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Building on Manufacturing Prowess: Software Convergence

Building on Manufacturing Prowess: Software Convergence

Dec. 10, 2012

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Korea's manufacturing sector -- the main pillar of the nation's economy -- has slowed to levels not seen since the first half of 2009, when it was reeling from the peak of the global financial crisis. Waning global demand caused by the eurozone debt crisis and stressed economies elsewhere caused manufacturing sector’s real GDP growth to fall to 1.3% year-on-year in the third quarter. It was the first time since the second quarter of 2009 that the growth rate of the manufacturing sector fell behind that of the service sector.

The contraction has led to a downgrade of its competitiveness. According to the 2013 global manufacturing competitiveness index compiled by Deloitte Consulting and the US Council on Competitiveness, Korea dropped to fifth place from third, supplanted by the US. China remained No. 1.

The importance of Korea’s manufacturing sector cannot be overstated in the nation’s export-dependent economy. The sector creates quality jobs and promotes diverse technological innovations. After the 2008 global financial crisis, advanced countries have become increasingly aware of the importance of their manufacturing sectors, and are attempting to preserve core manufacturing capabilities within their own borders.

General Electric (GE) Chairman Jeffrey Immelt, who was early to emphasize the need to revive US manufacturing, has said, “The world is experiencing a new zeitgeist in the shape of a global manufacturing renaissance.”

Conventional wisdom holds that the manufacturing sectors of advanced countries face a constant struggle to maintain market share because they lose price competitiveness to peers in less developed economies. To create value that can overcome this weakness, manufacturers are turning to "software convergence." This involves embedding software in a product’s microprocessors and memory to upgrade the value of its hardware.

Achieving software convergence requires recruiting and properly managing talented software engineers in a way that ensures timely development of software that creates added value in a diverse suite of products. Such “software convergence capability” is a core factor that will determine the value of products and the business performance of manufacturers more and more.

Software as a determinant in the value of products has been continuously increasing. According to Information Technology for European Advancement, software will account for 30-60% of all R&D expenses in major manufacturing industries by 2015, and will surpass the value of hardware in some industries like consumer electronics and networking equipment.

The downside to this value shift is that the fate of products will become increasingly vulnerable to software glitches. In contrast to hardware defects, a defect in software can be both hard to find and can cause products to be entirely unusable. Thus, a small software error could dramatically compromise a production schedule. For example, the new F-35 fighter jet for the US Air Force, Navy and Marine Corps was scheduled for deployment in 2010 but software defects have kept the aircraft grounded. This illustrates that no matter how strong a product’s hardware is, lack of software convergence capability can cause chronic problems. Such capability is imperative to manufacturers’ sustainable success going forward.

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