© BIPE 2010 December 2, 2010 Challenges from the environment and their effect on clusters Élisabeth Waelbroeck-Rocha Partner & Vice President, BIPE

2 © BIPE December 2, 2010 Challenges from the environment and their effect on clusters This powerpoint document constitutes the visual support of the presentation made at the TCI Annual Conference in Delhi, in December It cannot be quoted.

3 © BIPE December 2, 2010 Four main drivers will impact the future of clusters Demography

4 © BIPE December 2, 2010 Four main drivers will impact the future of clusters DemographyEconomy

5 © BIPE December 2, 2010 Four main drivers will impact the future of clusters DemographyTechnologyEconomy

6 © BIPE December 2, 2010 Four main drivers will impact the future of clusters DemographyEnvironmentTechnologyEconomy

7 © BIPE December 2, 2010 These four drivers are interdependent DemographyEnvironmentTechnologyEconomy

8 © BIPE December 2, Demography, not only the economy, will change the way businesses operate Demographic growth is highly variable across regions Continued urbanisation Reduced household size Ageing Demography EnvironmentTechnology Economy Change in population size, in millions

9 © BIPE December 2, 2010 By 2050, North America and Europe will merely represent 12,5% of the world’s population (down from 17% in 2000)

10 © BIPE December 2, 2010 Urbanisation will continue: this causes specific problems that have to be dealt with By 2020, 60 cities will have more than 5 million inhabitants, and 13 will have more than 10 million Source : ONU – World Urbanization Prospects Cities with more than 10 million inhabitants Cities with more than 5 million inhabitants

11 © BIPE December 2, 2010 Other consequences of these demographic developments include: Ageing in Europe, and a reduction in the population of working age, unless migration flows break from past trends Strong rise in demand for food products, concentrated in certain regions that do not all have a high agricultural growth potential – or whose potential will be curtailed by climate change Strong rise in energy consumption  For heating and cooking  For lighting  For transportation Ever increasing demand for clean water

12 © BIPE December 2, On the economic front, the recent crisis will have long lasting effects on the world economy Volatility is there to stay Diversification strategies of companies Emphasis on flexibility Reduced role of government Demography EnvironmentTechnology Economy Risks of bubbles Risk aversion / difficult access to financing for SMEs Continued strong competition Business cycles will be deeper, creating market disruptions

13 © BIPE December 2, 2010 Why volatility ? A result of:  The massive externalisation strategies Production / delivery volumes can be adjusted at short notice  Zero stock policies  The strategies of dominant players on resources markets Dual markets will emerge, characterized by different prices depending on the client …  Reduced government’ capacity to offset turnarounds in business cycles

14 © BIPE December 2, On the economic front, the recent crisis will have long lasting effects on the world economy Volatility is there to stay Diversification strategies of companies Emphasis on flexibility Reduced role of government Demography EnvironmentTechnology Economy Risks of bubbles Risk aversion / difficult access to financing for SMEs Continued strong competition Business cycles will be deeper, creating market disruptions

15 © BIPE December 2, 2010 Demographic developments will impact the economy Demography EnvironmentTechnology Economy Development of complex markets Growth in services sectors  In addition to the above changes, there will be growing opposition between mature / growing markets

16 © BIPE December 2, On the technology front, several breakthrough innovations could change the way we work, produce and consume New promising fields: Biotechnologies Nanotechnologies Vehicle propulsion Laser and optics Etc … Demography EnvironmentTechnology Economy

17 © BIPE December 2, 2010 The speed of change is evolving. Product innovation cycles are shorter and deeper We are in a process innovation phase, with low product innovation Product cycles 2010 ? Demography EnvironmentTechnology Economy Process cycles

18 © BIPE December 2, 2010 Demographic changes and the economy also impact the future of technology – and vice versa Demography EnvironmentTechnology Economy Innovation = new players new processes Functionality of products

19 © BIPE December 2, Environmental changes are underway New scarce resources: Raw materials, energy Food Space Time Silence / quietness Darkness in urban areas (clean) Water Privacy Comfort Demography EnvironmentTechnology Economy People will accept to pay higher prices to have access to the scarce resources This will change the relative price of goods / services People will accept to pay higher prices to have access to the scarce resources This will change the relative price of goods / services

20 © BIPE December 2, 2010 Demographic changes are speeding up changes in the environment Demography EnvironmentTechnology Economy Anthropic pressures on environment

21 © BIPE December 2, 2010 Between 2010 and 2030, world primary energy demand will grow by more than 40% Source: IEA Energy Outlook 2010

22 © BIPE December 2, 2010 Given the oil peak, coal fired electricity generation will have to grow – with major consequences on the environment – not on prices Source: IEA Energy Outlook 2010

23 © BIPE December 2, 2010 Greenhouse gas emissions accelerate climate change and will have a major impact on agriculture Source: European Commission, PESETA model results Changes in average mean precipitation and temperature between , from the period

24 © BIPE December 2, 2010 Again, economic factors and changes in the environment are linked Demography EnvironmentTechnology Economy Anthropic pressures on environment Internalisation of costs

25 © BIPE December 2, 2010 The same holds for technology Demography EnvironmentTechnology Economy Anthropic pressures on environment Internalisation of costs Efficiency search

26 © BIPE December 2, 2010 Impact on clusters Urbanisation Development of scarcity Emergence of complex markets Reduced role of government Increased competition, low price Urbanisation Development of scarcity Emergence of complex markets Reduced role of government Increased competition, low price Localized pressures on resources Cost increases Internalization of external costs Change in values New value chains, defined by market rather than by product Increased delegation, development of PPP New business models, new price setting mechanisms  Change in the firms’ scope of activity, development of multiproduct companies Localized pressures on resources Cost increases Internalization of external costs Change in values New value chains, defined by market rather than by product Increased delegation, development of PPP New business models, new price setting mechanisms  Change in the firms’ scope of activity, development of multiproduct companies

27 © BIPE December 2, 2010 Impact on clusters Urbanisation Development of scarcity Emergence of complex markets Reduced role of government Increased competition, low price Urbanisation Development of scarcity Emergence of complex markets Reduced role of government Increased competition, low price Localized pressures on resources Cost increases Internalization of external costs Change in values New business models, new pricing schemes New value chains, defined by market rather than by product Increased delegation, development of PPP New business models, new price setting mechanisms  Change in the firms’ scope of activity, development of multiproduct companies Localized pressures on resources Cost increases Internalization of external costs Change in values New business models, new pricing schemes New value chains, defined by market rather than by product Increased delegation, development of PPP New business models, new price setting mechanisms  Change in the firms’ scope of activity, development of multiproduct companies Location of clusters Ressouce efficiency of clusters Scarcity niches develop before scarcity spreads throughout the economy New borders of clusters New stakeholders in cluster Relocation closer to end client Location of clusters Ressouce efficiency of clusters Scarcity niches develop before scarcity spreads throughout the economy New borders of clusters New stakeholders in cluster Relocation closer to end client

28 © BIPE December 2, 2010 Impact on clusters Production starts after orders have been confirmed / paid Increasingly customized products Co-conception, value chains built from the end-market upwards, starting from the recycling stage Increasingly difficult financing of SMEs Production starts after orders have been confirmed / paid Increasingly customized products Co-conception, value chains built from the end-market upwards, starting from the recycling stage Increasingly difficult financing of SMEs Zero stocks Need to reduce delivery time Involvement of the final consumer in the value chain Innovation in financial engineering New stakeholders in cluster, new cluster frontiers Zero stocks Need to reduce delivery time Involvement of the final consumer in the value chain Innovation in financial engineering New stakeholders in cluster, new cluster frontiers

29 © BIPE December 2, 2010 Impact on clusters Zero stocks Need to reduce delivery time Involvement of the final consumer in the value chain Innovation in financial engineering Internalization of external costs Change in values New business models, new pricing schemes Zero stocks Need to reduce delivery time Involvement of the final consumer in the value chain Innovation in financial engineering Internalization of external costs Change in values New business models, new pricing schemes Process optimisation Relocation Cluster = living lab Innovation zones New stakeholders in cluster New frontiers for clusters Process optimisation Relocation Cluster = living lab Innovation zones New stakeholders in cluster New frontiers for clusters Production starts after orders have been confirmed / paid Increasingly customized products Co-conception, value chains built from the end-market upwards, starting from the recycling stage Increasingly difficult financing of SMEs Production starts after orders have been confirmed / paid Increasingly customized products Co-conception, value chains built from the end-market upwards, starting from the recycling stage Increasingly difficult financing of SMEs

30 © BIPE December 2, 2010 Consequences for cluster initiatives and cluster managers Need to internalize environmental issues:  Take into account local conditions (assets and weaknesses)  Pay attention to the location of activities / relocate ?  Adapt the cluster and companies’ organisation  Choice of process  Choice of market (Continuously) Review the cluster’s frontiers  Broaden the scope ?  Prepare the « transformation » stage in the cluster life cycle  Focus on services ?

31 © BIPE December 2, 2010 Consequences for cluster initiatives Review the clusters’ stakeholders  Open to new players of tomorrow (insurance, etc.)  Review the roles and responsibilities of stakeholders in clusters Means of governments / regions will shrink  find new leaders for the initiatives Interact with individual consumers  Reach outside the cluster to the final consumer – wherever he/she is – in order to adapt to permanently evolving customer needs  Use local residents to create living labs