ECONOMIC REPORT
A Key Factor for the Future
Innovations
2004

P r e f a c e 4
I. What ’ s a t s take? 6
II. Wh e r e a r e w e now? 14
1. What is our position in the international innovation competition? 18
2. Are there problems in how innovations are introduced? 22
3. Have we bid farewell to entertainment electronics? 26
4. What has become of the “Pharmacist of the World”? 32
5. Are we relying too heavily on “old” industries? 38
6. How strong are we in the “new” technologies? 44
7. How close are we to becoming an information society? 50
8. Does our educational system need some after-school help? 54
9. How accepting are we of innovation? 58
III. What d o w e n e e d t o d o ? 62
Publication data | References 70
ECONOMIC REPORT 2004
A Key Factor for the Future: Innovations
To o u r r e a d e r s :
The economic upswing is underway. It let us wait
longer than many had hoped. Time and time
again, we were confronted with factors that
weighed down the business climate and triggered
new uncertainties. At first, it was terror threats
and the consequences of the conflicts in the
Middle East as well as the strong Euro last winter.
Then it was price hikes for oil and raw materials
that are causing problems for the German
economy. Even though experts all think that the
bottom of the economic valley has now been
reached, initially there has only been a slight rise
in performance. I am convinced that considerable
growth is possible in the medium-term. I am also
optimistic that the employment rate can also be
lowered as a result of this growth.
P r e f a c e
4 | 2004
2004 | 5
The labor market reforms when they have
been completely implemented at the beginning
of next year, will considerably increase flexibility
in managing labor and add to the flexibility of
the workforce and companies. Job placement
will be more efficient, advisory services for employers
and employees will be more targeted,
new incentives will be given for individuals to
take on jobs and social benefits withdrawn when
people refuse work. Mini and midi jobs and
sup-port for business start-ups offer new ways
out of unemployment. The reforms to the Crafts
Code, the elimination of needless bureaucracy,
tax cuts, particularly at the low-end of the collectively
bargained pay scale, will make economic
activities easier to initiate. As a result, the
employment threshold of growth will be lower
or, in other words, there will be more employment
at a certain rate of growth. This in turn will
stimulate higher income and more demand and
lead overall to self-perpetuating growth. The
more stimuli there are, the more growth there
will be. This is why it is extremely important to
further reinforce Germany’s position as an economic
leader.
Education, research and innovations
are the driving forces for growth and employment.
If we not are out in front, we will fall behind
over the long run. Germany still demonstrates
outstanding performance in many areas but we
have to work hard not to fall behind. Our economy
and our society need fresh wind. We need
ways of thinking and acting that reflect individual
accountability and the desire for progress.
We need government regulations that create
and maintain the room necessary to turn ideas
into reality and stimulate the desire to achieve.
And, we need “communication marketplaces”
where partners who have the same goals can
find one another and combine forces to increase
the number of market opportunities. Our innovation
initiative will also make its contribution
by providing new impetus and eliminating
weaknesses. Growth will be more dynamic as a
result, there will be more employment and
incentives for continued innovation. It is primarily
up to the companies to set off this chain
of events but economic policy has a role to play
as well.
The 2004 Economic Report deals in-depth
with innovation as a decisive factor for the
future. It emphasizes its significance for the
German economy and lists strengths and weaknesses
in many areas. It also to states what has
to be done, thus making an important analytical
contribution to the “The year of Innovation”.
I hope that you find this report both unbiased
and insightful.
Wolfgang Clement
German Federal Minister for Economy and Labor
I. W h a t ’ s a t s take?
2004 | 7
When jobs are lost
to foreign countries,
people get scared.
This is not a new phenomenon. Since the
1950s, German companies have been manufacturing
abroad. Volkswagen, for example, went
as early as the 1950s to the Americas and South
Africa to manufacture locally for the regional
markets. Starting in 1960, Grundig took advantage
of the lower wages in Northern Ireland and
started manufacturing entertainment electronics
there (and later in other countries) to be able
to supply markets more cost effectively. Both are
examples of the classic motives behind foreign
investments: on the one hand, overcoming
entry barriers and accessing regional resources
to tap into new markets; and, on the other, capitalizing
on the cost advantages to become more
competitive and achieve higher profit margins.
In the past, both of these strategies have made
key contributions to the competitiveness of
German companies, to the creation of more jobs
and to a high standard of living in Germany.
These strategies coincided with the strategies
of foreign companies that capitalized on the
advantages Germany has to offer as a business
location and our favorable position in the middle
of Europe to form new companies and thus
also create jobs. As businesspeople, employers
and, not least of all, consumers, we have heavily
profited from the international division of labor
in the past. Don’t these experiences count for
anything anymore? Has the situation changed?
Don’t these experiences
count for anything anymore?
Has the situation changed?
The ongoing process of
globalization has drastically accelerated
the pace of structural change.
First:
competition on global markets has intensified
immensely caused in part by the opening of the
former communist countries, the entry of the
central and eastern European countries to the
European Union and the completion of the European
internal market and in part by the catch
up process currently underway in the newly
industrialized countries and the development
strategies being pursued by poor countries.
Intensive efforts in the area of education and
interwoven eco-nomic structures have dramatically
improved local conditions and production
possibilities around the world.
Second:
this process was accelerated by advancements
in information and telecommunication technologies.
Today, any location around the globe
can be accessed via Internet and telephone with
no time lag for next to nothing. Text, images and
anything that can be put into binary code can
be sent to business partners around the world.
Individuals without contacts abroad can establish
them easily without an intermediary or
having to travel.
Third:
foreign activities used to primarily revolve
around pre-production, intermediate and end
production of goods, but today they increasingly
involve specific business or functional areas.
Economists call this process outsourcing (using
resources outside of a company) or, if these
activities end up overseas, it is called offshoring.
This process no longer just has to do with simple
tasks such as shelling shrimp, sewing textiles or
data entry. It now also involves more complex
activities such as accounting, software development,
product design or customer service.
These activities used to be considered permanently
tied to the company location. Today,
information and communication technology
make it possible to easily transfer these activities
globally to locations offering favorable conditions.
The fact that with the new EU member
states, there are affordable business locations
with stable legal systems, a skilled workforce
and, at the same time, low corporate taxes, right
around the corner, is a relief for those who are
considering outsourcing but who think that
relocating activities to India or Bulgaria is too
risky (experts call this nearsourcing).
›
All in all globalization has entered a
new dimension with these changes. As John
McCarthy from Forrester Research clearly stated:
“Every company today has to look in the rear view
mirror to see if there is someone coming from
behind who can do the same for less money.”
This doesn’t just apply to costs, it also applies to
performance. Against the backdrop of increasing
competition, being a market leader on the world
markets is no longer a question of tradition but
of continual innovation and strategic market
analysis.
In addition: just because a German company
is successful does not necessarily mean that
Germany is a good place to invest. There are
companies and industries where the subsidiaries
earn more revenues and employ more people
than their domestic counterparts. It is also less
true today that excellent conditions domestically
guarantee the competitive strength of German
companies. The way that our “World, Inc.” firms
are marketed also reflects the fact that these two
ideas are no longer associated: the advertising
slogan “Made in Germany” has been replaced
by “Made by us”. And, another new development
as a result of the extensive business activities
overseas: It is not just the lower-skilled workers
that are exposed to the challenges on the labor
market but also more highly skilled ones.
This new dimension of
globalization affects the labor
market more strongly and
to a wider extent than before.
Wouldn’t this speak in favor of slowing
down the process of the division of labor to
prevent the negative impact it has? German
economic researchers don’t think so. In their
report on the “Situation on the Global Economy
and the German Economy in the Spring 2004”,
they say: “Preventing an intensification of the
international division of labor associated with
outsourcing would mean passing up opportunities
for growth.”
Their rationale, from an economic standpoint,
makes sense: shifting jobs to more
cost-effective locations abroad strengthens the
earning power and the competitiveness of
domestic manufacturers. This secures, on the
one hand, the remaining jobs that would have
potentially disappeared without cutting costs
and, on the other hand, also creates new jobs
domestically if the enhanced competitiveness
leads to an increase in revenues and expansionary
investments. This is the chain of events
domestically.
Another chain of events begins abroad,
beginning with the jobs that have been relocated
there. These jobs, with the resulting wage and
profit earnings, can be an impetus for a selfperpetuating
economic catch up process. As
this chain of events advances, local demand for
consumer and investment goods grows and
hence also the demand for German products.
This increase in demand can also form the basis
for new production and employment opportunities
in Germany even if it is not common for
them to emerge where they were originally lost.
What ’ s a t s take? I .
8 | 2004
2004 | 9
The Institute, referring to a study from
Roland Döhrn from the Rhine-Westphalia
Institute for Economic Research, arrives at the
conclusion that “the positive effects in Germany
appear to outweigh the negative ones”. Döhrn
himself sees this in an even more differentiated
way: in his estimate, an increase in foreign employment
at German companies of 10 percent
initially causes 2 percent of domestic jobs to
be eliminated; the additional exports brought
about by foreign production would then, however,
create more new jobs than were initially
lost.
McKinsey arrives arrives at a similar conclusion
for the U.S. where a widespread public
debate about the loss of IT jobs overseas is currently
underway. McKinsey estimates that for
each U.S. dollar invested in outsourcing, added
value totaling 1.12 to 1.14 US$ is created in the U.S.
This consulting company calculated that
the added value for Germany is only .79 US$ and
hence, would have a net negative effect. Their
explanation: the labor market in Germany is not
flexible enough and laid off employees have
fewer opportunities than in the U.S. to find new
jobs with higher levels of productivity. This issue,
however, is being hotly debated in the U.S. as
well.
These calculations are all quite speculative
because they are more or less based on arbitrary
assumptions. And, they don’t help individuals
affected by globalization directly because they
do not show people in concrete terms how to
overcome their personal problems.
We have to stop
Germany from being
divided into winners
and losers.
The persistently high unemployment
rate and the uncertain prospects for the
future are dampening the mood in our society.
Our country still has more than 4 million people
unemployed. Every one of us has family members
or friends who are affected and knows what
type of strain they are under.
The media report about jobs being lost
abroad increase people’s uncertainty about
whether their own job is still secure. Some time
ago, the U.S. magazine Business Week asked
the question: “Is Your Job Next?” and one of our
news magazines asked: “Is your job still secure?”
This uncertainty will not go away even with the
expected economic upturn. Growth of only
1,5 to 2 percent and a slight increase in the
number of jobs is initially anticipated for 2004
and 2005.
As a result, integrating the unemployed,
especially lower-skilled workers, into the labor
market remains a critical political task. The
measures passed in labor policy will make an
important contribution here. But they alone
cannot get rid of unemployment. More has to
be done. Above all, we need more expansive
growth and stronger demand for employees.
We need to push for
more growth and employment
to distribute the benefits
of globalization to as many
people as possible..
To achieve this, we have to remind ourselves
of what our strengths are. And, we have
to accept the rules of the globalization game
and capitalize on them by concentrating even
more on sophisticated, knowledge-intensive
products.
We need an educational and innovation
initiative that makes our economy and our
society more efficient, more creative and more
competitive. Germany must capture the lead
in the development and application of technological
innovations. This requires not least
of all our society to be more interested in and
open to technological issues. It will only be
possible to secure an adequate number of wellpaid
jobs if Germany can market itself as an
attractive and forward-looking location for
German and foreign researchers and investors.
Only then will low-skilled jobs again emerge.
Growth in high-skilled IT jobs is always
followed by a supplementary supply of more
simple tasks. Moreover, demand for services
also increases as the number of individuals
with higher incomes rises.
Finally, more growth also gives the government
room to invest in the future of education
and research and cushion the unavoidable
negative effects of globalization.
In the federal government’s 2004
annual economic report, the first steps in this
process are described in detail:
• relief from tax and levies
• reduction of bureaucracy
• budget consolidation
• labor market flexibility
• social insurance system reform
and much more.
The Institute’s report mentioned above
has again emphasized the contribution the
collective bargaining partners need to make:
more flexible working hours, productivityoriented
wage agreements (after adjustment
dismissal-induced productivity), longer working
hours per week and more opening clauses in
collectively bargained agreements.
Our report focuses
on the “Topic of the Year”:
Innovations.
What ’ s a t s take? I .
10 | 2004
›
2004 | 11
Does offshoring represent a risk or
an opportunity for domestic jobs?
It really represents both at the same time. The
phenomenon of the global division of labor is
nothing new. In the manufacturing sector, there
have been production sites in low-wage countries
for a long time now while this is a new development
in the service industry. Services are also becoming
transferable at an international level in
our global economy through electronic processes
and affordable global telecommunications. The
challenge lies in being able to reach an even lower
world market price for these services. I see offshoring
as an opportunity because this issue makes
us more aware of the problems Germany has as a
business location and promotes understanding
for the necessary changes. We cannot prevent jobs
from be-ing lost abroad if they stop being costeffective
domestically. Offshoring makes it possible
to truly lower costs in service industries where
traditionally little progress has been made in productivity.
We have to get control of our cost and
productivity problem. The offshoring trend is a
wake-up call. But we also shouldn’t exaggerate the
effects of this development. The number of jobs
that are actually affected is far less than the number that disappear and are
newly created every year domestically through normal fluctuations at the
workplace.
Should the government undertake measures to make
offshoring more difficult?
I think that this is an unreasonable demand. We should clearly address the
existing problems, analyze them in detail and then solve them. Of course, we
will never reach the cost and wage level of, for example, India. This is why it is
even more important that we work as productively as possible. We must produce
more. The government’s role is to help companies through deregulation,
less bureaucracy and more flexibility. This is the only way can our economy
can grow in a global landscape, thus guaranteeing our prosperity.
What you think of the “patriotism debate”?
As a leading export nation, we cannot isolate ourselves from global markets.
Companies who are at a disadvantage because of their location must be able
to seek out the best possible conditions that make it possible for them to assert
themselves in international competition. Companies that behave this way
are not inherently unpatriotic. On the contrary, their international presence
oftentimes secures jobs at home. If the labor market is working properly, this
can even create a lot of new jobs with higher value. Moreover, as offshoring
progresses, the demand for sophisticated investment goods that usually come
from the countries that export jobs, is on the rise. We used to be proud of our
status as the top exporter in the world and of the high percentage of foreign
workers in German companies. All of this can’t suddenly be wrong. And anyway:
we cannot celebrate EU expansion on the one hand and simultaneously
isolate ourselves economically.
Frank Mattern
McKinsey Company
Innovation is the answer to how
Germany can hold its own in the face
of intensified international competition
without having to bid farewell to the
achievements of our social system.
We want to maintain the high wage level we
have but have to bring compensation for lowerskilled
work more into line with productivity.
We want the benefits of the social insurance
system but we have to accept certain cuts in
collective funding as our society gets older, i.e.
more private provisions for future uncertainties.
We want to continue providing collective
assistance to those who cannot help themselves
but expect everyone who is able to work
to accept any type of reasonable work.
Innovations help to meet these demands.
They give impetus for the creation of
more jobs and training slots and create the
foundation for higher income and increased
purchasing power.
They guarantee tax revenues and
hence, ensure that future expenditures can
be financed and social benefits can be paid
by the government. Innovation is the key
to our future.
But innovations cannot be achieved through
political resolutions.
Innovation must be born as ideas, developed
in the research and development process and
brought to market maturity.
They must be introduced to the market
and sold using clever marketing strategies
worldwide, if possible. Each one of these steps
is associated with new risks.
It is easy to foster innovations, but it is
extremely difficult to develop and implement
them. Innovation is an entrepreneurial activity
reserved for companies.
Our report takes a look at this topic from
different perspectives. In the adjacent box, we
take a brief look at the long-running disputed
public discussion of the effects that innovations
have on the labor market. You only have to think,
for example, of the activities of the “machine
wreckers” at the beginning of the 19th-century or
the sharp criticism from Charlie Chaplin about
assembly line and piecemeal work in his movie
“Modern Times” (1936).
Today, that innovations
promote growth and
employment, is largely
beyond dispute.
What ’ s a t s take? I .
12 | 2004
Charlie Chaplin
“Modern Times”
(1936)
Source:
Jerry Murbach
www.doctormacro.com
›
2004 | 13
Innovation (Latin for renewal) has become
a key word for progress and change.
It was first used in German in the field of
botany to describe newly formed shoots
sprouting out of an old branch. It was
introduced into economics by Joseph
A. Schumpeter: “Innovation is taking
something old and doing it a new way.”
According to Schumpeter, innovations
in the economy lead to “creative destruction”.
Old companies and industries fold
while new ones emerge. Jobs are destroyed
but new ones are simultaneously created.
The impact of innovations was not a subject
restricted to economists and social
reformers, it was also taken up by writers
and journalists
A noteworthy example of the reservations
people have about innovations can be
found in the work entitled “The Life and
Opinions of Tristram Shandy” by Lawrence
Sterne in the middle of the 18th-century
that was widely read in Germany as well.
In this book, the wind-powered sailing
chariot built in 1599 by Simon Stevin for
Prince Maurice of Orange is discussed.
“I have often wondered,” says one of the
participants in the discussion, “why none
of our Gentry, who live upon large plains
like this of ours, attempt nothing of this
kind; for it would not only be infinitely
expeditious to make use of the winds,
which cost nothing, and which eat nothing,
rather than horses, which both cost and
eat a great deal.” “For that very reason,”
replied another. “Because they cost
nothing, and because they eat nothing,
the scheme is bad; it is the consumption
of our products, as well as the manufactures
of them, which gives bread to the
hungry, circulates trade, brings in money,
and supports the value of our lands; and
tho', I own, if I was a Prince, I would generously
recompence the scientifick head
which brought forth such contrivances;
yet I would as peremptorily suppress the
use of them.”
About 75 years later in 1834, a much more
optimistic tone was taken in the review
of a book entitled “About the powerful
influence machines have on prosperity”
that appeared in the Penny Magazine of
the Society for the Diffusion of Useful
Knowledge.”The author of the book under
discussion justifiably identifies the main
cause of the ever increasing standard of
living as the affordability of man-made
products brought about by machines.
At the same time, he shows us the level of
barbarianism to which a nation would
inevitably sink to if an arbitrary ruler were
to give the order to shut down all machines
immediately. It goes without saying that
he also admits that some interests are
sensitive to the effects of the introduction
of new production methods, that a new
machine can put thousands on the street.
But where have we ever seen evidence
that squalor is a permanent state? These
new goods produced by machines found
more buyers because they were so cheap;
the poor and those without means were
able to actually fulfill their own needs.
Sales were more vigorous than before, the
factory owners were given the opportunity
to enlarge their establishments and
they hired people who used to be manual
laborers to work in these factories.
The Penny Magazine showed similar
enthusiasm four years later for the
American steam engine, a locomotive:
“In a few decades, the civilized world will
be covered with networks of railroads...
while it used to be and is still the case to
some extent now that only the rich and
well-to-do have been able to see the world
and enrich their experiences, those with
fewer means will also be able to benefit;...
the numerous barriers that hinder a trading
boom will fall ...; sales of agricultural goods
and cattle will no longer be a source of
worry as they can now be transported to
places where there is a shortage of food;...
basic consumer needs can be fulfilled
effortlessly...”. In contrast, the personal
impressions of earlier train travelers like
Victor Hugo were only a literary reminiscence:
“There are no longer any single
points, everything has turned into streaks,
the wheat fields have become long yellow
strands, the clover fields long green
braids...”
(From a letter dated August 22, 1837).
“Useful knowledge about the powerful influence innovations have on prosperity”
xy
14 | 2004
II. Where are we now?
2004 | 15
On the one hand: Germany, as a
location for research and innovation,
has come under discussion.
In an international comparison of relevant
indicators, we often only receive average
marks, for sophisticated technologies, we are
more towards the front but not in the advanced
technologies. For more than 10 years now, we
have been importing more of these technologies
than we export. In the area of technological
services, we have had an almost chronic import
surplus that has, however, considerably decreased
since 2001. Former flagship industries have
almost disappeared or have shrunk drastically
over the last few decades: German suppliers of
entertainment electronics can now only be
found in niche markets; revenues in the entire
German pharmaceutical industry are just half
as high as the American world market leader,
Pfizer. The traditional industries of automotive,
machine construction and chemicals are still the
pillars of our industry. Involvement in new crosssection
technologies such as biotechnology got
off to a much later start. Fears in the general
public and the ongoing public controversies
about genetically modified food or electrosmog
are evidence that the general public’s attitude
toward technologies. The delays and problems
getting started with such projects as the Toll
Collect or the series of mishaps in railway car
construction underscore the deficiencies just as
the PISA study is evidence of our shortcomings in
educational policy.
Should the diagnosis therefore
be “Germany – A technological weakling”?
On the other hand: Germany has a good
position from which to start in the global
innovation competition.
EU-wide, Germany spends one of the highest
percentages of its domestic product on research
and development. With 40 percent of industrial
employees working in research and development-
intensive industries, Germany holds one of
the top positions among OECD countries. Automotive
manufacturing, chemicals and machine
construction are industries with sophisticated
technologies where 85 percent of all research
and development expenditures are made. The
distinctions between sophisticated technology
and the new advanced technologies are blurred
here: more than 80 percent of Germany’s exports
are now dependent on the use of modern in
formation technologies and electronic systems,
60 percent of the export surplus alone can be
attributed to automotive manufacturing. But
Germany is also one of the leaders in advanced
technologies: with 350 biotechnology companies,
we once again held the top position last
year in Europe; in nanotechnology, we are in
second place for patent registrations worldwide,
and for R&D expenditures, third. Germany
has a market share of 29 percent in Europe for
e-commerce. 80 percent of Germans have an
overwhelmingly positive attitude toward
technology and technical progress. Innovative
products such as the high-resolution stereo
camera for the Mars mission or driver assistance
systems in automotive design, innovative
methods such as the use of laser technology
in manufacturing all underscore not only what
we’re capable of but also the success of our
“dual educational system”.
Should the diagnosis instead be
“Germany – A technological leader”?
Source:
OECD, STAN database (2003).
DIW Berlin calculations and
estimates.
1 excluding apartment rental
›
›
Structure of Germany's sectors by knowledge and research-intensity
Comparison of the percentage of value creation with the G6 countries
G6-countries: USA, Japan, United Kingdom, France, Italy, Germany
Germany
Advanced technology
Sophisticated technology
Non-research-intensive industries
Knowledge-intensive services 1
Non-knowledge-intensive services
Other sectors
10 % 20 % 30 % 40 % 50 %
The fact is:
the German economy has both
– innovative strengths and innovative
weak-nesses.
We have companies that are driving technological
development forward and we have
others who only hold licenses.
We have companies that have a flair for
pushing innovations through and others who
spend more for advertising than for R&D.
We have companies that are repositioning
themselves strategically and others who
preserve existing structures.
We have companies that run their business
sustainably and others who set their sights on
short-term gains.
We have universities with advanced research
and good ties to business and others who pursue
research as a goal in and of itself.
In short: both statements are true. We have a
good starting position but we need to act.
This idea is also reflected in an expert survey
conducted by tns emnid about “Germany as a
Research Location”. One of the research managers
was quoted as saying:
“We can’t be satisfied with Germany as a
research location. But sometimes people complain
too much.”
The situation is not homogenous, thus
requiring different types of measures to
be undertaken. In the following sections,
firsta more in-depth look is provided of our
current situation:
How do we compare internationally based
on individual indicators? How close are we to
becoming an information society?
Do we have problems turning research and
development into innovations?
How successful are our companies in the
innovative “old” and “new” industries – in
entertainment electronics, the pharmaceutical
industry, automotive manufacturing, machine
construction, chemicals, biotechnology,
nanotechnology?
How close are we to becoming an information
society?
Where are the shortcomings of our
educational system? And last but not least,
how accepting is our society of innovations?
This limited selection of topics automatically
leaves the location issue open. At
the same time, this overview makes it possible
to form conclusions about why we are where
we are. It also tells us what we need to do to get
better. Chapter III takes a closer look at this
topic. das Kapitel III.
Wh e r e a r e w e now? I I .
16 | 2004
1 Germany before 1991
2 15 largest countries.
After 1998: 19 countries.
After 1991 ISIC3 classification,
previously ISIC2
(ISIC = International
Standard Industrial
Classification)
19 largest OECD countries:
Germany, France, Great
Britain, Italy, Belgium,
Netherlands, Denmark,
Ireland, Spain, Sweden,
Finland, Norway, Poland,
Czech Republic, Canada,
U.S.A., Japan, Korea,
Australia
Source: OECD, ANBERD
database, calculations and
projections of the Lower
Saxony Institute for Economic
Research.
Percentage Germany 1 spends on internal R&D among OECD 2 countries in
selected sectors 1973 to 2000 as a %
75 74 76 77 78 79 80 81 82 84 85 86 87 88 89 90 92 93 94 96 98 00 73 83 91 95 97 99
25 %
20 %
15 %
10 %
5 %
Industrial chemicals
Communications technology
Pharmaceuticals Cars Machine construction
Manufacturing sector
Office machines, data processing
Services
2004 | 17
Where do you see the strengths and
weaknesses in the German innovation
process?
The ability of the German economy to innovate is
better than its reputation. Its weaknesses lie
traditionally in quality consumer goods (with the
exception of automobiles) and its strengths in
investment goods, particularly special machines
and system construction. Even though many of
the required electronic components are purchased
from abroad in these segments, when precise
processing and good materials technology are
important, German manufacturers are more
often than not world leaders. The unmistakable
weakness in growth in Germany should not been
confused with a weakness in innovation.
Where has the government failed and
where have companies?
It might be cause for concern that Germany is
still far from reaching the goal set in Lisbon of
spending at least three percent of the gross
domestic product for research and development.
But even more worrying, however, is how poorly
German students performed on the PISA tests.
If the quality of school education is at best average in an international comparison,
then Germany is running the risk of falling behind over the long-term
in the international innovation competition. The German education and
training system is also poorly equipped to handle demographic changes. An
aging population that wants to prevent its human capital from becoming
obsolete has to rely on lifelong learning. German universities, in particular,
have not yet adjusted but still concentrate almost exclusively on giving students
their first professional degree. Companies will also need to adapt. Far
too many of them continue to rely on keeping their human capital “up-todate”
by getting rid of older employees and hiring younger ones. This practice
will no longer work when younger employees become a rare commodity in
the future. If companies do not make a stronger commitment to ongoing
education and training, weakness in innovation could arise out of this weakness
in growth.
What role do mega-mergers play in the ability of
companies to compete?
The success rate of mergers is sobering. Empirical studies have shown time
and time again that roughly half of all worldwide mergers fail. However,
this doesn't mean that, with respect to economic policy, mergers should be
made more difficult. Economic policy cannot be used to protect companies
from their own mistakes. It would also be wrong, however, to actively support
mergers with economic policy to make the German companies more competitive
internationally. If there have already been many mergers motivated
by pure business reasons that ended in failure, then the success rate of
mergers motivated by economic policy would even be lower.
Professor Henning Klodt
Institute for Global Economy Kiel
The power of innovation has dwindled
in Germany over the last few years.
According to a studyconducted by the
Center for European Economic Research,
the number of companies with innovations
(so-called innovators) fell by about 16 percent
in the manufacturing sector between 1999
and 2002.
According to an ifo innovation test,
only roughly 55 percent of all companies in
the manufacturing sector produced innovations
in 2003; in 2002, this figure had reached almost
59 percent.
The situation is similar for research and
development expenditures. Following hefty
increases at the end of the 1990s, R&D expenditures
stagnated in companies in 2003. Many
companies laid off R&D personnel. In 2001/2002,
the decline in personnel in medium-size companies
was four percent and in large companies,
one percent. At the same time, personnel bottlenecks
in key technical-scientific professions
hinder innovation projects particularly in medium-
sized companies. This also played a role
in the decline of young, technologically oriented
business start-ups. Many of these start-ups are
also suffering from a severe financing crisis.
There was only 292 million EUR invested
in 2003 in “pre-seed” activities, which include
the start-up and market introduction phases,
and 27 million EUR in actual start-ups. This is
seven percent of the financing volume in the
year 2000. Only 28 companies received start-up
financing in 2003, fewer than in 1991.
The identified problems are certainly
to some extent temporary in nature.
As the economy begins to pick up, investment
activities will potentially be revived.
Still, these setbacks show that we have to
work hard if we don’t want to compromise
the positions we have already reached.
1. What is our position in the international
innovation competition?
Wh e r e a r e w e now? I I .
18 | 2004
R&D intensity in selected OECD countries
83 85 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 81
Germany OECD USA France
Finland Italy
Great Britain Japan
– 3.5
–
3.0
– 2.5
–
– 2.0
1.5
1.0
0.5
Source:
OECD Main Science and
Technology Indicators;
percentage of domestic
product spent on R&D
2004 | 19
The international innovation
competition has intensified.
Primarily northern Europe, the U.S. and
several Asian countries have steadily expanded
their educational and innovation systems. In
international comparisons, they hold the top
positions.
On the other hand and, EU-wide, Germany
spends one of the highest percentages of its
domestic product on R&D. In 2002, this figure
was 2.5 percent. This means that Germany
invests far more than the EU average (1.9 percent)
and the average among industrialized
countries (OECD average: 2.3 percent). Worldwide,
Germany is in eighth place. Sweden and
Finland are out front globally; among large
countries, the U.S. and Japan are ahead of Germany
Even if R&D investments and educational
spending is merged together as “investments
in knowledge”, Germany is in eighth place
worldwide. According to the World Economic
Forum’s competitiveness index, Germany is
ranked 13th (14th last year). In the technology
index, Germany is in 14th place as a result of the
positive assessments it received for innovation
(10th place) while IT use is given a much more
cautious rating (17th place).
The EU Commission’s innovation indicator
confirms the good starting position that Germany
still has in the international innovation
competition. We are above the EU average in
16 of 25 indicators examined. According to the
Commission, Germany’s strengths are the high
percentage of industrial employees working
in high-tech industries, the considerable R&D
spending by companies and our good position
with respect to international patents. The EU’s
analysis clearly shows where Germany is behind
internationally: in graduates with degrees
in the natural sciences and engineering, in its
supply of venture capital for new start-ups
and in the added value in the sophisticated
technology sector.
For highly skilled individuals,
the German labor market is very appealing:
the percentage of highly-skilled foreign
workers is higher only in Austria and Belgium;
the net immigration of natural scientists and
engineers to Germany is considerably higher
than those to other EU member states.
Source:
Federal Statistics Office.
Lower Saxony Institute for
Economic Research
Changes in numbers of employees subject to social insurance contributions by
knowledge intensity of economic segments in Germany 1980 to 2002
average annual change in the segments as a %
knowledge-intensive segments
other segments
1980–1985
– 0.5
– 1.0
– 1.5
– 3.0
– 2.5
– 2.0
– 1.5
– 1.0
– 0.5
1985–1990 1990–1996 1996–2002
1. What is our position in the international innovation competition?
Germany has an efficient
research infrastructure.
For research cooperation and research
projects, companies primarily reach out to the
technical colleges, universities and the Fraunhofer-
Gesellschaft. In 2002, German technical
colleges received 12 percent of their research
funding from companies (OECD average:
six percent).
The Fraunhofer-Gesellschaft, with its 58
institutes and almost 13,000 employees, focuses
on applied research. Three-quarters of its earnings
stem from external projects (private and
public). Approximately 60 percent of their industrial
projects come from small and mediumsize
companies. The Confederation of Industrial
Research Associations is an innovation network
supported by industry that includes more than
100 industrial research associations with approximately
50,000 small and medium-sized companies
and 700 research locations.
The Max Planck Society has an excellent
reputation in basic research. Its institutes pursue
in particular new, innovative research directions
in the natural sciences, biosciences, humanities
and social sciences that have still not found a
place, or at least the right place, at German universities,
because they do not fit into the organizational
structure of universities due to their
interdisciplinary nature or they require personnel
or equipment that the universities cannot
provide. The Max Planck Society maintains 77
research institutes with 12,000 employees. Half
of the research directors come from foreign
countries.
Wh e r e a r e w e now? I I .
20 | 2004
Developer of the
electronic biochip
technology nominated
for the German Future
Prize 2004 – Fraunhofer ISIT,
Siemens and Infineon are
planning more cooperation
in biotechnology.
Source:
Siemens AG
Source: BMBF
The Helmholtz Gemeinschaft that researches
highly complex systems in particular,
has 15 research facilities with 24,000 employees
The government and the states have
invested heavily in building out this research
infrastructure over the last few years.
Research subsidized by federal
government and states
Volume of subsidies 4.9 billion EUR
Helmholtz centers 31.9 %
German Research Foundation 25.8 %
Max Planck Society 19.1 %
Facilities of the Leibniz-Gemeinschaft 14.3 %
Fraunhofer-Gesellschaft 8.0 %
Other 0.9 %
This research infrastructure plays an
important role in the cooperation that occurs
between the scientific and business communities.
More and more companies are tapping
into the advantages of this task-based cooperation
with research facilities and R&D providers.
For years now, external R&D spending is more
dynamic than internal R&D spending; between
1999 and 2002, it rose by 25 percent to 7.6 billion
EUR. Its percentage increased with this figure
to 17 percent (1995 10.5 percent). This sharp
increase in external R&D spending is a sign
that companies are more willing to cooperate.
At the same time, the figures also reflect a
tendency to move research departments out
of companies.
2004 | 21
How innovative is the German economy?
The level of innovation in Germany is lagging
further and further behind that which would be
necessary to sustain the level of prosperity that
people have come to expect. The strengths that
Germany (still) has in research are finding less and
less expression in higher economic performance.
Not all indicators are negative: Germany's patent
rate, for example, has even slightly increased in
the last few years from its already high level. But
innovation is far more than just research. It means
new and marketable products and services, new
production methods, new sales concepts and more.
And, when seen this way, Germany's innovation
level appears decidedly below par.
What are the strengths and
weaknesses of Germany as a location
for innovation?
Germany's strengths lie in its companies, especially
in traditional industries such as the automotive
industry, that compete on the global market with
their high quality and technological leadership.
Well-trained employees, specialized, mediumsized
suppliers, capable research institutes and
a demanding domestic market have made the necessary investments in innovation
both possible and profitable. Germany’s classic weaknesses are its
inflexible labor markets, long licensing processes, limited capital markets,
inadequate links between research facilities and companies and a population
that increasingly fears innovation. One new development is that strengths
we have had up to now are eroding which is evident in the debate about the
quality of German schools and the migration of top German researchers to
foreign countries. The most recent reforms are positive but, looking at it from
an international perspective, they are at best just a start. The strengths that
we have built up over decades won't disappear overnight but it is difficult to
stop the erosion process and this process can cause long-term damage.
What do you think the right place to start is in improving
the innovative ability in the new German states?
The following holds for all of Germany: money alone cannot successfully
deal with the eroding level of innovation and the lack of economic dynamism.
Without reforms that stimulate the economy, federal investment (and
subsidies in particular) will be wasted and the stealthy migration of German
researchers to other countries will continue. It is not only necessary to
accelerate the pace of reform and to make more resources available for the
innovation system, we also need to make structural changes, for example,
by giving the federal states more autonomy in decision-making, ending the
tenure system at universities and increasing the competitive pressure on
universities by making them more accountable. In the former Eastern states,
it has become apparent what the limitations are of an innovation policy
which is too focused on academic research. In research facilities and in newly
relocated companies, a performance level has already been reached there
that is not inferior to the West. What is lacking are the right economic policies
to encourage new business start-ups and to integrate less productive members
of the workforce into the active labor market.
Dr. Christian Ketels
Institute for Strategy
and Competitiveness,
Harvard Business School
Spectacular weaknesses and mishaps
cause people to question the ability
of the German economy to innovate
time and time again.
Hans-Olaf Henkel,
president of the Leibniz-Gemeinschaft:
“We are innovative at many levels but are sloppy
with product quality. The Toll Collect system is
a highly innovative product but two of our top
companies can't get it to run. Our cars are teeming
with innovations but the breakdown statistics
put us behind Japan. We design high-speed tilting
trains but the Deutsche Bahn has to go slowly
around curves without tilting.”.
The list of examples goes on and on. These
individual cases should not, however, become
generalizations.
Siemens CEO, Heinrich von Pierer, says
“Made in Germany has not become Botched in
Germany”.
But we also openly admit that cooperation
between science and business is often not ideal.
According to Martin Grötschel from the Konrad
Zuse Center for Informatics.
“The Americans are miles ahead of us in
marketing. For too long, the attitude of our
scientists has been: let them come to us”.
2. Are there problems in how innovations
are introduced?
Wh e r e a r e w e now? I I .
22 | 2004
Control bridge as seen from
the inside of a moving truck.
Source: Toll Collect
Examples of implementation problems for innovations in Germany
satellite-supported Toll Collect system: technical problems and delays in implementation +++ MP3 standard for compressing
digital audio signals: developed at the University of Erlangen-Nuremberg and the Fraunhofer Institute for Integrated Circuits,
brought to market by Thomson Multimedia +++ Transrapid: developed in Germany, 17 year test section in Emsland, first used
in Shanghai +++ Mercedes A-class: 1997 prototype flips over during “moose test” +++ Tilting train series from the Daimler rail
subsidiary, Adtranz: technical problems, had to be taken out of service +++ Combino trams from Siemens: costly stability
problems +++ Kalkar fast breeder nuclear reactor: failed due to mass protests and political dissent +++ Cargolifter: subsidies
lost for huge transport airship +++Flat-screens: technical basis created in Germany, manufacturing in Asia
2004 | 23
An important indicator for the
short-term feasibility of technological
knowledge are the patents relevant for
world markets – with Germany at the top.
Even though the economic value of patents
and hence, their ability to act as a catalyst for
new products is difficult to ascertain, many large
companies are pursuing special patenting strategies,
the goal of which is not necessarily to use
these patents themselves. However, world market
patents, i.e. those that are registered with the
European, Japanese and U.S. patent offices, can
be expected to be an indication of where the
innovative markets of the future will be. With
a share of 13.5 percent, Germany is far behind
the U.S. (40.7 percent) and Japan (26.8 percent)
but in terms of how dynamic these markets are,
we reached the top again during the second
half of the ’90s. For two years now, the earnings
from German exports of patents, inventions
and processes have exceeded the expenditures
for import of the same. Like Japan, Germany
has been able to reinforce its position primarily
in application-oriented, sophisticated technologies
(such as automotive manufacturing,
machine construction, electro-technology,
chemicals). In contrast, we are weaker in the
advanced technologies (particularly in electronics,
IT, pharmaceuticals, medical technology).
Four German companies, Siemens, Bosch,
Infineon and BASF, are among the 12 best companies
in the world for international patent
registrations.
Source:
ifo Innovation test
Dr. Maximilian Fleischer,
one of twelve winners of the
Siemens inventor prizes 2003,
has already registered
118 inventions for patents.
Numerous key applications in
sensor technology are based
on his ideas as well as a number
of international patents.
Source: Siemens AG
The involvement of companies
in innovative activities continues
to be high.
The Center for European Economic
Research conducts a survey every year of
companies in the manufacturing sector and
service industry about whether they have introduced
at least one innovation over the last
three years. These innovations are both product
innovations (new or markedly better products
or services) as well as process innovations
(new or markedly better manufacturing and
processing methods).
Structure of innovation spending
in the manufacturing sector 2002
Research and development 22.6 %
Process innovation 21.2 %
Construction 20.6 %
Production preparation 15.3 %
Product design 12.4 %
Sales preparation 4.4 %
Licensing and patents 3.5 %
In 2002 the percentage of companies with
innovations was 58 percent. Compared to the
boom at the end of the 1990s, this figure has
fallen drastically. In 1998, it was 66 percent.
Overall, roughly 35,000 companies are innovators
in this sector. Most of them, around 31,000
companies, introduced product innovations
(of which 17,000 were new market innovations).
Around 19,000 companies either had more
innovations in process or solely process innovations.
The percentage of revenues spent on
innovations has never again reached the high
level it was at in 1996. Innovation activities a
re shifting more and more to non-investive
activities, i.e. personnel and material expenditures.
2. Are there problems in how innovations are introduced?
The number of companies with considerable
cost reductions as a result of process
innovations has fallen over the last ten years.
In contrast, the number of innovators with
new products (market innovation) remained
relatively stable. The shows that companies
continue to prioritize occupying new markets.
The revenues from innovations also increased
significantly during the 1990s particularly
in he technology-intensive industries.
In the manufacturing sector, around
8 percent of revenues stem from original market
innovations. In the mid 1990s, this percentage
fluctuated as well as between four and five
percent.
In the service sector, almost seven percent
of revenues are earned with market innovations.
The report on technological performance says:
“From an international perspective, this figure
is high and, from an overall economic point of
view, particularly significant; the percentage of
imitations among product innovations is on the
decline.” According to the most recent EU innovation
indicator, Germany (ahead of Belgium
and the Netherlands) had, at fifty-five percent,
the highest percentage of innovative small and
medium-sized companies in 2000; we are in
first place for service companies.
Precisely in new technology fields
and in the early phases of technological
development, it is often young
companies that are the engines of
technical and economic change.
At the end of the 1990s, Germany gained
ground in this area among its international
competition. Since then, the number of business
start-ups has fallen again significantly in some
cases. This affected the information and communications
sector in particular where around
30 percent fewer companies were formed in
2002 than during the boom in 2000. This trend
is not just the result of the economic stagnation
we have been experiencing since 2000, it is also
due to the deterioration of the financing situation.
It is precisely business start-ups in advanced
technologies and those for specific technologyoriented
services (such as software) that are
affected by the slump in the venture capital
market.
Wh e r e a r e w e now? I I .
24 | 2004
Source: Centre for European
Economic Research
Research-intensive industries
Technology and knowledge-intensive
services
New business start-ups
in research and knowledge-intensive economic branches
3,050
31,300
3,050
32,500
2,950
35,700
2,800
37,200
2,600
32,500
2,250
29,800
1997 1998 1999 2000 2001 2002
2004 | 25
In light of the headlines about the Toll
Collect project or the Transrapid,
would you say that it is difficult to
introduce innovations to the German
economy?
I’m not in a position to say anything about the first
case, but in the case of the Transrapid, there were
various factors preventing the introduction of this
innovative transport medium in Germany. As is
generally known, it is always much easier for innovations
to find acceptance on the global market
when the domestic market is strong. This is not
just an economic issue, the overall conditions in
Germany for innovation, primarily the political
and the societal, play a large role here. There is
without a doubt a need for improvement. These
improvements include, on the one hand, making
working conditions more flexible and eliminating
bureaucratic processes that make it difficult to
form new companies and impose an often heavy
burden on small and medium-size companies in
particular. These improvements also include the
way new technologies are accepted by our society.
A differentiated view must be taken here: while
people in Germany become enamored with day-today
objects like cars or cell phones, they are much
more critical about large infrastructure projects
when it comes to technology. However, we are dependent on these types of
innovations, actually one of our country’s strengths, to achieve more growth
in Germany and enhance how or international competitiveness.
Do your research teams both in and out of Germany work
together or do they pursue different questions?
The increasing globalization and internationalization of research and
development absolutely require our research centers around the world to
interact together effectively. How their cooperation is organized in individual
cases depends very often on the subject matter. In our research centers, we
often work with subjects that make it necessary to bundle many different
skills to achieve innovative solutions with great customer benefit. In this case,
we have to promote development together in a way that spans technology
and regions. Other projects, on the other hand, are, for example, determined
by regional customer requirements. In this case, it is necessary to have a local
presence of experts who have the right knowledge about the market and
customer behavior.
Who is more important today for innovations: the internal
development yardstick or the quality of “talent seekers” for
external researchers?
A clear answer: both are equally important. Skills and experience are
essentially required that cannot be acquired from one day to the next but
rather have to be built up gradually with the technological challenges.
Basic innovations, on the other hand, rely on “disruptive” approaches. Here,
we rely both on the creativity of individual employees as well as on our
international cooperation network with universities.
Claus Weyrich
Siemens AG,
Corporate Technology
After World War II, entertainment
electronics was one of the foundations
for and, at the same time, a reflection
of the German economic miracle.
It symbolized, as only few sectors have been
able to do, the determination to create new companies
and the market opportunities that a new
economic start offers. In the spirit of the times,
Gerhard Kubetschek set up a small company
called “Kuba” in an abandoned army barracks in
Wolfenbüttel without “knowing a thing about
radios”. By 1965, this company was Germany’s
third-largest television manufacturer. In 1951,
the backyard workshop of a Fürth radio dealer,
Max Grundig, became the largest radio manufacturing
plant in Europe.
In 1952, there were 10 million people who
owned radios in Germany and the first 4,000
televisions were sold. During the mid 1950s, 2.8
million radios and 147,000 televisions were produced
annually. In 1960, 4.1 million radios and
2.3 million televisions were produced. For a long
time, today’s “brown goods” were combination
furniture/television sets or radios designed in
the “Germersheim baroque” style with wooden
cases, gold borders and fabric interwoven with
gold thread. Questions of design and aesthetics
only played a role later and became a decisive
competitive factor for companies like Braun.
Many innovations were also developed by German
companies during this time: Grundig introduced
its first portable radio to the market in
1949, Blaupunkt the first high-frequency car
radio in 1952, Loewe-Opta one of the first VCRs
in 1961 and Telefunken the PAL color TV system
in 1967.
At the beginning of the 1960s, almost
all units on the market were still being produced
domestically with the exception of the cheaper
transistor radios imported from Japan. In the
1970s, Grundig became the undisputed market
leader in Germany; in 1979 it employed approximately
40,000 people. In 1978, the next largest
supplier of color televisions (market share:
around 25 percent) and stereo systems (market
share: 20 percent) was only half as large.
Since the 1960s, the significance of
Germany as a production location for
entertainment electronics has waned.
On the one hand, German manufacturer’s
increasingly began to take advantage of the
foreign cost benefits for production:
Grundig in Northern Ireland in 1960, later in
Portugal, Italy and France, Telefunken in Brazil
and Mexico, etc., Standard Elektrik Lorenz in
Malaysia and other countries. Grundig’s strategy
from 1978 has lost none of its timeliness today:
3. Have we bid farewell
to entertainment electronics?
Wh e r e a r e w e now? I I .
26 | 2004
1963
Phillips introduces its
“Pocket Recorder 3300”
at the international consumer
electronics trade show in
Berlin
Source: Dresdner Bank
Photo: Philips
1961:
The “TV Boy” is the
first portable television.
Special features:
47 cm cathode ray tube,
remote control, buttons for
switching between VHF / UHF.
Source: Dresdner Bank
Photo: Grundig
2004 | 27
“In our company, a wage minute costs 40 pfennigs
here in Fürth, in our plant in Vienna, it costs
33 pfennigs, in England, 28 pfennigs, in Portugal,
18 pfennigs and in Taiwan, 6 pfennigs. We can no
longer get around the fact that many European
companies are no longer in the position to produce
in their own countries for cost reasons.”
On the other hand, since the 1960s, Japanese
companies have increased market penetration
for entertainment electronics. They produce
not only at considerably lower labor costs and
in higher numbers per unit, but they produce
more and more innovative and sophisticated
products. As early as 1962, Matsushita opened
a branch office in Germany; Sharp, Hitachi,
Kenwood, Toshiba, Sony, JVC, Aiwa and others
followed – in the 1980s came South Korean companies
like Goldstar and Samsung and in 2002,
the Chinese company, TCL. Most German manufacturers,
being medium-size companies,
were not able to keep up with the labor costs of
their new competitors, their aggressive market
strategies and the rapid technical progress for
products and production. New developments
in Germany were often determined by engineers
instead of by corporate strategies. In addition,
there were problems raising capital, in management
and in company succession. In the end,
the German companies, with their well-known
brand names, represented attractive takeover
opportunities and lucrative “market openers”
for foreign competitors.
In 1966, the result of businesses closures
and takeovers was that, of the 190 German
radio and radio furniture factories that
had been hoping for a boom following the
currency reform, there were only 16 left –
and declining steadily.
After selling Kuba to General Electric in
1966, Gerhard Kubetschek said, “I didn’t sell
because I had to. But in the near future, I want to
have something from my life and no longer bear
the sole responsibility as a single shareholder from
dawn until dusk.”
Max Grundig still tried to beat the Japanese
at their own game by offering innovative
products at low prices. But this strategy was
not sustainable from a high-wage country,
especially because there was an absence of
successes in the innovation competition and,
for example, its VCRs standard “Video 2000”
could not hold out against the VHS system from
JVC. Even the transfer of the corporate responsibility
to Phillips in 1984 wasn’t enough to
turn the company around: Grundig, prototype
of a “economic miracle” company, had to file
for bankruptcy in 2003.
Takeovers of German electronic entertainment companies:
Schaub-Lorenz: became Standard Elektrik Lorenz in 1958 +++ Graetz: taken over by Standard Elektrik Lorenz in 1961 +++ Telefunken:
became AEG-Telefunken in 1966, taken over by Thomson-Brandt in 1978 +++ Kuba-Imperial: taken over by General
Electric in 1966, by AEG-Telefunken in 1969, liquidation in 1972 +++ Saba: taken over by General Telephone & Electronics 1968,
by Thomson-Brandt in 1980 +++ Wega: taken over by Sony in 1975 +++ Nordmende: taken over by Thomson-Brandt in 1977
+++ Körting: taken over by Gorenje 1978, liquidation in 1983 +++ Braun: taken over by Gillette in 1967, hi-fi division merged
with Analog & Digital Systems (ADS)in 1981 to become Braun Electronic, “last edition” in 1990 +++ Dual: taken over by Thomson-
Brandt 1982, by Schneider 1988, Karstadt acquires rights to the name in 1995 +++ Standard Elektrik Lorenz: taken over by
Alcatel (Alcatel SEL) in 1987, by Nokia in 1988, Markt Graetz sold to RTF 1989, TV production facilities sold to Semi-Tech (Hong
Kong) in 1996 +++ Grundig: Philips assumes corporate responsibility in 1984, takeover by a consortium made up of banks,
managers and Kathrein in 1997, majority held by Kathrein in 2000, bankruptcy in 2003, takeover off home electronics division
(without its own production capabilities) by the British-Turkish consortium, Alba/Beko +++ Schneider: taken over by the
Chinese electronics company, TCL in 2002
Grundig introduces the
first home video recorder to
the market in 1969.
Source: Dresdner Bank
Photo: Philips
Today, the production of
entertainment electronics is clearly
dominated by Asian companies.
The world leaders are Sony and Matsushita
with more than 16 billion EUR in revenues. In
the meantime, the Japanese have relinquished
mass production to the Koreans and the Chinese
and have turned from a technological imitator
to an innovator.
Example of Sony:
1979 first Walkman,
1982 first CD player
1984 first Discman
1994 first Play Station
1995 first digital camcorder
Korean companies like Samsung and LG
Electronics rose long ago to the middle of the
playing field among the global players. This
is also where the two European suppliers with
the strongest revenues are found: Philips and
Thomson with under 10 billion EUR in revenues.
The three remaining German manufacturers
are “niche suppliers”: the family-run
company Metz and the Loewe Company (2003
revenues 290 million EUR following revenues
of 376 million EUR in 2002) primarily serve
the segment of sophisticated products, while
Technisat mainly offers satellite products but
also, for example, designer TVs (Colani). Part of
the reason Loewe experienced a slump in sales
was that the company put its faith in the strength
of its sophisticated CRT televisions far too long
and balked at taking the risk of broadly entering
the market for flat-screen televisions. In June of
1994, it was announced that Sharp, who had
already been a corporation partner in LCD TVs
since 2000, would take over 10 percent of Loewe’s
shares.
Of course, the German market for entertainment
electronics also includes the German
sub-sidiaries of foreign suppliers along with
their production, research and sales sites such
as Philips Germany, Sony Germany, Thomson-
Brandt Germany and Schneider Electronics.
The number of employees in the sector
has further fallen over the last few years, from
roughly 45,000 in 1995 to around 30,000 in 2003,
i.e. less than the total number of employees at
Grundig in 1979 alone. The sales volume in 2003
was around 10 billion EUR.
There is neither a German manufacturer
nor a German brand among the top 10 in the TV
business in Germany.
Wh e r e a r e w e now? I I .
28 | 2004
In 1979 the first mini cassette
recorder for continuous
play is introduced by Sony,
the “Walkman”
Source: Dresdner Bank
Photo: Philips
Source: GfK/gfu, iSuppli
3. Have we bid farewell to entertainment electronics?
The strongest growth markets in Germany
currently and the big players worldwide
Market leader
Middle segment
German niche
market suppliers
Sony, Matsushita
(Panasonic/JVC)
Toshiba, Hitachi,
Philips, Thomson,
Samsung, Sanyo,
Sharp, Fujitsu,
LG Electronics
Loewe, Metz,
Technisat
Revenues worldwide: 170 billion €
Markets in Germany
LCD TV
DVD recorder/Video
Port. MP3 player
Digital cameras
180 mio. € + 280 %
250 mio. € + 275 %
61 mio. € + 190 %
1,4 bn. € + 52 %
2004 | 29
Flat-screens are currently the
segment in entertainment electronics
showing the strongest growth.
From 2002 to 2003, sales rose by approximately
200 percent. Even though still
three-quarters of all TVs sold are CRT televisions,
Japanese companies have already announced
that they will no longer sell cathode
ray televisions in Europe starting in 2005.
In Germany, TVs with flat-screens are
experiencing high sales growth while sales of
traditional CRT televisions continue to shrink.
Flat-screens offer a range of environmental
benefits over traditional cathode rays: the
use less power and they produce less waste in
addition to their aesthetic value. They are almost
exclusively manufactured in the far east.
The largest manufacturers are Sharp,
LG.Philips LCD (a joint venture between Philips
and the South Korean LG Electronics), Samsung,
TM Display (Toshiba/Matsushita) and Sony.
They are all active on the European consumer
markets with their own brand. For the local
television manufacturers that do not have their
own manufacturing capacities, this means it will
become increasingly difficult to position themselves
in the price war with their competitors.
Flat-Screen
Source: Metz
Source: DisplaySearch, USA
World market for TVs (in billions of US$ )
global revenues for cathode ray tubes (CRTs)
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
70
60
50
40
30
20
10
global revenues for flat-screens
In Germany flat-screens are produced,
for example, for display systems in public
transport systems and for automotive
applications but not for televisions.
In this area, numerous German companies
have a leading international position in the
development and production of display components,
for example in the required coating,
semi-conductor, clean room, automation
and measuring techniques. Merck, a company
located in Darmstadt, is the world leader in
the production of liquid crystals, with 60 percent
market share. In 2003, it was awarded the
German Future Prize 2003 for its project “Liquid
Crystals for Television Screens”. This project
focused on adjusting mixtures made up of 20 to
30 liquid-crystal substances so that they meet
the requirements for display production. The
manufacturing partner in this project was the
Japanese company Sharp. Says Werner Becker,
liquid crystal expert at Merck, about why flatscreens
are not produced in Germany: “one of
the primary reasons is the lack of willingness on
the part of companies to invest and take risks that
must be undertaken for this type of production.
Moreover, the post-processing industry has also
overwhelmingly relocated to Asia in the meantime.
Here, Europe is absolutely an important market
for the final products. It is possible that OLEDs
represent a new opportunity for Germany.”
OLEDs (Organic Light Emitting Diodes), selfluminous
screens, use far less power than LCD
displays, load images more quickly and offer
wider viewing angles. Their colors are more
brilliant, the contrast higher and less hazardous
waste is produced during production – and, they
can be rolled up and put in a pocket. However,
their capabilities are still limited and they can
only currently be used in smaller displays. It is
not anticipated that they will be integrated into
televisions for 10 years. Research and development
will be driven forward by financially strong
companies such as Kodak, Sanyo, Sony, Samsung,
Philips and DuPont.
In Germany, there is a center for OLED
technology in Dresden which is a consortium
project that includes the Institute for Applied
Films at the Dresden Technical University,
the Fraunhofer Institute for Photonics and
Microsystems and the industrial partner,
Thomson Brandt. Hubert Karl Lakner, head
of the Fraunhofer Institute, is convinced,
“The future of the bright world of screens will be
forged in Dresden.”
According to estimates of market
researchers, the key patents for OLED,
however, are held by iSuppli in Japan, Taiwan
and Korea.
Wh e r e a r e w e now? I I .
30 | 2004
Dr. Kazuaki Tarumi,
Dr. Melanie Klasen-Memmer
and Dr. Matthias Bremer
(from left to right) from the
Darmstadt pharmaceutical
and chemical company,
Merck KGaA, have developed
liquid crystals with an
extremely fast response time.
Source: Merck
The figure shows how the
various layers of an LCD are
structured using an individual
image section. The liquid
crystal combination forms a
thin layer between two glass
plates. Polarization filters are
attached to the outer side of
the glass plates, color filters
are located on the inside as
well as transparent electrode
and orientation layers.
Source: Merck
3. Have we bid farewell to entertainment electronics?
2004 | 31
Why couldn’t Philips rescue
Grundig in the 1990s?
Philips put Grundig back on its feet in the 1990s,
giving it the financial resources it needed. But
Grundig, as an independent company, was ultimately
unsuccessful in adjusting to the drastically
changed global market conditions as were most
other European companies in the entertainment
electronics industry. Products and locations that
were no longer competitive were defended for far
too long in contrast to their Asian competitors who
recorded more than 2,300 working hours per year.
How do you explain the across-theboard
decline of German entertainment
electronics companies?
The mass production of entertainment electronics
products and household appliances that used to be
typical for Germany have shifted to other locations
across the globe where they can be produced at
the same high level of quality but much more costeffectively
and flexibly. The supply chain for entertainment
electronics has changed drastically
over the last 10 years. Today, this business is driven
by key components such as semi-conductors and
LCDs, but also patents and licenses, marketing and
sales. Companies no longer have to do everything
themselves. As a result, only true global players with a strong brand presence
in this industry were able to survive in the end and not the many mediumsize
and small manufacturers that believed for far too long that tradition or
niche markets alone would be enough to escape the global competition of
production sites. Flat-screen televisions, unlike the CRT televisions that have
been around for decades, can only be sold from a single location worldwide.
How was your German subsidiary able to escape this
downwards trend
Because we said goodbye to mass production but have still strongly
invested in our German organization: in the last 10 years alone, we have
invested more than 2 billion EUR. However, we did not invest in preserving
old manufacturing sites but in knowledge-based, high-tech activities, in
the technologies of tomorrow. Today, already 20 percent of our roughly
11,000 employees in Germany work in R&D.
How do you see the future of Germany as a research and
development location?
Germany has scientists, engineers and marketeers with excellent
education and training that is justifiably envied by other industrial nations.
Consequently, Germany has a chance in the future to be an industrial
location but more has to be done to create a positive climate for innovation.
Germany must successfully dispel distrust and suspicion of innovations,
accept that research and development are a foundation for business growth
and make the interdisciplinary cooperation between universities and
companies more effective. Ultimately, investment in training and education
are just as indispensable as flexible working models, including the willingness
to work more hours again without a rise in pay.
Gerard Kleisterlee
Präsident Royal Philips Electronics
The roots of the German
pharmaceutical industry stretch
far back into the 19th century
They can be traced back, on the one hand, to
the transition from the apothecary sciences
already strong back then to the production of
medicine in factories. Merck, for example,
emerged in 1927 from the Engel pharmacy
founded in Darmstadt in 1654 and Schering
from the Grün pharmacy formed in Berlin in
1851. On the other hand, the rapidly expanding
chemical industry at that time discovered
pharmaceuticals as a new business segment.
Hoechst, for example, was founded in
1863 to manufacture coal tar dyes, and it began
producing medicine in 1883. Bayer, which
was also founded to manufacture synthetic dyes
in 1863, created a pharmaceutical department
in 1888.
These developments established the
reputation of the German pharmaceutical
industry as the “pharmacist of the world”.
German pharmaceutical manufacturers lost
their excellent position as a result of the two
world wars. But they continue to play an important
role as producers and innovators.
Germany’s exports in 1970, for example, were
still 20 percent of world trade. But already at
this time, an OECD study prophesized:
“As Europe continues to fragment, many
companies will restrict their activities to
their domestic market; consequently, they can
only pursue basic research already begun by
American companies to a limited extent,
research that is probably indispensable for
continued progress.”
4. What has become of
the “Pharmacist of the World”
Wh e r e a r e w e now? I I .
32 | 2004
“Grün Pharmacy”
Source: Schering AG
Mergers in the pharmaceutical industry
Ciba (Switzerland)/Geigy(Switzerland) merged to become Ciba-Geigy in 1970, merged with Sandoz (Switzerland) to become
Novartis (Switzerland) in 1996 +++ merger of Zeneca (GB)/Astra (Sweden) in 1998/99 +++ takeover of Warner-Lambert by
Pfizer (USA) in 2000 +++ merger of Glaxo/Wellcome too become Glaxo Wellcome (GB) 1995, merged with Smithkline
Beecham to become Glaxo Smithkline (GB) in 2000 +++ takeover of Genentech (USA) 1990, takeover of Boehringer Mannheim
(D) by Roche (Switzerland) in 1997, merger between Nippon Roche and Chugai (Japan) in 2001 +++ takeover of Knoll
(Switzerland) in 1975, takeover of Boots Pharmaceuticals (GB) by BASF (D)in 1995, takeover of the BASF pharmaceuticals
division by Abbott (USA) in 2001 +++ merger of Bristol-Myers/Squibb to become Bristol-Myers Squibb (USA) in 1989, takeover
of DuPont Pharma (USA)in 2001 +++ merger of Pharmacia (Sweden)/ Upjohn(USA) to become Pharmacia & Upjohnin 1994,
merged with Monsanto(USA) to become Pharmacia, takeover by Pfizer (USA) in 2003 +++ takeover by Roussell Uclaf (F) 1972,
of MMD (Marion Merrell Dow/USA in 1999; emerged from Dow and Marion Labs) by Hoechst (D) in 1989, Hoechst pharmaceutical
division merged with Rhône-Poulenc (F) to become Aventis (F/D)in 1999, takeover by Sanofi/Synthélabo (Sansyn, F) to
become Sanofi-Aventis (F) in 2004
2004 | 33
In the booming market for
medicine, the U.S. has considerably
outflanked Germany.
Of the 130 research sites of the 30 leading
pharmaceutical companies, only ten are in
Ger-many, 52 in the U.S. and 16 in Great Britain.
Pfizer, for example, relocated to its last remaining
German development department from
Freiburg to Great Britain in 2003. Research
expenditures in Germany have been declining
and today are 4 billion EUR. In contrast, around
24 billion U.S. dollars is spent annually for
pharmaceutical research in the U.S.. From 1999
to 2002 global pharmaceutical revenues rose
by around 25 percent to more than 400 billion
U.S. dollars; 45 percent of these revenues are
earned in the U.S.
The U.S. market grew twice as fast as any
other market; more pills are swallowed
and more money spent on health care than
anywhere else. Eight of the 13 largest pharmaceutical
companies are headquartered in the
U.S. Since 1991, the number of employees in
the pharmaceutical sector has increased by
almost 10 percent. In Germany, the number of
people working in the pharmaceutical industry
fell by more than 15 percent to under 115,000
between 1992 and 2002. In 2002, the three traditional
German companies, Boehringer Ingelheim,
Bayer and Schering, held the last three
places among the 20 largest pharmaceutical
companies worldwide (Merck followed in 25th
place, Altana in 45th place and Schwarz Pharma
in 60th). Taken together, their market share
was 4.8 percent; which would put them in fourth
place behind Pfizer (U.S.), Glaxo SmithKline (GB)
and Merck & Co. (U.S.). In 1969, the market
share of German companies was still as high
as 12 percent. Behind these shifts are not only
various market successes but also merger activities
designed primarily to cut costs and create
synergies in research, production and sales
to ultimately increase company value. German
companies were by all means sought after
takeover candidates: the family-run company,
Boehringer Mannheim was bought up in 1997
by Roche, the pharmaceutical division of BASF
by Abbott in 2001, Hoechst became Aventis in
1999, only to become Sanofi-Aventis in 2004.
The 10 largest companies worldwide
had a revenue share of around 25 percent
20 years ago, but today, this figure is more
than 45 percent.
1 now merged together ;
2 now merged with
Sanofi-Synthélabo
Source:
Fraunhofer-ISI 2004
The largest pharmaceutical companies worldwide (as of 2002)
Company Revenues (bn. of US-$) |Percentage of world market
Source:
www.uni-frankfurt.de
1 Pfizer USA 1 29.5 7.4 %
2 Glaxo SmithKline UK 27.9 7.0 %
3 Merck & Co USA 20.0 5.0 %
4 Johnson & Johnson USA 18.5 4.6 %
5 Astra-Zeneca Sweden/UK 18.1 4.5 %
6 Novartis Switzerland 16.6 4.1 %
7 Aventis France/Germany 2 14.3 3.6 %
8 Bristol-Myers-Squibb USA 14.2 3.5 %
9 Roche Switzerland 12.5 3.1 %
10 Pharmacia USA 1 12.2 3.0 %
18 Boehringer Ingelheim Germany 5.6 1.4 %
19 Bayer Germany 5.5 1.4 %
20 Schering Germany 3.7 0.9 %
25 Merck Germany 2.4 0.6 %
Total 401.0 100.0 %
The German pharmaceutical
market is not unattractive
but German industry has
competitive weaknesses.
Thanks to its financially strong health-care
system, Germany is by far the largest market
in Europe and the third-largest in the world,
even though development over the last few
years has declined. At the same time, Germany
is an attractive location for the pharmaceutical
industry with its good infrastructure, high level
of education and competent research centers.
The reason that the these advantages have lost
significance over the last few years is partially
due to the fact that research, development and
production have also been relocated to the primary
sales markets in this global environment.
It also to some extent has to do, however, with
management level failures in the chemical and
pharmaceutical industries. Research budgets
were only hesitatingly concentrated on a
small number of indications in line with the
model of U.S. competitors. Instead of (if necessary
in cooperation with others) developing
high-earning blockbusters (medications with
annual revenues of more than one billion EUR)
and then pro-tecting them with patents, German
companies tended to rely on pushing OLED
best-sellers into the market or offering analog
compounds or product copies (generic drugs)
for medicines no longer in-patent.
The medication with the strongest
revenues in the world, the cholesterol-lowering
medication Lipitor from Pfizer, has a greater
share of the global market for all medications
with its two percent than the entire company
Boehringer Ingelheim has with 1.4 percent.
Blockbusters are by far the most profitable
products in the industry. In 1991 their global
revenue share was six percent and ten years later,
45 percent. Instead of pursuing the growth
markets of the future, Germany focused more
on making good copies. New suppliers such
as Ratiopharm (founded in 1974), Stada (founded
in 1895 as a pharmacist cooperative, in 1975
they entered the new generic market) and
Hexal (since 1986) profited from the business of
imitation products.
Wh e r e a r e w e now? I I .
34 | 2004
Genetically-engineered
production of insulin
(quality control)
Source: Aventis Pharma
4. What has become of the “Pharmacist of the World”?
Source:
IMS Health, VFA
Changes in the largest
pharmaceutical markets
Indices, 1998 = 100
170
160
150
140
130
120
110
100
Great Britain
USA
Spain
Italy
Germany
France
Japan
1999 2000 2001 2002 1998
2004 | 35
While major international companies
usually invest more than 25 percent of their
revenues in research, innovative German companies
usually invest less than 20 percent. The
advertising budgets of many companies are
now much higher than the research budgets for
innovative medicines. Looming consequence:
once existing patents have expired, the product
pipeline will dry up and new products will have
to be bought via licenses.
Even though there is a closely-knit network
of cooperation in research, production and
sales of medicines between domestic and foreign
companies and researchers in the meantime,
for Dieter Heuskel of the Boston Consulting
Group (BCG), it's not enough: “If a regional concentration
could be created in Germany, it would
be by all means possible that a player could emerge
who could be a presence on the world stage.”
His vision of a “German Pharma AG” is,
however, not shared by each person potentially
affected.
Gel-electrophorese
of proteins
Source: Schering AG
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
50
40
30
20
10
45
35
25
15
5
New active ingredients worldwide by the country where they were introduced to market
(Number)
USA
Source:
CMR International
Europe Japan Other Total
4. What has become of the “Pharmacist of the World”?
The pharmaceutical industry laments
political decisions particularly those
connected with health care reforms.
From the pharmaceutical industry’s
point of view, Germany has become
increasingly unattractive as a business location
as a result of various measures undertaken to
curb costs in the health care system. A reference
price system and mandatory discounts are the
primary targets of criticism, particularly those
for in-patent medicines, the reorganization of
the “aut-idem-substitution” (which regulates
more affordable drugs that have the same effect)
as well as the exclusion of non-prescription
medications from reimbursement by the health
insurance companies. As a result of these factors,
the industry anticipates sinking revenues,
profits and numbers of employees and has
hinted that this will have negative effects on
their continued commitment to Germany.
These types of reactions, in the political realm
too, are legitimate but are they also justified?
Since the beginning of 2004, the health
insurance companies have been able to set fixed
prices even for in-patent medications. The European
Court of Justice decided in March of 2004
that this ruling does not infringe on EU competition
law. According to this ruling, statutory
health insurance providers assume costs for
regulated medications only up to the preset fixed
amount. This always applies to a group of medications
with the same or similar active ingredients
with a similar effect. Fixed prices are not,
however, prices set by the government. It is up
to the companies to demand higher prices for a
medication. The difference between this amount
and the amount of reimbursement must than
be paid by the patients or their private health
insurance. Innovative drugs that offer a true
therapeutic improvement, for example, therapies
that make it possible to cure illnesses that
had up to now been incurable for the first time
or those that have fewer side effects than other
compounds, are not included in this price control
regulation. This creates a further incentive
to develop costly innovative compounds. It is still
possible to demand high prices for medications
with an additional medical benefit even in the
reimbursement system of the statutory health
insurance providers. It is not, however, justifiable
that the collective group of those with statutory
health insurance bears the costs of more expensive
drugs if there are cheaper products with a
similar quality available.
Analog compounds or “me-too compounds”
that contain known active ingredients but
have been slightly changed in their composition
and therefore hold new patents, generally give
patients few additional benefits. They would
give manufacturers considerably higher profits
than comparable generic compounds if prices
could be set freely without a specific “innovation
return” being necessary. State intervention
appears justified then in this case than for other
day-to-day products, such as television or cars,
for which the consumer has a pretty good idea
of which additional costs there are for which
product improvements. For medications,
the patient does not have the ability to judge.
And the doctors and pharmacists, who help
shape opinion, are often overwhelmed by the
huge number of compounds and revert to
the rationale of the pharmaceutical companies.
Wh e r e a r e w e now? I I .
36 | 2004
Insulin vials
Source: Aventis Pharma
2004 | 37
Companies pursuing research must
aim to accelerate the pace at which
new compounds are developed through
to market maturity and to make these
developments more strategic.
The goal is to reduce the development time
of around 12 years and the development costs of
around 800 million EUR per drug in the future
and to increase the probability of success from
today's figure of 5 percent to 10 percent. To
achieve this goal, research should focus on
indication areas where there is a higher level of
specialized knowledge. In addition, research
should be more interdisciplinary, particularly in
the area of biotechnology. The approval process
must become more efficiently through closer
communication between regulatory agency and
applicant and through shorter processing times.
There is a further need for improvement in
clinical tests, in cooperation between pharmaceutical
manufacturers and basic research and
in the competition in the health care system.
Do the increasing concentration on
the pharmaceutical market and
the formation of larger and larger
pharmaceutical companies also
promote medical progress?
The direct effects of these trends are negative in
the sense that some of the most creative scientists
are being pushed out of companies, partially
because of the streamlining processes themselves
and partially because, and this is more important,
they are no longer motivated to continue their
involvement under the new conditions. One
positive side effect, however, will be that these
exact scientists, however, will form smaller but
very creative biotech companies.
Why can Germany no longer be called
the “Pharmacist of the World”?
I see a negative trend not only in Germany, but
in a number of European countries. I think this
is primarily a result of the centralization that
naturally arises from mergers and which has led
to a concentration (of company management) in
the eastern states of the U.S.
If there were a “Pharmaceutical Oscar”,
which company would you award it to
and why?
The new scenario which, on the one hand, assumes that big pharmaceutical
companies will continuously grow while creativity weakens internally
and, on the other hand, that (more) small, creative biotech companies will
be formed, should logically lead to large pharmaceutical companies buying
more licenses. One company that has appeared to rely on this strategy,
perhaps more than any of its competitors and apparently with a high degree
of success, is Bristol-Myers Squibb. This is why they would be my candidate
for this type of award.
Professor Arvid Carlsson
University of Göteburg (emer.),
Nobel Prize winner for medicine 2000
The German national economy
will continue to be dominated by its
traditional “old” industries.
The manufacturing sector, with around
29 percent, still has a relatively high percentage
of the gross added value despite the fact that it
has recorded a decline of just under 4 percentage
points since the middle of the 1990s.
Percentage manufacturing contributes to
gross value creation 2001 (as a percentage)
Germany 28.6 %
Great Britain 26.5 %
France 24.8 %
USA 24.5 %
Static effects have also contributed to this
decline as well as the trend towards becoming
a service society. Industrial companies have
often relocated certain services to or in service
companies. Also, many companies with long
histories in industry have reoriented their
activities 180 degrees and now focus almost
totally on services such as tourism (Preussag,
now TUI) or cell phone communications
(Mannesmann, today Vodafone).
At the same time, traditional industries
such as the chemical industry, machine
construction and automotive manufacturing,
that have had excellent positions in the German
industrial landscape, are still today to the pillars
of the German economy. They are growth and
export drivers and provide millions of people
with jobs. Without the innovative power and
competitive strength of these “old” industries,
it would look bad for the current economic
situation and future growth prospects. According
to estimates of Prognos AG for “Germany
2020”, machine construction and automotive
manufacturing will continue to be the strongest
industries for growth in Germany even in
15 years.
Automotive manufacturing is
the traditional export leader of the
German economy.
After World War II, it made a substantial
contribution to the “economic miracle”.
Between 1950 and 1969, automobile production
increased by 15 times in Germany (from 219,000
to 3.3 million). It was only in 1967 that figures
fell far short of the previous year’s production
level (by 19 percent). This was also the year
that Germany replaced by Japan as the second
largest car manufacturer but still remained
the largest exporter.
5. Are we relying too heavily
on “old” industries?
Wh e r e a r e w e now? I I .
38 | 2004
Source:
Federal Statistics Office
The
“Five-millionth celebration”
1961
Photo:
kpa Photo Archives picture
agencies
2004 | 39
Following the period of the 1960s when
Japanese manufacturers had originally turned
toward the American market, German manufacturers
increasingly felt the pressure of the progressive
Japanese car strategy in the 1980s. The
German manufacturers were able to assert their
top position on the global market through new
technological developments, optimization of
production processes, better coordination of
delivery times, intelligent labor organization
as well as through acquisitions and mergers.
At the same time, the global automobile market
underwent further concentration.
In 2003, 5.15 million cars were produced in
Germany, which is 200,000 fewer than during
the record-breaking year of 1998. Exports form
the basis of the German automotive industry.
These exports were able to partially compensate
for the many years of weak domestic demand.
Exports reached a new high of 3.67 million in
2003 despite a simultaneous rise in foreign
production. Once again, Germany is the export
leader in automobiles. In the new EU member
states, the German automotive industry is wellpositioned
with a market share of more than
40 percent.
Growth in volume is also underway in
Asia; competition for China’s future market
in particular, is in high gear. There as well,
German car manufacturers have a market share
of 40 percent. Overall, German car manufacturers
have a global market share of right around
20 percent. Domestic production accounts for
at least half of this share. For a long time now,
German companies have not relied exclusively
on the principle of “made in Germany”, which is
evidenced by the fact that German automotive
manufacturers are spread throughout the entire
world. But according to Jürgen Kluge from
McKinsey: “Developers and manufacturers in
Stuttgart, Munich and Ingolstadt still decide how
a car will be built.”
Source:
German Association
of the Automotive Industry
Domestic production of automobiles by German manufacturers (1957–2003)
Automobile exports (1957–2003)
1960 1965 1970 1975 1980 1985 1990 1995 2000
6 mio.
5 mio.
4 mio.
3 mio.
2 mio.
1 mio.
5. Are we relying too heavily on “old” industries?
Automotive manufacturers and their
suppliers account for around one-third
of all expenditures for research and
development in Germany.
While manufacturers spend between
3,5 and 5 percent of their revenues on research,
suppliers spend between seven and nine percent.
More than 50 percent of innovations
in automotive manufacturing were developed
by suppliers. Whether air conditioners, headlights
or innovative products that further
enhance the active and passive safety of the
vehicles – new products and continued innovations
lie more and more in the hands of the suppliers.
On the one hand, these suppliers partner
with the manufacturers in development and,
on the other, it is exactly these manufacturers
who put more and more pressure on them
when it comes to prices which in turn can have
a negative effect on supplier R&D performance.
According to data from the Fraunhofer
Institute for System Technology and Innovation
Research (ISI), in the year 2000, automobile manufacturers
were still responsible for up to 70 percent
of the development of new generations of
vehicles but in 2010, it will only be 50 percent.
Overall, around three-quarters of an automobile
no longer originate from the automobile manufacturers
themselves but from suppliers, “the
unsung heroes of the automotive industry”. And
this trend is gaining speed, supported by more
and more module-based manufacturing and an
aggressive and more widely diversified model
policy. According to a study conducted by the
Gelsenkirchener Center Automotive Research,
by the year 2010, suppliers will create 80 percent
of value in this industry.
German suppliers are also world leaders;
Bosch, for example, has a global market share of
35 percent for anti-locking brake systems (ABS)
and 50 percent for electronic stability programs
(ESP).
Wh e r e a r e w e now? I I .
40 | 2004
Random sampling of the
latest ABS generation
Photo: Bosch
ABS testing in the Bosch
testing center in Baxberg.
The ABS is tested on a variety
of different road surfaces
so that optimum performance
is always ensured.
Photo: Bosch
Brand expansion of selected car companies
Bayerische Motoren Werke: BMW, Mini, Rolls-Royce +++ DaimlerChrysler: Chrysler, Dodge, Freightliner, Jeep, Plymouth,
Maybach, Mercedes-Benz, Setra, Smart, Sterling Trucks, Western Star Trucks, holds shares in Mitsubishi Motors and Mitsubishi
Fuso +++ Fiat: Alfa Romeo, Ferrari, Fiat, Iveco, Lancia, Maserati +++ Ford: Aston Martin, Ford, Jaguar, Land Rover, Lincoln,
Mazda, Mercury, Volvo +++ General Motors Corporation: Buick, Cadillac, Chevrolet, GMC, Holden, Hummer, Oldsmobile,
Pontiac, Saturn, Opel, Saab, Vauxhall, holds shares in Fiat, cooperation with Isuzu and Suzuki +++ Peugeot SA: Peugeot,
Citroen +++ Renault: Renault, Dacia, Samsung, holds shares in Nissan+++ Toyota: Daihatsu, Hino, Lexus, Toyota +++ Volkswagen:
Audi, Bentley, Bugatti, Lamborghini, Seat, Skoda, VW commercial vehicles, VW private vehicles, holds shares in Scania AB
2004 | 41
The machine and plant construction
sector has been able to maintain its
strong growth by integrating new technologies
such as microelectronics, sensor
technology and optical technology into
traditional products.
According to a study conducted by the
Center for European Economics, around
three-quarters of companies have introduced
at least one innovation to the market over
the last three years (only in every other company
in the entire manufacturing sector).
Most companies in the machine and plant
construction segment are mediumsized.
This sector is made up of approximately 6,000
companies with around 885,000 employees.
This small-scale structure makes it possible for
them to have a high degree of flexibility when
considering customer needs and seeking out
solutions. And it's worth it. 14 percent of German
machine construction companies are market
leaders, just under 60 percent belong to the top
five in their respective segment.
Machine construction in
the EU as a percentage (2001)
Germany 41 %
Italy 17 %
United Kingdom 11 %
France 11 %
Spain 4 %
Netherlands 3 %
Sweden 3 %
Belgium-Luxembourg 2 %
Austria 2 %
Other 6 %
Two-thirds of all machines manufactured end
up abroad. On the promising Chinese market,
German machine manufacturers are the second
most important supplier of investment goods
after Japan; according to a KPMG survey, almost
all German machine construction companies are
involved - more than half as exporters and every
third company as manufacturers.
The German machine construction segment
has an excellent position in the “mother of all
machines”, machine tools. Here, the German
share of the global market is 20 percent and the
ten largest European machine tool manufacturers
are headquartered in Germany. In Baden-
Wurttemberg alone, almost twice as many
machine tools are produced than in the U.S.
The three market leaders in printing machines
are German companies.
Even if the machine and plant construction
segment were to follow the lead of other industries
and take advantage of the production
benefits offered by other countries, manufacturing
would remain heavily concentrated
in the German production sites. For example,
German companies export up to 51 percent of
their finished machines to Eastern Europe but
import up to 74 percent of their parts and components
from there; this means that machines
for the new EU member states increasingly
contain components manufactured there.
Multimode fiber plug with
16 multimode fibers for use in
optical data transmission
Source:
Karlsruhe Research Center
Source:
Eurostat, National Statistical
Offices, VDMA
5. Are we relying too heavily on “old” industries?
The chemical industry, as a supplier
of research-intensive input materials
to other industries, gives the German
economy an important stimulus for
innovation.
This industry, with an industry-spanning
R&D transfer of 22 percent, stretches far into
other areas. It earns (without pharmaceuticals)
around 6,5 percent of the revenues of the manufacturing
sector and provides just under 350,000
jobs. German chemical companies are also well
positioned internationally: 16 percent of global
R&D spending occurs in Germany. Around 60
percent of the products manufactured in Germany
are exported and, in return, 50 percent of
chemical consumer goods are imported, giving
the chemical industry a considerable foreign
trade surplus. In terms of revenues, it is in first
place in Europe and in third place worldwide
behind the U.S. and Japan (and just slightly in
front of China).
The list of the ten chemical companies with
the strongest revenues includes three German
companies: BASF, the market leader, Bayer and
Degussa. Since the 1990s, the major chemical
companies have undergone radical changes
and adjusted their business divisions organizationally.
In 1999, for example, Hoechst spun off
its chemical division into the company Celanese
(it was taken over the spring by the U.S. investor
Blackstone); its pharmaceutical division merged
with the French Rhône-Poulenc to become
Aventis which was taken over this year by Sanofi-
Synthélabo. Bayer also decided to outsource
its chemical activities (it is planned that the initial
public offering will take place by the beginning
of next year under the name Lanxess up),
concentrating on the areas of health, nutrition
and sophisticated materials. In 2001, BASF sold
its pharmaceutical division to Abbott and now
markets itself as “The Chemical Company”.
Degussa AG, which is the end result of several
mergers and is now a majority holding of RAG,
is the world market leader in specialty chemicals.
In addition, there are many medium-sized
companies that are often highly specialized
and internationally oriented. Almost 60 percent
of production occurs in the areas of polymers
(plastics, synthetic rubber, synthetic fibers) and
specialty chemicals (for example, dyes/pigments,
photochemicals, adhesives, essential oils).
Production figures in the chemicals industry
(excluding pharmaceuticals) 2002
Fine and specialty chemicals 25.6 %
Polymers 20.8 %
Petrochemicals and derivatives 16.5 %
Anorganic base chemicals 5.0 %
Soaps and detergents 8.8 %
Agrochemicals 3.9 %
In the area of mass-produced chemicals,
the pressure from competition in low-wage
countries in Asia has become so strong that
only large companies with highly efficient
production processes can keep up. As a result,
many medium-size companies concentrate
on their strengths in specialty chemicals whose
products require special expertise or special
technology.
The final wording of the EU regulation
REACH (Registration, Evaluation and Authorization
of Chemicals) will also play an important
role. This regulation requires registrations,
evaluations and authorizations of chemicals
from the industry to eliminate risks for consumers.
This could make particularly the production
of specialty chemicals in smaller quantities
much more expensive.
Wh e r e a r e w e now? I I .
42 | 2004
Source:
Federal Statistics Office, VCI
“Shells” help influence
growth and structure of salt
crystals in a targeted way
during the desalination
process of salt water. This is
done using special polymers
called polycarboxylates.
Source: BASF
2004 | 43
Can the German machine construction
industry assert its position in the
face of increasing international
competition?
The German machine construction industry is
ranked first worldwide in 18 of 48 different product
segments, for example, in wood processing
machines, textile machines, conveyor technology,
scales and pumps. The unique combination of
technological and organizational expertise as well
its numerous technologies including biotechnology
and chemicals, form a strong basis compared
with the international competition. But machine
construction companies are usually medium-sized
companies, making them highly dependent on
conditions that affect Germany as a business location.
While larger companies can shift the focus of
their investments abroad, the majority of small
machine construction companies don’t have many
alternatives. Machine construction is a high-tech
industry with a lot of future potential and offers
good future growth and earnings opportunities
particularly for companies that offer their customers
innovative solutions.
What makes them so competitive?
There will also be considerable potential for
innovation in machine construction in the future, for example, through the
application of microsystems technology, materials technology and optical
electronics. Information technology, in particular, will rapidly speed up the
pace of development in machine construction companies. The potential lies
primarily in creating networks that link the systems and production facilities
both internally at a single company as well as externally. And then tapping
into the opportunities for management and optimization that emerge. This
is supported by an outstanding supplier structure as in hydraulics, bearings,
control and pneumatics. Highly successful machine designers don’t just imitate
their competition nor do they stop at fulfilling their customers’ needs.
They find new ways to markedly improve their customers’ efficiency and
hence, create a solution that their customers are willing to pay a higher
price for. The German machine construction industry can, despite all PISA
defeatists, is supported by upon an extremely skilled employee structure.
Engineers, specialized technicians and management are the guarantees that
innovation will be ongoing and the new solutions developed are creative.
What can the companies from other industries learn from
them?
There is hardly another industry where the managers identify so strongly with
their products and companies as here. This is a business dominated by a sense
of seriousness, endurance and the courage to follow a path unwaveringly all
the way to the end. New paths also require new ways of thinking which means
that imagination and fearlessness during the conceptual phase are just as
important as precision and stamina in implementation. All of these characteristics
are available in abundance in the machine construction industry and
can serve as a signpost for many fast-moving industries that focus on quarterly
results. Even many machine designers have realized that only a small portion
of their profits stem from the sales of new machines. The majority of their
earnings originate from follow-up business in diagnostics, maintenance, part
sales or consulting services. This trend can act as an example for other industries
and segments.
Peter Baumgartner
Corporate Consultant
Mercer Management Consulting
Germany
In sophisticated technologies,
Germany is at the top but
got off to a late start in
new technologies such as
biotechnology.
The German biotechnology industry,
however, experienced considerable dynamic
growth in the second half of the 1990s. It got
a big boost in 1993 mainly from the amendment
to the German Genetic Engineering Act that
was originally extremely restrictive as well as
from the successful start to the BioRegio competition
in 1995. It funded individual locations
with especially favorable overall conditions for
biotechnology research. The industry has also
been bolstered by the considerably augmented
funding for research, improved knowledge
transfer as well as better access to venture capital
for starting new, technologically-oriented
companies. These factors have made it possible
close the gap to the United States for certain
key data. Measured by the number of biotechnology
companies, Germany, with 350 companies,
has the top position in Europe in front
of Great Britain and France. However, according
to Ernst & Young, the number of companies and
employees as well as revenues and R&D expenditures
have fallen for the second year in row.
This means that the consolidation process which
has been anticipated by industry observers for
a long time now is continuing in the form of
company mergers and takeovers, restructuring,
strategic realignment and business closures.
The low number of 33 employees per company
in Germany compared to 99 in the U.S. is an indication
that Germany continues to lack critical
mass in most of its companies. The low maturity
level in the industry is also evident in the small
percentage of companies listed on the stock
market at only three percent (U.S.: 21 percent).
6. How strong are we in
the “new” technologies?
Wh e r e a r e w e now? I I .
44 | 2004
Source: Ernst & Young
“Gray” biotechnology
focuses on, among other
things, wastewater
treatment, exhaust gas
purification, trash recycling
and soil decontamination
using specially selected
microorganisms.
USA
Canada
Germany
UK
France
Australia
Sweden
Israel
Switzerland
China/Hongkong
India
Denmark
TOP 12 biotech countries, 2003
Number of biotech companies
800 1000 1200 1400 200 400 600
2004 | 45
Genetic engineers examine
how plants defy dryness.
Modern plant breeding also
occurs in test tubes: using
“green” genetic engineering,
useful plans can be improved
more quickly and more
systematically than with
conventional breeding
methods.
Source: BASF
“Red” biotechnology:
ceramic medium with
adherend mammal cells
to produce a medicinal
glycoprotein.
Source: Zellwerk GmbH
Source: Ernst & Young
The fact that revenues of the U.S. biotechnology
company, Amgen, from its blockbuster,
Epogen, are considerably higher than revenues
in the entire German biotechnology industry
makes the shortfalls in product development
in Germany apparent. After all, the German
companies still spend more on research than
they earn in revenues. Positive trends observed
by Ernst & Young: the product pipeline was
filled again last year and losses declined. The
first product from a German biotech company
was also approved.
The overwhelming majority
of German biotechnology
companies (92 percent) is active
in the area of medical applications
(“red” biotechnology).
How attractive Germany is as a location
for biotechnology is closely tied to the performance
level of the pharmaceutical industry.
Over the last few years, the pharmaceutical
companies outsourced more and more of their
research facilities to specialized biotechnology
companies and research centers. These activities
are holding their own increasingly well against
their American competitors and now provide
the co-authors for more than 1/5 of publications
from German pharmaceutical companies.
The significance of biotechnology applications
in agriculture and the foodstuff industry
(“green” biotechnology) as well as in industry
and environmental protection (“gray” biotechnology)
remains, at 13 percent in each, low.
Number of companies
of which listed on stock
exchange
Employees
Employees in R&D
Revenues (millions of €)
R&Dspending (millions of €)
Losses before tax
(millions of €)
Developments in German companies whose core business is biotechnology,
1997–2003
173
1
4,013
2,076
289
141
not
available
222
3
5,650
2,957
384
212
not
available
279
10
8,124
4,346
517
326
not
available
332
20
10,673
5,736
786
719
247
365
21
14,408
7,858
1,045
1,228
551
360
12
13,400
7,308
1,014
1,090
661
350
11
11,535
6,120
960
966
549
1997 1998 1999 2000 2001 2002 2003
The poor global growth and the bursting
of the stock market bubble have created many
challenges for the biotechnology companies
around the world over the last few years and
noticeably curbed industry growth. One of the
biggest challenges proved to be the slowdown
in venture capital financing. This was particularly
problematic because this industry is characterized
by long and cost-intensive research and
development phases and companies that often
only have a single product in development and
have experienced many losses up thus far.
According to Ernst & Young, however,
in 2003, only 32 percent of German biotech
companies were financed from venture capital,
meaning that 60 percent were largely free of
external funding. Moreover, last year the
invested venture capital was after all slightly
above the previous year’s level. In July of 2004,
Epigenomics was the first German biotech
company in two years to have an initial public
offering. More public offerings are expected.
Wh e r e a r e w e now? I I .
46 | 2004
Spotting robot on
microtitreplates
Epigenomics
management team
Source:
www.epigenomics.com
6. How strong are we in the “new” technologies?
Examples of biotechnology applications
Red biotechnology: Treatment of genetic defects with therapeutic genes (gene therapy) +++ Transplantation of cells and cell
structures, whole organs or body parts as well (allotransplantations, xenotransplantations) +++ Development and production
of vaccines and substances to detect (diagnostics) and treat (therapeutics) diseases +++ Production of tissue-replacement
materials (tissue engineering)