China’s Rapid Pulse: Thoughts from the Road

I am standing amid the hustle and bustle of the main street of Shanghai, unable to hail a taxi and scrambling to open Google on my phone. I’ve forgotten it’s recently been banned in mainland China and that drivers now prefer passengers who book through WeChat, a mobile app that awards taxis an additional service fee. I’ve lived in this country for most of my life, but I still have trouble keeping up with the pace of China’s evolution.

During the 12 days I spent in Shanghai, I spoke at length with clients, experts, local think tanks, and consulting analysts all focusing on one thing: how businesses can adjust to a developing China. A few of the on-the-ground insights I picked up are highlighted below.

Buildings in Shanghai
Older Shanghai-style “Shikumen” architecture is found adjacent to newer modern facilities.

From the business operations standpoint, local competition is happening at the provincial level rather than the national level. Many strong, regional-based Chinese brands are emerging and ramping up their capabilities in order to become “national” brands. Echoing the findings detailed in my past report on Managing Local Competition in China, the biggest challenge multinationals are facing is how to localize their strategy in an increasingly sophisticated China. Opening up a developed-market “toolbox” is not sufficient enough to solve China-specific issues.

The crux of this problem is that, in a sense, China is not really a single country—it is a series of distinct regions. A standardized strategy cannot work well in China because of the cultural diversities, wide range of local dialects, and large wealth gap. Some clients are beginning to reconsider their city tier-based model, questioning whether it is an effective way to segment customer needs. Even within one tier, the divergence will be daunting. However, you cannot create 200 business models for one country because it will not be profitable. In my upcoming report on Evolving Consumer Base and Urbanization, which will be released in a few weeks, I will provide detailed analysis of FSG’s cluster model and its implications for MNCs’ go-to-market strategies.

The idea to develop city clusters is central to the government’s plans to smartly urbanize people and cities in order to better allocate resources and boost small and mid-sized cities by leveraging the agglomeration effect from big cities. In the future, China will have three world-class super clusters that will radiate around 16 regional clusters. Logistical corridors will be built to strengthen the linkages between the northwest Chinese city of Urumqi and Russia, as well as the southwest city of Chengdu and European countries through the Pan Europe-Asia Bridge.

One pitfall that MNCs run into easily is making overambitious investments in backend facilities before the business strategy has been proven successful and the front end starts to generate revenue. Another pitfall is applying a swing strategy between the premier and middle markets. As the middle class booms, successful MNCs will create high-margin products to serve the massive middle market instead of the super premier market, which has very limited scale. (One client used the metaphor, “We don’t want only to skim a slide of fat from a big soup.”)

The O2O (Online-to-offline) model is poised to be the future of e-commerce in China. An e-commerce solution provider I talked to has already seen its O2O revenue contributions to their overall portfolio increase from 0% to 30% within one year. Target clients include lots of big-name retailer/FMCG/luxury products. Many MNC clients will be looking into this option in the coming years.

From the macroeconomic perspective, the recent shift in manufacturing is a result of the Chinese government’s policies. Although the current manufacturing outflow is an irreversible trend for China, the question here is about its timing. On one hand, this change is happening before the economy is fully ready. That’s why this transition is creating some problems. Some enterprises in the coastal region cannot afford the increasing labor/land cost because the government has implemented a land quota, and they will eventually move to ASEAN. On the other hand, the government is encouraging investment in west/central China by increasing the land supply and subsidiaries. However, the infrastructure-driven model makes inland China more prone to debt issues, the “ghost city” phenomenon, and heavy pollution.

Government always follows the path of creating supply first and then waiting for demand to materialize the supply. When the pace of “city-urbanization” outpaces “people-urbanization,” ghost cities are created. When highly polluting manufacturers move to inland cities, polluted water then flows along the Yangtze River from inland to east regions. Two types of manufacturing shifts are taking place. First, higher labor-intensive manufacturing is moving to ASEAN (as we mentioned in our latest ASEAN manufacturing piece), and possibly to Africa in the next 20 years. Second, lower labor-intensive manufacturing is moving to Shanghai’s satellite cities, such as Hefei or inland/west cities, based on the analysis of overall transportation costs and whether the business nature is more export-driven or more domestic market-driven.

Last but not least, China’s growth model dictates that it MUST grow. If growth is under 5%, all of the problems—shadow banking, local debt, and the real estate bubble—will explode. The internationalization of RMB and the financial market will feel consequences overnight and then will impact global markets too. If the country manages to maintain current levels of growth, all of the issues can be resolved by themselves. China’s current challenge is similar to the European debt crisis—one country, one currency. In addition, people cannot move freely because of the “hukou” restriction (the local registration system in China), and governance administrations are managed separately (different provincial governments work differently and lack integration). However, the future of China’s growth is promising. China is different from Japan. The advantage of having a centrally manipulated economy is also having well-planned fiscal/monetary policy from a government that can achieve highly effective results.

Finally in a taxi on my way to the airport, I noticed something interesting. Old Shanghai-style architecture is being replaced by modern facilities. It’s a result of the rapid pace of China’s urbanization, and the sharp contrast is visible on every corner. Differing styles must coexist as the society transitions, proof that everything moves at an astonishing pace in this market.

Manufacturing Attractiveness Index of the ASEAN Countries

Southeast Asia has experienced a strong CAGR of 5.5% in terms of its manufacturing output over the last decade and is now responsible for almost 4% of the global manufacturing output. This growth has been funded both by domestic companies as well as foreign investors; ASEAN surpassed China in terms of the FDI inflow in 2013 and the manufacturing sector received a large chunk of the funds. In fact, more than 30% of all FDI that has flown into ASEAN between 2005 and 2010 has been towards manufacturing, and the sector is likely to continue to be one of the biggest beneficiaries of the growing interest from foreign investors. The major reasons for this drive in investments can be summarized through the ASEAN’s four C’s: Consumption (growth), Cost (low), Commodities (abundant), and Community (single ASEAN trade bloc).

FSG’s Country-Level Manufacturing Attractiveness Index
As costs rise elsewhere and the addressable market becomes larger in ASEAN, companies should explore the viability of moving production to the region using a “total factor performance” analysis. It is important to make sure that the analysis looks beyond the simple math of labor-cost and considers total factor performance (labor, transport, leadership, material, components, energy, and capital)

FSG has created an industry-agnostic, manufacturing attractiveness index of the five major ASEAN countries based on the assessment of 30 key indicators under 6 key major groupings. See bar-graph below for the results of our analysis:

  • Labor conditions: average wages, minimum wages, engineer’s salaries, redundancy costs, literacy rate
  • Transport infrastructure: Quality of roads, quality of ports, quality of railroads, quality of air transport, logistics competence
  • Utilities (Support infrastructure): Quality of electricity supply, electricity production, energy production, broadband penetrations, mobile penetration
  • Regulatory environment: Investment freedom, tax rate, openness to foreign investment, prevalence of trade barriers, intellectual property rights
  • International trade conditions: Efficiency of import-export, number of days to import and to export, cost to import and export
  • Risk Factors: Gini coefficient, corruption, equity risk premium, banking sector risk, natural disaster risk

ASEANs Country Level Manufacturing

For companies conducting a similar analysis, couple of points to note before embarking on the exercise:

  • Make use of Weights: This benchmarking assumes equal weights for all parameters; however, companies should make adjustments according to their business needs to create the most accurate comparison
  • Conducting A Time Series Analysis: The benchmarking exercise should be done annually to measure change in the market’s dynamics

Country Profiles of the Major ASEAN Players and Their Key Provincial Regions of Manufacturing

1.       Malaysia

  1. Established industrial base: MNCs entered Malaysia as early as the 1970s, conducting manufacturing assembly in the country as a cheaper alternative to Singapore. The early entry of Western companies, access to raw materials (oil), and its established supply chains have allowed Malaysia to become one of the most competitive manufacturing locations in the region with top quality infrastructure
  2. High sophistication: Compared to its ASEAN peers, Malaysia has steadily moved up the value chain and is now mostly involved in higher value-added manufacturing and assembling, attempting to closely follow the footsteps of its neighbor, Singapore
  3. Cost barrier: With continuous progress and increasing sophistication, the cost of labor has also risen; engineers and manufacturing labor are the most expensive in the region

2.       Thailand

  1. Detroit of Asia: Accounting for over 12% of the country’s GDP, the automotive sector in Thailand has played a large part in cementing the country’s role as a key manufacturing location in the ASEAN region. Thailand has benefited heavily from sustained Japanese investments and is now the most industrialized nation in the region
  2. Rise of the Northeast: While most MNCs are unlikely to be exploring opportunities in Thailand beyond the central area, local firms are expecting the Northeastern region to perform better in the future, as it has access to a large consumer base, closer proximity to China, more attractive government incentives, a geographical area not prone to flooding, and mostly non-arable land

3.       Indonesia

  1. Manufacturing laggard: Despite obvious advantageous in terms of its location and relative wages, Indonesia has continued to remain a small player in regional production networks. Its labor market rigidities, a history of political uncertainty, and protectionist measures have kept MNCs at bay, but these trends are likely to change soon
  2. Rising interest because of costs and customers: Rising demand from ASEAN’s largest market has led several big-name MNCs to invest in the country; P&G began operations at its diaper production facility in 2013, and Foxconn, the world’s largest contract manufacturer, has committed a US$ 1 billion investment in order to set up its manufacturing facility

4.       Philippines

  1. Long-time semiconductor affair: The Philippines began to witness investments from semiconductor MNCs back in 1970s, when Western companies avoided the better established locations of Hong Kong, Taiwan, and South Korea, which were feared to be affected by the ongoing Cultural Revolution in China. Till date, the industry has a stronghold on the Philippines; almost 50% of the country’s network products (parts and components, and final assembly) exported are semiconductors, with another 27% related to computer manufacturing
  2. Philippine Economic Zone Authority’s (PEZA):  PEZA is an ISO 9001:2008 rated government agency responsible for being the one-stop-shop for investors looking to set up in the Philippines. The agency’s lack of corruption and relative efficiency have allowed for the 286 economic zones it manages, under which there are more than 3,000 companies and over 800,000 skilled and semi-skilled workers. The advantage companies find when dealing with PEZA is that it is a single entity, making stakeholder management simpler while reducing external intervention

5.       Vietnam

  1. Concentration: Vietnam’s most important industrial zones are concentrated in a remarkably small number of provinces. The majority of Vietnam’s manufacturing is located in the Southeast and the Red River Delta; together, these regions account for almost 75% of the country’s industrial output
  2. Cheap labor and proximity to China are Advantages: Samsung announced plans to invest US$ 4.5 billion in two plants in Bac Ninh and Thai Nguyen as part of its plans to relocate production from China. Both factories are expected to produce 250 million mobile phones per year. Vietnam serves as an excellent source of cheap labor (the cheapest among the ASEAN five) and is relatively close to two other manufacturing economies, China and Taiwan

Highlighted areas account for more than 75% of the manufacturing output in their respective countries

Manufacturing Map

For more information on the topic, you can download the podcast in which we discuss (a) the rise of ASEAN as a manufacturing hub, (b) diagnose the viability of movement of industries into the region, and (c) decipher the impact of the AEC

What Does The Rise of Manufacturing in ASEAN Mean for Multinationals?

While the rise of Southeast Asia has been discussed widely over the past few years due to its strong consumption demand, the production aspects of the region remain relatively unexplored with many companies not having examined ASEAN’s manufacturing capabilities, its ability to achieve economic integration, and the comparative strengths of the individual members as production units. FSG’s research shows that manufacturing is likely to play a significant role in ASEAN for years to come

The Rise of Manufacturing in ASEAN

Southeast Asia has experienced a strong CAGR of 5.5% in terms of its manufacturing output over the last decade and is now responsible for almost 4% of the global manufacturing output. This growth has been funded both by domestic companies as well as foreign investors; ASEAN surpassed China in terms of the FDI inflow in 2013 and the manufacturing sector received a large chunk of the funds. In fact, more than 30% of all FDI that has flown into ASEAN between 2005 and 2010 (see pie-cart below) has been towards manufacturing, and the sector is likely to continue to be one of the biggest beneficiaries of the growing interest from foreign investors. The major reasons for this drive in investments can be summarized through the ASEAN’s four C’s: Consumption (growth), Cost (low), Commodities (abundant), and Community (single ASEAN trade bloc)

ASEAN 1

However, even though the majority of the ASEAN countries have moved out of the agrarian state and have seen this growth in manufacturing, many are still in the early industrialization phases; meaning that the manufacturing sector is going to continue to see strong growth over the next 10 to 20 years (see graphic on the evolution of countries below) and will play a significant role in the development of the region

ASEAN 2

Assess the Direct Impact of the Rise of Manufacturing

  1. Serving the market: As costs rise elsewhere and the addressable market becomes larger in ASEAN, companies should explore the viability of moving production to the region using a “total factor performance” analysis. It is important to make sure that the analysis looks beyond the simple math of labor-cost and considers total factor performance (labor, transport, leadership, material, components, energy, and capital)
  2. Business customers (B2B) movement: Companies serving other manufacturing and production types of businesses should be assessing what types of industries are likely to invest heavily into Southeast Asia and which are not likely to consider moving beyond China

Gauge the Spillover Effects from the Rise of Manufacturing

  1. Productivity impact: The rise of manufacturing is going to positively impact productivity within the region, which has not seen a large improvement over the past decade. Manufacturing makes outsized contributions to trade, research and development (R&D), and productivity. The sector generates 70% of exports in major manufacturing economies, both advanced and emerging, and up to 90% of business R&D spending. Such productivity growth provides additional benefits, including considerable consumer surplus
  2. Rise in consumption will impact all industries: As the less industrialized countries of Indonesia, Vietnam, the Philippines, Myanmar, and Cambodia move from agrarian societies to manufacturing ones, companies should expect consumption dynamics to evolve. As people move from the less predictable farming sector to the fixed-wage manufacturing sector, they tend to experience strong income growth, increasing their capacity to consume. Even companies not exploring manufacturing opportunities in the region need to be monitoring this trend

Establish a Strategic Role for the ASEAN Region in Your APAC Portfolio

  1. Evaluate a “China Plus” strategy- China’s rise to manufacturing prominence over the past two decades has been staggering. However, rising costs, more sophisticated consumers, and fundamental macroeconomic realities mean that current approaches to manufacturing are losing their relevance. As the imperative for companies in China will be to boost productivity, refine product-development approaches, and tame supply-chain complexity, ASEAN has appeared on the horizon as a viable alternative for companies looking to expand their manufacturing footprint into relatively lower-cost locations. ASEAN countries provide cheaper labor, investor-friendly governments, and are part of established supply chains
  2. Compare the competitiveness of ASEAN (to China and India) – China is unlikely to lose its dominant position as the “factory of the world” anytime soon because of its well-established infrastructure, existing manufacturing facilities, ability to scale quickly, and strong involvement in established global supply chains. However, certain low value-added industries are likely to consider moving out of the country or at least setting up their next facility in Southeast Asia, where the cost of labor can be less than half of that in coastal China. ASEAN countries provide access to several raw materials, and certain locations have strong linkages to trade infrastructure
  3. Explore ASEAN’s complementarity to China- ASEAN countries are also likely to be playing a complementary role to China within several industries that depend on Asia for producing parts and final assembly. Given China’s established role as one of the most productive assembly locations in the world, due to its ability to scale quickly and availability of infrastructure, many companies produce their parts and components in cost-effective locations within the ASEAN region, conduct the final assembly in China, and then have the finished product shipped to the end customer. The ASEAN-China free trade agreement has helped companies create such fragmented supply chains

In FSG’s latest report on the region, titled ‘ASEAN’s Role in Manufacturing’, (a) we explore the rise of ASEAN as a manufacturing hub, (b) diagnose the viability of movement of different types of industries into Southeast Asian countries, (c) conduct a location analysis of the various manufacturing sites in ASEAN, and (d) decipher the impact of the ASEAN Economic Community on manufacturing decisions. FSG clients may click here to see the full report

Is China Losing its Competitive Edge?

This blog entry is the first of a six-part series on China which will cover China’s productivity growth, portfolio management, geographical coverage models, talent management, post-merger integration and sales force effectiveness.

Is China Losing its Competitive Edge?

Many multinational companies are re-assessing China’s competitive advantage as a manufacturing base since labor arbitrage is becoming less compelling. Although China’s productivity gains (as measured by TFP growth) outpaced other major economies in the first decade of the 2000s, this rapid growth was interrupted by the financial crisis in 2008 and has been slowing ever since.  This is largely due to overcapacity and a “crowding out effect” caused by the massive fiscal package that Beijing put in place to offset the effects of the global financial crisis.

"Made in China" Industry Competitiveness Matrix

 

We believe that China is gaining momentum in higher value-added industries such as heavy machinery, information technology, and medical devices, but losing competitiveness in low value-added manufacturing to other low-cost Asian countries, even when it comes to serving the domestic market. In a workshop that I have run recently, we discussed the possibility that “Made in Bangladesh” apparel will begin to flood the Chinese market in a few years.

As China continues climbing up the value chain, more and more of its companies are expanding abroad to other emerging markets. This leads to interesting dynamics on talent requirements, intellectual property, and portfolio management.

 

 

What you can learn from Apple in China

Apple Factory

The following is an excerpt from a recent entry in the Silicon Hutong blog by Frontier Strategy Group expert adviser David Wolf.

You could argue that this story [Apple in China] and the reception it is getting is a function, in part, of the end of the Steve Jobs Reality Distortion Field, or, as I overheard someone say the other day in reference to Apple, “the King is Dead, the Gloves are Off.” That may be true, in part, but I think that this story is the harbinger of a wider issue plaguing the global manufacturing sector, and the challenges Apple is facing with its suppliers are simply the most visible examples.

The problem goes deeper than the conflict implicit in asking a supplier to give you the best price AND to manage its business in a way that increases its costs. The matter of working conditions is part of a bigger question about the value and importance of control over the means of production. (Don’t worry, I’m not about to go off on a Marxist tangent here. Bear with me.)

I started my career managing the output of 30-odd factories and suppliers in greater China making furniture, jewelry boxes, and small gift items for a medium-sized US importer. I learned a hell of a lot from that job, but the lesson that has stuck with me throughout my career is that you cannot change what you cannot control. We like to think that a customer like Apple would, by virtue of the size of its business, be able to strong arm its suppliers into complying with its codes of behavior, or even “incentivize” a supplier to go along by raising prices. In reality, it is nowhere near that easy. Any customer, even one the size of Apple, exerts influence over how a supplier is run, but not control. A customer can exact some concessions from a supplier on factors outside of product features and quality, but at some point, any self-respecting factory owner is going to push back and say “you may buy from me, you may be my biggest customer, but you don’t own me. I’ll give in to you on some things, but beyond that, you need to let me run my own business.”

The original post is called, “The Beginning of the End of Outsourcing

 

Industrials Companies are Affected by Lower Capital Goods Investment in China

China industrials

Industrial companies are feeling the slowdown of investment acutely. Siemens has reported a 16% YoY decline in revenue from China in Q1 FY 2012

Other industrial giants such as Caterpillar and ABB have also experienced minor declines in sales in the most recent quarter, the first such decline for many companies since they entered China

Companies tied to the real estate market and infrastructure investment have been hit particularly hard. Elevator maker Otis has seen its YoY revenue growth rate slow to 7% in Q4 2011 against an average of  20% throughout the year

Frontier Strategy Group View

China is making small steps to loosen monetary policy, but the actual extent of loosening is going to be smaller and slower than many international investors expect

As a result, industrial companies are going to experience moderate to negative growth, depending on how dependent they are on infrastructure investment, real estate, and heavy industrial production

The super high growth rates of 2009 and 2010 are not likely to be seen again anytime soon
as demand falls back to a more sustainable growth rate

 

Higher-value Manufacturing is New Mexican Growth Engine

Multinationals can count on increased consumer spending as the evolution of the Mexican economy toward higher value manufacturing supports a more resilient and prosperous Mexican middle class. Companies servicing the automobile and heavy machinery sectors are set to benefit the most from the continued diversification of the Mexican economy.

Where is China manufacturing transitioning?

The three most critical considerations when deciding to relocate manufacturing are:

  • Total manufacturing cost (as opposed to labor cost)
  • Markets to serve: Domestic vs. Exports to developed markets
  • Capital intensity: Labor intensive vs. Capital intensive

Transferring Production Across Emerging Markets

(Source: Foxconn Website)

Foxconn is one of the most well-known emerging-markets based manufacturers. With labor prices increasing along with a string of suicides in it’s Chinese factories – the Taiwanese firm is looking to Latin America for new production capacity. The following is a cross-post from the China and Latin America blog which details Foxconn’s recent push into Brazil.

On August 6th, the Financial Times featured an article on Taiwan electronics firm, Foxconn (富士康科技集團), and its founder, Terry Gou. Foxconn controls close to half of the world’s outsourced technology products, including a number of Apple favorites (iPads, iPhones, etc).

According to the article, Mr. Gou recently announced a plan to place one million robots on Foxconn’s production lines. Automated production, he believes, will generate growth – the company made $80 billion in revenue last year, but is finding it hard to expand its market share.

Before Terry Gou ever announced his fondness for robo-employees, Foxconn was already seeking greater efficiency and market access through global expansion. In addition to production facilities in “greater China” (where it employs nearly one million people), Foxconn also operates in Europe, Australia, the United States, and Latin America. The company’s relatively new Latin American ventures (currently limited to Brazil and Mexico) provide greater access to local markets and close proximity to North American consumers.

Foxconn is now contemplating an additional investment of $12 billion in Brazil, which was first announced by President Dilma Rousseff during her visit to mainland China in April of this year. The company already operates at a limited capacity in the South American country, but the proposed investment would significantly expand production capabilities. New investments would offer Foxconn direct access to Brazil’s market and a means of avoiding the country’s notoriously high tariffs.

If the deal goes through, it would be Foxconn’s largest global investment. But the company’s leadership has hesitated in recent months.  Mr. Gou expressed concern about a culture in which “there’s all that dancing” and “as soon as they hear ‘soccer,’ they stop working.” Foxconn has asked the Brazilian government for certain labor and infrastructure guarantees and may eventually reduce the amount it is willing to invest.

Foxconn’s Mexico production is based near Ciudad Juarez. Its massive facility employs approximately 8,000 workers from nearby towns. The company’s presence was warmly welcomed by politicians in both Chihuahua and New Mexico, but faced controversy after a disgruntled worker set fire to the facility’s activities center.

Further expansion into Latin America – though certainly welcome – isn’t guaranteed. Foxconn’s founder seems to prefer Chinese manufacturing, even despite rising labor costs and the recent Shenzhen tragedy. Chinese laborers are thought to be very skilled, to tolerate more, and to work longer hours than many of their foreign counterparts. Mr. Gou believes that rising labor costs can be offset by a move to China’s cheaper inland provinces.

China’s remarkable distribution network is yet another advantage – shipments from China to the US are generally cheaper even than shipments from Brazil.

But as Foxconn and other firms look to expand market share, Latin America’s emerging markets are bound to receive more attention. Although fresh foreign investment in the country’s stock market has slowed (especially in the investor exodus this week), foreign direct investment in Brazil has increased steadily over the past year. As one of the fastest growing BRICS countries, its consumer market is attractive to investors. The country’s Mercosur affiliation also allows for tax-free export of certain goods to other member countries.

Mexico, for its part, boasts proximity to the US and a skilled labor force. Its manufacturing sector grew thirty percent in the first three months of this year and its share of US imports is also on the rise.

As for Mr. Gou’s cultural bias: if he ultimately decides to replace many of Foxconn’s workers with robots, futebol (fútbol) fanaticism and a proclivity for dancing should no longer be of tremendous concern.

The original post is titled: “Mr. Gou Goes to Latin America” and can be found here

China Remains Competitive in Manufacturing Despite Rising Labor Costs

Due to rising labor costs in China’s coastal areas, many companies are re-evaluating their manufacturing strategy. Often they face a choice between other low-cost Asian countries and inland China. These manufacturing choices are likely to differ from industry to industry. Companies sensitive to labor cost will move out of China, while companies requiring total manufacturing solutions will move to inland China.

Trends:

  • Wage growth in China has outpaced most major emerging economies in the last 5 years, resulting in China’s labor costs being among the most expensive in the developing world
  • Some consumer goods companies traditionally using China as a manufacturing base have started to seek alternatives
  • Vietnam overtook China to become Nike’s largest manufacturing base in 2010, contributing 37% of Nike’s global output vs. 36% by China
  • However, many high-tech companies are increasing investment in China, particularly in the west
  • Global PC makers HP, Acer and Asus have invested hundreds of millions of dollars in western Chinese cities Chongqing and Chengdu, a fast growing laptop manufacturing hub which will produce 1/3 of global output in 2011

Drivers:

  • Companies moving out of China tend to be in labor-intensive industries in which labor is a large component of cost
  • China still has advantages in labor productivity, proximity to a large domestic market, and support from industry clusters, which are important for high value-added industries such as technology