German Industrial Policy

FEDERATION OF GERMAN INDUSTRIES

German Industrial Policy On the Draft National Industrial Strategy 2030

13 June 2019

23. Oktober 201721 ▪ The tasks facing modern industrial and innovation policy have risen distinctively in the past few years, both at national and EU level.

▪ The draft National Industrial Strategy 2030 addresses major changes in the international economic order which pose new challenges for the political institutions and companies in Germany.

▪ We believe that we urgently need to have a broad debate on the objectives and instruments of national and European industrial and innovation policy.

▪ We propose several policy ideas on German industrial policy. We see the National Industrial Strategy 2030 as the start of a structured political process. Additional aspects of an industrial strategy must be incorporated and discussed in this process, including the specific challenges involved in creating a digital economy in Germany that is fit for the future.

German Industrial Policy

Executive Summary The social market economyas a success story Over the past 70 years, the German social market economy has generated an unprecedented high level of economic prosperity through open markets and the EU single market. Private enterprise must therefore continue to take the leading role in our liberal, decentralised and competitive economic order at all times. This is the only way in which we can ensure that business decision-making leads to an efficient and responsible use of resources. Sound competitive structures amongst suppliers is a central prerequisite for releasing innovative forces and establishing a balanced business landscape.

Protectionism and nationalism jeopardise prosperity Growing nationalist, protectionist and mercantilist trends are increasingly jeopardising Germany’s prosperity. Massive distortions in foreign trade patterns and global investment activity caused by aggressive industrial and foreign trade policy are undermining the liberal international economic order which is a central pillar of Germany’s prosperity. Together with our European partners, Germany’s policymakers must step up their efforts to protect open markets, democracy and the rule of law as cornerstones of the economic freedom needed in a social market economy.

Combat market distortions with the National Industry Strategy 2030 In the draft National Industry Strategy 2030, the Federal Economics Ministry squarely addresses the problem that foreign trade patterns and global investment activity are being distorted by industrial and foreign trade policy adopted in some parts of the world. We urgently need a discussion to find the appropriate German and European economic policy approach to respond to this threat. Germany and the European Union need to take extensive and decisive decisions to strengthen trade and competition policy and establish new instruments in innovation and industrial policy. Existing instruments need to be sharpened, and new and comprehensive approaches added. These approaches need to be more systematic on account of the high level of interconnectedness, progressing digitalisation and greatly accelerated innovation processes. These necessary steps must on no account replace the urgently required economic policy measures to create competitive framework conditions, but rather help make these conditions attractive.

Strengthening global rules on trade and competition The rule-based international trade regime and European competition laws urgently need to be strengthened. Germany and the EU must make concerted efforts to pursue this objective. Starting points here are strengthening the foreign economic policy toolbox at EU level, reforming certain parts of the WTO rulebook, e.g. on state-owned enterprises and state subsidies, additional support for German exports, and clear foreign economic policy regulations that are effectively coordinated at the national level. It should be considered in this process that the regulations established for industry do not as yet apply to the same degree to the new business models of the digital economy. The digital sector needs jointly agreed rules that prevent, for example, unfair data localisation measures, and create a level playing field for the real and the digital economy. In the opinion of German industry, as

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things stand, state intervention in the form of a “national participation facility�1 does not seem necessary, given the availability of market-based instruments. Any vertical state intervention must be considered under the aspect of the resulting distortion in the market-based allocation mechanisms.

Stronger industrial and innovation policy needed from Berlin and Brussels Berlin and Brussels should step up their trade promotion policy and economic regulation in line with the United States and China. Necessary components here are an ambitious industrial and innovation policy backed up with sufficient funds, and regulatory approaches that encourage innovation, maintaining and creating the space for it to flourish.

Establish a framework for a competitive data economy The availability of data is a key parameter for enabling innovation and determining the position of German industry in international competition. For both listed corporations and medium-sized family businesses alike, it is of paramount importance to view and support the data and platform economy as a whole. General legal regulations making data access and data sharing mandatory are not necessary to achieve an effective use of data. Strengthening the principles of contractual freedom and self-regulation would be the better option. The state must provide targeted incentives and a stable legal framework to achieve this. The industrial strategy should be designed to build on and expand the good starting position of German industry, particularly in B2B digital platforms. Alongside financing innovation, regulatory arbitrage and competition in data flow regulation are becoming increasingly important. Policymakers need to respond accordingly.

Close gaps in risk capital financing Concerted efforts must be made to close current market and policy gaps in financing and supporting innovation. This applies particularly to risk capital, especially in the expansion phase across all sectors. Conventional funding instruments need to be geared more strongly towards supporting changed private investment structures with a greater focus on intangible assets and collaborative innovation and business models.

A prudent industrial policy to achieve climate targets The climate protection targets defined in international agreements signify additional far-reaching consequences for industry and extensive tasks for industrial policy, far beyond current levels. Decades of high private investment, supported by state investment in new technologies, production processes and infrastructure, will be required to respond to the massive structural change that is taking place in numerous sectors. In an extended introductory phase, the lion’s share of the private investment needed should be stimulated considerably and encouraged by regulations so that market forces take effect as soon as possible. Protecting the climate is possible but it does not come at zero cost and must not reduce our international competitiveness.

1

Translation along the lines oft he Federal Ministry for Economic Affairs and Energy (https://www.bmwi.de/Redaktion/EN/Publikationen/Industry/national-industry-strategy-2030.pdf?__blob=publicationFile&v=9)

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German Industrial Policy

Remove deficits in energy prices, the tax burden and infrastructure Regional economic development policy at national and EU level should quickly, consistently and sustainably address, reduce and overcome structural weaknesses. There are currently shortcomings in corporate taxation, energy prices, infrastructure, legislation and the availability of skilled workers.

Competitive value creation in close cooperation between industry and services will only be able to make a sustainable contribution to raising living standards if private and public investment activities are substantially strengthened, infrastructure modernized, tax burdens reduced to internationally comparable levels and energy costs reduced to such an extent that they do not further weaken the position of industry. A targeted reduction of administrative burdens, faster approval and planning procedures for investment projects and a high-performance, digitally-supported local administration remain indispensable.

Value creation networks among the mid-tier sector The diverse landscape of German industry with companies of all sizes and across all sectors continues to secure dynamic competitive advantages for the country. Clusters and network structures that withstand constant scrutiny and dynamic change continue to play a key role in enabling pools of competence and synergies to form and forge competitive advantages. Many midsized companies need to realign their strategies to adapt to the new collaborative structures in value creation and define their succession arrangements. Germany’s industrial policy should build on the power of this diversity, fostering it to its full potential. The provision of state support for individual national and European “champions” should be viewed with scepticism, particularly given the importance of enabling dependable supplier relations and competitive value creation networks among large, medium-sized and small enterprises as a whole.

Adopt National Industrial Strategy in 2019 and bolster strategy with EU industry policy The National Industrial Strategy 2030 is scheduled to be debated in the coming months, developed into a federal government strategy and put together as a policy package. The European Council has similarly requested the European Commission to present a catalogue of industrial policy measures before the end of this year. The catalogue will draw conclusions regarding industrial and economic policy based on the diagnosis agreed among the member states. These two political decision-making processes will have a great deal of overlap. It is very important that the resulting measures and strategies are aligned at national and EU level. Europe will only be able to keep up with international technological competition and defend itself against the erosion of the liberal international economic order as a united front.

Tackle economic policy tasks resolutely Germany cannot afford to ignore the foreign trade and technological challenges in international competition. Nor can it fail to implement measures that enable the self-imposed climate targets to be met. We need to hold a broad debate among the public, in parliament and at European level on the decisions which need to be made for Germany’s prosperity to continue to grow within the framework of the social market economy in the decades to come. The laidback approach to industrial policy adopted while the economy was buoyant must be replaced by assertive and resolute action.

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German Industrial Policy

Content Executive Summary ............................................................................................................................ 2 Preamble .............................................................................................................................................. 6 Strengthening rule-based competition ............................................................................................. 8 Modernising regulations on state aid and competition .......................................................................... 9 Harnessing the potential of trade policy .............................................................................................. 10 Securing exports ................................................................................................................................. 12 Investment controls ............................................................................................................................. 13 Securing a sustainable commodity supply .......................................................................................... 13 Ensuring access to public contracts around the world ........................................................................ 14 Combating sealed-off procurement markets in third countries outside the EU ........................... 14 Combating unfair practices in foreign procurement within the EU .............................................. 15 Dismantling disadvantages in public procurement in Germany .................................................. 15 Dismantling the disadvantages of Germany as a business location .......................................... 16 Creating a level playing field ............................................................................................................... 16 Climate and energy policy ........................................................................................................... 16 Reforming corporate taxation ...................................................................................................... 18 Strengthening research, development and innovation ........................................................................ 18 Tax incentives for research ......................................................................................................... 18 Financing innovation ................................................................................................................... 18 Digitalisation, data policy, artificial intelligence ........................................................................... 21 Bio-based economy, biotechnology, life sciences ....................................................................... 23 Towards a truly circular economy................................................................................................ 24 Shortage of skilled labour ............................................................................................................ 25 Strengthening the entrepreneurial spirit ...................................................................................... 25 Reducing bureaucracy and improving legislation................................................................................ 26 Improving local infrastructure .............................................................................................................. 27 Raising acceptance for the expansion of infrastructure .............................................................. 27 Steadily increasing financing levels, accelerating planning and approval procedures ............... 27 Securing the transition to renewables and future mobility .......................................................... 28 Setting up gigabyte networks for the digital transformation ........................................................ 29 Imprint ................................................................................................................................................ 30

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Preamble 1.

With the presentation of the draft National Industrial Strategy 2030, the Federal Economics Minister has initiated debate on an ambitious industrial strategy for Germany. We largely agree with the findings of the draft and welcome this debate on the current state and future of Germany as an industrial location. The general analysis that there are enormous distortions in competition, particularly in medium and high-technology industries, is basically correct. It is now essential to set German economic and industrial policy on the right path for the future.

2.

It is therefore high time that the federal government adopts an overall concept. The BDI is thus very pleased to accept the invitation to enter into dialogue on the National Industrial Strategy 2030. In view of the specific specialisation profile of the German economy, it is certainly a good idea to sustainably strengthen value creation in the manufacturing sector and the closely connected business-related services sector. In assessing the competitiveness of Germany as an industrial location, other aspects need to be considered alongside value added in itself, including connections to intermediate inputs, networked value creation, research and innovation, foreign trade and employment.

3.

The German industry’s statement is divided in two sections. The first section sets out strategic approaches to prosper in the new global economic environment. The second section defines measures to overcome current weaknesses and strengthen Germany as a business location.

4.

The German economy has very close political, economic, social and cultural ties to other countries and continents, and our prosperity rests on these ties. We should be very aware of developments in other countries as, in consequence, almost every trend elsewhere affects or even challenges us.

5.

We are thus greatly concerned about the return to nationalisation policies in parts of Europe, Asia and America. The dominance of the rule-based global market economy is coming under fire. Without it, a level playing field with uniform rules for foreign trade and foreign direct investment, capital flows, migration and the flow of data and ideas, would be much less open and free than it is now. It could be replaced by a triade of the United States, China and the European Union, each with a different rulebook and rebalanced power structures.

6.

Germany, with its high industrial and technological potential, needs to be the guardian of a European policy that is rule-based and open, but alert. This is self-evident for internal market and foreign trade policy affairs but should also be increasingly reflected in innovation and industrial policy issues. Many companies in Germany are facing new challenges in international competition with market participants that are based in countries with completely different political and economic systems and regulatory frameworks that, in part, do not adhere to the basic principles of the market economy.

7.

German and European industrial policy must therefore rise above its current role of carrying out spot repairs to balance out structural and regional disadvantages. With a policy that is aligned at all levels, we can drive forward the renewal of our industrial society, reduce the weaknesses of our region as an industrial location and foster development that builds on our strengths.

8.

Economic and industrial policy can, and, in future, should, make a larger contribution to creating the right environment for productivity to increase and thereby support the growth of value added and jobs in both the manufacturing sector and closely integrated services. This applies all the more as overarching political objectives, such as climate protection targets, considerably impact

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German Industrial Policy

the structural transformation of whole industries towards low-carbon processes and products.

This transformation needs to be supported with research, infrastructure, education and other forms of state assistance. Concrete action in industrial policy will nonetheless be needed in many areas to mobilise the required investment in new solutions. The level of investment needed per year to meet the 80 percent reduction target for carbon emissions by 2050 in Germany alone is in the high two-digit billion range.

9.

In Germany, policymakers should therefore engage with industrial policy more actively.

Objectives and measures in innovation and industrial policy should be focused above all on new enabling technologies (e.g. Industry 4.0, artificial intelligence (AI) and cloud solutions), life sciences (biotechnology, pharmaceutics, medicine and healthcare sciences), new materials and lightweight construction technologies and on value creation networks in manufacturing.

10.

The findings on diverse distortions to competition, which also come to light in the industry dialogues with the Federal Economics Ministry, should continue to provide the basis for political decision-making.

11.

We also see a fundamental need for action in the conventional fields of German economic policy if we are to increase industrial value added in Germany for the long term. There are also specific challenges regarding industrial policy in individual fields, including those arising from the objectives set in climate and energy policy. Strategic industrial and competition policy regulations should quite generally be geared towards maintaining and strengthening economic openness in foreign trade, foreign direct investment and the flow of data and technologies across borders within the framework of fair and global market-based competition. Strengthening competitiveness sustainably does not just involve sharpening defensive instruments and adjusting competition regulations, but also fostering emerging industries and companies.

12.

The “new economic proportionality principle” presented in the draft should be given careful consideration. According to the draft, in the event of takeover attempts concerning “technological leadership”, it is “above all” up to the “private sector” to prevent such takeovers, although the state does have the role of “encouraging” and supporting companies. This formulation leaves many questions unanswered, such as the allocation of roles between the state and the private sector as well as the understanding of private corporate ownership.

13.

The well-established principle of openness in research policy should be continued in the National Industrial Strategy. State support for technology must not be exclusively tied to one or a few key technologies for the long term. Policymakers should closely monitor new technological options and provide internationally competitive framework conditions and schemes to fund research, development and testing. In technology fields with stringent climate policy objectives, the challenges of a successful market launch will need to be reviewed on a case-by-case basis.

14.

The draft National Industrial Strategy does not take sufficient account of the prospects of industrial midsized companies including the (constantly) researching SMEs. At the very core of the international competitiveness of German industry lies the capability to collaboratively and successfully provide (particularly in groups of large, midsized and small companies) complete system solutions, wide-ranging products and services to match on the global markets. Even though large companies do have advantages, e.g. in calls for tender and in participating in largescale projects in countries outside the European Union, we take a critical view of providing explicit political support to European champions. Because “champions” – whether hidden or not – are created by customer-oriented innovation and investment and not through state intervention. To further increase the potential of these companies and foster their development,

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it would make more sense to remedy the homemade weaknesses of Germany as a business location.

15.

This should be done in coordination with European efforts in this field. In a series of conclusions, the European Council decided on the type and course of action needed in economic and industrial policy but has done little to substantiate these conclusions with instruments. A strategic industrial policy should help improve the coordination between the different research and funding initiatives and programmes at national and EU level to make the use of funds more efficient.

This should also be on the agenda for serious debate by the end of the year so that the course of EU industrial policy can be set accordingly for the next policy cycle.

16.

With the regulations on state aid for an “Important Project of Common European Interest�

(IPCEI), the European Commission has at least opened up the option for states to support innovative high-tech investments in order to remain internationally competitive. This EU instrument is still in its infancy. Germany should, among other things, get more involved in projects such as the low carbon industry project which the steel, chemical and cement industry joined in early 2019.

Strengthening rule-based competition 17.

For German industry, regulatory policy is and will remain a key success factor and guideline for economic policy instruments. At the same time, we should develop solutions based on these principles that build on our strengths and respond to the nationalisation processes taking place in other regions of the world.

18.

In the event that the well-established national and European funding instruments prove inadequate, we would therefore advocate providing support in a technologically neutral, limited and highly market-based form to promote enabling technologies and companies, networks of companies, and clusters able to advance the development of these technologies, ideally at EU level, or otherwise by member states such as the Federal Republic of Germany.

19.

The significance of key enabling technologies, with artificial intelligence currently particularly relevant, is self-evident. In the last few years, the structure in this field has shifted from fully privately financed research, development and market introduction of these technologies to a competition between state (and private sector) R&D budgets, state and private sector provision of risk capital, the extensive subsidisation of loans, growing tax privileges and state-managed large-scale research projects. German industry is particularly strong in industrial research and development. However, there are major weaknesses in the commercial application of ideas in the form of products and services which put Germany at a disadvantage in international competition. As a result, and despite some minor improvements, the market framework and level of support provided by economic policy for these technologies has fallen behind the momentum seen in the United States and East Asia.

20.

The National Strategy thus addresses the challenges in these areas. As a general rule, every individual technology should be analysed separately and responded to individually within economic policy.

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German Industrial Policy

Modernising regulations on state aid and competition 21.

The strategic takeover policies and openly protectionist industrial policy approach adopted by some countries designed to support or create national champions present major challenges.

Priority should therefore be given to rebalancing the competition between market economies and state-controlled economies. We must defend the achievements of the market economy in Europe. The focus should remain on creating a global level playing field in international competition. The international community should therefore press on with the reform agenda of the WTO both in terms of content and in terms of structure. This includes introducing new rules on state-owned enterprises and against the forced transfer of technology. The modernisation of the WTO must also lead to improved compliance with the existing rules and a commitment by all members to move towards market openness in their economic development, possibly also on a sector-by-sector and plurilateral basis.

22.

Reforming European competition law is an issue that comes up repeatedly in the debate on strengthening industrial policy. Open markets and an effective supervision of competition by the European Commission and the national competition authorities are key elements of our economic system. Any changes to competition law made as a response to global markets should therefore also be considered in the light of their impact on competition within the internal market.

Tried-and-tested instruments such as EU merger control and the state aid law should under no circumstances be rendered obsolete in practice.

23.

Solutions need to be found to provide European companies with the best possible support – particularly in international competition against strong and often massively state-supported competitors from countries outside the EU. We would like to see approaches that accelerate procedures and facilitate the consideration of the positive impact of innovation. EU competition law is only part of the solution. The focus must be on dismantling the self-constructed disadvantages of Europe as a business location to increase its appeal for business. We also need the effective application of the instruments of foreign trade law. This includes having adequate staffing levels in the corresponding departments at EU level in general and particularly in the Directorate General for Trade of the European Commission.

24.

Collaboration between companies and joint research projects play a particularly important role in the times of Industry 4.0. Unfortunately, competition law often stands in the way of these kinds of collaboration projects, with longwinded and highly formalised procedures even if there are no concerns related to competition law. There are large grey areas and the legal uncertainty for companies and their advisors can be enormous. Policymakers should make improvements here to increase the legal certainty for companies who, for example, want to develop new digital projects using a platform. This could be achieved through, for example, informal preliminary talks with authorities, official decisions that indicate that “there are no grounds for action” and a revision of the guidelines of the European Commission on horizontal cooperation agreements.

Platforms open up new opportunities and business models both on the supplier and on the customer side. Cooperation here can also help form a counterforce to the non-European digital heavyweights.

25.

EU state aid rules should focus on the investment and innovation requirements of key enabling technologies in order to improve the opportunities of European companies in global competition.

The BDI welcomes the state aid regulations that enable the funding of IPCEIs – joint projects in key technologies such as microelectronics, battery cell production and the low carbon industry.

However, the scope and frequency of application should be increased, and approval procedures accelerated.

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German Industrial Policy

26.

Political measures to protect the climate must not decrease the appeal of the EU as a location for corporate investment. The EU rules on state aid should be adapted accordingly. Future state aid regulations should compensate the long-term additional costs for business caused by political decisions. The relief measures for industry proposed by the Commission on Growth, Structural Change and Employment for additional costs caused by the phase-out of coal and including the necessary structural transformation costs must be secured under EU state aid regulations in good time.

27.

The debate on whether our merger control regulations are still in line has fired up as a result of the prohibition of the Siemens/Alstom merger by the European Commission. Merger control procedures often take too long causing disproportionate costs for the companies involved.

Urgent action is needed to improve this situation. It may be worth considering whether measures that have been successfully introduced in other countries to slim down procedures could be adopted here. These include reducing the amount of information and documentation required to a reasonable measure that is manageable for all parties, abolishing the need for often longwinded prenotification talks, particularly in unproblematic cases, and lifting the mandatory use of the official form for the registration which makes the registration procedure excessively long and complicated. Furthermore, in contrast to some other countries, the European Commission is both the investigator and the decision-maker in European merger control which harbours the systemic risk that decisions will be prejudiced. The current elements of “checks and balances” within the European Commission should be strengthened considerably by, for example, setting up a separate team to prepare decisions. Depending on the individual case, the Commission could also focus more than it presently does on the global competition from non-European companies in the definition of the market, extend the timeline for reviewing the anticipated potential competition and take greater consideration of efficiency aspects. It is important, in doing so, that the European Commission has the policy space to respond on a case-by-case basis and on the impact on competition within the internal market.

Harnessing the potential of trade policy 28.

The BDI advocates the comprehensive strengthening and modernisation of the WTO. Necessary multilateral modernisation measures include global rules and standards for the digital present and future of industry. The WTO could take a first step here with a new e-commerce agreement. Another important aspect should be to step up the current transparency rules (such as subsidy reporting requirements) and improve enforcement. The BDI suports new options to impose sanctions in the event of non-compliance and a more clearly defined definition of stateowned enterprises in the WTO. Plurilateral agreements in the framework of the WTO could provide a pragmatic path to advance market openness and pave the way to multilateral agreements.

29.

EU trade policy should continue to work towards improving the access of European enterprises to global markets. The EU should aim at eliminating tariffs and other trade barriers through bilateral agreements, reduce non-tariff trade barriers through regulatory cooperation, promote European and international regulatory standards at the global level, and protect intellectual property rights and investment abroad. Having many bilateral free trade agreements in force does, however, create a level of complexity of different rules and procedures. This in turn prevents many companies – above all SMEs – from benefiting from the the preferences offered in the agreements. The EU should therefore increase efforts to harmonise and simplify the rules of origin (particularly in the processing regulations, proofs of origin and the review procedure) negotiated in the agreements. It is also evident that multilateral processes in the framework of

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the WTO cannot be substituted by bilateral agreements. The WTO should therefore be strengthened.

30.

Given that digital products and services are becoming an increasingly important part of global trade, it is essential that multilateral agreements keep up with developments and cover digital products and services as well. New plurilateral agreements between liberal market economies should also be used to close other gaps in the WTO rule book, e.g. those relating to public procurement, investment and subsidies. Corresponding rules, if possible within the WTO framework, could improve the mechanisms for real-time monitoring, speed up dispute settlement, and set out sanctions in case of non-compliance which could curb the spread of import substitution measures.

31.

The EU should work towards further harmonising technical market access conditions at an international level. International standards should be established to increase harmonisation and eliminate technical trade barriers. The WTO/TBT Agreement and other international agreements stipulate the adoption of international standards (ISO and IEC) into national standards with as little amendment as possible and referencing them in national technical regulations. The transposition rate of the IEC standards, for example, is below ten percent in many countries.

Furthermore, China is increasingly creating international institutions and technical standards that compete with the currently prevailing, predominantly Western ones.

32.

Trade defence instruments (anti-dumping and anti-subsidy measures) are an important element of the European free trade strategy. By sanctioning the freeriding on trade policy, they increase the legitimacy of free trade. The EU should continuously work towards achieving more transparent and objective procedures.

Economic upheavals in newly created free trade zones can be cushioned with moderate safeguard clauses in the free trade agreements. Under precisely defined conditions, these safeguard clauses can be used to give industry a temporary break from global competition to carry out restructuring measures.

33.

The application of trade defence instruments needs to be based on a careful consideration of the EU’s interests. The effectiveness of the defence instruments should be reviewed frequently, particularly in view of the systemic competition with the controlled capitalism of the People’s Republic of China. The lack of transparency on the Chinese market, for example, makes the implementation of anti-subsidy procedures very difficult. German industry urges the European Commission to review how the regulations for trade defence instruments could be adapted to respond with more clout in cases where the state-controlled economies distort competition. WTO rules and the legal standards of the reformed trade defence procedure should be reviewed to ascertain whether the anti-subsidy regulations need further amendments. Caution must always be paid to ensure that trade defence instruments do not become a back door for protectionism.

34.

The National Industrial Strategy should increase the competitiveness of German industrial companies, where both big and small companies are oriented towards international trade, by making the customs procedures more efficient. Progress in the digitalisation of customs procedures in the EU is sluggish. Art. 278 of the Union Customs Code which set down the date for completion of the digital processes by 2020 has already had to be extended to 2025. The European Court of Auditors is even anticipating another extension. This cannot be allowed to happen. Companies are also facing an increasing amount of bureaucracy in customs clearance because of the partly excessive risk analysis by the customs authorities and the continued absence of a centralised clearance system for customs procedures. Customs officials should also receive better training and be given more autonomy in their decision-making.

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35.

The violation of trademark and patent rights cause considerable economic damage to German companies every year. An effective protection of intellectual property in countries such as China continues to be difficult. The Federal Government and the European Commission should continue to urge countries outside the European Union to significantly improve their protection of intellectual property, technologies, patents and trademarks.

36.

The german industry is highly interconnected internationally through its high level of foreign direct investment. Germany and the European Union are in principle open towards international direct investment. Cross-border investment is the central driver of globalisation and the engine of economic growth and development. More than seven million people work in companies outside of Germany with German control. Since the end of the Cold War, global FDI stocks have multiplied twelvefold to reach 26.1 trillion US dollars. Multinational companies realise considerable efficiency gains through the global value chains set up with the help of their foreign investment. German FDI stocks abroad have increased almost sixfold since the fall of the Wall and are now at around 1.1 trillion euros. Investment from abroad to Germany, on the other hand, has created around three million jobs to date. These foreign investments are secured against expropriation and discrimination with around 120 bilateral investment treaties (BITs). Since the debate surrounding theTransatlantic Trade and Investment Partnership (TTIP), the protection of foreign investment under international law has also been questioned in the EU. Many of the BITs with other EU countries will be terminated in the course of this year without replacement. As part of its National Industrial Strategy, the federal government should work towards establishing a replacement instrument to secure German foreign investment within the EU. It should also work towards establishing the protection of German foreign investment within new agreements with other countries. Considerations on the foundation of a Multilateral Investment Court should be further pursued.

Securing exports 37.

Economic prosperity and the labour market in Germany are more dependent on foreign trade than in any other country. And yet the Industrial Strategy completely neglects the issue of safeguarding and promoting exports. However, international competitiveness and an internationally level playing field are increasingly jeopardised. The export credit guarantees of the federal government are designed to support industry, particularly in their activities with emerging and developing countries, to create and secure jobs in the German export business and supplier businesses. The federal government strictly adheres to the OECD Consensus of 1978. The central idea behind the Consensus of keeping competition between products and not financing conditions should be revived. The OECD Consensus is currently losing significance.

Competition outside of the OECD (through the increasing share of China, among other things) is on the increase. Countries within the OECD are also offering financing conditions that are not compliant with the rules set out in the Consensus.

38.

Consequently, German exporters are in competition with guarantees within and outside of the OECD framework with zero percent financing or very long grace periods. Japan, Korea, China and other countries provide extensive direct lending facilities which are increasingly distorting competition and, particularly in the long-term and large-volume sector, offer conditions which the private sector cannot compete with.

39.

The OECD Consensus should therefore be fundamentally reviewed. The federal government should advocate a fundamental reform at EU level and within the OECD and incorporate the challenges of the German export industry. As fundamentally reforming the OECD Consensus will be a longer process, some areas should be adapted speedily to counteract competitive disadvantages at this stage. A particularly important aspect, for example, is newly regulating the

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protection of local costs. Furthermore, a simple, transparent and reliable matching mechanism needs to be found to act as a defence against aggressive bids in competition. Currently the onus of proof is on the exporter. The federal government should therefore actively, quickly and flexibly adapt the matching instrument wherever necessary and provide adequate resources to do so.

40.

A continuing challenge is the financing of project volumes of less than five million euros. This is particularly relevant for SMEs. Export financing should be made fit for the future by simplifying the Hermes guarantee procedure, expanding the coverage options, reducing the deductibles, and reducing the regulatory burden on the credit industry. The reforms implemented so far are a step in the right direction, but more reforms must now follow.

41.

Interlinking the promotion of foreign trade and development cooperation is also useful in cases where exports are to be promoted in regions in the focus of development aid. Companies that make a particularly high contribution to achieving goals such as the Sustainable Development Goals of the United Nations (SDGs) through their business operations outside of the EU should be given increased support in the form of a system of incentives within the framework of foreign trade promotion. Procurement by German development banks should also keep sight of national interests. Calls to tender by German development aid agencies should be based on the same high quality, environment and work safety standards for which German products have long been known throughout the world. The corresponding principles are already set down in the Sustainable Procurement Toolbox of German development bank KfW.

Investment controls 42.

Unfortunately, the great achievements of listed corporations and family-run medium-sized businesses are increasingly jeopardised by the worldwide trend towards investment protectionism. Ever more countries are restricting their openness to foreign investment. A forward-looking industrial strategy must not support this trend and should leave no room for doubt that Germany welcomes foreign investment. The law as it currently stands stipulates that the freedom of investment may only be curtailed in the event of concerns regarding national security and public order. The criteria for reviewing the investment in these cases need to be clearly defined. We oppose extending “national security” to include the protection of key technologies. State investment control must not become a vehicle for industrial policy. The control mechanisms currently anchored in foreign trade legislation provide adequate protection of public order and security, particularly following the two amendments that have toughened up these provisions in the space of two years.

43.

Germany industry does not believe that a possible intervention by the state in the form of a “participation facility” is necessary as things stand due to the availability of market-based instruments. Any vertical state intervention always needs to be considered under the aspect of the ensuing distortion of market-based allocation. This should also be kept in mind in the current debate on the establishment of such a state-owned facility.

Securing a sustainable commodity supply 44.

For industry, each value creation starts with commodities. A secure access to raw materials is of central importance to Germany as a highly industrialized economy.

45.

Innovative products and new technologies such as electric mobility, digitalisation, Industry 4.0, the bio-based economy, and the transition to renewables are constantly changing the need for raw materials. More future-oriented technologies imply an increase in the raw materials required.

This means that there is a growing dependency on countries that are rich in natural resources.

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These countries frequently do not meet the stringent German and European social, environmental and governance standards.

46.

Digitalisation and commodity supply are two sides of the same coin. Without high-tech commodities there would not be any emerging technologies “made in Germany”. The availability of commodities is therefore becoming a major challenge for Germany as an industrial country.

A paradigm shift in commodity policy is necessary to master this challenge.

47.

A national commodity strategy should take account of all three pillars – import commodities, domestic commodities and recycled commodities. This is the only way in which Germany’s commodity supply can be secured for the long term.

Ensuring access to public contracts around the world 48.

The BDI has always advocated open competition in public procurement – on an international, European and national level. Barriers that restrict the access of tendering companies to public contracts should be dismantled.

Combating sealed-off procurement markets in third countries outside the EU 49.

On an international level, access to public contracts is, in part, severely impeded and, in some cases, completely sealed off, to the detriment of German and European companies. Access to procurement markets of third countries outside the EU is particularly problematic. Many major regional and local procurement markets in the United States, for example, are still closed for European tenderers – even though comparable EU markets are wide open to foreign bidders.

Participation in public contracts in third countries is also still often complicated by mandatory “buy national / buy local” provisions.

50.

While clearly defined, non-discriminatory localisation requirements to protect national security or personal data may be justified, the increase in such regulations represents a barrier for market access and internationalisation of German enterprises of all sizes – also including medium-sized family businesses – and for global competition. In cases not involving particularly sensitive data (e.g. core public and national security), the access to public contracts should not be dependent on mandatory data localisation measures let alone the disclosure of the source codes of products to local authorities.

51.

An example of critical provisions as mentioned before are the problematic “buy American” requirements which continue to make it very difficult for foreign bidders to participate in tenders in the United States. Another example of unacceptable market foreclosure in third countries is the lack of transparency and blocked market access for foreign companies in the environment of state-owned enterprises (SOEs), particularly in China.

52.

The BDI is basically opposed to localisation requirements and other requirements such as the application of specific technologies, licence models or the inadmissible specification of brand names which restrict international trade and cross-border investment.

53.

Still remaining market access barriers for German and European companies in third country markets should be dismantled. The BDI therefore welcomes the general objective of the European Commission’s proposal for an “International Procurement Agreement” to open up these markets. The proposal still needs to be fine-tuned, however, in order to ensure that there are no counterproductive effects and that the instrument will work in practice.

54.

In the efforts to improve access to public contracts in third countries, some structural improvements in access to particularly important third countries are a priority. With regard to

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China, it is particularly important that the country is unmistakeably called upon to submit an acceptable offer for its long overdue accession to the Government Procurement Agreement (GPA) of the WTO, in order to achieve a level playing field and with it the necessary fairness and balanced, mutual market opening. The call for the swiftest possible submission of a satisfactory Chinese offer the GPA accession should, from now on, form a key demand in all further negotiations with China. Further major emerging countries should also be urged to accede to the GPA soon.

Combating unfair practices in foreign procurement within the EU 55.

Unfair practices and impermissible bids in public procurement should also be combated on foreign markets within the EU. Therefor it is important that the transparency requirements of EU procurement law are strictly respected and EU procurement provisions enforced effectively.

Consequently, public contracts that are required to be put out to tender cannot be awarded by way of illegal “direct awards�. Violations of EU procurement provisions should be combated not only by national legal remedies in the individual member states but also continue to be combated by the Commission using EU infringement procedures.

56.

In the interests of fair competition in public procurement within the EU, tenders from third countries that offer dumping prices in some EU member states enabled by subsidies in their home country should be countered energetically. This applies to the whole of public procurement in the EU, but above all to the award of contracts for projects financed by EU funds. It should be reviewed, similarly to the anti-dumping investigations regarding trade in goods, to what extent an instrument can be created to effectively review unusually low tenders and thereby prevent dumping prices.

57.

In view of a number of negative experiences in this area, more attention should also be paid to individual EU member states or public contracting authorities who make problematic concessions in the quality of bids or tender criteria in order to get extremely low prices, to the detriment of domestic bidders or bidders from other EU member states. It is therefore important that adequate standards are not undermined. EU procurement law sets out extensive options to take into consideration environmental and social respectively sustainability criteria in the procedure for the award of public contracts. In this regard, compliance with the ILO core labour standards in public procurement is, for instance, very important in area like the IT sector, However, provisions of this kind need to be formulated very carefully in order to avoid legal uncertainty. A proper application of these criteria can help prevent dumping bids that damage competition. In any case, care must be taken that these criteria are applied objectively, strictly linked with the subject matter of the contract and and in a non-dicriminatory manner.

58.

European (and German) legislation basically prohibits a demand for specif brand names in public tender procedures. Thereby it is safeguarded that specific manufacturers or suppliers are not excluded from the group of potential bidders by discriminatory formulations in the call for tenders.

Strict compliance with the respective legal provisions of public procurement is extremely important to industry as a whole and should be complied with particularly also in the procurement of ICT.

Dismantling disadvantages in public procurement in Germany 59.

In regard to the necessary dismantling of disadvantages of Germany as an industrial location, in public procurement severe problems have occurred in view of very problematic legislative acts for subcentral public procurement respectively compliance with a collective agreementin procurement. While not legally required, fifteen regional states in Germany have created own

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procurement legislation regulating procurement in general and obligations to keep to wages agreed under collective agreements. These laws contain many unnecessarily divergent regulations, severely fragmenting procurement law. This complicates public procurement very considerably, both for public contracting authorities as well as the numerous companies that operate throughout the country, and especially for small and medium-sized companies. Above all, numerous legal uncertainties and risks arise through specific diverging procurement regulations on social aspects, differing marginally from the already very comprehensive general social law which applies in any case. This has already led to innumerable cases of legal uncertainty and disputes up to the European Court of Justice. These developments are causing an increasing number of companies to abandon the market for public procurement although in principle this market may offer attractive contract opportunities. The BDI therefore calls for these problematic and strongly divergent legislative acts in the German federal states to be abolished.

Should this be not feasible for political reasons, these rules should at least be harmonised.

Dismantling the disadvantages of Germany as a business location 60.

It is particularly the mid-tier and the (continuously) researching small and medium-sized enterprises who are loyal to their location that suffer from the disadvantages of being based in Germany. A large proportion of these companies are based in more rural areas and have been for generations. They cannot and do not wish to shirk their economic, social and societal responsibility by relocating. That is why they need reliable and effective local framework conditions.

61.

Every second “hidden champion” in the world comes from Germany. They are based throughout the country. With rigorous customer orientation and ongoing innovation, some 1.300 special mid-tier companies have worked to become and continue to work every day to remain highly specialised leaders on global markets. Others work in cross-industry clusters and network structures, also together with large companies, so that they are in a position to develop competences and synergies within international value creation networks that withstand the ongoing review and dynamic pace of change on the markets.

62.

Having a diverse business landscape with a wide range of different industries and corporate structures and sizes is a guarantor for German industry’s dynamic competitive advantages.

State support for individual national and European “champions” should be viewed with scepticism, particularly with a view to the possible impact on supplier relations and value creation networks with mid-tier family businesses.

Creating a level playing field Climate and energy policy 63.

Industry supports an ambitious climate protection policy and the national climate targets for 2050. The transformation in the economy and in infrastructure required to achieve these targets harbours considerable challenges and risks, but also opportunities. With its ambitious energy and climate policy, the federal government should focus more on concrete measures and their financing. A reduction of carbon emissions of 80 percent by 2050 is technologically feasible and economically viable given the best possible political support. Implementation would nonetheless require significantly stepping up current efforts, policy adjustments and an effective protection against carbon leakage. Four fifths of the measures identified as necessary to achieve the 80 percent reduction target in a cost-efficient way will have economic abatement costs. The transformation would be possible with investment of around 1.5 trillion euros until 2050.

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Reductions in carbon emissions of more than 80 percent until 2050 would also be possible but depend on three additional prerequisites (“80 percent + X”): -

Breakthroughs in the research of new climate protection technologies

-

The sustained support within society of the climate protection measures in all spheres of life

-

Comparable climate protection efforts abroad and an effective international market mechanism in accordance with the Paris Agreement on financing climate protection projects abroad which, at the same time, factors in the achieved reduction to a limited extent as an additional domestic achievement.

64.

The transformation needs technologically sound and economically viable management.

Climate and industrial policy should be intelligently interlinked. So as not to endanger Germany as an industrial location, energy and climate policy needs to be structured in a way that preserves the country’s international competitiveness in terms of carbon and energy costs, including the electricity grid fees that are set to rise. The objective should be to create an international level playing field in this regard. This should be taken into account when considering a higher carbon-based pricing in non-ETS sectors and in the debate on the future climate protection legislation. The federal government should drop rigid targets in tonnes for industry sectors. The BDI study “Climate paths for Germany” and the study synopsis by the BDI, Dtena and ESYS have shown that these targets lead to inefficiency and considerable additional costs in the billions. Framework conditions that are favourable to investment, cross-sector and technologically neutral are a much better option to structure sustainable economic and ecological climate protection. Regulations that impede stronger links between sectors should be abolished. The enormous burden of, e.g., electricity through the German Renewable Energy Act causes 96 percent of German industrial enterprises considerable additional costs which undermine the competitiveness of their products despite their high environmental and safety standards. Compensation for these additional costs should be introduced rapidly for those industrial enterprises that have not yet been unburdened, and, in the medium term, the current form of financing the funding under the German Renewable Energy Act should be replaced by an alternative form of financing.

65.

Furthermore, more focus should be placed on the opportunities connected with energy and climate technologies. Climate protection cannot work as a national go-it-alone. For this reason we need an active export policy and an environment that encourages innovation. Mechanisms for making innovative low-carbon production processes internationally competitive also need to be tested. Game changers also have the potential to facilitate the achievement of the climate targets in the next decades and lower the associated cost (including power-to-X technologies for the hydrogen economy and carbon capture and storage/utilisation – CCS/U). The marketbased research and development of potential game changers should therefore be another high priority in the National Industrial Strategy. A further integral component of an industrial policy strategy should be integrated energy technologies such as electric mobility and energy storage systems together with the parallel development of the necessary infrastructure.

66.

The burdens caused by the ETS and its impact on industry should be reviewed and the compensation of electricity prices prolonged for the long term.

67.

The high political uncertainty regarding the continuation of the regulations currently relieving the costs for industry is, for international investors, an argument against Germany as a location for

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investment. New proposals are therefore urgently needed on how to guarantee competitive prices for industry in the long term during the transition to renewables.

68.

The topic of carbon pricing is not appropriate for snapshot decisions. The federal government must initiate a thorough debate on how to structure carbon pricing for those sectors that are not covered by the European Emission Trading Scheme. This debate needs to discuss the impact and distribution effects of this kind of steering instrument to prepare the ground for future legislation. The outcome of this debate should be an intelligent, socially acceptable system that has a neutral impact on competition. It should include carbon-based technologically-neutral price signals for those sectors that are not covered by the emission trading scheme, combined with other steering systems.

Reforming corporate taxation 69.

More than ten years after the last reform, German corporate taxation legislation is in urgent need of modernisation. Germany has become a high-tax country in international tax competition, and is among the countries with the highest levels of corporate taxation.

70.

In 2019, the course should be set for an internationally competitive tax burden of 25 percent.

This can be achieved through a number of measures in several tax laws, particularly through the phased reduction of the corporate tax rate to ten percent, the complete abolishment of the solidarity surcharge for all payers, and adjusting the low tax rate threshold in foreign transactions tax law. The application of the preferential tax treatment for retained profits (Article 34a German Income Tax Act) should be rendered more practical and also apply to one-person businesses and partnerships. A debate on trade tax should also be put back on the agenda as it is an alien element of German tax legislation in an international context that can no longer be justified and should therefore be integrated into income tax in the long term in such a way that it does not impact the tax revenue at municipal level.

Strengthening research, development and innovation Tax incentives for research 71.

As well as making the tax burden competitive, corporate taxation legislation needs above all structural amendment. The BDI has long called for the introduction of tax incentives for investments in research and development before the end of this legislative term to trigger an investment drive and strengthen Germany as an innovative location. Tax concessions on research can provide effective incentives to keep R&D activities based in Germany irrespective of corporate size.

72.

The bill presented by the German Ministry of Finance in April 2019 for a research allowances act, alongside the existing project funding, to reduce R&D personnel costs for all companies that conduct research is the right instrument to bring the percentage of GDP invested in R&D closer to the 3.5 percent target of the federal government. In case of commissioned research, the contractor of the research should also be entitled to the research allowance as it bears the business risk. On account of the low annual funding earmarked for this proposal of only 1.25 billion euros, it would only constitute a first step. In the longer term, Germany needs a much stronger signal to propel itself to one of the top research locations in global competition.

Financing innovation 73.

The Industrial Strategy 2030 rightly underlines the importance of radical innovations and the pace of innovation in making German industry fit for the future. Radical innovations should be

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identified and promoted at an early stage. This should be established as a permanent process involving the ongoing monitoring and evaluation of innovations in cooperation with the business community and science with the aim of bringing outstanding ideas and approaches out of basic research and into industrial research and development. The funding instruments already in place and the planned agency for breakthrough innovations “Agentur für Sprunginnovation” are a good foundation to build on. The funding of incremental innovation nonetheless remains of major relevance to industry.

74.

Germany has a multi-layered investment and innovation financing structure in manufacturing which works well by and large but is far from perfect. Economic policy has triggered new and constructive momentum, particularly in start-up financing in the last few years. There should, from now on, be financing available on the market and through the established funding instruments at state, national and EU level for the lion’s share of investment and innovation projects for the start-up phase at least. Further steps still need to be taken in financial market integration in the EU and in funding policy for individual key areas that are either high risk or involve high capital costs.

75.

Investment and innovations in Germany are mainly financed through the internal financing of companies. Financial institutions also provide loans for investment and innovations. The state also has a range of instruments, partly in conjunction with the business community, to fund startups, growth and innovation financing for the mid-tier, and new projects of large companies.

These include Germany’s regional state development and guarantee banks, mid-tier venture capital companies in the individual states and the national development bank KfW. An equilibrium needs to be found to ensure that all companies that conduct ongoing research have sufficient financing options.

76.

Germany also supports the research and development activities of industry at federal and state level with funding schemes. Tax concessions for research and development should be introduced in this legislative term. National and KfW funding instruments available for risk capital are the high-tech start-up fund HTGF III, the coparion fund and KfW Capital. In addition, separate programmes have been approved for breakthrough innovations and artificial intelligence, in part in cross-border cooperation.

77.

The trend in corporate investment patterns towards increased investment in intangible assets causes difficulties as the traditional lending and funding criteria need to be adapted accordingly.

The BDI and several of its partners submitted recommendations to adapt the funding policy accordingly some years ago.

78.

Science and business need to be more closely aligned to be competitive in the new key technologies. Universities and colleges, alongside having a mandatory interdisciplinary module on entrepreneurship, should augment links to the regional economy with, for example, own startup centres. A certain share of public funding for non-university research centres could also be tied to a spin-off quota to counteract the declining number of non-university spin-offs.

79.

There are also European Union funding schemes in place (instruments from the EU budget and the loan and equity instruments of the European Investment Bank). In a variety of different types of programmes (e.g. the small funding scheme COSME focused on mid-tier companies), this support ranges from Industrial Projects of Common European Interest (IPCEIs), the activities of the European Investment Fund, and, shortly, possibly also the next research framework programme Horizon Europe and InvestEU in the form of funding for research and development to financing the pilot application of new technologies. However, the access regulations, the areas of focus and the administrative barriers are too challenging and complex for many researching companies. Additionally, the allocation of funds between universities and the large research

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facilities and research institutes of the private sector is not oriented sufficiently towards business challenges and the needs of mid-tier companies and application-oriented research.

80.

Agreement has recently been reached on establishing InvestEU as the leading institution for 14 separate funding activities of the EU. The European Commission and the European Investment Bank will play a central role in InvestEU. This move should increase coherence among the many investment promotion programmes of the EU. The planned reorientation of cohesion policy should therefore prove useful to investment promotion.

81.

The availability of risk capital and innovation capital is lower in Germany and the EU than in the United States and the People’s Republic of China. In Germany and the EU, particularly these respective funds have small and medium investment volumes which are often inadequate to cover the financing requirements of companies during the growth phase. Most funding terminates at the threshold to application financing, and the large-scale state technology programmes in security policy and military procurement with commercial spin-offs play a much less important role in Europe. Companies in Europe are at a particular disadvantage if they need high volumes of investment over extended periods of time because of the extensive regulatory framework. This is often the case in biopharmaceutical research, for example.

-

The People’s Republic of China has, without eliciting much international attention, been particularly active over the past few years in promoting industrial innovation and application through funding from budgets of the central government and the provinces and the credit facilities of state and state-owned development banks, and has established innovation funds with high volumes of state-financed risk capital. Aside from government support, the risk capital market on the financial market is also flourishing.

-

In the United States, technology programmes related to security policy continue to play a large role in the IT, electronics and software industries, in robotics and in artificial intelligence. State institutions fund research, development and application. Alongside the liquid risk capital market from the fund industry, the United States also has the high R&D and application expenditures of the platform companies, most of which are based in California and have their own investment and corporate venture capital structures.

82.

The combination of different market structures and massive direct and indirect influence from the state can make the financing of new technologies and business models possible only in the United States or China, or at much lower cost than in the EU where the availability of financing both from the market and from the state is low in key areas. In some technologies already, EUbased providers have been unable to participate on the market at all or with sufficient clout, risks have emerged for future innovative strength and value creation, and ideas and value creation have migrated abroad.

83.

If we then take into consideration that the capabilities of European companies to finance capitalintensive innovation projects internally has decreased on account of the divide, which has increased substantially in the last decade, between the relative market evaluation (market capitalisation) of U.S. and Chinese companies on the one hand and European companies on the other, then it is clear that this inadequate level of financing will bring down European innovation and growth prospects in the medium term. The European Commission has also recently pointed out these correlations.

84.

We therefore need to dramatically increase research and development support at EU level through Horizon Europe from 2021 (including allowing a combination of different funding

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programmes and making the framework for funding calls as uniform as possible). The funding volume for research and development should be doubled compared to the current programme period of Horizon 2020. Other necessary steps are a much stronger focus on industrial application research in line with the concrete packages of measures of the European Union, which the European Council requested the European Commission to compile at its spring meeting in 2019, the agreement of IPCEIs in many areas, the use of the multifaceted funds from the different programmes of the EU budget and the EIB to finance innovation in industry, and the appropriate further development of the national and European toolbox to adapt to the changed investment patterns of private enterprise.

85.

The European market for venture capital investment as a whole is not yet well-established enough to provide the financing required by young, innovative companies during the critical growth phase where steep scale-up and expansion is necessary, often with high initial losses and persistently high risks that the product or business model will fail. Companies often migrate during precisely this phase to the more mature and more liquid markets in the United States or even to China.

86.

The federal government and the European Commission should therefore consult extensively with market participants (financial industry, entrepreneurs, companies) to identify further legal and tax measures to deepen the capital market union, adapt the regulation of the financial industry, and other measures to open up a perspective for strengthening capital market financing in Europe. The current funding toolbox should also be reviewed to identify ways in which it can be adapted and extended to solve the problem of insufficient growth financing for start-ups.

87.

There are also challenges for technology policy in the traditional fields of industrial value added.

The swift progression of technically viable new solutions in the production chain, such as those designed to reduce emissions, through the pilot, test and introduction phases should be facilitated. A procedure should be established for those areas in which a commercial rollout is not economically viable in the short term, to pave a way to commercial viability with funding and suitable framework conditions. This task is a logical consequence of the sector-specific climate targets set down in law.

88.

It should also be reviewed whether new financing structures in the form of a technology fund should be created for certain large-scale projects whose required investment level exceeds the credit and equity volumes commonly available on the market. Institutional investment capital would need to be recruited for such a fund. A possible incentive to join the fund could be a certain level of co-financing by EU institutions or the member states. This fund would go beyond financing IPCEIs on a case-by-case basis. It would need to be reviewed whether the European Investment Bank and the national development banks could provide suitable assistance to set up such a fund.

Digitalisation, data policy, artificial intelligence 89.

A data policy that encourages innovation should form a key element of the National Industrial Strategy 2030. This involves finding a good balance between the interests of data producers and data users with improved and controlled access to data, improving legal certainty concerning the treatment of anonymised data and expanding the open data policy of Germany and EU member states. The full potential of digitalisation in areas such as healthcare and medical technology in Germany can only be harnessed if Germany orientates itself on established international standards and refrains from applying its own divergent standards. The voluntary provision of data to support the development of artificial intelligence applications in Germany should be encouraged. This also applies to sensitive areas such as healthcare, where medical

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diagnostics is set to become one of the major fields of AI application. The National Industrial Strategy should support the objective of the European Commission of establishing a European data economy with improved data usability. The free flow of data in the EU is a key prerequisite for data-based business models in Europe in general to succeed. We view the introduction of general legal obligations to grant access to data and on data sharing as problematic and believe strengthening the principle of contractual freedom and self-regulation within individual sectors to be the better option.

90.

The digital transformation is making platforms and data-based business models increasingly important. A major driver of this trend is artificial intelligence. Artificial intelligence is not one single technology or a separate, clearly delineated product. With the exponential growth in volumes of data, recent technological progress, particularly in machine learning, and increased computer processing powers, AI is ready for broad industrial application. It is now important to spread the use of AI and support companies in building up AI competence and integrating the technology in their own products and processes.

91.

The weak position of Germany in the platform economy as posited by the National Industrial Strategy is incorrect in that it is framed in too broad terms. To be more precise, U.S. and Chinese platforms in the B2C sector are world leaders and have extended this strength to cover parts of the industrial sector using targeted technology and industrial policy. Nonetheless, numerous well-established German companies and rising start-ups and small and medium-sized enterprises in the B2B sector have many successful industrial platforms in their product and service portfolio (online marketplaces, supply chain, maintenance and software management).

Furthermore, comparable platforms have succeeded in establishing themselves in the B2C sector. The interoperation of industrial platforms can make a major contribution towards a networked digitalised industry. Every form of regulation needs to take account of the major differences between the various platform models. The more intensive competition among platform services in the B2B sector should also be taken into account. This diversity is an advantage for users.

92.

For the aforementioned reasons, it is of elementary importance that technological developments and changing regulatory parameters are not viewed and supported in isolation but the data and platform economy as a whole. Strengthening the good starting position of Germany and Europe rapidly and effectively in the international competition in AI in industrial fields of application, and in the industrial data and platform economy of which AI is a key element, should be a priority of the National Industrial Strategy.

93.

Security and trust are central preconditions for the digital transformation to succeed. Complex cyber attacks in the industrial environment have nonetheless become one of the biggest threats to smooth business operations. A successful National Industrial Strategy should therefore prioritise the security of data, services and networks as the necessary basis for economies in the age of digitalisation. The German and European cybersecurity industry also needs to be strengthened. Companies need orders and reference projects from public authorities in Europe to generate a critical market volume. A harmonised standardised European procurement market would help Europe’s cybersecurity industry grow out of its current niche position.

94.

At the same time, efforts need to be stepped up throughout society to increase the cyber resilience of Germany. The state and the business community are together already making progress in better protecting the economy from cyber threats with the “Alliance for Cyber Security”, the initiatives “IT Security in Industry” and “Making Germany Safe in the Internet” and the cooperation project “Pact for Cyber Security”. The responsible and competent use of digital technologies should become a matter of course in all organisations, in all spheres of public and

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private life. Digital systems must be used securely if we are to leverage the potential of digitalisation and minimise the challenges (See also Shortage of Skilled Labour and Digital Education).

95.

The recent debates on the application of Chinese network components in the expansion of the 5G network have clearly demonstrated that Germany is dependent on both national and international companies for its digital transformation. Systematically excluding international providers in the establishment of digital infrastructures and terminal devices is therefore not a good idea, neither technologically, nor economically, nor in terms of time. Germany should nonetheless invest more in its digital sovereignty without falling into digital asceticism. Digital sovereignty means retaining the power to act and make decisions autonomously in the digital sphere. It involves establishing and maintaining the technical competence to evaluate the IT security of products and services. Digital sovereignty also includes the capability on the part of the user to independently evaluate technological components and systems with the ability to then use them competently. Digital sovereignty is consequently an indispensable prerequisite for an autonomous state in the age of digitalisation. High-performance data centres, for example, form the necessary basis for data-based and AI-based business models. The framework conditions for data centres in Germany (including energy and climate policy considerations) need to be made more competitive in order to strengthen the country’s overall competitiveness and digital sovereignty.

96.

In general, the ecosystem of the industrial data and platform economy needs to be viewed as a whole. The security of data and the trust in automated decision-making will only grow on the basis of reliable and secure hardware (e.g. through hardware security anchors) combined with trustworthy software. We also need a reliable digital infrastructure. Fifth generation mobile networks and fibre optic networks should be made available to all companies, private households and along transport routes by 2025. Only then can digital solutions and business models, including those based on artificial intelligence, grow further (for further information see Digital Infrastructure).

These areas need parameters that are more favourable to innovation and this should be taken into account more extensively in the Industrial Strategy 2030.

Bio-based economy, biotechnology, life sciences 97.

In the last few years, politics and society have responded to the challenges posed by the increasing consumption of resources and climate change with national and international programmes and measures. These programmes and measures are all aimed at creating a sustainable, environmentally-friendly and low-carbon economy while also securing the supply of food, vaccines and medicine for a growing global population. Biotechnology has become a central pillar in the transformation process towards a bio-based and sustainable economy. This enabling technology is likely to trigger a deep-reaching transformation in society and industry akin to digitalisation. In medicine, biotechnology is enabling new ways of curing and treating disease. In industry, the broad application of production processes based on biotechnology means that many commodities and consumer goods can be produced to a higher quality and with higher resource efficiency. Policymakers need to support this transformation process into a bio-based economy with an intelligent framework that encourages the development of biotechnology as a key enabling technology and driver of innovation. That also includes securing the protection of intellectual property rights relating to biological organisms.

98.

The bio-based economy is an interdisciplinary topic throughout industry. The announced agenda “From Biology to Innovation” under the umbrella of the “High-Tech Strategy 2025” must therefore

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be coordinated on an interdisciplinary basis. The Federal Economics Ministry, for example, is currently setting up an “Industrial Bio-based Economy” platform as a starting basis for debate.

At the same time, the Ministry for the Environment, Nuclear Conservation and Nuclear Safety on the one hand and the Ministry for Education and Research together with the Ministry of Food and Agriculture on the other are already very active in this area. All ministries involved should coordinate their work in this area.

99.

The “Biology to Innovation Agenda” should be designed to trigger investment in biotechnology, improve the regulatory parameters for new biotechnological processes and support the dialogue with citizens. The federal government should therefore incorporate a third pillar into its agenda, a “BioDialogue”, to discuss the opportunities, risks and issues of governance amongst a wide group of stakeholders. This pillar could pool all initiatives and the dialogue with business, science and the civil society announced in the coalition agreement and strengthen the level of acceptance in society for the bio-based economy and biotechnology.

100. Life sciences and healthcare is also a cross-cutting issue. A coordinated industrial policy is also very important for this area, one which steers technological developments into the correct regulatory paths in the interests of the healthcare system as a whole and of the insured individuals and patients. This industrial sector, which is one the most important in Germany and the European Union, needs a coordinated policy – in innovation, research, industry and healthcare – to continue to drive innovative capabilities and competitiveness. Some important measures in industrial policy are particularly necessary in the digitalisation of the healthcare industry. Digitalisation here is lagging behind on an international comparison and therefore needs to be paid particular attention and further measures set out in the industrial strategy.

Firstly, a more forward-looking and innovation-friendly national regulatory framework recognised by all parties for the use of healthcare data in industry. Secondly, a high-performance and nationwide network and communication infrastructure is essential for becoming internationally competitive. The full potential value creation of digitalisation in healthcare and in the industrial healthcare industry in Germany can only be exploited if Germany orientates itself on the corresponding standards established on an international level and does not apply own, separate standards for Germany.

Towards a truly circular economy 101. Industry can make a decisive contribution to sustainable development if it seizes the circular economy as an opportunity. Innovations developed in cross-sector networks are needed to create viable structures for the circular economy. This will fundamentally change the products, processes and business models of enterprises. The coupling of goods with services is a key to unlock additional value creation assisted by digitalisation. Reliable framework conditions that encourage innovation are needed to leverage this potential.

102. Many companies are already working on forward-looking solutions to recycle materials and increase resource efficiency. New business models are increasingly incorporating the use of recycled commodities, renewables and bio refineries, or extending lifetimes. Sustainable development always needs to be viewed holistically. That means that economic developments need to be structured in an ecological and socially responsible way along the whole lifecycle of products and services.

103. Future and existing regulations should be subjected to an innovation check to ensure that they keep pace with developments towards a truly circular economy and do not obstruct new business models. Recommendations to trigger more investment include the technologically neutral promotion of research, facilitated access to venture capital and, in certain cases, the

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promotion of private public partnerships for pilot projects. The state could support the establishment of cross-industry platforms. A dialogue is also needed within society on the potential of a circular economy and a suitable industrial policy framework.

Shortage of skilled labour 104. The acute shortage of skilled labour is curbing innovation and growth. This is particularly pronounced in the area of digitalisation. Measures to reinforce training and recruit skilled labour and experts to Germany should be afforded a high priority. In addition to the continued career advancement of young talents urgently needed in the STEM (mathematics, computer science, natural sciences and technology) subjects and professions, and the targeted and nonbureaucratic recruitment of skilled labour from abroad, the promotion of digital knowledge and competence in digital application needs to be stepped up at all ages and throughout the whole education system (pre-school, school, vocational training, higher education, further and continued training) and better aligned to digital needs in private life and at work, along with the promotion of life-long learning (technical skills, entrepreneurial thinking and creativity). The “Digital School Pact” should be implemented more speedily to improve the digital educational infrastructure. Securing a smooth functioning of the dual vocational training system in rural areas as well remains indispensable.

105. It is also important to raise the degree of acceptance for industry, research, innovation and technology within society. This is an essential prerequisite for increasing the desire for and enjoyment of education.

106. Even if domestic skilled labour is employed in the best possible way, it would not meet Germany’s needs for skilled labour. The German skilled labour immigration act should therefore be adopted as quickly as possible. The stipulations regarding language abilities and proof of professional experience should not be formulated too narrowly.

Strengthening the entrepreneurial spirit 107. A vibrant entrepreneurial landscape – both in business start-ups and in business succession – is a testament of applied individual responsibility and increases local cohesion. An entrepreneurial spirit safeguards competition and economic freedom and is the key to discovering new markets. This valuable contribution should be held in high esteem within society and by policymakers.

108. Start-ups are the companies of tomorrow and an important part of the industrial ecosystem. To foster innovation, Germany must develop a culture of entrepreneurship. The decision to become self-employed, develop innovative products and services and set up one’s own business model and create jobs should become a matter of course in the mindset of German society. Initiatives for entrepreneurs should be further expanded, the bureaucratic and tax requirements of young companies kept to a minimum and the cooperation between established and young companies strengthened in a targeted manner and the spin-off culture in established companies and science supported.

109. At the same time, considerations need to take into account that in the coming years a wave of succession within mid-tier companies will need to be managed, also politically. Until 2022, around half a million companies are planning to hand operations on to the next generation. An intelligent policy to support Germany as a business location is required to secure corporate expertise, financial stability and jobs. The package of measures needed in this area include underlining the value of entrepreneurship in the public administration and education system, reducing the bureaucratic burden of business succession, taking components that are not

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related to earnings out of corporate tax legislation, and making the inheritance tax legislation legally certain and favourable to the mid-tier.

Reducing bureaucracy and improving legislation 110. The high bureaucratic burden within Europe on an international comparison puts Europe at a disadvantage as a business location. Excessive bureaucracy curbs investment in innovation, growth and good jobs to the detriment of businesses and the economy as a whole. This affects companies of all sizes and in all industries, with the nationally loyal industrial mid-tier particularly affected due to its limited personnel and financial resources.

111. The objective should be to tangibly reduce annual and one-time compliance costs and the bureaucratic costs of regulations, accelerate approval and planning procedures and create a functional digital administration (e-government) with seamless interfaces to companies. Startups and innovative companies should be given the space they need (space to experiment) without thwarting their growth with bureaucratic barriers. Overall, legislation should be formulated with precision, be given a clear scope and not stand in contradiction to existing legislation as that would make legal certainty in implementation impossible.

112. While reducing bureaucracy, it will always be necessary to keep track of developments at the European level as the legislation applicable in Germany increasingly comes from Brussels, and the European internal market is the domestic market for companies. European law needs to be transposed into national law one to one, without adding additional national regulations (goldplating). The European Commission should step up its monitoring of and calls for the implementation of EU legislation in order to stave off disparities within the internal market.

113. Legislation should also be structured in a way that encourages innovation. Industry has proposed an official recognition of the “principle of innovation� in regulatory practice. The basic idea behind an innovation principle is to extend the legally stipulated precautionary principle.

Regulatory impact assessment should not just look at the impact of regulations in regard to the possible risks and dangers, but also look at the opportunities arising from a new technology or innovation, for example, and the impact on the digital and data economy. The BDI calls for the introduction of an innovation opportunity check within the regulatory impact analysis to aid the German legislator to conduct a systematic analysis of the impact of regulations on innovative strength and the digital and data economy. The innovation opportunity check would prevent legislation from having a restrictive impact on technology or innovation and obstructing the fulfilment of politically defined objectives in the digital sphere. Legislators need to start generally considering innovation and the data economy when passing new legislation.

114. Companies in Germany also bemoan the lack of legal certainty in authorisation procedures.

New, non-specific legal terms and changed requirements arising from European and national jurisdiction have increasingly turned the approval procedure under the German Pollution Protection Act into a procedure marked by numerous expert opinions from the project owner and on the part of the authorities. As expert opinions are both legally and scientifically contestable, a legally certain authorisation which can be used as a basis for investment decisions can no longer be considered the standard. Environmental legislation shaped by European legislation form the basis for authorisation procedures. Germany is almost the only country to have such problems with European environmental legislation, even though most member states have comparable or bigger environmental problems. Legal uncertainty in authorisation procedures is therefore not a necessary consequence of European requirements but caused by the specifics of the German legal system. These are related to the stronger position of environmental organisations and a higher propensity of individuals to bring legal action and, particularly, the

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high density of controls through courts and the consequent depth of investigations by public authorities. German industry believes that policymakers urgently need to discuss whether having German environmental legislation under full jurisdictional control is still in keeping with the times and proportionate in the European context.

115. Legislation and regulation play a central role during the market entrance phase of innovative products and services. Industry is increasingly facing debate on technology policy in which opportunities and risks are no longer weighed up on a scientific basis. The federal government should therefore enforce a rule and science-based implementation of public authorisation procedures.

Improving local infrastructure 116. Transport, energy and digital infrastructure are of particularly high strategic importance to the competitiveness of German and European industry. The transport infrastructure remains the backbone of Germany as a top exporting country. In many other parts of the world, transport is a much greater issue than in Europe. The Belt and Road Initiative (BRI) of China, for example, is expanding the country’s geopolitical and geo-economic influence and third markets in line with its own interests.

117. Critical infrastructure and infrastructure that is essential from an industrial policy perspective must be subject to separate allocation and financing criteria. Germany should work towards increasing the level of funds invested in the expansion of infrastructure at national and European level and enhancing the strategic coordination of this expansion. The connectivity strategy formulated by the European Commission last year can be the first step in this direction.

Raising acceptance for the expansion of infrastructure 118. High-performance and sustainable infrastructure also forms the basis of competitive industrial value added in rural regions, which is where many of the mid-tier and family businesses in Germany are based making it the backbone for prosperity in Germany. Policymakers and the business community are required to join forces to underline the correlation between infrastructure and prosperity in order to raise public support for the implementation of large and small infrastructure projects.

119. In view of the capacity bottlenecks in the transport and energy grids, the gaps in the coverage of fibre optic and mobile broadband internet, and the challenges arising from climate change, there is still a great deal that needs to be done fiscally, legislatively and administrative to improve infrastructure.

Steadily increasing financing levels, accelerating planning and approval procedures 120. The levels of financing need to grow steadily in order to establish planning certainty for the establishment and maintenance of the required planning and building capacities. In the event of user financing for infrastructure projects, with the exception of digitalisation measures such as the expansion of the fibre optics network, this should be introduced similarly to the HGV toll, ensuring both that user revenues are earmarked for the specified purpose and that a proportion of costs are met by these revenues.

121. Getting investment flowing in road and rail infrastructure will take a few more years to come and tie high levels of funding. Alongside the challenge of financing, the second challenge is enabling the swift use of the available funds. The planning and approval processes should be further accelerated and planning capacities increased in the relevant authorities.

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122. The act passed in late 2018 to accelerate planning in the transport sector, the amendment of the “German grid expansion acceleration act� from 2019 and the initiative for a port acceleration act are steps in the right direction, but more are needed.

123. The expansion of transmission networks and the efficient use of existing networks are among the major challenges for the transition to renewables. The federal government, together with the federal states, municipalities and network operators, must find swift solutions to implement the rapid expansion of infrastructure and accelerate planning and authorisation procedures.

Germany is already lagging far behind in grid expansion and efficient network use despite the new electricity grid action plan presented by the Federal Economics Ministry.

124. The expansion of the electricity grid continues to be of central importance to Germany as an industrial location and German industry’s value chains. Businesses in Germany are dependent on a secure and cost-efficient supply of electricity. German industry advocates the expansion of the electricity grids including underground powerlines. The transition to renewables will not succeed without a resolute expansion of grids. The costs should stay proportionate to the benefits otherwise this would cast doubt on very concept of the transition to renewables.

125. Regarding the road network, the situation would be greatly improved if, in future, new constructions to replace bridges with or without increasing capacity could be treated in terms of authorisation regulations as what they are, namely maintenance measures to the network.

126. In rail, the planning procedures could be substantially accelerated through an ordinance on compensation for encroachments on nature and landscape issued at federal level. The waterways would benefit in particular from more personnel, i.e. initially from a more rapid appointment of the planned positions in the Federal Waterways and Shipping Administration.

127. Gigabyte connections need to be provided in a way that simplifies and harmonises the longwinded and complicated application and approval procedures at the municipal level for rights of way, sites and construction sites. The required funds for building capacities should be made available predominantly for own expansion on a moderate, focused and subsidiary basis. The shortage of skilled labour will also be an issue here and resolute action should be taken to remedy this.

128. The realisation timeline for infrastructure expansion in all areas would benefit from a stronger coordination in land-use planning and planning permission in order to prevent duplicate work.

129. Federal funds should also be applied efficiently. In the expansion of the transport network, the federal authorities should pursue a broad approach encompassing different procurement models (the award of contracts in technical and partial lots, construction contracts with only functional specifications, design and build models, and public-private partnerships) of which the most economic option should be selected in every case. Partnership-based procurement models such as PPP which engages construction expertise at an early stage in the planning process would also help relieve the strain of staff shortages in the public sector and enable the integration of innovations and new construction solutions.

Securing the transition to renewables and future mobility 130. Novel infrastructure is essential to prepare the German economy for the future. This includes charging and fuel infrastructure for electric vehicles and, equally, alternative drives including truck overhead power lines as well as facilities and transport capacities for Power-to-X, LNG and hydrogen. This will require considerable investment in the transport infrastructure. This is the

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only way that we come within reach of integrated energy, which is so important for the transition to renewables and for the mobility of the future.

131. In order for rail transport to make the necessary contribution to climate and transport targets, the capacities of the rail network and the quality of the transport services offered will need to be raised substantially. To become more attractive for shipping agents, rail capacities must increase. This includes the expansion and new construction of routes, the upgrade of rail hubs, and the construction of a 740m network for freight trains as well as the nationwide rollout of digital interlocking and ETCS. Setting up gigabyte networks for the digital transformation 132. Fibre optic networks, ideally right up to individual buildings and apartments, should be available to all companies, private households and along all transport routes by 2025. At the same time, business needs a high-performance mobile network for the communication between machines in a factory and for reliable mobile communications in the cities and in the countryside.

133. The new 5G networks will drive forward industrial applications in particular. 5G is the new standard for the Internet of Things and Services and is therefore leading the way in securing Germany as a production and business location into the future. 5G will significantly speed up the further development of Industry 4.0 and digital solutions based on artificial intelligence.

Policymakers should therefore set incentives for a lead market and lead providers of 5G (above all in industrial production).

134. At the same time, the coverage of 4G networks should be increased swiftly to close remaining dead spots particularly in rural areas.

135. In this context, improved coordination between the federal ministries and an ongoing dialogue with industry is needed to meet the objective of providing the networks required for Industry 4.0 and artificial intelligence applications rapidly in collaboration with network operators and corporate users. This is the only way to make Germany an equally attractive business location as the pioneers in gigabyte network expansion such as China and Korea.

136. Furthermore, space-based applications are also an issue for industry as a whole. The satellite infrastructure and satellite data are necessary for automated driving, Industry 4.0 and digitalisation. If we want to continue to be a successful industrialised nation in the future, we will have to be among the global leaders in space travel.

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Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0 Contact partner Dr. Klaus Günter Deutsch Head of Department Research, Industrial and Economic Policy T: +49 30 2028-1591 k.deutsch@bdi.eu Rabea Knorr Deputy Head of Department Strategic Planning and Coordination T: +49 30 2028-1421 r.knorr@bdi.eu Matthias Krämer Head of Department Strategic Planning and Coordination T: +49 30 2028-1629 m.kraemer@bdi.eu BDI publication number: D 1044

This translation is based on “Deutsche Industriepolitik” as of 6 May 2019.

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