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Chapter 2 Towards stronger business environment and improved managerial capability Section 1 Changing business models and policies that support change 1. Germany (1) Economic Situation of Germany Despite the lack of progress in the recovery of the euro area economy, Germany’s real GDP has far surpassed the pre-the level before the collapse of Lehman Brothers level. Against the backdrop of the lowest unemployment rate since the unification of East and West Germany, personal consumption continued to grow until the fourth quarter of 2014 and exports acted as the driver of the German economy, making Germany the only prosperous country in the euro area.

Figure II-2-1-1-1 Real GDP growth rates in Germany

However, despite its apparent economic strength, Germany, like Japan, faces structural challenges. First, intensifying global competition, as exemplified by the catching up of emerging countries, is having an impact on the German manufacturing industry, which is supported by strong exports. Germany’s share of worldwide exports is declining due to China’s remarkable growth (Figure II-2-1-1-2). The labor cost in Germany, which has recently been rising, may increase further in the future because of the nationwide minimum wage system, which started to be phased in from 2015. On the other hand, the ratio of the export price index to the producer price index has not yet regained the level of the 1990s although it has been on an uptrend since the middle of the 2000s (Figure II-2-1-1-3). In other words, Germany, where there are many companies exporting products without resorting to price competition, is required to curb production cost amid the weakness of growth in export prices in

(%; year-on-year; seasonally adjusted)

Source: Eurostat.

(Seasonally-adjusted indexes; 2008, Q1=100)

(Year)

Household consumption Government consumption Fixed capital formation Inventory adjustment Exports Imports GDP (year-on-year) GDP (indexes) (right axis)

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order to maintain domestic production.

Figure II-2-1-1-2 Changes in shares of major exporting countries

Figure II-2-1-1-3 Changes in ratios of export price to producer price

China United States Germany

Japan

Netherlands France ROK

United Kingdom

Notes: Figures are dollar-based. Source: World Trade Organization.

Germany

United Kingdom

Japan

United States

Notes: 1. Figures show the magnification of each index (1996=100). 2. As for Germany and the United Kingdom, export price indexes target all products classified

in the SITC, and producer price indexes are based on the NACE Industry category, excluding construction and sewage/waste treatment/medicals. Japan’s exporting product indexes show total average (contract currency basis) and its corporate goods price indexes show total averages. As for the United States, the export price indexes target all products, and the producer price indexes are based on the Industrial Commodities.

Source: Eurostat, Corporate Goods Price Index (2005 as basis year) (BOJ), U.S. Bureau of Labor Statistics.

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Figure II-2-1-1-4 Changes in labor cost per unit

The second challenge is that Germany needs to continue promoting international business expansion because domestic demand cannot be expected to grow due to the ongoing aging of society coupled with the low birth rate, as shown by the forecast that more than 25% of the German population will be elderly people in 2024 (Figure II-2-1-1-5).

United States

Germany Japan

United Kingdom

Notes: The figures show those from Q1 in 2000 to Q3 in 2014 and they are seasonally adjusted.

Source: OECD. Stat.

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Figure II-2-1-1-5 Estimated aging rates in major countries

Figure II-2-1-1-6 Proportion of exports in major countries (to GDP)

Another problem is a future labor shortage arising from the aging of society coupled with the low birth rate. A shortage of highly skilled personnel is already emerging as a problem, and in the future,

United States

Germany

Japan

Notes: Figures show the ratios of population aged 65 or more in the total population. Data from 2011 (or 2012) to 2050 are estimated values.

Source: OECD.Stat.

Italy

China

France

United Kingdom Spain

RO

K

Notes: Figures shown are those in 2013 and are dollar-based. Target countries are those having one or more trillion dollars of GDP in 2013.

Source: World Trade Organization, World Economic Outlook, April 2014 (IMF).

Germ

any

Mexico

Canada

Italy

Russia

China

Spain

United K

ingdom

France

Australia

India

Japan

Brazil

United States

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the shortage is likely to worsen (Figures II-2-1-1-7 and 2-1-1-8).

Figure II-2-1-1-7 Estimated changes in population of productive ages in major countries

Figure II-2-1-1-8 Challenges that German companies face (questionnaire surveys)

China

Brazil

India

Germany

United Kingdom

United States

Japan

Notes: Figures show the population aged 15 to 64 (year of 2000=100), based on the estimations by the International Labour Organization (ILO), from 2000 to 2030.

Source: ILOSTAT.

Domestic demand

Labor cost

Shortage of skilled workers Prices of energy and raw materials Economic policies

Financing conditions

Foreign demand (*)

Exchange rate (*) Fall Feb. Summer Fall Feb. Summer Fall

(Timing of surveys) Notes: Figures are based on the collected answers to the questionnaire titled “What do you think

will be the biggest risk in the business filed in the coming 12 months?” (multiple answers allowed). The surveys were conducted by German Chamber of Commerce and Industry (DIHK), targeting about 27,000 companies. Asterisked (*) items are the questionnaires targeting exporting companies.

Source: DIHK-Economic-Survey Fall 2014 (DIHK).

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Finally, improving energy efficiency is a huge challenge. In 2011, the German government decided to abolish nuclear power generation by 2022. Although energy cost has significantly declined due to the oil price drop since last year, a shift from nuclear power to other energy sources will push up energy prices. In order to curb companies’ production cost, it will be necessary to continue promoting energy conservation (Figure II-2-1-1-9).

Figure II-2-1-1-9 Industrial energy prices in major countries

(2) Industrie 4.0 initiative <Outline> Against the backdrop of the abovementioned structural challenges, industry and government in Germany are working together to promote the Industrie 4.0 initiative. Germany’s Industrie 4.0 (fourth industrial revolution)145 initiative aims to spread smart factories, where production is digitized, among companies in the country, including small and medium-sized enterprises (SMEs).146 Under this initiative, production processes from the upstream to downstream will be networked and multiple value networks managed in real time from order taking to shipment will also be linked with each other. Specifically, networking of industrial machinery and distribution and production

145 First industrial revolution: introduction in the 18th century of mechanized production facilities using steam engines; second industrial revolution: introduction in the latter half of the 19th century of mass production using electricity; the third industrial revolution (as interpreted by the German government): introduction of computerized control of production in the 1970s. (Sawada (2015)) 146 There is no definitive definition.

(US price = 1)

Japan Germany Czech United Kingdom

Hungary France Poland United States

Industrial electricity

Industrial heavy oil Automotive diesel Gasoline

Notes: As for oil products, the latest price is those in the first quarter in 2014, and as for electricity, figures show those in 2013. Figures are dollar-based. As for the United Kingdom, no figure for industrial heavy oil is shown.

Source: Key World Energy Statistics 2014 (IEA).

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equipment as well as automation of production adjustment through communications between equipment will be realized, making it easy to identify products being manufactured individually through sensor technology and to keep track of the current production situation and production processes up to completion. The technology to network production processes from the upstream to the downstream has already been introduced by some major companies in developed countries in order to improve their production efficiency. However, Industrie 4.0 is distinctive in that it seeks to extend the networking beyond individual companies to realize inter-company supply chain networking and that it places emphasis on spreading the networking among SMEs as well. <Objective> To realize the networking of supply chains and spread new production processes among SMEs, there are huge challenges to overcome, including ensuring data security and improving IT infrastructure. Even so, Industrie 4.0 is being promoted at various levels presumably because it has been launched based on a clear awareness of problems in the public and private sectors of Germany. While Germany possesses an advantage in export, there is a clear sense of crisis that some measures must be implemented in order to enable German industries to maintain competitiveness at a time when emerging countries are gaining strength amid the global competition, and IT and other companies from the United States are advancing into the manufacturing industry by capitalizing on their strength in software services. Industrie 4.0 is an essential solution to these challenges and is expected to strengthen the international competitiveness of the manufacturing industry, which is Germany’s core industry, while maintaining the country’s advantage as a production and R&D center.147 Industrie 4.0 is included in the “The digital economy and society” section of the third “new High-Tech Strategy,” a document prepared by the German federal government, and is cited as an example in “The pace of innovation in industry,” one of the important aspects of the strategy. One of the strategy’s objectives is to enable Germany to maintain its position as a global innovation leader and to quickly translate creative ideas into concrete innovations. At the same time, the strategy states that innovations strengthen Germany‘s position as a leading industrial and exporting nation and contribute to solutions to new challenges such as sustainable urban development, environmentally friendly energy, individualized medicine and digital society. <Important aspects: (A) Standardization> In the “Recommendations for implementing the strategic initiative Industrie 4.0,”148 which was

147 In November 2011, Industrie 4.0 was adopted as an initiative under the High-Tech Strategy 2020 of the German government with a view to integrating information and communication technologies into the manufacturing sector (Council for Science, Technology and Innovation (2015)). Under the Future Projects, which was determined by the cabinet in 2012 in order to put the High-Tech Strategy 2020 (formulated in 2010) into practice, budget funds of 200 million euros were allocated to Industrie 4.0 as one of the 10 eligible projects. (JETRO (2013)). 148 In April 2013, the Industrie 4.0 Working Group, led by the National Academy of Science and

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presented by the industrial sector, eight key areas are cited as priority key-task areas. It is said that of the eight areas, the most progress has been made and a roadmap has been publicly announced in the area of “standardisation and open standards for a reference architecture.”149 In 2013, the Association for Electrical, Electronic & Information Technologies (VDE) announced “Die deutsche Normungs - Roadmap Industrie 4.0,” in which the association presented recommendations concerning standardization, mainly with respect to automation and IT technologies as fields important for realizing Industrie 4.0. With respect to standardization of reference architecture which maintains technological neutrality and which is installed in all production systems and services, an earnest study has been underway at an international standardization organization since June 2014.150 In addition, research and development is being conducted concerning a production line comprised of production modules provided by different manufacturers as specific factory automation technology. Usually, it is not easy to replace a machine tool in a production line with one made by a different manufacturer. However, this technology aims to make such replacement easy – by just plugging in or pulling out the power ― through standardization of necessary parts. With regard to this technology, SmartFactoryKL (which will be mentioned later), which is an organization mainly comprised of companies, and “it’s OWL (Intelligent Technical System Ost Westfalen Lippe” (which will also be mentioned later), which is an industrial cluster, are individually conducting research and development with a view to promoting Industrie 4.0. <Important aspects: (B) Support for SMEs> One of Industrie 4.0’s objectives is to improve the production efficiency of SMEs in Germany in order to maintain the country’s competitiveness in global competition. To that end, it is important to develop conditions that facilitate the entry of SMEs. As it is highly risky for SMEs to make prior investment in new production systems, various governmental projects to develop factory automation technology are being implemented with a view to providing the technology to such enterprises. For example, Autonomik (Autonomous, simulation-based systems for SMEs) is a governmental project to develop various applications for SMEs to promote automation.151 An industrial cluster called “it’s OWL” is developing factory

Engineering (acatech), announced “Recommendations for implementing the strategic initiative Industrie 4.0”. At the same time, major business organizations of manufacturing industries, such as the German Engineering Association (VDMA), the Federal Association for Information Technology, Telecommunications and New Media (BITKOM) and the German Electrical and Electronic Manufacturers' Association (ZVEI) cooperated with each other to establish the Industrie 4.0 Platform, which is intended to implement the recommendations. Subsequently, this platform formulated a roadmap of research and development in the eight priority areas. (JETRO (2014)) 149 “Reference architecture” is the collective name for mutually seamless specifications and regulations at the practical level that are necessary for networking multiple factories. 150 Sawada (2015) 151 Autonomik was implemented in 2010-2013, and subsequently, it, together with related projects, was taken over by Autonomik für Industrie 4.0 (source: the website of the Federal Ministry of Economics and Technology (http://www.autonomik.de/en/index.php) and the Federal Ministry for Economic Affairs and Energy, Germany (2014))

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automation technology that may be introduced by SMEs in cooperation with Fraunhofer research institute. In addition, various organizations, including state governments and private economic organizations, are vigorously conducting activities to spread and raise awareness about innovative technologies among SMEs. <Important aspects: (C) Ensuring data security> Linking factories through the Internet leads to opening to the outside data that previously existed within each factory. Leaks of companies’ technical information and data would be fatal to German companies with advanced technological prowess, so in order to promote digitization at German companies, it is essential to ensure highly reliable data security. The Digital Agenda (2014 to 2017), which was announced in August 2014, emphasizes the need to ensure data security in order to promote the spread of new systems. (3) Infrastructures and policies underlying Industrie 4.0 Under Industrie 4.0, it is necessary to spread cutting-edge technologies, including IT platforms integrating design, development, production and other processes, 3D printers and laser technology among many manufacturing companies in Germany and to present new business models that take account of the standpoints of various companies. While Industrie 4.0 is still moving toward realization, various elements that exist in Germany presumably enable the country as a whole to tackle such challenges. Here, we will examine systems that support SMEs’ innovation activities and systems to integrate domestic companies. (A) System to efficiently transfer technology to SMEs (a) Research institutions Under the Industrie 4.0 initiative, research institutions are actively involved in efforts to realize new business models that make full use of the Internet of Things (IoT) and automated production technology. For example, Autonomik, which is a project to develop applications for SMEs to automate design, development, production and other processes, is being implemented by Fraunhofer research institute and other research institutions in cooperation with companies. Meanwhile, SmartFactoryKL, which was established in 2005, is developing basic technologies for factory automation and commercial products in cooperation with IT vendors, manufacturers, which are users, and public research institutions. However, German research institutions’ active stance on cooperation with the industrial sector is not limited to Industrie 4.0. Major Germany research institutions tend to place emphasis on research partnership with the industrial sector. In particular, Fraunhofer research institute, which specializes in applications research, is important as an organization that acts as a bridge to the industrial world by turning innovations created through

512

basic research into new products. First, as a bridge to the industrial sector, Fraunhofer has personnel mobility. More than 20% of its employees are graduate school students, who will later find jobs in the industrial sector following their experience at Fraunhofer. After joining companies, former Fraunhofer employees will use the institute in their research and development projects, and this cycle promotes cooperation between Fraunhofer and the industrial sector. Another aspect of Fraunhofer’s role as a bridge to the industrial sector is conducting research on commission. Around one-third of Fraunhofer’s income is commission income from companies. On commission from companies, Fraunhofer implements such processes as product planning, product development, design and demonstration equipment development. Projects commissioned by companies are implemented based on close communications between them and Fraunhofer, so final products do not deviate much from what they have in mind.152 Furthermore, as its research facilities are located across Germany,153 Fraunhofer also conducts research and development in cooperation with universities in various regions. One of Fraunhofer’s missions is to develop commercial products by supporting innovation creation by SMEs, whose research and development functions are weak, so around one-third of its income received from the industrial sector comes from SMEs (companies with a workforce of 250 employees or less).154 Fraunhofer’s approach of turning innovations created through basic research into development and production of new products and supporting SMEs has become evident under Industrie 4.0. However, this approach is also applied to themes not covered by Industrie 4.0, so it may be said that Fraunhofer has been continuously supporting innovation activities of industry, including SMEs. (b) Higher education institutions Under Industrie 4.0, there are cases in which a higher education institution is contributing to innovation by participating in a local industrial cluster. In Germany, authority related to education mostly belongs to state governments. Higher education institutions established by state governments actively contribute to local economies. In particular, universities of applied sciences (Fachhochshule), a type of higher education institution specific to Germany, account for around 60% of the total number of universities in Germany, with some 60% of personnel who study engineering joining them. Universities of applied sciences are intended to strengthen the international competitiveness of industry through practical education based on academic infrastructure and play a significant role in transfer of technology to the industrial sector through education specialized in practical engineering applications. Some parts of the budgets of universities of applied sciences are funded by income from research work commissioned by the industrial sector. 155 As universities of applied sciences engage in

152 Fraunhofer is prohibited from engaging in production and sales itself in order to avoid obstructing companies’ sales activities using knowhow obtained from them. 153 The number of domestic research facilities is 66 (website of Fraunhofer). 154 A hearing survey conducted by the Ministry of Economy, Trade and Industry 155 For example, Hochschule München (University of Applied Sciences Munich), derives around 16% of its third-party budget from research and development commission income from the industrial sector (Hochschule München (2014)).

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education that meets the needs of the industrial sector, teachers without experience working in the industrial sector 156 cannot become professors. Meanwhile, companies dispatch lecturers to universities of applied sciences and provide practical training to students at their facilities, thereby forming mutually beneficial relationships with the universities. In many cases, students of universities of applied sciences find jobs at local companies due to close relationships between the universities and companies. Such relationships help companies resolve a shortage of engineers, while it greatly benefits local communities by securing local jobs for young people (Figure II-2-1-1-10).

Figure II-2-1-1-10 Potential in employment of German students in a master's degree courses (questionnaire surveys)

Universities and universities of technology contribute to the industrial sector by implementing more advanced design, development and research than universities of applied sciences. Professors of universities and universities of technology come from the industrial sector in many cases. As a result, they can nimbly respond to the needs of the industrial sector and implement efficient transfer of technology.

156 While the period varies from state to state, the minimum period is five years.

Universities of applied sciences

Notes: 1. Figures show the results of the questionnaire survey regarding the accessibility to labor markets

that targeted German students by course in 2009. 2. Figures show the ratios of the students marking answers as “Good” or “Very good” concerning

the assessment of: 1) their employment opportunities in their fields of expertise after graduation and 2) their employment opportunities after graduation. The periods of courses are: three years for master’s degree graduates and five years for undergraduates (traditional courses).

Source: Questionnaire surveys (German Federal Ministry of Education and Research (BMBF)).

Universities (master’s degree)

Universities (traditional courses) Mathematics,

computer science, natural science

Science, engineering

Mathematics, computer science,

natural science

Science, engineering

1. Employment opportunities in their fields of expertise after graduation

2. Employment opportunities soon after graduation

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Figure II-2-1-1-11 Investment amount of industries in R&D by higher education institutions

Their research partnerships with the industrial sector are actively implemented not only with domestic companies but also foreign ones. Meanwhile, the federal government is aggressively promoting inflows of highly skilled personnel from abroad, providing tuition-free education to foreign students as well as German students. According to a survey conducted by the EU, Germany is No. 1 as a research partner for SMEs in the EU.157

157 Ministry of Economy, Trade and Industry (2013)

(%; in GDP)

France

Japan

United K

ingdom

United States

EU

Denm

ark

Spain

Sweden

Austria

Finland

Belgium

China

Netherlands

Germ

any

Switzerland

Notes: Data is plotted based on those in 2013 or the latest year (data in 2012 as for the EU, China, France, Germany, Switzerland and the United States; data in 2011 for Austria, Belgium and Japan).

Source: EuroStat.

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Figure II-2-1-1-12 Proportion of overseas students in major European countries (university level)

(B) System to integrate domestic companies (a) Industrial clusters Industrie 4.0 also aims to improve the productivity of SMEs and integrate supply chains. Regarding the integration of supply chains, distribution of profits between companies and data security continue to be challenges. However, as many SMEs are participating in industrial clusters scattered across Germany, it may be relatively easy to discuss the integration of supply chains and productivity improvement including regarding SMEs. Below, we will examine this point with regard to industrial clusters in Germany. According to the evaluation of cluster projects in the EU,158 the average rating (indicated by the number of stars) is high for German clusters in many business sectors. Specifically, the average rating for German clusters is the highest of the ratings for clusters in five major European countries in 15

158 Clusters regarded as highly effective in knowledge spillovers. Regarding knowledge spillovers, a cluster is assigned one “Star” for satisfying the requirements of each of the following three elements: size (the cluster is in the top 10% of all clusters within the same cluster category in terms of the number of employees); specialization (the cluster has at least double the proportion of employment in a cluster category in a region over the total employment in the same region); focus (the cluster is among the top 10% of clusters which account for the largest proportion of their region’s total employment. (Source: EU Cluster Observatory (2011))

Finland

Notes: Data shows the proportion of overseas students to all students in the tertiary education (level 5 & 6) course. The number of the students in the field of science and technology is the sum of those in the fields of science, mathematics and computer science. The proportion of the students in the field of science and technology means the proportion of overseas students in the field to those of all overseas students. Figures are based on the data in 2012.

Source: Eurostat. Sw

eden

Germ

any

France

Denm

ark

Switzerland

Portugal

EU

Italy

Norw

ay

United K

ingdom

Spain

Netherlands

Hungary

Poland

Field of science and technology

Proportion of overseas students in the field of science and technology (right axis)

Total

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business sectors, including automobiles, chemicals, IT, electrical equipment and medical equipment (Table II-2-1-1-13).

Table II-2-1-1-13 Comparison of industrial clusters in major European countries

Number of

regions Total number of

rating stars Number of industries whose average number

of rating stars marked the top rating (*) Germany 32 503 15 France 22 187 2 Spain 19 220 7 Italy 20 329 11

United Kingdom 32 219 3 Notes: 1. The number of rating stars shows the results based on the EU Cluster Observatory rating (up to

three stars). Each industrial cluster is registered by region and assessed. 2. *The figures show the number of industries with top rating stars in the major five countries with

respect to the average number of stars of the clusters by industry. Source: EU Cluster Observatory (2011). <German type industrial clusters> In German type industrial clusters, participating companies are expected to virtually acquire competitiveness equal to major companies through cooperation and support provided by third-party organizations, such as research institutions, universities and economic promotion public corporations, to SMEs with respect to functions which are their weak points (Figure II-2-1-1-14).

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Figure II-2-1-1-14 Common types of German industrial clusters

In addition, SMEs try to develop globally competitive products and sell them in the global market by raising their level of all processes to the level of “hidden champions”159 by receiving cooperation and support, particularly for development of new products and opening of international sales channels, which are processes before and after manufacturing (Figure II-2-1-1-15). Development of new products and opening of international sales channels pose a difficult hurdle in terms of human and financial resources, so SMEs can gain significant benefits by obtaining functions that complement their weakness in this respect. Therefore, many companies participate in industrial clusters.

159 Companies that are particularly successful among Mittelstand (SMEs) (Definition: A Mittelstand is a company that fits all of the following three descriptions: (a) being among the global top three or No. 1 in the European continent in a specific field; (b) generating annual sales of less than 5 billion euros; and (c) being not popularly known). (Simon (2009))

Advisory board

Secretariat (Cluster manager)

Various supportive activities for cluster member companies Inspection tours Seminars

*Trends in the latest

technology, etc.

Information-exchange meetings among clusters

*Meetings inside countries and

Europe Workshops Conveying information to

members *Official publications,

newsletters, etc. Social gatherings of members

* Enhancing mutual understanding of members

Lobbying efforts targeting the political activities or the

government *Securing members’ benefits

through, e.g., creating new systems, initiatives for securing employment, support activities to develop human resources,

and other efforts

Activities on which German industrial clusters focus

1) Collaborative development of products with research institutes or

universities

2) Developing sales channels overseas

Efforts of marketing products overseas, which have been

developed through the step 1) above (exhibiting products at

overseas trade fairs)

Challenge-based WG

Challenge-based WG

* In Germany, some WGs for members are held to solve common challenges among the members. Example: Quality control, human-resource development, product design, energy saving, etc.

Source: Excerpts from Iwamoto, K. (2015) “Hitorigachi” no Doitsu kara Nihon no “Chiho/Chushokigyo” he no Shisa - Doitsu Genchi Chosa kara-

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Figure II-2-1-1-15 Mindset for supporting SMEs in Germany

<Cluster competition held by the federal government> The federal government’s cluster policy is providing funds to excellent projects selected through competition. In particular, the Leading-Edge Cluster Competition, which started in 2008, aims to create internationally competitive innovation clusters. The government provides a maximum of 40 million euros160 per project (five years) on condition of the provision of equal or more funds from private companies. Cluster activities eligible for the competition are limited to basic processes before market competition, with development of commercial products to be implemented at the company level. Applicants for the competition are limited to existing clusters. The competition was held three times by 2012, drawing many applicant projects (more than 80 applicants projects in the three competitions), and each time, five clusters were selected as the winners. Many clusters exploit their ingenuity to formulate projects with the aim of winning the competition, resulting in the creation of excellent projects across Germany regardless of whether or not they are selected. <Inter-sector and inter-company networks> Many industrial clusters in Germany are comprised of local governments, research institutions, universities and companies across multiple sectors. Participation not only by companies directly involved in the theme of the cluster but also by various companies involved in the supply chain is expected to create new ideas by incorporating the viewpoints of both users and developers. The

160 Approximately 4.1 billion yen (as of 2012).

Supportive efforts by research institutes,

universities, etc.

Hidden Champion Level

Supportive efforts for facilitating

participation in overseas trade fairs

Developing new products =>

Source: Excerpts from Iwamoto, K. (2015) “Hitorigachi” no Doitsu kara Nihon no “Chiho/Chushokigyo” he no Shisa - Doitsu Genchi Chosa kara-

Manufacturing using craftspersons’ skills

=> Developing overseas sales channels

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proportion of innovation companies in Germany161 is very high.162 As it is said that clustering of people spurs innovation,163 the diversity of personnel involved in industrial clusters in Germany is one of the factors promoting innovation. For example, MAICarbon, which is located in the state of Bayern, can efficiently develop manufacturing technology related to carbon fiber-reinforced plastics, because of the involvement of various sectors, including materials manufacturers and users. In the state of Bayern, there are also various other clusters, including those related to nanotechnology, aerospace, automobiles, biotechnology, chemicals, energy, machinery and ICT. It is said that the strength of companies located in the state of Bayern rests not only in their partnerships with companies from different sectors within clusters but also in their ability to easily contact other sectors and make use of their knowledge because of the close proximity between clusters pursuing different themes. In Germany, there are multiple clusters within a single region in many cases, including the case of the state of Bayern, and this is presumed to be supporting companies’ innovation (Figure II-2-1-1-16).

Figure II-2-1-1-16 Number of German industrial clusters by region

161 Including new and important innovations (process innovations, production innovations and innovations related to sales and organization) for the company (Eurostat). 162 The proportion for Germany is 70% (on an all-company basis excluding the construction industry; as of 2012), compared with the EU average of 51%. 163 Fujita (2005).

Sachsen NRW Baden-Württemberg Hessen Bayern

Stut

tgar

t K

arls

ruhe

Fr

eibu

rg

Tubi

ngen

Obe

rbay

ern

Nie

derb

ayer

n O

berp

falz

O

berf

rank

en

Mitt

elfr

anke

n U

nter

fran

ken

Schw

aben

Ber

lin

Bra

nden

burg

Bre

men

Ham

burg

Dar

mst

adt

Gie

sen

Kas

sel

Mec

klen

burg

-V

orpo

mm

ern

Nie

ders

achs

en

Dus

seld

orf

Kol

n M

unst

er

Det

mol

d A

rnsb

erg

Rhe

inla

nd-P

falz

Che

mni

tz

Dre

sden

Le

ipzi

g

Sach

sen-

Anh

alt

Schl

esw

ig-H

olst

ein

Thür

inge

n Sa

arla

nd

Transportation Communication Manufacturing technology Processed food Electric power Plastics Pharmaceuticals Petroleum gas Metals manufacturing Medical equipment Marine Electricity IT Instruments Heavy machinery Construction materials Construction Chemicals Biotechnology Automobiles Aircraft

Notes: Figures show the number of industrial clusters that have won more than one rating stars under the EU Cluster Observatory. State names are underlined. Figures shows the major industries alone and are based on the data in 2011.

Source: EU Cluster Observatory.

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Regarding activities toward standardization, it is presumed that in clusters comprised of multiple sectors interested in common themes, it is relatively easy to gather information and coordinate interests between companies. Indeed, many clusters are implementing initiatives concerning standardization.164 <Examples of Cluster> Example 1: “it’s OWL” “it’s OWL” is a cluster in the Ostwestfalen-Lippe region in the state of North Rhine-Westphalia (NRW) which is pursuing the theme of model operation of a smart factory, the main theme of Industrie 4.0, and which is said to be one of the most successful clusters in Germany. This cluster is dealing with a broad range of cross-sectoral matters, from basic elements such as sensors to networked systems, including smart grids and smart manufacturing plants. As very few of the 22 companies proactively involved in research and development in this cluster are listed on exchanges, local universities, research institutions and SMEs are conducting joint activities without depending on specific companies.165 In 2012, a facility of Fraunhofer research institute was established at a site close to Ostwestfalen-Lippe University of Applied Sciences, and they are jointly implementing a smart factory-related project. Regarding domestic and international standardization, participating members in the cluster are conducting brisk activities.166 In addition, the cluster provides educational programs for young experts and older engineers in order to ensure continuous supply of professional personnel.167 Example 2: MAICarbon MAICarbon is a cluster in the state of Bayern whose theme is fiber-reinforced materials, such as carbon fiber-reinforced plastics. Its participants, including not only materials makers but also companies in such sectors as automobiles, aircraft, machinery and plant engineering, are conducting research and development intended to reduce manufacturing costs. While MAICarbon is strengthening relationships between members and promoting transfer of technology by establishing a Web-based network, it is seeking to protect the knowhow held within the cluster. It is also conducting activities toward future standardization.168 Example 3: Fuel Cell and Hydrogen Network NRW Fuel Cell and Hydrogen Network NRW is under the umbrella of EnergieRegion.NRW, which is an energy and economic cluster and is comprised of more than 400 members. It is receiving grants totaling around 115 million euros from the state government of NRW and the EU. Members include not only companies developing fuel cell technology but also many user

164 See the footnote in Chapter 2, Section 1, 1(3)(B)(a) (German type industrial cluster). 165 A field survey conducted by the Japan Science and Technology Agency. 166 Federal Ministry of Education and Research, Germany (2015). 167 Website of “it’s Owl.” 168 Federal Ministry of Education and Research, Germany (2015).

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companies, including machine manufacturers and electronics-related firms. Regarding hydrogen technology, Fuel Cell and Hydrogen Network NRW’s activities range from production to storage and supply of hydrogen. While many members are companies and organizations located in the state of NRW, some members have facilities in other German states or outside Germany. In addition to providing member companies with such services as sharing information and searching partners, Fuel Cell and Hydrogen Network NRW is also conducting such activities as inviting new members to the cluster, organizing inspection tours, and public relations. Example 4: A nanotechnology-related cluster in Dresden in the state of Sachsen. In Dresden in the state of Sachsen, there are many nanotechnology-related research institutions and companies. A cluster organized by one such research institution, Fraunhofer-Institute for Material and Beam Technology IWS, aims mainly to enable participating companies to engage in product development without constraints. In this cluster, researchers and corporate engineers are conducting activities based on the idea that building relationships of trust will bring business results. Specifically, the cluster introduces research achievements and up-to-date technology trends to members through workshops and seminars held several times per year and organizes meetings intended to promote mutual understanding between researchers and member companies. There are no staff members who conduct technical sales activities for companies.169 (b) Chambers of commerce and industry, etc. In Germany, all enterprises, excluding handcraftsmen, are legally obligated to join IHK (regional chambers of commerce and industry).170 As a result, IHK equally represent not only major companies with ample financial resources but all companies in relevant regions. At the same time, its political neutrality and independence is ensured. Therefore, representing all enterprises (excluding handcraftsmen) in relevant regions, IHK give advice to regional administrative governments with respect to economic policy. Likewise, Deutscher Industrie- und Handelskammertag (DIHK), which is responsible for supervising IHK, represents the interests of all domestic enterprises (excluding handcraftsmen) vis-à-vis the federal government. In conducting their activities, regional IHK place emphasis on improving the business environment for SMEs. Many opinions submitted by DIHK to the federal government are intended to improve the business environment for SMEs in particular.171 In addition, regarding SMEs, a network linking regional IHK has been organized. In addition to providing favorable program information provided by various organizations and establishing networks

169 A hearing survey conducted by the Ministry of Economy, Trade and Industry. 170 German Federal Ministry of Justice and Consumer Protection, “Gesetz zur vorläufigen Regelung des Rechts der Industrie- und Handelskammern,” revised on July 25, 2013 (http://www.gesetze-im-internet.de/bundesrecht/ihkg/gesamt.pdf). 171 IHK’s work includes (a) representing the interests of member companies; (b) giving advice concerning economic policies to local governments; (c) providing vocational training and education; (d) providing information and consultation service to member companies; and (e) activities to promote exports, including supporting business fairs.

522

between companies, regional IHK, together with regional authorities, represent the interests of SMEs and seek to improve the business environment for SMEs. Not only chambers of commerce and industry but also state governments and regional economic organizations are conducing brisk activities, so we may say that SMEs’ activities are supported by the combined results of activities of various organizations. (C) Infrastructure and policies underlying Industrie 4.0 (summery) In Germany, in order to support SMEs’ innovation, research institutions and higher education institutions place emphasis on transfer of research achievements to the industrial sector. In Germany, exchanges of researchers and professors between academia and industry are leading to a closer relationship between the two worlds, making it possible for research institutions and higher education institutions to constantly absorb information from the industrial sector and implement efficient transfer of technology. Moreover, in German states, there are clusters from various sectors. Participants in some clusters include not only companies from specific sectors but also various supply chain-related companies. The diversity of companies and efforts to strengthen partnerships between companies may be spurring innovation among Germany companies. Meanwhile, industrial clusters extending across different sectors are presumed to have the function of coordinating opinions of companies in different positions. The presence of chambers of commerce and industry, in which all companies in Germany participate, and state governments and regional economic organizations, which are conducting brisk activities, are playing their role in having policies take hold across Germany and collecting and conveying requests from companies as a whole, including SMEs, to the government. Therefore, it is presumed that they are supporting initiatives to bring significant changes to industry and society, such as Industrie 4.0. (Column 9) International standardization Standardization is one of the keys to Industrie 4.0. In “Recommendations for implementing the strategic initiative Industrie 4.0” (April 2013), standardization is cited as the top of the eight priority areas and is the only area for which a roadmap has been publicly announced172 (as of January 2015). The subject of standardization is a factory automation platform that integrates design, development, production and maintenance through IT. If specifications concerning such a platform are standardized by a standardization organization and become popular in Germany, the cost competitiveness of domestic companies is expected to improve due to a rise in their productivity. Furthermore, if this becomes an international standard, it may give a push to the international expansion of German companies. Meanwhile, German companies are said to have traditionally been good at standardization in general, not only with respect to the standardization concerning Industrie 4.0. Here, we will look at the

172 “German Standardization Roadmap Industrie 4.0.” Announced by the Association for Electrical, Electronic & Information Technologies (VDE) (November 2013) (JETRO (2014)).

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system that supports German companies’ standardization activity. 1. Standardization at the domestic level Standardization at the domestic level is implemented by the German Institute for Standardization (DIN) based on a partnership contract with the federal government. Under the Presidial Board and the Presidial Committee, there are more than 70 Standards Committees.173 Technical committees (around 3,400 committees) are responsible for developing specifications. Development of specifications is implemented by outside experts with support from the staff of DIN (support for such work as conducting monitoring to make sure that the interests of all stakeholders are taken into consideration, that the specifications are in compliance with anti-cartel laws and that the circumstances of technology are reflected by the specifications, and submitting documents).174 DIN also attaches importance to promoting innovation through standardization. In recent years, the DIN SPEC and DIN Specification formats, which are simpler specifications with increased emphasis on speed and flexibility, have been introduced. In 2013, around 200 specifications were developed under these two formats and they are used mainly for the purpose of transfer of technology by research and development consortiums.175 DIN places emphasis not only on domestic standardization activity but also on the development of regional and international standards, so it is functioning as a German domestic platform as opposed to regional and international standardization organizations. Externally, DIN represents the German interests at European standardization organizations, including the European Committee for Electrotechnical Standardization (CEN), the European Committee for Electrotechnical Standardization (CENELEC) and the European Telecommunications Standards Institute (ETSI), and international standardization organizations, including the International Organization for Standardization (ISO), the International Electrotechnical Commission (IEC) and the International Telecommunication Union (ITU). DIN supports international standardization of specifications proposed by Germany by proactively undertaking secretariat work at CEN and ISO and by dispatching personnel with professional skills to those organizations.176 Moreover, DIN owns offices in Germany’s major trading partner countries, such as China, the United States, Russia, India and Indonesia, and uses them as contact points concerning standardization in order to strengthen relationships with the countries.177

173 The German Commission for Electrical, Electronic & Information Technologies of DIN and VDE (DKE), which is one of DIN’s Standards Committees, was significantly involved in the formulation of the “German Standardization Roadmap Industrie 4.0”. 174 Website of DIN Standards Committee Technology of Materials (NWT) (http://www.nwt.din.de/sixcms_upload/media/2515/DIN_Brosch%20NWT_NdrmAe_4.pdf) and the Standard Certification Unit, Ministry of Economy, Trade and Industry (2010) Guide on Practical Affairs of Standardization (pilot version). 175 DIN (2015). 176 As for working secretariats, DIN undertakes 28% of CEN’s secretarial work (2012; website of DIN) and 18% of ISO’s such work (2013; website of ISO). 177 As of January 2015 (website of DIN).

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2. Standardization at the international level In international standardization activity, domestic-level organizations (DIN/DKE (Association for Electrical, Electronic & Information Technologies)), EU-level ones (CEN/CENELEC) and international ones (ISO/IEC) cooperate with each other. When domestic standardization work on a specification has progressed in Germany, the specification is proposed to a EU-level organization (CEN/CENELEC), or international-level organization (ISO/IEC) before being approved as a domestic standard. At the EU level, in order to avoid duplication of international standardization work and reduce the necessary time, partnership agreements have been concluded with international standardization organizations, namely ISO and IEC.178 Based on the agreements, standardization proposals presented by CEN/CENELEC become joint proposals with ISO/IEC, resulting in efficient implementation of EU-level and international-level standardization work, such as parallel approval by CEN and ISO and a shift from a CENELEC standard (proposal) to an IEC standard. 3. Global reach of German certification organizations The presence of German-based certification organizations with global reach supports German companies. German certification organizations own offices in many countries and earn large revenue, with the combined revenue of three TÜVs (certification organizations) equaling revenue of SGS of Switzerland, the largest certification organization in the world. If revenue of DEKRA is included, the German organizations’ combined revenue far surpasses SGS’s revenue (Column Figure 9-1). TÜVs also advanced into China from early on, and it is said that their global presence is large, earning a high level of trust in the energy and environmental markets in particular.

178 CEN concluded a Vienna agreement (1991) with ISO, while CENELEC concluded a Dresden agreement (1996) with IEC.

525

Column Figure 9-1 Comparison of international standardization organizations

When a third-party evaluation is necessary, the disclosure of technical information of products before market launch may be required in some cases. In addition, when international evaluation is conducted, the time and cost of transportation also arises. The presence of globally acknowledged domestic evaluation organizations is supporting the international expansion of German companies by avoiding the risk of information leaks and by reducing the burden on domestic companies. 4. Summary German companies can implement standardization of their specifications relatively quickly as a result of support from relevant organizations. In addition, they can obtain the certification of an international standard relatively easily from German certification organizations with offices around the world. It is well known that medium-sized German companies attach particular importance to their own brands and that their branding is a means to guarantee quality when they expand internationally. At the same time, the efficient system concerning standardization is also supporting the international expansion of German companies.

JET (Japan) [250]

JQA (Japan) [914]

Underwriters Lab (US) [10,715]

TUV-Sud (Germany) [20,190]

DEKRA (Germany) [32,591]

TUV-Rheinland (Germany) [17,947]

TUV-Nord (Germany) [9,925]

NK (Japan) [1,571]

DNV (Norway) [16,107]

Intertek (UK) [36,000]

Bureau Veritas (France) [61,600]

SGS (Switzerland)

[83,515]

(Number of countries of business locations)

526

2. United States Amid the slowdown of the global economic growth, companies which have established a dominant position worldwide by creating a new business model based on innovation have emerged in the United States, leading the steady growth of the U.S. economy. In particular, innovative technologies emerging in the information technology (IT) industry, such as the Internet of Things (IoT) and artificial intelligence, has caused a shift in added value from products to services, thereby changing the competitive situation and the global industrial structure. In an environment where a smooth cycle of abundant funds tolerates active risk-taking, U.S. companies have developed business models based on such innovative technologies from early on and are conducting activities to gain a competitive advantage. U.S. companies have gained a leading position in an ecosystem that extends beyond existing industries and have continued to grow while enjoying high profitability against the backdrop of the U.S. government’s policy of securing innovation infrastructure. As innovation infrastructure that cannot be easily transferred, the clustering of such U.S. companies is strengthening the United States’ locational competitiveness globally. Below, we will look at the current situation of the U.S. economy that is led by advanced U.S. companies, a paradigm shift starting with innovations created by the growing U.S. IT industry, and the U.S. policy infrastructure that promotes accumulation of innovations by supporting base technologies of private companies. (1) Current situation of and changes in the U.S. economy The U.S. economy has maintained steady economic growth of around 2% since 2010, and in 2014, it grew at a moderate pace of 2.4% compared with the previous year. A breakdown of real GDP growth by expenditure shows that personal consumption179 has been increasing and capital investment has also been growing steadily. Recently, the U.S. economy has been slowing down as a trend due to temporary effects of unseasonal weather in the winter and changes in the market environment, such as the strong dollar and a fall in crude oil prices. According to the economic outlook published in April 2015 by the IMF, the forecast of growth was revised downward compared with the previous forecast (growth of 3.6% in 2015 and 3.3% in 2016; published in January 2015), and yet the U.S. economy is projected to maintain steady growth of 3.1% in each of 2015 and 2016 (Figure II-2-1-2-1).

179 Personal consumption accounts for around two-thirds of U.S. GDP.

527

Figure II-2-1-2-1 Changes in real GDP growth rates and degree of contribution by expenditure

Regarding shares of nominal GDP by industry, industries that have until now supported the U.S. economy account for most of nominal U.S. GDP. Among such industries are services industries, including financial services (a share of 20.2%), wholesale and retail trade (11.8%) and professional businesses (11.8%), and manufacturing industries (12.1%), in which the trend of reshoring is attracting attention. On the other hand, the share of the information and communication technology (ICT)180 sector (5.7%) in nominal GDP is still relatively small at the moment (Figure II-2-1-2-2).

180 As a reference GDP classification of the U.S. Department of Commerce, this classification represents the integration of computers and electronics equipment from the manufacturing sector, publishing (including software) and information and data processing services from the information sector, and computer system design and related services from the professional business sector.

<Year-on-year basis> (Change over previous period and annual rate; %; % points)

<Quarter-on-quarter basis>

(Year, quarter)

Personal consumption Capital investment Housing investment Inventory investment Net exports Governmental expenditure Real GDP

Notes: Figures are seasonally adjusted. Real GDP values (*) in 2015 and 2016 are IMF estimates. Source: U.S. Department of Commerce, World Economic Outlook April 2015 (IMF), CEIC

database.

528

Figure II-2-1-2-2 Shares of nominal GDP by industry (2013)

As for GDP growth by industry, the growth of the ICT sector expressed as an index with a base of 100 in 2006 is comparable to the growth of the mining industry, which has been driven by technological innovation related to shale gas and oil. Meanwhile, the growth of services industries, including financial services, wholesale and retail trade and professional businesses, and manufacturing industries, has been similar or lower than the growth of overall GDP. From this, we can see that ICT-related industries, together with the mining industry, have been driving the growth of the U.S. economy (Figure II-2-1-2-3).

Min

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Educ

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serv

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, ea

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and

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ICT

Notes: As for ICT (Information-Communications-Technology-producing industries), as a reference GDP classification of the U.S. Department of Commerce, this classification represents the integration of computers and electronics equipment from the manufacturing sector, publishing (including software) and information and data processing services from the information sector, and computer system design and related services from the professional business sector.

Source: U.S. Department of Commerce (BEA).

529

Figure II-2-1-2-3 Changes in real GDP by industry

When we look at the industrial production index from the viewpoint of the growth of the goods producing industries, we can see that in January 2010, ICT-related industries, including computers and electronics products, regained the level of 2007, before the global economic crisis, ahead of other industries, recording growth much stronger than the growth of the mining industry, which was driven by the effects of shale gas and oil. Subsequently, in July 2014, manufacturing industries as a whole also regained the level of 2007 (Figure II-2-1-2-4).

Real GDP

Notes: As for ICT (Information-Communications-Technology-producing industries), as a reference GDP classification of the U.S. Department of Commerce, this classification represents the integration of computers and electronics equipment from the manufacturing sector, publishing (including software) and information and data processing services from the information sector, and computer system design and related services from the professional business sector.

Source: U.S. Department of Commerce (BEA), CEIC database.

Mining

Manufacturing

Wholesale, retail trades Information

Financial services Professional business Education, healthcare ICT

530

Figure II-2-1-2-4 Changes in industrial production indexes by industry

The number of employees (nonfarm) has continued to steadily grow amid the robust U.S. economic growth, regaining the level of 2007 in 2014. By industry, the share of the manufacturing sector has stayed almost flat since 2009, and no growth was observed in the share of the ICT sector181 as well (Figure II-2-1-2-5).

181 Compiled in accordance with a reference GDP classification of the U.S. Department of Commerce. The same applies hereinafter.

Total (100)

Notes: Figures in a parenthesis in the legend represent the proportion of the total value (average in 2014).

Source: FRB, CEIC database.

Manufacturing industry (73.0) Automobiles, automobile parts (4.6) Aircraft, etc. (4.6) Computers, electronics products (5.8) Chemicals (11.4) Mining (17.5)

(Month, year)

531

Figure II-2-1-2-5 Changes in the number of nonfarm employees and shares by industry

The number of employees (nonfarm) has been continuously increasing in services industries, including education and health, and professional businesses. In recent years, the number of employees in the resources and mining sector has registered remarkable growth due to increased development of shale oil and gas. Regarding ICT, the number of employees in the ICT sector has been growing almost in line with the increase in the overall number of employees except during the IT bubble period. In recent years, the growth in the ICT sector has been slightly higher than the overall growth. On the other hand, the number of employees in the manufacturing sector has not yet regained its previous level although it has been recovering since the collapse of Lehman Brothers (Figure II-2-1-2-6).

Number of nonfarm employees (right axis)

Notes: The number of nonfarm employees shows the annual total. Shares of the employees by industry are based on the annual average of the employees by month.

Notes: As for ICT, as a reference GDP classification of the U.S. Department of Commerce, this classification represents the integration of computers and electronics equipment from the manufacturing sector, publishing (including software) and information and data processing services from the information sector, and computer system design and related services from the professional business sector.

Source: U.S. Department of Labor, CEIC database.

Resources (share) (left axis) Manufacturing (share) (left axis) Wholesale trade, retail trade (share) (left axis) Information (share) (left axis) Financial services (share) (left axis) Professional business (share) (left axis) Education, healthcare (share) (left axis) ICT (share) (left axis)

(100 million people)

(Year)

532

Figure II-2-1-2-6 Changes in the number of nonfarm employees by industry

Next, we will look at the trends in growth and profitability in terms of consolidated sales and the operating income margin. In the United States, industries that have traditionally supported employment and the economy, such as automobiles, show low growth and low profitability. On the other hand, ICT-related industries, such as software and IT services, show high growth and high profitability. Other related industries, such as personal computers and other hardware, are also recording high growth, indicating that companies in these sectors are continuing to grow by conducting activities with high profitability. Meanwhile, in Japan, industries in general, except for communication services, have low profitability (Figure II-2-1-2-7).

Total

Notes: The number of employees shows annual total in the nonfarm sectors. Notes: As for ICT, as a reference GDP classification of the U.S. Department of Commerce, this

classification represents the integration of computers and electronics equipment from the manufacturing sector, publishing (including software) and information and data processing services from the information sector, and computer system design and related services from the professional business sector.

Source: U.S. Department of Labor, CEIC database.

(Year)

Resources

Manufacturing

Wholesale trade, retail trade Information

Financial services

Professional business Education, healthcare ICT

533

Figure II-2-1-2-7 Operating income margin by industry United States

Average sales operating

income margin (%)

Materials

Consumer goods

Consumer goods (automobiles)

Commodities

Energy

Financial services

Healthcare

Industrials

Technology (software, IT services)

Technology (hardware)

Communication services

Public benefit

Average annual sales growth rates (%) Notes: 1. Data is plotted based on the sales and operating income of companies with respect to those

available for eight consecutive years after 2014 as the latest fiscal year (as of mid-April in 2015: 3,318 companies).

2. Average sales operating income margin is the calculation result of the total achievements for the recent eight years. Average annual sales growth rates represent the growth rates for the past eight years. The size of a bubble represents the sales in the latest fiscal year. Consumer goods include automobiles.

Source: EIKON (Thomson Reuters).

534

Japan

One factor behind U.S. companies’ high profitability is the fact that with respect to IT-related hardware such as semiconductors in particular, they have concentrated business resources in high-profitability activities, such as product design and development and after-sale services, while outsourcing low-profitability operations to foreign companies by using electronics manufacturing service (EMS), which refers to manufacturing products on commission182,183,184. As shown above, in the United States, sectors where revolutionary technological progress has been made or where innovations have occurred, such as shale gas and oil development and the IT industry, are leading the economy. In particular, the growth and profitability of IT companies are high, suggesting that the development of successful business models in this industry and high profitability of the models make it possible to continuously create innovations by making pioneering investments.

182 Another factor is that as was confirmed in the 2014 White Paper on Economy, Trade and Industry, compiled by the Ministry of Economy, Trade and Industry (2014), U.S. multinationals expanded into foreign countries in a strategic manner in accordance with the characteristics of the countries, such as intensive investments in manufacturing in China and in professional technical services in India. 183 An analysis found that when overseas manufacturing-sector jobs and sales at U.S. multinationals increase, research and development investments also increase (Moran & Oldenski (2014)). 184 From the perspective of the impact of manufacturing processes on innovation, Pisano & Shih (2012) mentioned the possibility that risks are involved in separating production bases from research and development centers. They argued that it is rational to outsource the manufacturing of general-purpose semiconductors because the manufacturing processes are highly mature, reducing the significance of closely relating product design and manufacturing.

Average sales operating

income margin (%)

Average annual sales growth rates (%) Notes: 1. Data shows those aggregated based on the sales and operating income of companies with respect

to those available in eight consecutive years after 2014 as the latest fiscal year (as of mid-April in 2015: 3,274 companies).

2. Average sales operating income margin is the calculation result of the total achievements in the recent eight years. Average annual growth rates of sales represent the growth rates in the past eight years. The size of a bubble represents the sales in the recent fiscal years. Consumer goods include automobiles.

Source: EIKON (Thomson Reuters).

Technology (hardware)

Technology (software, IT

services)

Industrials Consumer goods

(automobiles) Financial services Energy

Consumer goods

Public benefit

Healthcare

Communication services

Commodities Materials

535

Below, we will look at innovations which have been created by the growing IT industry and which change the industrial structure, activities of advanced U.S. companies which continue to evolve innovations into highly profitable platforms and their clustering. (2) Paradigm shift occurring in the United States The IT industry, which is leading the U.S. economy, has spread globally in recent years, and it is said to be bringing about an irreversible economic and social change (paradigm shift)185. In particular, U.S. companies which, from early on, made use of innovations brought by the growth of big data-related revolutionary technologies, such as the Internet of Things (IoT) and artificial intelligence, have established a competitive advantage, and this is seen to be changing the global industrial structure. Furthermore, market dominance and high profitability enabled by the distinctive effects of data platforms are further increasing the clustering of innovation industries in the United States, enhancing the country’s locational competitiveness. Below, we will look at structural changes due to IT-related revolutionary innovations, activities of U.S. companies which are developing an ecosystem based on a new platform and the accumulation effect caused by such U.S. companies. (A) Structural changes due to the advance of CPS (Cyber Physical System) It is said that the Internet, which has rapidly spread since the latter half of the 1990s, has linked supply chains, which were previously scattered across the world, globally and in real time, thereby driving productivity improvement and growth. Now, the functions and performance of products have improved remarkably, as digital data collected through the connection of everything through networks due to the spread of IoT186 undergo advanced analysis enabled by the evolution of big data analysis techniques and artificial intelligence. As a result, it has been pointed out that the value of products has shifted from the products per se to services brought by their functions and performance, resulting in significant changes in the global competitive environment. A cycle of digitizing real information in manufacturing processes using IoT, creating intelligence through the analysis of the data and feeding it back into the real world is called the cyber-physical system (CPS). This fusion of the real and cyber worlds is expanding in all industrial fields, and this is expected to lead to a significant change in the industrial structure (Figure II-2-1-2-8).

185 The Ministry of International Affairs and Communications (2014) “2014 White Paper: Information and Communications in Japan.” 186 The global market for IoT is expected to grow from 1.3 trillion dollars in 2013 to 3.04 trillion dollars in 2020 (IDC Press Release (November 7, 2014)) (http://www.idc.com/getdoc.jsp?containerId=prUS25237214). Meanwhile, economic value to be created by IoE (Internet of Everything) (not only products but also all other items, including public facilities and services, are covered) is estimated to total 19 trillion dollars between 2013 and 2022 (Cisco Systems G.K. White Paper (2013)).

536

Figure II-2-1-2-8 Data-Driven Society in which the CPS changes the whole society

“How Smart, Connected Products Are Transforming Competition” (Porter & Heppelmann (2015)), an article carried by Harvard Business Review, analyzes the impact of the advance of IoT on product value chains and changes in the competitive environment as follows. (a) Impact on the value chain that creates the value of products According to this article, smart, connected products187 make it possible to optimize various activities that constitute the value chain. The article also points out that in the process of

187 In the article, connected products are defined as products comprised of (a) physical components (mechanical and electrical parts), (b) smart components (sensors, software, etc.) and (c) connectivity (ports, antennae and protocols enabling connections with the Internet) and equipped with new functions such as monitoring, control, optimization and autonomy.

Data-driven Society through CPS (Cyber Physical System)

Society where CPS is implemented throughout social activities and significant value is created

Manufacturing process Mobility Smart house Medical/

Healthcare Infrastructure

Interaction between real world & cyber space

Cyber Physical System

Data collection

real digital

Accumulation & analysis of

data digital

intelligence

Affecting (control/ service)

intelligence real

Camera

Sensor on vehicle

Smart phone

Home electronics

Smart meter Vital sensor Monitoring

sensor

IoT: Digitalization & networking of things expands rapidly

Model

Database

Model

Database

Model

Database

Model

Database

Model

Database

Analyzing big data: Highly-developed judgement & autonomous control through the evolution of AI

Utilizing data in real time & cross industries

- Customer- made products without decrease of productivity

- Linkage of supply-chain reducing inventory stock

By utilizing automatic transportation systems - Reduction

of traffic accidents and traffic jams

- New type of mobility that changes travel time to free time

- Inexpensive & stable energy supply

- New service creation spurring the electricity retail market

- Extending health expectancy through preventive medical care

- Customer- made individually-focused medical service

- Providing new service through optimizing operational efficiency

- Strong natural disaster prevention base through linkage of infrastructures

537

manufacturing such products, changes, such as the reform of the process of providing services necessary for new design, marketing and preventative maintenance, occur and that new operational activities will become necessary, including analyzing product data and ensuring data security. Figure II-2-1-2-9 shows examples of change in corporate activities to create product value and value activities that will be caused by the spread of IoT. Such changes in the value chain are presumed to affect strategic decisions intended to gain a competitive advantage.

Figure II-2-1-2-9 Examples of changes in the value chain

(b) Changes in the competitive environment and the industrial structure due to the advance of IoT The article also points out that as a result of the spread of smart, connected products, competitive factors that determine the competitive situation change (Figure II-2-1-2-10). The article argues that competition will intensify due to the opening up of numerous avenues for differentiation and value-added services and that the area of competition will expand in response to a broad range of needs, resulting in a shift in the basis of competition from the functionality of a discrete product to the performance of the broader product system. The article points out the possibility that as a result,

Occurrence of necessity of security management Protecting data among

products, preventing unauthorized use of products, securing safety in mutual connection with other systems

Source: Compiled by METI based on: Porter and Heppelmann (2015), How Smart Connected Products Are Transforming Competition, and Porter (1985), Competitive Advantage.

Changes in product design Introducing new design

principles that operate smart products with connecting functions

Specialties to integrate hardware and software and coordinate the development speed between them

Changes in marketing Presenting effective product

value through analysis of product use data

Maximizing value through user-based customization of the combination of products and services

Changes in services Innovating the organizations

/processes capable of providing preventive maintenance

Developing software for repairing and upgrading so as to enhance service productivity

Facilitating feedback about product use that contributes to product design to minimize defects

General management (infrastructures)

Personnel/labor management

Technology development

Procurement activities Supp

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Major activities

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Margin

Impact of IoT

Impa

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important new entrants who regard consolidation and systems as a source of competitive advantage will emerge.

Figure II-2-1-2-10 Competitive factors that determine the competitive situation in industries

(B) U.S. companies which evolve business models As was mentioned earlier, the world faces changes in the industrial structure due to CPS. As a

Threat of new entrants

Nature and severeness of

competition among the existing enterprises

Negotiation capability of

suppliers

Negotiation capability of

buyers

Threat of alternative goods

and services

Changes in threat of new entrants Enhanced fixed costs required for IT

infrastructures, broadened scopes of product definitions, and advantages of first movers using accumulated data, all of which heighten entry barriers Development of products that exceed

the advantages of the existing enterprises or products generates the entry of enterprises from new fields

Changes in competition among the existing enterprises Intensified competition among the

enterprises due to new ways of providing added value, e.g., differentiated services by customization and enhanced services Recovering fixed costs of introduced IT

infrastructures, which causes a decrease in enterprises’ ability to resist price-cut pressure Incorporating products to systems, which

causes intensified competition among enterprises that have not been competitors in the past

Changes in competitiveness of suppliers Increased value of software relative to

those of physical items, resulting in a decrease in the competitiveness of products suppliers Emergence of new technology-related

suppliers, potential influential business that may expand, reflecting their opportunities of connecting to end users obtaining product use data

Changes in negotiation capability of buyers Accumulating product-use data, which

raises buyers’ product-switching cost Enhancing buyers’ understanding of

product functions, which promotes competition with other enterprises and enhances negotiation capability of buyers Product-servitization models, which

reduces switching cost relatively to those for product possessing

Changes in alternative products and services Reducing the threat of alternative products by

customization of products based on accumulated data Emergence of alternative products

incorporating the functions of the existing products Shifting to alternative modes (leasing, sharing,

etc.) to product possessing

Source: Compiled by METI based on: Porter and Heppelmann (2015), How Smart Connected Products Are Transforming Competition.

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result of the spread of the Internet in the 1990s and of mobile appliances in the first half of the 2000s, social changes such as the spread of IT, which previously constituted core systems, among individual persons, occurred, and companies were required to deal with the changes. In particular, the United States, which has IT innovation clusters as represented by Silicon Valley, has been leading IT-related businesses in the global market. According to the 2014 version of White Paper: Information and Communications in Japan, U.S. companies have the majority share in the total market capitalization of information and communications-related companies ranked in FT500188, indicating the strength of U.S. companies in this field (Figure II-2-1-2-11). It has been pointed out that U.S. IT-related companies may gain leadership in various fields outside existing industries by developing platforms189 that accumulate and utilize data through early adoption of revolutionary technologies in the IT field and by creating an ecosystem that includes various industries with the platforms as the foundation. Furthermore, in recent years, this trend is expanding from the IT industry itself into IT user industries, including manufacturing industries. Below, we will look at two business models whereby U.S. companies seek to establish a competitive advantage amid the significant change in the industrial structure due to the evolution of CPS.

188 Financial Times Global 500: Annual rankings of the top 500 companies in terms of market capitalization published by the Financial Times of the United Kingdom 189 This is a business model that increases users through price reduction by controlling the core common functions of a certain value chain based on unrivalled ability to differentiate in terms of quality and quantity and by promoting competition between business operations in other fields (Center for Research and Development Strategy, Japan Science and Technology Agency (2014a)).

540

Figure II-2-1-2-11 Total market capitalization of ICT industries ranked in the FT Global 500 (companies by country)

2,929,335 3,222,205

209,087 233,221 249,620 239,829 370,433 339,976

1,640,483 1,589,028

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

2007 2013

OthersJapanGermanyUnited KingdomUnited States

Source: White Paper 2014: Information and Communications in Japan (MIC).

Total market capitalization (million dollars)

-3.1%

-8.2%-3.9%11.5%

10.0%

(a) Business models growing by enhancing added value of products According to a report published by Accenture in January 2015 (”The Growth Game-Changer”), using IoT for industrial use will lead to high growth190. The report points out that the United States has generally high levels of elements necessary for spreading new technologies throughout the economy and society and has the potential to achieve the highest growth (Table II-2-1-2-12) (Figure II-2-1-2-13). Table II-2-1-2-12 Elements necessary for spreading new technologies throughout the economy

and society Elements Outline Ranking

Business environment

Healthy business environments, such as labor forces with higher educational backgrounds, reliable financial systems, secured distribution systems, and policies and laws to support such systems, as well as dissemination of communication and Internet technologies to assist the coordination of the elements

1. Finland 2. Sweden 3. Netherlands (11. United States)

190 In the period through 2030, IoT is estimated to increase the cumulative real GDP of 20 countries, including Japan, the United States and major EU countries, by 10.6 trillion dollars (growth of 1.0%). Moreover, if investments are increased through additional measures to spread IoT, the cumulative value is estimated to increase by 14.2 trillion dollars. In the United States, the cumulative value of real GDP is expected to increase by 6.1 trillion dollars in the period through 2030, while it is estimated to expand by 13.2 trillion dollars if additional measures are implemented.

Source: Ministry of Internal Affairs and Communication, White Paper 2014: Information and Communications in Japan .

541

Elements Outline Ranking

Commercialization and dissemination

of new technologies

Presence of elements that bolster commercialization and dissemination of advanced technologies: elements concerning the supply side, such as leading enterprises, human resources in the STEM field, and the government investment in R&D, and those concerning the demand side, such as urbanization and demand from the middle class

1. United States 2. Norway 3. Germany

Potential of spreading new technologies

Presence of organizations and social structures that could spread new technologies throughout the economy; presence of consumers who could accept such organizations and structures

1. Denmark 2. United States 3. Norway

Emergence of innovation

Elements with potential for innovation that can serve as a trigger for synergistic effects of new technologies in different fields, such as corporate cultures, R&D through industry-academia collaboration, and technology clusters

1. Switzerland 2. United States 3. Japan

Source: Data compiled by METI based on its Japanese translation of The Growth Game-Changer (2015) (Accenture).

Table II-2-1-2-13 Ranking of countries by elements for realizing IoT (indexes)

As shown above, businesses using IoT, which is likely to be increasingly used in the United States and which is seen to have high market potential, are becoming more and more vigorous in various business fields. In particular, in manufacturing industries, where the advance of IoT is expected to have the largest impact by changing the industrial structure through a shift of value from physical products to software, companies are conducting businesses fusing manufacturing and information and communications technologies, including preventative maintenance and provision of data analysis

Uni

ted

Stat

es

Switz

erla

nd

Finl

and

Swed

en

Nor

way

Net

herla

nds

Den

mar

k

Uni

ted

Kin

gdom

Japa

n

Ger

man

y

Aus

tralia

RO

K

Can

ada

Chi

na

Fran

ce

Spai

n

Bra

zil

Italy

Indi

a

Rus

sia

Source: Data compiled by METI based on its Japanese translation of The Growth Game-Changer (2015) (Accenture).

542

applications for industrial equipment, by quickly seizing the change in the competitive environment191. In March 2014, the Industrial Internet Consortium (IIC) was established in the United States, with five major companies in various industrial fields, including manufacturing, communications and IT, as its core. IIC is an organization responsible for providing an IoT-related test environment and promoting involvement in the process of formulating global standards. More than 100 members (157 members as of April 2015), including companies, researchers and public organizations from Japan and other countries, are participating in the consortium. According to a press release published by IIC192, the consortium is characterized as an ecosystem to promote the adoption of industrial Internet applications, which form a foundational element for accelerating IoT. To create the ecosystem, companies from different sectors, including manufacturing, communications and IT, are working together, and this indicates that competition is starting under a new industrial structure that extends beyond existing businesses and regions. (b) Business models that enhance competitive advantage through control of data Against the backdrop of the competitive environment where competitive advantage is influenced by the use of voluminous and complex data obtained through the spread of mobile equipment and cloud services, revolutionary analysis technologies, including artificial intelligence (AI), are under development. According to a report published by McKinsey (2013)193, AI-based automation of knowledge work, together with IoT, is cited as one of the “disruptive technologies” that produces an economic impact. The impact in 2025 is estimated at 5.2 to 6.7 trillion dollars (Figure II-2-1-2-14).

191 Ministry of Economy, Trade and Industry, Ministry of Health, Labour and Welfare, Ministry of Education, Culture, Sports, Science and Technology (2015) “2015 White Paper on Manufacturing Industries (Monodzukuri).” 192 http://www.iiconsortium.org/press-room/03-27-14.htm 193 McKinsey Global Institute (2013).

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Figure II-2-1-2-14 Potential impact of advanced technology on economy (annual; 2025)

AI is software that reproduces functions similar to human thinking194. Various AI technologies are being developed depending on the objective and method195. In particular, deep learning, which derives from machine learning, is an autonomous technology which acquires knowledge through automated learning using abstraction and identification of patterns based on teaching data, and the use of big data is expected to further advance AI. Therefore, persons who provide analysis technologies used for quick and accurate decision making concerning value creation by making use of AI technology that is advanced through automated learning are expected to further increase their competition domination in a broad range of industrial sectors. The United States is ahead of other countries in investments in and research and development on AI technologies which may cause market domination in fields outside existing industries196, and AI is already starting to be used for business applications as a base technology in various fields197 (Table

194 KDDI Research Institute (2014). 195 Including “machine learning,” which refers to a computer learning based on various information as humans do and analyzing trends, etc.; “natural language processing,” which refers to understanding texts used by humans (natural language); and image analysis, which refers to analyzing the meaning of images. 196 According to a recent list of AI venture companies compiled by a Bloomberg analyst, most core technologies are owned by U.S. companies. U.S. AI venture companies are also conducting activities in various fields (Yutaka Matsuo (2015) Jinko Chino wa Ningen wo Koeruka (Will AI Surpass Humans?), Bloomberg Press Announcements (December 11, 2014), (http://www.bloomberg.com/company/2014-12-11/current-state-machine-intelligence/)). 197 While the advance of AI technology brings merits such as making it easy to conduct analysis concerning solutions to difficult challenges, problems have been pointed out, including the possibility that human workers will be replaced by machines and risks that may arise when a certain organization monopolizes AI technology it has developed while refusing to disclose technical information to the outside.

Lower estimates

Source: Data compiled by METI based on its Japanese translation of: McKinsey Global Institute (2013), Disruptive Technologies: Advances that will Transform Life, Business, and the Global Economy.

Higher estimates

Mobile Internet

Automatization of knowledge work

IoT

Cloud computing technology

Advanced robots

3.7-10.8 trillion dollars

5.2-6.7 trillion dollars

2.7-6.2 trillion dollars

1.7-6.2 trillion dollars

1.7-4.5 trillion dollars

544

II-2-1-2-15). Table II-2-1-2-15 Business and activities leading to new business of companies in the field of AI

technologies in the United States Outline

Audio response systems built in mobile terminals and other devices Automatic image analysis functions on social media Home appliances and systems with autonomous control functions, e.g., for housework Real-time translation services Inventory management in the distribution sector Offering possible solutions based on the results of big data analysis using Q and A systems in natural language processing in a variety of fields, e.g., for medical decisions in the medical field and investment decisions in the financial field Autonomous vehicles with artificial intelligence (AI) as a core technology to analyze sensor information and determine the safety of driving courses Proactive acquisition of ventures in the fields of AI Source: KDDI Research Institute (2014), ICT Sentan Gijutsu ni kansuru Chosa Kenkyu Houkokusho,

and others. (c) Accumulation effect that causes market domination through digitization As shown above, the advance of CPS has enabled collection, storage and analysis of data in various sectors, including manufacturing, and as a result of the feedback of data into the real world, a shift of added value from physical products to services is occurring. In this environment, digital data is a source of added value. As the volume of digital data increases due to a rise in the number of network participants, entities that own digital data will have a greater competitive advantage. It is said that under a data platform, network externality, which refers to growth in advantage due to an increase in network participants, tends to arise, so accumulation on a specific platform is likely to accelerate as a result of the effect of the economy of scale caused by the accumulation of digital data. The possibility has been pointed out that once accumulation is established, the lock-in effect, which refers to the continuation of accumulation, arises due to the high cost of switching to another platform, resulting in market oligopoly or monopoly by platform operators198. Among U.S. companies maximizing their own profits through such continuous market domination, industries centering on digital data are clustered and are continuing to grow, particularly in Silicon Valley, where IT-related firms are concentrated. It is said that Silicon Valley is continuing to grow as an innovation industry hub because of such elements as a thick labor market, business ecosystems and knowledge transfer199 (accumulation effect). It is presumed that as the whole ecosystem is bound by 198 Presumably, companies operating a platform business have a tendency to secure high profitability by keeping customers captive by exploiting the difficulty of switching to an alternative market once the platform has spread due to such issues as interoperability (Center for Research and Development Strategy, Japan Science and Technology Agency (2014a)). 199 As a factor of a “thick labor market,” Moretti, E. (2013) cites the presence of personnel with required

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the lock-in effect in innovation industrial clusters like Silicon Valley, it is difficult for companies to relocate to other sites200. Due to the accumulation effect that arises from the use of digital data, U.S. IT companies are concentrating their research and development facilities in the United States, which is their home country (Table II-1-2-2-5). Governments of various countries are also cooperating with an incubation facility in Silicon Valley201 to conduct activities to enable their venture companies to grow by making use of the accumulation of innovations in the United States.

Table II-1-2-2-5 Location status of multinationals (information and communication) <Type 2> ii) Information and communication (high technology)

R&D Production

Country Number of bases

Country Number of bases

Total Bases in overseas countries

Bases in home

countries Total Bases in overseas countries

Bases in home

countries United States 44 2 42 China 8 5 3 India 12 3 9 United States 4 1 3 China 10 5 5 Australia 2 2 skills in abundance, particularly engineers in the high tech and other fields that require advanced professional skills. As a factor of a business ecosystem, he cites the presence of providers of legal and other professional services and venture capital companies which not only invest in venture companies but also give guidance and training intended to turn ideas into businesses (geographic proximity is regarded as improving efficiency in terms of giving guidance) and as a factor of knowledge transfer, he points to increased innovation and improved productivity due to proximity between creative personnel. 200 Moretti, E. (2013) (Yasuda (explanations) and Ikemura (translation) (2014) Nenshu wa Sumu Tokoro de Kimaru (The New Geography of Jobs)). 201 Plug and Play Tech Center. This is an incubation organization that provides various support services for growth of technology venture companies in Silicon Valley. Among its partners are governments of more than 20 foreign countries, including Germany (http://www.plugandplaytechcenter.com/).

: R&D bases : Production bases

: R&D bases (bases in home countries) : Production bases (bases in home countries)

(Figures show the number of bases.)

546

Israel 10 10 Mexico 2 2 United Kingdom 7 7 Viet Nam 2 2 Germany 5 5 Canada 4 4 Russia 4 4 Japan 4 4 As shown above, in an environment where digitization is ongoing, U.S. companies have established a structure to accumulate profits through the network externality effect within an ecosystem that includes various industries based on their platforms. As an innovation industry that cannot be easily transferred, the cluster of U.S. companies is presumed to be acting as one of the factors that enhance the United States’ global locational competitiveness. (3) U.S. policy infrastructure that supports private companies’ base technologies As described above, U.S. companies using revolutionary technologies for new business models have gained leadership in businesses in various fields outside existing industries and are changing the global industrial structure itself. Meanwhile, there have been concerns that domestic technological infrastructure that creates U.S. innovations will weaken because of U.S. companies’ activities to improve efficiency at the global level, such as the offshoring trend in manufacturing industries. Amid such concerns, the Obama administration is implementing innovation policy to strengthen new domestic base technologies by enhancing the innovation environment that supports the development of new business models by U.S. companies. (A) Basic principles of the Obama administration’s innovation policy The Obama administration, which was inaugurated in January 2009, has placed emphasis on innovation in order to create quality jobs and achieve sustainable economic development. The basic principles of the Obama administration’s innovation policy are made clear in “A Strategy for American Innovation: Securing Our Economic Growth and Prosperity” (“Strategy for American Innovation”)202 (announced in September 2009 and revised in February 2011). This strategy pointed out that the United States led the global economy with innovation in the 20th century and that innovation is the key to ensuring quality jobs and sustainable growth by departing from the unsustainable bubble-driven economy in the past. The strategy cites three principles – “invest in the building blocks of American innovation,” “promote market-based innovation” and “catalyze breakthroughs for national priorities” (revised version) (Figure II-2-1-2-16) and aims to develop an

202 Jointly announced by the National Economic Council (NEC), the Council of Economic Advisers (CEA) and the Office of Science and Technology Policy (OSTP). The strategy has set the goal of increasing research and development investment (the total of research and development expenditure by the government and the private sector) to 3% as a proportion of GDP and places emphasis on education concerning science, technology, engineering and mathematics (STEM) intended to foster innovators as well as on enhancement of public-private partnership.

Source: Research and Analysis on the Overseas Deployment and Methods for Risk Management of Global Companies (Deloitte Tohmatsu Consulting; a survey commissioned by METI).

547

innovation economy by “investing in the creativity and imagination of our people.” Below, we will look at policies included in the Strategy for American Innovation, particularly support for advanced manufacturing industries that forms the foundation of U.S. companies’ activities to develop new business models, and initiatives in the information and communications sector.

Figure II-2-1-2-16 New Strategy for American Innovation

Source: Data compiled by METI based on: National Economic Council, Council of Economic

Advisers, and Office of Science and Technology Policy (2011), A Strategy for American Innovation: Securing Our Economic Growth and Prosperity, National Diet Library (2011), Toward Establishing a Sustainable Society: Interdisciplinary Research Report.

(a) Support for advanced manufacturing industries that makes up for market failures As mentioned in the 2014 White Paper on Economy, Trade and Industry, manufacturing industries account for 70% of research and development activities conducted in the private sector, so they are seen to have been supporting the U.S. economic growth and employment by spurring innovations. Meanwhile, concerns have grown over the current situation in which U.S. manufacturing industries are

Innovation toward realization of sustainable growth and quality jobs

Catalyzing breakthroughs

for national priorities

Facilitating market-led innovation

Investment in bases of innovation

- Expanding the clean energy revolution

- Promoting biotechnology, nanotechnology and advanced manufacturing industries

- Developing breakthroughs for space applications

- Facilitating breakthroughs in the field of medical technology

- Creating dramatic advance of the technology in the field of education

- Promoting company-oriented innovation through a tax break treatment targeting experimental research expenses

- Facilitating investment in ingenuity through effective policies for intellectual property

- Supporting high-growth and innovation-based business activities - Promoting innovative, open and competitive markets

- Educating the people of the United States in 21st- century technology and creating a world-class labor force

- Strengthening and expanding the U.S. leadership in the fields of basic research - Building cutting-edge physical infrastructures - Building cutting-edge information technology ecosystems

548

losing international competitiveness because of the loss of the manufacturing infrastructure and manufacturing-related research and development infrastructure, not only in simple-work, low-wage sectors but also in the high-tech sector, that has been caused by offshoring and intensifying international competition203 (Figure II-2-1-2-17). Figure II-2-1-2-17 Trade balance of industrial products and advanced technology products in

the United States

203 PCAST: President’s Council of Advisors on Science and Technology (2011).

Notes: All industrial products are those classified in the Standard International Trade Classification (SITC) from 1989 and 1996 and the North American Industry Classification System (NAICS) in and after 1997.

Source: Ensuring American leadership in Advanced Manufacturing 2011 (PCAST), U.S. Department of Commerce, CEIC database.

(Billion dollars)

Advanced technology products

All industrial products

(Year)

549

(Reference) Trade balance of high-tech products by country

In light of this situation, the Strategy for American Innovation (revised version in February 2011) proposed to support technological progress in “advanced manufacturing” as a national priority that could be hampered by market failures despite being important for continuous innovations. Advanced manufacturing is a concept that includes technologies that form the core of the evolving IoT, such as sensing and networking204. Among the policies implemented under the strategy are those intended to support the creation and growth of advanced manufacturing and enhance the international competitiveness of the United States, such as creating a framework of partnership between industry, government and academia (Advanced Manufacturing Partnership (AMP)) with advanced manufacturing that is set apart from conventional manufacturing as its core, allocating budget funds to cross-sectoral advanced technologies, such as advanced sensing, additive manufacturing and industrial robotics, and establishing regional bases for partnership between industry, government and academia that cultivate ecosystems of advanced technologies.

204 According to a report issued by PCAST, advanced manufacturing includes activities that (a) depend on the use and coordination of information, automation, computation, software, sensing and networking and/or (b) make use of cutting edge materials and emerging capabilities enabled by the physical and biological sciences (nanotechnology, chemistry and biology). It also includes new products and manufacturing processes.

United States Germany

China Japan

Notes: A category of high-technology products include aircraft, communications/semiconductors, computer/office machinery, science equipment/measuring devices and medical instruments. The category is defined in the Science and Engineering Indicators 2014, U.S. National Science Foundation. The sum of the figures above is not equal to the total values shown in the document.

Source: Ensuring American leadership in Advanced Manufacturing 2011 (PCAST), Science and Engineering Indicators 2014 (U.S. National Science Foundation).

(Billion dollars)

(Year)

550

205 PCAST (2011). 206 Comprised of NEC, OSTP, PCAST, 12 U.S. companies and six major universities.

Column 10 Advanced Manufacturing Partnership (AMP) Advanced Manufacturing Partnership (AMP) was proposed by PCAST205 in June 2011 as the key to the policy concerning innovation by advanced manufacturing and its establishment was announced by President Obama. AMP is a framework of partnership between industry, government and academia206 that is intended as a national initiative to create quality jobs and promote investment in advanced technologies that strengthen the competitiveness of the United States. In July 2012, AMP issued a recommendation report for ensuring the advantage of the United States in the long term (“Capturing Domestic Competitive Advantage in Advanced Manufacturing”) by stimulating investment in the field of advanced manufacturing. In the recommendation report, emphasis is placed on strengthening innovation systems in order to enable the United States to innovate traditional manufacturing and lead the world in advanced technologies. Among the recommendations are allocating budget funds to cross-sectoral advanced technologies, including advanced sensing, additive manufacturing and industrial robotics, establishing regional bases for partnership between industry, government and academia that cultivate ecosystems of advanced technologies, fostering personnel who support advanced manufacturing, and improving the business climate, including tax and regulatory systems (Column Table 10-1).

Column Table 10-1 AMP recommendations (2012)

Recommendations

Cross-cutting top technologies in the AMP recommendation No. 2

(eleven areas)

○ Enabling Innovation 1. Advancing Sensing, Measurement, and Process Control

1. Establish a National Advanced Manufacturing Strategy 2. Advanced Materials Design, Synthesis, and Processing

2. Increase R&D Funding in Top Cross-Cutting Technologies

3. Visualization, Informatics, and Digital Manufacturing Technologies

3. Establish a National Network of Manufacturing Innovation Institutes Manufacturing Innovation Institutes (MIIs) 4. Sustainable Manufacturing

4. Empower Enhanced Industry/University Collaboration in Advanced Manufacturing Research 5. Nanomanufacturing

5. Foster a More Robust Environment for Commercialization of Advanced Manufacturing Technologies

6. Flexible Electronics Manufacturing

6. Establish a National Advanced Manufacturing Portal 7. Biomanufacturing and Bioinformatics

○ Securing Talent Pipeline 8. Additive Manufacturing

7. Correct Public Misconceptions About Manufacturing 9. Advanced Manufacturing and Testing Equipment

8. Tap the Talent Pool of Returning Veterans 10. Industrial Robotics

9. Invest in Community College Level Education 11. Advanced Forming and Joining Technologies

551

207 Over a 10-year period, the number of MIIs will be increased to 45, including the National Additive Manufacturing Innovation Institute, which is a 3D manufacturing technology research facility in which both the public and private sectors invest. Of the 45 facilities, five have already been established and the establishment of three others has been announced (Ministry of Economy, Trade and Industry, Ministry of Health, Labour and Welfare, Ministry of Education, Culture, Sports, Science and Technology (2015) “2015 White Paper on Manufacturing Industries (Monodzukuri)”) 208 See (3) (B).

10. Develop Partnerships to Provide Skills Certifications and Accreditation 11 & 12. Enhance Advanced Manufacturing University Programs and Launch National Manufacturing Fellowships & Internships

○ Improving the Business Climate 13. Enact Tax Reform 14. Streamline Regulatory Policy 15. Improve Trade Policy 16. Update Energy Policy

Source: Outline of the NEDO 2012 report on: Capturing Domestic Competitive Advantage in Advanced Manufacturing released by the Advanced Manufacturing Partnership (AMP) Steering Committee of PCAST (NEDO representative office in Washington D.C.).

As a measure to overcome the gap between basic research results and commercialization (so-called “death valley” (Column Figure 10-2)), a program is underway to establish and network Manufacturing Innovation Institutes (MIIs), which are platforms for partnership between research and development bases of universities, etc. and manufacturing divisions of small and medium-size enterprises in particular, across the country (Column Figure 10-3)207. As the Budget Message of the President for 2016 also calls for the allocation of budget funds208 for the establishment of MIIs, this is presumed to be a priority policy to promote innovation across the country.

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Column Figure 10-2 Gap in manufacturing innovation (Death Valley)

Government & universities It

t

Research to prove feasibility

Basic technology research

Gap (valley of death)

MIIs (Manufacturing

Innovation Institutes)

Technology development

Technology demonstration

System/ subsystem development

System test, launch & operations

Technology readiness level

Private sector

Source: Data compiled by METI based on its Japanese translation of Capturing Domestic Competitive Advantage in Advanced Manufacturing (2012), (AMP).

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(b) Policy for IT research and development as an innovation economy infrastructure Meanwhile, measures in the IT sector under the innovation strategy have been intended to

209 The White House (2014)” FACT SHEET: President Obama Announces New Actions to Further Strengthen U.S. Manufacturing,” (https://www.whitehouse.gov/the-press-office/2014/10/27/fact-sheet-president-obama-announces-new-actions-further-strengthen-us-m).

Column Figure 10-3 Manufacturing innovation institute model

In October 2014, President Obama announced new measures209 concerning strengthening of advanced manufacturing in view of the matters characterized as top priorities in supporting U.S. manufacturing industries in the AMP’s final report, “Accelerating U.S. Advanced Manufacturing.” President Obama announced investments of more than 300 million dollars in the three technologies identified as critical to U.S. competitiveness: advanced materials including composites and bio-based materials, advanced sensors for manufacturing, and digital manufacturing. Among other announced policy measures are those intended to promote evolution into advanced manufacturing incorporating digital technology, including providing grants of 100 million dollars for apprenticeships that help manufacturing workers to adapt to high-growth fields like advanced manufacturing and strengthening the functions of centers for small manufacturers to utilize advanced manufacturing in U.S. states (five-year, 130 million-dollar competition).

National network of MIIs

Faculty, students & graduates Technologies,

algorithms

Faculty, students & graduates

Funding for high priority research & development

Manufacturing Innovation Institutes

Applied research technology development

Prototype labs/shops

Mfg. software development

Education and workforce development

High tech start-up companies

Large manufacturing

companies

Universities & national labs

Community college manufacturing

programs

Multiple manufacturing support centers

Technology needs assessment Technology workshops

Mfg. technology services

Small and medium sized manufacturers

Source: Data compiled by METI based on its Japanese translation of: Capturing Domestic Competitive Advantage in Advanced Manufacturing (2012), (AMP).

554

“develop an advanced information technology ecosystem210, which forms the foundation for spurring innovations that, together with education, basic research and infrastructure improvement, drive future U.S. economic growth and competitiveness (“A Strategy for American Innovation” (revised version)). In the strategy, investment in next-generation super computers and CPS is cited, along with investment in infrastructure technologies such as broadband, smart grids and cyber security, as a measure to support research and development related to next-generation information and communications technology. In March 2012, the Obama administration also announced the “Big Data Research and Development Initiative”211 in order to promote the use of increasing digital data. This aims to solve national challenges by improving the ability to extract knowledge and insights from large and complex collections of data. More than 200 million dollars in research and development budget funds has been earmarked for six federal department and agencies212 213. Furthermore, this initiative has called for joint projects implemented through partnership between private companies, universities, non-profit organizations, etc., resulting in partnership projects between industry, government and academia214. (B) Budgetary steps for innovation policy The abundance of venture capital funds that support venture companies’ activities is playing an important role from the perspective of promoting innovations in the United States in terms of funding. However, the U.S. federal government’s role as a fund supply source (big push) is also supporting not only national science and technology research but also companies’ technology development. Based on the America COMPETES Act215, which was enacted in August 2007, and the America COMPETES Reauthorization Act of 2010, active investments have been made by the government in innovation-related research activities, such as promoting investment in innovation creation through research and development and in fostering personnel, promoting high-risk research programs and substantially increasing governmental budgets for such activities, in order to enhance the international competitive advantage of the United States. These activities were inherited by the Obama administration. Before the adoption of “A Strategy

210 The following five areas are targeted for investment: develop a nationwide, state-of-the-art communication network; Expand access to broadband; Modernize the electric grid; Secure cyberspace; and Support research for next-generation information and communications technology. 211 Office of Science and Technology Policy (2012) “For Immediate Release: Obama Administration Unveils “Big Data” Initiative: Announces $200 Million in New R&D Investments,” (https://www.whitehouse.gov/sites/default/files/microsites/ostp/big_data_press_release_final_2.pdf). 212 The six organizations are the National Science Foundation, the National Institutes of Health, the United States Department of Defense, the United States Department of Energy, the Defense Advanced Research Projects Agency and the United States Geological Survey. 213 From the perspective of minimizing risks related to big data, a report raising issues that will need to be addressed in the future, such as privacy protection, was published (Executive Office of the President), (2014)). 214 “Data to Knowledge to Action” (2013) (https://www.nitrd.gov/nitrdgroups/index.php?title=Data_to_Knowledge_to_Action). 215 The America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education and Science Act.

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for American Innovation” under the American Recovery and Reinvestment Act of 2009216, which was enacted in February 2009, the Obama administration not only implemented measures that needed to produce effects immediately, such as securing jobs and invigorating economic activities, but also invested more than 100 billion dollars in supporting the development of innovation economy infrastructure from the perspective of investment for long-term growth as an economy-supporting policy following the economic and financial crisis (Figure II-2-1-2-18).

Figure II-2-1-2-18 Investment amount in ARRA innovation

However, the wisdom of fiscal expenditure on funding such activities is being questioned because of the difficulty of making investment decisions concerning which industries and companies should be supported. As a matter of fact, a company which received a loan guarantee based on the ARRA failed. Against the backdrop of problems like this, while recommending support for high-risk, high-return research, a governmental memorandum concerning compilation of budgets related to science and technology, which will be mentioned later, calls for supplementing “the push” mechanism, such as grants, with results-based market incentives (“pull” mechanism) designed to overcome market failures and engage a wide range of solvers and catalyze innovation. Regarding research and development, which forms the foundation of innovation, governmental expenditure on research and development in the United States is three times as large as expenditure in Japan. As a proportion of GDP, U.S. governmental expenditure on research and development is the largest of all major countries (Figure II-2-1-2-19). 216 In order to overcome the economic slump following the global economic and financial crisis, the largest-ever economic package was implemented (totaling 787.2 billion dollars over 10 years).

Source: Recovery.Gov (White House). (Billion dollars)

Renewable energy and energy efficiency

Health IT

Health research

Innovative programs

High speed rail

Broadband

Education and training

Advanced vehicles and biofuels

Smart grid, interconnection, transmission

General research

Fossil energy R&D

General energy research

556

Regarding a broad range of priority items in U.S. innovation-related budgets, the Office of Management and Budget (OMB) and the Office of Science and Technology Policy (OSTP) signed a memorandum for compilation of budgets related to science and technology with each other. Priority items announced for the fiscal 2016 budget include advanced manufacturing technologies for future industries that bring benefits to many fields, such as robotics and CPS, as well as use of big data and cyber security217. The Budget Message of the President submitted by the Obama administration in light of the priority items reflects the idea of securing economic growth through innovation. In light of the memorandum, the research and development budget in the Budget Message of the President for fiscal 2016218 increased from the budget for fiscal 2015 by as much as 5.5%, or 146 billion dollars, including funds for development of advanced manufacturing technologies, demonstrating an emphasis on creating quality jobs and achieving sustainable economic growth (announced in February 2015) (Figure II-2-1-2-20 and Table II-2-1-2-21).

Figure II-2-1-2-19 Governmental expenditure on research and development by country and the proportion of GDP (2012)

217 The following eight fields are cited: (a) advanced manufacturing and industries of the future, (b) clean energy, (c) earth observations, (d) global climate change, (e) information technology, (f) innovation in life sciences, biology and neuroscience, (g) national and homeland security, and (h) informed policy-making and management (Center for Research and Development Strategy, Japan Science and Technology Agency (2014b)). 218 With “Middle Class Economics” as its theme, the Budget Message of the President places emphasis on support for the middle class. The total amount of the 2016 budget is 3,990 billion dollars.

Notes: Data about ROK are those in 2011. Source: Main Science and Technology Indicators (OECD).

Governmental expenditure on research and development Governmental expenditure on research and development/GDP (right axis)

United States

Japan Germany France ROK United Kingdom

Switzerland Taiwan Israel

(Billion dollars)

557

Figure II-2-1-2-19 Changes in research and development budget in the United States

Table II-2-1-2-21 Excerpts with respect to research and development budget from the FY2016

Budget Message of the President Related budget request, targets, and outlines

Promotion of advanced manufacturing industries and future industries Budget 2.4 billion dollars (previous fiscal year: 2.2 billion dollars)

Target National Science Foundation, Department of Defense, Department of Energy, Department of Commerce and other agencies

Outline Supporting initiatives by the industry-academia collaboration so as to create first-class jobs through the development and commercialization of new technologies; Providing funding to a national network of 45 manufacturing institutes

Networking and R&D of information technologies Source: FY2016 Budget Message of the President (2015), FY 2016 Supplement to the President's

Budget 2000 (2015), (NITRD). (C) Summary As shown above, amid concerns over the weakening of domestic technological infrastructure that creates innovations, the United States aims to shift to an innovation-driven economy in order to create quality jobs and ensure sustainable growth, so it is continuing policy measures and budgetary steps to enhance the domestic innovation environment through strengthened partnership between industry, government and academia and to strengthen base technologies. In the United States, an environment already exists that encourages new innovations by supporting

Notes: Figures in FY2015 are estimates, and those in FY2016 are budget requests. Figures in FY2009 include the budgets requested under the ARRA.

Source: U.S. Budget Message of the President from 2006 to 2016.

(Billion dollars)

(Fiscal years)

558

companies’ active risk-taking through smooth cycling of abundant funds, so the U.S. government’s policy to strengthen innovation infrastructure by supplementing this environment is functioning. In this environment, U.S. companies have been quickly developing advanced business models in anticipation of drastic changes in the competitive environment due to digitization in recent years, and they are further enhancing their advantage by integrating their superior platform businesses with other businesses. It is presumed that such moves by U.S. companies are enhancing the global competitiveness of the United States while causing clustering of innovation industries in the country.