[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 5.10.2005

SEC(2005) 1216

COMMISSION STAFF WORKING DOCUMENT

Annex to the : Communication from the Commission ”Implementing the Community Lisbon Programme: A policy framework to strengthen EU manufacturing - Towards a more integrated approach for industrial policy” European Industry: A Sectoral Overview {COM(2005) 474 final}

COMMISSION STAFF WORKING DOCUMENT

European Industry: A Sectoral Overview

The Commission Communication "Implementing the Community Lisbon Programme: A Policy Framework to Strengthening the Policy Framework for EU Manufacturing: - towards aA more integrated approach for Industrial Policy" (COM 474) from 5 October 2005 is based on a systematic identification of sectoral opportunities and challenges. It aims at deepening and supplementing the framework for industrial policy by focussing on its practical application to individual sectors. To this end, the Commission has carried out a thorough screening for 27 separate sectors of manufacturing industry and construction over the last months.[1] As indicated in the Communication, this screening has resulted in a systematic analysis of each individual sector in both a quantitative and qualitative fashion.

This Staff Working Paper contains a short description of the findings for these sectors and thereby accompanies and complements the above cited Industrial Policy Communication. Stakeholders such as industry associations and trade unions have been involved in this process. However, the Commission is prepared to discuss these issues further should it be appropriate. The Staff Working Paper aims at giving a clear picture of the current situation of these industrial sectors and their respective key challenges. Its structure (knowledge, competition, regulation, environment, external competitiveness and employment/regional dimension) broadly follows the main dimensions that have already been set out in previous Communications.[2] While these policy dimensions are not exhaustive, they are particularly relevant to productivity growth and international competitiveness of individual sectors.

The statistics used in the Communication are based on the data from a limited number of sources to ensure a maximum degree of comparability between sectors. In particular, whilst Eurostat data has been used where available for the EU25, this data has been supplemented by the EU15 data of Van Ark and O’Mahony (2003) for the assessment of longer-term trends.

Table of Sectors

Aerospace 4

Automotive Industry 9

Biotechnology 12

Cement and Lime Industry 15

Ceramics 19

Chemical, Rubber and Plastic 23

Construction 27

Cosmetics 31

Defence Industries 34

Electrical Engineering 36

Food Industries 40

Footwear 43

Furniture 47

Glass 51

ICT Industries 55

Leather 60

Mechanical Engineering 64

Medical Devices 68

Non Energy Extractive Industry 71

Non Ferrous Metals 75

Pharmaceuticals 79

Printing and Publishing 82

Pulp, Paper and Paper Products 85

Ships & Boats 89

Steel 93

Textiles 97

Wood products 101

AEROSPACE

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AEROSPACE COMPETITIVENESS ASSESSMENT

The European aerospace industry is a high-tech industry which develops and manufactures a broad range of products: civil and military aircraft, aero-engines, helicopters, launchers and satellites, unmanned aerial vehicles (UAVs), missiles as well as systems and equipment. In 2003 the European aerospace industry employed more than 415 000 directly and had a turnover of € 74 billion. It invested about 14.5% of its turnover in research and development. Exporting more than half its output, the industry provided a positive trade balance of € 29 billion for the EU as a whole.

The success of the industry depends on twin pillars, civil (64%) and defence (36%). They are both complementary and mutually dependent. Operating in civil and defence markets allows companies to share know-how, skills and products, and benefit from the economies of a broad product range. Both areas rely on the application of advanced technologies while serving private and public customers with different needs.

The global aerospace sector was formerly dominated by US companies which traditionally accounted for two thirds of the industry’s global turnover. Largely due to the success of Airbus, this picture has changed in the recent years in favour of the European aerospace industry which accounted for 39.5% of global sales in 2003 (USA: 44%).

KNOWLEDGE | A stable, long-term policy framework is essential, especially for research and development. Aerospace is an industry which must, by the nature of its business, look far into the future: a new generation of aircraft or spacecraft can take a decade or more from conception to realisation, with an in-service life of many decades and many upgrades thereafter; research into a new composite may mean a generation of work before it is ready for practical application. Thus a long-term policy framework is essential if the aerospace industry is to provide the capabilities which are required to match Europe’s goals and allow the European aerospace industry to compete on a level international playing field. In 2001, the Technology Platform ACARE (Advisory Council for Aeronautics Research in Europe) was established and presented Strategic Research Agendas (SRA) for the sector in 2002 and 2005. |

COMPETITION | The aerospace industry continues its consolidation process which has resulted in significant industrial restructuring across European borders. Development and production of airliners, military aircraft, helicopters, missiles, satellites aeroengines, systems and equipment are now largely in the hands of major enterprises operating on European level. At the same time, relations between governments and aerospace companies have changed and led to a situation where formerly state-owned companies are now wholly or partly in the private sector, quoted on stock markets and committed to providing value for their private stakeholders. |

REGULATION | Given its obvious security and safety requirements, the aerospace industry faces very detailed certification procedures to meet airworthiness standards for aircraft and components. Prior to the establishment of EASA in December 2004, certification activities were coordinated through the intergovernmental Joint Aviation Authorities (JAA) system. In contrast to the JAA system, EASA can act as a single entity and take binding decisions. Given the importance of this issue for Europe’s major aerospace companies, industry has been closely involved in setting up the new EASA structures. Currently EASA is responsible for certifying new aircraft and equipment (such as the A380 and its engines) and for certifying certain aircraft maintenance organisations. It is foreseen that EASA will assume additional responsibilities in other air transport related areas in the future (regarding air operations, flight crew licensing or airport operations). The ultimate objective is to build up an EASA which is responsible for all safety issues in air transport. In a longer perspective, EASA could become a European counterweight to the powerful US Federal Aviation Agency (FAA). So far, the FAA dominates aviation safety related discussions world-wide. Experience has also shown that FAA action has supported US companies in their competition with European manufacturers in selling aircraft (and equipment) in third countries. |

ENVIRONMENT | The aerospace industry is affected by other policy initiatives and EU regulations, for example the implementation of REACH (industry could face significant adaptation costs and time-to-market problems in case substances used for specific purposes in this industry are suddenly withdrawn for economic reasons), legislation on chemicals, environmental legislation or general initiatives in the area of transport. Legislation addressing airlines can also have a major impact on the aircraft manufacturers (e.g. proposals on air ticket duty, kerosene taxation or emissions trading). Active participation of the European Community in international organisations such as ICAO (International Civil Aviation Organisation) is key to guaranteeing the worldwide application of common standards for noise and gaseous emissions as well as ensuring an efficient match between the European regulatory system and global requirements. |

EXTERNAL COMPETITIVENESS | The aerospace industry is characterised by specific industrial structures which result from the scale of the financial and technological challenges: e.g. the market for large civil aircraft is dominated by two global players and that for large aero-engines by essentially three global players. Similarly there are only a handful of missile, helicopter and launcher producers in the world. However, unlike the civil side, the market for defence goods is strictly partitioned since State bodies are the only buyers. As regards international competition, US companies operate in the world’s single largest home market and benefit from a highly supportive operating framework which is designed to underpin a declared policy aim to maintain US supremacy in aerospace. The direct linkages between defence and civil uses, and the heavy investments in defence to fund research and innovation bring clear advantages to the US industry in terms of beneficial spin-off effects in non-defence aerospace applications. This situation poses a constant challenge to European industry which affects its competitive position.[3] In addition, in the large civil aircraft sector, while Airbus has to fully repay the launch support it has received in the form of loans from several Member States in line with international agreements, Boeing has benefited since 1992, from very large research and development grants, Washington State will provide the company with substantive tax incentives and subsidies for physical improvements of its plants and infrastructure and the company also receives tax benefits which have been ruled illegal by the WTO and which the US has failed to abrogate. Since for most markets, US and European companies will continue to supply the needs of customers worldwide, strong European aerospace capabilities are indispensable to maintaining competition for a wide range of civil and defence products. Hence, as soon as the US referred its allegations concerning EU support to the World Trade Organisation (WTO), the EU also asked the WTO to declare the US subsidies to Boeing illegal. Less than 10% of sector turnover is related to space (about € 5 billion, 30 000 employees). The turnover of the sector has declined markedly since 1997 due to a decline in demand for commercial telecommunication satellites. The satellite business now mainly depends on institutional markets which are much weaker in Europe than in the US to the competitive disadvantage of Europe’s space industry. After significant consolidation, four industrial groups now account for over two-thirds of Europe’s space turnover. The current lack of effective mechanisms to promote European standards handicaps the competitiveness of the European aerospace industry. Such involvement is vital for programmes like Galileo and the development of air traffic management technologies. There is no comparable requirement for regulation in the satellite or launcher field, although there are actions underway to derive mutually respected standards. |

EMPLOYMENT AND REGIONAL DIMENSION | Of the 415.000 employees in the EU aerospace industry, 89% are employed in aircraft related activities, 7% work in space programmes and 4% in missile programmes. The relative importance of the aerospace industry compared to overall EU employment varies within the EU. The group of countries with an above-average share in overall employment comprises France and the UK but also Luxembourg and Sweden. Given the global nature of the business, suppliers face stiff competition from around the world as transport costs are relatively unimportant compared to technical and financial capability (to contribute towards programme development costs). Europe must ensure that it maintains and builds on its advantages of knowledge, skills, critical mass, RTD support, etc. to keep activity in Europe. Safeguarding and further developing a strong European skills base will be a key factor in maintaining global competitiveness. The overall performance of education and training systems must therefore be improved, within a lifelong learning perspective. Signs that highly qualified personnel are proving increasingly difficult to recruit raises particular concerns. The European Aerospace Industry is characterised by a small number of very large firms, a large number of medium sized companies, and a very large number of small enterprises. As the main customer group for SMEs is the European Aerospace industry itself, the emergence of regional aerospace industry clusters around very large enterprises, often including research facilities, can be observed. |

* Nace 29.6

AUTOMOTIVE INDUSTRY

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AUTOMOTIVE INDUSTRY COMPETITIVENESS ASSESSMENT

The automotive industry is one of Europe’s key sectors contributing 3% of GDP, 7% of total manufacturing value added (€ 114 billion, EU15) and 6% of total manufacturing employment (over 2 million, EU25). The industry also provides indirect employment to 10-11 million people. In terms of labour productivity, the EU15 is behind the US and Japan , with data indicating that labour costs approaching US levels and remaining higher than in Japan and Korea

Slow growth in the home market : The existence of a large home market is a major competitive advantage for European manufacturers. However, the growth of European automotive markets has been flat in recent years and the continued growth of overseas markets is likely to diminish the relative demand advantages derived from the large home market.

KNOWLEDGE | Due to the role played by motor vehicles in air pollution and CO2 emissions, manufacturers are developing technologies to reduce pollutant emissions and CO2 emissions and increase fuel efficiency. European automotive firms are also leading in some transitional drive-train and fuel technologies which can become profitable before the fuel cell technology is ripe for the mass market. While Europe is currently stronger than other world regions in its attempts to reduce CO2 emissions from road transport, emerging markets such as China have introduced fuel economy standards also in view of oil dependence, highlighting the importance of fuel efficiency as a future driver for global vehicle markets. On the other hand, European pollutant emission standards are less stringent than those of the US and Japan (most Asian countries have adopted European standards in their home markets). While alternative methods for reducing CO2 emissions should be looked into within the context of an integrated approach (e.g. combining alternative fuels with vehicle technology), achieving emissions targets proposed by the EU will add to the cost of production of motor vehicles. The threat of missing groundbreaking innovations is still on the agenda as the industry’s international competitors have also stepped up their innovative efforts (with regard to hybrid cars and hydrogen technology). It is expected that major technological breakthroughs could permanently alter the processes employed by the industry and it is important that European companies are not only the leaders in innovation but are also able to rationalise the use of their R&D resources. In should be noted that automotive industry already accounts for over 20% of manufacturing R&D in Europe (over 20 bn Euro). However, given that research into “future” technologies, such as hydrogen, is unlikely to bring the industry significant competitive advantages in the short-term, joint research projects between the industry and the EU should continue to be encouraged. In addition, products are becoming increasingly complex from a technological point of view. In order to remain competitive, the industry needs to produce advanced, high tech products and must rely on a high skilled labour workforce. The ERTRAC Technology Platform was initiated two years ago in order to have a European level research policy. A Strategic Research Agenda was published in December 2004 with a vision for research in the next 20 years. The main priorities are related to: safety and security; environment, energy and resources; the mobility of people and goods, design and production systems. |

COMPETITION | The consolidation, which has occurred in the global automotive industry over the past few decades is expected to continue. Since 1990, the Commission has approved 133 mergers, out of which 3 with remedies, and has prohibited one. One of the drivers of such consolidation may be linked to potential overcapacity and the consequent stimulation of price competition where EU producers are not well positioned to compete. This may induce additional pressures for the restructuring or consolidation of the industry, e.g. via mergers.). |

REGULATION | The automotive industry is highly regulated (over 90 directives relating to the construction and functioning of motor vehicles), particularly in the fields of safety and environment, and the stringency of such regulation can become a driver for technological change in the sector although it also adds to the cost of production. The current approach seems to be supported (i.e., detailed technical rules which are commonly applied throughout the Community through the EC type-approval system), as it creates a level-playing field for manufacturers and it guarantees the good functioning of the internal market through homogeneous application by Member States. The EC “whole vehicle type approval” system applies to passenger cars and motorcycles on a mandatory basis while a proposal to extend the EC whole vehicle type approval system to commercial vehicles is currently being discussed. Above all, the real functioning of internal market is an issue and the lack of harmonisation in the area of vehicle taxation, which distorts the market and increases costs has been repeatedly criticised. In parallel to the efforts to achieve technical harmonisation within the Internal Market, the Community has strongly supported the international harmonisation efforts conducted in the framework of the UN-Economic Commission for Europe (UN/ECE), as a means to reduce industry’s development costs and increase economies of scale. |

ENVIRONMENT | The industry is highly regulated with respect to the environment. The stringency of such regulation can have the positive impact of becoming a significant driver for technological change (e.g. Euro I-V). The harmonisation of legislation seems to be preferred rather than mutual recognition as it provides the industry with certainty and predictability regarding their ability to market the same product. In a longer time perspective, the biggest environmental challenge for the industry is the reduction of CO2 emissions. European automotive firms are investing in hydrogen/ fuel cell R&D as well as in some transitional drive-train and fuel technologies. However, competitors (mostly Japanese), have stepped up their innovative efforts while the protection of intellectual property rights remains an issue in China. Major technological breakthroughs could permanently alter the processes employed by industry and it is important that European companies are not only the leaders in innovation but are also able to rationalize the use of their R&D capability. In addition other means for reducing C02 emissions should be part of an integrated approach to reducing CO2 emissions from the road transport sector as it is unlikely that the full cost of it can be borne by the automotive industry alone without compromising its competitiveness. However, some improvement of the fuel efficiency of cars themselves should be achieved in view of the potential rising worldwide demand for fuel efficient vehicles in view of climate change and high oil prices. An ambitious EU policy in this field will help to maintain the technology lead of the EU automotive industry and thus support its competitiveness. As regards REACH, the proposed new chemicals regulation: as a downstream user, this industry could face significant adaptation costs and time-to-market problems in case substances used for specific purposes in this industry are (suddenly) withdrawn for economic reasons. |

EXTERNAL COMPETITIVENESS | In terms of market share, production volumes, value added, employment levels and net trade position, the industry has maintained its global competitiveness in recent years. Traditionally, the industry has enjoyed a trade surplus –the latest at € 35 billion, with € 66 billion export value. The main competitors are Japan ,the USA, and South Korea and Chinese producers are currently entering the global market. On average, European manufacturers are doing better than their U.S. competitors but face tough competition from Japan, where the efficiency of producers (particularly Toyota) has been higher. European competitiveness as a production location is being threatened by other areas, which are catching up vis-à-vis educated labour and have fewer restrictions on its flexible use. With the current slump in most established markets, there has been a rapid capacity build-up in emerging Asian and Eastern European markets, which may induce world over-capacity and stimulate price competition. EU producers are not very well equipped for price competition, which may promote a further consolidation of the industry. As a major player in international markets, Europe has established stable channels that constitute a competitive advantage and should be among the prime beneficiaries from the opening of new markets and the strengthening of existing relationships, notably with the large emerging countries. However, European car manufacturers have only relatively recently started to address the challenge of mass motorization in low income, emerging economies. In addition, European manufacturers are reporting a series of problems with the Chinese market ranging from discrimination in favour of local producers to the imposition of regulation without prior consultation and have urged the Commission to take steps to remedy the existing state of affairs. |

EMPLOYMENT AND GEOGRAPHICAL DIMENSION | Employment in the automotive industry as a percentage of total industry employment grew at an average annual growth rate of 1.9% between 1995 and 2003 at the EU-15 level. In 2003, the share of the employment in the automotive industry in relation to total industry employment amounted to around 4.9% at the EU-15 level. However, currently a number of car manufacturers have announced job cutting programmes In 2003, most the employed workers in the EU-15 automotive industry were located in Germany (more than 40% of EU-15 employed workers in that industry), and to a lesser extent in France (16%), the UK (13%), Spain (11%) and Italy (7%). Labour market inflexibility remains an issue. In this context, the new Member States offer location advantages based on their affordable, qualified labour and tax policy, which combined with the EU regulatory framework context has led to a high level of automotive-related investment into the region. In 2003, around a half of the employed workers in the automotive industry at the EU-15 level were medium-skilled workers. The high-skilled workers represented about 20% of the employed workforce. |

* Nace 34

BIOTECHNOLOGY COMPETITIVENESS ASSESSMENT

The biotech industry employs 94.200 people, generates €19 billion in revenue and spends about €6 billion in R&D. Leading European countries in biotechnology in terms of number of companies are e.g. the UK, Germany, France, Netherlands, Sweden and Denmark. The number of firms doubled during the mid-90s; in contrast, recent years have been characterized by consolidation rather than growth of European biotechnology (employment fell by 4% in 2001-2003). Healthcare biotechnology accounts for the largest number of biotech companies in Europe – as in the US. Biotech medicines are estimated to account for approximately 20% of all marketed medicines, and represent 50% of all medicines in the pipeline. Therefore, the biopharma sector is set to benefit from the renewed pharma regulatory framework, the improved functioning of the European Medicines Agency (EMEA), and specific measures in favour of SMEs. The prevalent obstacle faced nowadays by European biotech firms is a financing gap, occurring mostly in the companies’ consolidation phase rather than in their start-up phase. The lack of a developed European venture-capital market is likely to hinder the future development of European biotech industry, as companies may move abroad where risk-oriented financing is easier to obtain. In addition, the EU biotech sector lacks late stage debt financing. In the area of agricultural biotechnology, some delays in setting up and implementing a coherent regulatory framework and a sceptical public attitude have led to decreasing public and private investments into agro-biotechnology research and a delocalisation of private R&D to countries outside Europe. The emergence of new competitors, particularly in the Asia-Pacific and South American regions, will put European competitiveness under even more pressure in the future. Biotechnology in industrial processing could become a key component in increasing Europe’s competitiveness, by reducing the environmental impact, reducing production costs, and creating new innovative products. However, the uptake of “white” biotech methods should be supported by a clear political strategy, favourable economic and regulatory conditions, and a stimulation of key technological capabilities.

KNOWLEDGE | In comparison with the US, Europe is characterised by a lack of critical mass, not only at the company but also at the cluster level. Therefore, integration between bio-clusters so as to give birth to mega-clusters accompanied by an increased inter-regional cooperation between bio-clusters (at the moment EU/US cooperation seems to be higher than intra-European co-operation) is desirable. Making sure that sufficient technology transfer from academia to the industry takes place both within and between different European clusters is also a key to increased competitiveness since the spill-over effects, particularly visible in innovative clusters are of utmost importance in knowledge and production networks. Companies in such clusters, mostly SMEs, are already becoming the dynamic part of Europe's industrial landscape and a source of innovative ideas (e.g. in biotechnology in the Munich region and the so-called MEDICON Valley between Sweden and Denmark). It is expected that biotech companies will benefit from several of the established Technology Platforms, in particular the Innovative Medicines, Plant Biotechnology and White Biotechnology plaftforms. In the area of industrial biotechnology and the chemical industry, Europe has a strong knowledge-base with many established companies active in this area. The knowledge-base has been strengthened e.g. by recent acquisitions of US-based companies by European companies (e.g. Danisco – Genencor). Several established European companies are active in the area (e.g. DSM, BASF, Novozymes, Danisco) and are joined by SMEs. A noteworthy development in this regard is the Sustainable Chemistry technology platform. |

COMPETITION | 2003 and 2004 were characterised by consolidation rather than growth for European biotechnology, with no change in the number of active companies in Europe and in the USA. An increase in the number of mergers and acquisitions of the sector in the EU was noted, with the same trend observed world-wide. Access to finance and the underdevelopment of the European venture capital market are considered a problem for further development of the sector. The financing gap is the biggest during the companies’ consolidation phase, usually occurring 3-8 years after start-up. Increased clustering and further efforts to facilitate technology transfer are needed to strengthen the biotech industry in general. |

REGULATION | The main challenges are to further develop and implement timely a science-based regulatory framework which would accompany biotech applications without creating unnecessary burdens on industry, in particular on SMEs. An evaluation of the broadening of the scope of existing legislation should take into account the potential economic consequences across multiple industrial sectors . Transposition and application in MS of existing legislation, e.g. the new GMO legislation, should be closely supervised. As for intellectual property, the full implementation of the Directive 98/44/EC (on biotech patents) together with the introduction of the Community Patent are still outstanding. A strict regulatory framework on Genetically Modified Organisms (GMOs) exists at the European level. The EU started legislating on GMOs in the early 1990s. The main legal acts are Directive 2001/18/EC of the European Parliament and of the Council of 12 March 2001 on the deliberate release into the environment of genetically modified organisms, Regulation (EC) No 1829/2003 of the European Parliament and of the Council of 22 September on genetically modified food and feed and Regulation (EC) No 1830/2003 of the European Parliament and of the Council of 22 September 2003 concerning the traceability and labelling of genetically modified organisms and the traceability of food and feed products produced from genetically modified organisms. |

ENVIRONMENT | Industrial biotechnology offers new ways to improve the environmental performance of industrial processes in various sectors. There are many examples of products already on the market, such as fibrous polymers for household applications (e.g. carpeting), biodegradable plastics made from corn, lubricants, cooling fluids, pulp and paper, food processing, mining, and manufacture of some antibiotics, vaccines, and vitamins. European companies are world leaders in the use of enzymes in the manufacture of chemicals, such as eco-efficient enzymes in the production of washing powder which reduce the consumption of water, raw materials and energy. Other examples include transgenic plants that can enhance the ecological sustainability in agriculture and forestry, and plant-based renewable resources to improve sustainability of industrial processes and transportation, such as biomass and biofuel. To make the most of these technologies in the future, the EU needs to give its full support. The importance of stimulating eco-innovation was emphasized in the recent report from the High Level Group headed by Wim Kok. The Commission recognises Europe’s potential to make industrial biotechnology an important eco-industry and has supported the launch of the “Industrial Biotechnology Platform”. Genetically Modified Organisms (GMOs) can provide benefits to agriculture and to the environment. While the EU’s stringent legislation on GMOs provides for a thorough analysis of the potential effects on health and environment, there have been some delays in setting up and implementing a coherent regulatory framework. In addition, a sceptical public attitude has reduced the possibilities to import or grow GMOs in the EU. This in turn has led to decreasing public and private investments into agrobiotechnology research and a delocalisation of private R&D to countries outside Europe |

EXTERNAL COMPETITIVENESS | Europe entered the field of biotech later than the US. Since a long time is necessary to develop biotech products, trade does not seem to be a good indicator to measure the competitiveness of the European biotech industry. The status of the sector can be assessed by the number of companies and people employed, equity finance raised, revenue generated and in particular R&D expenditures and products in the pipeline. Young companies’ revenues tend to be small. Hence R&D expenditures may serve as an indicator for future prospects. Most European biotech companies are micro or small, research-intensive firms, smaller than their US counterparts, partly due to the significantly greater availability of risk capital and debt provision in the US. At the aggregate level, the US biotech industry consists of roughly the same number of companies as the European industry, but employs two and half times more people and spends more than double on R&D than their European counterparts. In the US, biotechnology is characterised by a high degree of concentration of firms in a restricted number of regions. A similar process of clustering took place across Europe. Yet, the majority of European biotechnology clusters do not seem big enough to compete effectively with those in the US. The integration of smaller bio-clusters into bigger ones and increased cooperation between bio-clusters, as well as technology transfers from academia to industry both within and between different European clusters are needed. In certain fields of health biotech (pharmaceuticals, etc) and industrial biotech including the chemical industry, Europe has a competitive edge due to its strong knowledge base. Given the emergence of new competitors, particularly in the Asia-Pacific region, there are justified concerns as to the long-term competitiveness of the European biotech industry, although currently Asian competitors are still less mature than their European counterparts. |

Cement and Lime Industry

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Cement and Lime IndustryCompetitiveness Assessment

Output has been climbing steadily in recent years, 9.4% from 1998 to 2004. Total turnover in the European cement industry has more than doubled since 1990, to € 14 bn. The lime industry is much smaller, turnover is € 2 bn. Combined, they contribute 0.57% of value added and 0.25% of employment in total manufacturing. Demand for cement is cyclical, depending entirely on construction and civil engineering. The cement and lime industries are energy intensive, with energy accounting for 30-40% of total costs in cement production, up to 50% for lime, and are very vulnerable to energy price increases. Kilns that produce clinker, one of the constituent materials of cement represent a very high, long-lasting investment, which makes it difficult to respond to short-term fluctuations in demand, or comply with new legislation affecting energy or emissions. The production process is mature and further technical improvement is expected for the additives rather than the clinker. New developments are likely to come from the nanotechnology front. The cement production process provides solutions for some wastes, but the industry has an environmental image problem.

KNOWLEDGE | Technology in both sectors (Cement and Lime) is at a mature stage. Further developments are likely to be in the field of environment (emissions abatement and substitution of fossil fuels by wastes). The cement industry is using selected and treated wastes as alternative fuels and raw materials in many installations and this is likely to progress further. Some companies in the lime sector are experimenting with the use of waste, but their use is limited for reasons of quality requirements. Since the production process in these 2 industries is at a mature stage, no further revolutionary technical developments are likely. However, R & D research in the lime sector is leading to the introduction of new products and lime treatments. More work and standardisation is needed for the use of natural minerals as additives (up to 80% in some cases) to the clinker for the production of cement. Nanotechnology is expected to open new roads in cement production and use. |

COMPETITION | Both cement and lime industries are concentrated, with four biggest companies in cement and in lime respectively holding about half of the EU market share. Consolidation is high in case of cement, with many companies being multinationals. This is less the case for lime, where two biggest producers are multinationals but there is still a large number of SMEs, and further consolidation is anticipated in several Member States. All companies are vertically integrated upstream as they quarry most of their own raw material and process it up to the final product as well as downstream into readymix concrete. Capacity utilisation in the cement industry in 2003 was estimated at 84% in EU-15, and slightly lower in EU-25. There is thought to be no over-capacity in either industry. The numbers of firms in the cement industry does not fluctuate a lot, but is gradually going down in line with mergers and take-overs. The number of firms in the lime industry is thought to be stable. Since 1990, the Commission has approved 8 mergers, none subject to remedies. The Commission found one cartel case where it imposed fines in 1994. The principal barriers to entry are high capital intensity and regulation. Laying down a cement plant costs the equivalent of about three years' turnover, and although there is no information for lime, the cost is unlikely to be much different. |

REGULATION | The cement and lime industries consider that current legislation which will have the biggest impact on them will be the emissions trading scheme and REACH. |

ENVIRONMENT | Because the cement and lime sectors are energy intensive, and because CO2 results from the mineralogical transformation process used for their production as well as from the use of energy, the two sectors have every incentive to reduce energy consumption, and environmental concerns are of paramount importance. Their main concern is the emissions trading scheme and its impact on the industry’s costs. Besides CO2 emissions the cement industry's main emissions to air are NOX, SO2, and dust. Dust abatement has been widely applied for many years and SO2 is a plant-specific issue, but the abatement of NOX is a relatively new issue for the industry. Some plants have installed general primary measures to improve clinker quality, thus reducing energy consumption and emissions to air.(information from the BAT reference document – BREF). The same emissions are the main ones for the lime industry, along with CO, and similar primary measures are taken to improve product quality. With regard to waste, the cement industry is doing all possible to make optimal use of wastes from other industries as alternative fuels and materials, but this is not possible to the same extent in the lime industry. In the cement sector, practically zero wastes are produced as kiln dust removed from the stack is mostly recycled. In the lime sector, it is mainly in the form of unburnt or overburnt products. In modern lime kilns, very little product out of specification is produced, but when this occurs, it consists of dust collected from the exhaust gases. Small quantities of partly calcined material can be produced when the kiln is started up from cold. These are recycled back to the kiln wherever possible, recovered in various other applications, or otherwise sent to landfill. Soil is an important issue for both sectors, since soil has to be removed as a primary step in the quarrying of limestone, but is usually saved for use in quarry restitution. Access to raw materials and the complex permitting for planning and extraction are important issues for both sectors.. Hexavalent chromium is another issue in the cement industry, and EU legislation imposes restrictions on the use of cements containing more than 0.0002% of soluble Cr VI of the total dry weight of the cement. BREF, prepared in the framework of the IPPC Directive, was adopted by the Commission in December 2001, has to be taken into consideration when determining permit conditions based on BAT. Given the cement and lime manufacturing technology is at a mature stage it is expected to face competition from cement and lime producers in countries on the periphery of the EU which are not subject to the emissions trading scheme. |

EXTERNAL COMPETITIVENESS | Cement is a heavy product with a relatively low selling price so transport costs are determinant for trade. In the present EU25, 4% of production is exported, whilst imports supply 8% of consumption. The biggest importer of European cement is traditionally the USA due to its unstable demand. Lime is also a low priced bulk product, and so traded over long distances is scarce except for speciality products. Trade is substituted by FDI: European cement firms own over 60% of all production in the USA and have a significant production in south-east Asia. The situation is similar in the lime industry. The EU has become less attractive for domestic investment in the cement and lime industries with the introduction of the emissions trading scheme and the possible introduction of REACH in its present form. |

EMPLOYMENT AND GEOGRAPHICAL DIMENSION | Cement is produced in all Member States except Cyprus, Malta, and Slovakia, and lime in all except Cyprus, Luxembourg, Malta, and the Netherlands. |

* Nace 26.5

CERAMICS

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CERAMICS COMPETITIVENESS ASSESSMENT

Output in EU15 has grown steadily over recent years (10% in 1995-2003), amounting to 0.73% of total manufacturing output, and representing 0.96% of total manufacturing value added. Employment in EU15 has fallen steadily (20% in 1995-2003) to 222,000, amounting to 1.19% of total manufacturing employment. There are over 2000 companies in the EU, the biggest majority of which are SMEs.

Energy represents over 20% of total costs in some sub-sectors, which highlights the importance of electricity and gas liberalization to have a reliable supply of energy at affordable prices. The industry is also capital-intensive; kilns represent a very high, long-lasting investment, which makes it difficult to respond to short-term fluctuations in demand, or comply with new legislation affecting energy or emissions.

KNOWLEDGE | Ceramics manufacturing technology is at a mature stage, where production is highly automated in most sectors. Nevertheless, investment in R&D and innovation are still important for the long-term survival of the industry. With regard to the important field of technical ceramics, the last decades have seen the development of the wide potential of functional ceramics, based on a variety of physical and chemical properties. The R&D activities across this broad sector of materials science continue to be very significant, contributing to several high technology applications which include the electrical, mechanical, thermal, energy storage, chemical and nuclear industries. |

COMPETITION | The sector is mostly composed of SMEs. Vertical integration is normal in the coarse ceramics sector: producers of bricks & roof tiles and some refractory product producers usually have their own quarries from which they mine their own clays. Fine ceramics producers usually get their clays from dedicated clay producers, but some are vertically integrated in that they have their own retail outlets. Sanitary ware appears to be consolidated, and that process is on-going in the tableware sector. The Commission has approved 15 mergers, and has imposed remedies in one case only. The number of firms does not fluctuate a lot overall, but there have been some closures in recent years, especially in the tableware sector. Much of this stems from competition from very low-priced imports, mainly from China, often counterfeit from European designs. Barriers to entry comprise costs of laying down plant and regulation (REACH and emissions trading system of particular concern to industry though the further work on REACH Impact Assessment found no evidence of such concerns for certain sectors). There do not appear to be barriers to exit: there are examples of companies transferring their production to new Member States (prior to enlargement) or south east Asia. There have been complaints on state aid in the past, mainly in the tableware sector in Spain. |

REGULATION | The horizontal legislation is of environmental nature (e.g. IPPC directive) and related to health and safety (minimum requirements). All legislation is of EU origin. Specific issue: one of its raw materials is silica and there is a proposal that it should be classified as carcinogenic. Having an agreement between the social partners on silica would obviate the need for binding legislation at EU level. Therefore, the Commission has been requested to facilitate negotiations for the conclusion of a social dialogue agreement on workers’ health protection through the good handling and use of crystalline silica and products containing it. |

ENVIRONMENT | The industry should be compliant with the following environmental legislation: Directive 94/42/EC on packaging and packaging waste, Directive 96/61/EC on integrated pollution prevention and control (IPPC), Directive 2003/87 establishing a scheme for greenhouse gas emission allowance trading within the Community, Proposal for a regulation concerning the Registration, Evaluation, Authorisation, and restriction of Chemicals (REACH – as a downstream user, which means that the requirements are lighter than for a producer of chemicals). The issues related to environment are: i) particulate matter or dust can arise from the handling or processing of raw materials or finishing. Gaseous emissions arise during the firing or spray drying of ceramics and may be derived from the raw materials and/or the fuels used. Among these emissions are carbon oxides, nitrogen oxides, sulphur oxides, inorganic fluorine and chlorine compounds, as well as organic compounds. Heavy metals can also be emitted due to the use of substances used in decoration or to the use of heavy oil as fuel, ii) some of the waste arising from the production process can be recycled back to the kiln, and that which can not be recycled internally is sent for external recycling (e.g. road construction) or disposal (e.g. landfill). Some producers are beginning to bring in waste for recycling, but this is by no means common, as in, for example, the glass industry, and there is no standardised collection system, iii) waste water coming from the production process mainly contains mineral components (insoluble particulate matter). Depending on the production process, it can also contain other inorganic materials, small quantities of numerous organic materials as well as heavy metals, iv) the principal issue for ceramics is lead and cadmium used in decoration in the table- and ornamental ware sector. This is regulated by Commission Directive 2005/31/EC which introduces a requirement for a written declaration by the producer or importer that the goods placed on the market comply with the lead and cadmium release limits. In the industry’s opinion, the two items of legislation which will have the biggest impact on it will be the emissions trading scheme and REACH, the latter because, as a downstream user of a vast range of small quantities of chemicals, it fears that many of these will disappear from the market rather than being registered etc… . Given that ceramic production technology is at a mature stage, the emissions trading scheme will have an impact through higher energy prices. REACH may entail administrative burden, which may be particularly difficult for SMEs, but will also facilitate the implementation of workers’ safety legislation and risk management.. |

EXTERNAL COMPETITIVENESS | Bricks, roof tiles and vitreous clay pipes, with high weight and low price, have local or regional markets, whereas tableware and wall & floor tiles are traded over long distance –over 25% output is exported outside the EU. The USA is prominently the biggest export market, followed by Switzerland, Russia, and Japan. The most important source of imports is China by far, (20% of total imports), followed by the USA and Thailand. Trade issues concern counterfeit imports and access to third markets. There are still peak tariffs in third countries where EU ceramics manufacturers see potential for their products. In addition, there are many countries where the EU ceramics industry has difficulties in selling because of other types of barriers, mainly in the form of compulsory testing, conformity assessment, and certification schemes. These include Turkey, Egypt, Saudi Arabia, Russia, Ukraine,… Other barriers include special labelling requirements, or the obligation to clear customs in a specific port, which may be far from the main market. Industry has expressed concerns that the EU is becoming less attractive for investment because of the regulatory framework, especially the emissions trading scheme and REACH. EU competitors do not need to meet European standards of quality, energy use, environmental control, or working conditions. Another concern to industry is the supply of raw materials, and particularly their high cost. As far as high costs resulting from anti-dumping duties are concerned, the Community interest test regularly carried out in anti-dumping investigations ensures that they do not impact on the industry's competitiveness. Further concentrations of raw materials suppliers should be monitored closely, as more and more raw materials imported into the EU. |

EMPLOYMENT AND GEOGRAPHICAL DIMENSION | EU workforce is well trained and experienced with a high degree of craftsmanship, though insufficient flexibility to deal with factors such as seasonal peaks seems to be an important issue. |

* Nace 26.2, 26.3 and 26.4

CHEMICAL, RUBBER AND PLASTIC

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CHEMICAL, RUBBER AND PLASTIC COMPETITIVENESS ASSESSMENT

The European chemical industry covers a wide field of processing and manufacturing activities. It is a complex industry consisting of four main sub-sectors: Petrochemicals, Polymers,, Specialty and Fine Chemicals and Consumer Chemicals. With €360 billion turnover the EU is the lead chemicals producing area of the world (28% of world production). The chemical industry is a high-tech industry enabling virtually all sectors of the economy and therefore affects directly the competitiveness of its downstream users industries. Chemistry underpins numerous innovations in information technology, aerospace, medicine, hygiene, nutrition, mobility, housing, energy saving, clothing and many other areas. It is also closely linked to new developments such as bio- and nanotechnology. The chemicals sector directly employs 1,3 million people and twice that number indirectly. It comprises about 27 000 enterprises, 96% of which are SMEs generating 30% of sales and 37% of employment. The EU rubber industry is made up of about 4000 companies and employs 350 000 people. The plastic industry, on its side, entails about 30 000 enterprises employing some 1,5 million people. In total the chemical, rubber and plastics industries represents about 60 000 enterprises and a workforce of around 3 million. The EU chemicals industry is one of the largest manufacturing sectors in the EU. It accounts for 12% of gross value added in EU manufacturing and value added per employee is nearly twice as high as the manufacturing average. The chemical industry contribution to the GDP in EU15 amounts to 2.4%. The key factors influencing the competitiveness of the EU chemical industry are innovation and R&D, international trade, regulation, and energy . From a policy making point of view it is therefore crucial to create an environment (legal, societal, etc.) where innovation is stimulated. Feedstock costs (mostly oil) and energy costs are also major drivers for the chemical industry especially the Petrochemicals sub-sector. As the rubber industry is relatively labour intensive for this sector labour costs are important as well.

KNOWLEDGE | R&D spending is lower compared to the level of the main EU competitors (In 2003, R&D expenditure as a percentage of sales amounted to 1,9 % in the EU while it reached 2,4 % in the US and 2,7 % in Japan). Most plausible ways for the EU chemicals industry to maintain its competitiveness revolve around discovering, adopting and commercializing new technology. As a result, innovation in the chemical industry is a key driver for future European competitiveness, with a big impact on innovation activities in other manufacturing industries. Investment in chemicals is not particularly favourable in Europe because of 1) lower returns for many structural reasons endemic in Europe such as the complexity of protection of Intellectual Property and higher production costs , 2) the public/private partnerships for R&D are not yet fully developed, 3) immature venture capital markets, and 4) Europe is facing a sharp decline in students graduating in this area. Collaboration and the formation of strategic alliances become increasingly important. The need to increase production and capture new markets and at the same time to reduce emissions and improve worker safety, require major chemical innovations driven by competitive EU chemical and associated industries. There is a need to boost European research, development and innovation in chemical technologies if the economic contribution of the industry in Europe is to be sustained. The setting up of a Technology Platform for Sustainable Chemistry is therefore a positive development. |

COMPETITION | Given that the sector produces such a lot of different products, competition analysis is difficult. Consolidation and restructuring in the chemical industry are ongoing processes which will continue in the future. The sub-sector Petrochemicals is highly vertically and horizontally integrated, where economies of scale and scope are important. There is further consolidation to be expected as the average size of plant within Europe is small in comparison with the new plants that are built outside the EU. Also in the sub-sector Fine and Specialty chemicals, which is predominantly composed by specialised niche companies, consolidation is on-going. In this segment further restructuring is, among other things, driven by the overall business environment and by the degree of access to capital for SME. The investment of private equity capital in the chemical industry is another factor influencing the chemicals landscape: selling off of units, merging of businesses, restructuring companies, etc. with a view to creating high return on investment. Whereas in some cases, consolidation will improve the competitiveness of the chemical industry, in other cases this development may harm longer term competitiveness. Buyer power amongst clients from for instance automotive or retail sectors is important too. In general, for some frequently traded products (some petrochemicals and plastics) prices are transparent. Vertical integration is important in the industry, though some major players decided to exit commodities and focus on specialty chemicals. Since 1990, the Commission has prohibited two mergers, and has approved 51 mergers subject to remedies. The structure of the industry lends itself to considerable risks as regards anti trust problems, a situation which requires constant vigilance. . Since 1999, the Commission has found 16 cases of violations of anti-trust rules, and has imposed fines in 15 of them. |

REGULATION | The main regulatory challenge of the chemicals sector is the successful design of a workable and cost-effective REACH system (Registration, Evaluation and Authorization of Chemical substances) which will enhance the effectiveness of other regulations in force in this sector (such as Worker Protection directive) and which will ensure a homogeneous regulatory regime in the Internal Market, the international competitiveness and innovative capacity of the sector, notably of its SMEs, while achieving a marked improvement as regards environment, health and safety standards. Other regulatory issues that have a bearing on the chemicals, rubber and plastics industries are occupational and workplace regulations and most parts of other existing environmental and health regulations , notablythe legislation on pesticides, biocides, waste, water, climate change and air pollution. Energy liberalization in Europe for gas and electricity has been a legislative and business issue for more than a decade but it has not, at this stage, met its objection to deliver energy at competitive prices. .Many EU regions lack truly liberalised markets and true competition. In existing oligopolies, industrial consumers can not freely choose suppliers or negotiate on a fair basis with suppliers. |

ENVIRONMENT | From its very nature environmental issues play a crucial role in the chemical industry and therefore there are a substantial number of regulatory measures in the environmental area. As a result, environmental expenditures in the EU chemicals, rubber and plastics industries amount to 3.5% of value added and account for 23% of total EU environmental protection expenditure in all industries. There is a clear indication that the chemical industry managed to reduce emissions to all environmental compartments and to decouple its growth to a large extent from the growth of emissions e.g. emissions from chlorine production, emissions of volatile organic compounds. The EU industry has achieved in the past 15 years a remarkable progress in energy efficiency. By 2002, production in the EU 15 chemical industry had risen by 38% since 1990, while total energy consumption has increased by only 2.5% and CO2 emissions have fallen by 8%. Hence CO2 emissions per unit of energy consumption have been dramatically reduced and CO2 emissions per unit of production have even decreased almost 44% since 1990. Since the chemical industry is mainly a facilitating basic industry which provides inputs (plastics, lubricants, paints, etc.) to other industry, this industry needs a life cycle approach which does not only look at the production of the chemical itself, but as well at emissions in the use and in the waste phase. The voluntary Responsible Care programme is an important initiative of the chemical industry to further improve the downstream environmental impact of their products. |

EXTERNAL COMPETITIVENESS | In 2004, EU exports amounted to €102 billion versus €67 billion in imports. The rise in imports has been outstripped by the EU's export performance, such that since 1998 the external trade surplus for chemicals continues to increase despite the recent appreciation of the Euro. The European production base is however eroding, with investments flowing to other parts of the world where growth is higher (Asia, especially China) or with cheap feedstock (Middle East). According to a major study of CEFIC published in 2004, the share of the EU chemicals industry in the world chemical production could fall from the current 28 % to 23 % or 16 % respectively by 2015, depending on best or worst case scenario. During the last 3 decades new countries have emerged as important producers of chemicals. Two regions should be especially highlighted in this respect: Asia (China, India, Taiwan, South Korea, Thailand, etc.) became an important producer of the whole range of chemicals while the development of the Middle East was more focused on the Petrochemicals sub-sector. From an external competitiveness point of view the challenges facing the industry are: slow demand growth in Europe, high demand growth in Asia, delocalisation of customer industries, higher production costs and a highly regulated environment. This situation makes Europe less attractive for investments, resulting in less R&D spending and erosion of the global production share. The EU chemicals, rubber and plastics industries encounter market access problems, tariffs but also more and more non-tariff barriers, in some important export countries. The Petrochemical and fertilizers industries are seriously affected by double-pricing policies regarding raw materials of certain third countries. |

EMPLOYMENT AND REGIONAL DIMENSION | Germany is the largest chemicals producer in Europe, followed by France, Italy and the UK. Together, those four countries produce 61% of EU25 chemicals output. Adding Belgium, Spain, the Netherlands and Ireland raises the share to 88%. In almost all of these countries the chemicals industry has lost jobs the last decade (1994-2004), sometimes dramatically like in Germany (-22 %) and UK (- 14 %). In the 10 new member states the chemical industry is still rather small in comparison to the old member states although for instance Poland represents 1.8% of total EU 25 chemical sales which is more than Austria, Finland and Portugal. |

* Nace 24 (24.1, 24.2, 24.3, 24.5, 24.6, 24.7) and 25

Construction

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CONSTRUCTION COMPETITIVENESS ASSESSMENT

Construction is the biggest sectoral employer and a major contributor to GDP and Gross Capital Formation in Europe. Public regulations and public investment influence the sector a lot in terms of cyclical stabilisation of macro-economic trends. In a number of countries, recent economic recovery has positively influenced the construction activity, mainly for the new housing sector, with the exception of civil engineering. There are however significant national and regional differences in trends.

Compared to nearly all other sectors, the seasonality of the work and the labour intensity have a much greater influence on th e performance of construction. The value-added per person employed is in construction significantly lower than in most other activities, mostly due to the limited potential for increased automation and capital intensity of production. The investment per worker is less than half of the level of the industry in most of the countries. The only sub-sector with higher productivity is the renting of equipment with significantly lower employment than the rest of the sector.

On international level, Europe is a net exporter of construction services, largely before US and Japan,

KNOWLEDGE | The level of investment in R&D is rather low. One of the challenges is to bring participation and exploitation of R&D to small and medium-sized companies. ICT could benefit the construction sectors in many ways, for instance by embedding ICT in ‘smart’ materials/construction products and by offering new ways of interaction and coordination in trade, construction process and monitoring of materials. R&D and innovation in intelligent materials, constructions and buildings will offer a potential competitive advantage for construction enterprises. Since 2004, there is a European Construction Technology Platform. The European Construction Technology Platform (ECTP) mobilises the whole construction sector, e.g. contractors, authorities, architects and other designers, purchasing bodies, and the full range of suppliers, clients and users. In its vision report, ECTP has identified 3 strategic research themes for the development of the construction sector: (1) materials and technology: integration of developments in the fields of bio-, nano- and information technology; (2) industry transformation: involves bridging the gap in communication between the technical and human side of things in order to discover new business opportunities; (3) service: include the pursuit of health, safety and sustainability by meeting human needs and improving accessibility, quality of life and work. |

COMPETITION | The sector is composed of many micro enterprises and few large companies, the latter being in a number of cases parts of mixed activity corporates providing services including financing of construction activities or active in fields such as energy, transport, telecommunication and media. Since 1990, the Commission has approved 48 mergers, and has fined one cartel. Consolidation is expected among the large companies, which will lead to the emergence of few large firms dealing with project management that will outsource building work to subcontractors (small or micro enterprises). The demand for construction is influenced, i.e. by country-specific support measures for home-owners (e.g. subsidies credit, tax incentives). |

REGULATION | In addition to Council Directive 89/106/EEC (Construction Product Directive – CPD), a great deal of Community legislation in other policy fields has also a bearing on the competitiveness of the construction sector, i.e. technical harmonisation, public procurement, rules on health and safety, the recognition of qualifications, VAT, the protection of the environment and the consumers. The highest number of relevant EU legislation concerns Environment and Social Coherence. The sector is highly regulated at national level, including with respect to environment and labour safety requirements, and to the construction materials in use. Builders, design services and construction contractors have to observe building regulations. Their formulation, legislation and enforcement (control of application and building inspection) are Member State competence, with power given to regional and local authorities according to the individual constitutional and administrative system. Furthermore, the construction sector is mostly affected by national legislation concerning safety at work, social security, VAT and liability regimes. At local and regional levels, urban and spatial planning have an impact on business expansion. |

ENVIRONMENT | Directly or indirectly through the works in which they result, construction activities very significantly impact on the environment. The most important aspects are the loss or deterioration of open landscape and habitats, qualitative and quantitative change of micro-climate, ground and surface water, as well as vegetation through the built environment, emissions and energy consumption from the use of works, and construction waste in particular from demolition as well as pollution and disturbance caused by the execution of works.. Furthermore, the release of unhealthy or environmentally unfriendly substances from construction products needs to be controlled. Besides wise land use planning and management, and good design, environmentally respectful and sustainable construction requires environmentally friendly materials, energy- and waste-saving developments, etc. Solutions for environmental sustainable developments are often based on combinations of good planning, design of works and use of materials. The protection of human health and the environment is mentioned in many national building codes, but there are many views about which substances should be considered as dangerous in construction products. Moreover, a clear definition of construction waste facilitating an analysis of the socio-economic issues related to this waste stream is missing. Sustainability criteria trend nowadays to embrace a wide range of aspects like the whole life cycle of a building, re-using existing built assets, designing for minimum waste and energy use throughout the life cycle, avoiding pollution, adding to bio-diversity, conserving water resources, respecting people and communities. There are some voluntary schemes on Life Cycle Assessment and Environmental Product Declarations in place on a national level. However, there is still no systematic approach to assess the overall environmental performance of construction assets. |

EXTERNAL COMPETITIVENESS | The globalisation of construction activities is especially important for large civil engineering companies exporting management and planning concepts and accordingly, managerial and engineering skills. The manual labour is generally performed by local workforce. However, highly specialised construction functions and materials requiring the use of specific equipment and processes will also be more and more exported. Overall, EU contractors have good to excellent managerial and technical competences to execute complex international projects. The main difficulties in competition are due the lack of openness and transparency of the market and of the procurement rules, in particular in developing countries. It is often difficult to set up joint ventures with local partners due to the constraints put on the capital shares and the employment of local staff. |

EMPLOYMENT AND GEOGRAPHICAL DIMENSION | Employment in the construction as a percentage of total industry employment grew at an average annual rate of 1.4% between 1995 and 2003 at the EU-15 level. In 2003, the share of the employment in the construction industry in relation to total industry employment amounted to around 28.8% at the EU-15 level. In 2003, most the employed workers in the EU-15 construction industry were located in Germany (20% of EU-15 employed workers in that industry), the UK (16%), Spain (16%), Italy (14%), and in France (12%). In 2003, the majority of employed workers in the construction industry were medium-skilled workers (around 45%) and low-skilled workers (around 41%) at the EU-15 level. As in many other sectors, the qualification of personnel is an important factor for productivity of the construction sector, here especially at management level,. There is a need for developments in education and training (e.g. lifelong learning), in particular to uptake new method of working and management as well as technological innovation. Initiatives should cope with time flexibility and with the mobile and dispersed nature of construction sites (distance learning). Self-employed represent a high share of the workforce in the construction industry, and their remuneration and employment conditions are rather precarious. Construction is often mentioned as a typical case study of undeclared activities. Furthermore, the risk of accidents in construction is considerably higher than the EU average for all sectors. |

* Nace 45.1, 45.2, 45.3, 45.4 and 45.5

Cosmetics

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COSMETICS COMPETITIVENESS ASSESSMENT

The European cosmetics industry is an example of an internationally competitive industry which has established itself as a market leader. With 35 billion €, the European cosmetics industry has an ex-factory output which is twice that of Japanese companies and one third higher than U.S. companies. Direct employment in the industry is greater than 150,000 -plus 350,000 indirect jobs. The cosmetics industry is a dynamic industry, characterised by innovation and a high rate of product development. Several thousand new or improved products are placed on the market each year .

KNOWLEDGE | Technological challenges and innovations in cosmetics concern the development of new ingredients and product compositions and new delivery mechanisms. This includes for example having foams in gel form and cosmetic wipes, liposome technology to deliver vitamins E and C in anti-ageing creams into the upper layers of the epidermis and nanoparticles used as physical UV-filters. Moreover, industry has to meet the challenge to develop alternative testing methods by the year 2009/2013. |

COMPETITION | The sector consists of both a limited number of major companies, and a large number of SMEs. It remains to be seen whether their position will come under pressure from competitors from other sectors, having expertise in life sciences like pharmaceuticals, biotech and medical devices, which try to enter the market. It is unclear whether the SMEs in the sector will be reduced to niche players in the future, or whether they will be able to expend into new markets. Since 1990, the Commission has approved 13 mergers. |

REGULATION | The main regulatory framework for cosmetic products is the Cosmetics Directive. The Cosmetics Directive is regularly amended in order to update the list of prohibited, restricted or permitted ingredients as listed in the annexes to the Cosmetics Directive. The regulatory approach of the Cosmetics Directive is “in-between” highly regulated sectors with pre-market approval and sectoral new-approach regulation which sets out essential requirements for products. The Cosmetics Directive ensures the free movement of cosmetic products by providing the same regulatory framework throughout the Community. It also guarantees the safety of cosmetic products placed on the EU market. The question emerges of whether and how new, more potent cosmetics can be accommodated with this existing regulatory framework. Regulators can support the industry by providing a modern, innovation-friendly regulatory framework and by ensuring a continued international regulatory cooperation |

ENVIRONMENT | Innovation is essential to improve the environmental impact of products. The 7th Amendment to the Cosmetics Directive introduced a ban on animal testing of finished cosmetic products from 11 September 2004 and a ban on animal testing of ingredients not later than 11 March 2009 within the EU. It also introduced a ban on the marketing of cosmetic products tested on animals and products containing ingredients tested on animals, within the EU or elsewhere, not later than 11 March 2009/2013. It is important to note, however, that the Cosmetics Directive does not address environmental risks. Therefore, REACH is regarded as environmental legislation having an impact on the cosmetics sector in terms of further innovation requirements to meet the environmental requirements. |

EXTERNAL COMPETITIVENESS | The external challenge in terms of regulation lies in promoting the European regulatory model abroad, in particular in the emerging markets of China, Russia and South America. The EU is a world leader, with a high innovation-rate and a very considerable export surplus. Significant differences between regulation in the EU and other markets create barriers to the development of new ‘global products’ and increase the costs of product innovation. The main challenge lies in maintaining the high degree of competitiveness of the cosmetics industry in Europe. Openness of external markets also needs to be pursued: e.g. an EU Trade Barriers Regulation procedure is still ongoing in Korea. |

EMPLOYMENT AND GEOGRAPHICAL DIMENSION | The sector is an important employer in Europe, creating 150,000 jobs directly and another 350,000 indirectly in retail, distribution and transport. |

* Nace 24.5

DEFENCE INDUSTRIES COMPETITIVENESS ASSESSMENT

The EU defence industry turnover can be estimated at about € 70 bn, with employment of about 770 000. This represents roughly half of the US defence industry, both in turnover and employment. Most of the companies concerned are involved in both military and civil activities. In essence the European Defence Industry consists of the defence part of the activities of companies involved in aeronautics, space, electronics, shipbuilding, engines, trucks, etc. An analysis of the 28 European companies belonging to the World Defence Industry Top 100 shows that only 13 of them make more than 50% of their turnover in the defence sector. Budgetary restrictions have pushed those companies to diversify. But the evolution of the security threat also drives a technological evolution towards defence products in the range of information technologies, biotechnology, nano-technology, etc. with numerous civil applications.

The persistent demand fragmentation at national level has led to a very fragmented defence industrial landscape having to answer to different national requirements. The fact that defence companies have usually a unique national customer has put a curb on the competitiveness of those companies. The absence of a functioning market constitutes a major obstacle to the consolidation, competitiveness and sustainability of defence-related industries within the EU.

KNOWLEDGE | For many years, defence investment in Europe has been significantly smaller than in the US in procurement but the gap is even greater - and growing - in research and development. Major efforts to improve Research and Development in that sector through a reduction of the fragmentation and the duplications and also through a better exploitation of the synergies between defence and civil technologies are necessary. The technological evolution towards more and more complex technologies generates considerable increases in product developments. |

COMPETITION | A consolidation and restructuring process has started in Europe, following years of consolidation and restructuring in the United States, where the number of prime defence contractors has now been reduced to four. In 1999, two mergers created the largest defence companies within Europe, which both now rank in the top 5 worldwide: EADS and BAe Systems. Below the level of the major holding companies, a movement towards joint ventures, alliances and other forms of collaboration can be observed in several business segments (e.g. Matra BAe Dynamics for missiles, Thomson Marconi for sonars, Alvis-Hägglungs for armoured vehicles). However, the remaining number of European defence companies is still much greater, in a much smaller combined market, than in the US. |

REGULATION | The currently fragmented legal and regulatory framework – also deriving from the extensive use by member-States of Art.296 of the EU Treaty- places limits on the adjustment capabilities of companies or pushes them towards strategies and alliances which can put the Union in a disadvantageous position. A failure to safeguard a competitive defence industrial base, and the consequent loss of autonomous design and innovation capabilities, would limit available choice and would lead to higher procurement costs in the long run. The creation of a European defence equipment market is necessary to help consolidate both the demand and supply sides of the market in Europe, to provide a right environment for the European Industrial and Technological Defence Base and to put Europe’s industries in a better position on the international market. Measures towards a European Defence Equipment market include procurement rules, easier intra-EU transfers, adapted competition rules, standardisation etc. Standardisation would also help considerably competitiveness progress since the national defence markets are usually too small to reach a critical mass, especially in high tech areas. Standardisation would allow companies to invest with a broader perspective and to compete on a more equal basis with their American counterparts. The Commission is working with the European Committee for Standardisation (CEN) to draw up a European defence standardisation handbook cataloguing standards commonly used for defence. |

ENVIRONMENT | Environmental legislation does not create particular problems for the defence sector. As regards REACH, the proposed new chemicals legislation, this industry could face adaptation costs and time-to-market problems in case substances for specific purposes are (suddenly) withdrawn for economic reasons. |

EXTERNAL COMPETITIVENESS | According to available figures, the US are by far the biggest weapons exporter ($13 648 million in 2003 vs. $4 700m UK, $1 200m France, $1 200m Germany, $100m Italy, $100m Belgium (source IISS Military Balance 2004)). Russia ($3 400 million), Ukraine and China maintain important market shares on more simple products. Taken together, EU Member States spend less than half the US does on defence. The total annual US budget comes to $ 400 billion, or 43% of World Defence Spending (SIPRI) compared to a cumulative budget of some € 160 billion for EU Member States together. For many years, defence investment in Europe has been significantly smaller than in the US in procurement but the gap is even greater - and growing - in research and development. In 2001 more than three-quarters of the OECD total military research budget was accounted for by the US, that is more than four times the EU defence research budgets (source: OECD, STI Scoreboard 2003). This has of course impaired to some extent the technological developments in Europe and been detrimental to an important factor of the competitiveness of the industry. There is no doubt that the difference in level between the European and American defence budgets will remain considerable. Some restructuring of the European defence industry and the setting-up of an efficient European defence market can bring more cost efficiency. But major efforts to improve research and development in that sector through a reduction of the fragmentation and the duplications and also through a better exploitation of the synergies between defence and civil technologies are necessary, for the sake of competitiveness. It is worth noting that most available data are either uncertain or heterogeneous from a Member State to another one. Better knowledge and comparability would constitute a real help for the definition of appropriate policies. |

EMPLOYMENT AND REGIONAL DIMENSION | Restructuring and consolidation are foreseeable in several sectors (land force equipment and naval in particular) which could have consequences on employment and, in some cases, on regions – when defence industries represent a substantial part of the industrial activities of a given region. |

Electrical Engineering

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Electrical Engineering COMPETITIVENESS ASSESSMENT

Electrical Engineering accounts for 3% of the production, value-added and employment of the Manufacturing Industry of the EU. 8,015 electrical engineering enterprises with 20 or more employees produced in 2003 €168.306 million worth of electrical apparatus and equipment, directly employing 1,094 million people. (data for EU15). As a major supplier to other sectors, Electrical Engineering is very cycle sensitive. As a result, when there are recessions in the EU economy as a whole, there are depressions in Electrical Engineering (such as the 1992-93 recession which caused a major crisis in the sector). As a knowledge-based sector, Electrical Engineering has the long-term negative effect that companies shed during recessions a significant portion of their engineers and other skilled technicians, which they have great difficulties in recovering afterwards. Measures to smoothen structural change over time are therefore very important for this sector. Due mostly to the effects of the 1992-93 depression, the average annual growth rate in nominal terms of EU Electrical Engineering for the period 1995-2003 has been a modest 3%.

The EU electrical engineering market is the world’s largest one (€160 bn) followed by the USA and Japan (€100 bn and €91 bn respectively). Only two Electrotechnical Sub-sectors offer expansion opportunities in the long term: Electric motors, generators and transformers and Other electrical equipment. In 1998-2003 the former grew by 39% in current terms and the latter by 37%. At the other end Accumulators and batteries (-6%), Lighting equipment and lamps (-5%) and Wire and cables (-3%) have performed worst during that period. Within the first one, the EU has done best in large generators and transformers and electric motors for special purposes, while the European position in small, standard motors is being eroded. In 2003 the overall output of the Electric motors, generators and transformers sub-sector slipped down by one percentage point. In accumulators and batteries and in lighting equipment there is a progressive delocalisation of Western European production to Eastern Europe and Asia. These two are mature technology, relatively labour intensive sub-sectors.

KNOWLEDGE | The delays in the adoption of the Community Patent may cause a significant competitive handicap to EU manufactures, particularly in view of the fact that many electrical engineering products rely on mature technologies. Nevertheless, continuous R&D and innovation efforts are key to guarantee the long-term competitiveness of Europe’s electrical engineering industries. Counterfeiting of EU electrical brands is a serious and growing problem for European manufacturers. Over 5% of equipment sold as made in the EU is fake. Counterfeits affect not only the country where they are produced but the EU and third country markets as well. In this respect renewed attention must be paid to the effective enforcement of IPR legislation already nominally adopted by certain third countries like China. |

COMPETITION | The structure of the industry is characterised by a two-tier system: a few large corporations producing a wide range of electrical equipment, and many small companies specialised in niche markets. For SMEs, access to finance is a particular problem. Restructuring of the sector is not correlated with consolidation and bigger company size. In fact, the average payroll of the EU Electrical engineering company has decreased during the 1995-2003 period from 154 to 136 employees. Out of about 236 merger cases in the sector notified to the Commission since 1990, eleven have been approved subject to remedies and two have been prohibited. There have been two anti-trust cases where the Commission imposed fines for agreements restricting competition. |

REGULATION | The EU is the most open market for electrical equipment and appliances among large trade blocs and industrial countries. The piece of European Law that most directly concerns electrical equipment under low voltage is the Low Voltage Directive. The absence of third-party intervention in the conformity assessment procedures laid down by this Directive greatly reduces the burden on the manufacturer. This is a model of business friendly legislation for other trade blocs. The Low Voltage Directive has substantially contributed to the Single EU Market for electrical and electronic products since 1973. Most electrical equipment is also subjected to the Directive on Electromagnetic compatibility (EMC Directive). This Directive establishes essential requirements to prevent electrical and electronic equipment from generating or being affected by electromagnetic disturbances. It is also based on manufacturer self-declaration of conformity and is very appreciated by industry. Although recognising the need for and benefits of harmonisation, industry believes that the cumulative effect of legislation originating from various policy areas and levels can pose problems, particularly for SMEs. There seems to be a need to improve the market surveillance systems in the EU. In the absence of a well-functioning market surveillance system, there is a risk that EU manufacturers might be subject to unfair competition in particular from non-compliant imported products, thereby impacting on the competitive situation of European companies. |

ENVIRONMENT | Electrical equipment manufacturers are affected by Community environmental legislation affecting products either directly, such as the Directive on energy using products (EuP) and the twin Directives on management of waste from electrical and electronic equipment (WEEE) and on use of certain hazardous substances in this equipment (RoHS), or indirectly (waste framework Directive, waste shipments’ regulation). Electrical products are also concerned by energy labelling requirements and voluntary Community schemes such as the Ecolabel. Production sites are affected by legislation on installations such as Integrated Prevention and Pollution Control (IPPC) and voluntary schemes like EMAS. This industry is an important user of chemicals. As such, it could face significant adaptation costs and time-to-market problems in case substances used for specific purposes are (suddenly) withdrawn for economic reasons. Besides, the sector will be directly affected by the Directive for establishing a framework for setting eco-design requirements for energy-using products (EuP). The EuP Directive is a coherent framework for addressing in a harmonised and integrated way all the environmental aspects of energy-using products. This Directive is expected to promote product quality and thus strengthen the competitiveness of the sector’s enterprises. Regulatory eco-design requirements will be set by the subsequent implementing measures, to be adopted by the Commission. |

EXTERNAL COMPETITIVENESS | EU Electrical Engineering is significantly oriented toward export: €43.323 million exports outside the EU in 2003 gives this sector a 26% share in exports. The sector contributes to a trade surplus of €2.625 million to the EU economy. The EU is the largest producer of electrical equipment in the world, clearly surpassing Japan (€102 Bn in 2003) and far ahead of the US (€84 Bn). However, EU Electrical Engineering has a productivity handicap vis-à-vis its main competitors. The productivity of the average EU electrical worker is much lower than that of his Japanese colleague and the long-term trend in the growth of his productivity is slower than those of his Japanese and American colleagues, thus further widening the gap between the US and the EU. The Japanese electrical worker generated in 2003 €207.000, the US worker €161.000 and the EU worker €154.000. |

GEOGRAPHICAL DIMENSION, EMPLOYMENT, RESTRUCTURING | EU is the largest producer of electrical equipment in the world and successfully present on all significant export markets except Japan. Many electrical engineering products rely on mature technologies where the rate of structural change is relatively slow. From 1995 to 2001 the sector grew in number of enterprises, whereas employment remained relatively flat. As from 2001 however, it has registered a slight reduction in both employees and enterprises. This trend of slow decline is expected to continue but does not indicate that the sector is facing an acute crisis, rather that productivity is increasing. There is no need for significant restructuring. In 2003, most of the employed workers (figures for EU-15 only) were located in Germany (more than 40%), Italy (17%), the UK (17%), France (12%) and Spain (7%). Around half of the employed workers were medium-skilled. High-skilled workers accounted for about 23%. |

* Nace 31

Food Industries

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FOOD INDUSTRIES COMPETITIVENESS ASSESSMENT

The food industry ranks first in the EU 15, with 13.6% of total manufacturing turnover (€ 725 bn production, € 784 bn. for EU 25), over 13% of employment (over 4 million workers), and 11% value added. The industry has had a relatively limited but stable growth in production (1.8%) and value added (1.1%) over the last 10 years, and negative employment growth rates, yielding positive productivity growth rates. Germany, France, Italy, Spain and the UK account for over 70% of turnover of the EU-25, whereas the new Member States account for only 7.5%. The investment rate is relatively low, and labour costs are high. The EU Food Industry sector is extremely fragmented and dominated by a very large number of SMEs that are less permeable to innovation than big (multinational) companies.

Positive but low labour productivity growth (0.8% over 1995-2001, compared to 2.7% in 1990-1995) reflects the difficulty to disseminate ICT in SMEs (19% of companies are using on-line procurement; business to consumer e-commerce is very limited), and limited innovation for the creation of new products and production processes –particularly biotechnology (EU is lagging behind the USA with 30% less biotechnology patent applications in all domains). The EU has engaged to phase out export refunds for Processed Agriculture Products.

KNOWLEDGE | The food manufacturing industry in EU is characterised by low ICT intensity and weaker R&D investment and innovation compared to main competitors. Innovation for the creation of new products and new production processes is limited, particularly for biotechnology (EU is lagging behind the USA with 30% less biotechnology patent applications, including the Food sector). Initiatives are being taken with the development of the European Technology Platform on Food for Life that aims at research in nutritional sciences and food technologies in order to deliver novel, innovative food products for national, regional and global markets. |

COMPETITION | A certain degree of economies of scale is noticed, with the total number of firms reduced by 5.5% between 1999 and 2002, mostly due to raising mergers and acquisitions activity. Since 1990, the Commission has approved 152 mergers, out of which 17 have been subject to remedies and has found 7 cases of an abuse of restrictive agreement practices where fines have been imposed. |

REGULATION | The Food industry is a regulated industrial sector in the EU, like automobiles and chemicals. EU food legislation has developed over many years both to address food safety concerns and to create a single market. The programme of updating, reviewing and simplifying food legislation following the White Paper on Food Safety has provided a modern, up-to-date and flexible framework to ensure food safety, while ensuring the single market and thus offering a clear framework within which the food industry can develop. It has become one of the most regulated industrial sectors, but this harmonisation process has been a key economic factor in the development of the agro-food sector in Europe. For some domains (e.g. GMO’s, labelling) the legislation may be seen as a considerable regulatory burden, which might hamper innovation, particularly in an industry dominated by SMEs but this needs to be put into context of ensuring that the legitimate health and safety concerns are taken into account. |

ENVIRONMENT | Food industry is covered by the following legislative measures: - Integrated Pollution Prevention and Control Directive (the BREF for the food and drink sector has been finalised) - Packaging and packaging waste Directive - Waste Framework Directive |

EXTERNAL COMPETITIVENESS | Trade of processed food products is situated to just around 6 % of trade in manufacturing, though the balance is positive. The EU15 is the second world exporter after the US and the world’s largest importer of food products, with a share of 12.6% of total world trade. Contrary to the situation in the EU, other food production markets face considerable expansion, particularly in Latin America and Asia. The trade balance with these countries has worsened significantly, having as a result a decline (3,8%) in EU exports for the first time in a decade. The recent fall in import prices (2.9%) and the rise in production prices (1.5%) boosted the rise in imports, also triggered by the appreciation of the Euro. Imports represent less than 7.5% of the Euro zone’s consumption. The main destination of EU products is by far the USA, followed by Japan, Switzerland, and Russia. The main sources of EU imports are Brazil, Argentina, and the USA. Sugar prices within the Community are approximately three times the international prices; while European skimmed milk prices are in line with world prices, butter prices are 35%higher than the current international prices; European cereal prices are nowadays comparable to international prices. The recent reforms of the CAP that are gradually replacing price support with direct payments to farmers are leading to drops in the market prices in the reformed sectors. |

EMPLOYMENT AND GEOGRAPHICAL DIMENSION | Food industry is the 1st industrial employer with an estimated 4.1 million employees, of which 61.3% are employed in SMEs (undertakings of less than 250 persons) that represent more than 99 % of the total number of undertakings (CIAA data). Germany, France and the UK are its three most important contributors accounting for more than 80% of turnover whereas the ten new Member States account for only 7.5%. In the absence of a reform of the CMO (Common Market Organisation) in the sugar sector, the EU will witness a severe and generalised decline in sugar production. Under the Commission’s June proposal, sugar prices will fall by 39% and sugar will be produced in the most competitive regions of the EU. In the least competitive regions, where sugar production will cease, both the sugar beet growing and sugar processing industries, will benefit from the proposed restructuring scheme, which will help them to seek more profitable alternative economic activities. |

* Nace 15, 16

FOOTWEAR

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FOOTWEAR COMPETITIVENESS ASSESSMENT

The sector includes more than 27,000 enterprises, generating € 26.7 bn in turnover and € 7.2 bn in value added (0.5% of total EU manufacturing), and directly employing 361,000 people (over 1%). Since 1995 EU production has fallen by 36% and value added has fallen 2.2% annually. Production and employment have decreased twice as much, resulting in disappointing productivity gains making competition with low labour costs difficult. The average productivity is 40% below that of manufacturing as a whole and varies strongly among Member States, being below average in all new Member States. The competitive advantages of the EU production lie in the high quality of production in technical, aesthetic and fashion-related terms, and the development of highly demanded brands with a strong image. In addition, there is a need to enhance the capacity to produce high value added products through decisive technological breakthroughs in production and marketing processes.

Manufacturing is concentrated in Italy, Spain and Portugal, and characterized by networks of micro and small enterprises, adaptable to market changes but vulnerable to external shocks. Employment is concentrated in the smallest enterprises , while big companies of more than 500 employees employ less than 15% of the workforce in the sector. This contrasts with the manufacturing sector in general, where the biggest companies employ 33% of the workforce . It is interesting to note that the enterprises with less than 20 employees have the second highest productivity level. The highest productivity is registered in the group of companies having between 500 and 1000 employees, while the big companies of more than 1000 employees have the lowest level of productivity. The preponderance of micro enterprises and SMEs in the footwear sector represents a strength in the sense that companies of this size are usually more flexible and adaptable to change in the nature of market demand. On the other hand, the high number of SMEs in the sector is also an indicator of vulnerability as these companies have in general a narrower capital base and are therefore less able to sustain external shocks and economic downturns.

Retail, distribution, marketing and branding are increasingly controlled by large multinational companies with the capacity to source massively on the global market.

The significant productivity gap between new and old Member States is a subject of concern, especially in view of the fact that the footwear sector represents a relatively higher weight in the manufacturing production and employment in several of the new Member States. This issue will become even more important with the next wave of enlargement in 2007 as Romania and Bulgaria are countries where footwear plays a very significant role in the economy and where the productivity gap with the EU is important.

Increased market access in general and especially to emerging economies where middle classes are growing, representing a quality-conscious market where the EU has the highest competitive advantage, is of strategic importance to the sector.

KNOWLEDGE | The main technological challenge for the footwear industry is to focus on higher value-added and eco-efficient and sustainable products, processes, materials and organisations. A significant effort regarding research and skills is required to achieve these objectives in terms of business models, new materials, enhanced manufacturing processes, etc. Initiatives at EU level such as the CEC-made-shoe (custom, environment, comfort) integrated project under the 6th RTD Framework Programme are already underway covering many of these challenges. Of particular interest to the sector is the proposal for origin marking legislation. The sector is in favour of compulsory marking of origin for imports. |

COMPETITION | The sector is characterized by a hi