Electronics Industry Article – WNIE Jan/Feb 2016

CLUSTERING: The Key to a Sustainable Electronics Industry

Industry clusters have long been known to facilitate economic growth. New research shows the benefits to the electronics industry in Adelaide and in Christchurch from their cluster structures.

Aggregation of industry-related businesses in geographic proximity is not new. The phenomenon was reported during the Industrial Revolution in places then described as ‘industrial districts’. In 1990 Harvard Professor Michael Porter used the term ‘cluster’ to describe the 20th century iteration of this natural process. Porter defined clusters as:

“. . . . geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions in a particular field that compete but also cooperate.”

So, how have electronics firms evolved unaided over decades into dense and highly productive ‘industry clusters’? People in electronics firms communicate on common interests with others in local firms and when this leads to collaboration a cluster can begin to form. Over time inter-firm collaboration and connections between firms and local education, research and support organisations add structure and channels for the interchange of information, goods and services. Repeat localised business reduces transaction costs and increases productivity. Developing of specialisation within a firm can lead to contracting out of non-core tasks to trusted local firms. In clusters these relationships can mature to high levels of firm-to-firm interdependence. A developed cluster provides significant advantages to its participants that are not available to more isolated firms. Startups thrive in this cluster environment and the establishment of specialist firms can further extend cluster capability. However, the emergence and development of clusters to a sustainable level requires decades and successful electronics clusters have developed in only a small number of the many places that have the firms and other factors that spawn and sustain clusters.

Recent research provides additional understanding of the widely studied electronics clusters in Austin, Texas; Cambridge, UK; and Silicon Valley, California. These and electronics clusters in Ireland, Scotland and Singapore were studied to understand their origin and development. This study in 18 global cities also included the relatively unknown electronics clusters in Adelaide, South Australia and Christchurch, New Zealand. Since only limited research has focussed on these Australasian clusters their origin, structure and value to their regional communities and governments has not been well understood.

The research found that the most successful and highest density electronics clusters developed unplanned in small, ‘second tier’ regions that, importantly, were also remote from major national populations. Adelaide, Austin, Cambridge and Christchurch are small cities and relatively distant from major cities and while Silicon Valley’s population has now reached 1.8 million, it was a small and isolated horticultural community of 290,000 in 1950 when its electronics cluster began to grow.

Small city size and isolation from major populations encourages electronics industry people to collaborate with local people they know from their personal networks typically including school, university and community organisations. These prior relationships establish initial trust and a ‘known and trusted’ local colleague is often preferred to a lesser-known alternative collaborator in a distant city. Cluster firms typically operate within unwritten, tacitly-agreed behavioural norms and these positive factors encourage collaboration. A negative feedback loop also operates, particularly in small cities where cluster participants must ‘play by the rules’ since it is known that unfavourable reports circulate rapidly in small communities.

Electronics clusters have developed in very few of the many small and relatively isolated global regions, indicating that small city size and remoteness alone are not sufficient to initiate an electronics cluster. A unique factor was also required to spark the formation of the clusters in Adelaide, Austin, Cambridge, Christchurch and Silicon Valley. Austin’s electronics cluster developed around a company started by academics using surveillance technology they had developed at the University of Texas at Austin. The Cambridge electronics cluster started with a spinout by academics employing measurement technologies developed at the University of Cambridge. The origin of the Silicon Valley cluster is reported to be the startup of Hewlett Packard to manufacture a new audio oscillator developed by the company’s founders at nearby Stanford University.

While Adelaide and Christchurch have good research universities, their electronics clusters did not emerge from these institutions. The origin of the Christchurch cluster was the startup of firms around the two-way radio manufacturer, Tait Electronics. This firm was started in 1954 by Angus (later Sir Angus) Tait on his return from military service in the UK where he developed defence electronic systems while on secondment from the New Zealand Army.

The origin of the Adelaide electronics cluster is partly based on the technologies and crucially on the tacit knowledge and staff network relationships developed at the defence research laboratories, now known as Defence Science and Technology Organisation (DSTO). This is Australia’s principal defence research centre with 1,000 scientists, engineers and technologists. DSTO is Adelaide’s enduring dividend from the 1947 joint UK and Australian Government’s establishment of the Woomera Rocket Range. Importantly, these Adelaide-based laboratories designed and custom built the measurement and guidance systems required or rocket weapon testing at Woomera.

DSTO specialisation now includes electronics, communications, computing and surveillance systems and the technical skills and network relationships of former staff of DSTO – and staff of the adjacent defence contractor companies – are widely employed in many Adelaide electronics cluster firms and have spawned many Adelaide startups in the defence and non-defence electronics sectors.

The Christchurch and Adelaide electronics clusters are highly successful; Adelaide with less than 6% of Australia’s population has more than one-third of its national electronics industry employment. Christchurch with less than 8% of New Zealand’s population also has over one-third of its electronics industry employment.

A common theme in electronics clusters and particularly in the Adelaide and Christchurch clusters is the design and production of small volumes of high-complexity, intellectual property-based, high value-added, customisable products for commercial, industrial and professional applications.

High complexity and low production volumes combine to promote industry sustainability,.
since copying is both difficult and unrewarding.

Adelaide electronics cluster firms address a wide range of niche applications in an ‘open innovation’ environment with minimal local firm-to-firm competition which further encourages collaboration.

Decades of global research shows the valuable characteristics of industry clusters. Cluster firms benefit from skilled labour pools and their employees have wider alternative employment options. Skilled labour mobility within clusters also speeds collective learning and new concepts disperse quickly in small, ‘close-knit’ and isolated cluster communities.

Cluster firms typically share a ‘commons’ of technical and business services and suppliers of components and equipment. Education and industry bodies reinforce knowledge-sharing and positively influence collaboration. Flexible specialisation flourishes and transaction costs are found to be lower in regional clusters. Inter-firm contracting requires trust and over time this develops a high level of firm-to-firm interdependence. Firms in electronics clusters in small regions subcontract a higher proportion of specialist skills allowing further development of their own capability. Significantly higher levels of firm-to-firm interdependence have been measured in Adelaide electronics cluster firms when compared with firms in larger Australian cities where factors including distance and travel time limit face-to-face contact which restricts the development of trust, collaboration and firm-to-firm interdependence.

Small population and isolation from major populations have combined in the development of dense electronics industry clusters in a small number of global regions. These self-organised and highly productive clusters are widely researched and understood in the EU and USA, but are still relatively unrecognised in Australasia. The Adelaide and Christchurch electronics clusters will be major contributors to the transition of their regional economies from their past dependence on commodity trading and ‘industrial-age’ manufacturing to their logical future in the world of education, research, innovation and ‘knowledge-age’ industry.

Dr Ronald Grill, Managing Director, Technology Management Pty Ltd, Adelaide.

This article published in What’s New In Electronics, Jan/Feb 2016