EN Official Journal of the European Union C 44/88

Opinion of the European Economic and Social Committee on the ‘Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions — European strategy for Key Enabling Technologies — A bridge to growth and jobs’

COM(2012) 341 final

2013/C 44/15

Rapporteur: Mr Peter MORGAN

On 26 June 2012 the Commission decided to consult the European Economic and Social Committee, under Article 304 of the Treaty on the Functioning of the European Union, on the

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions — European strategy for Key Enabling Technologies — A bridge to growth and jobs

COM(2012) 341 final.

The Section for the Single Market, Production and Consumption, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 4 December 2012.

At its 485th plenary session, held on 12 and 13 December 2012 (meeting of 12 December), the European Economic and Social Committee adopted the following opinion by 102 votes to two with seven abstentions.

1. Conclusions and Recommendations

1.1 This is the second Communication from the Commission on the subject of KETs. The EESC produced an opinion (1) on the earlier Communication (2) in September 2010. In it the EESC welcomed the EU focus on KETs but expressed grave reservations about the effectiveness of the proposals because of the perceived weaknesses in EU hi-tech manufacturing.

1.2 Paragraph 1.10 of that opinion contained the EESC recommendations: — face up to the failure of the internal market to encourage enterprise and develop an industrial strategy to address Europe's considerable deficit in hi-tech companies; — bring back manufacturing to Europe and scale up new companies in Europe; — make it easier for companies to obtain funding for innovative technologies; — create financial incentives to make the EU a profitable location for KET innovation and enterprise; — initiate radical reform of schools and universities to provide the necessary skills; — encourage university and research centre based clusters of hi-tech innovative companies; — recognize that the world has changed and adopt aggressive international trade policies; — ensure that this initiative is all embracing, pulling in all related initiatives from all DGs. The EESC reiterates these recommendations.

1.3 In its latest Communication the Commission proposes that the EU's R&D efforts be transformed into a strategy based on three pillars with support not only for R&D but also for pilot lines to develop prototypes and advanced manufacturing schemes to convert the technologies into products. In this context, the EESC has two recommendations. The first is that the focus on the two new pillars of the strategy should not detract from or reduce the scale of EU R&D, since research, in particular basic research, is the necessary seed from which future KETs emerge. The second is that this scheme, which seems to rely on pushing new technologies towards the market, should be complemented by market pull from established manufacturers. Accordingly, the EESC would like to see more emphasis on building up the capacity of EU manufacturing companies.

1.4 The EESC is generally supportive of the Action Plan, outlined in Section 3 below. Even so, given the disparities between Member States, the EESC would like to see action programmes constructed according to the skills and capabilities of each region.

1.5 Certain components of the Action plan are likely to require more impetus, especially state aid modernisation, venture capital, IPR negotiations in the global context, trade negotiations in hi-tech industries and improvements to education and training at all levels, with a special emphasis on engineers and scientists.

1.6 Although Governance of the KET project is addressed in the Action Plan, the modalities are not clear so that the programme may lack impetus.

2. Introduction

2.1 The Commission engaged a ‘High Level Group’ (HLG) to study the responses to its first Communication and produce a report (3), which was published in June 2011. Subsequently, this second Communication lays out ‘A European Strategy for KETs’.

2.2 In its report the HLG has identified the major difficulties Europe has in translating its ideas into marketable products – in crossing the internationally recognised ‘valley of death’. To cross this valley, it recommends a strategy comprising three pillars: — the technological research pillar based on technological facilities supported by research technology organisation; — the product development pillar based on pilot lines and demonstrator supported by industrial consortia; — the competitive manufacturing pillar based on globally competitive manufacturing facilities supported by anchor companies.

2.3 The proposal is to develop an industry for advanced manufacturing generating a source of export revenues, and support the downstream producers of machinery capable to produce the most advanced manufacturing technologies in Europe (machinery, software, services, etc.), as well as the development and improvement of manufacturing systems (technology and processes) in order to build efficient, modern and high technology manufacturing facilities in Europe.

2.4 The eleven recommendations are as follows: — Make KETs a technological priority for Europe — The EU should apply the TRL scale R&D definition — Fully exploit the scope of relevant R&D definitions — Rebalancing of EU R&D funding programmes — A strategic approach to KETs programmes — Establish an appropriate set of rules to implement KETs programmes — Combined funding mechanisms — KETs state aid provisions — Globally competitive IP policy in Europe — Build, strengthen and retain KETs skills — A European KETs observatory and consultative body.

3. Gist of the Communication

3.1 ‘Based on current research, economic analyses of market trends and their contribution to solving societal challenges, micro-/nanoelectronics, nanotechnology, photonics, advanced materials, industrial biotechnology and advanced manufacturing technologies have been identified as the EU's KETs’.

3.2 In its situation analysis, the Communication makes the following points: — The EU is a global leader in the development of KETs. — The EU is not capitalising on its knowledge base. — The EU's major weakness lies in the failure to translate its knowledge base into goods and services. — The lack of KETs manufacturing is detrimental for two reasons: near term opportunities for growth and employment are missed while the long-term knowledge base is reduced.

3.3 The Communication advances the following reasons for these failures: — no common definition and understanding of KETs; — policy failures in respect of exploiting the synergistic potential of KETs and accelerating their ‘time to market’; — lack of product demonstration and ‘proof of concept’ projects; — ineffective use and coordination of public resources; — insufficient access to appropriate sources of risk capital; — fragmentation of EU Internal Market and regulatory differences across various regions and Member States; — shortage of sufficient skilled labour and entrepreneurs.

3.4 The strategy in this Communication aims to: — focus EU policies in the next multi-annual financial framework on research and innovation, cohesion policy, and prioritise EIB lending activities in favour of KETs deployment; — ensure coordination of EU and national activities so as to achieve synergies and complementarities between those activities and the pooling of resources where necessary; — establish an external KETs Issues Group that will advise the Commission on KETs-related policy issues; — mobilise existing trade instruments to ensure fair competition and an international level playing field.

3.5 The following is a summary of the Commission's action plan:

3.5.1 Adaptation of EU instruments — Horizon 2020 — Allocation of EUR 6.7 billion — Rebalancing towards pilot-lines/demonstrator projects — Crosscutting projects — Selection Criteria — European Regional Development Funds — Smart specialisation — Cluster-specific actions — Modernise State aid rules — An agreement with the European Investment Bank — Promotion of required multidisciplinary skills

3.5.2 Coordination — Synergies with national industrial innovation policies — Memorandum of Understanding by industrial stakeholders

3.5.3 Governance — Coordination Group on KETs within Horizon 2020 — An external KETs Issues Group

3.5.4 Skills – the Commission will: — under Horizon 2020 continue and reinforce actions to attract youngsters to KETs; — encourage the establishment by the EIT of a KIC on added-value manufacturing that would integrate business, research and higher education in this field; — publish a Communication which will address the changing and rapidly evolving challenges for skills supply in the EU by the end of 2012; — develop partnerships between education and business such as Knowledge Alliances for Higher Education (HE); and — look at ways to increase the supply of skilled labour in KETs-related areas, including through highly skilled talent from outside the EU.

3.5.5 Trade — The Commission will strive to ensure a favourable trade environment and a global level playing field. This includes the facilitation of market access and investment opportunities, avoiding international market distortion, improving IPR protection, promoting reciprocity notably in public procurement, reducing the use of subsidies and tariff and non-tariff barriers at global level and verifying compliance with applicable EU and WTO rules.

4. European Hi-Tech Manufacturing Companies

4.1 The KET strategy is designed to promote EU based manufacturing of hi-tech products essential for the everyday life of European citizens and European businesses in the 2020 time frame and beyond. Europe based manufacturing of hi-tech products is not at present sufficiently competitive in global markets even though European R&D is considered to be world class. The problem is not seen as a deficiency in European hi-tech manufacturing capacity and capability; it is seen as a transmission failure between R&D and manufacturing. In effect, the Commission strategy is to push technology at the manufacturers. In reality, the EESC believes that successful transmission requires manufacturers capable of pulling through the technology and, in the opinion of the EESC, Europe does not have enough companies competing in the global hi-tech manufacturing sectors.

4.2 The tables below have been extracted from the 2012 edition of the Financial Times analysis of the top 500 global companies and the top 500 companies in each major region. Only the hi-tech manufacturing sectors have been analysed.

4.3 Listed companies do not tell the whole story, but the EESC is satisfied that listed companies are an accurate indicator of the relative manufacturing strength of the regions of the world. The Global 500 table below shows the number of companies in each of the hi-tech manufacturing sectors. Emerging Markets (EM) includes, inter alia, the four BRIC countries. At this level, Europe only leads in industrial engineering, but the regional table gives a fuller picture. FT Global 500 Sector Number of companies Global USA JAP EM EUR Pharmaceutical & Biotechnology 22 11 2 0 6 Novartis (4), Roche (4), GSK, Sanofi- Aventis, AstraZeneca, Novo Nordisk Shire Technology Hardware 16 10 1 2 3 ASML, Ericsson, Nokia Software & Comp. Services 13 7 1 4 1 SAP Automotive & Parts 17 3 5 5 4 Daimler, VW, BMW, Continental Chemical 18 7 1 4 5 Bayer, BASF, Air Liquide, Syngenta (4), Linde Health Care Equipment 13 10 0 0 3 Fresenius, Synthes (4), Essilor General Industrials 12 5 1 5 1 Siemens Industrial Engineering 13 4 3 1 5 ABB (4), Volvo, Atlas Copco, MAN, Sandvik Aerospace & Defence 7 5 0 0 2 Rolls Royce, EADS Oil Equipment & Services 11 7 0 0 2 Sarpem, Transocean (4) Leisure Goods 4 0 3 0 1 Philips Electrical Electronic & Electrical 4 1 1 1 1 Schneider Electric

4.4 In the regional table, the number of companies is shown, together with their aggregate market capitalisation. This gives an indication of the strength in depth possessed by each region while the market cap measures the size and relative success of each regional sector.

4.5 Europe has a world leading position in chemicals and industrial engineering. It has a strong position in pharmaceuticals and biotechnology as well as the automotive sector. The USA dominates health care equipment, as well as technology hardware and software while both Japan and Emerging Markets are stronger than the EU in hardware.

4.6 From this analysis it is clear that the KET programme should have a strategy of reinforcing the sectors where Europe is weak and exploiting those sectors in which Europe enjoys relative strength. A specific effort should be made in medical technology and health care equipment. FT Regional 500 Technology Manufacturing Sectors Sector Number of Companies (#) and Market Value ($ billions) USA Japan EM Europe # $ # $ # $ # $ Pharmaceutical & Biotechnology 21 948 27 176 8 48 15 708 Technology Hardware 33 1,391 18 146 9 146 7 111 Software & Comp Services 25 1,083 12 58 5 109 7 126 Automotive & Parts 9 161 38 446 10 115 13 290 Chemical 16 286 32 133 16 262 22 384 Health Care Equipment 29 495 5 20 1 4 10 114 General Industrials 7 409 8 36 9 87 5 125 Industrial Engineering 13 247 34 217 15 143 21 275 Aerospace & Defence 12 269 0 0 1 5 9 115 Oil Equipment & Services 16 324 0 0 1 10 2 119 Leisure Goods 2 25 14 118 0 0 1 20 Electronic & Electrical 10 125 27 153 7 77 6 61 Alternative Energy 0 0 0 0 1 4 0 0

5. EESC perspective

5.1 Since 1957, the EU has only given birth to three global hi-tech companies: ASML, Nokia and SAP. It has been continually running behind. This would appear to represent a compound failure of capitalism and entrepreneurialism as compared with the achievements of US companies through the period and the successive Asian advances from Japan, Taiwan, Korea and now China.

5.2 While America practices free market capitalism in many fields, its military/industrial complex linked to its world-leading universities has created a hugely fertile field for invention and a plethora of ideas to be exploited in the prevailing enterprise culture and a large market.

5.3 Asian countries provide active state support to and protection of fledgling industries until they are established. They have been both open to and attractive to inward hi-tech investment. They have absorbed the technologies transferred by inward investment and are exploiting them.

5.4 The situation in Europe is very different and the lack of homogeneity is a major factor. In almost every dimension, whether GDP per capita, unemployment rates, corporate infrastructure, university infrastructure, schooling performance, capital markets, labour market flexibility, internet penetration, etc., there tend to be quite profound differences between the six sub regions of the EU as identified by the World Bank. These are EU 15 North (British Isles, Nordics), EU 15 Central (original six minus Italy plus Austria), EU 15 South (4 Mediterranean States), EU 12 North (Baltics), EU 12 Central (PL, CZ, HU, SI, SK), EU 12 South (RO and BG).

5.5 In an effort to establish a world class KET capability it would be logical to tailor policies and programmes for each of these six groupings in a way which takes account of the standing of their universities and research establishments, the scientific and technological skills of the workforce, the abilities and existing markets of their manufacturing companies, etc. If this were done, efforts could be prioritised by region with the best-placed regions in the vanguard. The Cohesion policies proposed in the Communication should be considered in this context.

5.6 The Commission governs the EU through legislation and financial disbursements supported by observatories and agencies. It can be effective in domains where one Commissioner can take full responsibility for an initiative. There are at least six Commissioners involved in the KET project and the EESC does not believe that it can succeed without a concentration of authority and a more direct mode of governance.

5.7 Much conventional wisdom needs to be challenged. A regional approach is one example. Both the HLG and the Communication have recognised that State Aid mechanisms need to be re-thought for KET projects. The Communication does not deal with the IPR proposals with the vigour described in the HLG report (5). The EESC welcomes what the Communication says about trade, but does not feel that existing trade policies have sufficiently protected the EU's interests. This is another domain that would benefit from new governance and a remorseless pursuit of EU interests.

5.8 The EESC welcomes the change in focus brought about by the HLG, turning attention from R&D support to a balanced three-pillar approach. In this respect, FP7 now seems quite deficient. Even so, the EESC is concerned that there may not enough companies in the EU with the capabilities, the products and the global reach to pull through and commercialise the output of the R&D pillar. The whole proposal is built on the assumption that pillars two and three can push KETs through to the market. In reality, KETs are more usually pulled through by high-tech manufacturers like Apple, BMW, Bayer, Rolls Royce or Airbus. The EU must develop, with Member States, a strategy to support and develop more world-class end product companies. Existing companies should be incentivised to expand their product lines with new products with high KET intensity aimed at global markets. The Communication states many times that KETs can create growth and jobs. The EESC has a different perspective; it is companies using KETs which can create growth and jobs. The EU needs more companies with products and markets which can exploit KETs.

5.9 When KETs are not pulled through into the markets by established end product companies, they are pulled through by entrepreneurs. Most entrepreneurs are, in their turn, either pulled through by venture capitalists or by established companies attracted to the entrepreneurs. IBM sponsored Microsoft and rescued Intel, Apple has sponsored ARM Holdings which now rivals Intel, both Google and Facebook received investments from rich tech industry investors; VCs then supported Google and Microsoft supported Facebook. In Europe, the Nordic entrepreneurs behind Skype and Angry Birds received VC support from London and California.

5.10 The KET project is a microcosm of the greater challenge of EU wealth creation. The USA has a market driven formula and Asia has state driven policies. EU Member States such as Germany and the Nordics have successful policies, but many others do not. At the overall EU level, the Communication puts the limited resources of the Union behind the KET programme, but the EESC fears that this wealth creation model will not prove sufficiently effective in the face of global competition.

6. Specific Comments

6.1 The EESC is concerned that ‘rebalancing’ towards the second and third ‘pillars’ could imply a reduction in the scale of EU R&D. The EESC would not support this. Powerful basic research is needed to provide for the next generation of innovation. Modern technology is mostly based on the unexpected results of basic research.

6.2 Since the EU does not have a military/industrial complex on the scale of the USA (or China), its science needs to be stimulated and challenged in other ways. This is the value of projects such as Galileo and ITER.

6.3 The EESC welcomes the focus on education and skills. However, it notes that the Communication highlights the decline in EU science and engineering graduates. The EU deficit in science and engineering at all levels of education is the Achilles heel of both EU competitiveness in general and of the KET project in particular. The plans outlined in the Communication are less than adequate, given the magnitude and the urgency of the problem.

6.4 The EESC has recently given its opinion in response to the Communication on State Aid Modernisation (6). In the KET context, the concerns expressed in paragraphs 1.5.1 (definition of market failure), 1.6.3 and 1.6.4 (level playing field) are relevant. In its drive to preserve competition within the internal market, EU external competitiveness has been jeopardised.

6.5 The Communication notes that venture capital (VC) activity has declined in the EU in the past decade and, in effect, sets out to replace VC money with EU funds. While this is welcome, it is not sufficient. The EESC recommends that the EU works with Member States to create the pre-conditions for VC in Europe.

6.6 The Commission has informed the EESC about its intentions for the KET Issues Group, the successor body to the HLG. ‘Besides technology representatives for each of the six KETs (nanotechnologies, microelectronics, biotechnology, photonics, advanced materials, advanced manufacturing systems), it is proposed to have multi-KETs representatives (most innovative products are a combination of different KETs) and to have more down-stream industry users (e.g. aeronautics, automotive, aerospace, construction, energy, food, medical devices, equipment, design…) than in the first High Level Group (as the aim of the KETs Strategy is to boost the industrial production of KETs-based products)’.

6.7 Much will depend on the companies represented, their influence on the larger (very much larger) Issues Group, the success of the Group in helping more of the 118 regional companies in the hi-tech manufacturing sector reach global status and, most importantly, its success in promoting the emergence of the next 118 at the regional level.

Brussels, 12 December 2012. The President of the European Economic and Social Committee Staffan NILSSON

(1) OJ C 48 of 15.2.2011, p. 112.

(2) COM(2009) 512 final.

(3) http://ec.europa.eu/enterprise/sectors/ict/files/kets/hlg_report_final_en.pdf

(4) Companies market with an asterisk (*) are Swiss, not EU

(5) The HLG recommends that the EU adapts state aid provisions to facilitate RDI activities and large-scale investment in KETs, in particular through the introduction of a matching clause in the EU state aid framework across the board, review of the scaling-down mechanism for larger investments increased thresholds for notifications, faster procedures and the use of projects of common European interest.

(6) State aid modernisation (OJ C 11, 15.1.2013).