2. XX2
ERT is a forum bringing together around 50 Chief Executives and Chairmen of major multinational
companies of European parentage covering a wide range of industrial and technological sectors.
Companies of ERT Members are widely situated across Europe, with a combined turnover exceeding
€1,300 billion, sustaining around 6.8 million jobs in the region. They invest more than €51 billion
annually in R&D, largely in Europe; which is equivalent to 18% of total EU R&D expenditure.
European industry cannot flourish unless it can compete in a global economy. This capacity to compete
cannot be determined solely by the efforts of individual companies. The prevailing economic and social
policy framework is crucially important and must be flexible enough to adapt swiftly to changes in
global conditions. ERT aims to strengthen and support key enabling conditions which trigger innovation
and entrepreneurship in the European economy.
ERT advocates policies, at both national and European levels, which help create conditions necessary to
improve European growth and jobs.
3. A PDF version of this report is available at www.ert.eu
INVESTING IN COMPETITIVENESS
A GLOBAL VALUE CHAIN PERSPECTIVE
JANUARY 2015
A PDF version of this report is available at www.ert.eu
4. 4 Index
INDEX
CHAPTER 1: The rise of Global Value Chains
• Interconnected economies
• Drivers of Global Value Chains
• Automotive industry value chain
• Base chemicals industry value chain
• Electronics industry value chain
• Brewing industry value chain
CHAPTER 2: Key challenges for EU industry in Global Value Chains
• Emerging economies climbing the value chain
• Increased competition for global innovation leadership positions
• The rise of State Owned Enterprises
• Europe’s cost competitiveness in global markets
CHAPTER 3: Keeping a broad and competitive industrial base in the EU
• Strengthening European industrial clusters
• Co-location of innovation and production within companies
• Embracing collaborative and open innovation
• Interdependency of industry and services sectors
CHAPTER 4: A perspective for a competitive EU industry in global value chains
• Unleash the Single Market & open foreign markets
• Accelerate the digitisation of the European economy
• Invest in skills
• EU climate and energy policy to enhance industrial competitiveness
05
19
27
33
5. 5Foreword
While other regions of the world continue to grow, Europe
struggles to stave off a new recession. Europe can only produce
robust growth if it takes decisive and strategic actions to urgently
address its competitiveness challenges.
Increasing global competition is not a new fact, but both
developed and emerging economies are rapidly advancing and
are targeting innovation leadership positions. This trend becomes
more and more important as economies around the world are
interconnected via global value chains.
Europe as a high-cost region with only limited access to natural
resources is particularly challenged by these global dynamics.
The shale gas revolution in the US, giving companies an energy-cost
advantage for decades, has added further competitive pressure.
Another example is the communications sector, which has fallen
behind North America and Asia Pacific in terms of investment,
which in turn will reduce productivity in Europe and negatively
impact Europe’s position in global value chains.
This booklet explains how companies operate within global value
chains, providing examples across industry sectors. ERT hopes that
the reader will gain a better understanding of the competitive
challenges EU industries face.
This is not only a topic of individual companies or certain industry
sectors. These challenges are also posing a significant risk to the
entire European industrial network, as industries are interdependent
and companies typically operate within regional clusters consisting
of suppliers, SME networks and service providers.
Due to this interdependency, European prosperity is strongly linked
to a broad and competitive industrial base within the EU. Europe
thus needs to address the long-term competitiveness challenges
of its industries so that they can successfully compete in the
global economy and find innovative solutions to the challenges
society is facing – increased cross-industry collaboration will play
a key role in this connection.
ERT Members are committed to support public policies and private
practices that boost EU productivity. European industries are
worldwide leaders in low-energy intensive production, but need a
European energy policy that safeguards its cost competitiveness.
Europe needs to reprioritise the completion of the Single Market,
in particular the Digital Single Market, which is dependent on
a regulatory environment that incentivises investment in digital
infrastructure.
Improving the EU’s labour, resource and energy efficiency will also
be crucial to the EU’s competitive edge in a globalised economy.
Therefore, we have to invest more in innovation and new
technologies. A skilled workforce and first-class infrastructure
will lay the groundwork for permanent and high-value jobs and
growth in the EU.
It is of vital interest for Europe’s prosperity that the growth and
strengthening of the European industrial base remain at the heart of
the political agenda, both in Brussels and in Member State capitals.
Kurt Bock
CEO, BASF
Chairman, ERT Competitiveness Working Group
THE EUROPEAN ECONOMY STANDS AT A CROSSROAD
FOREWORD
7. Interconnected economies 06
Drivers of Global Value Chains 08
Automotive industry value chain 10
Base chemicals industry value chain 12
Electronics industry value chain 14
Brewing industry value chain 16
THE RISE OF GLOBAL VALUE CHAINS
CHAPTER 1
7
8. 8 Interconnected Economies
The international fragmentation of production processes in global
value chains has dramatically changed the nature of globalisation.
Companies have located different value chain activities, including
research and development, raw materials processing, sub-
and final assembly, distribution, marketing, sales and after-
sales service across different countries through a network of
independent suppliers and affiliates.
Globalisation made a giant leap when technological progress
in transportation through containerised shipping radically
lowered shipping costs. This made it possible to ship goods
made in one nation to customers in another nation. However,
because of economies of scale and scope, manufacturing plants
and industries initially remained geographically concentrated.
Most companies were directly involved in all stages of the
production process, as the coordination of activities across great
physical distances remained difficult and costly.
This changed with a strong decline in communication costs in the
1990s and rapid advances in ICT that facilitated the international
coordination of value chain activities, including between high-
wage and low-wage nations. Economies of scale remained
important on the level of individual activities rather than industries.
Today, the pace, scale and complexity of global value chains
are rapidly changing. More countries, sectors and activities are
becoming part of the process of globalisation making economies
more interconnected. As a result, international trade today largely
consists of imports and exports of raw materials and intermediate
goods, in addition to trade in final goods.
As a mirror to the flow of goods, the flow of information is
becoming more relevant than ever. Today’s possibility to build
and access large business networks, combined with information
technology, advances offer compelling benefits. This includes
the reduction of latency times between demand signals and
supply, reaction of shortages in production materials in real
time, optimising prices via access to large supplier network
platforms and a higher degree of automation in supply processes.
The increasing reach and interconnectivity of global value chains
will therefore only be mastered by leveraging the potential of
digital business networks and information flows.
INTERCONNECTED ECONOMIES
10. International investment is a basic building block of global
value chains. Because of increased competition in domestic and
international markets, many companies have already relocated
or outsourced certain production activities abroad to improve the
cost competitiveness of their operations and to benefit from the
competitive advantages of other regions of the world.
Companies have typically offshored labour intensive assembly
activities, outsourced the production of certain components and
parts to specialised suppliers abroad, or have relocated production
facilities to access critical natural resources at a more competitive
price. Meanwhile, lead companies focus on maintaining control
over high value added functions and activities.
The expansion of the middle class and rapid growth in emerging
markets has also prompted a shift in global investment flows.
Companies seek to establish a local presence in these growth
markets by locating new production, distribution and sales
activities in these economies. Increasingly they also establish
local R&D facilities for example to improve the customisation of
products to local market needs or to access local research talent.
10 Drivers of Global Value Chains Source : fDi report 2014
DRIVERS OF GLOBAL
VALUE CHAINS
12. 12
R&D
Product Design
Raw Materials Individual Parts Major Component Systems & Complete Subsystems
2nd
Tier suppliers 1st
Tier suppliers Lead Firm
Aluminium
Steel
Plastics
Glass
Rubber
Copper
Chemicals
Shock absorbers, stabilisers & struts,
control arms and springs Suspension
Brakes
Axle, driveshafts
& components
Engine
Transmission
Fuel Systems
Pistons, bearings, valves, timing chains,
oil pumps etc.
Transmissions, clutches, gears
Other (e.g. battery; lighting; dashboard;
windows; airbags; seat belts; wheels;
tyres; catalytic converters etc.)
Other (e.g. electronics & electrical; audio &
telematics; suspension; exhaust; tyres;
wheels, interior; body & structural)
Complete subsystems (e.g. dashboard)
Mechanical parts (e.g. calipers & brake
pads) and electronic components (e.g.
actuators & sensors)
Automotive Industry
VALUE CHAIN EXAMPLE:
AUTOMOTIVE INDUSTRY
Famously called the industry of industries, the car industry
consumes output from just about every other manufacturing
industry. A highly complex product, the typical car contains
about 2,000 functional components, 30,000 detailed parts and 10
million lines of software.
Fragmentation of production has already taken place for decades
and resulted in a complex, multi-tiered supplier structure. However,
lead car manufacturers remain responsible for production of key
performance components, including powertrain technologies
and engine systems as well as final assembly for quality control
purposes. They also operate high value added activities such as
branding and after-sales service.
They work closely with a limited number of specialised first-
tier suppliers who produce major components and complete
subsystemsincludingunitdashboardsandbrake-axle-suspensions,
and therefore have to cooperate with a large network of lower-
tier suppliers and subcontractors.
Notwithstanding, the global activities of lead firms assembly
and parts production remains predominantly regional and near
major markets. High transportation costs make intercontinental
shipping very costly, in particular for cars and main parts such as
engines, seats and body panels.
The industry-wide implementation of just-in-time and just-in-
sequence production systems also requires tight coordination
with suppliers and machine tool developers. The geographic
proximity of those suppliers of just-in-time parts not only keeps
inventory costs low but also provides for short feedback loops to
meet design needs, for example when testing specialty metals.
These include high-strength steel and aluminium alloys, which
are respectively used to improve the crash protection of the
13. 13Automotive Industry
vehicle and to lower the weight of various car components.
European car manufacturers face unrelenting pressure from
competitors in low-labour cost emerging economies that seek
to develop a stronghold in the EU. These competitors may also
develop a cost competitive advantage, benefiting from bigger
and rapidly growing home markets.
At the same time, prevalence of governmental support for local
production and the need for proximity to the market limits
globalisation of the car industry and has also contributed to
overcapacity within the EU. The ‘world’ car remains an elusive
goal, given differences in safety and emission standards, driving
conditions and consumer purchasing power across regions.
For example, cars on both sides of the Atlantic generally have
a very high level of safety, but there are different standards for
things such as turn signals, airbags and mirrors. These divergent
standards require that carmakers design and build different
model variations for each market, which ultimately leads to
higher prices for consumers.
Conclude an ambitious Transatlantic Trade and Investment
Partnership (TTIP), including mutual recognition of car
safety standards and continued cooperation on future
regulatory issues. This would strengthen the position of EU
and US as worldwide auto standard setters and create a
sizeable common market that can compete with that of
emerging economies.
Trade Policy Recommendations:
Assembly
Lead Firm Operated
Branding & Marketing Distribution & Customer Services
14. 14 Base Chemicals Industry
VALUE CHAIN EXAMPLE:
BASE CHEMICALS INDUSTRY
The base chemical industry is a supplier to nearly all manufacturing
industries. A capital-intensive industry, manufacturing plants are
generally located close to customer markets, unless easy access
to infrastructure allows for the inexpensive transport of bulky
commodity chemicals or an ample availability of feedstock at
attractive conditions compensates for higher transportation costs.
With the strong growth in emerging countries, the balance
of production is shifting towards these economies, tracking
the build-up of infrastructure, housing and local industries.
In addition, by-products from one plant can be used as raw
material elsewhere. By contrast, both primary feedstock materials
such as crude oil and naphtha and many end-products from the
chemical industry, including polymers, can be transported easily
and at competitive cost.
Petrochemical companies in the Middle East have begun to
leverage their advantageous feedstock and their proximity to
growing markets in Asia, with a build-up of significant capacities
for base chemicals. The next high-impact market change occurs
Another factor forcing the local nature of the base chemical
industry is the strategic consideration by certain countries that
this may enable national infrastructure development and supply
materials to a wide variety of downstream higher value-added
industries.
The production of base and downstream chemicals is typically
closely linked. Production sites are often connected through
pipelines, enabling the rapid and safe exchange of liquid and
gaseous chemicals, which are difficult and costly to transport.
R&D Feedstock Raw Material Base Chemical
Low R&D Intensity
Bio Ethanol
Naphtha
Natural Gas
Ethane Ethylene
15. 15Base Chemicals Industry
from the discovery of giant supplies of natural gas in shale rock
in the United States, which is providing a growing and low-cost
supply of raw materials for ethylene-based products.
Most of Europe’s ethylene capacity is produced from naphtha, an
intermediate refined form of crude oil. This is less advantageous
to US shale gas ethane. A high volume industry, characterised by
high price competition, poses a competitiveness challenge not
only to the European base chemical industry but also to customer
industries.
Ensure a secure and affordable supply of energy within
the EU and adapt a value chain perspective when pursuing
improvements to the impact of energy prices and climate
change policies on EU industrial competitiveness.
Energy Policy Recommendations:
Base Chemicals Key Product Categories
Ethoxylate
Polyethylene
glycol
Ethyl
acetate
Lubricant Additives
Inks And Adhesives
Paints
Plastics
Coatings
Coolant & Antifreeze
Key Customer Industries B2B Marketing
Automotive Industry & Metal Production
Automotive Industry & Metal Production
Automotive Industry & Metal Production & Textile
Packaging Industry & Electronics
Metal Production
Petroleum Industry
Lead Firm Operated
16. 16
R&D / Product Design Raw Materials Individual Parts Major Components
2nd
Tier suppliers 1st
Tier suppliers
Metals
Plastics
Composites
Glass
Silicon
Camera lens modules/ primary and
secondary cameras
E-compass, audio codec, gyroscope,
accelerator, touchscreen controller
Baseband receiver, radio frequency
modules
Application processor
Display, touchscreen
GPS, WiFi, Bluetooth
Battery
Flash
Camera
Connectivity
Display
Interface & Sensors
Memory
Power Management
Radio Frequency
Electronics Industry
VALUE CHAIN EXAMPLE:
ELECTRONICS INDUSTRY
Due to rapid product cycles, the ability to innovate in the early
value chain stages namely product design and development can
be critically important in the electronics industry. For example, in
many semiconductor segments, only the company that gets to
the market first makes a profit, because it can dominate sales on
the early stages of the product lifecycle, when prices are highest.
The electronics industry has gone through a phase of unbundling
and fragmentation. For example, PCs and mobile phones have
become increasingly sophisticated and it is virtually impossible
for a single manufacturer to retain leading expertise across the
rapidly evolving spectrum of hardware and software technologies.
Fragmentation of the production process has enabled economies
of scale for the most standardised hardware and electronics
components. This has been followed by market consolidation
as suppliers need to match the scale and speed of production
required by brand buyers.
At the same time, the high modularity of standardised electronic
parts and components enables activities to be undertaken across
large distances. This is facilitated by relatively low transportation
costs. Therefore, electronics products and components are often
delivered by air transport.
Despite global production networks, the value captured in the
electronics industry is highly concentrated within a few countries
and companies that control R&D, design and production of key
technology components.
17. 17Electronics Industry
Boost investment in R&D and key enabling technologies
to build and maintain strategic technological innovation
positions and support EU-led standardisation efforts globally.
Asian economies have a stronghold in the production of
commoditised electronic components and the final assembly
of electronic products, whereas mainly American and Asian
companies are leading on the design and production of key
components including display, battery and processors.
Therefore, Asian economies seek to leverage their position over
suppliers from other regions to move up the value chain, including
engagement in R&D and product design activities as they relate
to electronic products. In response, branded manufacturers from
advanced economies consider buying themselves back into
the manufacturing of key performance components such as
processors, to maintain their technological leadership.
European companies are losing ground in many segments of
the ICT industry, including the smartphone market. They lack
the necessary scale of a Digital Single Market and face declining
innovation leadership. This affects the EU’s overall industrial
competitiveness, as a well functioning ICT sector is a prerequisite
for the digitisation and transformation of European industry.
Energy Policy Recommendations:
Branding & MarketingAssembly Distribution
Lead Firm Operated
Customer Services
18. 18 Brewing Industry
R&D Raw Materials Brewing Packaging Warehousing
Production mainly local to market
due to low value vs weight ratio
Supply chain security: Increased
collaboration with raw material suppliers
Supply chain efficiency: Distribution cost-optimisation
VALUE CHAIN EXAMPLE:
BREWING INDUSTRY
Brewing is one of the oldest manufacturing industries.
The advent of refrigeration and modern transportation in the
late 19th
century allowed the industry to expand beyond village
breweries with larger industrially modern regional breweries
springing up in the EU and the US.
The majority of beer sales are still on local brands, as customers
remain loyal to national brands and preferred tastes may differ
across markets. Global brewers have focused their expansion
strategy on the acquisition of local brands. This also creates
economies of scale for branding and marketing as a result of
which markets become increasingly receptive to global brands.
and relatively high transport costs. As a result, global brewers have
gradually changed their strategy from the export of mainstream
beers to the local production of global brands across continents.
Increased cost competition has led to a steady process of
consolidation of the global beer industry over the last decade.
Brewing is a high-volume industry with mergers and acquisitions
focused on achieving economies of scale with respect to the
procurement of agricultural ingredients, distribution as well as
marketing of final products.
Market saturation in much of the developed world has forced
many brewers to acquire attractive local brands in emerging
Producers of global beers typically source their hops and malting
barley internationally when operating across different markets.
This guarantees a consistency of taste. Conversely, spring water
is sourced at the local level and determines the style of beer
brewed. For example, Dublin’s hard water is excellent for stout,
whereas the Plzen region has soft water well suited to make lager.
Beer is distributed at the wholesale level and stored in warehouses,
which are strategically placed to minimise transport costs to
stores and retailers. Brewers may decide to distribute their beers
worldwide. However, this may only be a viable option for beers
marketed as premium given the high degree of cost competition
19. 19Brewing Industry
markets in order to boost their companies’ growth potential.
At the same time, EU competition authorities consider the
relevant geographic market for the production and distribution of
beer to be national. As a result, EU beer producers have limited
room to expand their presence within the EU through mergers
and acquisitions.
Fully capture global market dynamics in the determination
of the relevant market for the purpose of EU merger control
decisions.
Competition Policy Recommendations:
Distribution Marketing Retail
Responsiveness to changing consumption & demand trends
Lead Firm Operated
21. Emerging economies climbing the value chain 20
Increased competition for global innovation leadership positions 22
The rise of state owned enterprises 24
Europe’s cost competitiveness in global markets 25
KEY CHALLENGES FOR EU INDUSTRY
IN GLOBAL VALUE CHAINS
CHAPTER 2
21
22. 22 Emerging Economies Climbing the Value Chain
Low-tech Manufacturing
1 9 5 01 9 0 0 1 9 1 0 1 9 2 0 1 9 3 0 1 9 4 0
CHINA CLIMBING THE VALUE CHAIN
Medium-tech Design & Manufacturing
EMERGING ECONOMIES CLIMBING
THE VALUE CHAIN
Global value chains offer new opportunities for industrialisation
and economic development worldwide. Countries like China
can plug into global value chains according to their competitive
advantage.
Approaching middle-income levels, emerging economies like
China seek to reduce their dependence on low-technology
exports and focus more on high-technology manufacturing and
domestic consumption. Thus climbing the global value chain is
the only way to further their economic development.
This has created a new type of international competition that is
increasingly vertical in nature. Earlier phases of globalisation were
characterised by horizontal competition between companies at
the same stage. Today, companies also have to compete with
upstream suppliers that want to capture a larger share of the
value added and profits.
One strategy has been for companies to take control of more
processes before and during the supply chain. For example,
many Asian companies have climbed the value chain starting
from the mere assembly of consumer electronic products, to
support in designing the client’s supply chain, the initiation of
original designs and sometimes the successful development and
marketing of own branded products.
Chinese companies’ acquisition of foreign companies has also
levelled up their capabilities within global value chains, as
they obtained brands, distribution and marketing networks,
technologies and know-how embodied in the acquired companies.
As global competition intensifies, European rules need to be
competitive, flexible and outward looking for European companies
to succeed in global markets.
23. 23Emerging Economies Climbing the Value ChainSource: World Bank, Bruegel
1 9 6 0 1 9 7 0 1 9 8 0 1 9 9 0 2 0 0 0 2 0 1 0
SHARES OF WORLD MANUFACTURING (VALUE-ADDED) - 2003 | 2010
0
%
5
10
15
25
20
30
35
High-tech Branding, Design & Manufacturing Services
South Korea RoWJapan ChinaEU US
24. 24
5
4
3
2
1
0
%
GROSS R&D EXPENDITURE AS A % OF GDP (2012)
Gross R&D expenditure in billions of US dollars
USA
$397*
EU
$281*
China
$256*
Japan
$133*
South Korea
$60*
R&D spending targets
Increased Competition for Global Innovation Leadership Positions
INCREASED COMPETITION FOR GLOBAL
INNOVATION LEADERSHIP POSITIONS
The competition for global innovation leadership positions is
intensifying, as nations try to incubate, grow and attract high
value added sectors and activities, and the associated quality
jobs. Europe’s major competitors are all establishing national
innovation agencies and strategies.
A key attribute is countries’ increased investments in research
and development (R&D) and innovation. In fact, the EU faces an
R&D funding gap with the US, Japan and South Korea. Emerging
economies are also rapidly catching up and China overtook the EU
in terms of absolute R&D spending in 2014.
Ambitious R&D targets of South Korea, Japan and China also
translate themselves in a sharp rise of international (PCT) patent
and industrial design filings, in turn reflecting the reality of
increased competition for global innovation leadership positions.
The EU needs to boost investments in industrial R&D and key
enabling technologies to build and improve long-term competitive
European industries.
Source: OECD, World Bank, IMF, Batelle & WIPO
2011
19%*
7%*
2000
%ofFortune500Companies
25. 25Increased Competition for Global Innovation Leadership Positions
China:
In 2011, China became the largest patent applicant in the world, accounting for 24.6% of total patent applications. China
contributed to 72.1% of growth in total patent applications worldwide from 2009 to 2011. China’s share of international patent
filings has also been increasing.
INDUSTRIAL DESIGN
(direct and via The Hague System)
TOTAL PATENT APPLICATIONS
(direct and national PCT entries)
0
100
200
300
400
500
600
700
US Japan EU China US Japan EU China000’s
Total registrations Foreign registrations
0100200300400500600700
INDUSTRIALDESIGN
(directandviaTheHagueSystem)
0100
5
4
3
2
1
0
%
200300400500600700
TOTALPATENTAPPLICATIONS
(directandnationalPCTentries)
GROSSR&DEXPENDITUREASA%OFGDP(2012)
R&Dspendingtargets
*GrossR&DexpenditureinbillionsUSdollars
Japan
USA
EU
China
Japan
USA
EU
China
000’s
000’s
TotalRegistrations
ForeignRegistrations
SouthKorea Japan China EU USA
$397*$281*$256*$133*$60*
26. 26
2011
19%*
7%*
2000
% of Fortune 500 Companies
The Rise of State Owned Enterprises
THE RISE OF STATE OWNED
ENTERPRISES (SOEs)
State owned enterprises’ activities are highly concentrated in a
limited number of upstream sectors, including oil and gas, utilities
and energy, mining and steel industries. In addition to their sheer
size, state owned enterprises as well as ‘national champions’
may benefit from a range of benefits including tax breaks and
subsidies, cheaper loans and preferential treatment in public
procurement contracts that are not available to the private sector.
Emergingeconomiesmayleveragetheinternationalcompetitiveness
of state owned enterprises and ‘national champions’ in upstream
activities to build industrial clusters in downstream activities.
This raises concerns about an unlevel global playing field for
European companies, as emerging economies may for example
link competition decisions to trade and industrial policy objectives.
The EU should pursue the effective opening of markets in
emerging economies via trade agreements as well as consider
the appropriate use of EU trade defence instruments to address
unfair foreign State Aid leading to competitive distortions in the EU.
Global markets are not only characterised by increased
competition between companies but increasingly also between
economies as both investment locations and export nations.
Over the past decade, governments have become significantly
more important participants in the global economy, in particular
through state-owned enterprises. Among the largest 500
companies in the world ranked by revenues, state-owned
enterprises account for 19% of economic activity, up from around
7% in 2000.
27. 27
0
€/MWh
50
100
150
200
250
EU Lowest*EU AverageUSSouth KoreaJapanChinaIndiaBrazil
1
Total compensation costs include direct pay as well as additional employer costs
including pensions, disability insurance, sick leave, health insurance, severance pay,
other social insurance expenditures and taxes on payrolls or employment.
2
2010 data | 3
2009 data
EU hourly compensation costs do not include all Member States
$
11.20
$
1.452
$
1.743
$
35.34
$
20.72
$
35.67
$
8.25Hourly Manufacturing
Compensation Costs (2012)1
Industrial Electricity Price Natural Gas Price for Industry
$
54.77
EU Highest
Europe’s Cost Competitiveness in Global MarketsSource: US Labor Bureau, European Commission | * EU Lowest does not include data for Bulgaria and Romania
EUROPE’S COST COMPETITIVENESS
IN GLOBAL MARKETS
EU is also heavily dependent on imported raw materials, many
of which come from emerging economies that have undertaken
a number of national policy measures, including export taxes
that put European companies at a competitive disadvantage.
The EU should help to resolve the EU’s labour productivity gap by
investing in skills and making greater use of digital technologies in
the workplace. Furthermore, the impact of EU climate and energy
policy on European industrial competitiveness should be improved.
European companies typically face higher energy and labour
costs than their competitors operating in other economic regions,
includingtheUnitedStatesbenefittingfromitsshalegasrevolution.
Over the past decade, increasing unit labour costs in the EU show
that productivity gains could not compensate for higher costs.
This has led to deterioration in competitiveness for the countries
concerned. Therefore, labour productivity, traditionally one of the
strengths of European industry, has deteriorated. In addition, the
29. Strengthening European industrial clusters 28
Linking innovation with production 29
Strengthening collaborative and open innovation 30
Interdependency of industry and services sectors 31
KEEPING A BROAD AND COMPETITIVE
INDUSTRIAL BASE IN THE EU
CHAPTER 3
29
30. 30 Strengthening European Industrial Clusters
Universities
& Research
Institutions
Standard-
setting
Agencies
Related
Industries
LEAD COMPANY
“38% of EU jobs are based in clusters“
Components
Raw
Materials
Machinery
Suppliers
Services
Start-ups &
SME networks
Vocational
Training
Providers
Components
STRENGTHENING EUROPEAN
INDUSTRIAL CLUSTERS
Even in today’s global economy, the economic map of the world
remains dominated by regional clusters. They act as a catalyst
for growth, connecting companies and institutions by common
markets, technology or knowledge within close proximity.
Although location remains fundamental to competition, its role
today differs vastly from a generation ago. In an era when
competition was driven heavily by input costs, locations with
some important endowment - a natural harbour or a supply of
cheap labour - often enjoyed a comparative advantage that was
both competitively decisive and persistent over time.
Competition in today’s economy is far more dynamic. Companies
can mitigate certain input-cost disadvantages through global
sourcing, rendering the old notion of comparative advantage less
relevant. Instead, competitive advantage now rests on innovation,
including through increased collaboration with other stakeholders
alongside the value chain.
For example, companies in the automotive sector cluster around
suppliers of raw materials, parts and components to ensure
short feedback loops for the purpose of product design and
innovation. Conversely, companies in high-tech industries cluster
around cutting-edge research facilities, world-class universities
to facilitate knowledge creation and transfer, as well as the
commercialisation of R&D. Clusters also include a vast network of
SMEs, which can internationalise their activities alongside those
of lead firms.
Innovation and competitive success is in many sectors geographically
concentrated, whether it is high-performance car companies in
southern Germany or biotechnology companies in Cambridge.
By making available public funding for R&D projects, promoting
EU-led standardisation efforts globally or facilitating industrial
use of research and training infrastructure, the EU can upgrade
the competitiveness of its industrial clusters within global value
chains, and therefore contribute to the objective of keeping a
broad and competitive industrial and technological base within
the EU.
Source: European Commission
31. 31Linking Innovation with Production
LINKING INNOVATION WITH PRODUCTION
Industrial production is a core element of the value chain. When
production plants move to a new location, they often take with
them expertise in high value added activities including R&D,
product design, sales and marketing.
European companies have been slower to internationalise their
R&D operations compared to their production, marketing and
distribution activities. The primary reason is that site selection for
a R&D facility is based on different location criteria.
The R&D footprint of a company is determined primarily by access
to research talent.The location of R&D operations is also influenced
by the phase of research and development. For example, both
product design and manufacturing process development typically
require proximity to production facilities. The international
competitiveness of European companies’ production facilities is
therefore key for Europe’s innovation capabilities as well.
In many manufacturing sectors, innovative companies operate
and collaborate within industrial clusters, as proximity of
suppliers who can provide important product design input is key.
The lack of competitiveness of one sector may have a knock-on
effect on others.
The level of intellectual property protection may also guide
companies’R&Dlocationdecisions.Forexample,mostpharmaceutical
R&D facilities are concentrated in advanced economies. Conversely,
companies in other industries, operating in emerging economies,
may decide to review their modular production strategies to
better protect their intellectual property.
With increased global competition for innovation leadership
positions, companies in other regions are leveraging their energy
and labour cost advantages and rapidly building up innovation
talent. Therefore Europe not only needs to invest in skills and
human capital but also provide a framework for its industry to be
competitive globally.
HQ
Product
Customisation
Manufacturing
Process
Development
Product
Design &
Development
Basic
Research
Lead Production
Facilities
Customer Market Proximity
Public R&D Funds
Quality Universities
Research Talent
32. 32
TRADITIONAL INNOVATION STRATEGY MODERN INNOVATION STRATEGY /
CIRCULAR ECONOMY
The Corporation
Human
Resources
Start-ups
Customers
Suppliers
Competitors
Universities
Research &
Technology
Organisations
Other Industries
Business
Development
Legal
Procurement
Marketing
R&D
The
Corporation
STRENGTHENING COLLABORATIVE
AND OPEN INNOVATION
Increased global competition puts companies under increasing
pressure to reduce time-to-market and the cost of introducing
new products. As product lifecycles continue to decrease,
compressing research and development cycles and accelerating
new product introductions are becoming critical.
Therefore, companies increasingly engage in collaborative and
open innovation projects. This allows companies to manage their
R&D budgets more efficiently. Companies may also work together
to ensure the interoperability of new technologies as well as
the economies of scale needed for their successful deployment.
More generally, there has been an increase in the licensing
of patents across industries, as companies decide to insource
innovation as part of their business strategies.
ICT is enabling many industrial sectors to develop innovative business
models and to co-create new product-service value propositions
in cooperation with a network of suppliers, partners and even
customers. For example, leading healthcare technology companies
or engineering companies are increasingly collaborating with ICT
companies to deliver new products and services, which not only creates
new business ecosystems but also a new type of competition.
Companies may also collaborate with suppliers and other
stakeholders in adopting a circular economy business model to
drive innovation in the areas of material, component and product
reuse, as well as innovation in business models including solutions
and services that aim to make more effective and smarter use
of natural resources along the supply chain. This offers a vast
market opportunity across industries. EU governments could
support circular business models through adopting green public
procurement policies and addressing legal barriers, for example
environmental legislation hampering refurbishment business.
Strengthening Collaborative and Open Innovation
33. 33
INTERDEPENDENCY OF INDUSTRY
AND SERVICES SECTORS
The industry and services sectors are closely intertwined.
Manufacturing directly employs around 32 million people and
indirectly accounts for an additional 20 million jobs in related
sectors across Europe. Therefore, a broad and competitive EU
industrial base is also important for a healthy services sector.
Agriculture Business Services Communication Construction Financial Services Logistics Mining Private and Public Services Utilities
0.2% 0.2% 0.2% 10.2% 0.4% 29.0%20.4% 16.5% 22.9%
Industry
INDIRECT JOBS: 20 million
DIRECT JOBS: 32 million
Interdependency of Industry and Services Sectors
0
€/MWh
50
100
150
200
EU LowestEU AverageU.S.South KoreaJapanChinaIndiaBrazil
Industrial Electricity Price Industrial Gas Price
1
Total compensation costs include direct pay as well as additional employer costs
including pensions, disability insurance, sick leave, health insurance, severance pay,
other social insurance expenditures, and taxes on payrolls or employment.
2
2010 data | 3
2009 data
$
11.20
$
1.452
$
1.743
$
35.34
$
20.72
$
35.67
$
8.25
Hourly Manufacturing
Compensation Costs (2012)1
Source: Eurostat and WIOD
35. Unleash the Single Market & open foreign markets 34
Accelerate the digitisation of the European economy 36
Investing in skills 38
EU climate and energy policy to enhance industrial competitiveness 39
A PERSPECTIVE FOR A COMPETITIVE
EU INDUSTRY IN GLOBAL VALUE CHAINS
CHAPTER 4
35
36. 36
%
8
7
6
5
4
3
2
1
World US Japan China India EU Euro area
IMF GROWTH FORECAST
Unleash the Single Market & Open Foreign Markets Source: Mapping the cost of non-Europe 2014-2019, European Parliament Research Service
UNLEASH THE SINGLE MARKET
& OPEN FOREIGN MARKETS
The EU continues to trail behind other major economic regions of
the world in terms of economic growth. However, reprioritisation
of the completion of the Single Market and investments in cross-
border infrastructure networks would provide a significant boost
to EU growth rates.
At the same time, economic growth will largely take place outside
the EU, especially in emerging countries with high barriers to
trade. Therefore, companies’ export and growth opportunities
also depend on the effective opening of those markets. This
will ultimately impact the economic strength of EU industries in
an increasingly highly competitive global economy. Trade policy
should also fully account for global value chains and pursue the
elimination of tariff and non-tariff barriers. A globally competitive
EU industry is also important for Europe to maintain a trade surplus.
“A genuine Single Market could add €990 billion or
7.5% to EU GDP.”
37. 37Unleash the Single Market & Open Foreign Markets
THE STRUCTURE OF THE EU’S TRADE BALANCE
600
400
200
-48bn
+136bn
0
-200
-400
-600
800
Trade Balance
2005 2012
BILLION€
Commercial Services Manufacturing Agricultural Products Energy and Industrial Materials
Source: WTO, Eurostat
38. 38
Advanced Logistics
Rapid Prototyping | Scrap Elimination | Mass Customisation
Fully Integrated Supply Chain
Zero Default/
Deviation
Traceability
3D PrintingSuppliers
Advanced Manufacturing Systems
Integrated IT
System
Sensors
Advanced Materials
ACCELERATE THE DIGITISATION
OF THE EUROPEAN ECONOMY
Digital technologies are radically changing manufacturing
industries’ processes and capabilities. They will enable further
productivity leaps for companies, having a profound change on
cost structures, the skills landscape and production sites.
A number of digital technologies are converging. Computer aided
design and simulation compresses the time and cost of bringing
new goods to the market.
Advanced manufacturing systems, such as machine-to-machine
(M2M) technologies, will increase automation within companies.
Advanced robotics makes automation cheaper and more flexible.
This automation process is brought to life by many enabling
technologies including sensors and actuators, wireless networks,
high-performance cloud computing, big data analytics and cyber
security. Together they will accelerate the arrival of the Factory
of the Future.
Datawill be gathered from suppliers, customers and the lead company
itself, and be evaluated before being fed into production processes
which can be fine-tuned to allow for customisation of products.
Digital technologies will also significantly contribute to the
optimisation of energy and raw material consumption, as supply
chains will become fully integrated. For example, the repair, reuse
and recycling of car components may be facilitated by the use of
automatic alerts and tracking.
Overall, the Digital Enterprise will speed up production by linking
drive technology and automation with industry software. This will
increase production flexibility and shorten time to market. It will
facilitate personalised mass production and will increase energy
and resource efficiency. A digital twin will accompany both the
engineering and the production process, and allow for testing
any changes to the product or the production in the virtual world
Accelerate the Digitisation of the European Economy
39. 39
Cloud Computing Cyber Security
Real-time Autonomy
Advanced Robotics
BIG DATA
Big Data Business Model:
Innovation | e-Healthcare | Smart Grids | e-Mobility
WEB
OF
THINGS
Internet to object
communication
Real time data capture
e.g. driverless car
“Digital Single Market can increase EU GDP with €340 billion”
prior to implementing them in the real world. Together with Web
of Things technologies, the digital twin will drive the emergence
of cyber-physical production systems. The resulting Digital
Enterprise will open up possibilities to rapidly adjust machinery
and plants to new products and to fully integrate a production
lifecycle from product design to production and service.
Big data analytics will also drive innovation across industries,
underpinning new business models and services offerings. For
example, the success of e-healthcare depends on access to data,
but only 4% of hospitals provide online access to medical data.
Conversely, the uptake of e-mobility and smart grids depend on
standardisation efforts.
Digital capabilities will increasingly determine which companies
will stay ahead of global competition. For European companies to
participate in the value creation of the Industrial Internet as well as
new business models based on Big Data and Cloud, Europe needs
to lead the discussion on enabling factors like standardisation,
openness of platforms, confidentiality and security. It is therefore
critical that on the one hand the EU increases investments in
digital infrastructure and facilitates the wider adoption of digital
technologies through the creation of a Digital Single Market and
on the other hand provides for a global playing field among all
players in the digital value chain, in particular to ensure that every
company is subject to the same data protection and consumer
rules, regardless of where their servers are based.
Accelerate the Digitisation of the European EconomySource: Mapping the cost of non-Europe 2014-2019, European Parliament Research Service
40. 40
INVESTING IN SKILLS
Europe’s future depends largely on its people. With the EU
competing for high value added activities, having access to
the right mix of skills is essential to staying ahead of global
competition.
Technological advances in most manufacturing industries and
other parts of the economy have transformed the nature of the
tasks most employees engage in, as well as their responsibilities.
The manufacturing jobs of the future will require more people
with skills in science, technology, engineering, mathematics
(STEM) and ICT.
However, the EU citizens’ skills base has declined over the past
decade, while the OECD PISA tests show Asian countries leading
achievements in international rankings on mathematics and
science.
Several Asian countries are also producing larger numbers
of scientists and engineers, while tertiary education levels in
science and technology fields in Japan, China and South Korea
are significantly higher than that of the EU. Europe’s major
competitors clearly consider this a crucial part of their strategy in
the race towards technological leadership.
At the same time, evidence shows a skills shortage in certain
sectors and regions, despite a high unemployment level in the EU.
It is stated that the EU will face up to 700,000 unfilled ICT jobs by
2015, whereas in total, there are around 2 million job vacancies
across the EU, including a large part in STEM related professions.
At the same time, between now and 2025 two-thirds of STEM job
openings will be to replace people who retire.
There is a strong need to get more young people into science
and technology careers as a prerequisite for fostering innovation.
It is also important for adult workers to update their STEM and ICT
skills throughout their life to meet the demands of fast changing
workplaces. For example, whereas the car industry used to
employ mechanical engineers 20 years ago, now it increasingly
looks for engineers who can combine this with an understanding
of electronics and material science.
Member States should promote closer business-education
interactions to ensure that the skills being taught are pertinent
for today’s employment. This could for example be achieved
through the establishment of national STEM platforms, the
rapid modernisation to work-based vocational training, targeted
programmes to immediately boost the number of ICT knowledge
workers and integration of basic ICT skills in vocational training
and lifelong learning programmes.
Investing in Skills Source: Pisa scores, 2012, US National Science Foundation
Quality of Math and Science Education:
Top 5 Pisa scores for Maths & Science
University Degrees in Science & Engineering, 2010
Shanghai- China
Singapore
Hong Kong-China
Taiwan
South Korea
Shanghai- China
Hong Kong-China
Singapore
Japan
Finland
China
%
49.8
S. Korea
%
40.1
Japan
%
59.3
EU
%
32.0
US
%
31.5
41. 41
Energy shares of production costs have been rising over the past
decades. They may account for up to 40-80% of production costs
for energy-intensive sectors such as chemicals, aluminium, steel
and cement.
For these industries, energy prices and costs have a significant
impact on Europe’s industrial competitiveness, especially amid
the US shale gas revolution that has given ethylene producers in
the US a significant cost advantage over the EU. As ethylene is
the largest building block for the chemical industry, this shift in
competitiveness impacts the entire petrochemical industry.
In addition, climate and energy policies may lead to higher
costs, both direct and indirect, for energy-intensive industries.
For example, the majority of EU regulatory costs incurred by EU
aluminium smelters originate from passing through of energy
costs and surcharges to support renewables and related grid
costs, as well as indirect costs of the Emission Trading Scheme
embedded in electricity bills.
These regulatory costs have exceeded profits of the EU aluminium
industry in crisis years. This has made the EU aluminium industry
globally uncompetitive, in particular as aluminium is globally
priced on the London Metals Exchange.
Furthermore, the focus of any energy or climate policy needs to
be on value chains – covering production all the way to the end-
use phase – and not only specific sectors considered in isolation.
Assessing the impact of an energy or climate policy on the steel
sector in isolation may not give a good idea of the real challenges
the sector is facing. Suppliers to the steel industry may have to
increase the price of their products due to energy or climate
policy, which will have a knock-on effect on the steel industry.
Steel is globally one of the most traded products, hence it is
considered an industry most exposed to international trade
pressures. In consequence, their own energy consumption and
CO2
emissions need to be eligible for exemptions or allowances.
Without sufficient safeguarding measures the European steel
industry could suffer from direct and indirect regulatory CO2
costs
of 70-100bn Euros.
30% of the cost of producing steel is the cost of industrial gases
used in the production process. The production cost of industrial
gases is 70-80% energy and CO2
emission costs. Therefore,
if industrial gases rise in Europe due to energy and climate
policies, European steel becomes less competitive. When a steel
production site in Europe closes, the industrial gas industry is also
negatively impacted.
Innovative solutions, such as those required for a low carbon
society, are developed through close cooperation among actors
within the value chain. If Europe loses the building blocks of
its industrial base, it will impair the innovation capacity and
competitiveness of its downstream industries. Therefore, any
climate or energy policy needs to ensure that the objective to
increase industry’s share of EU GDP to 20% is respected.
EU CLIMATE AND ENERGY POLICY TO ENHANCE
INDUSTRIAL COMPETITIVENESS
EU Climate and Energy Policy to Enhance Industrial CompetitivenessSource: ICIS Consulting and CEFIC, CEPS (2013)
Global ethylene cash costs by region
USD/ton 2012
Middle East 485
United States 501
EU 1,201
Steel industry:
Cumulative EU regulatory costs as a % of EBITDA*
2011 31%
2006-2008 9-15%
Aluminium industry:
Cumulative EU regulatory costs as a % of EBITDA*
* Earnings before interest, taxes, depreciation, and amortisation
2011 242%
2006-2008 23%
42. 42 Sources & Acknowledgements
SOURCES & ACKNOWLEDGEMENTS
This document has been prepared by the ERT Competitiveness Working Group, chaired by Kurt Bock. We are grateful to the
ERT Member companies for their valued participation and contribution.
Lead Author: Roeland Van der Stappen, ERT | Design & Illustration: Luke Stephenson
43. 43XX
A PDF version of this report is available at www.ert.eu
Jean-Paul Agon L’Oréal
César Alierta Izuel Telefónica
Paulo Azevedo SONAE
Ben van Beurden Royal Dutch Shell
Kurt Bock BASF
Jean-François van Boxmeer Heineken
Carlo Bozotti STMicroelectronics
Svein Richard Brandtzaeg Norsk Hydro
Antonio Brufau Repsol
Ton Büchner AkzoNobel
Paul Bulcke Nestlé
Jean-Pierre Clamadieu Solvay
Michel Combes Alcatel-Lucent
Ian Davis Rolls-Royce
Rodolfo De Benedetti CIR
Pierre-André de Chalendar Saint-Gobain
Marijn Dekkers Bayer
Claudio Descalzi Eni
John Elkann FCA
Tom Enders Airbus Group
Ignacio S. Galán Iberdrola
Antti Herlin KONE Corporation
Zsolt Hernádi MOL
Heinrich Hiesinger ThyssenKrupp
Timotheus Höttges Deutsche Telekom
Frans van Houten Royal Philips
Chairman
Benoît Potier - Air Liquide
Vice-Chairmen
Nils S. Andersen - A.P. Moller-Maersk
Vittorio Colao - Vodafone Group
Secretary General
Brian Ager
Pablo Isla Inditex
Leif Johansson Ericsson
Joe Kaeser Siemens
Jacek Krawiec PKN Orlen
Bruno Lafont Lafarge
Thomas Leysen Umicore
Bill McDermott SAP
Gary McGann Smurfit Kappa Group
Nancy McKinstry Wolters Kluwer
Gérard Mestrallet GDF SUEZ
Lakshmi N. Mittal ArcelorMittal
Dimitri Papalexopoulos Titan Cement
Olof Persson Volvo
Jan du Plessis Rio Tinto
Patrick Pouyanné TOTAL
Norbert Reithofer BMW Group
Stéphane Richard Orange
Gerhard Roiss OMV
Kasper Rorsted Henkel
Güler Sabanci Sabanci Holding
Severin Schwan F. Hoffmann-La Roche
Risto Siilasmaa Nokia Corporation
Ulrich Spiesshofer ABB
Carl-Henric Svanberg BP
Johannes Teyssen E.ON
Jacob Wallenberg Investor AB
ERT Members
44. XX44
European Round Table of Industrialists I Place des Carabiniers 18A Karabiniersplein I B-1030 Brussels I Tel. +32 2 534 31 00 I www.ert.eu I @ert_eu I contact@ert.eu
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