If the manufacturing industry’s more than healthy growth rate of late is to be maintained, digitalization efforts need to be stepped up, according to an analysis by ING.
The Dutch manufacturing industry is doing well, according to ING research. Over the past five years, the sector’s added value grew five percent per year on average in the 2017-2021 period – almost twice as fast as the historical rate of 2.8 percent in the past quarter of a century. Its share in the economy at large increased from 4.5 to 4.8 percent, reversing a long-standing trend of decline. If the industry manages to maintain the current rate, it could double its added value compared to the reference year 2010. For years, this goal seemed out of reach, but in light of recent developments, ING’s economists are reviving it.
A major obstacle is standing in the way, however: a shortage of staff. According to a prognosis of the Research Center for Education and the Labour Market (ROA), published in July 2021, by 2026 the technological industry won’t be able to fill 15,000-20,000 vacancies for engineers, programmers, researchers and skilled laborers. Since this problem can’t be solved in the short term, the only alternative is to double down on digitalization, says ING.
Recoup
The manufacturing industry has been a front-runner in adopting digitalization, streamlining and automating design, manufacturing and testing processes as well as supply chains. Industrial productivity (3.5 percent per year on average) has historically topped overall Dutch productivity increases (1 percent per year), and in recent years (2014-2019), digitalization has been the biggest driving force behind the growth (Figure 1). Compared to European peers, the Dutch manufacturing industry is second only to Ireland’s in terms of productivity, though a relatively small automotive industry and a strong semicon sector during the pandemic may have artificially inflated differences.
Nonetheless, productivity hasn’t been growing as fast lately as it used to. In 2014-2019, the rate was about half of that compared to 2002-2008. This is an international trend, which economists can’t fully explain yet. Part of the explanation seems to be that many SMEs can’t seem to keep up: the difference in the productivity growth rate between front-runners, which are typically large corporations, and laggards is increasing.
That’s understandable. Smaller companies have a more limited investment power than larger ones. SMEs often don’t have sufficient scale to develop adequate knowledge about new technologies, or to proactively recruit and train staff internally. They’re also less likely to employ IT specialists themselves. Moreover, given the nature of their manufacturing operations – relatively low volumes, high mix – investments in digitalization are more difficult to recoup.
Step-up
SMEs are in a catch-22. Increasing productivity is probably the only way to maintain growth in times of labor shortages, and digitalization is an obvious way to do it, but those same shortages make it hard to innovate and change up business operations – management and personnel are too busy as it is. But if growth is impeded, the companies will have fewer resources to keep staff happy and attract new skilled workers, exacerbating the shortage. The only way out is to bite the digitalization bullet, says ING.
Industry association FME backs ING’s conclusions. “The required digital technologies aren’t necessarily new, but their implementation should really be the main priority now,” says FME and Smart Industry chair Theo Henrar. “More and better-trained professionals are needed, there must be more intimate collaboration in the value chain and R&D investments need to be stepped up.”
The Dutch Ministry of Economic Affairs and Climate Change, together with the European Commission, Dutch provinces and regional development agencies, recently announced 30 million euros in support for digitalization in the manufacturing industry.