D2.1 Mapping of the Current Status of Dynamics of Value Chain of European Transport Manufacturing Industry

Ref. Ares(2018)476363 - 26/01/2018

D2.1 Mapping of the current status of

dynamics of value chain of European transport manufacturing industry

Arrasate, 26/01/2016

Editor: Gerardo Pagalday [email protected] Authors: All parners Date: 26/01/2018

Document change record

Version Date Status Author Description 0.1 24/03/2017 Draft Konstantin Konrad Draft document structure 0.2 18/12/2017 Draft Gerardo Pagalday Deliverable version 2 26/01/2018 Deliverable Gerardo Pagalday Deliverable final version

Consortium

No Participant organisation name Short Name Country 1 VDI/VDE Innovation + Technik GmbH VDI/VDE-IT DE 2 Railenium Railenium FR 3 Cranfield University CU UK 4 Maritime University of Szczecin MUS PL 5 Transportøkonomisk Institutt ( TOI) TOI NO 6 Institute of Shipping Economics and Logistics ISL DE 7 IK4 Research Alliance IK4 ES 8 Intl. Association of Public Transport Operators UITP BE

Table of contents

1 Introduction ...... 23 1.1 Project background ...... 23 1.2 Objectives ...... 24 1.3 Focus Areas for D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry ...... 24 2 Automotive ...... 27 2.1 Automotive Industry: Cars ...... 27 2.1.1 SCORE Approach for automotive industry ...... 27 2.1.1.1 Challenges and technological trends for Europe`s industry ...... 28 2.1.1.2 Introduction to automation levels for on-road motor vehicles ...... 31 2.1.2 Description of the automotive sector ...... 32 2.1.2.1 Manufacturing: size and structure...... 36 2.1.3 Characterize the value chain and the individual parts ...... 39 2.1.3.1 Value Chain of BMW ...... 40 2.1.3.1.1 Products ...... 40 2.1.3.1.2 Final assembly sites ...... 41 2.1.3.1.3 Value chain main characteristics ...... 42 2.1.3.2 BMW AG and Electromobility ...... 42 2.1.3.2.1 Actual models and range ...... 43 2.1.3.2.2 Future Strategy ...... 43 2.1.3.3 Groupe PSA ...... 44 2.1.3.3.1 Description of the company ...... 44 2.1.3.3.2 Products ...... 45 2.1.3.3.3 Final assembly sites ...... 46 2.1.3.3.4 Groupe PSA and Electromobility ...... 47 2.1.3.3.4.1 Actual models and range ...... 47 2.1.3.3.4.2 Future Strategy ...... 48 2.1.3.4 Tesla, Inc...... 48 2.1.3.4.1 Description of the company ...... 48 2.1.3.4.2 Products ...... 49 2.1.3.4.2.1 Car Models ...... 49 2.1.3.4.2.2 Battery Products ...... 49 2.1.3.4.2.3 Supercharger ...... 49 2.1.3.4.3 Used Technologies ...... 50 2.1.3.4.3.1 Unique Battery Technology ...... 50 2.1.3.4.3.2 Autopilot ...... 50 2.1.3.4.4 Transition to a mass manufacturer ...... 51 2.1.3.4.4.1 Tesla Gigafactory 1 ...... 51 2.1.3.5 Build Your Dream BYD ...... 52 2.1.3.5.1 Description of the company ...... 52 2.1.3.5.2 Main company products ...... 52 2.1.3.5.2.1 All electric car models ...... 52 2.1.3.5.2.2 Plug-in hybrid car models ...... 53 2.1.3.5.2.3 Battery Manufacturing ...... 53 2.1.3.5.3 BYD`s expansion strategy...... 53 2.1.4 Scoring of the European Automotive Industry ...... 54 2.1.4.1 Research & Development ...... 55 2.1.4.1.1 Research & Development expenditures ...... 55 2.1.4.1.2 Research and Development funding initiatives ...... 60 3

2.1.4.2 Summary for the Focus Area Research and Development ...... 68 2.1.4.3 Technological readiness & leadership / manufacturing capability ...... 68 2.1.4.3.1 Expert survey determining technical leadership in electric mobility and Connected and Automated Driving ...... 68 2.1.4.3.2 Expert assessment - Index Automated Vehicles ...... 72 2.1.4.4 Summary for the Focus Area Technological Leadership...... 74 2.1.4.5 Skilled workforce / education ...... 74 2.1.4.5.1 Qualified Workforce ...... 74 2.1.4.6 Innovation ...... 78 2.1.4.6.1 Patent quantities for autonomous driving ...... 79 2.1.4.6.2 Patent quantities for autonomous driving, driver assistance and telematics 80 2.1.4.6.3 Patent quantity: Traditional car manufacturers vs. ICT-companies ...... 83 2.1.4.7 Summary for the Focus Area Innovation ...... 85 2.2 Automotive industry: LCV & HGV ...... 87 2.2.1 Introduction and Approach ...... 87 2.2.2 Current Value Chains of Leading LCV’s and HGV’s OEM’s ...... 88 2.2.2.1 Functional Structure of Value Chains in Europe, the US, and China ...... 88 2.2.2.2 Geo-spatial Structure of Auto Production Networks ...... 91 2.2.2.2.1 EU, Turkey and Ukraine ...... 93 2.2.2.2.2 The US ...... 95 2.2.2.2.3 Japan...... 96 2.2.2.2.4 South Korea ...... 98 2.2.2.2.5 China ...... 100 2.2.2.3 Geo-spatial Organization of Motorized Industry’s Value Chains ...... 102 2.2.2.4 Summary ...... 104 2.2.3 Characterization of Value Chains’ Product Portfolio and Players ...... 104 2.2.3.1 EU ...... 104 2.2.3.2 The U.S ...... 108 2.2.3.3 Japan ...... 110 2.2.3.4 Summary ...... 110 2.2.4 Structure of Supply Chain Industry and Intra-Chain Relationships ...... 111 2.2.4.1 Collaborative Relationships between OEMs and Suppliers, and between the Chain Participants ...... 111 2.2.4.1.1 Mergers and Acquisitions ...... 111 2.2.4.1.2 Collaborative Agreements between Autonomous Companies in Supply Chains 113 2.2.4.2 Summary ...... 115 2.2.5 Competitive Performance of Supply Chain Operators...... 116 2.2.5.1 KPI 1 - Research & Development Expenditure ...... 116 2.2.5.2 KPI 2 - Technological Readiness and Leadership/ Manufacturing Capability128 2.2.5.2.1 European Emission Standards for LCV’s and HGV’s ...... 129 2.2.5.2.2 Compliance Performance...... 131 2.2.5.2.3 New Vehicle Models ...... 135 2.2.5.3 KPI 3 - Innovation Capabilities by Patents and New Standards ...... 137 2.2.5.3.1 Patents ...... 138 2.2.5.3.2 Innovation activities ...... 141 2.2.5.4 KPI 4 - Workforce...... 143 2.2.5.4.1 Employment Levels in EU, US, China ...... 143 2.2.5.4.2 Education and Managerial Personnel ...... 147 2.2.5.5 KPI 5 - Productivity and Value-Added ...... 149 2.2.5.5.1 Economic Performance of the European value chain (value added) .... 153

2.2.5.6 KPI 6 - FDI Inflows to LCV, HDV and PV Manufacturers ...... 154 2.2.5.7 KPI 7 - Investments in Expansion of Production Assets...... 155 2.2.5.8 Summary ...... 156 2.2.6 Conclusions and Policy Implications ...... 159 2.2.7 References ...... 161 3 Aeronautics ...... 163 3.1 Civil Aviation Market – A Preamble ...... 163 3.1.1 Globalisation and its key drivers ...... 164 3.2 Theory of Value Chain ...... 166 3.2.1 Value chain theory evolution ...... 168 3.3 Characterising the aerospace value chain ...... 168 3.3.1 Risk Sharing Partnership (RSP) ...... 171 3.3.2 Supply chain structure ...... 172 3.3.3 The actors ...... 172 3.3.4 European Aerospace Manufacturing ...... 175 3.4 Value Chain Mapping ...... 177 3.5 Assessment of the European value chain and innovation capacities ...... 184 3.5.1 Value propositions ...... 184 3.5.2 Research & Development ...... 186 3.5.3 Innovation ...... 189 3.5.4 Skilled Workforce & Education ...... 191 3.5.5 Technology readiness & Leadership ...... 194 3.5.6 Additional Areas of Interest: Automation ...... 197 3.5.7 Additional Areas of Interest: Product disruptions ...... 200 3.5.8 Summary ...... 201 3.6 References ...... 202 4 Rolling stock...... 207 4.1 Global trends in the supply of rolling stock ...... 208 4.1.1 Concentration ...... 209 4.1.2 Increasing role of Tier-1 suppliers in the supply chain ...... 210 4.1.3 The high-speed rail segment ...... 211 4.2 The supply chain of high-speed rolling stock ...... 212 4.2.1 General structure of the rolling stock supply chain ...... 212 4.2.2 High-speed technological components and technology development ...... 215 4.2.3 Key actors in the assembly of high-speed trains ...... 217 4.2.4 Technological focus: Train Control Systems ...... 219 4.2.5 Key actors in the supply of high-speed train control systems ...... 221 4.3 Assessment of the innovation capacity of European high-speed rail manufacturers222 4.3.1 Research and Development ...... 225 4.3.1.1 Business R&D expenditures ...... 225 4.3.1.2 R&D personnel ratio...... 227 4.3.1.3 R&D intensity ...... 230 4.3.1.4 Other R&D activities in Europe and China ...... 232 4.3.2 Innovation ...... 235 4.3.2.1 Development of railway environmental technology ...... 236 4.3.2.2 Development of railway technology ...... 238 4.3.3 Technological leadership on the market ...... 240 4.3.3.1 High-speed rail technological mastery ...... 240 4.3.3.2 Share of high-speed trains commercialised in domestic and foreign markets245 4.3.3.3 Worldwide diffusion of the European, Chinese and Japanese Train Control Systems ...... 247 4.3.3.4 High-speed network equipped with GSM-R systems or equivalent ...... 250 5

4.3.3.5 Trade of railway signalling, safety and control systems ...... 251 4.3.4 Workforce and skills ...... 252 4.3.4.1 Employment ...... 252 4.4 Concluding remarks ...... 255 4.5 References ...... 256 5 Shipbuilding ...... 259 5.1 Approach ...... 259 5.2 Mapping the “AS-IS” value chain ...... 264 5.3 Characterize the value chain and the individual parts ...... 267 5.3.1 Important parts of supply chain typical in European shipbuilding ...... 267 5.3.2 European Maritime technologies – relevant component Europe 2020 policy269 5.3.3 Technological roadmap of a ship ...... 270 5.3.4 Shortly description of relevant European actors and non-European actors of shipbuilding ...... 274 5.4 Elaborate an inventory of the state of the art in shipbuilding manufacturing...... 275 5.4.1 Focus Area: R&D ...... 281 5.4.2 Focus Area: Technological readiness (TR) ...... 283 5.4.3 Focus Area: Workforce ...... 286 5.4.4 Focus Area: Innovation ...... 288 5.5 References ...... 294

Figures Figure 1: Relationship between the three content-related work packages in the SCORE Project (thick grey arrows: relationship between WPs, thin black arrows: relationship between tasks) 23 Figure 2: SCORE Methodology addressing different aspects of competitiveness 25 Figure 3: Key technological trends identified by KPMG`s Global Automotive Executive Survey. Top trends are Battery electric vehicles and Connectivity & digitalization identified by upstream players (product-driven – traditional OEMs and suppliers) and downstream (service-driven – ICT players or mobility service providers) (Source: KPMG) 29 Figure: 4 Definition and description of the different levels of automated driving according to CLEPA and based on the new SAE international standard J3016™ (Source: CLEPA) 32 Figure 5: Introduction of automated driving and parking functions (Source: VDA) 32 Figure 6: Passenger car production 2005 / 2015 (Source: ACEA) 33 Figure 7: Passenger car production in Europe 2015 (Source: ACEA) 34 Figure 8: Global Light Vehicle Production 1997-2020 (Source: IHS 2013) 36 Figure 9: Europe – motor vehicle industry footprint, 2010 (Source: ERIEP) 38 Figure 10: BMW Products (Source: BMW Group, 2017) 41 Figure 11: BMW i8 and i3, two specifically designed electric cars mainly built with lightweight materials (Source: BMW G) 43 Figure 12: Groupe PSA Worldwide Sales in 2016 (source: source: PSA Group) 45 Figure 13: Groupe PSA (Source: PSA Group) 46 Figure 14: World locations of PSA factories (Source: PSA Group) 47 Figure 15: PSA Electric Cars (Source: PSA Group) 47 Figure 16: The platform setup powering electric PSA vehicles (Source: PSA Group) 48 Figure 17: Tesla Superchargers stations Network (Source: Tesla) 50 Figure 18: Tesla car sales and Model 3 Pre-Orders (Tesla, Statista, 2016) 51 Figure 19: BYD is still mainly focussing on domestic market while being in the transition phase to a worldwide connected company. Automotive products have the largest share of yearly turnovers with an annual increase of 5 percentage points (Source: BYD Annual Report 2016) 54 Figure 20: Automotive value chain: Today and projected structure for the year 2025 55 Figure 21: Gross domestic expenditure on Research & Development in 2005 and 2015 (in correlation to % of GDP) 56 Figure 22: Research &Innovation expenditure – a strong shift of R&D efforts towards suppliers` responsibilities is expected (Source: CLEPA) 57 Figure 23: Countries by Total (Domestic & Imported) as a Percentage of Automotive R&D (Source: PwC, Strategy & 2015 Global Innovation 1000 data and analysis, Bloomberg data, Capital IQ data) 58 Figure 24: Comparision between biggest R&D spending companies and public opinion based on a survey asking for the most innovative companies (Source: PwC, Strategy&2015 Global Innovation 1000 data and analysis, Bloomberg data, Capital IQ data) 59

Figure 25: Total Automotive R&D Spend (Domestic & Imported) by Region as a Percentage of Automotive R&D (Souce: PwC, Strategy& 2015 Global Innovation 1000 data and analysis, Bloomberg data, Capital IQ data). 60 Figure 26: Initiatives by the European Commission for Connected and Automated Driving (Source: Breslin, EC) 61 Figure 27: Who is expected to be in charge of the customer interface (Source: KPMG) 70 Figure 28: Survey results for technical leadership in electric mobility and self-driving capabilities (OEMs only; Source KPMG) 71 Figure 29: Expert opinions of which OEM to expect to gain or lose market shares over the next 5 years (Source:KPMG) 72 Figure 30: Consolidated scoring of automotive nations (Source: fka, Roland Berger) 73 Figure 31: Fields of actions with top priority considering education and training necessities (Source: Nationale Plattform Elektromobilität, Kompetenz Roadmap 2012) 75 Figure 32: Top ten countries with the highest number of engineering graduates. Data contains degrees in engineering, construction and manufacturing. For China and India was no data available (Source: Forbes Statista, World Economic Forum 2015/Unesco Institute for Statistics). 76 Figure 33: Countries with the most STEM (Science, Technology, Engineering, Mathematics) graduates (Source: Forbes Statista, World Economic Forum 2016) 77 Figure 34: Snapshot on the number of patent filings in 2012 (Source: CLEPA) 78 Figure 35: Number of relevant patents grouped by company (Source: IW-Trends, Data from PATENTSCOPE; Institut der deutschen Wirtschaft Köln). 80 Figure 36: Number of self-driving inventions based on publication year (Source: Thomas Reuters). 81 Figure 37: CAD innovations (autonomous driving, ADAS, telematics) by company summarized from 2010 until October 2015 (Source: Thomson Reuters Derwent World Patents Index) 82 Figure 38: Driver assistance innovations by company summarized from 2010 until October 2015 (Source: Thomson Reuters Derwent World Patents Index) 83 Figure 39: Individual company´s patenting visualizing the focus points and therefore indicating business strategies of traditional car manufacturers and new rivals (Source: World Intellectual Property Organization (WIPO), Oliver Wyman) 85 Figure 40: Functional Structure of Automotive Supply Chains 89 Figure 41: Three Tiers of Value Chain Suppliers in the German Automotive Industry 90 Figure 42: Pan-European Ford’s EcoBoost Engine Development with Functional Distribution of Manufacturing Operations (2013) 91 Figure 43: Interconnectedness of Value Chain Operations for Fuel Injections for Diesel Lorries Manufactured by US Component Maker Delphi in the UK and Sold to Truck Makers in Sweden, France and Germany in 2017 (before Brexit) 91 Figure 44: Map of Three Assembler Networks Who Compete and/or Collaborate in Different Product / Market Segments 92 Figure 45: Geo-spatial Networks of Automotive Manufacturing Clusters in Europe 93 Figure 46: Geolocations of LCVs Assembly and Engine Production Cluster in EU, Ukraine and Turkey 93 Figure 47: Spatial Locations of Heavy-duty Vehicles (HDVs) Assembly and Engine Production Clusters in EU, White Russia, Ukraine, Russia and Turkey 94 8

Figure 48: Light-duty (LDV) and Heavy-duty (HDV) Vehicle Manufacturing Clusters and Plants in Turkey 94 Figure 49: Cars and Commercial Vehicle OEMs and Engine Manufacturing Clusters Located in the UK as Part of Sub-European Regional Production Cluster in 2014 95 Figure 50: Networks of Assembly Plant Clusters of in North America 95 Figure 51: Networks of Tire 1 Supplier Clusters in North American Automotive Industry 96 Figure 52: Networks of Tier-2 Supplier Clusters in North American Automotive Industry 96 Figure 53: Location of OEMs in Kaisai, Chubu and Kanto region 97 Figure 54: Location of Tier 1 in Kaisai, Chubu and Kanto region 97 Figure 55: Location of Tier 2 in Kaisai, Chubu and Kanto Regions 98 Figure 56: Location of OEMs in South Korea 99 Figure 57: Location of Tier1 in South Korea 99 Figure 58: Location of Tier2 in South Korea 100 Figure 59: Geographical Locations of Tier-1 and Tier-2 Automotive Parts and Sub-system Manufacturing Clusters in China 101 Figure 60: Six Major Regional Production Clusters/Zones in China’s Automotive Industry 101 Figure 61: Import Content of Exports by Country of Origin in Motor Vehicle Industry, 2009 102 Figure 62: Internationalization Levels of Value Chains by Industry, 2009 103 Figure 63: Degrees of Internationalization of Motor Industry by Country. (2009) Inputs Imported vs. Value-added Domestically 104 Figure 64: Imports of Gearboxes into EU Focus Countries (2015) in € Million, by Main Origin 105 Figure 65: Revenues of Top Global Gearbox Suppliers in 2015 (in Billion US$) 106 Figure 66: Imports of Vehicle Wiring into EU Focus Countries (2015) in € Million, by Main Origin 107 Figure 67: Revenues of Top Global Vehicle Wiring Suppliers in 2015 (in Billion US$) 107 Figure 68: Imports of Brakes and Servo-brakes into EU-27 (2015) in $ Billion, by Main Origin 108 Figure 69: Revenues of Top Global Vehicle Wiring Suppliers in 2015 (in Million US$) 108 Figure 70: Import of gear boxes to the United States from 2009 to 2016 (thousand USD) 109 Figure 71: Import of brakes and servo-brakes to the US from 2009 to 2016 (thousand USD) 109 Figure 72: Import of gear boxes to Japan from 2009 to 2016 (thousand USD) 110 Figure 73: Import of brakes and servo-brakes into Japan (thousand USD), by main origin 110 Figure 74: Global Automotive M&A Deal Volumes and Values (US Dollar), 2009-2016 112 Figure 75: M&A Deals by Types of Vehicle Subsystem Manufacturer, July 2014-July 2015 112 Figure 76: OEM- Supplier Relations as Measured by the Working Relation Index (WRI) 114 Figure 77: R&D Spending of Total Revenue from 20013 –2015 Worldwide, by Sector (%) 117 Figure 78: Evolution in Spending on R&D as % of GDP 117 Figure 79: Human and Financial Resources Devoted to R&D in 2015 118 Figure 80: R&D Expenditures in Automobile Industry by Main Activity of the Enterprise, Current Prices (USD, PPP) 119 Figure 81: Automotive R&D Global vs. US Spending (R&D Spending, Billions of USD) 119 Figure 82: Top 5 American Industries by Research & Development Spending in USD Billion 119

Figure 83: General Motors, Ford and FCA’s Annual R&D Spending versus Other Leading Innovators in USD Billion (2014) 120 Figure 84: Internal R&D Spending in China in 2015 by Industry (Billion Yuan) 121 Figure 85: Internal Company Expenditure on R&D in China 2006-2015 (Billion Yuan) 121 Figure 86: R&D Spending of the Automobile Industry in China as a Share of Revenue 2010-2011 (in %) 121 Figure 87: Toyota R&D Expenses from FY 2007 to 2016 (Million Japanese Yen) 122 Figure 88: R&D Investment of Korea Automotive Industry 123 Figure 89: Research and Development Expenditure in Germany as % of GDP (1996-2014) 123 Figure 90: Share of Innovative Expenditure in Industry Turnover (2015) 124 Figure 91:Top Ten R&D Spenders and Ten Most Innovative Companies in Customer-centric Value Creation 124 Figure 92:Research & Development Expenditures in France as % GDP (1996-2014) 125 Figure 93: French Automotive Industry Research and Development Spending (2001-2011) (DIRDE stands for Domestic Research and Development Spending) 126 Figure 94: Total Corporate R&D Expenditure in France by Industry Segments (2011) 126 Figure 95: Gross Domestic Expenditure of R&D (GERD) as per GDP in Italy from 2000-2015 127 Figure 96: Top Ten Countries That Imported Automotive R&D as a Percentage of Automotive R&D Imports 128 Figure 97: Progress in Reduction of Pollutant Emissions from HGV through Introduction of “Euro” Standards 131 Figure 98: The Trajectory of 8% Reduction in CO2 Emissions (2011-2016) 131 Figure 99: Emission 2012 Performance of Key EU LCV Manufacturers and 2020 targets (CO2- emissions in g/km) 132 Figure 100: Light-commercial vehicles: CO2 emissions by brand 132 Figure 101: Trends in CO2 Emission Volumes in Japan’s Transport Sector, by Mode 133 Figure 102: Change in CO2 rate of New Light-duty Vehicles and Heavy-duty Trucks with World- class Emission Standards 134 Figure 103: Light Truck Models as a Percentage of Overall New Models to Be Launched by Key Manufacturers on the US Car Market 2017 – 2020 135 Figure 104: New Vehicles - Engine Power by Type of Vehicle and Engine Technology (EU) 136 Figure 105: New vehicles - Engine Displacement by Type of Vehicle and Engine Technology136 Figure 106: Estimated Fuel Efficiency Gains for Selected European Vehicle Manufacturers 137 Figure 107: New Vehicles – Number of Cylinders by Type of Vehicle and Engine Technology137 Figure 108: Total Grants, 2016 138 Figure 109: EU Automotive Sector Patent Applications Filed by Manufacturers in 2016, by Country or Region of Origin 139 Figure 110: Number of Patents Granted to Selected Automobile Manufacturers Suppliers in Country of Origin 139 Figure 111: Automotive Inventions by Publication Year 140 Figure 112: Employment Trends in Global Automakers (Passenger cars, LCV and HGV) (2010- 2016) 143 Figure 113: Employee Numbers in the EU Automobile Industry by Country (2010-2014) 144

Figure 114: Number of Employees in the Automotive Industry in Germany (2005-2015) 145 Figure 115: Number of Employees in the US Automotive Industry 2003-2016, by Sector 145 Figure 116: The US Employment by Automakers (2015) (%) 145 Figure 117: Number of People Employed in the Automotive Industry in China (in 1,000) 146 Figure 118: The 20 Largest German Companies in China, by Number of Employees 147 Figure 119: Occupational Workers in Automobile Industry in EU15 148 Figure 120: Number of Engineers and Technical Staff in the Automobile Industry in China (in 1,000) from 2002 to 2011 149 Figure 121: Output per Worker by Country in EU 150 Figure 122: Value added at factor cost in manufacture of motor vehicles, trailers and semi- trailers (million EURO) 151 Figure 123: Annual Output and Number of Employees in the Chinese Automobile Industry (1990- 2010) 152 Figure 124: Output per Worker by Country in EU 152 Figure 125: Worldwide Revenues of Selected Truck Manufacturers in FY 2015 (in million U.S. dollars) 153 Figure 126: Key Supplier Financial Performance by Region 2007 v. 2015 154 Figure 127: FDI Projects in the Automotive Sector 2014 by Origin Country (in percent) 155 Figure 128: FDI Projects in the Automotive Sector 2014 by destination country (in percent) 155 Figure 129: The Number of Newly Built Foreign Automotive Supplier Plants by Country in Central and Eastern Europe (CEE), 1997-2009 156 Figure 130 A representative example from Boeing showing various parts and suppliers; (Source: http://www.huffingtonpost.com/2011/01/20/a-wing-and-a-prayer- outso_n_811498.html) 165 Figure 131 Global commercial aircraft deliveries between 1971 and 2011; (Source: http://aerospacereview.ca/eic/site/060.nsf/eng/00040.html ) 166 Figure 132 Generic value chain structure (Source: https://opentextbc.ca/strategicmanagement/wp- content/uploads/sites/30/2014/07/porter-value-chain.png) 167 Figure 133 Porter's five competitive forces 168 Figure 134 Global Value Chain Types of Governance. Large arrows represent information and control, while the small ones show the exchange based on price (Gereffi et al., 2005) 170 Figure 135 Number of suppliers on selected engine platforms (Source: http://aerospacereview.ca/eic/site/060.nsf/eng/00040.html) 174 Figure 136 Ishikawa diagram of supply chain risk disruption. (Source: Treuner, (2014)) 175 Figure 137 Passenger traffic in 2015 (Source: http://ec.europa.eu/eurostat/statistics- explained/index.php/Air_transport_statistics) 176 Figure 138 Sub-systems value percentage (Wipro, 2009, in Bamber & Gereffi, (2013)) 178 Figure 139 Aircraft manufacturing process (Handbook for automation, Springer) 179 Figure 140 Fuselage assembly process (Handbook for automation, Springer) 179 Figure 141 Wing assembly process (Handbook for automation, Springer) 179 Figure 142 Aircraft overall assembly process (Handbook for automation, Springer) 180 Figure 143 Industry 4.0 and relating technologies (Griessbauer et al., 2016) 186 11

Figure 144 Level of Digitisation Across Aerospace Companies (Griessbauer et al., 2016) 187 Figure 145 Internet of things - technology summary (Alena, 2016; Banafa, 2016; Warwick, 2016) 188 Figure 146 Cyber Physical Systems – technology summary (Atkins & Bradley, 2013; Energetics Incorporated, 2013; Winter, 2008) 188 Figure 147 Blockchain - technology summary (Buck, 2017; Cavalieri, 2017; Kim & Kang, 2017) 188 Figure 148 Composites in aircraft 189 Figure 149 Distribution of Materials on Boeing 787-Dreamliner(Atwater, 2013) 190 Figure 150 CFRP Technology (Ingenia, 2008; marketsandmarkets.com, 2017; Nayak, 2014) 190 Figure 151 Self-healing materials (Celik, 2015; Das, Melchior, & Karumbaiah, 2016; GVR, 2017) 191 Figure 152 Piezoelectric materials (GVR, 2016; Qiu, Wang, Huang, Ji, & Xu, 2014; Rambabu, Eswara Prasad, Kutumbarao, & Wanhill, 2017) 191 Figure 153 GE Leap Engine Fuel Nozzle (Kellner, 2015) 192 Figure 154 Multi-functional structures (Panesar, Ashcroft, Brackett, Wildman, & Hague, 2017; University of Nottingham, 2017; Werkheiser, 2014) 193 Figure 155 4D printing technology (Al-Rodhan, 2014; Goehrke, 2014; marketsandmarkets.com, 2015) 193 Figure 156 Mobile AM technology (Lim et al., 2012; Nathan, 2017; Welte, 2016) 193 Figure 157 AR&VR Revenue Forecasts (Merel, 2017) 195 Figure 158 Flight Altitude Indicator (Citi GPS, 2016) 195 Figure 159 AR&VR training (Deal, 2017; Ismail, 2017; Robinson, 2017) 196 Figure 160 AR&VR CAD/CAE Technology (Bellini et al., 2016; DAQRI, 2016; Ismail, 2017; Robinson, 2017) 196 Figure 161 AR&VR Task Assistance Technology (DAQRI, 2016; Robinson, 2017; Sponge UK, 2015) 196 Figure 162 Aircraft data generation (Aviation Week, 2016) 197 Figure 163 Expected Growth of Traditional and HRCs (Glaser, 2017) 198 Figure 164 Robots Technology (Davids, 2017; Glaser, 2017; Tieman, 2016) 199 Figure 165 Human robot collaboration summary (Doral, 2015; Glaser, 2017; KUKA, 2017) 199 Figure 166 Deep learning technology (Ambur, Schwartz, & Mavris, 2016; Tractica, 2016). 200 Figure 167 Disruption timeframe 201 Figure 168: Global rolling stock market size, revenues and value pool by player (new business and after-sales, including services) (Source: McKinsey & Company (2016)) 208 Figure 169: Geographical split of rolling stock OEMs 209 Figure 170: Top 10 manufacturers of rolling stock ranked by new vehicles' revenue 2015 (EUR million) (Source: SCI Verkehr (2016a)) 209 Figure 171: Major mergers and acquisitions in the railway industry 2012-2016 (year of the announcement) (Source: Siemens AG (2017)) 210 Figure 172: Expected changes in the relationship between OEMs and Tier-1 suppliers (Source: Schwilling (2017)) 211 Figure 173: Market shares of high-speed train manufacturers (units delivered) (Source: SCI Verkehr (2016b)) 212 12

Figure 175: Structure of the supply chain of rail rolling stock (Source: Based on CGGC (2010)) 213 Figure 175: Railway rolling stock OEMs’ production process (Source: Author’s elaboration based on USITC (2011) and Connor and Berkeley (2017)) 214 Figure 176: Passenger rolling stock value chain structure by technological domain 214 Figure 177: High-speed train technological systems according to their strategic relevance to OEMs 216 Figure 178: High-speed rail value chain with examples of system integrators and component manufacturers 217 Figure 179: Technical comparison of train control systems in Europe, China and Japan (Source: Author’s elaboration based on Matsumoto, 2005, Ning et al., 2004 and Wang et al., 2012) 221 Figure 180: Members of the European consortium UNISIG( 222 Figure 181: Business R&D expenditure of the railway rolling stock industry of selected EU countries, 2002-2014 (million USD) (Source: Author’s elaboration based on OECD ANBERD data) 226 Figure 182: Business R&D expenditure of the railway rolling stock industry in selected regions, 2010-2016 (million USD) (Source: Author’s elaboration based on OECD ANBERD data and CSR and CRRC annual reports) 227 Figure 183: R&D personnel in the manufacture of rolling stock in selected EU countries (FTE), 2006-2014 (Source: Author’s elaboration based on OECD ANBERD data) 228 Figure 184: R&D personnel ratio in the manufacture of rolling stock in selected EU countries (FTE), 2008-2014 (Source: Author’s elaboration based on OECD ANBERD and STAN data) 229 Figure 185: R&D personnel ratio in the manufacture of rolling stock in selected regions/countries (HC, FTE), 2010-2016 (Source: Author’s elaboration based on OECD ANBERD and STAN data and CRRC annual reports) 229 Figure 186: R&D intensity of selected rolling stock manufacturers (2016) and the EU rail manufacturing industry (2008, 2011) (Source: Author’s calculation based on companies’ reports and (1) Leduc, et al. (2010), (2) Wiesenthal et al. (2011) and (3) Wiesenthal, Condeço-Melhorado and Leduc (2015)) 231 Figure 187: R&D intensity in selected countries, 2000-2015 (%) (Source: Author’s elaboration based on OECD MSTI data) 231 Figure 188: Funding for rail research in the framework of the EU research and innovation programmes (million EUR, %) (Source: Author’s elaboration based on DG MOVE (2016) and DG RTD (2012)) 233 Figure 189: Development of railway environmental technologies in selected European countries (all inventions), 2005-2014 (Source: Author’s elaboration based on OECD Environment Statistics database) 237 Figure 190: Development of railway environmental technologies in selected countries/regions (all inventions), 2005-2014 (Source: Author’s elaboration based on OECD Environment Statistics database) 238 Figure 191: Development of railway environmental technologies in selected countries/regions (high-value inventions), 2005-2014 (Source: Author’s elaboration based on OECD Environment Statistics database) 238

Figure 192: Development of railway technologies in selected countries/regions (EPO and USPTO patent grants), 2000-2012 (Source: Author’s elaboration based on OECD Patent database) 240 Figure 193: Technological transitions of high-speed reference trains worldwide (Source: Moretto et al. (2014)) 241 Figure 194: Partnerships established between foreign companies and CSR and CNR (Source: GIC (2014)) 243 Figure 195: High-speed foreign technologies involved in the transfer to the Chinese rail industry (Source: SCI Verkehr (2014)) 243 Figure 197: . High-speed trainsets delivered in China by the origin of the supplier, 2006-2012 (number of units) Source: Author’s calculation based on data from UIC (2017) 244 Figure 197: Market share by manufacturer of Chinese high-speed trainsets, period 2006-2009 (number of units) (Source: Author’s calculation based on data from UIC (2017)) 244 Figure 198: High-speed market shares according to the origin of the manufacturer (number of trainsets) (Source: Author’s calculation based on data reported by UIC (2017) 246 Figure 199: Global deployment of ETCS in terms of onboard (left) track (right) contracted systems (Source: UNIFE (2016)) 248 Figure 200: Deployment of ETCS onboard systems in domestic (left) and foreign (right) markets (Source: UNIFE (2016)) 249 Figure 201: Global deployment of ETCS track systems in domestic (left) and foreign (right) markets (Source: UNIFE (2016)) 249 Figure 202: Proportion (left) and length (right) of the high-speed network equipped with GSM-R systems in EU and China (Source: Author’s calculation based on data reported by UIC (2017a) and ERMTS (2013)) 251 Figure 203: Import-Export of railway signalling, safety and traffic control equipment in selected regions/countries, 2005-2015 (million USD) (Source: Author’s elaboration based on UN COMTRADE data) 252 Figure 204: Exports over trade ratio of railway signalling, safety and traffic control equipment in selected regions/countries, 2005-2015 (million USD) (Source: Author’s elaboration based on UN COMTRADE data) 252 Figure 205: Total employment in the railroad equipment industry in selected European countries, 2008-2016 (Source: Author’s elaboration based on OECD STAN) 253 Figure 206: Total employment in the railroad equipment industry in selected countries/regions, 2008-2016 (Source: Author’s elaboration based on OECD STAN data CRRC annual reports) 254 Figure 208: Simplified Shipbuilding global value chain 266 Figure 208: AS-IS diagram describes the present state of the ship build organization's process in world (including European 267 Figure 209: Ship systems and subsystems consisting on the ship’s construction 268 Figure 210: Four field the development of technical and technological modern ship construction 272 Figure 211: The matrix of relations between the main targets and the assumed effects of the Europe 2020 strategy 277

Figure 212: Diagram of three main parts of the shipbuilding value chain 278 Figure 213: The scheme of system of implementation of new technical solutions using new technologies in the value chain of the shipbuilding 286 Figure 214: Supply chain management 291

Tables Table 1: Passenger car producers (Source: ACEA) 37 Table 2: Europe – plants per country (Source: own work) 38 Table 3: European OEM parts suppliers (Source: Automotive news) 39 Table 4: BMW Production Network (BMW 2017) 42 Table 5: Overview on Research programs for Connected and Automated Driving (Source: ERTRAC, SCOUT, Fraunhofer ISI) 61 Table 6: Commercial truck classification in the US (Source: Dieselhub, 2017) 87 Table 7: Chinese LCV fleet features (Source: Tuet al.2014) 88 Table 8: Selected Tier 1 and Tier 2 Suppliers in Automobile Parts and Subsystem Manufacturing Clusters in China (2017) 100 Table 9: Top 20 Automotive Transactions in 2016 113 Table 10: Gross Domestic Expenditure on Research and Development in the Main Corporate Research Segments in France (€ million) (2011) 125 Table 11: European emission standards for light commercial vehicles ≤ 1,305 kg reference mass (Category N1-I), g/km 130 Table 12: European Emission Standards for LCV 1305-1760 Kg Reference Mass (Category N1- II), g/km 130 Table 13: Progress in Reducing Emissions by Selected European Truck Manufacturers 133 Table 14: Policy Status of Light-and-Heavy-Duty Tailpipe Emission Standards in G20 Transport Task Group (TTG) (Country/Regions Ordered Alphabetically) 134 Table 15: Innovation Categories in Automotive Industry 139 Table 16: Hop Topics in Automotive Industry 140 Table 17: Number of Enterprises with Innovation Activity in 2014 in NACE DM 141 Table 18: Share of Enterprises with Innovation Activity in 2014 (%) in NACE DM* 142 Table: 19 Margin Differentials between 3 Tier Suppliers of Brakes and Brake parts in the EU 5 in 2013 (Vehicle Body Parts in Germany, France, Spain, Italy and the United Kingdom) 153 Table 20 Features of producer- and buyer-driven value chains (Gereffi, 1999) 169 Table 21 GVC governance structures elaborated from (Gereffi et al., 2005) 170 Table 22 Major aerospace firms and their locations 173 Table 23 Typical parts and components of the aircraft 178 Table 24 Typical sub-systems for the aircraft 178 Table 25 Disruptive technology assessment 185 Table 26 European competencies assessment (European capabilities were subjectively assessed, after having reviewed several research initiatives and have scored the commitment in four areas. The scoring, is between 1 – 4, 4 given for the criteria that Europe has a competitive advantage. 201 Table 27: Share of value added of railcar component systems in the US (Source: CGGC (2010)) 215 Table 28: Profiles of five key global high-speed train manufacturers 218 Table 29: Indicators analysed and data availability (Source: own work) 224

Table 30: Shift2Rail R&I actions for future high-speed systems (Source: Author’s elaboration based on Borghini (2016)) 234 Table 31: Major Chinese outward acquisitions of high-speed rail technologies (Source: Sun (2015)) 235 Table 32: Assessment of the Chinese high-speed rail technological mastery based on arguments collected from different sources 244 Table 33: Order book market share (in % CGT), merchant vessels of 300 GT and over 260 Table 34: Merchant ships on order as of July 1st, 2016, ships of 300 GT and over 261 Table 35: Three ship manufacturing phases and main actions in each phase 264 Table 36: Important parts in the construction of a cruise and ro-ro/ferry vessel in Europe - supply chain 268 Table 37: New solutions and technologies implemented on ships 272 Table 38: New solutions and technologies applied in ship manufacturing 280 Table 39: Selected configurations of B 2 R&D cooperation in the shipbuilding sector 282

Executive Summary

This document contains the assessment of current status of value chains of European transport manufacturing industry from socio-technological point of view developed in task 2.1. Four transport modes are assessed separately: Automative, Rolling stock, Aeronautics and Shipbuilding. For WP2, 12 high-level Focus Areas were identified and refined, in order to establish a clear focal point which allowed the current status assessment. 4 out of 12 Focus Areas were defined for task 2.1: Innovation, Research & Development, Technological readiness & leadership and Skilled workforce. To reach the assessment, a subsequent methodological steps are developed per transport mode. It is important to underlie that each transport mode has its particular and independent assessment KPIs. This was decided after different brainstorming and debating sessions among consortium members. First of all, value chain selection and analysis are developed. Each transport mode contains a countless number of different value chains, involving a wide range of product families, so selecting the most representative value chains is a crucial initial step. Once selected the chains, main actor identification and characterization is stated, in order to focus the assessment. Later, as a way to develop later investigations, an inventory of the current state of the art in transport manufacturing is compiled. Finally, the selected European value chains are compared and assessed against the references identified in the previous step, stablishing a relative position. The assessment ranking applied for each Focus Area varies between 0 and 4, and has the following meaning: 0--> Europe has a strong competitive disadvantage in comparison 1--> Europe has a competitive disadvantage in comparison 2--> Europe has neither a competitive advantage nor a competitive disadvantage 3--> Europe has a competitive advantage in comparison 4--> Europe has a strong competitive advantage in comparison As a result, each transport mode has defined its particular assessment KPIs and obtained a particular result for them. The accessibility of the data deserves a special mention. In certain transport modes it has not been possible to have the necessary data to evaluate some of the Focus Areas. Fortunately most of them found appropriate data sources.  Automotive.

In Automotive transport mode, the analysis is done separately for cars and for LCV and HDV vehicles.

o Cars

For the scoring of the present competitiveness of the European Automotive industry international studies and analysis with a focus on electric mobility or CAD (or specific aspects like connectivity) have been investigated. In general, a scoring of the European competitiveness is very difficult as for the electric car substantial changes in the value chain are expected. Due to the comparable low technical complexity of electric cars, the market barrier for new car manufacturers is very low and the competitive situation for the European industry is more difficult than ever. In the digital sector, car manufacturers are competing with traditional competitors, large high-tech companies with an IT-background or new rivals like Tesla or BYD combining electric-powered engines and new approaches for CAD. At present, the biggest disruption is impending the automotive value chain. Technological development will drive this process and dramatically change the value chain from the bottom up.

Looking at “Research & Development” Focus Area, current position for Europe obtains an assessment of 2, which means that it’s position is neither favoring its economic and technological prospects, nor is it hampering it. “Research & Development expenditures” and “Research & Development funding initiatives” are considered in detail being both analysed and assessed.

For “Technological readiness & leadership” Focus Area 2 surveys are considered. Summarizing the findings of both, it is determined that Europe has a strong competitive position, confidence in the near future and positive prospects regarding the short-term economic situation according to the consulted experts. With the widespread availability and large number of premium cars, Europe, its car manufacturers and its suppliers are in a favorable position for the application of new ADAS features and functionalities. Japan seems to be at present the only country with a comparable technological capability. For “Skilled workforce” Focus Area, the assessment reflects a score of 1, which means that Europe has a competitive disadvantage. Skilled employees and workers are crucial assets for innovations, R&D activities and technological leadership. In the knowledge-intensive environment of CAD this question becomes more relevant than ever. While China is taking the clear lead in the annual number of qualified graduates, the United States still have the best universities and with Silicon Valley the most famous innovation hub. Finally, for “Innovation” Focus Area, the meta-analysis of three studies provides some insights into patent filings, quantities in specific mobility sectors, the competitive position of Europe, its OEMs and 1st Tier suppliers. 3 score for this Area shows that Europe has a competitive advantage in comparison with competitors. Nevertheless, competitors are catching up at rapid speed.

o LCV and HDV vehicles

Despite their strategic, commercial, and logistics importance to OEM’s, supply chains are under severe pressure. At the same time, technology advances in new powering solutions replacing diesel engines in both LCV’s and HDV’s, have created new opportunities and challenges for both the OEM’s and their suppliers. Although varying significantly between countries, European R&D investments trail those of South- Korea, Japan, and the US, and have recently also been overtaken by China. With technological development becoming increasingly important in the main automotive challenges ahead, European manufacturers may well see themselves at a relative disadvantage. This means that “Research & Development” Focus Area, in terms of expenditures, obtains an assessment of 1. Similar conclusion and assessment can be obtained for “Technological readiness & leadership”. Although EU manufacturers like Peugeot, Citroën, and Renault do relatively well on reducing CO2-emissions, projections indicate that EU-made LCV’s are not likely to overtake Japanese, Indian and Canadian manufacturers. For HDV’s, projections indicate that US manufacturers could well overpower their European counterparts in this respect, to sustain competitive advantages. The analysis shows that for “Innovation” Focus Area, while the number of inventions within automotive navigation, handling, safety & security, and entertainment has shown a stable or slightly increasing development, the number of inventions related to propulsion systems has more than five-doubled in course of a few years. Most inventions in this fields, however, are done by non-European companies, which might increase any gaps in competitiveness. This concludes as an assessment of 1. Finally, for “Skilled workforce” Focus Area, the assessment reflects a score of 2. Employment levels are important aspects in judging production capacity, market coverage, and competitive strength. After the crisis, employment levels increased in Germany and particularly China (partially due to outsourcing), while American recovery is slower and some EU-countries show decreases. The main production regions all show a transition towards more highly skilled personnel. Productivity and Value-Add, FDI Inflows to LCV, HDV and PV Manufacturers and Investments in Expansion of Production Assets are others additional analysis developed in this chapter that contribute to the understanding of European relative position.  Rolling stock.

This transport mode approach has explored the value chain of the European high-speed rail manufacturing industry. The evidence collects points towards an increasing global consolidation trend, not only at the OEM level but also at the supplier level. An increasing share of the value chain revenues being captured by Tier-1 suppliers is also evidenced in the analyses. Together these findings reveal the growing pressure European rolling stock OEMs are dealing with. Whereas consolidated and vertically-integrated actors intensity competitive rivalry, suppliers increasing their share of the value chain contribute to the erosion of profitability of OEMs. These aspects raise the question about the need for OEMs to look for new avenues of revenue to retain their competitiveness in this changing environment.

From an assessment of eleven indicators is concluded that the European high-speed rail manufacturing industry remains competitive vis-à-vis its major rivals worldwide, namely Japan, China, and South Korea. This competitive advantage seems, nevertheless, to be fragile face the intense competition coming from Asia, and especially from China. This new entrant, who built an extensive industrial capacity upon foreign high-speed technologies and know-how, has placed innovation at the top of the national agenda and is investing substantially in R&D. Although these R&D efforts have not yet translated into innovation leadership (as measured by invention activities) and commercial success (as measured by global market shares) in the high-speed rail segment, they might not take long to be fruitful. The important R&D investments from China contrast with a decreasing trend of R&D investments of the European rolling stock industry. The significant increase of the European Commission’s R&D budget for the rail sector under the Shift2Rail initiative compensates somehow the decline in private investments and will, hopefully, succeed in mobilising resources from the private sector. It is, nevertheless, important to note that the Commission's rail research budget appears to be low compared to resources assigned to other transport modes in the Horizon 2020 initiative.

The analysis of indicators in the technology development domain also revealed that the technological leadership of the European high-speed rail manufacturing industry is, to some extent, the result of its long-lasting expertise. In this respect, and despite the rapid technological development of the Chinese high-speed rail industry, some experts remain sceptical about the innovative and system management capabilities of this industry. Again, the competitive advantage of the European industry seems to be frangible, as experience can be accumulated more rapidly by new entrants than by pioneers. This is particularly true in this case, where technology transfers from European leaders served as the foundation of the Chinese industry.

An inventory of the current state of the art in high-speed train control systems combined with the evidence collected through three indicators on technology adoption and technology diffusion of these systems revealed that the European-developed standards (i.e., ETCS) have been extensively adopted worldwide. The European communication standards have also served as the foundation of the Chinese systems. In this area, the European industry appears to hold a substantial competitive advantage. Surprisingly, although Japanese suppliers are recognised for their high-quality signalling and control systems, their technologies appear to have limited success in global markets.

It is worth noting that this study has focused on the high-speed rail segment and these findings cannot be, therefore, generalised to the other segments of the rolling stock industry. It is also important to note that the construction and analysis of indicators are limited by the availability of suitable quality data, especially from China. The lack of official statistics has overcome, when possible, by using corporate data. Caution must be, therefore, exercised when data from international databases and corporate reports are compared.

Next paragraphs contain the assessment results each Focus Area. For a simple identification, the KPI results are collected in brackets.

Looking at “Research & Development” Focus Area, current position for Europe is obtained from an assessment of 3 KPIs: “Business R&D expenditures”(1), “R&D personnel ratio”(no score) and “R&D intensity”(1). An additional analysis named “Other R&D activities in Europe and China” has been developed. The weak position of Europe is clear. 20

For “Technological readiness & leadership” Focus Area 5 KPIs are considered (in brackets each assessment): “High speed rail technology mastery”(3), “Share of high-speed trains commercialised in domestic and foreign markets”(3), “Worldwide diffusion is the European, Chinesse and Japonesse Train Control Systems”(3), “High-speed network equipped with GSM-R systems or equivalent”(2) and “Trade of railway signaling, safety and control systems”(3). Results show that Europe has a strong competitive position.

For “Skilled workforce” Focus Area, the assessment reflects a score of 3, which means that Europe has a competitive advantage. “Employment” KPI combines employment stability, working population ageing and skill shortage analysis in railway manufacturing industries to get a final assessment decision.

Finally, for “Innovation” Focus Area, two KPIs are defined: “Development of railway technology”(3) and “Development of railway environmental technology”(3). Both reflect a well positioned European railway manufacturing industries.

 Aeronautics.

The aerospace industry is characterised by high risk and uncertainty in all its supply chain. OEMs performances are affected by many elements, including global economy, market trends and uncertainty, oil prices, competition, and international politics. In the last decade, the pressure in the supply chain has been directed on the upstream actors who have to cope with a growing demand, driven by new technological developments involving lighter materials and more fuel- efficient propulsion systems. Digitisation, new materials, additive manufacturing, automation and augmented & virtual reality are the disruptive technologies that will permit the assessment of each Focus Area in aerospace transport mode. Both “Research & Development” and “Innovation” Focus Areas are assessed with 4, representing a strong competitive advantage in comparison for Europe. The main leading firms in the industry heavily invest in R&D activities, trying to constantly innovate their product in order to gain a larger competitive advantage against competition. Even if the European investment in R&D are still lower compared to the United States, for instance, there are many research programmes under development within the frame provided by Horizon 2020 that support the R&D activities within Europe. The manufacturing industry reveals a geographic dispersion over the continent, with United Kingdom, France, Germany, Italy, Spain, Poland, and Sweden being the main hubs. The industry reveals a cluster organisation, which allows institutions, academia, and the industry to cooperate under the lead of different regional specialisations. The French Aerospace Valley and the European network Wings-for-Regions initiatives represent interesting examples of cooperation at a local and trans-national way. Specialised in aeronautics and space, these clusters foster innovation, being heavily based on R&D activities and allowing SMEs to remain competitive in the sector against the globalisation challenges (Schönfeld & Jouaillec, 2008). “Skilled workforce and education” Focus Areas appears to be the most critical threat, assessed with 1, were all the technologies present a similar level. “Technological readiness & leadership” Focus Area is assessed with 3, while some of the disruptive technologies present a lower estimation. Next table resumes the partial assessment per relevant technology technology in each Focus Area:

 Shipbuilding.

Strategic activities that were implemented in Europe at the beginning of the 21st century in the shipbuilding and offshore industry have created a sector with global potential that uses the latest technologies in the production of ship systems (suppliers) and new highly specialized vessels and offshore floating construction (shipyards). The production potential of the European shipbuilding sector is adjusted to the level of orders expected from shipowners in the coming years, expecting ship's systems and new ships with very high added value. The key action to position the European shipbuilding industry in the world shipbuilding market was the “integration” of the EU shipbuilding industry into the EU's implementation of knowledge-driven and smart economy (i.e. smart growth) policy and the promotion of a resource efficient, greener and more competitive economy (sustainable development). They are the ideal solution for the opportunities that can be found in the maritime sector. As a result, “the European marine equipment industry is a world leader for a wide range of products ranging from propulsion systems, large diesel engines, environmental, and safety systems, to cargo handling and electronics”1 enabling the European shipbuilding subsector to build technologically complex and innovative (high value added in the value chain) ships. In reference to “Research & Development” Focus Area, current position for Europe is obtained through “B 2 R&D cooperation” KPI. Assessed with 4, it stablished the best relative position for European shipbuilding manufacturing industries. Continuous cooperation of shipbuilding companies with R&D sector is one of the key drivers of its technological development and implementation. As a result, the European shipbuilding industry has achieved a competitive advantage on the world market to tackle the construction of highly technically complex vessels with the simultaneous application of state-of-the-art technology in the ship. For “Technological readiness & leadership” Focus Area, 2 KPIs are considered: “Implementing new technologies”(4) and “B2B cooperation in the implementation of new technological solutions”(4). European shipbuilding manufacturing industries are implementing state of the art technologies and a proper cooperation between the value chain companies. In the case of “Skilled workforce” Focus Area, the assessment has been developed through “Knowledge and skills of employees” KPI, being scored as a 3. The established education structures have created a learning system in Europe that "supplies" the shipbuilding industry with employees with specific knowledge, skills and competences. This gives the European shipbuilding industry the opportunity to acquire workers not only from the domestic labor market but from the entire European labor market. Finally, for “Innovation” Focus Area, one KPIs is defined: “Implementing management innovation”(4). The shipbuilding sector is similar, and have retained a competitive advantage in high value added vessels where innovation in process management, enterprises, B2B relationships are key to the high value chain productivity of the shipbuilding process.

1 Importance of the Shipbuilding Sector http://ec.europa.eu/growth/sectors/maritime/shipbuilding/index_en.htm (15.06.2017) 22

1 Introduction

This report has been created within the SCORE project “Scoreboard of Competitiveness of European Transport Manufacturing Industry”. It is the second report for Work Package 2 “Assessment of current position of European transport manufacturing industry in terms of dynamics of industrial value chains, demand side requirements and economic analysis of competitiveness” and covers Task 2.1 “Mapping of the current status of dynamics of value chain of European transport manufacturing industry”.

1.1 Project background

WP 2 is the first of the three content-related work packages of the project. It will assess and deliver a coherent picture of the current status and dynamics of value chains (Task 2.1), the demand-side requirements (Task 2.2) and the competitive situation (Task 2.3) of the European transport manufacturing industry covering Europe’s most relevant transport modes: automotive, aviation, rolling stock, and shipbuilding. The final output of this work package will be summarized in a scoreboard offering a comprehensive picture of the current global competitive position of the European transport manufacturing industry (Task 2.4).

Figure 1: Relationship between the three content-related work packages in the SCORE Project (thick grey arrows: relationship between WPs, thin black arrows: relationship between tasks)

WP 2 also provides a fundament for the investigation of disruptive trends and their impact in WP 3 and contributes with significant insights for the derivation of recommendations in WP 4 (see Figure 1).

1.2 Objectives

Against this background, the main objective of this task (Task 2.1) is to investigate current status of dynamics of value chain of European transport manufacturing industry. A selection of relevant and representative value chains and predominant actors per transport mode and its characterization is a must that will permit obtaining a real focus for European best practices. Furthermore a comparable world best practices are investigated in order to obtain the Europeans relative position. Finally, an assessment of the innovation capacities of the European transport manufacturing industry will be made.

Based on overarching Focus Areas, different indicators shall be identified and analysed per transport mode. These indicators will have a particular transport mode orientation. This analyse will allow a posterior assessment of European transport manufacturing industry

Finally, this task aims to supply a baseline for the analysis of future trends from the dynamics of value chains to be analysed in Task 3.1 (WP 3).

1.3 Focus Areas for D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry

Due to the nature, the fundamental differences and the individual characteristics between the different transport sectors, a comprehensive analysis approach suiting all industry requirements is very complex to establish. Existing approaches like Porter-5-Forces or Porter´s Diamond may address some of the required aspects for a comprehensive competitiveness analysis but do not satisfy all transport manufacturing industry needs addressing e.g. multi-market demand aspects, globally integrated value chains, environmental policies and geopolitical aspects, demographic indicators or business strategies at the same time and appropriately for all considered industry sectors. To establish a clear focal point for the different tasks in work package 2, task-specific Focus Areas were defined. These high-level Focus Areas were identified and refined in multiple discussions and brainstorming sessions within the consortium. For work package 2, which assesses the current status of the competitive situation of the European Transport Manufacturing Industry overall 12 different topics were identified and assigned to the respective tasks:

 Innovation, Research & Development, Technological readiness & leadership and Skilled workforce are the high-level building blocks for the technology focused analysis carried out in D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry.  The topics Social, Economic, Demographic will be further investigated in the Demand Analysis carried out within D2.2 Push and pull factors for industry as derived from comprehensive demand side analysis.  For the Deliverable D2.3 Report on comprehensive picture of global competitive position of European transport manufacturing industries the topics Market Dynamics, Competition, Financial Excellence, Value Added and Supporting Industries act as main pillars.

Figure 2: SCORE Methodology addressing different aspects of competitiveness

In line with the proposed and within the consortium agreed SCORE Methodology (detailed information in D2.4 Scoreboard of current competitive position of European transport manufacturing industry) for Task 2.1 four areas of interest were defined:

Research & Development Within this Focus Area different indicators help evaluate a single company’s, a certain industry’s or an entire country’s R&D effectiveness and intensity (percentage of revenue or GDP invested in R&D). It is more oriented towards basic research opposed to market-oriented research. Additional light is shed on the source of funding (e.g. government, industry) and the year-on-year change for certain indicators. Besides this quantitative approach, a qualitative analysis investigates e.g. the intensity of academia-industry co-operation and effects of R&D expenditure.

Innovation Similar to the Focus Area “Research and Development”, this Focus Area also takes both quantitative and qualitative factors into consideration. However, it is more market-oriented and covers product, process and service innovation. It concentrates on the share of innovating enterprises, innovation expenditure, funding of innovation, and effects of innovation. Additionally, industries and countries under study shall be analysed along other quantitative indicators such as the number of patents, standards and licences filed.

Technological readiness & leadership Based on the Technology Readiness Level (TRL), this Focus Area focuses on the maturity of available technology on the market. Scaling it up to company, industry or country level this indicator delivers comparable results for the number and quality of innovated products and services. It not only shows who are the main technology leaders (for both companies and countries) but also discloses international and domestic value chain dynamics. Further aspects include the manufacturing volume and quality of respective companies, industries and countries.

Skilled workforce This Focus Area deals with education and labour market-related indicators. These comprise e.g. the average education degree in countries of focus, the availability of a skilled workforce, the magnitude and effects of brain drain on a specific industry or country, researchers per inhabitants, unemployment rate etc. It further evaluates a country’s education system’s and labour market’s effectiveness by investigating in how far the labour demand is satisfied by available study programs and amount of places to study.

The established approach does give guidance for the different tasks as the defined Focus Areas should be definitely considered within the analysis but on the other hand it does not limit the carried out analysis to these aspects. That way a clear standard for the different tasks is institutionalized within the structure of the individual deliverables, but it also allows enough flexibility for the industry experts to add their industry-specific experience in additional chapters, if they feel it is necessary and appropriate. Furthermore the implementation of the analysis in a specific Focus Area will vary depending on the particular importance for the specific industry sector. One topic might be of essential importance for an industry sector while being only of general importance for others. Within the SCORE Methodology experts can perform their analysis within multiple graduation levels where they identified the biggest potential. It allows referring to or developing specific indicators demonstrating the influence on the respective industry segment or compiling existing Key Performance Indicators in already carried out competitiveness analysis and studies.

2 Automotive 2.1 Automotive Industry: Cars

“An exciting new era of change is sweeping the global automotive industry. In fact, I believe the industry will experience more change in the next 5 years than it has in the last 50 years…. It is impossible to overstate the magnitude of change I'm talking about….But the competition in this industry is fierce and getting stronger every day. In fact, this is one of the rare times in the history of the industry when virtually every auto company is profitable. As you would expect, confidence is 2 running high among all of our competitors.” (General Motors CEO Mary Barra)

The European car industry is witnessing a turning point in its history. The decline of its traditional market and, abroad, the growing pressure of ´local´ producers create an immense stress on the EU OEMs and on their suppliers. As with the EU shipping industry, a shift towards the ”premium” segment, cutting-edge technologies, technical and non-technical innovations are often envisioned as the next stage for the EU car producers. At present the industry is facing an extremely dynamic and potentially disruptive era. Enabled by sophisticated IT technologies completely new business models come into reach and will sustainably reshape the value chain as we know it. Recent developments indicate an end of the traditional car ownership concept and the introduction of a new area of mobility service providers (Strategic Analytics, 2017). This rapid and vital development is mainly driven by digitalization, shared mobility concepts resulting for the automotive industry in the evolution of Advanced Driver Assistance Systems (ADAS) towards the introduction of self-driving technologies and the completely autonomous cars and trucks. The estimation of the market potential varies between different studies but the common ground is that the digital area offers new business possibilities and will enlarge the traditional automotive market tremendously. Intel for example 3 estimates a $7 trillion passenger economy , McKinsey expects up to $1.5 trillion - or 30 percent more 4 - in additional revenue potential in 2030 . These long-term perspectives have already strong effects on the present strategies and industry roadmaps. While earning good money with reasonable margins at present the traditional car manufacturers have to concentrate on a variety of new and emerging technologies simultaneously. OEMs have to work in various technology fields (new propulsion technologies, digitalization, mobility services, artificial intelligence /deep learning, Lithium-ion battery production and many more) at the same time. All these technology fields are more or less completely new to car manufacturers and pose tremendous challenges for them. These developments will substantially change the whole value chain, force OEMs and suppliers to form new partnerships and open the market for new rivals. The competitive advantage of the European Automotive Manufacturing industry is at stake like it was never before. Nevertheless, Europe has picked up the challenge and is in a good position to defend it and also benefit from upcoming business opportunities.

2.1.1 SCORE Approach for automotive industry

The analysis of the automotive industry will first describe the main characteristics of the automotive sector in general including a historic development with a focus in manufacturing capabilities. It will furthermore describe the main value chain characteristics based on several examples of European automotive original equipment manufacturers. The analysis will explain exemplary a high-end manufacturer targeting mainly the premium segment and one large European OEM group focusing on the mass-market with a platform model. Furthermore, exemplary value chains of international competitors in different markets will be investigated.

In a second step the competitiveness of the European industry will be assessed in multiple ways.

2 General Motors – Pres Release: GM CEO Address Chicago Economic Club , 2015-03-12

3 Strategic Analytics: Accelerating the Future: The Economic Impact of the Emerging Passenger Economy, 2017

4 McKinsey: Automotive revolution – perspective towards 2030, 2016

 Multiple studies, benchmarks and analysis are already investing these topics or certain aspects. The results of the different publications will be further analyzed in order to create a coherent picture of the competitiveness of the automotive industry. The work in this aspect will investigate open accessible documents focusing on national and international (respective European) competitiveness aspects which have a certain importance within the automotive stakeholders.  Key Performance Indicators for individual topics of interests will be used to determine the competitiveness of Europe automotive industry.  Specific technology chapters will be focusing on individual competitiveness aspects. The specific reason for choosing the focus of the individual chapters will always be explained in a transparent way and might depend on the strategic significance for the industry sector, Europe’s capability to compete in the future or due to the high impact of policy implementations. 2.1.1.1 Challenges and technological trends for Europe`s industry

From a technology perspective the analysis will mainly concentrate on two crucial topics for the car industry: the manufacturing of electric vehicles and the Connected and Automated Driving (CAD). The necessity to focus on future technologies becomes evident when having a closer look at some of the aspects of technical leadership and the entry and resources of new rivals:

 Strict future orientation: For a moment Tesla became the 4th most valuable car company in the world despite producing solely fully electric vehicles in comparably low production quantities. Never the less Tesla`s stock valuation surged surpassed traditional car manufacturers like BMW, General Motors and Ford. The clear focus on disruptive technologies like CAD (Teslas`s Autopilot became a brand name over time and caused somewhat of a customer hype but also a lot of discussion) in combination with pure battery 5 electric vehicles and a visionary marketing concept seems to pay off at the end. A detailed analysis of Tesla will be given in in the next chapter.  New competitors with large capital resources at the consumer interface: When looking at the digital automotive market and the strategy of large high-tech enterprises like Google or Apple the necessity for change becomes evident again. Apple CEO Cook recently elaborated Apples strategy to enter the automotive market for the first time in more detail. He clearly expects major disruptions to come and focusses the company´s activities for developments in 6 the areas of self-driving technologies, electric vehicles and ride-hailing services. The company is investing incomparable amounts in these future technologies. For example they 7 announced an invest of 1 billion Dollars in the Chinese ride-hailing company Didi Chuxing. Google on the other hand has created its own brand Waymo focussing on self-driving technologies with large invests and plans to enter the automotive market as well. The “Google 8 Car” has become famous as it was among the first cars without a steering wheel on the road. At present both companies seems to target on supplying technologies for automotive rather than producing cars by themselves. Although having global activities in China the U.S. Tech

5 https://electrek.co/2017/06/09/tesla-bmw-most-valuable-car-company/

6 https://www.bloomberg.com/news/articles/2017-06-13/cook-says-apple-is-focusing-on-making-an-autonomous-car- system?cmpid=socialflow-twitter-business&utm_content=business&utm_campaign=socialflow- organic&utm_source=twitter&utm_medium=social

7 http://www.cnbc.com/2017/04/20/apple-ceo-tim-cook-on-didi-chuxing-deal.html

8 https://waymo.com/

giants have tough competition. There are a lot of Chinese counterparts like Baiduu, Didi and 9 Tencent who also compete in the race for the self-driving technology.  Indicators for disruptive mobility: The Federal Chancellor of Germany, Angela Merkel mentioned to the journal “Spiegel” at a meeting at the European Council that “everybody is 10 aware that the car industry will not survive in its present form”. As Germany is at present the leading European country for car manufacturing this message can be interpreted as a very strong hint for the necessity to react on expected changes and adjust the industry segment on future and emerging technologies.  Key technological trends identified by stakeholders: Traditional car manufacturers are well aware of those disruptive technologies and their strategic importance for their future 11 prospects. In KPMG’s 18th consecutive Global Automotive Executive Survey 2017 almost 1,000 senior executives from the world’s leading automotive companies and 2.400 customers were interviewed. The analysis is split between the upstream (product-driven) and the downstream (service-driven) market and has a strong focus on ICT companies. Results indicate the vital importance of battery electric vehicles and CAD for the future.

Figure 3: Key technological trends identified by KPMG`s Global Automotive Executive Survey. Top trends are Battery electric vehicles and Connectivity & digitalization identified by upstream players (product-driven – traditional OEMs and suppliers) and downstream (service-driven – ICT players or mobility service providers) (Source: KPMG)

 Focus on electric mobility (industry): Last but not least several car manufacturers recently announced the introduction of several electric vehicles. This includes e.g. Volkswagen (which 12 plans to build 2 to 3 million all electric vehicles by 2025) , Porsche (which plans to have 13 approx. 50% of its production to be electrified in 2023) , Daimler (which recently announced 14 to intensify their already ambitious plans) , Volvo (this car manufacturer plans to have every manufactured vehicle electrified by 2019, however this may be a joint strategy with the mother 15 16 company Geely) and others . This can be interpreted as one of the mitigation activities by

9 http://www.businessinsider.de/baidu-will-open-source-self-driving-car-software-2017-4?r=US&IR=T

10 http://www.spiegel.de/wirtschaft/angela-merkel-sieht-schwarz-fuer-deutsche-autoindustrie-a-1156453.html

11 https://home.kpmg.com/uk/en/home/insights/2017/01/global-automotive-executive-survey-20172.html

12 https://electrek.co/2016/06/16/vw-2-3-million-all-electric-cars-2025/

13 http://www.manager-magazin.de/unternehmen/autoindustrie/porsche-jedes-zweite-fahrzeug-soll-bald-elektroauto-sein-a- 1153417.html

14 https://electrek.co/2017/03/29/daimler-accelerate-electric-car-plan-2022/

15 http://www.car-it.com/volvo-setzt-ab-2019-voll-auf-elektrifizierung/id-0051396

the automotive industry to set the public discussion about the emission scandals at ease. The emissions scandal started in 2015 with Volkswagen where the car manufacturer faked their emissions under testing through software to pass environmental standards. This caused massive problems for the sales of diesel powered cars and furthermore for the image of car producers as well. As a matter of fact a lot of car manufacturers were struggling to meet the strict emission standards for diesel cars and cheated during the official test procedures. Additionally to the already convicted OEMs, there are simultaneous investigations against several others, where essential discrepancies between the official testing results and the measured emissions during utilization were detected. Involved car manufacturers are amongst others are: Volkswagen, General Motors, Fiat Chrysler, Daimler, Ford, Volvo and 17181920 Renault.  Focus on electric mobility (politics) But not only the industry itself reacted to the emission scandal, there is also a lot of dynamics in the political discussions regarding an end of combustion engines. France will end all sales of petrol and diesel powered cars by 2040 in order to meet its targets under the Paris climate accord. In Germany there are similar discussions, also targeting a different timeline (up to 21 22 2030). , Norway has even more ambitious plans with a time horizon up to 2025, the 23 24 Netherlands are targeting the same time limit for only zero-emission vehicles being allowed , and recently the United Kingdom announced their commitment to banish combustion engines 25 from 2040. There is almost no doubt that there will be exceptions for combustion engines but the general approach points in a clear direction for the future and towards electrical powertrains. China announced the implementation of a sales quota for electrically powered vehicle. At present the policy is in a draft stage, but will influence Europe’s competitiveness in the Chinese market massively. Recent negotiations between the German chancellor Merkel and the Chinese Premier Li Keqiang to postpone the quota for another year indicate the importance and the struggle for German (and European) car manufacturers to meet the formulated obligations. However, the latest draft published by the Ministry of Industry and 26 Information Technology is still planning with the quotas coming in to effect in the year 2018. One important policy factor pushing this trend is the Paris Agreement where 196 nations were 27 negotiating greenhouse gas emissions mitigation strategies.

16 https://electrek.co/2017/03/22/bmw-electric-vehicle-plans/

17 https://www.theguardian.com/environment/2015/sep/30/wide-range-of-cars-emit-more-pollution-in-real-driving-conditions- tests-show

18 http://www.independent.co.uk/news/business/news/volkswagen-emissions-scandal-more-carmakers-implicated-as-tests- reveal-pollution-levels-of-popular-a6674386.html

19 http://money.cnn.com/2017/05/25/news/companies/gm-emissions-cheating/index.html

20 Daimler, Press Release 18.07.2017

21 https://www.treehugger.com/cars/germanys-bundesrat-calls-end-internal-combustion-engine-powered-cars-2030.html

22 https://www.theguardian.com/business/2017/jul/06/france-ban-petrol-diesel-cars-2040-emmanuel-macron-volvo

23 http://insideevs.com/netherlands-moves-to-allow-only-all-evs-by-2025-no-more-gas-diesel-sales/

24 http://www.independent.co.uk/environment/climate-change/norway-to-ban-the-sale-of-all-fossil-fuel-based-cars-by-2025-and- replace-with-electric-vehicles-a7065616.html

25 https://www.theguardian.com/politics/2017/jul/25/britain-to-ban-sale-of-all-diesel-and-petrol-cars-and-vans-from-2040

26 https://www.reuters.com/article/us-china-autos-electric-idUSKBN1941V5

27 UNFCCC, 7. d Paris Agreement, 2015 30

 Increased Safety aspects: Although the European Roads are the safest in the world, approximately 26.000 people died on European roads in the year 2015 and it is estimated that 135.00 people were seriously injured. The social costs for fatalities and injuries caused on the 28 road sum up to over €100 billion . Vision Zero (achieving zero fatalities and injuries on European roads) is one of the major goals for the European Commission. Technological breakthroughs and developments in ADAS have greatly improved vehicle safety over the last years. One of the major improvements is expected to be realized by the introduction of higher automation levels and functions (like autonomous emergency braking system) and at its final stage the fully autonomous vehicle.

Regarding competitiveness aspects Europe’s capabilities will mainly be compared with the automotive industry in the U.S. and in China. This will as well be done by describing in a first step exemplary value chains of important stakeholders within these countries.

 The importance of China and the United States was already explained by their tremendous market shares in detail in Deliverable “D2.2 Push and pull factors for industry as derived from comprehensive demand side analysis”. The United States is dominating the market with IT- companies entering the automotive sector with incomparable data skills and enormous financial resources. Furthermore, the U.S. is home to electric automotive pioneers like Tesla (which is targeting at the technical leadership of EV and CAD simultaneously), small spin-offs in Silicon Valley like Faraday Future or Atieva and suits several innovation labs of the most 29 important OEMs or major suppliers. Furthermore it has a tremendous market potential for the utilization of automated trucks.  China is of special interest as it has by far the biggest market potential for EVs and strict regulatory structures by the government. The latest announcement of China´s government to consider a fixed rate of EVs for the production of domestic cars has alarmed the European 30 manufacturing industry . Furthermore, in the area of CAD domestic IT-companies have comparable skills to the internationally dominating U.S. counterparts and are entering the market.

The analysis will focus mainly on developments within Europe, the U.S. and China but might include additional regions accordingly if a certain interest seems justifiable (e.g. taking South Korea as main supplier for Lithium Batteries into consideration when analyzing this aspect for electric batteries).

2.1.1.2 Introduction to automation levels for on-road motor vehicles

SAE defined in its standard six levels to classify the degree of automation for on-road vehicles with a specific focus on the highest three levels of automation and their operation on public roadways. The automation levels define the required interaction of the driver with the automated car.

28 European Commission - Press release: Road Safety: new statistics call for fresh efforts to save lives on EU roads, 31 March 2016

29 http://www.autonews.com/section/map502&iframe=true&width=960&height=540 30 http://www.spiegel.de/wirtschaft/unternehmen/e-auto-quote-in-china-schockiert-deutsche-autokonzerne-a-1118966.html 31

Figure: 4 Definition and description of the different levels of automated driving according to CLEPA and based on the new SAE 31 international standard J3016™ (Source: CLEPA)

While autonomous driving is still a future vision, technology solutions for different automation levels were, are and will be offered to customers. Figure 5 illustrates the introduction and implementation of specific automated features and functions.

32 Figure 5: Introduction of automated driving and parking functions (Source: VDA)

Automation is therefore not only as an end result, the autonomous car interesting to OEMs, they are making high margins with specific advanced driver-assistance systems (ADAS) in the meantime.

2.1.2 Description of the automotive sector

31 http://clepa.eu/what-we-stand-for/mobility-evolution/automated-driving/

32 Verband der Automobilindustrie e. V., VDA Magazine Automation - From Driver Assistance Systems to Automated Driving, Sept. 2015

The automotive industry is capital intensive, with a relatively high capital-to-labour ratio, and a large share of the production is exported. In recent years, production has been increasingly shifted towards non-OECD regions, in particular Asia. The share of the United States and Japan in global production fell from 40 to 30%, while the share of the non-OECD areas increased production from one car in ten to one car in five. The economic crisis reinforced and accelerated this trend.

The next figure contains the cars produced globally in 2015 and evolution since 2005 (Source: ACEA):

Figure 6: Passenger car production 2005 / 2015 (Source: ACEA)

Market saturation in OECD countries, high shipping costs and efforts by automakers to gain market share by locating production where they have encouraged these trends. Outsourcing the manufacturing of small automobiles and parts has also been increasing among main car producers. At the same time, the minimum efficient scale of production has increased over time, spurring mergers and acquisitions in order to gain economies of scale.

The resulting economic geography of the industry is complex, with only some segments being fully global. Automakers and part suppliers form buyer-supplier relationships on a global scale. Interregional vehicle and parts trade is substantial, but capped by political and operational considerations. Intra-regional trade of finished vehicle and parts is the dominant operational pattern. Domestic production is still very strong in many national markets. Activities such as design or assembly tend to be geographically concentrated in clusters of specialized activity within countries.

As for any other complex industry, beside the OEMs, several tiers of suppliers are involved in the car manufacturing process, although the number of those suppliers and of those tiers has been reduced in the past decades. While spread geographically around the world and, within Europe, in many countries, and despite the outsourcing process, all together the car industry is still organized around production clusters, the markets are definitely “in close geographic proximity to the OEMs’ plants” (Bailey, et al. 2010). Which is to say that if the supply chain has become more and more internationally integrated, and “components and subsystems are increasingly sourced from other parts of the world”, final car assembly remains in general relatively close to the market. Around 85% of cars sold in the EU are also assembled there”. This is not true only for Europe, but it is a worldwide trend, with a somewhat different pattern for USA market (Bailey, et al. 2010).

Political and market reasons stand behind the above, explaining also the trend, as old as the car industry is, of internationalization, acquisition of aboard local manufactures and/or implementation of national plans by abroad firms. This has received further speed in the past decades, although as soon as 1920s major American and European firms already acted in such a way (Laux 1992).

If compared to its heydays, e.g. 1960s, the core of EU production has shifted toward Spain and south Europe; more recently, facilitated by EU enlargement, “Central and Eastern Europe have become attractive as a low-cost location for new export-oriented automotive investments.” (Stanford 2010, 389).

Figure 7: Passenger car production in Europe 2015 (Source: ACEA)

Next figure shows the EU car production in 2015:

Considering the relevant position of the EU market for the EU OEMs and suppliers, the role of the “domestic” is a key factor of financial success, which can exacerbate the long term contradictions of the industry. Indeed, the crisis in 2008 and the dramatic drop of the EU market have made more evident that there are “structural problems pre-dating the crisis. […] Recent falls in demand and production have made the situation worse and average overcapacity in Europe is estimated to be at least 20%” (EC 2009, 4). Thus, as the EU automotive industry lobby states, there is a “critical juncture”. While car manufactures have benefited (at different depth and intensity) “from the strong current and projected growth in motor vehicle sales globally, particularly in the BRIC countries and other emerging markets”, the main troubles are at “home”.

So, generally speaking, while facing overcapacity, the industry witnessed a decline in its biggest markets and thus it is under particular pressure. “This has an impact on the profitability on the European market, particularly for the volume segment, where most of the manufacturers reported losses on their European operations in recent years, although the aftermarket (repair services and spare parts) provides them a more profitable activity” (EC 2012, 15). On the contrary, those EU companies which experienced successful operation aboard, and especially in emerging economies, can claim better results, although the “majority of vehicles sold in these markets however is assembled locally”, a situation which “nevertheless contributes to investments in R&D and high added-value jobs in EU” (EC 2012, 15). That success, especially concerning Asian emerging countries, affects primarily the premium car segment, favoring those EU companies able to serve that niche.

The whole German automotive sector benefitted from the global development. The German industry has been traditionally export-oriented, with a first-class skilled workforce (and first-class training schools), and a great variety of SMEs companies organized in clusters. Thus, “the auto industry in Germany thrives as a result of the diversity of companies active in the sector: large and medium-sized auto manufacturers alike are to be found in Germany, as are system and module suppliers, not to mention numerous small and medium-sized tier 2 and 3 suppliers. In fact, around 85 percent of auto industry suppliers are medium-sized companies. All of these suppliers provide up to 70 percent of

value added within the domestic auto sector – ensuring that the German auto industry remains at the forefront of the competition” (Germany Trade & Invest 2012, 9).

Looking ahead, and beyond issues of straightforward capacity, car manufacturers face a number of challenges that will likely require significant restructuring to realign production capacity with changing patterns of demand. Most trend sales growth will be in the BRIC countries and other emerging markets while mature OECD markets will remain relatively stagnant. Ongoing globalisation, which will likely influence minimum efficient scale economies and the configuration of companies worldwide.” (OECD 2009, 110-111)

As reported by all the stakeholders, the motor-vehicles market are becoming less geographically concentrated and the share of world-wide sales in mature economies will decrease further (even in absolute numbers).

Two conflicting factors will be relevant here:

1. The first one is the globalisation of the industry´s value chain and the international projection of (fewer and bigger) OEMs; 2. The second element is the geographical proximity of production and sales, which is expected to remain in the future. Additionally, a global market means also the need of the car industry to produce vehicles according to different tastes, needs and conditions.

Indeed, “most automakers indicate a preference to continue to produce nearer to their final markets, and this causes a continuing regionalization of production. These regional production strategies reflect a mixture of economic and political influences”. Beside the relevant cost of shipping which can be “as much as 10% to the cost of a finished vehicle” (Stanford 2010, 385), further element can back a globalised industry with regional production: exchange rate volatility, “the agglomerating effect of tightly managed supply chains (including the trend towards just-in time components production and delivery systems that require tight logistics and transport planning, and hence are not amenable to global components sourcing)”. Least but not last, “political influences on investment location include a desire to avoid trade protection in key markets, thus stimulating FDI as an alternative to international trade flows.” (Stanford 2010, 385)

But there will be also ‘regional’ attitude in term of production outline: “Global (or interregional) trade in finished vehicles and components is important, depending on which regional markets are considered, and the leading OEMs clearly ‘think globally’ in their management and marketing. For example, it is now commonplace for OEMs to produce several different vehicles, customized for different regional markets, from a single standardized global ‘platform’” (Stanford 2010, 385).

The above described factors created an enormous pressure to the European production plants (or, better, at least many of those) which were experiencing over-capacity and decreasing European market volumes. To use the words of the EC, in this decade, “important changes are expected in the global automotive industry in several areas that are likely to profoundly reshape the industry and its markets worldwide. While the European market is mature, third markets are growing fast, changing the trade flows and the automotive value chain. The intense competitive pressure is growing further and EU companies are increasingly being challenged on their home market and developing opportunities in third markets.” (EC 2012, 3).

Figure 8 shows the expected evolution of light vehicle production:

Figure 8: Global Light Vehicle Production 1997-2020 (Source: IHS 2013)

To mitigate those disruptive trends, it had been already largely assessed that “automotive investment is not instantaneously mobile; even a low-cost region must develop a complex supply network, infrastructure, and demonstrated quality and logistics capabilities before it becomes attractive as a site for automotive investment. […] It cannot be accomplished simply by closing a plant in a high-cost region and opening a new one in a lower wage location.” (Stanford 2010, 391)

Moreover, in the medium-term, the car industry can face limits in its de-localization and ability to develop further abroad-based plants. The case of Curitiba region firstly had “provided an attractive opportunity to foreign investment by major auto manufacturers […], but also how the key factors that played an important role in attracting auto investments outside of old core regions (such as fiscal incentives, low labour costs) have been largely exhausted; further expansion in such regions will depend on developing competitive advantages based on agglomeration economies, labour skills and general expansion of the economy.” (Bailey, et al. 2010, 313)

This means that we can expect a new wave of changes both in Europe and abroad. Out of Europe this trend will lead to consolidate the existing clusters of production, developing local skills, solutions and services currently fed from abroad. And, this while, in opposition, it is expected a further de- localization, in order to meet new growing markets (Africa, next-11 etc.).

2.1.2.1 Manufacturing: size and structure

The value chain of motor vehicles is largely organized through a hierarchical structure, with the large automotive manufacturers positioned on top of the pyramid as lead firms responsible for design, branding, and final assembly. One level down, first-tier suppliers produce complete subsystems by cooperating with a large network of lower tier suppliers and subcontractors. Close relationships have developed especially between car assemblers and first tier suppliers as these last ones have taken up a larger role in the whole production process, including design.

These suppliers have increasingly developed into global suppliers since lead firms increasingly demand that their largest suppliers have a global presence and system design capabilities as a precondition to being considered as a source for a complex part or subsystem.

Generally speaking, the value chain has become worldwide more and more internationally integrated: components and subsystems are increasingly sourced from other parts of the world. Final car assembly, however, remains in general relatively close to the market. While mature economies are saturated markets and seem to have experienced their peak in car ownership, emerging economies have increasingly skyrocketing growth, mainly fed by local plants.

The EU car producers industry landscape is notable simpler than 20-30 years ago, and today we can count six major EU OEM groups, with a grip on the international market, e.g.

 Volkswagen Group (branding among other Volkswagen, Audi, Bentley, Bugatti, Lamborghini, Porsche, SEAT, Škoda, Ducati, MAN and Scania),  Groupe PSA comprising brands like Peugeot, Citroën, Opel, Faurecia, and also a chinese joint venture Dongfeng Peugeot-Citroën Automobile,  Renault Group (Renault, Dacia, Renault-Samsung, not to mention the alliance with Nissan),  FIAT (Fiat, Ferrari, Maserati, Lancia, Alfa Romeo, IVECO, Piaggio, and owning Chrysler, Jeep and Dodge),  BMW Group (BMW, Mini and Rolls-Royce),  Daimler group (Mercedes and Smart).

Other not-European OEMs with plants in Europe include Ford of Europe, General Motors Europe, Hyundai Motor Europe, Jaguar Land Rover (owned by Indian Tata), Toyota Motor Europe, Volvo Cars (owned by Chinese Geely) and Volvo Group.

Table 1 contains top ten car producers in the European Union and EFTA during the first three months of 2016, according to ACEA statistics

Table 1: Passenger car producers (Source: ACEA)

The EU production is spread in “250 production lines”, which are “split between 16 Member States, and every single Member State is involved in the supply chain for manufacturing and the downstream chain for sales. Typically, there are around 50 upstream component suppliers for a car, spread all over Europe and around 75% of the value-added of a new car is generated by these suppliers” (Source, EC).

Figure 9 presents the footprint of the production facilities of the largest motor vehicle parts suppliers present in Europe. The map shows 1,749 individual plants, representing 94 companies. In comparison with North America, the footprint of parts production in Europe is noticeably more compact, and many times is clustered around the assembly plants.

Figure 9: Europe – motor vehicle industry footprint, 2010 (Source: ERIEP)

In numbers, seven European countries are home to a large number of motor vehicle parts plants, representing 71% of the total. The countries with the largest number of plants are Germany, France, Spain, Italy, U.K., Poland, and the Czech Republic:

Table 2: Europe – plants per country (Source: own work)

Country Country Country Austria 44 Hungary 39 Romania 65 Belgium 37 Ireland 5 Russia 28 Bulgaria 2 Italy 97 Serbia 1 Czech 102 Lithuania 1 Slovakia 43 Czech Republic 2 Luxembourg 2 Slovenia 5 Denmark 2 Macedonia 1 Spain 184 Estonia 1 Moldova 1 Sweden 24 Finland 3 Monaco 1 Switzerland 10 France 234 Netherlands 10 Turkey 41 Germany 483 Norway 3 UK 144 Germay 1 Poland 84 Ukraine 6 Greece 2 Portugal 36

Next table shows the top 50 European parts suppliers ranking in 2014. Is a fact that some of them can be considered as “megasuppliers”. Those companies have the deep pockets to build factories anywhere, support worldwide Research & Development activities and ride out recessions in key markets such as Europe. That’s why they are positioned to exploit the auto industry’s growing use of global platforms. By 2019, global platforms are expected to account for 74 percent of the world’s light vehicle production, which would be up from 65 percent last year

Table 3: European OEM parts suppliers (Source: Automotive news)

Similarly to most industries, the value chain of the automotive industry starts with the extraction/recycling of raw materials. In addition to being a major consumer of basic and commonly accessible commodities, including a wide variety of metal alloys, the automotive industry now also plays a prominent role in the market for rare materials for highly specialized applications. Moving towards cleaner and more efficient solutions including hybrid or electric powertrains, efficient lighting, magnets or lightweight materials requires increasing quantities of such materials including rare earth elements.

The supply crunch experienced in the end of 2010 caused by an introduction of extensive export duties and export quotas by China, as well as additional requirements on exporters of rare earths, tungsten and molybdenum has revealed the vulnerability of the supply sector to decisions taken by exporting countries. It has also confirmed that controlling access to raw materials can be used as a political tool to protect local industry and to put foreign companies at a disadvantage. In addressing such issues, trade policy has a role to play in order to remove tariff and non-tariff barriers as indicated in the discussion paper on trade, international harmonization and global competitiveness.

In response to the supply crunch, significant efforts have been made to reduce the use of these scarce resources, promote their recycling, to develop alternative raw materials or processes and to develop new sources of strategically important materials and components. In a broader sense, however, it has become apparent that the unrestricted access to raw materials, especially to those which are indispensable to the proper functioning of the sector and the development of advanced technologies needs to be considered as a priority.

2.1.3 Characterize the value chain and the individual parts

In the following part different OEMs are exemplary introduced and their business strategy for electric mobility and Connected and Automated Driving analyzed to gather an understanding of this topic and the different backgrounds and basic conditions.

The three companies are BMW, PSA Group, Tesla and BYD.

BMW and PSA Group were chosen to give a snapshot on present European competences and capabilities. BMW is a premium manufacturer producing high-end and high-technology cars for many years now. The company was and still is a leading pioneer for electric mobility in Europe, being the first company to offer all-electric vehicles in a specific brand (BMW i) and specifically designed electrified cars built of lightweight materials. Recently BMW has adapted its strategy a bit and is also using alternative materials like aluminum or steel for cost reasons instead of focusing on carbon 33 structures (Reuters, 2016) . After the acquisition of Opel and Vauxhall Motors brands from General Motors the PSA Group is Europe's second largest automaker. As a mass manufacturer they utilize a platform strategy for their electric vehicles and are also striving for the technical leadership in CAD 34 while pursuing a clear Roadmap for the realization of ADAS features (PSA Group, 2017) .

Tesla is a relatively new American car company focusing on pure electrical-powered cars and is a very good example for a new rival to traditional OEMs. Tesla is pursuing a clear, well-known market entry strategy with the market launch of expensive car models, followed by the cheaper Model 3. At present Tesla with its prominent CEO Elon Musk is in the transition from a niche manufacturer with low quantities to a mass manufacturer offering affordable products in high quantities. Furthermore, Tesla is a leader in marketing strategy, has a direct sales strategy cutting out traditional car dealers and its innovation strategy is at the edge of what is allowed and not (e.g. updates-over-the-air) 35 (Bloomberg, 2017) .

BYD has emerged as one of Chinas top car manufacturers within just 10 years and can therefore also be identified as a new rival. The company is characteristic for the rapid speed at which Chinese companies are able to emerge. Furthermore it not only focusing on the production of cars but started as a battery manufacturer and continuously expanded its business fields. BYD Auto was 2015 the best-selling electric vehicle brand worldwide and for the second year in a row the world's top selling 36 plug-in electric car manufacturer with over 100.000 cars sold in 2016 (Greencarreports, 2017) .

2.1.3.1 Value Chain of BMW

Bayerische Motoren Werke AG (BMW) was founded 1916 and has its headquarters in Munich. At present it is one of the best-selling premium car manufacturers in the world. Besides traditional cars BMW produces sport cars (within the BMW Motorsport division) and motorcycles (under BMW Motorrad). Plug-in electric cars are offered under the BMW i sub-brand and the "iPerformance" model within the regular BMW line. With its three brands (BMW, MINI, Rolls-Royce) BMW is a luxury car and motorcycle manufacturer. BMW group operates atotal of 31 production and assembly sites in 14 37 countries (BMW, 2017) .

2.1.3.1.1 Products

BMW Group is separated into the four business sections:

 Automotive: In 2016, this section generated the gross profit margin of almost 14 percent.  Motorcycles: Gross profit margin in this segment amounted to 18.5 per cent in 2016.  Financial Services: This section deals with providing credit financing and leasing for BMW Group brand cars and motorcycles. Gross profit margin in financial services segment equaled to over 15 percent in 2016.

33 http://www.reuters.com/article/us-bmw-carbon-idUSKCN12S0S8

34 PSA Group,2017 https://www.groupe-psa.com/en/automotive-group/innovation/connected-car/

35 https://www.bloomberg.com/news/articles/2017-04-20/elon-musk-nears-1-4-billion-windfall-as-tesla-hits-milestones

36 http://www.greencarreports.com/news/1108813_chinas-byd-built-more-plug-in-cars-than-any-other-maker-last-year

37 https://www.bmwgroup.com/en/company/locations.html

 Other Entities: In 2015, this segment generated EUR 211 million profit before tax, which was 38 an incline by EUR 57 million compared to the previous year. (BMW Group, 2016)

Figure 10: BMW Products (Source: BMW Group, 2017)

2.1.3.1.2 Final assembly sites

 The manufacturing network of the BMW Group includes 31 sites in 14 countries on four continents. The production plants are located in Munich (parent factory which has assembled more than 9.7 million cars), Dingolfing (largest factory producing around 1.5000 vehicles daily), Regensburg, Landshut (exchange engine production, exterior, interior, articulated shaft production, foundry), Leipzig (production started 2005 and the site is producing also vehicles with an electric drive and carbon fiber reinforced polymer lightweight bodies), Berlin Spandau (motorcycles), Spartanburg (South Carolina, USA ), Rosslyn (South Africa), Oxford (UK, Mini), Hams Hall (UK, Engines), Steyr (Austria, Engines), Swindon (UK, press parts and components), Goodwood (UK, Rolls-Royce), Eisenach, Wackersdorf (CKD shipping) and Shenyang, China. In 2012, BMW Motoren GmbH (Steyr) produced more than one million engines (petrol and diesel engines). This means that around 80% of all engines utilized in BMW vehicles are delivered from Steyr. The Steyr plant also develops all BMW diesel engines (Diesel Competence Center in the BMW Group). Hence, there are works for the assembly of so-called CKD sets (Completely Knocked Down – meaning that components and devices are delivered to a country and assembled there), e.g. in Kaliningrad (Russia), Cairo (Egypt), Chennai (India), Rayong (Thailand), Malaysia and Indonesia. BMW exports more cars from the U.S. than General Motors and Ford together. (BMW, 2017; DesignBoom, 2017; 394041 Kempf, 2017)

38 https://www.press.bmwgroup.com/global/article/detail/T0258078EN/bmw-group-achieves-record-earnings-in- 2015?language=en

39 BMW, 2017 https://www.bmwgroup.com/en/company/production.html#Productionlocation

40 DesignBoom, 2014https://www.designboom.com/technology/inside-look-bmw-mini-production-facilities-10-28-2014/

39  BMW Group Production Network (BMW 2017) :

Table 4: BMW Production Network (BMW 2017)

Spartanburg, South Carolina, United Hams Hall, Great Britain Rayong, Thailand States (X-Series except X1) Berlin, Germany (Motorcycles, brake Jakarta, Indonesia Regensburg, Germany discs) Dingolfing, Germany (3,4,5,6,7 Series, Kaliningrad, Russia Rosslyn, South Africa M 5,6) Cairo, Egypt Kuala Lumpur, Malaysia Shenyang, China (Dadong) Cassinetta, Italy Landshut, Germany Shenyang, China (Tiexi) Chennai, India Leipzig, Germany Swindon, Great Britain Eisenach, Germany Manaus, Brasilia Steyr, Austria Goodwood, Great Britain Munich, Germany Wackersdorf, Germany Graz, Austria Oxford, Great Britain San Luis Potosí, Mexico Born, Netherlands

2.1.3.1.3 Value chain main characteristics

BMW has more than 13.000 suppliers worldwide and adds value in its inbound logistics primary activity via minimizing transportation costs and sourcing the raw materials of the highest quality. The car manufacturer purchases the majority of its raw materials from Germany (43 %) and Eastern Europe (20%). The main reason is the close proximity to the manufacturing and assembly units based in Germany and Europe to reduce the costs of logistics and ensure an undisputed supply based on 42 the trust and experience with its well-known suppliers (Dudovskiy, 2016) .

 Outbound logistics

BMW Group global distribution network comprises about 3,310 BMW, 1,550 MINI and 140 Rolls- Royce dealerships. In China alone, around 60 BMW dealerships were opened in 2015 (BMW, Annual 43 Report 2015) . The dealership and agency network for BMWi comprises about 950 locations. In total, about 63% of new vehicles are transported out of manufacturing plants by rail.

2.1.3.2 BMW AG and Electromobility

BMWi is a comprehensive mobility concept representing electric vehicles in conjunction with sophisticated mobility services. These services include Car sharing (DriveNow), web-based parking services (ParkNow), search help for public charging stations of various providers (ChargeNow, ChargePoint, ChargeMaster) but also entertainment features like electronic city guides (MyCityGuide) 44 or social communication apps for families (Life360) (BMW, 2017) .

41 Kempf, 2017 http://www.deutschlandfunk.de/usa-besuch-merkel-wir-muessen-uns-nicht- kleinmachen.868.de.html?dram:article_id=381043

42 Dudovskiy, 2016, http://research-methodology.net/bmw-value-chain-analysis/

43 BMW Group, Annual Report 2015 https://www.bmwgroup.com/content/dam/bmw-group- websites/bmwgroup_com/ir/finanzberichte/pdf/en/12784_GB_2015_en_Finanzbericht.pdf

44 BMW, 2017 https://secure.bmw.com/com/de/insights/corporation/bmwi/mobility_services.html

2.1.3.2.1 Actual models and range

BMW i3 was launched in the year 2013 and the brand has been continuously developed. In November 2016 seven models have been available with pure electric drive (i-) or as a plug-in hybrid (eDrive). Since 2013 more than 100.000 cars from the brand BMWi were sold worldwide (Bimmer 45 Today, 2016) .

In addition to the two BMW i8 and i3, the iPerformance models 225xe, 330e, 740e, X5 xDrive40e and the BMW X1 xDrive25Le, which are only available in China, are among the i-models.

Figure 11: BMW i8 and i3, two specifically designed electric cars mainly built with lightweight materials (Source: BMW G)

Further models, such as the BMW 530e G30 and the MINI Cooper S E Countryman, complement the product range already from 2017. For the largest part of the 100.000 cars sold, accounts the electric car BMW i3 (range: 300 km), which has been sold more than 60.000 times worldwide. More than 10.000 sales go to the account of the hybrid sports car BMW i8 (range battery only: 37 km, combined: 600 km), the rest is a comprehensive result of the comparatively newer plug-in hybrids.

BMW is reportedly planning a purely electric version of the BMW i8, which is to come with a battery capacity up to 400 kilometers. BMW is building a version of the i8, in which the three-cylinder turbo motor has been removed and a larger battery has been installed. This way the two-seater would be 46 an alternative to the Tesla S. (Kable, 2016)

Recently rumors indicate that BMW is planning to introduce an all-electric 3 series. This can be understood as one counter measure against Tesla`s Model S which has already 400.000 pre-orders 474849 at present.

2.1.3.2.2 Future Strategy

BMW Group and Nanyang Technological University of Singapore are cooperating since 2013 on electric mobility research programs at their Future Mobility Research Lab located in the city state. The joint lab started with an initial funding of S$5.5 million (at a later stage additional S$1.3 million were added) and was BMW Group’s first in Southeast Asia. Research will mainly concentrate on the all- electric i3 and the plug-in hybrid sports car i8. Scientists from BMW and NTU will conduct joint

45 http://www.bimmertoday.de/2016/11/03/bmw-feiert-100-000-verkaufte-fahrzeuge-seit-i3-marktstart/

46 https://www.autocar.co.uk/car-news/new-cars/all-electric-bmw-i8-works

47 https://electrek.co/2017/06/28/bmw-3-series-electric-tesla-model-3/

48 http://www.cnbc.com/2017/06/28/bmw-plans-to-introduce-an-all-electric-3-series-car-later-this-year.html

49 https://global.handelsblatt.com/companies-markets/bmw-set-to-introduce-electric-3-series-789071

research on real-life driver behavior and log detailed data on car performance. Test trials for new 50 mobility services will be conducted on public roads with both cars (Inside Evs, 2015) .

BMW is also continuing its research on fuel-cell technology. Current prototypes already have a range of about 700 km, which is comparable to combustion-powered engines. BMW´s CEO Krüger expects 51 that in the future a diversity of powertrain technologies will coexist (BMW, 2016)

The iNEXT is meant to be the next model in the i-series and will combine sophisticated levels of automated driving and digital connectivity, electric powertrain innovations as well as new concepts in interior design and lightweight construction. At present the iNEXT is in the product development phase; however, it won’t be available before the beginning of the next decade. (Auto motor und sport, 52 2017) .

In the digital area, BMW is pursuing a strategic project, called “i 2.0”. Already the name states that it is focused at utilizing synergies between electrification and CAD. The approach includes the creation und usage of high-precision digital roadmaps required for automated driving, new sensors, cloud- based systems and the application of artificial intelligence. For the creation and continuous improvement of digital high-precision maps, BMW has entered a strategic Alliance investing jointly 53 with Audi, Daimler and recently Intel in the digital street map service HERE (Hammerschmidt, 2016).

In its press release May 2017 BMW laid out its strategy in the CAD area, including explanations of technical necessities like the transition from fail-safe to fail-operational systems. In 2016 approximately 600 employees within BMW group were focussing on developments of highly automated driving and ADAS. In 2017 the car company is channeling this knowledge in an innovation hub located in a new campus in Unterschleißheim near Munich. The plan is to raise the number of employees up to 2.000 working on all the developments required for the next steps on the roadmap to fully automated driving. In total, 40 BMW 7 Series test cars for motorways and urban environments will be built in 2017 to starts trials for highly and fully automated driving.These high-tech test cars will be put into operation at sites of Intel in the 54 U.S., at Mobileye in Israel and within BMW Group in Munich (BMW, 2017).

2.1.3.3 Groupe PSA

Exemplary for an important mass manufacturer the PSA Group will be analysed regarding their products, production and assembly facilities and value chain characteristics. As already in previous chapters, a special focus will be laid on electric mobility and the strategy for Connected and Automated Driving.

2.1.3.3.1 Description of the company

Groupe PSA (Peugeot Société Anonyme) is a French multinational manufacturer of automobiles and motorcycles sold under the Peugeot, Citroën and DS Automobiles brands, and pending the completion of their agreed purchase from GM, Opel and Vauxhall Motors too. (PSA Media Center, 55 2017) . In 2016, the company ranks first in France, with over 27% market share for the Citroën, DS and Peugeot brands. In Europe, the PSA Group ranks third in terms of market share with almost 10%.

50 http://insideevs.com/bmw-launches-electromobility-research-program-singapore/

51 http://www.eenewsanalog.com/news/bmw-throws-switch-smart-and-electric-mobility

52 Auto motor und sport, 2017 http://t3n.de/news/inext-bmw-elektroautos-757866/

53 http://www.eenewseurope.com/news/electromobility-luxury-range-bmw

54 BMW Group, 2017 https://www.press.bmwgroup.com/global/article/detail/T0271369EN/automated-driving-at-the-bmwgroup?language=en

55 Groupe PSA, http://media.groupe-psa.com/en/press-releases/group/opelvauxhall-join-psa-group

Following the completion of the agreed acquisition of Opel and Vauxhall Motors brands from General Motors, Groupe PSA will become Europe's second largest automaker. Globally, the group was the 56 10th automaker in 2014 (Fournol, 2017) .

57 In 2016 the Group sold 3,146,382 vehicles, which is 5.8% more than the year before (Gautier,2017) . The PSA Hybrid4 technology places PSA in the second rank of hybrid car sales in Europe in 2014. Building on its production in France, PSA is France's third largest exporter, bringing in 4.721 billion euros (+5.3%), Industrial activities combined with the French trade balance in 2014.

Figure 12: Groupe PSA Worldwide Sales in 2016 (source: source: PSA Group)

2.1.3.3.2 Products

Groupe PSA is divided into the five business segments Automobiles (73.8%), Automotive parts (21%), Financing (2.8%), Logistics (2.2%) and Motorcycles (0.2%).

PSA produces personal vehicles detailed in the articles of four general brands: Citroën, Peugeot as well as Vauxhall and Opel since 2017. Launched in 2010 as a declination of Citroën models, DS became an autonomous brand in 2014. PSA also produces lightweight utilities. With more than 20% market share, PSA is the European leader in this segment. Since 1978, the group has been working with Fiat on the Boxer-Jumper range in Val Di Sangro, Expert-Jumpy in Valenciennes and Nemo- Bipper at Tofas in Bursa, Turkey. It produces, on the other hand, only in its factory in Vigo (Spain), the Partner and Berlingo, also assembled in Portugal in the small factory PSA of Mangualde and by the partner manufacturer Karsan in Turkey. Berlingo and Partner account for 50% of PSA light commercial vehicle volumes.

Through its Peugeot Citroën Moteurs entity, PSA markets parts such as chassis, engines or gearboxes intended to be sold to other manufacturers, including craftsmen such as PGO, DeLaChapelle or Side-Bike as well as competitors such as BMW or Suzuki (diesel engines). The

56 http://www.leblogauto.com/2017/01/bilan-2016-france.html

57 http://www.leblogauto.com/2017/01/bilan-2016-psa-peugeot-citroen-ds.html

Peugeot and Citroën brands retain separate sales and marketing structures, but share common technology, development and assembling assets.

Figure 13: Groupe PSA (Source: PSA Group)

2.1.3.3.3 Final assembly sites The group's production plants / assemblies are:  In France: Poissy, Sochaux (the biggest in France, the second in Europe), Mulhouse- Sausheim, Rennes (la Janais), Valenciennes: Sevel Nord (with Fiat until 2012)  In the rest of Europe: Vigo and Madrid-Villaverde (Spain), Mangualde (Portugal), Kolin (Czech Republic with Toyota), Trnava (Slovakia), Val di Sangro .  On other continents: Buenos Aires (Argentina), Porto Real (Brazil), Wuhan I, II and III, CAPSA in Shenzhen (China), Iran Khodro (Peugeot partner in Iran), Turkey (Bipper and Nemo with Fiat and Tofaş). From 1996 and 2000, PSA had 30,000 Citroën AX manufactured under license by the Malaysian manufacturer Proton.  Minor Productions: (Kazakhstan), Kaduna (Nigeria), Cairo (Egypt), Vietnam in partnership with Thaco, Wukro (Ethiopia) for a CKD assembly in cooperation with Mesfin Industrial Engineering, Uruguay, Chile , Indonesia, Thailand, Zimbabwe, Kenya.

Figure 14: World locations of PSA factories (Source: PSA Group)

PSA Group is strongly established in China with two domestic partners Dongfeng through DPCA and Changan through CAPSA. China is the second largest producer of vehicles for the PSA Group with 688,300 in 2015, against 972,400 for France the same year. The PSA Group produces these vehicles in 7 plants in China: 5 factories in the DPCA partnership, located in Wuhan, Shanghai, Beijing, Chengdu, Guangzhou and 2 factories in Shenzhen, Shanghai thanks to the CAPSA partnership. The group has 2,938 sales outlets through its partnerships (PSA Groupe; 2015).

In June 2015, PSA announced the opening of a new plant with an initial capacity of 90.000 vehicles 58 per year at Kénitra in Morocco to manufacture models from the CMP platform. (Le Monde, 2016)

Under Carlos Tavares (CEO), PSA decides to produce more engines and transmissions at the terminal sites (Trnava, Kénitra and Tehran and Kashan in Iran by 2019) in order to reach a local integration of 85% in America Latin America, 75% in Eurasia and 70% in Africa and the Middle East 59 by 2021 (LesEchos, 2016).

2.1.3.3.4 Groupe PSA and Electromobility

2.1.3.3.4.1 Actual models and range 1. Opel Ampera-E: 380 km 2. Peugeot iOn: 150km 3. Citroen E- Mehari: 200 km 4. Citroen C-Zero: 150km 5. Peugeot Partner Electric: 170 km 6. Citroen Berlingo Electric: 170 km

58 http://www.lemonde.fr/automobile/article/2015/06/19/psa-s-implante-au-maroc-pour-lancer-une-offensive-commerciale-en- afrique_4658304_1654940.html

59 https://www.lesechos.fr/06/11/2016/lesechos.fr/0211467361614_psa---le-declin-annonce-du-made-in-france-des- moteurs.htm

Figure 15: PSA Electric Cars (Source: PSA Group) 2.1.3.3.4.2 Future Strategy

PSA Groups has outlined its plans for rechargeable (or plug-in) hybrids and a second generation of pure electric vehicles for its brands Peugeot and Citroen. The French brands are working on an electric vehicle with a 50 kWh battery resulting in a total range of 450km. The hybrid strategy is based on modular platforms (EMP2 for mid-range cars, CMP for compact cars and SUVs), with the Common 60 Modular Platform (CMP) developed alongside with the Chinese brand Dongfeng (PSA Group, 2016) .

Figure 16: The platform setup powering electric PSA vehicles (Source: PSA Group)

Considering CAD PSA Group made like almost every OEM a lot of efforts for the technological leadership. It was in 2015 the first OEM to test autonomous vehicle prototypes on the open road in France and it was also the first carmaker to obtain the French authorizations to carry out autonomous mode experimentations with “non-experts” drivers. On the company homepage is a roadmap for the gradual implementation of ADAS including a reference to the different automation levels. Starting 2018 the car manufacturer will equip vehicles with driver-supervised” automated driving functions and in 2020 level-two (“hands-off”) and level-three (“eyes-off”) autonomous driving functions should be implemented and offered to the customers. For sure, safety for the driver, its passengers and the 6162 vehicle must be ensured under all circumstances (PSA Group, 2017, 2017b) .

2.1.3.4 Tesla, Inc. 2.1.3.4.1 Description of the company

Tesla is a new and rising American car maker and energy company (energy storage and solar panels) based in Palo Alto, California. The OEM is offering electric cars, lithium-ion battery energy storage systems and solar panels (via its SolarCity subsidiary) Tesla is for the last two years in a row the

60 PSA Group, http://media.groupe-psa.com/en/press-releases/innovation-technology/psa-group-presents-electrification- solutions

61 PSA Group, 2017 http://media.groupe-psa.com/en/press-releases/group/what-about-testing-autonomous-car-psa-group

62 PSA Group,2017b https://www.groupe-psa.com/en/automotive-group/innovation/connected-car/

63 world's second bestselling manufacturer of plug-in electric cars after BYD (hybridcars, 2016) . Overall Tesla has globally sold 211.000 electric cars since its beginning in 2008, making the carmaker the second largest global pure electric car manufacturer after the Renault-Nissan Alliance. (Tesla, 2017)

2.1.3.4.2 Products

2.1.3.4.2.1 Car Models

The top selling car of Tesla's line-up is the Model S, with global sales of over 171.600 entities between 2012 and 2017, followed by the Model X with more than 37.000 cars sold (2015 to 2017), and the Roadster with almost 2.500 units sold globally through December 2012. Tesla's fourth vehicle, the Model 3, is aimed for the mass market and retail deliveries are scheduled to begin by late 2017. Each car is provided with a minimum battery capacity enabling more than 300 km. (Young, 64 2016) .

2.1.3.4.2.2 Battery Products

Besides becoming one of the biggest OEMS for all electric cars Tesla also enters the energy market and tries to make use of synergies. Starting in 2015 Tesla launched its Powerwall home and industrial battery packs and received orders which summed up to a total value of 800 Million Dollars. Besides offering small wall-mounted units (7 kWh) they have already announced large-scale battery blocks for 65 66 67 industrial applications (up to 100 kWh) (Randall, 2015, Berzon, 2015 , Geuss,2016) . In February 2017, Musk announced plans to build three additional Gigafactories to increase its factory capacity to 68 handle battery manufacturing (Bhuiyan, 2017) .

2.1.3.4.2.3 Supercharger

In 2012 Tesla began to build up its own PowerStation network of 480-volt fast-charging stations. In the year 2017 there are some 848 Supercharger stations with 5,487 Superchargers (Tesla, 2017).

The Supercharger is a proprietary direct current (DC) charging technology that can provide up to 120 69 kW of power (Tesla, 2016). Charging is for Tesla users free of charge if the car was ordered before 70 January 15, 2017 (Lambert, 2017) . Cars that are ordered from that time onwards will be limited to free 400 kWh per year. Beyond that, supercharging will apply a fee (Tesla, 2016).

63 http://www.hybridcars.com/chinas-byd-becomes-worlds-third-largest-plug-in-car-maker/

64 http://www.ibtimes.com/tesla-motors-tsla-1q-2016-sales-14820-model-s-model-x-cars-were-delivered-first-three-2348000

65 https://www.bloomberg.com/news/articles/2015-05-08/tesla-s-battery-grabbed-800-million-in-its-first-week#r=read

66 https://www.wsj.com/articles/tesla-ceo-elon-musk-unveils-line-of-home-and-industrial-battery-packs- 1430461622?mod=trending_now_2

67 https://arstechnica.com/business/2016/09/socal-utility-will-buy-80mwh-of-battery-storage-from-tesla-after-methane-leak/

68 https://www.recode.net/2017/2/22/14702690/tesla-fourth-quarter-2016-earnings-solar-city

69 https://www.tesla.com/supercharger

70 https://electrek.co/2017/01/01/tesla-unlimited-supercharging/

Figure 17: Tesla Superchargers stations Network (Source: Tesla)

2.1.3.4.3 Used Technologies

All Tesla cars receive over-the-air software updates via mobile services. This is a novelty in the car industry and accelerates the innovation cycles radically. Although some doubts were raised concerning the required security features, other OEMs are following Tesla`s approach and implement 71 over-the-air updates with the option to unlock specific software features remotely (Porsche, 2015).

Besides that, Tesla also builds electric powertrain components for cars of other OEMs, including the Smart ForTwo electric drive (Daimler), the Toyota RAV4 EV, and Freightliner's Custom Chassis Electric Van.

2.1.3.4.3.1 Unique Battery Technology

Despite single-purpose, large battery cells being commonly used for electric cars, Tesla built its battery pack out of thousands of small, cylindrical, lithium-ion 18650-like commodity cells which are usually used in consumer electronics devices (Fischer, 2013). Panasonic is the single supplier of the battery cells for the car company, and cooperates with Tesla in the Gigafactory (Fischer, 2016).

Tesla may have the lowest costs for electric car batteries, estimated under US$200 per kWh. Tesla 72 indicated in 2016 that their battery pack costs less than $190/kWh.

2.1.3.4.3.2 Autopilot

Tesla is offering its ADAS features under the brand name ‘Autopilot’. The clear company strategy is to realize fully autonomous vehicles in the future. The company is well known for its aggressive marketing strategy and very ambitious targets. Elon Musk has announced plans to demonstrate complete self-driving cars by the end of 2017 and to enable and commercialize it by 2019.

71 Porsche, Weltpremiere für den Porsche Mission E, 2015 https://newsroom.porsche.com/de/produkte/iaa-2015-porsche- mission-e-mobilitaet-studie-11389.html

72 http://www.greencarreports.com/news/1084682_what-goes-into-a-tesla-model-s-battery--and-what-it-may-cost

Furthermore all Teslas being built these days are supposed to have the required hardware capability for self-driving. The hardware setup includes 8 cameras, 12 ultrasonic sensors and one radar system. The software always operates in a "shadow mode" (processing without taking action).The gathered data is being sent to Tesla for further processing and continous improvement of the software 73 capabilities (Tesla, 2016).

2.1.3.4.4 Transition to a mass manufacturer

Until March 2017 Tesla has sold approx. 210.000 all electric cars. The business strategy was to enter the market with a premium car (the Roadster), then launching mid-range vehicles (Model S and Model X) and use the synergies to realize and offer a comparable low-cost electric car for the mass market 74 (Model 3) (Rossof, 2016). This is a crucial time for Tesla. If the Model 3 becomes a success the company made the transition from providing comparable expensive cars in small quantities to an OEM manufacturing electric cars in high quantities. Latest numbers indicate already 400.000-500.000 75 pre-orders for the Model 3 (Car-it, 2017) .

Figure 18: Tesla car sales and Model 3 Pre-Orders (Tesla, Statista, 2016)

2.1.3.4.4.1 Tesla Gigafactory 1

The Tesla Gigafactory 1 is a lithium-ion battery factory under construction, primarily for Tesla Inc. (in conjunction with Panasonic), in Nevada, USA. The factory already started a limited production of Powerwalls and Powerpacks in 2016 using commercially available battery cells and began the 76 production of cells in 2017 (Randall, 2017) . The US$5 billion plant will employ more than 6000 employees when running at full capacity and it is expected to reduce Tesla's battery costs by more 77 than 30 % (Electrek, 2015) . In February 2017, Tesla announced in a letter to its stakeholder plans to 78 build three additional Gigafactories to increase its factory capacity (Tesla 2017).

73 Tesla, 2016 https://www.tesla.com/blog/all-tesla-cars-being-produced-now-have-full-self-driving-hardware

74 http://www.businessinsider.de/tesla-model-3-orders-vs-lifetime-sales-2016-4?r=US&IR=T

75 http://www.car-it.com/mehr-als-500-000-vorbestellungen-fuer-model-3/id-0051806

76 https://www.bloomberg.com/news/articles/2017-01-04/tesla-flips-the-switch-on-the-gigafactory

77 https://electrek.co/2017/02/18/tesla-battery-cost-gigafactory-model-3/

78 http://files.shareholder.com/downloads/ABEA-4CW8X0/3944480501x0x929284/22C29259-6C19-41AC-9CAB- 899D148F323D/TSLA_Update_Letter_2016_4Q.pdf 51

Tesla says it aims to have capacity ramped to the point where its production of lithium-ion cells tops 79 35 GWh/year, which is more than the worldwide battery production capacity in 2013 (Tesla, 2013) .

Comparable to the next company introduced (Built Your Dreams), Tesla is not only focusing on the manufacturing of cars, but pursues a mixed-product strategy. With the acquisition of SolarCity and the construction of the lithium-ion battery factory, the American company made a big step in the sustainable energy market and for sure will try to generate as many synergies as possible in the future.

2.1.3.5 Build Your Dream BYD 2.1.3.5.1 Description of the company

BYD Co Ltd is a Chinese manufacturer of rechargeable batteries, battery systems and cars and has two major subsidiaries, BYD Automobile and BYD Electronic. BYD is at present the world’s largest 80 electric vehicle maker (Technologyreview, 2017) . The BYD Auto Co., Ltd. was founded in 2003, following BYD Company's acquisition of Tsinchuan Automobile Company in 2002. The company does design, develop, manufacture and distribute cars and busses and has also a joint venture with Daimler AG, Shenzhen BYD Daimler New Technology Co., Ltd., which develops and manufactures 81 luxury electric cars sold under the Denza brand (BYD, 2017) .

In the year 2013, BYD Auto sold a total of 506,189 passenger cars in China, making it the largest 82 domestic selling brand (Chinaautoweb, 2014) . BYD Auto was in 2015 the best-selling electric vehicle brand worldwide and for the second year in a row the world's top selling plug-in electric car 83 manufacturer with over 100,000 cars in 2016 (Greencarreports, 2017) .

2.1.3.5.2 Main company products

2.1.3.5.2.1 All electric car models  BYD e6 is an electric multi-purpose vehicle with a range up to 400 km (with 80kWh battery), and a fast battery charging to 80 per cent in approx. 15 minutes. For these reasons, the vehicles are often used in vehicle fleets with long range requirements like taxis, police cars or car rentals. Sales started in 2011 and summed up in total to more than 34.000 entities, 82 ranking BYD e6 as the top-selling all electric car in China in 2016 (Chinaautoweb, 2017) .  BYD e5 (all-electric car) is equipped with a lithium iron phosphate battery capable of 220 km range and a speed of 150 km/h. Total units sold were more than 17.000 (Chinaautoweb, 82 2017) . A 300-km-range version (BYD e5-300) shares many characteristics with the BYD 84 Qin EV300 and was launched in 2016 (Ning, 2016) .  BYD Qin EV300 (all-electric car) was launched in 2016 with a battery capacity to achieve a total range of 300km at a top speed of 150 km/h. Up to the end of 2016 BYD sold over 10.000 85 units (Wang, 2016) . There are four versions with different technological set-ups available.  BYD eBus K9 is a battery electric bus manufactured with a self-developed lithium iron phosphate battery (LiFePO4). With it a range of 250 km can be achieved with one single

79 Tesla, 2013 https://www.tesla.com/sites/default/files/blog_attachments/gigafactory.pdf

80 https://www.technologyreview.com/s/604335/the-worlds-largest-electric-vehicle-maker-hits-a-speed-bump/

81 http://www.bydeurope.com/

82 http://chinaautoweb.com/2014/01/2013-passenger-vehicle-sales-by-brand/

83 http://www.greencarreports.com/news/1108813_chinas-byd-built-more-plug-in-cars-than-any-other-maker-last-year

84 https://carnewschina.com/2016/04/01/byd-e5-300-ev-launched-on-the-chinese-car-market/

85 https://carnewschina.com/2016/02/15/byd-qin-ev-will-hit-the-chinese-car-market-in-march/

charge (motoring, 2010). the company claims that the batteries are recyclable without any 86 toxins .

2.1.3.5.2.2 Plug-in hybrid car models  BYD Qin is a plug-in hybrid compact sedan with a range of 70 km (all-electric). The hybrid powertrain extends the car´s range up to distances comparable to that of combustion- powered vehicles. It is the best-selling plug-in and highway-legal passenger car in China with 87 20.000 units sold in 2016 alone (Chinaautoweb, 2017) .  BYD Tang (plug-in hybrid mid-size SUV) is equipped with a lithium iron phosphate battery pack (~19kwh) and able to achieve a range of 80 km. It was the best-selling car in China in 88 2016 and worldwide the third-best-selling plug-in car (ChinaAutoWeb, 2017) .

2.1.3.5.2.3 Battery Manufacturing

Besides being an OEM for electrical powered vehicles, BYD is also one of the major companies producing the required batteries for electric vehicles and has more than tripled its production capacity from 2014 to 2015. However these figures do not include the electric bus battery operation which may 89 put BYD even ahead of the list (Cleantechnica. 2017) . It is expected that BYD will add annually about 6 GWh of global production resulting in approx. 30 GWh of production capacity in 2020 (Electric 90 vehiclenews, 2015) .

2.1.3.5.3 BYD`s expansion strategy

There is a very interesting case study, explaining BYD early start in the battery business with semi-automated production lines and its development to a multi-national car manufacturer with the help of highly skilled and low-cost employees. It pursued a strict growth strategy (A case study of BYD 91 in China) .

Despite other companies in the battery business, BYD invested heavily in Research and Development capabilities and in further training and education of its employees in order to continuously improve its products and the required production processes. BYD has major industrial bases in Shenzhen, Shanghai, Xi`ian and Beijing and is still mainly focusing their R& D capacities in China. BYD still focusses its R&D efforts and manufacturing capacities mainly on China. However as the company becomes more and more a global player, it started cooperation with local partners and has CKD manufacturing activities e.g. in Syria, Egypt, Russia, Vietnam and Sudan. The present strategy is to 92 raise the automation level of the production facilities and enforce vertical integration (Faust, 2013).

86 http://motoring.asiaone.com/Motoring/News/Story/A1Story20101221-253971.html

87 http://chinaautoweb.com/2017/01/best-selling-china-made-evs-in-2016/

88 http://chinaautoweb.com/2017/01/best-selling-china-made-evs-in-2016/

89 https://cleantechnica.com/2016/03/26/top-ev-battery-producers-2015-vs-2014-top-10-list/

90 http://www.electric-vehiclenews.com/2015/03/byd-to-build-battery-gigafactory-to.html

91 http://eprints.worc.ac.uk/4603/1/ABM15_paper_27.pdf

92 Faust, Peter; Yang, Gang: China Sourcing: Beschaffung, Logistik und Produktion in China; 2013, p.265-p.274

Figure 19: BYD is still mainly focussing on domestic market while being in the transition phase to a worldwide connected company. Automotive products have the largest share of yearly turnovers with an annual increase of 5 percentage points (Source: BYD Annual Report 2016)

2.1.4 Scoring of the European Automotive Industry

For the scoring of the present competitiveness of the European Automotive industry international studies and analysis with a focus on electric mobility or CAD (or specific aspects like connectivity) will be investigated. Furthermore strategic technical oriented topics of interests will be investigated in detail. In general a scoring of the European competitiveness is very difficult as for the electric car substantial changes in the value chain are expected. For example a three-cylinder combustion engine has approximately 1.200 separate parts, which are assembled by the employees; a comparable electric motor consists of just 20 parts. And the employees only need one tenth of the time to 93 assemble. Due to the comparable low technical complexity of electric cars the market barrier for new car manufacturers is very low and the competitive situation for the European industry is more difficult than ever. In the digital sector car manufacturers are competing with traditional competitors, large high-tech companies with an IT-background or new rivals like Tesla or BYD combining electric- powered engines and new approaches for CAD. At present the biggest disruption is impending the automotive value chain. Technological development will drive this process and dramatically change the value chain from the bottom up.

93 Manfred Schoch, Chairman of the General Works Council of BMW: http://www.br.de/nachrichten/elektromotor- arbeitsplaetze-104.html

Figure 20: Automotive value chain: Today and projected structure for the year 2025 (Source: Strategy & PwC Connected Study 2015)

Apart from this trend and in order to anyhow establish a clear view on the current situation multiple studies ananalysis for specific aspects will be used within this chapter.

2.1.4.1 Research & Development

Car manufacturers invested more than 100 billion Dollars on research and development activities in 2015. This ranks the automotive industry ahead of any other technology driven industry (incl. software & internet technologies and the entire aerospace and defence industry). To get a more clear view on the real dimensions of R&D activities, we can state that in the U.S alone are more than 60.000 people employed for this work. Automakers in the United States invest roughly 18 billion Dollars annually in the United States alone. This amount results in 1.200 Dollar R&D expenditures per vehicle 94 manufactured on average with 99% of this amount funded by private sources (Auto Alliance, 2017). For a successful R&D implementation strategy and a maturing of technologies, public funded research initiatives and industrial R&D efforts are both equally important and are therefore considered within this chapter. There is no doubt that both approaches are essential for a competitive environment and have to be analysed in conjunction.

2.1.4.1.1 Research & Development expenditures

Focus Area: Automotive

Type: Qualitative

Key Performance Indicators / Areas of Interest: Research & Development

SCORE: 2--> Europe has neither a competitive advantage nor a competitive disadvantage

Management summary

94 Auto Alliance (Alliance of Automobile Manufacturers): https://autoalliance.org/innovation/

The total amount of R&D expenditures is a strong indicator for the race to technological leadership and reflects the companies’ and the countries’ specific capability to innovate and push technological developments. Asia has become the geographical center for R&D activities and has outperformed Europe and the United States. Asia is for example already the biggest market and supplier at the same time for electric cars. To secure or even increase its market shares there, Europe´s industry has to intensify its efforts.

Description:

The total amount of R&D expenditures is a strong indicator for the race to technological leadership and reflects the companies` and the countries´ specific capability to innovate and push technological developments

Analysis & Assessment:

For a start, the overall expenditures from European countries are compared to the ones from international competitors. To allow a harmonized view on the data, the R&D budget is displayed in proportion to the country-specific GDP. It is obvious that most competing countries (South Korea, Japan, China…) have enforced their R&D efforts tremendously compared to the relatively stable expenditures in Europe.

Figure 21: Gross domestic expenditure on Research & Development in 2005 and 2015 (in correlation to % of GDP) 95 (Source: European Commission, 2017)

The European vehicle manufacturers are the largest private investors in Research & Development in Europe, with an annual spending of approx. 20 billion € in R&D, or 4% of their turnover in 2008 96 97 (EUCAR, 2008) . The total amount has since then grown to over 41 billion €. (ACEA)

95 Eurostat, 201 http://ec.europa.eu/eurostat/statistics- explained/index.php/File:Gross_domestic_expenditure_on_R_%26_D,_2005_and_2015_(%25_of_GDP)_YB17.png

At present automotive suppliers account for approximately 50 per cent of the spent Research & Innovation expenditures. CLEPA estimates that the already started innovation shift from the Original Equipment Manufacturers to the suppliers continues and intensifies further. Since Germany is the main supplier for premium cars it is no surprise that they also account for one third of total global R&D

Figure 22: Research &Innovation expenditure – a strong shift of R&D efforts towards suppliers` responsibilities is expected (Source: CLEPA) spending in the automotive sector. In 2014 the worldwide expenditure by the German automotive 98 industry was approx. 34.3 billion € which is an annual growth rate of 8% compared to 2013.

The 2015 Global Innovation 1000 study from PwC investigates trends at the world’s 1.000 largest 99 corporate R&D spenders where automotive companies sum up to over 160 entries.

96 EUCAR – European Council for Automotive R & D: The Automotive Industry - R&D Challenges of the Future, 2008

97 ACEA European Automotive Manufacturers Association: Factsheet Research & Innovation, http://www.acea.be/uploads/publications/Research_and_Innovation.pdf

98 CDA: Press Release - German automotive industry invests 34 billion euro in research and development, 2016

99 PwC: The 2015 Global Innovation 1000: Automotive industry findings https://www.strategyand.pwc.com/media/file/Innnovation-1000-2015-Auto-industry-findings.pdf

Figure 23: Countries by Total (Domestic & Imported) as a Percentage of Automotive R&D (Source: PwC, Strategy & 2015 Global Innovation 1000 data and analysis, Bloomberg data, Capital IQ data)

The R&D funding by companies in the automotive industry increased especially in China dramatically. In Figure 23: Countries by Total (Domestic & Imported) as a Percentage of Automotive R&D (Source: PwC, Strategy & 2015 Global Innovation 1000 data and analysis, Bloomberg data, Capital IQ data). In Figure 23: Countries by Total (Domestic & Imported) as a Percentage of Automotive R&D (Source: PwC, Strategy & 2015 Global Innovation 1000 data and analysis, Bloomberg data, Capital IQ data)it can be seen that mainly China radically increased their share of the total R&D amount spent.

Figure 24: Comparision between biggest R&D spending companies and public opinion based on a survey asking for the most innovative companies (Source: PwC, Strategy&2015 Global Innovation 1000 data and analysis, Bloomberg data, Capital IQ data)

The public opinion does not always correspond with the actual amount invested in Research and Development activities. Japanese car manufacturer Toyota is the only company ever to make it repeatedly in both lists (2010, 2012, 2015) while on the other hand Tesla is estimated to be very innovative but spends far less on R&D than other competitors.

Comparing the total amount of money spent for R&D activities by automotive companies within the list of the top 1.000 innovative companies in 2015 with the amount spent in 2007, an increase of 70% can be stated. Asia is now leading the competition, followed by the United States and Europe. This shift is a very strong signal indicating the strategic vision of China evolving from the main market to the main supplier of cars. Innovation capability in this industry sector is no longer owned by Europe´s companies.

As the demand for cars increases, e.g. in emerging markets it is also natural that production capacities but also Research & Development activities shift to these countries. Nevertheless the amount of R&D expenditures does reflect the race for technological leadership and the capability to innovate and evolve. For example Asia is already the biggest market and supplier at the same time for electric cars. To secure or even increase its market shares there, Europe´s industry has to intensify its efforts.

References

Eurostat, 2017 http://ec.europa.eu/eurostat/statistics- explained/index.php/File:Gross_domestic_expenditure_on_R_%26_D,_2005_and_2015_(%25_of_GDP)_YB17.png EUCAR – European Council for Automotive R & D: The Automotive Industry - R&D Challenges of the Future, 2008 ACEA European Automotive Manufacturers Association: Factsheet Research & Innovation, http://www.acea.be/uploads/publications/Research_and_Innovation.pdf

2.1.4.1.2 Research and Development funding initiatives

Focus Area: Automotive

#Type: Qualitative

Key Performance Indicators / Areas of Interest: Research & Development

SCORE: 2--> Europe has neither a competitive advantage nor a competitive disadvantage

Management summary

The report provides an overview of European and international research & development initiatives. Europe puts a lot of effort in the implementation and harmonization of research activities and strengthens and guides the industry. However, activities lack of a coordinated strategy across the responsible units (there is no automotive PPP) coordinating the efforts while the Chinese and US industry on the other side have full support of the government.

Description:

Public research programs are an important factor supporting and guiding industrial research activities.

Analysis & Assessment:

As electric mobility is already in the market launch phase, research activities for CAD are still mainly influenced and guided by public research programs. The European Commission declared these to their top priorities.

Figure 26: Initiatives by the European Commission for Connected and Automated Driving (Source: Breslin, EC)

This was fostered by the signing of the "Declaration on automated and connected driving" by all Transport ministers on 14 April 2016 in Amsterdam. The declaration was the next step towards a fruitful cooperation for CAD within Europe after the implementation of the Cooperative Intelligent Transport Systems (C-ITS) platform, the Round Table on Connected and Automated Driving (established by Oettinger) and the Gear 2030 initiative. The ultimate aim is to establish a coherent European framework for the deployment of interoperable connected and automated driving.

Table 5: Overview on Research programs for Connected and Automated Driving (Source: ERTRAC, SCOUT, Fraunhofer ISI)

Country Program Actor Content Budget United Connected and INNOVATE-UK & The Centre for 2015-2020: total: Kingdom autonomous vehicles Centre for Connected Connected & £100m 61

2 & Autonomous Autonomous Vehicles/Government Vehicles (CCAV) First competition is to invest up to 2015/16: £20m £30 million, and Innovate UK £5 Second million, in industry- competition led research and 2016/17 up to development £35m projects on connected and autonomous vehicles. Spain No program at the time Austria Mobility of the Future Government 11Mio € (5Mio e per year) Finland AURORA Government 2-3m € in 2017/2018 France Nouvelle France VEDECOM *Electric Mobility 300m €* over 10 Industrielle (PPP)/Government and CAD years Germany Self-determined and Federal Ministry of 2015-2020: 2015 secure in the digital Education and -2020): 180m € world Research *, e.g. including call „IT-Security and autonomous driving“ Germany Human Machine Federal Ministry of 2016-2020: 70m € Interaction Education and Annually (not all Research for CAD) Germany Federal Ministry of 2016-2020 80m € Automation and Transport and Digital Connectivity in Road Infrastructure Traffic Germany New Vehicle and Federal Ministry of including: „Highly 40m € System Technologies Economic Affairs and and fully Energy automated driving for sophisticated driving situations“ Sweden Swedish Transport Swedish Transport Administration, Administration: VINNOVA DriveMe (innovation agency), (Field Operational Swedish Energy Tests with 100 Agency vehicles) 10.5m € annually

VINNOVA (innovation agency): Drive Sweden (CAD innovation program) 62

1.5m € annually

Swedish Energy Agency, VINNOVA, Swedish Transport Administration • FFI (Strategic Vehicle Research and Innovation: partnership between the Swedish government and the automotive industry): 2.5-3.5m € annually EU Automated Road European short term Transport (ART) Commission introduction of 2016/2017 114m € automated driving systems for passenger cars, trucks and urban transport; Large- scale Demonstration Projects" to test technologies in complex traffic and driving conditions

EU Mobility for Growth European MG Up to 27m € Commission 8.2 (Big data in Transport) •MG 6.1 (Mobility as a service) •MG 6.2 2016 (Large-scale demonstration(s) of cooperative ITS) EU Internet of Things European Autonomous Approx. (IOT) Commission vehicles in a 20m € connected environment EU Information European 2016/17 and Commission 25m € (not all for

Communication CAD) Technologies Japan Cross udget in 2016 for -ministerial Strategic CAD: Innovation Promotion ¥2.62bn (19m €) Program (SIP)

South Government An experimental •Estimated costs Korea city for CAD („K of 15.2bn € (not all -City“) is set to be into CAD) completed in 2019

United Department of Autonomous States Transportation Vehicle Program: (preliminary figures $200m, for 2017 up to $3.9bn ( €3.5bn) over 10 years •Electronics & Emerging Technologies: $55m (49m e) (not all for CAD) •Crash Avoidance (automatic intervention technologies): $10.4m (9m e) (Not all for CAD) •Connected Vehicle Pilot Deployment: $45m (40m €) •Smart City Challenge (incl. transport, ITS, smart sensors): $40m* •Mobility on Demand (innovative transportation business): $8m( 7m €) (Not all for CAD) •Advanced Transportation & Congestion Management Technologies Development (Large scale

deployments): $10-15m (9-13.5m €) (not all for CAD)

Department of Next-Generation Energy (preliminary Energy figures for 2017) Technologies for CAD

On Road Vehicles: Up to $30m ( 27m €) •Transportation as a System (incl. test environments, CAD): $20m (18m €) (not all for CAD) National Science Smart and Foundation Autonomous Systems (only universities & non - profit organizati ons): $16.5m ( 14.6m €)(not all for CAD)

China Program “863” as Ministry of Science Support of three 290 million RMB part of the 10th Five- and Technology key technologies Year Plan (FYP) (MOST), called “the three Government. verticals”. This includes the fuel cell, pure electric as well as hybrid technologies. Moreover “the three horizontals” of key technology areas are part of the research. Specifically it is about power engine, electric drive and power battery. China 11th FYP Government, Developing new 10 billion RMB cooperating with energy vehicles enterprises together with the investments of several enterprises.

China Special 12th FYP for MOST, Government Because they are - “Electric Vehicle closer to Technology commercialization, Development” hybrids should be supported as well as pure electric cars.

Furthermore the Working Group 2 of the GEAR 2030 initiative has published a comprehensive overview about existing and implemented funding and financing services and tools addressing current challenges for Connected and Automated Driving. The report analysis whether the implemented funding tools and mechanism address the challenges appropriately, whether they are likely to accelerate the implementation and successful introduction of CAD technologies and vehicles across Europe and provides an overview about programme strategies on a national and European level (European Commission GEAR 2030- Working Group 2 Highly Automated and connected vehicles).

Besides offering an overview abut active funding initiatives for CAD technologies like HORIZON2020 or EUREKA, the report also gives an outlook about potential future funding instruments for CAD and evaluates the pros and cons for each instrument. Strategic instruments for supporting and enhancing CAD developments like a specific contractual Public-Private-Partnership, a dedicated Joint Technology Initiative, the realization of an EUREKA Cluster, the funding of an Important project of common European interest (IPCEI) or the implementation within the ERA-NET program are listed and each instrument is evaluated by the experts. Major disruptions in the mobility sector and the respective value chains are expected by the working group, but also the opportunity for the realization of new products and services for domestic and international markets are emphasized. For Europe´s industry and its future prosperity several major challenges were identified:

Europe lacks of private funds for long term, risky and investment intensive initiatives.

 There are no major European actors in the new economy like Google, Amazon, Facebook or Baidu specializing on data-driven applications and innovations. This means furthermore, that Europe’s downstream industry will get more and more dependent on foreign stakeholders offering their IT-platforms which poses a threat to Europe`s long-term sovereignty in this high- technology area.  Furthermore there is a lack of a specific identified location to attract actors and stakeholders in the domain of automated driving.  Finally, Europe has a clear need for more secure digital infrastructure which is a basic prerequisite for near- real-time communication features and functions.

There is a strong need for additional research and innovation projects, pilot implementations and large-scale demonstration projects both on European and national level. At present there is a lack of joint and harmonized prioritisation between the member states and partially between the European funding programs. The individual funding strategies are not coordinated, and the knowledge exchange is insufficient and has room for improvement. The analysis reveals that there is no common and consistent European funding strategy for the development and acceleration of CAD technologies.

The analysis concludes that “a holistic European initiative is the right approach comprising public and private passenger transport, freight transport, and interaction between the different areas.” The GEAR 2030 initiative recommends a three-step approach starting with the establishment of a dedicated PPP for CAD, followed by large-scale demonstrations and pilot initiatives and concludes with the recommendation of an IPCEI to develop, deploy and realize CAD in Europe and gain global visibility (European Commission GEAR 2030- Working Group 2 Highly Automated and connected vehicles).

In the US, the ITS Joint Program Joint Program Office (ITS JPO) of the US Department of Transportation is the central office promoting and coordinating US R&D activities for CAD (ITSA

2017) such as the establishment of driving corridors for CAD, e.g. the Virginia Automated Corridors (VAC 2015). The ITS and NHTSA focus on cybersecurity research besides other topics such as “localized Vehicle-to-Vehicle (V2V), Vehicle-to-Infrastructure (V2I) and Vehicle-to-Device Systems (V2X) to support safety, mobility and environmental applications using vehicle Dedicated Short Range Communications (DSRC)\ Wireless Access for Vehicular Environments (WAVE)” (European Commission 2017, p 32). The USDoT announces a total funding of $200m in 2017 and $3.9b within the next ten years (USDoT 2017). International r&d efforts have been going on between the US, EU and Japan since 2013. The Tri-Lateral Working Group (WG) has been established by the Vehicle and Road Automation FP7 project as a share point for public authorities and stakeholders to exchange knowledge on advances in standardization and harmonization effectively (VRA 2014).

For China the study of the SCOUT project finds that China´s state funding address “state-owned universities/institutes” only. According to SCOUT local companies could be granted with funding through smaller programs of local governments. The “National Hight-Tech Program 863” from the Ministry of Science and Technology (MOST) mentions the promotion of automation technologies in general, but gives no specification on promotion tools (MOST 2017). The English version of the 13th Five-Year Plan does not reveal financial plans for connected and automated driving as well (Central Committee of the Communist Party of China 2016). Hence, due to language barriers it is difficult to assess the extension of state funding for CAD. The Chinese Society of Automotive Engineers sets the technical target of conditional automated driving for 2020-2022 and the level 4 automation for 2025 (The Swedish Council Trade & Invest Council 2016). Thus, the study can only assume that these ambitious plans are promoted by the state. Due to the Chinese economic structure, money flows between the state and the state-owned joint ventures are hardly assessable.

A benchmarking between the considered countries is due to the available data nearly impossible and will therefore not be rated. Although our analysis do only cover partial aspects of public funded research programs and does not consider other relevant policies (e.g. like China`s Thousands of 100 Vehicles, Tens of Cities (TVTC) Program ) it certainly provides some insights into research strategies and funding budgets. It is obvious that Europe puts a lot of effort in harmonizing the R&D activities by funded projects and research programs. The United States are seen as a competitor but also as a partner suitable for technical cooperation. The European commission plans in conjunction with US Department of Transportation the twinning of research activities to exchange knowledge and experience and exploit synergies (Breslin EC, 2016). There are also some cooperation’s with China in this field. Nevertheless, it must be noted that while Europe’s` industry (and also companies from the U.S:) has to undergo long and time-consuming efforts for standardization activities, China holds a big advantage since the government takes direct influence and supports and guides the industry when beneficial. The European research programs are covering important aspects of CAD, never the less there is no specific Public-Private-Partnership (or comparable organization) prioritizing, directing and coordinating research activities yet. Because the innovation speed in the automotive industry is faster than it ever has been and the car companies are facing more technological challenges at the same time (propulsion technologies, CAD, …) a coordinated European initiative seems more necessary than ever.

References

ETRAC. (2015). Roadmap Automated Driving. Retrieved from: http://www.ertrac.org/uploads/documentsearch/id38/ERTRAC_Automated-Driving-2015.pdf

Declaration of Amsterdam Cooperation in the field of Connected and Automated Driving, 14-15 April 2016

European Commission (2017). Towards a Single and Innovative European Transport System. Luxembourg: Publications Office of the European Union.

100 Gong H. et. al (2012) New energy vehicles in China: Policies, demonstration, and progress, Springer Science+Business Media B.V., DOI 10.1007/s11027-012-9358-6

Fraunhofer Institute for Systems and Innovation Research ISI (2015) E- mobility in China: Chance or daydream, http://www.isi.fraunhofer.de/isi- wAssets/docs/p/de/diskpap_innosysteme_policyanalyse/discussionpaper_40_2014.pdf

ITSA (2017). Our Vision. Retrieved from: https://www.itsa.org/. Accessed on 30/08/2017.

Liam Breslin, Sustainable Surface Transport, DG Research & Innovation, European Commission: Road Automation – European Research & Policy Collaboration, Fachtagung Automatisiertes und vernetztes Fahren, Berlin, 22 November 2016

SCOUT (Safe and COnnected AUtomation in Road Transport”) , Coordination and support action, Nº 13843 funded by the European Commission

VAC (2015). Providing real-world testing environments for the development and deployment of automated vehicles:Retrieved from http://www.vtti.vt.edu/PDFs/VAC.pdf. Accessed on 30/08/2017.

VRA Networking in Automation (2014). Trilateral Automation WG on Road Vehicle Automation. Retrieved from: http://vra-net.eu/event-archive/trilateral-automation-wg-on-road-vehicle-automation/ Accessed on 30/08/2017.

USDoT (2017). FY 2017 Factsheet. Retrieved from: https://cms.dot.gov/sites/dot.gov/files/docs/DOT- fy-17factsheet.pdf. Accessed on 30/08/2017.

2.1.4.2 Summary for the Focus Area Research and Development

Focus Area: Automotive

Type: Quantitative

Key Performance Indicators / Areas of Interest: Innovation

SCORE: 2--> Europe has neither a competitive advantage nor a competitive disadvantage

Looking into the aspects considered, we can state that the current position of Europe is neither favoring its economic and technological prospects, nor is it hampering it.

2.1.4.3 Technological readiness & leadership / manufacturing capability 2.1.4.3.1 Expert survey determining technical leadership in electric mobility and Connected and Automated Driving

Focus Area: Automotive – CAD & Electric mobility

Type: Qualitative

Key Performance Indicators / Areas of Interest: Technical Leadership

SCORE: 4 – Europe has a strong competitive advantage

Management summary

The survey summarizes the expert assessment of almost 1.000 experts on the automotive industry with regards to technical leadership in electric mobility and CAD. Furthermore, the prospects of the car industry over the next 5 years are analysed and the experts have a clear opinion of whom to expect to win or lose market shares. Europe still has a strong competitive advantage with international rivals catching up. However this will probably require more time than a couple of years and is more likely to be a threat because of the introduction of disruptive technology solutions and mobility services. But for the near future the prospects of the European Automotive Industry is estimated to be very positive and even likely to increase their market shares

Description:

The survey demonstrates the aggregated and consolidated opinion of automotive stakeholders about the current status of the technical leadership and short-term prospects (max. 5 years) in the global competition. The 18th consecutive study by KPMG it is based on 953 expert interviews with senior executives from automotive companies including suppliers, dealers, service providers, car rentals and companies from the ICT sector (information and communication technologies). Furthermore, 2.400 consumers were consulted to get an additional perspective on the considered topics. The survey was conducted online and took place between September and October 2016. It integrated viewpoints from down-stream players (product-driven companies like OEMs, suppliers…) and upstream players (service-driven companies like ICT-companies, mobility service providers, ridesharing…) and tries therefore to establish an integrated view of the digital technologies and platform concepts within the automotive ecosystem.

Analysis & Assessment:

The KPMG survey (KPMG 2017) ranks different key technological trends according to their denominated importance for the stakeholders. Battery electric vehicles were rated as the most significant trends in the year 2017 followed by connectivity and digitalization. The survey also investigates different powertrain technology solutions but no one stands out for a favoured investment for executives. However, Diesel-powered engines are meant to be dead, at least socially inacceptable. Applications for the future might be limited to heavy-duty trucks (as a lack of satisfying alternatives) or emerging countries. Major disruption of the market is expected by the vast majority of experts with the implementation of the autonomous car as traditional purchasing criteria will not be relevant for the determination of the purchase any more. Instead it is expected that most customers will base their mobility expenses on vehicle independent products and mobility services in the future. The digital services are very likely to generate higher revenues compared to the traditional hardware- driven value chain. Never the less the roles in this expanded and transformed value chain are not decided yet due to a highly dynamic environment. More than 80% of the interviewed experts expect major disruptions to be likely or very likely to the traditional business models. However, almost 80% of automotive experts have the opinion that a car from an ICT-company will be assembled by one of the traditional car manufacturers.

One important factor for the future will be the question of who to be in charge of the customer interface all related data exchange that comes with it. Regarding this question one can easily see the gap between public awareness and expert assessment when looking at the numbers of the survey. Experts gain strong confidence that the customer interface will mainly be controlled by OEMs or important system suppliers while they do not trust car dealers or retailers to do this.

For customers on the other hand the expectation shows right into the opposite direction. This assessment by non-experts however might be a result of the growing media attention for the activities and announcements of ICT companies in the automotive market. Furthermore the growing confidence in car dealers and retailers is somewhat questionable and even for the authors of the survey not backed up by hard factors or recent developments. Actually, the first OEMs started to bypass car dealers selling their products directly to the customers [1]. Nevertheless most probably there will be not a single customer interface in the future and rather a mixture of access point so this topic was somewhat simplified for the survey and cannot be answered to the perfect satisfaction all the desired details.

Figure 27: Who is expected to be in charge of the customer interface (Source: KPMG)

The technical leadership in self-driving capabilities in combination with electric mobility is clearly led by BMW. Tesla has made a big step forward in the electric mobility sector, has outperformed Toyota and Honda in 2017 and is challenging BMWs first place. When it comes to the assessment of self-driving capabilities BMW is ranked first place (27% of all executives) with a tremendous gap to Tesla on the second place (9%) followed by Honda (9%). It is interesting that the survey results do not correspond to the currently available product rage and ADAS features offered by the OEMs. Especially when it comes to marketing strategies Tesla has a much more aggressive way of promoting self-driving features with its “Auto-Pilot” (see chapter 2.1.3.4.3.2 for details)

Figure 28: Survey results for technical leadership in electric mobility and self-driving capabilities (OEMs only; Source KPMG)

One important question for car manufacturers is where to pilot new mobility services or cars. Survey results indicate three countries for this topic: USA, Germany and China. The order varies whether a new car or a new product is considered (1:China, 2: Germany, 3:USA), a novel mobility service (1:China, 2: USA, 3:Germany) or a data-driven business model (1:USA, 2: Germany, 3:China). This might be a result of china´s increasing demands for urban mobility concepts and eco-friendly vehicles with low emissions. Furthermore it also reflects the effects of the Great Wall of China and the limited and controlled access for globalized IT-platforms and ICT companies.

Finally, the survey focusses on the best prospects over the next 5 years and surprisingly the experts have a clear opinion about whom to expect to win or lose market shares.

Figure 29: Expert opinions of which OEM to expect to gain or lose market shares over the next 5 years (Source:KPMG)

Summarizing the different survey results, Europe still has an advantage with international competitors catching up. However this will probably require more time than a couple years and will be a threat with the introduction of disruptive technology solutions and mobility services. But for the near future the prospects of the European Automotive Industry is estimated to be very positive and even likely to increase their market shares.

References

KPMG 18th consecutive Global Automotive Executive Survey 2017 [1] http://fortune.com/2016/01/19/why-tesla-sells-directly/

2.1.4.3.2 Expert assessment - Index Automated Vehicles

Focus Area: Automotive

Type: Qualitative

Key Performance Indicators / Areas of Interest: Technological Leadership

SCORE: 3--> Europe has a competitive advantage in comparison

Management summary

The study analyses the relative competitiveness of industrial nations manufacturing vehicles based on the market conditions and industrial capabilities. For the SCORE project, the capabilities of the

different considered European nations are consolidated. The combination of the individual capabilities from Italy, France, the United Kingdom, Sweden and Germany pushes Europe in the top position with nations like Japan, South Korea or China challenging its position.

Description:

The composed indicator “Automated Vehicles” summarizes the expert assessments scoring the national capabilities within several dimensions. The study was carried out by a well-respected consultancy company and leading German institute for automated driving.

Analysis & Assessment:

The study by Roland Berger GmbH and fka Forschungsgesellschaft Kraftfahrwesen mbH Aachen analyses the relative competitiveness of industrial nations manufacturing vehicles based on two major indicators:

 Industrial Indicators: These indicators examine the current status of a country´s automotive industry with regard to the maturity of automated driving functions in commercial available vehicles as well as their realization in prototype vehicles. Furthermore, they consider the Research and Development capabilities based on the research activities of the top universities and corresponding research programs.  Market-based indicators: The legal frameworks and general requirements for the operation of automated vehicles are considered as well as the relative market shares of vehicles with relevant ADAS.

The individual indicators are scored by the two authors (scale from 0 to 5), consolidated within the study and allow a comparison of the considered automotive nations (USA, Germany, China, Sweden, UK, South Korea, France, Italy and Japan).

Figure 30: Consolidated scoring of automotive nations (Source: fka, Roland Berger)

The main findings of the study are that Germany still has a competitive advantage which is mainly based on the realization of automated driving features in their premium car. Nevertheless, there are increased dynamics and intensity within the international competition. The focus of research activities varies between the considered nations. Japan and the United States are specifically focussing on the provision and installation of the required infrastructure for connected vehicles. The legislative framework in the U.S. for licensing is regarded as the most beneficial for the car manufacturers but

urban concepts are about to be realized within specific test areas like Singapore. USA, South Korea and China realized major inclines considering market volumes with automated driving features. However, the top three countries in this indicator are still the USA, Germany and Sweden. But there is no time for Europe to rest. Approx. 50% of all new cars in China will offer some driving assistance features and low-level autonomous driving functions by 2020. It is expected that this percentage raises to almost 80% in 2025. This initiative is driven by the Ministry of Industry and Information Technology (MIIT), the National Development and Reform Commission (NDRC), and the Ministry of Science and Technology (MOST) and illustrates china´s effort to gain technical leadership (China 101 Daily, 2017) .

For the SCORE project, the capabilities of the different European nations are consolidated. The combination of the individual capabilities from Italy, France, the United Kingdom, Sweden and Germany pushes Europe in the top position. Unfortunately, the study is mainly focussing on the current status and does not provide a foresight for the near future. Never the less the study provides an expert spotlight on current capability for some aspects in the CAD context.

References

Roland Berger GmbH, fka Forschungsgesellschaft Kraftfahrwesen mbH Aachen, Index "Automatisierte Fahrzeuge", 2016.

2.1.4.4 Summary for the Focus Area Technological Leadership

Focus Area: Automotive

Type: Quantitative

Key Performance Indicators / Areas of Interest: Innovation

SCORE: 3--> Europe has a competitive advantage in comparison

Summarizing the findings of both considered surveys we can determine that Europe has a strong competitive position, confidence in the near future and positive prospects regarding the short-term economic situation according to the consulted experts. With the widespread availability and large number of premium cars, Europe, its car manufacturers and its suppliers are in a favorable position for the application of new ADAS features and functionalities. Japan seems to be at present the only country with a comparable technological capability.

2.1.4.5 Skilled workforce / education 2.1.4.5.1 Qualified Workforce

Focus Area: Automotive

Type: Qualitative

Key Performance Indicators / Areas of Interest: Workforce

SCORE: 1--> Europe has a competitive disadvantage in comparison

Management summary

101 China Daily, 2017 http://www.chinadaily.com.cn/bizchina/motoring/2017-04/26/content_29086394.htm

Skilled employees and workers are crucial assets for innovations, R&D activities and technological leadership. In the knowledge-intensive environment of CAD this question becomes more relevant than ever. While China is taking the clear lead in the annual number of qualified graduates, the United States still have the best universities and with Silicon Valley the most famous innovation hub.

Description:

Skilled employees and workers are crucial assets for innovations, R&D activities and technological leadership. In these knowledge-intensive environments of CAD this question becomes more evident than ever.

Analysis & Assessment:

For the new technologies like electric mobility a new skillset for the employees is required. Fields of action which should be given priority are infrastructure (stations and networks), maintenance and trade/dealers and supporting services required for the utilization of the electric vehicle. But also new abilities are required for manufacturing electric vehicles. These comprise the applied production processes and systems, methods and materials. Specific conditions, like explicit safety instructions when connecting, testing, maintaining or repairing high-voltage components are requiring well trained workers.

Figure 31: Fields of actions with top priority considering education and training necessities (Source: Nationale Plattform Elektromobilität, Kompetenz Roadmap 2012)

But as already mentioned in the beginning of the automotive section, the demand for skilled workers will rapidly decrease with the increase of the production of electric cars. This will be true. especially for the final assembly of the vehicles The complexity of electric cars is much lower and therefore fewer workers are required. Furthermore, the required skillset to engineer and produce electric vehicles is more or less comparable to very traditional industry sectors like electrochemical engineering, power electronics or electrical engineering in general. The required courses of study basically revolve around technical scientific disciplines such as engineering, physics and informatics. Therefore, this seems like a rather evolutionary path. For instance it is estimated that in Germany the annual demand for graduates across relevant disciplines for electric mobility will increase from around 102 20.000 (present) to approximately 26.000 (2020) (Deutsche Bank research, 2011). That seems like a challenging but manageable increase. Never the less this incline does only consider well-educated engineers, not the expected radical decline of required shop floor employees.

102 Deutsche Bank Research: Electromobility- Falling costs are a must, 2011

While for electric cars the system components require new hardware-driven capabilities known from other industrial sectors, innovations for Connected and Automated Driving will mainly be driven by software. Required capabilities are therefore educational programs like software engineering, IT-security or informatics in a general sense. Already now the digital knowledge of employees seems not sufficient for many companies, especially as many sectors are simultaneously competing for 103 IT-experts (BITKOM, 2017) .

In another survey interviewed companies responded that more than 60% of all respondents are aware of a shortage of highly skilled employees and managers. The general trend indicates that competition 104 for excellent workers will intensify further (BITKOM Research, 2017) . China (and also India) is way ahead of Europe when it comes to jobs and graduates in the IT-sector. Furthermore they are likely to shine with comparable low wages for programmers and the high quantity of available graduates each year.

Figure 32: Top ten countries with the highest number of engineering graduates. Data contains degrees in engineering, construction and manufacturing. For China and India was no data available (Source: Forbes Statista, World Economic Forum 2015/Unesco Institute for Statistics).

When looking at the latest available data from 2017 one can easily see the huge number of graduates China is providing annually.

103 BITKOM - Pressemitteilung: Unternehmen sehen Lücken bei Digitalkenntnissen ihrer Mitarbeiter: https://www.bitkom.org/Presse/Presseinformation/Unternehmen-sehen-Luecken-bei-Digitalkenntnissen-ihrer-Mitarbeiter.html

104 BITKOM Research: Migration von Fach- und Führungskräften nach Deutschland, 2016.

Figure 33: Countries with the most STEM (Science, Technology, Engineering, Mathematics) graduates (Source: Forbes Statista, World Economic Forum 2016)

The latest analysis of the National Science Board's `Science and Engineering Indicators’ highlights that Asia (China, South Korea an India) are investing heavily in developing a well-educated workforce skilled in science and engineering. While the United States are still leading in a variety of metrics, especially China invested heavily in providing skilled workers and made its increases the last decade despite the Great Recession in 2007 to 2009. That fits to the fact that China has become an important competitor in knowledge and technology-intensive industry sectors, including high-tech manufacturing.

“In 2012, students in China earned about 23 per cent of the world's 6 million first university degrees in S&E. Students in the European Union earned about 12 per cent and those in the U.S. accounted for 105 about 9 percent of these degrees.” (National Science Board, 2016)

The output of Chinese university degrees has grown faster than in any comparable economy, rising more than 300% between 2000 and 2012 and by 1.000% in the same time frame for the quantity of non-Science & Engineering degrees. However the United States still leads in the number of Science 106 and Engineering doctorates and has e.g. according to the QS World University Rankings 2017 the best Universities in Computer Science (7 among the top 10) and in Engineering (6 among the global top 10) with MIT leading both rankings.

Europe is traditionally strong in producing and engineering hardware and the respective knowledge. However as for CAD most innovations are expected to take place in the software sector, highly-skilled computer scientists are needed. At present car manufacturers have already problems acquiring the necessary numbers (and quality) of computer scientists. The United states have a superior role in this sector with their first-class and highly ranked universities and their IT-innovation hub in Silicon Valley. China is coping up with the sheer number of graduates each year. With the right support they will help transform China from an importer of high technology equipment and products to a country providing these to others. Europe has to face these very different and difficult challenges and maintain its favourable economic position.

References

105 National Science Board 2016, https://www.nsf.gov/news/news_summ.jsp?cntn_id=137394

106 https://www.topuniversities.com

BITKOM - Pressemitteilung: Unternehmen sehen Lücken bei Digitalkenntnissen ihrer Mitarbeiter: https://www.bitkom.org/Presse/Presseinformation/Unternehmen-sehen-Luecken-bei-Digitalkenntnissen-ihrer-Mitarbeiter.html BITKOM Research: Migration von Fach- und Führungskräften nach Deutschland, 2016 Deutsche Bank Research: Electromobility- Falling costs are a must, 2011 Nationale Plattform Elektromobilität, Kompetenz Roadmap 2012 QS World University Rankings: https://www.topuniversities.com

2.1.4.6 Innovation

Technical leadership is sometimes of crucial importance, especially in the very fast developing technological area like CAD. It is expected that the technology leaders will mainly influence the upcoming standards in this mobility area. Therefore special focus will be laid on studies analysing the current patent situation. However as we concentrate our analysis on sheer quantities and do not assess or weight the quality or the specific focus area of the patents, the raw quantitative data for the actual patent applications will only provide indicators for the real innovation capability. For example Uber is well known to be one of the leading mobility service providers at present. The company itself generated $6.5 billion in revenue in 2016 but is holding just two patents. Furthermore some automotive companies follow a new IP strategy. Tesla´s innovation model is based on an open- source approach. That is one of the reasons why their patent numbers are comparably low (Tesla, 107 2014). Never the less there is some uncertainty in how this approach will turn out in the long-term perspective.

CLEPA, the European Association of Automotive Suppliers published a snapshot of filled patents from EU member states and compared them with the quantity from the United States, Japan and China 108 (CLEPA, 2012) .

Figure 34: Snapshot on the number of patent filings in 2012 (Source: CLEPA)

107 Tesla, All Our Patent Are Belong To You, 2014, https://www.tesla.com/blog/all-our-patent-are-belong-you

108 CLEPA 2012, http://clepa.eu/who-and-what-we-represent/sector/facts-and-figures/

Never the less a more detailed analysis is required to gain insights in the competitiveness of the European automotive industry.

2.1.4.6.1 Patent quantities for autonomous driving

Focus Area: Automotive

Type: Quantitative

Key Performance Indicators / Areas of Interest: Innovation

SCORE: 3 – Europe has a competitive advantage

Management summary

The entrance of new rivals has tremendously increased the competitive pressure and therefore also the necessity for innovation. Europe’s automotive companies have a good initial situation for the introduction of ADAS since they mainly control the premium market and have the highest numbers of patents with Germany and the UK being the leading countries in Europe. Nevertheless, competitors like Tesla are catching up at rapid speed and demonstrate with their advanced developments that the speed of innovation cycles is faster than ever.

Description:

The competition for the fully autonomous car is mainly driven by technological developments and available innovation capacities. The considered study identifies patent applications in the field of autonomous driving and determines the competitiveness on the number of relevant patent applications.

Analysis & Assessment:

To assess the innovation capabilities of the individual companies, all relevant patent applications from 2010 until the publication of the study were analysed. The study considered 70 companies and classified all identified patents from the PATENTSCOPE database of the World Intellectual Property

Organization in four categories. A combination of search criteria within the patent documents and categories of the international patent classification were utilized. The quality of the patents and the relevance for the tangible implementation for the autonomous car were not analysed. Within the study 22 international OEMs, 25 large suppliers, 17 international electronic companies and six new rivals like Apple, Tesla or Google were considered.

Overall 2.838 patents for autonomous driving were identified, more than half of them were filed by traditional car manufacturer, more than a third by well-established suppliers. New rivals account for just 7 per cent and are mostly concentrated on Google. Approximately 50% of all worldwide patents were filed by German OEMs, followed with a clear distance by Japan and the UK. This lead is mainly caused by the premium strategy of German’s car industry. Within the top ten companies filing patents are 6 companies from Germany (4 OEMS, 2 suppliers), 3 from the United States and 1 from Japan.

Bosch (Germany) 545

Audi (Germany) 292

Continental (Germany) 277

General Motors (USA) 246

Google (USA) 198

VW (Germany) 184

Toyota (Japan) 166

Daimler (Germany) 156

BMW (Germany) 142

Ford (USA) 103

0 100 200 300 400 500 600

Figure 35: Number of relevant patents grouped by company (Source: IW-Trends, Data from PATENTSCOPE; Institut der deutschen Wirtschaft Köln).

The autonomous car is a clearly disruptive mobility solution and furthermore has great synergies when offering concomitant mobility services. Until now the evolutionary technology development is mainly driven by traditional automotive companies. But as mentioned before, the study is based on and considers only the sheer number of patents. It does not consider relevant aspects like the potential or applicability of a patent or the proximity to the customer interface.

The world market for premium cars is mainly controlled by European companies. As these tend to be the first applications were new technology (like ADAS) is applied the initial situation for European car manufacturers and companies within the automotive industry sector is good. Never the less new rivals like Tesla or ICT-Companies are catching up at rapid speed. Especially the establishment of new mobility services and IT-platforms enabling sharing-concepts will be of vital importance in the long perspective.

References

IW-Trends Hubertus Bardt: Autonomes Fahren – eine Herausforderung für die deutsche Autoindustrie , 2016 World Intellectual Property Organization: PATENTSCOPE database http://www.wipo.int/patentscope/en/

2.1.4.6.2 Patent quantities for autonomous driving, driver assistance and telematics

Focus Area: Automotive - Passenger

Type: Quantitative

Key Performance Indicators / Areas of Interest: Innovation

SCORE: 3 - Europe has a competitive advantage.

Management summary

The entrance of new rivals has tremendously increased the competitive pressure and therefore also the necessity for innovation. Europe`s automotive companies have a good starting position for the introduction of ADAS as they mainly control the premium market so far. Within this study however,

results demonstrate that the Japanese automotive industry is leading the race for innovation, closely followed by the European companies. Both automotive industries clearly have the edge over the rest of the international competition.

Description:

The competition for the fully autonomous car is mainly driven by technological developments and available innovation capacities. The considered study identifies innovations using the Thomson Reuters Derwent World Patents Index collection to assess global innovation activity in the field of autonomous driving, driver assistance and telematics and determines the competitiveness on the number of relevant innovations.

Analysis & Assessment:

In total there were over 22.000 individual self-driving inventions from 2010 through October 2015 with a trend indicating a further increase. Innovations in autonomous driving are leading in quantity, followed by ADAS and telematics applications.

Figure 36: Number of self-driving inventions based on publication year (Source: Thomas Reuters).

For automated driving the Japanese company Toyota is in the clear lead and has among its assets the biggest collection of protected IP in the fields of autonomous driving, driver assistance and telematics. Second to first comes the German 1st Tier supplier Bosch, followed by his Japanese competitor Denso, the Korean car manufacturer Hyundai and the American company General Motors. Another six European companies are amongst the top candidates: Daimler (6), Continental (8), Volkswagen (10), Audi (11), BMW (12) and Valeo (18). Toyota has not made any announcements in the field of autonomous driving yet, but this might be due to their conservative business culture. So far Honda was the only automaker in Japan to set and publish with the year 2025 a clear target for fully 109 automated driving.

109 http://www.asahi.com/articles/ASK663HZ8K66ULFA00J.html?iref=comtop_8_01

Figure 37: CAD innovations (autonomous driving, ADAS, telematics) by company summarized from 2010 until October 2015 (Source: Thomson Reuters Derwent World Patents Index)

Having more than 1.400 patents for autonomous driving alone, Toyota is the clear leader, demonstrating with other strong companies like Denso (2), Nissan (4) and Honda (5) the innovation culture and strength of the Japanese industry.

The European companies are very strong in the ADAS sector with the German supplier Bosch leading the competition in total patents. However, Hyundai recently outperformed Bosch with regards to the annual patent applications.

Figure 38: Driver assistance innovations by company summarized from 2010 until October 2015 (Source: Thomson Reuters Derwent World Patents Index)

Considering applications and innovations in telematics General Motors is leading the competition with 300 patents in total, followed by Marvel (American chip manufacturer), LG and Denso. One reason for the American efforts in this technology field might be the wide-spread road system in the United States where telematics solutions become of vital importance and applications might become a key competitiveness factor.

The pure quantity of patents is a strong indicator for a company’s innovation capability. However, the likelihood of filing a patent might also vary between the different business strategies and mind-sets. Furthermore the time duration between the application for a patent and its actual approval and publication takes approximately 18 months which results in a corresponding time delay. Nevertheless the dominance of traditional manufacturers against ICT companies is obvious. Within this study the Japanese automotive industry is leading the race for innovation, closely followed by the European companies. Both automotive industries have the edge over the rest of the international competition.

References

Thomas Reuters: The 2016 State of Self-Driving Automotive Innovation, 2016 Thomson Reuters Derwent World Patents Index; http://ip.thomsonreuters.com/product/derwent-world- patents-index

2.1.4.6.3 Patent quantity: Traditional car manufacturers vs. ICT-companies

Focus Area: Automotive

Type: Quantitative

Key Performance Indicators / Areas of Interest: Innovation

SCORE: 3--> Europe has a competitive advantage in comparison

Management summary

The entrance of new rivals has tremendously increased the competitive pressure and therefore also the innovation potential. ICT companies are mostly focussing with their patents on mobility services 83

with direct customer contact and interface but traditional car manufacturers are holding the vast majority of mobility patents and have a competitive advantage.

Description:

The competition for the fully autonomous car is mainly driven by technological developments and available innovation capacities. The considered study analyses patents in the mobility sector and compares the quantities filed by established car manufacturers against the numbers filed by ICT-companies in the mobility sector.

Analysis & Assessment:

Over 5.000 patents in the considered mobility sector were filed only by 12 leading car manufacturers and ICT-companies according to a study conducted by the World Intellectual Property Organization (WIPO) and Oliver Wyman. The majority of these patents (approx. 3.800) were filed by only six OEMS (Audi, BMW, Daimler, General Motors, Volkswagen, and Tesla).

From these five thousand patents, approximately 1.200 are dedicated to self-driving and connected cars applications or functions and almost one third was filed by ICT-companies,(with Google resp. Alphabet in the lead. Identified quantities are: Audi (223), Google (221), BMW (198), Daimler (159), General Motors (141) and Volkswagen (75).

When narrowing down the analyses on the field of mobility services, ICT companies are taking the lead with 55 filed patents compared to 44 patents filed by traditional car manufacturers. Established car manufacturers focussed (for the most part) the vast majority of their mobility-related patents work in the area of environmental friendly powertrain. General Motors is an exceptional case as it was at the time of the study the only pure fuel-based car manufacturer

Figure 39: Individual company´s patenting visualizing the focus points and therefore indicating business strategies of traditional car manufacturers and new rivals (Source: World Intellectual Property Organization (WIPO), Oliver Wyman)

Results of the study demonstrate that ICT-companies are catching up at rapid speed. The quantity of mobility patents was increased by the considered ICT-companies by approx. 50 per cent and actually decreased for the six regarded automotive manufacturers. This might result from the fact that R&D expenditures rose by 20% for the ICT companies and only by 5% for the automotive manufacturers. Furthermore, the focus point of ICT-companies and their patents is more on the direct interface and communication with the customers. This allows them on the one hand to utilize synergies with their other services and offer integrative solutions. On the other hand customers are more likely to switch to alternative mobility systems if these are offered directly to them and provide enough direct benefits. But as the scope of this analysis within the work package 2 of the Score project is the current situation and prospects for the near future, the European car manufacturers are in a very good position. There are no signs indicating ICT companies are taking over customer control or even realizing self-driving technologies faster than the well-established automotive companies.

References

Oliver Wyman: The Oliver Wyman Automotive Manager, 2017

2.1.4.7 Summary for the Focus Area Innovation

Focus Area: Automotive

Type: Quantitative

Key Performance Indicators / Areas of Interest: Innovation 85

SCORE: 3--> Europe has a competitive advantage in comparison

The meta-analysis of the three studies provides some insights into patent filings, quantities in specific mobility sectors, the competitive position of Europe, its OEMs and 1st Tier suppliers. A comparison with ICT-companies demonstrates that traditional car manufacturers are leading the competition and especially Europe has a competitive advantage in the Focus Area. Nevertheless, competitors are catching up at rapid speed. Furthermore, the studies only evaluate the quantitative number of patent filings and do not rate the quality or the application area. Therefore it can only be interpreted as one indicator, demonstrating Europe`s present position.

2.2 Automotive industry: LCV & HGV 2.2.1 Introduction and Approach

This chapter explores the structure, functionalities and organization of global LCV and HGV’s sector’s supply chains with a purpose to assess their contribution to supporting or weakening competitive positions that the main brand owners might hold in European and global markets. In so doing, we open with definitions of vehicles whose supply chains have been mapped and assessed below.

Commercial vehicles are motor vehicles with at least four wheels used for the carriage of goods (ACEA, 2017). These include pickup trucks, SUVs, vans and panel trucks and are classified according to mass given in tons. They include light commercial vehicles (LCVs) with a gross vehicle weight (GVW) of less than 3.5 tons and heavy goods vehicles (HGV’s) (or sometimes called “large goods vehicles (LGV’s) with gross vehicle weight of over 3.5 tons according to European Unions’ standards. However, in the U.S, Mexico and Canada, LCVs can be up to 7 tons and HGV’s have a capacity of over 7 tons. It is to be noted that the GVW is the weight of the commercial vehicle and the load, not the amount of pay load that can be carried.

Light-commercial vehicles (N1 category) in the EU are defined as vehicles designed and constructed for the carriage of goods and having a maximum mass not exceeding 3.5 metric tons. They can be further classified into three sub-categories: N1 class I vehicles with a reference mass (mass in running order plus 25 kg) not exceeding 1,305 kg, N1 class II vehicles with a reference mass between 1,305 and 1,760 kg and N1 class III vehicles with a reference mass above 1,760 kg (Campestrini and Mock, 2011).

The classification of LCVs and HGVs is therefore different in the US and European Union (Table 6). According to the EU standards, the lightest category of trucks is up to 3.5 tons gross vehicle weight (GVW), covering all panel vans. Examples of the light trucks are the Dodge Dakota, Chevrolet Colorado/GMC Canyon, Toyota Tacoma, Nissan Frontier and Ford Ranger. Medium trucks have a GVW capacity between 3.51 to 7.5 tons. Popular medium truck brands are Dodge Ram 3500, GMC Sierra 3500, Ford E-350, Ford F-350 and the Hummer H1. Heavy trucks have capacities from 7.51 to 18 tons GVW, such as the Dodge Ram 5500, GMC 5500, Ford F-550, International TerraStar. The fourth type of trucks are extra heavy vehicles with a load carriage capacity over 18 tons and special duty characteristics, for example, Autocar ACX 12x6, International WorkStar, Western Star 6900 (6900XD or 6900TS)110.

In the United States, however, trucks are classified into 3 types: light trucks, medium trucks and heavy trucks. Light duty trucks are classified as class 1-3 trucks (0-14,000 pounds or 0-6.350 kg). medium trucks are classified as class 4-6 trucks (14,001-26,000 pounds or 6.351-11,793 kg), and heavy trucks are classified as class 7-8 trucks (26,001-33.001 pounds or 11,794-14,969 kg111). Thus, some trucks that are classified as ‘light’ under the American standard, are classified as medium trucks in the European Union.

Table 6: Commercial truck classification in the US (Source: Dieselhub, 2017)

Class Gross Vehicle Weight Rating Range Examples Class 1 GVRW 0 - 60,000 pounds Ford Ranger (0 -2,722 kg) Class 2 GVWR 6,001 - 10.000 pounds Ford F-150, Dodge Ram 1500, Chevrolet (2,723 - 4,536 kg) Silverado 1500 Class 3 GVWR 10,001 - 14,000 pounds Dodge Ram 3500, Chevrolet Silverado (4,537 - 6,350 kg) 3500, Ford F-350, Ford F-450 Class 4 GVWR 14,001 - 16,000 pounds Dodge Ram 4500, Ford F-450 (chassis (6,351 - 7,257 kg) cab)

110 https://www.trucklocator.co.uk/hub/search-help/weightrange/

111 https://en.wikipedia.org/wiki/Truck_classification

Class 5 GVWR 16,001 - 19,500 pounds Dodge Ram 5500, Ford F-550 (7,258 - 8,845 kg) Class 6 GVWR 19,501 - 26,000 pounds Ford F-650 (8,846 - 11,793 kg) Class 7 GVWR 26,001 - 33,000 pounds Ford F-750 (11,794 - 14,969 kg) Class 8 GVWR over 33,000 pounds Tractor Trailer (14,969 kg)

LCV’s are grouped into 2 categories: N1 and M2, as illustrated in Table 7. N1 includes mini-trucks, van pickups and trucks, while M2 comprises vans and minivans. It is to be noted that the EU LCV market operates with just one category, N1 (Tu et al., 2014).

Table 7: Chinese LCV fleet features (Source: Tuet al.2014)

The same applies to Japan’s classification of commercial vehicles. Analyses of data from Japan Automobile Manufacturers Association (JAMA, http://www.jama-english.jp/), show that the Japanese definitions of Standard, Small and Mini commercial vehicles diverge from those applied in the EU and the US. However, our in-depth analysis suggest that these categories might by and large be equivalent to European LDV and MDV classes. The rationale for this assumption derives from the facts that UD-Trucks, Hino Motors and Mitsubishi Fuso have Standard and Small trucks in their production portfolio, but no production line for Mini trucks, since these companies in general manufacture HDVs and MDVs only. Next, the above dataset shows that Toyota is the largest manufacturer of Standard Trucks. Since Toyota in general does not manufacture HDV’s or too many MDVs, the only possibility left is that Toyota’s Mini Truck corresponds to the LDV’s, and that Standard and Small Truck correspond to models in between European classes of MDVs and LDVs.

2.2.2 Current Value Chains of Leading LCV’s and HGV’s OEM’s 2.2.2.1 Functional Structure of Value Chains in Europe, the US, and China

Figure 40 schematically presents the functional sequence of manufacturing processes that the three tier suppliers within the vehicle manufacturing chain perform to produce ready-marketable vehicles, and the collaborative interdependencies between the OEM’s and their upstream chain partners.

Figure 40: Functional Structure of Automotive Supply Chains (Source: Own Elaboration Based on Heneric et al., 2006 and Ambe and Weiss, 2011)

The physical flows within a value chain start with the raw inputs and production factors delivered by logistics operators from hundreds of Tier-3 suppliers (Heneric et al., 2006). These suppliers are usually located in geospatial proximity to reduce delivery lead times and to facilitate collaboration with brand owners. Local suppliers may be located one or two delivery days away from the assembly plant, whereas overseas suppliers may require several weeks to deliver raw inputs and production factors. Tier-3 suppliers deliver engineered materials and special services, such as rolls of sheet metal, bars and surface treatments to Tier-2 suppliers. They rank below Tier-2 and Tier-1 suppliers in terms of complexity of the products they provide. Tier 2 suppliers produce value-adding parts in the initial sub-assemblies which are then delivered to Tier-1. Tier 1 suppliers usually encompass subsystem and/or modules manufacturers delivering directly to final vehicle assemblers, who in turn are responsible for the finished assembly, product development and continued technological innovation. They work closely with OEM’s in designing, manufacturing and delivery of technologically sophisticated automobile systems and modules, such as significant interior and exterior elements, power train units and transmissions, but also in the production of machinery, equipment and tools112. Tier 1 suppliers purchase from Tier-2 and Tier-3 suppliers. Tier-3 vendors often collaborate with establishments below Tier-3 rank but also with vendors from other industries.

Lead firms in the automotive industry have the power to drive supplier co-location at the regional, national, and local levels for operational reasons, such as just-in-time delivery, development of new designs and/or new vehicle production platforms. But politics also motivate lead firms to locate production close to end markets, thus adding pressure for supplier co-location. However, for suppliers, the decision to move closer to automotive companies’ manufacturing locations is not so straightforward, despite that governments and/or local agencies might provide financial incentives (tax breaks and/or site investments) or support for R&D activity. Suppliers carefully evaluate the business case for each location. Many automobile companies want their suppliers to operate in every jurisdiction in which they have manufacturing facilities (the so-called supplier clusters and/or supplier production parks). Yet, before suppliers can/ will move, they must evaluate access to financing, workforce relocation, recruitment, laws and regulations of the new jurisdiction, how to maintain the client production output quotas and quality, and optimize the production process and inward and outward logistics.

The European Union is considered as the world’s largest vehicle production block, with multiple clusters of three-tier suppliers attracting substantial FDI and R&D investments (ProMexico, 2016).

112 OEM: original equipment manufacturer

Suppliers in the EU create competitive advantage for OEM’s, by offering the following benefits and capabilities

(i) High-quality manufacturing skills and production assets: low-cost structures, readily available talent, geographic proximity to countries with traditional poles of innovation (for example, Sweden, Germany, France, and Italy among others) and specializing in the manufacturing of technologically sophisticated components and luxury vehicles. (ii) Market proximity: border sharing with dynamic, relevant markets within the European Union and Asian countries that generate demand for high-quality and innovative products. (iii) Technological excellence and cross-segmentation of manufacturing capabilities and networking: investment by luxury carmakers, presence of R&D centers, high-edge research institutions, and associations that facilitate collaboration between the different industrial clusters.

A starting point in each value chain is the supplying industry, which delivers parts and subsystems to Tier-1-3 suppliers and vendors. After the upstream production process is completed through functional interactions between the OEM and these suppliers, the downstream channel segment arranges for the marketable vehicles to be offered and sold through retail dealerships (Heneric et al., 2006).

In the following, several examples from the German, British, and Chinese functional collaboration between the different automotive suppliers and OEM’s are reviewed.

The automotive industry in Germany is the largest in the EU and consists of about 950 companies, whose Tier 1-3 suppliers collaborate along and across multiple parallel and /or vertical supply chains (Figure 41). Key OEM players in Germany are Volkswagen, BMW, and Daimler. Germany is home to 46 automobile assembly and engine production plants, constituting over one third of the total automobile production capacity in Europe (Business Sweden, 2015). The largest German automotive Tier-1 and Tier 2 suppliers by turnover in 2014 were Continental (33%), Bosch (31%), ZF Friedrichshafen (17.%), Mahle (10.0%), ThyssenKrupp (9%), Schaeffler (8%) and Hella (5%). Lastly, Tier-3 suppliers represent about 500 small and medium-sized companies, which account for about 53% of the automotive industry establishments in Germany.

Figure 41: Three Tiers of Value Chain Suppliers in the German Automotive Industry (Source: Business Sweden, Opportunities within the German Automotive Industry, July 2015, Berlin).

An in-depth example of Ford’s sequence of Eco-Boost engine value-added manufacturing operations in the UK, Germany, Spain, Turkey and Romania is depicted in

Figure 42: Pan-European Ford’s EcoBoost Engine Development with Functional Distribution of Manufacturing Operations (2013) (Source: KPMG (2014): “The UK Automotive Industry and the EU; An Economic Assessment of the Interaction of the UK’s Automotive Industry with the European Union”, p.7.)

Another example of spatially dispersed but technologically interconnected manufacturing processes with several value-added operations in the UK, Germany, Sweden and France is shown in figure 43.

Figure 43: Interconnectedness of Value Chain Operations for Fuel Injections for Diesel Lorries Manufactured by US Component Maker Delphi in the UK and Sold to Truck Makers in Sweden, France and Germany in 2017 (before Brexit) (Source: FT Research published in FT on June 17th, 2017) 2.2.2.2 Geo-spatial Structure of Auto Production Networks

The automotive industry, with its sub-segments producing cars, buses, LCV’s, and trucks, is organized as geo-spatially disintegrated but functionally and operationally synchronized networks, connecting the value-adding sub-contractors with OEM’s. In this environment, the network’s competitive advantage depends on how effectively the upstream suppliers and the downstream distribution channels are integrated with brand owners, and how much value they deliver to the

customers they target 113. Figure 44 depicts three different network structures composed of physical exchanges and communication link-ups between three tiers of upstream value-adding suppliers and three final assemblers. Suppliers and/or sub-contractors who gravitate towards OEM’s are represented by blue nodes, while working relationships and physical, financial and information exchanges between all parties are marked by directional links. The OEM’s are positioned at the network epi-centers and act as hubs which source and assemble the generic and branded elements, components, and subsystems into marketable products. The OEM’s have a smaller number of connections to tier 1 subcontractors, while the latter have more numerous linkages to tier 2 suppliers. Tier 3 suppliers have the largest number of material and financial exchanges, in addition to IT linkages, because they collaborate both with tier 1 and tier 2 companies within their native system, and with other fabrication networks. Often, tier 3 suppliers who produce non-branded generic parts and elements also supply other industries than just the automotive industry.

The network hub-and-spoke topology underscores the functional and competitive interdependency between the brand owning OEM’s and their sub-contractors. The OEM’s final value proposition and market-traded values aggregate the entire network partners’ outputs. In this way, the network collectively affects the OEM’s competitive standing and the uniqueness of the products compared to relevant rivals.

In summary, the OEM’s branded vehicles are both created and delivered by the upstream and downstream segments of a value chain. The above indicates that global, regional and/or national competition does not solely take place between OEM’s, but between the different manufacturing networks. To remain competitive and to ensure profit margins for all sub-contractors and final assemblers, the sub-suppliers’ deep involvement in product design, development and improvement became the core capability required by most automotive OEM’s. As a result, the final quality and competitive leverage embodied in different brands of LCV’s, MGV’s and HGV’s are composed of collateral and sequential contributions of all network members.

Figure 44: Map of Three Assembler Networks Who Compete and/or Collaborate in Different Product / Market Segments (Source: Brintrup, A., Torriani, F., and Choi, T. (2013) “Structural Embeddedness and Supply Network Resilience” in “Disruptive Supply Network Models in Future Industrial Systems: Configuring for Resilience and Sustainability”, Proceedings from 17th Cambridge International Manufacturing Symposium”, pp 1-16.)

113 However, this statement disregards the contributions of logistics operators who move materials, elements and sub-systems between suppliers’ plants and the OEMs’ assembly facilities, and between the OEMs’ final fabrication premises and the supply chains downstream segment composed of distribution and/or dealership outlets. Neither it recognizes the important role of financial flows exchanged between the OEMs and the networks of T1, T2, and T3 subcontractors which provide economic background for intra-and inter-network business. Finally, network members are connected through IT applications which virtually manage and steer their production operations and input-output shipments. The effectiveness and timeliness of logistics, financial and IT service providers do also contribute to the scope of value added that the OEMs deliver to their dealers’ and that the latter deliver to the final customers. Consequently, the quality of performance of all these parties undelay the entire networks’ competitive standing and its final competitive advantage vi-a-vis rivals in markets of interest.

In the following, several geographical and functional configurations of European and North American and Chinese automotive industries’ networks are reviewed, revealing different production clusters of network participants.

2.2.2.2.1 EU, Turkey and Ukraine

Figure 45: Geo-spatial Networks of Automotive Manufacturing Clusters in Europe (Source: European Cluster Observatory. ISC/CSC cluster codes 1,0 dataset 20070606)

As of 2004, the European automotive industry network was comprised of 39 product clusters (dispersed throughout 259 regions) that met two or three cut-off performance criteria regarding the following themes 1) employment size in the focal industry cluster within a region 2) degree of specialization, and 3) the clusters’ contribution to the region’s employment. On this basis, 155 regional clusters were awarded 3 stars (85), 534 regional clusters got two stars (25%) and 1.338 received 1 star (67%) (The EU, Enterprise and Industry Directorate General (2006) “Innovation Clusters in Europe: A Statistical Analysis and Overview of Current Policy Support”, p.7)

As illustrated by Figure 46, the LCV assembly and engine production automotive sub-segment in the EU was made up of a 5 plant-cluster in Germany, a 7 plant-cluster in France, a 5 plant-cluster in Spain, and a 5 plant-cluster in Italy (AECA, 2017).

114 Figure 46: Geolocations of LCVs Assembly and Engine Production Cluster in EU, Ukraine and Turkey

114 Automotive suppliers and small vehicle and engine manufacturers are not included in this overview for reasons of complexity. This map does include most members' engine production sites, but omits transmissions, body shells and any other vehicle parts plants (ACEA, 2017).

(Source: ACEA, 2017)

Meanwhile, Russia, Turkey, France and Germany had the highest number of assembly and engine production clusters for HDV’s, with 8, 6, 7 and 4 plants respectively, according to ACEA’s statistics (figure 47).

Figure 47: Spatial Locations of Heavy-duty Vehicles (HDVs) Assembly and Engine Production Clusters in EU, White Russia, Ukraine, Russia and Turkey (Source: ACEA, 2017)

Figure 48 depicts locations of automotive manufacturing clusters in Turkey, which encompasses subsidiaries of EU brand owners such as Volkswagen, Daimler, Renault and Fiat, as well as American, Japanese and Korean LDV and engine manufacturers (Ford, Hyundai and Isuzu), in addition to the local parts and module suppliers. Vehicle production plants are clustered in the northwestern part of Turkey, with a number of important plants in the Istanbul/Kocaeli and Bursa areas. In addition, there are typically numerous factories of vehicle part suppliers located in the vicinity (not shown on the map) (ACEA, 2017).

Figure 48: Light-duty (LDV) and Heavy-duty (HDV) Vehicle Manufacturing Clusters and Plants in Turkey (Source: Mock, 2016)

Figure 49 displays the geospatial locations of automotive manufacturing clusters in the UK, with regional production clusters located in the Midlands, the southern part of England.

Figure 49: Cars and Commercial Vehicle OEMs and Engine Manufacturing Clusters Located in the UK as Part of Sub- 115 European Regional Production Cluster in 2014 (Source: KPMG (2014): “The UK Automotive Industry and EU: An Economics Assessment of Interaction of the UK’s Automotive Industry with the European Union” p.2)

2.2.2.2.2 The US

Figure 50 and Figure 51 illustrate the geospatial dispersion of automotive industry clusters in North America.

Figure 50: Networks of Assembly Plant Clusters of in North America Marked in Green – LCV Assemblers, Blue - MDV Assemblers, Red- HDV Assemblers. (Source: Own Elaboration)

115 Not exhaustive.

Figure 51: Networks of Tire 1 Supplier Clusters in North American Automotive Industry Marked in Green – Suppliers of Electrical Components and Sub-systems, Brown – Suppliers of Mechanical Component/Subsystems, Blue – Suppliers of Tires, Red – Suppliers of Electrical and Mechanical Components and Sub- systems. (Source: Own Elaboration)

Comparison of the two maps presented in the figures above reveals that OEM’s are surrounded by much more numerous Tier-1 supplier clusters which produce and deliver major components and subsystems. The more spatially dispersed and functionally fine-meshed clusters of Tier-2 suppliers are shown in figure 52, revealing an increasingly denser pattern of lower layer participants in this network.

Figure 52: Networks of Tier-2 Supplier Clusters in North American Automotive Industry Marked in Green – Suppliers of Mechanical Parts, Elements and Components, Yellow – Suppliers of Electrical Parts, Components and Elements, Blue – Suppliers of Hydraulics, Red – Suppliers of Electrical /Mechanical Parts, Elements and Components. (Source: Own Elaboration)

2.2.2.2.3 Japan

In general, the Japanese automotive market consists of Japanese companies, of which some are (partially) owned by European companies (UD Trucks/Volvo, FUSO Trucks/Daimler).

Tier 1 and Tier 2 companies were identified using the list «Top 100 global OEM parts suppliers» by Autonews116. This list consists of 28 Japanese suppliers, for some of which also subsidiaries were listed.

Comparing the different OEM’s in terms of size is not straightforward, as most of the automakers do not exclusively produce LDV’s and HDV’s. An example is Toyota, Japan’s biggest auto manufacturer, for which LDV’s only amount to a small share of production. Generally, it seems that the largest HDV manufacturers are Mitsubishi Fuso, UD Trucks and Hino motors, while the largest LDV manufacturers are Toyota, Suzuki and Nissan.

Figure 53, Figure 54 and Figure 55 show the location of OEM’s, Tier-1 and Tier-2 firms respectively, in the Japanese regions of Kaisai, Chubu and Kanto.

Figure 53: Location of OEMs in Kaisai, Chubu and Kanto region (Source: Own Elaboration)

Figure 54: Location of Tier 1 in Kaisai, Chubu and Kanto region (Source: Own Elaboration)

116 Source: https://www.autonews.com/assets/PDF/CA89220617.PDF

Figure 55: Location of Tier 2 in Kaisai, Chubu and Kanto Regions (Source: Own Elaboration)

85% of OEM plants, 77% of Tier 1 plants, and 65% of Tier 2 plants are located in these regions, generally near the coast, to allow easier transport.

There are several reasons to expect that the automotive industry within a country forms clusters: (1) Suppliers are more involved in the design phase, and therefore they establish own design centers close to those of their major customers to facilitate collaboration, and (2) to enhance the technical integration of the production117.

2.2.2.2.4 South Korea

South Korea is a relatively large producer of passenger car, taking into account the size of the country, but a more modest producer of LDV’s and HDV’s.

To identify OEM’s and tier 1 and tier 2 suppliers (shown in figure 56, Figure 57 and Figure 58, four steps were taken:

1. Review of the top 100 global OEM supplier list 2. Direct search for the automakers supplier lists 3. Review of the relevant models of the different auto manufacturers 4. Identification of engine manufacturers, transmission manufacturers, and manufacturers of other key components and sub-assemblers, and their locations

117 Source: http://feb.kuleuven.be/public/n07057/cv/svb11ijtlid.pdf

Figure 56: Location of OEMs in South Korea (Source: Own Elaboration)

Figure 57: Location of Tier1 in South Korea (Source: Own Elaboration)

Figure 58: Location of Tier2 in South Korea (Source: Own Elaboration)

2.2.2.2.5 China

Table 8 list the main Tier-1-2 manufacturing companies supplying to OEM’s in China.

Table 8: Selected Tier 1 and Tier 2 Suppliers in Automobile Parts and Subsystem Manufacturing Clusters in China (2017) (Source: EU SME Centre)

Vehicle Elements Manufacturing Companies Engine (Tier 2) Weichai, Yuchai, Shanghai Diesel Engine Tires (Tier 2) Michelin, Bridgestone, Goodyear Audio (Tier 2) Continental, Clarion, JVC Kenwood Glass (Tier 1) Asahi, Pilkington, Shanghai Yaohua Pilkington Chases (Tier 2) Mando (Beijing), Pingyuan Hengming, Anyang Gulong

Body (Tier 1) Xiamen Golden Dragon, Human Changsha Pingtou, Hebei Qiying Air Conditioning (Tier 2) Shanghai Delphi, Valeo, Tianjin Sanden

Figure 59 illustrates the geo-spatial patterns of Chinese automotive supply.

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Figure 59: Geographical Locations of Tier-1 and Tier-2 Automotive Parts and Sub-system Manufacturing Clusters in China (Source: Own Elaboration Based on Data from Companies’ Web-sides)

Figure 60 shows the six major regional production clusters/zones for China’s automotive industry.

Figure 60: Six Major Regional Production Clusters/Zones in China’s Automotive Industry (Source: FOURIN, Own Elaboration Based on Various Chinese Media Outlets)

The figure shows that China’s auto parts industry clusters are concentrated within the same 6 regions, as their OEMs. Eastern China hosts the largest number of industry clusters with both parts manufacturers (market share of 39%) and vehicle OEM’s (market share of 37%). Yet, suppliers of parts seem to follow the OEM’s trends of expanding production and sales towards western regions.

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2.2.2.3 Geo-spatial Organization of Motorized Industry’s Value Chains

For decades, the motor vehicle industry has operated with geographically dispersed manufacturing networks. Consequently, the outsourcing of fabrication, value-added operations, and manufacturing and technological innovations to highly specialized suppliers has disintegrated the industry’s structure creating needs for bridging functional and geographic fragmentation. The value chains of motor vehicle manufacturers are organized as hierarchical networks, with large brand owners and/or vehicle assemblers positioned at the top layer of the network topology. One layer down, Tier-1 suppliers and sub-contractors deliver complete sub-systems, modules and critical components, followed by Tier-2 subcontractors and Tier-3 vendors and suppliers. Alongside the disintegration of supply chains, Tier-1 suppliers started increasing their contribution to vehicle and equipment design. Consequently, brand owners became more dependent on their upstream chain partners (ECB, 2014).

Nevertheless, geo-spatial production patterns of the motor vehicle industry remains, by and large, regional. With transportation costs growing steeply for shipments of high-value sub-assemblies, the numbers of intermittent long-distance transfers had to be cut down. Calls for functional and spatial proximity were further amplified by the need for control of intermittent material. In addition, political authorities seeking preservation of industrial jobs in their jurisdiction incentivized multi-layered centralization of automotive clusters. As consequence, three regional blocks of global production networks emerged worldwide; the European automotive manufacturing system, the NAFTA agreement manufacturing block, and the Asian automotive production area.

Figure 61 shows the import content of exports by country of origin in the automotive industry.

Figure 61: Import Content of Exports by Country of Origin in Motor Vehicle Industry, 2009 (Source:De Backer and Miroudot (2014), p.22)

It can be seen from the figure that intra-regional sourcing dominates the value-adding activities of the motor industry on three continents.The EU final vehicle manufacturers rely heavily on sourcing trade with their European suppliers and sub-contractos. The North American vehicle brand owners source majority of their parts, modules and subsystems from suppliers in NAFTA countries. Also in Asia, a regional pattern of sourcing exists, caused by the brand owners’ intensive procurement of vehicle subsystems from supply intermediaries in their native regions.

Once the regional pattern of vehicle production is assessed, the next step in mapping a value chain structure, is the assement of its value-creation by suppliers from different nations. The degree of operational dispersion is affected by the number of stages a vehicle fabrication process goes through

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before it reaches the final customer. On the other hand, the degree of national dispersion is a product of the number of countries within which the fabrication process is performed before its reaches the final assemblers and distribution systems and retailers. When the processes of sub-assemly and value-adding through co-production takes place in several countries, this also reveals the level of the industry’s internationalization. Thus, when the value-adding sequences are physically dispersed across several countries, a strong need for functional and spatial coordination emerges.

Figure 62 compares the internationalization levels of the different manufacturing and service provision industries in countries participating in automotive co-fabrication. It shows that the motor vehicle manufacturing industry is the second most internationally regionalized industrial segment, after the TV and communication sector.

Figure 62: Internationalization Levels of Value Chains by Industry, 2009 (Source:De Backer and Miroudot (2014), p.22)

Figure 63 breaks down the degree of internationalization by country. Noteworthy is that smaller countries add on average value to the previously internationally processed elements, confirming that these countries depend more on directly or indirectly imported intermediaries for their scope of worth creation. The data reveal that the Slovak Republic, Hungary, the Czech Republic, Slovenia and Poland process mainly foreign inputs in their car manufacturing plants.

The opposite is true for S.Korea, Japan, China and the US, which harbor more numerous value- adding stages within their national automotive industry, thanks to the existence of many highly specialized domestic manufacturing clusters which serve their national brand owners.

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Figure 63: Degrees of Internationalization of Motor Industry by Country. (2009) Inputs Imported vs. Value-added Domestically (Source:De Backer and Miroudot (2014), p.23)

The above trend is further supported by statistics on geographic sourcing of imports of vehicles parts and sub-elements presented below.

2.2.2.4 Summary

The functional structure of the value chain of OEM’s of LCV’s and HGV’s is characterized by three tier levels. Third tier suppliers supply raw input and production factors, second tier suppliers are responsible for branded parts and elements and generic components, while first tier suppliers deliver key-components and sub-assemblies, sub-systems, modules, production machinery, tools, and technology. OEM’s in turn are the lead assemblers and brand owners. In short, the OEM’s branded vehicles are both created and delivered by the upstream and downstream segments of their value chains. This indicates that global, regional and/or national competition does not solely take place between OEM’s, but between the different manufacturing networks.

Geographically, and despite the seemingly global scope of activities in the automotive industry, a closer look at sourcing patterns revealed a regional concentration of procurement and manufacturing in three main regional production blocks in Europe, Asia, and North-America. Within these blocks, and particularly for efficiency reasons, the different tiers described above exhibit a certain degree of geographical clustering. In this chapter, the value chain’s geographical topology is visualized in more detail for the EU, Turkey, and Ukraine; the US; Japan; South-Korea, and China.

Analyses of domestic and international value contributions by countries where production and supply chains are located, revealed differences between countries whose value-adding constitutes merely a small part of the total vehicle manufacturing process (e.g. Poland, Slovakia), and the larger vehicle manufacturing nations, such as China, South Korea, Germany, France, the US, and Japan. In the latter countries, specialized production and supply clusters across all tiers are to a larger extent internalized in the country itself, resulting in high scores on domestic value added and on technological innovation. Generally, OEM’s in the three main production blocks source much of their intermediate inputs from their own country/region, and only to a much smaller extent engage in trade with suppliers from less developed countries and/or from the rest of the world. Distant sourcing is discouraged by efficiency challenges such as costs, technical compliance, oversight, stock-holding, and (risks regarding) longer delivery times.

2.2.3 Characterization of Value Chains’ Product Portfolio and Players 2.2.3.1 EU

In numbers, the largest imports of intermediate automotive items to the EU in 2015 consisted of parts and accessories of bodies, followed by brakes and servo-brakes, gear boxes, drive-axles, and road wheels. In value terms, imports of parts and accessories of bodies were largest and amounted to 33

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billion USD, followed by the import of gear boxes (24 billion USD), brakes and servo-brakes (14 billion USD), and steering wheels (9 billion USD) (UN Comtrade, 2017).

Gear boxes

As shown in figure 64, the European buyers of gear boxes predominantly sourced these inputs from European suppliers, while importing little from developing countries and the rest of the world.

3000 2757

2500

2000 1822 1513 1500 1309

1000 787 629 558 596 326 402 500 182 187 239 90 67 39 51 79 0 Import from EU countries Import from developing Import from the rest of the countries world

Germany United Kingdom Spain France Italy Czech Republic

Figure 64: Imports of Gearboxes into EU Focus Countries (2015) in € Million, by Main Origin (Source: CBI, 2017)

A closer look at the above and below charts confirms that the EU suppliers dominated provisions of automotive intermediate elements to the European OEM’s. Within the EU, Germany was the largest importer of vehicle gearboxes, with 2015 imports amounting to €3,73 billion, followed by the UK, Spain, and France (€ 1.67 billion) (CBI, 2017). The post-crisis automotive economic recovery in 2016 spurred larger demand from OEM’s and the aftermarket, contributing to an increase in the production of gearboxes. Interestingly, only 3,8% of the value of the gearboxes imported came from the developing countries, while Mexico was the largest source country for EU manufacturers for gearboxes in the rest of the world.

Many of the automotive transmission manufacturers are located in Germany. Figure 65 shows the revenues of the world’s largest suppliers of gear boxes in 2015.

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ZF Friedrichshafen (Germany) 33

Aisin Seiki (Japanese) 24,9

Eaton Corporation (Ireland) 20,9

Fiat Powertrain Technologies (Italy) 8,0

Voith (Germany) 6,072

Linamar Corp. (Canada) 3,887

Getrag (Germany) [VALOR],0

Showa Corp. (Japan) 2,3

Allison Transmission (USA) 1,84

BorgWarner (USA) 0.651

Ricardo plc (England) 0.33

Bühler Motor (Germany) 0.289

0 5 10 15 20 25 30 35

Figure 65: Revenues of Top Global Gearbox Suppliers in 2015 (in Billion US$) (Source: https://en.wikipedia.org/wiki/Category:Automotive_transmission_makers)

With sales revenues of 33 billion USD in 2015, ZF Friedrichshafen AG (ZF) was the largest gearboxes supplier. ZF had 230 production facilities in 40 countries with approximately 138.000 employees (ZF.com, 2017). ZF was followed by Japanese Tier-1 components supplier Aisin Seiki Co., whose revenue in 2015 amounted to nearly $25 billion on a manufacturing portfolio composed of gearboxes, drivetrains, and bodies and chassis.

Vehicle wiring

Within the EU, Germany was the largest importer of vehicle wiring, with imports in 2015 amounting to €4 billion (figure 66). Germany was followed by Spain (€1,6 billion) and the United Kingdom (€1,4 billion). It is noteworthy that sourcing by Spanish automakers of vehicle wiring from developing countries amounted to €1,3 billion, while Spain’s imports from the EU amounted to €281 million only. An explanation might be that wiring manufacturers like Delphi, General Cable, Fujukura and Sumitomo Electric Europe also subcontract large batches of their outputs to suppliers in developing countries, thus causing Germany and Spain to import sizable amounts of wiring from these manufacturing locations. However, European suppliers remain preferential locations for German, Czech and the UK intermediate sourcing trade.

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3000 2500 2000 1500 1000 500 0 Import from EU countries Import from developing Import from the rest of the countries world

Germany Spain United Kingdom France Czech Republic Hungary Slovakia Austria Romania Italy

Figure 66: Imports of Vehicle Wiring into EU Focus Countries (2015) in € Million, by Main Origin (Source: CBI, 2017)

Figure 67 shows the world’s largest suppliers of vehicle wiring.

Yazaki Corp. (Japan) 14

Samvardhana Motherson Group (India) 7

Leoni AG (Germany) 3

Flex (Singapore) 2

Dura Automotive Systems (USA) 2

0 2 4 6 8 10 12 14 16

Figure 67: Revenues of Top Global Vehicle Wiring Suppliers in 2015 (in Billion US$) (Source: PwC (2016))

With global revenues of $14 billion, Yazaki Corp was the leading supplier in 2015, with a product portfolio including wiring harnesses, connectors, junction boxes, power distribution boxes, instrumentation, and high voltage systems. Yazaki was followed by Samvardhana Motherson Group (PwC, 2016118)

Brakes and servo-brakes

Figure 68 shows the import of brakes in servo-brakes by the EU-27 in 2015.

118 PwC, 2016. http://evertiq.com/design/38485

107

12,0 10,423

10,0 Billion 8,0

6,0

4,0 2,950 1,206 1,369 2,0 0,973 0,865 0,857 0,568 0,820 - China Czech Germany Spain EU27 France United Italy Poland Republic Kingdom

Figure 68: Imports of Brakes and Servo-brakes into EU-27 (2015) in $ Billion, by Main Origin (Source: UN Comtrade, 2017)

The EU-27 imported roughly $280 billion worth of brakes and brakes parts in 2015 (UN Comtrade, 2017). Germany alone accounted for nearly 25% of this import, followed by the UK (11%) and France (9%),

Eighty-four percent of brakes and brake parts used by the EU automotive industry were sourced from within the EU-27.

Continental AG recorded $31.480 billion in 2015 value of brakes and brakes parts sold. Apart from electronic brakes and foundation brakes, the company offered the modules like advanced driver assistance systems, stability management systems, tires, chassis systems, safety system electronics, telematics, and powertrain electronics (PwC, 2016). The German supplier was followed by Aisin Seiki (Japan), Mando (South Korea), and Federal-Mogul (Japan).

Continental AG (Germany) 31.480

Aisin Seiki Co. (Japan) 25.904

Mando Corp. (South Korea) 5,560

Federal-Mogul Corp. (Japan) 5.077

Cooper-Standard Automotive (USA) 3.343

Nissin Kogyo Co. 1.385

0 5.000 10.000 15.000 20.000 25.000 30.000 35.000

Figure 69: Revenues of Top Global Vehicle Wiring Suppliers in 2015 (in Million US$)

(Source: PwC (2016))

The list above supports some previous observations that the US, South Korea and Japan host several world-class sub-contractors covering the all stages of vehicle fabrication process.

2.2.3.2 The U.S

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Contrary to the EU, the US imports a great deal of gear boxes from developing countries119 (see figure 70). Canada and Mexico are important NAFTA trading partners of the US, with gear box imports up to 1,8 and 0,7 billion USD respectively in 2015.

4.000.000 3.500.000 3.000.000 2.500.000 2.000.000 1.500.000 1.000.000 500.000 0 Mexico Canada EU Developing Rest of the world countries (including China)

2009 2010 2011 2012 2013 2014 2015 2016

Figure 70: Import of gear boxes to the United States from 2009 to 2016 (thousand USD) (Source: UN Comtrade, 2017)

Figure 71 shows the development in the import of brakes and servo-brakes to the US, in the period 2009-2016.

1.600.000 1.400.000 1.200.000 1.000.000 800.000 600.000 400.000 200.000 0 Canada Mexico EU Developing Rest of the world countries (including China)

2009 2010 2011 2012 2013 2014 2015 2016

Figure 71: Import of brakes and servo-brakes to the US from 2009 to 2016 (thousand USD) (Source: UN Comtrade, 2017)

Again, a sizable share of the sourcing took place from Canada and Mexico, while only about 3% of imports of brakes and servo-brakes had their origin in the EU. With an import value of over 1,1 billion USD in 2016, and a share of 33% in total imports, developing countries including China were also a main import source.

119 Developing countries refer to 59 countries under WTO’s classification. In fact, WTO has no definitions of “developed” or “developing” countries. “Members announce for themselves whether they are developed or developing countries”. (https://www.wto.org/english/tratop_e/devel_e/d1who_e.htm)

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2.2.3.3 Japan

Figure 72 breaks down Japan’s import of gear boxes by region.

9.000.000 8.000.000 7.000.000 6.000.000 5.000.000 4.000.000 3.000.000 2.000.000 1.000.000 - EU-27 US China Developing countries (including China)

2009 2010 2011 2012 2013 2014 2015 2016

Figure 72: Import of gear boxes to Japan from 2009 to 2016 (thousand USD) (Source: UN Comtrade, 2017)

The figure indicates that Japanese buyers of gear boxes predominantly imported these components from China. The total import of gear boxes from Chinese suppliers reached 4,1 billion USD in 2016 (ca. half of Japan’s total imports of gear boxes). Within the EU-27, Germany was the largest exporter, with exports amounting to about 1 billion USD, followed by France (0,5 billion USD), the UK, and Spain.

Figure 73 shows the development in the import of brakes and break parts to Japan, for the period 2009-2016.

1.400.000 1.200.000 1.000.000 800.000 600.000 400.000 200.000 - US EU China Mexico Developing countries (including China and Mexico)

2009 2010 2011 2012 2013 2014 2015 2016

Figure 73: Import of brakes and servo-brakes into Japan (thousand USD), by main origin (Source: UN Comtrade, 2017)

Between 2012 and 2016, the import of these components decreased from an import value of 2,1 billion USD to 1,2 billion USD (UN Comtrade, 2017). Of these imports, 0,4 billion USD worth of inputs was sourced from the United States, while the EU and China both stood for about 0,16 billion USD.

2.2.3.4 Summary

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For each of these categories, this chapter described import characteristics for the three major automotive production regions; the EU, the US, and Japan. In addition, the chapter showed the largest suppliers of each of these component types globally.

The analysis shows that EU manufacturers, to a larger extent than American and Japanese manufacturers, source their main inputs from their own country/region. American and Japanese OEM’s in turn source more from developing countries, particularly from China, and in the case of the US, from Mexico.

2.2.4 Structure of Supply Chain Industry and Intra-Chain Relationships 2.2.4.1 Collaborative Relationships between OEMs and Suppliers, and between the Chain Participants

In the following, the organization of collaborative relationships between lead vehicle manufacturers and their suppliers, are discussed.

2.2.4.1.1 Mergers and Acquisitions

Despite their strategic, commercial, and logistics importance to OEM’s, supply chains are under severe pressure. Several cost-cutting programs have been initiated by OEM’s and transferred to the downstream supplier companies, putting the lower echelon chain members under severe economic pressure. At the same time, technology advances in new powering solutions replacing diesel engines in both LCV’s and HDV’s, have created new opportunities and challenges for both the OEM’s and their suppliers.

In this environment, both vehicle manufacturers and large suppliers of components have realized that they must make strategic shifts to adopt new technologies to satisfy increasingly stringent environmental regulations and consumer preferences. Therefore, they used mergers and acquisitions to buy new assets and professional expertise, and to consolidate control over multiple production stages, optimize portfolio and manufacturing costs, and effectively integrate innovation uptakes. As a result, from 2010 to 2015 large capital spending on mergers and acquisitions in the automotive supplier sector occurred, substantially increasing the deal values and volumes, thereby changing the global competitive landscape (Ostermann et al, 2016).

Figure 74 shows the volume and values of global M&A in the automotive industry.

40 350 35 303 300 30 265 264 275 257 250 257 250 25 222 200 20 34,1 150 15 27,5 24,2 100 10 18,8 21,3 5 11,6 10,6 13,1 50 0 0 H1 2009 H1 2010 H1 2011 H1 2012 H1 2013 H1 2014 H1 2015 H1 2016

Disclosed Deal Value Deal Volum (R-Axis)

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120 Figure 74: Global Automotive M&A Deal Volumes and Values (US Dollar), 2009-2016 (Source: PwC (2016))

As illustrated by figure below, the deal values and volumes in the first half of 2016 have underperformed the transactions completed in the first half of 2015. The total transaction value of $21,3 billion in the first half of 2016 was down by 37% from the first half of 2015. A total of 257 deals were closed during the first half of 2016, down by 7% from the first half of 2015, but still 3% higher than the number of transactions completed in the first half of 2014.

Figure 75 breaks down the M&A deals completed between July 2014 and July 2015 in both the global markets (left panel) and North America (right panel) by suppliers of different types of vehicle subsystems. Most of the M&A involved companies who manufactured chassis (20% of all global suppliers) and powertrain subsystems (19%). Producers of interior components were the third most popular acquisition objects, and were the subject of 17% of deals, followed by suppliers of electronics. In the North America, acquisitions centered around suppliers of powertrains (22%), chassis (20%), interior (18%) and electrical components (12%).

Figure 75: M&A Deals by Types of Vehicle Subsystem Manufacturer, July 2014-July 2015 (Source: Thomson M&A, Strategy and Analysis Based on Merger Market Data; Company Filings and News, as cited in Ostermann et al., (2016) gives an overview of M&A deals in the automotive industry during 2016.)

120 Deal volumes are defined as number of deals made by a given brand owner.

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Table 9 gives and overview of M&A deals in the automotive industry during 2016.

Table 9: Top 20 Automotive Transactions in 2016 (Source: Thompson Reuters Cited by PwC in “Global Automotive M&A Deals Insights Year-end 2016”, 2017, p.7 Note: Deals in this chart have disclosed their values)

2.2.4.1.2 Collaborative Agreements between Autonomous Companies in Supply Chains

In contrast to M&A, where ownership rights are transferred, collaborative agreements are governed by different legal contracts regulating business between autonomous companies. Research has shown that, when contracts are well fulfilled and working relationships between the chain partners are amicable, they create more value to all collaborating parties, and to final customers.

To assess the quality of inter-party working relations, a Working Relations Index is often applied.

A study by John Henke (2014) from Oakland University who pioneered the measurement of the quality of buyer-supplier relations, showed that better working relations lead to better company business performance, better profitability and a stronger competitive position121.

Henke established clear causal links between the health of working relations that an automotive manufacturer (OEM) nurtures with its suppliers, and the bottom-line of its performance. In addition, Henke estimated how much of the OEM’s profitability comes from supplier contribution, as opposed to

121 Source: http://spendmatters.com/uk/supplier-relationships-and-profitability-prof-john-henke-proves-the-link/

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in-house managerial competence122. His data analyses provided basis for ascribing 60% of OME’s profitability to suppliers, depending on the strength of working relations, while 40% was attributed to managerial prowess and efficiency. The analysis further suggested that the non-price benefits created through good collaborative interactions contributed around 10 times as much value as price concessions and/or other financial demands.

Inspection of Work Relationship Index levels calculated in the 2016 Annual Automotive Industry Study in the US, revealed that that Toyota and Honda emerged as the most supplier-friendly automakers, although the quality of their working relations has fluctuated broadly during 2008-2016 (see figure 76 below).

400

350 Toyota

Honda 300 Ford

250 Nissan

200 GM

FCA 150 2008 2009 2010 2011 2012 2013 2014 2015 2016

123 Figure 76: OEM- Supplier Relations as Measured by the Working Relation Index (WRI)

(Source: Planning Perspective, Inc. web site, http://www.prnewswire.com/news-releases/oem-supplier-relations-study-shows- strong-gains-for-toyota-and-honda-with-ford-nissan-fca-and-gm-falling-well-behind-300084605.html)

Japanese companies Toyota and Honda have made a great effort to gain supplier trust, by providing them with sufficient information and transparency, whereas other car manufacturers have failed to do so (Gilbert, 2014). In 2014, Toyota was rewarded by Gartner with a third place among the best supply chains in Asia Pacific Region and a 22nd place in the global ranking (Florea and Corbos, 2015). Toyota worked to improve inter-function communication, introducing new and better systems to collect and analyze the supply chain data, and to build flexibility in its production methods. Toyota also collected information on vehicle reliability and performance from customers, suppliers and dealers to enhance customer care, knowing that customer knowledge means accurate information about elements that determine the value perceived by the market, preference for the product or the company, and ultimately, the willingness to accept the vehicle price (Deac and Stanescu, 2014).

The knowledge-based economy, impacted by the information technologies, brings vast new opportunities in terms of communication and value co-creation (Plumb and Zamfir, 2009). According to the official Toyota website, the procurement policy builds on two pillars: fair competition based on an open-door policy, and mutual trust leading to mutual benefits and local sourcing. Toyota operates

122 The latter was defined by Henke as “catch-all” causal factor impacting company profit in addition to external relations

123 The Working Relations Index (WRI) ranks OEM’s supplier working relations based on 17 criteria across 5 areas: OEM-Supplier Relationship, OEM Communication, OEM Help, OEM Hindrance and Supplier Profit Opportunity. A score between 0 and 250 is considered to represent very poor to poor supplier working relations; a score between 250 to 350 indicates adequate relations and above 350 indicates good to very good supplier working relations.

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a milk-run service, picking up parts from multiple supplier locations and delivering just-in-time to support its production lines. Just Toyota Manufacturing UK has no less than 800 suppliers, most of them located in areas around the plants.

In recent years, Ford has slightly improved its relationships with suppliers and was a significantly more preferred customer than were GM, FCA and Nissan. Ford has rebuilt its “collaborative working relationship” with its suppliers since the financial crisis of 2008. The automaker’s purchasing model does not prefer sourcing to the lowest-cost bidder but rather facilitates long-term development and purchasing agreements with select suppliers, without upfront payments, but with data transparency (Putre, 2016).

Nissan’s WRI has gone down 11% in 2015 and later 8% in 2016 to just 225. Nissan has implemented cost-cutting programs to achieve a stated 10% profit-margin goal in the last two years, which irritated suppliers. This turned the company into one of the least desirable OEM’s to work with.

According to a survey from Tier 1 automotive suppliers conducted by Planning Perspectives in 2014, General Motors was perceived to be the worst client to work with among automakers presence large presence in the US (Autoblog.com, 2017). 2014 was also the year GM reached the lowest WRI of 244 among the selected OEM’s. Since it was found in 2014 that GM had installed faulty ignition switches in millions of vehicles, the company had issues with trust and communication with suppliers, as well as intellectual property protection. Many of the suppliers rated that the company was the least likely to allow them to raise their prices in the face of unexpected increases in material cost, all of which contributed to 55 percent of suppliers stating that their relationship with GM was “poor to very poor”. For example, Plast-tech Engineered Products Inc., a plastic parts maker supplying the automotive industry said that when they are pressured by the raw materials distributors and by the customer, it was GM who was pushing down the prices (Brown et al., 2006). Recently, however, GM’s WRI has shown a positive development, increasing with 12% compared to 2015.

Tier 3 suppliers enjoy higher margins than those of tier 1 and 2. Based on the margin ranges, the developing country suppliers selling to a Tier 3 supplier in the OEM supply chain could price their products at between 65% and 83% of the OEM’s delivery price. The aftermarket sector is very discount-driven and has varied mark-ups at each distribution step for different parts and components. In the original equipment sector, the price is set in contracts of four years or more, which usually include a yearly price reduction after the first year, of 3-5%. In the aftermarket sector, prices are negotiated every year (CBI, 2014).

2.2.4.2 Summary

In this environment, both vehicle manufacturers and large suppliers of components have in recent years increasingly been the subject of mergers and acquisitions and collaborative agreements within supply chains. Under mergers & acquisitions, ownership rights are transferred, for example to buy new assets and professional expertise, to consolidate control over multiple production stages, to optimize portfolio and manufacturing costs, or to effectively integrate innovation uptakes. Collaborative agreements, on the other hand, rather build on cooperation contracts. As research has shown that, when contracts are well fulfilled and working relationships between the chain partners are amicable, they create more value to all collaborating parties and final customers, this chapter shortly discussed the quality of supplier relationships for a selection of the world’s largest auto manufacturers.

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2.2.5 Competitive Performance of Supply Chain Operators 2.2.5.1 KPI 1 - Research & Development Expenditure

Management summary

Although varying significantly between countries, European R&D investments trail those of South- Korea, Japan, and the US, and have recently also been overtaken by China. With technological development becoming increasingly important in the main automotive challenges ahead, European manufacturers may well see themselves at a relative disadvantage.

SCORE: 1--> Europe has a competitive disadvantage in comparison

Analysis & Assessment:

The auto industry is the largest private investor in R&D in Europe, with more than €60 billion invested annually. In 2016, about 8,000 patents were granted to the EU automotive sector by EPO (AECA, 2017). Research and development is an investment in technological know-how which translates into new processes, products, and services and thereby affects competitive performance. In this regard, the R&D intensity also reflects the company’s assessment of its prospects, and willingness to create new market opportunities for the most innovative customers. By so doing, R&D affects the European vehicles’ environmental and technical performance and the European manufacturers’ competitive edge.

Figure 77 compares the percentages of corporate revenues allocated to R&D by the main manufacturing sectors worldwide. The data were generated from the number of 2,500 top companies worldwide by Statista (https://www.statista.com/statistics/270324/expenditure-on-research-and- development-by-industry-sectors/).

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Figure 77: R&D Spending of Total Revenue from 20013 –2015 Worldwide, by Sector (%) (Source: Statista 2017)

The comparison reveals that the pharmaceutical and biotechnology sectors invested the highest shares of corporate R&D funds, followed by the software and computer services and technology hardware and equipment manufacturing industries. As shown above, the automotive industry and its parts and component manufacturing segments were not among the biggest R&D investors, although R&D investments grew from 4,5% of corporate revenue in 2014, to 5,9% of corporate revenue in 2015.

This assessment might be useful to keep in mind when exploring the trends in R&D spending in the US, Asia and Europe, and for comparing the different region’s automotive innovation spending as an instrument to bolster competitive prowess.

Figure 78 illustrates the significant growth in R&D spending in South Korea and China over the last 16 years in the light of flattening innovation investments in the US and EU, particularly over the last four years

Figure 78: Evolution in Spending on R&D as % of GDP

(Source: OECD and European Commission)

It must be underlined that in contrast to other large R&D investing countries, South Korea’s R&D expenditure is partly used to finance “basic” technical research aimed at the production of new knowledge that does not yield an immediate commercial application. The South Korean government wants to increase its R&D spending from the current 4,2% of GDP to 5% of GDP by the end of 2017. At present, almost three quarters of South Korea’s R&D is both funded and performed by the business sector, with 88% invested in manufacturing. This is second only to Germany (see below). It is also interesting to observe that China’s spending on R&D has increased from less than 1% of GDP in 2010, to 2,5% in 2015. Moreover, the number of patents filed by Chinese inventors is on the rise, while filings under the Patent Cooperation Treaty by US inventors are showing a decline.

Figure 79 visualizes large disparities between the different nations’ overall R&D spending in 2015 (OECD Infographics)124.

124 2015 was the last year for which such data were available.

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Figure 79: Human and Financial Resources Devoted to R&D in 2015 (Source: OECD - Research and Development Statistics @ www.oecd.org/sti/rds)

The figure shows that the gross domestic expenditure on R&D as percentage of GDP in 2015 reached 2.8% which amounted to 462.766 million (2005) USD and provided jobs for 9,10 researchers employed per 1,000 industry workers. The number of researchers employed per 1,000 industry workers in Germany was 8,3, compared to 13,74 in South Korea. Despite continued growth in the number of highly qualified personnel in China, the number of researchers per 1,000 workers in China was only 1,97. In Japan, this number was 10,11. Although the values of research intensity do not directly indicate the level of readiness of innovative technologies in the automotive industry, they underscore the reliance on scientific breakthroughs as instruments for vehicle and systems advancement that the different countries apply in order to bolster the industrial competitiveness. It is rather conspicuous that the large world R&D spenders are also big investors in car manufacturing- dedicated innovations.

When looking at R&D expenditures of car manufacturers in three major auto producing regions, the US, Japan, and the EU (figure 80), a change in R&D spending pattern can be observed. Between 1994 and 2009, the EU increased its share of the overall R&D expenditures from 34% to 38% among the three regions’ total budgets. Japan was ahead of both the EU and the US in terms of R&D investment in automobile industry, while the US recorded 33.387 USD (PPP) in 2014, an increase by 36% from 2007 to 2014. It was followed by Germany, with an increase from 16.308 USD (PPP) in 2007 to 25.657 USD PPP in 2014, an increase of 57%.

35.000

30.000 Japan 25.000 Germany 20.000

15.000 United States

10.000 France

5.000 United Kingdom 0 2007 2008 2009 2010 2011 2012 2013 2014 Italy

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Figure 80: R&D Expenditures in Automobile Industry by Main Activity of the Enterprise, Current Prices (USD, PPP) (Source: OECD (2016))

From the figure, it could be deduced that in 2014, Japan was still ahead of other major auto manufacturer countries in terms of R&D expenditures.

Figure 81 shows how R&D expenditures in the United States relate to global R&D expenditures.

Figure 81: Automotive R&D Global vs. US Spending (R&D Spending, Billions of USD) (Source: 2016 Global R&D Forecast Magazine)

From the figure, it becomes clear that R&D investments by US auto manufacturers stand for more than 30% of global budgetary allocations and have been increasing consistently from 2014 to 2016.

Figure 82 illustrates how the R&D in the American automotive industry compares to R&D expenditures in other industries.

Figure 82: Top 5 American Industries by Research & Development Spending in USD Billion (Source: American Automotive Policy Councils (2016) “State of the U.S. Automotive Industry 2016: Investment, Innovation, Jobs, Export and American Economic Competitiveness”, July 2016, p.14) 119

This 2016 assessment by the American Automotive Policy Council (AAPC) shows that American automakers and their suppliers invest approximately 115 billion USD in research and development each year. This money is spent on the development of new/better technology hardware, software, electronics, chemicals, aerospace, chemicals and gas and oil solutions and other breakthroughs. The same source reports that in 2013, American automakers and their suppliers invested 20 billion USD in developing alternative fuels, more advanced powertrains, new materials, and better sensors. On average, this represented about 1.150 USD of R&D-investment for each car sold in 2013. Figure 83 juxtaposes the R&D spending by GM, Ford and FCA against other leading innovators in the US manufacturing and service provision industries.

Figure 83: General Motors, Ford and FCA’s Annual R&D Spending versus Other Leading Innovators in USD Billion (2014) (Source: American Automotive Policy Councils (2016) “State of the U.S. Automotive Industry 2016: Investment, Innovation, Jobs, Export and American Economic Competitiveness”, July 2016, p.15.)

Since China is the biggest world market for LCV and HDV producers, the spending of China’s automotive industry on R&D as a percentage of revenue from 2010 to 2011 is illustrated in figure 84.

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Figure 84: Internal R&D Spending in China in 2015 by Industry (Billion Yuan) (Source: Statista, 2017125)

The figure above shows that in 2015, the Chinese automotive industry allocated about USD 9 billion to automotive R&D, which made it the third biggest R&D domestic spender after manufacturers of computer, communication and other electronic equipment. This development indicates that the Chinese automotive industry has a significant desire to advance the technology and environmental sustainability of Chinese motor vehicles.

Figure 85 illustrates the growth in private R&D expenditures committed by business enterprises from 2006 to 2015.

Figure 85: Internal Company Expenditure on R&D in China 2006-2015 (Billion Yuan) (Source: Statista 2017)

The figure shows that R&D investments have more than doubled between 2010 and 2015, increasing from 41,5 billion Yuan to 101 billion Yuan.

Figure 86 shows that China’s auto manufacturing industry spent about 1,62% of revenues on R&D in both 2010 and 2011.

Figure 86: R&D Spending of the Automobile Industry in China as a Share of Revenue 2010-2011 (in %) (Source: Statista (2017))

125 Exchange rates between the US D and Yuan vary over time but one can assume they oscillate around 10 Yuan for 1 USD.

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In the following, Japanese R&D expenditures in the automotive industry are discussed. According to the Asian Review of May 20th, 2017, Japan’s seven major automakers (Honda Motor, Suzuki Motor, Mazda Motor and Subaru, Toyota Motor, Nissan Motor and Mitsubishi Motors) plan to spend a record 2,85 trillion-yen (ca. USD 25 billion) in fiscal 2017, towards testing and deploying new technology solutions for green autonomous driving and other emerging innovations, such as connected cars, artificial intelligence and robotics ( https://asia.nikkei.com/Business/Trends/Japan-automakers- spending-record-25bn-on-R-D). For Honda Motors, Suzuki, Mazda, and Subaru, this amount will be up 7% from fiscal 2016. Toyota and Nissan plan to keep their existing record levels from 2015, while Mitsubishi Motors will increase its R&D outlays by 20%.

According to the Japanese Ministry of Internal affairs and Communication, the Japanese auto industry accounted for 22% of 2015’s total of13,7 trillion-yen R&D spending by private companies. Yet, with R&D investments imposing a heavy financial burden, automaker need to conduct innovation development and deployment work more efficiently by capitalizing on expertise and talent from other companies. Honda is for example co-developing an autonomous driving system with Google-affiliated Waymo, and said to be eager to pursue “open innovation“ which applies know-how from several other industries.

Figure 87 illustrates the development in Toyota’s R&D spending.

Figure 87: Toyota R&D Expenses from FY 2007 to 2016 (Million Japanese Yen) (Source: Statista 2017)

The graph shows that Toyota alone incurred over one trillion Japanese yen (app. USD 9.5 billion) in R&D costs in 2016. The company announced it is to further increase its R&D spending in 2018 by 1%. This level of R&D investment exceeded the biggest US R&D spender, General Motors, but not German-based Volkswagen, whose innovation outlays in 2015 surpassed USD 15 billion.

In the following, the trend in South Korea’s outlays on R&D are displayed. The elaboration by the Korea Institute for Industrial Economics and Trade in figure 88, indicates that in 2012, the Korean auto making industry spent 4,5 billion USD (PPP) on innovation solutions such as EV and FCV (full- cell-vehicles) cars and on the doubling of battery power and single charge driving distance (http://www.oica.net/wp-content/uploads/KAMA_-situation-of-Automobile-industry-in-South-Korea- and-Green-car-strategy.pdf). This amount increased to more than 5 billion USD in 2013 and was planned to increase by another 10% over the next five years. Korean automakers are particularly keen on leveraging the nation’s ICT technology advancement to better equip their vehicles with consumer electronics, wireless communication devices, and road-traffic management systems.

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Figure 88: R&D Investment of Korea Automotive Industry (Source: Korea Research Institute for Industrial Economics and Trade) http://www.oica.net/wp-content/uploads/KAMA_-situation-of-Automobile-industry-in-South-Korea-and-Green-car-strategy.pdf

Although the Korean auto industry’s research intensity has dropped from its 2007 peak of 4% of industry revenue, it still remained at almost 3%.

Against this backdrop, the R&D investments in the three largest LCV and HDV manufacturing countries (Germany, France and Italy) are reviewed in comparison to their American, Chinese, Japanese and Korean rivals126. Figure 89 shows Germany’s R&D expenditures as percentage of GDP for the period 1996-2014.

Figure 89: Research and Development Expenditure in Germany as % of GDP (1996-2014) (Source: The World Bank, United Nations Educational, Scientific and Cultural Organization (UNESCO) Institute for Statistics)

The figure shows that Germany’s R&D expenditures continued to grow undisrupted from 2.2% of GDP in 1997 to 2.9% in 2014. In 2014, the German auto industry invested € 19.4 billion in R&D activities, and engaged 100.000 people in 2015. This amounted to one third of the country’s total R&D expenditures. Since Germany has the highest concentration of all European OEM’s and tier 0,5 supplier R&D centers, it makes the country an important automotive development location in the EU. In addition to significant internal R&D expenditures, the German automotive sector spends another € 4,9 billion in externally commissioned R&D project. This is equivalent to almost half of the country’s external R&D investments.

Figure 90 shows the share of innovative expenditures in total industry turnover for the five most research-intensive German industry sectors.

126 As the UK is in the process of withdrawing from European Community, its R&D investment is not reviewed in this chapter.

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Figure 90: Share of Innovative Expenditure in Industry Turnover (2015) (Source: “The Automotive Industry in Germany”, GTAI Germany Trade & Invest, Issue 2016/2017, p.10)

The figure shows that the German auto industry remains the country’s leading innovator. This is also confirmed by the fact that 46% of the industry’s 2015 turnover was generated from new product innovations127. However, being the largest R&D spender does not automatically translate into being the most competitive company in terms of value-creation for customers.

Figure 91 illustrates the disparity between the largest R&D spenders and the world most valued innovative companies, as judged by 120 global executives polled by PwC in “The 2015 Global Innovation 1000 – Automotive Industry Findings”.

Figure 91:Top Ten R&D Spenders and Ten Most Innovative Companies in Customer-centric Value Creation (Source: Strategy& 2015 Global Innovation 1000 Data and Analysis, Bloomberg Data, Capital IQ Data, p.4)

Despite being the largest global R&D spender in 2015, Volkswagen was not among the most innovative companies whose value creation was highly recognized by both the customers and

127 http://www.gtai.de/GTAI/Content/EN/Invest/_SharedDocs/Downloads/GTAI/Industry-overviews/industry-overview- automotive-industry-en.pdf

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industry peers128. It is interesting to observe that Tesla was considered the most innovative auto value contributor, despite its quite meager R&D expenditures. Toyota’s position as the second most innovative automaker among the globally most admired innovators was preceded by other sector manufacturers from the US and South Korea. It is conspicuous that among the ten most innovative value creating companies in the world (as assessed by PwC), none has its base in the EU.

As the French-manufactured LCV’s and HDV’s are among the most popular in the EU and in some foreign markets, figure 92 illustrates French R&D expenditures.

Figure 92:Research & Development Expenditures in France as % GDP (1996-2014) (Source: The World Bank, United Nations Educational, Scientific and Cultural Organization (UNESCO) Institute for Statistics)

The figure shows that the level of French R&D investments dropped from 2,16% of GDP in 2002, to 2% in 2007, after which investments started increasing, only to reach 2,56% in 2014.

Table 10 compares the R&D expenditures of several high-tech value-adding French industry sectors.

Table 10: Gross Domestic Expenditure on Research and Development in the Main Corporate Research Segments in France (€ million) (2011) (Source: The French Automotive Industry, 2014 Analysis and Statistics, Comité des Constrectuers Francais d’Automobiles, p.37)

1) DRDS: Domestic Research and Development Spending 2) ERDS -External Research and Development Spending 3) Excluding Research Tax Credits

The table shows that the French automotive industry has by far dominated all other knowledge intensive manufacturing segments as compared to both domestic and foreign R&D spending.

Figure 93 illustrates the R&D spending of the French automotive industry.

128 One cause for this judgement could have been the company’s exhaust cheating scandal detected in 2015.

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Figure 93: French Automotive Industry Research and Development Spending (2001-2011) (DIRDE stands for Domestic Research and Development Spending) (Source: The French Automotive Industry, 2014 Analysis and Statistics, Comité des Constrectuers Francais d’Automobiles, p.37)

Although the amount of € 6,5 billion was quite sizable and constituted about 18% of the total research and development budget of French business combined, it amounted to only one third of the € 19,4 billion that the German automotive industry as a whole invested in innovation advancement in 2014.

A publication issued by Comité des Constrectuers Francais d’Automobiles in 2014, “The French Automotive Industry, 2014 Analysis and Statistics” mentions that already in 1999, the French automotive industry became the highest R&D spender among all other research- intensive industries (see below). The document also specifies that 23% of the 2011 domestic research and development budget of €4,700 mill was spent in 2011 by foreign subsidiaries in which foreign companies had a controlling stake of 50% or higher. This indicates that French automakers invest heavily in their suppliers and manufacturing partners abroad.

Figure 94 illustrates the total French R&D expenditures, divided by industry.

Figure 94: Total Corporate R&D Expenditure in France by Industry Segments (2011) (Source: The French Automotive Industry, 2014 Analysis and Statistics, Comité des Constrectuers Francais d’Automobiles, p.37)

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Similarily to the automotive industry in the US and Germany, the figure confirms that the French automotive industry dominates other national industry sectors in terms of R&D expenditures.

Figure 95 shows the development in Italian expenditures on R&D in terms of GDP between 2000 and 2015.

Figure 95: Gross Domestic Expenditure of R&D (GERD) as per GDP in Italy from 2000-2015 (Source: Statista 2017)

The figure shows that the share of Gross Domestic Expenditures on R&D (GERD) rose significantly, with a peak in 2014, which 1,38% of Italy’s GDP was dedicated to R&D. However, this percentage is much lower than in Germany and France. According to the European Commission’s inter- member comparison of competitive performance, one of the weaknesses of the Italian R&D system is the low contribution of the private sector. (https://www.google.no/search?q=R%26D+expenditures+in+Italian+Automotive+Industry&ie=utf- 8&oe=utf-8&client=firefox-b&gfe_rd=cr&ei=Xb-nWcCMDIy2ygWR4K-QDw).

This might explain why the R&D activities of Italy’s major vehicle manufacturer did not take place in Europe, but rather in the US, as part of FCA’s innovation commitment (see Figure 95). In addition, the EC observed that although the share of private R&D investments in Italy’s total R&D expenditure in 2012 reached 54,6%, this percentage remained below the European average (63,1%), not to mention the levels of private R&D allocations in Germany (67,7%) and France (63,9).

However, another issue related to the role of R&D in advancing the competitive position of European automotive manufacturers involves the geo-spatial pattern of sourcing the R&D activities. Figure 96 illustrates the development in the sourcing of automotive R&D services by the world’s ten largest vehicle manufacturing companies. In 2015, China was the destination for 14% of all R&D activities that the main ten automakers contracted from Chinese science sectors, an increase of 8 percentage points from 2007, reaching a level almost twice as high as Germany. Given the large scale and high level of technologic advancement of the German auto manufacturing industry, the fact that the world automakers did contract just 6% of their R&D activities in Germany (a considerable slide from 11% in 2007) is striking, and might warrant policy interventions.

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Figure 96: Top Ten Countries That Imported Automotive R&D as a Percentage of Automotive R&D Imports (Source: Strategy& 2015 Global Innovation 1000 Data and Analysis, Bloomberg Data, Capital IQ Data, p.4)

Comparing German, French and Italian R&D with spending in the US and particularly Asian countries (China, Japan and South Korea) provides indications that European LCV, HDV and CP manufacturers might be losing competitive ground. If not dealt with, this might leave European automotive manufacturers strive towards technically more advanced and more environmentally and driver friendly vehicles overpowered by foreign competitors. As result, this might negatively affect the competitive position of European manufacturers in race for presence in emerging markets.

In summary, it is apparent that the more money is spent on R&D, the larger might be technological advancements, and more sustainable might be competitive advantages in markets of interests. However, since funds to invest in R&D must first be earned in fiercely contested markets, R&D- investments need to be effective and functional. Therefore, innovation could also be achieved through wise and highly-focused partnerships with other automakers and/or through outsourcing of certain activities to more specialized industry segments, such as software providers, material manufacturers, and ICT hardware developers. Outsourcing and the collaborative co-creation of comparative advantages together with players from the ICT and software industry might be two key strategies for mastering the complexity of automotive product innovation and easing the onus on OEM’s spending on new vehicle deployment.

This analytical review suggests that exactly this is already happening, especially through R&D outsourcing to Chinese and other relatively new scientific knowledge producing locations in the CEE. Collaborative alliances and partnerships, particularly with CEE countries, might considerably ease the pressures on OEM’s and their suppliers for spending large sums on rapid technology advancement, and facilitate technical deployments through work division between the old and the new EU research institutions, thus bolstering the intra-European pace of technological progression and fortification of its competitive strength.

2.2.5.2 KPI 2 - Technological Readiness and Leadership/ Manufacturing Capability

Management summary

Although EU manufacturers like Peugeot, Citroën, and Renault do relatively well on reducing CO2- emissions, projections indicate that EU-made LCV’s are not likely to overtake Japanese, Indian and Canadian manufacturers. For HDV’s, projections indicate that US manufacturers could well overpower their European counterparts in this respect, to sustain competitive advantages.

SCORE: 1--> Europe has a competitive disadvantage in comparison

Analysis & Assessment:

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The EU has a strong competitive advantage over international rivals in technological readiness and leadership in the automotive industry. It is among the world’s biggest producers of motor vehicles, and the sector represents the largest private investments in research and development (R&D). To strengthen the competitiveness of the European automotive industry and to preserve its global technological leadership, the European Commission supports global technological harmonization and provides funding for R&D (European Commission, 2017).

The technical harmonization of motor vehicles allows car manufacturers to access as large of a market as possible. Harmonization in the EU is based on the Whole Vehicle Type-Approach System (EU WVTA) and enables manufacturers to benefit from the European Single Market. Worldwide technical harmonization under the United Nations Economic Commission for Europe (UNECE) offers easy access to global markets. The European Commission is responsible for EU legislation on motor vehicles, providing rules for safety and environmental protection, as well as the conditions under which vehicles can be put on the EU market (European Commission, 2017).

2.2.5.2.1 European Emission Standards for LCV’s and HGV’s

Emission standards are compulsory socially and environmentally motivated regulations that policy makers impose on commercial and passenger vehicle manufacturers to reduce the socio- environmental harms caused by motorized vehicles. The types of emission standards imposed on light commercial vehicles are summarized in the following tables. Since the Euro-2 stage, EU regulation introduced different emission limits for diesel and petrol vehicles. Diesels face more stringent CO standards but were allowed higher NOx emissions. Petrol-powered vehicles were exempted from particular-matter standards (PM) to the Euro-4 stage, but vehicles with direct injection engines were subjected to a limit of 0,005 g/km for Euro-5 and Euro-6. A particulate number standard (P) or (PN) has been introduced in 2011 with Euro 5b for diesel engines and in 2014 with Euro 6 for petrol engines.

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Table 11: European emission standards for light commercial vehicles ≤ 1,305 kg reference mass (Category N1-I), g/km (Source: Transportpolicy.net, 2017) Tier Date CO2 THC NMHC NOx HC+NOx PM P [#/km] Diesel Euro 1 October 1994 2.72 - - - 0.97 0.14 - Euro 2 January 1998 1 - - - 0.7 0.08 - Euro 3 January 2000 0.64 - - 0.5 0.56 0.05 - Euro 4 January 2005 0.5 - - 0.25 0.3 0.025 - Euro 5a sep.09 0.5 - - 0.18 0.23 0.005 - Euro 5b sep.11 0.5 - - 0.18 0.23 0.005 6×1011 Euro 6 sep.14 0.5 - - 0.08 0.17 0.005 6×1011 Petrol (Gasoline) Euro 1 October 1994 2.72 - - - 0.97 - - Euro 2 January 1998 2.2 - - - 0.5 - - Euro 3 January 2000 2.3 0.2 - 0.15 - - - Euro 4 January 2005 1 0.1 - 0.08 - - - Euro 5 sep.09 1 0.1 0.068 0.06 - 0.005* - Euro 6 sep.14 1 0.1 0.068 0.06 - 0.005* 6×1011

Table 12: European Emission Standards for LCV 1305-1760 Kg Reference Mass (Category N1-II), g/km (Source: Transportpolicy.net, 2017) PN Tier Date CO THC NMHC NOx HC+NOx PM [#/km] Diesel Euro 1 October 1994 5.17 - - - 1.4 0.19 - Euro 2 January 1998 1.25 - - - 1 0.12 - Euro 3 January 2001 0.8 - - 0.65 0.72 0.07 - Euro 4 January 2006 0.63 - - 0.33 0.39 0.04 - Euro 5a sep.10 0.63 - - 0.235 0.295 0.005 - Euro 5b sep.11 0.63 - - 0.235 0.295 0.005 6×1011 Euro 6 sep.15 0.63 - - 0.105 0.195 0.005 6×1011 Petrol (Gasoline) Euro 1 October 1994 5.17 - - - 1.4 - - Euro 2 January 1998 4 - - - 0.6 - - Euro 3 January 2001 4.17 0.25 - 0.18 - - - Euro 4 January 2006 1.81 0.13 - 0.1 - - - Euro 5 sep.10 1.81 0.13 0.09 0.075 - 0.005* - Euro 6 sep.15 1.81 0.13 0.09 0.075 - 0.005* 6×1011 * Applies only to vehicles with direct injection engines

According to the European Automobile Manufacturers Association, between 1990 and 2013, the main task of the European LGV and HDV industry was to substantially decrease emissions such as nitrogen oxides (NOX), particles PM and CO2. To this end six “Euro” efficiency and emission reduction standards were introduced over the last twenty years (see above). As a result, pollutant emissions from HDV which also include HGV, have been slashed to near-zero level (ACEA, 2017), as illustrated in Figure 97.

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Figure 97: Progress in Reduction of Pollutant Emissions from HGV through Introduction of “Euro” Standards (Source: European Automobile Manufacturers Association (2017): “Reducing CO2 Emissions from Heavy Duty Vehicles – An Integrated Approach”.)

Due to technical trade-offs, a challenge was long to simultaneously reduce both CO2-emissions on the one hand, and NOx- and PM-emissions on the other. After succeeding at bringing down NOx- and PM-emissions, the industry succeeded in reducing fuel consumption by about 8% over the last five years (figure 98).

Figure 98: The Trajectory of 8% Reduction in CO2 Emissions (2011-2016) (Source: European Automobile Manufacturers Association (2017): “Reducing CO2 Emissions from Heavy Duty Vehicles – An Integrated Approach”)

2.2.5.2.2 Compliance Performance

Figure 99 compares the CO2 emission reduction performance of selected EU LCV manufacturers in 2012 and the targets imposed for 2020. For LCV’s, average CO2 emissions in 2012 amounted to 180 g/km (ICCT, 2014). The 2020 target of 147 g/km (corresponding to roughly 5,6 l/100 km) therefore requires a further reduction of about 21 percent. Most key manufacturers are on track to meet the regulatory 2020 target. The figure indicates that GM, Fiat and PSA (Peugeot-Citroen) are already working with relatively low CO2 emission levels of emissions of 178, 157 and 159 g/km respectively. Iveco, Daimler, and Toyota, on the other hand, still operate with relatively high CO2-emissions.

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Figure 99: Emission 2012 Performance of Key EU LCV Manufacturers and 2020 targets (CO2-emissions in g/km) (Source: ICCT, 2014)

Figure 100 shows the development in average CO2-emissions for LCV’s per brand.

Average CO2 emissions (g/km) Mercedes-Benz 260 Toyota

Nissan 240 VW

220 Ford Average 2017 target

200 All brands

Fiat 180 Opel

Citro‘n 160 Renault

140 Peugeot 2009 2010 2011 2012 2013 2014 2015

Figure 100: Light-commercial vehicles: CO2 emissions by brand

The figure suggests that while Peugeot, Citroën, and Renault produce LCV’s with on average relatively low CO2-emissions, LCV’s produced by Mercedes-Benz, Toyota, and Nissan, on average emit more CO2 than vehicles of most other manufacturers.

Table 13 illustrates the pace of progression in the reduction of poisonous emissions that the selected European truck manufacturers followed in pursuit of compliance with the subsequent Euro standards.

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Table 13: Progress in Reducing Emissions by Selected European Truck Manufacturers (Source: ACEA (2017)) Truck manufacturer Daimler Scania DAF Volvo MAN Iveco Timeframe 1996-2016 1992-2016 2002-2015 1991-2016 1994-2016 1994-2016 20 years 24 years 14 years 25 years 22 years 22 years CO2 reduction -22 % -25 % -15 % -19 % -31.50 % -21 % Yearly CO2 reduction -1.10 % -1.04 % -1.07 % -0.76 % -1.45 % -0.95 %

The highest yearly attempt to reduce CO2 emission was achieved by India’s truck leading manufacturer, MAN Truck & Bus, at 1,45%. There was a change from F90 Euro II (engine type: D28 and engine power 402ps) in 1994 to TGX Euro VI in 2016 (engine type: D26NEW and engine power 460ps). Second on the list comes German manufacturer Daimler with a 1,1% annual reduction in CO2-emissions. The test compared Daimler’s Mercedes Benz SK 1845-Euro VI in 2016 (engine type: 6 cylinder and engine power 450 hp) with its 1996’s version, Mercedes Benz SK 1844-Euro II. In third place comes Dutch truck manufacturer DAF, with a reduction in CO2-emissions of 1,07%, closely followed by Scania (ACEA, 2017).

However, to assess how the European automakers stand on competitive gains extracted from higher fuel efficiency and the production of less polluting vehicles, the following question must be answered - how do EU manufacturers perform when juxtaposed to manufacturers from the US, Japan, China and the rest of the world?

European manufacturers are global players, producing trucks for the American, Chinese, Japanese, and other markets. It is difficult, however, to compare CO2-emissions of trucks sold in the EU and the US, as trucks are designed for their market-specific use, and freight efficiency is mostly determined by legal standards, which differ between the EU and the US. Trucks that are produced in the US and the EU for example differ when it comes to the maximum speed limits under which they operate (higher maximum speeds in the US), as well as in terms of payloads and trailer cargo volumes. Other key differences include emissions of CO2/g/cubic meter km (volume), on which American trucks perform better because they are legally allowed to transport up to 21% more in terms of volume. EU trucks perform less well simply because US trucks can legally transport 21% more volume. Expressed in fuel consumption per ton-km, however, EU-made trucks emit 16% less CO2 than US-made trucks.

For Japan, figure 101 illustrates the gradual reduction in pollutant exhaust emissions from operations of different transport modes, including trucks and passenger cars.

Figure 101: Trends in CO2 Emission Volumes in Japan’s Transport Sector, by Mode (Source: Japan’s Ministry for Environment (2017))

However, it must be underlined that regulatory pressures from the EU, US and other authorities for emission reduction are having effect. They have led, for example, to higher emissions transparency,

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making the tracking of all emissions more feasible over the entire value chain. When emissions under driving are monitored more rigorously, it is easier to engineer solutions for its control and reduction (PwC, 2014). But, considering that regional and national emission reduction and energy efficiency improvement policy regimes differ, it might be educational to benchmark the Euro norms with other G20 emission control metrics for LDV and HDV. Such a comparison might help to forecast whether EU made LCV’s and HDV’s possess any competitive benefits from technical superiority rendering higher fuel efficiency improvements and lower emissions. Such a benchmark is presented in Table 14

Table 14: Policy Status of Light-and-Heavy-Duty Tailpipe Emission Standards in G20 Transport Task Group (TTG) (Country/Regions Ordered Alphabetically) (Source: Miller, J., Du, L., and Kodjak, D. (2017)” Impacts of World-class Vehicle Efficiency and Emissions Regulations in Select G-20 Countries”, The International Council on Clean Transportation, p.4.)

Assuming all policies presented above are implemented by 2035, figure 102 shows how CO2- emissions of LDV’s and HDV’s may develop in different global regions.129.

Figure 102: Change in CO2 rate of New Light-duty Vehicles and Heavy-duty Trucks with World-class Emission Standards

129 These aspirational targets include a 50% reduction in LDV fuel consumption in 2030, compared to 2005, and a 30% reduction in HDV fuel consumption in 2030, compared to 2010.

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(Source: Miller, J., Du, L., and Kodjak, D. (2017)” Impacts of World-class Vehicle Efficiency and Emissions Regulations in Select G-20 Countries”, The International Council on Clean Transportation, p.6.)

The projections of CO2-emission reduction technologies for EU-made LDV’s indicate that EU manufacturers are not likely to overtake Japanese, Indian and Canadian vehicle manufacturers when it comes to progress in reducing emissions. European manufacturers may therefore not sustain any competitive superiority in terms of environmental technology. At the same time, projections around emission reductions projected to be attained by European manufacturers of HDV’s indicate that US manufacturers could well overpower their European counterparts and sustain competitive gains from more environmentally friendly technologies in the time ahead.

2.2.5.2.3 New Vehicle Models

Another indicator of Innovative Leadership is the capacity to produce and launch new vehicle models within relatively short time.

Figure 103 shows the share of new light truck models to be launched by selected manufacturers onto the automobile market in the United States between 2017 and 2020. The ability to launch new models indicates a manufacturer’s capacity to innovate and invent new/better offerings and strengthen its competitive position to gain new customers.

General motors 49% FCA 46% Ford 42% Toyota 20% Honda 11% Nissan 5% European 3% Korean 1% Overall 27%

0% 10% 20% 30% 40% 50% 60%

Figure 103: Light Truck Models as a Percentage of Overall New Models to Be Launched by Key Manufacturers on the US Car Market 2017 – 2020 (Source: Statista (2017))

The figure indicates, for example, that of all Ford’s expected new models until 2020, 42% will be light trucks.

Figure 104 illustrates the development in engine power by type of vehicle and technology. Engine power for LCV’s in the EU increased to 82 kW in 2015.

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105

100

90 84 83 85 82 81

Engine Power (kW) 80 80 77

75 2010 2011 2012 2013 2014 2015 All (PC) Diesel (PC) Hybrid-electric (PC) Gasoline (PC) Diesel (LCV)

Figure 104: New Vehicles - Engine Power by Type of Vehicle and Engine Technology (EU) (Source: European Vehicle Market Statistics Pocketbook (2010-2016))

Figure 105 illustrates engine displacement by type of vehicle and technology in the EU. From 2010 to 2016, engine displacement decreased by 4,5%, while the average number of cylinders for LCV (diesel) decreased by 2% during the same period.

2000 1935 1938 1929 1905

1900 1853 1819 1800

1700

1600

1500

Engine displacement cm3 1400

1300 2010 2011 2012 2013 2014 2015

All (PCs) Diesel (PCs) Hybrid-electric (PCs) Gasoline (PCs) Diesel (LCVs)

Figure 105: New vehicles - Engine Displacement by Type of Vehicle and Engine Technology (Source: European Vehicle Market Statistics Pocketbook (2010-2016))

Figure 106 provides an overview over estimated fuel efficiency gains for selected European vehicle models.

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Figure 106: Estimated Fuel Efficiency Gains for Selected European Vehicle Manufacturers (Source: Kraftfahrt-Bundesamt3)

The figure shows that for the Fiat Ducato and Volkswagen Transporter, engine displacement could be reduced with 19%, followed by the Ford Transit (13%) and Mercedes Sprinter (11%). As such, the figure signals an underlying technological trend: improved combustion processes and turbo-charging allow manufacturers to extract more power from smaller engines. Thus, manufacturers can substitute a 6-cylinder engine for a 4-cylinder, and to generally reduce engine displacement, which renders considerable innovation benefits.

Figure 107 illustrates the development in the average number of cylinders by type of vehicle and technology, which in turn relates to CO2-emissions.

4,4

4,3

4,2 4,1 4,04 4,03 4,02 4,02 3,96 3,96 4 3,9

3,8 Numbercylinders of 3,7 3,6 2010 2011 2012 2013 2014 2015

All (PCs) Diesel (PCs) Hybrid-electric (PCs) Gasoline (PCs) Diesel (LCVs)

Figure 107: New Vehicles – Number of Cylinders by Type of Vehicle and Engine Technology (Source: European Vehicle Market Statistics Pocketbook (2010-2016))

While average CO2 emissions have dropped for all engine technologies, the decline in emission levels since 2005 has been particularly steep for gasoline vehicles. This is in part due to changes in the market, but also to the fact that the CO2 efficiency gap between gasoline and diesel engines continues to narrow. Hybrid-electric vehicles show a lower CO2 emission level.

2.2.5.3 KPI 3 - Innovation Capabilities by Patents and New Standards

Management summary 137

While the number of inventions within automotive navigation, handling, safety & security, and entertainment has shown a stable or slightly increasing development, the number of inventions related to propulsion systems has more than five-doubled in course of a few years. Most inventions in this fields, however, are done by non-European companies, which might increase any gaps in competitiveness.

SCORE: 1--> Europe has a competitive disadvantage in comparison

Analysis & Assessment:

2.2.5.3.1 Patents

The data on patents that is used in this section was collected from USPTO, EPO and JPO. Using EPO-data on the number of patents registered and granted globally, we extracted the most relevant data for automotive innovations.

In 2016, approximately 95.900 patents were granted by the EPO (figure 108), an increase of 40% from 2015 and the highest ever number (EPO Annual Report, 2016). With a share of 51%, Europe is the leading region in the total number of patents granted, followed by the US (23%) and Japan (16%). Among European patent champions were Germany (18.728 grants) and France (7.032 grants). China (and to a smaller extent South Korea) posted a rapid growth in patent numbers, albeit starting from relatively low bases (China: 3.910 and South Korea: 3.210).

Others KR CN 4% 3% 3% DE 20% JP 16% FR 7% CH 4% IT US 23% 3% GB 3% NL Other EPO 3% SE States 3% 8%

Figure 108: Total Grants130, 2016 (Source: EPO Annual Report (2016))

Zooming in on the automotive sector, the European Patent Office reports just under 8.000 patent filings in 2016.131. Figure 109 shows the percentage of the EU patent applications filed by companies in the automotive sector in 2016, with a breakdown by country or region. With 32% of all patent filings in the automotive industry, Germany has a dominant position, although with nearly 60% between 1997-2002, this share has been higher (Heneric et al., 2006). Japanese companies have expanded

130 DE=Germany, FR=French, CH=China, IT=Italy, GB=Great Britain, NL=Netherland, SE=Sweden, JP=Japan, CN=Canada, KR=South Korea

131 EPO-the European Patent Organization is an intergovernmental organization that was set up on 07/10/1997 on basis of the European Patent Convention (EPC) signed in Munich in 1973. The organization currently has 38 members, comprising all the member states of the European Union together with Albania, Croatia, the former Yugoslav Republic of Macedonia, Iceland, Liechtenstein, Monaco, Norway, San Marino, Serbia, Switzerland and Turkey. Its mission to grant European patents in accordance with the EPC is carried out by the European Patent Office. The Organization has its seat in Munich (https://www.epo.org/about- us/foundation.html)

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rapidly within the EU automotive patent market and are now responsible for 23% of all automotive patent applications, while American firms accounted for about 11

Austria China Switzerland Sweden UK 1% 2% 2% 3% 3% Others Italy 3% Germany 4% Other EPO 32% member states U.S 5% Japan 11% 23% France 11%

Figure 109: EU Automotive Sector Patent Applications Filed by Manufacturers in 2016, by Country or Region of Origin (Source: Statista (2017))

Figure 110 shows the number of patents granted to selected auto manufacturers in 2016.

TOYOTA MOTOR CORPORATION 870 HITACHI LTD 630 MITSUBISHI HEAVY INDUSTRIES, LTD 333 RENAULT SA 272 BMW AG 265 AUDI AG 256 NISSAN MOTOR COMPANY, LIMITED 248 GROUPE PSA 246 VOLKSWAGEN AG 245 HONDA MOTOR COMPANY LTD 244 DELPHI AUTOMOTIVE PLC 74

0 200 400 600 800 1000

Figure 110: Number of Patents Granted to Selected Automobile Manufacturers Suppliers in Country of Origin (Source: EPO (2017))

The figure indicates that Japanese manufacturers Toyota, Hitachi, and Mitsubishi were granted the highest number of patents, followed by French Renault and German manufacturers BMW and Audi.

At the same time, the three largest American auto manufacturers were granted ca. 5.000 patents a year in the United States (American Automotive Policy Council, 2016). Together, FCA, Ford and GM applied for 15,000 patents from 2010 to 2014.

In general, automotive innovations can be divided into four categories: propulsion; navigation; handling, safety and security; and entertainment. Relevant definitions and vehicle components are listed in Table 15.

Table 15: Innovation Categories in Automotive Industry (Source: Kayaha, 2015)

Innovation Category Definition Vehicle Components

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Systems and components of automobiles responsible for generating motion, or movement of Engine Design, Transmissions, Alternate Propulsion the vehicle Power Systems, Powertrains

Systems and components dedicated to determining where the vehicle is located and how it interacts GPS, Dedicated Short Range Navigation with other vehicles Communications The aspects of automobiles responsible for determining the direction and velocity of the Braking Systems, Steering Systems, Handling vehicle Suspension Systems Systems and components for protecting the vehicle Safety Systems, Seats, Seatbelts, Airbags, Safety & Security and its inhabitants Security Systems, Locks

Systems and components for occupying passengers and for allowing them to interact with internet Smartphone Integration, Heads Up Entertainment based systems Display (HUD), In-Car Communication

Table 16 gives an overview of ‘hot topics’ in the automotive industry.

Table 16: Hop Topics in Automotive Industry (Source: Kayaha, 2015)

Topic Area Definition Category Also knows as fuel efficiency, or the maximization of the distance Fuel Economy traveled on a unit of fuel Propulsion Global Positioning System technology integrated with computers and Telematics mobile communications technology in automotive navigation systems Navigation Automobiles that are capable of driving themselves without input from Autonomous Driving a human passenger Handling Various systems such as auto braking, lane departure warning, and traffic sign recognition that help the driver become aware of and avoid Safety & Driver Assistance road hazards Security Systems for displaying data from a smartphone to the windshield of an Heads-Up Displays (HUDs) automobile so a driver can keep his/her eyes on the road Entertainment

Figure 111 shows the types and the numbers of automotive innovations from 2009 to 2013.

Figure 111: Automotive Inventions by Publication Year Source: Thomson Reuters, 2015

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Given the importance of fuel economy, and a growing demand for hybrid vehicles and vehicles with alternative fuels, it is not surprising that propulsion is an innovation focus. Generally, significant numbers of inventions were introduced in all innovation categories, but while the yearly number of inventions remained rather stable for most categories, the number of new inventions with regards to propulsion went up rapidly. Top propulsion assignees are Toyota, Bosch, Denso, GM, Honda and Daimler. Toyota’s primary interest is in new propulsion technologies, and it has been consistent over time. Hyundai is an up-and-coming player. Meanwhile, in navigation, Japanese electronics company Seiko Epson is at the top of the field, joined by other electronics companies including Semiconductor Energy Lab, Panasonic, Fujitsu and Aisin. While Toyota is the top filer overall, leading many of the individual categories, it is listed fourth for the handling category. In this category, Hyundai is responsible for most inventions, while also playing a prominent role in most of the other categories (SOI-Automotive-Industry-Report, 2015).

Navigation also attracts a lot of innovators’ efforts but its importance seems to decrease during 2009- 2013. In navigation, Japanese electronics company, Seiko Epson is at the top of the innovation category, but joined by other electronics companies including Semiconductor Energy Lab, Panasonic, Fulitsu and Aisin (SOI-Automotive-Industry-Report, 2015).

Handling attracted around 5,000 innovation patterns in 2013. While Toyota is the top filer overall, and leads many of the innovation categories, it is listed the forth for the handling category. This is contrasted with Hyundai, which is the top inventive company in handling category and plays a prominent role in most of the other categories as well.

Safety & Security ranked the fourth on the invention focus list, but enjoyed an increase in the number of inventions from 2009, reaching around 3,000 registered inventions in 2013. Safety & Security has been taken seriously by Japanese manufacturers, Toyota, Hyundai and Honda, and was followed by Daimler.

Lastly, entertainment innovation area recorded 1,000 novelty solutions in 2013 but with a decreasing trend from 2009. Hyundai paid more attention to entertainment than did other manufacturers and was followed by Toyota (SOI-Automotive-Industry-Report, 2015).

All in all, Japanese and South-Korean companies have as sharper competitive edge with regards to electronics and communications innovations, compared to European manufacturers.

2.2.5.3.2 Innovation activities

Technological progress, competitiveness, and innovation are based on research and development. Innovation continuously redefines markets and opens new sectors of economic and social activity. Over 50% of the EU-28 manufacturers of motor vehicles, trailers and semi-trailers introduced new or significantly improved products or processes, and were categorized as innovating enterprises.

Table 17 shows the number of enterprises which were innovatively active in 2014, based on results of the second European Community innovation survey (CIS2) by Eurostat. With 961 innovative enterprises, Germany was the EU leader. Germany has also hosted 727 product innovators, 381 process innovators and 943 enterprises that introduced at least one innovation, also accounting for Compared with Germany, other motorized vehicle manufacturing enterprises in France and Italy account for fewer innovations. In France, there are 501 innovative car producers (66.3%), 278 product innovators (36.8%) and 266 process innovators (35,2%)Meanwhile, Italy has 692 innovative motorized vehicle parts producers (72.2%), 333 product innovators (34.8%), 234 process innovators (24.4%). In total, the average results for EU-28 are highly influenced by the performance of Germany -and to some extent France, Sweden and UK- (Heneric et al., 2006).

Table 17: Number of Enterprises with Innovation Activity in 2014 in NACE DM * NACE_R2: Manufacturers of motor vehicles, trailers and semi-trailers (Source: Innovation statistics, Eurostat (2017))

Country Innovative Product Process Enterprises that have introduced enterprises innovators innovators an innovation EU-28 202 117 99 194

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Belgium 84 37 62 80 Bulgaria 26 13 10 25 Czech Republic 236 167 169 234 Denmark 28 12 20 24 Germany 961 727 381 943 Estonia 6 3 5 6 Ireland 14 9 12 14 Greece 15 10 8 15 Spain 380 178 218 353 France 501 278 266 467 Croatia 8 8 8 8 Italy 692 333 234 679 Latvia 16 3 4 16 Lithuania 18 10 10 17 Hungary 86 52 44 84 Austria 82 60 44 82 Poland 239 141 151 229 Portugal 118 80 97 115 Romania 41 17 20 41 Slovenia : : 18 : Slovakia 52 22 22 51 Finland 28 19 23 28 Sweden 175 119 : : UK 456 238 200 434 Switzerland 55 34 20 55 Turkey 740 366 438 653

Table 18: Share of Enterprises with Innovation Activity in 2014 (%) in NACE DM* *NACE_R2: Manufacture of motor vehicles, trailers and semi-trailers (Source: Innovation statistics, Eurostat (2017))

Country Innovative Product Process Enterprises that have introduced an enterprises innovators innovators innovation Eu-28 countries 54.6 31.3 30.0 51.7 Belgium 70.8 31.5 52.5 67.4 Bulgaria 52.0 26.0 20.0 50.0 Czech Republic 55.7 39.3 39.8 55.1 Denmark 57.0 24.9 39.5 47.6 Germany 74.4 56.3 29.5 73.0 Estonia 25.0 12.5 20.8 25.0 Greece 42.9 28.6 22.9 42.9 Spain 56.1 26.3 32.2 52.1 France 66.3 36.8 35.2 61.8 Croatia 31.0 31.0 31.0 31.0 Italy 72.2 34.8 24.4 70.9 Latvia 52.6 9.9 13.2 52.6 Lithuania 66.7 37.0 37.0 63.0

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Hungary 40.4 24.4 20.7 39.4 Austria 74.5 54.5 40.0 74.5 Poland 41.0 24.2 25.9 39.3 Portugal 70.0 47.6 57.6 68.2 Romania 15.6 6.5 7.6 15.6 Slovakia 39.4 16.7 16.7 38.6 Finland 38.9 26.4 31.9 38.9 Sweden 72.6 49.4 : : United Kingdom 64.8 33.8 28.4 61.6 Switzerland 60.7 38.1 22.5 60.7 Turkey 69.1 34.2 40.9 61.0

2.2.5.4 KPI 4 - Workforce

Management summary

Employment levels are important aspects in judging production capacity, market coverage, and competitive strength. After the crisis, employment levels increased in Germany and particularly China (partially due to outsourcing), while American recovery is slower and some EU-countries show decreases. The main production regions all show a transition towards more highly skilled personnel.

SCORE: 2--> Europe has neither a competitive advantage nor a competitive disadvantage

Management summary

The level of employment is important for judging the automotive industry’s production capacity, vehicle output, market coverage and competitive strength. This section discusses developments in employment in the automotive industry in the EU, the US and China.

2.2.5.4.1 Employment Levels in EU, US, China

Professional skills and educational attainment of workforce affect the level of employment in the automotive industry. The quality of the workforce affects the quality of products that are manufactured, the innovativeness of these products, and the financial performance of the entire industry. Figure 112 illustrates employment trends for a selection of the largest global auto manufacturers.

700.000 614.896 581.281 598.330 600.000 540.993 563.302 494.634 500.000 390.611 400.000 325.905 333.498 338.875 344.109 348.877 300.000 200.000 100.000 0 2010 2011 2012 2013 2014 2015 2016

Volkswagen Automotive Ford Automotive Renault FCA Fiat GM Motor Daimler Toyota Motor Hyundai Nissan Motor

Figure 112: Employment Trends in Global Automakers (Passenger cars, LCV and HGV) (2010-2016) (Source: Own Elaboration Based on Annual Reports of Selected Car Manufacturers) 143

Globally Volkswagen employed almost 615,000 people in 2016, nearly twice as many as Toyota. The figure also reveals that while Volkswagen’s workforce increased rapidly over the period displayed, Toyota’s only increased slightly

Figure 113 shows the number of employees in the European automotive sector, for the years 2010- 2014.

Germany France Italy Spain Sweden Czech Republic Poland Belgium Hungary Romania Slovakia Austria Netherland Portugal Finland Slovenia Latvia Greece Lithuania Norway 0 100.000 200.000 300.000 400.000 500.000 600.000

2014 2013 2012 2011 2010

Figure 113: Employee Numbers in the EU Automobile Industry by Country (2010-2014) (Source: Eurostat, 2017)

In 2014, the EU automobile industry employed around 2,35 million people. From 2010 to 2014, employment in the EU increased by about 9,5%.

The highest percentage of workforce employed in the automotive industry during these years was recorded in Germany (figure 114 below), where its share in the domestic employment number grew from 0,7 million people in 2010 to 0,8 million people in 2014, increasing Germany’s global share in automotive employment from 34,8% in 2010 to 35,5% in 2014. This development was contrasted by employment decreases in the French, Italian, and Spanish automotive sectors (illustrated in (figure 114 below).

800.000 792.618 774.891 780.000 755.983 760.000 749.222 749.098 742.199 740.000 730.567726.415 723.190 719.535 720.000 701.585 700.000 680.000 660.000 640.000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

144

Figure 114: Number of Employees in the Automotive Industry in Germany (2005-2015) (Source: Statista (2017))

Figure 115 shows developments in the number of employees in the American automotive industry, split by manufacturing and dealer segment.

The developments in the US employment in automotive industry is shown below.

2,0

1,5

1,0

0,5

0,0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Manufacturing Dealers

Figure 115: Number of Employees in the US Automotive Industry 2003-2016, by Sector (in million)0 (Source: Statista 2017)

Firstly, the figure shows that the number of people employed in dealership and post-sale services exceeded the number of people employed in manufacturing by a factor of 2. It is also noteworthy, that during the economic crisis 2008-2010 the number of workers in manufacturing were reduced substantially, while layoffs in sales, marketing and after-sale services were much smaller. By 2016, the number of employees has not yet fully recovered to the pre-crisis level.

Figure 116 shows a breakdown of employment by 16 major automakers competing in the American automotive market

Figure 116: The US Employment by Automakers (2015) (%) (Source: American Automotive Policy Council (2016)” State of the U.S. Automotive Industry 2016: Investment, Innovation, Jobs, Export and Economic Competitiveness” p.13.)

All together, these manufacturers employed 353.000 workers in 2015, with Fiat-Chrysler (FCA US), Ford and General Motors accounting for the lion’s share. Trailing Toyota, Honda and Nissan,

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European automakers (Volkswagen, BMW and Daimler) were relatively small employers compared to both the native American and Japanese manufacturers. It is difficult to judge whether employment figures of German manufacturers were constrained by competition from Japanese and American contenders or whether they were caused by strategic decisions that these companies made about the magnitude of foreign capital investments.

Figure 117 shows the development in employment levels in the Chinese automotive industry for the period 2002-2010.

4.500 4.249 4.000 3.500 3.000 2.417 2.203 2.500 2.041 2.094 2.165 1.855 2.000 1.570 1.605 1.693 1.669 1.500 1.000 500 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 117: Number of People Employed in the Automotive Industry in China (in 1,000) (2002-2012) (Source: Statista 2017)

The figure makes clear that the number of employees in this sector has increased significantly in recent years.

To understand what role European, and particularly German companies play in Chinese automotive employment, figure 118 depicts the 20 largest German investing companies in China, in terms of employment.

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Volkswagen 48.000 Siemens 43.000 Bosch 21.000 DHL 19.000 Continental 15.000 Epcos 12.000 Bayer 11.000 Lufthansa 11.000 ThyssenKrupp 10.500 Daimler 9.000 BMW 8.600 Metro 8.000 BASF 7.000 Schenker 4.700 Bertelsmann 4.200 Evonik 4.000 Freudenberg 4.000 Henkel 3.600 Heraeus 2.750 Knorr Bremsen 2.200

0 10.000 20.000 30.000 40.000 50.000 60.000

Figure 118: The 20 Largest German Companies in China, by Number of Employees (Source: Statista 2017)

From the figure, it is revealing that the German automotive industry, represented by the lead brand owners (Volkswagen, Daimler, BMW), value adding subcontractors (Siemens, Bosch, Continental, Thyssen Krupp) and logistics operators (DHL, Schenker) were among the largest German employers in Chinese industry.

2.2.5.4.2 Education and Managerial Personnel

Figure 119 depicts a breakdown of the work force in the automotive industry in the EU-15, in terms of job categories.

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70 60,8 60,2 59,2 58,1 58,5 58,5 Skilled workers 60 55,4 55,2

Engineers 50

Office staff 40

Other 30 professionals 19,5 17,1 18 18,8 Unskilled workers 20 15,4 15,5 15,6 16,9

8,7 7,6 7,9 8,3 7,4 7,6 7,9 7,6 Managers 10

Sales staff 0 2000 2001 2002 2003 2004 2005 2006 2007

Figure 119: Occupational Workers in Automobile Industry in EU15 (Source: Heneric, Licht & Sofka, 2006)

From 2000 to 2007 it could be observed that the relative number of managers, engineers and other professionals and technicians have increased as compared to workers, especially skilled workers, whose numbers declined by 4% throughout the EU15.

Reductions in the number of skilled workers employed at European OEM’s might be attributed to several causes. The first could be an increasingly important role of automotive suppliers in vehicle fabrication processes, particularly in the areas of electronics, modules and sub-systems. This transformation moved several production processes, such as module and sub-system pre-assembly to suppliers (McNeill and Chanaron, 2005). Apart from gaining from speedier and less technically demanding assembly processes, the brand owners also benefited from transferring the responsibility for production quality and logistics to upstream value chain members. In addition, proliferation of modular and lean production methods required suppliers to settle closer to final assembly plants, and more tightly integrating their operations with those related to vehicle assembly. This gave suppliers higher stakes in value creation and advanced their role in spurting technological and collaborative innovations. As a consequence, final assemblers benefitted from cost savings, but lost factory jobs for highly competent manual people. This resulted in “hollowing out“ the skilled workforce.

Another factor that might have contributed to the decrease in the number of skilled workers is related to the increasing application of robotics in the production of parts, components and modules, warranting more effective execution of dangerous/dirty operations (such as painting or molding), contributing to the reduction of waste, and boosting assembly productivity132. Another contributing factor could be higher foreign investments of European automakers in manufacturing facilities in

132 In 2016, the automotive-related orders for industrial robotics became major driver for growth in industrial robotics manufacturing sector in the US and around world. Robot orders to the automotive component industry increased by 66 %( as compared to 2015) while robots ordered by automotive OEMs grew by 6% ( https://www.bastiansolutions.com/blog/index). The most common applications for robots included material handling (33%), spot welding (26%), and coating and dispensing (9%). The United States ranks 3rd globally (after China and Japan) in robot application density as defined by the number of industrial robots in operation per 10.000 employees in the automotive industry. China, which emerged as the world largest car market is by far the largest consumer of industrial robots. Automotive industry accounts for 40% of Chinese robots’ applications. The International Federation of Robotics estimates that the race by the US and EU automakers to build plants in China, along with wage inflation will push the operational stock of industrial robots in China to 428,000 units in 2017. Statistics about “robotization” of the EU auto industry are hard to find. However, the European robotic industry 2017 news-letters mentioned high-speed proliferation of robotics applications at VW and BMW plants, particularly at the latter, where “human friendly” robots perform the final assembly the car doors in addition to other auxiliary operations

(http://www.blog.robotiq.com/bid/69722/Top-5-Robotic-Application-in the-Automotive-Industry).

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China and South-east Asia, which also prompted overseas capital transfers and rationalization of production bases in home countries. On the other hand, the steady increase in the number of engineers employed by EU automakers (figure 120) could be attributed to the increasing digitalization of vehicles.

400 355 350 311

300 267 245 254 250 220 200 193 200 168 173 150

100

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Figure 120: Number of Engineers and Technical Staff in the Automobile Industry in China (in 1,000) from 2002 to 2011 (Source: Statista 2017)

The figure above shows that the numbers of engineers and technical staff employed in the Chinese auto manufacturing industry has more than doubled from 2002 to 2011. However, since the time line for this data is different than for the European auto industry employment statistics, drawing a conclusion that the Chinese have outpaced the European vehicle manufacturers in hiring highly qualified workers would be ungrounded. Having stated that, it is undisputable that the quality of technical skills of Chinese workforce has improved considerably during the period analyzed.

2.2.5.5 KPI 5 - Productivity and Value-Added

Management summary

While American and European suppliers considerably improved their profitability from 2007-2015, and exceeded their Japanese and Korean peers on EBIT margins, Chinese, Japanese and Korean revenue growth rates over the period were considerably higher than for European firms, which in turn saw revenues increase faster than their American counterparts.

SCORE: 2--> Europe has neither a competitive advantage nor a competitive disadvantage

Analysis & Assessment:

Since industrial productivity constitutes one of the most important pillars of the EU’s competitiveness, and contributes significantly to the Community’s global competitive standing, hereunder we review productivity levels achieved by automotive workers in the different EU countries and in global regions.

The EU automotive industry produced an average of 7,6 vehicles per worker annually in 2016 (AECA, 2017). Spain recorded the highest motor vehicle production per direct manufacturing worker over the period 2010-2014, with an average of 19,2 vehicles per worker in 2014. It was followed by Belgium (13,71 vehicles/worker) and Slovakia (12,83 vehicles/worker) in 2014. Spain produced 2,7 million cars and became the 8th largest automobile manufacturing country in the world and the 2nd largest car

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manufacturing country in Europe after Germany (The Wall Street Journal, 2016). The main manufacturers in Spain were Daimler AG, Ford, General Motors, Nissan, PSA Peugeot Citroen, , Renault, , SEAT, and Volkswagen. Spanish export sales amounted to over 24.000 million euro’s during the first half of 2016 (economia.elpais.com, 2016).

Figure 121 shows the output per automotive worker by country in the EU.

20,00

15,00

10,00

5,00

2010 2011 2012 2013 2014

Figure 121: Output per Worker by Country in EU (Source: ACEA (2010-2015)133)

Figure above indicates that automotive workers in Hungary, Italy, Poland, Hungary and even Sweden performed relatively poorly in terms of productivity as compared to industry leaders. However, as we do not know what reasons contributed to this disparity, the responsibility cannot be solely put on workers

Given that the capital investments in automotive plants have increased over the last decade in new member states, and given that many vehicle production facilities in Western Europe were closed and employment reduced since 2009, Deloitte carried out a survey of automotive industry executives with operations in Central and Eastern Europe (Deloitte, 2016)134. Among the areas that, according to study participants, required urgent attention from both the company management and the local governments, was the need to enhance worker productivity through better education and vocational training. However, varied on the most effective measures to better professionally educate employees. In Hungary and Slovakia, executives sought co-operation with public schools in addition to internal training, while companies in the Czech Republic, Romania, Bulgaria and Poland prioritized internal training and in-house vocational education centers.

However, all automotive employers agreed that to meet increasing expectations regarding technological progress, and to maintain global competitive advantages, higher qualifications and skills were required. Some employers emphasized urgent needs for reforms in the public education system. Others would rely more on own training and developing company-owned academies. Multi-national companies were more willing to finance in-house training and/or education facilities than were mid- size companies. The latter were forced to draw from a less educated workforce.

The automotive industry contributes about 11% of total manufacturing employment and 6,8% of total output in Europe (ACEA, 2017). Employment in the EU motor vehicle industry exceed 1,9 million people, and the annual value added was higher than EUR 114 billion in 2005 (Heneric et al., 2006). Using the entire motorized industry as a level of analysis, the European Association of Automotive Suppliers estimated that in 2016, around 5 million people directly and indirectly were employed in supply chains with suppliers playing a leading role in the European automotive industry research and innovation.

133 2013* *Based on automotive employment most recent data available motor vehicles per worker. 134 Deloitte Study (2016) “Central Europe as a Focal Point of the Automotive Industry”

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Figure 122 shows the value added in the manufacturing of motor vehicles, trailers, en semi-trailers, in the EU.

Germany 78.339 89.379 United Kingdom France Spain Italy Czech Republic Poland Sweden Hungary Austria Belgium Romania Slovakia Netherlands Portugal Slovenia Denmark

0,0 20.000,0 40.000,0 60.000,0 80.000,0 100.000,0

2014 2013 2012

Figure 122: Value added at factor cost135 in manufacture of motor vehicles, trailers and semi-trailers (million EURO) (Source: Eurostat, 2017)

The figure above indicates that the total value added in the EU-28 increased rapidly, from €154 billion in 2011 to €181 billion in 2014 (Eurostat, 2017). In 2014, the largest national motor vehicle industries by percentage of the total EU-28 valued added were Germany (49%), the United Kingdom (12%), France (8%), Spain (5,4%), Italy (5,1%), and the Czech Republic (3,6%). Together, these six countries account for about 83,5% of motor vehicle production within the EU-28. Shares of all other EU member countries were below 3% in 2014. As such, the European automotive industry is concentrated in a few countries.

Figure 123 shows the annual output and the number of employees in the Chinese automotive sector, for the period 1990-2010.

135 Value added at factor costs incorporates the gross income from operating activities after adjusting for operating subsidies and indirect taxes. Value adjustments (such as depreciation) are not subtracted (Eurostat, 2017)

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Figure 123: Annual Output and Number of Employees in the Chinese Automobile Industry (1990-2010) (Source: Lu Zhang (2014)” The Chinese Auto Industry: Challenges and Opportunities for Management and Labor”, Perspectives on Work, December 2014, p.56 at https://www.research gate.net/publication/270582457)

The figure indicates considerable and steady increases in productivity in the Chinese automotive industry from 1990-2010. However, it is quite difficult to compare the China’s productivity growth with the progress attained in the EU, without knowing the level of capital equipment within this sector, and the shares of the workforce employed in direct manufacturing and different supply chain segments, as well as sales and distribution services.

Figure 124 shows the output per automotive worker by country in the EU.

20,00

15,00

10,00

5,00

2010 2011 2012 2013 2014

Figure 124: Output per Worker by Country in EU (Source: ACEA (2010-2015)136)

136 2013* *Based on automotive employment most recent data available motor vehicles per worker. 152

operations in Central and Eastern Europe (Deloitte, 2016)137. Among the areas that, according to study participants, required urgent attention from both the company management and the local governments, was the need to enhance worker productivity through better education and vocational training. However, varied on the most effective measures to better professionally educate employees. In Hungary and Slovakia, executives sought co-operation with public schools in addition to internal training, while companies in the Czech Republic, Romania, Bulgaria and Poland prioritized internal training and in-house vocational education centers.

2.2.5.5.1 Economic Performance of the European value chain (value added)

Figure 125 shows the global revenue of selected truck manufacturers in 2015.

Daimler (Trucks) 42.595

Volvo 26.319

Paccar (Trucks) 14.783

MAN (Truck & bus) 10.202

Scania (Trucks) 7.534

0 5.000 10.000 15.000 20.000 25.000 30.000 35.000 40.000 45.000

Figure 125: Worldwide Revenues of Selected Truck Manufacturers in FY 2015 (in million U.S. dollars) (Source: Statista (2017))

Table: 19 shows the margin differentials between suppliers of brakes and brake parts in the EU-5.

Table: 19 Margin Differentials between 3 Tier Suppliers of Brakes and Brake parts in the EU 5 in 2013 (Vehicle Body Parts in Germany, France, Spain, Italy and the United Kingdom) Source: CBI Trends for Automotive Parts and Components, CBI Market Intelligence, 2014 OEM supply chain Margin Tier 1 supplier delivering to OEM 6-8% Tier 2 supplier delivering to tier 1 6-15% Tier 3 supplier delivering to tier 2 10-25% Aftermarket OES supply chain Margin Tier 1 delivering to OEM for OES sales through approved service chain 10-30% Tier 1 delivering to OEM for OES sales through independent outlets 10-25%

137 Deloitte Study (2016) “Central Europe as a Focal Point of the Automotive Industry”

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OEM delivering OES parts through its approved service chain 25-65% OEM delivering OES parts through independent outlets 30-40%

The table indicates that the most profitable are both OEM’s and Tier 1 and Tier 3 suppliers who deliver via independent outlets. Tier 1 suppliers who do very well financially usually serve more than just automotive manufacturers and also industry clients.

Figure 126: Key Supplier Financial Performance by Region 2007 v. 2015 (Source: Roland Berger: Global Automotive Supplier Overview 2016)

The chart above shows that NAFTA and Europe-based suppliers have considerably improved their profitability from 2007 to 2015 and exceeded their Japanese and Korean peers on EBIT margins. It also indicates that China-based suppliers’ financial performance declined from 8 % EBIT to 7.4 % during the same period. However, with 13.5% and 11.4% CAGR, the Chinese and Korean suppliers were leading in terms of annual growth rates of their businesses.

2.2.5.6 KPI 6 - FDI Inflows to LCV, HDV and PV Manufacturers

Management summary

FDI inflows to Europe (particularly to Germany, the UK, and the Czech Republic), are relatively high, compared to America and Asia. This might suggest some advantages for European manufacturers, managing to attract foreign direct investments.

SCORE: 3--> Europe has a competitive advantage in comparison

Analysis & Assessment:

According to Ernst & Young (2014), Germany has been the most attractive FDI destination in

Europe (50%) due to the skilled labor force, high productivity, reliable logistics infrastructure, stable economy and its secure legal framework (see Figure 127 and Figure 128). German companies have invested heavily in research and development (R&D), putting them at the cutting edge of technology and engineering (Business Sweden, 2015). With 50% and 41% respectively, the United Kingdom and the Czech Republic also attracted a high level of FDI.

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Germany 44%

USA 40%

Japan 28%

India 16%

France 15%

0% 10% 20% 30% 40% 50%

Figure 127: FDI Projects in the Automotive Sector 2014 by Origin Country (in percent) (Source: Ernst & Young (2014), as cited in GTAI Germany Trade & Investment, 2016/2017)

Germany 50%

UK 41%

Czech Republic 19%

Russia 16%

Poland 14%

0% 10% 20% 30% 40% 50% 60%

Figure 128: FDI Projects in the Automotive Sector 2014 by destination country (in percent) (Source: Ernst & Young (2014), as cited in GTAI Germany Trade & Investment, 2016/2017)

2.2.5.7 KPI 7 - Investments in Expansion of Production Assets Figure 129 shows the number of newly built foreign automotive supplier plants in Eastern European countries.

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300 262 255 250 208 200

150 127 121

100

50 26 23 22 10 7 1 0

Figure 129: The Number of Newly Built Foreign Automotive Supplier Plants by Country in Central and Eastern Europe (CEE), 1997-2009 (Source: Pavlínek, P. (2015))

Between 1997 and 2009, three countries, the Czech Republic, Poland, and Hungary attracted a high number of automotive supplier plant investments. In contrast, countries like Croatia and Macedonia only attracted a few manufacturing investments in manufacturing assets. By considerably expanding production assets in the Czech Republic, Poland and Hungary, but also in Romania and Slovakia the European automotive industry foresees good prospects for business growth and market – beating profitability. These investments provide hard core confirmation that European vehicle manufacturers invest in their future competitiveness.

2.2.5.8 Summary

Chapter 5 discussed seven key performance indicators (KPI) regarding the competitive performance of supply chain operators. These KPI’s and their main findings are summarized below.

KPI 1 – Research and Development Expenditure

Although topped by other industries globally, the auto industry is the largest private investor in R&D in Europe and number three in China. R&D intensity reflects companies’ assessments of their prospects, and their willingness to invest in new market opportunities. In the context of the automotive industry, R&D is largely focused on technological developments that make products more driver- and environmentally friendly.

Although varying significantly between countries, European R&D investments as a percentage of GDP trail those of South-Korea, Japan, and the US, and have recently also been overtaken by China.

Looking solely at R&D expenditures by auto manufacturers, Japan tops the list, followed by Germany and the United States, with all three countries considerably increasing their R&D efforts in recent years. Generally, Chinese R&D expenditure has also seen significant increases throughout the past decade. In Germany, the auto industry stands for the largest share of innovative expenditure in industry turnover, and in France, the automotive industry has by far dominated all other knowledge intensive manufacturing segments in terms of both domestic and foreign R&D-spending. In Italy, general R&D expenditure in terms of GDP has throughout the last decade increased, with a minor dip during the economic crisis.

At the same time, European auto manufacturers also export R&D expenditures abroad, for example to the US, and more particularly, China, Japan, and South-Korea. Some of this R&D is organized

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through strategic partnerships with other auto manufacturers or more specialized industry segments, such as software providers, material manufacturers, and ICT hardware developers.

KPI 2 – Technological Readiness and Leadership/Manufacturing Capability

In recent years, one of the main tasks of the LGV and HDV industry was to bring down emissions of NOx, PM (and CO2). To this end six “Euro” efficiency and emission reduction standards were introduced over the last twenty years. As a result, pollutant emissions from HDV which also include HGV, have been slashed to near-zero level. Due to technical trade-offs, a challenge was long to simultaneously reduce both CO2-emissions on the one hand, and NOx- and PM-emissions on the other. After succeeding at bringing down NOx- and PM-emissions, the industry succeeded in reducing fuel consumption by about 8% over the last five years, and European auto manufacturers like Peugeot, Citroën, and Renault do relatively well towards 2020 targets, compared to other manufacturers. At the same time, regulatory differences in for example the United States (speed limits, truck payload and volume), make it more challenging to objectively compare emissions between truck models.

Nevertheless, when assuming all expected policies are implemented, projections of CO2-emission reduction technologies for EU-made LDV’s indicate that EU manufacturers are not likely to overtake Japanese, Indian and Canadian vehicle manufacturers when it comes to progress in reducing emissions. European manufacturers may therefore not sustain any competitive superiority in terms of environmental technology. At the same time, projections around emission reductions to be attained by European manufacturers of HDV’s indicate that US manufacturers could well overpower their European counterparts and sustain competitive gains from more environmentally friendly technologies in the time ahead.

KPI 3 – Innovation Capabilities by Patents and New Standards

Of European patent applications within the automotive sector, almost a third is done by German companies. Germany is followed by Japan (23%), with leading firm Toyota, and the United States (11%). At the same time, the three largest American auto manufacturers were granted ca. 5.000 patents a year in the United States. When categorizing the working sphere of patents and innovations, it becomes clear that the number of inventions within automotive navigation, handling, safety & security, and entertainment has shown a stable or slightly increasing development, while the number of inventions related to propulsion systems has more than five-doubled in course of a few years. However, it is non-European companies that top the list of most inventions in these fields.

KPI 4 – Workforce

The level of employment is important for judging the automotive industry’s production capacity, vehicle output, market coverage and competitive strength. In terms of work force, Volkswagen tops the list, with ca. 615.000 employees almost double the work force of Toyota.

In 2014, the EU automobile industry employed around 2,35 million people. From 2010 to 2014, employment in the EU increased by about 9,5%. The highest percentage of workforce employed in the automotive industry during these years was recorded in Germany, where its share in the domestic employment number grew from 0,7 million people in 2010 to 0,8 million people in 2014, increasing Germany’s global share in automotive employment from 34,8% in 2010 to 35,5% in 2014. This development was contrasted by employment decreases in the French, Italian, and Spanish automotive sectors.

While in the US, employment in the automotive manufacturing and dealer segments are still not back at pre-crisis levels, the number of people employed in the Chinese automotive sector has continued to increase, with a particular pace increase from 2011/2012 onwards. In part, this is due to European automotive companies moving part of their activities to China. Volkswagen is for example German firm with largest investments in China.

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Looking at education levels and management, our analysis showed that from 2000 to 2007, the relative number of managers, engineers and other professionals and technicians throughout the EU15 increased as compared to workers, and especially skilled workers, whose numbers declined by 4%. Causes for this might include the transfer of some processes to suppliers, the increasing use of robotics, and foreign investments of European auto manufacturers in for example China and South- East Asia.

KPI 5 – Productivity and Value Added

The productivity in terms of vehicles produced per employee varies a lot from country to country, both within Europe and outside of Europe. In part, this is related to developments in (or the lack of) capital investments in automotive plants and employee skills. A European survey by Deloitte identified the need to enhance worker productivity through better education and vocational training.

The automotive industry contributes about 11% of total manufacturing employment and 6,8% of total output in Europe, and, according to the European Association of Automotive Suppliers, directly and indirectly employs around 5 million Europeans. Also, the value added from the European automotive industry has shown considerable increases in recent years.

KPI’s 6 and 7 – FDI Inflows to LCV, HDV and PV Manufacturers and Investments in the Expansion of Production Assets

Within Europe, Germany has been the most attractive FDI destination in Europe, but also the United Kingdom and the Czech Republic have done well. Contributing factors in this respect are skilled labor forces, high productivity, a reliable logistics infrastructure, (until Brexit) relatively stable economies, and secure legal frameworks. When it comes to the expansion of production assets, European manufacturers have over the last 1-2 decades shown a tendency to expanding production capacity through the building of new or investing in existing manufacturing plants in Central- and Eastern Europe.

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2.2.6 Conclusions and Policy Implications Globalization has changed the economic geography of the European and global automotive industry

Rapid economic development in East Europe and emerging economies in Asia and Africa spurred the construction of new assembly and supplier plants in Poland, the Czech Republic, Slovakia, China, Turkey Thailand, Ukraine, Brazil and Mexico. These new investments have been partly driven by competition from global rivals in OEMs’ home markets and by relatively subdued domestic demand in mature economies. The opening of new and vast investment opportunities in Asia, the Americas and Africa combined with host country requirements for local production and sourcing, unlocked possibilities to cut costs and access new markets through regional free trade arrangements such as NAFTA and the EU, and a series of bilateral trade pacts (e.g., Japan - EU). Even so, the automotive industry remains overwhelmingly concentrated in mature economies of the EU, the US, Japan and South Korea, although higher growth in emergent demand will over time accelerate the re-location of industry investments closer to Asian and African consumers.

Globalization has created new challenges and opportunities for the European automotive industry and public policy makers

Investments in new production and markets service facilities in foreign locations bestowed the European PV, LCV and HDV industry with possibilities to:

1) build vehicles where they are sold,

2) design vehicles with common under-body platforms allowing quick adaptation of bodies, and trimming the levels and driving characteristics to market preferences and local customer purchasing power, and

3) leverage the benefits of global platforms and regionally and/or internationally clustered subcontractors, thus capitalizing on less model-specific fabrication methods, multiple technologies and generic production systems.

On the other hand, the outsourcing of less convergent components and subsystems to highly specialized upstream supply chain manufacturers facilitated more “modular” and “flexible” assemblies. This allowed the OEMs to exploit vehicle differentiation as competitive edge vs. direct and indirect rivals.

Globalization has significantly affected the industry structure, intra-industry-relationships and competition patterns.

The 2015-2016 wave of mergers and acquisitions among the European and the American automotive supply companies signifies the concentration of production, financial power, and market power in the upstream echelons of the European and American component manufacturing industries. The acceleration of outsourcing of R&D and design activities to spatially and functionally decentralized supply players has spawned power transfers from automakers to subcontractors. Thus, despite the still predominantly regional pattern of supply chain networks in Europe, Asia and North America, we have seen a concomitant emergence of “global suppliers” with wide production portfolios and R&D capabilities, serving multiple OEMs on different continents. As these parties have increasingly mastered global design and operational integration, they developed large economies of scale and scope. This, together with world-wide manufacturing and R&D prowess, has driven a wave of consolidation and geo-spatial expansion among component makers, empowering them to influence the brand owners’ product offerings, technology choices, and competition methods.

Furthermore, with tier-1 suppliers overtaking R&D and the delivery of subassembly systems, the tier-2 players increasingly excelled at the integration of component sourcing and the securing of local supplies to vehicle plants in emerging markets. Not surprisingly, it was thus component suppliers, particularly in Eastern and Central Europe, but also in China and other emerging locations, that attracted the clear majority of the industry’s foreign investments (FDI) in production assets. This

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further strengthened their capabilities to benefit from economic, industrial and social gains from higher employment and investment returns. These developments have de-constructed the global competition arenas between final vehicle manufacturers into several smaller rivalry domains, where competition between component suppliers rallying to transform the mechanical vehicle systems into digitally interconnected mobility devises enfolds. The winners on these race trajectories will have profound impacts on the competitive standing of global brand owners and the entire European automotive industry.

As the recent invigoration of economic growth in Europe, China, and North America has pushed capacity utilization rates to physical ends, it has also unlocked potentials for massive investments in production assets in new locations, particularly in Eastern and Central Europe, China, India, Russia, Mexico, and Brazil, where market demand exceeds that of traditional industrial centers. However, the growth in production and design activities in emerging and/or new markets has also re-energized economic activity in traditional centers of the automotive industry. Besides, the growth in imports of European vehicle brands manufactured in lower-cost locations boosted financial returns for traditional automakers, also creating space for higher employment, income growth, and the related spillover gains.

Public Policy Directions

Taking stock of the above, one of the main considerations of European policy makers might be to utilize the internationalization and regionalization of vehicle production patterns, to assure that the largest chunks of gains from the most intellectually demanding value-added operations, such as the design of electric powertrains and electronic systems, and the supply of ITC equipment and the digitalization of driving and transport infrastructure, are harnessed by the industry in the European Community.

Another consideration for public policy makers might be to utilize globalization opportunities by the proliferation of European norms, standards and industrial legislations, through voluntary bilateral and/or multilateral agreements with countries in both mature and emerging economies.

Another field where public policy makers might contribute to the sustainable competitiveness of the European automotive industry, is support for broader collaborative exchanges between industry and R&D personnel from both advanced economies (the US, Japan, South Korea), as well as emerging powerhouses such as Brazil, India, Russia, and Mexico.

In the home territory, EU policy should stimulate new investments, to speed up the development and adoption of new technologies, and boost resource efficiency and value-creation. Special attention might also be given to medium and small enterprises, such as those populating the automotive component manufacturing industries, whose role in the creation of competitive advantages for the industry majors increased considerably.

The next domain for EU policy intervention might be the improvement of the functioning of internal markets, in order to increase opportunities for European companies, notably SMEs (but not solely) to expand in international markets, by fostering export and value-co-creation partnerships. This might require better access to finance, venture capital, highly skilled workforce, and better knowledge of the comparative gains that foreign locations might render. In so doing, one has to remember that participating in value-chain networks in external and internal locations in the EU might be more competitively beneficial than the outright exporting of final and/or intermediate items.

Finally, support for technical, social and organizational innovations should also be in focus for public policy makers, particularly a rapid decarbonization of European-made vehicles and transport services.

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2.2.7 References

European Vehicle Market (2013). Light-Duty Vehicle Technology Cost Analysis. Updated Indirect Cost Multiplier (ICM) Methodology. Retrieved from: http://www.theicct.org/sites/default/files/2013%20-%20FEV%20-%20ICM%20analysis.pdf https://www.epo.org/about-us/annual-reports-statistics/statistics.html#national EPO Annual report (2016). Granted patents. Retrieved from: http://documents.epo.org/projects/babylon/eponet.nsf/0/35E90F1C530D8067C12580D8005B458F/$File/granted _patents_en.pdf http://documents.epo.org/projects/babylon/eponet.nsf/0/35E90F1C530D8067C12580D8005B458F/$File/granted _patents_en.pdf http://documents.epo.org/projects/babylon/eponet.nsf/0/35E90F1C530D8067C12580D8005B458F/$File/europea n_patent_applications_en.pdf De Backer., K. and Sebastien M. (2014) «Mapping Global Value Chains», Working Paper Series No 1677/May 2014, European Central Bank Statista (2017). EU automotive sector patent applications filed by manufacturers in 2016, by country or region of origin. Retrieved from: https://www.statista.com/statistics/286939/eu-patent-applications-in-the- automotive-sector-by-region/ http://europe.autonews.com/article/19980216/ANE/802160841/european-truckmakers-face-squeeze ACEA (2017). Reducing CO2 from trucks: progress in practice. Third-party assessment. Retrieved from: http://www.acea.be/uploads/publications/CO2_from_trucks-progress_in_practice.pdf Pavlínek, P. (2015). Foreign direct investment and the development of the automotive industry in central and eastern Europe. Foreign investment in eastern and southern Europe a er 2008, 209. McKinsey&Company (2016). Automotive revolution-perspective towards 2030. How the convergence of disruptive technology-driven trends could transform the auto industry. Retrieved from: https://www.mckinsey.de/files/automotive_revolution_perspective_towards_2030.pdf. January 2016. Statista (2017). Number of automobile manufacturing plants of the global automotive industry from 2000 to 2012. Retrieved from: https://www.statista.com/statistics/266855/automobile-plants-of-the-global-automotive- industry/ Automotiveworld (2014). Global truck production outlook: can the industry maintain pace beyond 2014? Retrieved from: http://www.automotiveworld.com/analysis/global-truck-production-outlook-can-industry- maintain-pace-beyond-2014/ OECD (2016). OECD Research and Development Expenditure in Industry 2016. Retrieved from: http://www.keepeek.com/Digital-Asset-Management/oecd/industry-and-services/oecd-research-and-development- expenditure-in-industry-2016_anberd-2016-en#page80 ACEA (2010-2015). Per Capita EU Production. Retrieved from: http://www.acea.be/statistics/article/per- capita-eu-production ACEA (2017). http://www.acea.be/statistics/tag/category/european-production-plants-map Economia.elpais.com (2016). Automotive industry in Spain. Retrieved from: http://economia.elpais.com/economia/2016/08/19/actualidad/1471596014_317985.html The Wall Street Journal, 2016. Car Makers Pour Money Into Spain. Retrieved from: https://www.wsj.com/articles/car-makers-pour-money-into-spain-1470613487 Heneric, O., Licht, G., & Sofka, W. (Eds.). (2006). Europe's automotive industry on the move: competitiveness in a changing world (Vol. 32). Springer Science & Business Media. Osterman, P. (1995). Skill, training, and work organization in American establishments. Industrial relations: a journal of economy and society, 34(2), 125-146. ACEA (2017). Facts about the industry. Retrieved from http://www.acea.be/automobile-industry/facts- about-the-industry Statista (2017). Capacity of the global automobile production industry. Retrieved from: https://www.statista.com/statistics/266852/capacity-of-the-global-automobile-production-industry/ Carsalesbase.com (2014). Light-commercial vehicle sales in Europe. Retrieved from http://carsalesbase.com/light-commercial-vehicle-sales-europe-2014/ http://www.acea.be/statistics/article/automobile-assembly-engine-production-plants-in-europe West European “Commercial LCV”Sales by Manufacturer Group http://www.ihsglobalinsight.com/gcpath/Munich_GM.pdf European Market Statistics Pocketbook (2010-2015). Retrieved from: http://eupocketbook.org/data-2/

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Eurostat (2017). Innovation statistics. Retrieved from: http://ec.europa.eu/eurostat/statistics- explained/index.php/Europe_2020_indicators_-_R%26D_and_innovation Burden (2016). GM inventory at 8-year high; will reduce car production. Retrieved from: http://www.detroitnews.com/story/business/autos/general-motors/2016/12/18/gm-production/95601094/ Eurostat (2017). Transport equipment production statistics. Retrieved from: http://ec.europa.eu/eurostat/statistics-explained/index.php/Archive:Transport_equipment_production_statistics_- _NACE_Rev._1.1#Database https://www.vda.de/en/topics/innovation-and-technology/fuel-strategy/the-mobility-and-fuel-strategy.html Heneric, O., Licht, G., & Sofka, W. (Eds.). (2006). Europe's automotive industry on the move: competitiveness in a changing world (Vol. 32). Springer Science & Business Media. Oliver Heneric,Georg Licht,Wolfgang (2005). Europe's Automotive Industry on the Move: Competitiveness in a Changing World. https://books.google.no/books?id=5n9_xZ20YbIC&pg=PA128&lpg=PA128&dq=R%26D+expenditure+in+the+autom otive+industry+in+europe&source=bl&ots=ngHGNY_jtC&sig=IwjzalSY6k- rfVcy6253pgQqVcs&hl=no&sa=X&ved=0ahUKEwiZobG8hK7UAhWBB5oKHUR- CVIQ6AEIVzAG#v=onepage&q=R%26D%20expenditure%20in%20the%20automotive%20industry%20in%20europ e&f=false PwC (2015). The 2015 Global Innovation 1000 Automotive industry findings. Retrieved from: https://www.strategyand.pwc.com/media/file/Innnovation-1000-2015-Auto-industry-findings.pdf Terry Ward & Patrick Loire (2008). Employment, Skills and occupational trends in the automotive industry Industrial Development Report 2016. The Role of Technology and Innovation in Inclusive and Sustainable Industrial Development. https://www.unido.org/fileadmin/user_media_upgrade/Resources/Publications/EBOOK_IDR2016_FULLREPORT.pd f https://www.unido.org/fileadmin/user_media_upgrade/Resources/Publications/EBOOK_IDR2016_FULLREPORT.pd f http://www.cnbc.com/2016/04/18/driving-growth-the-future-of-europes-car-industry.html http://ec.europa.eu/eurostat/statistics-explained/index.php/Manufacturing_statistics_-_NACE_Rev._2 http://ec.europa.eu/eurostat/statistics-explained/index.php/Archive:Car_production_statistics_-_NACE_Rev._1.1 https://www.strategyand.pwc.com/reports/mergers-acquisitions-auto-industry

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3 Aeronautics 3.1 Civil Aviation Market – A Preamble

Civil aircraft manufacturing sector is one of the most globalised industries in the world, both in terms of operations and markets (Mocenco, 2014). It is one of the main sources of high technology devices with a global estimated value of US$ 650 billion as of 2014, with an estimated trade value in excess of US$ 400 billion (Duke University, 2016). This industry sector is very capital intensive, it being characterised by the production of non-standardised and high technological products, in relatively low volume, with high non-recurring costs (McGuire, 2014; Smith & Williams, 2012).

Aircrafts are large and complex product systems, composed of many customised and interconnected elements organised in a hierarchical way, requiring user involvement in the innovation process, and a change in one of its components can determine changes involving the entire system (Eriksson, 2000).

The return in terms of technology regards areas like transportation, communication and defence (Bamber & Gereffi, 2013). Consequently, if compared to similar industries, as the automotive one, phases such as design and manufacturing appear to be more complex, because of the required integration of complex sub-systems in the final product, the use of advanced materials, and the presence of very tight standards relating production and testing (Elola, Valdaliso, & López, 2013).

The manufacturing industry is concentrated mainly within a bunch of countries, including Brazil, home of Embraer Company; Canada, with Bombardier; France and Germany, with Airbus; and the USA, with Boeing. However, new countries, like China and India, are emerging in the global scenario as key players. The industry appears, thus, to be not so globalised in terms of global players, as there are still 20 countries accounting for over 90% in many market segments (Duke University, 2016).

Large civil aircraft manufacturers need to obtain large orders to survive the cyclical downturns characterising the industry. The large civil aircraft segment is dominated by the duopoly Airbus – Boeing, while the aero engine sector shows American based firms, General Electric Aircraft Engines, United Technology Corporation (UTC) – Pratt & Whitney parent and Engine Alliance, and the European groups, Rolls Royce, SNECMA, and International Aero Engines (IAE) (Niosi & Zhegu, 2010).

There are relevant linkages between the civil aircraft industry and the defence sector, in terms of technical knowledge provided to the civil industry. For instance, this relationship was the base for the development of Volvo Aero (Eriksson, 2000).

Companies involved in the aerospace manufacturing industry usually show a high level of flexibility in fulfilling market demand, as they can offer a certain level of product customisation. Airbus, for instance, gives customers the opportunity to decide which engine model to choose. This approach increases the complexity of the manufacturing process, which already requires a large amount of resources in terms of technical and design capabilities, materials and assembly methods. The low volume production and the long lead time affect the sector, leading to low profit margin, high risk, and high nonrecurring costs. Despite the high revenue that can be generated by an aircraft, the profit margin can be lower than five percent of the revenues (Horng, 2007). High entry costs, oligopolistic market and a strong government support are other key feature of the industry. It should be understood that due the long manufacturing lead time taken by an aircraft and it becoming profitable, no aircraft manufacturer can sustain the competition without government support (Niosi & Zhegu, 2010).

Currently, the industry is facing a period of deep global changes. The main challenges involve the design and development of more technological complex product and with shorter lead times; how to manage emerging markets within the supply chain, in order to keep a competitive advantage; how to increase the production capacity to cope with the increasing demand, sharing more risks with the Original Equipment Manufacturers (OEMs). The drivers of these challenges can be identified in some issues directly affecting the market, as a growing demand for spare parts and original equipment, a growing need for aircraft diversity, emerging countries entering the market and creating a new competition, an internationalisation of the supply chain, and more tight environmental and noise

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regulations (Oliver Wyman, 2015). The driver for this internationalisation are identified by Niosi and Zhegu (2010) as a direct association with increasing development costs.

Developing countries have started considering the technology outsourcing by large aerospace manufacturers as a possibility of development; thanks to the transfer of sophisticated technologies and the creation of new jobs. Mexico, Poland, and other developing countries have introduced policies to attract aerospace manufacturing companies (Bamber & Gereffi, 2013). Consequently, OEMs prefer to focus on core activities as design, development and system integration, outsourcing non-core activities, including sub-systems.

3.1.1 Globalisation and its key drivers

Today, the globalised production environment is characterised by the coordination and linkages at a global level, providing the chance for developing countries to enter into the market, and allowing a better quality and a high product differentiation. Globalisation is a phenomena defined as:

“the pervasive decline in barriers to the global flow of information, ideas, factors, technology, and goods” (Kaplinsky & Morris, 2000).

Since War World II, open international trade, high product diversification, as well as the revolution in transportation and communication, fostered an industrial globalisation process, which led to the creation of a global manufacturing system. Thus, nations started to specialise their manufacturing industry in specific processes (Gereffi, 1994).

A crucial and fundamental point that contributed to continue and increase the internationalisation process was the creation of the Airbus consortium and the starting of the A300 programme in the 1970s (Smith & Williams, 2012). Through the years, engine manufacturing started to be affected too by this internationalisation, with Rolls-Royce among the leading firms in this trend. In particular, Smith & Williams (2012) recognises how the switch between joint ventures and Revenue Risk Sharing Partnerships (RRSP) in the early 2000s represented a key driver for continuing the internationalisation process, especially in the aero engine sector with Rolls-Royce still at the forefront of it. A RRSP can be defined as:

“… a partnership agreement in which a small number of firms, normally at the instigation of one of the leading engine manufacturers, agree to invest in jointly designing, developing, and manufacturing a new engine” (Smith & Williams, 2012).

In the last 30 years, the aerospace manufacturing industry has gone through an internationalisation and globalisation138 process, becoming a global industry. The 1980s and 1990s changed the industry radically. Trade liberalisation, improvements in transport and communication, and political changes after the Cold War period are some of the factors that led to the outsourcing process (Smith & Williams, 2012). Nowadays, the civil aircraft market is growing strongly, driven by a set of features including a need of replacing aged airline fleets, an increase of the air traffic in developing countries especially in Asia, and a trend toward more fuel-efficient aircrafts (Duke University, 2016; Treuner, 2014). The importance of countries within the Asia-Pacific Area, such as Japan, Singapore, and China, has been grooving in the last decade. Developmental state policies, high-skill workforce, have fostered the regional development, attracting aerospace manufacturers like Boeing and Airbus. These have started to outsource part of their business, taking into account Asian customers’ needs in designing new products (Bowen, 2007; Smith & Williams, 2012). The competition between Boeing and Airbus has contributed to a higher innovation in term of product development, supply chain management, and business strategies.

138 "Internationalisation" refers to the geographic spread of economic activities across national boundaries. "Globalisation" is much more recent than internationalization because it implies functional integration between internationally dispersed activities (Gereffi, 1999).

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Figure 130 A representative example from Boeing showing various parts and suppliers; (Source: http://www.huffingtonpost.com/2011/01/20/a-wing-and-a-prayer-outso_n_811498.html)

Globalisation is continuing to shape the rate of production and trade, leading the change of vertically integrated transnational firms. These firms are now concentrating their efforts on innovation and value added activities. By outsourcing non-relevant activities as manufacturing and service activities, they have generated cross-border production systems. The reason behind this approach may depend on the inability to develop the necessary set of capabilities required to enter a market, as it would be resource consuming. Moreover, a firm that focuses on its core activities, will perform better than vertical integrated competitors (Gereffi, Humphrey, & Sturgeon, 2005).

Niosi & Zhegu (2010) have identified and analysed the delocalisation process implemented by large western firms to developing countries, providing a technology transfer through investments, access to global value chains (GVCs) and outsourcing. Through these channels, developing countries can acquire and develop the necessary capabilities and resources, which can pose a competitive threat to the western dominance within the industry. Multinational corporations, defined as large firms operating within and across countries, conducting global trade and investing directly abroad, are a result of globalisation. The outsourcing process is allowed by the modularity approach implemented in 165

the aircraft design and production, reducing the costs and time of the overall process, reducing the complexity of the project and of assembly and design, allowing parts to be manufactured simultaneously, facilitating the innovation.

Globally, the aerospace industry is experiencing a growth due to a set of elements, including aged fleet an increase in air traffic in Asia and Middle-East countries, and a need for more fuel-efficient airplanes (Duke University, 2016; Treuner, 2014). Consequently, the Original Equipment Manufacturers (OEMs) have increased their capacity to accommodate a new demand due to lighter materials and technology development, pushing more pressure on the suppliers to increase production (Moghaddam Zilouchian, Martinez, Koochak-Yazdi, & Murad, 2012). As a result, there is a change from traditional vertical integrated programs to a globalised one (Mocenco, 2014).

The civil aircraft industry shows also a cyclical pattern, due to the long lead times, the uncertainty in the manufacturing schedule, and the changeable trends in capital spending by customers. There is also a risk of losing high-skilled workforce, with employees moving to other sectors, due to the seasonality of the demand.

Figure 131 Global commercial aircraft deliveries between 1971 and 2011; (Source: http://aerospacereview.ca/eic/site/060.nsf/eng/00040.html )

The globalisation process introduces new challenge to the supplier base, as the distance from OEM facilities is no longer a decision criteria in suppliers selecting process. Costs, time, reliability and quality, as well as market access have become competitive factors weighting more.

3.2 Theory of Value Chain

In order to effectively analyse a complex environment such as the civil aircraft manufacturing industry, it is fundamental to implement effective academic tools and concepts.

Academia offers different approaches focused on analysing global industries, ranging from the international production networks concept, to the global production networks (GPNs), the global production systems (GPSs), the French filière concept, the global commodity chain (GCCs), and the global value chain (GVC) (Bair, 2005).

All the approaches introduced above are based on the Porter’s value chain theory. In the modern globalised economy, the value chain theory appears to be a suitable tool to understand how countries and firms are globally interconnected, by analysing the dynamics of these linkages, and understanding the related policy and social context. Kaplinsky & Morris, (2000) present three main

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reasons why value chain is a suitable tool to accomplish the task, including the growing division of labour and the global dispersion of production; the importance of efficiency for entering global markets; and the need for understanding the dynamic behaviour of value chain to entry global markets. Thus, it provides an understanding of how firms and countries behave in the global economy, assessing the competitiveness variables, and determining the distributional income of each actor within the value chain.

The Value Chain concept, introduced by Porter (1985) within his theory of competitive advantage, asserts that, company’s performances depend on the environment surrounding the company itself, relying on its value activities and on how these value activities are linked among each other, influencing the firm’s competitive advantage. Firms need to differentiate their activities to be competitive in the market. A firm can obtain a competitive advantage only if it performs these strategically relevant activities in a cheap or better way than its competitors. The value is defined as the amount buyers are willing to pay to obtain a certain product or service, and it is measured in total revenue. Thus, value activities represent physical and technological activities performed by a firm in order to deliver a product or service, adding value step by step. The value chain of a firm is within in a larger stream composed of activities performed by other companies, which are linked to the firm. These include suppliers, channels, and buyers, which composed the so-called value system (Porter, 1985).

Figure 132 Generic value chain structure (Source: https://opentextbc.ca/strategicmanagement/wp-content/uploads/sites/30/2014/07/porter-value-chain.png)

Porter differentiates between:

 primary activities, involved in the physical creation of a product, in its sale and transfer to the buyer, and in the after-sale services;  support activities, supporting the primary ones by providing inputs, technology, and resources.

Based on Porter’s value chain structure, the following scheme can be adapted to the aerospace theme,

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Figure 133 Porter's five competitive forces

3.2.1 Value chain theory evolution

The value chain concept evolved into the global commodity chain (GCC), emphasising the international and global features of today’s capitalism, where activities are functionally integrated and spread across different countries. The approach identifies any actor involved in the production and distribution of goods, and how these actors are connected with each other. The system perspective also stresses the important of considering also the linkages between different agents involved within the chain. Furthermore, global players are depicted as drivers to develop an effective supply base triggering global production and distribution systems (Gereffi, 1994; Gereffi et al., 2005).

As the word commodity widely used in the literature refers mainly to standardised products, the term global value chain (GVC) has been introduced. Despite GCC, GVC is focused on activities, which add value from raw materials until finished products, taking place within an intra-firm environment on a global scale (Gereffi & Fernandez-Stark, 2011; Smith & Williams, 2012). This approach is especially suitable for the aerospace sector, as it is so resource and knowledge intensive that it needs to be widespread among different locations and players, creating a GVC. Lead by large multinational firms, GVC is integrated by regional clusters and many smaller companies. The approach also provides a tool to analyse how local production systems are linked to the global industry, in order to understand the opportunities of growth (Elola et al., 2013).

3.3 Characterising the aerospace value chain

The civil aircraft manufacturing industry is a key high-tech pillar for European economy, with a turnover of 113.4 billion euros and almost 368,200 employees, being the second most attractive industry after the US (Geissbauer, Wunderlin, & Lehr, 2017; Griessbauer, Vedso, & Schrauf, 2016). Total exports include both final products and components sale, accounting to an average of 75% of total.

The current globalised market requires a deep form of coordination not only concerning firm positioning and logistics, but also the integration of suppliers within all the product lifecycle, satisfying the needed quality standards. This relies on a governance structure implemented in form of dynamic power centres, represented by actors within the chain with greater responsibilities than others. There are three types of governance including “legislative”, relating the setting of parameters governing the value chain as standards and regulations firms must comply with; “judicial”, regarding assessing that every actor is conforming to the parameters; “executive”, which helps firms in complying with these parameters (Kaplinsky & Morris, 2000).

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As indicated by Buxton, Farr, & Maccarthy, (2005), within the aircraft industry the governance is influenced by environmental regulations, in terms of carbon emissions and noise levels; taxation and financial regulations; company ownership and deregulation rules; company protection, as state rules protecting airlines from bankruptcy, which in turn can affect market supply and demand.

Based on the role played by buyers and producers, two types of value chains can be identified. Buyer-driven chains are directly coordinated governed by buyers, positioned at the apices of the chain, and are common in the labour-intensive industries. In producer-value chains, instead, usually large and transnational manufacturers having control of key technologies, coordinate the links within the chain, assuming the responsibilities of increase the efficiency of both their suppliers and customers. This is the case of industries with a high level of capital and technology, as the automotive or the aerospace sectors (Gereffi, 1999; Kaplinsky & Morris, 2000). This can be summarised in Table 20.

Table 20 Features of producer- and buyer-driven value chains (Gereffi, 1999)

Gereffi, Humphrey and Sturgeon (2005) define governance for GVCs, based on three determinants: transaction complexity, relating the information needed to sustain a transaction; information codifiability, influencing the opportunity to share information across parties; and suppliers’ capability. Depending on these three features, five dynamic types of governance are introduced, as contained in Table 21.

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Table 21 GVC governance structures elaborated from (Gereffi et al., 2005)

Figure 134 Global Value Chain Types of Governance. Large arrows represent information and control, while the small ones show the exchange based on price (Gereffi et al., 2005)

Governance is also affected by institutions, like FAA and EASA. The aeronautical sector witnessed different disruptive technologies changing the industry structure, as a consequence of the regulatory 170

transformation occurring between the 1970s and 1980s. The first important event was the airlines deregulation occurred in the 1970s, which led to the entrance of new low-cost players. These required smaller, cheaper, and low maintenance work airplanes, whose demand increased in the 1980s at the expenses of the large commercial aircraft (LCA). Consequently, new manufacturers entered the market as Airbus, Bombardier, and Embraer. In particular, Airbus challenged the Boeing monopoly even for LCAs, integrating new technologies developed previously for the military sector, as fly-by- wire or composite material as carbon fibre. And in order to support these new technology, subcontracting and cooperation with specialised and vertically integrated firms was chosen as main strategy, contributing to enlarge the aeronautical GVC, allowing the entrance of new players, shifting from vertically integrated firms to more globalised, and affecting the governance development, (Elola et al., 2013; Horng, 2007).

As indicated by Scott, Hedenryd, & Buxton, (2005), the governance is influenced in different areas including the environmental regulations, in terms of carbon emissions and noise levels; taxation and financial regulations, as state rules affecting the period of time an aircraft can be operated before being replaced, affecting in this way the financial position of the airlines through owning and trading assets; company ownership and deregulation, which affect the market competition; company protection, as state rules protecting airlines firms from bankruptcy that can affect the market supply and demand.

However, it should be noted that the aerospace manufacturing industry is characterised by different type of businesses within it. Consequently, based on the stage and on the actor of the value chain, different value chain theory can be implemented. For instance, if the GVC approach provides an overall representation of the industry at a global or regional level, the analysis of a certain stage performed by a certain firm may require the GPN theory. This is true for Rolls Royce within the aero engine market, which is characterised by a GPN structure, with Rolls Royce acting as a leading flag firm surrounded by its suppliers. This regards also the governance established in the value chain. Indeed, as specified by Elola, Valdaliso, & López, (2013), different types of governance may coexist within the same value chain, and different types of relationships can be implemented by the leading firm with its suppliers depending on its strategy.

3.3.1 Risk Sharing Partnership (RSP)

RRSPs represent a tendency towards internationalisation followed by aero engine makers, leading to more specialised suppliers and a division of tasks among different actors within the industry RRSP is the instrument through which OEMs spread the manufacturing process of subassemblies among different countries. Led by a flag company who initiates the project, partner suppliers acquire the right of shares coming from the product selling and long terms after-sales activities, by funding a percentage of the overall costs for R&D, as well as manufacturing and other costs. In addition, these partners also own responsibilities for design, manufacture, marketing and product support, providing resources and skills in a high cooperation. Considering the long life cycle of an engine, for instance, that could last 40 years, RRSPs represent a long-term commitment for all the firms involved in it (Smith & Williams, 2012).

RRSPs provides interesting advantages to both partner suppliers and OEMs. It helps OEMs in sharing the high costs and risk of a development programme among different partners, and in complying with lower state financial aids due to the WTO rules. Thus, it also increase the OEMs ability to be competitive and to secure a position with an airframes, as it is no longer forced to rise all the needed funding (Scott et al., 2005).

Source: Scott, Hedenryd, & Buxton, (2005)

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In order to manage the risk relating the outsourcing of non-value adding activities, major OEMs implement Risk Sharing Partnership (RSP) with tier-one suppliers, which are defined risk-sharing partners, and reducing the number of total suppliers while increasing the risk relating an aircraft development project. The partnership specifies the type and level of shared risk, how this risk is shared, associated to a certain work package, which could be a single part, a component, or a system (Wagner & Baur, 2015). The classic outsourcing model within the aerospace manufacturing industry is known “build to print”, where a supplier manufacturers or assembles a work package according to the drawings received from the buyer company. “Design and build”, instead, concerns a supplier developing the activities involved in the work package, according to certain specifications, and manufacturing the product. There is also a cost associated to the partnership, for the supplier. Finally, the design stage can be completely outsourced if there is a subcontractor responsible for all this stage. Considering the pure RSP, where a supplier is involved in all the product life-cycle, sharing profits, risk, and investment, there are two methods for non-recurring cost amortisation: mechanism 1, characterised by an amortisation based on serial production, as for work packages involved with the system, equipment, or structural areas, with a break-even point of 7-12 years; mechanism 2, defined Revenue Risk Sharing partnership (RRSP), where a supplier receives a share of the sales revenues of the final product, as in the engines area where an OEM provides the propulsion system to the final customer, creating a revenue flow with after sales activities, and a break-even point of 15 years.

3.3.2 Supply chain structure

Tightly related to the value chain theory is the supply chain concept. A supply chain is defined as

“a supply chain consists of a number of partners or components (such as suppliers, manufacturers, distributors and customers), its effective management requires integration of information and material flow through these partners from source to user.” (Samaranayake, 2005).

There are not many studies regarding aerospace supply chain studies in the literature. Koblen & Nižníková, (2013) provide an overall description of the supply chain management and framework within the aerospace industry, focusing their interest on the European context. Key stakeholders and supply chain levels are introduced, further, industry features and future challenges are identified by them.

Rose-Anderssen et al., (2009) present a cladistics classification of the commercial aerospace supply chain, describing its evolution until today. The approach, which considers the industry as a whole, identified the relevant changes to supply chain management, as agile or lean supply chain theory. Mocenco, (2014) describes the main features of the aerospace supply chain, as well as the value chain framework, providing two case examples involving Boeing and Airbus. The main challenges involving OEM and airlines were also introduced.

As stated previously, firms operating with a global value chain extend vertically their activities across different countries, subcontracting these to hosts-country firms, or creating joint ventures. Furthermore, production of modules is passed from OEMs to their supply chain, giving OEMs the opportunity to focus on product development, by sharing its costs and risk, and learning from their suppliers. This relationship between an OEM and its suppliers, which could be governed in different ways, may also introduce competitive threats to the OEM, as suppliers can learn from OEM gaining a fundamental competitive advantage (Niosi & Zhegu, 2010).

The current aerospace manufacturing industry supply chain needs to evolve, embracing automation within the manufacturing process. Currently, the supply chain is complex and affected by delays in fulfilling orders. These affect the entire supply chain network, right from the engine manufacturing stage (e.g. Pratt & Whitney developing its own new geared turbofans), to its assembly (Airbus’s new wide-body A350). The failures can be caused by the complexity level of the supply chain due to high level of outsourcing.

3.3.3 The actors

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New players are emerging, trying to overcome Airbus and Boeing’s domain. Players such as Bombardier of Canada, Embraer of Brazil, Irkut in Russia and Comac of China, all of them competing to sell single-aisle jets. Most of these companies are investing in new equipment, facilities and personnel, shifting the production focus from helicopter and business jet markets, to the airline.

The aerospace manufacturing industry is located in a bunch of countries, and are represented in the following table.

Table 22 Major aerospace firms and their locations Country Main Company Brazil Embraer Canada Bombardier France, Germany Airbus U.S.A. Boeing

China and India are emerging players in the industry. In particular, the main Indian manufacturer, Hindustan Aeronautics Limited (HAL), is mainly focused on the defence market, in addition to taxi- planes and helicopters.

The trigger to innovate the supply chain is through attributes such as the increase in order volume and price pressure, due to the entrance of new player in the market, especially from the Middle East (Gulf airlines).

The supply chain includes four main actors,

1. Original Equipment Manufacturers (OEMs), in charge of design, manufacturing or complete assembling of the final aircraft; 2. First tier suppliers, in charge of supplying sub-assemblies directly to OEMs; 3. Second tier suppliers, who deliver components to the first-tier level; and 4. Third part suppliers, delivering special components and specific process.

Other players involved in this framework are research and government institutions, and universities, being responsible for R&D tasks or educational purposes. Outsourcing has been spreading to let manufacturers comply with a grooving demand, giving more responsibilities to the first and second tier levels. These have to deal with new challenges, in terms of performances, reliability, and financial risks. An example is the new B787 Dreamliner. Here Boeing tried to reduce the number of suppliers by selecting the more reliable and trying to share the risk with more partners. To reduce the cost and delivery time, these suppliers were responsible for the entire work package they had. This led to a more effective collaboration and coordination with suppliers, reducing the overall production costs, improving suppliers’ performances, reducing the development time by sharing the work with the suppliers, and keeping production and assembly process costs low. Example of this are the Airbus programme “Extended Enterprise” or the Boeing one “Exostar”.

There is a general trend by OEMs to reduce the number of suppliers while increasing the number or risk-sharing partners. For instance, Airbus has reduced its supplier and, consequently, many aerospace parts are supplied though its 1st, 2nd, and 3rd tier suppliers (CBI Market Intelligence, 2016).

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Figure 135 Number of suppliers on selected engine platforms (Source: http://aerospacereview.ca/eic/site/060.nsf/eng/00040.html)

1.3.4 Disruptive impact on supply chain

The industry is characterised by high risk and uncertainty in all its supply chain. OEMs performances are affected by many elements, including global economy, market trends and uncertainty, oil prices, competition, and international politics (Moghaddam Zilouchian et al., 2012). In the last decade, the pressure in the supply chain has been directed on the upstream actors who have to cope with a growing demand, driven by new technological developments involving lighter materials and more fuel- efficient propulsion systems. In this complex supply chain network, even the shortage of the smallest components can disrupt all the processes, as a simple fastener. This can be caused also by aerospace regulations and changing industry practices that are causing an obsolescence of part and components, putting more pressure on the suppliers.

According to Mocenco, (2014), the aircraft demand from commercial airlines depends on a variety of factors such as trade policies, the possibility of financing a new aircraft programme, fuel prices, rentability, etc. In particular, the political and economic contexts are those which affect the long term trend of airlines. In order to maintain an efficient manufacturing system which is able to cope with the global demand, and to deal with the disruption risk, firms need to cooperate with their suppliers. Any disruption in the chain can lead to delays in fulfilling orders, or cancellations of them. This is not affordable by companies who must comply with high standards of performance and reliability. The outsourcing policy made these firms more dependent on their suppliers, and this is why supply chain management is becoming incredibly important as the manufacturers have to monitor their partners in the chain constantly. This risk also affects the availability of raw materials like titanium or aluminium. All these elements, including market competition, led firms to face a list of risks. There is also an issue related to the data integrity and security in the entire supply chain.

Treuner, (2014) analysed the disruption caused in the industry, due to the increased complexity in the supply chain, the need of a faster production rate to fulfil an increasing global demand, to the use of innovative technologies (e.g. carbon composites), a global supply chain, etc. Through conducting a survey, they highlighted how the main causes of supply chain disruption are mainly resource constraints (as materials, machines, or workers availability), communication, and quality issues, followed by suppliers’ insolvency, and environmental events. These events led to delays in order fulfilment, pushing airlines in continuing the use of aged fleets with high costs involving unplanned 174

maintenance and fuel consumption leading on to disrupting flight schedule with bad financial results. This delay also affects the development of new generation aircraft programmes. Moreover, supply chain disruption can also be caused by natural disasters or political reasons. Firms’ size also affects the probability of disruption, as small firms are more likely to be hit by such an event. The study proposes the implementation of a Supply Chain Risk Management framework (SCRM), sustained by a full commitment by a firm’s management, in order to increase supply chain resilience and manage the disruption risk. Such SCRM has to be continuously reviewed and monitored in order to be effective.

Figure 136 Ishikawa diagram of supply chain risk disruption. (Source: Treuner, (2014))

Value chain complexity increases when demand within the chain increases, for instance when just-in- time supply policy are implemented, when there is a higher product differentiation, or when new suppliers need to be integrated in a global value chain. However, the introduction of technical and process standards can reduce the complexity level, by codifying the information between partners, at the same time increasing chain flexibility (Gereffi et al., 2005).

Bowen (2007) analyses GPNs used within the aircraft manufacturing sector, providing a description of the involvement of Asia Pacific countries in the industry.

3.3.4 European Aerospace Manufacturing

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Figure 137 Passenger traffic in 2015 (Source: http://ec.europa.eu/eurostat/statistics-explained/index.php/Air_transport_statistics)

The civil aircraft manufacturing industry is a key high-tech pillar of the European economy, employing almost 368,200 people and being characterised by a turnover of 113.4 billion euro in 2015. Compared to 2014, the sector shows an increase of 17%, especially due to export sales. Total exports, indeed, account to an average of 75% of total sales in civil aeronautics, and regard final products and components sale (Deloitte, 2017). The sector is specialised in different segments, including the development and manufacturing of aero engines, unmanned vehicles, and aircrafts, as well as helicopters, equipment and systems. It also provides training and maintenance services.

Europe holds a strong leading position in large civil aircraft (LCA) and helicopters. Because of an increasing of extra-European share of procurement, developing countries are witnessing interesting opportunity of entering the market aircraft metal components manufacturing. This outsourcing trend is accompanied by more production sites established outside the E.U., for instance new site realised in Northern Africa (CBI Market Intelligence, 2016).

The manufacturing industry reveals a geographic dispersion over the continent, with United Kingdom, France, Germany, Italy, Spain, Poland, and Sweden being the main hubs (European Commission, 2015). The industry reveals a cluster organisation, which allows institutions, academia, and the industry to cooperate under the lead of different regional specialisations. The French Aerospace Valley and the European network Wings-for-Regions initiatives represent interesting examples of cooperation at a local and trans-national way. Specialised in aeronautics and space, these clusters foster innovation, being heavily based on R&D activities and allowing SMEs to remain competitive in the sector against the globalisation challenges (Schönfeld & Jouaillec, 2008).

European industry is a leading player in the large commercial aircraft (LCA) segment, with EADS Airbus being the largest firm operating on the continent and the producer of the largest commercial aircraft A380. The main players in the aero engine sector are Rolls Royce and MTU, both involved in global joint ventures with US firms, Pratt& Whitney and General Electric) in order to develop the next generation of propulsion systems according to the current need of noise reduction and fuel efficiency. Another example of joint venture is the one between the French SNECMA (part of Safran Group) and General Electric (Ecorys, 2009). The European industry plays an important role also in the avionics segment, with Airbus being the first to introduce fly-by-wire technology and Traffic Alert and Collision System (TCAS) on civil aircraft. Clusters are influenced by local governments policy and technological context, as well as by social capital a, local markets and firms and industry structure.

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3.4 Value Chain Mapping

As highlighted by Scott, Hedenryd, & Buxton, (2005), the governance structure chosen by primes and OEMs is influenced by how the governance is implemented by the airliners and the primes’ customers.

Elola, Valdaliso, & López, (2013) identify the aerospace value chain as composed of engineering and design; 1st tier suppliers in charge of the first integration; 2nd tier suppliers responsible of subsets; 3rd and 4th suppliers responsible for components, tolls manufacturing, mechanising machinery, thermal and surface treatments, testing; universities, companies, and technological centres involved in research. This structure is then integrated by OEMs in charge of integrating the engines or the entire aircraft.

The integrated value chain developed for the purposes of the present study comprises the following value adding activities:

1. R&D 2. Design 3. Parts and components manufacturing 4. Sub-systems / sub-assemblies 5. System integration 6. Marketing and sales 7. Post-sale services 8. End-of-life

R&D

The main leading firms in the industry heavily invest in R&D activities, trying to constantly innovate their product in order to gain a larger competitive advantage against competition. Even if the European investment in R&D are still lower compared to the United States, for instance, there are many research programmes under development within the frame provided by Horizon 2020 that support the R&D activities within Europe.

Design

The development programme of a new aircraft is the longest and the costliest phase within all the different segment of the aircraft industry. For instance, considering the LCA segment, development costs for the A350 were estimated to be over US$ 15 billion. It can last from five to ten years, while the aircraft profitable curve is very long, in terms of 10 and 18 years before a new aircraft becomes profitable. Moreover, this phase is also very costly.

The high costs and long time required, as well as the large resources required in terms of facilities, capabilities, etc., represent the main entry barriers to the aircraft market, especially in the LCA, regional, and business aviation segments. This appears to be a simple scenario in the aerospace sector considering the fact that there are only a few large companies capable of developing a complete development of a new aircraft (e.g. Airbus, Dassault).

In order to become able to sustain the high costs and the complexity associated with the design stage, the design phase has been shared across different firms, defined risk partners, specialised in providing systems like engines or airframes. These risk partners are actively involved in the design of these systems, cooperating with the main leading firm in charge of the overall aircraft design and final integration. Moreover, they keep the ownership of the system they developed, being able to sell it to other companies. Considering the different innovations introduced in the aerospace sector, composite materials appear to be the most interesting due to the weight reduction they allow. For instance, the A350 is made up of 50% more composites than its predecessors.

Parts and Components Manufacturing

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Firms involved in this stage provide the necessary components to realise aircrafts sub-assemblies, as rotors or antennas. Therefore, there are even non-specialised firms, which are both involved in different industries like automotive or suppliers to non-aerospace customers. However, firms operating in consumable products, as fasteners or screws, may use large specialised distributors in order to provide their products (e.g. KLX).

Table 23 Typical parts and components of the aircraft Software Electronic Components Mechanical Components Wiring Aluminium Components

Sub-Assemblies / Sub-Systems

Within the present value chain activity, there are firms providing the sub-assemblies and sub-systems, and defined modules that are assembled into the final aircrafts. These modules include airframe, propulsion systems, avionics, fuel systems, landing gear, etc. Firms operating at this stage are often involved into a risk share schemes as mentioned previously.

Table 24 Typical sub-systems for the aircraft Fuselage Wings Engine Landing Gear Hydraulics Avionics Electrical Power Supply Interior Systems (including support systems)

For instance, considering the airframe production, this is shared across different firms located around the world.

Figure 138 Sub-systems value percentage (Wipro, 2009, in Bamber & Gereffi, (2013))

Figure 138 displays the sub-systems value as a percentage of the overall aircraft value. The two main sub-systems with the highest values are the airframe and the engine. These, indeed, are those requiring the highest costs, time and resources to be developed and designed. Within the airframe, wings and fuselage account for almost all the value, due to the extended use of composite materials.

Final assembly and Systems Integration

The sub-systems and sub-assemblies are then assembled and integrated into the final aircraft. Nowadays, this process is much faster, with a production rate of one aircraft in less than one week for the Boeing 787 Dreamliner. Although the assembling process is controlled by the final manufacturer, 178

firms involved in risk-sharing schemes have an important role in ensuring the correct integration between the different sub-systems.

Currently there are different categories of aircraft available on the market. Large commercial aircraft (LCA) and regional jet operations are limited in number compared to the general aviation segment. The reason regards especially the high development costs.

Figure 139 Aircraft manufacturing process (Handbook for automation, Springer)

Figure 140 Fuselage assembly process (Handbook for automation, Springer)

Figure 141 Wing assembly process (Handbook for automation, Springer)

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Figure 142 Aircraft overall assembly process (Handbook for automation, Springer)

Marketing and Sales

Globally there are four main end market segments, which are served by the European manufacturers, and which represent the customers of the industry: passenger airlines, cargo operators, lessors, and general aviation operators. In particular, passenger airlines may be state-owned, letting the government be the industry customer.

Final aircraft manufactures usually play an important role at this stage and, sometimes, they can interact directly with final customers. This allows manufacturers to offer high flexibility customer services, as for the Boeing 787 that has different engines configurations for final customers, also involving an interaction even with the engine manufacturers (e.g Rolls Royce and General Electric).

The selling phase of an aircraft can occur through different selling channels, including:

 Lessors;  Export credit agencies;  Major aircrafts finance group.

Post-sales services

After sales services include primarily maintenance, repair and overhaul services (MRO), parts supply, technical training, customer support, and flight simulators provision. As aircraft maintenance is carried out at specific times, or it is a function of mileage, it is required that the parts be supplied effectively and, consequently, they have to be manufactured in high mix and low volume, due to their demand in form of one-off, and needs to be fulfilled within 24 or 36 hours. Consequently, firms do not have any more in-house inventory, as it is hosted by service providers.

Spare parts and components for civil aircrafts represent a critical stage, as airlines require high quality products delivered on time. Due to the current long manufacturing processes, there is a need to keep a safety inventory that, in turn, contributes to rise the overall supply chain costs. The spare parts are characterised by less frequently used parts, and frequently used ones. In particular, they respect the 80/20 Pareto’s law, as the 80% of parts are needed frequently and are the main source of airlines demand. The supply chain structure associated with the segment includes an airline warehousing, containing a safety stock in order to maintain a sufficient level of customer satisfaction due to the long manufacturing lead times. Frequently used parts are ordered periodically, while less frequently used parts are ordered and delivered in 24 hours by a supplier that, in turn, keeps a stock of parts as low as possible because of their high costs (Liu, Huang, Mokasdar, Zhou, & Hou, 2014).

The business of supplying parts to MRO operations is becoming very profitable; thanks to the growth of airlines fleets. For instance, parts can be sold at three times their manufacturing price. Looking at the MRO services; the engine overhaul, line maintenance, and components overhaul are the ones with the large market share estimated for 2016-2025.

End-of-life

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It is estimated that 150 passenger aircrafts retire from service every year, while the current practices of aircraft materials valorisation account on average for 60% aircraft parts in weight (Airbus, 2008). Consequently, how to efficiently valorise, disassemble, dismantle, and recycle aircraft parts are topics that are becoming increasingly important.

When an aircraft reaches the end of its useful flying life, there can be different destinations for it. Firstly, the aircraft is mandatorily decommissioned, even if it is parked for a short period. At this stage, ¾ of aircrafts return to service (Airbus, 2008). After that there are different scenarios. For instance, a possibility for disassembly. Parts and components go through a maintenance process, to be repaired or replaced, before the aircraft can return to operations, and include the scenario of being sold to a new operator. Aircrafts retired from operations, instead, are dismantled. While non-useable parts are recycled, or trashed, all the working parts are refurbished and used as spare parts for after-market services, naturally after receiving a re-certification (e.g. MRO). Additionally, the aircraft can be simply stored, waiting for further end-of-life operations or, it can become part of an aircraft museum.

Differing from the European automotive industry, where there are legal requirements concerning the end-of-life operations managements, the aerospace manufacturing industry still lacks them. However, due to the environmental concerns regarding the recycling process, there is drive to introduce adequate regulations.

The following is the AS-IS value chain that exists in the current form and is followed by an OEM case study identifying various actors and collaborations / initiative

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The Aero Engine Value Map – with Key Actors

Airbus General Electric Safran NPO Saturn Safran

CFM international PowerJet Boeing

Honeywell

Dassault

MTU Aeroengine Pratt & Whitney Japanese Aero Engine manufacturers are considered OEMs as the Engine Corp engine is the second greatest cost in an aircraft, it is Embraer complex, and it ensures more of the competitiveness features of an aircraft as range, fuel consumption International Aero Engine (IAE) Source (Bamber Gereffi 2016, competing in the global aerospace supply chain) Bombardier st 1 tiers are free to choose their supply base, some of them preferring low cost countries as China, Mexico, India, etc. SAAB Rolls-Royce Russia is not considered ready to compete globally (source: competing in the global aerospace supply chain)

Airbus Leonardo Snecma Silvercast Safran ATR

Aero-engine market Evektor - Oligopolistic market Aircraft - Joint ventures business models - CFM International (JV between General Electric Aircraft Engine General Electric Pratt & Whitney and Safran) - International Aero Engine (JV among Pratt&Whitney Canada, MTU Engine Alliance Aero Engine and Japanese Aero Engine Corporation) Fokker - PowerJet (JV between Safran and NPO Saturn) (dead) - Rolls-Royce - Snecma (part of Safran)

Pilatus Aircraft Williams (Business Jet) International

LCA Primes Engine OEMs (Tier 1 suppliers)

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3.5 Assessment of the European value chain and innovation capacities

Innovation can be the key to fulfil both industry and customers’ needs, respectively demanding for high quality products and better work conditions against aging workforce, and for quieter, faster, and cleaner aircrafts (Butterworth-Hayes, 2013b). In order to understand disruptive technologies that may be introduced by 2030, a value proposition is introduced. Technologies impact on the current value chain is discussed, highlighting key benefits and implementation barriers, followed by a description of future product segments.

For the purpose of this assessment, four key performance indicators are identified and can be summarised as follows;

1. R&D 2. Technology readiness & leadership 3. Skilled workforce & Education 4. Innovation 3.5.1 Value propositions

The present value proposition aim is to allow the European industry to keep its current competitive advantage, against the increased socio-economic uncertainty, by investigating a set of disruptive technologies and future product segments that will provide increased value across the value chain, fulfilling both industry and customers’ needs.

New materials, or processes, bringing better performances and efficiency; emerging markets; new business or service models; these are only few examples of how disruptive innovations can occur in the aerospace industry. However, due to regulatory framework, long development times, aircraft lifetime, and the industry’s conservative behaviour, the time taken for innovations to mature in the aviation industry I much longer than other industries (Alix Partners, 2015; Felder, 2011).

The table below (Table 25) provides an assessment of disruptive technologies belonging to five innovation themes, based on a set of parameters. Each innovation theme is briefly analysed, and the impact of technologies with highest score is discussed. Some of these technologies have been already implemented on small scale. For instance, VR has been used by Ford in design since 2000 (Bellini et al., 2016). As the reader will easily note, some technologies may overlap each other in certain applications. Technology Disruptiveness, the disruptiveness assessment framework developed by the Institute for Strategic Management at Vienna University was used to analyse the technologies

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Table 25 Disruptive technology assessment

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To be able to understand and assess the value propositions, five high-level disruptive technologies were identified based on Table 25. Each to the assessments made were qualitative and the entire list was finally assessed against the four indicators as mentioned above.

3.5.2 Research & Development Focus Area: Type: Technology: Score: 4 - Europe has a competitive advantage in the global market Summary:

Digitisation can be considered as the future backbone of the innovation process in aircraft manufacturing. By implementing the industry 4.0 concept, manufacturing activities will be merged even more into a digital world, through technologies like Internet of Things (IoT), cloud computing, automated systems, and small low costs devices with high computational capacity. Griessbauer et al., (2016) estimate an annual cost reduction of approximately 5% for A&D by 2020. The concept is summarised in Figure 143.

Figure 143 Industry 4.0 and relating technologies (Griessbauer et al., 2016)

IoT will provide the physical network allowing the digital revolution, by contributing to real-time data collection, and providing:

 A deep horizontal integration through the value and SC, ensuring flexibility, more control, and increased operational performances;  A vertical integration inside the firm, realising the so-called smart factory, ensuring operational efficiency, low costs, high quality, and environmental sustainability (Wang, Wan, Li, & Zhang, 2016).  Integration of the product in the integrated network, allowing the real-time collection of data regarding assets status for MRO purposes.

The combined integration will increase risk management and control, within and outside the firm, supporting the decision-making to proactively act against potential disruptions. This will be translated into a more “pull” production system, minimising current delays and wastes, and will result in higher competitiveness

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According to the current “servitisation” trend, the end-to-end digital integration of all engineering activities in the value creation process, including the entire product life-cycle, will ensure better customer satisfaction and maximum asset availability.

Most reports and media publications suggest that Industry 4.0 is still in its infancy across manufacturing sectors as it is heavily reliant on the adoption of widespread digitisation. Aerospace is no different as verified during a survey compiled by PwC completed by a range of aerospace manufacturing companies in 2016 shown in Figure 144.

Figure 144 Level of Digitisation Across Aerospace Companies (Griessbauer et al., 2016)

A lot of Industry 4.0 digitisation principles are already used by a significant proportion of aerospace manufacturing companies. However, 44% of the companies surveyed are expected to join the existing 32% at a high level of digitisation over the next five years, which key investments expected in Vertical Value-Chain Integration and Digital Business Models. The reason an increasing number of aerospace companies are investing in digitisation is clear, adopting a high level of digitisation is expected to reduce costs by 3.7% per year and create additional revenue at a rate of 2.7% per year (Griessbauer et al., 2016). Supporting this, Roland Berger Aerospace and Defence Management Issues Radar reported that 98% of top executives in aerospace believe that digitisation will heavily affect the industry in the next five years (Russo, 2016). These figures highlight how widespread digitisation has the potential to disrupt the aerospace manufacturing industry.

The trend digitisation covers a multitude of technologies and innovations that all need to collaborate to enable widespread digitisation from embedded sensors to improved mobile data coverage. From an aerospace perspective, three technologies which could disrupt the industry are Internet of Things (IoT), Cyber-Physical Systems (CPS) and Blockchain as summarised below.

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Figure 145 Internet of things - technology summary (Alena, 2016; Banafa, 2016; Warwick, 2016)

Figure 146 Cyber Physical Systems – technology summary (Atkins & Bradley, 2013; Energetics Incorporated, 2013; Winter, 2008)

Figure 147 Blockchain - technology summary (Buck, 2017; Cavalieri, 2017; Kim & Kang, 2017)

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In summary, digitisation and the realisation of Industry 4.0 beginning. Businesses throughout the manufacturing sector are starting initiatives and investing in technologies that will enable an even more connected world by 2050. Based on the above assessment, it can be concluded that Europe has a huge competitive advantage in terms of R&D.

3.5.3 Innovation Focus Area: Type: Technology: Score: 4 - Europe has a competitive advantage in comparison with Asian markets Summary:

Advanced materials directly influence aircraft market success in terms of reduction in weight and operating costs (e.g. fuel consumption), and providing better mechanical properties compared to metallic parts. Composites have represented one of the most relevant innovations recently (Bamber & Gereffi, 2013), as depicted in Figure 148, especially due to weight reduction.

Figure 148 Composites in aircraft

Regarding different material family, like ceramic, polymer composites, and self-healing materials shows a high potential for disruption. They could allow self-repair while aircraft is still on flight, increasing overall reliability and safety, and facilitating MRO activities parallelly (Hager, Greil, Leyens, Van Der Zwaag, & Schubert, 2010).

Moreover, using advanced materials in the production of high-level assemblies reduces the number of task needed but, at the same time, will require new inspection and testing approaches.

The ongoing desire to make aeroplanes lighter and smarter continues to make the pursuit of advanced materials a disruptive trend. The ongoing push for lighter aircraft stems from the pressure for greater fuel burn efficiency which is continually driving aerospace manufacturers to incorporate and use new materials and existing materials that were once thought unrealistic to machine (King, Inderwildi, & Carey, 2009). Forty years ago, aluminium was the disruptive metal with as much as 70% of the metal being used on the aircraft. As highlighted in Figure 149 that number is around 20% today, as the latest models are predominantly made from composite materials due to their superior strength to weight ratio and corrosion resistance. The widespread use of composites on Airbus’s A380 led to a 17% reduction in fuel burn by passenger seat (Ingenia, 2008).

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Figure 149 Distribution of Materials on Boeing 787-Dreamliner(Atwater, 2013)

Composite materials are materials that are made from two or more separate materials which each have different physical or chemical properties meaning that when combined, the resulting composite provides superior mechanical or chemical performance to the individual materials. This term is broad and covers a wide range of materials meaning that the widespread use of composites might not increase and disrupt to the same extent it has done in the past four decades. However, aerospace will continue to drive the conception and implementation of composite materials to achieve disrupting benefits such as self-healing properties, increased strength to weight ratio, reduced manufacturing costs and morphing capabilities. Three key composite material technologies are summarised as follows.

Figure 150 CFRP Technology (Ingenia, 2008; marketsandmarkets.com, 2017; Nayak, 2014)

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Figure 151 Self-healing materials (Celik, 2015; Das, Melchior, & Karumbaiah, 2016; GVR, 2017)

Figure 152 Piezoelectric materials (GVR, 2016; Qiu, Wang, Huang, Ji, & Xu, 2014; Rambabu, Eswara Prasad, Kutumbarao, & Wanhill, 2017)

Very few materials today are made from one single element due to the increase in material science technology. Furthermore, the continued material development and improvement in the respective manufacturing processes will see an increase in composite materials throughout the AMI. The beneficial properties for advanced materials in AMI is long meaning this trend will continue for the foreseeable future. Innovation being the top priority, Europe has a huge competitive advantage when compared with developing and Asian markets. The data above serves as clear evidence, though the split in market is mainly between Europe and US.

3.5.4 Skilled Workforce & Education Focus Area: Type: Technology: Score: 1 - Europe has a disadvantage in comparison with global markets Summary:

ALM is currently implemented on small scale within a wide range of activities, as R&D and design in the form of rapid tooling and prototyping, parts and components manufacturing, and MRO services. It ensures weight, material waste, and components reduction, increasing durability and lower costs. 191

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Additive techniques as 3D, 4D, and multi-functional printing may impact on:

 Spare parts manufacturing, whose current SC suffers due to long delivery time and high costs, caused by long traditional manufacturing processes, (Liu et al., 2014).

 Part and components manufacturing.

Benefits include high flexibility in the manufacturing process and in its SC, having a positive impact on warehousing, transportation, and packaging; establishing a parts on demand approach; ensuring shorter lead times, smaller inventory, and lower shipping and tooling costs; manufacturing parts according to “first the right” rule. ALM will require less human labour needed for assembly and transportation, and an increase in shipping volume with related cost benefits. Parts could be manufactured closer to customers, according to distributed manufacturing, with faster response. Thus ALM would become shorter and agile (Liu et al., 2014), while manufacturers might want to produce in-home components or spare parts, instead of outsourcing them.

Additive Manufacturing (AM) processes are already used to create various components of commercial aircraft. The present focus is on using AM techniques which produce parts of limited quantities which are difficult to produce using traditional casting and machining methods (Nathan, 2015). Currently, the most prominent uses of AM have occurred on jet engine components with both GE and Rolls-Royce investing heavily in this area in the past few years (Worstall, 2013). For example, GE introduced their LEAP A1 engine in 2016 which was the first new engine design to contain AM components (Kellner, 2015). Figure 153 displays the new nozzle design, 19 of which are used in a single LEAP engine and have dramatically improved its all-round performance. AM has reduced the part count for this assembly from 18 to 1, they’re approximately 15% more fuel efficient than the previous design and are five times more durable. This engine design is both Federal Aviation Administration (FAA) and European Aviation Safety Association (EASA) approved and production has begun with over 10,000 orders placed valued around $145billion (Winick, 2017).

Figure 153 GE Leap Engine Fuel Nozzle (Kellner, 2015)

It could be argued as some AM processes are in full production, these are no longer a disruptive technology. However, the term “additive manufacturing” covers many processes, many of which are yet to reach their full potential or even be discovered. Supporting this, Siemens estimate that improvements to current processes in the next five years will make them up to 50% cheaper and 400% faster (Columbus, 2015). There are many possible future applications for AM in aerospace ranging from creating multi-functional structures or products to manufacturing products remotely on demand. The three key additive manufacturing technologies identified in this report are summarised as follows.

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Figure 154 Multi-functional structures (Panesar, Ashcroft, Brackett, Wildman, & Hague, 2017; University of Nottingham, 2017; Werkheiser, 2014)

Figure 155 4D printing technology (Al-Rodhan, 2014; Goehrke, 2014; marketsandmarkets.com, 2015)

Figure 156 Mobile AM technology (Lim et al., 2012; Nathan, 2017; Welte, 2016)

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AM is established within AMI; however, the trend can mature further and future applications are continually being developed. The improvements in AM require further research to be completed in materials science and relevant automation technologies. Though a score of 3 would be more apt for AM if assessed under R&D. However, Europe lags behind in the area of AM in terms of skilled work force and they face still competition from China, Japan and the US and hence the score of 1.

3.5.5 Technology readiness & Leadership Focus Area: Type: Technology: Score: 3 - Europe has a fair advantage in comparison with global markets Summary:

Developed in the 1990s for the videogames industry, nowadays Augmented Reality / Virtual Reality (AR/VR) are witnessing a new surge, due to technology developments and new investments. Merging the real with the digital world, manufacturing is a perfect context for AR and VR, with currently application concerning operators’ support, remote inspection, and design (Frigo, Silva, & Barbosa, 2016).

Through portable devices, AR may be implemented for:

 MRO training and support;  Assembly, and other in-house processes, providing information support.

Similarly, VR may be a concern in:

 Training;  Remote maintenance and inspection;  Design cooperation;  Customer involvement in the design.

Ease of use and user friendliness are the major benefits, while specific benefits rely on particular application. For instance, VR in design can overcame the constraint represented by geographical distance, while in training it may reduce costs and learning time.

AR&VR is still very much in its infancy compared to the other technology themes, however the industry is forecast to boom over the next 10-15 years. This is highlighted by the total market value forecasts to be $80bn in 2020, $569bn in 2025 and $855bn by 2032 (Citi GPS, 2016). In terms of market share between AR&VR, AR is forecast to overtake VR and generate far greater revenue by 2021 as demonstrated in Figure 157 (Merel, 2017).

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Figure 157 AR&VR Revenue Forecasts (Merel, 2017)

Technically, augmented reality has been used in aerospace for some time. The digital flight altitude indicator displayed in Figure 158 is an example of a VR tool that has been used since the mid-1970s to allow pilots to adjust orientation whenever visibility was poor. The commercial inception of Heads Up Displays (HUDs) in 1975 has contributed to a huge reduction in aviation accidents.

Figure 158 Flight Altitude Indicator (Citi GPS, 2016)

Adopting AR&VR provides several benefits to a businesses and industries. From a manufacturing perspective, AR&VR could provide key benefits including (Robinson, 2017);

 Reduced work times  Faster problem solving  Easy access to data  Reduced maintenance time  Reduced production downtime  Increased error prevention  Faster, more effective training

All the above are benefits that will be achieved by the aerospace industry through the adoption of AR&VR technologies, three of which are summarised below.

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Figure 159 AR&VR training (Deal, 2017; Ismail, 2017; Robinson, 2017)

Figure 160 AR&VR CAD/CAE Technology (Bellini et al., 2016; DAQRI, 2016; Ismail, 2017; Robinson, 2017)

Figure 161 AR&VR Task Assistance Technology (DAQRI, 2016; Robinson, 2017; Sponge UK, 2015)

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AR&VR technologies have multiple applications in the AMI meaning that as the technologies mature, this trend could significantly disrupt the industry. The main areas of improvement would come in labour productivity and MRO reduction. Nevertheless, the technology readiness & leadership in the area of AR&VR is fair, again stiff competition from the Asian and US markets being the reason for a score of 3.

3.5.6 Additional Areas of Interest: Automation

Automation refers to a wide range of technologies, including robots for automated manufacturing activities; human-robot collaborative systems; automated software analysing complex dataset.

Currently, automation has been implemented mainly within the manufacturing and assembly process, being a valid solution to reduce cost and improve quality and ergonomics, despite high initial costs (Sarh, Buttrick, Munk, & Bossi, 2009). It can increase productivity and flexibility, while reducing waste, processes steps, space obstruction, and need for human operators (Felder, 2011; KUKA Aerospace, n.d.).

Due to the massive amount of data provided by future extensive integration, specialised software in Big Data analytics will become essential, as deep learning technology.

137

Aircraft data generation (TB/Year)

2012 2022

Figure 162 Aircraft data generation (Aviation Week, 2016)

Deep learning will contribute to:

 The overall integration along the value and SC, with better control and risk management;  Analyse large dataset (Duke University, 2016), being integrated with automated systems on the assembly floor, enabling JIT and JIS  MRO, which will become automated, with “self-conscious” systems able to change functional parameters while in flight, and to automatically collect and analyse information (Keegan, 2017).

Deep learning systems can ensure the already mentioned real-time monitoring, ensuring better decision-making and management processes. Product will witness a highly update in terms of capacity, with deep learning technologies allowing unmanned aircrafts operations, being “self- conscious” of reality.

Another area of interest is robotics. Robotics have been seen in manufacturing for some time now, particularly in the automotive industry. During the early robotics years (1993-2007), it is estimated that the adoption of robotics provided a 0.4% increase to overall productivity statistics. It may not seem 197

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry much, however, it is more than the revolutionary invention of the steam engine which is estimated to have contributed 0.3% to productivity between 1850 and 1910 (Manyika et al., 2017).

Robotics and automated processes are becomingly common throughout aerospace manufacturing sites for a variety of processes. The most common uses of robotics and automation in aerospace include operations such as: Drilling, Fastening, Welding, Inspection, Sealing and Dispensing. An example of a recent introduction of robotics and automation to aerospace manufacturing is at Boeing’s Everett plant in Washington State where a KUKA production line has been installed to drill and rivet fuselage sections together, reducing the risk of workers incurring injuries from repetitive tasks (Tieman, 2016).

Similarly, to additive manufacturing, robotics and automation may seem like a technology theme that is no longer disruptive. However, the current adoption rate of automation is relatively low compared to that of the automotive industry. An increased adoption rate, combined with new automation technologies such as machine learning and HRC are predicted to increase productivity growth from now until 2065 by between 0.8% and 1.4% (Manyika et al., 2017).

The forecast sales figures of industrial robots in Figure 164 highlights the predicted increased adoption rate. Notably, in 2016 HRC’s only represented 3 percent of industrial robots sold. Fast-forward to 2025 and 34% of all robot sales are forecast to be HRCs as demonstrated in Figure 163 (Glaser, 2017).

Figure 163 Expected Growth of Traditional and HRCs (Glaser, 2017)

This report has identified three automation technologies that could go on to disrupt the aerospace industry as summarised in Figure 165. Notably, standard production robots are included. This is because although the technology itself is well developed and there is widespread implementation in the automotive industry, the adoption rate in aerospace is forecast to increase significantly.

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Figure 164 Robots Technology (Davids, 2017; Glaser, 2017; Tieman, 2016)

Figure 165 Human robot collaboration summary (Doral, 2015; Glaser, 2017; KUKA, 2017)

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Figure 166 Deep learning technology (Ambur, Schwartz, & Mavris, 2016; Tractica, 2016).

Conclusively, advanced automation technologies will play a major part in the future of the AMI. The disruptiveness will range from the widespread adoption of established industrial robots to introducing HRC elements such as exoskeletons and interactive robots. Deep learning will fuel advanced automation developments, but there are considerable cultural and legislative hurdles to overcome first.

3.5.7 Additional Areas of Interest: Product disruptions

Driven by a need for more fuel-efficient aircrafts (Butterworth-Hayes, 2013b) current design concepts are going to undertake a gradual innovation process improving efficiency and costs by 2030 (Wrede, 2014). The long period is likely to witness relevant revolutions in aircraft design, with new product segments by 2050, which will introduce new manufacturing challenges.

High-speed passenger aircraft, integrating supersonic or hypersonic technologies, will be an incredible breakthrough in aviation, especially in BA and freighters. Airbus and Japan Aircraft Development Centre estimates 500,000 employees and a turnover of € 3.5 billion p.a. by 2030 in the hypersonic industry. For instance, Airbus supersonic concept, will provide a valuable means of transportation for both wealthy passenger and cargo operations, travelling from Paris to New York in only one hour. But there are several issues such as regulations and sonic boom that needs to be resolved before such technologies can become a reality (Musielak, 2016).

Blended wing-body design will introduce new challenges for manufactures. The integration between airframe and engine, to reduce noise and increase aircraft efficiency, will require a deep collaboration among all partners involved in sub-systems manufacturing (Early, 2000). Despite considering each sub-assembly as stand-alone, concurrent engineering practices needs to be establish, ensuring the best efficiency possible and stressing the already established relationship between engine OEMS and primes.

Modularity aims to increase customers’ needs fulfilment. Considering the Airbus concept, it will increase airlines flexibility in accommodating both passengers and cargo needs by allowing to choose the right combination of cabin modules. Thus, it may be a solution to sustain the lower demand for every LPA, changing the cabin modules to maximise aircraft load with both passengers and goods. Modularity can be extended to the fuselage itself, as the Clip Air project, ensuring intermodal transport between air and rail.

All-electric aircrafts (Butterworth-Hayes, 2013a), present another breakthrough in aviation, implementing electric systems instead of traditional mechanical components, potentially displacing hydraulics industry. 200

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Disruptive New product Current issues technologies segments Digitalisation High-speed aircrafts Manufacturing needs Materials Electric-propelled aircraft ALM Product needs Modular aircraft Automation Blend wing body AR / VR

2017 2030 2050

Figure 167 Disruption timeframe

3.5.8 Summary

The discussed technology and product disruptions will be subdued to new skills and knowledge needed by firms, concerning automation, data analytics, and advanced materials. Considering Table 26, assessing the current state of European capabilities concerning discussed innovation themes, skilled and workforce education appears to be the most critical threat.

Table 26 European competencies assessment (European capabilities were subjectively assessed, after having reviewed several research initiatives and have scored the commitment in four areas. The scoring, is between 1 – 4, 4 given for the criteria that Europe has a competitive advantage.

New opportunities can arise for existing and new providers specialised in IT training, digital services, and related hardware, especially due to firms outsourcing digital services because of skills issues. The current trend in “servitisation” will continue, increasing even more the geographic dispersion of the value chain. Firms will benefit a deep integration along the value and SC, including end-customers products as aircrafts and their modules. Primes and 1st tier suppliers could implement a better control on both in-house processes and on SC, against potential disruptions. The SC will become shorter, using advanced data-analytics to precise forecast demand. In the long period, it is reasonable to assume large assembly facilities heavily automated, less labour-intensive (Boeing Commercial Airplanes Market Analysis, 2016). New product segments and upgraded aircraft design will introduce new challenges along the value chain, therefore providing a new opportunity of gaining competitive advantage through product differentiation.

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Recommendations for Increasing Resilience. Supply Chain Management, 14(3), 7–12. Retrieved from http://e-citations.ethbib.ethz.ch/view/pub:150707 University of Nottingham. (2017). Advances in Multimaterial and Multifunctional Additive Manufacturing. Retrieved from https://www.nottingham.ac.uk/research/groups/cfam/documents/esprc-centre-final-report-2017- web-2.pdf Wagner, S., & Baur, S. (2015). Risk Sharing Partnership (RSP) in Aerospace: The RSP 2.0 Model. Supply Chain Management, 3, 7–13. Wang, S., Wan, J., Li, D., & Zhang, C. (2016). Implementing Smart Factory of Industrie 4.0: An Outlook. International Journal of Distributed Sensor Networks, 2016. https://doi.org/10.1155/2016/3159805 Warwick, G. (2016). Internet Of Things To Change Aircraft Design And Manufacture. Retrieved July 29, 2017, from http://aviationweek.com/connected-aerospace/internet-things-change-aircraft- design-and-manufacture Welte, T. (2016, December). Solving Aircraft Overload With 3D Printing. Aviation Week Network. Retrieved from http://aviationweek.com/connected-aerospace/opinion-solving-aircraft-overload- 3d-printing Werkheiser, N. (2014). Overview of NASA Initiatives in 3D Printing and Additive Manufacturing. 2014 DoD Maintenance Symposium. Retrieved from http://ntrs.nasa.gov/archive/nasa/casi.ntrs.nasa.gov/20150002612.pdf Winick, E. (2017). Additive Manufacturing in the Aerospace Industry. Retrieved January 3, 2018, from https://www.engineering.com/AdvancedManufacturing/ArticleID/14218/Additive-Manufacturing- in-the-Aerospace-Industry.aspx Winter, D. (2008). Cyber Physical Systems – An Aerospace Industry Perspective. Retrieved from https://www2.ee.washington.edu/research/nsl/aar-cps/winterrev4.pdf Worstall, T. (2013). Both GE and Rolls Royce Are To Use 3D Printing To Make Jet Engines And Violate Engineering’s Prime Commandment. Retrieved January 3, 2018, from https://www.forbes.com/sites/timworstall/2013/12/02/both-ge-and-rolls-royce-are-to-use-3d- printing-to-make-jet-engines-by-violating-enginererings-prime-commandment/#65e583a73374 Wrede, R. Von. (2014). Rainer von Wrede.

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4 Rolling stock

This chapter explores the value chain of a crucial component of the European rolling stock industry, the manufacture of high-speed trains. As the whole value chain for the manufacture of rail rolling stock is highly complex and too extensive to be covered in this report, we have decided to focus on the high- speed segment which involves a supply chain with high technological content, complexity in design and manufacturing. Although the market for high-speed trains remains a small business in terms of the revenues generated (i.e., around one-fifth of the new vehicle business), this type of rolling stock uses a large volume of technology-intensive solutions due to the size of the trains, their operation in open 139 environments, the speeds they reach, and the safety and security standards imposed by regulatory bodies. Moreover, work published in the Deliverable D2.2 of this project demonstrated the substantial growth of the high-speed rail segment in the recent years, a market in which European manufacturers have been particularly successful. As reported by a study on the competitiveness of the European railway industry, ECORYS (2012), European high-speed rail manufacturers enjoy an excellent reputation worldwide as suppliers of high-quality products of outstanding reliability. Not only European OEMs use high-performance components and offer highly integrated solutions, but those components are delivered by specialised and long-term experienced Tier-1 suppliers who are also active in non-EU markets where high-speed networks have been intensively expanding. For European manufacturers, it is therefore of crucial importance to retain the leadership achieved in this market segment vis-à-vis the new Asian entrants, who, after building upon foreign high-speed technologies and know-how, have completely changed the global competitive landscape. This and other demand-side factors, evidenced in the Deliverable D2.2 of this project (such as the challenges imposed by lower cost modes and the emergence of new mobility trends) show the pressure imposed on European manufacturers to continue providing high-content and high-quality technological solutions at competitive prices.

Among the technological components of high-speed rail vehicles, of particular importance are those systems that ensure the safe operation of the trains. Safety plays a vital role in the future expansion of high-speed rail worldwide. As pointed out by Torkel Patterson (the Vice-Chairman of the International High-Speed Rail Association), “of the utmost importance [to ensure that high-speed rail continues to flourish into the future], must surely be the absolute, and almost reverent, commitment to safety” (Petterson, 2017). Furthermore, with the increasing development of high-speed rail, the need for higher quality of train safety control technologies is of primary importance (Wang, 2017). In a more general view, control command and signalling systems represent a high-tech segment of the railway industry. Besides vehicle technology, they are at the peak of technological development in the field of rail transport (SCI Verkehr, 2013) and are gaining significant importance in the value chain as they are the backbone of the digital revolution. According to Schwilling (2017), regarding train management systems, technologies which integrate the control of other onboard sub-systems are increasing their “share of wallet” regarding the overall price of vehicles. In light of this evidence, we decided to explore the performance of the EU industry in the production of train control systems used in high-speed rail.

The chapter is divided into three sections as follows:

Section 4.1 presents a review of current global trends in the supply of railway rolling stock. Relevant market figures and trends that help to better understand the high-speed rail value chain are exposed. In particular, we explore the increasing concentration of rolling stock manufacturers and the increasing role of Tier-1 suppliers in the supply chain. The section builds on a comprehensive picture of the current state of the rolling stock manufacturing industry portrayed in McKinsey & Company (2016) and on analyses of rail market specialists such as SCI Verkehr, UNIFE and Roland Berger.

Section 4.2 describes the general structure of the high-speed train supply chain. First, it describes the general structure of the rolling stock supply chain covering the major technological domains and the relationships between the major actors. Second, it presents the relevance of the different technological components of high-speed trains for the actors involved in their development. Third, it compares some corporate figures of the major high-speed assemblers among the 13 companies identified worldwide. Finally, it shows a brief state-of-the-art review of high-speed train control systems worldwide followed by the identification of some of the principal actors in this segment. Among the different bibliographic

139 Contrary to, for example, the metro which operates in a closed environment. 207

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry resources used in this section, it is worth mentioning two widely used sources: a study of the manufacture of passenger rail vehicles in the U.S. (CGGC, 2010) and a study on technology assessment in the high-speed train industry (Moretto, Palma and Moniz, 2012). Other sources include academic papers and company’s annual reports.

Section 4.3 assesses the innovation capability of the European high-speed train supply chain vis-à-vis its major competitors worldwide. For this analysis, a European manufacturer is defined as a manufacturer that is headquartered in Europe (i.e., EU-28, Switzerland and Norway) and whose production sites and workforce are primarily located in Europe. The comparison covers specifically Japan, China, and South Korea, as countries with major high-speed rail vehicle makers outside Europe. A set of indicators is used to capture the performance of the four analysed industries at two different stages of the value chain: technology generation and technology exploitation. Whereas technology generation focuses on the ability of the industry to generate new knowledge (e.g. R&D and innovation activities), technology exploitation focuses on the technological leadership on the market (e.g., the ability to commercialise new knowledge). The use of skilled workforce in both stages is also considered. In this section, an extensive set of data sources is used. As the focus of the study is not at the company but the European level, only international data were taken into account. Statistics were mainly collected from the OECD databases which allowed to gather international, reliable, comparable and homogenised data for the four analysed industries. Highly specific data from the International Union of Railways (UIC) were also used to construct some of the indicators examined. It is worthwhile noting, nevertheless, that the comparison was widely limited by the availability of appropriate data and the time coverage for the different countries/regions. In some cases, data analyses had to be complemented with data from companies’ annual reports and insights from academic papers, specialised railway stakeholder unions reports and railway magazines.

4.1 Global trends in the supply of rolling stock

The global rolling stock industry for new vehicles and after-sales, including services, currently generates revenues of around EUR 120 billion per year, encompassing EUR 50 to 60 billion in the 140 new vehicle business and EUR 60 to 70 billion in the after-sales and services segment (McKinsey & Company, 2016). The major players in this industry segment are the vehicle OEMs and the suppliers of components and parts. According to estimations by McKinsey & Company (2016), OEMs are currently capturing roughly a quarter of the value pool, while Tier-1 suppliers tap almost half of it (Figure 168). Railway operators and third-party service shops, which are predominantly responsible for the maintenance of the vehicles, are capturing the remaining quarter.

Figure 168: Global rolling stock market size, revenues and value pool by player (new business and after-sales, including services) (Source: McKinsey & Company (2016))

As shown in Figure 169, around half of the most significant rolling stock OEMs (i.e., those which feature more than EUR 50 million revenue) are located in Europe and around one third in Asia. These

140 UNIFE (2016) reports revenues around EUR 115.1 billion with EUR 53.7 billion generated from rolling stock and EUR 61.4 billion from services. SCI Verkehr (2016) reports EUR 51 billion for the new rail vehicles segment. 208

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry two geographical areas are of particular importance for the analyses performed in the subsequent sections.

Figure 169: Geographical split of rolling stock OEMs (Source: McKinsey & Company (2016))

4.1.1 Concentration

Over the last few years, the world’s top ten rolling stock OEMs increased their market share from 65% in 2012 to more than 75% in 2015, according to data reported by SCI Verkehr (2016). The ten largest suppliers, who contributed EUR 39 billion to the new vehicle market, are ranked Figure 170 according to their revenues in this segment (for comparison, the 2012 ranking is presented in brackets).

Figure 170: Top 10 manufacturers of rolling stock ranked by new vehicles' revenue 2015 (EUR million) (Source: SCI Verkehr (2016a))

Key industry players increasingly engage in mergers and acquisitions transactions and therefore grow in size. This is the case of China Railway Rolling Stock Corp. (CRRC) which resulted from the merger (in 2015) of the two Chinese rolling stock OEMs, China South Locomotive & Rolling Stock Corporation (CSR) and China North Locomotive & Rolling Stock Corporation (CNR) and who has become the global leader in the high-speed segment, as well as for the metro cars and electric locomotives segments. As shown in Figure 170, CRRC generated in 2015 more revenue from the sales of new vehicles than the five next largest companies together (SCI Verkehr, 2016). As shown in the Deliverable D4.1 of this project, this sharp rise has been the product of an intense technology transfer mainly from European OEMs (and to a lesser extent from Japanese manufacturers) encouraged by the political backing of the Chinese government. Along with this technology transfer, massive 209

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry investments in research and development, have allowed China to consolidate a strong railway industry.

Another example of this consolidation trend is the acquisition of the Italian rolling stock manufacturer AnsaldoBreda and the majority stake in Ansaldo STS (in 2015) by Hitachi. These acquisitions have allowed Hitachi to secure its footprint in Europe not only by entering the top ten list at the eight position (SCI Verkehr, 2016), as shown in Figure 170, but also by enforcing its position as a (non-European) supplier of signalling and traffic management systems compatible with European-developed 141 systems.

Blown by the growing pressure from Asian manufacturers, European OEMs, who used to dominate the market, are now looking at ways to form strategic partnerships and to connect closely with domestic players to retain their dominance (Frost & Sullivan, 2011). The recently signed Memorandum of Understanding by Siemens and Alstom to merge their rail operations also exemplifies this 142 movement.

This merger-and-acquisition trend is not only taking place at the OEM level, but also among the leading suppliers of components and subsystems. For instance, US-based Wabtec Corp has been steadily acquiring smaller businesses in many rail-related fields, most recently taking control of French brake and air-conditioning manufacturer Faiveley Transport (Schwilling, 2017). CRRC acquired a majority stake in the semiconductor maker Dynex (UK) in 2008 (through its subsidiary Zhuzhou CSR) and is currently in talks with the Czech Republic's Skoda Transportation AS for a 100% stake, a move 143 to increase its market share in Europe's railway markets.

These and other significant merger-and-acquisition movements in the railway industry, in the last few years, are summarised in Figure 171.

Figure 171: Major mergers and acquisitions in the railway industry 2012-2016 (year of the announcement) (Source: Siemens AG (2017))

4.1.2 Increasing role of Tier-1 suppliers in the supply chain

Regarding Tier-1 suppliers, the study from McKinsey & Company (2016) concludes that these industry actors are capturing an increasing share of the value chain and profits. As shown in Figure 168, they are currently generating twice the value created by OEMs as they are often able to achieve important profit levels, whereas OEMs struggle to earn significant profits. According to McKinsey, this is due to: (i) the suppliers’ clear USP, (ii) the limited competition in the production of core components which

141 Note that Ansaldo STS is part of UNISIG, the industrial consortium which develops the ERTMS/ETCS technical specifications (see Section 4.2.5).

142 See: http://www.alstom.com/press-centre/2017/09/siemens-and-alstom-join-forces-to-create-a-european-champion-in- mobility/

143 http://www.chinadaily.com.cn/business/2017-06/08/content_29661737.htm 210

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry require highly specialised knowledge and (iii) the high level of R&D expenditure required to sustain a fast development pace of products with high technology content.

Even if some components are already largely outsourced today (such as wheelsets, braking systems, and the interior), suppliers are likely to increasingly take on traditional OEMs’ in-house component manufacturing, such as the body, connectivity systems, and potential application engineering. This would allow increasing, in the coming years, their already large value chain share, resulting in a reduction of the OEM value pool (in the range of EUR 2-3 billion by 2025, according to McKinsey estimates). High-value roles are, however, likely to remain OEMs’ core activities such as the manufacture of key components (control, diagnosis, safety, and propulsion systems) as well as core engineering.

Whether the balance of negotiating power between manufacturers and their principal suppliers will change is still an open question. According to the Rail Supply Industry Watch Survey of April 2017 (by Roland Berger, see Schwilling, 2017), even if there is no a clear trend yet, the industry expects rather limited changes to the balance of negotiating power between manufacturers and suppliers, particularly regarding insourcing by the larger groups. Nearly half of the survey respondents (46%) agreed that some manufacturers would strengthen their position while others would lose negotiation power, and the same would apply to Tier-1 suppliers. Nevertheless, 23% of respondents believed that the bigger manufacturers and system integrators would “flex their muscles” and increase the degree of vertical integration, strengthening their power when negotiating with suppliers. Only 8% of respondents felt that negotiating power would shift from the OEMs to Tier-1 suppliers.

Figure 172: Expected changes in the relationship between OEMs and Tier-1 suppliers (Source: Schwilling (2017))

According to this survey, there is not widespread belief among railway experts that Tier-1 suppliers would increase their share of value added for crucial vehicle components such as brakes, doors or air conditioning. Given the high level of integration that OEMs retain, they will continue to manufacture body-shells, running gear and traction equipment themselves.

4.1.3 The high-speed rail segment

Specifically for the high-speed segment, the market stands for around EUR 9.9 billion. Market concentration in this segment is considerably high since there are around 13 manufacturers of high- speed trains in the world but, currently, more than 90% of all trains are being delivered by only three major manufacturers, with CRRC covering alone two-thirds of deliveries (Figure 173).

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Figure 173: Market shares of high-speed train manufacturers (units delivered) (Source: SCI Verkehr (2016b))

The French group Alstom and the Japanese consortia around Kawasaki and Hitachi, the actors who used to dominate this market, dropped from a market share of around 20% each, in the period 2007- 2009, to slightly less than 10% each, in the period 2013-2015.

4.2 The supply chain of high-speed rolling stock

Rolling stock comprises all the vehicles that move on a railway, including both powered and 144 unpowered vehicles. The high-speed rolling stock is a type of vehicle which operates on systems specially designed for high speed (dedicated line or upgraded conventional line) and capable of 145 running at over 200km/h (UIC, 20110). Given that high-speed rolling stock is just a particular type of railway vehicle running on a particular infrastructure, the general structure of the rolling stock supply chain can be used to explain major relationships between actors and the major technological components. This is done in Section 4.2.1. The technological components of high-speed trains according to their relevance for OEMs are exposed in Section 4.2.2, and the key actors worldwide in the manufacture of high-speed rolling stock are then presented in Section 4.2.3.

4.2.1 General structure of the rolling stock supply chain

144 Rolling stock comes in a variety of forms and can be broken down in various segments. A general classification of the most common types of railway vehicles and their description is given in World Bank (2011).

145 While a variety of definitions of high-speed rolling stock are used worldwide, in this document we use the proposed by UIC (2010), where other definitions worldwide are provided. 212

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OEMs Design and assembly

Tier-1 suppliers Components, systems and sub-systems

Body & Propulsion Electronics Interior

Tier-2 suppliers Materials and part inputs

Figure 174: Structure of the supply chain of rail rolling stock (Source: Based on CGGC (2010))

Figure 175: Structure of the supply chain of rail rolling stock (Source: Based on CGGC (2010)) illustrates the general structure of the industry as a pyramid. On the top of the supply chain, there are OEMs who design and assemble the different types of vehicles from a series of complex systems and subsystems (which are either manufactured in-house or purchased from other companies from the supply chain) and who deliver the finished product to the customer (see Figure 175 for more detail). They are followed by Tier-1 firms which supply the main systems in the three different technology categories: propulsion components, electronic systems, and body and interior. Each of these systems includes several major components such as electric generators, engines, traction motors or driving controls. Although suppliers of major systems are not integrated with the equipment manufacturers, they work together with the OEMs to ensure a safe and efficient integration of their products during assembly. Finally, Tier-2 companies provide materials (e.g., aluminium, iron, or steel) and input parts such as air compressors and brake parts.

146 Major activities of OEMs are summarised in Figure 175. Completing the whole process, from design to delivery, can take several years. Connor and Berkeley (2017) report that about three to four years are necessary from contract signing to the entry into service of the vehicle. Moretto, Palma and Moniz (2012) indicate that the process can even take four to five years from responding to a tender and the final commercialisation of the vehicle. Manufacturing rail rolling stock is, therefore, a time-consuming, not to mention costly, business which involves not only technical and financial risk but also burdensome certification procedures.

146 For a complete and detailed description of the railway rolling stock manufacturing activities, see Connor and Berkeley (2017). 213

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Original Equipment Manufacturers (OEMs)

Design and define technical specifications

Buy assemblies and systems or build them from parts bought or fabricated

Integrate parts (e.g., steel plates, frames, couplers, brake components, wheels) and assemblies (e.g., communications gear, engines, motors, transmissions, trucks) into systems

Integrate other parts and purpose-built assemblies and systems into finished products: locomotives and rail cars

Test, commissioning, authorization and delivery of the rolling stock

Clients Operators, leasing companies and private investors Part, assembly and system manufacturers

Figure 175: Railway rolling stock OEMs’ production process (Source: Author’s elaboration based on USITC (2011) and Connor and Berkeley (2017))

Figure 176 depicts the value chain for the manufacture of passenger rail vehicles by technological domains (propulsion and electronic systems and body and interior). The figure was adapted from a study of the US value chain (CGGC, 2010) which focused on the manufacture of rail vehicles for intercity and urban services. Nevertheless, the structure is general enough to be extrapolated to other kinds of trains, including high-speed trains (see, for instance, BGA/ELPC, 2015).

Tier 2 Tier 1 OEMs Propulsion components Propulsion systems Main materials Integrated Aluminium Electric generator Engine Chemicals propulsion Fabrics system Glass Truck system Fuel system Iron Passenger Paints Wheel set Brakes Transit Plastics Rubber Coaches & Under carriage Stainless steel Suspension Locomotives Steel casting

Traction motors Part inputs Electronic systems Air compressor Coaches Brake parts EMUs Communication Blower motor Security system Driving control DMUs Cable system High-speed Elastic material trainsets Flanges, Integrated Auxiliary power Electronic collector Metros forgings, software unit gears, shafts Light rail Fuel supply vehicles controller Inverter Body and interior Printed circuit Electric & diesel boards locomotives Rectifier HVAC Hatch cover Seating flooring Sensors Speed indicator Bathroom Lighting Coupler Switch gear Voltage convertor Body Door system Window

Figure 176: Passenger rolling stock value chain structure by technological domain 214

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147 (Source: Adapted from CGGC (2010))

The manufacture of a train requires ordering materials and equipment from a large number of suppliers in rather different domains. CERTU/Sétra (2013) report that around 300 suppliers and sub- suppliers can be involved in the manufacture of a single train. Moreover, the purchases to those suppliers account for most of the value added to the vehicle. According to Bocquet and Parternotte (2011), only about 30% of the cost of a train is generated by the OEMs’ main activities (design, assembly, and test), whereas that the outsourcing represents the remaining 70%. CGGC (2010) estimates that the major value added comes from the body and interior components followed by the propulsion systems (Table 27).

Table 27: Share of value added of railcar component systems in the US (Source: CGGC (2010))

Components Share of total value added Railcar shell 10% Propulsion 15-20% Electronics 10-15% Body and interior 40-50% Final assembly 10% 4.2.2 High-speed technological components and technology development148

A high-speed train is a highly sophisticated technology-product system, with a complex integration of components and different levels of technology intensity. The vehicle integrates hierarchical subsystems until it reaches a point at which components are the minimal elements of the system, each of them manufactured by different stakeholders at different levels of the supply chain and integrated by the system manufacturer (Moretto, Robinson and Moniz, 2014). OEMs receive technological inputs from advanced-knowledge providers, including highly specialised suppliers working exclusively for the railway sector and sometimes on an exclusivity basis with the OEM. These suppliers of equipment and precision instruments exhibit a high level of technological capability and can meet the tight requirements imposed by the OEMs. In a smaller, but increasing scale, there are also knowledge-intensive business services, such as providers of communication and onboard navigation systems or providers of virtual maintenance systems. With the higher technical complexity of the high-speed train, manufacturers are expanding the range of contracted services and relying more on these companies to design subsystems.

Figure 177 displays the product tree of technologies composing a high-speed train according to the strategic relevance for the OEM. The figure shows the core technologies and activities which remain produced in-house and those technologies, systems, and components which are outsourced.

147 Note that CGGC (2010) classifies OEMs as Tier 1 and therefore, the suppliers of systems as Tier 2 and the suppliers of materials and inputs as Tier 3.

148 This section builds extensively on Moretto, Palma and Moniz (2012). 215

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Figure 177: High-speed train technological systems according to their strategic relevance to OEMs (Source: Moretto, Robinson and Moniz (2014))

Core technology areas, such as structural parts, bogies, energy conversion and safety systems, are situated at the top of the tree. They are highly protected by OEMs which develop them in-house by the centres of excellence and design, directly coordinated by top management, and subject to a high level of secrecy and protection from competitors.

Relevant signalling and communication systems, situated in the middle range of the tree, are highly relevant for the manufacturer but, in some cases, fall outside the OEMs’ core engineering capabilities. Manufacturers tend to co-develop this kind of technology, mostly on a bilateral basis, with other partners such as component suppliers (generally from the railway sector, but not necessarily) or external knowledge centres and academia. Partners are located in the proximity of the production site, even if there are cases where the OEM sends technology envoys to component suppliers located in a different region in the world.

Technology subject to outsourcing, such as interiors and telematics, is found at the bottom of the tree. The relationship between OEMs and their partners is dominated by consortium agreements on an open basis (e.g., not subject to exclusivity). In particular cases, such as those addressing modularisation and standardisation, technology development could also involve competitors.

As claimed by Moretto, Robinson and Moniz (2014), OEMs have traditionally been the sole actors knowledgeable of the overall architecture of the interoperable trains and their subsystems interfaces. Nevertheless, with the increase of outsourcing, for cost-reduction reasons, their knowledge decreases as the subsystems themselves subdivide.

Regarding the timeframe for the introduction of new high-speed rolling stock series, UIC (2010) reports that it takes about three to four years for the technical development a new product (time is reduced if the product already exists). The authors also report that it takes about four to five years between the decision to launch a tender (call for competition) and commercial operation of the first set (including approval testing).

Other characteristics of the manufacture of high-speed trains include the small production scale and the formation of consortia for

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4.2.3 Key actors in the assembly of high-speed trains

High-speed trainset assembly is carried out by a relatively small number of manufacturers headquartered in Europe and Asia. The 13 companies identified in this study are listed on the right- 149 hand side of Figure 178. Some examples of system integrators and component manufacturers of propulsion and electronic systems and body and interior components are displayed on the left-hand side of Figure 178. This is, nevertheless, a non-exhaustive list displayed only for illustrative purposes 150 as the focus of this document remains at the OEM level.

High-speed train manufacturers exhibit different profiles ranging from large to small companies that have been in the high-speed niche for several decades (e.g., Kawasaki and Alstom) or only a few years (e.g. Talgo and CRRC). Table 28 displays the profiles of the five major high-speed train manufacturers (i.e., those who generated more than EUR 4 billion rail-related revenues in the last available financial year). Data were collected from the companies’ annual reports, business presentations, and websites. Given that some of these firms also have substantial activities in other transport modes (e.g. automotive) or non-transport sectors (e.g., energy), an effort was made to gather only rail-related business statistics so that data displayed can be directly compared. Caution is nevertheless advised as corporate financial statements necessarily depend on estimates and judgment calls that widely vary from company to company.

OEMs Propulsion components and systems High-speed trainsets

• KNORR BREMSE (DE) • LUCCHINI RS (IT) • ABB (CH) • ALSTOM (FR) • WABTEC (US) • VOITH TURBO (DE) • SKF (SE)… • SIEMENS (DE) • BOMBARDIER (DE) • STADLER (CH) Electronic components and systems • CAF (ES) • TALGO (ES) • ANSALDO STS (IT) • AŽD PRAHA (CZ) • TELTRONIC (ES) • RVR (LV) • MERMEC (IT) • COMLAB (CH) • KAPSCH (AT)… • CRRC (CH) • HITACHI (JP) Body and interior • KAWASAKI (JP) • NIPPON SHARYO (JP) • FAINSA (ES) • SMTC (FR) • IMI (UK) • MITSUBISHI (JP) • LPA EXCIL (UK) • WABTEC (US) • HUBNER (DE)… • HYUNDAI ROTEM (KR)

Figure 178: High-speed rail value chain with examples of system integrators and component manufacturers (Source: Author’s elaboration)

Notes: This figure does not intend to give an exhaustive list of system integrators and component manufacturers. Those mentioned are only displayed for illustrative purposes. The country refers to the company’s headquarter (AT: Austria, CH: Switzerland, CZ: Czech Republic, DE: Germany, ES: Spain, FR: France, IT: Italy, JP: Japan, KR: Korea, LV: Latvia, SE: Sweden).

These five firms are highly integrated and develop not only assembly but also system integration activities. They are present in all the demand segments from the urban to the high-speed segment. They are also highly involved in the development and manufacture of relevant signalling and communication systems.

The top three European companies in the high-speed segment are Alstom, Siemens and Bombardier. It is worth noting that, although Bombardier Transportation (the railway division of Bombardier Inc.) is

149 As noted earlier, AnsaldoBreda, another important manufacturer of high-speed trains, was recently (2015) acquired by the Japanese Hitachi.

150 It should also be noted that some of the companies develop activities in other areas than the specified in the figure. 217

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151 a Canadian group, in this report it is considered as a European manufacturer for three main reasons. 152 First, around two-thirds of both Bombardier Transportation’s production facilities and workforce (see 153 Table 27) are located in Europe. Second, Bombardier Transportation is an important R&D investor in Europe. This can be seen, for instance, from the fact that it is one of the Founding Members (together with Alstom, CAF, Ansaldo STS, Siemens and Thales) of the EU research and innovation initiative Shift2Rail (see Section 4.3.1.4). Third, specifically for the high-speed segment, 22 of the 29 projects in which Bombardier Transportation has participated as a rolling stock supplier (outside China) have been in consortia with other European manufacturers. Finally, Bombardier Transportation headquarters are located in Germany.

Table 28: Profiles of five key global high-speed train manufacturers

Headquarters: France Sales: EUR 7.3 billion Orders intake: EUR 10 billion Orders backlog: EUR 34.8 billion Alstom covers the full range of rail solutions ranging from components, trains, signalling and Employees: 32,800 services to fully integrated systems. Alstom’s 63% Europe, 16% Americas, 12% Asia-Pacific,

high-speed rail range includes Pendolino, 9% Middle East-Africa Euroduplex, Avelia Liberty, and AGV. R&D expenditures: EUR 136 million (1.9% of sales**)

FY Apr 2016 - Mar 2017 Alstom, Annual Financial Report 2015/2016

Headquarters: Germany Revenues: EUR 8 billion Siemens Mobility Division combines businesses Orders intake: EUR 8 billion in the area of passenger and freight Orders backlog: EUR 26.4 billion transportation, including rail vehicles, rail Employees: 29,500 automation systems, rail electrification systems, 77% Europe, 8% Americas, 12% Asia-Pacific, IT solutions and related services. Siemens’ 3% Middle East-Africa high-speed rail range includes the Velaro family.

FY Nov 2015 - Sep 2016 Business presentation: Siemens AG (2017)

Headquarters: Germany Revenues: EUR 7.1 billion* Orders intake: EUR 8 billion* Orders backlog: EUR 28.3 billion* Bombardier Transport covers the full spectrum of rail solutions, ranging from complete trains to Employees: 37.150 subsystems, services, system integration, and 63% Europe, 22% North America, 12% Asia- solutions. Bombardier’s high-speed range Pacific, 3% rest of the world includes the AVE and the Zefiro family. R&D expenditures: EUR 97 million (1.4% of revenues**)

FY Jan-Dec 2016 Bombardier, Financial Report 2016

151 Note that Bombardier Transportation portraits itself as “a global player with a European base”, see, for instance, Bombardier (2014) and Bombardier (2015).

152 According to our calculations, currently, 25 out of 41 Bombardier’s production and engineering sites are located in Europe.

153 This may be the reason why in some railway specialized reports, Bombardier is considered as a European player (see, for instance, ECORYS, 2012). 218

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Headquarters: China Revenues: EUR 30.5 billion* CRRC undertakes design, manufacture, testing, Orders intake: EUR 40 billion* commissioning, and maintenance of Employees: 183.061 locomotives and rolling stock for all the demand R&D expenditures: EUR 1.5 billion (4.3% of segments. CRRC’s high-speed rail range revenues) includes the CHR family.

FY Jan-Dec 2016 CRRC Corporation Limited, Annual Report 2016

Headquarters: Japan Revenues: EUR 4.1 billion* Orders intake: EUR 3.9 billion* Hitachi Rail’s offering extends from rolling stock Orders backlog: EUR 431.5 billion* to traffic management, traction equipment, signalling, electrical conversion and information Employees: 11.091 systems. Hitachi’s high-speed rail range R&D expenditures: EUR 168 million** (2.7% of includes the AT300 family. revenues)

FY Apr 2016 - Mar 2017 Business presentation: Hitachi (2017)

For comparison, the revenues from rail activities of the other manufacturers are: Stadler EUR 1.9 billion, CAF EUR 1.3 billion, Hyundai Rotem EUR 1.2 billion, Kawasaki EUR 1.1 billion, and Talgo EUR 0.6 billion (Siemens AG, 2017). * Figures were transformed into Euros using the 2016’s Yearly Average Exchange Rate. **Calculated based on reported figures.

4.2.4 Technological focus: Train Control Systems

Operating any high-speed line requires a particular signalling system, incorporating, among others, in- cab signalling devices (UIC, 2017). Line side signals are no usable for high-speed operation because 154 they may not always be observed in time by the drivers. At high-speeds, signalling information is instead transmitted to the trains, through digital balises and/or track circuits and/or radio-based systems, and displayed as part of the train controls within the on-board signalling system. In-cab signalling is mandatory for high-speed systems.

155 156 Worldwide, three different systems exist at the present moment:

 The European Train Control System (ECTS), developed by the European Union as part of the European Rail Traffic Management System (ERTMS).  The East Japan Train Control System (EJTC), developed by the East Japan Railway.  The Chinese Train Control System (CTCS), developed by the Chinese Railways.

The remaining of this section provides a state of the art review of these three systems.

European Train Control System (ETCS)

ETCS is an Automatic Train Protection (ATP) system for high-speed lines through Europe. The project began in 1992 with the development of an interoperable high-speed European railway network

154 At high speeds it is not possible for a driver to accurately see the colour-light based railway signals along the track-side.

155 It is worth noting that these systems are not exclusively used in the high-speed rail segment, but also meet the needs of conventional train sage operations. Nevertheless, their major application remains the high-speed segment.

156 Other European systems, such as the French TVM or the German LZV, are not considered given that ECTS was designed to avoid the use of the multiple incompatible signalling systems that exist across Europe, and allow a unique signalling system to ensure interoperability on the whole EU railway network. 219

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry between France, Germany, Italy, United Kingdom and Spain. The system is called interoperable which means that trains can cross borders and can read signalling in different countries in Europe (EC, 2006). It requires balises (Euro-Balise), GSM-R (Euro-radio) for signalling information and mobile communication and a standard controller inside the train cab (Euro-Cab).

ETCS is divided into four levels (Ning et al., 2004):

 Level 0 means that the ETCS on-board system is installed in locomotives running on existing lines without ETCS or with ETCS system in commissioning.

 Level 1 means that balises and continuous information transmission (in-fill) for signalling and block occupation are implemented.

 Level 2 is based on Level 1. This level means that the radio communication network (GSM-R) and fixed block railway function for train interval control are implemented.

 Level 3 is based on Level 2. This level means that a full radio-based train spacing for the moving block railway function is implemented.

Chinese Train Control System (CTCS)

CTCS is an ATP system put forward in 2002 as the technical standard of Chinese train control systems (Ning et al., 2004). Based on the ETCS system, CTCS has two subsystems: a ground subsystem and an on-board subsystem. The ground subsystem is based on balise and radio communication network (GSM-R) but is also based on track circuits (like French TVM 430). The onboard subsystem includes on-board computer and communication modules (see Wang et al., 2012 and Junting et al., 2016).

CTCS is divided into five levels (Ning et al., 2004):

 Level 0 is for trains with speed less than 120 km/h with existing signal systems. This level only uses track circuits.

 Level 1 is for trains with speeds of 120 km/h and 160 km/h. This level uses track circuits and point balises.

 Level 2 is for trains with speeds of 200 km/h and 250 km/h. This level consists of track circuits (for block occupation detection and movement authorisation), point balises and on-board ATP systems. This level is similar to the French TVM-430 high-speed control system. CTCS-3D is an enhanced version of Level 2 (Wang et al., 2012). This system is similar to the European ETCS Level 1 and is used for the Beijing-Tianjin high-speed railway line.

 Level 3 is for trains with speeds between 300 km/h and 350 km/h (high-speed railway lines). This level is based on level 2 and uses the railway system for mobile communication (GSM- R). This level is equivalent to the European ETCS Level 2 (Wang et al., 2012).

 Level 4 is the highest level. It is based on level 3 but also adopts the moving block railway function for train interval control as the European ETCS level 3. However, this level also includes the GSM-R evolution into LTE-R and the global navigation satellite system for trains (GNSS) (Junting et al., 2016).

East Japan Train Control System (EJTC)

The EJTC is an Automatic Train Stop device (ATS) to prevent train collisions. EJTC consists of several train control systems applied in railway lines in Japan and which are classified into four levels (Matsumoto, 2005):

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 Level 0 (ATS-S) uses wayside signals, and the train detection is made by track circuits. All train control systems in Japan are based on it. Signalling information is transmitted by balises.

 Level 1 (ATS-P) is an enhanced version of level 0 and uses digital information from a balise.

 Level 2 (D-ATC and DS-ATC Digital Communication and Control for Shinkansen Line) is based on level 1, but there is a continuous information transmission, signalling information are displayed into the cab (Yokoyama et al., 2017). This level is similar to the European ETCS Level 1 or the Chinese CTCS level 2 (Matsumoto, 2005).

 Level 3 (ATACS Advanced Train Administration and Communications System) uses wireless transmission between the train and the infrastructure and adopts the moving block railway function for train interval control. This level is equivalent to the European ETCS level 3 (Matsumoto, 2005).

A comparison between the above three control systems is shown in Figure 179.

Signalling Wayside Cab system

Block Fixed block Moving block system

Transmission Track circuit / Balises Wireless to train

Control Point Continuous method

ETCS L0 ETCS L1 ETCS L2 ETCS L3

CTCS L1 CTCS L2 CTCS L3 CTCS L4

EJTC L0/L1 EJTC L2 EJTC L3

Figure 179: Technical comparison of train control systems in Europe, China and Japan (Source: Author’s elaboration based on Matsumoto, 2005, Ning et al., 2004 and Wang et al., 2012)

4.2.5 Key actors in the supply of high-speed train control systems

At the European level, the industrial consortium UNISIG was created (1998/99) to develop the ERTMS/ETCS technical specifications, at the specific request of the EU Commission. UNISIG is a technical body whose role is to develop, maintain and update the ERTMS specifications in close cooperation with the European Railway Agency (ERA). UNISIG is currently composed of seven full members (Alstom, Ansaldo STS, Bombardier, Siemens, Thales, CAF and AŽD Praha) and one associated member (MERMEC), as illustrated in Figure 180. Any company involved in the development of ERTMS can apply for UNISIG membership, but applicants are required to have already played an active role and developed sufficient technical competence in the ERTMS field, and to contribute to the work of UNISIG both by providing the necessary workforce and funding for the consortium (UNIFE, 2014).

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Figure 180: Members of the European consortium UNISIG( (Source: UNIFE (2014))

As UNISIG members are companies with a confirmed experience and sufficient technical competence in the ETCS, it can be assumed that they are the major industrial suppliers of ETCS. Notice that in Figure 180, there are both specialised suppliers of signalling systems (e.g., Ansaldo STS, Mermec, Thales and AŽD Praha) and rolling stock manufacturers (e.g., Alstom, Siemens, Bombardier, CAF) which are highly vertically integrated.

ETCS equipment can, of course, be produced by any supplier in the world. Hitachi, for instance, has 157 been very active in testing ETCS-compatible equipment in the recent years in the UK and this process may have accelerated since Ansaldo STS (part of the UNISIG consortium) became part of the Hitachi Group, in 2015.

4.3 Assessment of the innovation capacity of European high-speed rail manufacturers

This section measures the ability to innovate of the European high-speed train supply chain vis-à-vis the major competitors worldwide. The comparison covers specifically Japan, China, and South Korea, as countries with major high-speed rail vehicle manufacturers outside Europe. A set of indicators is used to capture performance at two different stages of the value chain: technology generation and technology exploitation (technology diffusion and adoption). Whereas technology generation focuses on the ability of an industry/economy to generate new knowledge (R&D and innovation activities), technology exploitation focuses on the technological leadership on the market (ability to commercialise new knowledge). The use of skilled workforce in both stages is also considered.

Given that we are analysing a particular part of the value chain, the manufacture of high-speed rail vehicles, it is difficult to find specific data for some of the focus areas (e.g., R&D, innovation, use of workforce). Some of the indicators, therefore, use data at an aggregate level, for instance, the manufacture of rolling stock or railroad equipment. It is essential, therefore, to bear in mind that the assumptions, as well as the aggregation/classification systems, are not always the same.

To analyse the performance of European manufacturers against the other three competing economies comprehensively, data from different sources were collected. Statistics from the OECD databases were mainly used. The advantage of using OECD databases derives from their international coverage which allows gathering reliable, comparable and homogenised data for the different geographical regions studied. Data from other sources, such as companies’ annual reports and research papers, were used to complement the analyses. Nevertheless, the comparison was widely limited by the availability of appropriate data and the time coverage for the different countries/regions (see Table 29).

For the analysis of technological leadership, five specific indicators to measure the industries’ leadership in the manufacture of high-speed trains and control and signalling systems were constructed. For this purpose, the use of highly specific data sources was required. Specifically, different documents from the International Union of Railways (UIC) were used.

Table 29 provides some detail on the indicators used per focus area, the data sources, the level of disaggregation of data (domain) and its availability.

157 At least since 2008, according to information published by the Group. See for instance: http://www.hitachirail- eu.com/index.php/about/company/history and http://www.hitachi-rail.com/topics/2008/080220.html 222

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Table 29: Indicators analysed and data availability (Source: own work)

Level of Data availability Stage of Focus area Indicator Main data source disaggregation innovation cycle (domain) EU Japan Korea China

Technology OECD ANBERD Partially Business R&D expenditures Rolling stock Available Available Not available development database available OECD ANBERD & Research and Technology Partially R&D personnel ratio OECD STAN Rolling stock Available Not available Not available Development development available databases Technology R&D intensity Several sources Different levels development Development of railway Technology OECD Environment Rolling stock Available Available Available Available environmental technology development Statistics database Innovation Development of railway Technology OECD Patent Rolling stock, Available Available Available Available technology development database Signalling systems

High-speed rail technological Technology Several sources High-speed rail n/a n/a n/a n/a mastery development

Share of high-speed trains Technology commercialised in domestic and UIC (2017) High-speed rail Available Available Available Available adoption foreign markets

Worldwide diffusion of European, Technological Technology Chinese and Japanese train UIC (2016) Signalling systems Available Not available n/a Not available leadership on the diffusion control systems market High-speed network equipped Technology UIC (2017a) & with GSM-R systems or Signalling systems Available n/a n/a Available adoption ERMTS (2013) equivalent

Trade of railway signalling, safety Technology UN COMTRADE Signalling systems Available Available Available Available and control systems diffusion database

OECD STAN Railroad Partially Workforce Employment Available Available Not available database equipment available

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4.3.1 Research and Development

The high-speed train was commonly considered disruptive when introduced, but that is no longer the case, at least for those manufacturers mastering the technology (Moretto et al., 2014). The technology is, nevertheless, subject to continuous development. At present, technology development is mainly focused on standardisation, modularisation, safety and the need to meet specific socio-cultural requirements imposed by the operator (Moretto, Palma and Moinz, 2012). However, innovation in this industry is not linear, characterised by long technology trajectories, subject to heavy certification procedures and cost pressure from its clients. The technology trajectory in the industry involves three to five years between technical development and the final product, and four to five years from responding to a tender and its final commercialisation. Moreover, as locomotives and rolling stock are long-term assets with long depreciation periods, the speed of dissemination of innovations is low and the capacity to innovate strongly dependant on the ability to access new markets (ECORYS, 2012).

According to Moretto, Palma and Moniz (2012), high-speed rail OEMs have the capacity to develop new products and processes internally, with their in-house R&D facilities, on its own or in conjunction with suppliers, clients and end-users, but development strategies differ according to the relevance of the components (see Figure 177). First, core technologies with high-strategic relevance in line with the OEMs’ core competencies, are highly protected and not subject to collaborative research. Co- development is almost inexistent, and the level of ownership of end-results is high. If cooperation exists at this level, it is mainly held with universities, subject to strict confidentiality agreements and with OEMs claiming ownership of the technology development. Second, for relevant signalling and control technology, OEMs tend to co-develop the technology, mostly on a bilateral basis, with other partners such as component suppliers or external knowledge centres and academia. In this case, the level of co-development is low, and ownership of results tends to be high. The instruments used are often bilateral, confidential agreements between the manufacturer and co-developer. Third, for the technology subject to outsourcing, the level of co-development is high and ownership of end-results is low.

4.3.1.1 Business R&D expenditures

Focus Area:

Type:

Key Performance Indicators:

Score: 1 Europe has a competitive disadvantage in comparison with its global (Asian) rivals

Summary

Industrial R&D is closely related to the creation of new products, production techniques and value added, all critical elements for the survival of the European rail rolling stock industry in the current competitive environment imposed, mostly, by Asian competitors. From available statistics, it could be established that EU private R&D expenditures in the rolling stock industry amounted, in 2014, around one-third of the global R&D expenditures in this industry. Although a decreasing trend in R&D investments of EU countries hosting major rolling stock OEMs (e.g. Germany, France and Austria) was identified, an increasing trend in investments from countries hosting major industry suppliers (e.g. the Czech Republic and Poland) was also detected. This means that, at the aggregate level, EU business R&D investments have remained more or less stable in the recent years. European investments remain, however, lower compared to the Chinese counterparts. Perhaps more importantly, if the decreasing trend of the major European R&D investors persists, it is likely that in only a few years the European railcar manufacturing industry ends up with a strong competitive disadvantage in this area.

Description of the indicator 225

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The indicator Business Enterprise R&D Expenditures (BERD), the amount of money spent on R&D activities carried out in the business sector by performing firms and institutes, is of considerable interest when assessing R&D performance. Industrial R&D is closely linked to the creation of new products, production techniques and value added, and it is, therefore, a good indicator of the industry’s innovation efforts.

Analysis & Assessment

Available public statistics for the six European countries with the most significant R&D expenditures in 158 the rolling stock industry are compared in Figure 181. It can be seen that Germany has traditionally led private R&D expenditures in the industry, followed by France and Austria. Nevertheless, R&D expenditures in these three countries have been falling in recent years, whereas they have remained more or less stable in Italy and, surprisingly, they have been increasing in the Czech Republic and Poland (practically three folding in the analysed period). It is worth noting that the Czech Republic and Poland account with a rich railway tradition and host important rail supply companies ranging from the manufacture of rail cars (especially urban solutions, such as trams), to the supply of command and signalling systems and vehicle parts. Unfortunately, R&D expenditures of Spain, one of the major European high-speed rail investors in the recent years, was not available in the OECD ANBERD 159 database.

300

250

200

150

100

0 Germany France Austria Italy Czech Poland Republic

2002 2004 2006 2008 2010 2012 2014

Figure 181: Business R&D expenditure of the railway rolling stock industry of selected EU countries, 2002-2014 (million USD) (Source: Author’s elaboration based on OECD ANBERD data)

Notes: Data displayed correspond to: (i) the industry D302 Railway locomotives and rolling stock (extracted in August 2017); (ii) the main activity of the company (except for France and Italy whose data are associated with product field); (iii) 2014 or the latest available year; and (v) the ISIC Rev. 4 (updated in February 2017).

To compare how Europe performs regarding private R&D expenditures relative to its major rivals, data from the six countries displayed in Figure 181 were aggregated (2010-2014) together with data from other 5 European countries whose aggregated R&D investment represents around 5% of the total. Statistics from two relevant Asian countries, South Korea and Japan, were obtained from the same dataset (OECD ANBERD). Unfortunately, official statistics of Chinese R&D investments in the rolling stock industry were not available. Those reported by the Chinese Statistical Yearbook aggregate three different industries: railway, ship, aerospace, and other transport equipment. In an attempt to overcome this lack of data, we have relied on data reported by the China's biggest railway vehicle and equipment manufacturer, CRRC (2015 and 2016), and one of its two predecessors, CSR (2012-2014)

158 Data from other 5 European countries which amount for around 5% of the total EU R&D investments (calculated from the available data) are not displayed in this Figure. They are nevertheless taken into account at the aggregated level in Figure 16.

159 According to Fortea (2017), the country’s commitment to railway innovation is demonstrated in its institutional R&D investment which exceeds EUR 12 billion (about USD 13 billion) per year. This figure may, nevertheless, encompass expenditures of whole railway sector and cannot, therefore, be directly compared with numbers in Figure 15, which are specifically related to the manufacture of rolling stock. 226

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(data from CNR could not be collected). Although this approach allows us to overcome somehow the difficulty of collecting data for this country, we are aware that it has at least two limitations. First, the underestimation of Chinese private R&D investments. Second, the potential incompatibility of data from the different sources (e.g., R&D expenditures reported by CRRC and CSR may include different areas and not only the development of rolling stock).

1600

1400

1200

1000

800

600

400

200

0 2010 2011 2012 2013 2014 2015 2016

EU-11 China Japan Korea

Figure 182: Business R&D expenditure of the railway rolling stock industry in selected regions, 2010-2016 (million USD) (Source: Author’s elaboration based on OECD ANBERD data and CSR and CRRC annual reports)

Notes: Data displayed for EU-11 (Germany, France, Austria, Italy, Czech Republic, Poland, Belgium, Finland, the Netherlands, Portugal and Slovenia), South Korea and Japan were extracted from the OECD ANBERD database (see notes Figure 181). Data for China correspond to CRS’s (2012-2014) and CRRC’s R&D corporate data.

Even if the Chinese R&D budget displayed in Figure 182 might be underestimated, it is by far the largest R&D expenditure in the rolling stock industry of the analysed countries/regions. It is worthwhile noting that CRRC performed No. 7 and No. 6 among the Top 10 R&D spenders in China in 2015 and 2016, respectively. Moreover, part of the company’s R&D budget has been used to establish R&D centres in Europe allowing them to access local resources and knowledge and to base their R&D activities on relevant EU market needs.

Europe follows by far with around one-third of Chinese investments, but it can be seen that the decreasing trend observed for the major European R&D investors in the industry (Figure 181) does not seem to be transferred at the aggregate level. The increase in the R&D budget of the other countries in the region compensates to some extent the identified decline of the major investors. South Korea appears in the third position despite the steady increase of its R&D budget in the recent years. On the other hand, Japanese expenses, which exhibit a decreasing trend until 2013, have experienced a marked increase in 2014 and 2015.

Based on these facts, we consider that currently Europe exhibits a (moderate) competitive disadvantage in comparison with its Asian rivals regarding business R&D expenditures in the rolling stock industry. Attention has to be drawn to the decreasing trend of the industrial R&D budget of the major European investors. If this trend persists, it is likely that in the coming few years the European railcar manufacturing industry ends up with a strong competitive disadvantage. 4.3.1.2 R&D personnel ratio

Focus Area: < R&D>

Type:

Key Performance Indicators:

Score: Based on available statistics, no score could be defined for this indicator

227

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Summary

Private resources devoted to R&D can also be measured in labour terms through the indicator R&D personnel. Statistics collected for the six European countries with the most significant R&D expenditures in the rolling stock industry show similar trends that those identified in Section 4.3.1.1. The number of employees carrying out R&D in the manufacture of rolling stock in Germany, France and Austria have been falling in the recent years whereas they have been increasing in Italy, the Czech Republic and Poland. Unfortunately, comparing European aggregated statistics on R&D personnel with other regions in the world was not possible. Only official data from Japan could be found. Although a couple of statistics from China were gathered, from CRRC’s corporate reports, the measurement unit differs from European and Japanese data.

Description of the indicator

The indicator R&D personnel measures private resources devoted to R&D measured in labour terms. It helps to measure the extent of an industry’s R&D activity and its reliance on highly qualified science and technology specialists. This indicator is calculated as the industry’s R&D personnel divided by the number of persons employed in the industry.

Analysis & Assessment

Figure 183 displays available statistics on R&D personnel (full-time equivalent) for the six European countries with the largest R&D expenditures in the rolling stock industry. Not surprisingly, Germany leads regarding the number of people who perform research in the industry, followed by France and Austria. Nevertheless, the number of employees carrying out R&D in the manufacture of rolling stock in Germany, France and Austria have been falling in the recent years whereas they have been increasing in Italy, the Czech Republic and Poland. These trends are similar to those identified in the business R&D expenditures.

1800 1600 1400 1200 1000 800 600 400 200 0 Germany France Austria Italy Czech Poland Republic

2006 2008 2010 2012 2014

Figure 183: R&D personnel in the manufacture of rolling stock in selected EU countries (FTE), 2006-2014 (Source: Author’s elaboration based on OECD ANBERD data)

Notes: Data displayed correspond to: (i) the industry Manufacture of railway locomotives and rolling stock (extracted in August 2017); (ii) 2014 or the latest available year; (iii) the ISIC Rev. 4 updated in February 2017.

To offer a more juxtaposed picture, the number of people assigned to R&D in relation to the total labour force was calculated using the OECD ANBERD data displayed in Figure 183 and employment 160 statistics from the OECD STAN database. Results are depicted in Figure 184.

160 OCD ANBERD data correspond to industry Manufacture of railway locomotives and rolling stock (ISIC Rev. 4) whereas OECD STAN data correspond to Railroad equipment and transport equipment n.e.c. (industry D302A9, ISIC Rev.4 and/or NACE Rev.2). 228

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8,0%

7,0%

6,0%

5,0%

4,0%

3,0%

2,0%

1,0%

0,0% Germany France Italy Czech Republic Poland

2008 2009 2010 2011 2012 2013 2014

Figure 184: R&D personnel ratio in the manufacture of rolling stock in selected EU countries (FTE), 2008-2014 (Source: Author’s elaboration based on OECD ANBERD and STAN data)

Notes: Data displayed correspond to the ratio of R&D personnel (FTE) in the industry Manufacture of railway locomotives and rolling stock (OECD ANBERD, ISIC Rev. 4) and total employment (number of persons engaged) in the industry D302A9 Railroad equipment and transport equipment n.e.c. (OECD STAN, ISIC Rev.4 and NACE Rev.2).

Surprisingly, France exhibits a higher proportion of employees carrying out research in the industry than Germany. Between 2010 and 2013, the average in France is 6.8% whereas in Germany it is 3.5%. The Czech Republic follows closely with an average of 2.8% in the same period. Poland and Italy perform far below with 1.2% and 0.9%, respectively, in the same period.

In order compare how Europe performs in regards to other regions in the world, the R&D personnel ratio for Europe (Germany, France, Austria, Italy, Czech Republic, and Poland) and Japan were calculated based on OECD ANBERD and STAN data. Given that data for China could not be gathered, we collected data reported by CRRC (20015-2016) but only for indication, as the measurement units might not be compatible. CRRC reports the proportion of R&D personnel during the fiscal year based on the total number of persons engaged in R&D (headcount) regardless the 161 effective time spent on research, whereas EU-6 and Japan report data on a full-time basis (FTE), the statistic used for international comparisons.

20,0% 18,0% 16,0% 14,0% 12,0% 10,0% 8,0% 6,0% 4,0% 2,0% 0,0% China (HC) EU-6 (FTE) Japan (FTE)

2010 2011 2012 2013 2014 2015 2016

Figure 185: R&D personnel ratio in the manufacture of rolling stock in selected regions/countries (HC, FTE), 2010-2016 (Source: Author’s elaboration based on OECD ANBERD and STAN data and CRRC annual reports)

Notes: Data displayed for EU-6 (Germany, France, Austria, Italy, Czech Republic and Poland) and Japan were calculated based on the OECD ANBERD and STAN databases (see notes Figure 184) and measured in Full-Time Equivalent. Data for China correspond to CRRC’s R&D personnel ratio collected from in their annual reports and

161 The Full-time equivalent (FTE) of R&D personnel is defined as the ratio of working hours actually spent on R&D during a specific reference period (usually a calendar year) divided by the total number of hours conventionally worked in the same period by an individual or by a group. 229

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measured in Headcount. 4.3.1.3 R&D intensity

Focus Area:

Type:

Key Performance Indicators:

Score: 1 Europe has a competitive disadvantage in comparison with its global (Asian) rivals

Summary

Given the difficulty to gather specific statistics on the R&D intensity of the different rolling stock manufacturing industries of interest, R&D intensity figures were explored at the company and the country levels. Conclusions, nevertheless, are difficult to draw. At the company level, assumptions behind corporate estimates make comparison difficult. At the country level, the diversity of the R&D- intensity profiles of the different industries composing the aggregate pre-suppose that the aggregate value might not be transposable to the rolling stock industry. Based on companies’ figures and insights provided by a few academic papers on the topic, the R&D intensity of the European rolling stock manufacturing industry appears to be decreasing and is, currently, presumably lower than the R&D intensity of its Chinese rival.

Description

R&D intensity measures the relative R&D effort of industry to spur innovation in and through research. It is also an imperfect indicator of other R&D concepts such as reliance on highly educated personnel, use of advanced technology or broader forms of knowledge-based capital (Galindo-Rueda and Verger, 2016). This indicator is calculated as the industry’s business R&D expenditure divided by an output measure, usually gross value added or gross output.

Analysis & Assessment

A study of the innovation activities of the European transport sector (Wiesenthal et al., 2011) reports an R&D intensity for the manufacture of rail transport equipment around 3.9% in 2008. This figure takes into account the aggregated R&D investments of the 18 largest EU-based rail equipment manufacturers and suppliers (which leads to an estimate of EUR 930 million spent on R&D by the 162 industry in 2008). According to the authors, this elevated value can be linked to the high technical knowledge of European companies (e.g. in high-speed trains) which are amongst the leading players on the world scale. At the same time, the R&D intensity in this sector is lower than those characterising the automotive and the aeronautical sector. According to the same authors, this is because of factors that limit incentives for innovations, such as a relatively small market size, a high capital intensiveness, a limited amount of rail transport operators, the relatively good energy efficiency of electric trains and the long turnover of the rail vehicle stock. The study was recently updated in Wiesenthal, Condeço-Melhorado and Leduc (2015) leading to an estimate of 3.6% for the year 2011. It is nevertheless worth mentioning that a similar study, Leduc, et al. (2010), estimated the R&D intensity of the rail industry at 4.3% in 2008, which is slightly higher to Wiesenthal’s et al. (2011) estimate.

Regrettably, available data did not allow us to calculate the R&D intensity specific to the rolling stock 163 industry, in a more recent period, and for the different countries of interest. To overcome this lack of

162 It is important to note that this is an aggregated figure which includes the manufacture of all kind of railway equipment (EU- 18) and differs, therefore, from that displayed in Figure 182 which focuses on the R&D expenditure for the manufacture of rolling stock (EU-11).

163 Note that the OECD has recently published a taxonomy of industries according to their average level of R&D intensity (in Galindo-Rueda and Verger, 2016). Unfortunately, the study aggregates the manufacture of railroad equipment, military vehicles and other transport equipment. The estimated average R&D intensity (for the aggregate of the three industries) for OECD countries is 6% and 9% for the nine EU countries included in the study. These figures are far above the estimations of Wiesenthal et al., (2011), of 3.9% and 3.6%, and might therefore be driven by the military vehicles industry. 230

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4,3% 4,3% 3,9% 3,6%

2,7%

1,9% 1,4%

CRRC Hitachi Alstom Bombardier EU 2008 (1) EU 2008 (2) EU 2011 (3)

Figure 186: R&D intensity of selected rolling stock manufacturers (2016) and the EU rail manufacturing industry (2008, 2011) (Source: Author’s calculation based on companies’ reports and (1) Leduc, et al. (2010), (2) Wiesenthal et al. (2011) and (3) Wiesenthal, Condeço-Melhorado and Leduc (2015))

Not surprisingly, the Chinese manufacturer is far above its Japanese and European counterparts regarding R&D intensity. This is confirmed by McKinsey Global Institute (2015) who reports that the average R&D spending of top Chinese players (as a percentage of revenue) is around 1.5 times the R&D spending of top global players.

To provide some further insights, we also explored R&D intensity at the country level. In this case, it is calculated as the country’s expenditure on R&D as a percentage of its Gross Domestic Product. This indicator could therefore roughly reflect the extent to which a country performs regarding R&D and allow a broader comparison among countries/regions in a more extensive period. The latest available data on R&D intensity for OECD countries and other major economies published in the OECD Main Science and Technology Indicators (MSTI) were therefore examined. Statistics for the countries of interest are displayed in Figure 187.

5,0 4,5 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 2000 2002 2004 2006 2008 2010 2012 2014

EU28 Japan Korea China

Figure 187: R&D intensity in selected countries, 2000-2015 (%) (Source: Author’s elaboration based on OECD MSTI data)

It can be seen that China has been steadily increasing its R&D intensity during the last years, reaching a level of 2.07% in 2015 (only 0.3 of a percentage point below the OECD average which is at 2.38%). According to OECD (2016), China’s competitive advantage as a global manufacturer is faced with a challenge, as Chinese labour costs have increased and Chinese multinationals are increasingly 231

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry relocating their manufacturing activities to countries with lower labour costs. To address these challenges and the opportunity of the “next production revolution”, the “Made in China 2025” strategy was launched in 2015 to strengthen China as a manufacturing country. This plan focuses on enhancing innovation, product quality and environmental sustainability, optimising industrial structure and developing human resources in manufacturing. Railway equipment is one of the ten sectors that were targeted for support in this plan.

In the EU area and Japan, R&D intensity has been somewhat stable since 2000. In the EU-28, it amounted 1.96% in 2015 driven by three countries which perform the most R&D in the EU: Germany 2.9%, France 2.2%, and the UK 1.7%. It is worthwhile noting that the EU28 accounts for nearly a quarter of world GDP and contributes to the world's R&D on a similar order of magnitude (24%) (OECD, 2016). In Japan, R&D intensity amounted 3.29%. Korea, which was the world’s most R&D‐intensive country in 2013 and 2014 due to rapid increases in recent years, is now at the second place with a 4.23% R&D intensity level. Israel (4.25%) narrowly overtook Korea in 2015 after two years in the second place.

Caution is, however, advice before drawing conclusions from statistics in Figure 187. Although R&D intensity at the country level can be a rough indicator of the country’s R&D environment in which the industrial sector performs, it may not be a good indicator of the R&D intensity of the railroad equipment manufacturing industry. Industries exhibit very different R&D intensity profiles (see, for instance, the classification provided by Galindo-Rueda and Verger, 2016) and therefore an aggregate measure can hardly capture these differences. Korea has a robust revealed technology advantage in ICT with almost half of business R&D being performed by the computer, electronics and optical industries. This industry ranks third among the high-R&D-intensity industries in OECD countries (in Galindo-Rueda and Verger’s (2016) classification) and might to a certain degree drive the Korean R&D intensity indicator.

4.3.1.4 Other R&D activities in Europe and China

Europe

Currently, at the European level, funding for research in the rail sector comes through the Research and Innovation (R&I) programme Horizon 2020 and in particular through its Shift2Rail technology initiative. Shift2Rail is the first European rail Joint Undertaking (JU) to seek focused R&I and market- driven solutions by accelerating the integration of new and advanced technologies into innovative rail product solutions (ERRAC, 2014). The initiative pursues R&I activities in support of the achievement of the Single European Railway Area and the improvement of the attractiveness and competitiveness of the European rail system (EC, 2014).

The overall research strategy was laid out in the Shift2Rail Master Plan (endorsed by the Council on February 2015) with three ambitious targets: to cut the life-cycle cost of rail transport by up to 50%, to double railway capacity, and to increase reliability and punctuality by as much as 50%. These objectives are pursued through five themed Innovation Programmes (IP):

 IP1 (Cost-Efficient & Reliable Trains) covers rolling stock development, including both high- speed and high-capacity trains  IP2 (Advanced Traffic Management & Control Systems) focuses on signalling and train control systems  IP3 (Cost Efficient and Reliable High Capacity Infrastructure) looks at different aspects of infrastructure, from the holistic system approach to individual structures and track components  IP4 (IT Solutions for Attractive Railway Services) looks at different applications of information technology from ticketing and passenger information to operations and maintenance strategies  IP5 (Technologies for Sustainable & Attractive European Rail Freight) covers all aspects of the freight task, to help rail play a more significant role in the evolving European transport market

This public-private partnership provides a platform for cooperation that will drive innovation in the years to come. The Founding Members are the European Union plus eight representatives of the rail industry, including rail equipment manufacturers Alstom, Ansaldo STS, Bombardier, CAF, Siemens 232

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry and Thales, as well as infrastructure managers Network Rail and Trafikverket. These nine founding members were subsequently joined by Associate Members selected through an open call launched in October 2014. The programme is expected to see around EUR 920 million invested over six years, of which EUR 450 million will come from the Horizon 2020 budget (around 6.3% of the total budget for transport research) and the remainder from the industrial partners. With Shift2Rail, the Commission is tripling its financing for rail research and innovation compared to the EUR 155 million for the previous period (which represented around 3.7% of the total budget for transport research, see Figure 188).

500 7,0%

6,0% 400 6,3% 5,0%

300 4,0%

3,8% 3,7% 450 3,0%

200 Million Euros Million

2,0% Share of transport budget transport of Share 100 155 1,0% 117

0 0,0% FP6 2002-2006 FP7 2007-2013 H2020 2014-2020

Rail research budget Share of transpot budget

Figure 188: Funding for rail research in the framework of the EU research and innovation programmes (million EUR, %) (Source: Author’s elaboration based on DG MOVE (2016) and DG RTD (2012))

Under the 2015/2016 calls for proposals, Shift2Rail awarded 27 grants. The 27 Shift2Rail members submitted project proposals to cover all 13 of their reserved call topics. The value of activities to be performed amount to EUR 142 million co-funded up to EUR 63 million. The applicants to the Open call for proposals for non-Members covered 14 out of 15 topics. The value of the activities to be performed by the awarded consortia amount to EUR 25 million and will be financed up to 100% of the eligible costs. With its first calls for proposal, Shift2Rail launched EUR 167 million of complementary R&I activities and planned to grant EUR 88 million for their completion. A total of 454 participants applied to the different topics available under both the open calls and the calls designated for Members, of which 25% are SMEs. In the open calls funded projects only, more than 30% of the participants are SMEs.

Under the 2017 call for proposals, 17 research projects with a combined value of EUR 110.9 million 164 have been selected for financing. These will share up to EUR 60.1 million of EU co-financing under the multi-year research programme. The call attracted 60 applications from groups representing 412 organisations, with a total value of EUR 192.8 million. These applications were seeking co-financing totalling EUR 136.5 million, which was more than twice the EUR 60.8 million available. The 27 Shift2Rail members submitted proposals under all seven of their reserved call topics with a total value of EUR 91.4 million. These will be co-funded up to EUR 40.6 million. The other 10 Open Call topics attracted 53 proposals requesting funding of EUR 95.9 million. Of these, ten were selected to share 165 the remaining EUR 19.5 million in this year’s budget. Out of 412 participants, 29% are SMEs.

Shift2Rail will impact all segments of the rail market including the high-speed segment. Specifically, high-speed rail will benefit from this programme through life cycle cost reduction, predictability, digitalisation, artificial intelligence in infrastructure, maintenance, asset management and an integrated holistic system approach (Borghini, 2016). The Innovation Programmes IP1 to IP4 are particularly relevant for the high-speed segment, as shown in Table 30:

164 Rail Gazette (15.06.17). Shift2Rail project grants awarded. Retrieved from: http://www.railwaygazette.com/news/technology/single-view/view/shift2rail-project-grants-awarded.html

165 Briginshaw D. in International Railway Journal. April 04, 2017. Shift2Rail call for research proposals exceeds budget. Retrieved from: http://www.railjournal.com/index.php/europe/shift2rail-call-for-research-proposals-exceeds-budget.html 233

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry

Table 30: Shift2Rail R&I actions for future high-speed systems (Source: Author’s elaboration based on Borghini (2016))

Innovation Major topic R&I focus on the high-speed segment Programme Light, hybrid composite car body-shells and light and efficient Lightweight and energy efficiency full silicon carbide traction systems

User-friendly rail Modular and flexible train interiors IP1: Cost-efficient and reliable trains Drive-by-data and wireless TCMS functions and low noise, Safety, reliability and connectivity friction independent brakes

Track friendly running gear and advanced monitoring of sub- Cost-effective rail system systems

Moving block Signalling Systems which defines train detection Line capacity without existing constraints IP2: Advanced traffic Developing and validating a standard ATO up to Grade of management and Automatic Train Operation Automation 4 control systems Optimising the level of protection against any significant threat Cyber Security to the signalling and telecom systems

Applying Smart power supply in an overall interconnected and Smart AC Power Supply communicating system at existing high-speed lines

IP3: Cost-efficient and Improving capacity and security, reducing whole life costs, Future Stations reliable high-capacity standardising design and improving accessibility

Improving the operational performance of existing S&C Switch and Crossing System designs with enhanced reliability, availability, maintainability and safety, and life-cycle costs

Develop new services for comprehensive door-to-door IP4: IT solutions to Multimodal journey information allowing for well-informed digital travel decisions increase the attractiveness of the Providing a comprehensive digital shopping application with railway services Customer experience applications all relevant trip offers, all operators and all geographies

166 China

The strategy for developing China’s high-speed railways was guided by the Long-Term Plan of High- speed Rail Network (2004) and the Medium-to-Long-Term Railway Network Development Plan (2008) which set up the goal of building internationally competitive high-speed rail and indigenous brands. To achieve this goal, the Chinese Ministry of Railways (MOR) and the Ministry of Science and Technology (MOST) signed the Joint Action on Developing Indigenous Innovation of China’s High- speed Rail aiming to build a high-speed rail technology innovation system based on the experience of technology import.

During 2008 and 2010, the National Natural Science Foundation of China sponsored 55 R&D projects in the high-speed domain, of which 33 (above 67%) were dedicated to absorbing the imported technologies, and developing new technologies in accordance with China’s situation. MOR and MOST consolidated 11 research institutes, 25 universities, 51 national laboratories and engineering research centres, and two leading state-owned enterprises (CRS and CNR) and their subsidiaries to participate in these projects. In this way, the enterprises could cooperate closely with research institutes and universities. From 2008 to 2010, Chinese listed enterprises in the high-speed rail industry applied for 1284 patents.

In addition to the home-based technology innovation effort, the government has considered about taking advantage of innovative global resources to enhance China’s high-speed rail technology innovation capability further. The landmark events were the approve of the 12th Five-Year Plan and the 12th Five-Year National Development Plan of Strategic Emerging Industries by the State Council in 2011 and 2012. According to the plans, domestic railway equipment manufacturers are encouraged

166 This section presents a summary of evidence examined in Sun (2015), where more information can be found. 234

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry to conduct international collaborations, acquire foreign enterprises and research institutes. Table 31 shows some examples of recent Chinese outward acquisitions in the high-speed rail domain.

Table 31: Major Chinese outward acquisitions of high-speed rail technologies (Source: Sun (2015))

Year Acquirer Acquired Description

CSR TMT acquired 75% stake in Dynex with 109 million Yuan. Through the acquisition, CSR TMT mastered IGBT CSR Zhuzhou Times Dynex Power Inc. technology, which is the core in developing HSRs at 350 2008 New Material Technology (Dynex) (located in the km/h. A leading high-power semiconductor R&D centre was Co., Ltd. (TMT) UK, listed in Canada) established in the UK. This is the first outward acquisition in China’s railway equipment manufacturing industry

CSR TMT acquired 100% stake in Delkor with 18.8 million Delkor Rail (Delkor) Yuan. CSR TMT attempts to enhance its competitiveness by 2011 CSR TMT (Australia) utilising Delkor’s R&D capability in track shock absorber products

Rubber & Plastics CSR TMT acquired full assets of ZF’s BOGE Programme with Division (BOGE 290 million Euros, including 10 global production bases and 4 2013 CSR TMT Programme) in ZF R&D centres. The acquisition is conducive to making TMT a Friedrichshafen AG global developer of automotive damper products (ZF) (Germany)

MA Steel acquired Valdunes with 13 million Euros. The acquisition is beneficial to MA Steel in HSR wheel R&D, Maanshan Iron & Steel 2014 Valdunes (France) design and production. A new company, MG Valdunes, has Co., Ltd (MA Steel) been established. An R&D centre will be established within MG Valdunes

This new round of technology acquisitions focuses on the forefront technologies of the key components. Chinese enterprises tend to establish R&D centres in the acquired companies. In this way, China attempts to integrate innovative external resources into the existing high-speed rail technology innovation system. For instance, the R&D team of the semiconductor maker Dynex (UK) increased from 12, at the time of its acquisition, to about 40 today and the overall staff grew from 167 fewer than 250 to about 300 (Liu C. in China Daily Europe, 17/02/2017).

168 Moreover, according to Liu C. (China Daily Europe, 17/02/2017), CRRC has recently (2015) established a rail R&D centre in the UK, to collaborate with three British universities: Imperial College London, the University of Southampton and Birmingham University. The collaborations focus on pioneering train technology to increase reliability and create products specifically suited to the needs of the UK (and therefore the European) market. With the Imperial College London, the research concentrates on modern manufacturing processes for high-speed trains, to improve efficiency and reduce costs. R&D work could incorporate innovative modern manufacturing methods, including new methods of forming metals that can cope with the complex shapes of trains. The collaboration may also explore automated manufacturing methods that have advantages for mechanical behaviour and aerodynamics. On the other hand, the work with the University of Southampton focuses on improving active noise and the travelling experience, which can help CRRC's expansion in Europe, a market attuned to train comfort.

4.3.2 Innovation

The development of significant technological changes in rail rolling stock is difficult given the long lifetime of vehicles and signalling systems and the particularly high safety standards of the rail industry which involve complex homologation processes of new trains and control systems (see Deliverable D4.1 of this project). These factors make the rail industry to exhibit a low speed of dissemination of

167 See: http://qingdao.chinadaily.com.cn/2017-02/17/content_28301245.htm

168 See: http://qingdao.chinadaily.com.cn/2017-02/17/content_28301245.htm 235

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry innovations. It is, nevertheless, worth mentioning that regulations can also play a crucial role in driving innovation. This is the case, for instance, of the Commission’s requirements of a common European railway signalling system (ERTMS) which has provided incentives for an intense R&D activity in the field and helped EU companies to export their products in third markets (Wiesenthal et al., 2011). This example shows the innovation capability of the European railway industry as the standard has become global.

It should be mentioned that the availability of suitable quality international statistics to measure innovation activity in the rolling stock industry was limited. The analyses in this section are based on patent statistics extracted from the OECD Green Growth Indicators and the OECD Patent database. Two indicators on the development of railway technology are analysed, the share in global patents in railway environmental technology and the share of global patents in selected key railway technological components.

Patent data are widely used as a measure of technological innovation under the assumption that they reflect the output of the inventive process. Patents can also be considered as an intermediate step between R&D and innovation (OECD, 2008). Patents refer to technical inventions that contain new knowledge, have a potential for commercial application and proofed a certain level of technical feasibility (Van de Velde et al., 2015). Therefore, patents can be seen as a first step in the deployment of new technological knowledge. It is important to bear in mind, however, that patent statistics do not provide a perfect measure of innovation as not all new technologies are patented, and not all patents 169 are commercialised.

4.3.2.1 Development of railway environmental technology

Focus Area:

Type:

Key Performance Indicators:

Score: 3 Europe has a competitive advantage in comparison with its global (Asian) rivals

Summary

Europe is leading its Asian competitors as regards the development of railway environment-related technology, followed by Korea. Within Europe, Germany is the leader in knowledge creation, followed by France. Nevertheless, it should be noted that whereas the innovation performance of Europe has decreased in the recent years, China’s performance has significantly increased. When looking at high- value inventions, Europe stands out as the world leader, far ahead of the other countries. However, in this segment, China has also shown a significant upsurge in the last few years.

Description of the indicator

The indicator technology development in environment-related technologies was recently added to the OECD Green Growth indicators. This indicator accounts the number of inventions developed by country's inventors (i.e. all known patent families worldwide are considered) using the Worldwide 170 Patent Statistical Database (PATSTAT) which covers over 90 patent offices worldwide. The indicator allows assessing innovative performance related to selected environmental technologies including climate change mitigation technologies related to transportation. The share in global inventions was calculated as the number patent applications by country/region divided by the number of applications worldwide.

Analysis & Assessment

169 For a complete list of advantages and disadvantages of the ability of patent data to reflect inventive activities, see OECD (2008).

170 See OECD (2015a) and Haščič, Silva and Johnstone (2015) for more details in the construction of this indicator. 236

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry

Data were collected from the OECD Environment Statistics database under the technology domain rail transport (IPC/CPC code Y02T30). Technologies in the railway sector include energy recovery and improvement of energy efficiency (see OECD, 2015a), as follows.

Energy recovery technologies concerning the propulsion system in locomotives or motor railcars in:

 Electric locomotives or motor railcars with electric accumulators (e.g. involving regenerative braking)  Locomotives or motor railcars with pneumatic accumulators  Locomotives or motor railcars with two or different kinds or types of engine  Specific power-storing devices

Other technological aspects of railway vehicles:

 Reducing air resistance by modifying contour  Composite and lightweight materials  Devices for using the energy of the movements of the vehicle  Bogie frames comprising parts made from fibre-reinforced matrix material  Applications of solar cells or heat pipes, e.g. on ski-lift cabins or carriages for passengers or goods  Concerning heating, ventilating or air conditioning

Before analysing Europe’s performance compared to its major global rivals, it is useful to look at European trends at the country level. Figure 189 shows statistics for the two major inventors of railway environment-related technologies at the European level: Germany and France. These two countries represent around 75% of the EU inventive activity in the field. With almost half of Europe’s inventions, Germany appears as the clear leader in the development of railway environment-related technology.

70%

60%

50%

40%

30%

20%

10%

0% Sharein European patent applications (%) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Germany France

Figure 189: Development of railway environmental technologies in selected European countries (all inventions), 2005-2014 (Source: Author’s elaboration based on OECD Environment Statistics database)

Figure 190 displays the share in global inventions of environmental-related technologies of the countries/regions of interest. The data indicate that Europe has been the leader in rail environmental technology inventions closely followed by Korea, whereas Japan and China have remained behind with a low share of patents in the field. Nevertheless, the innovation performance of European countries has decreased by around one-third in the last few years. A similar trend is displayed by Japan and Korea which have lost nearly half of their innovation performance. On the other hand, a sharp increase is apparent in the share of rail environmental inventions developed in China in the last couple of years. This country has six-folded the number of inventions in only two years and surpassed Europe by four percentage points in 2014, becoming, therefore, the new leader in this segment. Whether this trend is set to remain is still to be confirmed.

237

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry

40%

35%

30%

25%

20%

15%

10%

Sharein global patent applications(%) 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

EU China Japan Korea

Figure 190: Development of railway environmental technologies in selected countries/regions (all inventions), 2005-2014 (Source: Author’s elaboration based on OECD Environment Statistics database)

The upsurge observed in China has nevertheless to be taken with caution. OECD (2015a) claims, for instance, that the low patentability standards and the narrow patent breath required by the Chinese patent office may be at the origin of the Chinese high patent-based performance figures. According to estimations of McKinsey Global Institute (2015), the ratio of average forward citations per patent of top Chinese players in high-speed rail relative to global top players was only 0.2 in the period 2010-2013.

Figure 190 takes into account figures based on all available data worldwide considering, therefore, the entire stock of patent priorities, but also including many low-value inventions. In order to compare performance on inventive activity based on high-value inventions, the related literature (see e.g., OECD, 2015a and UNEP/EPO, 2015) usually considers statistics that have sought patent protection in at least two jurisdictions (which reflects their high value as regards additional costs and delays involved in extending protection to other countries). Following this literature, Figure 191 compares data for only high-value inventions in railway environmental technology.

70%

60%

50%

40%

30%

20%

10%

Share in global Share patent applications(%) 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

EU China Japan Korea

Figure 191: Development of railway environmental technologies in selected countries/regions (high-value inventions), 2005- 2014 (Source: Author’s elaboration based on OECD Environment Statistics database)

Even if the trends displayed in Figure 191 are similar to those shown in Figure 190, three significant observations can be drawn. First, when it comes to high-value inventions, Europe stands out as the world leader, far ahead of the other countries (with an average share over 40% in the whole period). On average, around 70% of all European railway environmental technology inventions are high value. Second, Korea, which ranked second in Figure 190, performs poorly on high-value inventions (with an average share of 1%), suggesting, therefore, an inventive Korean activity focused on low-value inventions. Third, Japan holds a high rate of high-value inventions. Finally, it is worth noting that China is also active in high-value inventions and is also taking over Europe at this level.

4.3.2.2 Development of railway technology 238

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry

Focus Area:

Type:

Key Performance Indicators:

Score: 3 Europe has a competitive advantage in comparison with its global (Asian) rivals

Summary

Patent-based statistics for four railway technological components analysed: locomotives and motor railcars, body, suspensions and control and signalling systems. The analysis shows that Europe is leading in knowledge creation for the four segments, far ahead Asian countries. It is important, nevertheless, to mention the possible bias arising from the fact that comparable international data were only found for the EPO and USPTO offices (OECD Patent database).

Description of the indicator

Patent statistics allow measuring the inventiveness of countries, regions firms and industries, under the assumption that patents are a reflection of inventive output and that more patents mean more inventions (OECD, 2008). The indicator share in global patent grants allows comparing the inventive performance and the production of new technology. It is calculated as the number patents granted at the EPO and USPTO offices for the different countries/regions divided by the number of patents granted worldwide in these two offices.

Analysis & Assessment

Data were extracted from the OECD Patent database which covers patent applications to the European Patent Office (EPO), the US Patent and Trademark Office (USPTO) and the Patent Co- operation Treaty (PCT). Only data on patent grants to the EPO and USPTO were considered. PCT

Four key technological components of rolling stock systems are considered: locomotives and motor railcars, body, suspensions and control and signalling systems. Figure 192 provides the grant shares for the different countries/regions analysed. The figure reveals that Europe is an important knowledge generator worldwide. In the four technological segments analysed, Europe exhibits, in average, a share higher to 45% and this share increases to more than 50% when it comes to control and signalling systems (i.e., Figure 192-d). Europe is followed by far from Japan which appears to be increasing its share of vehicle suspensions in the last few years.

(a) Locomotives and motor railcars (b) Body details and kinds of railway vehicles 70% 60%

60% 50% 50% 40% 40% 30% 30% 20% 20%

10% 10% Sharein global patent grants(%) 0% Share inglobal patent grants (%) 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

EU China Japan Korea EU China Japan Korea

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60% 70% 60% 50% 50% 40% 40% 30% 30% 20% 20%

10% 10% Sharein global patent grants(%) Sharein global patent grants(%) 0% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

EU China Japan Korea EU China Japan Korea

Figure 192: Development of railway technologies in selected countries/regions (EPO and USPTO patent grants), 2000-2012 (Source: Author’s elaboration based on OECD Patent database)

Notes: Patent counts are based on the priority date and the inventor’s country of residence by patent offices. IPC codes are as follows: (a) B61C, (b) B61D, (c) B61F and (d) B61L. EU data includes EU28, Norway and Switzerland.

It should be emphasised that patent data are complex and their use and interpretation require caution. Statistics presented in Figure 192 correspond to the aggregate of patents granted by the EPO and USPTO which protect the European and US markets and, therefore, an imbalance of representation of European against Asian countries cannot be ruled out. Chinese inventors, for instance, might tend to file for protection mainly in China to the State Intellectual Property Office of People’s Republic of China (SIPO). Unfortunately, the OECD Patent database does not take into account other national patent offices. The fact that USPTO grants are taken into account in these analyses might reduce, to some extent, this imbalance as European as well as Asian inventors might highly value the US market.

4.3.3 Technological leadership on the market 4.3.3.1 High-speed rail technological mastery

Focus Area:

Type:

Key Performance Indicators:

Score: 3 Europe has a competitive advantage in comparison with Chinese rivals

Summary

Technological leadership involves the concept of technological mastery (i.e., the ability to make effective use of technological knowledge). This section shows that traditional European and Japanese high-speed train manufacturers have gained their technological mastery through accumulated learning and experience over time. On the other hand, the recently established Chinese high-speed rail industry has built its technological capacity based on technology transfers from the European and Japanese industries. Evidence collected shows that, currently, no clear consensus allows determining the degree to which China’s high-speed train makers master the technology acquired from worldwide industrial leaders. As reservations remain, both regarding significant technological improvements and system management, we conclude that Europe still holds a competitive technological advantage in comparison to China. Nevertheless, the gap is reducing, and the intense R&D efforts of the Chinese government and firms will undoubtedly end up paying high dividends regarding technological mastery.

Description of the indicator

Technological mastery, the ability to make effective use of technological knowledge, is a critical issue when investigating technological leadership. In high-speed rail manufacturing, the traditional technology leaders have been Hitachi, Kawasaki Heavy Industries (KHI), Nippon Sharyo, Alstom, Siemens and Bombardier. In recent years, these world-class firms transferred their technical long-term experience and know-how in the manufacture of high-speed rail vehicles to the new entrants in this 240

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry niche, namely the South Korean Hyundai Rotem and the Chinese CRRC (i.e., its predecessors CNR and CSR). Market statistics presented in Section 4.1.3, showed that the recently established CRRC had become the leader in the high-speed segment in terms of units delivered. In this section, we investigate whether, despite this, European manufacturers have succeeded in keeping their technological leadership. This qualitative indicator shows evidence on the ability of Chinese high- speed rail suppliers to make effective use of the high-speed technology.

Analysis & Assessment

Moretto et al. (2014), based on Zhou and Shen (2011), identifies four high-speed train world-class technologies, as follows:

 The Japanese Shinkansen (models S0, S500 and E5) manufactured by the consortium around Hitachi, Nippon Sharyo and KHI  The French TGV (models PSE, MED and AGV) manufactured by Alstom  The German ICE (models 1, 3 and 350E) manufactured by Siemens  The Chinese CRH (models 1, 2 and 380B) manufactured by Bombardier, Siemens, Tangshan Railway Vehicle and Changchun Railway Vehicles

Figure 193 displays the technological evolution of these high-speed trains according to their maximum commercial operation speed. The first generation corresponds to a maximum of 250 km/h, the second 171 generation to a maximum of 300 km/h, and the third one is above 350 km/h.

Figure 193: Technological transitions of high-speed reference trains worldwide (Source: Moretto et al. (2014))

The development cycle separating the first from the second generations of vehicles of the Shinkansen, the TGV and the ICE is about 30, 20, and 10 years, respectively. The shift from the second to the third generation is shorter, taking about 13, 7 and 4 years, respectively. This radically contrasts with the CRH (late entrant) which took only one year to shift from the first to the second generation and two years to shift from the second to the third generation. This could be explained by the fact that, in 2004 (after almost a decade of unsuccessful attempts to develop indigenous high-speed technology), China implemented a strategy on technology transfer to import and reverse high-speed technology from foreign firms to achieve indigenously manufactured systems (USCC, 2017). Therefore, the first high- speed rail vehicles produced in this country benefited from the experience of the industry leaders in the segment which, at that moment, were already moving to the second generation of trains.

171 For a complete analysis of the development of each of technology, see Moretto et al. (2014). 241

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry

Several experts around the world have, nevertheless, cast doubt on the rapid development of the Chinese high-speed rail industry. Bocquet and Parternotte (2011), for instance, question the quality of “such a massive production and such a rate of putting in service until then never seen in the world”. According to the authors, the import of foreign technology requires development and adaptation capabilities that cannot be neglected before any mass production. It is worth mentioning that knowledge in the railway industry is typically based on accumulated learning, acquired over time through experimentation and learning by doing. According to Raimbault, Banquart and Poinsot (2017), in the railway sector, feedback is considered as the primary and unavoidable mode of validation of a project.

The importance of experience in railway manufacturing is well illustrated in a recent paper by Dhir, Marinov and Worsley (2015) which intends to identify the most suitable manufacturer of high-speed rail vehicles for the UK project High Speed 2. The paper defines six criteria under which high-speed rail manufacturers are compared. Among the criteria, priority is given to the experience in high-speed rail manufacturing (with a weight of around 51% among the criteria), measured as the number of very high-speed trains in operation (32%) and experience in the high-speed sector (19%). Amongst the four rolling stock manufacturers identified by the study as the most suitable for supplying the vehicles for 172 High Speed 2 (i.e., Bombardier, Siemens, Hitachi and Alstom ), Alstom was the recommended choice. Alstom’s assessed performance was almost the double of the second choice, Bombardier (followed by Siemens and Hitachi). The apparent dominance of Alstom arises from its experience in very high-speed train applications and the extensive portfolio of countries with applications.

To assess the level of technical mastery of high-speed rolling stock by the Chinese industry, in what follows, we summarise the development of this industry in China and how European manufacturers participated in it.

Development of the Chinese high-speed rail industry and assessment of its technological mastery

In 2004, the Long-Term Plan of High-Speed Rail Network set three strategies regarding inward technology exploitation: to import advanced high-speed rail technologies from multinational enterprises, to design and produce jointly, and to build Chinese brands (Sun, 2015). The first contracts with foreign companies, eager to access China’s massive market, were awarded on the condition that they assemble the trains through local joint ventures (JV) while transferring their technical know-how. According to Lin, Qin and Xie (2015), a technology transfer contract typically consisted of four components:

 Joint design of trains based on foreign prototypes with adaptation to the Chinese environment  Access to train blueprints  Instructions on manufacturing procedures  Necessary training of engineers

This way, established European and Japanese OEMs (Alstom, Siemens, Bombardier and KHI) designed and supplied high-speed trains and component technologies (ranging from engines, dynamos, and electricity transmissions to railway signal control systems) to this country through joint ventures and partnerships with the local manufacturers CSR and CNR (not integrated by that time). CSR had joint ventures with KHI and Bombardier, while CNR’s partners were Alstom, Siemens and Bombardier (Figure 194).

172 Note that in November 2017, the project promoter (HS2 Ltd) announced that five bidders have been shortlisted for the contract to supply at least 54 trainsets for High Speed 2: Alstom, Bombardier, Hitachi, Talgo and Siemens. See Railway Gazette, 20 Nov 2017, HS2 Ltd reveals rolling stock contract shortlist, retrieved from: http://www.railwaygazette.com/news/high-speed/single-view/view/hs2-ltd-reveals-rolling-stock-contract-shortlist.html 242

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Figure 194: Partnerships established between foreign companies and CSR and CNR (Source: GIC (2014))

Figure 195 displays the different technologies involved in the agreements according to the manufacturer. It includes the high-speed train models: Zefiro (Bombardier), Shikansen (KHI), Velaro (Siemens) and Pendolino (Alstom). Chinese manufacturers gained, therefore, access to the technical expertise of all leading competitors with valuable and longstanding technology and know-how.

Figure 195: High-speed foreign technologies involved in the transfer to the Chinese rail industry (Source: SCI Verkehr (2014))

It is worth noting that not only the two Chinese OEMs (CSR and CNR) benefitted from this technology transfer but also multiple of their subsidiaries at different degrees, in different geographical locations, and in different technological domains (Lin, 2016). Many of the introduced technologies had even applications separated from the high-speed system, with high potential for technology spillovers.

Between 2007 and 2008, China introduced the country’s first high-speed services, featuring trains manufactured in China using foreign platforms. To better understand the participation of European OEMs in this technology transfer, data from the last UIC’s world inventory of high speed rolling stock (1st September 2017, referenced as UIC, 2017) were analysed. To facilitate comparison with data in Figure 173, the same time periods were used (e.g. 2007-2009, 2010-2012).

According to UIC’s data, 128 new trainsets were delivered to China in 2006, 691 in the period 2007- 2009, and 808 in the period 2010-2012. Figure 197 shows the number of trainsets delivered in each period according to the origin of the manufacturer. Trains delivered in 2006 were manufactured by an EU and Chinese consortia between CRS and Bombardier. In the period 2007-2009, 42% of the trainsets delivered (287 units) were manufactured by EU and Chinese joint ventures, 45% (313 units) by Japanese and Chinese joint ventures and only 13% (91 units) by Chinese manufacturers alone. This trend was reversed in the period 2010-2012 in which almost the totality of trainsets (91%) was delivered by Chinese manufacturers replacing, therefore, the joint ventures with foreign manufacturers.

900 800 700 91 600 500 313 732 400 300

Number of trainsets of Number 200 287 243 100 128 76 0 2006 2007-2009 2010-2012

European-Chinese JV Japanese-Chinese JV Chinese D2.1 Mapping of the current status of dynamics of value chain 1of Figure 196:European . High-speed transporttrainsets delivered manufacturing in China by the industry origin of the supplier, 2006-2012 (number of units) Source: Author’s calculation based on data from UIC (2017)

When looking at those manufacturers who supplied vehicles in the period 2006-2009 (Figure 197), the consortia formed by Bombardier and CSR accounted for 21% of the market share, the consortia formed by Alstom and CNR for 20% and Siemens and CNR for 10%. This means that 51% of the high-speed trainsets put in service in China during the period 2006-2009 used high-level technology from European manufacturers.

CNR-CSR 11% CSR-Bombardier 21%

CNR-Alstom 20% CSR-KHI 38%

CNR-Siemens 10% Figure 197: Market share by manufacturer of Chinese high-speed trainsets, period 2006-2009 (number of units) (Source: Author’s calculation based on data from UIC (2017))

It was only until 2010 that Chinese officials and manufacturers claimed to have built a high-speed rail vehicle product of their intellectual property, the CRH380A, through “digesting” and innovating upon foreign technology (USCC, 2017). Nevertheless, the degree of innovation and the technological mastery of the Chinese domestic high-speed products have been challenged by several specialists. Some of the concerns raised include intellectual property rights issues, use of low-quality materials, design flaws and negligent safety management practices. Some specialists have advocated, for instance, that roughly 90% of high-speed rail technology used in China was derived from partnerships or equipment developed by foreign companies and that China’s “innovation” only involved cosmetic modifications with no significant technology breakthrough (see: USCC, 2017 and Credit Suisse, 2016). Regarding the mastery of the acquired high-speed technology, some have pointed out important signalling-equipment design flaws (possibly linked to the use of low-quality materials) and negligent safety management practices given the haste in the expansion of the country’s high-speed system (see: USCC, 2017 and GIC/GCC, 2014). Conversely, others hold the view that the Chinese high- speed rail industry has proven to be innovative and has learned efficiently and applied the acquired technology (see: McKinsey Global Institute, 2014).

We have summarised these different views in Table 32 and assessed the capacity of the Chinese high-speed industry to master the technology acquired based on the arguments exposed by the sources. It is worthwhile noting that the authors of the reports used for the evaluation range from governmental bodies (i.e. the US-China Economic and Security Review Commission and the German Industry and Commerce Ltd. / German Chamber of Commerce in Hong Kong), to market analysts and consultancy firms (i.e. Credit Suisse and McKinsey Global Institute).

Table 32 disclosures that no a clear consensus allows determining the degree to which China’s high- speed train makers master the technology acquired from worldwide industrial leaders. Considering all of this evidence, we conclude that as reservations remain, both regarding significant technological improvements and system management, Europe holds a competitive technological advantage in comparison to China. Nevertheless, the gap is reducing, and the intense R&D efforts of the Chinese government and firms will undoubtedly end up paying high dividends in terms of technological mastery.

Table 32: Assessment of the Chinese high-speed rail technological mastery based on arguments collected from different sources

Chinese HSR Reasons 244

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technological mastery Foreign industry executives have (privately) advocated that: (i) the core technology behind the CRH380A was nearly identical to acquired foreign technology; (ii) roughly 90% of HSR technology used in China was derived from partnerships or equipment developed by foreign companies; and (iii) China’s “innovation” only involved cosmetic modifications to the body of the train and a beefed-up Low propulsion system to achieve faster speeds. (USCC, 2017)

In 2011, the investigation of the HSR accident in China, near the city of Wenzhou, determined that “serious design flaws” in the signalling equipment were the proximate cause of the collision. The report also highlighted bidding irregularities and negligent safety management practices. In less than a decade, the technological jump-start supported by foreign enterprises, in high-tech train R&D and production, has allowed for CNR and CSR to catapult into the position of a major and sophisticated locomotive and rolling stock producers. Even though the actual share of genuine Chinese innovations in train models like the CRH380A is certainly questionable, the technical capabilities of the Chinese train manufacturers are inevitably growing in line with the gained Medium knowledge and experiences, regardless whether from own R&D or copying and reverse engineering. (GIC/GCC, 2014)

The haste and low-quality materials in use (mainly connected to the virulent corruption in the entire Chinese railway sector) had led to a fatal accident in July 2011, when two high-speed trains collided near Wenzhou, due to insufficient and defect signalling equipment. The collision was not connected to the high-speed trains themselves, these trains (CRH1B and CRH2B) were not even one of the ‘genuine’ Chinese models, but manufactured by CSR joint ventures with Bombardier and Kawasaki. Chinese manufacturers account with a large domestic market, and the state-sponsored technology Medium transfer policy helps them build up their technology base. It remains to be seen whether China can (Credit Suisse, 2016) successfully export its high-speed rail products to other countries in a profitable manner. Also, there is no major technology breakthrough from China in high-speed rail yet.

The high-speed rail industry exemplifies the “digest and innovate” approach to learning. To advance learning, CRRC developed a 1:3 ratio approach: for every dollar spent on technology transfer, the company would invest three dollars to learn and apply the technology. Once they had the knowledge High to do so, Chinese engineers pursued innovations to meet local requirements. In 2010, the company introduced the CRH380, China’s first local locomotive design, which has a top speed of 380 km per (McKinsey Global hour. Other innovations include locomotives designed to operate in difficult environments, such as Institute, 2015) the Harbin–Dalian route in the frozen northeast. Engineers developed a cabin designed for snowy conditions and ways to control water produced by rapid temperature changes. China has already built more than 16,000 km of high-speed rail lines, and Chinese equipment companies are in discussions with 28 countries for export deals.

Notes: Although the assessment compiled in this table derives from arguments collected from the referenced reports, the evaluation (low, medium, and high) remains ours and does not imply any endorsement by the authors of the mentioned reports of the evaluation assigned.

4.3.3.2 Share of high-speed trains commercialised in domestic and foreign markets

Focus Area:

Type:

Key Performance Indicators:

Score: 3 Europe has a competitive advantage in comparison with global (Asian) rivals

Summary

Technological leadership on the market can be measured through the ability to commercialise technological products in global markets. Market shares calculated using UIC’s (2017) data show that 245

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European manufacturers have succeeded in accessing the majority of global markets. European high- speed rail vehicles are not only present in the domestic market (with a share of 92%) but also in new high-speed markets such as Turkey, Saudi Arabia and Morocco although an intense competition from other manufacturers who were also bidding for projects in these new markets. European OEMs have also introduced their advanced technologies and know-how in China and Korea under joint ventures of technology transfers with local manufacturers. Based on this evidence, we conclude that European manufacturers have a competitive advantage in comparison with their Asian rivals.

Description of the indicator

This indicator assesses the degree to which high-speed rail manufacturers have succeeded in accessing global markets with their vehicle technologies. The indicator measures the market shares in a region, in terms of the number of trainsets (currently in operation and planned), per manufactures according to their origin (i.e., European, Japanese, Chinese, and Korean).

Analysis & Assessment

Our calculation is based on the World High-Speed Rolling Stock Inventory provided by UIC (version 1st September 2017, referenced as UIC, 2017), which contains all the high-speed trainsets in operation and planned (i.e. already contracted) in the world. Beyond technical characteristics (e.g. power, tractive effort, acceleration), the document provides information on the vehicle class, the number of trainsets, the year the vehicle was put in service or delivered, the operator/owner, and the leading suppliers. Both vehicles currently in service and ordered were taken into account (covering until the year 2020). Results are displayed in Figure 198 (the bars represent the different geographical markets).

Figure 198 shows that European manufacturers have not only succeeded in keeping the majority share in their domestic market but have also accessed the majority of geographical markets. In their domestic market, European manufacturers have delivered 92% of the vehicles. The remaining 8% 173 corresponds to the Japanese Hitachi who has recently (2009) accessed the UK market. European OEMs have introduced their advanced technologies and know-how in China and Korea under joint ventures of technology transfers with local manufacturers. Vehicles produced under these joint ventures represent around 30% of the market in these countries. European manufacturers have also successfully gained new high-speed markets such as Turkey, Saudi Arabia and Morocco although an intense competition from other manufacturers who were also bidding for projects in these new markets.

8% 19% 38% EU-KR JV 30% JP-CH JV EU-CH JV 100% 100% 100% 100% 100% 100% 100% 92% Korean

62% Chinese 51% Japanese European

EU Japan Korea China Turkey Saudi Arabia Morocco US Russia Chinese Taipei

Figure 198: High-speed market shares according to the origin of the manufacturer (number of trainsets) 174 (Source: Author’s calculation based on data reported by UIC (2017)

173 This figure (8%) includes vehicles already delivered and contracted for delivery in 2017 and 2018.

174 The World High Speed Rolling Stock, downloadable at: http://uic.org/high-speed-database-maps 246

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Notes: The figure includes Joint Ventures for technology transfers between European and Chinese manufacturers (EU-CH JV), Japanese and Chinese manufacturers (JP-CH JV) and European and Korean manufacturers (EU-KR JV). Vehicles for inspection were not taken into account. Data updated September 2017. The EU market includes: Austria, Czech Republic, Finland, France, Belgium, UK, Netherlands, Germany, Denmark, Italy, Poland, Portugal, Slovenia, Spain, Sweden, Norway and Switzerland.

Japanese high-speed makers have successfully kept their domestic market, supplied high-speed in Chinese Taipei (Taiwan) and, as already said, they have succeeded in entering the European market. This year, Japan and India have formally agreed on a plan to build a high-speed rail line in India, with 175 the Japanese government financing 81% of the cost (with a soft loan carrying an interest rate of 0.1%) and Kawasaki and India’s Bharat Heavy Electrics Ltd. collaborating on the rolling stock.

When looking at Chinese manufacturers, it is clear that they have delivered most of the vehicles used in their domestic market but have not accessed yet international markets. Figure 198, therefore, reveals that China has become the major manufacturer of high-speed trains (see Figure 173) by serving the substantial domestic demand (secured by the Chinese government, see Deliverable D4.1). The role of Chinese firms in high-speed projects abroad (Turkey in 2014) has been limited to the construction of infrastructure and not to the supply of rolling stock. Chinese railway firms have been actively looking for high-speed projects overseas without significant success. Although initially they were focused on emerging markets, in recent years they have also begun to bid aggressively for 176 contracts in developed markets (USCC, 2017). According to China Daily USA (March 10th 2016), as of March 2016, China was in talks about high-speed rail projects with more than 30 countries including the United States, Russia, Brazil, Thailand, Turkey, Saudi Arabia and Iran. Nevertheless, it was only until this year that CRRC signed a contract (April 2017) to supply high-speed trainsets for Indonesia. Interestingly, 75% of the project is financed by China through the China Development Bank.

Similarly, Korean manufacturers have only supplied high-speed vehicles in their domestic market and have not accessed yet international markets in this segment.

It is worth mentioning that whereas the European rail market is becoming more liberalised and open to foreign suppliers, certain Asian markets remain less accessible. The UNIFE World Rail Market Study 2016, for example, confirms a continuous exclusion of European bidders from certain markets (e.g. China and Japan) and highlights the fact that whereas overseas suppliers can operate freely in European countries, some Asian markets are barely accessible or completely closed to European players.

4.3.3.3 Worldwide diffusion of the European, Chinese and Japanese Train Control Systems

Focus Area:

Type:

Key Performance Indicators:

Score: 3 Europe has a competitive advantage in comparison with its global (Asian) rivals

Summary

This indicator provides insights on the ability of the European, Chinese and Japanese industries to commercialise worldwide their control and communication systems, namely the ETCS, CTCS and EJTC (see Section 4.2.4). The evidence collected shows that the ETCS has emerged as a global signalling standard. Its global domination is not only proved by the fact that it has been deployed in non-European countries, but also by the fact that Chinese and Japanese suppliers have been working on the development of ETCS systems. The success of the system in non-European countries demonstrates that it is highly price-competitive and has a high business case, even where

175 Skift (14.09.2017), High-Speed Rail in India Finds Momentum as Japan Sells It Shinkansen Tech. Retrieved from: https://skift.com/2017/09/14/high-speed-rail-in-india-finds-momentum-as-japan-sells-it-shinkansen-tech/

176 http://usa.chinadaily.com.cn/epaper/2016-03/10/content_23813667.htm 247

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry interoperability is not at stake (Brutin, 2010). Unfortunately, only statistics for the diffusion of ETCS systems were found so that the indicator remains of a qualitative nature.

Description of the indicator

This qualitative indicator explores the degree to which the European, Chinese and Japanese industry have succeeded to commercialise worldwide the ETCS, CTCS and EJTC, respectively. Unfortunately, only statistics showing the worldwide deployment of the ETCS were found. The comparison with the Japanese and Chinese systems, therefore, relies on evidence found mainly in the UIC’s World High- 177 Speed Rolling Stock Inventory (UIC, 2017) and specialised railway magazines such as the Global Railway Review and the Rail Engineer.

Analysis & Assessment

Figures below show the deployment worldwide of both onboard and track ETCS systems. It is worthwhile noting that around one-third of ETCS contracted vehicles (left-hand side of Figure 199) and nearly half of ETCS contacted tracks (right-hand side of Figure 199) are found outside Europe. When looking at those countries that have contracted vehicles outside Europe (right-hand side of Figure 200), it can be seen that Chinese Taipei (Taiwan), (South) Korea and China account as the major contractors. Regarding contracted ETCS lines outside Europe, it is indubitably China that accounts for the major share (right-hand side of Figure 202).

Figure 199: Global deployment of ETCS in terms of onboard (left) track (right) contracted systems (Source: UNIFE (2016))

177 Beyond rolling stock characteristics, the UIC’s World High Speed Rolling Stock Inventory also provides the signalling system used. 248

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Figure 200: Deployment of ETCS onboard systems in domestic (left) and foreign (right) markets (Source: UNIFE (2016))

Figure 201: Global deployment of ETCS track systems in domestic (left) and foreign (right) markets (Source: UNIFE (2016))

Unfortunately, similar statistics were not found for the EJTC and CTCS systems. A quick glance at the UIC’s World High-Speed Rolling Stock Inventory, let us conclude that Japanese EJTC signalling systems (e.g. ATS or ATP, see Section 4.2.4) have also been used outside Japan, notably in Korea and Turkey (which also use the ETCS, as shown in Figure 200 and Figure 201). Regarding the CTCS, the UIC’s Inventory reveals that these systems have only been used in China. All of this evidence, nevertheless, does not take into account the use of these systems in conventional railways and may, therefore, underestimate the extent to which EJTC and CTCS systems have spread worldwide.

It should be noted that Japanese companies have been developing ETCS-type products in the recent years. Hitachi, for instance, has been active in the Chinese market with systems which combine both infrastructure (including the Radio Block Centre) and onboard equipment compatible with CTCS level 3 (and therefore with ETCS Level 2), but without some of the sub-set requirements (Clive, 2015). After several successful tests, in the UK, on the integrity of its ETCS onboard systems and their compatibility with systems provided by other suppliers, Hitachi received the regulatory approval to use 178 its digital signalling on passenger services. Nevertheless, Clive (2015) claims that much more mainline testing will be required before the trains enter service, including achieving all the necessary safety and performance verifications, which can be a slow and complex process.

178 In 2016, the Rail safety regulator (ORR) approved Hitachi Rail Europe’s on-board ETCS equipment for use in passenger service. See: http://www.railwaygazette.com/news/technology/single-view/view/hitachi-etcs-approved-for-passenger- service.html 249

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4.3.3.4 High-speed network equipped with GSM-R systems or equivalent

Focus Area:

Type:

Key Performance Indicators: < Proportion of high-speed network equipped with GSM-R systems or equivalent>

Score: 2 Europe has no a competitive advantage, non a competitive disadvantage in comparison with Chinese rivals

Summary

This indicator allows assessing the level of implementation of the currently most advanced train control systems in Europe and China, those using a GSM-R protocol. As there is no Japanese system comparable, the assessment is limited to Europe and China. Even if the proportion of the high-speed network equipped with a GSM-R protocol is slightly higher in Europe than in China, the level of implementation is very close (45% in Europe against 41% in China). Therefore, regarding implementation, no particular competitive advantage or disadvantage is identified for Europe.

Description of the indicator

The indicator proportion of high-speed network equipped with GSM-R systems compares the level of implementation the European and Chinese train control systems in the domestic networks.

Analysis & Assessment

The introduction of ERTMS/ETCS Level 2 is considered as one of the major technological innovations in the world of railway signalling in recent years (Senesi, Marcoccio and Olmi, 2016). ETCS Level 2 and Level 3 use a protocol that communicates directly with a Radio Block Centre (RBC) to the onboard unit using GSM-R (Section 4.2.4). Currently, these levels are the most advanced 179 implemented train control systems in Europe and China. Unfortunately, as shown in Figure 179, there is no a Japanese digital ATP system comparable to ETCS level 2 or CTCS level 3. Therefore, the comparison is limited to Europe and China.

Two different data sources were used to construct this indicator. The UIC’s World High-Speed Lines Inventory (UIC, 2017a) provided the length of the lines (km) and the ERTMS Deployment World Map (ERTMS, 2013) allowed to identify the type and level of the communication system used (i.e., ETCS level 2 or CTCS level 3). Results are displayed in Figure 202.

Figure 202 shows that the level of implementation of train control systems using a GSM-R protocol is slightly higher in Europe than in China, but the level of implementation is somewhat close. Europe has already equipped 45% of the high-speed network with ETCS level 2 systems whereas that China has equipped 41% of its high-speed network with CTCS level 3 systems (left-hand side of Figure 202). Nevertheless, the length of the network already equipped in China is considerably higher than the European (10.722km of lines in China against 3.482km in Europe, right-hand side of Figure 202). It is also worth noting the speed of the implementation in China, equipping 10.722km of lines in only eight years.

179 Both ETCS level 3 and CTCS level 4 are still in a conceptual phase. 250

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12000 45% 41% 10000

8000

6000

4000

2000

0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

EU China EU China

Figure 202: Proportion (left) and length (right) of the high-speed network equipped with GSM-R systems in EU and China (Source: Author’s calculation based on data reported by UIC (2017a) and ERMTS (2013))

4.3.3.5 Trade of railway signalling, safety and control systems

Focus Area:

Type:

Key Performance Indicators:

Score: 3 Europe has a competitive advantage in comparison with its global (Asian) rivals

Summary

This indicator measures the ability of each of the analysed industries to produce and commercialise internationally competitive railway signalling and control systems. Data collected on international trade reveals that Europe has been, by far, the leader regarding exports and this trend has been sustained over time. Even if exports of Chinese signalling and control equipment have significantly increased in the last few years, they remain low compared to the European ones. Japan, who used to be a net exporter, has recently become a net importer. Although Japanese signalling and control systems are recognised for their high-quality, they have had limited success in global markets.

Description of the indicator

The indicator exports over trade ratio assesses the level of exports in terms of total trade (the sum of exports and imports) in a country/region. In addition to giving information on trade balances, this indicator measures the ability to produce and commercialise internationally competitive products based on new technological knowledge. Export patterns reveal how a country’s technological performance transcends into success in international trade. Values higher (lower) than 50% indicate a positive (negative) trade balance.

Analysis & Assessment

Figure 203 displays imports and exports of railway signalling systems for the regions/countries of interest in the period 2005-2015. The figure reveals that Europe has been, by far, the leader regarding exports, a trend that has been sustained over time. Not only Europe is the region that has the higher exports but also, they have more than doubled in the analysed period. Even if China has significantly increased the exports of its signalling and control equipment (passing from being a net importer in 2005 and 2010 to a net exporter in 2015), its exports remain low compared to the European ones, which are six times higher. South Korea remains a net importer with a negative balance trade. Surprisingly, Japan, who used to be a net exporter (2005-2010), has recently become a net importer (2015). Although Japanese suppliers are recognised for their high-quality signalling and control systems, their technologies have had limited success in global markets. 251

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EU-28 China

2005 -10 138 2005 -42 0

2010 -17 207 2010 -71 9

2015 -31 316 2015 -22 51

-50 0 50 100 150 200 250 300 350 -80 -60 -40 -20 0 20 40 60

Import Export Import Export

Korea Japan

2005 -36 4 2005 0 29

2010 -6 0 2010 0 17

2015 -24 3 2015 -14 13

-40 -35 -30 -25 -20 -15 -10 -5 0 5 10 -20 -10 0 10 20 30 40

Import Export Import Export

Figure 203: Import-Export of railway signalling, safety and traffic control equipment in selected regions/countries, 2005-2015 (million USD) (Source: Author’s elaboration based on UN COMTRADE data)

When calculating the export over trade ratio for the different regions/countries (Figure 204), it can be seen that Europe has succeeded in keeping a leadership position over time, with an export over trade ratio higher than 90%. Whereas Japan (which was a net exporter) has experienced a sharp decline and is currently exhibiting a 50% export over trade ratio, China (who was a net importer) has experienced a marked rise, passing from a ratio of 0% in 2005 to 70% in 2015. Taking all this evidence into account, we consider that Europe has maintained a leadership position in the global market of railway signalling and control systems.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2005 2010 2015

EU-28 China Japan South Korea

Figure 204: Exports over trade ratio of railway signalling, safety and traffic control equipment in selected regions/countries, 2005-2015 (million USD) (Source: Author’s elaboration based on UN COMTRADE data)

4.3.4 Workforce and skills 4.3.4.1 Employment

Focus Area:

Type: 252

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry

Key Performance Indicators:

Score: 3 Europe has a competitive advantage in comparison with its global (Asian) rivals

Analysis & Assessment

Available public statistics for the six European countries with the most significant number of employees in the railroad equipment manufacturing industry (i.e., those which employ more than ten thousand people in average) are displayed in Figure 205. Germany, which is currently leading, has shown an important and sustained growth in the last few years (about 17% between 2011 and 2014). Italy, which used to be the leader in the past, is now in the second position with a sustained decreasing trend in the whole analysed period. After recovering from a down period, Poland is now in the third position. The Czech Republic and Spain are in the fourth and fifth position, respectively, but the countries exhibit different trends. Whereas in the Czech Republic employment has been increasing (about 10% between 2011 and 2014), in Spain it has been decreasing (about 5% between 2011 and 2014). France appears in the sixth position with a clear decreasing trend (about 10% between 2011 and 2014). As the development of employment of these six countries largely differs, no clear-cut conclusion can, therefore, be drawn at this level.

35,0

30,0

25,0

20,0

15,0

10,0

5,0

Number of persons persons of Number (Thousands) engaged 0,0 2008 2009 2010 2011 2012 2013 2014

Germany Italy Poland Czech Republic Spain France

Figure 205: Total employment in the railroad equipment industry in selected European countries, 2008-2016 (Source: Author’s elaboration based on OECD STAN)

Notes: Data displayed correspond to the industry D302A9 Railroad equipment and transport equipment n.e.c. ISIC Rev.4 and NACE Rev.2.

Figure 206 compares employment development for the countries/regions of interest. In general, the European, Japanese and Korean figures seem somewhat stable over time. At the EU level, the overall employment figure (about 170 thousand people in 2014) has increased by some 6% in the period 2010-2014. In the same period, Japan exhibits an increase of employment of about 5% whereas that Korea exhibits a decrease of about 10%. Unfortunately, official data for China could not be obtained, the two points displayed in Figure 206 correspond to the number of employees of the Chinese biggest railway vehicle and equipment manufacturer, CRRC, which employed around 187 and 183 thousand people in 2015 and 2016, respectively.

253

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200 180 160 140 120 100 80 60 40

20 Number persons of engaged(Thousands) 0 2008 2009 2010 2011 2012 2013 2014 2015 2016

EU China Japan Korea

Figure 206: Total employment in the railroad equipment industry in selected countries/regions, 2008-2016 (Source: Author’s elaboration based on OECD STAN data CRRC annual reports)

Notes: Data displayed for EU (Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Italy, Latvia, Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, United Kingdom, Norway and Switzerland), Korea and Japan were extracted from OECD STAN, industry D302A9 Railroad equipment. Data for China correspond to CRRC’s corporate data.

Population ageing (i.e., the increasing share of older persons in the population) is currently affecting the supply of labour in the European, Japanese and Korean railway manufacturing industries, whereas the Chinese industry seems less affected by this problem (ECORYS, 2012). In the railway industry, a large number of workers retiring means the loss of substantial knowledge and experience, as in this industry, knowledge is widely transferred via employee-to-employee interaction within an organisation and through dealings with component suppliers and technology partners. The situation is set to worsen as demand increases and new technology develops. According to ECORYS (2012), two factors drive the demand for railway engineers: the need to handle increasingly sophisticated railway technologies and the growing need to replace retiring engineers.

180 In Europe, the skill shortage in the railway industry has been identified. Skill shortages are argued to restrain the capacity of economies to innovate. They reflect, to some extent, supply-side inadequacies within educational institutions, as these institutions fail to deliver a sufficient quantity and quality of trained persons (Toner, 2011). At the European level, a few projects have been funded to analyse the scope of training, skills and innovative solutions required by the European railway sector to better match its human resources requirements and the skills developed by the education and training system. The FUTURAIL project (funded under the FP7), for instance, emphasises the need for investing in R&D and in innovative technological upgrading to enhance the competencies in the rail sector. These initiatives combined with talented and skilled staff would help in facing future challenges and lead to a more competitive and innovative rail sector. Similarly, the SKILLRAIL project (funded under the FP7) focused on improving education and training for railway workers, including a specific framework for creation, dissemination and transfer of knowledge within the European railway sector. To meet future requirements, this project proposes a virtual European University of the Railway (EURAIL) to address the training needs of the sector.

180 See for instance: Rail Technology Magazine (16.10.2014), Tackling the skills shortage in the rail industry, retrieved from: http://www.railtechnologymagazine.com/Rail-News/tackling-the-skills-shortage-in-the-rail-industry, International Railway Journal (02.08.2013), Tackling a skills shortage, retrieved from: http://www.railjournal.com/index.php/policy/tackling-a-skills- shortage.html and Railway technology (01.10.2008), Skills Shortage in the Rail Sector, retrieved from: https://www.railway- technology.com/features/feature43038/ 254

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4.4 Concluding remarks

This chapter has explored the value chain of the European high-speed rail manufacturing industry with a particular focus on its capacity to innovate. The evidence collected points towards an increasing global consolidation trend, not only at the OEM level but also at the supplier level. An increasing share of the value-chain revenues being captured by Tier-1 suppliers was also evidenced in the analyses. Together these findings reveal the growing pressure European rolling stock OEMs are dealing with. Whereas consolidated and vertically-integrated actors intensity competitive rivalry, suppliers increasing their share of the value chain contribute to the erosion of profitability of OEMs. These aspects raise the question about the need for OEMs to look for new avenues of revenue to retain their competitiveness in this changing environment.

From an assessment of eleven indicators at two different stages of the value chain, technology generation and technology exploitation, we conclude that the European high-speed rail manufacturing industry remains competitive vis-à-vis its major rivals worldwide, namely Japan, China, and South Korea. This competitive advantage seems, nevertheless, to be fragile face the intense competition coming from Asia, and especially from China. This new entrant, who built an extensive industrial capacity upon foreign high-speed technologies and know-how, has placed innovation at the top of the national agenda and is investing substantially in R&D. Although these R&D efforts have not yet translated into innovation leadership (as measured by invention activities) and commercial success (as measured by global market shares) in the high-speed rail segment, they might not take long to be fruitful. The important R&D investments from China contrast with a decreasing trend of R&D investments of the European rolling stock industry. The significant increase of the European Commission’s R&D budget for the rail sector under the Shift2Rail initiative compensates somehow the decline in private investments and will, hopefully, succeed in mobilising resources from the private sector. It is, nevertheless, important to note that the Commission's rail research budget appears to be low compared to resources assigned to other transport modes in the Horizon 2020 initiative.

It is worth noting that this study has focused on the high-speed rail segment and these findings cannot be, therefore, generalised to the other segments of the rolling stock industry. It is also important to note that the construction and analysis of indicators were limited by the availability of suitable quality data, especially from China. The lack of official statistics was overcome, when possible, by using corporate data. Caution must be, therefore, exercised when data from international databases and corporate reports are compared.

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4.5 References Banerjee S., Hempel M., Sharif S. (2016): A survey of Wireless Communication Technologies and their Performance for High Speed Railways, Faculty Publications from the department of Electrical and Comuter Engineering, 352, http://digitalcommons.unl.edu//electricalengineeringfacpub/352, 2016. Beugin J., Marais J. (2008). An approach to quantify the Satellite Based Train Location Service using a Petri Nets Model, 8th WCRR World Congress on Railway Research, Seoul, Korea, January 2008. BGA/ELPC (2015). Passenger Rail & Transit Rail Manufacturing in the U.S. Bocquet A. and Parternotte Y. (2011). Situation de l'industrie ferroviaire française : production de matériels roulants voyageurs et fret. Rapport de commission d'enquête, No. 3518. Juin 2011. Bombardier (2014). Bombardier Transportation. Profile, Strategy and Market. Presentation February 2014. Bombardier (2015). Bombardier Inc. Profile, Strategy and Market. Presentation February 2015. Borghini C. (2016). High Speed Rail as a solution to the increasing demand for Mobility. Presentation. 7 November 2016. Burtin E. (2010). The deployment of ETCS: an important test case for Europe. Global Railway Review. Issue 3 2010. 31 May 2010. CERTU/Sétra (2013). Les matériels ferroviaires de voyageurs sur le réseau ferré national. Rapport d’études. Clive K. (2015). ERTMS a new player emerges. Rail Engineer. March 2015 pp 44-45. Connor P. and Berkeley P. (2017). Rolling Stock Manufacturing. Archive Paper. Railway Technical Website. Updated 10th May 2017. Dhir S., Marinov M. V., and Worsley D. (2015). Application of the analytic hierarchy process to identify the most suitable manufacturer of rail vehicles for High Speed 2. Case Study on Transport Policy 3 (2015) 431-448. DG MOVE (2016). Shift2Rail and rail research within Horizon 2020. Shift2Rail Information Day for non-JU members (Open calls). Presentation. DG RTD (2012). Rail R&D in Europe – New opportunities: Horizon 2020 – the EU Framework for Research & Innovation (2014-2020). Presentation, Madrid, May 31st 2012. EC (2006). European Commission, ERTMS – Delivering Flexible and reliable rail traffic, DG TREN, 16 pages, 2006. EC (2010). High-speed Europe. A sustainable link between citizens. EC (2014). Shift2Rail: driving innovation on railways. EPO (2016). Intellectual property rights intensive industries and economic performance in the European Union. Industry-Level Analysis Report, October 2016. Second edition ERRAC (2014). Strategic rail research and innovation agenda. A step change in rail research and innovation. Fortea P. (2017). 25 years of high-speed rail in Spain: a beacon of international reference. European Railway Review. Issue 3, 2017. Frost & Sullivan (2011). Global High Speed Rail Market on the Fast Track for Business Development. Market Wired, News Room. April 06 2011. Retrieved from http://www.marketwired.com/press- release/global-high-speed-rail-market-on-the-fast-track-for-business-development-1423323.htm Galindo-Rueda, F. and F. Verger (2016), “OECD Taxonomy of Economic Activities Based on R&D Intensity”, OECD Science, Technology and Industry Working Papers, 2016/04, OECD Publishing, Paris. 256

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Gonzalez I. and Pilo E. (2015) Regenerative braking and the different traction systems, Energy Recovery Workshop, UIC, Spanish Railways Foundation, 29th, September 2015. Haščič, I., J. Silva and N. Johnstone (2015), “The Use of Patent Statistics for International Comparisons and Analysis of Narrow Technological Fields”, OECD Science, Technology and Industry Working Papers, 2015/05, OECD Publishing, Paris. Hitachi (2017). Railway Systems Business Unit Business Strategy. Hitachi IR Day 2017. June 8, 2017. Presentation. Leduc, G., Köhler, J., Wiesenthal, T., Tercero, L., Schade, W., Schade, B. (2010): Transport R&D Capacities in the EU. Deliverable report of GHG-TransPoRD (Reducing greenhouse-gas emissions of transport beyond 2020: linking R&D, transport policies and reduction targets). Project co-funded by European Commission 7th RTD Programme. Fraunhofer-ISI, Karlsruhe, Germany. Lin Junting, Dang Jianwu, Min Youngzhi (2016). NGCTCS: Next generation Chinese Train Control System, Journal of Engineering Science and Technology Review, ISSN: 1791-2377, Vol. 9(6), pp 122-130, November 2016. Matsumoto M. (2005). The revolution of Train Control System in JAPAN, Proceedings of Autonomous Decentralized Systems (ISADS 2005), pp 599-606, IEEE eds, doi: 10.1109/ISADS.2005.1452145, 4-8 April 2005. Moore Ede B. and Polivka A. (2006). Moving Block in Communication-Based Train Control : Boon or Boondoggle ?, 7th WCRR World Congress on Railway Research, Montréal, Canada, June 2006. Moretto S., Palma A., Moniz A. (2012).Constructive technology assessment in railway: The case of high-speed train industry. International Journal of Railway Technology. Moretto S., Robinson D., Moniz A. (2014). The role of endogenous and exogenous FTA in the European high-speed railway innovation system: CTA as the next step? 5th International Conference on Future-Oriented Technology Analysis (FTA) – Engage today to shape tomorrow. Brussels, 27-28 November 2014. Moretto S., Robinson D., Moniz A., Chen S. (2014). Mind the gap in high-speed trains futures: A methodological contribution. Proceedings of the Second International Conference on Railway Technology: Research, Development, and Maintenance. J. Pombo, (Editor), Civil-Comp Press, Stirlingshire, Scotland. Ning et al., 2004: B. Ning, T. Tang, K. Qiu, C. Gao, Q. Wang, CTCS – Chinese Train Control System, Computers in Railways IX, Allan, Brebbia, Hill, Sciutto and Sone Eds, WIT Press, ISBN 1-85312- 715-9. Petterson T. (2017). Maintaining momentum for high-speed rail in 2017. European Railway Review. Issue 1 – 2017. Siemens AG (2017). Creating a European champion in Mobility to better serve our customers worldwide. Analyst Call. Paris, September 27, 2017. Presentation. SCI Verkehr (2016). China’s manufacturer heavily dominates world market for new high-speed trains – market volume for new trains decreasing. Press Release. August 10th 2016. OECD (2008). Compendium of patent statistics 2008. OECD (2015). OECD innovation strategy. An agenda for policy action. Meeting of the OECD Council at Ministerial Level. Paris. June 2015. OECD (2015a). Measuring environmental innovation using patent data: Policy relevance. Environment Directorate. Environment Policy Committee. OECD (2016). G20 Innovation report 2016. Report prepared for the G20 Science, Technology and Innovation Ministers Meeting. Beijing. November 2016. Raimbault N., Banquart C. and Poinsot P. (2017). Innovations in the railway sector: an innovation system in transition between state impulsion regime and market oriented regime. Published by ISTE Ltd. London, UK. 2017 ISTE OpenScience. 257

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Sun Z. (2015). Technology innovation and entrepreneurial state: the development of China's high- speed rail industry, Technology Analysis & Strategic Management, 27:6, 646-659. Toner P. (2011). Workforce skills and innovation: An overview of major themes in the literature. OECD STI Working paper series. UIC (2016). Worldwide High speed network, Database and Maps, http://www.uic.org, November, 2016. UIC (2017). UIC High Speed, World High Speed Rolling Stock, 6 pages, September 1st, 2017 UIC (2017a). UIC Passenger Department, High Speed lines in the world, UIC - Worldwide Railway Organisation, 21 pages, http://www.uic.org, April 1st, 2017. UNEP/EPO (2015). Climate change mitigation technologies in Europe – evidence from patent and economic data. Van de Velde E., Debergh P., Rammer C., Schliessler P., Gehrke B., Wassmann P., De Heide M. Butter M., Wydra S., Som O. and Weidner N. (2015). Key Enabling Technologies (KETs) Observatory. Methodology Report. Wang J.F., Wang H. H., Lin Z. (2012). Research on a new type of train control system used at 350km/h, Computers in Railways XIII, pp 51-57, doi: 10.2495/CR120051, WIT Press, 2012. Wang X., Yu F. R., Zhu L., Ning B. (2015). A cognitive Control Approach to Communication Based Train Control Systems, IEEE Transactions on Intelligent Transportation Systems, Vol. 16(4), pp 1-14, doi: 10.119/TITS.2014.2377115, August, 2015. Wang J. (2017). Safety theory and control technology of high-speed train operation. Academic Press. Elsevier. Wiesenthal T., Leduc G., Cazzola P., Schade W., and Köhler J. (2011). Mapping innovation in the European transport sector. An assessment of R&D efforts and priorities, institutional capacities, drivers and barriers to innovation. Wiesenthal T., Condeço-Melhorado A. and Leduc G. (2015). Innovation in the European transport sector: A review. Transport Policy. 42 (2015) 86–93. Yan X., Cai B., Ning B., Shanguan W. (2016) Online distributed cooperative model predictive control of energy-saving trajectory planning for multiple high-speed train movements, Transportation Research part C, Vol. 69, pp 60-78, doi: 10.1016/j.trc.2016.05.019, Elsevier Ed., 2016 Yang Z. (2006). Application and Development of CTCS, Technical Presentation, China Railway Corporation, Feb. 2016. Yokoyama H., Minesaki S., Kidachi T., Ikeguchi N., Suzuki K., Arima M. (2017) Improving Onboard DS-ATC Equipment Functions in Response to Shinkansen Service Expansion, Hitachi Review, Vol. 66(2), pp 167-172, 2017.

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5 Shipbuilding 5.1 Approach

A seagoing ship / vessel is any floating device intended for navigation on the seas and waters associated therewith. Commercial ships are categories of vessels used for commercial purposes. We distinguish among them:

 ships for the transport of people, e.g. Cruiser Ships (from big ocean vessels to small local of short sea shipping vessels), Passengers Ferries,  ships for the transport of cargo, e.g. Tankers or LPG / LNG Carriers, Bulk Vessels, Containers Vessels, Ro-ro Vessels, General Cargo Vessels,  ships for the transport of people and cargo - generally, ferries of various types from big sea ships to a ships of local sailing,  fishing ships,  ships for exploration and exploitation of submarine natural resources, e.g. Supply Vessels, Search and Rescue Vessels, 181  vessels for providing various auxiliary services, e.g. Arctic/Offshore Patrol Ships, Tugs.

The shipbuilding market can be divided into the following market sectors:

 Tankers Manufacturers,  LNG Carriers Manufacturers,  LPG Carriers Manufacturers,  Bulkers and Combos Manufacturers,  Containers Manufacturers,  General Cargo Manufactures,  Cruise Vessels Manufacturers,  Ro-Ro and / or Ferries Manufacturers,  Offshore Manufacturers,  Others Manufacturers (e.g. Manufacturers of Arctic/Offshore Patrol Ships, Polar Icebreaker&Science Vessels, Joint Support Ships, Search and Rescue Vessels, etc.).

Ship’s manufacturing is carried out in different types of shipyards all around the World. Ships are manufactured on individual order. The characteristic feature of shipbuilding is the high degree of personalization of individual ships. Ships are produced individually or in series of several vessels.

Original Equipment Manufacturers (OEM) for the shipbuilding industry refer to shipyards involved in the construction of all of types of new vessels (as well as conversion of already exploited units) and all types offshore ships and offshore floating structures (platforms, drilling vessels and floating point production, storage and loading - FPSO).

General description of world production ships

Past development:

The European shipbuilding sector comprises two main parts, i.e. the shipyards and the marine supplier industry. Both industries play and essential role for Europe from an economical and social perspective – and is moreover connected to other industries like transport, security energy environment and research.

Today, there are about 150 operating shipyards within Europe whereof about 40 yards are operating on a global level for commercial vessels.

181 Organizacja i technika transportu morskiego, (ed) J. Kujawa, University of Gdansk, Gdansk 2001 259

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However, the role of the European shipyards has significantly changed in the recent past. The very dominant role of the European shipbuilding sector with a market share of around 80% about 100 hundred years ago has started to decrease in the 1950s when Japan entered the shipbuilding markets following its strong economic development and the introduction of national supports for the Japanese shipyards. This had led to a world-wide market share of approximately 90% for both - Europe and Japan.

Following the Japanese way, South Korea started to become a new player in the shipbuilding sector by offering competitive advantages like lower wages for a labour-force intensive industry – and heavily accompanied by national support programs. As a consequence, South Korea achieved a market share of about 25% within the 90s XX century.

China entered as the preliminary latest strong global player the shipbuilding market about 15-20 years ago – also following a very intensive upwards development of its economic.

In addition to this also the role of marine supply industry has started to move as it has become more and more important and also independent due to more complex processes in shipbuilding. While in former times, shipyards performed the whole or at least biggest share in a shipbuilding process, the technological progress has led to a manufacturing process based on strong division of labour. Hence, nowadays the contribution of the marine supply industry to the shipbuilding value chain is assumed to be around from 55%-75% to even higher shares in very specialized vessel segments.

Moreover, an imbalance between the demand for maritime transport and the supply of freight transport capacities particularly has led to a severe overcapacity in the world’ shipbuilding industry – leading to an even more fierce competition and economical problems within all shipbuilding countries – and even furthermore sharpened by the absence of effective global trade rules, inter alia for monitoring and controlling state supported over investments.

Current situation:

These world-wide developments within the shipbuilding industry has nowadays lead to European market shares of something between 5% to 8% in terms of tonnage and of about 35% for equipment from the marine supply industry.

The world order book totaled 3,531 merchant vessels totaling 92 million compensated gross tons (CGT) at the start of July 2016. This is the smallest order book since 2006. The drop particularly concerns bulk ship building, which today is only a fraction of what it used to be during the boom years 2008/2009. According to Clarkson Research statistics, 152 merchant vessels with a combined 7.2 million CGT were on order for EU shipyards. Thus, the CGT-share for European yards (EU28) , mainly engaged in specialized shipbuilding, stood at 7.8 per cent - for comparison: middle of 2005 the market share for EU-shipbuilders stood at nearly 12 per cent and mid of 2015 at 6.0 per cent, respectively.

Table 33: Order book market share (in % CGT), merchant vessels of 300 GT and over

mid of year 2005 2007 2010 2012 2015 2016

in % EU 28 11,9 9,1 4,6 4,3 6,0 7,8 China 14,1 25,9 37,2 40,3 37,5 36,7 Korea 39,0 36,3 32,4 33,6 31,3 25,6 Japan 24,9 19,5 15,9 13,2 19,6 23,8 Rest of World 10,0 9,2 9,8 8,6 5,6 6,1

Total 100,0 100,0 100,0 100,0 100,0 100,0

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Table 34: Merchant ships on order as of July 1st, 2016, ships of 300 GT and over

Bulk Container General cargo Passenger ships Tankers carriers ships ships Cruise, Ferries Total

in % cgt EU 28 1,9 0,5 0,1 8,6 84,1 7,8 China 23,9 56,8 42,7 51,6 7,6 36,7 Korea 47,2 2,3 26,8 13,2 0,0 25,6 Japan 21,1 35,3 20,6 22,7 4,5 23,8 Rest of World 5,9 5,0 9,8 3,9 3,8 6,1

Total 100,0 100,0 100,0 100,0 100,0 100,0

General description of European manufacturing of ships

While standard shipbuilding has largely moved to Asia, European yards are still dominant in a few specialised market segments such as cruise vessels, fishing vessels, offshore vessels and yachts. The largest European shipyards, worldwide ranked 10th and 11th, respectively, are Meyer Werft and Fincantieri, both engaged in cruise shipbuilding.

According to the European Commission the shipbuilding sector is a very important and strategic industry in Europe (in many aspects, e.g.: it develops advanced technologies, supplies modern navies with advanced vessels or provides essential means of transport for international trade). Moreover, the European marine equipment industry is a world leader for a wide range of products ranging from propulsion systems, safety systems, environmental, large diesel engines, to electronics and cargo 182 handling . With a further technological advance in the shipbuilding industry, the role of marine equipment manufacturers still increases.

The European Ships and Maritime Equipment Industry Sector employs more than 500,000 (120,000 in shipyards) persons and has an average annual turnover of around 72 bn €. The sector comprising 183 of :

1. Shipbuilding and ship repair subsector. The European shipbuilding industry and ship repair industry is made up of around 300 yards of which more than 80% can be considered to be ‘small to medium’ (building small ships). The remaining yards can be defined as ‘large’. Around 90% of the orderbook is for export markets. 2. Marine equipment manufacturing subsector. The European marine equipment manufacturing and industry (propulsion, cargo handling, communication, automation, integrated systems, etc.) is made up of around 7,500 companies, the vast majority of which can be considered to be ‘small to medium’. Around 70% of production is for export markets.

Technology based on knowledge, innovations and regulatory frameworks is one of the most important factors and keys for building competitiveness of the European shipbuilding industry. As European shipyards have lost market shares in the building of e.g. container vessels, tankers and bulkers, they have focused on the production of specialized high-tech ship types.

Hence, European shipyards have been seeking market niches based on relevant key success factors. Here, product innovation is one of the foundations of their competitive advantage. The others (more important, although not all) are: innovation processes and organization, technology, know-how, high quality products, a strong base design and entrepreneurship.

182 Shipbuilding Sector. Internal Market, Industry, Entrepreneurship and SMEs, http://ec.europa.eu/growth/sectors/maritime/shipbuilding/index_en.htm 183 LeaderSHIP 2020The Sea, New Opportunities for the Future Brussels, 20th of February 2013 261

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Europe is the long-time leader in cruise and passenger ferry ship construction. Middle of 2016, about 84 per cent of all ordered cruise/passenger tonnage (CGT) was placed on Italian, German, Finnish or French yards. But in European shipyards are manufactured many miscellaneous vessels too. Examples for highly specialized ships built in Europe are:

 passenger-car ferries gas-powered or electrical-powered,  double sides ferries (double-ended ferries) and shuttle ferries,  combined LNG, LPG and ethylene vessels,  fishing vessels,  tugs and cargo sea barges,  seagoing luxury yachts,  arctic ships with ice class,  boats made using the technology of carbon fiber and fiberglass,  the individual offshore to service offshore oil fields and gas and floating units of large,  floating construction for maritime industries,  the construction of wind farms at sea,  warships.

Currently, European shipyards not build simple hulls but technologically advanced units with innovative solutions. They are modernizing existing vessels and introducing innovative solutions, incl. providing of repair services.

In order to strengthen the European shipbuilding sector, the LeaderSHIP2015 strategy was initiated in 2002 in order to ensure and maintain its competitiveness and continued in 2013 with the adoption of the new LeaderSHIP 2020. The Leadership initiative has been the response to the impacts from the economic crisis on the shipbuilding sector and has provided a strategic vision for the industry with a focus on:

 innovation,  greening,  specialisation in high tech markets,  energy efficiency,  capability of diversifying into new markets, etc.

In order to transfer the vision into concrete actions, the initiatives has provided a series of recommendations for the short and medium term to generate sustainable growth and high-value jobs linked to maritime technologies. Hereby the focus is on the four priorities ‘employment and skills’, ‘improving market access and fair market conditions’, ‘access to finance’ and ‘research, development and innovation (RDI)’.

With regard to RDI, the focus is on the exploitation of new market opportunities, and stimulation of research and innovation activities like zero emission and energy efficient vessels, zero technical accident vessels and emerging market opportunities. In addition, a number of national support initiatives for the shipbuilding and marine supply industry do exist like the program ‘Maritime technologies of the next generation’ in Germany.

EU policy of R&D

Supporting the R&D sector is an important element of the EU's socio-economic development policy enhancing the competitiveness of the EU economy, which inevitably affects the whole of Europe. A number of EU programs allow the R&D sector to focus on research, which has translated into increased innovation in the European economy in recent years.

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The new technical and technological solutions for the ships and their construction processes can be divided into areas that are developed by the shipbuilding industry and associated R&D centers (Internal development):

1. Shipbuilding. 2. Propulsion and powering. 3. Smart ship. and areas that are developed by other industries and associated R&D centers and used by the shipbuilding industry in the shipbuilding process (External development): 4. Advance materials. 5. Big data analytics. 6. Robotics. 7. Sensors. 8. Communication.

The above set of areas clearly indicates the technological and technical level of the European economy, which is important for the technological and technical development of the European shipbuilding sector, where the pace of development is driven by the R&D sector of the European Union. Much of the new technology used by the shipbuilding industry and the technological development of the ships is generated outside shipbuilding industry. Therefore, the overall technological and technical level of the European economy, which is the key factor for growth in this sector, is based on the efficiency of the R&D sector.

The development of the R&D sector in the EU is one of the five main targets of the Europe 2020 strategy. Therefore, we can observe a number of activities that led to the creation of research and development infrastructure in Europe. These activities were carried out in EU, individual EU member states and economic sectors. The infrastructure consists of:

184 1. Institutionalized EU R&D funding system, with leading programs such as Horizon 2020 (FP7 continuation), Marie Skłodowska-Curie Actions; complementary to a number of regional programs aimed at R&D development, cross-border co-operation, cross-sectoral cooperation. 2. National centers for the development of science, which are part of national R&D systems financed or co-financed from national budgets. 3. Higher education institutions conducting research that result in new: technologies, technical solutions, organizational solutions; The indicators of the implementation of research results are an important element of the evaluation of science effectiveness in this field. 4. Independent research institutes conducting R&D research; They can be divided into sectoral and cross sectoral ones, ie those with research that is applicable in a given sector or in many sectors; However, it should be pointed out that the phenomenon of the flow between sectors of new solutions and new technologies is growing. 5. R&D institutions that are part of large companies or holdings able to generate substantial resources for research and implementation of their results in production; The Volkswagen 185 Group, which has an R&D expenditure of € 13,612m , is the leader in this field in Europe (and worldwide).

Consortia of universities, research institutes and enterprises set up to develop specific technologies or technical solutions and implementation for business use.

The development of the R&D sector in the EU is one of the five main targets of the Europe 2020 strategy. The agenda states that in order to achieve the desired result, research and development spending should reach 3% of the EU's GDP. We have not achieved this target yet. Between 2012 and 2015, 2% have been achieved with a very different level of spending in the EU. The leaders in this

184 Kontynuowany w ramach Horyzontu 2020 185 http://iri.jrc.ec.europa.eu/scoreboard16.html#modal-two (11.10.2017) 263

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186 regard are Sweden, Austria, Denmark, Germany and Belgium . The Joint Research Center (JRC) is the European Commission's science and knowledge service. It prepares reports on the involvement of the private sector in research and development. Below is a summary of the information included in the report published in 2016.

“The 2016 edition of the EU Industrial R&D Investment Scoreboard (the Scoreboard) analyses the 2500 companies investing the largest sums in R&D in the world in the fiscal year 2015/16. It comprises companies based in the EU (590), the US (837), Japan (356), China (327), Taiwan (111), South Korea (75), Switzerland (58) and further 20 countries.

This Scoreboard edition shows significant worldwide rise of corporate R&D, driven by high-tech industries while revenues declined mostly due to low-tech sectors. The top 2500 Scoreboard firms invested in R&D €696bn in 2015/16, an increase of 6.6% over the previous year. EU companies increased R&D above both the world's and US's growth rates and Asian companies continued to show substantial R&D growth but a slowing of revenue growth.

R&D Growth was driven by companies operating in the largest R&D-investing industries (ICT, health and auto), that also increased significantly net sales, while the overall fall in net sales was mostly due to low world oil and commodity prices. The Software industry showed the highest R&D growth 187 worldwide led by global software firms.”

The results of the analysis presented in the report, cited above, clearly indicate that the EU's R&D sector development policy and, as a result the technological and technical advancement of the European economy, leads to the competitiveness of European manufacturing, services, construction and R&D sectors. The report shows that private companies invest in research and development in the areas of Pharma & Biotech, Industrial Engineering, Software & Computer Services, Electronic & Electrical Services and Support Services.

Excluding the Pharma & Biotech area, the remaining four areas of research, either directly or indirectly, affect the technological and technical development of the shipbuilding sector in Europe. An example is a solution for the use of engines adapted to the combustion of natural gas fuels or hybrid drives. They are used today in cars as well as in ships. Big Data systems for ship design are a universal solution that is also used in other segments of European transport. There are many examples of this kind. Some of them are described in points 5.2, 5.3 and 5.4 of this analysis.

Conclusion - Europe's R&D sector is one of the leading sectors in the world and its effectiveness is reflected in the technological and technical development of the European industry, which is highly competitive in the world market

5.2 Mapping the “AS-IS” value chain

Ship manufacturing is currently a complex multi-phase system where a number of shipbuilding companies, as well as companies, enterprises and institutions from other manufacturing sectors of the regional and global economy are involved. This process consists of several phases.

In the area under consideration the customer is the shipowner and at the conceptual level the shipowner makes key decisions regarding the ship utility features and therefore also its technical design, with a decisive influence on the target shape of the vessel. This process is therefore the first phase of the ship manufacturing system, as shown in Table 35.

Table 35: Three ship manufacturing phases and main actions in each phase (Source: own work using: Kasińska (Brózda) J. Czerniachowicz B. Zasoby partnerskie i klienckie przedsiębiorstwa. In Marek S., Białasiewicz M., editors. Podstawy nauki o organizacji. Przedsiębiorstwo jako organizacja gospodarcza, Polskie Wydawnictwo Ekonomiczne. Warszawa 2008. & Center on Globalization, Governance & Competitiveness, Duke University, based on the ABS Expanded Ship Work Breakdown Structure (ESWBS), The NSPS shipbuilding value chain, January 2013)

186 http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&plugin=0&language=en&pcode=t2020_20&tableSelection=1 (10.10.2017) 187 http://iri.jrc.ec.europa.eu/scoreboard16.html (12.10.2017) 264

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Ph1 Ship manufacturing decision process

Process leader - Shipowner

Actions:

1. Market analysis and future demand for services provided by the ship after its manufacturing. 2. Conceptual design of the future ship. 3. Financial engineering of ship manufacturing, 4. Selection of classification society - supervision of the ship manufacturing at all phases, including the supervision of manufacturing of materials, subsystems and systems at future suppliers. 5. Selection of suppliers of certain subsystems (Tier 2 suppliers) and certain ship systems (Tier 1 suppliers). 6. Contract design of the ship. 7. Selection of shipyard for ship manufacturing. 8. Ship design considering the expected quality and efficiency of materials, subsystems and systems. 9. The contract with the shipyard for the ship manufacturing, which defines all issues related to the ship manufacturing. Ph2 Ship pre-manufacturing process

Process leader – Shipyard (OEM)

Organization of ship manufacturing by shipyard::

1. Determination of the rules of cooperation with the shipowner, designer, classification society in the process of ship manufacturing, 2. Implementation of TQM (Total Quality Management) system, i.e. quality system of production and flow of goods, including uniform ISO quality standards of products (from materials to systems), constituting a ship's technical system covering all participants in the supply chain (from 3 to 1 suppliers), 3. Contracts with suppliers (Tier 3, Tier 2 and Tier 1), including suppliers selected by the shipowner, 4. Coordination of contracts between suppliers of different levels, e.g. contract for the supply of materials and subsystems for the manufacture of engines, 5. Scheduling deliveries of materials, subsystems and systems for the manufacturing of the ship, forcing production dates from suppliers. Ph3 Ship manufacturing process

Process leader – Shipyard (OEM)

Ship manufacturing by shipyard:

1. Implementation of the supervision system by the classification society acting on behalf of and for the benefit of the shipowner over the manufacturing of materials necessary for the construction of the ship's hull, both at the supplier and the shipyard. 2. Implementation of the supervision system by the classification society acting on behalf of and for the benefit of the shipowner over the manufacturing of materials necessary for the construction of the ship, both at the supplier and the shipyard. 3. Coordination of supplies of materials necessary for the construction of the ship's hull and its systems. 4. Prefabrication of the ship’s hull components in the flow and work center production system. 5. Construction of the ship's hull in the work center production system (phase 1). 6. Prefabrication of components of subsystems and systems in the flow and work center production system, e.g. pipelines, sections, foundations, etc. 7. Ship manufacturing by equipping it with subsystems and systems and finishing (phase 2).

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8. Technical tests of subsystems and systems, technical tests of a ship in the sea in the presence of representatives of the classification society and the shipowners. 9. Obtaining certification by the ship from the classification society and other necessary certificates resulting from the regulations and transferring the vessel to the shipowner.

Figure 208 presents a schematic the simplified global value chain in shipbuilding. The scheme is applicable for the production of all types of ships and all types of floating offshore construction describes.

Subcontractors and Services

Domestic Tier 2 Tier 1 Suppliers Suppliers Shipyard S

Ship h Manufact m i Subsystems a urers manufacturing and n p u Ship- suppliers o Global f breaker’s of systems w Tier 2 a yard Suppliers c n t e u r r i n Tier 3 Suppliers g materials and components manufacturing

Upstream Downstream

Figure 207: Simplified Shipbuilding global value chain (Source: own work)

In the case of shipbuilding, the value chain is also co-created by the shipowners. Therefore, they are part of the manufacturing process of the ship. Thus, in practice:

Simplified Shipbuilding value chain = Simplified Manufacturing value chain minus Ship- breakers’ yard

The shipbuilding process shown in Table 35 and the scheme of the global value chain shown in Figure 208 illustrate the shipbuilding parts indicating on the one hand the processes involved in its construction (Table 35), and on the other, the structure and links between companies and institutions engaged in shipbuilding from suppliers of materials to the manufacturer (manufacturing shipyard) (Figure 208).

Figure 208 shows a schematic diagram of a shipbuilding system from Tier 3 suppliers to the shipowner as the ordering party and the entity creating the final structure of the ship. Based on this diagram, the ship's production value chain is described.

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Figure 208: AS-IS diagram describes the present state of the ship build organization's process in world (including European (Source: own work using presentation The NSPS shipbuilding value chain, Lukas Brun Center on Globalization, Governance & Competitiveness, Duke University, January 24, 2013)

The diagram illustrating the current shipbuilding system is a commonly used solution. The solution is used e.g. for the construction of a bulk carrier in a Chinese shipyard or a technologically advanced cruise vessel in a shipyard in France. The differences concern the place of manufacture of the components, from materials and components to ship systems as well as the size and nature of the manufacturers of the above mentioned components and systems necessary to build the ship.

The shipbuilding industry is global because of the fact that shipowners are global companies, and their decisions regarding shipbuilding are determined by the global shipping market and the shipbuilding market. Therefore, in analyzing the value chain created in the shipbuilding process and describing this chain based on the shipbuilding process in Europe, it should be borne in mind that similar shipbuilding systems are used around the world and that a competitive advantage is not the mere organization of the construction process but the price per ship (ships with simple construction and technologies) or the level of technical and technological complexity (ships with complicated construction and a large amount of technical and technological ideas).

5.3 Characterize the value chain and the individual parts

Based on the diagrams shown in Figure 208 and Figure 208, which outline the important parts of the value chain created in the shipbuilding process as well as the links between them, the following analysis of the value chain created in the shipbuilding process based on a cruise and ro-ro vessels built in Europe has been made. The analysis focus such issues as: description of the value chain in shipbuilding, EU strategy for the development of the R & D sector in Europe and its importance for the technological development of the shipbuilding industry in Europe and technological innovation roadmap in shipbuilding in Europe.

5.3.1 Important parts of supply chain typical in European shipbuilding

The basis of shipbuilding is to order the ship in a specific shipyard preceded by conceptual, technical and work (also called contract) projects. The latter project is the basis for contracting the vessel and concluding a contract for its construction by a shipyard or consortium of shipyards (Table 35, Ph1).

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With the conclusion of the contract the shipbuilding process is going to start, where the shipyard or consortium of shipyards (Table 35, Ph2 and Ph3) is responsible for the organization of the process and thus for the value chain arising from the construction process.

Figure 209: Ship systems and subsystems consisting on the ship’s construction (Source: Center on Globalization, Governance & Competitiveness, Duke University, based on the ABS Expanded Ship Work Breakdown Structure (ESWBS), The NSPS shipbuilding value chain, January 2013)

Figure 209 shows a sample diagram of ship subsystems and systems, adequate to a cruise or ro-ro vessel. The technical and technological process of its construction consists of the four parts presented in Table 36.

Table 36: Important parts in the construction of a cruise and ro-ro/ferry vessel in Europe - supply chain (Source: own work) Part Supplier Product Recipient Added value in the value chain 1st Tier 3: Materials Tier 2: Subsystems Guaranteed quality  steel manufacturer, and manufacturing, e.g.: materials and  rubber manufacturers, components  generators, components delivered  plastics manufacturers,  electric motors, on time and at the  glass manufacturers,  lighting systems, lowest possible cost.  woods manufacturers,  ship steering system,  scaffolding and other  anchor handling system, construction work  navigation system, manufacturers,  beams,  cleaning products  ramps manufacturers, and others are presented in  casting of metals Figure 209 manufacturers (semi- Shipyard: finished products),  steel plates for hull  others. construction,  plastics, glasses, woods for equip the ship. 268

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2nd Tier 2: Subsystems Elements Tier 1: system manufacturing Guaranteed quality and manufacturing, e.g.: and main and systems integration specifications in  generators, ship system companies, e.g.: accordance with  electric motors, subsystems  propulsion system, technical project and  lighting systems,  electric plant, contract design,  ship steering system,  auxiliary systems, components of  anchor handling system,  ship management & subsystems and  navigation system, surveillance systems, systems as well as  beams,  outlift & furnishing systems, subsystems delivered  ramps  ro-ro loading / unloading on time and at the and others are presented in system with loading ramps lowest possible cost. Figure 209. and cargo decks. Shipyard:  prefabrication of the ship’s hull components,  construction of the ship's hull,  prefabrication of components of subsystems and systems. 3rd Tier 1: system Ship Shipyard: Guaranteed quality and manufacturing and systems systems  ship manufacturing by specifications in integration companies, e.g.: equipping it with subsystems accordance with  propulsion system, and systems and finishing, technical project and  electric plant,  technical tests of subsystems contract design,  auxiliary systems, and systems, technical tests components of systems  ship management & of a ship in the sea in the and systems delivered surveillance systems, presence of representatives of on time and at the  outlift & furnishing the classification society and lowest possible cost. systems, the shipowners.  ro-ro loading / unloading system with loading ramps and cargo decks. 4th Shipyard Ship Shipowner Guaranteed quality and specifications in accordance with technical and operational project, ship built on time and at the lowest possible cost.

In today's globalized economy supply chain are vertical networks of companies where added value creation starts with raw material companies and ends with manufacturers of market goods. This common activity is part of market oriented strategies and is geared towards maximizing the added 188 value in the supply chain . By describing the supply chains, the value chain created in the process of creating a finished product for the market is characterised. In the analyzed case, the final product is a ship built according to the order of the customer i.e. the shipowner.

Table 36 presents the four main parts of the shipbuilding supply chain, which characterises the parts of the physical flow of the components that make up the finished ship, from the materials and components to the finished ship handed over to the shipowner by the manufacturer, i.e. the shipyard. It is undeniable that the usable value of the ship, as well as any technically complex and technologically advanced means of transport, is determined by its weakest link. The quality of materials, such as the steel that is used to build the ship hull, is just as important as the reliability of the systems, such as the propulsion system. Therefore, when referring to the relevant analysis, from the point of view of creating the value chain in the manufacture of ship parts, four parts described in Table 36, were identified while also qualifying the added value of each described part.

5.3.2 European Maritime technologies – relevant component Europe 2020 policy

In the 1990s, the European shipbuilding industry lost its competition with Asian shipyards in the production of tankers, bulk carriers and container ships. This has led to certain perturbations in this

188 Bozarth, C.C., Handfield, R. B., Introduction to Operations and Supply Chain Management, Pearson Education, 2006 269

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry sector in Europe resulting in the closure of shipyards and the halt in production of many suppliers specialized in the home market. Employment declined, exports fell sharply, and the profitability of the shipbuilding sector, as a whole, rapidly began to decline. A new strategy for the development of the shipbuilding industry in Europe has become a necessity. Under the aegis of the EU, work has begun on analyzing the state of the shipbuilding industry by identifying its strengths and weaknesses, opportunities and threats. The results of the work undertaken by a group of representatives of the European shipbuilding industry are contained in the report “LeaderSHIP 2015 DEFINING THE 189 FUTURE OF THE EUROPEAN SHIPBUILDING AND SHIPPING INDUSTRY” . They have become an impetus for the involvement of the shipbuilding industry in European development policy, where improving the innovation of the European economy is one of its key elements.

Leadership of the shipbuilding industry led by the initiators of "LeaderSHIP2015" resulted in the development of new long-term strategies and deep changes in the functioning of enterprises and the whole sector by the companies of the sector (shipyards and suppliers). At the beginning of the 21st century, the European shipbuilding industry experienced significant growth, becoming highly competitive and innovative in the specialized shipbuilding market segments. Great progress has been made in all five key strategic aspects, formulated in 2002. These strategic elements include:

 Improving leadership in selected maritime market segments,  Continuing to drive and protect innovation,  Strengthening customer focus,  Improving industry structure and implementing a network driven operating model, 190  Emphasising production optimisation and shift towards a knowledge based production.

These five strategic elements continue to be the basis of the strategy for the development and operation of the European shipbuilding industry. The dominant or strong competitive position of European manufacturers in the production of cruise ships, ro-ro and con-ro vessels, ferries and miscellaneous vessels is confirmed by its competitive position in selected shipbuilding segments with a high degree of complexity and innovative applications.

The above five strategic elements have enabled the European shipbuilding sector (shipyards and suppliers) to implement the latest shipbuilding technologies by the sector itself (Internal development) 191 and European sector (RDI) (External development) co-financed by the EU. The support infrastructure created by the European Union's innovation policy in Europe has increased the potential of the European shipbuilding industry, so that it can handle all orders from shipowners, not only private but also public ones.

The strategy for the development of the shipbuilding industry in Europe adopted at the beginning of the 21st century allowed for systematic blocking of the following issues:

 shipbuilding technology and the creation of highly effective value chain, measured by the relation of the resulting effects to the expenditure incurred,  a technological ship chart showing the degree of innovation of the ship as a result of the application of new technological solutions in its design.

This means that the analysis of the value chain created in the shipbuilding process should be carried out simultaneously with an inventory of state of the art in shipbuilding.

5.3.3 Technological roadmap of a ship

This part analyzes the technical and technological innovations used in the shipbuilding process with focus on fields related to changes in ship construction. Innovations within these fields that allow building of modern ships responding to:

189 LeaderSHIP 2015 Defining the future of the European shipbuilding and shiprepair industry, European Commission, Enterprise publication 190 LeaderSHIP 2020 The Sea, New Opportunities for the Future Brussels, 20th of February 2013 191 RDI (Research Development Innovation) s a combination of R&D and Innovation activities; 270

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 social and environmental demands for reducing external costs generated in the operation of the ship and negatively impacting the environment,  economic requirements related to competitiveness on the maritime transport market, which is related, among other things, to the reduction of operating costs of the ship.

Two technology arenas will shape commercial shipping in 2030 with a significant impact on ship system design and ship operation: the first technology arena originates from within the shipbuilding industry, where competition develops technology sophistication and operational efficiency in order process to gain commercial advantages by shipbuilding companies. The second technology area comes from other sectors, as maturing technology is ripe for transfer to ship system design and operation to enhance safety, as well as financial and commercial performance both by shipbuilding 192 companies and by maritime sector companies .

As mentioned above, the key technological aspects of shipbuilding concern the ship as the means of transport (product innovation) but also the manufacturing processes that improve the quality and technological advancement of the ship while reducing the cost of its construction, and then contribute to its subsequent lower costs of operation (innovation of management / strategy).

According to the Global Marine Technology Trends 2030 report, the new technical and technological solutions for the ships and their construction processes can be divided into areas that are developed by the shipbuilding industry and associated R&D centers (Internal development):

The technical and technological developments, grouped into the eight areas presented above, are used to a varying degree in ship construction (materials, subsystems and systems) and shipbuilding, including, of course, suppliers, in shipbuilding technology (productivity in the value chain). Some of the technical or technological innovations are used both in the production itself and in the ship's construction, deciding on the level of competitiveness of the shipbuilding industry.

By concentrating on the ship itself and its technical parameters, we can distinguish the four main fields of technical and technological developments in the modern shipbuilding, presented in Figure 210, using new solutions and innovations from the areas presented earlier:

I. Smart ship. II. Propulsion and powering. III. Hull construction. IV. Equipment of ship.

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Figure 210: Four field the development of technical and technological modern ship construction (Source: http://www.konstrukcjeinzynierskie.pl/redakcja/30-wybor-redakcji-2009/104-wyjtkowe-con-ro-ze-szczecina?showall=&limitstart= (22.10.2017))

In each of these fields a number of technical and technological solutions are used to change the structure of the ship, the configuration of the subsystems and systems, the technical functioning of selected ship systems and the entire vessel. Table 37 presents a new solutions and technologies implemented on ships in each of the four fields presented in Figure 210.

Table 37: New solutions and technologies implemented on ships (Source: own work using presentation The NSPS shipbuilding value chain, Lukas Brun Center on Globalization, Governance & Competitiveness, Duke University, January 24, 2013, Jurdzinski M.: Technological innovation on maritime ships to reduce energy consumption and CO2 emissions, Scientific Journals Maritime University of Gdynia no 77, December 2012, Global Marine Technology Trends 2030, © 2015 Lloyd’s Register, QinetiQ and University of Southampton. First Printed: August 2015) Field Technology Application (Category) I Big Data Analysis IT tools that enable the processing of large amounts of data from Smart ship individual ship systems in a very short time. The technology enables the creation of a single set of data transmitted by the control subsystems of individual ship systems to automate ship management processes as a single system. Communication Two areas:  Communication of the ship with the shipowner, port, other ships, other institutions and enterprises related to the safety of the ship and its operation, including efficiency,  Transfer of data collected by the ship's systems using wireless communication to exchange data with the naval administrations of the respective states (ship and cargo identification), the shipowner (continuous information of the ship by the shipowner), port operators (loading and unloading plans, ship data including position and planned entrance to port). Integrated Integrated ship management with the use of Big Data Analysis Platform technology where analytical software enables decision support by the Management ship's crew. The development of IPMS is aimed at automating the ship as System (IPMS) a whole and not just its individual systems so that in the near future it is possible to remotely control an autonomous ship where Communication is the key technology. II New constructions Three areas: Propulsion of main engines  to increase the efficiency of main engines by improving the energy and and motors of efficiency of traditional fuels (heavy fuel, diesel); 272

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powering generators  technological adaptation of main engines to the new fuel combustion, mainly LNG, also in the dual system - engine adapted for the combustion of traditional fuels and LNG,  recovery of heat from the exhaust system for further use in the heat and power management of the ship. New propulsion Application of hybrid systems with technological development in the part systems relating to the propulsion and production of electricity and its transfer to propellers or thrusters, including the issue of the ship control. Cold ironing Power supply of the ship from shore during the stoppage in the port, which results in reduction of CO2 and other chemical emissions contained in the exhaust that negatively affect the environment. III Big Data Analysis Design of ship hulls in the following aspects: Hull system in ship hull - optimizing the shape to reduce resistance and improve hull construction design aerodynamics, including the bulbous bow shape and the aft part in the propeller region or thrusters, - optimizing the shape of the hull to increase the cargo capacity of the ship, - optimizing the dimensions of the hull components to reduce its weight while preserving the strength and durability parameters. Advanced Use of new materials (steel alloys, material structure of steel alloys, materials polymers and composites, bio-materials) in construction of: - outer hull of the ship, - inner hull of the ship and watertight bulkheads, - superstructure, - interior decks, cargo hold hatches, internal walls and other structural elements of the ship's construction to reduce the weight of the structure, the use of corrosion-resistant materials, increase the strength and durability of the structure of the ship. IV Sensors A system of data collecting equipment from individual devices that make Equipment up ship subsystems and systems and sending them to the IPMS, using of ship Big Data Analysis system to monitor device performance and response to interference or performance data other than set and transmitting data using Communication technology to ship supervision services for analysis and remote response (Telematics). Robotics Three areas:  assessment of the condition of the hull, pipelines, valves, electrical installations and other equipment of the ship in inaccessible or dangerous places,  repairs of hull and ship equipment requiring heavy work such as welding, cutting or cleaning of ship components using, for example, welding apparatus or exoskeleton.

Automation of technologies for individual marine systems began several decades ago. In the initial stage of operation, they focused on the automation of the propulsion system of the ship and the electricity production system together with the subsystems supporting these systems (e.g. cooling and heating subsystems, fuel preparation and feeding, electricity distribution). At the same time, the integration of navigation subsystems into one integrated navigation and communication system has begun. The third field of innovation was the remote control of all systems and subsystems that consisted of an engine room (propulsion, electricity, ventilation, heating, ballasting, drinking water and sanitation, and others, depending on the location of the equipment).

In the 90s and then in the 21st century engineers aimed at further automation of systems, but also their integration in the field of interoperability and control, as well as intelligent solutions, where process management, decision control and decision making systems are used to support IT management processes in ship’s operation. Integrated Platform Management System (IPMS) - the group of these systems, differently configured for different vessels - is being developed today with the widespread use of systems capable of collecting large amounts of data in a very short period of time - Big Data Analysis System.

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As mentioned above, the strategy for the development of the shipbuilding industry in Europe at the beginning of the 21st century has allowed for a systematic blocking of shipbuilding technology and the creation of highly effective value chain, as well as technological issues in the ship chart, reflecting the innovation of the ship, leading to the conclusion that value chain analysis created in the shipbuilding process should be carried out simultaneously with an inventory of state of the art in shipbuilding. Hence, in this technical and technological analysis of state of the art of the European shipbuilding industry, the issue of the capacity and productions of the European shipbuilding sector as well as the R&D and TR&L support infrastructure are discussed in detail in point 5.4.

5.3.4 Shortly description of relevant European actors and non-European actors of shipbuilding

As already indicated in the analysis, the shipbuilding sector in Europe consists of two intrinsically linked subsectors: shipbuilding and different Tier suppliers. It is important for the short description of the shipbuilding sector that both subsectors are often capital-related. The second important element is the fact that the main European actors in the sector operate on a global scale. An example is the Fincantieri Group (Italy - Headquarter), currently the largest ship manufacturer (in terms of income) in the Western World (in the sense of Europe and North America), which employs 19000 people in 20 shipyards located in Europe, both Americas and Asia. The Group focuses its activities on the shipbuilding segments of high value added vessels using high-tech. This group operates in areas such 193 as :

 construction of commercial and war ships, off-shore platforms and large ships,  ship repair,  servicing, designing, classifying and consulting,  production and supply: propulsion / power generation, auxiliary systems, apparatus & accessories, electric / electronics / nautical equipment & communication.

In general, enterprises operating in the European shipbuilding sector (shipbuilders and suppliers) can 194 be divided into :

 global market leaders who operate both in the shipbuilding sub-sector, including ship repairs and suppliers (e.g. Fincantieri Group - Italy),  global market leaders operating mainly in the shipbuilding and repair sub-sector (e.g. Damen Group - Netherland), global market leaders operating in the supplier sub-sector (e.g. Technip - France, Saipem - Italy, Kongsberg Maritime - Norway, Aker Solution - Norway),  global suppliers specializing in selected areas (e.g. Muehlhan - Germany, Cargotech - 195 Finland, Wartsila - Finland, MAN - Germany, Volvo Penta - Sweden, Inmarsat - UK)  European suppliers specializing in selected areas (e.g. Viking Life-Saving Equipment - Dennmark, Palfinger - Austria).

In turn, the global leaders in the production of ships (in the context of orders for 2016) are Asian 196 manufacturers, where the top five are :

 Hyundai HI – South Korea,  Daewoo Shipbuilding – South Korea,

193 "Study on New Trends in Globalisation in Shipbuilding and Marine Supplies – Consequences for European Industrial and Trade Policy”, Funded by the European Commission Contract No. EASME/COSME/2015/005, BALance Technology Consulting GmbH, Shipyard Economics Ltd., MC Marketing Consulting 194 Ibidem 195 In the group of global suppliers specializing in selected areas, there can be found many suppliers also acting as suppliers for other industry and service sectors 196 https://www.statista.com/statistics/257865/leading-shipbuilding-companies-worldwide-based-on-volume (4.09.2017) 274

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 China State Shipbuilding Corporation – China,  Samsung HI – South Korea,  Imabari Shipbuilding – Japan.

In Europe, the largest ship manufacturers are:

 Damen Group – The Netherlands,  Fincantieri Group – Italy,  Mayer – Germany,  Navatia Group - Spain,  MV Werften Genting Group – Hong Kong / Germany,

The largest world shipbuilding groups listed above are the owners of several to several dozen production and repair shipyards (a natural arrangement among the largest shipbuilding companies in the world, including Europe) located in several or more than a dozen countries. Asian manufacturers concentrate their yards in Asia. European manufacturers, as part of acquisitions and capital concentrations, they do not limit their expansion to Europe by taking over yards on other continents and investing in their further development. An example is the Fincantieri Group, the owner of production and renovation shipyards not only in Europe but also North America, or the Domen Group, which develops shipbuilding activities in Vietnam or in Qatar as part of companies with local enterprises.

The situation is similar among first-tier suppliers operating on the global market, where European suppliers (35% share in the global supplier market) began global expansion in the 1990s in response to the rapid development of shipbuilding in Asia (South Korea, China and Japan) . This expansion was implemented by building new factories in Asia alone or jointly with Asian companies. Examples:

 Cargotech (Finland), a global supplier of ship-type reloading equipment that has concentrated its efforts on maintaining a leading position in Europe and gaining a competitive advantage on the Chinese market,  Wartsila (Finland), a global supplier operating in several areas (e.g. offshore systems, propulsion / power generation, auxiliary systems, apparatus & accessories), sub-sector of supply of subsystems and ship equipment systems and off-shore structures, which only in the years 2014-2016 strengthened its position in the main shipbuilding markets through acquisitions in the US market and joint ventures with Chinese companies.

The examples of ship manufacturers and suppliers of subsystems and systems operating in the main shipbuilding markets (Europe, USA, Asia) presented above illustrate the tendency in the modern economy to globalize the activities of the largest actors in the given production sectors. This is no different in the shipbuilding sector. The leading position of Asian manufacturers of not very technologically advanced vessels, such as bulk carriers, tankers or container ships, would not have been possible without European suppliers who, following changes in the geography of production, changed their character from European to global suppliers of subsystems and systems. Of course, parallel leading suppliers in the given areas strengthened their position on the European market, which focused on the production of technologically advanced and structurally high-tech vessels and off-shore vessels. As a result, European shipyards basing on ship production and repairs as well as supplier sub-sector developed in the last years on the basis of the implementation of new technical solutions and new technologies arising both outside and inside the shipbuilding sector.

5.4 Elaborate an inventory of the state of the art in shipbuilding manufacturing

The key to today's state of the European shipbuilding value chain was the adoption by the European Union at the beginning of the 21st century of an agenda for a new development strategy where smart, sustainable and inclusive growth of EU member states was considered as a way of overcoming structural weaknesses in Europe. to improve its competitiveness and productivity and to support a

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197 sustainable social market economy . This agency identified four targets for 2020 and the results of their implementation for the socio-economic development of the EU Member States:

“Targets:

1. Employment:  75% of people aged 20–64 to be in work. 2. Research and development (R&D):  3% of the EU's GDP to be invested in R&D. 3. Climate change and energy:  greenhouse gas emissions 20% lower than 1990 levels,  20% of energy coming from renewables,  20% increase in energy efficiency. 4. Education:  rates of early school leavers below 10%,  at least 40% of people aged 30–34 having completed higher education. 5. Poverty and social exclusion.  at least 20 million fewer people in – or at risk of – poverty/social exclusion

Features of the targets:

1. They give an overall view of where the EU should be on key parameters by 2020. 2. They are translated into national targets so that each EU country can check its own progress towards each goal. 3. There is no burden-sharing – they are common goals for all EU countries, to be met through a mix of national and EU action. 4. They are interrelated and mutually reinforcing:  educational improvements help employability and reduce poverty,  R&D/innovation and more efficient energy use makes us more competitive and creates jobs,  investing in cleaner technologies combats climate change while creating new business or job 198 opportunities.”

Targets formulated in the European Union's strategy at first sight may seem to be sectoral. However, if we refer them to the effects (by 2020), these targets appear to be multisectoral repercussions leading to synergies in Europe's social and economic development. Figure 211 shows the matrix of relations between targets with the effects visualizing the added value of the entire EU economy to achieve the five main targets.

197 https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance- monitoring-prevention-correction/european-semester/framework/europe-2020-strategy_en (10.10.2017) 198 Ibidem 276

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Figure 211: The matrix of relations between the main targets and the assumed effects of the Europe 2020 strategy (Source: own study based on Europe 2020 strategy, https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal- policy-coordination/eu-economic-governance-monitoring-prevention-correction/european-semester/framework/europe-2020- strategy_en (10.10.2017))

A comprehensive approach to the EU's economic and social development in the Europe 2020 strategy allows the creation of benefits for each sector through cross-sector flows. In the case of shipbuilding, this concerns both R&D, the development and achievements (studies, analyzes, technologies, technical solutions, patents) of which are multisectoral and can be used by various sectors of the European economy, including the production of various means of transport in Europe. These sectors, in cooperation with each other, adopt technology and technical, organizational and managerial solutions created by the R&D sector as well as other sectors of the economy. The same applies to shipbuilding. The sector of shipbuilding in the process of its development has implemented a number of technologies, technical or organizational solutions from other sectors of the economy over the past several years, including the R&D sector (both internal and external R&D institutions and those acting for other sectors of European economy).

Selected Tier 2 factors for the technical analysis of shipbuilding development in Europe are convergent in their structure with the targets of the Europe 2020 strategy. In turn, the cross-sectoral effects of achieving these targets have already been largely demonstrated in the analysis. It is completed with the description provided below, final analysis and estimation of the importance of each of the selected Tier 2 factors for the current state of shipbuilding in Europe in technological, technical and organizational areas.

Three main parts determinants of the added value in shipbuilding

Section 5.2 describes the AS-IS mapping of the shipbuilding value chain by analyzing the activities undertaken in each part, the basic relationships between chain actors as well as the most important activities in each of the indicated parts. The analysis of the shipbuilding value chain enabled to distinguish, in the case of European production, the three main parts determinants of the added value represented by a ready sea ship, where its economic and utility value is a determinant of the efficiency of the whole value chain:

199 P1. Contract/work design of the ordered ship developed for the shipowner. P2. Production of ordered ship subsystems and systems. P3. Construction of a ship in a shipyard.

199 Shipbuilding design agreed between the shipowner (contracting authority) and the shipyard (contractor) differs in nomenclature in shipbuilding practice, hence two different terms are provided. The term “contract design” will be used hereafter. 277

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Figure 212 shows a diagram of the relationships between selected and described above three main parts that mainly create the shipbuilding value chain. Above are described activities undertaken in each part.

Figure 212: Diagram of three main parts of the shipbuilding value chain (Source: own study based on interviews with representatives of European shipowners and shipyards and analysis of shipbuilding processes)

Description each of the main parts:

Ad P1.

As already mentioned in this analysis, shipbuilding is a custom-made production. The order may concern one ship or series of several ships. Hence, each ship or series is built based on the individual preferences of the shipowner and individually developed design, from conceptual through contract to construction design where the shipowner decides on the selection of materials, subsystems and systems.

The conceptual design is prepared by a design office where not only the operating parameters of the ship are taken into account, but also a predetermined propulsion system including the type of fuel to be supplied to the system or an electric or hybrid propulsion system. The conceptual design also defines the basic parameters of other subsystems and systems, where the shipowner and the design office decide precisely which manufacturers of the materials, subsystems and systems will be used on the ship.

The contractual design of the vessel is another process in this part where the shipowner chooses the shipyard to build the ship. The shipyard, with the assistance of the design office, prepares the contract design based on the conceptual design, underlying the contract with the shipbuilder for the construction of the ship. Virtually all shipbuilding issues, configuration of materials, subsystems and systems from which the ship will be built are determined at this point. This means that Tier 3 material suppliers, Tier 2 subsystem suppliers and some Tier 1 system suppliers are selected. In this part it is also decided whether the ship will be built in two or one parts. 278

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Ad P2.

Acceptance of the contractual design is the beginning of contracting by the shipyard the material suppliers (Tier 3), subsystem suppliers (Tier 2) and system suppliers (Tier 1) forming a future ship. In the case of two-part construction, it is also contracting the shipyard (Tier 1), which will build a hull or partially fitted hull. Contracting by the shipyard that builds the ship also launches contracting of Tier 3 material supply by Tier 2 subsystem manufacturers or systems and possibly ship hull in case of two- part construction (Tier 1). Similarly, ordering of Tier 2 subsystems is implemented by Tier 1 suppliers and integrators. A result of these orders between companies that create the shipbuilding value chain is defined certain technological and technical level of the future ship in terms of its quality and modernity expected by the shipowner.

Ad P3.

Construction of the ship in the shipyard is carried out on the basis of a construction design which is a technical development of the contract design. This design, which has the character of a technical plan for the construction of a ship in accordance with the adopted technical and operational parameters for materials, systems and subsystems, is essential in the shipbuilding part, being the basis of the entire ship manufacturing process. In Table 35, Phase Ph3 presents the main activities required for shipbuilding to be completed by the shipyard to ensure that the shipowner receives the vessel in the parameters specified in the contract design.

As already mentioned, the common practice in Europe is the two-part production of technologically and technically advanced ships, where the hull and the equipment are built in a single shipyard that becomes a Tier 1 supplier on a par with system manufacturers and integrators. Moreover, the final construction of the ship and its equipment with subsystems and systems is done in the final shipyard which has signed a contract with the shipowner for the fully equipped vessel and of the parameters as specified in the contract design.

The manufacturing potential of the shipbuilding industry in Europe combined with the R&D and technology implementation and production management (TR&L) standards allow to build technologically advanced ships in Europe. Moreover, the European industry is a leader in cruisers, ferry and ro-ro vessels, miscellaneous high-tech vessels and off-shore construction with a large portfolio of products competing successfully with the Asian shipbuilding industry. Analysis of the potential of the European shipbuilding industry in R&D and TR&L areas was carried out in section 5.4. combining the issues of the value chain created in the ship manufacturing and the technical and technological capabilities of the shipbuilding industry in the Old Continent.

Technological roadmap of the state of the art in European shipbuilding

As previously stated, the new technical and technological solutions for the ships and their construction processes can be divided into areas that are developed by the shipbuilding industry and associated R&D centers (Internal development):

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When concentrating on the ship's manufacturing process, it is possible to indicate which of the above technological solutions are used at different stages by the companies participating in the process. Table 38 shows the main part (Figure 212), in which particular technologies are used by particular participants in the shipbuilding process. The effects of applying different technologies were also indicated.

Table 38: New solutions and technologies applied in ship manufacturing (Source: own work using presentation The NSPS shipbuilding value chain, Lukas Brun Center on Globalization, Governance & Competitiveness, Duke University, January 24, 2013, Jurdzinski M.: Technological innovation on maritime ships to reduce energy consumption and CO2 emissions, Scientific Journals Maritime University of Gdynia no 77, December 2012, Global Marine Technology Trends 2030, © 2015 Lloyd’s Register, QinetiQ and University of Southampton. First Printed: August 2015)

Nr Name Technology Enterprise Application

P1 Contract/work Big data Shipowner Analysis of future utility features of the planned design of the analytics Design company ship using available databases to simulate vessel ordered ship operation under operating conditions. developed for Shipowner The design of the ship using available databases, the shipowner Design company taking into account ship’s technical aspects, Tier 2 environmental aspects (vessel impact on the Tier 1 environment) and legal aspects related to the Shipyard future operation of the ship (e.g. marine life Classification protection regulations, environmental regulations) society P2 Production of Big data Shipowner A joint database facilitating the exchange of data ordered ship analytics Tier 2 and information between companies involved in subsystems Tier 1 the construction of the vessel in the subsystem and systems Shipyard and system manufacturing part to produce them Classification with technical and technological parameters society consistent with the ship's design and applicable standards and regulations. Robotics Tier 3 Automation of material, subsystem and system Tier 2 production with extensive use of robots plus Tier 1 production of components using 3D printing Advance Tier 3 Use of advance materials for mechanical and materials Tier 2 thermal processing of materials and components Tier 1 of ship subsystems and systems. P3 Construction Big data Shipowner A joint database facilitating the exchange of data of a ship in a analytics Design company and information between companies involved in shipyard Tier 1 the construction of the vessel in the subsystem Shipyard and system manufacturing part to produce them Classification with technical and technological parameters society consistent with the ship's design and applicable standards and regulations. Robotics Tier 1 The use of robots in the processing of materials, Shipyard welding of the hull and other components of the ship, assembly of individual components and systems (where possible) Advance Tier 1 Use of advance materials for mechanical and materials Shipyard thermal processing of ship's materials and equipment.

The application of new technology and solutions (Table 38) in conjunction with new shipbuilding technologies (Table 37) enables the European shipbuilding sector and offshore industries to build world-class vessels. At the same time, the efficiency of the value chains created in these processes is of high level.

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The strategic activities that have been implemented in Europe in the early 21st century in the shipbuilding sector and offshore industries have created a sector with global capabilities in terms of technology tailored the anticipated level of orders from shipowners in terms of production capacity of high added value.

The European shipbuilding industry (shipbuilding, repairs, materials, components, subsystems and systems) employs over 500,000 people and its average annual turnover in the past few years accounted to ca. € 72 billion. In the European Union alone, the sector employs around 225,000 people in more than 20,000 businesses with sales of € 40 billion.

The shipbuilding subsector (shipbuilding and repairs) includes about several hundred shipyards, most of which belong to the SME group, where small vessels of up to 150 tones are built (yachts, fishing boats, service ships). The remaining shipyards (about 150) are large companies, about 40 of which 200 are active in the global market for the construction of large merchant ships . And the big shipyards decide on the manufacturing capabilities of the European shipbuilding industry, both merchant ships and warships. In the European Union, this sector employs around 120,000 people, with around 6% of the global market for shipbuilding contracts in GT. The shipbuilding sector generates a total production 201 value of € 41 billion .

To a large extend the strength of European shipbuilding industry is determined by the marine equipment subsector. The European industry, which comprises Tier 1 and 2 suppliers in the value 202 chain, has a 35% share in world maritime equipment . With a total production volume of € 44.5 billion, Tier 1 suppliers in shipbuilding have a very high production value, where production for the EU exports (€ 6.3 billion) and outside the EU decides on a competitive position of the European shipbuilding industry. Tier 1 suppliers employ more than 231,000 people in over 28,000 companies across Europe.

The economic strength of the Tier 1 suppliers stimulates the development of a group of Tier 2 suppliers. The analysis made in “Study on New Trends in Globalization in Shipbuilding and Marine Supplies – Consequences for European Industrial and Trade Policy” project showed that Tier 2 suppliers deliver value of € 2.6 billion to their suppliers by employing some 109,000 workers.

The key action to the position of the European shipbuilding industry in the world shipbuilding market was “integration” of the EU shipbuilding industry into the EU's implementation of a knowledge-driven and smart economy (i.e. smart growth) policy and the promotion of a resource efficient, greener and more competitive economy (sustainable development). They are the ideal solution for the opportunities that can be found in the maritime sector. As a result, “the European marine equipment industry is a world leader for a wide range of products ranging from propulsion systems, large diesel 203 engines, environmental, and safety systems, to cargo handling and electronics” enabling the European shipbuilding subsector to build technologically complex and innovative (high value added in the value chain) ships.

5.4.1 Focus Area: R&D

KPI Template – B 2 R&D cooperation

Sector of means of transport: Shipbuilding

Type: Qualitative & Quantitative

Key Performance Indicators / Areas of Interest: R&D

200 Importance of the Shipbuilding Sector http://ec.europa.eu/growth/sectors/maritime/shipbuilding/index_en.htm (15.06.2017) 201 "Study on New Trends in Globalisation in Shipbuilding and Marine Supplies – Consequences for European Industrial and Trade Policy”, Funded by the European Commission Contract No. EASME/COSME/2015/005, BALance Technology Consulting GmbH, Shipyard Economics Ltd., MC Marketing Consulting 202 Importance of the Shipbuilding Sector http://ec.europa.eu/growth/sectors/maritime/shipbuilding/index_en.htm (15.06.2017) 203 Importance of the Shipbuilding Sector http://ec.europa.eu/growth/sectors/maritime/shipbuilding/index_en.htm (15.06.2017) 281

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Management summary: Collaboration between companies (B) and the R&D sector is one key factor for the implementation by the shipbuilding industry (including suppliers of various Tiers) of new solutions in technology (shipbuilding and manufacturing), cooperation and production management, as well as the entire value chain created in the construction process of the ship. Without this cooperation there would be no technical and technological progress in shipbuilding.

SCORE: 4

Description:

As previously indicated collaboration between companies (B) and the R&D sector is one key factor for the implementation by the shipbuilding industry (including suppliers of various Tiers) of new solutions in technology (shipbuilding and manufacturing), cooperation and production management, as well as the entire value chain created in the construction process of the ship. Consequently, the continuous cooperation of shipbuilding companies with R&D sector is one of the key drivers of its technological development and implementation of new technical solutions in the process of building a ship. As a result, the European shipbuilding industry has achieved a competitive advantage on the world market the construction of highly technically complex vessels with the simultaneous application of state-of- the-art technology in the ship.

Analysis & Assessment:

Ships and off-shoring structures currently being developed in many European shipyards are, in many cases, very complex technical vessels that use the latest materials, technologies and technical solutions for subsystems and systems. This would not have been possible without cooperation with the R&D sector, which is one of the leading sectors in Europe, as described in the KPI Template - EU policy of R&D.

Table 39 presents the selected configurations of shipbuilding companies' cooperation with European R&D institutions / companies, indicating issues of this cooperation.

Table 39: Selected configurations of B 2 R&D cooperation in the shipbuilding sector (Source: own work using presentation The NSPS shipbuilding value chain, Lukas Brun Center on Globalization, Governance & Competitiveness, Duke University, January 24, 2013, Jurdzinski M.: Technological innovation on maritime ships to reduce energy consumption and CO2 emissions, Scientific Journals Maritime University of Gdynia no 77, December 2012, Global Marine Technology Trends 2030, © 2015 Lloyd’s Register, QinetiQ and University of Southampton. First Printed: August 2015)

Enterprises Place in Research area Technology / value chain of R&D sector technical solution and application area

Shipowner Shipowner Softwere & Big Data Analytics - ship design, including hull The ship designer Subcontractor Computer Services construction, configuration of equipment and company systems (the main area is described in Table 37.)

Materials Tier 3 Industrial Materials and components: steel, rubber, plastics, manufacturers Engineering glass, woods and others materials Softwere & Advance materials: steel alloys, material structure of Computer Services steel alloys, polymers and composites, bio-materials, Electronic & Electrical others.

Manufacturers of Tier 2 Industrial New constructions of main engines and motors of propulsion and Tier 1 Engineering generators (the three main areas are described in power systems. Softwere & Table 37.) Computer Services New propulsion systems (the main area is described Electronic & in Table 37.). Electrical Cold ironing (the main area is described in Table 37.)

Manufacturers of Tier 2 Industrial Communication (the two main areas are described in navigation, 282

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communication Tier 1 Engineering Table 37.) and IPMS Softwere & Big Data Analysis (the main areas is described in systems Computer Services Table 37.) Electronic & Integrated Platform Management System (IPMS) Electrical (the main areas is described in Table 37.)

Shipyard Prime Industrial Big Data Analysis – use of very high computing contractor Engineering power to develop shipbuilding technology and the Softwere & whole process of its construction from the Computer Services organization's side (the main issues are described in section 5.2, including Table 1 - Ph2 and Ph3). Electronic & Robotics (the three main areas are described in Electrical Table 37.) Support Services

Confirmation of the effective cooperation of the European shipbuilding industry with the European R&D sector is the statistical data indicating the dominance of European shipyards in the manufacture of very complex technical vessels using the latest solutions in the areas of materials, technology and technical solutions of subsystems and systems. Examples include the production of passenger ships, ocean cruisers and ferries where the share of European shipyards in global production exceeded 84% in the group of 300 GT and above. Also in offshore production, European manufacturers are leading the way in the production of various high-tech ships for the transport of people and goods for the operation of mining towers, wind turbines and other marine constructions. One of the specializations of European shipyards is also the production of short sea shipping vessels, including sea-going vessels.

Conclusion - Shipbuilding companies in Europe work very well with the R&D sector in Europe, which results in the construction of high-tech ships.

5.4.2 Focus Area: Technological readiness (TR)

KPI Template - Implementing new technologies

Sector of means of transport: Shipbuilding

Type: Qualitative

Key Performance Indicators / Areas of Interest: Technological readiness

Management summary: The implementation of new technology in the manufacture of ship materials, subsystems and systems, as well as in the construction of the ship itself, is one of the key factors of competitiveness of shipbuilding companies operating in global competition. Hence, the ability of companies in this sector to implement the technology of manufacturing individual components of the ship and the technology of combining these elements together, including ship as a final product, is a key quality factor determining the level of technical readiness of a company.

SCORE: 4

Description:

One of the consequences of the cooperation of the European shipbuilding sector with the R&D sector is the implementation of new technologies by the companies involved in ship manufacturing. This applies both to design companies, different suppliers, and shipyards. The extensive cooperation of individual actors in the ship's supply chain has led to the modernization of the European shipbuilding industry in recent years in a similar pace to the pace of development of the R&D sector in Europe (as 283

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry described in KPI Template - EU policy of R&D). As a result, the latest technologies developed outside the shipbuilding sector, such as in the automotive production sector, hybrid drives or gas-fueled natural gas, the new materials for producing various components in various sectors using 3D printing are rapidly implemented in ships and other vessels in European shipyards.

Analysis & Assessment:

In Figure 210 are indicated four field the development of technical solutions and technological innovation of modern ship construction in Europe: Smart ship, Propulsion and powering, Hull construction and Equipment of ship. In Table 37, new ones are described new solutions and technologies are implemented on ships built in European shipyards in each of the four field.

Estimating the capacity of the European shipbuilding industry is best illustrated by the examples of several ships built or being built in Europe where new technologies and new solutions have been applied, using the European and global achievements in this regard:

1. Propulsion and powering - LNG as fuel instead of diesel; Norwegians are pioneers in the use of LNG to power ships. For more than a decade, people and cars have been transported in Norway and between Sweden and Finland by ferries powered by liquid natural gas. Norway and Sweden also provide the necessary infrastructure for supplying ferries with gas. 2. Propulsion and powering - hybrid (electric-diesel) ferries; An example is the Crist shipyard in Gdynia (hull with partial equipment) and the Ulstein shipyard (final equipment) 160 m long passenger and car ferry for Color Line, which will operate between Sweden and Norway, with a capacity of up to 2000 passengers and 500 cars. 3. Propulsion and powering & Integrated Platform Management System (IPMS) - newly built double-ended ferry with IPMS (three persons crew are all control vessel) and an innovative hybrid diesel and electric propulsion system. The ferry is provided with battery banks of 1040 kWh capacity to operate the vessel year-around; the battery bank is automatically charged from external power sources. 4. Smart ship, Hull construction and Equipment of the ship – European shipowners and shipyards in design processes use specialized design companies where Big Data Analysis systems are used to design the ship, allowing for the rapid processing of large amounts of data (using calculation algorithms) in terms of: determining the vessel’s durability for operating conditions and maximizing bearing capacity length, width and draft immersion, optimization of energy consumption during operation, minimization of greenhouse gas emissions, weight reduction of the ship, inter alia by the use of new, lighter, more corrosion resistant and destructive materials, or finally designing fully automated propulsion systems and semiautomatic support systems navigation, communication and ship management (IPMS).

Conclusion - in qualitative terms, on the basis of a previous technical analysis of shipbuilding in Europe on the effectiveness of implementing new technologies, it should be noted that the European transport industry very well uses new technologies to build the world's most modern ships in selected segments. It is also the reflection of the development strategy adopted by the largest European shipyards from France, Germany, Norway, Poland or Turkey.

KPI Template – B2B cooperation in the implementation of new technological solutions

Sector of means of transport: Shipbuilding

Type: Qualitative & Quantitative

Key Performance Indicators / Areas of Interest: Technological readiness

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Management summary: Contemporary supply chains are network and vertical relationships between businesses, from raw materials to supplying finished products, where we distinguish several stages of production, from raw materials through materials, components, subsystems and systems to finished product. The high quality and modernity of the final product depends on the ability of the companies to cooperate in the implementation of new technological solutions. The construction of a ship, which has already been presented previously, is complex, where the suppliers of various Tiers produce materials, subsystems and systems at various levels that are part of a finished market product - a ship built in a shipyard. This network and vertical system of companies requires proper cooperation between the chain companies conditioning the construction of a modern ship where the latest technological solutions are used.

SCORE: 4

Description:

In the points 5.2, 5.3 i 5.4. analysis of the current status of dynamics of value chain of European transport shipbuilding manufacturing industry was carry out. An analysis of the IS-AS of the European Shipbuilding Value Chain (point 5.2), the characteristics of the shipbuilding value chain in Europe and the main parts of this chain (point 5.3.) and the technical and technological state of the shipbuilding sector (point 5.4.) was made. The analysis has clearly demonstrated that the key factor for maximizing added value in the value chain is the enhanced cooperation of companies involved in the shipbuilding process, which co-ordinates the implementation of new technical solutions using new technologies in newly built ships.

Analysis & Assessment:

In the above analysis, the issue of creating a value chain in the shipbuilding process, starting with its conceptual design, through the stages of shipbuilding described from the organizational and technical aspects (linking the companies in the supply chain) to the production of a ready-made ship in the production yard, was pointed out. The analysis also included a map of technical solutions using new technologies used in ships currently built in Europe.

Figure 213 shows in a schematic diagram the cooperation of companies, participants in the shipbuilding value chain, in the implementation, as part of the shipbuilding process, new technical solutions, based in many cases on new technologies both within and outside the shipbuilding sector, including in the R&D sector working in different areas of technology development in Europe.

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Figure 213: The scheme of system of implementation of new technical solutions using new technologies in the value chain of the shipbuilding

Examples of implementation of new technical solutions using innovative technologies in ship construction are the result of cooperation of the network of supply chains commonly used in the European shipbuilding sector where vertical and horizontal links of sector enterprises are strong part of the sector. They enable for rapid deployment of new technical solutions both in ship construction and in production processes (Figure 213). Cooperation has the features of product innovation and management innovation, as described in section 5.6.

Conclusion - The quality of the European shipbuilding industry for the implementation of new shipbuilding technology in European shipyards should be very highly assessed in terms of qualitative and quantitative aspects, where the suppliers of various Tiers are a European group of companies with a 37% share in global deliveries (2nd and 1st Tier suppliers) for shipbuilding.

5.4.3 Focus Area: Workforce

KPI Template - Knowledge and skills of employees

Sector of means of transport: Shipbuilding

Type: Qualitative

Key Performance Indicators / Areas of Interest: Workforce

Management summary: Increasingly, the market dominance of companies is determined by people with the knowledge and skills to implement new solutions in the areas of technology, organization and

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D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry management (processes, businesses, supply chains). In this group we distinguish knowledge workers, i.e. the key group to the development of the company with special knowledge and problem solving skills able to implement in the company innovation at the levels of product, management and strategy. In shipbuilding, knowledge and skills of workers are key to achieving the highest possible level (quality and productivity) of design processes, implementation of new technologies, the production of ship components and the ship itself, determining the market success of the companies engaged in ship production.

SCORE: 3

Description:

Each of the European Union countries has its own educational policy, but educational policy is also an element of the EU's socio-economic development policy. Hence, the EU is working together to create common goals for achieving and disseminating best practices in education and skills for pupils, staff, students and doctoral students.

As part of the EU's efforts to develop the European education system, we can distinguish a number of activities e.g. the Erasmus+ program with a budget of € 14.7 billion (2014-2021) aimed to help four million people (mostly young people) wanting to study, train, gain experience or work as a volunteer abroad and help for more than 125,000 organizations wishing to cooperate with foreign organizations 204 in the field of innovation of teaching and apprenticeship and to modernize these areas .

Another example of action at the EU level to create a common market for employers and employees is Europass, the standard Resume. It allows foreign employers to find out what education and skills each applicant has. The Resume includes: CV, Language Passport (for language assessment and language qualification), Europass Document (confirming the study periods abroad), Europass Supplement to the certificate (competence certified by vocational training certificates), Europass Diploma Supplement (confirmation of education at university), European skills passport (overall image 205 of skills and qualifications) .

206 On the other hand, the European Qualifications Framework has led to the unification of the national education frameworks of individual EU Member States, resulting in a comparability of the learning rules in the various Member States where the level of knowledge, skills and competences is set at different levels of education (eight). In the case of European shipbuilding, this unification of learning principles in the European Union is a favorable factor for its development as a result of the fact that shipbuilding is of an international nature, including, of course, its value chain created by suppliers and OEM.

The above-mentioned programs and activities of the EU, together with other activities in the European forum, such as the European Institute of Innovation and Technology (EIT) or the EU Marie Skłodowska-Curie actions (addressing social challenges and supporting the education and further development of scientific staff), as well as unified EU-based education systems, have created a learning system in Europe that "supplies" the shipbuilding industry with employees with specific knowledge, skills and competences. This gives the European shipbuilding industry the opportunity to acquire workers not only from the domestic labor market but from the entire European labor market.

Analysis & Assessment:

The education system adopted in the European Union emphasizes that education must be a continuous process. It must consist not only of the stages of education in schools and colleges of

204 https://europa.eu/european-union/topics/education-training-youth_pl (05.10.2017) 205 Ibidem 206 https://ec.europa.eu/ploteus/en/search/site?f[0]=im_field_entity_type%3A97# (05.10.2017) 287

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry different levels but also of the continuous improvement of knowledge, skills and competences of employees in working time or professional retraining. Hence, the education system in the EU consists of two basic subsystems: eight-stage institutionalized education system and continuous training (including professional retraining) in various forms by various enterprises and institutions, from employers (internal education systems) to specialist vocational training institutions (external education systems). Both these subsystems have the possibility of using EU funds. The refinement is due to the fact that the education system is integrated into the EU development policy outlined in the Europe 207 2020 strategy, where objectives 1 and 4 are linked to staff development and education .

Analysis of the professional structure of employees within the shipbuilding sector indicates that from the point of view of knowledge, skills and competencies, employees can be divided into the following groups:

 designers, who are able to design (from concept to technical design of the ship) all types of offshore vessels and structures, including those with the highest level of complexity and technological sophistication, which is a strength of the competitiveness of European shipbuilding industry in the world shipbuilding market,  highly qualified physical workers capable of building ships and offshore vessels of various types and with varying levels of complexity and technology,  production supervisors (both at the level of various Tier suppliers and shipyards), whose knowledge, skills and competencies allow for technical supervision of the shipbuilding process in the suppliers (subsystems and systems) and in the shipyard in accordance with the ship’s technical design,  managers of different levels (both at the level of various Tier suppliers and shipyards), whose knowledge, skills and competences allow for the organization of the shipbuilding in the suppliers (subsystems and systems) and in the shipyard in accordance with the ship's technical design;  top managers (including employers), who are able to implement the latest technical and technological developments in the European shipbuilding industry, cooperating with ship operators, the R&D sector (European and global), classification societies and various Tier suppliers.

By specifying the capabilities of the European education system in the context of staff training for the shipbuilding sector, it can be concluded that this system satisfies, in qualitative terms, the needs of European shipbuilders and offshore structure manufacturers in terms of designers, highly qualified workers, production supervisors and managers up to the highest level. This is one of the factors that enables Europe to be a leader in the design and manufacture of off-shore vessels with high technology and complex technical solutions.

5.4.4 Focus Area: Innovation

Innovation - (Latin innovatio), in a general sense, means introducing something new, novelty, reform. The first to analyze the importance of innovation for the development of economies was Joseph A. 208 Schumpeter , who described innovation as:

- introduction of new material to the market, - new production methods (technologies) - new production methods (organization and technique) - introduction of products to new markets, - new marketing techniques in sales, - new supply and distribution techniques.

207 https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance- monitoring-prevention-correction/european-semester/framework/europe-2020-strategy_en (10.10.2017) 208 Śledzik K. Schumpeter’s view on innovation and entrepreneurship, http://www.academia.edu/5396861/SCHUMPETER_S_VIEW_ON_INNOVATION_AND_ENTREPRENEURSHIP (10.10.2017) 288

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The definition of innovation formulated by various researchers and analysts of the issue:

- Mansfield J. - innovation is the first use of the invention, - Kotler Ph. - innovation refers to any good, service or idea that is perceived as new, - Rogers E.M. - innovation is everything that is perceived as new, independent of objective novelty, idea or thing, - Freeman Ch. - the first commercial introduction (use) of a new product, process, system or device.

209 The Oslo Manual for measuring innovation defines four types of innovation:

I. Product innovation: A good or service that is new or significantly improved. This includes significant improvements in technical specifications, components and materials, software in the product, user friendliness or other functional characteristics. II. Process innovation: A new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software. III. Marketing innovation: A new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing. IV. Organisational innovation: A new organisational method in business practices, workplace organisation or external relations.

The types of innovation presented in the “Oslo Manual” illustrates what is the broad spectrum of today's business innovation and what might be the place for new solutions. The 2005 report has become one of the many indicators of the classification of innovation and its importance for the socio- economic development of the regions. It is important, however, that nowadays innovation is regarded as one of the key drivers of the development of societies and economies. It is not the case with the EU. In point 5.5. this study presents the targets and expected results of their implementation formulated in the Europe 2020 strategy. An important issue in the strategy is to increase the innovation of the European economy in the areas of technology, technical solutions and organizational solutions (process management, project management, organization management).

The division of innovation described in the “Oslo Manual” evolves with the development of new process management tools, projects, organizations. In order to analyze the innovativeness of the European shipbuilding industry, the focus is on two factors of the Tier 2 factors of innovation: Implementing product innovation and Implementing management innovation.

KPI Template – Implementing management innovation

Sector of means of transport: Shipbuilding

Type: Qualitative

Key Performance Indicators / Areas of Interest: Innovation

Management summary: The managerial revolution, which began in the 1950s, completely changed the processes of company management and the approach to business competitiveness in the market. This revolution has also led to the implementation of new management tools that enable to optimize the management of processes, enterprises, B2B and B2C relationships for years, and consequently reduce costs of production, construction and service delivery in various sectors of the local and global economy. The shipbuilding sector is similar, and have retained a competitive advantage in high value added vessels where innovation in process management, enterprises, B2B relationships are key to the high value chain productivity of the shipbuilding process.

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry

SCORE: 4

Description:

Krugman's 1991 theory of economic globalization is considered to be the beginning of the New Economic Geography (NEG). P. Krugman was not the first to draw attention to the importance of geographic distribution of manufacturers and consumers in the world economy, as well as the determinants that influence businesses to be placed in a particular area. However, as the first, he presented a model approach to the problem, where he considered, from an economic point of view, the spatial (geographic) issue in the production and trade sectors.

The above theory and the emergence of many scientific and market studies at the turn of the 1980s and 1990s have consolidated knowledge of the phenomenon of globalization of the economy, where spatial distribution of manufacturer and consumer markets ceased to be a barrier to the development of global trade. Thanks to production specialization, the increase in production scale, which translates into lower unit costs, lower labor costs in developing countries and new business management tools and processes, has led to a new global economic system. As a result, a global economy has emerged, with a network of companies that outsourced resources to focus on the core area of the business, creating a number of organizational and legal links with principals, suppliers and logistic operators.

Globalization of the world economy, localization of production in the most cost-effective places, distance between production places and consumption places, new methods of enterprise management have led to aggregated supply chains, i.e. fixed network of vertical relationships of enterprises in multi-stage production and supply processes, where the efficiency of this joint action is 210 measured by the efficiency of the value chain consisted of global or regional enterprises. .

The contemporary supply chain is a system that delivers efficient goods flow, determined by the needs of the consumer/end customer, using a broad range of logistics, in this case, a multifunctional process management tool in the chain. C. Bozarth, R.H. Handfield defined supply chain as a network of manufacturers and service providers working together to process and move goods, from raw material to end-user. All these entities are connected by physical goods flows, information flows and cash 211 flows .

Offshore organization of ships and offshore structures is a network in line with the networking of companies in global and regional supply chains, where the competitive position of the European shipbuilding industry is determined by the efficiency of the supply chain. Its shareholders include:

 Tier 3, 2, 1 suppliers,  production shipyards,  subcontractor,  service companies,  enterprises, institutes and universities of the R&D sector  logistic operators.

Figure 208, Figure 208, Figure 212, Figure 213 and Table 35, Table 36 and Table 39 show the links between the key actors in the supply chain in the European shipbuilding sector. These relationships are described in sections 5.2, 5.3 and 5.4. as well as in point 5.5. describing and evaluating key technical and technological factors that determine the effectiveness of the European shipbuilding sector value chain.

The recent change in the organization of shipbuilding and the management of processes and businesses in the European shipbuilding industry has enabled the industry to achieve competitive advantage in selected segments of shipbuilding worldwide. The key to this was the application of a

210 Montwiłł A.: Change management in supply chains in the context of changes in demand, Problemy transportu i Logistyki, Zeszyty Naukowe Uniwersytetu Szczecińskiego, 4/2015, pp. 35-50 211 Bozarth, C.C., Handfield, R. B., Introduction to Operations and Supply Chain Management, Pearson Education, 2006 290

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry number of tools and strategies in the management of the sector's own businesses (Tier 2 and 1 suppliers and production shipyards) as well as production, organization and cooperation processes between the different actors in the European shipbuilding and offshore supply chains.

Analysis & Assessment:

As a scientific discipline management is part of economic sciences. Since the attempts were made to provide a scientific basis for management it has been regarded as an activity which covers:

 planning, organizing, staffing, directing and controlling - according to the Anglo-Saxon approach,  planning, organizing, stimulating and controlling - an approach presented by management classic H. Fayol and approaches of other management schools.

In the past, the concept of management has been defined many times, were different authors was concentrated on various aspects of it. Currently, no model of management exists. Because this process is more and more individualized an old definition given by an unknown author is used: management is a form of art or practice which involves reasonable application of resources for achieving formulated objectives. This definition is simple and provides an opportunity to have an individual approach to each economic phenomenon which requires management. This is even more important in creating more and more complex structures in different areas of the world economy. An example of such complex structures are the supply chains where management is multilevel and multi- faceted, involving both enterprise management of the chain actors and the management of product and information flows, or finally management of the entire supply chain.

Figure 214 illustrates a chart showing management tools and concepts which are used in a comprehensive supply chain management. What is worth noticing is a multitude of management tools and concepts which are applied for establishing and maintaining efficiency of a supply chain and developing a competitive advantage in the consumer / end customer market.

Supply chain management

Strategic management

Logistics as a multifunctional tool for Change managing processes management

Selected concepts of logistic chain management:

 LM (lean management),

 AM (agile management),  TQM (Total Quality Management),  Six Sigma,  BPR (Business Process Reengineering).

Figure 214: Supply chain management (Source: own work based on 'Instrumenty zarządzania łańcuchami dostaw', academically edited by M. Ciesielski, PWE, Warszawa 2009)

The supply chain management diagram illustrated in Figure 214 indicates the strategies and concepts of management that are relevant for its effectiveness. They are also important for the management of 291

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry individual companies that are part of the chain and for managing the processes in the chain. A key concept / management strategy for building a competitive position of the enterprise in the market or the sector (in this case, the shipbuilding sector) is strategic management, which, in the face of volatility and turbulence, extends traditional business management - aimed at optimizing internal processes and optimize resource utilization - with the problem of continuous adaptation of actions within the organization to the variability of the environment.

Strategic management, where the analysis of the environment and anticipation of changes in it, e.g. in the area of demand, is one of the key elements of building and maintaining a competitive advantage in the marketplace, is today an essential system for achieving the above. In supply chain management it is even more important because the long-term relationship between the participants in the chain is one of the basis of long-term economic efficiency and increased market share of the product / end product.

The analysis of the European shipbuilding industry clearly indicates the sustainability of the relationships between the supply chain actors in Europe. This is indicated by e.g. authors of 212 “Competitive position and future opportunities of the European marine supplies industry” study stating that the very strong competitive position of the European maritime supply industry (35% share 213 in world maritime equipment ) for the shipbuilding industry is a long-strategic cooperation in European production shipyards and repair yards, shipowners and the R&D sector.

Within strategic management the European shipbuilding industry has introduced several key competitive strengths, tools and management strategies that have gained competitive advantage in selected segments of the world shipbuilding industry. Key solutions include:

1. The strategic segmentation, where the European shipbuilding industry has concentrated its resources (human, financial, material, information) on selected shipbuilding segments; this will advance its development into the design and construction of highly complex technical vessels using the latest R&D technology. 2. Clustering organization of shipbuilding where, at Tier 2 (subsystems), Tier 1 (systems) and Shipbuilding levels, a number of contractors specialized in shipbuilding, assembly or system integration are involved in the implementation of the processes. These companies are linked together in a variety of horizontal and vertical technical, organizational and commercial relationships to form a cluster capable of making a ship and offshore structures for the marine 214 shipping, marine construction and marine industries . 3. The specialization of manufacturers of components, subsystems, systems, system integrators on a narrow range of activities allows them to concentrate their resources on the development of new technical solutions and technology deployment, thus providing added value at various stages of the shipbuilding value chain. On the other hand, the existing potential of European shipyards allows for the construction of a wide range of offshore vessels, but also advanced technical structures for other sectors of the economy. As a result, using the clustering nature of shipbuilding companies and long-term strategic cooperation within the established supply chains, the European shipbuilding sector has a strong ability to adapt its market potential and demand to the changing demand of shipowners and customers in other maritime industries. . 4. In the European shipbuilding industry there are many links between the civil and military sectors. These are the capital, organizational and legal relationships that result in mutual know-how flow which creates synergies. This allows the civil sector to gain access to technology originally created for military use, increasing its ability to build ships using

212 “Competitive position and future opportunities of the European marine supplies industry”. Funded by the European Commission DG Enterprise and Industry Contract No. SI2.630862, , BALance Technology Consulting GmbH, Shipyard Economics Ltd., MC Marketing Consulting, © European Commission, [2014] 213 Importance of the Shipbuilding Sector http://ec.europa.eu/growth/sectors/maritime/shipbuilding/index_en.htm (15.06.2017) 214 The role of Maritime Clusters to enhance the strength and development of European maritime sectors. Report on results. Policy Research Corporation. November 2008 Commissioned by the European Commission (DG MARE) 292

D2.1 Mapping of the current status of dynamics of value chain of European transport manufacturing industry

advanced technology. The transfer of technology from the military to the civil sector and the principle of cooperation between the two sectors was taken from the American economy.

Conclusion - The European shipbuilding industry uses the latest tools and strategies in management to achieve a competitive advantage in selected shipbuilding sectors, where the implementation of management innovation has allowed for a dominant position in the global shipbuilding market in selected market segments.

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5.5 References Bozarth, C.C., Handfield, R. B., Introduction to Operations and Supply Chain Management, Pearson Education, 2006

'Instrumenty zarządzania łańcuchami dostaw', academically edited by M. Ciesielski, PWE, Warszawa 2009

Jurdzinski M.: Technological innovation on maritime ships to reduce energy consumption and CO2 emissions, Scientific Journals Maritime University of Gdynia no 77, December 2012

Kasińska (Brózda) J. Czerniachowicz B. Zasoby partnerskie i klienckie przedsiębiorstwa. In Marek S., Białasiewicz M., editors. Podstawy nauki o organizacji. Przedsiębiorstwo jako organizacja gospodarcza, Polskie Wydawnictwo Ekonomiczne. Warszawa 2008.

Montwiłł A.: Change management in supply chains in the context of changes in demand, Problemy transportu i Logistyki, Zeszyty Naukowe Uniwersytetu Szczecińskiego, 4/2015, pp. 35-50

„Organizacja i technika transportu morskiego”, (ed) Kujawa J., University of Gdansk, Gdansk 2001,

Śledzik K. Schumpeter’s view on innovation and entrepreneurship, http://www.academia.edu/5396861/SCHUMPETER_S_VIEW_ON_INNOVATION_AND_ENTREPREN EURSHIP (10.10.2017)

“Competitive position and future opportunities of the European marine supplies industry”. Funded by the European Commission DG Enterprise and Industry Contract No. SI2.630862, BALance Technology Consulting GmbH, Shipyard Economics Ltd., MC Marketing Consulting, © European Commission, [2014]

LeaderSHIP 2015 Defining the future of the European shipbuilding and shiprepair industry, European Commission, Enterprise publication

LeaderSHIP 2020 The Sea, New Opportunities for the Future Brussels, 20th of February 2013

The NSPS shipbuilding value chain Center on Globalization, Governance & Competitiveness, Duke University, based on the ABS Expanded Ship Work Breakdown Structure (ESWBS), , January 2013

The NSPS shipbuilding value chain, Lukas Brun Center on Globalization, Governance & Competitiveness, Duke University, January 24, 2013, presentation

The role of Maritime Clusters to enhance the strength and development of European maritime sectors. Report on results. Policy Research Corporation. November 2008 Commissioned by the European Commission (DG MARE)

"Study on New Trends in Globalisation in Shipbuilding and Marine Supplies – Consequences for European Industrial and Trade Policy”, Funded by the European Commission Contract No. EASME/COSME/2015/005, BALance Technology Consulting GmbH, Shipyard Economics Ltd., MC Marketing Consulting

Importance of the Shipbuilding Sector http://ec.europa.eu/growth/sectors/maritime/shipbuilding/index_en.htm (15.06.2017)

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