TABLE OF CONTENTS

1........... Introduction.................................................................................................................... 3

2........... State of implementation of the industrial policy flagship initiative........................................ 4

3........... Situation of EU industry.................................................................................................. 8

4........... Analysis of priority areas............................................................................................... 24

4.1........ Industrial innovation...................................................................................................... 24

4.1.1..... Priority areas for intervention in industrial innovation....................................................... 27

4.1.2..... Future workplaces and design for innovation................................................................. 35

4.1.3..... Demand side innovation................................................................................................ 36

4.2........ Internal Market............................................................................................................. 38

4.2.1..... Internal Market for goods in non-harmonised sector...................................................... 39

4.2.2..... The EU Defence industry.............................................................................................. 41

4.2.3..... Services sector............................................................................................................. 42

4.2.4..... Entrepreneurship in the Internal Market: Digital Single Market........................................ 44

4.2.5..... Intellectual Property Rights............................................................................................ 47

4.3........ International markets..................................................................................................... 52

4.4........ Access to finance.......................................................................................................... 59

4.5........ The crucial role of human capital................................................................................... 66

5........... ANNEX...................................................................................................................... 71

1. Introduction

In 2010, the Commission adopted the Europe 2020 flagship initiative on “An Integrated Industrial Policy for the Globalisation Era” in the context of our Europe 2020 strategy for smart, sustainable and inclusive growth'. The prolonged aftermath of the financial and economic crisis has brought about new challenges. Instability has spread from financial markets to sovereign debt markets, compromising the sustainability of public finances in several Member States. Economic confidence has deteriorated and business plans have been delayed. As a result recovery of manufacturing has been subdued. There has been a good progress of our flagship with a high rate of implementation of the 70 key actions announced in the flagship.

The communication updating the 2010 industrial Policy aims at accelerating the impacts of the reforms included in the flagship communication by introducing some new actions with effects on the short term and others to remove barriers blocking progress in the implementation of the 70 proposals presented in 2010. It is in this way that industry can make a more substantial contribution to the recovery from the crisis and to smart, inclusive and sustainable growth, our ultimate objectives.

This staff working document has two purposes. First, it presents progress made in the implementation of the policies announced in 2010 as well as the overview of the current developments. However, since most of the actions included in the flagship communication only have a mid- to long-term impact, their effects on the economy are hardly visible at this stage. Therefore, we present here steps taken to date for the implementation of the communication establishing connections with proposals presented in the new communication update.

Secondly, we present evidence on the current situation and performance of the EU industry paying attention to the impact of the crisis as well as to the previous record of our industry in the preceding decade. This evidence is based on studies conducted over the last two years and the permanent monitoring of EU industry conducted by the Commission services. This is helpful to underpin the importance of the four elements proposed as pillars for our industrial policy in the communication: investment in innovation, skills, markets and access to capital.

The new communication relies on these four main ingredients: restoring confidence to kick-start industrial investment in innovations and new technologies that can increase competitiveness at the same time that it reactivates internal demand and job creation; improving skills base necessary for maintaining industrial competitiveness[1]; fostering the development of entrepreneurship and better market conditions for EU firms, both in the Internal Market and in global markets; finally, actions to facilitate access to capital markets – in particular to SMEs – are proposed.

The next section gives account of developments in the implementation of the 2010 flagship communication while the rest of the report presents a quantitative description of the situation of industry putting emphasis on innovation, the Internal Market and globalisation, access to capital and skills.

2. State of implementation of the industrial policy flagship initiative

In the course of the last two years significant progress has been achieved in the implementation of the flagship communication and a number of actions have been adopted (a detailed overview of the implementation of the 2010 Communication is presented in the annexed table). The 2010 Communication has been successful in articulating different policy initiatives in the pursuit of competitiveness as one of the major objectives of the EU2020 strategy. This emphasis on industrial issues is already visible in the plans for future policy orientations (e.g. Horizon 2020), where deployment of technological innovations has gained in importance. This is also reflected in other areas that were addressed in the 2010 Communication, notably competitiveness proofing, industrial innovation and globalisation of EU industry.

A major development was the publication in January 2012 of an 'Operational guidance for assessing impacts on sectoral Competitiveness within the Commission Impact Assessment System'[2], a Commission Staff Working Document, which builds on best practices inside and outside the EU. It has provided the Commission with an effective tool to deliver more thorough analyses of the impact of new proposals on competitiveness. The Commission now implements competitiveness proofing through an in-depth assessment of the impacts on competitiveness and on SMEs of its new policy proposals with significant impacts. This has been the case for some half dozen proposals, including issues such as the ETS State aid Guidelines to address the risk of carbon leakage. It addresses the impacts of a policy proposal on enterprise competitiveness through its effects on the cost of doing business, on the affected sectors' capacity to innovate, and on their international competitiveness. The task now is to streamline its application in the Commission's impact assessment practices and to promote its application at national level. Commission services are continuously developing methods for an efficient application of this instrument, as well as the "fitness checks".

In the area of industrial innovation, the High-Level Group on Key Enabling Technologies presented its final report in June 2011 with concrete recommendations on the development and deployment of these technologies[3]. A follow-up Communication with a European strategy for Key Enabling Technologies was adopted in June 2012. These technologies have enormous market potential with annual growth rates estimated between 5% and 16% per year up to 2020 and also provide crucial spill-over effects to key downstream industry sectors in terms of innovation and growth. The strategy will focus EU policies in the next multi-annual financial framework on research and innovation and prioritise EIB lending activities in favour of KETs deployment. It will also ensure coordination of EU and national activities in this area, which is coming ever more into the focus of European policy. The transition towards industrial market application of these technologies is a top priority action line in the update of our industrial policy.

Furthermore, to promote the commercialisation and deployment of key environmental technologies, in December 2011 the Commission adopted the Communication "Innovation for a sustainable Future - The Eco-innovation Action Plan" (EcoAP)[4]. This Action Plan is a follow-up of the Innovation Union Flagship Initiative and a natural evolution of the Environmental Technologies Action Plan (ETAP) launched in 2004, although it also complements other Europe 2020 Flagship Initiatives, i.e. Resource-efficient Europe[5], Industrial policy for a globalized era[6] and Agenda for new skills and jobs[7]. The EcoAP aims at promoting the market uptake of eco-innovation through concrete actions both on the demand and supply side, on research and industry, and on a policy and financial instruments. The Commission is now working on a Strategic Implementation Plan (SIP) to take further the implementation of the EcoAP.

The Communication foresees promotion and market uptake of eco-innovation through concrete actions in the environmental policy and legislation, including development of new standards, mobilisation of financial instruments and support services for SMEs, and establishing the European Innovation Partnerships foreseen under the Innovation Union.

The 2010 Communication also had a focus on globalisation that is maintained in the 2012 update of our flagship. This has led to actions such as impact assessments of trade negotiation agreements and international regulatory co-operation initiatives. Another breakthrough has been the high-level business diplomacy Missions for Growth undertaken by Vice-President Tajani. This has so far led to agreements and joint declarations on co-operation with growing economies in Latin America, notably Chile, Brazil, and Mexico. The areas concerned include sectors of strategic industrial importance, such as space policy and radio-navigation by satellite.

In December 2011 the Commission presented an Action Plan to improve access to finance for SMEs. It was accompanied by a proposal to facilitate access to venture capital across Europe through an EU passport that will allow venture capital funds to raise capital in all 27 Member States on the basis of a single registration. If successful, this initiative could create up to 315,000 additional jobs and € 100 billion additional GDP. In addition, in 2012 the Commission aims to complete its examination[8] of the tax obstacles to cross-border venture capital investment with a view to presenting solutions in 2013 aimed at eliminating the obstacles while at the same time preventing tax avoidance and evasion. Furthermore, given the deterioration in the conditions of access to capital markets especially for SMEs, more public sector financial support to SMEs and measures to improve access to capital markets to business are presented in the flagship’s update.

The Commission also continued its efforts to improve the business environment for SMEs. The Small Business Act for Europe was reviewed in February 2011[9] putting emphasis on improved access to finance, more favourable regulation environment and helping SMEs facing globalisation challenges. The latter aspect was further developed in related follow-up actions, like the new strategy to support the internationalisation of SMEs that was adopted in November 2011[10]. The review also recalled the need for Member States to prioritise the business environment through smart regulation, reducing unnecessary regulations and permits, introducing simpler procedures through e-government, and reducing the set-up time for a new business to 3 working days.

An important step towards modernisation of the Single Market was the Commission's proposal, made in June 2011, for a major modernisation of the European standardisation system[11] by, amongst others, issuing standards on services and giving more recognition to ICT industrial specifications. The proposal also announced more transparent cooperation between national standardisation bodies, better planning of the Commission mandates and improved representation of SMEs and societal stakeholders in European standardisation. This is an area of fundamental importance for industry, as it has direct implications for the innovation process. These improvements in standardisation will be put to the test in the implementation of the six priority action lines presented in the 2012 Industrial Policy communication update.

As regards raw materials, a new strategy for the sector has been set out in a dedicated Commission Communication[12]. It reinforced the initiative on raw materials initiated in 2008 and put forward an array of measures aimed at promoting fair and sustainable supply of raw materials from international markets, fostering sustainable supply within the EU, and boosting resource efficiency and promoting recycling. It also identified 14 materials which are critical to the EU industry. Furthermore, the Commission aims to launch an innovation partnership on raw materials in 2013 (subject to Council decision in 2012) to foster innovation along the entire raw material value chain. External actions on raw materials are developed further in the 2012 update of our flagship.

As a part of actions aiming at the promotion of industrial modernisation, the Commission adopted in January 2012 a 'Green Paper on restructuring and anticipation of change'[13] followed by a public consultation. The aim was to identify successful practices and policies in the field. This consultation also helped to select specific restructuring measures that could facilitate European companies improving competitiveness through innovation and a fast, but smooth adaptation to change.

Concerning skills, preparations are under way for a Communication on "Re-thinking skills". Its aim is to steer the modernisation of Europe's education and training systems, in order to increase the quantity, quality and relevance of skills supply. The recently adopted communication on reinforcement of the European Research Area[14] proposed linking funding to the implementation of the EU Principles on Innovative Doctoral Training. This will allow Europe to provide better and faster industry-relevant doctoral training, which is instrumental in meeting the demand for expert human capital.

Furthermore, a comprehensive EU Action Plan for the implementation of the renewed EU Corporate Social Responsibility Strategy 2011-2014, adopted in October 2011, is being discussed with Member States and the main EU private stakeholders (business and non-business organisations). It outlines actions such as launching, from 2012 onwards, a European award scheme for CSR partnerships between enterprises and other stakeholders, and creating a peer review mechanism with Member States in 2012 for national CSR policies. Multi-stakeholder CSR platforms will be created in 2013 in a number of relevant industrial sectors, for enterprises, their workers and other stakeholders to make public commitments on the CSR issues relevant to each sector and jointly monitor progress.

Notwithstanding these horizontal actions, the Commission has also put forward a range of sector-specific initiatives, such as the adoption of a strategy for space policy[15] aiming at strengthening the European space sector or the initiative on "Innovating for Sustainable Growth: A Bioeconomy for Europe"[16]. The former will be the subject of a communication on Industrial Policy exclusively dedicated to the space sector. The latter puts in place conditions to create bio-based markets, one of the priority action lines included in our communication.

Given the major market potential for clean vehicles, the Commission re-launched the CARS 21 process with an objective to obtain an input to the EU's strategy for clean and energy efficient vehicles. In June 2012, the members of the CARS 21 High Level Group had their final meeting and adopted a final report, thereby setting an industrial policy strategy for the automotive sector towards 2020 with recommendations for rapid progress on important subjects such as electro-mobility, road safety, market access strategy and a review of the CO2 emissions from cars and vans. The report also announced concrete actions to be taken in reaction to the current economic situation. Concretely, the report puts a clear emphasis on providing EU financing for research, on smart regulation, and on improving international market access. These conclusions will find their follow up in the priority action line included in the 2012 Industrial Policy communication update.

In October 2011, the Commission published a Communication[17] on Industrial Policy in Member States highlighting key actions to improve competitiveness at national level. The package included the second Annual Report on Member States competitiveness performance and policies[18], which pointed out that there are considerable differences among Member States as concerns for instance the labour productivity in manufacturing, or share of innovating companies. Faced with this scenario, the Commission encouraged Member States to rapidly implement policies to converge to competitive levels coherent with participation in the euro and the Internal Market. In this context, it should be pointed out that several Member States have recently taken concrete steps to formulate and implement national industrial policies, which are largely in line with the 2010 Communication. The complementarities between national and EU interventions in industrial policy are a fundamental condition for the success of European industrial policy

Results

The different tools of the integrated industrial policy adopted in 2010 vary considerably in their scope and depth. They also have different implementation delays and their impacts will not be traceable until some time after they have been implemented. Therefore, it is too early to detect their impact on industry. Furthermore, they also present a mix of actions under Community competence and of actions under Member States' competence. This also means that benchmarks and indicators cannot readily be compared, in particular since many of the measures concern not competitiveness performance as such, but rather competitiveness policies.

When the 2010 Communication was adopted, the focus of policy makers was mainly on long-term structural challenges, in particular maintaining global competitiveness, climate change, energy, skills and knowledge. Given the short time since the 2010 Communication, as well as the nature of the measure proposed therein, it would be unrealistic to expect any measurable results or evidence on such policy variables. It is possible, however, to report on the state of implementation of the Communication.

The implementation table (see Annex) shows that a majority of the actions have been, or are being, implemented. Around 60% of the actions have been fully implemented, and for another 24% implementation has started and is under way. Since some actions consist of constant monitoring or implementation by Member states, implementation has been completed or is well ongoing in around 90% of the actions in the 2010 Communication. So in most cases, the work is done, or good progress is being made.

The 2010 Communication focused on the long term as part of the 2020 strategy. This is also illustrated in the implementation table, with most of the measures actually expected to show results on the real economy only in the longer term (over 5 years or more). A glance at the table indicates that only 1 in 7 measures would be expected to have some effect in the short term. A bit more than half of the measures could show some effects in the medium-term (less than 5 years) and the rest of the measures would have effects only in the longer term (see table).

The 2012 Communication has a more streamlined focus. While preserving current efforts on-going implementation of long term initiatives, it focuses on actions that will have a more immediate impact on the real economy.

3. Situation of EU industry

Manufacturing - powerhouse of the EU economy

The financial crisis has had a serious impact on the manufacturing sector. Nonetheless, the recent moderation of recovery should not be associated with the poor state of European industry, but rather with the general weak economic situation in Europe.

Over the last decade the share of manufacturing in EU value-added and employment has been declining. However, in 2011 it accounted for over 14% of employment and over 15% of total value added, which represented some 23% of employment and 22% of value added in the non-financial business economy. This negative trend has to be put in the context of the change in the business models and the increasingly blurred distinction between manufacturing and services. Consequently, the fall in jobs in manufacturing is accompanied by a rise of employment in business related services This is in part the result of the increasing importance of services for manufacturing goods, but also of outsourcing of service-type jobs to companies outside the manufacturing sector).[19] Roughly speaking, it is estimated that for every job in manufacturing a further complementary job is needed in related business services, such as logistics, marketing or legal advice.

Manufacturing has also been the main driver of productivity growth. From 2000 up to 2007 the average productivity growth stood at around 3%, compared to the average for total economy at 1%. The crisis had a serious impact on productivity in manufacturing, but the subsequent recovery was also relatively fast bringing the productivity growth back to the pre-crisis trend. Industry is clearly a driver of knowledge-based economy, being responsible for some 80% of private R&D.

Furthermore, manufacturing is the most important sector for European international trade accounting for over 90% of overall exports of goods. The fast recovery of exports indicates a strong competitive position of European manufacturing and its ability to compete in foreign markets. This good performance is also confirmed by the high positive trade balance in industrial goods. If we add to the economic importance the fact that industry is a major generator of demand and innovation and contributes to our long-term societal objectives, it is obvious that industry deserves to be in the centre of policy focus.

Figure 1: Quarterly labour productivity per person and employment in manufacturing in EU27 (at basic prices)

Source: Eurostat

Potential for reindustrialisation

Over the last 20 years manufacturing in Europe and other developed economies like the United States has been under pressure of delocalisation of production facilities. However, it seems that this process might be approaching a reversal point. Much as the unit labour cost still do not favour localisation in Europe, the advantages of cheap labour are gradually diminishing. In recent years wages in industrial areas in China have been growing at a 20% rate per year in industrialised regions (exceeding substantially improvements in productivity) making them less and less cost attractive locations for manufacturing facilities. Indeed, rising labour costs are increasingly perceived by European investors as a significant risk for doing business in China[20].

In addition, labour costs seem to be becoming a diminishing part of total production costs. When accounting for logistics, duties, industrial real estate and other costs, the advantages of manufacturing in China could be relatively less important than years ago. While improvements and automation of production in China will lead to higher productivity, they are likely to undermine what has been up to now China's primary attraction, i.e. its low labour costs. This situation increases the importance of raising productivity in Europe.

Furthermore, companies that located their production sites in Asia will to a larger extent serve the increasing local demand for goods. This may encourage companies to bring some of their production capacities serving the European market back to Europe, especially considering increasing risks and costs related to the management of global value chains. Companies would need to balance the diminishing cost benefits with persisting localised risks linked to high density of production in one geographical area. These risks include for instance natural catastrophes, socio-political disruptions and security issues (counterfeiting, sabotage, misappropriation)[21].

Figure 2: Average hourly wage in China by industry (in US$ per hour)

Source: Accenture[22]

New technologies that are about to appear on the market will open new possibilities to redesign the comparative advantages of nations. The European orientation towards sustainable growth will help in getting a lead in energy and resource savings in production processes. Customised production will gain importance and favour closeness to the customer rather than mass standardised production.

These trends will favour more current European strengths i.e. strong micro-economic environment, high productivity, large, integrated market, and qualified, flexible labour force. One should not forget that Europe is an extremely important market accounting for some 30% of global personal consumption expenditures in 2010, which is more than double than BRICS combined (around 14%). Besides, despite the problems reported by industry of skills mismatch, Europe leads in the number of graduates in natural science and engineering, accounting for 18% and 17% respectively of the world total.

Nonetheless, in order to grasp these opportunities European industry needs also to deal with several challenges. Much as the cost structure in industry changes, cost competitiveness will continue to be the key factor of industrial location that cannot be ignored by policy makers. Emerging economies are moving towards more knowledge-intensive sectors and start to compete not only with lower costs but also with increasingly qualified labour and improved infrastructures. Finally, the protracted consequences of the crisis put European industry in a difficult economic context to carry out the necessary efforts to increase their competitiveness by technological changes and innovations into the European industrial landscape.

Negative macroeconomic conditions hamper industrial recovery

As mentioned earlier, the impact of the crisis on industrial sectors has been quite severe. It has delayed the process of long-term adjustment and created short-term stressful conditions for SMEs that are perfectly competitive in the long-term. The financial crisis has first compromised the stability of public finances and is currently threatening the real economy. This is the case especially in those countries more seriously touched by the crisis but also of SMEs in general across the EU.

Since the beginning of the crisis, employment in manufacturing has fallen by almost 11%. The initial fall that followed the 2008-2009 shock was somehow mitigated by the use of short-term working schemes, which resulted in a reduction in the number of hours worked and productivity growth. The subsequent recovery in 2010 led to an increase in the average number of hours worked but has not improved significantly employment in industry. This is a first clear indication of the lack of confidence in the demand for industrial products that resulted in a drop in investments of manufacturing companies. Unfortunately, the recent moderation of the recovery has kept employment levels in manufacturing low and the perspectives of a fast rebound remain rather weak.

Figure 3: Evolution of employment and average hours worked in manufacturing in EU27 (percentage change compared to Q12008)

Source: Eurostat

The subdued economic conditions in the European economy are a major factor explaining the recent deterioration of Europe’s industrial performance. Low internal demand and private consumption keep markets for industrial goods downcast. Uncertainties about the economic outlook, relatively high international raw materials and energy prices and on-going difficulties in access to finance for SMEs continue to weigh down business confidence.

Figure 4: EU27 manufacturing output and industrial confidence (2005=100)

Source: Eurostat, DG ECFIN

Investments do not show recovery since the outbreak of the crisis

Persisting uncertainties have a negative impact on the level of investments. Despite the end of the recession, fragile GDP growth and the overall weak economic situation hold back industrial investment. As a consequence of the crisis, the share of gross fixed capital formation in total GDP has fallen by some 2.5 percentage points, which corresponds to a decline of some € 350 billion compared to the level in 2007 (see figure below). What is more, the subsequent recovery did not increase the level of investment that remains low since 2008 and shows few signs of improvement. Successive Commission forecasts on investment have had to be reviewed downwards since 2010. Without reversing this trend it will be difficult to achieve a sustainable recovery.

Figure 5: Changes in the annual growth rate of GDP compared to the share of gross fixed capital formation in total GDP (EU27, current prices, €)

Source: AMECO database, ECFIN economic forecasts

The depressed context for industrial investment in the EU is highlighted by the slow and partial recovery in new orders for capital goods, typically those needed to maintain and expand production capacity. After having reached a maximum level in late 2007 – early 2008, new orders for capital goods fell by more than 35% during the 2008-2009 recession and have only partly recovered since. This recovery ended in the summer of 2011.

Figure 6: New orders – capital goods (2005=100)

Source: Eurostat

The seriousness of the impact of the current crisis on industry is also reflected by replies to the Commission's investment survey, carried out twice a year among industrial companies, which shows that expectations for investments for the extension of the production capacity are quite low (increase by 4% for the EU). Financial resources and expected profits together with other factors (mainly related to public policies) are perceived as little stimulating for further investments at the moment.[23]

Figure 7: Extension of production capacity (% respondents that choose this category as the most relevant)

Source: European Commission, Investment survey

Figure 8 suggests that in addition to the uncertainties due to the crisis, the lack of new expectations of market expansion is also contributing to hold back investment in the EU. This additional factor seems to have been present since the effects of the creation of the Internal Market in the early 1990s were exhausted towards the end of that decade. Only the “irrational exuberance” of the years previous to the crisis led to a higher increase in production capacity.

Comparing the evolution of investment in equipment in the EU, the USA and Japan it becomes apparent that these three economic areas show a slightly downward trend in investment as a percentage of GDP between 1999 and 2011. Nonetheless, Japan has managed to keep a significantly higher share of investment over GDP than the other two regions. Finally, although this indicator experienced a sharper drop in the USA following the crisis, it seems to be rebounding faster and stronger in the USA than in Europe at present.

Figure 8: Gross fixed capital formation on equipment as a percentage of GDP (current prices, national currencies)

Source: AMECO database

European industry has to overcome its cost competitiveness disadvantage

In addition to the unfavourable investment climate, relatively high input costs add to the challenges that EU industry has to deal with in the medium-term. Energy prices, the evolution of labour costs and exchange rates have not helped to increase our competitiveness.

In general terms, nominal unit labour costs have remained stable and this has not contributed to increase productivity in Europe compared to the top 36 industrialised countries (the “IC36” group). Labour costs in the USA have also been rather stable over the last decade, whereas Japan has managed to improve substantially its labour cost performance[24].

The overall cost competitiveness of EU27 has deteriorated due to the impact of exchange rate fluctuations and a relative appreciation of euro. The USA and Japan managed to improve their competitive positions following the relative depreciation of their currencies, but the latter has lost most of its advantage following a strong appreciation of the yen since the beginning of the crisis

Figure 9: Changes in the competiveness based on the nominal unit labour costs and effective exchange rate (relative to IC36)

NEER/REER* 100/REER*

Increase of indicators indicates improvement of the competitive position versus other countries

* Real effective exchange rate deflated by nominal unit labour costs

Source: DG ECFIN, Price and Cost Competitiveness database

Box 1: Factors affecting European cost competitiveness

An in depth analysis of the unit labour costs (ULC) covering the BRIC countries[25] shows that the real effective exchange rate calculated for a group of 16 EU Member States[26] (REER) deteriorated substantially over 2000-2007. Moreover, the estimated deterioration in EU unit labour cost competitiveness is markedly worse when BRIC countries are included in the competitors group: a deterioration of nearly 50% compared with just over 40% if they are excluded. Virtually the whole of this impact is due to the inclusion of China. Chinese imports have risen very sharply in some sectors (mainly, but not only in low labour cost sectors such as wearing apparel and textiles).

Figure 10: Manufacturing REER for alternative groups of competitors

EU16: Austria, Belgium, Czech Republic , Denmark, Finland, France, Germany, Greece, Hungary, Italy, Netherlands, Slovakia, Slovenia, Spain, Sweden, UK.

Selected competitors: Portugal, Canada, Japan, Norway, South Korea, USA, Estonia, Iceland.

Selected competitors+BIC: Canada, Estonia, Iceland, Japan, Norway, Portugal , South Korea, USA, , Brazil, India, China.

Source: ECORYS

Currency movements (the relative appreciation of the euro) have a strong impact on the relative competitive positions of BRICS. Competitive improvements in REERs of Brazil, India and China have been sustained by the evolution of their exchange rates. This effect was especially substantial for Brazil, and relatively less for China. On the other hand, trends in unit labour costs (ULC) show that, with the exception of China, differences across countries were not substantial and they contributed little to changes in cost competitiveness. Consequently, Brazil's improved cost competitiveness was supported by the massive devaluation of the real. Similarly, in India where the increase of ULC was faster than in the EU16, gains in cost competitiveness were also assisted by currency depreciation. In China, though, the rapid fall in ULCs, which was spurred by improvements in labour productivity, combined with currency depreciation (following the US dollar) gave a sustained improvement in its REER.

Figure 11: Brazil, China and India unit labour costs in manufacturing

Source: ECORYS

The negative effects of the appreciation of the euro were to some extent reduced by the recent depreciation of euro, but the real ULC has remained broadly unchanged. Still in the longer term the manufacturing sector has to further increase its productivity in order to improve its competitiveness performance.[27]

Affordable and reliable access to energy and raw materials are becoming increasingly important as they account for a significant part of the cost in many industries. Energy prices for European industry went up by 27% in real terms between 2005 and early 2012, which is significantly more than in most other industrialised nations, especially the US.[28]

Figure 12: Indices of real energy prices for industry (total energy, 2005 = index 100)

Source: IEA energy prices and statistics

As regards electricity more specifically, European industry is on average facing significantly higher prices than industries in other developed economies such as the US, Canada, Mexico and Korea – and the difference has on most accounts increased drastically over the last decade. The differences in prices are also evident in the gas market, which is in part due to substantial reductions of gas prices in the USA in the last couple of years, thanks to the "shale gas" boom. Consequently, the impacts on the price of energy in Europe must be carefully considered when defining future policies for energy and related areas.

Figure 13: Energy prices for industry

Electricity (EUR/MWh; US data excl. tax) Natural gas (EUR/MWh)

Source: IEA energy prices and statistics

The need to promote innovation as a driver of competitiveness

Our innovative performance has been poor compared to our main trading partners. The evolution of Total Factor Productivity (TFP) does not provide very optimistic results for the EU27 and euro area. Since 2000, the TFP has remained broadly flat for the euro area while the improvement for the entire EU27 was relatively small and lagged behind that of the USA and Japan. This indicates that the EU is not only losing its cost competitiveness, but is also performing worse than its competitors in terms of exploiting new technological developments or improving efficiency. The relatively better performance of the EU27 than euro area might point to some catching up effect of the Member States that joined the Union after 2004 (EU12), but the overall pace of TFP improvement for the EU27 has been slower than in the USA or Japan.

This situation reflects the relatively slow evolution of competitiveness in the EU last decade compared to emerging countries and the USA. The distribution of manufacturing value-added among high-tech, medium-tech and low-tech industries is basically the same as in 1979. In contrast, in the USA there has been a significant shift in industrial structure towards more high-tech and knowledge intensive manufacturing and service sectors. The industrial structure of Europe is relatively more focused on medium and medium-high tech sectors and relatively less on high-tech sectors. These trends were also visible in the recent years. In the period between 2006 and 2009 high-tech industries were losing their importance in favour of medium-tech industries, whilst in the USA exactly the opposite happened. Despite the importance and contribution of the medium-tech sectors to GDP, this lack of structural shift in Europe suggests that the European economy has been less dynamic and less competitive in exploiting the opportunities from new technologies.[29]

Figure 14: Total factor productivity: total economy (2000=100)

Source: AMECO

Table 1: Technology specialisation of manufacturing industry

|| Manufacturing value added by type of industry (% of total)

2006 || 2009

EU || USA || EU || USA

High-tech || 12 || 18 || 10 || 21

Medium-high-tech || 32 || 25 || 33 || 22

Medium-low-tech || 26 || 23 || 27 || 23

Low-tech || 30 || 34 || 30 || 34

Total manufacturing || 100 || 100 || 100 || 100

Notes: *High-tech: office machinery and computers (30), radio, television and communication equipment and apparatus (32), medical, precision and optical instruments, watches and clocks (33), aircraft and spacecraft (35.3), pharmaceuticals, medicinal chemicals and botanical products (24.4).

* Medium-high-tech: machinery and equipment (29), electrical machinery and apparatus (31), motor vehicles, trailers and semi-trailers (34), other transport equipment (35) excluding building and repairing of ships and boats (35.1) and excluding aircraft and spacecraft (35.3), chemicals and chemical products (24) excluding pharmaceuticals, medicinal chemicals and botanical products (24.4).

* Medium-low-tech: coke, refined petroleum products and nuclear fuel (23), rubber and plastic products (25), non-metallic mineral products (26), basic metals (27), fabricated metal products (28), building and repairing of ships and boats (35.1).

* Low-tech: food products and beverages (15), tobacco products (16), textiles (17), wearing apparel; dressing and dyeing of fur (18), tanning and dressing of leather, manufacture of luggage, handbags, saddlery and harness (19), wood and products of wood and cork, except furniture (20), pulp, paper and paper products (21), publishing, printing and recorded media (22), furniture and other manufacturing (36), recycling (37).

Source: Eurostat, OECD, own estimations

The differences in firm demographics between the USA and Europe illustrate the point further. Data on the firm growth rates indicate that a significantly higher proportion of European firms experience only modest or zero growth compared to the USA, and that there is a significantly larger proportion of both contracting and expanding firms in the USA[30]. An examination of data at sectoral level shows a similar picture, suggesting that the difference is systemic and not limited to the manufacturing sector.

An analysis of data from the R&D investment scoreboard[31] confirms this conclusion for high-tech firms. In particular, it shows that a larger proportion of the USA scoreboard companies are young companies and that these USA companies are also comparatively more R&D intensive.[32] In other words, in Europe fewer newly founded firms grow to become large companies (i.e. fewer "Google's” or “Microsofts") and large European companies are more often older compared to the USA.

The increasing difference between the USA and Europe in the adoption of new technologies can also be explained by data on manufacturing R&D intensity a few years ago, which is an indicator of the level of technological innovation. These data show that there was a lower level of R&D in Europe compared to the USA. It is well-documented that this overall "R&D gap" between Europe and the USA is, to a large extent, explained by a higher proportion of high-tech industries in combination with a higher R&D intensity of those industries in the USA. This gap seems to have been growing over time.

Figure 15: Europe-USA gap in firms distribution by type of company

Source: Bravo-Biosca, 2011

These data also show that the European R&D intensity tends to be lower also in the more mature low-tech and medium-high tech sectors. While R&D is an integral part of the business strategy of firms in high-tech industries, which are characterised by a more rapid technological development, all sectors are today confronted with the need to face up to the challenges and opportunities from technological developments.

Therefore, it is important to increase the share of high-tech sector over value added in Europe, because these sectors display the highest levels of R&D and innovation. However, exploiting the potential for innovation is crucial for the competitiveness also of mature industries, and in terms of growth of jobs this may be economically as important as R&D in high-tech industries.

Table 2: R&D by type of industry

|| Manufacturing BERD as % of manufacturing value added by type of industry ( 2006)

EU || USA

High-tech || 24.1 || 38.4

Medium-high-tech || 8.5 || 9.2

Medium-low-tech || 1.8 || 1.7

Low-tech || 1.0 || 1.6

Total manufacturing || 6.5 || 10.1

Notes: * EU does not include BG, EE, IE, EL, CY, LV, LT, MT, PT, RO and SK. The 15 member states included in the EU aggregate account for more than 90% of total manufacturing value added and manufacturing BERD in the EU

* USA building and repairing of ships and boats was classified as medium-high-tech rather than medium-low-tech

* The manufacturing BERD data for BE, FR, FI, SE, UK were classified by product field; the data for all other countries were classified by main activity

Source: DG RTD, Eurostat, OECD

Notwithstanding this relative innovation underperformance, Europe has strong competitive positions in a number of industries and it has many world class-companies. Among the dominant market players the European firms account for the highest share in the total worldwide investments in R&D in sectors such as automotive, chemicals, aerospace or industrial engineering.[33] However, globalisation is putting the traditionally strong positions of European industry that are being threatened by the BRICs rapidly catching up across all sectors increasingly under pressure. Thus, in order to remain competitive it is necessary to improve innovation performance in all manufacturing and service sectors of the economy.

4. Analysis of priority areas

4.1. Industrial innovation

Despite the economic slowdown, Europe needs to continue to make major investments in new technologies and promote their adoption and diffusion in the economy. This is essential not only to maintain the competitiveness of industry, but also to facilitate the achievement of our wider social and environmental objectives. In this context, Europe should strengthen its industrial base through ensuring the timely commercialisation and deployment of the key enabling technologies and the development of the market framework for new products such as electric and hybrid vehicles. It is also crucial to make a step change in the transition to an energy- and resource-efficient economy of our industry and to increase the degree of recycling and reuse. This requires upgrading our electricity infrastructure and smart grids to accommodate the massive roll out of renewable energies in tune with our 2050 decarbonisation targets, and ensuring a major improvement in the energy-efficiency of residential and office buildings.

Box 2: The potential of the new industrial revolution for manufacturing competitiveness and addressing societal challenges

A variety of radical new industrial technologies are emerging in the course of a "new industrial revolution" that will lead to the formation of new goods, services, and business models that will reshape EU industry. Some prominent examples include:

- The development of "intelligent products that do the job" including clean, safe and intelligent vehicles that combine electric power trains that reduce emissions with new safety and comfort features such as auto-piloting that improve security and performance and allow the more intensive and efficient use of infrastructure. The development of such products will improve assisted living and will be essential to allow elderly and disabled people maintain an active and healthy lifestyle.

- The deployment of advanced manufacturing technologies that allow customised production in much smaller quantities than is currently economically feasible. So-called 3D printing technologies are increasingly used to make plastic and metal production parts by carmakers, aerospace firms and consumer-products companies. These “printers” use very thin layers of powdered materials fused by lasers or electron beams enabling the production of precision products whilst saving energy and raw materials[34]. The wide availability of low cost small production runs will increase opportunities for innovative SMEs to develop new niche products and business models.

- The development of key enabling technologies such as advanced materials and nanotechnology may result in a reversal of the current tendencies for basic production and processing in heavy industries to be outsourced to third countries. Advanced materials with special properties such as heat-resistant or high-strength steel for aircraft and intelligent nano-materials such as corrosion-resistant steel for bridges are being developed in Europe. This provides the opportunity for Europe to become a competitive location once more for the upstream part of the steel value chain.

- New business models are emerging that link manufacturing closer to services. The development of new services and business models is enabled by technological innovation. The development of smart phones that bundle internet services with equipment is a clear example. The development of RFID (Radio frequency identification) that has resulted in a vast increase in timely information availability allowing the closer integration of market research, logistics, and manufacturing businesses, resulting in faster responsiveness to market demands and increased energy-efficiency of the transport sector is another good example[35]. These developments also affect more traditional services such as cleaning (ultrasonic cleaning) and chemicals leasing, rather than outright sale, when this is feasible.

Technologies developed by industry will also be indispensable to find solutions to the major societal challenges facing the EU and the world. Over the next five to ten years, EU industry will:

- Contribute significantly to the reduction of the "environmental footprint" of mankind (climate change, air, water and soil protection and waste management). In particular, the environmental challenges triggered by the aspiration of a growing number of emerging market economies to EU-levels of living standards will increase enormously the demand and opportunities for eco-technologies and services. EU industry is in a strong position to supply such demands.

- Deliver clean production and a sustainable resource footprint for the economy (resource and energy efficiency, use of renewable forms of energy, recycling, management of depleting raw materials). For example, heavy investment in energy- and resource-efficiency will lead to the development of the clean factory that maximises energy and resource efficiency and produces zero waste and near zero emissions. Such factories would employ energy and material efficient processes and machinery, utilise renewable power sources, and employ smart energy management with extensive recovery of heat and dissipated energy[36].

- Provide solutions for a healthily aging society. For example, the exploitation of the potential of the life sciences will enable the development of new medicines based on biotech and genomics providing more targeted interventions, blurring the distinction between therapeutic and diagnostic interventions and leading to the availability of new treatments as well as the prevention of certain conditions such as asthma and diabetes[37].

- Contribute to providing global security in the face of natural disasters and terrorist threats. For example, once operational GMES services will provide the monitoring and forecasting of the Earth's subsystems, including climate change. GMES will also address emergency response e.g. in case of natural disaster, technological accidents or humanitarian crises, and security-related issues such as maritime surveillance, border control.

Despite a strong research base, Europe has traditionally been slow at translating its research strength into the deployment and commercialisation of new products, processes and services. The results of the Lead Market initiatives[38], Key Enabling Technologies Communication[39] and subsequent High-Level Group[40] drew attention to the need for a more ambitious industrial innovation policy that addresses the reasons for the failure of the EU to take sufficient and timely commercial advantage of its excellent research base:

- The fragmentation of the EU Internal Market reduces the market for new goods and services developed from new technologies. There is a need to improve the framework conditions for developing and implementing new technologies, goods, services and business models, including an earlier provision of regulation and standards needed to create the Internal Market for new products and services and appropriate widespread development and usage of innovative public procurement.

- The technology policies of the EU and Member States are insufficiently co-ordinated and lack integration. This leads to delays and wasteful duplication relative to practices in the USA and Asia. It also importantly reduces the scope for economies of scale and synergies in innovation: in particular, it is often necessary to integrate together different technologies to be able to create highly innovative goods and services.

- The successful development and commercialisation of technologies into goods and services requires the undertaking of high-cost and high-risk demonstration and proof-of–concept projects. The costs of such "experimental development" activities are considerably greater than the costs of R&D, resulting in what the HLG on Key Enabling Technologies called a "valley of death" in the development of new products. In particular there is the need to develop risk- and cost-sharing facilities to ensure the timely carrying out of such projects.

- There is a relative shortage in the EU of technology entrepreneurs and skilled labour capable of handling the highly multi-disciplinary nature of technological development. There is a need to improve the EU's skills base, increasing the number of science, technology, engineering and mathematics (STEM) graduates, fostering inter-disciplinarily in education, promoting entrepreneurship education and training.

- There is also a major shortage of risk and venture capital in the EU compared for example to the USA market. Priorities are improving the financing of innovation and risk capital especially for young innovative SMEs, including through improved venture capital, risk sharing facilities, and project bonds.

4.1.1. Priority areas for intervention in industrial innovation

Successful delivery of key investments in technologies and innovation will require substantial co-ordination between private and public sectors. Proactive intervention of the Commission requires setting out flanking measures such as targets and timetables for the development of the legislation (especially Internal Market legislation), technical standards and other necessary steps to create an appropriate and predictable legal environment for the development of the market, as well as further R&D measures.

The focus of policies should be on a limited number of new markets where ready to adopt innovations are already available. At the same time, the policies need to enable exploiting the potential of the emerging technologies resulting from the new industrial revolution. Thus, considering their market potential and possible role in meeting the societal challenges following markets and sectors have been identified as areas where policy intervention could have the highest impact.

Advanced manufacturing technologies for clean production

Markets for clean production technologies are expected to grow strongly with the world market almost doubling up to 2020 from some € 380 billion in 2007 to € 765 billion in 2020. The most important parts of this market are in production technologies. Europe already has a 35% plus share in production machinery. The world markets for electric motors and control devices are expected to double from 370 billion in 2007 to € 730 billion in 2020. Smaller markets such as that for water efficiency are expected to grow at even faster rates, by some 10% p.a. Very fast growth is also expected in automatic waste separation, a sector where Europe has dominant market share: the world market is expected to growth by a factor of five by 2020.

Table 3: World markets for clean production technologies (2010-20, € billion p.a.)

Sector || 2007 || 2020 forecast || Annualised growth rate

Measurement and control || 250 || 470 || 5%

Electric motors for production || 120 || 260 || 6%

Water efficiency in production || 9 || 33 || 10%

Automatic waste separation || 0.3 || 1.5 || 15%

TOTAL || 380 || 765 || 5.5%

Source: Roland Berger "GreenTech Made in Germany" 2009 (updated 2012)[41]

Amongst the principal technological opportunities for advanced manufacturing are[42]:

· Developing new manufacturing processes such as 3-D printing, photonics-based processing technologies and innovative physico-chemical processes;

· Developing smarter manufacturing through advanced control and monitoring technologies to generate high-value in terms of quality and productivity whilst consuming less energy and generating less waste;

· Developing better collaboration, security, and mobile information processing through deployment of ICT, facilitating e.g. the sale of products as services;

· Developing modelling, simulation and forecasting methods to enable the optimisation of processing systems and improved product design and management;

· Developing and integrating new sustainable materials and waste as industrial feedstocks;

· Using novel advanced energy systems and industrial symbiosis to radically reduce energy usage;

· Developing waste into resources through separation, extraction, sorting and harvesting of gaseous, liquid and solid waste streams.

Amongst the key challenges:

· Ensuring a stable and predictable legal environment that would set clear targets and minimum requirements;

· Developing incentives that would mobilise economically attractive investments in clean technologies;

· Stimulating market through investment plans in public infrastructure and buildings;

· Enabling the financing of risky and costly demonstration projects;

· Ensuring the availability of appropriately skilled workers and engineers.

Sustainable construction and industrial products

The construction industry accounts for over 6% of GDP and provides around 15.5 million direct jobs, mainly in micro and small enterprises (data for 2011). This economic importance of the sector, however, is accompanied by its substantial impact on the environment. The manufacturing and transport of construction products are responsible for about 10 % of final energy consumption and about 50 % of all materials extracted from earth. Besides, buildings account for the largest share of the total EU final energy consumption (42%) and produce about 35% of all greenhouse emissions.[43]

The construction sector has been seriously affected by the current crisis leading to a loss of some 2 million jobs. Consequently, supporting sustainable construction is a not only important for employment and economic growth, but also a major element of the EU sustainable development strategy. According to the Commission assessments, the contribution of the buildings sector to the overall EU's long-term 80-95% greenhouse gas emission reduction objective is high, with low-cost and short-term opportunities to reduce emissions of around 40 to 50% in 2030 and around 90% in 2050[44]. Higher energy efficiency in new and existing buildings is also crucial for the transformation of the EU’s energy system.

To achieve these potentials, appropriate policies to promote demand and encourage investment are needed. These investments would also contribute substantially to the competitiveness of the European construction sector and job creation[45]. The areas concerned are quite wide and cover both residential and non-residential buildings as well as infrastructure construction and modernisation. They also involve different aspects of business activity, from the use of ecologically sound building materials to assessing the environmental impact of urban development strategies.

Moreover, sustainable construction and industry is tightly linked with development of markets for sustainable products. Encouraging the supply and the demand for sustainable construction products enables manufacturers and suppliers to compete on parameters other than price, i.e. energy and environmental performance. This requires better reflecting the key environmental impacts of a product over its life cycle, both for highlighting improvement and cost saving opportunities, and providing the possibility to differentiate the product on the market.

Sustainable construction markets have an important local element as construction markets are mainly local. Thus, the use of recycled or reused materials depends on the local infrastructures and the distance that recovered materials need to be transported. Nonetheless, development of a more efficient Internal Market for waste and in particular for recycling would greatly contribute to a further reduction of waste going to disposal as well as consumption of natural resources and to additional improvements in energy efficiency. The EU has around 50% of world share of the waste and recycling industries and its recycling sector has a turnover of € 24 billion, employing about 500 000 persons. Given the fact that the European industry is facing increasing price volatility on commodity markets and difficulties in accessing certain critical materials, addressing the challenges in the recycling industry is fundamental to achieving sustainable materials management by European companies.

Key challenges are:

· Overcoming the mismatch of building regulations at the EU and national levels which leads to considerable administrative burdens and fragmentation of sustainable construction market;

· Better value-chain integration leading to an increase in innovation spill-over effects and spreading of good practices;

· Providing right investment conditions, funding and incentives for innovative energy-efficient solutions in buildings renovations and infrastructure maintenance as well as an enhanced up-take of renewable energy technologies;

· Adapting the market and preparing of the labour-force for the introduction of Nearly Zero Energy Buildings;

· Developing European market for eco-products by combining various instruments such as public procurement, standardisation, advisory services, technology support and regulation to boost demand and attract companies to invest in eco-products;

· Facilitating further use of waste as a resource for industry.

(a) Clean vehicles and vessels

The European automotive industry is a key sector for the European economy, providing over 12 million jobs and a positive contribution to the trade balance of around € 90 billion (in 2011), which is essential for continued European prosperity. The global car fleet is predicted to grow from 800 million to 1.6 billion vehicles by 2030[46].

In order to meet the EU's climate change goals and to reduce oil dependency, a variety of alternative fuels need to be developed, including renewable electricity, biofuels, methane, hydrogen and LPG. The market penetration of these fuels requires the development of appropriate standards and regulations, the development of infrastructure, and support for initial R&D and demonstration projects.

The Renewable Energy Directive (2009/28/EC) established a 10% share of renewables in transport by 2020. Biofuels are expected to play a major role in fulfilling these targets, according to the National Renewable Energy Plans. There is a need to further harmonise these fuels across the Single Market. The challenge is to make the transition from first-generation biofuels to more sustainable second generation biofuels, including from waste and other residues or sustainable energy plants.

Electric vehicles are a niche market at present, but sales are then expected to expand as battery technologies improve, reducing costs and increasing vehicle ranges. Initially plug-in hybrid vehicles are likely to dominate the market first, and from 2020 onwards, battery electric vehicles will gain in importance, with full-cell electric vehicles developing later. An industry study projects fuel cell vehicles becoming competitive with battery electric vehicles by 2025[47]. A recent study predicts that in 2020 about 7% of the European new vehicle will be electric vehicles (5% for Plug-In Hybrids and about 2% for Battery Electric Vehicles and Range Extender). Additionally, about 9% of the EU new vehicle registrations will be represented by Full Hybrids. In 2030 approximately 31% of the EU vehicle registrations will be Electric Vehicles.[48] Which of these forecasts is closer to the truth will depend to large extent on the policy support.

Despite the increasing globalisation and outsourcing, the European value added is expected to decrease only slightly as a result of the transition to electromobility. Consequently, employment in automotive sector should also not change substantially. In case of services, it is predicted that field maintenance and repair sectors might experience some decline, because electric vehicles will not require as much servicing as vehicles with internal combustion engines. However, it is also expected that new services linked to electromobility will emerge in the long term (e.g. charging, recycling).

The construction of charging stations for electric vehicles will require investments in the grid upstream to accommodate the additional demand for electricity. Investments in reinforcing the grid are part of the regulated activity, and do not bear high financial risk for the Distribution System Operator (DSO) as long as the regulator approves the investments. However, investments in the charging stations can be done either by the DSO as part of the regulated activity, or they can be operated as a commercial activity.

It is important to assure that public charging points are 'smart' i.e. control of charging and communication is possible between wholesale electricity providers, management of the distribution grid and charging stations. This should ensure that the choice of electricity supplier at the public charging point is possible, while billing is adequate and the impact of vehicle charging on the grid is manageable and can contribute to the grid's flexibility. This should allow for business models where electricity (including the flexibility that controlled charging enables) is sold together with an electric vehicle.

For investments in charging points for electric vehicles in households, the EU smart meter policy (Annex I.2 of Directive 2009/72/EC) needs to be taken into account. This means that the Member States policies on separate charging points for private locations should be consistent with smart meter roll-out plans i.e. when smart meters are planned to be installed they need to ensure that the electric vehicle charging benefits from it. Vice-versa, smart meters may become also more cost-beneficial for owners of electric vehicles.

Currently, there is no overall European policy framework for electric vehicles, although policy will play a major role in accelerating the transition to electric mobility. It is essential to support automotive industry by introducing economically efficient policy measures.

(b) Bio-based products

The bio-based products cover a broad range of intermediate products, product components, and ready-made products, e.g. bio-based plastics, bio-lubricants, bio-fibres for textiles, composite materials for construction and automotive, chemical and pharmaceutical building blocks, organic acids, amino acids, and enzymes. The total market or markets for bio-based products globally and within the European Union (EU) are difficult to estimate. Generally there is a strong tendency to focus on markets where bio-based products can substitute for products based on other raw materials and the possibilities to estimate the extent of markets for these new bio-based products are limited. Thus, since the sector is expected to change over time as bio-based products evolve, it is extremely difficult to make an exhaustive definition or a list of bio-based products and to identify corresponding data.[49]

Nonetheless, in 2009 the market of bio-based was estimated at some 57 billion euros and accounted for over 300 000 work places.

Table 4: Market size of bio-based industries

Sector || Annual turnover (billion €) || Employment (thousands) || Data source

Bio-chemicals and plastics || 50 (estimation*) || 150 (estimation*) || USDA, Arthur D Little, Festel, McKinsey, CEFIC

Enzymes || 0.8 (estimation*) || 5 (estimation*) || Amfep, Novozymes, Danisco/Genencor, DSM

Biofuels || 6** || 150 || EBB, eBio

*Estimation for Europe for 2009, **Estimation based on a production of 2.2 million tonnes bioethanol and 7.7 million tonnes of biodiesel at average market price in Europe

Key challenges:

· More coherent policy framework including more consistent standardisation, labelling and certification to encourage the diffusion of innovative practices;

· Increasing investment in research, innovation and skills;

· Development of bio-based markets e.g. through unambiguous European and international standards, binding targets or specific labels;

· Stronger policy coordination and better communication with the public.

(c) Key enabling technologies

Key enabling technologies (KETs) include micro-/nanoelectronics, nanotechnology, photonics, advanced materials, industrial biotechnology and advanced manufacturing systems. Market potential for these technologies is difficult to estimate, as they represent technologies and products which are often at a pre-commercial or even conceptual stage. Future demand is largely unknown and, as past experience shows, many of the most important application areas of new technologies are difficult to envisage at the early stages of technological development. In any case, the market volume was roughly estimated at some $ 830-970 billion in 2008 and was projected to grow to $ 1.3-4.4 trillion around 2015.[50] However, key enabling technologies should be also considered as enablers of entirely new applications in many fields of manufacturing that will help establish new markets which cannot be measured by current market volumes.

Table 5: Estimated global market potentials of key enabling technologies

|| Current market size (around 2006/08; $) || Expected size in 2015 (around 2012/15; $) || Expected compound annual growth rate

Nanotechnology || 80bn || 1500 *bn || 30%

Micro and nanoelectronics || 250 bn || 325 bn || 9%

Industrial biotechnology || 90 bn || 135 bn || 8%

Photonics || 230 bn || 480 bn || 8%

Adv. materials || 100 bn || 150 bn || 6%

Adv. manufacturing techn. || 150 bn || 200 bn || 5%

* Average estimation with high variance

Source: ECR 2010; Confindustria (2009)

It may also be noted that communication network and service platforms represent critical enabling technologies with huge downstream market potential, as 2015 global market figures indicate:

(a) Communication network equipment: € 360 bn

(b) Communication network services: € 1270 bn

(c) IT equipment: € 390 bn

(d) IT services: € 890 bn

As European industry represents more than 25% in several of these sectors, their inclusion as part of an enlarged set of KET's will be considered. Existing platforms, like the Future Internet PPP[51] and a possible successor PPP in Horizon 2020, could provide the mechanisms to articulate the sector actors in these sectors.

Key challenges include:

· Industrial deployment and commercialisation of solutions from KETs research base;

· Exploiting the synergies between KETs;

· Assuring sufficient funds for industrial research and experimental development activities;

· Pooling resources for European industrial projects;

· Ensuring non-discriminatory and transparent environment for KETs development;

· Assuring sufficiently skilled labour and entrepreneurs.

(e) Smart grids

There is an urgent need to upgrade the EU's energy network to a smart energy grid. Smart grids would allow the two-way communication between suppliers and consumers, improve the efficiency and flexibility of the grids, enhance the control of energy transmission and distribution, and allow consumers to control their energy consumption through intelligent metering and monitoring systems. They would also enable the mass integration of intermittent energy renewable energy sources into the EU energy system, including consumer own-generated power, and they will be essential to facilitate the wide-scale use of electric and plug-in hybrid vehicles.

Conservative market projections show investment spending on smart grids is likely to increase very fast from just over € 1 billion per year at present to over 4 or 5 billion by 2015[52]. The estimated cumulative investment cost of upgrading and modernising the European electricity grid network is a steep acceleration from € 5.5 bn today to € 56 billion by 2020. The IEA estimates cumulative investment expenditure to rise to some € 480 billion by 2035. The number of smart meters installed in the EU will rise from some 45 million at present to at least 240 million by 2020.

The benefits from smart metering are likely to be considerable – between 2 to 10% or more improvement in household energy efficiency. Some € 3 billion, more than half of the cumulative investment up to present, has been spent on the deployment of some 45 million smart meters. Other applications of smart grids include:

· Consumer applications: from in-home displays to home-area networks (feedback controls);

· Demand response: empowering the consumer and providing higher grid flexibility;

· Advanced metering infrastructure: communication of smart meters with utility, suppliers and aggregators;

· Grid applications: monitoring and diagnostics, Volt-VAR optimisation, fault detection and restoral, wide area measurement to improve grid reliability;

· Storage and smart network balancing.

Table 6: Cumulative EU investment in Smart Grids

|| 2010 || 2020 || 2035

Cumulative investment || €5.5 bn || € 56 bn || € 480 billion

Installed smart meters || 45 million || 240 million || n.a.

Source || JRC Smart Grid Projects in Europe 2011 || Pike Research "Smart Grids in Europe"2011 || IEA World Energy Outlook 2010

The Commission Communication COM(2011) 202 Smart Grids: from innovation to deployment, adopted in April 2011, sets policy directions to drive forward the deployment of future European electricity networks. The Commission proposes to focus on the following challenges:

· Developing technical standards;

· Ensuring data protection for consumers;

· Establishing a regulatory framework to provide incentives for Smart Grid deployment;

· Guaranteeing an open and competitive retail market in the interest of consumers;

· Providing continued support to innovation for technology and systems

Actions already launched by the Commission are: the Commission's Mandate M/490 to European Standard Organisations for Smart Grid standards; the Commission Recommendation [C/2012/1342] of 9 March on the preparation for roll-out of smart metering systems which includes guidance for Member States with respect to data protection and security requirements; and the Commission proposal for a Regulation for Energy Infrastructure COM(2011) 658, published on 19 October 2011, which includes the identification of Smart Grid Projects of European Interest and means to leverage their financing. Furthermore, the Commission have also launched two related industrial initiatives: the European Grids and the Smart Cities and Communities.

Key challenges ahead for the development of these markets include:

· Regulating other aspects of smart grids than smart metering (privacy and security, home area networks and grid applications, demand response);

· Identifying the ways of financing of smart grids: Member States, consumers, network operators or electricity retailers, aggregators and energy service companies;

· Fill the gaps of EU-wide technical standards: different countries adopting different technology standards for smart grids and smart metering systems;

· Lack of clarity about future deployment of some of the technologies for which smart grids will be needed such as electric vehicles;

· Lack of consumer demand: short-term costs to consumers vs. long-term benefits, low awareness of potential benefits of smart grids.

4.1.2. Future workplaces and design for innovation

The advent of a new industrial economy is likely to generate readjustments and restructuring in labour markets. The digitalisation of manufacturing leads to higher demand for multidisciplinary skills and high-skilled engineers who can combine mechanical and software engineering. The retraining of workers for new skills will also be important in fields such as bio-based products or the automotive sector. An anticipative adaptation of the manufacturing workforce to new skill requirements is required, although this is particularly difficult for small companies to manage. Stronger governmental support and government-academia-industry cooperation could reduce cost and improve vocational training provision.

Labour mobility is a key adjustment variable in these processes of industrial change. The crisis has made apparent severe imbalances in the supply of skilled labour across the EU. The smooth operation of the Internal Market for labour will eliminate considerable delays in the adoption of new technologies and innovations. New working practices will help companies to employ an aging workforce and attract skilled people to manufacturing.[53] Novel technologies change the mix of jobs and change the mix of tasks inside jobs. So, an environment should be created that stimulates transformation of workplaces, that promotes new forms of ‘active jobs’[54] and encourages the development of new skills (including innovation and entrepreneurial skills).

Another key driver of innovation and productivity is the mainstreaming of design as a strategic company asset. Strategic design is understood to go beyond purely aesthetical considerations and represents a tool for solving complex problems in modern business

As announced in the Commission's Innovation Union flagship initiative, a European Design Leadership Board has developed proposals for enhancing the role of design in innovation across Europe. Grouped into six strategic design actions, they include the need to differentiate European design on the global stage, to strengthen design competencies, and to position design within the European research and innovation system. The Commission will implement these recommendations through a comprehensive plan of targeted actions in this field.

4.1.3. Demand side innovation

A well-functioning market for innovations will attract a new generation of competitive manufacturing and services, and help respond to societal challenges. Private and business consumers may need initial incentives to buy innovative products and services. High uncertainty[55] and low levels of demand in many innovation markets hold back investment in innovation, product design and prototypes.

Realising this potential will require a significant shift in the policy interventions to spur European innovations to the European and global marketplace. Europe has a tradition in investing public and private money in research and innovation by grants, loans and tax incentives. However, we also need to create market pull for innovations, thereby cutting the long and arduous journey to market. For example, more innovation inside the public sector[56] leads to better and more efficient services for civil society and for business, and it brings about amplification of impact of public spending on R&D with the public sector acting as 'lead users'. Company surveys show that companies benefit from a first government customer as much as from public research grants. At the same time, a more balanced approach[57] (use of demand- and supply-side tools) could in many cases increase the impact, compared to a situation that demand- and supply side tools are used separately. It is currently quite rare that demand-side and supply-side (research) measures are combined towards the same goal.

Europe has some initial experience in demand-side policies[58] through the Lead Market Initiative[59] (LMI) that was launched in 2007. This piloted holistic roadmaps of demand-side tools tailored to sector/market needs and their innovation dynamics. The final evaluation of the LMI concluded that there was added value in coordinating the use of these tools in most of the pilot sectors. Furthermore, it indicated that engagement with users and supply chains from the private sector brings additional value to the initiative. In the last 5 years, policy makers have focused on piloting these distinct demand-side policy interventions for pulling particular solutions to end-users; pre-commercial public procurement of e-health; low-energy public buildings or zero-emission buses.

The identification process of the sectors in the LMI was done in a top-down manner in 2007. Although this sped up the LMI's time-to-launch, it led to lower engagement by potential stakeholders during the implementation phase. Learning from this experience, the services of the European Commission ran a public consultation on "demand-side policies to spur European industrial innovations in a global market"[60] that gauged the interest in including new sectors in the LMI's successor amongst European business and policy makers, This results of this consultation and discussions with policy makers, industry and other stakeholders will contribute to defining sectors for demand-side actions, that complement the six priority action lines that have been identified in the Communication.

The Commission will plan, in close cooperation with Member States, industry, civil society and other stakeholders over the period 2012 to approximately 2018 a horizontal action plan to boost sales of European products on global markets. This action plan consists of the following three subsequent phases:

i) A set of markets (sectors), which would benefit from demand-driven growth models will be identified. In due course, other sectors could be added.

ii) Following the identification of a number of candidate markets, strategic roadmaps for demand-side measures for specific sectors (e.g. 5 to 8) will be developed and implemented (possibly four years). These sectors may be identified from (sub-) sectors of the six priority action lines, by outcome of public consultation and economic studies, or suggested bottom-up by industry and policy makers. These roadmaps can plan the demand-side actions in larger initiatives, such as European Innovation Partnerships, in public-private partnerships in Horizon 2020 and in programmes at national and regional levels.

iii) The actions form the roadmaps will be executed in the candidate markets selected in the second phase.

In addition, a new monitoring system will be set up to measure the impact of the implementation of the strategic roadmaps. This system will also act as a platform to exchange best practices in defining, implementing and evaluating actions at any operational level. The Enterprise Policy Group (and its sub-group on innovation) will continue to play a major role in this policy area.

Figure 16: Structure of the action plan to boost sales of European products on global markets

4.2. Internal Market

Companies in the European Union benefit from easy access to the European Internal Market and its nearly 500 million consumers thanks to common procedures, standards and rules between the countries. The Internal Market continues to be the main destination and origin of goods sold in the EU. The share of intra-EU trade in total EU trade in goods in 2010 was almost 64%. Before 2007 imports from other Member States were rising in all EU27 countries, with the fastest growth rate of imports registered in the new Member States. The recent crisis, though, led to a substantial drop in trade in goods, both of imports from outside and inside of the EU. Interestingly, despite the generally subdued internal demand, the former experienced a more pronounced subsequent recovery exceeding their pre-crisis levels. This could indicate some substitution of internal imports with imports from foreign markets.[61]

Looking at the structure of EU imports following the impact of the crisis, it turns out that while the trends follow similar patterns, the magnitudes of changes in imports of consumer, intermediate and capital goods differ somehow. In particular imports of capital goods from foreign markets seem to have been relatively less affected by the crisis than imports within the Internal Market, which are still more than 10% below the levels from the first half of 2008 and are lagging the recovery in other sectors.

Figure 17: EU imports in volumes in selected sectors (BEC), three month moving average (H12008=100)

Intra-EU Extra-EU

Source: Eurostat

Figure 18: Value of intra- and extra-EU exports as a share of the EU GDP large, integrated market

Source: Eurostat

4.2.1. Internal Market for goods in non-harmonised sector

Looking at the importance of trade for the economy it turns out that the share of intra-EU trade in the GDP has not increased much in the last decade and in 2011 its value was equal to some 22% of the EU27 gross domestic product. On the other hand, the growth of extra-EU exports was much more dynamic, but its value equals only some 12% of the EU GDP. This indicates that the Internal Market is still of huge importance for European companies and that there is some space for improvement in order to stimulate growth of the intra-EU trade. However, the Internal Market regulations should also help boosting extra-EU trade, given the high growth potential of external markets.

Some aspects of the Internal Market are still governed by non-harmonised national provisions. Approximately half of the trade in goods within the EU is covered by harmonised regulations, while the other half is accounted for by the “non-harmonised” sector, which is either regulated by national technical regulations or not specifically regulated at all. National technical regulations must be notified at the draft stage to the Commission and the other member states under directive 98/34 (the so-called "transparency directive") which verify, during a standstill period of three months, whether they comply with the free movement of goods (and Information Society services) rules. In the last 10 years (1 January 2002- 1 January 2012) Member States notified 6882 technical regulations on which the Commission and the other Members States reacted by delivering 1230 detailed opinions which prevented several obstacles to the free movement of goods from arising.[62]

These are lower-risk sectors that have in general not been the subject of legislation on a European level. Trade in this “non-harmonised” segment of the market normally relies on the “mutual recognition” principle, under which products legally manufactured or marketed in one Member State should in principle be able to move freely throughout the EU.

Nonetheless, national rules often create unnecessary administrative burdens/costs and have the effect of shielding national markets/products from foreign competition. That is why the principle of mutual recognition has been re-emphasised and strengthened in Regulation 764/2008. In addition, the Commission regularly updates a non-exhaustive list of products not subject to Community harmonisation legislation to facilitate the exchange of information between economic operators, Product Contact Points and/or the competent authorities of the Member States[63].

In the First Report on the application of the Regulation N° 764/2008 it is concluded that the Regulation works by and large in a satisfactory way and that there is no need for amendments at present.[64] However, it also shows that there are certain specific categories of products, such as foodstuffs, food additives and medicines, energy drinks, electrical equipment and precious metals, where the difficulties in the application of the Regulation and notifications on marketing restrictions seem to concentrate. Because of differences in national legislation, which may affect the free movement of goods, further harmonisation in foodstuffs, food additives and medicines has been recommended. Moreover, the application of the Mutual Recognition Regulation will require continued monitoring and may be subject to further clarification, as regards:

· Difficulties to demonstrate that a product has been lawfully marketed in another Member State;

· Difficulties in identifying which legal provisions apply and which are the relevant national authorities in charge;

· Different testing methods relied upon by the Member States and their possible compatibility through mutual recognition;

· The role of prior authorisation procedures.

Market surveillance

According to recent assessments, capital goods manufactured by the European machinery industry are exposed to shortcomings in the Internal Market in terms of weak market surveillance.[65] The presence of non-compliant machines in the European market has contributed to losses in sales, unfair competition, loss of competitiveness and jobs, compromised safety and sustainability. Strengthening market surveillance is vitally important for maintaining level playing field, keeping Europe as a strategic manufacturing location and ultimately ensuring the effectiveness of the rules that protect health and safety of workers and the environment.

The Commission is therefore elaborating a Product Safety and Market surveillance Package, which will benefit all parties, including national authorities, business and consumers. The Package will include four elements: (a) the new General Product Safety Directive; (b) the new Single Market Surveillance Framework; (c) a communication on a multi annual market surveillance plan and (d) a report on the implementation of the current regulation 765/2008 on market surveillance. The new Market Surveillance Framework under this initiative will cover both harmonised and non-harmonised consumer products and also harmonised professional/non-consumer products, while non-harmonised professional/non-consumer products will be considered at a later stage.

4.2.2. The EU Defence industry

The defence industry is a hi-tech research-intensive sector of the EU economy that makes a major contribution to EU exports. It has a turnover of some € 94 billion and provides over 200,000 highly skilled jobs in the naval and military sectors and a high proportion of the half a million jobs in aerospace. However, the industry is currently confronted with the impact of cuts to national defence budgets that affect new and existing programmes and will lead to a substantial reduction in R&D. This will erode the industry's ability to compete in the longer term in the international market.

The sector is still characterised by a focus on national markets and industries which prevents the industry from benefiting from economies of scale that operation at EU level can provide. Actions are underway already to further integrate the sector at EU scale with the transposition of two directives[66] on intra-EU transfers of defence-related products and on defence and security procurement. These internal market measures will help to generate a genuine European defence market to support the development of an industry to give Member States with the most cost effective options for their defence needs and to provide the framework for Europe's most competitive and innovative defence companies to thrive.

However, these measures by themselves will not provide the transformation of the sector needed to face the challenges ahead and prevent the erosion of the industry. Support for research and innovation are fundamental inputs for the high-tech segment of the sector and the industry, especially SMEs, needs support to adapt to the changes to the defence industrial landscape in Europe. The Commission has established a Task Force on Defence to examine ways the Commission can use the tools at its disposal, and within its own competence, to support the competitiveness of the industry, strengthen the internal market, increase Member State co-operation, and maximise the synergies between European security and defence research.

4.2.3. Services sector

The services sector is a significant driver of growth in the EU as it represents more than 65% of EU GDP and employment. However, while the Internal Market for goods has been functioning reasonably well, the Single Market for services is not equally integrated. The Services Directive 2006/123/EC is the most important measure to remedy that.[67]

The Directive was adopted in 2006 and its implementation deadline was set for December 2009. The transposition was completed by all Member States by the end of 2011. The Directive does not oblige Member States to remove all market obstacles and allows maintaining some level of national regulation. As some Member States have been more ambitious than others and some heterogeneity in the implementation of the Directive is inevitable.

As a recent report on the implementation of the Directive shows[68], many barriers to the Single Market for services have been removed. The Directive facilitated the establishment of service providers in another Member State. In contrast, the cross-border provision of services seems to have been less affected and continues to face obstacles. Besides, implementation is still not complete in all Member States. In some cases problems arise because of inconsistent or incorrect application of other EU instruments such as the Directive on Recognition of Professional Qualifications or the E-Commerce Directive.

According to the most recent economic assessment of the implementation of the Services Directive[69], implementation will generate an additional 0.8% of EU GDP over the 5–10 years following its adoption. But this figure could be increased to 2.6% if Member States would open up their services markets covered by the Directive more ambitiously. Furthermore, better transposition and implementation of EU legislation could reduce administrative burdens for businesses by a third, leading to an overall saving of nearly 40 billion euro.[70]

Currently only about 8 per cent of European SMEs do business in other Member States. Barriers of trade within the Internal Market have a serious negative effect on the cost and quality of services. Small and medium sized enterprises, in particular, are disproportionately affected by complex administrative and legal requirements due to lack of resources and staff to deal with burdensome red tape and formalities. Consequently, SMEs are more likely than larger firms to turn down cross-border opportunities. Less-regulated services would provide more competition in the sector and boost economic growth and jobs.

Business services

The business services sector has been one of the fastest growing sectors of advanced economies in the past decade. It accounts for an increasing share of the EU economy corresponding to some 12% of GDP (2009). The sector was growing at an average annual growth rate of 2.4% in the period of 1999-2009, which is clearly above the 1.1% growth rate for all the sectors of the EU economy. It consists of many different activities, for example, professional business services (such as legal services), consultancy services (such as management consultancy), technical services (such as engineering consultancy), marketing services (such as advertising or market research), design and facility management.

Given the trend towards building up services together with physical goods ("convergence of manufacturing and services"), business services and in particular those relying on professional knowledge i.e. knowledge intensive business services (KIBS) are becoming more and more important for industrial competitiveness. In major manufacturing industries with global outreach, such as the aerospace, automotive, high-tech and telecom equipment sectors, the service output of manufacturing firms is now related in various ways to research, development and innovation. Business services are of particular importance for the competitiveness of SMEs which rely more on purchasing services from the market (outsourcing) compared to large companies' in-house service provision.

In addition, the manufacturing sector is not only a purchaser, but also increasingly a producer of knowledge intensive business services. During 1995-2005 the share of services in total manufacturing output increased in all but three EU27 countries (Poland, Czech Republic, and Hungary). The largest shares are found in the Finnish and Dutch manufacturing industries, where services constitute around 8% of total manufacturing output.[71]

The linkage between services and manufacturing activity offers an additional opportunity for the European manufacturing sector to innovate by opening up new markets, exploit economies of scale, and finding new sources of revenue around their products. However cross-border trade in the business services sector remains modest and lags behind trade in the manufacturing sector. Industrial users of external services are confronted with a European market that is fragmented, non-transparent, and often lacking well-defined quality benchmarks.

The recent performance check of the Services Directive[72] points out to outstanding barriers and restrictions in many Member States as regards corporate structures available for professional services and possibilities to attract outside capital. Limitations on the available legal forms can be the cause of difficulties for companies or professionals wanting to establish in another Member State as they restrict their choice of the most appropriate corporate vehicle. Similarly, requirements relating to capital ownership may result in reduced options for the acquisition of financing and in limitations on available business models.[73] The Services Directive established thar Member States must ensure that these requirements comply with the principles of non-discrimination, necessity and proportionality. However, Member States have often opted for preserving the status quo in this exercise. Companies in the business services sector are thus obliged to adapt their structure when they establish in other Member States or sometimes even when they wish to provide cross-border services.

This lack of dynamism not only hampers choice for consumers, but also prevents small and innovative businesses to grow, develop their activities and become more competitive. A properly functioning Internal Market for services would, therefore, increase the competitiveness of manufacturing firms by decreasing costs of cross-border trade and promoting innovation through new offerings of packages of services and goods.

Apart from the business services sector's direct contribution to employment and wealth creation, it has a key role to play in promoting the competitiveness and growth prospects of other sectors, thereby also contributing indirectly to job and wealth creation across a broad range of economic activities. For these reasons, promotion of the business services sector has become an increasingly important aim of the EU. Business services have been identified as a service sector where the level of productivity could be significantly improved. The Commission, as announced in the Single Market Act[74] and "the Industrial Policy for the Globalisation Era" Communication[75], is setting up a High-Level Group on Business-Related Services to study the shortcomings of this particula