arithmetic average. The highest per capita GRP can be observed in the service and tourism centres of Austria (e.g. Vienna, Salzburg and Tyrol).

The GDP in Styria (2.9 % / a) is growing faster than in Austria (2.4 % / a) but as expected slower than the EU-25 average which is massively influenced by the cohesion of the new member states. Among the Austrian regions Styria is the fastest growing one.

Figure 7 Economic Growth (GRP) in 2004 in Styria and other Regions in Austria

Economic Growth 2004 in percent in Austrian Regions (NUTS II)

Styria 3,8

Vorarlberg 2,9

Upper Austria 2,7

Low er Austria 2,6

Salzburg 1,7

Carinthia 1,5

Tyrol 1,4

Vienna 0,6

Burgenland 0,5

0 0,5 1 1,5 2 2,5 3 3,5 4

2.2.3 Sectoral Specialization Patterns Compared to thee other regions considered in the project IKINET, Styria has a very high share of employment in high tech manufacturing (1.4 %). Only Wales (1.7 %) and the Ile de France (1.6 %) succeed in outperforming Styria in that respect. Considering all regions, Styria has the highest share of total employment (6.3 %) in the medium tech manufacturing sector. Almost a quarter of the gross value added of the manufacturing sector6 is generated in the area of machinery (including automotive). The Machinery Sector has been encouraged by traditional competences in the field of materials and

6 The manufacturing sector makes more than a quarter of the gross domestic product of Styria. 38 % of the Styrian GRP is appor- tioned to the production sector.

IKINET 19 metals. 12 % of the Styrian GRP are generated in the field of basic metals and fabricated metal products.

Figure 8 Sectorial Structure of the Manufacturing Sector in Styria Manufacturing

Electronics, Food a nd Beverages; 9% Textiles and Electrical Leather Engineering; 12% Products; 3%

Automotives and Wood, Other other Machinery; Manufacturing, 24% Recycling; 9%

Paper, Printing; 12%

Basic Metals and Chemistry and Non-metal Fabricated Metal Ploymeres; 4% Products; 20% Minaeral Products; 7%

Finally the field of electronics and electrical engineering should be mentioned which accounts for 13% of the Styrian GRP.

The following figure draws a similar picture from the perspective of regional employment data. The branches “motor vehicles” and “machinery and equipment” respectively the machinery sector (following the definition used in the project IKINET) can clearly be identified as the Styrian job-machines.

IKINET 20

Figure 9 Significance of employment in Manufacturing industries for the regional economy of Styria employment 2004 (size of balls) 16,000

14,000

electronics, motor vehicles electrotechnics 12,000

metal products basic metalls 10,000 food, beverages machinery, equipment 8,000 wood, products of wood furniture, manufactoring 6,000 not elsew. class. pulp, paper non-metall 4,000 textiles mineral products chemicals

publishing, printing2,000

leather rubber, plasitc products 0 -8 -6 -4 -2 0 2 4 6 8 average annual increase of average annual decrease of employment 1999/2004, in % employment 1999/2004, in %

IKINET 21

The good technological knowledge base in Styria is evidenced by a high share of highly qualified employees with an engineering degree. This high share of technical engineers in total employment also applies to the machinery sector and the automobile sector in Styria.

Figure 10 Share of technical Engineers in total Employment (Index: Austria = 100)

(50) - 50 100100 150 200 250

29: Machinery and Equipment

28: Metal Products, except Mach. a. Equip.

25: Rubber and Plastic Products

34/35: Motor Vehicles

21: Pulp and Paper

27: Basic Metals

26: other non-metallic Mineral Products

20: Wood and of Products of Wood

30-33: Electrical Machinery, Electronics

The significance of the machinery sector and especially the production of motor vehicles are also reflected by export data. The following figure shows the share of Styria in total Austrian exports in goods in different sectors and stresses the important role export of Motor Vehicles plays for Styria as a region and Austria as a nation.

IKINET 22

Figure 11 Share of Styria in total Austrian exports of goods in different sectors 35 Chemical Products, Petroleum (23/24) 30

25 Electrical Machinery, Electronics (30 bis 33) 20 Motor vehicles (34/35) 15

10 Technology Goods (23,24, 29-35) 5 Manufacturing Goods - (15-37) 2000 2001 2002 2003 2004

Finally it can be stated that Styria coped well with its main structural problems with fast growth in the machinery and the automobile sector accompanying the catching-up process. Despite the good performance of large regional R&D-intensive firms the region has to face the challenge of broadening the innovation-base of SMEs in the manufacturing sector.

IKINET 23

3 Excursus: differing and changing rules of interaction along the value-chain in the Machinery Sector

Economic regions are characterized by spatial concentration of horizontally or vertically networking firms (research and education institutions). Communication and cooperation between these firms are determined by industry or market specific customs and rules, accepted routines and implicitness. The following section intends to give a short introduction into basic parameters of supply-chain networks in the machinery sector.

The dimension of supply-chain-networks is a function of vertical integration and division of labour in an industry. The automobile but also the aerospace industries are the mascots of empirical investigations of supply chain networks and relations. Anyhow, they are somehow special cases since medium or high volumes of products with a relatively high number of individual parts are produced by speci- fied routines.

While most of the automobile suppliers of the 70ies and 80ies worked as component suppliers - as usual in other areas of the machinery sector - the automobile OEMs began to source out working steps and therefore value added to systems suppliers as a result of growing technological complexity, higher cost- pressure and (because of the customer-orientation) broader product portfolios. During the 80ies the division of labour in the automobile industry peaked out with respect to the supplier networks. In the mid-eighties, Chrysler had 3000 suppliers and BMW 1400 (today both less than 500). At the same time some of the Styrian suppliers focused on the automobile sector as an attractive market for their activities. Regional clients in other areas of the machinery sector and their limited lot or individual piece orders set limits to medium and long-time strategic planning, to automation and long time growth. The traditional machinery sector did not pick up this strategy that extensively. Given the importance of the systems being subcontracted by assemblers, there is a clear strategic goal towards working with a smaller number of large suppliers. In general 5 different groups of suppliers can be distinguished along the value chain which can be identified in the automobile industry as well as other sub-

IKINET 24 industries of the machinery sector: Original Equipment Manufacturers, Systems Integrators, Component Suppliers and finally Raw Material Suppliers.

Supplier Hierarchy Firm sample for Styria An original equipment manufacturer (OEM) sells his Anton Paar products with his own brand name. An OEM integrates GmbH components and modules bought from other suppliers in his own products which are sold to the end customers. Nor- mally the OEM bears the design and development responsibility for the final product. Especially in the automobile and Magna Steyr the aerospace sector a new trend is breaking this rule as an Fahrzeugtechnik admission to the growing system complexity and shortened development times, either at an OEM or first tier supplier, induces the development of a new type of supplier. These suppliers do not supply physical products, but rather services, in particular design and engineering. Response to strict deadlines and product proliferation in both OEMs and suppliers requires the ability to rapidly develop and test new concepts and solutions. Systems integrators (tier 0.5 suppliers) are suppliers capable of designing and integrating components, subassem- blies, and systems into modules. (Magna Steyr Fahrzeug- technik, Karmann etc.) Systems Manufacturers are capable of design, develop- Pankl Racing ment and manufacturing of complex systems. Following a Systems

“black-box” design this often implicates complementary de- firm A, velopment competences to those of OEMs or system inte- Magna Power- grators. Systems manufacturers supply directly to OEMs or train, Systems Integrators. Typical examples are electronic systems, gearboxes, pumps, compressors. firm B, firm C The majority of the suppliers that participate in supply Firm D, chains of the machinery sector are working as component firm E, suppliers, which manufacture and (seldom) design a spe- firm F, cific component or a simple subsystem. Component Suppli- ers are mostly confronted with a work drawing. A consider- firm G, able part of these firms are classified in the sectors “Manu- firm H, facture of fabricated metal products (28)“, e.g. smithies firm I metal stamper, die-caster, and ”Manufacture of rubber and

IKINET 25 plastic products (25)” e.g. injection molder, spray-caster. Another type of component suppliers produce standard products like bearings, screws, gaskets, fuses, cables or tubes, which can be ordered with a catalogue. Toll manufacturers are important partners of the machin- Firm J, ery sector. Their success is based on specialization, proc- firm K, firm L, ess knowledge and additional production capacities. Typical firm M examples can be found in the field of heating, surface treatment, cutting machining or welding.

A last group has not been explicitly mentioned are suppliers of raw materials. In the case of Styria raw material suppliers are wholesale traders who source on the international market. They are the only possibility for smaller manufacturers (with a smaller storage, and financing basis) to buy raw materials (polymer pel- lets, steel, titanium, aluminium or magnesium) because of high minimum charges which are claimed by primary producers. One of the possible strengths of the sample chosen for Styria represented by the partner firms might be a differentiated picture of this loose multi-central In- novation-network which reflects the heterogeneity of actors in the region. A first macroeconomic glance on the region offers the impression of high concentrations of economic activity in a relatively small range of technology fields and industries. Notwithstanding this first statistical impression the thickness of economic interaction may not be overestimated. The system learning capacity has been established in prudent processes of stabilization of expectations as a consequence of informal interaction of agents which have been confronted with global challenges and competition on the one hand and a locally stabilizing knowledge infrastructure, human resource base and immobility of regional agents on the other. In its last consequence we may not oversee the size of the region resp. Austria but the geographical, historical and political determined fine-grained structure. The following excursus gives room to a short introduction of the partner firms. Basically we can differentiate following groups of industrial firms in the IKINET- sample in Styria: • Original Equipment Manufacturers resp. System Integrators • Local tier 1 system suppliers to the automobile industry • Highly specialized extended workbenches of international Tier 1 system suppliers • Firms with a strong focus on tool-making and a relatively high specialization to the automobile industry

IKINET 26

• Firms in the field of Plastics Technology with a strong focus on tool- making • Firms in the field of Hardening and Surface Technology

3.1.1 Original Equipment Manufacturers resp. System Integrators Anton Paar is highly specialized manufacturer of measuring and analysing devices for science and industry. Three years ago the family enterprise has been transferred into a foundation. Anton Paar is a highly innovative enterprise whose success is based on the direct transportation of findings of natural science in high quality measuring and analysis devices enabling measurement of physical or chemical phenomena. Magna Steyr Fahrzeugtechnik (MSFT) was founded in 1998 on the technological origins of former Steyr Daimler Puch (founded 1899 by Johann Puch), the manufacturing routines of the former Eurostar factory and additional human resources set free in 2002 by the bankruptcy of a Philips-factory in the south of Graz. Indeed Magna Steyr Fahrzeugtechnik is a tier 1 supplier of the European automobile-industry which works in the value-chain position of an OEM (Original Equipment Manufacturer) from a functional perspective. The development center of Magna Steyr Fahrzeugtechnik is moving towards a highly specialized knowledge intensive engineering service, which primarily acts for third party clients.

3.1.2 Local tier 1 system suppliers Firm A (but also the sister firm) is a tier one systems supplier of exhaust systems, has been re-founded as a strictly hierarchically organized family enterprise (900 employees) and is supplier to Magna Steyr Fahrzeugtechnik and most of the international OEMs. Magna Powertrain, a subsidiary of the Magna group, is an externally and internally fast growing first-tier supplier to Magna Steyr Fahrzeugtechnik but also other OEMs in Germany, America and Asia. Magna Powertrain is a former spin- off of Magna Steyr Fahrzeugtechnik. Both firms possess high autonomy within the Magna Group. The Pankl AG is working in several fields which can be reduced to the common denominators of high pretentiousness of manufacturing, high quality, short innovation circles, short time to market, high quality, high costs and imposed secrecy. These are the production of racing parts for racing teams in the F1, F2000, F3000, Rally World Championships etc. but also limited-lot-production sportcars (Ferrari, Porsche, Bugatti etc.) and aerospace. At least 85 % of the total turn-over (66 Mio. €) which is generated by 450 employees at the location

IKINET 27

Styria are made in the field of automobile racing parts. The family-enterprise had a phase of fast external growth and became a joint-stock-corporation at the end of the nineties. The major challenges of restructuring and organizational consolidation after the fast developments of the early past are still fad points on the agenda.

3.1.3 Extended workbenches of international Tier 1 system suppliers Firm C and firm B (but also other similar firms which have not been interviewed) are tier one systems- suppliers to Magna Steyr Fahrzeugtechnik and are extended workbenches which follow the baggage train of the automobile industry and settled in Styria accompanying certain clients of Magna Steyr (Daimler Chrysler, BMW). The locational choice of this tier 1 supplier is directly determined by a local production commission of a partner OEM (e.g. BMW for firm B). The headquarters and R&D-units (in Germany) of these tier 1 suppliers mostly established loose long time partnerships with the headquarters and R&D-Centres of OEMs (in Germany).

3.1.4 Firms with a strong focus on tool-making • Firm F is a fast growing (2005: 30 %) middle sized subsidiary of Magna Powertrain which has been founded as a merger of the departments for prototyping, tool-making, automation and equipment manufacturing of several Magna firms in Styria (Magna Auteca, Tesma, Magna Power- train). Firm F also produces plastic parts. Typically for the Magna Group, the firm has to compete on the free market even if the call is announced by a sister-firm. Actually only 25 % of the annual turnover is generated with its former parent-enterprises. • Firm G is in a similar position but a highly specialist of tool-making and a producer of sheet metal components. The sheet metal components have been shifted to Western Hungary at the mid of the nineties. Nearly all tools used in the Hungarian plant are developed and produced in Styria. Tool making clients are Magna Steyr, big international players in the field of sheet metal components, OEMs (automobile, power mower, white goods etc). Clients in the field of sheet metal components are producers of small series and niche vehicles (like Magna Steyr, right-side-steered vehicles).

• Firm N (former Bauer Automotive) is a supplier of pipes and pipe- systems e.g. for air condition systems with 80 employees. Firm N is a supplier to German OEMs and tier one suppliers but also to Magna Steyr

IKINET 28

Fahrzeugtechnik. Firm E, firm N as well as firm D are participating in a new networking initiative (5 medium sized firms) the “Styrian Technology Network”.

• Firm D, basic technology provider, is a relative small supplier of cast parts in the South of Styria with 350 employees. Magna Powertrain, Magna Steyr Fahrzeugtechnik and also Anton Paar are clients to firm D but the customer with highest sales is General Motors (Opel). Firm D has been delivering the automobile industry since the mid of the eighties and has two subcontractors in Croatia. 7 • Firm E, basic technology provider, is a relative small smithy with 240 employees producing hand tools. Since the mid of the eighties firm E is supplier to the German automobile sector. Clients of firm E are Magna Powertrain but also Pankl Racing Systems.

3.1.5 Firms in the field of Plastics Technology with a strong focus on tool-making Both, firm H and firm I are specialists in the field of plastic products and tool making. Both are participating at the Polymere-Competence-Center Leoben. Both are suppliers to Magna. • Firm H is an affiliate of an international firm group, the High tech Plastics AG. Firm H is active in the field of plastics for the Aerospace and Auto- motive Industry, which is highly dependent of firm Q a small engineering firm which has common roots with firm H in a former nationalized firm. • Firm I is a producer of smaller plastic parts and high level spray-casting tools. It is a supplier to firm H (and another manufacturer of plastic products for the automobile industryy in the region which is not in the sample) and producers of small electric appliances. • Firm M is a joint venture of firm H with a German partner and small toll- manufacturing supplier to firm H in the field of surface- and cutting tech- noloy for tools.

3.1.6 Firms in the field of Hardening and Surface Technology Firm J, firm K and firm L are specialists in the field of heating and surface treatment. Firm J is a supplier to Magna Powertrain. Firm K and firm L are suppliers to Pankl Racing Systems and also to other Styrian firms (e.g. Magna Steyr Fahrzeugtechnik or Anton Paar), but less frequently.

7 The research team to encl

IKINET 29

4 Business service firms and their profile

One of the regional strengths of Styria can be seen in the area of engineering competences respectively international competitive engineering business services. Employment in the area of knowledge intensive business services over- whelming increased since the end of the nineteen-eighties. This was accompanied by a trend towards downsizing, streamlining und outsourcing in the industrial sector. Focussing on their core-competences and expecting higher efficiency, lower costs and more flexibility industrial firms started to outsource knowledge intensive services. (Piore, Sabel 1984; Coombs und Battaglia 1998). Engineering services indeed can play a decisive role in the regional innovation system and the manufacturing sector. Following the literature technical engineering services affect the innovation-intensity of industrial firms to a higher degree than business consulting services. (Koschatzky 2001) Therefore we concentrated on technical business services and their diverse linkages to other players in the region. • Firm O has been founded 1948 and is the world's largest privately owned and independent company for the development of powertrain systems with internal combustion engines as well as instrumentation and test systems. Firm O has 1450 employees in Graz. Firm O develops and improves all kinds of powertrain systems and is a worldwide acting partner to the engine and automotive industry. In addition firm O develops and markets the simulation methods which are necessary for the development work. The products of this business area, Engine Instrumentation and Test Systems, comprise all the instruments and systems required for engine and vehicle testing. Firm O is active partner of three cooperative research institutions in Styria and partner of the Automobile Cluster in Styria. • Firm Q is a technical business service firm and a spin-off firm of a former nationalized industrial firm in Upper-Styria. The services of firm Q are focused on technology and innovation management in the fields of plastics engineering. Firm Q accompanies and implements new products from scratch to market launch of the final product. The projects are carried out in loose cooperation with national as well as international institutes and research facilities. Beyond others the market focus is on the automobile industry (Styria) and the aircraft industry (UpperAustria). Firm Q is a close R&D-partner of the firm H. • Firm R was founded in 1997, when two companies have been merged under the name „firm R GMBH“. Tool Management was developed by

IKINET 30

firm R as a service in the area of machined manufacturing. The starting point was to professionally take advantage of improvement and development potentials in tool supply and to offer resulting cost savings potentials to regional customers. In the same year the firm ventured inot other regions. Firm R is a very interesting case because it was a small (now a medium) sized firm which has established its services internationally without any regional key-customer but the direct support of the AC- Styria. At the end of 1998 firm R was founded with had headquarters in Graz and offices in Germany (Koblenz) and Hungary (Györ). In 1999 firm R Polska (Polkowice) was founded. Affiliates in Autralia, Brazil and China (Shanghai) followed. At the moment there are more than 300 employees who work at 9 locations worldwide. • Firm S was founded by three former employees of the TAM-Group, a Slovenian public firm group manufacturing buses for instance. The firm started as producer-firm and changed its focus to engineering services during the 90ies. Firm S is a small firm co-operating with firms in Austria (MSFT, firm O, a small technical business service firm), Slovenia and Germany in the field of FEM analysis, eigenvalue analysis as well as non-linear analysis in different models.8 Nearly the half of the staff is working in projects for MSFT. The co-operation base with the local automobile-cluster as well as the local universities is very weak. • The Laboratory for measuring technologies of firm P is a small engineering service firm with a unique long term co-operation with the Anton Paar GmbH and the local R&D-infrastructure in the field of development of precision measuring equipment for an international market. Recently the firm grew by the absorption of staff of a university-institute facing shutdown.

8 Firm S Research, Testing and Inspection of Vehicles & Engines Ltd. is an independent institution, performing development, research, technical and business services.

IKINET 31

5 R&D-institutions and their profile

The landscape of public and semi-public R&D-organisations and institutions in Styria has originally been dominated by the Technical University in Graz, the University of Metallurgy and Metalls in Leoben, JOANNEUM RESEARCH, an applied research organization owned by the regional government and some weakly funded industrial R&D-institutes (ACR-Institutes). In the mid of the nineties the Austrian tertiary education system has been extended by polytechnics which are more oriented towards education than R&D, yet developed small- scale cooperation in specific technology fields with local SMEs. In 1998 in Aus- tria a new type of R&D-organizations has been established with the intention of building stronger links between science and industry: Competence Centres are collaborative research centres in which an average of 8 - 12 companies work together with research institutions on projects at a pre-competitive stage. They are co-funded from the national, regional and firm side. Competence Centers have a limited lifetime of seven years in which they receive funding from the accompanying program (Kplus, Kind or Knet). Competence centres cover a broad range from a high scientific content on the one side to industry-related problem-oriented R&D on the other side. Kplus (for instance LKR9 or MCL10) are time-limited research facilities in co-operation with the Austrian Federal Min- istry for Transport, Innovation and Technology (BMVIT) that aim to build up high-level, targeted, internationally competitive R&D excellence at a pre- competitive level with relevance for both academia and industry. As a joint initiative with the Austrian Federal Ministry for Economic Affairs and Labour (BMWA), Kind Centres (e.g. ACC) are industrial competence centers that strive to create and strengthen internationally competitive technology clusters, taking as their point of departure the existing technological competence of several enterprises with similar thematic or methodical R&D interests.11 • The Technical University of Graz has seven faculties, more than 100 institutes and 8000 students. One of the most prominent faculties is the faculty of mechanical engineering and economics. The university traditionally has close contacts to industrial partners (especially regional large firms). Recently Magna Steyr Fahrzeugtechnik endowed three professor- ships at the Frank Stronach Institute which has been founded 2003. Be- yond those more or less unusual industrial engagements in science industry co-operations are based on research projects, several Christian

9 Competence Center for Light-metals ( 10 Materials Centre Leoben 11 Co-supported by the Austrian Federal Ministry for Economic Affairs and Labour (BMWA), K Net networks are competence networks consisting of a number of complementing competence nodes from the fields of science and industry in those areas of technology where there is competence and/or demand at different locations.

IKINET 32

Doppler Laboratories and the participation in competence centres or the business incubator Science Park Graz. The re-orientation of the university system in Austria (since 2004) should allow a closer accordance with the regional industrial demand in Styria in the long run. • The FH-Joanneum is a polytechnic (applied university) which has been founded in 1995 and started with four degree programs (Electronic, En- gineering, Industrial Management, Industrial Design). In 1996 degree programme for automotive engineering and vehicles has been established which trains all-rounders especially for the regional labour market. FH-Joanneum is a partner of the Automobile Cluster Styria and a well established provider of young engineers for the regional labour market (especially in the automotive industry). Beyond the provision of young graduates FH-Joanneum tries to strengthen its industry linkages by its transfer centre (for applied research, testing, simulation etc.). • JOANNEUM RESEARCH is one of the largest non-university research institutions in Austria. Apart from applied research and development for small and medium-sized enterprises JOANNEUM RESEARCH has to fulfil a public mandate in the field of technical business consulting for regional SMEs. The investigated Laser Center Leoben is one of 14 JOANNEUM RESEARCH institutes and co-operates with several industrial firms in the IKINET-sample. At the Laser Center Leoben, the directed light of the laser is harnessed especially in the manufacturing steps of welding, alloy- ing and coating. Since its introduction, laser welding has established itself as a precise and flexible method in manufacturing technology. Addi- tionally, lasers are also used in coating and shaping, thin-film technology, materials modelling and simulation techniques; the researchers of the LCL compute a range of tasks from microstructures and the behaviour of individual materials to complete processes. The Laser Center Leoben is joining its Head of the Department with the Materials Center Leoben. • The Materials Centre Leoben, MCL, is a Kplus-Competence Center which focuses on R&D in the field of new materials and implementation of work processes, surface finishing and product development. Its core- competences are fundamentals and methods of materials research, modelling and simulation, functional and nanostructured materials, joining-, surface- and powder- technology. Core-Partners are metallfabricat- ing firms, firm K, firms in the electronical sector, Anton Paar, Technical University of Graz, University of Metallurgy and Metals in Leoben, Tech- nical University of Vienna and others. Beyond the core-activities knowledge-intensive (especially for SMEs) services like feasibility studies or

IKINET 33

materials testing, production of testing-materials or consulting in respect of the implementation of new technologies are offered. • The Acoustic Competence Centre, ACC, is a Kind-Competence Centre and was founded in the year 1999 in Graz. ACC focuses on noise, vibration and harshness as well as sound quality, and carries out dedicated research activities in partnership with the automotive industry. Owners are firm O, the Magna Steyr and the Technical University of Graz. The main targets are developing and planning acoustically optimized components for vehicle construction. In close co-operation with academia and industry, field of numerical simulation ACC's facilities include three test beds to investigate the acoustic properties of component parts. Beyond the core-projects with the partners in the automobile the centre tries to transfer its knowledge to adoptions for other sectors. • The Competence Center for Light-metals (LKR) is a Kplus- Competence in Upper Styria with close linkages to Styrian core-partners. The LKR tries to cover the entire process chain from materials to component systems by its expertise. Following the philosophy of Kplus- Competence Centres the LKR tries to combine and strengthen the competences of scientific and industrial partner and PhDs from computer simulation to the production process and quality management. MSFT as well as Pankl Racing Systems owning are core-partners of this competence centre. • The Austrian Foundry Research Institute (ÖGI) is a non-university, non-profit research institute and accredited for broad range of testing methods which offers knowledge intensive services and R&D in the field of simulations of castings, casting technologies and the application of castings. The ÖGI is an association which is a member of the ACR.12 The ÖGI is in close collaboration with the Chair of Casting Research at the University of Leoben. The Managing Director of the Austrian Foundry Research Institute is also the acting professor at the University. The customers and partners of the OGI are foundries, suppliers for the foundry industry, Industries, which use castings (automotive industry, heavy machinery industry and plant industry) and R&D institutions. One characteristics of the ÖGI and other ACR-Institutes is a very close relationship to it’s SME-Partners.

12 Austrian Cooperative Research (ACR), the association of cooperative research organisations, was founded in 1954

IKINET 34

6 Policy-agents and intermediates and their profile

The landscape of policy actors and intermediates in Styria considerably changed with the number of agents exponentially increasing during the past 10 years. Based on reciprocal share-holding, ownerships and seats in advisory boards policy, science and economy melt into one another. The complexity of this resulting system reflects the ongoing development towards multi-level governance. Due to this situation the research team tried to cover the broad spectrum from governmental departments to private-public partnerships and associations which considerably influence regional policy strategies. The following figure illustrates the direct inter-linkages between selected players which are relevant for IKINET. Figure 12 Direct linkages between selected players in Policy, Science and Economy

POLICY

Department of Department Economics and of Science Labour – A14 and R&D

City of SFG Graz

AC - JOANNEUM Y FTI M ) STYRIA RESEARCH S s C O ICS I N rm STN E O fi N C ( Technical C E E University Chambers Graz of Commerce Materials INNO- Cluster ACC Industrial REGIO Assoc. PCCL

University of Firms Metallurgy and Metalls

• Styrian Business Promotion Agency (SFG): Until the beginning of the nineties the executive agendas (e.g. funding and promotion of entrepre- neurship) have been directly in the hand of the regional government. In 1991 the Styrian Business Promotion Agency (SFG) has been founded. During the nineties the areas of responsibility have been widened. Today the SFG is structured in 14 departments. The Department for Co- operations, Business Networks and Clusters – Knowledge & Technology Transfer aims to build on and reinforce Styria’s strength fields through the well-directed integration of enterprises on the one hand and research institutions, universities and other relevant actors on the other. The SFG

IKINET 35

provides assistance throughout the early stage of cluster formation and facilitates active participation and finance models to lead selected key projects into a consolidation stage. Once this stage is reached, SFG withdraws still offering on-going support. At present SFG is a partner of Automotive Cluster Styria GmbH, the Wood Cluster Styria GmbH, the Humantechnology Styria GmbH, the Materialcluster Styria GmbH and Eco-cluster. Another core objective of this department is to support existing potential for co-operation between science and industry to help Styrian SMEs access knowledge resources, thus enabling them to innovate faster and to enhance their competitive edge. The Department for Business Expansions and Innovation is the key driver for sustainable growth, technical efficiency and competitiveness of enterprises. Therefore, the Action Programmes for Innovative Invest- ments and Consulting Services are designed to improve Styrian enterprises’ capabilities for innovation to support the conversion of innovative concepts into new products, services and processes and to maintain and safeguard jobs. Moreover, the Action Program for Skills Development in Networks provides innovative ways for collaborative actions in order to increase the level of knowledge within enterprises and to access new markets in Austria and at the international level. The Department for Competence Centres, R & D aims to fulfil the following strategic objectives: to promote Styria as the premier location for scientific research and technological advances to create and disseminate cluster-specific know-how to individual businesses. • The Department of Economics and Labour (A14) initiated, accompanied or supported the striking developments of Technology and Regional Policy in Styria, e.g. Cluster-Policy, Internationalization Policy focusing towards South-eastern Europe or the establishment of Competence Cen- tres in Styria. While the SFG is responsible for the operative side of activities, the department focuses on the strategic part. In the sense of a fruitful division of labour with the SFG the Department A14 focuses on the areas qualification, R&D and internationalization. In the future the strategic attraction of foreign firms will be of growing interest for the department.

IKINET 36

• The Automobile Cluster Styria (AC-Styria) was the first example of a pro- actively implement cluster in Austria and a forerunner of the establishment of new instruments of regional policy. The basic idea of the AC- Styria is grouping all in the automotive value chain available forces of the region, thereby increasing the innovation strength and international competitiveness. The focus is on the role of a communication and information platform, marketing of the automotive region Styria, development of existing networks, initiation of co-operation projects and training programs, technology and knowledge transfer. At the moment the Cluster has approximately 200 members ranging from system suppliers in the automobile industry to personal services (professional cleaning services etc.) The Automobile Cluster is an intermediate representing the interests of the involved firms, R&D institutions and the regional policy. The first initiative steps have been taken by large leading firms which intended to create a locally concentrated integrated production centre. Competition of local players (at the level of districts) eventually hampered the realiza- tion of the original idea. In 1995 the SFG got the instruction from the department of economics and labour to support the creation of a firm- network in the automobile sector. Between 1995 and 1999 the Cluster was managed by the SFG. In 1999 the Cluster got a private self- sustaining management. (The SFG is still shareholder.) • The FTI is a transfer centre resident at the University of Technology of Graz but third party funded to a considerable degree (e.g. by the City of Graz). The aim of FTI is to facilitate co-operation between industrial enterprises and research and development facilities at the university level. FTI cultivates close contacts to all TUG institutes as well as to regional and supraregional trade and industry. FTI is especially committed to designing and carrying out programs and projects which have long-term effects. FTI establishes contacts with TUG institutes, sets up co-operation projects in research and development (e.g. diploma theses), helps find experts in all specific fields of engineering and the natural sciences, ad- vises regional small and medium-size enterprises on matters regarding the concrete implementation of innovations within the framework of »Ac- tive Knowledge Transfer« (supported by the City of Graz – Trade and In- dustry Promotion) in co-operation with UNI Graz. This is done without any commercial interests on the part of the TUG.

IKINET 37

• The Styrian Industrial Association (IV) as the traditional private association and representative lobbying organization of medium and large industrial firms is working in a very close partnership with Chamber of Commerce. The Industrial Association is an active lobbyist for the regional firms. Beyond lobbying or the direct support of single firms, the IV tries to strengthen networking among regional firms. After a phase of reorientation the IV (notwithstanding its roots) tries to open its doors for smaller (growth and technology oriented) firms. • Innoregio Styria is an innovation policy network, an open long term oriented platform which has been initiated by the Styrian Industrial Associa- tion and is actively supported by regional industrial firms, universities, non-university R&D, the national bank and regional policy actors. Pres- ently it is discussed whether Innoregio Styria should become the range of an advisory board for the regional Research-, Technology-, Develop- ment- and Innovation Policy (RTDI) in the style and intention of a similar advisory board on the national level.

IKINET 38

7 Financial services and their profile

The system of direct and indirect funding of R&D is very progressive, differentiated and balanced. In Styria firms can choose among a broad range of financial sources for investments or R&D and innovation projects at the regional but also the national side. For external observers maybe surprisingly a remarkable gap with respect to the availability of risk capital can be identified. The explosion of the new-economy bubble aggravated the situation. No firm investigated for IKINET in Styria did receive risk capital from a private financial service. • The Raiffeisen Landesbank is traditionally focusing on SMEs and the start-up-segment. 70 % of the firm start-ups in Styria are financed by the Raiffeisen Landesbank. The regional focus is on the future region South Eastern Europe, where the Bank tries to accompany the first steps of its small and medium sized costumers with adequate supporting services. Therefore the Raiffeisen Landesbank takes an active part in several intermediates and association and is a partner of the SFG. The Raiffeisen Landesbank respectively its CEO is sitting in supervisory board of the Styrian Risk Capital Fund and is official partner and of the AC-Styria. • The Styrian Risk Capital Fund (StBFG13) existed long before the SFG and was founded in 1983. The activities of the StBFG were focused on the restructuring and recapitalization of (mainly industrial) firms. In 2000 the StBFG started to work in the area of venture capital funding to compensate the weak venture capital market in Styria. The first steps have been accompanied by a notification procedure based on the verifi- cation of existing market-failures. Since March 2003, the StBFG has participated in the risk capital market under the Action Programme “Venture Capital” with funds made available by the Province of Styria, thereby setting a benchmark for other regions. So far three Styrian high-tech companies have received VC investments, with two investments carried out in this business year alone.

13 Steirische Beteiligungsfinanzierungsgesellschaft m.b.H

IKINET 39

The activities of the StBFG are well-suited with the Department for Fi- nancial Assistance, Liabilities/Guarantees of its parent company SFG, which has the core task to allocate equity participations in the form of si- lent partnerships. In addition, it also acts as a trustee for the Province of Styria as regards the allocation of venture capital to highly innovative projects, projects involving high technical risks and extraordinary potential for development. Moreover, on the basis of a resolution passed by the Parliament of the Province of Styria, a concept for a support instrument will be drawn up. This instrument is to be designed to pinpoint opportunities for the Prov- ince of Styria to participate in offensive projects or defensive projects, i.e. to support companies after their collapse when the company’s core business is still considered essential for safeguarding jobs and for strengthening the region. For Styrian companies striving to operate globally, a plan for a support instrument will be drawn up which will also include guarantees.

IKINET 40

8 The evolution of the sectoral network

At a first glance, the machinery sector in Styria seems to be dominated by the automobile sector. A closer analysis of the history of economic activities in this sector but also of the multilayer relationships between the firms reveals an entirely different picture. Although we can find a significant concentration in the automobile industry and a certain regional dependence of the automobile sector, a big share of firms doesn’t sell its products to the automobile-sector. Even for the automobile sector an internal investigation of the automobile cluster (AC-Styria) confirmed that at max. 57 % of the production of responding AC-Styria-Partners has delivered to the automobile sector.

Most of the firms which form the base of the machinery sector have overcome the structural change of the Styrian economy during the early nineties by adopt- ing new technologies or opening up new markets. The traditional automobile industry which founded competences in the limited- lot-production of for wheel driving cars (despite a high vertical integration of manufacturing) established a network of small suppliers. However, due to the relatively weak demand base provided by Steyr Daimler Puch most of these firms moving towards the automobile industry didn’t properly cope with structural change towards the modern automobile industry starting at the local market. But the German automobile industry has been a strong incentive for several firms in the region to shift from the traditional market to this new field, a movement which happened regardless of the existence of leading firms. An internal investigation of the automobile cluster (AC-Styria) exposed that the internal turnover in the Cluster (including the supplied goods and services to Magna Steyr Fahrzeugtechnik and Magna Powertrain) amounts to 9.1 % of the total turn-over. The automobile sector has been a vehicle of structural change and economic growth in the machinery sector although the common dimension of technological identification might be seen in the field of material competences. Therefore the participating firms do not seem to cluster in a material sense (i.e. per input- output-linkages) but rather through direct, more often indirect channels of knowledge. Inter-linkages and co-operations beyond supply-relationships within the automobile value-chain are essential. Leading firms like Pankl racing systems or Anton Paar are embedded in the innovations systems obliquely.

IKINET 41

Most of the firms investigated are independently oriented towards the export- market. The firms established small niches from the perspective of the regional market, which are highly competitive at the international level. Therefore global competition is not suspended by regional leading firms. Most of the medium sized but also small sized firms are confronted with the challenges of global competition and markets. Especially small and medium sized firms differ in their ability to utilize the supplier base in the south-eastern European countries. Nev- ertheless, the machinery sector seems to ride forward compared to other industries in the manufacturing sector.

The following excursion helps to integrate the core-discussion of IKINET in the broader context of the machinery sector in Styria.

Employment and production in the machinery sector in Styria seems to reach its maximum extension and importance for the regional economy. After a phase of fast growth despite the perspectives of single players the general aim of the sector might be to maintain stable employment. This alludes in particular to the automotive sector, where the centre of gravity will continue to move eastwards. This development is caused by approved lo- gics of transportation and logistic, wherefore tier 1’s follow the OEMs to markets with good growth potential and low production costs and shift their supplier base to potential partners in Eastern Europe. Firms in the machinery sector in Styria have to develop towards higher levels in the value chain of knowledge production (perceived competence centres), have to find new arrangements with partners and networks in Eastern Europe or have to resort to new niches and markets. Apart from those firms which are in the core-business of manufacturing of automobiles or parts for automobiles Styrian firms identified the automobile industry as a market which can be opened with prevailing core-competences. In some cases the automobile sector might be considered at an intermediate stage on the way to other pretentious markets like aerospace-technologies or rail-way-technologies.

Clusters following the traditional idea of industrial district as well as cluster completely fulfilling the Porterian diamond do not exist in Styria. Actually closed value chains of this magnitude disappeared with the break down of the nationalized industry and structural change in Styria.

In the sample of the machinery sector in IKINET four (sub)-networks or economic condensations can be identified, where relatively stabile value-added- chains are evident. Physical linkages in between these sub-networks are weak

IKINET 42 but intersections based on co-operative R&D and R&D infrastructure, qualification and informal exchange are evident. Both dimensions will be discussed in the following section These at first glance rather loose relations are very important for the position of the machinery sector in Styria and are enforced by policy measures of the regional government. • As may be expected the leading firms of the core-network are Magna Steyr Fahrzeugtechnik and its supplier Magna Powertrain (including the daughter firm F). The network also includes several other affiliates of the Magna Group in Styria, which are not in the sample of the empirical study but also interact with regional second tier supplier firms in Styria. This sub-network reflects the rules of automobile production. Most of the firms are highly specialized to the automobile sector but not exclusively focused on Magna Steyr Fahrzeugtechnik • A second sub-network in the field of plastics and rubber has strong intersections with the automobile network but also interregional linkages to clients in the field of aerospace-suppliers especially in Upper Austria. • Pankl Racing Systems and Anton Paar are vertically highly integrated and are both embedded in smaller networks which are concerted with their niche- strategies. Restrictions of attention and resources entail that the research team had to space out some firms from a deeper investigation. This concerns partner firms of Anton Paar in the field of cutting machining, sheet metal forming or spray- cast of plastics or glassblowing, partner firms of Pankl Racing Systems which have not been revealed because of potential violations of secrecy and some affiliates of the Magna Group in Styria.

8.1. BUYER SUPPLIER RELATIONS – THE DIMENSION OF PHYSICAL EXCHANGE The following discussion is oriented towards the physical exchange of goods between the industrial firms with Figure 13 presenting an overview of the revealed buyer-supplier relations and differentiates between casual and continuous relations, individual firms versus affiliates of firm groups, R&D-propensity. Supplier relations with knowledge intensive services or research institutions resp. knowledge-relations in between the industrial firms are not depicted in Figure 13.

The following paragraphs will give an overview of the positions of the firms in this buyer supplier network and differentiate typical forms of buyer-supplier relationships.

IKINET 43

Figure 13 Buyer Supplier Relations among the industrial firms in the investigation

Firm A Firm M Firm B Firm H

Firm C Firm I

Anton Paar

Magna Steyr Fahrzeugtechnik Firm L

Firm D

Firm F Firm G Firm K Pankl Racing System Magna Firm N Powertrain

Firm J Firm E sub-networks

Firms, not in the sample Industrial Firms

O E M Second Level Subcontractor (less then 20 employees) System Supplier Firms with Formal R&D: First Level Subcontractor codified knowledge

Second Level Subcontractor Firms with Informal R&D: (more than 100 employees) tacit knowledge

Second Level Subcontractor (20 - 100 employees)

8.1.1 Condensations in the field of automobile suppliers industry As already outlined in the macro-economic and historical introduction, the growth of the automobile industry in Styria has been accelerated in a certain way by the appearance and intensification of activities of the Magna-Group in Styria, even though input-output relations within the region are weak and the core of indigenous automobile firms are oriented towards clients from abroad at the bulk. The leading firms have to deal with a stepwise shift of the centre of gravity of the European automobile industry towards Eastern Europe in the course of the next decade. Probably the baggage train of the automobile industry will leap some Cohesion Countries and move directly to Romania, Bulgaria or the Ukraine, countries which are beyond usual distances of 400 – 600 kms.

IKINET 44

If the Cluster had to count on buyer supplier relations, it would stand on “cat ice”, as already mentioned. The origins of some buyer-supplier relations in field go back to early nineties - e.g. in the case of firm A, firm G, firm N which also existed during the late phase of the Steyr Daimler Puch or Chrysler-Eurostar - but most of the buyer-supplier relations have been established during the last five or seven years.

The biggest players in the sample are Magna Steyr Fahrzeugtechnik (MSFT), Magna Powertrain and firm A. Magna Steyr Fahrzeugtechnik with about 9000 employees is the biggest player in the region but not dominating in the sense of direct regional supply chains respectively material input output relations. The MSFT is specialized in the field of European premium brands. Other automobile suppliers directly utilize the short distances to the centres of the German automobile industry resp. their supply-partners in Austria (BMW-Steyr etc.). Following the American resp. Ca- nadian Model of supply-chain relationships both Magna Steyr Fahrzeugtechnik uses prize-elastic arms length relationships to handle their suppliers. It can not be overseen that Magna Steyr Fahrzeugtechnik is sourcing globally, thinking about strategies for a better integration of potential production capacities in Eastern Europe (e.g. Romania). Following a general trend in the automobile industry recent efforts try to concentrate the number of suppliers and integrate the suppliers into R&D processes. Suppliers of systems and modules are more affected by this trend. Most of the indigenous regional suppliers deliver single component parts and engineering services to Magna Steyr Fahrzeugtechnik.

Because of the indirect OEM-responsibility as a tier 0.5 supplier the autonomy of decision especially with respect to systems supplier partners is restricted. The customers dictate their traditional tier 1 - mostly system suppliers - to Magna Steyr Fahrzeugtechnik, e.g. firm B, firm C. As mentioned before the challenges for suppliers differ in dependence from their position in the value chain. Workbenches like firm B or firm C are short or middle time employers and typical examples of firms which move with the baggage train of the international automobile industry and their location-choice. The flexibility and viability of these firm-groups is based on international mobility, investment incentives and windfall-gains which are widely accepted by local authorities to attract the production-line of an OEM. Buyer-supplier relationships to regional firms are the exception but not the rule.

IKINET 45

Beyond these global system suppliers with firm A (exhausting systems) and, Magna Powertrain (but also another plastic product manufacturer which is not in the sample) system suppliers of MSFT are located in Styria with their headquarters. Both suppliers are not entirely dependent on MSFT. Firm A is a fast growing family firm group (900 employees) with communication channels meeting at the final decision of the CEOs. The supplier relationships are not very complex and knowledge intensive. Suppliers are toll manufacturers (stamping, surface treatment), producers and wholesale traders of raw materials (sheet metal, tubes). While firm A has concentrated its R&D and production capacities in Styria sourcing from a small range of mostly regional suppliers, Magna Powertrain avails of a broad range of international suppliers and considerable production capacities throughout the world (esp. in Northern and Middle America). Because of its quick external growth Magna Powertrain is bigger than MSFT from an international perspective. As a tier 1 supplier Magna Powertrain would have more degrees of freedom in its choice of supplier partners. Basically Magna Powertrain is highly vertically integrated using a single sourcing strategy which is based on prize-elastic arms length relationships. The regional suppliers make 25 % at maximum with Magna Powertrain. The majority of suppliers of Magna Powertrain can be found in Ger- many and Italy. Direct suppliers to Magna Powertrain are firm E (forging) and firm D (die casting) as well as firm N (pipe-systems) or firm G Technology (sheet metal components), two suppliers to MSFT. These firms have established contacts to the German automobile sector beyond the appearance of Eurostar or Magna.14; Firm D and firm E are family enterprises, firm G is a subsidiary with a high decision autonomy, and firm N is a subsidiary with limited degrees of freedom. Among these firms a reverse development from single players with direct international links to OEMs and tier 1 suppliers to a local orientation seems to be evident. Despite their competitiveness, the buyer-supplier relationships to their clients are not very knowledge intensive.

8.1.2 Condensations in the field of polymer and plastics processing During the last decade a small group of polymer and plastics processing firms discovered the automobile industry as an attractive market for their competences and products. Firms in this field are mostly tier 2 suppliers with competences in the field of tool-making. Firm H is a spin-off which was founded after privatization of EUMIG (now AT&S), firm I is a medium enterprise which gener-

14 Firm D is supplier to Opel, Bombardier-Rotax and Linamar, Firm E is a supplier to firm B, Mitec, Linamar, Pewag, and Doka and firm N a supplier to Saab, Skoda, Daimler Chrysler, Audi and VW, Firm G is asupplier Another supplier which is not in the sample for IKINET is a Subsidiary of the Georg Fischer- group. The firm former independent firm had a long tradition in casting and has been overtaken by the Georg Fischer- group in 1999.

IKINET 46 ates two thirds of its turnover in the automobile industry. Both are suppliers to several Magna firms in Styria (MSFT, Magna Powertrain, firm F, Magna Au- teca). Especially firm H attempts to find new markets as tier 2 supplier in the aerospace sector. These firms are part of the growing network in the field of polymer and plastics processing which has multiple linkages to the machinery sector as the case of Anton Paar illustrates. A recent public funded project financed by the Styrian Technofit-program tried to establish sourcing co- operatives however failed due to lack of correspondence of raw materials. Dur- ing the last decade the institutional landscape has been considerably revaluated by the emergence of knowledge intensive business services and cooperative research.

8.1.3 Condensations in niches beyond large volume automobile industry in the field of racing parts The addressed network evolves around Pankl Racing Systems, a fast growing specialist in the field of racing parts and components for the aerospace industry. In the field of engine-technology and aerospace-technology Pankl Racing is a component supplier. In the drivetrain-segment Pankl Racing Systems is a systems-supplier. The long-time target is to be a specialist for the whole powertrain from the piston to the hub. Pankl Racing Systems and its subsidiaries form an integrated network of firms which covers a considerable part of the value chain. Pankl has established closed relationships to network suppliers in the forging, surface treatment, cutting machining, precision-drilling, surface treatment or hardening. Other than in the typical case of the high-volume automobile industry the supply-chain relationships determined by secrecy-pre-requirements are compulsory and therefore rather restrictive and price-inelastic. The unusually closed relationships to these toll manufacturers are essential to maintain the short development cycles, the high performance and quality and the secrecy- directions. Particular examples have been where co-operative R&D yielded new (now irreplaceable) processes. Especially in the field of engine components short-time orders of clients are an additional challenge.

8.1.4 Familial networks and strict division of labour along the knowledge value chain in the field of measuring The final network has partial intersections with the rest of the sample. The leading firm started as metalworking shop for fine-mechanic and precision components which still are a second supporting leg. Starting with an invention at the Technical University of Graz the firm began to produce measuring devises (viscosimeters). Small lots, casual orders and quality requirements exacted a mickey-mouse sourcing strategy, based on rather

IKINET 47 binding contract relations, where long run trust based relations are the basis for cost reduction but also innovations. Mostly suppliers of the automobile industry are avoided, because of the relatively small bargaining power and the long delivery periods. The buyer-supplier relations are based on a careful pre-selection- phase and social trust. Orders are not necessarily bound to the period of validity of corresponding offers. Suppliers of Anton Paar are component suppliers and can be found in the field of die casting, spray casting, plastics processing, electronics, metal forming, and manufacturing of high performance glasses.

8.2. LINKAGES BETWEEN INDUSTRY, ENGINEERING SERVICES AND SCIENCE Despite of evident sectoral concentrations, direct links to the science base and also the availability of human capital seem to loom larger as binding factors than long term firm networks. Focusing on the side of relations based on knowledge, information and non- material forms helps to round off the picture. Figure 14 also reflects the condensations and sub-networks, which have been brought up in Figure 13. The picture also differentiates between continuous partnership (share holding) and casual cooperation (R&D-projects, diploma thesis, consulting, measurement and testing). Immediate but also oblique exchange with resp. by knowledge generating institutions and service firm partner surpass the exchange of physical goods. The density of linkages between industrial firms and research institutions and engineering services is striking. A considerable part of the firms have direct contacts with the university sector. This is especially true for the leading firms in our network. Nevertheless, some firms don’t have mentionable contacts to the knowledge infrastructure, e.g. firm E, firm G or firm N, albeit they revealed informal contacts in the context of dispositions and events or informal meetings. Those firms are threshold-firms which are an attractive target-group for technology policy measures.

IKINET 48

Figure 14 Institutionalized Relationships between industrial firms, engineering-services and .the knowledge infrastructure in Styria

Firm C Firm H Fim A

Firm Q Firm B Competence Firm I Center KNOW Polymer Competence Firm G AC-Styria Center Leoben Anton Paar University Magna Steyr JOANNEUM of Graz Fahrzeugtechnik RESEARCH

VIF Technical Firm Competence C. University S Firm P Virtual Vehicle Graz AC²T Material Center (Tribology) Leoben ACC University for Accustic Compet. Pankl Metallurgy and Racing Center Materials Firm System O Polytechnics Light Metal FH-Joanneum Competence Center Ranshofen

Firm E ÖGI Firm N Austrian Foundry Firm D Research Inst. Firm L Firm K

Firm R co-operative R&D-institutes Firm F Magna universities, polytechnics, applied public research Powertrain Firm J

In the observed section of the machinery sector in Styria the network between science and industry is highly institutionalized. Relative new instruments of the FTI policy and important players in the innovation system of the machinery sector are Competence Centres (ACC, ViF, KNOW, MCL, PCCL, AC”T, LKR).

Competence Centres are temporary cooperative research institutions based on a program of the Austrian Research Promotion Agency which are co-financed by the regional government but also industry partners. The program aims at strengthening the technological infrastructure, improving the co-operation between science and industry and increasing the innovative potential of the regions. The Polymer Competence Centre (PCCL), the Acoustics Competence Centre (ACC) and the Materials Centre Leoben (MCL) are in the IKINET sample.

Two important players are the Technical University of Graz and the University for Metallurgy and Materials which also hold interests in several of the competence centres.

IKINET 49

JOANNEUM RESEARCH is one of the largest non-university research institutions in Austria with 14 institutes, which is owned by the regional government of Styria and also hold interests in several of the competence centres. The Austrian Foundry Research Institute is a cooperative external R&D partner for Austrian firms in the field of foundry and casting (a registered association) The association has 5 partners in Styria – basic technology providers as well as technology-users.

IKINET 50

9 Attributes of the cluster reflected by the internal structure of the participating firms

9.1. EMPLOYMENT AND QUALIFICATION A considerable high share of the interviewed firms is part of a firm group. Ex- cept for firm B and firm C with green field investments and local workbenches of international tier 1 suppliers all firms which are part of a foreign firm group have indigenous roots. The takeovers occurred at the end resp. the half way of the restructuring process at the end of the nineties. Because of the immobility of the local labour force but also the small capacity of the regional labour market most of these firms had the chance to hold the key-personnel resp. competences and the regionally integrative potential of the personnel. This applies to the case of Magna Steyr Fahrzeugtechnik as well as to firm H, firm J or Georg Fischer (which is not in the IKINET-sample).

Measured by the number of employees we observed a relatively homogenous field. The IKINET sample in Styria is dominated by medium sized firms. Only Magna Steyr Fahrzeugtechnik and Magna Powertrain are large firms from the perspective of their employees. Firm A and its sister are part of a regional “family-firm group” and have 900 employees together. Pankl Racing Systems and Anton Paar have 450 employees in Styria. Firm L and firm M are small firms with less than 50 employees each.

Concerning the qualification structure, there are considerable differences between OEMs, systems- or suppliers with R&D-units on the one hand and basic technology providers, extended work-benches or third party subcontractors on the other. This can be explained by the follwing factors: a higher knowledge and R&D-intensity on the one hand and a higher attractiveness of larger firms and central locations for highly qualified Persons on the other hand. Compared to German or Italian regions with a considerable weight of the automobile and machinery sector a lower inter-organizational mobility and fluctuation of employees has been pointed out by several firm-partners.

The availability of a sufficient local labour market with respect to an industry or technology has been revealed as one of the most striking locational factors. Es- pecially firms in rural or more or less isolated areas like firm D, firm E or firm G refer to very local labour markets, binding traditions and low mobility of employees. Especially small and medium sized supplier firms show familiar traditions structures, sometimes over generations. Workers come from the locally sur-

IKINET 51 rounding area, sometimes also over generations and are educated and trained internally. A regional network of schools or higher technical education works in favour of the local availability of qualified workforce which also helps fill middle leading positions.

The Styrian firms in the machinery but also in the material based supply- industries benefit from the regional universities that provide the labour market with highly qualified engineers. Verifying the brain-drain-thesis the universities attract a considerable number of freshmen-students from other regions which are integrated in the regional labour market to a considerable degree. This has been confirmed by recent survey for Technical University of Graz. By means of data of the national social insurance it also can be affirmed that the Styrian enterprises in the manufacturing sector have higher shares of technical academics among their employees than the Austrian average. Magna Steyr Fahrzeugtechnik and firm O (which is in the service firm sample) are the largest employers of technical engineers in the machinery sector in Sty- ria. Both firms benefit from the availability of young graduates on the one hand and suffer from the size of the regional labour pool of high-qualified engineers at the same time. Especially Magna Steyr Fahrzeugtechnik stressed the problem that the large centres of the German automobile-industry are too far and the wage level in Styria is way too low to participate in this specialized labour pool. On this account MSFT is debarred from an important source of knowledge transfer which is opened up by natural fluctuation. MSFT would be a clear win- ner of approaching labour markets. This might not be true for small and medium sized firms.

Although most of the firms complain about the availability of qualified employees the apprenticeship graduation seems to be a good regional endowment at this qualification level. 15 Most of the firms in machinery sector resp. the supplying areas qualify apprentices – especially in the field of tool-making. Particularly the medium sized firms prefer apprentices which have been qualified internally for key positions. This is especially true where implicit firm-specific knowledge has to be transported via education (tool-making, moulding, surface treatment or hardening), e.g. firm D, firm E or as a special-case firm A.

15 Magna Steyr Fahrzeugtechnik was in the favourable position to attracted mobile employees from other firms because of higher loans and to have the opportunity to catch up qualified personal from local bank- rupted firms (especially Phillips-Lebring). Compared to the number of employees a small number of apprenticeships are (resp. can be) offered.

IKINET 52

Most of the larger firms also developed qualification programs for their employees (Magna Steyr Fahrzeugtechnik, Magna Powertrain, firm F, Anton Paar GmbH and Pankl Racing Systems). The members of the AC-Styria also use the offerings of the Cluster organization. Pankl Racing Systems is confronted with fairly high fluctuation of employees. Therefore a relative sophisticated program has been developed which should help to handle initial qualification deficits, the Pankl-Academy. Beyond the voluntary offerings of the program, systematic courses may be obligatory for single person provided specific personal or technical qualification deficits have been identified. Especially small and medium sized firms support personal qualification by eas- ing the labour time resp. personal shift schedules or by financing of courses. Two firms addressed the problem of restricted perspectives for higher qualified persons referring to the restricted opportunities of vertical mobility in their enterprises.

Partially associated with qualification, some firms (Magna Steyr Fahrzeugtech- nik, Magna Powertrain, Pankl racing Systems) stressed their awareness for knowledge management as a method to handle the transfer of implicit knowledge, experience resp. implicit expert knowledge. A first cooperation with an international consulting firm in the field of knowledge management between 2001 and 2002 was not very fruitful but Magna Steyr Fahrzeugtechnik made a second self-reliant attempt three years ago. Self- propelling MSFT developed very successful projects which warrant further efforts. Beyond systems for an improved utilization of explicit knowledge sophisticated mechanisms have been developed to integrate individual experiences from completed projects as inputs for future projects. The next steps entails integrate suppliers to broaden this learning system. The step after the next step will be to integrate other Magna firms. Magna Powertrain didn’t set steps in the field of knowledge management because of urgent need for consolidation in the area of information management, which is caused by the unusual external growth during the last year. Especially Pankl Racing Systems and Anton Paar pointed at the possibility to accelerate the integration of young employees by knowledge management. Pankl Racing systems tries to set first steps with an IT-based approach (ERP- Systems, work-flow-model, process-oriented organization etc.) Anton Paar has implicitly established routines which follow some ideas of knowledge management. All other firms didn’t reveal actual demand for or experiences with knowledge management techniques.

IKINET 53

9.2. ORGANIZATION AND MANAGEMENT STYLE Already the contingence theory of organisations treats organizational structures in dependence of multiple factors, deriving from the size, the manufacturing technology but also environmental factors (stability vs. rapid change) While firms with broader product range and complex technologies tended to choose advanced forms of organization, firms with a homogenous product range followed the model of a functional organisation, despite their medium size. Most of these organizations are hierarchically organized and have a small share of high-qualified employees. Decisions are made by on person or a small group at the top of the hierarchy. This is especially true for firm D, firm E, firm N, firm M and as a special case for firm A, a R&D-intensive and innovative enterprise. All these firm have moderate paternalistic tendencies. Most of the other firms are organized in a matrix-organisation. (MSFT, Anton Paar, firm H etc.) Anton Paar has to be mentioned because it is an extreme case of a consensus based organisation, which is based on voluntariness and personal obligation. In 2004, Anton Paar has been voted the most family-friendly firm in Austria, inter alia because of its flexible labour time management for women.

With respect to the outside relations of the firm, hierarchically organized firms seem (as might be expected) to predominantly communicate bilaterally, while more complex organisations seem to support (or be confronted with) multi- lateral communication.

An important distinction which has to be made refers to differentiation between internally and externally growing organizations. While the former case has to prevent itself from lock-in effects and encrustation the latter one has to bear the challenge of integration. The Magna Group is a typical externally growing organization which is able to sidestep some problems of continuous integration of its affiliates by a model of small profit-oriented individually deciding firm-units which interact with price elastic-arms-length buyer-supplier relationships. This might be advantageous for economical handling but hampers co-operative advanced developments, common knowledge management etc. Two other firms with fast external but also fast internal development are Pankl Racing systems and Magna Powertrain. Both are confronted with challenges of reorientation and reintegration and are confronted with a rather hierarchical di- visional interim-organization. Internal R&D-units work relatively independently. Both firms extensively work on advanced information management systems. Firm F, which has been in a similar situation, coped well with centrifugal forces by means of restructuring radically and of introduction of a matrix organization.

IKINET 54

Firm C and firm B are outside dependent branch plants with no capacities and no authority for development and design. Their only business is to supply just in sequence seats or axe-systems.

Among the business services firms we can identify very different styles of management and internal organization. While firm O is organized like a multinational industrial enterprise with elements of an applied research institution, smaller business services like firm Q or firm S are dominated by the entrepreneurs. Firm R is a special-case of a multi-locational firm which necessitates affiliates in different regions to be designed as organizational clones of the parent firm.

IKINET 55

10 Innovation history and processes of innovation

A massive structural change of the regional innovation system in Styria could be observed between the mid of the eighties and the mid nineties. This is especially true for the machinery and material sector. High degrees of diversification and broad unspecified clienteles have been reduced to market niches and technological specialization, and higher lot sizes and a higher integration of functions (sourcing of basic materials, construction, tool making) maintaining flexibility by leaving scope for automation. This flexibility with respect to clients, lot sizes etc. widened the operating range of suppliers of components and parts. Technological upgrading (including the introduction of quality and measuring standards) also opened doors to a new clientele, the German automobile industry, which could be reached within an ambit of 500 kilometres. This has been accompanied by an extension of their responsibilities for tool making or their sourcing capabilities and also by shifting of the responsibility for quality and price from clients to suppliers. Higher Quality standards called for new electronic forms of construction and communication (CAD, CAM) and production (CNC)

Styria has a long tradition of R&D in the machinery sector, which is inextricably associated with the Technical University of Graz with 1200 students at the faculty of machinery a long tradition in the field of materials sciences and a long industrial history. The science base in the machinery sector has been extended during the last years by a couple of small cooperative research institutions, which (as could be expected) are partially dominated by the big R&D players and Magna Steyr Fahrzeugtechnik and firm O. Before we go deeper into the discussion of R&D and innovation behaviour, we have be aware of the fact that firms have different positions in the value chain, are of a different size and level of evolution and belong to different sub-sectors with different technological rules of game. The participating firms innovate and do research at very different levels in range from long time pre-competitive research (e.g. fuel cells and storage of hydrogen) to incremental improvements in mature technologies (e.g. die casting).

As has been observed with the third Community Innovation Survey, roughly half of the firms in Styria were involved in innovation activities between 1998 and 2000, the majority was also involved in R&D activities. The propensity to innovate in the machinery sector is significantly higher than the average of all firms. The survey also supported the hypothesis of significant differences between the

IKINET 56 top of the innovation system on the one hand and the broad mass of small and medium sized firms on the other. Despite the good overall performance in the region a strong insider-outsider-effect can be observed. There is a considerable gap between those firms involved in R&D activities with a sound technological qualification base and established information links to universities and research institutions on the one hand and a very contrary group of firms with low innovation input and output on the other. A top-league of high performers in the manufacturing sector which is increasingly supplemented by middle sized knowledge intensive service firms go along with a broad range of smaller manufacturing firms which on average are not able to take up innovation opportunities suffi- ciently. (Ploder/ Adametz 2003) The R&D and innovation performance of a firm respectively its position in a network or cluster in the regional innovation system only can be explained in the context of a broad range of factors, e.g. the size of the firm, the industry and position in the value chain markets and the degree of diversification, its organizational structure, the location and the institutional setting.

10.1. THE INDUSTRIAL FIRMS AND THEIR R&D AND INNOVATION PROFILE We will try to present differences coming along with these characteristics after a short introduction of the individual firms and their R&D and innovation situation. Among the leading firm partners we can find four different attitudes towards R&D and innovation.

10.1.1 R&D and innovation in Magna Steyr Fahrzeugtechnik Magna Steyr Fahrzeugtechnik (MSFT) is an innovative manufacturer of small series vehicles but also a big R&D service provider16 which has competences for total vehicle development albeit the relative development autonomy given by its clients ranges within a very broad spectrum, e.g. the BMW X3 has been developed completely in Graz on the basis of the first idea, first sketches and contract specifications from BMW. Roughly 1000 developers work in 6 fields of competence.17 85-90 % of the R&D volume pertains to several departments. During the last two years the R&D approach of MSFT changed significantly from mainly demand pull driven R&D to an increasing science push approach. The saturation of the automobile market causes reluctance with respect to external R&D requests of international OEMs. This situation called for a more of-

16 Dynamic compound suspension, Liquid hydrogen tank, Bumper crossbeams made of magnesium, Lightweight design concept for door-assembly beams, Safety-related component made of aluminum foam, Concept studies of niche-market cars

17 Vehicle Development, Body & Trim, Chassis, Electrics/Electronics, Powertrain, Prototype Engineering

IKINET 57 fensive strategy and movement to a science push approach and pre- competitive research. In 2004 two thirds of the R&D volume has been realized as an exclusive R&D service provider. The toughest competitors are the OEM- clients. The development-centre has several international branches (Detroit, Munich, Ingolstadt, Györ in Hungary, India etc.). As compared to the high volume of contract-research a relatively small share of the R&D volume (6 Mio. €) is spent with advanced R&D. Supported by a matrix-organization 10 advanced R&D projects are realized which are based on more the 200 individual ideas that have been collected within the scope of an internal call. Public funding (regional, national, EU) is a regular calculative quantity in the course of R&D- planning. • R&D and innovation at MSFT have enormously expanded during the last years. The development centre is forced to head in the direction of a pure R&D-service provider where more than half of the R&D volume is independent from production. • In comparison to big R&D service providers like firm O advanced R&D resp. reinvestment in advanced R&D is only weakly pronounced. • The fastest growing theme is car-electronic where MSFT tries to make up for lost time in comparison to tier 1 systems suppliers in this field. • Although there is a general trend to fetch back (lost) competences from system-suppliers, MSFT intends to integrate (selected) SMEs and their creative potentials more intensively in their internal innovation system. • Their relations between the development centres of MSFT and the regional knowledge infrastructure have been enforced during the last years. Artefacts are endowed chairs resp. institutes at the Technical Uni- versity of Graz but also investments in cooperative research institutes. • MSFT is a global player with a concentration of its core-activities in Graz but trans-regional co-operation strategies.

10.1.2 R&D and innovation in Magna Powertrain The MSFT-spinoff Magna Powertrain (renamed from Magna Drivetrain to Magna Powertrain in July 2005) experienced a period of emancipation from MSFT, fast external growth, several moments of reorientation and extension in respect of locations, markets, partners etc. and finds itself confronted with a longer period of consolidation and restructuring. A decisive step has been the building of developing capacities in addition to the production capacities. This has been made possible by the takeover of R&D staff (specialized in the field of powertrain-development) from MSFT. The takeover of New-Venture in America brought additional developing capacities. Beyond these broad contract-oriented R&D-capacities (more than 400 employees, half of them in Styria) the firm tries

IKINET 58 to promote capacities in advanced R&D. Notwithstanding this revealed backlog demand the firm achieves considerable market success with a new product as a result of advanced development. The average product lifecycle of Magna Pow- ertrain products is 6 – 10 years (sometimes two or three model series). The linkages to regional knowledge generating institutions are presently relatively weak respectively not institutionalized. 200 developers work in 5 vertical competence fields of computer-aided and nu- meric design engineering, voice-vibration-harshness (NVH), experimental and testing activities and mechatronics. • Successful cord clamping with respect to the parent company MSFT. Magna Powertrain still uses infrastructure e.g. testing facilities. • R&D exclusively aims at own industrial production - no contract-research is conducted. • Requirements of an urgent streamlining of the development competences internationally are evident. • Revealed backlog demand with respect to advanced development and utilization and exchange with local knowledge infrastructure.

10.1.3 R&D and innovation in Anton Paar Initially, Anton Paar was a pure converter, producer and specialist in marketing. This division of labour changed since the 1980s. A well established cooperation base allows Anton Paar to utilize university partners but also to avail of an independent research laboratory which is supplying to Anton Paar exclusively for science push driven R&D. Demand pull driven R&D mainly happens in the firm and in cooperation with the independent research laboratories. A high share of the turnover is reinvested in R&D activities, 10 % for intramural R&D and an additional 10 % of the turn-over for external R&D. While radical innovations and market novelties mostly emanate from R&D or client-partners, incremental improvements are promoted by internal R&D. The average product lifecycle of an Anton Paar product is 5-6 years. The core competences of Anton Paar are based on combinative knowledge at the edge of a high receptivity for findings from basic research, competences in precision engineering and electronics. Anton Paar is a best practice case for intensive cooperation with the science base, industry partners and the government (especially public gaging offices on a regional but also international level) based on intensive personal contacts and social trust. Public funding (regional, national, EU) is a regular calculative quantity in the course of R&D-planning. • R&D, production and marketing of new products are concentrated in Sty- ria. (International sales departments)

IKINET 59

• High R&D intensity, focusing on the core-competences and the cautious extension of the product portfolio. • Intensive unattached partnership with a local R&D service provider exclusively working for Anton Paar (laboratory for measuring technologies of firm P) • Deep cooperation with key-clients to prepare new product developments for their market launch.

10.1.4 R&D in Pankl Racing Systems The R&D approach of Pankl Racing System seems to be unique. Basically, R&D of the Pankl Racing Systems is not concentrated in one department working for several profit-centres or sub-firms but in a separate R&D unit for engine parts, another separate unit for powertrains and a third laboratory for the development of the converter of a new emission control system for heavy vehicles. In the business-field of aerospace Pankl Racing Systems is working as a toll manufacturer. In the field of R&D the enterprise has to allocate its attention on product- (caused by new materials), process-, (caused by new delivery partner) organizational and new market innovations (determined by different racing regula- tions). Due to this constellation but also to the extremely short product life cycles (2months referring to engine components – 2 years referring to drivetrain- components at max.) a low division of R&D processes with external partners is obvious. Intensive and continuous knowledge exchange happens with the Uni- versity for Material Sciences and Metallurgy in Leoben, few high volume suppliers and several toll-manufacturers of screws, bearings or suppliers in field of heating and surface treatment. In the field of engine parts R&D basically is demand-pull driven (because of direct request from the client-side or stability problems and troubles during races). This points at a long range of incremental innovations, which are based on a very specialized knowledge and are directly implemented in significantly improved products. In the field of drivetrains an entirely new gearbox has been developed, mainly demand-pull driven. In the field of aerospace technology process innovations are dominating because Pankl is a toll-manufacturer in this field. • Long tradition and core-competences in the field of motor-components with intensive interaction with the regional knowledge infrastructure and exclusive toll-manufacturers. • Partnerships are interpreted as long term interim solutions for restricted internal resources. • Fast building up of competence in the field of drivetrain components by acquisition of international experts.

IKINET 60

• Strict agreements of secrecy and nondisclosure with all partners. • Challenge to utilize internal cooperation potentials. Weak communication R&D-units for engine and drivetrain-components since the locational separation.

10.1.5 R&D and innovation in firm A As a systems supplier firm A is in a similar position as Magna Powertrain. R&D is assigned to two different areas or two separate research teams: initial equipment and replicas. For the development of exhausting system very specialized knowledge is necessary which has been built over years. A trend can be observed that OEMs separate the development commissions from production orders. Advanced development is concentrated at the field acoustics and material science. The firm tries to combine contract development with advanced development. • Striking closeness with respect to potential regional R&D-partners for fear of outflow of critical knowledge. • Therefore trans-regional partners (Germany) in the fields of testing, measurement or simulation.

10.1.6 R&D and innovation in firm F The firm is doing first steps in building up a small R&D unit with 10 employees at the moment. Combinative knowledge on the intersection of automation and tooling seem to be more decisive for firm F at the moment than specialized knowledge. Actually an offensive innovation strategy is based on two advanced development projects.

10.1.7 R&D and Innovation in firm H For its automobile clients firm H is working on the basis of work drawings and detailed specifications. The R&D-efforts are concentrated at the aerospace sector, where 90 % of the R&D is carried out by firm Q - a regional engineering service firm specialized in plastics and polymer technology - and in a small part by the Polymer Competence Centre Leoben. Specialized knowledge plays a more distinctive role than combinative knowledge.

IKINET 61

10.2. THE BUSINESS SERVICE FIRMS AND THEIR R&D AND INNOVATION PROFILE The market for knowledge intensive business services demands for continuous extension and development of core-competences and business fields. Espe- cially technical business-services reveal a high propensity to innovate. Technical business services have a positive influence on the absorptive capacity of their customers.

10.2.1 R&D and innovation in firm O Firm O is a high-performer in the Styrian R&D and Innovation System and spends more than 20 % of its total turnover on internal R&D. 75 % of the employees are involved in innovation activities. Beyond internal R&D the firm is involved in three competence centres in Styria (the acoustics competence centre, the competence centre for stationary large engines and the competence centre “virtual vehicle”) and one in the Vienna region (the competence centre for tribology). A considerable part of ex-ante research has been delegated to these competence centres. Beyond these competence centres the firm O is participating in a regional centre of excellence in the area of hydrogen and several CD- laboratories.18 Following the words of the R&D management those competence centres helped to bind ex ante research activities to the region of Styria. Notwithstanding the transfer-mandate of competence centres the number of core-partners seems to be a determining factor for the long time success. Be- yond the transfer-activities of the competence centres the direct innovation linkages to regional SMEs are very weak. Public funding (regional, national, EU) is a regular calculative quantity in the course of R&D planning.

10.2.2 R&D and innovation in firm S Firm S is a typical example for a young firm whose technological upgrading was initiated by direct contact to an R&D manager in a large firm seeking for outsourcing partners in the field of FEM-analysis19 and simulation. The management and most of the staff of firm S can speak German. The first years of co- operation have been accompanied by intensive knowledge transfer and an increasing technological level of co-operation. Firm S is a service firm which is indirectly involved in R&D-processes of its customers (MSFT, firm O, SIEMENS etc), but doesn’t have own R&D activities. Therefore linkages to the local science-infrastructure are surprisingly weak. Local universities and their third party activities are seen as competitive challenge but not as potential partners.

18 CD-Laboratories are co-operative (science-industry) laboratories, which are financed by the national Chistian Doppler Society. 19 FEM = finite elements method

IKINET 62

10.2.3 R&D and innovation in firm R Firm R is a fast growing service firm and a first mover in the field of tool management. The multi-locational approach which is determined by the necessity of intensive and frequent interaction between customer and service-provider im- plies challenges for internal knowledge transfer. Tool Management is still underestimated as a source of saving costs and increasing quality and productiv- ity. Innovation activities have to be translated into and codified by service products which can be transferred to other locations. Striking steps with respect to organizational innovations (e.g. quality management and international certifica- tions) have been undertaken under the direct support and due to exploitation of relevant courses offered by the AC-Styria.

10.2.4 R&D and innovation in firm Q Firm Q is a moderate growing service firm which was able to build a tight network of cooperating partners. Social trust and a clear position with respect to provided services and competences allow a fruitful co-existence with partners at the University of Metallurgy and Metals or the Polymer Competence Centre in Leoben. The R&D and innovation activities are accompanied by a specific pub- lication-strategy which should help to codify and exploit results. The firm tries to take up an active role in science by different voluntary activities. Public funding (regional, national, EU) is a regular calculative quantity in the course of R&D-planning. At the moment the firm is planning two spin-offs which are based on technologies which have been developed in the course of previ- ously public funded projects.

10.2.5 R&D and innovation in the Laboratory for measuring technologies of firm P Firm P is the congenius partner of the Anton Paar GmBH. The co-operation and last but not least the economic base of the Laboratory of firm P is determined by social trust and long time partnership respectively personal contact of both entrepreneurs. R&D (that means all activities) in the Laboratory for measuring technologies are exclusively financed by licence agreements with Anton Paar. The laboratory needs 5-6 years for a breakthrough marketable product- innovation. These long periods of ex-ante research and development are exclusively financed by licence revenues from former projects with Anton Paar. One striking reason for the firm to rely on private R&D funding is long decision processes and increasingly costly application forms which are necessary for the acquisition of public R&D-funding.

IKINET 63

10.3. GENERAL CHACTERIZATION OF INNOVATION IN THE CLUSTER Following the statement that the cluster does not have a determining centre in the form of a leading firm overruling external demand and the diversification of regional automobile suppliers innovation in this loose and open cluster seem to be determined by specialized knowledge in the field of materials, tooling and processing techniques, or very specific problems in the machinery segment. For firms who are already active in R&D a shift from demand pull driven to science push driven R&D seems to be evident.

For the majority of SMEs innovation is not driven by R&D activities. Most of the SMEs are suppliers of simple components or toll-manufacturers and are no potential R&D partners but confronted with work drawings detailed process- specification. An interesting exception is firm K, an R&D partner of Pankl Racing Systems. • Innovations in small-medium sized enterprises supplying firms in the machinery sector mostly have an investive character. This is especially true for basic technology providers like firm E or firm D, a low level component supplier like firm N or firms like firm I and firm L. That means for instance that a new pressing-machine, robotics or new facilities are bought. Important process innovations are based on investments in information systems or construction (CAD etc.) and simulation tools (especially for toolmaking). Firm G for instance achieved a significant technology up-grading by building up simulation competences. Firm E tries to go similar path, hoping for a binding effect of specialized competences but also a higher value added. • Especially in the automotive industry the introduction of information system or quality management are important components of innovation which are a prerequisite for this market. • Most SMEs are not able to enforce advanced development resp. pre- competitive research. The CEO of a co-operative R&D institute stressed that a considerable share of enquiries comes from SMEs, which try to find some clues for their urgent questions but don’t have the resources for a deeper treatment of the problem in cooperation with a research partner. An interviewee hit the mark by stressing that: SMEs were not seeking for questions but they wanted fast answers to their concrete problems. Therefore SMEs have particular problems to interpret results from public research partners in their context. It appeared that most of the small and medium sized firms didn’t use diploma thesis to treat with

IKINET 64

current development problems. An exception seems to be firm I which is a partner of the Polymere Competence Center in Leoben. • The interviews with small and medium sized firms principally affirmed the recent literature on firm innovation and technology transfer. According to this existing knowledge gained from prior experience facilitates the identification and implementation of new knowledge catchword: absorptive capacity. Clients of SMEs revealed that they need intensive supervision at the beginning of a co-operation. Decreasing marginal efforts of supervision therefore justify reverting to this partners with the next mission.

10.4. FUTURE INNOVATION Most of the firms try to enforce their R&D engagement. The saturation of demand and international competition necessitate pro-active search for innovative solutions, which can be placed on the international market. Firms in the machinery sector and even basic technology providers are aware of this challenge and try to identify niches and upgrade their position in the value chain by tooling-, material-, simulation or design and construction competence.

Nearly a third of the interviewed firms revealed to work on radical innovations which change their product portfolio. Well established R&D players traditionally based their competences on a science push approach, pre competitive basic R&D. Therefore MSFT tries to re-integrate competences especially in the automobile electronics. Magna Steyr Fahrzeugtechnik tries to open up the market for car electronics. Magna Steyr Fahrzeugtechnik wants to enforce their cooperative R&D partnerships to highly innovative SMEs and benefit from their creative potential. Therefore direct supporting (organizational, financial etc) measures are discussed. This approach seems to focus on a relative small elite of SMEs but not the rank and file of SME-suppliers. Firm F tries to find new business fields after a short phase of restructuring and consolidation. Pankl Racing Systems tries to find new markets beyond the international car-racing scene which is a shrinking market in the long run, but also to expand its position from a supplier of components to a system supplier of the whole powertrain. Firm H will extend its activities in the field of aerospace technologies.

IKINET 65

Two firms revealed requirements to change the market or the technology at the long run without concretising a possible direction.

Increasing requirements on innovation and R&D in small and medium enterprises are simply initial adjustments to a new supply context, which correspond to the intention of their clients to roll off the technical liability and risks of sourcing. In the long run SMEs are faced with the challenge of higher R&D efforts. Most of the small and medium firms don’t have institutional, organizational and financial resources for R&D.

10.4.1 Financing of innovation Particularly for small enterprises external finance is a critical success factor while bigger enterprises are more flexible. Especially suppliers to the automobile industry are confronted with competitive pressure. Additionally OEMs and also Tier 1 and 2 suppliers try to roll off economic risks. The preliminary financing of equipment (e.g. tools) or operating resources are a permanent burden. As pointed out above OEMs and Tier 1 suppliers are anxious to concentrate their supplier supply base and reintegrate R&D-competences in general. These firms hope to acquire small and highly innovative firms that bring in a new ideas, creativity and innovations. Notwithstanding the challenges of treating with IPRs or control, sustainability of revealed problems with a weak equity background and insufficient human resources are evident.

In the new program period of the EU Structural Funds the established attitudes with respect to investment assistance have to be reconsidered. As innovations in SME often have an investive character R&D projects and extensive knowledge transfer play a secondary role as compared to financing of investments. Especially the Basel 2 guidelines complicate the access to loans and credits for SMEs. Venture capital firms try to have the jam and try to exercise control over the targeted firms.

IKINET 66

Nevertheless those enterprises that have to handle with relative high shares of pre-competitive science push research are very dependent on public research funding respectively the resources of public research institutions. In the long run this becomes relevant in the light of budgetary restrictions and the autonomy of public universities in Austria (since 2004) which claim for a higher share of third party R&D-funding.

Austria has significantly rearranged the system of indirect promotion of R&D during the last decade. The tax system is relatively favourable compared to the EU average. Companies may now deduct 25 % of their R&D expenditures from their profit- before-tax statements, where the definition of the R&D expenditure item follows the OECD Frascati Manual. Alternatively, a tax allowance is granted for “economic useful inventions”. In this setting the tax allowance is again 25 % of R&D expenditures and in addition expenditures exceeding the average annual level of the last three years are deductible with a rate of 35 %. If firms are not profitable they can draw on an R&D premium of 8 % (until 2003: 5%) of R&D spending as defined by the OECD Frascati Manual.

IKINET 67

11 Relationships of local actors

Regional buyer supplier relations between local firms exist on a broad base. Nevertheless concentrations of economic interaction can be identified in the periphery of the Magna Group but also in the field of plastics production and tool-making. Beyond physical exchange direct support is given to SMEs with respect to quality management. Although regional client firms reveal their intention to hold a stable network of suppliers, relations to SMEs seem to be based on prize-elastic arms-length relationships.

The cluster may be characterized as an individualistic open system, which is based on particular informal linkages. The regional extension of the cluster is restricted by personal contacts but not by buyer supplier-relation, respectively transportation or logistic costs. Apart from firm B or firm C which have to deliver just-in-sequence the automobile suppliers do not directly depend on short distances to Magna Powertrain or Magna Steyr Fahrzeugtechnik. For Pankl Racing systems and Anton Paar regional suppliers play a major role because of imitated lot orders which frequent demand for adaptations and necessary adjustments and closed interaction. Pankl Racing Systems may not get away with a delay in delivery. Short distances work in favour of timeliness. With respect to quality, adherence to delivery dates and innovation Pankl makes extremely high demands on its suppliers. Though high demands on secrecy R&D- co-operations with partners in science and industrial partners exist (especially in the field of materials research). Supplier relationships are based on long term trust and assurance and go beyond formal contracts with respect to the validity of quotation, individual support etc.

Despite those weak connections between Magna Steyr Fahrzeugtechnik and Pankl Racing Systems in the field of prototyping and batch production another dimension of exchange seems to play a crucial role: direct and indirect channels of knowledge exchange. Especially players with internal R&D capacities have direct access to the regional science base and are co-operating with the same research institutions or co-operate in research projects. This is enforced by a favouring configuration of the university and public research sector. Based on a long tradition in basic and metal-industry but also the long existence of the Technical University of Graz and its focus on machinery a co-evolutionary development between science and industry could be observed in some technology fields.

IKINET 68

Since the late nineties several co-operative research institutions at the edge of science and industry have been established in the environment of the machinery sector. A considerable number is participating in these competences centres. One of the targets for these Competence Centres is co-operate with third party firms, which are not partners resp. share-holders. Large R&D players changed their strategies and concentrated their to co-operative R&D in said temporary competence centres. While the core-partners of the Acoustics Com- petence Centre are large R&D-players (MSFT, firm O) in the automobile sector, their third party project partners are medium sized firms in the non-automobile machinery-sector.20 In this respect the institutional conditions of the policy system pro-mote processes of knowledge creation. Most of the firms which co-operate with the science base have established long time partnerships based on informal personal contacts. R&D intensive co- operations are frequently supported by common research partners. A considerable role is played by private engineering services, e.g. firm O, firm P, firm Q or APE. Typical examples are the closed partnerships between Anton Paar and firm P or firm H and firm Q. A similar situation is obvious with the Austrian Foun- dry Research Institute which has the function of an outsourced cooperative research unit for firms in the field of foundry and casting. Some members don’t have the financial capacities (e.g. firm D) and if even do however not have adequate problems which justify a research projects. But they address many questions and daily problems to their research partners which are covered financially by their membership fee.

Short distances play a crucial role for knowledge intensive co-operations. Nev- ertheless all larger firms have contacts to partners in the international science community (especially in Germany and Switzerland). While large R&D players like Magna Steyr Fahrzeugtechnik, Pankl Racing Sys- tems, or Anton Paar participate in cooperative research institutions small players only have oblique access to this system. The relatively small condensation of firms in the field of plastics and polymer technologies seems to be more integrative than the core-automobile network. In the field of foundry and casting the Austrian Foundry Research Institute plays an important role.

In the automotive sector a formal cluster has been established at the mid of the nineties. It became an accepted instrument of common presentation of the cu- mulated competences of the region in the field of automobile economy. As stated by most interview partners they benefit from the qualification and infor-

20 Most have been in the fore-running sample but not in the IKINET Core-Sample

IKINET 69 mation events (e.g. information and quality management) provided by the cluster organization. An important aspect is the support of informal contacts which are refreshed continuously. At an early stage several SMEs (firm E, firm D, firm N, firm R) try to intensify their cooperation base with a sub-network, the “Styrian Technology Network”, and consider value chain partnerships which offer complete product-service- bundles directly to German OEMs.

The Industrial as well as the business service firms explicitly have been asked for their estimate of different hampering factors for the transfer of knowledge and R&D co-operations. • As might be expected the hampering factors of capital importance for SMEs refer to missing financial and personnel resources. • A very interesting (especially form the perspectives of the Austrian system of R&D promotion) aspect points at the significantly high co- financing requirements for SMEs. The barriers to access which are dic- tated by the funding rules of public funds seem to be too strict and restrictive. A second interesting point which has been mentioned by nearly all interview partners stresses the high level of costs of application pro- cedures. • SMEs are often afraid of asymmetric balance of power in a partnership with larger firms. • Considering the co-operation with universities and public research the interviewed firms mentioned that universities don’t approach SMEs conse- quently. Finally results of co-operative (sometimes publicly funded) research cannot directly be applied by SMEs – additional costs.

Competence Centres (which are institutionalized gateways between public and private research) have an explicit mandate to co-operate with SMEs and try to overcome some of the challenges by open days, internal technology trade fairs etc. Larger firms like Magna Steyr Fahrzeugtechnik are intensively thinking about solutions which help to overcome the main barriers of R&D co-operation between large firms and SMEs, e.g. by providing free loans for R&D-projects.

IKINET 70

12 Relationships with national or international actors

• Most of the production of the Styrian machinery sector is exported. Aus- tria is a small open economy with the structural change in the machinery sector has basically been accomplished by a reorientation from standard- products to niche-products for international markets. A considerably high share of the exported goods is targeted for the Germany market and des- tined for the German exporting industry but not the German domestic market. Focusing on the 18 firms which have been interviewed the key-areas of future growth are the exporting industries of the western European countries, especially Germany and Italy. • The internationalization of suppliers has not directly been enforced by the relationships to leading firms but in a lot of cases in a self-reliant way. Nevertheless evidence of the enhancement of the internationalization of firms by sectoral networks can be seen (qualifications in quality management, common presentations at trade fairs etc.). Most firms have established themselves as suppliers which have been able to overcome the selection mechanisms of the Automobile industry during the last years. Apart from systems suppliers (firm A, Magna Pow- ertrain, MSFT) the interaction intensity with “bullet proved” supplying partners is relatively low. Logistic and transportation costs are secondary within 500 km. Pankl Racing Systems and Anton Paar are examples for enterprises that move in global markets with extremely R&D intensive niche-products. Business service firms like firm O21, firm Q or firm R embark on very different strategies of internationalization. While firm R and its affiliates seem to act relatively independent from the regional industrial base firm Q is bounded to the home-market and the local science community in a very close way. Both firms did their first steps of internationalization relatively self-sufficient in neighbour countries of Austria. Firm O is an extraordinary example of a global player in the business service sector which is able to practice global R&D management. The affiliates work for the Styrian parent firm to a large extent. Firm S the small supplier to MSFT did its first steps towards internationalization as a consequence of the active search of MSFT for SME-partners in the field of computation and simulation outside the region Styria.

21 Firm O is a global player with an export quota od 96 %. 1850 of 3300 employees of the firm O-group can be found in 45 repre- sentations and affiliates worldwide.

IKINET 71

• Apart from this relatively small selection of interviewed firms the new Eastern European countries are interesting areas for future growth especially for small medium sized firms. Especially small enterprise can use larger client-firms which are active in these countries in the sense of a rucksack-strategy. A small elite of larger firms (Siemens SGP, Andritz AG) also developed strategies to open up the Asian resp. the Chinese market. • Most of the supplying partners of the regional leading firms can be found in Germany and Italy. • Nearly all firms stressed the difficulties of initial business contact with with partners in the new member states. Magna Steyr Fahrzeugtechnik or firm O have several R&D-branches as well as supplying partners in the new member states (especially Hungary and Slowenia). An intensive co-operation base is given between the development center of MSFT and Firm S, a small business service firm in Maribor in the field of nu- meric design engineering. Firm A has two supplying partners in Slovenia for surface treatment and cutting. Firm D has to long term supplying partnerships with two die-casting partners in Slovenia which are supported in the field of tool-making, processes and materials. Firm G has shifted the whole production to Hungary. At the moment the firm builds up tool-making competences at the Hungarian branch. Anton Paar has two suppliers in Slovenia and a partner in Hungary, which has been supported by loans for machines but also by technology transfer. The Hungarian partner has to acquit the debt in return to direct orders. All firms reveal the need for intensive interaction at the initial stage. A frequent constellation is to co-operate with or to invest in a firm in the Mem- ber State, which already has contacts to firms in Western Europe. Some of the firms have established dependences or long time partnerships. Some of the firms (e.g. firm E or Magna Powertrain) reduced their engagement. The numerous co-operations affirm the hypothesis that SMEs can benefit from direct exchange with firms in the New Member States despite problems with corruption and bureaucracy. Partnerships with the science base in the New Member States are exceptions but not the rule. • Firm R and firm O have long experiences in the New Member States. While the firm O is exploiting the human resources, firm R is interested in the markets in Eastern Europe. Customer of firm R in the New Member States are suppliers of the German automobile industry resp. affiliates of Germen suppliers.

IKINET 72

13 Policy implementation: Impressions from a policy and intermediates perspective

As an outcome of long-standing policy-division between the national and the regional level Research, Technology, Development and Innovation Policy (RTDI) is implemented at both governance levels. Cluster policy is a matter of the regional level in Austria. The institutional structure of the Austrian resp. the Styrian RRSI policy is very fragmented, involving: • three ministries on the national side and two policy resorts and to governmental departments on the regional level and • a large number of publicly financed funds and semi-public agencies like the Austrian Research Promotion Agency (FFG), the Austrian Science Fund (FWF), the aws - Austria Wirtschaftsservice Gesellschaft mbH on the national side or the Styrian Business Promotion Agency (SFG) in Sty- ria. • Social Partners and Semi-public (integrating) associations

While regional governments mostly think regional, firms think national or global. Therefore strong need with respect to strengthening of interregional cooperation is evident. In the last decade, local representation lobbies intensified their intermediary role between science, policy and industry in the field of technology and innovation policy. Recent work on innovation systems and clusters stresses the dependence of technological competitiveness not only on the excellence of research respectively the supply-side of research but on the demand-side, the absorption of knowledge as well as the speed and extent of diffusion and application. The formal starting point of Cluster Policy in Styria has been the “Technology Policy Concept” (1995), which has been up-dated and extended by “Science and Re- search Strategy for Styria” (2004) and the “Technology Policy Concept - new” (2005). This conceptual framework tries to give strategic implications for the network of organizations involved in technology promotion and development including a series of initiatives involving co-operation between different agencies on the regional and national level, local government, research institutes, capital providers as well as social partners and federal ministries.

The regional government played a crucial role in promoting cooperation and networks in Styria during the last decade. Actually there are four clusters in Sty-

IKINET 73 ria. Network-orientation also includes policy networks which help to develop and implement regional strategies in the sense of multi-level governance. The formal cluster-strategy is complemented by initiatives by the policy and transfer agencies (technology partners, Technofit etc.). During the past years a broad range of measures which should help to integrate SMEs into the regional innovation system, adduce to and enable SMEs to access regular R&D-funding-offerts have been designed, discussed, tested, implemented, adapted and also rejected. Based on an extensive analytical framework the policy action has been accompanied by a process of policy learning.