Now is a great time to invest in business digitalization: how Lithuanian industry can change itself

2020 07 07 · 3 min read

Over the last five years, Lithuanian production sector has grown by a third. Currently, industry is the largest economy sector in Lithuania, generating more than a fifth of GDP, accounting for a quarter of the country ‘s population. However, the market analysis carried out by Baltic Amadeus, has shown that there is still a lot of untapped potential in this area.

While economic conditions for industrial production are stable, further development is often hampered by risks related to external demand, and limited access to alternative sources of financing. In the light of manufacturers’ expectations of high demand for production -as is reflected in expectations for export and domestic markets – it is now favourable to invest in increasing production capacity and digitising the business – so what to do?

Production of low technological development dominates

It is important to note that industrial goods account for more than 80% of Lithuanian exports of goods and services, 80% of Lithuanian goods are exported to the EU region. Total industrial output (excluding VAT and excise duties) generates 23.5 billion EUR value.

As much as 70% of this amount, or 16 billion EUR are made in the manufacturing sector (excluding petroleum products) and one fifth from refined petroleum products. These segments are followed by industries such as electricity, gas, steam and air conditioning, water supply, waste water treatment, waste management and mining, quarrying, taking into account the value of production.

According to Eurostat data, pharmaceuticals, computers, electronics, optics and aircraft would enter the field of high technological development. Medium – chemistry, electrical equipment, equipment, motor vehicles, medical equipment, petroleum products, rubber and plastics, metal products, other non-metallic mineral products.

And although there are various exceptions, we must recognize that the production of low technological development dominates in Lithuania. The industry in this field accounts for approximately three quarters of Lithuanian production and as much as 85% of all employees in the Lithuanian manufacturing sector work in low and low-medium-range technological development production plants.

Added value is three times lower than EU average

The analysis showed that each employee of the Lithuanian manufacturing sector generates about 19 000 EUR added value. EU average is 62 000 EUR per year. Although Lithuania has more than doubled its productivity in few decades there is still where to go.

Why does productivity growth stop? Indeed, manufacturing observed a slight decline in productivity in 2018 (from 17.6 to 17.4 EUR/hour). This is linked to factors such as rising labour costs (an average annual growth of 5.5%), tight borrowing conditions (lower investment in productivity gains), fierce competition in the EU export market and concerns about Brexit, trade wars.

I’m going to take a separate look at how the leaders are doing. In total, there are more than 4.8 thousand manufacturing companies in Lithuania. More than 200 companies could be assigned to leaders in this area, which are able to generate 55% of the total value of the production in question and ensure the employment of more than a third of the industry’s workforce. One thing is clear – Lithuanian manufacturing leaders are 2 times the EU average for productivity. One employee generates about 112,000 EUR value of annual output.

The question may be – what are the companies and what is their key to success? It turns out that the leaders are mostly companies established in the late 20th century, in other words, having seen both black and white, survivors of crises. Electronics, furniture, transport and food can be considered as areas of highest profitability.

Lack of skilled workers

The increase in labour costs in industrial enterprises is mainly due to staff shortages.

In almost 80% of cases, companies want skilled workers with higher education, at least one or two years of experience and digital skills. The problem is therefore due to the fact that most of the current unemployed are not suitable for industrial enterprises.

Over the next two years, demand for new workers in manufacturing is projected to reach around 13 000 people, or 7% of all those employed in the sector, but the development-related change will be negative (-1%).

However, the challenges in the industry do not end even when they find an employee. For example, training new staff takes approximately half a year. This creates additional costs and prevents companies from expanding their business more quickly. Lack of motivation and competence, emigration, and strong competition from other employers are just a few of the reasons cited by the survey participants. Employers value appropriate education, qualifications and work experience, but also personal characteristics. The most important factors in choosing an employee are his/her motivation, ability to adapt quickly to innovation and experience. Lifelong learning and continuous skills development (especially digital skills) will continue to be of particular importance in industry.

Use of information technology in Lithuanian industrial enterprises

When thinking about solutions that could help the industry, first of all, it is important to understand the situation of this market today. We found that 15% of companies do not even own their own website. In addition, only 1 in 5 sites have an e-commerce option (booking, reservation, purchase). This sounds extremely absurd when you estimate that a website can also provide opportunities such as a product catalog and price, customization for regular customers, tracking order delivery.

Therefore, it is not surprising that income from online sales in the industrial sector reaches just 13% , while turnarounds on the Internet are even smaller and account for only 8%. Almost half of Lithuanian industrial companies still do not use business management systems (ERP), an even larger proportion refuses the opportunity and digitise customer relations (CRM).

Microsoft software is used in a quarter of all companies. And here, for example, only about 1 in 10 manufacturing companies care about the big data. About three quarters of companies do not use a virtual private network (VPN), do not encrypt documents, carry out IT risk assessment, and do not take similar cybersecurity measures.

It is also important to take into account the fact that only 37% of workers use computers at work in manufacturing companies, while mobile devices with the mobile internet are used only by 17% of workers.

Digitalization is a priority

The EU promises to support industrial digitalization intensively from next year and promote research, innovation and the introduction of industrial digital technologies in various forms, and is now a great opportunity to address this. By 2030, the EU Cohesion Funds provide 664 million EUR for the digitalization of industry in Lithuania.

The EU institutions stress the importance of industry. Unfortunately, even 90% of the small and medium-sized businesses and 60% large companies lag behind, taking into account the adaptation of digital technologies, from their competitors in the US, Japan, South Korea and even China. It is estimated that the successful digitisation of goods and services would generate 110 billion EUR over five years.

Lithuania remains among the leading EU Member States that consistently support state-of-the-art infrastructure for industrial development (affordable transport, logistics and energy supply in every corner of the country, as well as information and communication technologies(ICT) adapted to the 5G network and Industry 4.0, but there are weaknesses that hinder progress.

Therefore , the further action taken by the Lithuanian industry, not to mention digital hygiene such as the company’s website and focus on cyber security , is the choice of industrial digitalization directions and the assessment of potential. Apparently, the greatest relevance to Lithuanian business is related to factory connection, process visualization, predictive maintenance, large data-based processes and data-based resource optimization.