Industrial innovation can broadly be divided into two different approaches: incremental and disruptive. Speaking in broad geopolitical terms, German and Japanese industry are the global leaders in incremental innovation - think of the outstanding quality of a BMW 7 series or a Yamaha subwoofer system. There are a couple of reasons for this approach, one is that incremental improvements can be easily integrated into an existing production asset base set in a pre-determined direction. As German and Japanese firms have truly incredible manufacturing facilities, innovating in a complementary sense to these assets makes total sense. I argue however that a potentially larger factor explaining the incremental approach is a cultural one. Both German and Japanese firms have very hierarch-defferential corporate environments, and thus challenging the status quo has to be directed via appropriate channels. So, it you do want to rock the boat, you better do it gently.

This approach has served German and Japanese companies very well for the last 60 years, with both countries achieving the first and second highest aggregate efficiencies (a measure of how efficient an economy is at getting goods and services out of inputs) of any country, both peaking in the 1990s, Germany (19%) and Japan (20%). The US peaked at 14% for comparison. So, what is different now? Recently, BASF has moved a significant proportion of their production to Louisiana, citing energy costs as a major hurdle. The major European and Japanese car manufacturers are somewhat late to the electrification game with Tesla being the company setting market norms. Toyota has nearly entirely missed the electrification boat and is now playing catch up with a solid-state battery concept.

The world has changed quite dramatically in the last few years, with energy costs, geopolitics and trade sanctions all playing a role. Incremental innovation is a fine approach when the world of the future appears to not be dramatically different to the past, when demographic expansion means there is a growing consumer base, when energy costs increase gradually, and when global peace amongst the developed nations is (semi)guaranteed. The problem with this approach to innovation is that it is not resilient, and it lulls a company into a false state of comfort where they are doing “something” rather than pushing the envelope of the possible.

The opportunity for IP rich start ups in this space is immense as companies seek to survive the economic and political headwinds of the next few years. The incrementalists will have to quickly adapt more disruptive technology to survive and the challenge for startups will be in providing a de-risked scale up roadmap and developing the capability to work well with larger firms. It will also require a cultural toolkit to navigate corporate hierarchies and get technology adopted quickly. Despite all the recent doom and gloom, under these difficult conditions in the next few years the best companies will be built, and the average ones will fade away. Not everyone can move to Louisiana.