Innovation Business Partnering in the EU (ii): Improving Competitiveness of EU Companies in the Global Market
Peter Davies, CBE (Chief Executive, Pera) and J. Sean Curtin (Fellow, GLOCOM and Asia Times)
The first part of this article can be found here.
The following interview was conducted at the Langham Hotel in London on 10 May 2005.
Sean Curtin: How does innovation partnering allow small and medium-sized companies to work together so successfully?
Peter Davies: As commodity manufacturing is going to China and other countries, there is a natural imperative for companies to improve their products and to move to higher value products with new features. So, innovation is important, but it is also very expensive. The natural life cycle of products at the moment is getting shorter, new technologies are coming through that the customer wants, so development of new products is getting more expensive. If you are a medium size company, you cannot meet all these challenges on your own, so you need to partner.
Sean Curtin: What is the average return rate on an investment from the partnering work you do with your clients?
Peter Davies: Generally, there is an initial period when the projects are set up and the new product technology is being developed. But, typically after two or three years the companies are getting 20% per annum returns.
Sean Curtin: 20% per annum sounds quite impressive.
Peter Davies: Yes, because by bringing new higher added value products into the market you start moving away from break-even economics. So, the return on investments is higher. In the big consortium projects across Europe, where you have companies from five or six countries, the latest estimates for returns in the medium term is about 7 to 1 on the original investment.
Sean Curtin: How does globalized innovation work on an innovation consortia basis?
Peter Davies: The very large companies, who have already accepted the need to have innovation partnerships down the road, have acknowledged the fact that they cannot do everything on their own. They do have the resources to scout for the right sort of innovation partners, and to negotiate intellectual property rights arrangements with access to the different markets themselves. The smaller companies do not have the critical mass to do this themselves. This is the crucial step that we are now identifying in Europe, that suddenly smaller companies are finding ways to do this. They are achieving this with subsidies from the European Commission.
Sean Curtin: There is quite a lot of money out there, isn't there?
Peter Davies: Yes, there is at the moment. In the future, there will be tens and tens of billions of pounds to assist companies to create the critical mass of capability amongst the consortia which can compete with larger corporations in the Far East and the US itself. The important aspect of the consortium working is that there is often a facilitator organization, an expert organization, that can define the programme that they are going to conduct together, can negotiate the intellectual property rights, can manage the consortium project on behalf of smaller and medium size companies that would not normally be able to do this on their own. This is the sort of role that Pera provides. We act as a catalyst to enable these sorts of things to happen.
Sean Curtin: It sounds like a very exciting field. Are the EU funds available to advance such projects exclusively for use within the EU?
Peter Davies: Yes, they are. The consortia are not necessarily exclusive to European Union companies, but the subsidy can only be used on European Union companies. There could be companies from other territories in the consortium. Clearly, the European Union is spending the money in order to improve the competitiveness of European companies in the global market. At the moment, this is a very big trend.
Sean Curtin: What improvements would you like to see to the EU Framework FP7 programme that will make it more beneficial for small and medium-sized companies?
Peter Davies: The main part and future framework of the FP7 programme will be technologically themed. So, for example, there will be strong themes on life science and technology. Quite rightly, the bulk of the funding will go to technology leading companies, who are going to be internationally excellent. However, for every technologically leading company, there are probably going to be twenty other companies that have the capability and the innovation, but will not be in the top ranks.
Sean Curtin: Who or what makes the determination of what is or is not considered to be a technology leading company? Is there some ranking mechanism or framework?
Peter Davies: There are very large projects funded by the European Commission for tens and tens of millions of Euros. It tends to be the bigger companies that can take advantage of this, for example the aerospace companies, the pharmaceutical companies. However, we also need schemes where average size companies that will be innovative, but more technology users rather than technology developers that can actually innovate their own products. That is the horizontal strand that you need in the framework programme as well as the vertical strand of technology focuses. You need a technology adapting strand as well.
Sean Curtin: Are there different frameworks and mechanisms within the different countries of the EU?
Peter Davies: Each country has different mechanisms for supporting its own domestic companies. The benefit of putting together a consortium across Europe, especially if it is assisted by the European Commission programme, is that you are then working to a common, European-wide set of rules which is a significant step.
Sean Curtin: In essence, this process enhances and facilitates the innovation process.
Peter Davies: It gives a predefined set of rules and this unifying set of rules that enable the process to happen in a way that a single company would find difficult on its own. For example it would be tough for a UK-based single company unilaterally trying to set a consortium relation with a Danish company and a Spanish company and a Polish company.
Sean Curtin: Being assisted in a consortium-based innovation project must be an attractive idea for many small and medium-sized companies.
Peter Davies: It is absolutely vital for these companies to bring in new products and the technological innovation behind them. If European companies look around the world, they can see the major technology companies innovating and now they can afford to do so. Nobody has a monopoly on good ideas, so small companies can have good ideas but just lack the means to enacted them. These mechanisms set them on the path to realizing their ideas and objectives.
Sean Curtin: It is an exciting field. Presumably it is of major importance to the UK and the EU as a whole?
Peter Davies: We think it is absolutely vital for the future because many European countries, and the UK in particular, are very strong in the area of R&D. However, in the future with the R&D strength of China and India coming through, the important thing is how the UK, and other EU countries, become a hub and manager of global product development partnerships. This globalized innovation is definitely the trend of the next ten or twenty years. The more we have open boundaries and the capabilities set up for international consortia, the more we can claim a position of world trade.
Sean Curtin: What would you say is Pera's main role as an innovation technology company in promoting innovation?
Peter Davies: Firstly, to make all this happen, you need the small and medium-sized companies to share the vision of what they can actually achieve. If it has not been possible in the past, it is a big step for them to realize what they can actually do today. Therefore, the first part of facilitation is vision creating: new product, new technology concept generation. At this stage the companies are very excited about what they could do, but believe there is no way they can afford it. Thus, the next stage is to find them the partners, establish the management of the programme, establish the intellectual property rights regime and turn the entire idea into a reality for them.