Originally Published 13 July 2001

Speech

by Dr. Werner Müller

Federal Minister of Economics and Technology


"The future of manufacturing in Europe"


on 13 July 2001

at the University of Warwick


Text as prepared for delivery

Anrede

Ladies and gentlemen:

I. Introduction

There is no doubt that the 13th of July is a significant date.

Not because I have the pleasure and honour to speak to such an outstanding audience today.

No: this is a special date for the whole of humanity, because, as we all know, on the 13th of July 2305 (two thousand three hundred and five) Jean-Luc Picard takes over from James T. Kirk as the captain of USS Enterprise.

Now, under normal circumstances, I would not have reminded you of this.

But there is a little sign on the body of the starship, and if you get right up close to the TV, you can just about read it.

It says: "Airbus Industries Ltd., Hamburg, Toulouse, Farnborough"...

So now you know why I didn?t put a question mark behind the title of my lecture.

II. The manufacturing sector today

However, if you drive through the West Midlands or the Ruhr district today, you may get the impression that manufacturing in Europe is past its best.

The scenery is dominated not by smokestacks, but by shiny glass buildings.

The blast furnaces and steel mills have been replaced by banks, insurance companies and electricity firms.

You see empty factory sheds, and the occasional futuristic building whose purpose is hard to imagine.

But there is hardly anything left of the traditional industries and their noise and smells.

These impressions are visible proof of a massive structural change which has taken place in just one generation.

And this structural change is continuing.

Economies whose labour costs are far lower than in central Europe are coming onto the world market.

China is on the doorstep of the WTO, and central and eastern Europe is on the verge of joining the EU.

In view of these challenges, can manufacturing continue to be competitive in the longer term in countries like the UK, France and Germany?

In fact, do we even want a manufacturing sector in our countries, since the manufacture of goods consumes resources and the environment?

Shouldn?t we be concentrating on white collar jobs in those stages of the supply chain which come before and after manufacturing?

That would certainly be a response to structural change: we solve the structural problems by removing the structures.

But it is the wrong response.

Let me list a few reasons to show why it is wrong.

My first argument: the goods-producing sector is not facing extinction: it has merely changed its shape.

One reason why the sector is no longer regarded as a very important factor in the economy is that it looks different than it did two or three decades ago.

Modern production takes place in air-conditioned sheds and labs which look virtually the same as the buildings used by the services sector.

Industrial workers are often highly qualified experts who go to work dressed in suits and ties.

On the underground, you can no longer tell whether the person next to you works for Jaguar or for Morgan Grenfell.

My second argument: statistics can be misleading

According to the statistics, the share of total economic output accounted for by industry has kept declining in recent decades ? in both Germany and the UK.

One reason for this is certainly that rising incomes boost the demand for services.

Another is a purely statistical effect.

If an industrial firm outsources its computer department or its car pool and facility management, the statistics for the manufacturing sector will fall and those for the services sector will increase.

But in reality, nothing has changed.

The programmer still writes the programmes for the process control, and the lorry driver still delivers the products.

And that brings me to my third point: many services could not survive without manufacturing in the locality.

And the services which depend on an efficient manufacturing sector are not just the ones directly related to industry.

Many ?traditional" services ? banks, insurance, etc., would shrink fast without industry.

What business would the traders of industrial shares in the City of London do ? if there were no firms issuing shares?

Many people claim that, in a global economy, the various business functions can be located in different countries.

Why shouldn?t a team of engineers develop a product in Germany which can then be mass-produced cheaply in a factory in China?

Why shouldn?t banks and insurance companies in London provide finance and insurance for industrial firms in India?

All of this happens.

But the key question is:

can we in the high-wage countries restrict ourselves to the high added-value segments of the supply chain, and leave the actual manufacturing to low-wage countries?

I say no!

And so my fourth argument is:

Europe cannot live on the export of blueprints and of financial and consultancy services alone.

The modern information and communication technologies have made it easier to split up the supply chain, but many aspects still cannot be moved around at will: new technologies have also created new inter-relations.

For example, progress on biotechnology is only possible with electronic equipment.

And at the same time, the information and communications sector is increasingly profiting from the input from biotechnology.

Traditional silicon is being replaced by organic components, enabling memory to be vastly expanded.

As production processes become more complex, the interplay between R&D and manufacturing is becoming more and more important.

You can?t design a BMW or a Jaguar at a drawing board and then build it in Kyrgyzstan.

This leads on to my fifth argument: we need clusters of efficient core industries in Europe.

Let me give you two examples:

In Baden-W?rttemberg, in the south-west of Germany, we have a powerful car industry.

You will have heard of Mercedes and Porsche.

An efficient sector of component suppliers has grown up around these companies, with a lot of small and medium-sized firms.

Mechanical engineering lives in fruitful symbiosis with the auto industry, and the region leads the world in many segments.

The cluster is rounded off by numerous research and education facilities and by specialised service providers.

The second example: a biotech cluster has emerged around Munich in the last few years.

This has been made possible by a powerful academic infrastructure, by complementary industrial firms, such as the makers of special equipment, and not least by the establishment of venture capital firms in the region.

And finally, the state has supported this development, for instance by setting up a new stock exchange, the Neuer Markt, where it is easy for start-ups to get hold of capital.

The results of the biotech firms impact on pharmaceuticals, chemicals, medical technology, and many other areas, and make them more competitive.

This brings me to my last argument:

Governments need to create an environment in which Europe's manufacturing sector has a future.

What do I actually mean by that?

Firstly, I mean that government policies always need to consider their impact on the competitiveness of industry.

For example, we cannot afford to take decisions on chemical safety which would endanger the survival of the chemical industry in Europe.

If the production of chemicals were to leave Europe, this would affect other sectors as well, and it might tear an irreparable hole in the fragile economic networks of our countries.

Looking at the present decision-making structures in Brussels, I must confess that I'm not sure whether they really help us to weigh up the various interests rationally.

Too many matters are now being decided on by consumer affairs and environment ministers, who sometimes regard European industry as a thing of the past.

But that was just by the way.

What European industry needs is an environment which encourages investment and innovation, and which permits production to take place at internationally competitive conditions.

III. Safeguarding innovation and competitiveness

Ladies and gentlemen:

If industry is to remain competitive in the long term, it needs innovations and technology.

Business and government need to work together to create the conditions in which enough new knowledge is generated and " just as important " is turned into marketable products.

German industry has done a lot in recent years to safeguard its competitiveness and ability to innovate.

Let me give you a few figures:

Firstly: spending on R&D by German firms rose by more than 9 % each year between 1996 and 1999.

And the forecast is that it has continued to rise in 2000 and 2001.

R&D now accounts for about 2.4 % of GDP in Germany.

That is higher than in France or Britain, but is still less than in the US or Japan.

Amongst the major economies, only Japan is ahead of Germany on patents, with 177 world-wide patents per million workers, and Germany?s patents are mostly in mechanical and automotive engineering.

Germany has caught up on patents in mobile communications and the internet.

Secondly: the desire of businesses to innovate has kept improving since 1995.

Two out of three industrial companies said in 1999 that they had introduced new products in the last three years or had improved production processes.

Roughly 45 % of industrial turnover in 1999 came from new or improved products.

And more and more innovation in industry is aimed at the development of growing markets abroad.

Every second euro of high-research industries is now earned abroad.

In certain companies like Siemens, the proportion is over 70 %.

One major reason for this success is the skills advantage which Germany enjoys in Europe, particularly in the manufacturing sector.

According to data by Eurostat, the proportion of highly skilled workers is higher only in Sweden, Finland and the Netherlands.

Britain is one of the countries which has been catching up fast since 1995.

A positive aspect for Germany is that employment in the research-intensive sector has been recovering since 1997 and rose by about 2 % up to 2000.

So there is no cause for pessimism.

Despite this, the ability of commerce to innovate is impeded by a number of factors.

One key problem is the growing lack of skilled workers.

40 % of job vacancies for science graduates in R&D-intensive industry, and 50 % in R&D-intensive services, could not be filled in the first half of 2000.

We have a particular shortage of IT specialists.

There were some 93,000 unfilled job vacancies for people with these skills, and 74,000 of them were for university graduates.

And this shortage affects not only the IT sector itself, but the entire economy.

By putting much more money into funding for education, and by introducing the green card for IT specialists, the German Government has already started tackling the problem.

But long-term improvements depend on further key reforms to our education system.

I believe that Germany can learn a lot from the UK on this, especially about reforming higher education.

This has been shown, for example, by the German-British report entitled ?Towards greater entrepreneurial dynamism: interaction of education and innovation", which I presented last September together with my then colleague, Stephen Byers.

Its key points on education are more independence and competition, greater orientation towards applications, and internationalisation.

The German Government has now made it possible to offer the internationally recognised bachelors and masters degree courses.

This is an important step in the right direction.

The number of these new courses has already risen to 650 in the 2001 summer semester.

And more than a third of them are in engineering sciences.

These courses are helping to shorten the length of studies and to make the course content more practical.

Also, the German Government aims to reform the employment rules for professors and academic staff at universities and colleges, thus creating an internationally competitive and flexible pay structure with variable salary components.

The intention is to reward outstanding performance in research and teaching.

Of course, we like to see German students and researchers doing well abroad.

But you will understand that we have mixed feelings when our best brains are at home in Oxford or Cambridge.

Also, the new employment rules will try to boost the transfer of technology into industry.

After all, a transfer via people?s brains ? I mean from the education system into new start-ups or existing firms ? is the best form of technology transfer.

However, the SMEs in all areas of the economy need particular support as they improve their innovative capacities.

This is not a matter of supporting a particular innovation or a specific sector.

If the state exerts too much influence on innovation, it will tend to stifle and not encourage initiative ? as Lord Kelvin put it:

"Had government funding of science existed in the stone age, mankind would now have splendid stone machines ? and no metal."

So the state is better advised to view technology promotion as support for an evolutionary process.

And therefore the German Government has focused its policies on enhancing the general technological skills of smaller firms.

In total, we are spending roughly half a billion euros on promoting innovation by small and medium-sized firms in 2001 alone.

Our approach is basically to try and bring together the existing potential for R&D in companies and research establishments, and to promote co-operation on R&D and innovative networks.

All sides benefit from such co-operation: the firms which bring together their expertise and their resources, and also the research establishments whose activities are thus specifically oriented to the needs of industry.

But as in education, Germany can also improve its innovation support for small businesses.

For example, we need to enhance the competitive elements when allocating the funding.

Also, we need to do more to encourage interdisciplinary and cross-sectoral co-operation.

The lone researcher and developer working away in splendid isolation is more than ever a thing of the past.

IV. Has the German/European model reached the end of its life?

Some people say that manufacturing will only have a future if the European model, with its high welfare standards, is also consigned to the past.

I do not share this view.

Firstly, we have not seen any academic proof that hire-and-fire does create more jobs in the long term.

Secondly, the German experience with co-determination shows that it is easiest to cope with structural change in a socially acceptable manner together with the employees.

You can ignore others when you destroy structures, but in order to modernise structures and make them fit for the future, you need a consensus.

V. Conclusion

Ladies and gentlemen:

I deliberately did not formulate the title of my speech as a question, because it isn?t.

Manufacturing in Europe has a future ? or Europe doesn?t.

However, this future will not happen automatically.

Another Jean-Luc Picard ? the real one, the famous French astronomer of the 17th century ? put it like this:

In about 1670, he wrote: "I prefer to regard the future as something not yet set in stone."

That is the only future-oriented, sensible view.

We must never allow ourselves to become prisoners of the future.

And the students, who enjoy such an excellent education here in Warwick, are an important part of that future.

It depends both on them and on us whether the future will be a time in which we regret not having done what we can do today.

Or whether the future will be a time in which we are glad to have made progress.

Ladies and gentlemen:

According to an inscription at Cambridge University, an intellectual is someone who uses more words than he needs, in order to say more than he knows.

Since I have no intention of allowing anyone to suspect that of me, I shall stop at this point and look forward to the discussion.

---

Further information about the above press release and all other media services at the University of Warwick can be obtained from:

Peter Dunn, Press Officer
Public Affairs Office
Senate House
University of Warwick
Coventry, CV4 7AL
West Midlands
Tel: 024 76 523708
Email: puapjd@admin.warwick.ac.uk