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Manufacture of ICT, optical and medical instruments

Manufacture of ICT, optical and medical instruments accounts for an overwhelming majority of employment in high-tech manufacturing industries in the Czech Republic . This sector includes companies whose main business activities are primarily related to the manufacture of apparatus and equipment that is necessary for work with electronic data and information - ICT products. (NACE 30, 32, 33.2 and 33.3). Moreover, the Czech Republic has a well developed manufacture of medical equipment (NACE 33.1) and manufacture of optical instruments and photographic equipment (NACE 33.4). On the contrary, there is a very low occurrence of manufacture of watches and clocks (NACE 33.5).

The manufacture of ICT, optical and medical instruments in the CR has experienced an extremely dynamic development till 2008. This was mainly due to foreign investors. Of these investors six major ones created over 17 thousand new jobs in the past years. Employment in the manufacture of ICT, optical and medical instruments increased by 55% in the 2000-2007 period.

Table: Major investors in manufacture of ICT, optical and medical instruments

 Investor Jobs created Note
 Hon Hai Precision  Industry (Foxconn) 4,500 Foxconn remains almost utouched by the recession and already plans further growth. Companies, providing so-called EMS - Electronic Manufacturing Services - face the recession better than OEM - "branded producers"
 Matsushita Electric  Industrial Co. / Panasonic 4,230 Panasonic reduces staff globally, Czech Republic is not affected so far (1.Q 2009).
 L.G. Philips Displays  Holding / Multidisplay 3,250 Production facility in Hranice is scheduled for closure, last 200 employees will be fired.
 IPS Alpha Technology 2,100

Around 1550 job positions were created, 400 employees were dissmissed in 1.Q 2009.

 Hitachi 2,000 Just 800 job positions were created, facility closure announced 18 months after its opening.
 FIC 1,300 --

In comparison with Asian competitors Europe has inappropriate capacity of human resources and, increasingly, also the quality of technical qualifications and knowledge. This in combination with insufficient knowledge of the market and customers constitutes a major weakness. Research and development centres operated by electronics manufacturers are more and more frequently placed in China , India , Vietnam , Taiwan and other countries in South and East Asia. The Czech Republic has not yet managed to grasp the trend of outsourcing these activities to countries offering better cost advantage. In view of the fact that the Czech Republic already faces a shortage of engineers and technicians specialised in electronics/electrical engineering, and the number of graduates of these disciplines will only slowly grow in years to come, its position in the global competition for knowledge-intensive investments is not very likely to change.

The manufacture of ICT, optical and medical instruments is described as the most demanding part of the manufacturing industry. Over the last seven years, however, the growth in this sector in the CR was based on those parts of the value chain that meet this description to a little degree (manufacture of components and assembly of final products). 

Figure: Competitive advantages of Czech Republic and developed countries in Electronics/Electrical Engineering

Competitive advantages of Czech Republic and developed countries in Electronics/Electrical Engineering 

It is clear that the current nature of this sector in the CR represents one of the stages of its gradual transformation. At the turn of the millennium the industry in the CR tackled, above all, the problem of lack of competitiveness in production, lack of capital and, consequently, hindered access to new technologies. These problems were relatively well resolved by the inflow of foreign capital. However, it would not be realistic to expect that the CR will manage, in a short period of time, to establish conditions for ensuring competitive production over the long term that would be based more on research and on advanced services. It is necessary to respect the limitations resulting from the way in which the country and its human resources potential are viewed by investors, from the prestige of brands and the quality of the business environment and related services. 

In the following years the manufacture of ICT, optical and medical instruments in the CR will be influenced, above all, by the commodisation process. Traditional producers gradually lose their predominance in terms of technology know-how. Due to technological innovations sophisticated products may be manufactured by a far higher number of producers who do not need to buy the know-how of market leaders, nor do they need to invest in in-house development. Moreover, the quality of products by these producers begins to approach the quality achieved by so-called traditional producers. Thanks to the expanding supply of good quality products from various companies the market gradually ceases to distinguish between brand and non-brand  products, and the price is becoming the main criterion in for purchase. Moreover, market pressures accelerate the product life-cycle which makes it possible for non-brand producers to easily supply mass produced and mature products. The so-called OEM (Original equipment manufactures) thus lose their main competitive advantage – intellectual property. Non-brand producers benefit from this position and may expand and demand more skills-intensive occupations and workers with tertiary qualifications specialised in electronics/electrical engineering, as well as trade-related occupations and specialists in supply chain management. Typical representatives of this trend in the CR are  ASUS, Celestica and Foxconn.

On the other hand the prospects of OEM producers in the Czech Republic are jeopardized by this trend. Moreover, the strengthening of the crown against the Eurozone currency (where most of the products are headed) and the growing energy and labour costs have negative effects as well. There is therefore the threat of a gradual decrease in employment in these companies. The pace of growth of Western economies is also important – the optimism related to investments and consumption west of the Czech border will tend to diminish in the following years, and this may have a negative impact on employment in this sector.

Employment in this sector in the CR may take several directions in the future. The effect of new investors is beginning to be offset by negative implications of the exchange rate, and large new investments (like Foxconn and IPS Alpha) fill the announced jobs far more slowly than expected. Hitachi, one of the most important investors in this sector, announced factory closure just 18 months from its opening due to economic crisis. This suggests that employment in ICT manufacture approached a peak level in 2008. As the consequences of the global financial crisis reach out to a growing number of economic sectors, decline is inevitable likely.

These trends will be reflected in a  change in the qualification structure. The manufacture of ICT, optical and medical instruments differs from other manufacturing industries in that workers in production represent a far smaller proportion in total employment in the sector. In developed European countries the proportion of production workers in industry hovers at around 25-30%, while in this sector it is between 15-20%. In the CR over 40% of the workforce are in production (and there has been a growing trend in recent years, which is not sustainable in the long term).  

Another major factor affecting the manufacture of ICT, optical and medical instruments in the CR consists in changing investment priorities. Changes in the investment incentives scheme, changing priorities of the government (and, consequently, of CzechInvest) as regard the desired structure of industry and a growing number of higher education graduates with technical specialisations – all this will attract new investors in the area of development, design or service activities. This will further enhance the structure of employment. However, new jobs will only appear in the order of tens or hundreds at most – the labour market will not be able to absorb a larger investment in his area. If there is an outflow of some investors, it will be necessary to find new jobs for lower-skilled people. Some of them are likely to be absorbed by other industrial sectors, the growing sector of services showing the largest potential in this respect. However, it will be necessary to expand the provision of continuing training and retraining to ensure that these employees can perform their jobs effectively.

A shortage of lower-skilled workers can still cause difficulties in the sector in the following couple of years. It is likely that companies will seek these occupations at labour offices and through recruitment agencies. Moreover, they will seek to import foreign workforce from increasing number of countries. There will be fewer Slovaks, Poles and Ukrainians, while the number of workers particularly from the Balkans and Asia will rise. As a result companies will face specific complications due to cultural and language differences. 

The growing number of higher education graduates with technical degrees will only have a limited positive effect. Enterprises in the sector will face difficulties in attracting these graduates due to their changing preferences (decreasing attractiveness of the sector, lower pay levels, lower willingness on the part of the graduates to move to accept a job in more remote regions). An increasing number of graduates of technical universities will end up in the services sector where the demand for them will soar in the future. In a short period of time there will also be a shortage of skilled technicians with secondary qualifications (“maturita”). The demand on the part of enterprises will not be satisfied due to an overall decrease in the number of students, a higher proportion of those who continue studying at  tertiary education institutions, and preferences for general education that does not provide such good foundations for work in technical occupations.

Figure: Employment structure in the manufacture of ICT, optical and medical instruments (200-2007, in %)

Employment structure in the manufacture of ICT, optical and medical instruments (200-2007, in %)

As regards occupations requiring tertiary education, there will be the highest level of demand for programmers who are drawn into ICT companies in large numbers. The proportion of software development in total development in ICT will increase. There is a shortage of designers and developers. However, in view of scope of development in the CR that is still tiny (as compared with Western countries) this problem will not yet be as perceptible. Technologists and production designers represent other professions that require tertiary education and that might be in short supply. 

In terms of professional competencies in skilled workers there is a problem in that employment is concentrated with larger employers.  In the manufacture of computers nearly 80% of workers are employed in companies with 250 and more staff. In the manufacture of electronics and electronic components this figure approaches 60%. Large companies draw employees into large-scale production, which weakens development and innovation know-how typical of small and medium-sized enterprises.

Tertiary qualifications holders, in particular, opt for employment in larger companies that normally offer higher pay levels and better career growth opportunities, but their work is then less creative and their specialisation more narrow. The creative potential of talented workers becomes disintegrated due to this phenomenon, and the CR ’s ambitions to achieve a stronger position in research and development in this sector are endangered. 

ICT manufacture will continue to be exposed to the effects of  legislative changes of which the most important are EU directives concerning environmental protection, product life-cycle (the need to address the issue of repurchasing used products and recycling input materials when the product is being designed and developed), and restrictions on the use of selected chemicals in manufacturing. Legislative changes have a major impact on changes in the demand for skills in production, technologies and development, and non-manufacturing activities.

In view of the expected increase in costs (e.g. according to a study carried out by  Roland Berger Strategy Consultants, by 2010 a Czech worker is four times more expensive than a Chinese worker, twice as expensive as a Romanian or Russian worker and nearly 50% more expensive than a Slovak or Polish worker). Furthermore, in view of the expected decline in the supply of the workforce with vocational and full secondary (“maturita”) qualifications there will be a growing necessity to seek subcontractors for specific parts of the development or production process in other countries.

More extensive cooperation with other suppliers will increase demands placed on management, logistics and sales – i.e. particularly business, language, organisational and technological skills. Moreover, the proportion of services in the activities and revenues of manufacturers is expected to grow in years to come. This will concern, above all, the actual trade and sales, logistic services, customer support and service. This can influence the demand for occupations and skills in two ways: there may be increased requirements for enhancing skills in jobs requiring technical education so that the aforementioned activities may be carried out in the appropriate quality and scope ;   there may also be an increasing demand for non-technical staff. In view of the scope of technical education and the better position such qualifications ensure in terms of employment in this sector, the first alternative is more favourable – also from the perspective of the education sector. 

Manufacture of electrical machinery and apparatus

The manufacture of electrical machinery and apparatus (NACE 31) involves the production of electric motors, generators, transformers, cables, conductors, accumulators, batteries, lighting equipment and other electrical equipment.   Together with the manufacture of ICT, optical and medical instruments it is denoted as “electrical engineering”. According to the EUROSTAT definition this industry ranks among medium high-tech economic sectors. In this sector the Czech Republic has a very good historic position and a relatively strong position and tradition in research and development.

As with ICT manufacturing, employment in this sector increased significantly in the last seven years – by 37%. The main reason for this growth was an increasing demand on the part of the largest employers – the automotive industry and mechanical engineering, construction and partly also energy. Production in the Czech Republic was expanded and therefore demand for employees increased. 

The education structure of the workforce in the manufacture of electrical machinery and apparatus reveals that the creation of new jobs has not changed qualification requirements in a major way. The considerable decline in the proportion of workers with basic qualifications was caused, above all, by modernisation of production lines, since their operation normally requires at least secondary vocational education (a vocational certificate).

Figure: Education structure in the manufacture of electrical machinery and apparatus (2000-2007, in %)

 Figure: Education structure in the manufacture of electrical machinery and apparatus  (2000-2007, in %)

After seven years of a relatively dynamic development this sector in the CR retains a medium level of skills intensity with a large proportion of assembly work. The share of secondary qualifications holders in total employment increased to more than 85%. Unlike the ICT, optical and medical instruments manufacture there is not yet an increasing demand for workers with tertiary qualifications. The turnover per one employee in the manufacture of electrical machinery and apparatus in the Czech Republic reaches up to 60% of that in Germany and two thirds of this turnover in the UK . The figure for the CR is higher than in most Central and East European countries.

Figure: Annual turnover per 1 employee (2006, in thousand EUR) and its increase in the manufacture of electrical  machinery and apparatus (2002-2006)

Figure: Annual turnover per 1 employee (2006, in thousand EUR) and its increase in % in the manufacture of electrical machinery and apparatus (2002-2006) 

The employment structure in the manufacture of electrical machinery and apparatus in the Czech Republic consists of some two thirds of production workers (particularly ISCO 72 – metal, machinery and related trades workers and ISCO 82 – stationery equipment operators and assemblers). In terms of comparison with selected developed West European countries these occupational groups have about twice as large proportions in total employment. Despite the strong tradition in development the employment of scientists and engineers (particularly ISCO 21 and 24) is below the average – in the UK and in Germany it is a few times higher. In Hungary it is also twice as high than in the CR.  Of these countries the CR has the largest proportion of skilled technicians (particularly ISCO 31 and 34), and, conversely, a very low proportion of unskilled workers ( ISCO 9) in total employment. However, in terms of innovation potential and R & D activities, technicians ( ISCO 3) are not of key importance for the industry and they cannot fully make up for the shortage of scientists and engineers.

In the upcoming years the manufacture of electrical machinery and apparatus will be influenced by the following major trends: 

The development of manufacture in the auto industry that envisages another major impulse as the third plant for the production of passenger vehicles (Hyundai) has been opened at the end of 2008. Economic crisis may weaken influence of this market driver, but longterm prospects should be better - electrical and electronic components will represent an increasingly important part of the value of a car and its price. The most important components will include hybrid drives and brake control systems including advanced electronics. Demand for qualifications in electrical engineering will therefore become stronger in the car industry itself. Consequently, there will be a growing interest in workers with electrical engineering qualifications and knowledge in other user fields. It is likely that demand in this respect will exceed supply and that companies will have to address this situation by more intensive in-service training and qualification enhancement schemes for selected employees.

There will be a worldwide increase in demand for turn-key projects in the energy sector that will be pulled by an increase in demand for energy (particularly electricity) in absolute terms and for new energy generation sources in the Czech, European and, most importantly, developing markets (particularly in the so-called BRIC – Brazil, Russia, India and China). At the same time it will be necessary to modernise and renovate the existing energy equipment and transmission networks in the CR and in Europe to meet energy efficiency and fuel savings requirements.

Some occupations that are of key importance for this area (development and design of equipment for the generation of electricity) experienced a relatively steep decrease in demand on the part of employers. This had a negative impact on the interest in the relevant field of study on the part of students. As in the energy supply sector, the age structure is unfavourable and the supply of skills will not satisfy the future demand on the part of many enterprises. Changes related to legislation, outsourcing and a greater emphasis on accompanying services, which are analysed in the previous chapter, will have a similar impact on occupations and skills in this area.

However, a further growth of the sector in terms of overall employment is less likely.  This growth will be counteracted by both a change in the conditions and the overall environment that will lower the level of attractiveness of the CR for new investors, and by the demographic development and the expected decrease in the inflow of new graduates. The deteriorating cost situation will also have an effect (wages, energy, exchange rate development). This will constantly force enterprises to increase labour productivity or, possibly, to move parts of production to cheaper locations. All this will tend to have a negative effect on total employment – even in the event that skills and technology intensive investment projects are placed in the CR in the upcoming years.

The following development may be expected in terms of demand for occupations and skills in the manufacture of electrical machinery and apparatus.

Stagnation and a possible slight decrease in total employment caused by continuing automation and companies ’ efforts to pursue cost optimisation of their production. The largest decline in demand for the workforce may be expected in the group of production workers and assemblers where companies will see the largest room for cost savings and increased automation levels. Demand for engineers and technicians specialised in electrical and mechanical engineering is likely to grow slightly. This will bring the CR closer to developed countries in terms of employment structure. Demand for workers with tertiary qualifications in electrical and mechanical engineering is likely to exceed supply in the long term as well. 

The expansion of activities associated with the development of new products and technologies will not have such a major impact on total employment as compared to the growth in demand for the workforce in non-manufacturing units (purchase, logistics, quality, customer services and sales).  Availability of these workers with full secondary and tertiary qualifications will be one of the key factors of the competitiveness of manufacturing companies in years to come.

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