Technology industry is growth engine of Dutch industry

Digitalisation, electrification and the breakthrough of artificial intelligence (AI) are creating structural growth in the demand for technological products worldwide. As a result, the technology industry has become the growth engine of the overall Dutch industry in recent years.

This reports ING in an analysis of the technology industry. "In more than 50 years, the share of manufacturing in the economy has more than halved, but mainly due to the growth of the technology industry, its share in the economy has increased from 10.7% in 2013 to 12% in 2023. The semiconductor cluster benefited the most from this: for instance, Dutch chip machine manufacturers quickly gained ground with now a turnover share of more than 60% - largely ASML (50%) - in the machine industry, the largest technological growth industry," writes Edse Dantuma, economist Industry & Healthcare at ING.

Dantuma also points to the strong starting position of the Dutch technology industry; the sector is excessively robotised in the Netherlands. In fact, with 205 robots per 10,000 people employed, the Netherlands has the highest robotisation rate of major Western industrial countries. There is also sufficient growth potential.

At the same time, ING points to the need for further productivity-enhancing technological innovations to exploit this growth potential. Especially as staff shortages in the sector threaten to worsen. ING points to the scaling down of the expat scheme, but also to the tightening requirements for labour, study and knowledge migrants. This demands even more intensive knowledge cooperation and more investment in R&D from companies and governments.

Gert Jan Braam, Sector Banker Industry at ING: "Technology manufacturers have proven to be the new growth engine of Dutch industry. But this growth can only be sustained with a steep innovation curve. For companies that are more at the beginning of production chains, there is usually a lot to be gained from optimising processes through, for example, robotisation and digitisation. At the end of the chain, end producers can actually grow faster by increasing the market value of their product range through product innovations."

In its analysis, ING stresses that manufacturing is essential for increasing Europe's autonomy. It points to the development of emerging technology in recent decades and the rapid rise of Asian industry. At the same time, the global share of European as well as US industry has declined from a third to less than a quarter. Also, emerging industries such as China and Vietnam are becoming bigger competitors to western industries.

"Continuation of this path leads to further decline in the European manufacturing share to an expected around one-fifth by 2040-2045, according to long-term estimates by Oxford Economics. However, the pace of catch-up growth is slowing as the speed of value creation requires more own resources, more knowledge and higher-quality technologies," ING writes.

For some time now, the Netherlands and Europe have been pushing for more industrial autonomy. Partly in view of geopolitical unrest and risks. As a result, the technology industry is seeing increased demand due to government investments that ensure a more autonomous position in strategic technologies. These include semiconductors, photonics, mechatronics, AI and quantum technology.

The cost of global supply chains is rising. Not only due to increased risks, but also because production costs in emerging economies have risen relatively hard. The Netherlands, like other developed economies, has traditionally had relatively high labour costs. The increasing ageing population and associated tightness in the labour market is expected to put further upward pressure on labour costs. This also means that the gap in labour costs with emerging economies is narrowing.

ING also points out that after declining and stabilising, the economic share of the technology industry is growing. "In over 50 years, the share of manufacturing in the Dutch economy has more than halved, from 25% in the early 1970s to 12% in 2023. An industrial revival has been underway since the credit crisis. Although there has also been a temporary recovery earlier - a 1.4 percentage point GDP increase between 1983 and 1988 - the current growth period lasts longer. Since 2014, the share has been increasing again (with ups and downs), totalling a plus of 1.2 percentage points in 10 years. This phenomenon is particularly visible in the technology industry," ING said.

Technological manufacturing companies have become a real growth engine of Dutch industry in the past five years. Adjusted for price changes, added value - the difference between production and consumption of energy, materials and services - has grown almost twice as fast in the Dutch technology industry over the past five years (+5.8% per year) as in other manufacturing (+3.1%). At the same time, energy-intensive industry shrank sharply (-4.2%).

The machinery industry is the strongest growing subsector (+12% year-on-year), followed by other means of transport (+7%) and electrical appliances (+4%). Looking at the past 12 months, the electronic appliances and components industry also belongs in the top four. Machinery manufacturers saw their economic share within the technology sector double over the past two decades to 46% of value added. Metalworkers are the main suppliers to this sector, benefiting from this growth. The car and trailer industry had some good years before and after the COVID-19 pandemic. This year, however, the sector is experiencing the effects of Nedcar's closure.

Final manufacturers and suppliers of machinery, electrical and electronic devices and components are benefiting from the growing demand for products for the further electrification and digitalisation of the Netherlands. The semiconductor cluster and its suppliers are benefiting from increasing demand. This is also boosted by the popularity of generative AI. "The AI computing power needed and the sharp increase in electronics - and thus the number of chips per product - are creating structural demand growth, which has only temporarily declined due to a fluctuating business cycle. Chips are more common in both traditional and new products, such as electric vehicles. Furthermore, the number of electronic products as a whole is increasing. Moreover, electronic control, digital links to other systems and built-in sensors require many more chips per product than in traditional (analogue) devices," ING writes.

Finally, it points to making products more energy efficient, which requires a growing number of chips. For example, to run climate control on a low setting if no people are present in a building.

Zooming in on the machinery industry, the industry of chip machine makers has been the strongest growing subsector for years. "In 2021, the latest year available, this subsector already accounted for 50% of the machinery industry's turnover and 80% of its total profits. By 2023, this revenue share of chip machine manufacturers is estimated to have increased to over 60% and that of ASML alone to over 50%," ING said. The electronic devices and components industry is also benefiting from the strong demand for chips. Although sales in the subsector are under pressure, the industry with manufacturers of semiconductors, printed circuit boards and other electronic components is showing 8% annual sales growth since 2015.

In terms of labour productivity, the three frontrunners in the technology sector show a sharp increase. The machinery industry, for instance, was almost 80% more productive in 2022 than in 2016. The electronic devices and components subsectors as well as electrical appliances show more mixed trends. On balance, productivity growth is just above the average for the whole sector.

Achieving further growth requires a combination of more working hours, more capital investment and more innovation, according to ING. At the same time, human resources are scarce, and this scarcity is only expected to increase further. For example, it points to recent research by McKinsey, which predicts that the Dutch labour market could be as much as three times tighter in 2030 than it is today.

Total factor productivity (TFP) measures the efficiency of production processes. Among other things, it is affected by economies of scale and changes in capacity utilisation. However, also consider technological innovation.

"This growth factor comprises that part of the growth explained by technological progress in a broad sense and not by changes in the use of labour and capital. In the last decade of volume growth, TFP was the most important industrial growth factor. Especially in the high-growth technology subsectors, a relatively large share (69% to 84%) of value creation came from TFP growth. Technological innovations that enable this include a new type of (chip) machine (such as EUV instead of DUV machines) that is more efficient or can make higher-quality products, but also quantum computers or new applications based on AI have the potential to create more added value per (labour or capital) input," ING said.

Asked about the main structural impediments that companies see, they do not so much mention demand, but rather inadequate capacity. These include grid congestion, but also a scarcity of available physical space for company buildings and housing for employees. ING also points to the very high network tariffs in the Netherlands as well as the increasing (European) regulatory burden.

At the same time, the drive for greater autonomy at European and national level not only leads to more government support, but also to trade barriers. ING: "Export restrictions and import levies provoke counter-reactions, which on balance tend to be at the expense of growth. Especially for a highly internationally oriented industry like technology, this is a risk. However, industrial entrepreneurs consider the biggest limiting factor for future growth to be the increasing shortage of staff. They indicate that this has their continuous attention and that, besides active recruitment and training, further automation is especially needed."

Interestingly, the popularity of technology courses has hardly increased. The share of technology students in higher education is around 17%. This is still considerably lower than in most other Western European countries, where this share is often at least 25%. Secondary vocational education has also made almost no progress in this area.

The number of robots in the technology industry grew strongly in 2021 and 2022. For every 10,000 people employed, 205 robots are now active in the technology industry. This is the highest robotisation rate among major Western industrial countries. "This does not include the relatively underrepresented but highly robotised (freight) car industry in the Netherlands. Since the corona pandemic, the rapidly increasing labour shortage provides an additional reason to accelerate task robotisation," ING writes.

The added value of robots is also increasing, including in production processes with a focus on highly variable, more complex and smaller production runs. For instance, computerised software programming makes robots profitable even for very low volumes. Entrepreneurs also argue that robots actually make work more interesting for skilled workers by allowing them to focus on optimising the process.

The technology sector is largely digitised. "Within the Dutch technology industry, metalworking in particular still has big steps to take on the road to further digitisation. The machinery industry is leading the way. As many as 62% of companies in this subsector have a high to very high digitisation rate," ING said.

Digital communication between and within companies plays an indispensable role in the development of a 'smart industry', also known as 'industry 4.0'. For instance, digital technologies can increase the efficiency of designing, manufacturing and distributing products. Think of smart software, robots and sensors.

ING calls further digitalisation necessary to increase productivity with artificial intelligence (AI) applications. This includes interconnecting IT systems and IT and manufacturing processes to generate suitable data for AI control. ING expects that it will still take years for AI to realise its full industrial potential.

At the same time, the number of valuable AI applications is increasing rapidly. ING: "Meanwhile, AI applications are in full development and AI is already being used in various ways. In addition to AI-driven predictive maintenance, AI is used for production planning optimisation, for example. Quality controls can also become more effective when AI systems analyse sensor data during production to make early adjustments to the process in case of errors. Furthermore, AI-driven robots can work more autonomously than pre-programmed robots, allowing the automation of increasingly smaller product series."

ING calls increased investment in R&D for technological manufacturing companies essential for achieving productivity-enhancing innovations. Within the technology industry, more innovative subsectors such as the machinery industry, the electrical equipment industry and the electronic equipment and components industry invest significantly more in R&D than less innovative sectors, such as the transport equipment industry, the metal industry and the machinery and equipment repair subsector.

Besides high levels of productivity, knowledge and skills, intensive collaboration in research and innovation ecosystems is also a cornerstone of Dutch success. "Technological manufacturing companies also cooperate among themselves relatively extensively and often in great openness, often within regional clusters with research organisations and educational institutions. This is an important source of knowledge diffusion and productivity growth," ING said.

ING also points out that as the Netherlands nears the European-agreed and national target of at least 3% GDP in public investment in R&D by 2024, these investments are actually being scaled back. For instance, the new cabinet is withdrawing money from the National Growth Fund and wants to cut research spending. These announcements are expected to further reduce the already anticipated decline in R&D spending between 2024 and 2028.

Companies need to adapt their processes and ways of working to successfully deploy new technology, ING warns. Both flexibility and scale are important for implementing new innovations. Studies show that, on average, large companies implement productivity-enhancing technology faster. Also, large companies can generally bear the increasing costs of R&D, ICT, staff training and accountability requirements better than small players.

Read ING’s full analysis here.

Author: Wouter Hoeffnagel
Image: jarmoluk via Pixabay