General Economic Policy, Industrial Policy

In focus: Germany as a
competitive industrial nation
Building on strengths – Overcoming weaknesses –
Securing the future

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Issue
October 2010
General Economic Policy, Industrial Policy

In focus: Germany as a
competitive industrial nation
Building on strengths – Overcoming weaknesses –
Securing the future
4

Table of contents

1. Introduction: Germany’s international competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

2. Factors determining German industry’s competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

3. The future of industrial production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3.1. A global shift: manufacturing moves towards Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.2. Environmental awareness and climate protection are influencing industrial production . . 9
3.3. Limited supplies of raw materials and fossil energy sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.4. An ageing population changes production and consumption patterns . . . . . . . . . . . . . . . . . . 10
3.5. Faster technological development and exchange of knowledge and information . . . . . . . . . . 11
3.6. Increasing importance of customised production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.7. Closer networks between the working world and production . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.8. Greater integration between industry and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.9. Global value chains: the hallmarks of industrial production . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.10. Preliminary conclusion: megatrends provide only a rough sketch of the future . . . . . . . . . . 15

4. Requirements of a vital and dynamic location for industry – spotlight on Germany . . . . . . . . . 16

4.1. Promoting skills and qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.2. Facilitating technical progress and new ideas, enhancing the capacity for innovation . . . . 20
4.3. Cost-effective management of environmental and climate protection . . . . . . . . . . . . . . . . . . . 23
4.4. Securing energy and raw material supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.5. Guaranteeing open and efficient markets, creating fair framework conditions . . . . . . . . . . . 27
4.6. Enabling compatible production processes and products with high added value . . . . . . . . . 30

5. Nothing is certain but uncertainty: framework conditions for greater adaptability . . . . . . . . 32

 5

List of abbreviations

AmCham American Chamber of Commerce

in Germany e. V.
GDP Gross Domestic Product
GVA Gross Value Added
EFRD European Fund for
Regional Development
EU European Union
EC European Commission
R&D Research and Development
GHS Globally Harmonised System
IT Information Technology
IC Information and Communication
IW Köln Institut der Deutschen Wirtschaft
Köln (Cologne Institute for
Economic Research)
SME Small and Medium-sized Enterprise
MINT Mathematics, Informatics,
Natural Sciences and Technology
REACH Registration, Evaluation and Autho-
risation of Chemicals
VDI Verein Deutscher Ingenieure e.V.
(Association of German Engineers)
VDMA Verband Deutscher Maschinen-
und Anlagenbau e. V. (German En-
gineering Federation)
WTO World Trade Organization
ZIM Zentrales Innovationsprogramm
Mittelstand (Central Innovation
Programme for SMEs)
6

1
Introduction:
Germany’s international competitiveness

Barely a short decade or so ago, Germany was conside-
red to be downright uncompetitive compared to its
international counterparts. Described as a “laggard”
and “the sick man of Europe”, its supposedly rigid and
outdated economic structures were blamed for the
country’s ills. Many experts advocated adopting the
Anglo-Saxon economic model. One of the remedies
prescribed, in particular, was a stronger focus on the
services sector.
Fast forward to today and the general consensus
has changed radically. International companies are li-
ning up to sing the praises of Germany‘s competitive-
ness and the former ‘sick man’ now ranks as one of the
best locations for doing business. The German eco-
nomy, which has proven to be comparatively resilient
in the face of the current crisis, is viewed by other
countries with a mixture of suspicion and admiration.
All eyes are on German exports: only China, a country
with a much larger population, has higher overseas
sales than Germany.
Germany’s competitiveness stems from several
successful reforms and a relatively high level of spe-
cialisation in industrial manufacturing. Compared to
other countries, Germany’s manufacturing sector is a
key factor in its macroeconomic performance. Accor-
ding to data compiled by the OECD in 2008, industry
accounted for 23.1% of the gross value added in Ger-
many. This figure was considerably lower in France
(11.9%), the United Kingdom (12.3%) and the US (13.3%).
According to the German Federal Statistical Office
(Statistisches Bundesamt Deutschland), industry’s
share of gross value added fell to just under 20% in
2009 due to the economic and financial crisis. Howe-
ver, it still far exceeds the figure for comparable eco-
nomies.
sectors and diverse range of company sizes. Finally,
there is a strong impetus for growth within German
industry: this will be vital in enabling Germany to
emerge from the current crisis in a stronger position
than other advanced industrialized countries.
With industry prospects looking up, several Euro-
pean countries have returned to an appreciation of
the value of their manufacturing industries. Germany
is now often cited as a benchmark country in the Uni-
ted Kingdom. France is also studying the factors that
have boosted the economy of its neighbour across the
Rhine: in seeking to expand its SME sector, it is emula-
ting the German model. While Germany’s neighbours
are ambivalent about the country‘s export success, it
is increasingly recognised that a strong and broadly
diversified industrial base remains crucial for a suc-
cessful European future. Even EU Member States that
no longer focus on industrial production are realising
that industry heads the European value chain and
greatly benefits the other stages within that chain.
Not surprisingly therefore, industrial policy is a prio-
rity in “Europe 2020”, the new European growth strat-
egy for the coming decade.

Thanks to its competitive industrial sector, Ger-

many can benefit from the megatrends that have
been emerging for some time now. These trends in-
clude environmental and climate protection, future-
proof mobility and energy solutions, state-of-the art
health technologies and everyday goods geared to-
wards an ageing population. German industry is well
placed to help tackle these challenges by producing a
wide range of products: in addition to a capacity for
innovation (industry accounts for almost 90% of com-
mercial R&D expenditure), it has a broad variety of
 7

Figure 1 – Manufacturing as a percentage of GVA, 1991, 2000, 2008*.

40

35 34.4

1991 2000 2008

30
 27.9

25
23.1

20.6
20
17.5
16.0 15.8
15
13.6 13.3 
12.3  11.9
10

CN KR DE JP RU BR IN NL US  UK FR

Sources: OECD, World Bank.

Data from the US is only available from 1998, data from Russia from 2002.
* Values for KR, JP and the US are from 2007.
8
2
Factors determining German industry’s
competitiveness
Germany has managed to safeguard its strong in-
dustrial base, even in this globalisation age – with in-
ternational locations competing with each other, and
companies responding to unfavourable conditions by
relocating first production and even business sites
themselves. This is because of the multiple geographi-
cal advantages that make industrial production in
Germany attractive from an international perspec-
tive. These advantages include
3 a large domestic market at the heart of Europe
and a mainly modern energy, transport and telecom-
munications infrastructure (rated first in the world by
the World Economic Forum in its Global Competitive-
ness Report 2009-2010),
3 a motivated and skilled workforce plus a diversi-
fied and productive research environment,
3 a high number of businesses per capita and a va-
ried structure in terms of size and sector, with an ef-
ficient industrial SME sector including leading lights
in many niche areas (“hidden champions”); thus enab-
ling the formation of networks and clusters,
3 a very high percentage, by international stan-
dards, of R&D-intensive industries; traditionally, Ger-
man industry excels in sophisticated technology, e.g.
automotive and mechanical engineering, the chemi-
cal industry and electrical engineering, but it has also
made significant gains in cutting-edge technologies
and developed particular expertise in the area of me-
dical devices and instrumentation,1
3 high productivity in the manufacturing sector
and a reduction of at least 6% in unit labour costs bet-
ween 2000 and 20082 - according to a survey conduc-
ted by the Cologne Institute for Economic Research
(IW Köln) on productivity and labour costs in Ger-
many and abroad, Germany ranks fifth among 27 in-
dustrialized countries.
The American Chamber of Commerce’s business baro-
meter reveals that these are just some of the factors
that make Germany the most attractive location in Eu-
rope for US investors once again in 2010. In addition to
high process and product quality, US companies par-
ticularly value the expertise of German employees.
However, there is no hiding from the fact that
Germany faces major challenges in a number of areas,
particularly the following:
3 compared internationally, German industry must
tolerate high labour costs (gross pay and non-wage la-
bour costs) and high electricity and energy costs,
3 a skills shortage is becoming an increasingly ur-
gent problem; in terms of the shortage of engineers
alone, a study carried out in 2009 by the Association of
German Engineers (VDI) and the Cologne Institute for
Economic Research calculated the loss of value added
at 3.4 billion euros3
3 in contrast to other countries such as the US and
China, the number of patent applications has been
stagnating for years in Germany.4
Existing and emerging challenges must be actively
addressed if Germany’s attractiveness as a competi-
tive location for industry is to be maintained and en-
hanced in the long term. In particular, the relevant
groups in society need to take appropriate and
prompt action to ensure that industry remains com-
petitive internationally in the longer term. The future
is, by definition, uncertain. Nevertheless, a number of
different trends are clearly emerging. The following
section explains the most important trends and chal-
lenges for the future of industrial production. It is up
to companies, policy makers and civil society to find
the right answers.
1
See Belitz/Clemens/Gornig (2009): Germany’s Technological
Specialization Assures Growth Opportunities, DIW Weekly
Report 11/2009.
2
IW Köln (2009): Lohnstückkosten – Deutschland bleibt im
Hintertreffen, iwd No. 50/ 2009.
3
Oliver Koppel (2010), Ingenieurarbeitsmarkt 2009/10, a study
on the engineering labour market conducted by the IW in con-
junction with the VDI, p. 32.
4
IW Köln, Tüfteln, testen – und was dann? iwd No.12/ 2010.

3
The future of industrial production
3.1. A global shift: manufacturing moves
towards Asia
Germany was the world’s largest exporter at the start
of the millennium, but lost its unofficial title of “ex-
port world champion” to China in 2009. In the mean-
time, other emerging economies are also making
strides. Countries previously resigned to watching
global economic developments from the sidelines
have become active participants. The Asian tiger eco-
nomies became the poster children for other nations
to move successfully from agrarian, impoverished
self-reliance to industrialized prosperity with a focus
on global markets. This trend has been most pro-
nounced in China, albeit under different political
auspices.
The global economic might of Asia, and in parti-
cular China and India, is set to increase further simply
by virtue of population growth alone. Currently
viewed as emerging economies, their role will no
longer be limited to supplying raw materials, semi-
finished parts and technologically unsophisticated
mass-produced goods. Indeed the focus of industrial
production is likely to continue shifting towards Asia.
It is difficult to predict or determine the particu-
lar countries and the particular sectors that will enjoy
a comparative advantage in the future. Economic his-
tory is full of failed attempts to create systematic com-
parative advantage. Clearly, all countries can benefit
from integration into the global economy and the
increasing prosperity of their trading partners. The
current emerging economies are likely to follow
similar trajectories to those taken by the established
industrialized countries over the last 150 years – but at
a faster pace, thanks to technological advances.
As most production activities relocate and an
affluent global middle class emerges, it is important
to bear in mind that this is not a case of the rich getting
richer at the expense of the poor. To the contrary, it is
a positive-sum game. For example, the trend towards
urbanisation will entail huge infrastructure require-
ments; agglomeration-related problems will call for
innovative solutions; and higher incomes, in addition
to ensuring that people can earn a basic livelihood,
will also allow increased demand for environmental
goods and technologies and more upmarket con­
9
sumer and capital goods. As competition from the
Asian region grows, German industry will increasin-
gly be able to benefit from rising prosperity in the Far
East.
3.2. Environmental awareness and climate pro-
tection are influencing industrial production
Environmental and climate protection are key
challenges for industrial production and will remain
so in the future. The pioneering role played by Ger-
many and Europe in these areas will become a greater
differentiating factor, and will also be reflected in­
creasingly in value added processes in business and
industry.
Many companies have recognised that environ-
mental protection can generate business opport­
unities and are developing their manufacturing pro­
cesses and products accordingly. Germany thus holds
a strong position in producing and exporting poten-
tial environmental and climate protection goods,
with German industry playing a key role: pumps,
exhaust filters, assembly robots, wind farms and
refineries are all reliant on the components and
assemblies manufactured by the electrical industry,
the process control systems and gears made possible
by measurement and control technology or the trans-
missions and turbines produced by mechanical engin­
eering firms. Examples of growing worldwide mar-
kets for environmentally friendly products include
electromobility, green IT and building insulation.
Apart from featuring in the production and use of
environmentally friendly finished goods and ancillary
environmental measures (end-of-pipe technologies),
environmental protection will increasingly be in­
tegrated in all stages of industrial value processes in
the future. Environmentally friendly products and
production methods will become more important in
mechanical engineering, metal processing and the
automotive industry. A growing number of com­
panies are deploying environmental management
systems, material flow accounting and life cycle
assessment already for reasons of economic self-
inter­est and the rising cost of raw materials and
energy.
Climate protection is already an important cost
factor for companies operating in Europe due to the
10 The future of industrial production
EU Emissions Trading Scheme and other regulation
governing climate policy. Global efforts to reduce
greenhouse gas emissions must be stepped up in
future, even if the Copenhagen Agreement lacks bin-
ding provisions and there is still a gap between the
climate targets deemed necessary and the reduction
measures proposed by many countries. Europe can-
not reduce emissions sufficiently on its own to limit
the global temperature increase to under 2°C. The
establishment of a global carbon dioxide market is
therefore urgently required.
Transitioning to lower-carbon production methods
will continue to represent both a cost for industry –
plant and equipment must be modified or even shut
down – and an economic opportunity. Demand for
climate-friendly applications that reduce CO2 emissions
will continue to rise. At the same time, global warming
could lead to more rapid weather changes and an in-
crease in natural disasters and weather-related catas­
trophes, such as storms and hailstorms. Com­panies
will have to focus more intensely on the implications
of climate change on globalised industrial produc-
tion.
3.3. Limited supplies of raw materials and
fossil energy sources
A reliably supply of raw materials and energy resources
will remain a key factor in maintaining competitive­
ness in German industry. Future developments will
continue to be influenced by ambitious climate tar-
gets, a growing world population and a long-term rise
in demand for energy and mineral resources. Fossil
energy sources will still play an extremely important
role in Germany’s energy mix for the foreseeable
future.
Access to a reliable supply of raw materials is of
the utmost importance for German industry’s high-
tech and cutting-edge technology products. Sectors
such as the chemical industry, automotive sector,
electrical industry and metal processing are heavily
reliant on raw materials such as copper, zinc and nickel
and on other metals and industrial minerals. Metals
like lithium, niobium, tantalum and germanium, for
example, are essential for producing the batteries
needed for electromobility, photovoltaic modules
and mobile phones. Manufacturing companies based
in Germany are almost entirely dependent on im-
ports, not only for most energy resources but also for
metals and many important industrial minerals.
As the major emerging economies catch up on
the industrialized countries, international competi-
tion for the procurement of raw materials will inten-
sify. States such as China, India and Russia will secure
access for themselves to important raw material re­
serves in developing countries. The geological reser-
ves of many raw materials may still be a long way from
exhaustion, but there will be recurring shortfalls in
the exploration of mineral deposits and in transport
and processing capacities. Government and business
must therefore work together to prevent distortions
in the market. Maintaining a consistent focus on
material and energy efficiency is also crucial for the
competitiveness of German industry.
3.4. An ageing population changes production
and consumption patterns
This year, 2010, sees the world population in the midst
of profound change. Although the growth rate has
now fallen, the global population is still expected to
increase from today’s figure of 6.8 billion5 to a total of
9.1 billion by 2050. The age profile is also changing:
the proportion of young people is shrinking, while the
percentage of older people is on the rise. Demographic
change will have far-reaching effects on the labour,
goods and capital markets. It will also affect inter­
national economic relations.
According to current forecasts, Germany’s popu-
lation will decline from the current figure of 82 million
to 77 million by 2025. This will be an older population,
based on the number of people no longer in gainful
employment. In purely statistical terms, there is likely
to be a ratio of 0.9 pensioners to each economically
active individual. The figure for 2010 is 0.6 pensioners.
By 2030, the economically inactive population will ac-
count for more than 50 % of total consumption. Capital
intensity and technological progress will need to in-
crease significantly to prevent a drop in per capita
income. Given the current shortage of skilled workers,
5
Deutsche Stiftung Weltbevölkerung Datenreport 2009
(a report by the German Foundation for World Popualtion)

demographic change will also exacerbate an already
grave problem. Today, German industry faces a severe
skills shortage and lacks employees capable of meeting
the complex demands of innovative development and
management of modern production methods. The
problem is acute in the MINT subjects (mathematics,
informatics, natural sciences and technology), most
particularly in informatics/engineering.
Altered consumption patterns resulting from
demographic change will also have a major impact on
the product markets. More will be spent on medical,
health and wellness products, while spending on
daily necessities will fall. Manufacturers of both indus-
trial durables and capital goods will have to adjust to
the new consumption patterns. In particular, SME
producers of electrical appliances, medical devices,
packaging, food or furniture, for example, or com­
panies operating in the construction sector, face the
challenge of adapting their products and product-
related services to the needs of older people. If indus-
try can adapt to these changed requirements and
deliver high-quality product solutions, it could reap
significant benefits. Germany is not the only country
in the world confronting the challenges of demo­
graphic change. However, it is one of the first. German
industry can thus gain a competitive advantage by
acquiring the necessary expertise and developing a
reputation for technologies geared to emerging
demographic needs.
3.5. Faster technological development and ex-
change of knowledge and information
New technologies and innovations are changing the
world at breathtaking speed. German industry is
renowned as a technology leader and famous for its
innovative developments. The extent to which Ger-
man industry takes the technological lead in future
will depend largely on whether it can exploit the
potential of industrial key technologies (“key enab-
ling technologies”):
3 Advanced production technologies can revolutionise
manufacturing processes. Clean room technology, for
example, which is already used in medical engin­
eering and in the chemical and food industries, could
render flavour enhancers and preservatives obsolete.
11
3 Optical technologies, which are currently used for
image processing and for measurement, medical,
lighting and energy technology could soon make
untidy cables and concerns about electrosmog a thing
of the past.
 
3 Microsystem technologies, i. e. technical systems
whose dimensions can be measured in micrometres
(which until now have been used in microchip archi­
tecture and connection technology) could make com-
puter chips smaller, more reliable and usable for
entirely new tasks, such as plant care.
3 Nanotechnology, which involves structures
measuring less than 100 nanometres, opens up brand
new opportunities, particularly in the fields of energy
and environmental technology and health research.
The technology could be deployed in the medical
world, for example, in innovative diagnostics or in
wearable or implantable artificial kidneys.
3 Biotechnology, while evolving towards a “know-
ledge-based bioeconomy”, could generate product
innovations in several areas including the food,
pharma­ceuticals or even textile industry, with the in-
dustrial application of microorganisms. Such inno­
vations might include self-cleaning, odour-free
sportswear or insulin-producing chocolate.
3 Electronics, particularly systems used in energy
technology, medical engineering, traffic engineering
and the automotive industry, is a constant innovation
driver. The innovation is evident in intelligent elec­
tricity meters, computed tomography, interactive
traffic lights, optimised traffic management and
engine control, for example.
3 New materials can be used as lightweight ma­
terials in automobile manufacture, aviation and space
travel. They can help to create competitive advantage
in terms of cost but also open up new business seg-
ments: cars made from lightweight materials, for ex-
ample, require less fuel and are therefore more en­
vironmentally friendly than previous generations of
cars.
3 Geotechnologies help to provide a better under-
standing of the processes and interactions that take
place in the geosphere, hydrosphere, cryosphere,
atmosphere and biosphere. This understanding is
essential to assess the impact that humans have on the
natural balances and cycles more accurately and
direct political decisions accordingly.
12 The future of industrial production
These industrial key enabling technologies typically
comprise a strong interdisciplinary element and
mutual dependencies. The technologies can be com-
pared to a set of keys. For example, modern produc-
tion engineering integrates machining, electronics,
information technology, sensor technology, optical
technologies, microsystem technology, nanotechno-
logy and biotechnology. Microsystem technologies
facilitate the integration of nanotechnologies and
biotechnologies in micro- and macro-environments,
making them compatible and usable for new products.
There are risks for German industry here. On the
one hand, it could fail to identify major technological
developments in time. On the other, it could take
precipitate action and back the wrong horse. In the
first case, Germany would lose its position as techno-
logy and expertise leader, while the second scenario
could result in technological isolation and possibly
total exclusion from future markets. Compatibility
with the key enabling technologies will therefore be
the minimum requirement if Germany wants to
manufacture products that are fit for global markets.
To be truly successful, German industry will need to
go one step further: it will have to deliver cutting-
edge technology goods and services itself.
� work, taking place in temporary clusters, not bound
3.6. Increasing importance of customised
production
The German manufacturing sector has long benefited
from the advantages of traditional industrial mass
production, such as automation, economies of scale
and the benefits of experience curves. These days,
however, customers are placing an increasingly high
priority on customisation. Incorporating client re­
quirements is now standard business practice in selling
textiles, furniture, computers, cars and machinery.
Although the initial priority is to build a stronger
customer relationship while preserving the benefits
of standardised production (mass customisation), in-
dustry will have to gear itself for complete customer
integration in the medium to long term. This will re-
sult in completely new forms of division of labour. The
customer is becoming both a consumer and a pro­
ducer (“prosumer”). Prosumers express their wishes,
make suggestions for product innovations (“open
innovation”) and even assume aspects of develop-
ment and production. To master this development,
businesses will need to prove they can meet the
following requirements:
3 Ability to handle the increasingly variant and
dynamic nature of the product portfolio.
3 Extreme flexibility in the area of logistics, equip-
ment and machinery.
3 Willingness to adopt a “just-in-time” approach
and incorporate customers’ individual wishes up to
the last minute.
Increased customisation – including single-piece pro-
duction in a one-piece flow system – is a key strategy
for future industrial production. Manufacturers of
both consumer and capital goods must be prepared
for this development.
3.7. Closer networks between the working
world and production
Industrial production and work increasingly features
intensive technological and economic networking
across borders, sectors, markets and companies. This
networking will require ever more flexible and virtual
organisational structures. Interdisciplinary project
by location or time, will continue to gain in impor-
tance.
There are at least three reasons for this trend.
First, enhanced networking has been enabled by ad-
vances in information and communication techno­
logies (ICT) and broadband infrastructure, the stan-
dardisation of IT interfaces (hardware, data formats,
web services), standardised programming platforms
and control software. Second, fragmented global
value processes rely on efficient and reliable net­
working between the companies involved in the pro-
duction process. Third, cutting-edge technology pro-
ducts and innovative, knowledge-intensive services
require expertise and a breadth of knowledge that
can only rarely be provided by individual companies
alone.
Ultimately, enhanced networking provides
knowledge about markets and factor costs. Com­
panies will be able to use this information as a basis
for faster decision-making with regard to production,

capacity and offshoring/relocating back (back­
shoring). Furthermore, complex manufacturing pro-
cesses will be controlled digitally, making global
manufacturing logistics easier to coordinate. How­
ever, there are downsides to increased networking:
potential vulnerability of supply chains, greater
difficulty protecting intellectual property and
security risks such as global terrorism.
3.8. Greater integration between industry
and services
Industrial production and the services sector are be-
coming progressively more intertwined: the trend
is towards service providers becoming upstream
suppliers providing essential inputs to industry, while
product support services are increasingly important
as part of the marketing effort for industrial products
and facilities. Business-related services directly affect
the competitiveness of industrial enterprises. Only by
linking industrial hardware and service-oriented soft-
ware can companies offer their customers the complex
problem-solving products and services increasingly
sought after on the world markets.
Today, specialised service providers such as engin­
eering firms, software companies and logistics pro­
viders are frequently engaged in developing and manu­
facturing high-technology industrial products.
German companies are already offering complete
problem-solving packages consisting of the actual
product and comprehensive product support services.
This means, for example, that mechanical engin­
eering companies now often offer consulting and
planning services, financing and installation as well
as servicing and maintenance services. Knowledge-
intensive services are particularly important: these
are in demand particularly for technological inno­
vations, but also in the financial, marketing and logis-
tics sectors.
There is therefore little point in viewing industry
and the services sector as individual, isolated economic
sectors. In fact, they have a mutually beneficial rela­
tionship, with cooperation and interdependence bet-
ween both sectors. The importance of multifaceted
services for industry is also growing, as the organis­
ation of industrial production operations associated
with cross-border value processes becomes increas­
13
ingly sophisticated and intricate. At the same time,
the demand for customised and specialised solutions
is on the rise. This trend is reflected in a survey con-
ducted by the German Engineering Federation
(VDMA) in 2008. Many machine manufacturers cited
an extended range of customer-specific solutions and
an expanded selection of services as particularly im-
portant factors in improving their competitive
position.
If companies are to satisfy increasingly sophisti-
cated and personalised client requirements, simply
offering supplementary services (such as a mainte-
nance contract) with a product will not suffice. The
industrial customer of the future will demand not just
products but also complex, tailored solutions that
together form a complete package. Drawing a dividing
line between products and complementary services is
no longer an option.
3.9. Global value chains: the hallmarks of
industrial production
Production has become ever more internationalised
in recent decades. The European Single Market,
eastern enlargement of the EU, progress made by the
World Trade Organization (WTO) and its new mem-
bers are the main factors in this development. This
trend is likely to continue into the future, with new
free trade agreements, possible transport cost reduc-
tions and further progress in ICT.
The above factors have not only led to expanded
international trade relations, they have also effected
fundamental changes in the nature of modern indus­
trial production over the last 10 to 15 years. Production
processes, which traditionally were conducted almost
entirely within national borders, are becoming in­
creasingly fragmented across several countries. In the
search for advance inputs from efficient producers,
these processes are split into smaller and smaller tasks
such as R&D, design, individual production steps,
marketing, distribution and services. These activities
are performed, where possible and appropriate, in
locations where the required skills and materials are
available at the lowest cost. These locations are just as
likely to be in the old or new EU Member States or
North America or, as is increasingly the case, in the
international growth markets of China, India or Brazil.
14 The future of industrial production
Figure 2 shows that, with the exception of Canada and
France, the import content of exports produced in the
manufacturing sector consistently rose in the G7
countries between the mid-1990s and the middle of
the first decade of the new millennium.6 The increase
is particularly marked in Brazil, China and India.
Global value chains have made companies ex­
tremely flexible. Depending on their efficiency cal­
culation, they contract out certain aspects of their
production process to specialised companies (out-
sourcing), relocate certain business functions or
entire sites abroad (offshoring) or even decide to
backshore production to Germany. High staff costs in
the home country or a wish to be close to customers
are just two of the reasons behind such relocations.
Backshoring decisions are frequently based on quality
Figure 2 – Import content of exports in the manufacturing sector. (in %)
45
40
35
30
25
20
15
10
Canada France Germany Italy
Source: OECD (2010): Structural Analysis (STAN) Database (April 2010).
issues or excessive coordination and monitoring costs.
Multinational companies are playing a progress­ively
important role in the global links of industrial pro­
duction. A large proportion of the international trade
in goods occurs as cross-border transactions between
multinational companies and their subsidiaries, a
practice known as intracompany trade.
Global value chains also have an impact on
national economies. First, they change the industrial
structure within individual countries. They result in
fewer geographically concentrated vertical clusters
performing complete production processes. Instead,
there are more horizontal clusters performing indivi-
dual, specific production steps in one region. Changes
in the international division of labour can lead to
pressure on certain sectors, regions and low-skilled
Mid-1990s Early 2000s Mid-2000s
Japan UK US Brazil China India Russia
6
Canada, France, Germany, Italy, Japan,
United Kingdom, US.
 15

workers. Second, fluctuations in economic activity
can very quickly cause a domino effect internationally
due to the collapse of functioning value chains. Any
negative effects on growth are exacerbated by the fact
that technology-intensive and research-intensive
goods, in particular, are manufactured by means of
global value chains. Third, international division of
labour can give rise to technological dependencies on
suppliers, particularly if individual production stages
are characterized by a high concentration among
suppliers.
3.10. Preliminary conclusion: megatrends
provide only a rough sketch of the future
mental technology would indicate the opposite.
Whether or not the dual goals of environmental/
climate protection and greater international division
of labour will clash or be reconciled will depend on
the calibre of international regulation.
We cannot identify a priori which of these trends
will determine the future environment in which Ger-
man industry will have to prove itself. However, if we
are prepared to set aside deterministic forecasts and
content ourselves with probabilities, it is possible,
despite all the uncertainty, to distinguish between
plausible and less plausible scenarios, as this section
illustrates.

It is virtually impossible to make exact predictions

about longer-term developments. The trends outlined
above do not claim to be complete, nor do they claim
to paint an accurate picture of the world in five, ten or
fifteen years. In addition, the trends that are often
referred to as “megatrends” in public discourse over-
lap with one another and it is frequently difficult to
distinguish clearly between them.

Complicating the situation further is the fact that

some of the trends influence one another, can be
mutually conflicting and even contradict one another.
The trends for global value chains and for shifting
production towards Asia are closely linked and rein-
force each other. However, there is another noticeable
business development (not addressed in the trends
mentioned) that contradicts both of these trends: the
increased need for local and regional identification.
This is reflected in a growing willingness to pay
higher prices if necessary for locally produced goods.
Whether this renaissance of regional business cycles,
some of which even operate with separate regional
currencies, will prove to be a relevant and long-term
phenomenon remains to be seen.

There is also potential for conflict between the

trends for global value chains and the relocation of
most production to Asia on the one hand, and the in-
creasing importance of climate and environmental
protection on the other. After all, longer transport dis-
tances tend to involve higher levels of environmental
pollution. However, more globalisation does not
necessarily mean more environmental damage: in-
come effects and the dispersal of advances in environ-
16
4
Requirements of a vital and dynamic location for
industry – spotlight on Germany
Certain conditions must be met if German industry is
to be efficient and successful in the medium and long
term and continue making a significant contribution
to productivity, growth, prosperity and quality of life.
Determining these conditions calls for a sober analy-
sis of both the current strengths and weaknesses of
Table 1 – Strengths, weaknesses, opportunities and challenges for the manufacturing sector
in Germany.
Strengths
3 Broad range of industry sectors and balanced variety of
company size and structure
3 Very good capacity for innovation in industry
3 High level of expertise in sophisticated technologies
3 Many SME world market leaders in different niches
(„hidden champions“)
3 Modern supply, transport and telecommunicationsinfra-
structure
3 Highly skilled engineers and professionals
3 Differentiated and productive research landscape
3 High level of productivity and product quality in the
manufacturing sector
3 Pioneering role in environmental and climate technolo-
gies, efficient use of resources
3 Problem-solving expertise (linking product and service)
Opportunities
3 Increased demand for capital goods due to global
population growth and urbanisation
3 Growth in emerging economies generating new
opportunities for specialisation
3 Increased global environmental awareness boosting
demand for industrial environmental and climate
protection goods
3 Greater global efforts in climate protection and possible
international development of emission trading
3 Growing importance of products and technologies
geared towards an ageing population due to demo­
graphic change
3 Strengths in areas of quality and advanced product tech-
nologies can be transferred to customised production
3 New types of division of labour by integrating customers
into the production process
3 Greater networking facilitates an international division
of labour, technological top performances, digital control
of manufacturing processes and efficiency gains through
electronic goods identification
German industry, and the opportunities and challen-
ges posed by global megatrends. Starting with the de-
termining factors for German industry (section 2) and
the megatrends shaping the environment (section 3),
one can summarise this analysis with the following
brief overview:
Weaknesses
3 More expertise needed in cutting-edge technologies
3 Relatively high labour costs
3 High dependency on raw material imports
3 Relatively high energy and electricity prices compared to
international counterparts
3 Limited range of business-related services and
relatively low level of research in the manufacturing
sector in the new Länder
3 Shortage of skilled workers and engineers,
particularly in the MINT subjects
3 Widespread scepticism about new technology among
the public at large, in particular opposition to potentially
high-emission facilities near residential areas
3 Risk of disproportionate charges based on unequally
weighted climate protection standards in the world
(threat of carbon leakage)
Challenges
3 Fragmented production processes favour offshoring/
backshoring/outsourcing and change Germany‘s tried-
and-tested industry clusters
3 Networked production increases dependency on
suppliers and general vulnerability
3 Structural change and growth in emerging economies
generates competition for certain sectors, regions and
low-skilled workers
3 Dealing with energy-intensive industries in emissions
trading; rising energy costs
3 Limited fossil energy resources, e. g. oil
3 Raw materials subject to harmful international com­
petition, supplier cartels and market distortions
3 Effect of declining and ageing population in Germany on
potential workforce and labour productivity
3 Tailored production requires high level of product
variance
3 Protection of technological advances through effective
intellectual property rights
3 Growing demand for complex solutions requires closer
integration of business-related services and products

To preserve and develop its role as a vital and
dynamic industrial location, Germany must expand
its strengths, overcome its weaknesses, seize opportu-
nities and tackle challenges. Industry must be capable
of maintaining high value-added production with the
maximum degree of vertical integration in Germany.
Indeed, it is industry’s adaptability that will largely
decide whether Germany thrives as an industrial
centre.
Given the current strengths and the success of
recent decades, there is reason to be confident: over-
all, German industry is extremely inventive and
dynamic; it identifies trends and will find the right
answers – provided that government provides it with
a favourable economic environment in which to ope-
rate and sufficient creative scope. From an economic
governance perspective and based on the record of
the social market economy, there is much to support
the proven division of labour between State, enter-
prise, the social partners and civil society.
Seemingly obvious problems and solutions may
prompt government to intervene and indicate what
measures to take. However, policy makers must be
wary of falling victim to the “pretence of knowledge”.
Given the uncertainty inherent in the trends outlined
above, any claims to omniscience carry grave risks: by
anticipating market performance, it ignores the sharp
instincts and proven problem-solving expertise of
businesses. After all, there are multiple possible solu-
tions for every relevant future problem, the most cost-
effective of which will be discovered by the market
alone. Governments do not know all the potential
solutions and are not reliably informed about future
problems. If policy makers try to channel entrepre-
neurial activity based on ostensibly predictable trends
– by heralding a “green economy” for example – they
run the risk of popularising poor solutions for irrele-
vant problems.
Instead, policy makers must help to resolve mani-
fest and emerging shortcomings in the framework
conditions or general economic environment. The
right-hand column in table 1 illustrates where there is
room for improvement: this can be defined more
specifically in terms of tasks. These tasks, which are set
out in the following section, focus on promoting
qualifications and skills, accelerating innovation and
17
technical progress, cost-effective environmental and
climate protection, safeguarding of energy and raw
material supplies, increasing productivity and effi­
ciency, and developing products and production sys-
tems. Government cannot handle these tasks under
its own steam; they require efficient cooperation
between all groups in society.
4.1. Promoting skills and qualifications
Human capital is a driving force in the capacity for in-
novation and economic growth. It must be developed
across a broad basis and with the involvement of all
major stakeholders. This is why, despite necessary
cost-cutting measures, the Federal Government re-
mains committed to investing an additional 12 billion
euros in education and R&D by 2013. The Federal
Government is also calling on the Länder to continue
to strive to spend 10 % of economic output on edu­
cation and research.
Globalisation and technical progress call for
highly skilled workforces. These days, such work-
forces must be able to work productively in global
value chains. With its extremely well-trained engin­
eers and other highly skilled professionals, Germany
is well-qualified in this regard. However, demographic
change is also bringing huge new challenges, with a
population advancing in age and declining in num-
bers, and an associated shortage of skilled workers.
Policy makers, social partners and businesses face
the urgent challenge of creating new skills, using
existing skills as efficiently as possible and maintaining
and expanding these skills in the long term. Better
education at all levels is the key variable in creating
new skills. For individuals, better education is the
basis for a viable livelihood; for the German economy,
it is a prerequisite for employment, income and
growth. In addition to providing knowledge, education
must promote an even greater emphasis on learning
new practices, acquiring intercultural skills and re­
inforcing learning processes. Employees in a know-
ledge-based global economy must be empowered to
adapt their skills constantly to new economic develop­
ments. Lifelong learning is crucial and must be com-
plemented appropriately by new forms of employ-
ment such as temporary self-employment, part-time
working and temporary contracts.
18 Requirements of a vital and dynamic location for industry – spotlight on Germany
Studies on the economics of education show that
investing in education at the earliest possible stage
can generate the highest returns in terms of later
career development. Early childhood education
therefore plays an important role both economically
and in giving all children equal starting opportunities.
Germany needs to expand its childcare and preschool
services considerably. It also needs more qualified
kindergarten staff. Kindergartens must be seen as
educational establishments offering a systematic
approach that fosters basic skills and caters to the
needs of children. International comparisons have
starkly illustrated shortcomings in the German school
system. In this case, more competition and greater
autonomy in the state education system is necessary
to ensure improvements in quality. More permeability
between the different types of schools and more
Ganztagsschulen are (where children attend 5 days a
week, from 9 to 5 and lunch is provided; this contrasts
with the traditional German model of 6 days a week,
mornings only) are also important aspects. Universities
and other third level institutions must offer interna­
tionally competitive bachelor’s and master’s degree
courses. In general, participation in “MINT” degree
courses needs to be encouraged, the average age of
graduates must be reduced and the proportion of
third level graduates must be increased. The Länder
also have a role to play here. For lifelong learning to
be a reality, greater permeability (also at European
level) is required between vocational and academic
programmes, for example.
The dual vocational training system is a mark of
quality in the German education system. Its policies
and institutions must be as adaptable as possible to
technological progress and structural change. Indus-
try needs diverse and flexible professional groups and
modular training material if it is to educate the next
generation of skilled workers to adapt to market con-
ditions as quickly as possible. Ultimately, employee
skills must match labour market requirements. With
this in mind, education and skills must focus more on
the sciences to counter imminent skills shortages in
this area.
Unfulfilled potential in young people from im­
migrant backgrounds urgently needs to be realised.
It is simply not acceptable that more of these young
people leave school without a general school leaving
qualification than German young people or that they
are far less likely to complete a vocational training
course or obtain a third level qualification. Improving
conditions to allow the immigration of highly skilled
foreign workers may also help to ensure Germany’s
long-term success as it competes for the world‘s know-
ledge elite. A points-based immigration system would
be an important step in this regard. Implementing a
system that would make it easier and faster to recog-
nise non-German qualifications would allow im­
migrants and foreign nationals living in Germany to
use their qualifications and skills.
The purpose of continued vocational training is
to maintain and broaden expertise. It must also be
adapted to meet the challenges posed by new techno-
logies, increasing internationalisation, demographic
change and a longer working life. Companies must
work to secure their employees’ commitment, moti-
vation and potential through their HR policies. To do
this, they must effectively manage diversity in the
workplace, include both older and younger employees
in their teams, engage with „working life accounts“
(which employees can use to arrange their working
hours over their working life), encourage a work life
balance among their staff and operate a functioning
company health management system. In the interests
of benefiting from the experience of older people,
existing early retirement incentives should be abolished,
jobs designed to suit older people and flexibility intro-
duced for the transition to retirement.
 19

Figure 3 – Action area: qualifications and skills

Government, social partners, business

3 The Federal Government plans to work with the main stakeholders involved to reinforce education as a
central plank in the country’s capacity for innovation and growth. Educational services must be improved at
all levels.
3 Notwithstanding the necessary fiscal consolidation, the Federal Government is adhering to its objective of
investing an additional 12 billion euros in research, development and education by 2013. The “Länder” must
also increase their level of expenditure on education and research, despite budgetary constraints.
3 Employees must be able to avail of lifelong learning so that they can constantly adapt their skills to changed
economic circumstances.

Government (Länder, municipalities)

3 Education must begin in early childhood. Childcare and preschool services must be expanded and the
number of qualified kindergarten staff increased.
3 Improvements in quality must be achieved through greater competition and more autonomy in the state
education system.
3 Universities must focus more intently on the “MINT” subjects and courses and lower the average age of
graduates. This particular area is one where the “Länder” have a particular role to play.

Business and social partners

3 The dual vocational training system must be adaptable and flexible enough to respond to technological
progress.
3 Good employability skills are crucial. This entails a stronger focus on the sciences in particular.
3 Continued vocational training must adapt to new technologies, increasing internationalisation,
demographic change and a longer working life. This includes mixed-age teams, “working life accounts”,
a work life balance and a functioning company health management system.
3 To enable companies to benefit from the experience of older employees, the number of existing early
retirement incentives should be reduced. Jobs should be designed for older people and facilitate a flexible
transition to retirement, e.g. by introducing part-time work and partial pensions.

National and European policy

3 Existing skills can be used more efficiently if individuals coming from an immigrant background are
integrated more effectively. Faster and simpler recognition of non-German qualifications would help to
achieve this objective.
3 There is also a need for further improvement in the conditions relating to the immigration of highly skilled
foreign workers, e.g. through a points-based immigration system.
3 European Social Fund actions should further concentrate on training people but also continue to promote
the integration of disadvantaged individuals.
20 Requirements of a vital and dynamic location for industry – spotlight on Germany
4.2. Facilitating technical progress and new
ideas, enhancing the capacity for innovation
Industry must ensure it is open and capable of adapt-
ing to more rapidly evolving technological develop-
ments. It must also be able to contribute to these
developments and in particular acquire and maintain
a high level of expertise in key technologies. Demo-
graphic change requires an extraordinary boost in
productivity, which can only be achieved through
process and product innovations. Technologies
designed to resolve demographic problems combine
two areas – machining and systems engineering – in
which Germany has established companies and re-
search institutes. German industry is also considered
to be highly innovative in the field of robotics. How­
ever, demographic change is not a strong enough
driver of research activities at present. An increased
international division of labour requires specialisa-
tion in value-added and technology-intensive produc-
tion; German industry is subject to constant pressure
from growing international competition to innovate.
A thriving environment for new ideas, innovation and
technical progress is therefore vital.
Compared internationally, Germany currently
supports a differentiated and productive research
landscape and a highly innovative industrial sector
that boasts outstanding expertise, particularly in the
area of more sophisticated technologies.
Nevertheless, this innovation climate is clouded
by a widespread scepticism among the general popu-
lation about new technologies. A negative attitude
towards almost any type of new project prevails in the
energy and infrastructure sector but also in industrial
projects. This strong aversion to risk is also reflected in
a relatively widespread reluctance to become involved
in entrepreneurial activity. Current financing condi-
tions for innovation and R&D are also considered to be
less than favourable. Hence, while Germany scores
well in country rankings when innovation is measured
in terms of output variables (e. g. patent registrations,
share of new products in turnover), its performance is
only middling for the relevant input variables (e. g.
availability of venture capital or R&D investment by
companies). There is a risk, therefore, that this current
high output performance erodes. Measured as a per-
centage of gross domestic product (GDP), R&D expen-
diture is certainly higher than in most industrialized
countries. However, there is still room for improve-
ment in the manufacturing sector’s level of research
in cutting-edge technologies, particularly in the new
Länder.
The State – Federal Government, “Länder” and
the EU – must therefore continue working to improve
framework conditions for innovation projects and,
where possible, remove existing obstacles to innova-
tion. Regulation per se is not harmful; on the contrary
it can even accelerate the process and pace of inno­
vation in some areas. A moderate level of regulation
(e. g. limit values to protect the environment from
pollutant inputs) thus creates incentives for technical
innovations from which comparative advantage can
be gained to counter the advancing competition. New
sales markets can be established for the products and
technologies that emerge from this development
(„demand-led innovation”). On the other hand,
cumber­some regulation and long and complex
approval procedures hamper innovation.
For example, overly complicated European bio­
cides legislation in recent years meant that numerous
active ingredients were lost. The approval of new
products has practically come to a standstill. A sustain­
able industrial policy must therefore support the up-
coming revision at European level for unbureaucratic
approval procedures of biocide products without
compromising safety standards. Nanotechnology is
another example. As outlined in the Federal Govern­
ment’s coalition agreement, this important techno-
logy of the future is to be developed responsibly. First
and foremost, this means that, as part of the existing
chemicals legislation (particularly the European
REACH and GHS regulations7), the potential risks of
nanomaterials, like all other substances, are to be
recorded and monitored. Conversely, it also means
that these types of chemical substances will not have
to be subject to more stringent or separate approval
or registration requirements and the corresponding
time limits.
7
Global Harmonised System for classifying,labelling and
packaging chemical substances and mixtures.

Standardisation can greatly facilitate the dissemi­
na­tion of technical progress. Early standardisation
promotes competition and helps German companies
to position themselves better on the international
stage.
The State must not only ensure it does not get in
the way of innovation and technical progress, it must
also continue to actively promote research, develop-
ment and innovation. One option is to strengthen the
currently inadequately developed venture capital
market and develop the existing tools designed to
promote direct research. Another way in which the
State can provide assistance is by improving research-
related infrastructure. Compared internationally,
Germany’s exemplary transport network contrasts
with a comparatively underdeveloped data network.
This tends to hamper scientific exchange. In other
countries, researchers and developers cooperate
much more closely across international borders. Im-
proving the physical network will also benefit inter-
national networking among the scientific com­
munity.
This measure – improving the physical data net-
work – is one that the State also has to promote di-
rectly; the European context is crucial here. The
European Research Area must be established and or-
ganised in such a way that it forms a single market for
education and research, generates competition and
instils a passion for excellence. The European Fund for
Regional Development (EFRD), which is already play-
ing a major role in promoting applied research and
innovation for small and medium-sized companies
(SMEs), should focus more intently on this objective in
line with the Europe 2020 strategy. The State can pro-
vide direction with an innovation-oriented public
procurement policy, thus illustrating the fundamen-
tal feasibility of technological ideas, encouraging a
spirit of innovation and creativity and creating an in-
novation-friendly environment.
21
Ultimately we need the right mix of appropriate,
innovation-friendly laws, straightforward administra-
tive procedures, technology-neutral and easily acces-
sible funding and creative freedom for researchers
and developers. Finding the right mix is an ongoing
process.
Industry has an important role to perform in this
process. This can take the form of increasing R&D ef-
forts to shore up its capacity for innovation. In addi-
tion to ramping up expenditure and personnel in the
R&D sector, this would also entail improving innova-
tion management, intensifying efforts in the continu-
ing vocational training of employees and strengthe-
ning its commitment to international research and
development partnerships.
Finally, civil society must also play its part. It must
collectively arrive at a more realistic and more balan-
ced assessment of technology and learn to perceive
the opportunities in new technological developments
instead of focusing on risks and adverse effects from
the outset. Excessive scepticism towards technologi-
cal innovation must be overcome. Society as a whole
must develop the courage to take risks. Adventurous
and entrepreneurial thinking must be granted grea-
ter recognition and find a wider audience.
22 Requirements of a vital and dynamic location for industry – spotlight on Germany

Figure 4 – Action area: technical progress and capacity for innovation

Business
3 German industry lags behind its international counterparts in terms of the proportion of turnover spent on
R&D, although expenditure has increased in recent years. Companies must raise the ante in this area if they
want to maintain their capacity for innovation.
3 Also needed is a greater commitment to international R&D partnerships and more intensive cooperation with
research institutions and networks, such as those promoted by the “Kompetenznetze Deutschland” initiative,
which brings together the best-performing innovation clusters in Germany.

National policy
3 With the “Wissenschaftsfreiheitsinitiative” (Freedom of Science initiative) the Federal Government is
providing new stimulus for the German research landscape by promoting the market-relevance of research
activities.
It is also supporting science in attracting and retaining highly skilled staff.
3 With its high-tech strategy, the Federal Government is preparing a fertile breeding ground for new key
technologies, without trying to anticipate market trends. This successful approach must be continued.
3 The Federal Government’s Central Innovation Programme for SMEs (ZIM) is now promoting more than 10,000
SME innovation projects. Support is also provided for partnerships with research institutes linked to business
or economic interests. Where possible, this extremely successful, technology-neutral and cross-sector
research promotion effort must be developed.
3 Based on the three pillars of competition, regulation and cooperation, the Federal Government’s broadband
strategy is providing a vital boost to the development of nationwide high-performance networks. These
networks, characterised by competitive structures and a mix of technologies, will facilitate the transfer of
knowledge and scientific communication and thus further improve the conditions for research, development
and innovation.

European policy
3 Efforts to establish a European Research Area must be advanced in the interests of creating a single market for
R&D. Impediments to cross-border scientific dialogue must be removed. Harmonisation must be limited to the
bare essentials for the operation of a “common market for science”. It must not proceed at the expense of
scientific freedom and diversity.
3 At only 12 %, the percentage of SMEs participating in the EU Research Framework Programme remains too
low, considering they represent a large share of German industry. The measures taken by the European Com-
mission and Member States to improve the role of SMEs in promoting research (in particular by cooperating
with the Enterprise Europe Network) must be followed consistently.
3 The European Fund for Regional Development (EFRD), in line with the Europe 2020 strategy, should focus
more intensely on research, development and innovation that favour SMEs.
3 Unnecessary bureaucratic obstacles in approval procedures, e.g. in the Biocides Directive, must be tackled.
New technologies such as nanotechnology should not be viewed as dangerous per se and thus automatically
subject to particularly stringent legal barriers.

Civil society
3 A new culture of social dialogue is needed to rapidly implement new ideas and disseminate new technologies.
A more in-depth, wide-ranging and knowledgeable debate on opportunities and risks will facilitate more
realistic assessments, while encouraging an open mind towards new developments; overall, efforts must be
stepped up to reduce technophobia and scepticism.

4.3. Cost-effective management of
environmental and climate protection
Natural resources are key to any economic activity.
Industrial production is not viable in the long tem
without raw materials, energy, clean air, clean water
and healthy soil. Likewise, one needs to adapt to the
global increase in environmental awareness, climate
protection and expected trends in energy and raw
materials. German industry is a pioneer of environ-
mental and climate protection technologies and
efficient resource usage. It faces huge challenges as a
result of price increases on the raw materials and
energy markets.
Policy makers are called upon to support long-
term reliable framework conditions for sustainable
economic activity. Where possible, market economy
mechanisms should take priority over regulation to
achieve these conditions. Environmental policy ob­
jectives can be achieved efficiently and cost-effectively
as follows: first, if those responsible for causing environ­
mental damage are required to cover the costs of re­
ctifying this damage; second, if supply and demand of
natural resources is reflected in pricing; and third, if
voluntary eco-labels are used to increase transparency
for businesses and consumers. The Federal Govern-
ment is therefore pursuing a sustainable industrial
policy as part of an integrative strategy which must
account for the interactions and interdependencies
between economic performance, social responsibility
and environmental protection.8 At the same time,
there is nothing to be gained in the long term by
elevating environmental concerns over competing
requirements. Like any other legitimate societal
objective, the social return on investment relating to
environmental issues must be weighed up carefully.
Clear identification of any conflicting objectives and a
realistic assessment of opportunities and threats are
required to make rational decisions for the overall
economy. A sustainable industrial policy should meet
the following requirements:
8
Fortschrittsbericht 2008 (2008 progress report on the national
sustainability strategy), p.21.
23
3 it welcomes environmentally friendly minimum
product requirements as an important contribution
to the European energy and climate policy. Concer-
ning the implementation of the Ecodesign Directive,
it advocates equal consideration of environmental,
social and economic factors to ensure the develop-
ment of product standards that are technically feasible,
environmentally appropriate and economically
sus­tainable,
3 it aims to further develop waste management
and resource management in the European context
with a waste management system that is environ­
mentally and economically efficient and consumer-
friendly,
3 it supports efforts to harmonise chemicals legis­
lation at European level and ensure a high level of
protection for humanity and the environment. At the
same time, consideration must be given to the principle
of proportionality. If, as in the example of the Euro-
pean REACH regulation, legislation covers the minute
details of chemical usage and, if necessary, also moni-
tors this usage, it hampers innovation and flexibility
in the industrial use of chemicals. Similarly, it does not
seem appropriate to subject all hazardous substances
to a notification procedure as required under the
European GHS legislation. Instead, exceptions should
apply for small quantities and for chemical substances
used in research – for practical reasons but also to
avoid jeopardising research results.
3 recognises that innovation occurs along the
entire value chain. It is primarily the basic materials
industry, with its innovative materials, products and
procedures, that creates the basis for innovations that
occur at the end of the value chain. To refer to an “old
economy” and contrast this with purportedly
“greener technologies” is to ignore the realities of
industrial production.
In the long term, raw material and energy costs will
continue to account for a high proportion of businesses’
production costs. Efficient use of resources is there-
fore in the legitimate interest of companies. They
need to pursue a policy of environmental protection
at all stages of the industrial value chain. In particular,
energy-intensive industries such as steel, metal,
chemicals, glass and paper will have to reduce their
energy consumption further.
24 Requirements of a vital and dynamic location for industry – spotlight on Germany

The growing prosperity of emerging economies commit to appropriate reduction contributions. The
will have a positive effect on the demand for indus­ commitment to appropriate reduction contributions
trial environmental goods from Germany in the long also applies in particular in the context of future EU-
run. Like other industrial goods, the key challenge internal burden-sharing.
will be to intensify research and use of technology
and thus the value added of such goods. The German
automotive industry needs to build on progress
following its important development of alternative
drive concepts. For example, it now needs to focus on
energy storage, safety and cost-effectiveness. The
State can add fresh impetus to this goal by funding
technology-neutral R&D. Other important examples
include technical standards, infrastructure and
demonstration projects.

Energy-intensive industries deliver a large pro-

portion of the value added in the German manufac­
turing sector. They are an integral component of the
domestic industrial value chain and manufacture
many of the industrial products that help to lower
CO2. Germany therefore has a vested interest in an
affordable and internationally balanced climate pro-
tection policy. To avoid the relocation of production
from Germany and the EU (carbon leakage risk), an
agreement on climate protection, binding under
international law and including the US and the major
emerging economies, continues to be an imperative.
Following the sobering results of the Copenhagen
climate summit in December 2009, efforts should be
renewed to improve the decision-making process in
international climate negotiations. The aim must be
to devise incentives that will make it possible to safe-
guard climate as a global public good without un-
fairly burdening certain countries and regions. If a
comprehensive agreement appears to be unrealistic
for now, appropriate solutions are required to pre-
serve the international competitiveness of economic
sectors affected by EU emissions trading. Among
other things, this calls for the development of appro­
priate and specific EU allocation rules that can be
used as a basis for free allocations. Another priority is
the rapid establishment of legal certainty about the
relief that may be granted to energy-intensive indus­
tries which are particularly hard hit by the indirect
costs of EU emissions trading. The EU’s new tougher
target – to reduce greenhouse gas emissions by 30 %
rather than 20 % of 1990 levels by 2020 – will only work
if other industrialized countries agree to comparable
reduction targets and the major emerging economies
 25

Figure 5 – Action area: cost-effective environmental and climate protection

Business and government

3 Companies and policy makers must work together to create the conditions that make environmental
protection a high priority at all levels where industry adds value. This includes making further efforts to
improve energy and material efficiency, e.g. in energy-intensive companies and SMEs.
3 In the case of alternative drive concepts, efforts must be made to achieve progress in energy storage, safety
and cost-effectiveness. The State can boost development in this area by funding technology-neutral R&D.
Technical standards, infrastructure and demonstration projects are also important.

National and European policy

3 In industry, investments frequently tie up a considerable amount of capital. Long-term, reliable and plannable
conditions are therefore vital for sustainable economic activity.
3 Environmentally friendly minimum product requirements are an important factor in energy and climate
policy. They must be environmentally necessary, technically feasible and economically sustainable.
3 Waste management and resource management must be developed further in a European context.
3 Following close examination of the European REACH regulation, the Federal Government supports a reduction
in costs in this area. National procedures in chemicals policy should be accelerated without compromising
standards.
3 With regard to climate policy, the Federal Government supports an agreement that is binding under inter­
national law and includes the US and major emerging economies. It needs to work with the EU to consider
how decision-making can be improved in international climate negotiations.
3 The Federal Government is working to implement the EU Emissions Trading Scheme, while preventing loss of
competitive advantage for German and European industry. Appropriate and specific EU allocation rules must
be developed as a basis for free allocations to prevent carbon leakage.
3 Reducing greenhouse gas emissions by 30% rather than 20% of 1990 levels by 2020 is only possible if other
industrialized countries and major emerging economies make comparable efforts. The Federal Government
welcomes the European Commission’s intention to conduct a more in-depth analysis. This should also address
the carbon leakage risk, fair burden-sharing between Member States, the comparability of emission
reductions of other industrialized states and reductions by emerging economies, plus the effect on the
national budgets.
3 Moreover, to create reliable framework conditions, commercial energy consumers should not be burdened by
multiple charges. These can be avoided by better coordination of energy- and climate-policy instruments.
26 Requirements of a vital and dynamic location for industry – spotlight on Germany
4.4. Securing energy and raw material supplies
A clean, reliable and affordable energy supply and
well-functioning, cross-border energy markets re-
mains essential for a competitive industry. The
Federal Government therefore supports an energy
policy that is free of ideology, technology-neutral and
geared towards the market. To this end, it has formula-
ted basic principles and guidelines for its energy con-
cept. Looking ahead, renewable energies should
account for the bulk of the energy supply. Nuclear
energy – together with the use of cleaner coal – could
form a bridge to achieving this goal. Concentrated
energy research that is aimed at redeveloping or
further developing innovative energy technologies is
the key to a future-proof energy supply and a strategic
instrument of energy policy. Producing a new energy
research programme focusing on energy efficiency,
storage technologies, intelligent network technology
and second-generation bio fuels remains a key project
for the Federal Government.
As a country with limited supplies of its own raw
materials, it is particularly important for Germany to
have access to and availability of raw materials under
competitive conditions. Current technology trends,
together with new production and consumption
patterns, are changing the profile of raw material
usage and raw material requirements. As raw
ma­terial prices have risen, material efficiency, raw
ma­terial substitution and greater use of secondary
raw materials and recycling have become increasing­ly
important. Companies’ own raw material supplies –
from exploration to extraction, processing and
storage – remain the responsibility of individual com-
panies. Business transactions abroad (backward inte­
gration) can help to develop this aspect of the busi-
ness. However, the State must support, at national and
European level, the removal of distortions of trade
and competition, the incorporation of raw material
considerations in trade agreements, the implementa-
tion of political support measures at an international
level and improved access to domestic raw materials.
The Interministerial Committee on Raw Materials
(Interministerielle Ausschuss Rohstoffe) is an impor-
tant committee working at national level to advance
important industrial matters in issues relating to
raw materials. The EU Raw Materials Initiative supple-
ments the national raw materials policy. It also ana­
lyses which raw materials could be critical for sup­
plying industry in future.
 27

Figure 6 – Action area: securing raw material and energy supplies

Business and government

3 Securing raw materials is a key task for industrial enterprises. Progress can be made in this area through
greater involvement abroad, improved recycling, raw material substitution, material efficiency and greater
use of secondary raw materials.

National and European policy

3 The Federal Government supports a clean, safe and affordable energy supply and well-functioning cross-
border energy markets.
3 At the same time, the use of nuclear energy can serve as a bridging technology to the era of renewable
energies.
3 In its energy concept, the Federal Government is formulating guidelines for an environmentally friendly,
reliable and affordable energy supply.
3 Innovative energy technologies must be developed further as part of the energy research programme.
3 In the area of raw materials, the Federal Government supports abolishing market distortions, including raw
materials in trade agreements and implementing political support measures at an international level.
3 The Interministerial Committee on Raw Materials and the raw materials dialogue of the Federal Ministry of
Economics and Technology with business and union representatives work on an ongoing basis to identify the
need for action and develop possible solutions. The Federal Government supports new raw material partner-
ships with developing countries and the establishment of a German raw materials agency at the Federal
Institute for Geosciences and Natural Resources (Bundesanstalt für Rohstoffe und Geowissenschaften).

4.5. Guaranteeing open and efficient markets,
creating fair framework conditions
Open markets guarantee efficiency and promote pro-
ductivity. Making the best possible use of scarce re-
sources is essential for all commercial and State activity.
Advances in productivity are the ultimate source of all
increased prosperity. Consequently, guaranteeing
open markets is an interdisciplinary task. The trends
described in the sections above on moving the focus
points of production, global value chains, scarcity of
raw materials and energy and demographic change
illustrate the particular urgency of this task:
Globalisation increases the costs of retaining out-
dated production structures and production factors in
industries where Germany has no comparative advan-
tage. For industry to avail of the opportunities out­
lined above, it must adapt as quickly, seamlessly and
completely to global market developments and – in
the case of changed premises – be capable of easily
revising decisions. Flexible and efficient product and
factor markets within Germany are a vital prerequisite.
Well-functioning markets are also important for
the efficient use of natural resources. They ensure
optimum use of increasingly scarce resources and
genuine commitment to the search for the best alter-
natives – whether this involves developing new
energy sources, recycling raw materials or developing
completely new, non-resource-based technologies.
Demographic change not only reduces the poten-
tial workforce (thus requiring a significant increase in
labour productivity), it also has implications for the
international division of labour, suggesting a greater
focus on efficiency: Since societies age differently and,
most importantly, at different rates, additional oppor-
tunities are opening up for mutually beneficial inter-
national cooperation. This intertemporal trade, as it is
known, between countries with a comparative advan-
tage in producing “present goods” and countries
whose comparative advantage lies in the production
of “future goods” can help mitigate the negative
consequences of demographic change. In this con-
text, the current account surpluses of recent decades
reflect Germany’s comparative advantage with
28 Requirements of a vital and dynamic location for industry – spotlight on Germany

regard to present production. The net foreign assets
thus accumulated facilitate greater consumption in
the future. The equivalent value – in the form of cheaper
imports from other countries – that Germany receives
for these assets depends on the openness and efficien­cy
of markets. If a State undermines market forces, re-
stricts access to markets and protects domestic mar-
kets and inefficient domestic producers from superior
foreign providers, it will lose out on intertemporal
gains from trade. This would be a fatal approach for a
country like Germany, which has an ageing popula-
tion. Guaranteeing domestic markets that are open,
efficient and characterised by free and fair competi-
tion, while also competing and battling for inter­
national markets organised on the same principles,
remains an immensely important and ongoing task.
While Germany can address these shortcomings
to a large extent on its own, the EU has primary
responsibility in other areas. The EU must use its
diplomatic clout more effectively to ensure free access
to and trade with raw materials and to act against the
formation of cartels. As well as insisting on opening
up markets in other locations, the EU must also liber­al­
ise its own import regime further and rethink its sub-
sidy policy. When examined closely, it is obvious that
import restrictions are also export restrictions.

Germany still lags behind some of its competitors

in this regard. The OECD has pointed out that com­
petition is hampered significantly by regulation of the
product and service markets.9 This regulation entails,
among other things, unnecessary cost burdens for in-
dustry. The Federal Government must simplify and
ease market access conditions while still meeting the
required demands for quality.

A lack of competition on the energy market is a

factor in comparatively high energy costs. Promoting
the expansion of renewable energies, while laudable
in itself in some instances not only exceeds its brief in
some cases, it bypasses it altogether. A greater focus
on efficiency is needed here.

9
OECD Economic Survey of Germany 2010, p. 9.
 29

Figure 7 – Action area: open and efficient markets

National policy
3 To preserve the decision-making freedom of citizens and business owners and improve the functioning of
markets, regulation and its necessity must constantly be reviewed. In addition, possible means of reducing
the costs associated with regulation must be evaluated, and unnecessary bureaucracy eliminated.

European policy
3 Further liberalisation of world trade opens up huge opportunities for Germany and all other participating
countries. Multilateral negotiations under the auspices of the WTO remain the ideal for progressing in this
direction. The aim of European policy must therefore be to continue and reinforce its support for a rapid
conclusion to the Doha Round and a comprehensive and ambitious result.
3 Removing subsidies and other trade-distorting measures will also help to achieve market functionality in
general and an efficient allocation of resources. Intervening to combat unfair trade practices must only
occur in cases where this is justified; it should not be abused for protectionist purposes.
3 In parallel with the multilateral negotiations, European policy must also continue to expressly support open
markets and the protection of intellectual property rights. One option would be to conclude free trade
agreements.
3 Crisis situations must not be used as a pretext to resort to protectionist or trade-restrictive practices. When
formulating European and national activities, inward and outward distortion of competition must be avoided.
The WTO’s regular monitoring of new trade initiatives ensures transparency and discipline and should be
used as a lasting instrument to defend against protectionist tendencies.
3 The Single Market is the success story of European integration. It must be developed further and completed.
3 Dismantling bureaucracy is also a high priority at European level. The steadily growing body of EU law,
compiled over decades, must be systematically examined to determine how relief can be granted to business
and industry. The approved programme aimed at cutting 25 % of red tape related to EU law by 2012 is a
milestone in this regard. The Federal Government will ensure that the 25 % target is systematically implemen-
ted. However, this 25 % can only be a starting point for further efforts. Policy makers must also ensure that
no unnecessary burdens arise with the introduction of new EU regulations.
3 The Federal Government and the EU will continue to work on the effective implementation of fair competitive
conditions (level playing field) to provide business with internationally competitive conditions.
30 Requirements of a vital and dynamic location for industry – spotlight on Germany
4.6. Enabling compatible production processes
and products with high added value
Companies must constantly refine their production
processes and management of their international
value chain to exploit the benefits of global produc-
tion. Sustainable industrial production must be founded
on high-quality information and communications
technologies (ICT). It must also be equipped to handle
a broad variety of customized production systems and
the integration of production and services. Modern
production systems typically have on-site quality con­
trols and high levels of automation. Digital production
processes are essential if international sub­sidiaries,
partners and key customers are to be inte­grated in glo-
bal value chains. Complex information on, for example,
efficient suppliers, quality and dis­tri­bution can only be
fully leveraged through extensive use of ICT.
For production plants of the future to be success-
ful, their processes must be regionally compatible and
based on the latest technologies. As the worldwide
shift of centres of production towards Asia continues,
sustainable production processes must have globally
compatible interfaces. Chinese suppliers must be able
to connect with German production centres in the
same way as their competitors in North America or
Eastern Europe. Emerging key technologies and new
scientific paradigms must be incorporated quickly
into the production process. Government incentives
should be created for this purpose through standard­
ization programmes. Policy makers and civil society
can also play a role in creating an environment that is
conducive to industrial production. A greater under-
standing of the functioning of global value chains is
also vital. Foreign activities are not usually carried out
at the expense of domestic employment. Outsourcing,
offshoring and backshoring decisions are not isolated
events: they occur as the result of more efficient
global division of labour.
German industry must adapt its value creation to
changing lifestyles and values. Medical and pharma­
ceutical products are becoming more important, for
example, due to demographic trends. As the newly
ndustrialised countries continue to grow, Germany’s
traditional strength – specializing in capital goods
and durables – offers great opportunities. Adapting
global strategies to regional and local markets is key
in this case, combined with a greater ability to offer
industrial goods as just one part of comprehensive
solutions. Another challenge faced is how to guarantee
the high quality and customer satisfaction associated
with products bearing the “Made in Germany“ label
but produced in global value chains.
To compete on international markets, German
industrial firms need sustainable strategies for value
creation. In the face of a growing skillbase worldwide
and fragmented production processes, business
planning activities relying on human capital will gain
in importance, as will maintaining a knowledge edge.
According to a representative survey (IW-Zukunftspa-
nel) by the Cologne Institute for Economic Research,
almost one in five larger companies in Germany de-
ploys an above-average number of staff with business
planning activities in the domestic market, and thus
qualifies as what the BDI (Federation of German In-
dustries) refers to as a ‘system head company”.10 The
focus on high quality components of the value chain
also has important economic implications. It is not for
the government to make a distinction between high
value stages of the chain and purportedly lower value
stages. However, a forward-looking and sustainable
industrial policy must take account of the roles played
by R+D, design, marketing, production planning, sales
management and actual production in generating
employment, revenue and growth.
10
BDI/IW Köln/Roland Berger/vbw (2008): System Head Germany
Plus – Germany‘s future as a place to do business – and a place to
add value, BDI Document No. 405, p. 15.
 31

The role of policy makers therefore, is to encourage
production stages in the global value chain that have
high value to remain in Germany as their preferred in-
dustrial location, by ensuring positive business con­
ditions such as a competitive tax system, strong infra-
structure, high quality of life and secure investment
conditions. Attractive site conditions are required to
transfer the spillover effects of multinational corpora-
tions (through high value business-related services,
for example, or consolidated tax revenues). In ad­
dition to creating the conditions for high-potential
clusters and regional production associations, the
State is also expected to act as a responsive and expert
contact point for businesses. One thing is certain, an
awareness of the technological and economic depen-
dencies in global value chains is vital.

Figure 8 – Action area: compatible production processes and products with high
added value

Policy makers, social partners, business

3 Industrial production processes must have globally compatible interfaces and be capable of responding
flexibly and rapidly to technological change. Policy makers must ensure that the necessary conditions are in
place through standardization programmes.
3 Industrial production is often described as a backward, environmentally damaging activity. Policy makers,
industry and civil society must work together to counter this preconception. It is essential to highlight the
economic and technological importance of industry and help create a more open and favourable climate
towards industrial production.
3 Increasingly, outsourcing, offshoring and backshoring reflect a production process based on international
division of labour. Policy makers, social partners and industry are urged to generate a better insight into how
global value chains operate and draw attention to the opportunities within these chains for Germany’s
export-oriented industry.

Business
3 Businesses must address new management challenges in global value chains, customized production and
hybrid value creation.
3 Industry must continually adapt its product mix to changing lifestyles and values.

Policy makers (federal government, Länder, municipalities)

3 The State must encourage businesses with the highest possible added value to retain their operations in
Germany by creating positive business conditions. These business conditions include, for example:
3 An internationally competitive taxation and levy system
3 Modern and cost-efficient transport infrastructure (roads, railway, inland waterways, hinterland connections
of ports, airports)
3 A high quality of life, based on a clean environment and cultural diversity
3 Secure conditions for investment
3 Recognition of business drive and incentives for entrepreneurs
3 It is also the government’s role to create the right conditions for high-potential clusters and regional
production associations, for SMEs in particular
3 Government must be prepared for the impact of global value chains, e. g. technological and business cycle
dependencies.
32
5
Nothing is certain but uncertainty:
framework conditions for greater adaptability
Nobody today can predict the future with any great
accuracy. Markets will decide which industries and
which specific products will be successful in the de­
cades ahead. Progress is the result of trial and error,
rather than planning down to the last detail. How can
Germany best prepare itself for the challenges
brought by this basic uncertainty, and seize those
challenges as opportunities? This is a key question.
The analysis of requirements demanded of Germany
as an industrial location has shown that, even without
knowing in detail what shape future industrial
production will take, global megatrends allow us to
draw conclusions for decision makers in the industrial
and political sphere. To confirm its standing as a
prime industrial nation, Germany must continually
improve its economic sustainability as the demands
grow on goods in production and production techno-
logies used. Germany must be in a position to respond
ever faster and at all levels to new developments.
Every effort must be made to help not only businesses
and their employees, but also policy makers and the
social partners, to respond rapidly and flexibly to new
developments. Civil society itself will also need to
show a willingness to change attitudes and embrace
new technologies.
Industrial policy must continue to focus rigo-
rously on the “market as discovery procedure”. The
development, manufacture and marketing of future
consumer and investment goods and the development
of new production technologies is best left to the in­
visible hand – that is, to the free interplay between
market supply and demand. For this reason, the state
should interfere as little as possible with market pro-
cesses. Instead, the state should focus on its essential
role of creating clear, reliable and positive framework
conditions for consumers, businesses and industrial
production. Intensive dialogue between government
and industry is therefore necessary to enable early
detection and remedy of weaknesses or malfunctions
within the economic environment. Direct state inter-
vention should be limited to exceptions such as exter-
nal effects in the environmental or research sector,
and economies of scale within network industries.
Otherwise individual initiative and self-reliance
should underpin the market economy. An efficient
and forward-looking industrial policy is not based on
spending programmes for individual sectors. Instead,
it focuses on incorporating legitimate interests of
industry into relevant policy areas – from education
and technology to energy and the environment. In all
cases, the objective of such policy is to strengthen the
international competitiveness of companies opera-
ting in Germany in a sustainable way that conforms
with market requirements (to create a level playing
field).11
With favourable economic conditions in place,
uncompetitive companies do not remain in the mar-
ketplace any longer than necessary and there are no
artificial high performers thriving on government
support alone. There is no denying that the structural
change required may be painful for affected parties.
However, this change is absolutely vital to secure
long-term growth and employment in Germany.
Bringing about the structural changes in a positive
way requires close coordination between all political
actors involved. It also calls for a willingness to em­
brace new and permanent changes, while rethinking
conventional ways of doing things. Agility and crea­
tivity can only be enabled through a business-friendly
environment – these are two traits that are essential
for companies if they are to cope successfully with
emerging developments in the global marketplace.
There is another lesson to be learnt from reflec-
ting on the future of Germany as a prime industrial
nation: we must not rest on our laurels. The natural
human tendency to retain a comfortable status quo is
the greatest impediment in the search for innovation.
It will only be possible to make available the fruits of
prosperity to the broader population if and when
Germany can maintain its technological lead against
newcomers in the global economy. Germany’s suc-
cessful export industry, which managed to capture
some additional shares of the world market even
during the financial downturn, must be wary of com-
placency. Adhering to current production models and
resisting global megatrends would inevitably result in
domestic industries losing their importance and a
massive drop in income for the population.
Coalition agreement between the CDU, CSU and FDP, 26th
11
October 2009, Chapter 4.3.
33
34
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