Digitalization in industry is improving labor productivity, but smaller companies have cold feet.
It’s often stated that digitalization is important to ensure the competitiveness of our industry and solve issues on scarce and costly labor, energy and materials. However, despite the investments and progress in digitalization, the average labor productivity in the Netherlands barely increased for a long period. On average, Dutch workers in 2020 produced hardly more value per hour than they did in 2010. Is digitalization really successful – and should it be supported?
The good news is that Dutch labor productivity has been picking up in recent years. Also, the labor productivity of the technological industry, ie the high-tech and mid-tech manufacturing industry, has been growing consistently and significantly from 2015 onward. In the province of South Holland, home to about one-fifth of the Dutch technological industry, productivity increased by about ten percent in 2020 and 2021, data from the province’s Economic Board and Innovationquarter show. So it can be done.
Interestingly, the interest in industrial digitalization in the Netherlands was kickstarted in 2014 by the presentation of the Smart Industry report of TNO, the Chamber of Commerce, FME and others to Prime Minister Mark Rutte. This presentation has led to significant Smart Industry programs, including Field Labs, Smart Industry Hubs, Smart Makers Academy and so on. It’s hard to imagine that these programs immediately led to an increase in productivity in 2015.
However, promoting digitalization awareness appears to have been a trigger for many companies to act. We’ve observed such effects in the evaluation of SMITZH, the digitization program for South Holland that ran from 2017-2022. Apparently, larger companies are capable and willing to digitally transform themselves.
So, can we quit supporting digitalization in the manufacturing industry? No way! Firstly, digitalization isn’t all finished and may never be. Very large support programs are in place in the US, China and large European countries. If we step down on digitalization now, we’ll lose out. Productivity increase must remain a priority in Dutch economic policy.
Secondly, solving labor issues with workers from abroad is rapidly becoming less popular in the Dutch political landscape while ‘home-grown’ talent is scarce. Digitalization is simply needed to grow production.
Thirdly, and most importantly, whereas larger companies (100+ employees) are able to take steps themselves or find their way to support programs, smaller companies struggle. These smaller companies form the backbone of both production (often family-owned businesses) and innovation (startups). Larger companies rely on them in their production network.
In SMITZH, dozens of these small companies were interviewed by business innovation researchers from the Rotterdam University of Applied Sciences. The researchers concluded from these interviews that many factors contribute to the slow uptake of digitalization in small enterprises. Lack of knowledge and lack of dedicated staff are important, but the most important factor is the high risk involved.
Small companies usually have only one production process. If the digitalization of that process takes too long, clients will walk away. If this happens, bankruptcy is imminent. To wager your company, often built by hard work for dozens of years or even several generations, is to wager your existence as an entrepreneur. Together with the lack of knowledge of digitalization and negative experiences in the past (IT projects that cost more, took longer and delivered less than expected), the entrepreneur is understandably reluctant to digitalize.
So, we still need to support (small) companies in digitalization and need to continue doing so in the coming years. However, we’ll need to do this in another way. Smaller steps with limited risk are called for. And better support in Fieldlabs 2.0, where the actual new production process can be tested not only with scientists but also with technology suppliers, for instance.
If the Dutch regional governments and the national government would quit supporting the digitalization of their industries now, that would be much like the management of Feyenoord saying: “Okay, we’re the national champion and gained some nice results in the Champions League. We know how to win. Let’s sack Arne Slot and do without a head coach from now on.”