The Australian telecommunications subscriber equipment industry

The Australian telecommunications subscriber equipment industry Technical change and international competitiveness

E. Sciberras

This article reports a study of the Australian manufacturing industry in telecommunications subscriber equipment. The impact and interrelationship of technical change and international competitiveness were examined, and compared to the situation found in the US and Japanese industries. The most important influence on firms’ commercial behaviour in Australia was found to be the role of Australia Teiecom. The author makes several recommendations and observations about the adjustments necessary for the Australian industry in order for it to adopt new technology effectively and compete sucCeSSfUiiy in international markets. The lessons learned may be of use to policy makers in other countries with small markets, and in developing countries. Dr E. Sciberras is a Principal Research Fellow at the Technical Change Centre, 114 Cromwell Road, London SW7 4ES (Tel: 01 370-5770). This study of the Australian industry is part of a wider study of technical change and international competitiveness of the telecommunications subscriber equipment industry being conducted by the Technical Change Centre, London, in collaboration with the information, Computing and ComContinued on page 142

0308-5961/86/020141-23$3.00

The Australian market is small by international standards. However, the experience of the Australian telecommunications subscriber equipment industry in attempting to adjust to technical change and achieve international competitiveness is in many respects relevant to small countries, including those in the developing world, who are trying to encourage entry into this industry. This article offers an analysis and recommendations which may therefore help firms in other small countries to adjust, so as to meet the requirements of international competitiveness. The Australian experience may assist such countries in the formation of appropriate industry policy to encourage the necessary adjustments.

Background The subscriber equipment industry is that segment of the telecommunications equipment industry which also includes public switching and network (transmission) equipment. For the purposes of this study, ‘subscriber equipment’ includes residential and business telephones (including feature phones), key systems and private automatic branch exchanges (PABXs). The two largest single markets for subscriber equipment are the USA (see Table 1) and Japan. These markets were valued at around $US 7 billion and $US 2.5 billion in 1983/84. Collectively, European countries’ markets are also large. According to an estimate by Frost and Sullivan, the European market for subscriber equipment reached a total value of $US 1.72 billion in 1984.’

Q 1986 Butterworth

& Co (Publishers)

Ltd

141

The Australian

telecommunications

subscriber equipment

itldusrg

Table 1. US communications

industry, selected market estimates (millions of US dollars). Compound annual growth rate i 98x3-88 ph)

Category

1903

1988

Total

$12 238

$25 527

158

13430

14.5

Cusiomer premises

6 820

equipment Private automatic branch exchanges Key telephone systems Residential telephones Facsimile machines Voice-and-data work stations Stand-alone modems Multiplexers Data PABXs Local-area networks

Source: Based on Dataquest Inc, cited in Electronics Weekly, 1 January

1985.

Continued from page 14 1 mumcations Division of the OECD Directorate for Science, Technology and Industry. The wider study is to be published in 1986187 by Longman: Technical Change and International Competitiveness: 2 Telecommunications Industry. The author wishes to thank, in particular, the Australian Department of Industry, Technology and Commerce, who sponsored the Australian industry study, and the firms and other government departments and agencies who assisted with comments and suggestions. The author however, accepts full responsibility for the analysis and findings. ‘Cited in ‘Europe set for big growth’, Computing, 12 January 1984. Caution must be exercised before any quick conclusions can be reached based on comparison of these totals. Considerable differences exist between major countries (and between consultants’ surveys) in the classification of products as subscriber equipment. ‘lnfonnation Technology in Australia, Capabilities and Opportunities, Vol2, W.D. Scott and Co, July 1984, p A20.

142

2 820 2 360 1 140 460

4 060 2 600 4 350 790

7.6 2.0 30.6 11.4

40 778 209 77 140

1 630 1 592 919 422 1 030

108.9 15.1 34.5 40.5 48.2

Switching equipment Central office

1 925

2 408

4.6

Transmission

1 832

3 005

10.4

457

2 721

equipment

Other

In contrast, the Australian market is very small. According to a recent report commissioned by the (then) Australian Department of Science and Technology, the Australian market for all telecommunications equipment (including public switching and transmission) was $A 471 million in 1981182.’ The subscriber equipment market would account for considerably less than one-half of this. The markets in the USA for subscriber equipment (which is called customer premises equipment in the USA, and includes data PABXs, multiplexers and modems) are over three times larger than those for traditional transmission and public switching products. They are also projected to grow at much faster rates. This growth is largely to be stimulated by the spread of office automation, the expectation of diffusion of integrated services digital network (ISDN) technologies, the opportunities for replacement of old analogue technology products and the demand for new features, following liberalization in North America, Japan and the UK. However, even these impressive growth projections do not reveal the extent of the wider competitive importance of the subscriber equipment industry. Subscriber equipment products, such as PABX, work stations and key systems integrated with computers, will be central elements in the much-heralded office automation and information technology revolution. Countries with an internationally competitive subscriber equipment industry may be in the most advantageous position to direct and stimulate the diffusion of office automation and broader information technologies throughout their economies.

The study The international study reported here examined the leading subscriber equipment firms in the major OECD member countries; 40 firms in the USA, Canada, Japan, West Germany, the UK, Sweden, France and Australia were involved. The sample of firms accounts for over 75% of the telecommunications subscriber equipment industry in each country, for the product segments examined. Telecommunications ministries, telecommunications authorities and network operators were also included. TELECOMMUNICATIONS

POLICY

June 1986

T/w Ausrraliat~

relecommutficarrons

subscriber equipnetrr

irldusrr>

The Australian sample of eight firms includes five large firms with a turnover in subscriber equipment of between $32 and 63 million. and three smaller firms with turnover between $7 and 10 million. Over 90% of the Australian industry for PABX, telephones and key systems was represented. Four of the large firms are wholly owned foreign subsidiaries (two European, one Japanese and one US). The smallest of the five is an Australian firm. These firms are mainly involved in telephone. key systems and PABX product segments. The three smaller firms are all Australian. These are mainly involved in modems and other data communication products. In this respect they are not strictly comparable with the international sample. This may limit some of the analysis. and requires that the recommendations, particularly concerning this group, be considered with caution. Nevertheless, it was considered that they should be included in the study. Valuable findings with respect to the impact of technical change and international competitiveness in this segment of the Australian industry were obtained as a result. Tables 2, 3 and 4 show some basic comparisons between the Australian sample of firms and those of Japan and North America. They show turnover in subscriber equipment, growth and profit rates, employment (including shares of engineering graduates and technicians), market shares, R&D, production volumes and export shares of turnover. Most obvious from these data is the much smaller size of even the leading Australian firms, in comparison with their international competitors. This is reflected in small turnover and monthly production volumes for subscriber equipment. Put starkly, the combined monthly production of two leading Japanese firms alone would account for almost all the Australian PABX market for one year. Strong contrast can also be seen in technical effort. This is clear from comparing R&D expenditure and shares of engineering graduates in total employment of leading firms in the Australian industry with those of North America and Japan. The smaller firms perform better (comparing percentages) but from a much smaller base. With the exception of only one large and one small Australian firm, export performance is very poor. The remainder of this article will attempt to explain the reason for some of these differences, and consider their implications for the successful adoption by the Australian industry of technical change for international competitiveness. Underlying concepts and hypotheses In order to understand the relationship of technical change to competitiveness, it is necessary to understand the competitive behaviour of firms in industry. Although other institutions also develop, generate new technology and solve problems, it is only when firms adopt technical change and ‘run with it”that new technology begins to have a widespread impact on society, the workforce and on international competitiveness in particular. In order to understand the pattern of diffusion of technical change and its impact, therefore, it is first necessary to understand the motivations and strategies of firms and why they adopt technical change. Firms are not interested in new technology for its own sake. To draw an analogy from combat, firms are involved in a constant competitive

TELECOMMUNICATIONS

POLICY June 1986

P

5

under 150 -to over 1400

$@Z&)

Low NA Under 1 NA

over 100 15

NA

Loss 7 8

NA

6

25

E-47

Growth (%)

Profit rate (return on sales) (%)

750 1 500 approx. a 500

700 (phones)

18 5 200 400 8 600

7 300 (phones)

Employment increasing (+) or decreasing (-)

%ubsidiaries

(% A owned)

0-0

A

Company

-20

to 60

6-10

:; (PBX) ;;(keys) NA

&

10 ;z 8 (phones) G7 15 (keys) 3 20 10

20

Growth (%)

pa:ot (return on sales) (%)

(4 500)

460( +) 450 400( +)

1500(+) 620( +) 18001+)

850( +)

Employment” increasing (+ ) or decreasing (-)

sometimes not Included (employment could be further 500-1000)

-

7

Turnover subscriber equipment jy_$fio$

Table 3. Japanese subscriber equipment industry: leading firms (1984).

Company

Turnover subscriber

NA :: NA

4: NA

20 A:

20

NA

3: 20

40

% engineering graduates/ technicians

NA

+ I-? NA

5100

(-20)

20 NA

1’Zj (-10) (2s 25)

1:

NA

;?!

12

% engineering graduates/ technicians (NA)

Table 2. North American subscriber equipment industry: leading firms (1983/1984).

9 600

25 NA 000

100 000 NA

20 000

200000 30 000 50000

80 000

NA

Phones

Phones

NA

30 000

15 130000 000 4 000

NA

:

25

effort

NA

NA

2

4

4 8 NA

3

: 40 (to USA)

30

prod) 20 (to 57 (+ US USA)

23 5(+ (+ USprod) US prod)

15a 75%

NA NA

3-4

21:

24-27

PABX

Phones

NA --97

20 21-23

NA

22 NA

0

35

PABX

NA 91

NA 10

20

9 8

30

io

Key

NA 40

1;

NA

I!::

30

10

Phones

US market shares (%)

NA

6 NA

NA

1;

z

Key

US market shares (%)

% R&D and technical

3 20 Co. average

15

:

11 55 (l/z to USA) gY2Obillion US prod) 8

(1517)a

4 10

8

:“g

4 2-3

lo-12 5

NA 30 :;

%R&D and technical effort

Export shares (%)

Export shares (%)

40 000 -lO 130 000

60 000

3 000 NA

NA

1:

OEM

5400 150 20-25000

100 000

Production PABX (lines per month) Key

130 000

-IO

1:

Production PABX (lines per Key month)

5 a 2 3

A

iz

k

Over 5 to under 15

Profit

5

$1 million to 20 $12 million in one year

100

I

‘Average’_

PBX: negative; phones: flat; keys: 50 60

20

‘Low’

15

_

0

‘Break even’

10

(%)

‘Fast’

4(phones) 6(keys) 15

Growth W

1

(Iver 30 lo LJnder 65

I

Company

Turnover subscriber equipment ($A million)

Under 70 to over 250

I 1Jnder 250 11 o over Ei50

Employment

15

7

30

tt

Over 15

NA

Between 4000 and 40 000

Phones

I

Behvecsn 5 000 and 1oOOaI

1 7

Production PABX (lines per Key month)

Between 1500 and 5000

1

Ovsrr 10

5

10

Under 10

10

12

10

4

Under 3

5

% engineering graduates/ technicians

Table 4. Australian subscriber equipment industry: leading firms (1984).

0

‘Small’

15-20

0

(%)

‘Small’

2

300 50 (modems)

400 (special communications products)

1000 0 (modems)

NA

NA

NA NA

Other

Exoori shares

20-25

10

2.5

0

1

2

10

4

30

50

5

2

NA

NA

NA

-

-

Total 91

-

-

95

-

-

110 (rounding possibly)

60-90 (special communrcation equipment 20 (multiplexers)

50 (special communication equipment

NA

50

NA NA

50

0

NA

NA

0

100

NA

100

NA

100

100

NA

100

NA

100

25 (of total) 60 (of modems)

NA

NA

NA

NA

% share of sales to Australia TelecorrPABX Key Phones Other NA

% R&D and Market shares (Australia) technical PABX Keys Phones Other effort

5. ;: =. 2 i 5 2 3.

$ s

; z ;i ‘c 2

Y ,*

The Ausrralian telecommunications

subscriber equipment industry

battle of greater or lesser intensity, depending on the technical maturity and extent of concentration in an industry. The ultimate indicators of success over rivals in this battle, and therefore the goals of the firm, are long-run profitability and market share. To fight, firms use the ‘weapons’ of products, investment, manufacturing and labour power, and they sometimes enlist government protection and support. Firms’ interest in technical change is in the way in which it can contribute to their ability to compete. ‘Technology’ is not a discrete, tangible weapon in itself. When effectively embodied, it is a means of sharpening the competitive impact of weapons. Each of these ‘weapons’ used by the firms in the Australian sector was examined in order to identify the competitive difficulties and opportunities posed by the introduction of new technology.” On the basis of this analysis, some recommendations can be made for industrial policy, to improve the effectiveness of new technology diffusion in the Australian subscriber equipment industry.

Commercial

3A comprehensive comparison of firms in the industries of the wider OECD study is not attempted in this article. Such a comparison is planned for the final report of the international study, to be published by Longman in 1986/87.

146

developments

Internationally, the most important commercial developments affecting most firms have been associated with the liberalization of telecommunications and its impact. This applied particularly to the UK, the USA, Japan and Canada but less so to West Germany, Sweden and France. The consequence has been to increase competition and to force firms to take more of a market orientation in their commercial strategies and product development. There is also now greater pressure to try to reduce manufacturing costs. The findings of the study were similar for the Australian firms. The most important influence on firms’ commercial behaviour in Australia was the role of Australia Telecom. The ability of firms oriented towards supplying Australia Telecom to plan in the long term was dependent upon Australia Telecom’s scheduling and ordering pattern. Firms welcomed the three-year scheduling arrangement because it enabled them to adopt a medium-term outlook. But this was still considered too short. particularly for making decisions about investment in advanced equipment. Also, many firms feared that after the three years they might not obtain any orders at all. This happened to some firms in the PABX area, who in the past had been important suppliers. Such commercial uncertainty severely affects their ability or willingness to outlay more capital in advanced equipment. Sometimes the effect of failing to win Australia Telecom orders proved a positive stimulus to technical change. The firms who failed to win orders for the latest PABXs had not at the time supplied a suitable third-generation PABX. Because of being rejected by Australia Telecom. they are now trying to introduce advanced products quickly. Some firms supplying key systems were also affected in this way. One firm which failed to win contracts for Australia Telecom began to develop a smaller PABX so that it could provide an alternative product to compete for key systems users’ markets. An important effect of Australia Telecom’s favouring of wider competition, with up to seven suppliers of PABX, has been the segmentation of the Australian market. The total Australian market for PABX in 1985 is 212,000 PABX lines per year. This is equal to the volume of production of just one of Siemens’s PABX products

TELECOMMUNICATIONS

POLICY June 1986

The Australian

telecommunications

subscriber

equipment

idu.str>

worldwide, while the Canadian firm Northern Telecom produces about 900,000 PABX lines per year. This has important implications for Australian competitiveness, to be discussed below. An important commercial development for firms in the Australian industry has been the increased speed of change in the market, arising from greater competition. This poses a problem in terms of the pace of adjustment needed in the larger firms. For example, product engineers and designers who have been used to relatively slow rates of change in the industry, with relatively clear long-term engineering targets, are now being compelled to operate at a much faster pace. This is proving very difficult. One large firm, for example. found that its ‘old’ engineers could not adjust quickly enough to the new pace of change that was needed. Its new, younger engineers are presumed to adapt more readily to the current marketing environment. This new pace in the market has been largely pressured by Australia Telecom. The effort by Australia Telecom to provide more competitive products for the Australian market has forced many suppliers to move faster. Both the large and small Australian firms considered that the move to larger customers (banks and insurance houses) and away from the smaller type of customer was also an important new commercial development for the industry. Large customers are attractive because unit value of sales tend to be higher. These customers are often more informed and therefore easier to deal with. Maintenance costs tend to be lower as service can be more concentrated. Although the attraction of the larger customer market is therefore understandable, it is only a limited market; this could soon pose a competitive problem for the Australian industry. Greater market orientation, because of increased competition, is generally considered to be the most important commercial development in the Australian industry. It has required adjustments within all firms. This has involved changes in decision making about products, allowing marketing (V engineering) a greater role in product development. This ‘re-alignment’ of status has not gone as far as many firms suggest. It has become ‘conventionally wise’ in the industry for firms to acknowledge the need for a greater role for marketing. In practice that adjustment is very difficult to achieve. Firms which are moving away from Australia Telecom, and particularly those firms whose tenders have been unsuccessful, have to confront strategic decision making about subscriber equipment products for the first time. They, not Australia Telecom, must now determine general marketing and pricing strategies. They must decide upon a range of products which suits the open market, and develop marketing policy in response to a more open competitive situation. This requires a set of managerial skills for the firms which are very different and very difficult to acquire.

Export-led strategies The international structure of the telecommunications industry’s subscriber equipment sector has been changing dramatically during the past five years. There always has been some degree of internationalization in the industry. For a handful of large firms, including Ericsson of Sweden, Philips of Holland and ITT, international business through exports,

TELECOMMUNICATIONS

POLICY June 1986

rhe ALl.srralian

relecommunication.s

subscriber

equipnenl

itzdu.s/r_v

overseas investments and licensing accounted for a major share of their subscriber equipment activities. However. these firms were the exception. Generally, national preferential policies and PTT regulations in the major OECD countries meant that international trade accounted for only a small share of the business of the industry overall. Most firms concentrated on supplying their own captive domestic markets and PTTs . This is now changing. Regulatory changes. opening previously closed markets to international competition and opportunities due to technical change have lead to a new internationalization. Japanese firms have been the most successful in reorienting their competitive strategies and winning export markets. Most Japanese firms carried out between one-quarter and one-half of their business overseas. In the face of a growing reaction to that export success and the threat of trade retaliation. Japanese firms are increasingly shifting to direct investment in the manufacture of subscriber equipment in the USA and in the UK. With only a handful of exceptions (other than the traditional international suppliers), North American and European firms have been less successful. Despite attempts to win new export markets most European and North American firms have failed to establish a significant foothold by exports. direct investment or joint venture outside their home markets. The export performance of the Australian subscriber equipment industry was poor. There was only one firm in the Australian sample which was strongly export-oriented and has done well as a result (see Table 4). About 50% of its turnover was accounted for by sales to Europe and the USA. Its methods of achieving overseas market penetration. however. may lead to difficulties for the firm in the longer term and may perhaps jeopardize its ability to compete. Since the firm could not support its own export effort alone. it resorted to licensing manufacturing overseas with leading suppliers in the USA and Europe. The firm was concerned that these licensing arrangements were not giving it the exposure it needed in the overseas market. It also feared that. while licensing did offer quick access. the firm itself did not obtain the learning and cost benefits of production experience. The competitive benefits from production experience and larger scale are. in fact, being enjoyed by the As the overseas market becomes UK and the US licenced partners. more competitive (with the success of the Australian product itself encouraging the entry of US and UK firms!), the Australian firm will have to face more competition without having reaped the benefits of direct experience of volume production.

Technical

developments

The most important technical development in international subscriber equipment products is the integration of voice and data transmission capability. This was confirmed by almost all of the Australian firms in the study as also being true for Australia. These ‘third-generation’ subscriber equipment products are being introduced by all of the major firms. With each new generation of subscriber equipment products, Australian dependence on overseas technology has increased. AWA has resorted to licensing a Northern Telecom product and the subsidiary

148

TELECOMMUNICATIONS

POLICY

June

1986

firms

are dependent upon their parents to supply them with the new generation of digital products. With the earlier technology. Australianbased firms enjoyed substantial participation and experience in technical development. Because they were required to make analogue public switching products locally. Australian firms were also capable of making a significant contribution to the development of that generation of With the introduction of digital subscriber equipment products. technology. the role of Australian engineers has been reduced almost exclusively to applications engineering of products to meet 10d conditions. This can amount to a significant a~zoll~f of work (basically application software); in terms of the total de.s@r~ and tic~do~mc~~t of the product. however. it is a relatively small effort and. technically. a minor contribution. The most important technical developments in the industry. in terms of actual technologies, were in software. particularly for key systems and PABXs. and real-time software as opposed to the batch-processing software used for data communications. Software development was not considered so important for telephone products. Medium-scale integration (MSI) hardware technology was more important for feature telephones and business telephones. In key systems and PABX, custom large-scale integration (LSI) technology was also considered to be very important. It was this advanced hardware which enabled the application of ‘clever’ software. It enabled additional features at virtually no extra cost for a product. Increased component integration has also significantly reduced manufacturing time and improved production reliability. One firm estimated that current hardware technology has reduced manufacturing time from nine hours per line a few years ago to only one hour per line. for current generation PABX products. The flexibility of the new digital technology poses serious risk to firms intending to pursue a ‘niche’ strategy in subscriber equipment markets. The technical developments in PABX and key systems enable industry leaders to incorporate an excess amount of memory and communication processing capacity in their standard products at virtually no extra cost. With application software, these mainstream products can meet the particular needs of users. Will it be feasible to pursue specialist niche strategies in a market with general-purpose mainstream products having such extra capacity and application flexibility at competitive cost ? Firms resorting to particular user niches may have very short (and ever-shortening) opportunity ‘time windows’ indeed in their particular niche.

Goals and planning The time horizons which firms adopt can substantially affect how they view investment in product technology and in manufacturing technology. For example, firms which take short-run positions and set short-run profit-maximizing targets may reject as inappropriate very advanced forms of manufacturing equipment which may have quite long payback periods. The goals adopted can affect the way firms view their staff planning. hiring and training. If firms take a short-run view of hiring and training, they may perceive as a labour skill shortage what is in effect a problem resulting from their inability to plan. For example, after a new subscriber equipment product is introduced, a firm with short-run

TELECOMMUNICATIONS

POLICY

June 1986

The Australian telecommunications

subscriber equipment industry

strategies may discover that different kinds of maintenance skills are necessary for it, or additional applications software is required. In the crisis, the firm expects to find appropriate maintenance skills or software engineers immediately, and so experiences a ‘shortage’ of labour in the marketplace, when the deficiency is actually a result of their short-term attitude to hiring and training. All the firms in the Australian sample recognized the need to have a five-year strategic plan, and to have long-term plans for staffing. They acknowledged the necessity of trying to identify the direction of new technology development and then to attempt to match it with the mix of skills perceived as necessary in three or four years’ time. This matching should be the basis for planning staffing. In reality. the firms’ plans cover only a one-year to eighteen months’ time horizon. This was attributed to increased pressure of competition and the vagaries of Australia Telecom’s demand. Also affecting firms’ ability to plan for the longer term was the component supply situation. Firms have been experiencing six to nine months’ delay in the supply of major semiconductor components. They felt that, in the light of this, to attempt to plan in concrete terms beyond eighteen months would be unrealistic. Some differences were found in planning horizons between the smaller and larger firms. The larger firms who were subsidiaries of overseas companies tended to conform to their parents’ planning requirements. They tended to have longer term horizons than the smaller Australian firms, particularly in staffing planning. In some firms the pressure for short-term strategy was the result of the requirements of shareholders. For example, one small Australian firms’ venture capital providers demand a return on investment within twelve months. This expectation determined its competitive strategy. The pressure to shorter horizons is, however, a recent development in the subscriber equipment industry. Until about five years ago one large Australian firm did operate five-year plans. This was considered practical because the market was then more stable, the relationships with Australia Telecom were more predictable and the rate of technological change was slower. In response to the changing commercial environment and increased pace of technical change, Australian firms have become more cautious and have taken a shorter view in their competitive strategies.

Product policy The study showed that an important factor in how well a firm adopted technical change and succeeded in international competition was its strength in product development. Equally important was the ‘balance’ of influence within the firm between marketing, manufacturing and product engineering in deciding on the adoption of new technology, and in the design and development of new products. Adjustments in the balance were required with a new competitive environment and with new technology. Firms which recognized this fact and were able to adjust in time were the most successful internationally. Modular design of products, maximizing common components and resisting demands for customization were also very important factors in competitive success in the subscriber equipment industry. There was very little strong in-house technical capability in the

150

TELECOMMUNICATIONS

POLICY June 1986

The Auswalia~ telecommunications

subscriber equipment indusrr>

Australian industry except in some of the smaller firms. Larger firms had application software engineering capability, but basic design engineering of products, incorporating the newer generation of technology, was retained by the parent. Australian ‘development’ of one key system involved modification of a Japanese product. The firm claims that the Japanese company benefited as a result of the Australian nevertheless the product’s funcontributions to the design effort, damental technical engineering is not being supplied in Australia. The level of technology is generally low in the Australian subscriber equipment industry. All mainstream subscriber equipment in production in Australia at the time of this study were analogue technology products. Third-generation products are either about to be introduced or only planned. Some third-generation products of the leading foreign companies operating in Australia have been available overseas, especially in the USA and Japan, for over a year. Even among Australian firms with a strong technical capability, the dependence upon foreign microelectronics hardware means that much of the ‘enabling’ technology is brought in from abroad. Frequently 30 to 35% of the value of some of the firms’ products resides in the microelectronics components and the products’ performance depends on the components’ reliability and capability. With the increasing importance of VLSI in subscriber equipment, much more of the new products’ technical capability will reside in imported hardware. What role can there be for Australian firms in the subscriber equipment industry, in the absence of a local component capability? How competitive can Australian firms remain by undertaking only application software engineering for others’ key systems and PABXs? The international competitors who are pushing the technology forward, and in whom Australia Telecom and Australian customers will become increasingly interested, have both software and hardware capability. However clever local software engineers may be, Australian subscriber equipment firms will have to face that combined integrated strength in future competition. Competitive pressures and developments in technology have led to changes by leading international firms in the balance of skills contributing to product development - product engineering, marketing and manufacturing engineering. Australian firms claimed that marketing has now become much more important in product design than in the past. But most acknowledged that the majority of their current products have actually been inspired by product engineers. Australian firms have had experiences similar to those of overseas firms trying to adjust this balance. and are having difficulty. Marketing managers tend to push for too many different product features, and too wide a variety of products, and want new product introduction too fast. Many firms expressed the need for product engineers who are more market-responsive. While some product engineers recognize that there is a need to be more responsive to the market, they are still very protective of their pre-eminence in the firm. They are concerned about the negative effects of rapid change brought about by marketing’s influences on product’s engineering quality, reliability and standardization. The extent of standardization and modularity of products, even in the small Australian firms, was comparable to that of many overseas firms in the USA, Japan and Germany. Product engineers in these firms were concerned that, while meeting the needs of the market, marketing

TELECOMMUNICATIONS

POLICY June 1986

The Australian relecommunications

subscriber equipmenr indusrr!,

should not push change so fast as to incur significant engineering and cost disadvantages. For successful firms, a third very important contribution to the balance of influence in product design comes from manufacturing engineering. In two leading Australian firms (including the one indigenous firm), an important manufacturing engineering contribution was made to product design and development. been exercised by the In one firm, a ‘veto power’ has actually manufacturing engineers on product specifications. If it is considered that a particular component or component layout will have a serious effect on production efficiency, manufacturing can actually override the product engineers’ designs. In the other firm, some decisions were taken on manufacturing investment which were not easily justifiable within the firm’s short-term payback requirement. The ‘concession’ to allow the investment was a reflection of the importance given to the manufacturing engineers in determining production layout and requirements for new products. In Japanese firms, components, the product and the manufacturing equipment used for subscriber equipment are frequently designed and developed in parallel. This extensive design integration was not found in Australia, but the manufacturing engineers of the leading indigenous firm did design a major item of automated manufacturing equipment specifically for a sub-assembly of the firm’s telephone transmitter. The equipment, however, was not made in-house but by an independent local supplier. A balanced contribution to product design from manufacturing engineering was not found in the smaller Australian firms. Two small firms in the sample do not have any manufacturing capability at all. Manufacturing is subcontracted out. The firms were unaware of manufacturing considerations in product design. They were even unaware of failure rates or reject rates of their products during subcontracted manufacturing. In one of the firms there was a clear reaction against undertaking manufacturing responsibility. They want to develop new products. they want to be able to develop them fast, and they do not want to allocate resources to manufacturing. The firm recognized a real limit to how far it can continue to be competitive with such a perspective, but plan no changes. Product development does not end with product designers or engineers. A substantial amount of learning about improvements in product design can come during the initial experience of manufacturing and testing, an opportunity which is being denied to the smaller Australian firms. This competitive advantage will become more important with the diffusion of digital technology into subscriber equipment products. Reliability and cost-competitiveness of digital products depends largely upon understanding product design for manufacturability on automated lines, rather than just ingenious design for advanced product features. Modularity The study revealed a very strong awareness among Australian firms of the importance of modularity in product design. A considerable degree of success has been achieved in developing products on a modular basis. Among the large firms this was driven by the need for manufacturing efficiency. Modular design was also seen as a means of offering

152

TELECOMMUNICATIONS

POLICY

June

1986

The Ausrralian teleconmunications

subscriber eyuipmenr indusrr~

upgrading capability to a user without significant reengineering of a product or even its removal from the user’s premises. Even among the small, product engineering oriented firms, modularity was a recognized objective. Standardization and component

commonalit)

The need to standardize subscriber equipment design and maximize the common components in products was widely recognized. Some Australian firms had done well in achieving this objective. Four large firms and one smaller firm achieved about 75 to 80% common componentry on PC boards within a particular product range (such as a PABX product. a key system or a modem). One large firm was unable to standardize successfully. Even though it produced around half a million telephones per year, its product ranges are diverse. This lack of standardization was partly the result of trying to move too fast in the short-term and not allowing manufacturing engineering to have sufficient influence in product design and development. The temptation of product engineers always to seek things new can be a problem for firms. Product engineers’ enthusiasm to ‘design in’ the latest components as soon as they become available, needs to be restrained at least until the next range or generation of products is being planned and the implications for manufacturing and reliability of new components can be assessed.

Investment,

manufacturing

and firm structure

Investment policy Levels of investment in manufacturing equipment in the Australian subscriber equipment industry were found to be related to the size of the firm. There was a wide diversity in the annual levels of investment. The large firms invested between $A 2 million and $A 7.5 million. while the smaller firms invested from under $A 50 000 to $A 500 000 per year over the past few years. Most of the manufacturing investment was in test equipment. Investment in automatic insertion equipment is now being ,undertaken by the large firms for the manufacture of the new generation of products. Only two firms were considering investing in surfacemounting equipment for components and in equipment for the automated handling of assemblies (such as robots). Productivity was frequently cited by leading firms in Japan and North America as the main reason for their new investment. In Australia, investment was justified on the grounds of the need for the new generation of products; productivity tended to come second. Broadly, Australian firms’ investment tended to follow product engineers’ interest in new products, which require new manufacturing techniques, rather than being driven by awareness of the need for improved manufacturing efficiency. Investment strategy reflects the power of the product engineer rather than the influence of the manufacturing engineer in investment decisions in the Australian firms. Automatic insertion In leading integrating

TELECOMMUNICATIONS

POLICY June 1986

overseas firms advanced equipment was being introduced, automatic insertion machinery, flow soldering and test

The Australiar~ lelecornmur?icarions subscriber equipment indusrr)

4Reject rates of over 15~20% were frequently found on manual PC6 assembly operations. Even ‘best practice’ manual assembly reject rates for Japanese firms

were

about

5%.

(With automation,

Japanese reject rates were down to l2%.) This increases if more components need to be inserted on a board. The cost consequences of high reject rates are serious. The actual ‘repair’ work itself may only take minutes, but half an hour can be spent merely finding an assembly fault before reworking can begin.

154

equipment with methods of automated handling (electric carrier vehicles, robots, etc) between the assembly work stations. Where automatic insertion was being introduced in Australian firms, the machines were laid out as discrete pieces of manufacturing equipment. Only two examples were found in the Australian industry of robots being used to handle boards. Scales of production in Australian subscriber equipment firms could not justify more extensive automation. One of the smaller firms which had taken the risk of investing in an advanced, automated flow soldering machine, only operated it for 15X of the time necessary for its full capacity utilization. Fully automatic, integrated production requires three-shift working to avoid downtime of expensive equipment and to achieve a compctitivc return on investment. It is not possible with Australian volumes of production for three shifts to be operated. Only one example of more than one shift working was found in the industry. Substantial automatic insertion was being undertaken in three large firms, including the indigenous Australian firm. Very advanced equipment, enabling assembly of both radial and axial components on one machine, was adopted in the indigenous firm. More common for the large firms were separate inserters for radial and axial components and dual in-line (dip) machines with ‘dip-sticks’ for insertion of integrated circuits. These machines were operated as discrete assembly work stations with boards loaded and unloaded manually. Therefore, while individual machines used in the Australian firms were sometimes ‘on par’. the overall manufacturing process was not as advanced as in leading firms overseas. With the exception of one of the small firms (which had one dip-stick inserter), component insertion for the small firms was done manually. This has important longer term competitive implications, since a major benefit of automation, apart from lower cost, is higher manufacturing (and hence higher product) reliability.’ It has particular implications for firms pursuing niche strategies, as a major feature of niche product differentiation strategy is superior quality. Success in a niche results from the high prices which can be charged for features and quality. In the past. with analogue subscriber equipment technology products, it was reasonable to expect competitive quality and reliability with manual methods of manufacture and testing. This is no longer possible with digital technology, and particularly not with competitors who are using integrated automated assembly and test equipment. often designed in parallel with new technology components and end products. The Japanese have now taken advanced manufacturing technology one step further with the introduction of ‘soft’ (or flexible) automation. This enables competitive production of small batches of differentiated products on large-scale production lines. Without losing their scaleeconomy. automated production advantages, they can ‘pick off’ niches if and when they appear sufficiently attractive, or during troughs in mainstream

Return

subscriber

product

demand.

OH ijlvestnletlt

The short return

which Australian firms expect is a major of advanced manufacturing equipment. Only in one firm (the subsidiary of a Japanese firm) was a period as long

constraint

on

on investment

their

adoption

TELECOMMUNICATIONS

POLICY

June 1986

as

five years allowed. Another large firm allowed a three-year period; the rest permitted only about 18 months to two years to recoup investments. It is not feasible to expect to justify investment in advanced equipment with such short return times - not with the small volumes of production existing in the Australian industry. Australian firms will be compelled to make what they perceive as unacceptable decisions in order to introduce necessary advanced equipment, or else they will not be investing in the equipment at all. A major conclusion can be drawn from this. Managers in Australian firms (or their shareholders) need seriously to reconsider the kind of decision-making horizons they adopt, given the requirements of the new generation of digital subscriber equipment products and given their manufacturing requirements. If they are to remain competitive with a new generation of technology, firms’ shareholders and managers may have to be prepared to accept as a VJ~~J~RZWFJ a three-year return expectation on new investment. For firms with smaller volumes of production, expectations will have to be substantially longer, possibly extending to five or more years. Firm structure: vertical integration The competitive advantages and disadvantages ment firms of two forms of vertical integration 0 0

for subscriber were examined:

equip-

Integration into networks and public switches. Integration involving in-house semiconductor design and manufacturing capability, particularly of custom integrated circuits.

Generally, successful overseas subscriber equipment firms were involved in network and switching activities and in design and manufacture of semiconductor components in-house. Successful firms were also increasingly merging subscriber equipment activities with office equipment, to develop integrated office communications and data-processing products. Vertically integrated firms were able to benefit, in terms of market forecasting and understanding user needs, from involvement in telecommunications networks as service carriers. They also benefited from ‘captive’ carrier markets for their own subscriber equipment products. One-quarter of the value of a network system sale can consist of attached subscriber equipment products. Those firms which had custom semiconductor chip design and manufacturing capability invariably argued that as lor~g as they were big enough there were crucial competitive benefits to be enjoyed. These included exclusive differentiation in product design and the ability to retain proprietary information over unique designs. Firms were reluctant to divulge what were the essential engineering secrets of their new products to independent component manufacturers who also supply their competitors. Integrated firms can also internalize the value and cost benefits of the main component elements of their products. There were benefits of control of cost and stability of supply for the major element of hardware engineering in their products. Over 80% of hardware costs of subscriber equipment products could be accounted for by semiconductor components. Such benefits from vertical integration, found among international

TELECOMMUNICATIONS

POLICY

June 1986

The Australian telecommunications

subscriber equipment industry

competitors, tended to be recognized by the Australian firms. One Australian firm. integrated into public switch production, has attempted to organize joint production of PC boards for their public switches and their subscriber equipment products. By so doing, it planned to increase production throughput to justify investment in an advanced component insertion machine. Another integrated firm had already installed advanced equipment to manufacture its mobile telephone, and it was able to use that manufacturing capability for other subscriber equipment products. The scale of subscriber equipment production alone could not have justified the equipment. Vertical integration into wider office equipment activities can also offer firms opportunities to design more competitive, integrated products. One Australian firm was significantly involved in the office automation market, and has enjoyed a competitive edge in marketing its PABX as a result. It promotes its subscriber equipment to its customers, as part of a voice/data communication package. It enjoys a marketing advantage in selling the PABX, by sharing the existing widespread distribution outlets and maintenance facilities of the other office products. Equally importantly, it can plan the design of its PABX as the ‘central processor’ for its office equipment product range. This boosts the strength of its engineering capability because it can develop the PABX not as a discrete product but as part of a management information communications system. Another firm - a subsidiary of a leading vertically integrated European manufacturer with office automation divisions - confirmed this advantage, and designs and promotes its subscriber equipment products accordingly. Often, vertically integrated firms may not manufacture a large proportion - in terms of numbers or total value - of their components in-house. Frequently, the key processor, perhaps only one component, is what differentiates the firm’s products from those of its competitors. That component will be designed and manufactured in-house by successful firms. Most of the Australian firms acknowledged the competitive advantages of having a custom-semiconductor design and manufacturing capability in-house. In one large firm, a chief manufacturing engineer attributed the international success of the company’s advanced digital PABX to its parent’s strong in-house custom-chip capability. Another firm, which has some major semiconductor components supplied by a sister subsidiary overseas, was reluctant to acknowledge the role played by this facility. Not all vertically integrated firms operate a close collaborative relationship between their component divisions and their end-equipment operations. The parent of one subscriber equipment manufacturing subsidiary in Australia pursues a strict policy of independent profit centres for each operation. The divisions treat each other technically and commercially at arm’s length. Vertically integrated structures alone, therefore, are not a sufficient condition for competitive transfer of technology. Firms’ managements must be willing and able to manage such structures in such a way as to ensure the benefits of integration. Some US and European companies find managing vertically integrated structures problematic, and treat each division as a separate business. If firms can effectively transfer technology from component divisions to the subscriber equipment operations, the benefits of vertical integration are lower cost, reliable component supply, more rapid

156

TELECOMMUNICATIONS

POLICY June 1986

The Auslralian relecommunicafions

subscriber equipmen:

industq

product development and greater flexibility in product design. These are crucial competitive advantages. Delays of six to nine months for supply of major semiconductor components have been experienced recently in the subscriber equipment industry. All of the Australian firms have suffered, particularly those needing advanced memory and processing components. Of particular importance is that the delays are unpredictable; if delays were always six to nine months, firms could plan accordingly. However, the supply situation can change very rapidly. Currently there is surplus supply by the semiconductor industry - a dramatic reversal in less than six months from the time of the study. Firms without an in-house supply, attempting to plan the introduction of new products designed around a particular semiconductor component, cannot tell what the supply situation for that component will be six months later. It makes product and marketing planning impossible and denies firms the ability to respond quickly in a volatile market. One leading firm said that without an in-house component supply it would be quicker (and safer) to import complete subscriber equipment products than to import the component needed in order to manufacture in Australia. The major constraint upon vertically integrated structures for many Australian firms is size. In-house custom-component manufacturing capability requires substantial levels of investment and risk. To be viable, this needs to be written off against large volume requirements. North American firms estimate a minimum demand of around one million chips to make in-house production viable. Japanese subscriber equipment firms were prepared to absorb the short-run cost of much smaller initial runs, in order to reap the long-term benefits of a lead in product introduction, security of supply, and integrated component/ product design capability. Monthly volumes well below half the required levels were accepted by the Japanese firms. Even these volumes, however, are well above the needs of Australian scales of production. The competitive advantages of vertical integration, enjoyed by international rivals, pose a major dilemma for the Australian firms competing in the industry. Avoidance of direct competition by retreating to niche strategies may not be a way out: technology requirements for competitiveness may not permit it. Product differentiation is essential for a niche strategy, and relying on standard semiconductor components to succeed is very difficult. The amount of component ‘real estate’ necessary to design unique features in this way makes the product too costly and almost impossible to manufacture reliably - particularly with the manual production techniques adopted by small Australian firms. Competitive product differentation (by performance or features) to secure a market niche requires custom componentry. Particular product niches, in a period of rapid technical change, tend to be short lived. Therefore, to be successful in the long term, firms need to be flexible and able to respond quickly to new opportunities in that niche, or to be able to change niches. Dependance on arm’s-length supply of the essential differentiating component denies firms control over costs and the flexibility necessary to survive. Whether they choose to pursue a mainstream or niche strategy in competition, Australian firms may not be able to avoid this dilemma, Large firms may be able to justify some in-house custom component

TELECOMMUNICATIONS

POLICY June 1986

157

The Au.srrulian relecommunications

subscriber equipmenr industry

manufacture. Small Australian firms, if they are to remain in the subscriber equipment industry, may require some form of collective solution to secure custom component capability.

Effects of telecommunications

5This section does not attempt to review current Australian telecommunication policy or its efficacy. Australia Telecom and the Department of Communications pursue important objectives and are subject to major pressures which are other than economic. The perfectly valid ‘noncompetitive’ concerns of telecommunications policy, such as wider consumer choice, are not to be dismissed.

158

policy on competitiveness

The purpose of this section is to outline some aspects of telecommunications policy which have had an impact on the competitiveness of firms in the Australian telecommunications subscriber equipment industry.’ The ‘opportunity costs’ of some of these wider policy objectives will be outlined, in terms of long-term competitive consequences for the Australian industry. Firms in the Australian subscriber equipment industry are often heavily dependent upon business with Australia Telecom in major product areas (see Table 4). Firms which are involved in the mainstream products argued that Australia Telecom’s policy of permitting seven suppliers of PABX destroys any chance for them of scale economies in manufacturing. As a result, they cannot justify major forward investment. The situation is better with key systems procurement, because there are only two approved participants. This allows the two selected firms to produce at scales more approximate to competitive levels of production. The issue of the scale of production in subscriber equipment products becomes critical with the change from electromechanical to microelectronics technology. Electromechanical products can be assembled competitively using labour-intensive (manual) production technology, with low capital requirements. With microelectronics technology, the need arises for much more capital-intensive production. This is not only because the assembly process requires the insertion of large numbers of semiconductor components, it is also because of the requirements for quality and reliability. Direct labour cost saving is not the only important economic benefit of advanced automatic component insertion. Very dramatic cost saving can be obtained from the better assembly connection which is possible. The generally higher reliability which results reduces significantly the amount of reworking necessary in production. Reference has already been made to the fact that some firms experienced reject rates of around 20% on some of their boards made on non-automated production lines. The conflicting requirements of the new technology and the ‘wide procurement’ policy of Australia Telecom may be creating a dilemma for the Australian industry: a large number of suppliers means that the level of production for any one Australian firm will be very small by international standards. The only way in which the manufacture of new-generation subscriber equipment products is feasible (competitive) is with automatic equipment. But the adoption of automatic testing and insertion by firms is not feasible without large scales of production. Australia Telecom’s current view is that the best way to serve Australia’s future communication products needs is to have a wide range of competing suppliers. This may be a perfectly valid view, but it creates problems for firms hoping to adopt new technology and ensure ‘their competitiveness. In order to meet its requirement for widest choice, Australia Telecom may be denying Australian firms the ability to manufacture new generation digital products. Australia may have to face the choice of either having the competition and choice that

TELECOMMUNICATIONS

POLICY June 1986

The Ausrrulian telecomm~rnications sducriher

equipmrm

idftsrrj

Australia Telecom wants, or having digital products made in Australia but not both. Regulations with respect to specifications administered by Australia Telecom may also effect manufacturing investment opportunities for Australian firms. One large firm had invested in an advanced machine enabling insertion of both radial and axial components. The productivity (rate of component insertion) and flexibility (ease of programming to change quickly to batches of different kinds of PC boards) of the permitted the firm to improve investment return and machine, efficiency by assembling boards for both public switches and PABXs together on the one machine. However, in order to be able to insert both kinds of components. the ‘wire legs’ of certain components had to be crimped by the machine. According to the firm, while this was acceptable for PABX specifications, Australia Telecom regulations prohibited crimping of components for public switches. The firm therefore was denied competitive benefits from the more intensive use of the machine over a larger. combined volume of production. The firm claimed that crimping of component legs in no way affects performance or reliability of the public switches. Australia Telecom can also have a very important influence on firms’ commercial performance through its ability to control tariffs or charges, and through its take-up of new communications technology. Recently some of the small Australian firms succeeded in developing interface products for telex when Australia Telecom introduced the technology. This business proved very profitable and grew rapidly. However, the firms claim that Australia Telecom’s decision to adopt an alternative technology and the high rates which they decided to charge for the telex services eliminated this business almost overnight. Greater awareness and consideration by Australia Telecom of the commercial implications of its decisions could ease local firms’ adaptation to new technology and avoid unnecessarily damaging their competitiveness. In order not to be too vulnerable in this unpredictable environment, firms felt they must remain flexible. Therefore. they will not commit themselves to advanced means of production and types of products which are needed; they view the necessary investment as too risky. If this is so, then ‘flexibility’ cannot be regarded as a positive feature of the Australian industry. This may mean Australian exclusion from advanced subscriber equipment products and manufacturing technology which require long-term commitment of capital and skilled labour. Australia Telecom may have to include among its priorities the creation and maintenance of a more predictable market environment.

Recommendations

for industry policy

The purpose of this study of the telecommunications subscriber equipment industry is to contribute to the understanding of the relationship between technical change and international competitiveness, in an industry which is central to the office automation and information technology revolution. The aim is to identify the adjustments necessary in firms, to enable them effectively to adopt new technology for competitive success.

TELECOMMUNICATIONS

POLICY June 1986

159

The Ausrralian relecommunications

subscriber equipmenr indusrr>

In summary, the Australian

the major adjustments found industry are as follows.

to be necessary

by firms in

(1)Reconsideration of short decision-making horizons in product development and in return on investment, towards the longer term. (2)Redress of the imbalance in product decision-making to allow greater contributions to product design and development from marketing and, in particular, from manufacturing engineering. (3)Greater recognition of the importance of manufacturing engineering for the successful adoption of new technology. Better skills. including graduate engineers, need to be applied in this direction and greater status needs to be afforded to manufacturing generally throughout the industry. (4)There must be greater willingness to invest, not only in discrete advanced automated manufacturing equipment. but also in more integrated production processes including handling and testing. The small scale of Australian firms will be a major inhibiting factor, as are the current expectations of management for a quick return on investments. It would be presumptuous, on the basis of an extremely brief visit to the Australian industry, to attempt to make comprehensive recommendations to policy makers who have had many years’ experience of the industry. Furthermore, the Australian sample included small firms mainly involved in communication products (such as modems and multiplexers) which were not explored in the larger international study. Recommendations which may be valid for the leading firms would therefore need to be treated with caution for firms in these other communication products segments. However. I have ventured to make some brief observations which will need to be explored further with the firms, with Australia Telecom and with the government departments concerned. Oire: pursuance of a ‘niche’ strategy for subscriber equipment products is an increasingly precarious basis for establishing a long-term competitive presence in the industry. Leading firms worldwide have developed applications software and flexible methods of automation to enable rapid assault on niches as they prove attractive, or in times of depressed business in mainstream subscriber equipment products. Their mass-manufacturing cost strengths and wide marketing networks will offer a substantial advantage when they decide to compete for niche segments. Individual Australian firms may make short-term profits, but face a precarious long-term existence, on the basis of niche strategies alone. TWO: advanced subscriber equipment products are dependent for their cost and performance upon LSI semiconductor components. Most successful products are designed by firms around custom circuitry which originates in-house. Large scales of production are required to justify investment in such component development, often with very long-term profit expectations required of management. The Australian industry will need to address the problem of appropriate access to custom semiconductor components. ‘Appropriate’ access will involve using components sources which can offer: (1) the advantages of rapid recognition and response to new technical opportunities; (2) security of supply; (3) intimate parallel development with

160

TELECOMMUNICATIONS

POLICY June

1986

The Australian telecommunications

subscriber eyuiptnenr industr)

products; and (4) production cost control - in order to be competitive with their vertically integrated international rivals. Three: most leading international firms which have succeeded in competition have won major export business. Means will have to be considered to stimulate the export performance of Australian subscriber equipment firms. This will be vital to achieve and then to retain In the absence of a large domestic international competitiveness. market, only improved export performance will offer the larger scales of production necessary to justify integration into custom components and investment in more automated means of manufacture. Four: small scale, particularly of the smaller firms in the Australian industry, will be a major constraint upon investment in advanced manufacturing equipment, even if changes in management attitudes are made. Means of rationalizing production arrangements in the industry may need to be considered. A possible model for rationalization may be provided by the Italian machine tool industry. Coordinated by the Italian Machine Tool Industry Association (UCIMU), groups of small machine tool firms have formed common manufacturing facilities. This has enabled them to adopt more advanced manufacturing equipment than their small, separate, production needs could justify. Only subassembly manufacture is collective; marketing and other commercial activities are conducted separately by each of the members. The small Italian firms thereby secure greater control over valueadded than under the previous methods of subcontracting manufacture at arm’s length. With increasing experience and confidence, some firms may begin collaborative product design to improve further the efficiency of the automated joint facility. They can do this by increasing standardization around common subassembly ‘modules’ which can then be assembled into unique final product configurations. The firms can thus obtain some benefits of larger volume manufacture while retaining differentiation of their products. A variant of such a model may be appropriate for small firms in the Australian subscriber equipment industry. These, too. are often dependent upon subcontractors for manufacture. Subcont.ractors are small and survive by supplying a wide range of needs to many customers in many industries. To remain flexible they may be unwilling to commit themselves to the advanced manufacturing equipment requirements of new subscriber equipment products, or to adjust rapidly to the industry’s changed conditions. A collective or common manufacturing facility may be more responsive to the subscriber equipment firms’ needs. Questions such as who will manage such a facility and how joint decisions will be taken among fiercely independent members will need to be addressed. It may be fruitful to explore further the experience of the Italian machine tool industry model. Five: given the small base of the Australian industry, even if some collective arrangements are achieved and if substantial exports are won, feasible scales of production may still not be possible through a purely indigenous solution. Many fundamental management skills and vital semiconductor engineering skills are not available in Australia. Such knowledge underlies the competitive leadership of the dominant firms in the industry. It cannot be purchased by licences and it is not visible for copying. Direct investment by leading firms does not ensure that this

TELECOMMUNICATIONS

POLICY June 1986

The Aus~aliun

telecommwlicarions

subscriber equipment indusq

‘Such a collaborative arrangement between the N7T and the leading Japanese suppliers has been claimed to be a major reason for the highly successful innovative and competitive performance of the Japanese subscriber equipment industry during this period of dramatic change. See D. I. Okimoto and H. K. Hayase, Organisafion of Innovation: N‘TT Central Research. Laboratories and Nl7 Family Firms, unpublished paper, June 1985.

knowledge and necessary skills will be transferred to Australia, and efforts will need to be made if this is to be secured. Once having identified the basic management and technical knowledge needed, joint ventures between (one or more) Australian firms and a leading international competitor - subject fo a comprehensi\~e, monitored technology transfer agreement - may be the only effective way of accessing the necessary managerial and technical skills. Competitive scale economies may be possible if the Australian facility is given responsibility for a major product line by the parent (for example. a particular PABX or key system), which is directed to worldwide markets. If the joint-venture partner is also vertically integrated into semiconductor and office equipment activities, opportunities for learning from parallel design and development may be built into the technology transfer agreement. The total Australian market is small; but it is advanced in the willingness to take up new technology. With the introduction of integrated digital services in the near future, the Australian market can provide an attractive proposition to any leading international firm. particularly in the intensely competitive environment worldwide. The willingness or ability to use privileged access to the Australian market as a bargaining ploy in any negotiations with potential joint-venture partners depends to some degree on the attitudes of Australia Telecom and government policy. Sir: the strictly non-economic, social policy objectives of Australia Telecom in providing the Australian public with a reliable. efficient and advanced telecommunications service are perfectly valid. The recommendations and observations offered here are in no way in conflict with such objectives. However, these social policy objectives should not be incompatible with a thriving domestic subscriber equipment supplier industry. In fact, in the long term, only such a local industry may be sufficiently responsive to particular Australian communications requirements. given the small size of the market and the uncertainty about the nature of future needs following the pervasion of digital technology. It may therefore be necessary to reconsider policy priorities and permit the use of privileged access to the Australian market to attract desirable joint-venture arrangements. Australia Telecom may also need to reconsider its decision-making methods and procedures with respect to tariffs and new services and products. to allow for planning and competitive adjustment by Australian firms. Closer collaboration between the industry and Australia Telecom to discuss plans and needs,” rather than an arm’s_length relationship between supplier and may best serve the long-term interests of the Australian ‘customer’. communications industry. New manufacturing requirements have been identified as a major area for adjustment in the Australian industry. Australia Telecom may have to acquire skills and an awareness of the munufucturing needs and potential of new technology. It may have to do this in order to be able to take these into account in arriving at appropriate specifications and procurement arrangements for new products. Australia Tclecom’s ability to recognize and accept manufacturing engineering needs would greatly assist adaptation by Australian firms attempting to achieve international competitiveness. No one solution

to the problems

of achieving

international

TELECOMMUNICATIONS

POLICY

competitive-

June

1986

The A usrralian re1ecommur~icarion.s .suhscriher ec~~~ipn~e~~~ irldusrr~

ness should be considered as applicable to all firms in the Australian subscriber equipment industry. Some solutions may be attractive to some firms but not to others. These recommendations are not intended. however, to offer specific solutions for irrdividualfirms. The objective is to suggest means to improve the international competitiveness of the Australian industry as a whole. Recommendation number five above -joint ventures with monitored technology transfer agreements - seems the most appropriate method to achieve international competitiveness quickly. and the successful transfer of the necessary technical skills to the Australian subscriber equipment industry.

Conclusion The subscriber equipment industries in small countries (or countries with small subscriber equipment markets), particularly developing countries, may find that they have adjustment needs similar to those found in Australia if they are to achieve international competitiveness. This article has attempted to identify the difficulties. Some small advanced countries - Sweden and Canada in particular have produced leading international competitors in the industry. Their successful firms are among those which have adopted long-term decision-making horizons and strategic perspectives. appropriate product policy, long-term manufacturing and investment strategies and which have effectively managed integrated structures. Their performance in terms of exports, foreign investment and innovation in competition with Japanese and US firms demonstrates that it is not impossible for subscriber equipment industries in small countries to achieve international competitive success.

TELECOMMUNICATIONS

POLICY June 1986

163