Clustering — key to electronics industry growth

Industry clusters have long been used to facilitate economic growth. New research shows how the electronics industry in Adelaide and in Christchurch is using a cluster-based approach to seize growth opportunities.

Aggregation of industry-related businesses in geographic proximity is not new. The phenomenon was reported during the Industrial Revolution in places described as ‘industrial districts’. In 1990, Harvard Professor Michael Porter introduced the term ‘cluster’ to describe the 20th-century iteration of this natural aggregation process. Porter defined clusters as “geographic concentrations of interconnected companies, specialised 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’? Electronics industry professionals communicate on common interests with others in local firms, and when this leads to collaboration a cluster can begin to form. Collaboration between businesses and local education, research and support organisations provides a channel for the interchange of information, goods and services. Repeat localised business reduces transaction costs and increases productivity. Specialisation allows local businesses to outsource non-core tasks to trusted local companies. These relationships lead to a high level of firm-to-firm interdependence. A developed cluster provides significant advantages to its participants — these benefits aren’t available to businesses that are isolated. Start-ups thrive in a cluster environment and the establishment of specialised firms can further extend cluster capability. However, it takes decades to develop successful clusters.

Recent research provides additional understanding of the widely studied electronics clusters in Austin, Texas; Cambridge, UK; and Silicon Valley, California. As a part of this research project, electronics clusters in Ireland, Scotland and Singapore were also studied. The study, involving 18 cities around the world, also included the relatively unknown electronics clusters in Adelaide, South Australia and Christchurch in New Zealand. So far, only limited research has been done on the Australasian clusters, and their origin, structure and value to the regional communities and governments is not well understood.

The research found that the most successful and highest density electronics clusters developed unplanned in small and relatively remote second-tier regions. Adelaide, Austin, Cambridge and Christchurch are small cities that are relatively distant from major cities, and while Silicon Valley’s population has now reached 1.8 million, it was once a small and isolated horticultural community with a population of 290,000 (in 1950).

Electronics industry professionals in smaller cities are isolated from major markets and they tend to network with people from their 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 collaborator in a distant city. Cluster firms typically operate within unwritten, tacitly agreed behavioural norms and this encourages collaboration. Negative feedback loops also operate in industry clusters – which means cluster participants must ‘play by the rules’ since unfavourable reports circulate rapidly in small communities.

Electronics clusters have developed in very few small and relatively isolated global regions, indicating that small city size and remoteness alone are not sufficient to initiate a cluster. In each city — Adelaide, Austin, Cambridge, Christchurch and Silicon Valley — a unique factor was responsible for the formation of clusters. Austin’s electronics cluster was developed by academics who started a surveillance company for the technology they had developed at the University of Texas, Austin. The Cambridge electronics cluster started with a spinout established by academics for measurement technologies developed at the University of Cambridge. The origin of the Silicon Valley cluster is related to the establishment of Hewlett Packard to manufacture a new audio oscillator developed by the company’s founders at Stanford University.

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

The electronics cluster in Adelaide started with the relationships among the defence research laboratories, now Defence Science and Technology Organisation (DSTO). This is Australia’s principal defence research centre with 1000 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 and, importantly, the Adelaide-based laboratories that designed and custom-built the measurement and guidance systems for rocket weapon testing. DSTO specialises in electronics, communications, computing and surveillance systems. Former DSTO staff and employees of the adjacent defence contractor companies are employed in many Adelaide electronics cluster firms and have spawned many Adelaide start-ups in the defence and non-defence electronics sectors. Adelaide, with less than 6% of Australia’s population, controls more than one-third of the Australian electronics industry. Christchurch, with less than 8% of New Zealand’s population, also has over one-third of New Zealand’s electronics industry.

A common theme in electronics clusters, and particularly the clusters in Adelaide and Christchurch, is the design and production of a small volume of high-complexity, intellectual property-based, high value-added, customisable products for commercial, industrial and professional applications. Copying is both difficult and unrewarding for complex, low-volume products. Electronics businesses in the Adelaide ‘cluster’ offer a range of niche services in an ‘open innovation’ environment with minimal firm-to-firm competition.

Decades of global research show that there are significant benefits of clusters. Cluster firms benefit from skilled labour pools and their employees have alternative employment options. Skilled-labour mobility within clusters speeds up collective learning and new concepts disperse quickly in small and isolated clusters. Clusters typically use the same technical and business service providers and component/equipment suppliers. Educational institutions and industry bodies reinforce knowledge sharing and positively influence collaboration. Inter-firm contracting requires trust and over time this develops a high level of firm-to-firm interdependence. Firm-to-firm interdependence is significantly higher in the Adelaide electronics cluster compared with firms in larger cities where factors including distance and travel time limit face-to-face contact, restricting the development of trust, collaboration and firm-to-firm interdependence.

Small population size and isolation from major cities have led to the development of dense electronics industry clusters in a 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 industrial economy to knowledge economy.

Image credit: ©iStockphoto.com/Les Cunliffe