The Future of Manufacturing and Innovation in Germany and the United States

Manufacturing in the United States and Germany face several innovation-related challenges: the structural impact of the green and digital transformations on key industries such as car manufacturing, skills and capabilities in the labor market for innovation, and vulnerabilities in the globalized value chains. For decades, the policy consensus may have been that these were not problems to be solved, but the logical, and indeed desirable, conclusion of large, industrialized economies operating in an open, globalized market. Offshoring the production of a certain component was not an issue so long as that component was readily available; an undiversified supply of energy was not a threat so long as the supply of gas did not pose challenges; the lack of domestic skills and capacities was not so much a concern so long as the movement of people across borders was relatively unobstructed.

This event brings together several leading thinkers on STI from the United States and Europe to discuss some of the key innovation challenges for manufacturing now and in the years ahead, and to explore what types of policies are necessary for innovation to meet these challenges.

Join ITIF and OECD to explore policy questions that arose in the context of the OECD Reviews of Innovation Policy: Germany 2022, but which have relevance to both the United States and Germany.

Welcome and Introduction (10:00–10:30 AM)

This session will provide the context of the event and introduce to the strengths and weaknesses of the U.S. innovation system.

• Robert Atkinson, President, ITIF
• Andrew Wyckoff, Director, OECD Directorate for Science, Technology and Innovation

Session 1 (10:30–11:00 AM): Strengths and Weaknesses of the German Innovation System

The COVID-19 pandemic and the Ukraine war have revealed vulnerabilities in Germany’s economic model: undiversified energy supply, an over-reliance on fossil fuels, delayed digitalization, and disreputable supply chains. Digital technologies may significantly disrupt manufacturing industries Germany has dominated for decades, threatening future competitiveness. The green transition also requires significant industrial transformations. Germany can call upon one of the world’s most advanced innovation systems in dealing with these challenges, but a new more agile, and experimental approach to innovation policy is needed. Based on the recent OECD Review of Innovation Policy: Germany, this session will introduce the current challenges of the German innovation system and elaborate on recommendations for the future.

What are the strengths and weaknesses of the German innovation system? How serious are these challenges and what should policymakers in do to address them?

• Caroline Paunov, Head of the Working Party for Technology and Innovation Policy & Luke Mackle, Policy Analyst, OECD
• Ulrich Romer, Head of Division for General Issues of National and International Innovation and Technology Policy, Federal Ministry for Economic Affairs and Climate Action of Germany

Session 2 (11:00–11:40 AM): Innovating for the Future of Manufacturing—Competitiveness and Key Enabling Technologies

What are the main changes needed in U.S. and German manufacturing to succeed in the future? There is a growing consensus in the United States and Germany that the manufacturing sector requires additional technological capabilities in order to improve the resilience of its supply chains and production, particularly in key enabling technologies such as semiconductors, batteries, and hydrogen. But how should priorities be identified, and by whom? In the United States the CHIPS and Science Act was a watershed movement where the government targeted particular industries for support. Is this likely to be a one-time event, or portend a new era of government support for advanced industries? Should industries or technologies be the focus, or, in fact, is it the application of technology, that is of critical, even strategic, importance? Are weaknesses in manufacturing supply chains really a question of innovation, or simply investment (incentives)?

Panelists are invited to provide a short intervention on one or more of these themes, before opening the floor to a Q&A.

• Robert Atkinson, President, ITIF (moderator)
• Gil Kaplan, Senior Fellow, Manufacturing Policy Initiative, Indiana University
• Sridhar Kota, University of Michigan
• Sicco Lehmann-Brauns, Senior Director, Research and Innovation Policy, Siemens

Session 3 (11:40 AM–12:20 PM): Changing Course in Innovation: Guiding Transitions—Digital Transformation and Environmental Sustainability

The competitiveness of manufacturing in the United States and Germany has been supported by a mature, well-functioning STI system. But can the institutional and policy mix for STI respond to challenges of resilience? How can the transition to cleaner manufacturing be supported without significantly harming national competitiveness? What role is there for digital technologies in transforming industries, given the different regulatory framework for tech companies in Germany and the U.S. and the U.S.’ lead in digital services?

One key difference in contemporary policymaking discussions is a growing sense of directionality, that is, the idea that policymakers should set the direction of STI development, rather than leaving the market to set the course. But what role should government really play in setting that direction, and how, can ‘directional’ policy decisions be pursued in the highly federal political systems of countries such as the United States and Germany?

Panelists are invited to provide a short intervention on one or more of these themes, before opening the floor to a Q&A.

• William B. Bonvillian, Former Director, MIT Washington Office
• Uwe Cantner, Professor, Friedrich-Schiller-University Jena; Chairman, Commission of Experts for Research and Innovation
• David M. Hart, Senior Fellow, ITIF; Professor, George Mason University
• Sylvia Schwaag Serger, Professor at the Department of Economic History, Lund University (moderator)

Final Remarks and Outlook (12:20-12:30 PM)

• Robert Atkinson, President, ITIF
• Andrew Wyckoff, Director, OECD Directorate for Science, Technology, and Innovation
• Caroline Paunov, Head of the Working Party for Technology and Innovation Policy, OECD
• Luke Mackle, Policy Analyst, OECD

Event Transcript

Andrew Wyckoff: I am Andy Wyckoff, the Director of Science Technology and Innovation, and I'm joined by Rob Atkinson, the president of ITIF. It's our pleasure to welcome you all to this online seminar. I want to start off by thanking ITIF and Rob in particular for hosting us as we discuss this report, which was recently produced by the OECD looking at the German innovation. It was a review of German innovation policy.

Now, it's a fascinating country to look at and to compare to one like the United States. These two countries are amongst the most powerful science and technology innovation systems in the world. They have key capacities essential for achieving social and economic wellbeing that all countries are striving towards, and they have the capability to help navigate the green and digital transitions.

With that, let me ask Rob if he has any opening words before I make a small presentation just to kind of frame the debate that will go on today.

Rob Atkinson: Thanks, Andy. It's a pleasure to do this jointly with you and OECD. I would encourage folks to click on the link there to read the report. It's a long report, but you can at least read the executive summary. It's really quite insightful and it's important, that report, because the ecosystem and the competitive conditions that Germany faces are really changing quite rapidly. And so that, to me, is an important lesson for other countries, including the US. How do you adapt policy when the outside world and systems are changing so rapidly?

So anyway, looking forward to a really good and interesting discussion today. Over to you.

Andrew Wyckoff: Thanks, Rob. And in true OECD fashion, I have a PowerPoint to go along with a few of my remarks. It's not long, but if we could advance to the next slide.

You'll see that by 2020, US and Germany, as you see in the right-hand side here, this is R&D intensity, kind of a classic indicator that we use. Both these countries have made very good progress over the last 10, 15 years, and both now exceed more than 3% of GDP, which is seen as a threshold by many. And when you go to the right-hand side, and sorry, this may be a bit small, we put these R&D amounts into absolute constant 2015 US dollars. And we do that because I think every now and then, scale does matter, and here, you can see that the US has about five times the overall amount of R&D compared to Germany.

And in the US, about 74% of this total R&D expenditures originate in business, while in Germany, it's a little bit less at 69% originating in the business sector. But below these aggregates, you begin to see some real differences between the two countries, which I think will help the discussion today, if we go to the next slide.

The first is when we just zoom in below total to business enterprise R&D, and actually, even more narrowly into business enterprise R&D in manufacturing, and compare the two countries. And you can see that here, the United States puts 58% of its total business enterprise R&D into manufacturing, while Germany, the number's much higher at 85%. And when you look at this in absolute terms, actually the position of the two countries change whereby Germany plays a rather important role.

If we go to the next slide, you can see the differences are even starker when we break down by the manufacturing sector. The main manufacturing industries in the US in terms of R&D are pharmaceuticals first and the ICT sector, but each of these represents more than a third of business enterprise R&D by themselves. Other important industries include automobiles, air and spacecraft, machinery and chemicals. In Germany, on the other hand, nearly half of manufacturing business enterprise R&D is in one industry and that is the automobile industry. Other important industries are information computing technologies at 14%, machinery, pharmaceuticals, and chemicals.

And here's where the PowerPoint stops. These are really the reasons why both these countries are doing very well. Germany asked for the review because they know that past success is not a guarantee of future success, particularly in a period of rapid change. And the report focuses on two big challenges confronting manufacturing. The first is the digital transformation that's been underway for some time, but seems to be coming to a threshold, still making the headlines, it seems like, every day. What's been going on for decades is transforming every sector of the economy, especially manufacturing, and with it, the ever-increasing need for swift action to advance on the green transition. So now, we have what we're dubbing the twin transitions where we need to leverage one to achieve outcomes in the other.

Let me just focus on digital technologies, which have been a focus of OECD work for some time. We know through that analysis that digital technology have a tendency to change where value-added is created. Increasingly, the value of manufactured goods isn't only in the physical product itself, but it's in the digital services that come with it. And with this, the datafication and servitization of manufacturing, the value in manufactured products will be determined by digital and data-driven services attached to it. And the enabling technologies for these services are things importantly in the headlines as well, such as semiconductors and artificial intelligence that power these services. Now, take the automobile industry. A modern car may contain up to 3,000 different semiconductor chips.

Coupled with this digital transformation is of course the ever-increasing attention being paid to climate change and the global challenge that affects us all associated with that, and the substantial efforts needed to transform the manufacturing sector on both sides of the Atlantic and the Pacific, for that matter. Both the United States and Germany have to ensure that industrial output, be it cars, machinery or chemicals, correspond to these stringencies of new markets and respond to shifting demands from consumers and regulators for less carbon-intensive goods.

Overall, Germany and the United States have a few key differences, but they also have some similarities, and that's pointed out in the report. In terms of their innovation ecosystem, they both have very distinguished and internationally renowned research institutions that underpin advances in science, technology and innovation. In both countries, large industry's responsible for most of the business enterprise in R&D. Germany has a very strong innovation support ecosystem through Fraunhofer and other mechanisms, while the United States excels in its startup ecosystem with private financing for disruptive innovation and ability to scale new business models is much more of a possibility in the United States. Typically, US companies face fewer constraints from financiers, governments or unions.

Now, what are the strengths and weaknesses of these respective systems and what can Germany and the United States learn from each other? Well, these are very much the questions we're looking forward to discussing and addressing today, and I'm really looking forward to the exchange of insightful insights.

Let me just conclude by saying it is those issues that this OECD Review of Innovation Policy of Germany addresses. The review of Germany was developed by Caroline Paunov and her team and the working party on innovation technology policy at the OECD, and you'll hear their insights and policy perspectives in a minute. Over to you, Rob.

Rob Atkinson: Great, super interesting, Andy. Thank you. So, I'll have some slides to show, and just okay, we can show them now.

Just an opening thought. One of the lessons from Joseph Schumpeter, and from others like Clay Christensen who study disruptive innovation, is oftentimes what displaces the leader is the emergence of a new technology or a new technology system, that the leader, whether it's a leading country or a leading firm, either it doesn't fit their comparative advantage and it's just hard for them, or they are, if you will, maybe asleep at the switch and don't really take it all that seriously until it's too late. And I think that really is a challenge for Germany in the sense of there's a lot of creative destruction and new technologies that are emerging, and the question is how well can Germany make that adaption?

I mean, one of these obviously is EVs. It's a similar technology, but it's not the same technology. Ten years ago, if you told me that Tesla was going to be a successful car company, I have to say I would've laughed because I said that my thought was the barriers to entry and getting into cars are so high, there's so much economies of scale and learning that all the auto companies have done, but Tesla was able to break in because it was a fundamentally different technology.

Andy talked about the importance of digital and software and AI and all these other technologies, including in manufacturing, and I do think that's a big challenge. The US has a lot of weaknesses in my view in manufacturing and in our overall innovation system, but one of the strengths that we have is very good software engineering, very good computer science systems, and that is embedded in a lot of different sectors including in manufacturing.

Also related to that is bio. The White House just put out a report this week or last week on the bioeconomy and bioengineering. DARPA has a new announcement on bioengineering and biomaterials, and it's always unclear how big that's going to be, but I do think it seems like that's going to be a big area, and that's an area, frankly, not as much strength for Germany as Andy showed in his slides.

Let me see if I can... Warren, do you do that? Go to the next slide. Yeah, there we go.

So I want to talk a little bit about the US since we're comparing US versus Germany. This is a real value-added in manufacturing, so inflation-adjusted value-added for all these sectors. And if you look over on the far left, you'll see GDP. A little hard to read that chart. And then underneath that is manufacturing.

So you can see that manufacturing value-added grew much less than GDP, but then you see that big tall bar, and that's computers and electronics. And what that is not that the US economy, that US computer and electronics and semiconductor companies expanded value-added in real terms, what that almost all is is Moore's Law. So when the iPhone has doubled the processing power or a computer chip has doubled the processing power, the US government equates that as making two of these things. And it's just a completely distortionary way to measure output.

And this is one of the big problems in the US debate is people think that the US manufacturing sector's doing a lot better than it really is because that big bar of computer and electronics, what's called NAICS 334, overwhelms everything else. In fact, that one sector alone accounted for 111% of US manufacturing value-added output between this period of time. In other words, all the rest of US manufacturing declined, we're making less than we were in 2005, and it was all made up. The fact that it grew at all was made up by computers and electronics. So I think that's an important way to say that, an important way to understand. We're not doing anywhere near as well as the overall sort of number, if you will, the top line number for manufacturing.

Okay, next slide.

The other big problem in the US, and I haven't looked at Germany as much, I think it'd be an interesting discussion when we get to the panels, is for many, many years and then probably decades and century even, US manufacturing labor productivity was growing faster, pretty much every year, than the rest of the economy. And so what these bars are are the difference between manufacturing, productivity, growth and subtracted from overall US productivity growth or US productivity subtracted. And what you see really through 2007, through the Great Recession by and large, manufacturing was getting more productive than the rest of the economy, which was one reason, not the only reason why we were seeing relatively fewer manufacturing jobs.

But then if you look at the right part of that graph, you'll see pretty distressing and depressing numbers where manufacturing productivity was much, much lower than the rest of the economy. And that is just an unsustainable measure. US companies just simply can't be cost competitive in global markets if they're not raising productivity.

This is a puzzle. I wish the US government and commerce would study this to figure out what's going on because it's a real problem and it's gotten almost no attention.

This is a study that ITIF did last year using this wonderful OECD dataset. So I give Andy, your team, all the credit for putting the data together. But what we did here is we looked at basically seven major advanced industries. So everything from pharmaceuticals to machine tools, electrical equipment, computers, autos or other transportation equipment, semiconductors and also information or software. And what you see is this is essentially, these bars, the circle size is just how big the sectors are. So the US has $1.6 trillion of production. Germany has about $600 billion, $578. But the other part of this is... And then that's sort of how much global market share. The US has a lot of global market share because we're so big.

But if you look at the vertical axis, that's called a location quotient. So in other words, what that is a measure of is how big are these industries in the domestic economy relative to the rest of the economy? Are you more specialized in these than the rest of the world or are you not? And if you can see that, the US is actually less specialized, just slightly less specialized than the rest of the world, so we actually have less of this than the 78 or so countries in the OECD dataset. Germany is the third highest of these countries that we looked at, about 1.7. So we're about 0.95, Germany's 1.7. So in other words, they have 1.7 times more this advanced industry output than the rest of the world. You see Korea doing quite well, and Taiwan being the highest of these 10 countries.

And then this is a similar thing here. This is the change between '95 and 2008, and you can see Germany actually has done very well. They have grown, they've gotten more specialized or more concentrated in advanced industry output, presumably as they've shed maybe some of the more commodity-based or less advanced industries to Eastern Europe or other countries. Unfortunately, the US actually has gotten less concentrated. We've lost competitive share.

You'll note that... Let me go on here.

Here are a few sectors. This shouldn't be a surprise. Germany is the most concentrated country in the world for motor vehicle production, more than three times the average in the global economy. The US, pretty pitiful frankly, just about 0.6. So we have significantly less auto production as a share of our economy than the average. Interestingly, you can see Mexico, three times more. That's very different than what it was in 1995, so Mexico has gained dramatically in motor vehicle production. The US has lost. And you can see China doing pretty well there as well.

Machinery and equipment. Again, an industry Andy alluded to. If you look at those R&D numbers, to me they're very telling. One of the things I think would be interesting is to do an HHI, in other words, a concentration index, on R&D. And my sense is that the US is more specialized than Germany is. At one level, that's good, but at another level, it's problematic because there's certain sectors of the US where we're just not doing enough R&D and innovation. If you look at the US, we're strong really in three main areas. One is information. So if you look at the top six companies in the world doing R&D according to the EU R&D list, the 2,500 top R&D spenders, five of them are US tech companies: Google, Amazon, Apple, and the like. And we have a lot of R&D in biotech and we have a lot of R&D in semiconductors still, but we don't have anywhere near the same in a lot of other sectors.

And so again, this is just machinery and equipment. You can see Germany doing the best in the world. It's almost 2.5 times more than the average. China is the biggest in the world, but the US is about 0.6. So we're just not very good at machinery and equipment, again, relative to our size.

Same thing with electrical equipment. Really striking, what you see there, and that's China being just so massive when it comes to electrical equipment. Korea doing well, but again, Germany doing very well, double the global average, and the US doing pretty badly, less than about half of the global average.

And then computers, electronics and optical is essentially, this is as you would expect, mostly computers and mostly semiconductors. US is doing pretty well there in terms of size, but not very well in terms of concentration. We're about right at the global average. Taiwan, no big news there because they have TSMC. I mean, just look at that number. Nine times more. Korea is about 5.5 times more. There's an area there though where Germany doesn't do as much, doesn't do as well. They're about a little bit below the global average.

Okay, sorry it's hard to read that. But this is, you can see sort of the strengths of Germany just on a chart. You got motor vehicles where it has the highest market share, machinery and equipment, electrical equipment. IT and other services, that's interesting because oftentimes the narrative in Europe and even in Germany is that Germany's great in manufacturing, but it's America who has all the IT and other services and internet and all, and Germany has to respond. In fact, this slide suggests Germany's doing better in that sector than they might think. Then pharmaceuticals, computers, electronics and other transportation equipment would be things like aerospace.

So the real strengths, at least from that slide as also the OECD report shows, it's those three big sectors: motor vehicles, machinery, and electrical equipment.

This is the US and you can see it's very, very different. Other transportation equipment, which is basically aerospace and Boeing, IT and other services. Again, that is now the big US strength. Pharmaceuticals and computer and electronics. So if you think about these slides, they're almost mirror opposites. So the areas of real strength for the US are, in one sense, areas of maybe weakness or moderation, mediocrity for Germany, but it's the opposite. The areas of weakness for the US -- motor vehicles, machinery and electric equipment -- are areas of real strength for Germany. I don't know what that means for policy, but maybe what it means for policy is we need to have a more integrated ecosystem, particularly as we both address the China challenge.

So I'll stop there and would just add and reiterate that each country has real strengths and weaknesses, both in terms of the sectors that they're good at, but also in terms of the capabilities. The US tends to be better, again, broad generalization, tends to be better at science-based innovation in my estimation, and Germany's better at engineering-based innovation. And so the challenge almost for both of us is work on our weakness. I do think that's the big weakness in the US. We've got to do a better job on engineering education and integrating engineering more into our enterprises and that's what we will be... That's a lot of the policy changes that I think the US just recently made. And for Germany, it's the other way around. It's more computer science education, more computer science integration, and the same potentially with biotechnology.

So with that, I will turn it over I guess to Caroline.

Caroline Paunov: Yes. I'm just waiting for... So yes, I think one of the ideas of... I really look forward to our discussions today because one of the questions that was not yet addressed by Andy and Rob is a question like, well, maybe we can see who in what ways is better prepared for some of those dimensions?

But before we get there, we wanted to just give you a bit of a glimpse of what is in that report, which is quite an extensive report, for sure, but there's a shorter version of it with some of those parts and I give it to Luke to start and then I'll carry on from there.

Luke Mackle: Hi. Good morning, everyone. Good afternoon, colleagues in Europe. I think there are some slides to go on the screen. Yeah? Perfect.

Okay, so just as a means of a quick introduction, my name is Luke Mackle and I'm a policy analyst with OECD, and I worked extensively on this review with Carline and Ulrich in Berlin. And really, the purpose of what I would like to do is to give a bit more context from the Germany perspective coming from this review, what this means from the policy perspective, and picking up a couple of threads that were mentioned by Rob and by Andy.

So I think we can go straight to the second slide. Okay.

So let's start with a metaphor, right? So when we were starting this review of innovation policy and we were looking at Germany, I think we had a lot of similar thoughts to what Rob mentioned, and Andy for that matter, which is you're looking at Germany and what do you see? You see a system, you see a system which is incredibly well-equipped. It has a massive capabilities, a massive experience. It has all the skills, a huge amount of finance available to it. It is a big, hefty system that can do a lot of things very, very well.

But like this big ship that we see on this slide, it's maybe not the easiest thing to maneuver. Maybe it moves a little bit too slowly, maybe it's a bit hard to position, but within it, perhaps it has what it needs to succeed. It certainly has succeeded for a very, very long time. The question is whether the direction of this system, the direction of this ship is the right one for where many of the markets in which it is specialized are going to be in, let's say, 5, 10, 15, 20 years time.

We'll go onto the next slide please.

So just to start, and again, I'm probably going to touch back a couple of things that Rob said because I think that he anticipated some of my remarks, which is good. I think we're on the same page, which is that despite certain comments and certain corners, really when you look at the German innovation system, what you see is a system which is working more or less very well. There's a great degree of investment in R&D, particularly in the manufacturing sector as we've seen, that just in sheer numbers, is the biggest contributor to R&D and innovation in the European Union. It is a massive leader in many of the sectors in which it's specialized in the global economy, it's highly integrated into some very complex, very strategic value chains around the world. It has some of the leading companies in these sectors. It has a research base which is recognized as being one of the best in the world, particularly in engineering and applied sciences. So there's a lot of things in there which are working well and ostensibly gives a really good platform to do something with.

So if we then peek behind or peek under the hood a little bit to use that car metaphor again, and go onto the next slide and start to look into the details a little bit, obviously there's a couple of specificities which come out and which then start to interact with this conversation about what you do from a policy perspective, if anything, for German innovation.

And so of course, we all know this, that the automotive sector is really the locus of German innovation. There is extremely innovative firms in many other areas of the economy, but if you're talking in sheer numbers, it is the automotive sector which really drives R&D in Germany. And you see that 85% of business enterprise R&D is happening just in the manufacturing sector. This is an extremely high number. It is the highest level in the G7. Just in terms of advanced industrialized economies, this is very high. This is something which really maybe you would see in smaller economies, the big manufacturing sector, but not necessarily in an economy quite the size of Germany. And much of that, again is driven by the automotive sector.

And just onto the next slide.

And here again, this is just expanding on this, we're seeing this in an international context. You can see almost 40% of R&D in Germany coming from the automotive sector, and then compared to the value-added of that sector in the country's output. So you see that relative to the output, the value-added of the German economy, the R&D share is really quite significant. And now we're starting to get a flavor of what some of the questions might be going forward.

Okay, next slide.

But Rob also mentioned that maybe these historical competencies in these sectors, as good as they have been for Germany for many decades, is not necessarily going to set the economy up for success in the future orientation of these sectors, but that's also not necessarily true. Right?

Luke Mackle: Of these sectors, but that's also not necessarily true. If you look from a perspective of the technological arc advantage in some of the directions where, for example, the automotive sector is going, you see that Germany actually is a leading economy when it comes to EVs and it commands a very significant share of the EV market in the world. But then if you think about where else might the automotive sector go, for example, in the direction of autonomous vehicles, vehicles where the value added is determined more and more by a software and by some of the advanced enabling technologies which allow these very high powered software programs to run. There, the story is a little bit different. And here we start to see perhaps the effect of the strengths. For example, if you look at the US in the ICT sector, in the software sector relative to its manufacturing sector.

So you see that really a lot hinges on where these sectors are going to go and what that means for the future competitiveness of, for example, the automotive sector in Germany. Okay, so next slide. There's also a firm level dimension to this, which has inclusion aspects and industrial inclusion questions. You see that a very significant proportion of this already concentrated R&D is happening at very large firms. Admittedly, these very large firms are plugged in to very extensive industrial ecosystems in Germany, so there are spillovers, there are connections with the broader economy. Of course there are, but nevertheless, if you take a step back and you're looking at it and going, well, you have this concentration of innovation expenditure in the manufacturing sector. Within that manufacturing sector, there's a concentration within one or a few industries. And within those industries there's a concentration within not very many very large firms.

And so of course this means that the success of those large firms will have major determinants for whether those spill overs into the broader economy continues in the years ahead. So there are these inclusion aspects which we start to think about when we're talking about, for example, the future of these sectors in the context of the sustainability transition and in the digital transition and some of these broader consequences. Okay, and the next slide. And here obviously this is the flip side of this, where we're looking at the SME aspect, where the SMEs play a relatively smaller role in R&D in Germany, but, again, this doesn't necessarily tell the whole story. Germany is an economy which has a large number of extremely advanced larger SMEs, which often refer to its middle hidden champions. These firms being not just national leaders, but really global leaders in some extremely specific technological areas, whether it's lenses that you use for satellites or the machinery you need to make the highest end semiconductors.

So Germany in certain ways, and some of these SMEs, are actually embedded into some of the highest value chains of extremely advanced technologies. But not necessarily in the production of those technologies, but in the production of the machinery necessary to make them. So there are other ways of looking at how these firms are integrated into these emerging technologies. Okay, next slide. Now, there's also a trades dimension of this, which is probably more important for Germany than it is of the United States. We go back to the concentration of business enterprise R&D in the manufacturing sector and how that makes Germany somewhat of an outlier of G7 economies. And this is also true in terms of the percentage of domestic value added, which comes from foreign demand. For a large economy, Germany is highly dependent upon foreign demand for its domestic output. Essentially, what this means is that in the absence of a domestic market the size of the United States, then in order to see output, it needs to sell abroad.

Which means that in the future, the revenues that come into to these very innovative sectors are linked to global conditions and to the continued competitiveness of these firms and all these industries in the global context. They are inextricably intertwined with what is going on outside of Germany. And we can see here on the right-hand side where this is going and where this is coming from. Okay, and the next slide. And here's a very interesting slide that just for a bit of context for those who might not be aware of this, this data comes from an OECD data set called the trade and value added. So a data set that OECD SDI puts out. And it allows us to make some very interesting insights into the ways in which our industries are integrated into global value chains and matching us up with some other observations on innovation. And I wanted to touch upon this because it links, again, to something that Rob had said about where those competencies are and how that's changing over time.

And what you can see here is basically the relative share of foreign markets in terms of their inputs into German output, German production. And you can see how that's changing over time. And perhaps the most striking thing on this chart is the rising importance of China. Previously, we were talking about the importance or the size of the Chinese market in terms of electronics equipment, for example. Well, here we can see what that means for some of these value chains. And you see that really China has started to play this extremely important role as an output into some of Germany's most innovative industries. Of course, other economies in OECD and G7 economies continue to play a major role as well. And then the next slide. And so here is, again, just touching upon the same thing, which here we're looking at the centrality of different economies in different value chains. You see Germany, this in terms of the extent to which it's plugged in both as in forward value chains, but also backward value chains.

You see Germany's position in its mean innovative sector. The automotive sector has remained relatively constant over the past 20 years or so, but, for example, if you look at the top table there and we're looking at China, you can see that there is a lot of movement elsewhere. And this means that, when we're thinking about what are the high value added inputs necessary for Germany's industries, where are those inputs coming from and what does that mean for the future of German manufacturing, there is a lot to consider there from a policy perspective. And then we go back to the ship at the very beginning of the presentation. We think is the policy setting that is currently in place, that has led to these competencies being cemented over the past 50 years or so, the right setting for making sure that Germany continues to develop competencies in these other areas which are gaining importance in some of its most innovative in industries. And with that, I think that's my last slide, Caroline, and I'll pass over to you. Thank you very much.

Caroline Paunov: Yeah. So when we were doing this piece, it was not to do an analytical report, but it was really was the objective of saying what is it that policy should be doing, looking into the design of innovation policies going forward. And differently, maybe from looking at some of the angle that we took here was to think about a number of challenges ahead and challenges that are very much the future challenges that have been alluded to already in parts. And was really thinking about there's a number of shifts ahead and there's the competition for the future in a way, in a number of these dimension, has led to a number of countries taking leadership in some roles. And Rob was referring to the computer and electronics industry in the US and the very successful performance when it comes to some of the services.

There's also China. There's a number that has taken very important steps in some of those dimensions. And it's not only the digital economy that of course is shaping and reshaping industries in important ways. And where the question is how do you have the essential capacities or the essential technology leadership to develop further. Also, in a number of other sectors and which we'll probably come back to in some of those discussions, whether this be the area of biotechnology or quantum or other such fields where there's important issues about building foundations or how do you build some of those foundations to stay in that leadership role that is currently there. And a complication or an issue in this current context that is also important is that these transitions we're talking about will not just be some industrial changes, but they'll have societal implications. And when they have societal implications in terms of distributions, in part who benefits? Who might be affected, whether that be employment or just rising costs of living that we see currently due to the disruptions to do with rising inflations and the war in Ukraine?

So there's dimension there where it is also about how do you manage the societal dimension of some of these disruptions and changes in such a way that you can really pull through into a successful manufacturing sector that generates the employment, that deals with some of those inclusion dimensions at the same time as it meets international competitive targets. And we'll go to the next slide. Just a small item on the question of digital technologies. Of course it's not the case that digital technologies haven't been adopted and there's a lot of impressive advances in automating productions. It is, however, the case that when you look at some of the statistics, some of the advanced digital tools, for example, that you'll find that differently from a lot of the charts on innovation performance that you'll have for Germany. Germany is not among the front leaders in some of those, but often is more like in an average position in some of those parts here.

So there is clearly some struggling in that specific when it comes to digital technologies, that if we think that that is a core capacity going forward in the sectors might be an area or that is an area then that raises some concerns. I just want to go to the next slide. Just wanted to briefly allude to is the question about disruptions. And Luke was saying that in the German case you have a very integrated manufacturing sector that relies on international supplies from a number of both in the production and then in the ... And which also generates a number of issues. And over the past years, starting with COVID, there have been a number of disruptions that then also raise questions about how you set up a very secure supply chain so that production is not being affected by potential disruptions.

So there's also much more of awareness at this stage about these value chain linkages as a global issue when one thing that we have seen during the COVID disruptions is there were several moments when production in the automotive sector had to be paused for some periods because of the missing materials. And there's also a question about not just the raw materials, but also the question of a key future technology capacities. So with that, I just want to focus on some of the recommendations which I hope will also be some issues. So what to do about some of this we'll get into when we have the panel discussions. So not just the diagnostics, but what is it really the action that is essential here? And I will just be referring you here to we have a total in the overall report. We have 10 recommendations, out of which are out of which apart is more about the how on policy, how to build more agility going forward, how to experiment in what are unknown futures that might change in quite important ways.

But when it comes to the ones I want to focus on a bit more here is the direct policy action that apply and that we felt were the important components thinking about the government role of building the framework in the framework conditions for these shifts and for supporting the industrial system or the manufacturing system in those transformations. And these are four areas. The first one is about data and data infrastructure. So it's arguably an important component when we're thinking about ingredients for innovation. That is a data infrastructure both in terms of gathering data in terms of analyzing data, in terms of dealing and merging and working with massive data because that generates alone an extremely huge potential for innovations both in terms of a lot of the innovations that we've seen have had to deal with tracking or being able to have on the time information on consumer preferences or being able to profile much more specifically clients and services.

So this whole data issue becomes an important infrastructure that previously, when the capacities were much lower, was not as essential in that context. And here there's a recommendation and we have specifically on data infrastructure and data platforms, which also is related to dealing with some of the regulatory issues that arise, which is not to say that there's regulatory concerns should not be taken into account. Of course they have to, but the question is more very often about avoiding there being uncertainties. There being doubts about data and data uses that then do not allow enough industry users to actually take advantage of some of those data or differential regulations across the different regions. So a number of points here on that data infrastructure. A second component, one of the issues is also about your ecosystem. So when you're thinking about a completely new way of doing things, you want to be bringing together support.

And one of the graphs that Luke was showing previously was there's a lot of also the hidden champions in the German system who have been extremely successful and extremely successful exporters, but who tend to have very, very low internal capacities to think about some of these very fundamental transformations or at least to adopt new processes in that context. And here is where the ecosystem infrastructure of institutions plays in and where there's questions about more collaborations and more multidisciplinary in supporting some of that business and the manufacturing industry in its transformations. And then another component is about the conditions around scaling. So some of these ideas, some of what is in times of massive change particularly interesting is there's going to be potentially is being the first or being the leader in introducing a massive alternative innovation.

And that requires then huge or can for scaling some of these ideas. There's a question about how do you get the funding for this? And there's no scarcity of a number of support measures and risk capital options in the German context. This, however, does not meet some of the levels of funding that are available in the US context and often raises the risks of some of these really breakthrough ideas when they're scaled and when they're successful of actually moving away from Germany, moving away from the EU. And so there's issues here about how do you create the financial market conditions for these breakthrough innovations. And then final issue is that also about government and government capacities when you think about ideas that are much riskier. And so thinking of using public procurement in a way of driving some of the innovations into some of those directions. And saying can this be used much more actively because it's massive public spending in ways that stimulate some of this and it stimulate the universe of startups? And not only established companies and moving towards a different way of doing things and therefore stimulating a different way forward.

And this is where I'll stop here, just saying there's a number of other dimensions that are being dealt with in the report, but this was really just a zoom in on some of those dimensions. And I now give it to Uwe to talk about the measures being actually implemented to deal with some of those.

Uwe Cantner: Yes. Hello, everybody, and thank you very much for the invitation to speak to you on this panel about the strengths and weaknesses of the German innovation system. In the first step I would like to give you an overview of the key issues of German innovation policy and today I would like to focus on our innovation policy for SMEs and startups. And the second part I would like to address how we have started to implement the recommendations from the OECD innovation policy report, which is a very fruitful input in our thoughts and our design of future innovation policy. I hope you can hear me because Caroline looks a little bit doubtful. No, everything's fine. Okay. In the last years we've set up a big and sophisticated portfolio of funding programs to support innovations of SMEs throughout the entire innovation process. To provide a coherent approach of supporting SMEs, we bundled our innovation support programs in four program families covered by an umbrella we call from idea to market success.

The first family is encouraging innovative startups. For example, our exist program supports knowledge-based startup projects, which are drafted in research establishments. The second family helps broadening expertise in innovation. For example, innovation for [inaudible 00:51:44] for consultancy services help SMEs to professionalize their innovation management. The third family addresses the pre-competitive aspects for better transfers. Industrial collective research brings together the pre-competitive research needs of large number of companies. And last but not least, the fourth family provides the opportunity for close to market innovation. The central innovation program for SMEs, the so-called SIM program is our largest program. It funds market oriented R&D projects of innovative SMEs in any field of technology or sector. One core characteristic of our approach is that it is based on a bottom up approach because we are convinced that it's the entrepreneurs themselves who know best how to decide and in which field it's the best way to innovate.

Another aspect is the funding programs are principle open to all kinds of technology and business sectors. This is a very big point in our innovation policy, to be open, to not give any limits to the fields the entrepreneurs will be active in. As I said, because it's themself who know best where to be the active, where to innovate, but I have to also say that there are also technology specific approaches in our ministry, but I want to focus on this SME approach because, as Luke said, the SMEs are the backbone of our economy. It's some 97% of SMEs in the share of companies. Besides that, we have to realize that there's an increasing innovation gap between large corporations and SMEs. And SMEs spent only 1.5% of the revenue on innovation. Innovation activities are mostly and the biggest bigger companies and not enough in the SMEs. So that's the approach. That's for families covering these different stages or different challenges in the innovation process.

But besides that, there's also a framework that has to enable the innovation activities, let's say the quality infrastructure approach, for example. It's standardization, it's accreditation, it's market access and accreditation market access. A fourth thing, I forgot. I'm sorry. It's a whole set of things who make the quality infrastructure and of course it's also the tax aspect, tax incentives. We have tax incentives since 2020 which compliment these funding programs. We are very happy that the results of the OECD showed that our technology open approach is a good approach and is a very successful approach. And I have to add that this approach also addresses ecological and digital aspects. These transformations were also highlighted in the OECD report as crucial challenges and the experiences of the last few years show digital and ecological innovations seem to be increasingly worthwhile for companies from an economic point of view.

In the same programs, the central innovation program, for example, 34% of the funded research projects are clearly related to ecological innovations. 21% of the SIM projects are related to digitalization. For example, in the areas of electrical engineering, measurement technology and sensor technology. In the IGF industrial collective research in 2021, about 51% of the 1,800 IGF projects were related to climate protection and 16% to topics related to the energy transition and 25% addressed digitization. There are, again, the technology open approach is successful in tackling the challenges posed by the ecological and digital transformation. But moreover, we are constantly updating and enhancing our programs that are covered by this umbrella from IT to market success. And now I will skip to the implementation of the OECD recommendations. Just a few aspects, a few highlights.

To further improve the transfer of R&D results into applications, we are planning to launch a new transfer initiative in this legislative period. As part of this initiative, we will identify and analyze obstacles to technology acknowledge transfer with the involvement of innovation actors and other stakeholders. We will develop concrete proposals to tackle those obstacles and we will hope to start soon. Another issue that was highlighted by the OECD was the public procurement item. To be frank, in nearly any paper I have got on my desk that the sentence you have to strengthen public procurement. We've tried to do so by several things. Since many years we have in charge a contractor operating our core innovation center. Sorry, it's a firm who try to make some awareness rising all over Germany, telling the municipalities and the lender and anybody to focus stronger on innovation procurement and to shift the practical things, the practical procedures.

But it's a hard thing to be open because we don't have the power. We don't have the possibilities to tell any municipality how they should do their procurement. It's their own decision, so it's only at first we can only do some awareness rising, as I already told. But what I'm proud of to open is at the end of last year we started the so-called [foreign language 00:58:43] that's an internet platform that tries to match startups on the one hand, giving them the opportunity to present their new innovations and new solutions to any problems. On the other hand, procurers has the chance to post there some challenges and define and show their problems, what they're looking for some solutions for.

Another important topic that we would like to pursue as part of our new initiative, as I already mentioned, is a kind of technology monitoring. We are currently in the early stages of checking the possibilities and necessities in this area. We invite such a neutral technology watch for SMEs so that they are in the best position to decide for themselves in which direction they want to steer the companies and which are the new challenges on the market. Lastly, I would just touch upon the recommendation the OECD made to play a more active role in on an international level with regard to innovation policy. As I'm here in the states, at least virtually ...

PART 2 OF 5 ENDS [01:00:04]

Uwe Cantner: As I'm here in the States, at least virtually, today, I would like to mention the ACE, the Americas Competitives Exchange, which is a great network. Germany is very proud to be the only country in Europe, the only European country, that has been given the chance, it's established itself as a permanent partner in this committee, and we are happy and looking forward to going on in this corporation in the future. So thank you very much for your attention at that point and thank you again to the OECD of this great work and long work. I guess it was 18 months or something like that. And I think it's a very good compendium for us and for all the other OECD partners to look in and to take out some, or should I say incentives. So thank you very much at that point. And yes, thank you...

Rob Atkinson: There we go. Sorry about that. All right, well we're just move into the next panel. We should have plenty of time for questions. Feel free to put them in the chat. I'm going to introduce quickly our panelists, no particular order. Sridhar Kota is a Professor of Engineering at the University of Michigan. He's also the founding director of MForesight, an alliance for manufacturing foresight, which was a federally funded consortium. He's also an inventor and the founder, he's actually not just a professor, Sridhar actually builds things and builds companies. So he is a founder and CEO of FlexSys Inc., which developed and flight tested the world's first modern aircraft with shape changing wings to improve fuel efficiency. And I got to know Sridhar when he was the key manufacturing advisor in the Obama administration and played a key role in many of the forward-looking manufacturing policies from the Obama administration.

Sicco Lehmann-Brauns is the Senior Director Research and Innovation Policy at Siemens. He is an expert in S&T policy, has a broad network in that area, in Germany and the EU. He's recently been working on all questions around data and Industry 4.0 and the new business models that stem from that.

And finally, Gil Kaplan is the former Under-Secretary of Commerce for international trade in the Department of Commerce. He was also a longtime partner at King & Spalding, which is a law firm in DC, and part of the International Trade Practice Group. And more recently, he was the founder of the conference on the renaissance in manufacturing and the co-founder of the Manufacturing Policy Institute at the University of Indiana.

So Sridhar, let me go to you and just, we all know about all these new and impressive policy initiatives, particularly in this last Congress. What was the strength of those? What was good? What was lacking? Is it enough? Obviously I'm talking about CHIPS and Science, and to some extent, the Inflation Reduction Act Energy Tax programs. What are your thoughts on all of that? You're on mute, Sridhar. Sridhar, you're on mute.

Sridhar Kota: Sorry about that. Hi.

Rob Atkinson: There we go. No worries.

Sridhar Kota: Good to see everybody. And I just wanted to clarify that I retired from one out of my three jobs, retired from University of Michigan last year, but I'm busy doing other stuff. But going back to your question about what, you're talking about, CHIPS and Science Act. There's a lot of investment, fortunately, in some of these areas. I think the CHIPS Act, the CHIPS part of it, I think is the right thing to do, and we need to do more of that in some of the other critical industries as well. Government has an important role to play. In the memo that came out just a couple of days ago about the even printer circuit [inaudible 01:04:41], that's also important. We need to do emerging technologies as well as foundational technologies. We'll get to that later. The science part of it, I know we already invest a lot into science and, which is a good thing. We should continue to do that.

I'm not sure the science part of that investment within CHIPS and Science Act could lead to the desired outcomes in terms of strengthening our manufacturing sector or even the innovation sector. Again, I must say that we're still probably the best country in the world when it comes to the... Because we are the most inventive country in the world, but when it comes to hardware, we are not the most innovative in terms of taking your best ideas and turning them into products manufactured domestically. That's where our challenges are. And listening to some of that commentary earlier session, and that's exactly where Germany's trying to start, which is a good thing. There's a lot to learn from what Germany has done. So I'll stop here and continue.

Rob Atkinson: Great, thank you Sridhar. Yeah, we can come back to sort of why the science portion was so big and changed frankly from the original vision in the Endless Frontier Act, which we were quite involved with. I know you were, and maybe Gil. Sicco, let me ask you [inaudible 01:06:05] about Germany. I know Siemens is obviously taking the lead in integrating digital into everything you do. How do you see that overall though for Germany? Is that kind of what you see as one of the biggest challenges and opportunities for German industry?

Sicco Lehmann-Brauns: Yeah, thanks Rob, and thanks for the invitation to participate today. And many greetings from Berlin. Yes. What's the situation Germany? I think we are very excited about all the possibilities that we have using data in industry. And this is really something we are very strongly working on together with our partners in Germany and in Europe and also abroad of course. And where do we stand there? I think we are right now in an quite early period still. So the data economy in industry is emerging. We are very happy to have the new possibilities for new forms of value creation, including new business models as a service models, for example, on the one hand side. On the other hand side, if you ask where do we stand in Germany, we are still facing the danger and threat of a digital divide because not all companies are actually already using their data, already using these new formats that we can offer.

And the bitcom, the digital association Germany recently did a survey which showed that two thirds of the German companies are not still part of the data economy. And I think this is something which we get also as feedback from part of our customers. And so we need to establish platforms and tools that make it easier to use data to work together with partners that can help really getting the value creation out of that data usage. And in order to do so, Siemens, for example, launched last year the accelerator as an open ecosystem, which is based on three principles. It's first modular portfolio of software and hardware with a pluck and play connectivity that really makes it possible to connect every hardware to the software world and to use the data from the hardware, from the sensors, from the industrial assets, be it a machine or be it a train.

That's point one. Point two, it's an interoperable approach so that we can really make sure that the data are interoperable between the different sectors of industry, which is very important, a big asset of our customers. And the third point is that we have a cloud edge connectivity with open standards, open APIs in order to really get in all different solutions. It's not a proprietary platform or ecosystem, but it's an open one, which is very crucial for us. And this platform approach shall enable our customers, especially from the two thirds which are not still a part of the data economy, to join in and to start using their data, to start integrating that data into these platforms. And on the other hand side, we cooperate with startups and with other companies in order to make the best value out of these data by offering apps, by offering data analysis, offering artificial intelligence and so on in order to create value to optimize the industrial assets on the firsthand side. And then second to create new business models.

Rob Atkinson: So before I go over to Gill, I want to have quick follow up Sicco. I was just finished a fascinating book. I think it was by maybe a Wall Street Journal reporter, I can't recall, on the rise and fall of General Electric. And there was a good discussion in there. That's very sad book really when you think about it. But there was a good discussion in there about their initial foray into this play. In fact, I met with the executive who was running it, and I can't remember the name of it right now, but they were going to do what you were doing. But as I recall, it was not an inner platform, it was proprietary platform. And that appears to be one of the reasons, I'm sure there are others, that it didn't really work. How important do you think the interoperability openness is?

Sicco Lehmann-Brauns: Yeah, absolutely. I would absolutely highlight that. I think from our point of view, it's really crucial to be open to integrate the partners and to offer interoperable solutions. Of course, in the history, we also did a lot of business with proprietary solutions also as Siemens, of course. But we see now today we need to offer open platforms because nobody wants a lock in effect in the industrial area. And that's one reason. And the second reason is we cannot do everything alone. We need to partner and we need to integrate, and that's why we need open solutions. We built that one and we see the first success, and we are sure that we'll be successful in a whole because we have this possibility to engage all customers, all other companies, startups and so on, in order to make the best out of the data, nobody can do this alone. So openness is crucial from our point of view.

Rob Atkinson: Great, thank you. Yeah. I want to come back to a couple questions about European policy with regard to data because I think it's a big issue. Gil, so Sridhar made this point, what many of us have made, I know you've made it, that we tend to be good at R&D and then other countries go and basically build the manufacturing plant to produce it. Do you agree with that? And are we on the right steps to fix that challenge? And if not, what do you think we need to do?

Gil Kaplan: Well, thanks Rob for inviting me to speak and thank everybody from Germany and the US and anywhere else that is in our forum here. I think we're on the right track. The United States government has put basically 1 trillion dollars in the last few years into building up manufacturing facilities in the United States. Nothing like this has ever been dreamed of in the past. And in terms of spending money on chips or spending money for infrastructure, they're very tight rules that these manufactured products that are made or that go into infrastructure have to be made in the United States. So it's a real kickstart in a way that's in the Buy American provisions. There's a real kickstart here to enhance US manufacturing. So I think it's an excellent program in many ways, and we're going in the right direction. I would just say that one of the problems with this is if you put so much money in certain kinds of manufacturing, all the entrepreneurial strength and innovation kind of moves away from other areas.

If you are an inventor right now, University of Michigan or anywhere, you'd probably want to think about semiconductors. There's nothing wrong with that, but you might forget about all kinds of other new ideas. So we've got to be careful that the incredible innovation and freedom to innovate in the United States is not buried under all this money because as you remember, the great high tech companies that have shown up so well on the slides, we are just looking at indirectly, like Apple or Google or Micron Technology is a very good semiconductor company now, all started in basements or dorm rooms or in the case of Micron, the basement of a dentist's office. So finances from the government cannot create things like this for the most part. So we have to be careful to maintain the creative spark in the American economy.

Rob Atkinson: Yeah. The Micron story is interesting because he was funded by the potato magnate, if you know America, Idaho potatoes, Simplot family. So at the risk of getting into controversy, which I always like to do, I want to come back Gil to the Buy America provisions because those are a source of, shall we say, tension with our transatlantic neighbors. We just wrote a little report on Buy America when it comes to the broadband infrastructure piece. And our assessment was, while it's a well-intentioned program, there are certain areas where it just won't work because the market isn't big enough to pull this over. It's going to delay broadband. There are other areas where it is big enough and where we're close enough where we can just expand production. So I think there's that nuance there. Sicco, I know that it's a big point of pain for European policy makers to see this as unfair. And I know there's talk with the Biden administration of maybe modifying that so some of the European companies, particularly with regard to the Buy America provisions or the Build America provisions on the IRA, is that something you're thinking about?

Sicco Lehmann-Brauns: Yes, absolutely. I think it is absolutely crucial that we still have the possibilities to offer also our new innovative solutions in a competitive way in the US. So what we are really looking forward is to be a partner, and I think there are negotiations between the European Union and the American administration in order to integrate at least parts of the European offerings also in that initiative under certain circumstances. And I think this will be really necessary also for the American market in order to be able to choose between the best solutions possible on the market.

Rob Atkinson: Gil or Sridhar, I don't necessarily need to make this into a pro, con, but I'd just be curious at your reaction?

Sridhar Kota: I think-

Gil Kaplan: Go ahead.

Sridhar Kota: Buy American is, it's a very complicated issue, but overall I would say it's a right approach in a way that makes sense. We should do that. And of course, Siemens and Toyota, they've been investing in manufacturing and R&D in the US for a long time. And then there's so much more we've done with the electric vehicles, attracting foreign companies. I don't know what's foreign anymore, because as long as manufactured in the US and creating jobs and growing the economy, that's what government should care about. Does it matter whether it's a German company, Japanese company, or an American company, as long as it's manufactured here. So I think that should drive the policy.

Rob Atkinson: I know that Siemens is actually one of the leading companies in the United States in working to establish and build and run apprenticeship programs. We've been learning a lot from, I know people in that field have been learning a lot from Siemens because of your leadership here. Gil, anything?

Gil Kaplan: Well I've heard obviously about the negotiations going on both with Japan and Germany in terms of how we'll define exactly what constitutes a product that can be covered by certain subsidies and the like. I think the proposals that are being made, and I appreciate USTR trying to address this, that would expand the coverage to companies perhaps in Europe or Japan, is not really what was intended by these acts. I mean, everybody, I know you and me and many others for years have talked about the decline in manufacturing. And the feeling was we did need an intervention from the United States government. And I think it's very important to follow basically the directions of Congress and the policy directions we've all talked about starting in the conference on the Renaissance for American Manufacturing. So I have some doubts about that.

But I'd also say following on Sridhar's point, if these European or Japanese or other companies want to come to the United States, they will be covered by these programs. And that's a heavy burden for some companies, obviously. But there have been plenty of transplant auto companies have come to the United States. BMW has an enormous plant in the United States. Mercedes has the largest plant I have ever seen in my life in the United States in Alabama, I believe. So there's plenty of opportunity for these companies to participate.

Rob Atkinson: So I want to talk about another issue that's not, it's related because it's part of, related to the IRA, but there's a narrative I think in a lot of countries now. I'm up in Canada today, and the budget just came out from Minister Freelandar, and a lot of the budget for clean energy manufacturing. And while that is critical, my own worry is that, well, let me put, as they say in jeopardy, let me put that in the form of a question. Do you think it's enough to be focusing on clean sectors and clean tech, or does the US and Germany have to go beyond that if we're going to be broadly competitive in manufacturing? It's kind of leading question, but I'd love to hear anybody's answer.

Gil Kaplan: Well, I'll chime in because I've thought about this, and if you look at the OECD recommendations to Germany, I just want to read one thing that troubles me a little bit that answers your question. It said, the very first recommendation is, the government should create a cross ministerial, federal, state, cross-institutional and cross-sectoral forum to steer the process of developing a shared vision founded on the identified key priority areas for action. And the priority area is clean and climate and digitalization as they call it. I think that kind of forum it would be so difficult to operate in. And it sort of ties in with your question in this sense, should the government be... People talk about industrial policy, not pinpointing companies or even particular sectors, but sort of direction. And what you're saying is the tremendous direction on clean energy now may not be the most profitable or technologically sophisticated or the thing that's going to drive America or Germany forward. So I share some of your concerns about the focus on any particular sector coming from the government.

Rob Atkinson: Sridhar or Sicco?

Sridhar Kota: I think the very particular sentence you read, Gill, I thought that was fascinating actually, because there's a greater participation not just by big large companies or lobbyists, but taking the input from all stakeholders is important. At the end of the day, the government has a role to play to identify what the critical sectors are from the national security perspective, from the economic growth perspective, from creating the supply chains. They need to, government, we need an office or an agency that does, we don't have. We spend hundreds of billions year after year. We got great institutions, we have great agencies, we just don't have a coach. We got great players. It's hard to win without a coach, I guess. So that kind of conversation, that identifying and continuously monitoring what technologies and what industries are critical to the US because we can't make everything here, that's not the point. But what are the critical ones we should do?

That certainly includes clean energy and there are others, number of others, we don't need to go through the list. And that list keeps changing. Right now everybody's talking about air and quantum computing. If it was something else later. So those, and then make the proper investments, we keep talking about how much we've spent. I think if we dig deeper into what we are spending it on, we need to spend it on every aspect of the innovation pipeline. Otherwise, again, we'll continue to be inventing here and selling it overseas. So I think clean energy is, probably is, a very important aspect to it. It gives an opportunity for exporting our clean energy products and there's plenty of demand for clean energy in the US, and why not.

Rob Atkinson: Sicco, I know Siemens has a bunch of businesses in that space, but also outside that space. So your thoughts?

Sicco Lehmann-Brauns: Yeah, I think of course in Europe we talk about the digital transition. It's the transition towards a more digitalized economy and towards a green economy. And I think both topics are actually strongly connected and we have to see and foster that connection. What does this mean? From my point of view, there is a lot of regulation being prepared now in the European Union, which actually concretely defines what are the sustainability goals, what are the goals for clean energy and so on that we have to fulfill. And on the one hand side, this is of course sometimes difficult and challenging. On the other hand side, this will lead to solutions, how to fulfill this. For example, the Sustainable Product Initiative and Regulation will in future make it transparent what the CO2 emissions connected with the product are. And you have to deliver this information. And in order to deliver this, there is a construction that we call the digital product passport because it enables each supplier in the value chain to deliver the informations connected to the product in a trusted, trustworthy way because this data is of course, highly relevant.

And yeah, you need a mechanism to ensure that you really deliver the right CO2 emission amount for each component, for example. And we build a network as Siemens, it is called Estanium, that is something like a data space where you can have trustworthy access to this CO2 emission data that will be necessary to provide in the future. And the structure of this data space and this digital product passport, you can also use, of course, in order to offer other things, other solutions connected or using this infrastructure based on data. And I think this could be one example where regulation on the first hand then actually enables and supports other innovations that can be used in order to invent new business models, to improve the products, to improve new capabilities in maintenance, for example, using this structure coming from this new sustainability focus and regulation.

So I think these topics are actually completely intertwined, and there are a lot of course concerns and partly difficulties to really realize it on the one hand side. On the other hand side, they might in the best cases, offer new business opportunities and help us build structures. Interoperability, for example, plays a big role there as well. Trustworthy data management, trustworthy data spaces is a second big topic that really helps us also on the business side.

Rob Atkinson: Yeah, no, that's very interesting. Little commercial for ITF, we just hired a person and launching a new initiative on digital and energy, including in manufacturing because we see it as a really important role that policy makers need to get, right. So there's a question from the audience, which I want to ask. It basically says, with fully automated factories, does it matter which country they are in? Well, I don't think we're going to get fully automated factories for a long time, but let's just assume that's the case for hypothetical reasons. Really what that person is asking is what is the reason for manufacturing policy? Is it jobs or is it something else? So imagine that all the factories are fully automated or a bunch of them are. Why does Germany or the US need them and what value would we get out of it?

Sridhar Kota: Well-

Rob Atkinson: Sridhar?

Sridhar Kota: Okay. It is hypothetical. No, it's not fully automated. And a lot of the discussion about the productivity growth and how we lost jobs to automation is totally not true at all. It has little to do with the jobs we lost. Having said that, if we just continue along that hypothetical question, maybe we have Covid, maybe we need ventilators. What do we do now? They are made somewhere else in the other side of the globe with fully automated, right? Doesn't matter. So that's one, we all understand that. The of course job growth, job creation, we wiping out the middle class. Inequality, all kinds of challenges. These are good paying manufacturing jobs. So I think that's the role of the government too. And I think all of us should care about creating jobs for the masses.

Rob Atkinson: Well, sure, but-

Sridhar Kota: [inaudible 01:28:04] -

Rob Atkinson: Assuming that, I agree with you that we're not going to, but assuming for the sake of argument, there are no jobs. Let's just say we could take one sector and there's no jobs. Why should US policy makers and the public care whether that's in the US or in China or somewhere else?

Sridhar Kota: It's [inaudible 01:28:19] then in the cases of national security or health security.

Rob Atkinson: Okay, Gil?

Gil Kaplan: I'd say it definitely matters. And for one thing, someone has to make these incredible factories and they encourage investment in robotics and sensors and all kinds of things. So there's all kinds of R&D attached to this. Secondly, if you look at one of the problems Sridhar mentioned, which is people can invent things here but not prototype or commercialize them here, I propose we start a new program called Marco, the manufacturing advanced research and commercialization agency, sort of like DARPA, but also with the commercialization part. We can't have people doing all the inventing here and then sending everything abroad to be made. That just is not going to work. There's also interchange between manufacturing and R&D. And finally, as a question of wealth, I mean, we don't want all the wealth that comes from these enormous factories to be in another country. I guess there'd be less wealth if there are no workers at all. But as a practical matter, there's going to be clusters of manufacturing. There are going to be people making these factories, and we can't just put them all in some other place.

Rob Atkinson: Yeah, actually there'd be more wealth, Gil, because those people would be doing something else. So you'd have the factory plus those other people. But Sicco I want to ask you that same question for Germany in part because you get a sense listening to the dialogue in Germany that policy makers take manufacturing very seriously. If-

Rob Atkinson: Policy makers take manufacturing very seriously. If you asked a typical German member of parliament, "Hey, if there's no jobs, would we still care about manufacturing?" What's sort of the rationale do you see behind the German focus on manufacturing? Is it just simply jobs or is it more than that?

Sicco Lehmann-Brauns: No, I think the points Gilbert just raised are very essential because of course really producing something and the reality is strongly combined with the know how you need with the R and D. There is something like you could call it a feedback loop where you have to be near to your customers, which we also follow. If you have a look at Houseman's is organizing its own R and D. We have R and D in a lot of regions and markets where we are also strong as a company for our customers because you actually have to combine it very strongly one another. So I think this is really a crucial aspect. So you need this proximity there. Of course, I would say beside the job aspect where we can see with past automation phases that automation always create a new kind of jobs.

So it's really interconnected. It's not the way that automation makes it unnecessary to have people in the factory, but the kind of jobs they do changes and they get even better or higher value jobs. So this is a discussion we have in Germany and in Europe is strongly connected with the question of how will AI change the working landscape? We have now given ChatGPT a really new excitement on that question. And I think, so it's crucial to have this development of creating higher value jobs also connected with automation or perhaps even with artificial intelligence. And the third aspect that comes to my mind is perhaps the taxation aspect because you have taxes on factories that produce things and also that might be a motivation to keep them in an economy where you also want to collect taxes. But I think the crucial point is innovation and the R and D aspect and that you can really learn from functioning factories and that you need these ecosystems that are combined with factories and production units.

Rob Atkinson: Yeah, I would add one other thing, taking moderator's prerogative, we just did a little quick blog recently and we divided countries into are they basically advanced manufacturing countries or are they tourism or natural resource? So taking all the countries that are advanced manufacturing countries, Europe, Canada, US, Japan, Korea, those kind of countries, and then dividing them into two categories. Ones that were running a trade surplus and ones that were running a trade deficit. The United States is in the deficit category as we all know, but what's striking about this is we account for 80% of the deficit in the world among manufacturing countries. China accounts for about 50% of the surplus in the world among surplus countries. So I would add that's another reason we can't keep doing this forever. Just as Herb Stein once said, if it can't go on forever, it won't go on forever. Sridhar?

Sridhar Kota: Just to close the loop on that, while that question is hypothetical, the automated is not the issue at all, but we've seen this happen already in the last 30 years. If you think about from cell phones to solar cells to lithium ion batteries to everything else, we invented them here, created tens of millions, hundreds of millions of jobs elsewhere. It's already happening whether it's automated or not. And add to the wonderful comments that Sicco made about interplay between manufacturing and R and D and innovation. Because if you start making today's high-tech products, you lose your ability to innovate in next generation products. That already happened too. We lost the flat panel technology. We have challenges with flexible electronics. So we played this movie before, we've been playing it for 30 years. Automated or not.

Gil Kaplan: Can I just-

Rob Atkinson: Go ahead, Gil.

Gil Kaplan: Add one thing. The whole foundry model for semiconductors is sort of a case study for this in a sense because you have Qualcomm, you have Nvidia, you have AMD, incredible semiconductor companies, and they're sending everything to TSMC in Taiwan. And so a lot of the value is added there and it's great that they have invented or designed these incredible semiconductors, but somebody woke up all of a sudden and said, the most advanced semiconductors cannot be made in the United States. We don't know how to do that and that has national security and economic security implications. So that's almost a case study of why the hypothetical question is answer seems to be you've got to have some kind of manufacturing here to continue having national economic security.

Rob Atkinson: So we got just a couple of minutes. I wanted to give Sicco the last word before I just sort of wrap up. I was on a plane a number of years ago coming back from India. I sat next to a person from a big German company, I won't say who it is. I said, "What are you doing in India?" And I assumed it's like, "Well, we're offshoring a lot of our production there." And actually they offshored some work that was where the part volume was so small it kind of needed to be done by craft, kind of almost handwork. And he said, "Oh, we would never offshore the main parts. When we have a cost problem, we bring our engineers in." And I'm just curious, you can't answer this in a long way, but it does seem like German companies, because of the engineering focus, are really focused more on meeting the China challenge with engineering. Whereas our companies often it's just go to China. Quick thoughts? I know that's a big question.

Sicco Lehmann-Brauns: Yeah, thanks. That's really a big question. I just want to answer with a short concept that is very popular with us at Siemens. We talk about globalization. So from our point of view, we need both. We need to use the global value chains and global partnerships and global R and D. And we do this of course on the one hand side. On the other hand side, and this is what we especially learned during the pandemic situation, we have to focus more also on local supply chains and on local production as well. But it's not one thing or the other, but you have to combine it in an intelligent way and that is what we try to do and what we call globalization.

Rob Atkinson: Interesting, thank you. There was an audience question, it wasn't another one. It didn't appear to be a question, it was a statement. So let me just read it. I think we'd all agree. "Clean energy manufacturing and addressing the energy transition is critical to addressing climate change. Industry cannot continue to externalize the emission cost." Sure, I agree with that. Although it's really government that has to externalize that cost. There's another question about how to measure R and D and I'm going to leave that up to Andy in the final comments to address that. So with that, Gil, Sridhar and Sicco, I really want to thank you. I wish we had more time because we could have gone on for at least double the time. But thank you so much and I'm looking forward to the next panel. So thank you.

Gil Kaplan: Thank you.

Sridhar Kota: Thank you everyone.

Sicco Lehmann-Brauns: Thanks a lot.

Sridhar Kota: Thank you.

Sylvia Schwaag Serger: All right. I think it's my turn to take over. My name is Sylvia Schwaag Serger. I'm professor of research policy at the University of Lunds in Sweden and I'm thrilled to be moderating this panel since I'm half German and half American. It's also great to see some old friends like Bill and Uwe and to meet new acquaintances like David. So this panel is going to be about how the US and German manufacturing have been really rather well supported by a mature and well functioning STI system. But the question really is how both the STI system but also the manufacturing system will handle these transitions that have been mentioned throughout the seminar already, which is the digital transition, but also the transition to cleaner manufacturing. So I would like to invite you to maybe give short opening statements and I'll introduce all of the three of you first and then we'll go into a discussion. And I would also like to encourage the audience to pose questions or ask questions, we'd be happy to pick those up.

So first of all, I have David Hart who's at ITF, but also a professor at George Mason University. Then I have Bill Bonvillian, who's a former director of MIT at the Washington office, but has also spent a long career as a policy advisor to the US Senate. And from Germany we have Uwe Cantner who's a professor of economics at the University of Jena, but also chair of the Expert Commission for Research and Innovation, which is a highly influential commission, which once a year publishes an annual report on the state of innovation to the German government. So I'm very thrilled to have this panel. So how about David, would you like to start?

David Hart: Sure. So my role at ITF has been to run the Center for Clean Energy Innovation for the last few years, and I've recently stepped down from that, but my focus is going to be on the green part of the green and digital discussion. The framing of this session was termed in terms of quote, guidance of search. So those of us in innovation systems field see this as a function of innovation systems. And I do think as Rob acknowledged there, and I would say Rob and I have a running conversation on this question, that climate mitigation should be an imperative in our innovation systems. It's not the end of the world, it's not as bad as some people have made that out to be, but it's pretty bad. That is impending climate change. And the more we can do to cut greenhouse gas emissions, the better.

And industry produces roughly a third of global emissions. So that needs to be dealt with and that means that major manufacturing sectors are going to have to be retooled, like steel, like chemicals. And then of course we have major energy using sectors that are being transformed like electricity and cars. And so those are also retooling. So we're looking at product and process innovation across a very large segment of manufacturing if we're going to deal with greenhouse gas emissions and this could be disruptive, so it's something that policy makers ought to be thinking about. Now just reflecting on the US, the past debate was really dominated by something that Rob just referred to, which is trying to internalize this environmental externality through carbon pricing. So we're going to raise the price of dirty energy and that's going to make cleaner energy more competitive. And this was guidance essentially through the market mechanism.

Now as a political matter, this just didn't get anywhere in the US and in fact most of the guidance was provided through more mandatory kinds of tools like state level mandates for electricity production. But in the last Congress, the last two years, there's really been a decisive turn at the federal level in a new direction. So we have both supply and demand measures across a number of sectors including for the first time heavy industry. So there's six billion dollars in the Inflation Reduction Act for industrial demonstrations. In addition, we also have green procurement funding. So there's a demand side policy, but this is also true in electricity and transportation as well, R and D funding, infrastructure funding, and tax credits on the demand side. And then on top of this we've had what was just discussed, strong incentives for domestic production, which has of course been a matter of debate with Europe.

And I guess I would say this is a political economy rationalization as much as anything else, but it does have some potential innovation and competitiveness benefits I think that we could talk about. So the Biden Administration has incorporated into this into what they call industrial strategy. I just heard Brian Deese, the former economic advisor talking about this, but I would say that was as much a rationalization as anything else. This emerged out of congress, out of the States, out of sort of our fragmented system. And so what I kind of hope is a rationalization of our approach over time.

Hopefully, we've got a new set of experiments and we need to choose among them. And we see some of these tweaks going on now in the trade area and in some of these discussions over who qualifies for tax credits. But I guess I would say my hope for a very rational, coherent industrial strategy on the part of the United States is tempered. It's never going to be that way in our system. It would be great if we have what Sridhar talked about, a stronger analytical support for these policies and there are some efforts underway in that regard, but it's never going to be a top-down model and that's to the good as well. We just have to accept some of the limitations as well as the strengths of that.

Sylvia Schwaag Serger: Thanks a lot, David. A lot of stuff to come back to. I'll move to Germany to Uwe, would you like to give a few opening comments?

Uwe Cantner: Yes, of course. Good morning from Germany and thank you very much for the invitation to be on this panel. Situation in Germany. The German economy, the German society is certainly aware of the necessity that we have a digital transformation and that we have also transformation towards sustainability. As in you find it every day in the newspapers, in the TV, and so on and so forth. Nevertheless, the progress in these dimensions is relatively small. I would say it's below what would been expected, I would say. The reasons are manyfold. On the one hand side, it is that, especially with respect to sustainability transition, German firms are not so easy in radically changing their ways of production, the using of radical new technologies. They are more better and I think more find them better in doing incremental steps in technologies they know and then to improve them to an incredibly good level, I would say.

But these radical changes are extremely difficult. The automobile industry in Germany is a good case in this respect, as they for years they were extremely reluctant to go onto alternative energy engine systems. They did not go for that, although all the world told them you have to. So this is one aspect. The other aspect, what I became aware of one hour ago by the DIN institution, that's a German standardization institute where they told me they have the feeling that German strategies are only shortsighted. The firm strategies are not a strategy for 15 years, it's more strategy for the next two or three years, even if only for one year. And of course this leads them not to think in radical changes, but to improve a little bit here and there and to continue. And then you have to be aware that Germany is expert champion and if the order books are full, they even do not see that there is a need to change their technologies, their production, so on in a radical way.

This is the private sector part of this sustainability transformation. The other one is for public policy. I mean, the public policymakers since years have at least here in their strategy papers, if you want to call them strategy papers, where they claim we need sustainability transformation and we want to do this or that, but these strategy papers are only there. They have yet really not really put into action. And the question is why have they not put into action? And it is something of a kind of problem in operationalization strategies on the political level. I will not comment more on that now. I can do it maybe later in the panel discussion.

With respect to digitalization, I mean, in the EFI Commission, which I'm now member since 2015, nearly each year we have a certain digital technology under consideration. And we always tried to check what is the position of Germany in this technology compared to other countries in the world, US, Japan, China, meanwhile and so on and so forth. And in each one we found that Germany first is not top. Second, it is often far behind the frontier and it is losing contact to the frontier. Last year we had the discussion of key technologies and all the digital key technologies. Germany is falling back more and more. The question is why. I mean, one point is certainly, again, radical changes are not the things Germans want to do, but on the other hand, the public infrastructure you need in order to implement digital technologies, broadband connections and so on, so forth. This is extremely meager in Germany.

I mean, if you take your laptop and you travel through the country and you think you can always access internet and do what you want to do, this is not what is taking place. You find the landscape where there's no connection or very low connection, very low speed. So this infrastructure is extremely bad developed. And this of course prevents actors to become more active in this field. So it is a combination of private sector failure, but it's to a large degree I would say also a public policy failure. And I think there has something to be done and we can discuss later why in Germany this is not really working and what our suggestions in order and to improve on the situation.

Sylvia Schwaag Serger: Thanks a lot, Uwe. That doesn't sound like a hopeful combination, being shortsighted and at the same time rather slow when it comes to radical transformation. We'll come back to that. Bill, please go ahead.

Bill Bonvillian: Sure. Thanks, Sylvia. Happy to join you today. I mean, an underlying question here is applying the STI system to the future of manufacturing. And look, that's been a big, big problem and challenge in the US. We just simply have not connected our innovation system to our manufacturing system and largely historical reasons. In the post-war period, US mass production capability really dominated world production. The last problem the US had to worry about was the strength of its manufacturing sector. The US built massive manufacturing production capability in the course of the latter part of the 19th and 20th century. It just wasn't an issue. Instead, the US focused on building its research capability, frankly, which was not as strong in a pre-war period. And that was the new piece that was being added and that was what required the focus. So little attention was paid to manufacturing.

So American policy makers began to see that US manufacturing was facing challenges when Japan's quality model and also comparable advances in Germany began really making massive inroads into major US sectors, autos, and consumer electronics in the 1970s and eighties. In the end, only limited policy steps were taken. Instead, the US shifted its focus to doing an IT revolution, which was fine, but we still didn't really pay attention to manufacturing. It was not until the Obama administration that an innovation based set of policies started to evolve for manufacturing. Previously, there had been attention paid to tax policy, trade policy, and manufacturing, but it was really an innovation policy that evolved through 16 new manufacturing institutes. And that was an effort to bring together the key actors [inaudible 01:50:49] government in a collaborative kind of model to tackle the new strands of manufacturing that were needed to really create a new future for manufacturing, a highly productive, more efficient future.

But we've got a series of detail problems in implementing that program. We put the manufacturing institutes on term limits. We assumed for political reasons they're all going to last for five years. That distorted the model. These are long-term problems. We copy the institutes in some ways from their [inaudible 01:51:22] institutes. These are permanent institutions in Germany, not short-term quick fix institutions like they became in the US. So that distorted the model. We never figured out how to network the institutes so that they could be putting together packages of technologies. Employers, they don't want to just do digital, they don't want to just do additive. They don't want to just do robotics. They want to have a combination of these technologies packaged for them, particularly small and mid-sized firms, not just adopt one at a time. And we'd never developed that networking packaging capability.

So there have been, and in addition, the funding level for the institute is just not adequate to the size of the task involved. So there's issues there, but there's other deep issues. We have yet to connect our R and D agencies with manufacturing research portfolios. They aren't connected to the institutes and we haven't really developed those earlier stage research innovation advances in the manufacturing sector. We lack a system for scale up financing. If we compare the scale up financing system that China's put into place, it's a massive system and amounts to more than 500 billion in equivalent to US dollars a year. We have zero roughly. And our venture capital sector, which is very powerful in areas like software and biotech just is not involved in hard tech. So a whole financing mechanism for scale up once you get the innovations in place is just missing in the US system. We haven't really built a strong manufacturing focus into the industrial innovation policies that David and Gil and others have been summarizing, and Sridhar earlier.

There's just not a really strong manufacturing focus. And yet one of the aims of those policies is to really solve supply chain resilience, but without production capability going along with that, it's just not going to happen. So those policies need a production focus. In the area of workforce education, I mean frankly, Germany is the model here. Germany, as Uwe can better explain than I, but it's long game productivity improvements from its famously well-trained manufacturing workforce based on an apprenticeship system. US has a broken workforce ed system. Its companies have assumed you get productivity through capital plan and equipment investment, not from workforce improvement. So our broken system really needs to get fixed because we're going to need to adopt advanced manufacturing. We're going to need a workforce that's ready to adopt it. And then as kind of a final point, we haven't used our procurement programs, particularly from the Department of Defense to implement kind of advanced manufacturing technologies.

The US actually developed CNC equipment, computer numerically controlled equipment for machining. The Defense Department needed it for a level of precision for missile and other programs. So the Department of Defense required its manufacturing, defense, manufacturing base to adopt CNC equipment. It was mandated and there were lending activities that enabled firms to adopt that equipment. We could do that for the suite of new manufacturing technologies coming on and that would provide kind of an early startup and an initial spread into at least a decent part of the manufacturing sector. So these are all steps I think that we could take to really better connect our STI system and make related improvements that are going to be necessary to really put in place a system for advanced manufacturing in the US.

Sylvia Schwaag Serger: Thanks a lot. Well, that was a really interesting first round. So what I hear there is Germany with a very strong manufacturing system, but for the reasons that have been pointed out by the OECD, but also Uwe talked about, perhaps struggling a little bit in these transitions towards digital and sustainable. And Bill talking about, I think what you're describing as various areas of neglect when it comes to manufacturing. The weak link to STI, the workforce education, perhaps also a policy neglect. And that ties really into also this recent article by Dan Wang when he talked about China and said, what we should be more concerned about is their successful link between manufacturing and high tech rather than only their strength in high tech. So David, would you like to maybe respond to Bill's?

David Hart: Well, Bill and I have worked together on this for a long time, so I can't take issue with Bill the way I can with Rob. But I do think, and again, my focus over the last few years has been mostly in the clean tech area. I would say I've been somewhat surprised by the level of funding going in. And of course we know that venture and risk capital generally is cyclical, so this isn't going to last. And some of the areas that the money is going into is rather baffling to me, fusion that has a multi-decade payoff probably.

So you know what? I think we're in a little bit of a period of euphoria. We start with electric vehicles where the stock prices skyrocketed and now they're coming back to earth. And I guess my hope is, while there's going to be a lot of waste from the [inaudible 01:57:02] sort of perspective, at least there'll be some assets left behind by that. But I do think we have systemic problems in the US and I don't think the kind of measures that were adopted to focus solely on environmental performance are going to solve them. We need some more structural elements as well, and we're a ways away from having those.

Sylvia Schwaag Serger: Thank you, David. That's interesting. And also as you mentioned initially, a lot has been happening, not at least with the IRA, but it's pretty recent, so it's going to take some time. Whereas Uwe, you've been talking about that. I mean, I was looking at the World Economic Forum that ranked countries as green leaders and 16 of them were from Europe and the US wasn't among them. And you said Uwe, there is a longstanding sort of awareness of these issues, but too little is maybe happening. So what do you think could be done or should be done? And I know that you and your expert commission have been looking at several types of policies that might help to speed up these transitions, but do you have any more suggestions there?

Uwe Cantner: From the literature, we know that transformative processes have a couple of failures. And one among the four prominent failures is a policy failure. It's namely fading coordination between different ministries. What does this mean? This means that a transformation is not accomplished by simply setting up a new subsidy tender of several billion of euros, and then firms or applicants take it and then do it, and then the thing is accomplished. A transformation is a dynamics where you need a lot of measures. And these policy measures do not come only from the research ministry or only from the Ministry of Economic Affairs as they come from a lot of ministries, from the Ministry of Justice, the Ministry of Environmental Affairs, the Ministry of Internal Affairs, and so on and so forth.

And these these policy measures have to be coordinated in a way that they build up a sequence or parallelism, which is favorable for accomplishing the transformation. And this has not been put into action in Germany. [inaudible 01:59:30] high-tech strategy, 2025. In the strategy, big missions, green missions were formulated and we appreciated that. But when it came to take action, then all ministries said the Research Ministry should do it. But I mean, there were regulatory changes necessary. There were changes necessary with respect to digitalization there and others. And this then did not work together. In our concurrent report-

Uwe Cantner: In our concurrent report, we attempt, with a suggestion to the German chancellor to the government, to overcome this non-coordination by taking the example of Korea or of Japan. But you have a council of ministries which is close to the prime minister and in this council the big strategies are coordinated by the ministries and they are contracted on that. They have to subscribe, "This is our strategy and my contribution will be this and your contribution will be something additional," and so on, so forth. And if they do not follow these strategies, then they are also punished. And these things that this feature has to be taken over in the German government, which adjusted a future assembly, or a government assembly, with the relevant ministries for a certain mission. Let's say sustainable mobility 2030 or something like this. The relevant ministries have to be in there, they have to contract on the strategy.

Then the strategy is given down to the ministries which have to work together in specific mission or transformation teams and then operationalize the strategy in a way that it can work. In Japan, in Korea, I would not say that it always works, but in a good share of [inaudible 02:01:28], it really worked relatively well. And we think that something like this could activate also the German government and put it more into fruitful action. How this will be, let me say, the idea is taken up. They are considering it, whether they take it over in the end, I have some doubts. Because there are a lot of other forces which do not want to have this concentration of power close to the German chancellor and so on and so forth. But at least as long as they have not said no, we are a little bit optimistic that some elements can be taken over. And this would, in our view, resolve one of these big transformation problems, namely non coordination of the policy makers. That's one idea which we want to push forward.

Sylvia Schwaag Serger: Thanks, Uwe. And that's interesting because it ties into one of the recommendations, right? The first recommendation of the OE CD report, a little bit of more like an overarching vision, right?

Uwe Cantner: Yeah.

Sylvia Schwaag Serger: Consensus built vision. So, I mean, looking forward, again, I find this really fascinating because you have a strong manufacturing sector in Germany, very dominated by the automotive sector. We could also talk about how that helps or hinders perhaps the transition, the green transition. One of the interesting things is that I read that in the OECD report, we actually also wrote about the fact that the automotive sector is actually quite good, the German automotive sector now when it comes to green patents or environmental technology patents. But it's been a little bit slow to start perhaps.

And then we look at the U.S. with, I think as Bill described and also David described, perhaps structural problems in the manufacturing sector as you said, David, with these new ambition initiatives will not necessarily all address or solve. So looking forward, Bill and David, what do you see happening? And this question would also be to Uwe because we're also not just operating in a vacuum. We have the Ukraine war, the energy crisis in Europe, the looming financial instability and recession. How do you see the trajectory for U.S. manufacturing both becoming stronger and becoming greener? And we haven't yet talked about the digital transition that much, so I don't know if you'd like to say a little bit more, any of you on that?

Bill Bonvillian: I mean, I can start off and I'll turn to David on the green side. I mean, U.S. is at least now where the fact that it's got a serious manufacturing problem. U.S. is in denial of this problem until really relatively recently. And it's clearly been a national priority, at least on the problem list, for the last two administrations. So the issue now confronting us in the U.S. is what are we going to do about it? And just to pull on some of Uwe's comments, a systematic approach is really going to be needed here. Just trying to tackle a problem through the R&D side is frankly unworkable. And despite the U.S. great strength in that earlier stage research side, it's simply not enough. And as I discussed earlier, we have established a mechanism that does bring the right actors together around advanced manufacturing technologies, not simply digital.

The U.S. is defined advanced manufacturing not only in terms of digital technologies, but in terms of a whole range of other advances that could also be high productivity opportunity areas. So it's digital for sure, and that's probably at the top of the list and the earliest to potentially adopt. But it's also the opportunities created through 3D printing, it's the opportunities created through advanced composites, it's the opportunities created through new materials. It's the opportunities created through biomanufacturing. There's a host of these non-digital technologies that we need to bring to bear here because the rewards are potentially very powerful. I mean, the scientists and engineers are telling us we're at a moment where we could really significantly fundamentally change the way in which we undertake production. That doesn't happen very often. That's something that occurs every century or two, but this is one of those moments. And can we pull our act together, not only through manufacturing institutes and supporting them adequately, but bringing the R&D system into a better connection, providing this scale up financing.

U.S. has not seen manufacturing is part of its innovation system. It thinks of innovation as R&D. Germany has done a better job at understanding that innovation is deeply connected to manufacturing. Can we do that and provide the kind of scale up for production that we're going to need to have for the innovation that comes out of that? And then finally, can we fix the workforce education system [inaudible 02:06:37] because without fixing that underlying problem, this stuff will simply not be adopted. So where do you set priorities? How do you organize? Is a council approach in the U.S. going to be possible in a highly federalized system? It's tough, as David pointed out earlier, but I think we're starting to see steps. I think we're starting to see a trajectory where solutions are going to start to come about as we confront these problems. We've brought new resources into manufacturing and we're starting to put together the organizational models to deal with it.

Sylvia Schwaag Serger: Thank you, Bill. David?

David Hart: Yeah, I think on clean products and processes, it's going to be bumpy. I mean, I think the road forward is bumpy and my hope... So we put out a book in 2020 where we envisioned a nice smooth ramp up. And, of course, rather than that we got a flood all at once. And we also know that there's going to be a change of party in power. You already saw it in the House of Representatives in the current election. So we still haven't built a durable coalition, I don't think, behind these policies. So we should expect some backsliding. At the same time, I think there are some fairly powerful forces that are going to keep pulling us up the hill, so to speak. The States are part of it, but also the world market. There's some alignment of forces in a number of sectors and to some extent finance is also pushing in this direction.

So I'm hopeful that the forward progress, while it will be a little episodic, it will be in that direction. And I do think we shouldn't be viewing it as a crisis that requires an immediate transformation, which some have called for. I think that just doesn't work in a system. We saw the picture of the super tanker I think at the beginning of the day, and all of these systems are very complex and they can't be moved quickly. And if you do try to move them quickly, you either break them or you break your head on them. So I'm hopeful that we'll have two steps forward and one step backward, not two steps forward and two steps backward.

Sylvia Schwaag Serger: Thank you, David. Uwe, would you like to say... I mean, thanks also, Bill. You pointed out the federalism. That's a challenge that of course both Germany and the U.S. face, but do you want to comment on some of these things?

Uwe Cantner: Yeah, I think the description Bill gave for the American manufacturing and the problems, I think it mirrors a little bit, what is it going on in Germany. I had the feeling Bill always says in Germany it looks a little bit better. It looks different, I would say. I mean, in Germany we have the problem that for the innovations which are necessary for transformation, one would expect that small and medium-sized firms, and especially startups, would be the driver of the dynamics. Because big firms have issues in doing these radical changes and these are management issues. I think this is acceptable. But in Germany, our startup scene is extremely low developed. We do not have these big financial means, which you have in the U.S., in order to push these startups. We do very, very weak in that. I think in the U.S., you can rely on a very strong startup scene in order to do the transformation.

Whereas in Germany, you still have to build that up and, as I said, we do very hard with that. The other point is, Bill, you said also in your comment, the one before the last one, this issue with the workforce and said, "Yeah, Germany has a strong workforce," and you said in the U.S. it's not that strong and other factors, work and productivity. I would say in the past, I think you're right. But meanwhile, with respect to the workforce, Germany runs into big trouble because we have a scarcity of properly trained workforce. We need workforce which has digital capabilities and competences and we do not have them. We do not have find them. And therefore we have a big issue with that. And we are close to full employment, so there is not really big issue with unemployment. All is okay.

But the quality of the workforce is an issue because they are trained but not in the right competencies. And this situation will become more and more severe because we have a different demographic development as you have it in the U.S. So we have a tremendous decline or increase of elderly people, let's put it that way. And those situation with the labor force will become even more severe over time. And then you also honored the German education system. Thank you. But I have to confess, I mean, I think from the U.S., when you think about the German education system, you think about this dual training system, which is something which is unique in the world. It is unique and it is appreciated by everybody, but not by the German young people.

They want to become students at universities and they want to study mainly social sciences and not mathematics, engineering, natural science, et cetera, and there we really face a problem. And we don't need so many sociologists or economists as I am, I'm a economist. You don't need that for the transformation. We need these other competencies. And therefore, although you appreciate our education system, it has a couple of big problems still in there. And this is something which the policy also needs to take some action.

Sylvia Schwaag Serger: Thank you, Uwe. I have one more quick question. We barely touched upon this federalism and versus the national level, but in Europe of course we also have the EU level. So we have the super national, the national, and then the federal. And as you started with, David, by mention the IRA, at the EU level, member states are not super happy with all of the aspects of the IRA and have launched now this European Industrial Green Deal. But do you want to say something, Uwe, about the European level and what aspect that might come in here? And then I would ask Bill and David if they have any final comments before we wrap.

Uwe Cantner: I think that in Europe, the coordination between the member states in the past was weaker than today. I think there is a tendency to coordinate better to agree on common targets, objectives and strategies. And I think there's also now a little bit of a thinking that rules which impede with direct subsidies to important problems here and there we have this so-called [foreign language 02:13:44]. I cannot translate it. Maybe you can translate it, Sylvia.

Sylvia Schwaag Serger: It's a subsidy law, yeah.

Uwe Cantner: Yeah, subsidy law. And this is also preventing a lot of good initiatives. And I think this is also now getting into discussion. I hope there will be a novelization of that in due course. So in this sense I think Europe, also because of Ukraine war, on the new geopolitical situation, they come closer together and we always suggest to German government, "If you think in these R&I strategies, do it European level wise." Now I have to put the German glasses, Germany alone will not make it.

Sylvia Schwaag Serger: Thank you. That ties very nice into the OECD recommendation also for Germany to take a little bit more of a lead on the EU scene. David, a final word and then Bill.

David Hart: Sure. And maybe I'll set up Rob a little bit. I want to bring China back to the foreground of our discussion. It hasn't really been there for this panel, but the Chinese challenge is serious. I think the war has amplified it, even though China is dancing a little bit diplomatically. And so while it's important for the U.S. and German companies to compete, and European companies to compete, I also think that cooperation is going to be important. And that's for the green transition as well as economic competitiveness generally. So I think the trade discussions that are underway as well as the somewhat interconnected legislative processes with the green deal industrial plan in the U.S., IRA implementation, we have to find a way to keep the markets linked to keep the supply chains connected and growing out of the China trap that we've fallen into together.

Sylvia Schwaag Serger: Thank you. Thank you for bringing that in. I think that's a good way to segue into the final session. Bill.

Bill Bonvillian: Oh, just a couple of closing thoughts. I mean, I share David's emphasis on China. Obviously that's a huge driver at this point in U.S. policies and politics. That has really driven the roughly $400 billion in U.S. industrial policies that have become law or been implemented through the executive branch in the last three years, which is a dramatic change in U.S. policy, a really transformative change. Now how lasting it will it be, how much political warfare there will there be around it? I'm sure there'll be substantial. But again, this concern about China's advance, and just to give you one statistic; the U.S. ran a trade deficit in advanced technology goods in 2022 of $244 billion, largely with Asian nations, predominantly with China. The previous year was 195. Two years before that it was 130. This is an accelerating problem for the U.S. It's not a declining problem, it's not a stabilizing problem.

So if the U.S. is going to tackle this problem, it's going to really have to shift to advanced manufacturing to get the kind of productivity and efficiency gains that are needed. And just a word further on workforce and the way I understand your points, the grass always looks greener from the other side, but the apprenticeship program that Germany has been able to [inaudible 02:17:15] looks pretty good to me. And your new efforts to bring apprenticeship programs into the college level is particularly fascinating. A very intriguing approach. Obviously that's just in the process of scaling up, but it's a very interesting way to tackle this problem.

The U.S. historically has had a big gap between its education system and its work. The barriers between the two are really huge. We have never had an apprenticeship type approach in any kind of scale, except in our construction trades, to tackle this. And to try and embark on something like that, along with developing the curricula for advanced manufacturing and using one set of institutions we do have, which is our community colleges, and beefing them up, improving their completion rates, those are all going to be key steps in the way in which the U.S. confronts an advanced manufacturing challenge.

Sylvia Schwaag Serger: Thank you so much. I want to thank all three of you. I think it's been a fascinating discussion and I think it's interesting how we did converge on the need of addressing structural problems on both sides and perhaps some kind of vision or council or consensus and that it will be a bumpy ride ahead as you said, David. I think in both cases, but hopefully in the right direction. So thank you very much. And with that I'd like to hand back to Rob, Andy, Caroline, and Luke.

David Hart: Thank you, Sylvia.

Uwe Cantner: Thank you.

Rob Atkinson: Great. Andy, what order do you want to do?

Andrew Wyckoff: Why don't you lead off, Rob?

Rob Atkinson: Sure. Okay, just a few minutes. So first of all, fascinating discussion and again, I like my panel. I thought we could have gone even on even longer and there's no end to the complexity of these questions and issues. Just a couple of quick thoughts; I agree with Bill, it is grass is greener. We always look, "Oh geez, we need dual circulations, a dual system that Germany has." But I will say to the credit to the U.S., one advantage we have is we're pretty entrepreneurial system. And so there are these pressures in market forces and a lot of high schools have really moved to get better computer science education in the U.S. A lot of colleges. I mean, my old liberal arts college just ended up creating a big data analytics program. So that is a strength of the U.S. We do have this entrepreneurial educational system that could do better. But I think it's something maybe that Germany could learn from because it allows quicker adaptions to big new skill developments.

And in fact, the U.S. computer science BS degrees have been growing, which suggests that that strategy is working. And then I just want to comment on David's point of setting me up here, because I was going to bring this up anyway. I was a little struck by the fact that we didn't really mention China in here and let me be the pessimist, the skunk at the garden party. I would argue unless we, and here I'm pointing at Germany, shall we say, collectively address the challenge from China's innovation, mercantilism and unfair trade practices, intellectual property theft, cybersecurity, closed markets, massive subsidies. I can go on. Unless we really address that collectively, together in a serious way, I just don't see either country really winning ultimately. I think the Chinese will win.

And I know how the Germans think about this. Like, "Hey, we can sell a few more Deutsche marks in the next five years." Sure you can, but you ought to be thinking about the next 20 years, not the next five years. So that would be my plea. Doesn't mean we're anti-Chinese. I got called that one time, it was amazing. My daughter's Chinese, I don't see how I can be anti-Chinese. I'm not anti-Chinese. What I'm anti of is the policies that the Chinese government has put in place that make it harder for legitimate companies and countries to really compete fairly. So I do think we have to collectively address that challenge. Over to you.

Andrew Wyckoff: So why don't I lead off by first of all just thanking you, Rob, and the ITF team. It was great to be hosted in the United States to discuss this. I'm struck that pretty simple analytical frameworks like direct comparisons of countries actually are pretty revealing and allow you to do a deep dive on some of these issues. And as you say, the grass is always greener. What people look to Germany and envy on the same hand, the Germans turn around and look to the U.S. And so I think it's a really useful discussion to have both sides look at a particular sector and the challenges, which are really global, that are facing the sector. And to me, one of the takeaways from the report and from the discussion today is it's not about which approach is better; software versus mechanical engineering. It's about the blend and how do you get that to work and, as Bill was saying, to scale and to be more of a structural approach rather than a one-off policy fix here and there without really enough sustainability to keep it going?

Just quickly. China's not a member of the OECD. They're what we call key partner. I've been here a long time, I'm struck that shifting geopolitics has had a pretty interesting effect on the OECD where, from my perspective, our member countries used to love to quibble about the differences between them. But with shifting geopolitics, particularly the war in Ukraine, I think they realize that their similarities far outweigh those small differences and we've seen more of a coming together around certain policies. And I think what you point to is coming together to create more resilient and diversified supply chains is one dimension of that. But let me pivot. I don't know if Caroline or Luke want to say some final words, but I do want to say thanks to you and to thanks to all the speakers who have participated in the seminar.

Caroline Paunov: Yeah, also from my side, thank you so much. This was really fascinating. And one of the things is what we were talking about is really there's some complex transformations and we're not exactly in a simple situation. We're really unique. You have the different components, you have government industry and people have to play their roles in different ways. And it was interesting to hear all the massive actions that both the U.S. and the German governments are undertaking and the challenges they're facing therein. So I heard the nice reference to saying, "Well, maybe the government has to be some kind of coach of a team, but a coach that lets the team being sufficiently creative, yet that is strategic, that is setting certain directions, that is understanding some of the security issues, that is cooperating, that has this long-term vision," et cetera.

So quite a high bar for the actions where you don't want to go too far, but it also is clearly not the case that... The role of government, I think, is completely a somewhat different debate to when we were discussing industrial policies. And it's one of those things that came through quite a bit here and the different approaches and the struggles that both sides are facing. And then on the other side you have also industry and industry strengths and industry shortcomings in terms of, well yeah, maybe if the books are still full, why do you really need to change in any possible direction? But are you then going to be too late? Are you too slow to move? How do you tap into your ecosystem and get the support?

And then there's also a part that maybe we didn't talk about quite as much. I mean, we talked about the people side in terms of the skills and the skills development and how to do that component, but I think there's also a part on bringing people along in that process in both country sides. It probably will be an important issue. And then maybe just the last thing is this issue of right now what we see is there is massive efforts into some of the sustainability dimensions. There's funding there and there's a question there about whether that will be hype or whether that will be a sustained transformation. And that's an interesting thing to see on both sides. That as well, in addition to China, is probably a collective issue that also Germany, the U.S. could ideally in some ways address collectively. Luke.

Luke Mackle: Okay, so I've been told I've only got about two minutes until we wrap up. So I'll be very, very quick. I think maybe two things come out of this conversation, which I thought was really, really fascinating for me, or reinforce perhaps two things I've been thinking about. One is really how difficult it is to give some kind of evidence based policy recommendation on some of these issues, especially when you're dealing with countries like Germany and the United States, which are ostensibly so far at the frontier in some of these areas. And where the success in innovation policy has such implications for broader considerations of whether it's national security or economic competitiveness. And I think this is something that really comes out through the review where we're trying to think, "Okay, well, there's maybe not precedence for some of this stuff," and we have to think a little bit more creatively about what kind of advice you give.

And then I think that one last thing is, I think it was Gil picked up on one of the recommendations on the forum, and I absolutely understand why he picked up on this. And it's funny, just after the review came out, there was a line in a French publication, a media publication that I won't name, let's say poked fun at our statist inclinations in this one. But that really wasn't the point. The point was that there are so many innovation adjacent issues that have an implication for the success of some of these innovation policies and the bridging the gaps, the coordination gaps, between the different people who are involved in that is not just a positive additionality like it might have been in the past, but something which is increasingly necessary. And that I will finish. And thank you everyone again for giving us this opportunity to talk today. [inaudible 02:28:22].