EN Official Journal of the European Union C 12/23

Opinion of the European Economic and Social Committee on the impact of business services in industry

(own-initiative opinion)

(2015/C 012/04)

Rapporteur: Mr van Iersel Co-rapporteur: Mr Leo

On 22 January 2014, the European Economic and Social Committee, acting under Rule 29(2) of its Rules of Procedure, decided to draw up an own-initiative opinion on the

Impact of business services in industry

The Consultative Commission on Industrial Change (CCMI), which was responsible for preparing the Committee's work on the subject, adopted its opinion on 16 September 2014.

At its 502nd plenary session held on 15 and 16 October 2014 (meeting of 16 October), the European Economic and Social Committee adopted the following opinion by 100 votes in favour with 0 votes against and 2 abstentions.

1. Conclusions and recommendations

1.1 Given the close interaction between services and manufacturing and its impact on sustainable growth and employment in Europe, the EESC urges the Commission, in its next term of office, to put business services on the priority list. This is all the more necessary because of a new production model that some call ‘the fourth industrial revolution’.

1.2 Concrete EU initiatives are required in all fields that are related to the digital revolution and the transformation of the economy and society that it brings about. Raising awareness among public authorities and in society is a prime prerequisite.

1.3 Business services should be part of an active industrial policy and be taken on board in the mid-term revision of the Europe 2020 strategy in 2015. The EESC notes that their significance has hitherto been undervalued by the Commission and by the Council.

1.4 Half of the Commission’s DGs are in some way involved in services, but there is no systematic, let alone a strategic, approach. There is no clear policy or a visible spokesman in this area. Very disappointing and short-sighted was also the reduction by the Council of the budget for the Connecting Europe Facility in the Multiannual Financial Framework from EUR 9 billion, the figure proposed by the Commission, to EUR 1,2 billion.

1.5 The EU has to decide now whether it wants to take the lead, contributing to new sustainable growth and new jobs, or leave its place to others.

1.6 Therefore, the EESC warmly welcomes the Commission’s initiative last year to start a fundamental discussion in a High Level Group on business services (1). The EESC insists that this must be followed shortly by: — an in-depth analysis, — effective coordination between the Commission departments concerned, and — a European agenda (see point 1.15).

1.7 Fast-expanding business services are already dominant in manufacturing. A wide and growing range of companies — both manufacturing and service — is now involved in designing and delivering new generations of business services. New technologies make services still more relevant to manufacturing.

1.8 In addition, the Internet of Things and the Internet of Services is currently known in Europe as the fourth industrial revolution, a dawn of a new era following that of automation.

1.9 A quantum leap results from a vertical and horizontal cooperation from machine to internet, machine to human, and machine to machine along the value chain in real time. Islands of automation will get interconnected in innumerable networks and variations. Software and networks will connect intelligent products, digital services, and customers to the new innovative ‘products’ of the future.

1.10 This development is widely discussed. A pioneering economic and political approach is the German project Industry 4.0, which pays due attention both to business services and to the wider economic context which is undergoing a fundamental transformation. Together with similar initiatives, it should be a building block for the agenda for the industry and a wide range of public and private stakeholders. In digital markets, the first mover enjoyed big competitive advantages in the past.

1.11 Globally-comparable strategic initiatives are foreseen in the US, China, and Korea. An investment programme is planned by the Pentagon. Data giants like Google, Amazon, Apple and Yahoo have a natural advantage in the market place.

1.12 The human factor is decisive. New value chains and business models generate new alliances and interrelationships between companies, and this has a tremendous impact on work organisation. Moreover, considerable shifts in the labour market are expected. New forms of work organisation, employment arrangements, and updating of skills are, due to the rapidly developing digital technology, constantly emerging in industry and, in particular, in business services sectors. These transformations must be monitored closely. Purpose-built policies that must be based on well-funded research, must focus on promoting positive conditions and mitigating negative effects.

1.13 Many business service sectors currently lack a culture of social dialogue, which may undermine the quality of employment in these sectors. A robust framework for social dialogue and active participation — also in view of innovative education and training facilities — at company, sectoral, national and EU levels is required, taking into account the often firm restructuring in the quickly evolving business service industry.

1.14 Cross-border and EU recognition of qualifications and skills will promote labour mobility and knowledge. This will also extend and reinforce European opportunities for the very high number of small and micro-companies in this field.

1.15 The EESC largely agrees with the recommendations of the EU HLG and the five working groups of 2013. Given the overwhelming importance of business services to achieving the goal of manufacturing making up 20 % of GNP in 2020, as well as the prospect of the fourth industrial revolution, a European agenda or roadmap for business services is necessary. In the view of the EESC it should embrace the following: A. Knowledge and policy support: — raising awareness and promoting debate, — defining and classifying business services, — providing relevant and reliable statistics on business services and their evolution. B. Policy areas: — strengthening integration, combating fragmentation of the internal market and removing barriers to intra-EU trade, — supporting a regulatory framework and European platforms on standardisation, — strengthening the internal market in the telecoms sector, — promoting investment in the infrastructure required for a secure digital marketplace for communication, cooperation, and the exchange of digital goods and services, — protecting data and intellectual property rights, — reducing legislative and regulatory barriers to international trade in business services. C. Specific topics: — the impact of Big Data — the significant increase in the volume, variety and velocity of data — resulting from intensified networking and data generation, — the very important link between research, industry, services and employment, — public procurement, — environmental performance and sustainability, — the social impact of business services on society in general and the labour market, D. Financial: — financial resources.

2. Introduction

2.1 In mature economies more than 70 % of output and employment comes from services. The percentage of services as well as their sophistication is rising everywhere in the world.

2.2 Business services are an important growth factor. According to the EC, between 1999 and 2009 their average growth rate was 2,38 %, while the average of all sectors for the EU economy was 1,1 %. In the same period, the employment growth rate in this sector was 3,54 %, while the figure for all sectors of the EU economy was only 0,77 %.

2.3 The rise of the service economy (or ‘tertiarisation’) in overall economic activity in the EU outstrips that of manufacturing. This stage is being followed by ‘quarterisation’ which is associated with the rise of information and knowledge-based services.

2.4 Services is a generic term. It concerns a very broad range of economic and social activities, from the lower to the high end of the labour market. Employment growth occurs in high- and low-skilled occupations, while the workforce in medium-skilled service occupations is shrinking, which puts pressure on the middle class.

2.5 In the service-industry interaction the following main types of relevant services can be identified: — externally supplied services, used by industry, i.e. services coming from the business services sector. These cover the whole range of operational services (e.g. industrial cleaning), professional services (e.g. engineers), and other services, including KIS (e.g. computer services), — internally supplied services, used by industry, i.e. service functions that are performed ‘in-house’ within industry, — supporting services, supplied by industry, i.e. services supplied by industry alongside their products (e.g. after-sales services), — embedded services, supplied by industry, i.e. service functions that are embedded within the products supplied by industry (e.g. software).

2.6 Business services have considerably increased since the 1970s. They currently account for EUR 2 000 billion of turnover, and provide jobs for 24 million people. Millions of companies, mostly small and micro-sized, are involved, apart from not to mention the internal service-based parts in larger companies. Business services account for 11,7 % of the EU economy.

2.7 The picture is extremely diversified without a common denominator. The tremendous impact affects all layers and relationships in society. They are a driving force for change and stimulate the revision of business models. They foster continuous reorganisations of public and private companies and public bodies.

2.8 In recent decades, automation and ICT have been strong drivers (2). Developments in individual service sectors also often have transversal effects on other sectors.

2.9 Traditional boundaries between manufacturing and services are blurring. The development of manufacturing can no longer be seen separately from services as it was in the past. In this context the EU target of raising the share of manufacturing industry to 20 % of European GNP should be redefined, taking account of the added value of business services. It would be more appropriate to speak of a manufacturing-centred value chain (3).

2.10 In the global context Europe is — by and large — doing well, although there are fields where European industry is struggling. A rise in productivity and the dynamic introduction of new technologies may provide a positive effect on relocation. On the other hand, one notices a sensitivity of people to renewal and a hidden resistance to innovation. This trend deserves to be given specific political attention.

3. The development of business services and industry inter-linkages

3.1 Business services are at a very dynamic stage. Due to the revolution driven by the Internet, the impact of services on production lines as well as on the overall performances of business is increasing. Production lines are now driven by software. The role of labour in manufacturing is being reduced.

3.2 This is contrary to the conventional theory and indicates that manufacturing and business services are increasingly interwoven. Consequently, a distinction between the two is often artificial. Nowadays, companies use inputs and produce products and services that incorporate components from both manufacturing and services. This interaction is a two-way process.

3.3 This conclusion can also be drawn from changes in the corporate landscape. Although services are mainly supportive, they are a key driver in the fragmentation of value chains. Among other things, this brings about the split-up of larger companies and changes them from being rather static entities into ones based on dynamic combined interactions between more or less independent — or at least identifiable — parts within the same company or outside (outsourcing). As flexible and adaptable intermediaries, services are supporting these processes.

3.4 Fragmentation of the value chain also considerably reduces the distinctions between sectors, as the boundaries between sectors are blurring. A totally new picture comes into being, for instance Google producing a car, knowing that 35 % of the investment in a car is in software, even climbing as high as 50 % in engineering and in sophisticated machine-building.

3.5 Despite a general acknowledgment of the impact of services for the whole economy and employment, in-depth analyses at EU level are, most astonishingly, still lacking which is, among other things, due to the following: — apart from some big companies, the sector generally consists of innumerable small and micro-companies which are hardly organised, so the voice of the business services sector at EU-level is very weak, — moreover, due to a dynamic and continuous process of renewal and inventions, it is very difficult to come up with reliable classifications, — the long-standing exclusive attention paid in the EU to manufacturing industry has prevented it from taking an honest and dispassionate look at the overwhelming impact of supportive services.

3.6 Traditional statistical indicators with sharp distinctions between manufacturing and services are therefore incapable of capturing the complex structure of value chains. Input/output perspectives should highlight, among other things, which service industries deliver, and how much, to manufacturing and vice versa. But first this requires the development of new sets of statistical indicators.

3.7 More precise and detailed statistics should build a better basis for policy debates on what is going on and on possible instruments to improve output.

3.8 Statistics can also help to focus the debate, among other things, on removing obstructions to cross-border trade and mobility which stem from national regulations, ‘gold-plating’ and special national rights granted to professions in the services sector, e.g. concerning qualifications. The harmonisation and cross-border recognition of professional qualifications should facilitate cross-border mobility among the regulated professions, which is also of particular interest to small and micro-companies.

3.9 Overall EU figures will highlight considerable differences between European countries. A strong service sector feeds a strong economy. Infrastructure, especially broadband, is of great importance. Infrastructure should be duly protected both for data protection reasons and to ensure continuity of services. A number of Member States must undertake considerable efforts to catch up in this area.

3.10 Production lines are more concentrated than before. The interconnectedness of European and emerging markets has created complex economic and knowledge networks where services are a driving force. Delocation will become less effective, as industry will depend on the most specialised, knowledge-intensive and high-quality services.

3.11 Europe still maintains a comparative advantage in the production of such high-end services, mainly due to its highly skilled workforce and level of R&D. However, Europe should not fall into the trap of complacency. Competitive advantages need to be maintained pro-actively. This requires, in particular, policies that foster continuously high levels of investment in R&D and a further improvement of the workforce's skills.

3.12 The interaction between service providers and clients is paramount. Business services foster the production — products and/or auxiliary tools — of the client. Successful developments result from effective cooperation between demand and supply, envisaging new ‘architectures.’ Different visions and ‘languages’ are bundled together to produce new solutions. In these processes creative and tailor-made solutions come from a variety of disciplines. One thing that is remarkable is the lack of medium-sized companies. Apart from important large service-suppliers like SAP, Europe is less represented in the large segment of service-providers than the US. In some high technology sectors Europe is virtually absent compared with the US. The examples of Google, Apple, Amazon, and Microsoft, as masters of the game in which ‘the winner takes all,’ show how deplorable it is that Europe has no player in this field.

3.13 As regards any problems arising from the Services Directive, the completion of the single market for business services must display a commitment to seizing opportunities for growth and job creation whilst keeping in check the possible negative consequences of services liberalisation, such as social and wage dumping.

3.14 In 2011, the Commission drew particular attention to the need for an appraisal of the role of knowledge-intensive business services (KIBS). One overarching conclusion is that services — and KIBS in particular — play an important and growing role as inputs into manufacturing processes. The two are in fact inseparable, while manufacturing output depends more and more on the quality of such services.

3.15 Science and universities are also very much involved in innovative services and in interaction with industry. Quite a number of universities are the sites of promising start-ups in business services. This adds to the clustering of science, innovative solutions and industry. Moreover, it leads to further positive effects as better services contribute to a moving-up of the value chain in industries where a country already has technological capacity and a comparative advantage (4). This adds substantially to the importance of manufacturing in international trade.

3.16 Due to the significance of services one speaks of the ‘servitisation of manufacturing’. The symbiosis of manufacturing and services often changes the focus of companies or even whole fields of activity. A change in marketing concepts is made possible by new services, as they are no longer focused on selling products but on (individual) customers’ needs. Another example is that manufacturing is now increasingly relying on the design and delivery of business services as the most profitable part of their activities.

3.17 Against this backdrop, a goal of 20 % for manufacturing industry's share in Europe's GNP by 2020 is too unspecified. The goal should rather be the need to create favourable conditions for enhancing industrial processes in which the symbiosis of manufacturing and services is delivering up-to-date products by upfront production processes and productivity.

3.18 The new wave of ICT applications is a self-propelling process: services breed services, and consequently their significance for the economy at large increases disproportionally. They foster productivity and stimulate transversal effects across the economy which give rise to new combinations. They will also give a further impetus to globalisation.

3.19 Another phenomenon is that more and more products are marketed together with services attached to, or even incorporated into them, which again leads to new alliances and combinations.

4. The fourth industrial revolution — a major sea change

4.1 The spectrum and the impact of business services becomes much larger when it is linked to the fourth industrial revolution, which has a broader scope than business services alone (5). This revolution is following the three eras of mechanisation, electricity, and IT. Now it is all about the introduction of the internet of services and the internet of things.

4.2 As part of this process there is a variety of initiatives in business and science, some of which have been encouraged by public authorities, to adjust production processing and develop new products. One pioneering initiative is a roadmap concerning the fourth industrial revolution initiated by the German government in 2012 (6).

4.3 There are currently more initiatives in parallel with corresponding characteristics, for instance: — the Dutch ‘Smart Industry’ initiative of April 2014; — the ‘Industry 4.0’ strategies of the Austrian regions; — the Walloon region’s competitive clusters; — the ‘Future of manufacturing’ project sponsored by the UK government; — the Fondazione Democenter — Sipe, Emilia Romagna; — the Smart Manufacturing Leadership Coalition — US; and — the Cyber-physical systems innovation hub, India (wider than 4.0).

4.4 The smart factory of the future is of a very sophisticated complexity, embedded in fine-tuned networking due to further developed software applications and systems. This development will result in progressive individualisation — for customers as well as employees — in delivering and benefiting from smart and tailor-made products and components.

4.5 The potential for industry and the economy is immense. The instantaneous accomplishment of customer's wishes, flexibility, optimal decision-making, the efficient use of raw materials, and a potential for added value by new services are to be promoted. The development might equally fit in with demographic trends in Europe and may benefit the work-life balance, at the same time boosting competitiveness in a high-income environment.

4.6 In all industrial sectors, horizontal and vertical integration, as well as an end-to-end digital integration of engineering across the entire value-chain will be envisaged. Open access and innovation will boost intense networking.

4.7 In order to avoid losing ground to competitors from non-EU countries, common EU platforms on the standardisation of products and services, including all relevant components in the value chain, have to be put in place.

4.8 Large and small companies alike are involved. The outlook for SMEs is positive. They will be able to make use of services and software systems far more easily than hitherto. New opportunities will be created for region-based SMEs, which can also be integrated more easily into internationalisation processes. SMEs will benefit from interdisciplinary knowledge and technology transfer anyway.

4.9 As described above, in all categories there will be a far closer relationship between clients and suppliers.

4.10 Existing IT-based technologies need to be adapted to the specific requirements of manufacturing and continue to be developed. Research, technology, and training initiatives are needed with a view to developing methodologies in the field of automation engineering modelling and system optimisation.

4.11 An infrastructure of the economy is required which includes an appropriate building up of broadband-internet-infrastructure as well as adequate education and training facilities. In this respect the EESC insists once again on the need for a Growth Initiative in addition to sound fiscal policies (7). EU Member States should benefit from the current recovery and take the opportunity to intensify investments in indispensable infrastructure as a matter of urgency in the industry 4.0 era.

4.12 Industry 4.0 will give Europe a unique chance to drive towards various goals with one single infrastructure investment. Postponement would undermine European competitiveness. Such investment should therefore also be considered positively as part of the country-specific recommendations in the annual Semester.

4.13 The German roadmap pays due attention to the social aspects of this new development. Not only the management and personnel of companies, but the whole of society is involved. It is a major sea change in the spheres of human-technology and human-environment interaction. Technological innovations must be seen in their socio-cultural context, since cultural and social changes are also major drivers of innovation in their own right.

4.14 In the same vein, decentralised leadership and management approaches, as well as the responsibility of the employed for making their own decisions, are breaking new ground. This entails fundamental changes.

4.15 Platforms, seminars, and working groups, including businesses, social partners, the world of science and public authorities should be organised nationally and at EU level. Such platforms and working groups are crucial to defining the vision and strategies to manage the transformation process in order to seize opportunities and avoid pitfalls. The HLG (see below) provides an example of successful stakeholder dialogue.

4.16 The new digital industrial business and services world will need a secure, trusted digital exchange platform with clear market rights and rights protection (8). In this modern hybrid world, a communications and cooperation platform is equally important.

5. Implications for society and labour markets (9)

5.1 A service-driven society and digitilisation have tremendous consequences for the labour market and for society at large: — The ‘servitisation’ of the economy generates a reduction of employment in middle-class income groups. To stop and reverse this trend, the creation of medium-income employment opportunities should be made an explicit objective in policies on structural adjustment. To this end, instruments such as Active Labour Market Policies and investments in innovative education and training should be highlighted in EU policies for industries and services. Steps should be taken to examine how collective agreements can be supportive in this respect. — People at all levels must be prepared to equip themselves with new sets of skills which, in view of the huge social challenge involved, is all the more reason to foster up-to-date education curricula as well as life-long learning. The transition affects all generations, so elderly workers too must be given the opportunity to continuously update their skills. Any research on or evaluation of the transformation process must help to identify occupational skills and qualification needs properly. — Development is mainly being driven by (new) small and micro-companies, while large operations are reducing their labour force. This process is reflected in a boost of start-ups and self-employed people around Europe. Nowadays, somebody can set up a software company over the weekend by using readily available tools that allow him to quickly develop and test products, the so-called ‘lean start-up’ movement.

5.2 It is worrying that this sea change in the economy, with all its consequences for society and the labour market, is still insufficiently analysed and is not being discussed more widely in circles other than the business and scientific communities.

5.3 Consequently, there are many reasons why this transition to totally new perspectives in the economy must be discussed widely in politics and in society, both nationally and at EU level. This process affects the day-to-day life of many citizens in regions and towns in terms of employment as well as unemployment. It will thus also influence the choices of people regarding their own future. The social and cultural aspects involved should be duly highlighted and taken into account.

5.4 Research on the rapid shifts on the labour market which must be mapped accurately as a basis for future education and training should be given priority under the heading of ‘Industrial Leadership’ in Horizon 2020.

5.5 Many vulnerable jobs are at risk, and if this process is not well managed it will have social and political consequences. The EU and the Member States must therefore put political and regulatory environments in place that, in addition to providing new and indispensable technology, also ensure that the objectives of improving working and living conditions and of avoiding a polarisation between low- and high-income groups are achieved.

5.6 Developments from country to country are uneven. Traditional programmes have to be reviewed and curricula adapted. Companies are underway. The relationship between education and companies is changing in order to keep pace with industrial change. The employed have to be prepared to learn different and, generally, more specialised skills, and they must be enabled to adapt to rapid changes in the demand for skills.

5.7 This development does certainly not mean a one-sided emphasis on technical skills. Intellectual and social skills remain just as important. These are indispensable for keeping pace with all the developments in society and the need for social innovation which goes hand-in-hand with fundamental shifts in the economy.

5.8 In this all-over perspective, social dialogues at company, sector, national and EU level must be ensured to discuss developments, framework conditions in the EU and in the Member States, and ways and means to prepare the work force properly.

6. High Level Group on business services — a first step

6.1 The impact of the intensification of business services has too long been neglected at EU level and in EU policy-making. The expected quantum leap makes it all the more necessary that this situation is rectified. Therefore the EESC welcomes very much, as a first step, the report of the HLG on Business Services in 2013.

6.2 Although the Commission is involved in processes which are interlinked with the broad effects of business services, notably via the Digital Agenda and via research and innovation projects, an overall picture is missing.

6.3 Business services deserve a prominent place in a future-oriented industrial policy. The Report of the HLG should pave the way to getting a full picture of developments and defining the desirable steps to be taken in the EU.

6.4 The HLG identifies a great number of business services, from professional services through technical services to operational support services.

6.5 In particular, they make it clear that business services have been considered largely in-sufficiently up till now in the Commission’s preparation of new policies as well as in the political discussions in the Competitiveness Council.

6.6 Besides the HLG, five working groups have produced reports on: (i) the single market, (ii) innovation, (iii) skills, (iv) standards, and (v) trade. They contain numerous analytical observations and detailed comments on the ongoing process in the areas discussed as well as on desirable approaches for EU policies and actions.

6.7 Many observations and proposals in the reports underline the need for in-depth EU analyses in parallel with improved and focused political guidance to SMEs which the EESC, in line with many experts, has been advocating for years. The outstanding role of micro- and small companies as well as an exponential rise in their numbers in the current industrial cycle underline once more the urgent need for better regulation, improved conditions for innovation partnerships, and a special focus on access to finance.

6.8 Apart from the traditional barriers facing services as compared to those with which manufacturing is faced, the analysis shows that, remarkably, the ongoing fragmentation of the single market for goods also has additional damaging effects on cross-border development and the stimulation of business services. Europe is still far from creating a successful large home market for services.

6.9 The many proposals for improvement of the environment for business services underline the outstanding significance of the latter for the link between manufacturing and services, and thus for the perspective of strengthening manufacturing industry in Europe.

6.10 Therefore the work of the HLG and the working groups is, in the view of the EESC, a very useful starting point for carrying out a more detailed analysis and for the drawing-up of concrete proposals by the Commission.

Brussels, 16 October 2014. The President of the European Economic and Social Committee Henri MALOSSE

(1) The HLG on Business Services, initiated by DG Enterprise and Markets, presented its conclusions in April 2014. In parallel with this, five working groups focused on specific areas.

(2) See in particular EESC opinion TEN/549, ‘Shaping the future of internet governance’, July 2014. (OJ not published yet).

(3) Institut der Deutschen Wirtschaft, Cologne, 2013.

(4) OECD Trade Policy Papers no. 148 ‘The role of services for competitiveness in manufacturing,’ 2013.

(5) The wide-ranging implications of 4.0 have to be discussed separately and more extensively in forthcoming opinions.

(6) ‘Recommendations for implementing the strategic industry initiative 4.0’, April 2013.

(7) See the EESC opinion on ‘A stronger European industry for growth and economic recovery — Industrial policy communication update’, July 2013, especially point 1.2. OJ C 327, 12.11.13, p. 82.

(8) See in this respect EESC opinion TEN/550 ‘Cyber attacks in the EU’, July 2014. (OJ not published yet).

(9) See also EESC opinion TEN/548, ‘The digital society: access, training, employment, tools for equality’, July 2014. (OJ not published yet).