European machine and plant manufacturers are increasingly competing on the global market with local companies from the low-cost segment - which offer high-quality products. Is the "golden tap" on the brink of extinction?
Machines and systems from Germany and Europe - that sounds like high-tech, top quality and a comprehensive range of functions. The local industry has been successfully serving the global markets for decades, but competition is getting tougher. Globally active companies are increasingly facing successful and technologically advanced competitors from emerging markets - and these typically come from the low-cost segment. The high-end industry should therefore not take the competition lightly, as the products of emerging market players are improving while prices are still relatively low.
German and European companies are increasingly struggling with the fact that the functional scope - and therefore the price - of their products go far beyond what local customers actually need or want to pay. As a result, they are not only at risk of losing market share in established markets, they are also missing out on growth opportunities in emerging economies.
Omit Complicated Functions if Possible
"Our current innovation approaches and, above all, our innovation culture are often too lengthy and complex to find quick, sustainable and customer-centric solutions to the major challenges of our time," says Katharina Hölzle. She is Director of the Fraunhofer Institute for Industrial Engineering IAO and, together with the Fraunhofer Institute for Manufacturing Engineering and Automation IPA, has written a study on frugal innovations in mechanical and plant engineering on behalf of the VDMA Impuls Foundation.
In it, the authors address the question of how companies can succeed in reaching price-sensitive customers better, or at all, with their products. A decisive key here is omission: Whenever possible, complicated and often unusable additional functions should be left out.
"Offer Exactly What They Want"
"The 'art' of frugal systems is to offer the relevant markets and customer groups exactly what they want while still earning money," says Thomas Bauernhansel, Head of Fraunhofer IPA and also author of the study, summarizing the challenge. However, this is not necessarily just about low-cost for developing markets in emerging economies in Africa, India, China or Brazil, as customers in industrialized countries also expect high quality at low prices.
In fact, numerous companies are already developing simple, affordable and high-quality products, even though the term frugal innovation is still largely unknown in companies today. Various examples show how companies can be commercially successful with products that are strongly tailored to customers and markets.
Industry Already Successful with Frugal Innovations
In the transportation sector, for example, Renault and Daimler Truck have developed successful vehicle models for the Indian market. The agricultural machinery manufacturer Claas also offers the Crop Tiger, a combine harvester specifically for the Indian market, while Stihl has developed an engine unit designed to reduce the acquisition costs of agricultural and forestry equipment in emerging markets, where the total cost of ownership is often not a decisive factor in purchasing.
KSB has also been successful with flood pump systems specially developed for the Indonesian market, which can be mounted on trucks or trailers and quickly transported to the place of use. However, the company also reports that the development of a frugal solar pump has failed. It was developed in Germany. It was technically perfect, but far too expensive for the target market.
Redesign Instead of Reducing Functions
The authors of the Impuls study also confirm that frugal innovations are not easy to implement. For example, the obvious approach of reducing the functional scope of existing products is hardly promising if there is no precise knowledge of the needs of local customers. Instead, in order to get an accurate picture, potential customers would first have to be surveyed and observed in order to design frugal products for specific target groups and to achieve an optimal price-performance ratio.
In addition, internal company resistance to the development of frugal products should not be underestimated, especially if they are perceived as cheap and reduced developments. The authors of the study believe that management has a responsibility to create a corporate culture that is open to new approaches and solutions. This includes emphasizing the advantageous characteristics of frugal products in communication, especially from the customer's point of view, such as simplicity, robustness or affordability.
More Responsibility for Local Development
Despite everything, a "we've always done it this way" attitude persists and not all employees are willing or able to adopt a frugal mindset. When putting together project teams, employees' actual interest in the topic should therefore be taken into account. The teams should cover different disciplines and include both experienced and new employees.
Pump manufacturer KSB has already learned important lessons from its frugal innovations: If employees in the target market are given enough freedom in development, they can implement solutions locally very quickly in a functional and fit-for-purpose manner. Frugal innovations from the company headquarters become obsolete as a result. The solutions found then form the basis for the development of a scalable basic product that can be sold worldwide.