Marketing Prowess Salesmen Don't Rule the World

The head of Europe's largest institution for applied research, the Fraunhofer Institute, talks about the challenges of digitalization, German innovation and the modesty of the nation's Mittelstand.
German industry is poised to commercialize the digitalization of industrial processes.

The Fraunhofer Institute is one of Germany’s most-renowned research institutions, focused on fields such as health, energy and environment. With 24,000 employees and 66 research facilities, it is Europe’s largest organization for applied research. The yearly research budget totals more than €2 billion. Clients are government, industry and service providers.

Reimund Neugebauer took the helm at Fraunhofer two years ago. The mechanical engineer started his research career at the Technical University of Dresden before joining Fraunhofer.

Mr. Neugebauer spoke to Handelsblatt’s Axel Höpner at Fraunhofer's headquarters in Munich.

 

Handelsblatt: Mr. Neugebauer, the digital file format MP3 was invented at Fraunhofer, but others commercialized and made money off of it. What went wrong back then?

Reimund Neugebauer: First of all, it was the special Fraunhofer model in Germany, which includes support by the federal and state governments, that made the invention of MP3 possible.

But what followed seems quite typical – it’s the Germans who develop something, but others who are good at commercializing it.

When the technology was available by the end of the 1990s, the major players in consumer electronics were in Asia and the U.S., with very few in Europe. Together with the French firm Technicolor, we had developed a licensing program that made MP3 available globally.

And then what?

Thanks to the Internet, MP3 has turned into a phenomenal worldwide success. And its successor file formats for mobile devices, whether Android- or Apple-based, have been developed by Fraunhofer as well. This dissemination and billion-fold use are a great success for Germany, not just for Fraunhofer.

But it were companies abroad that benefited from it...

It’s always possible for a German invention to gain a foothold in other parts of the world. In return, German companies make money off of technologies that weren’t developed over here. But back to MP3: A huge patent family has grown from it. We have at least €300 million in tax revenue each year from MP3. According to early data, at least 9,000 jobs were created in Germany because of MP3, for example in retail or with producers of MP3 players.

So it’s just a misconception that Germans can’t market their own inventions?

I’ve often heard that Germany has missed the boat when it comes to innovations. That’s not true, international studies prove that. The German innovation indicator ranking of 2014 ranks Germany sixth and the U.S. only 13th.  Germans are developing groundbreaking innovations. It’s happening more slowly, but constantly. Others are quicker with revolutionary things and cause the next hype. But their cycles are shorter, and it goes downhill more quickly.

What surely isn’t a hype, but a real turning point, is the digitalization of industry. Some fear a repetition of well-known patterns. After all, Germans were the first to develop the so-called "Industry 4.0'' concept, but others are quicker in applying it and setting standards.

That’s a misconception. Digitalization in the sense of computer-controlled machines has been around for decades – and Germany is leading this field. We’re the country of pioneers in digitalization! And the field of software has produced nice success stories like those of SAP and Software AG as well. The current buzz is all about networking.

 

Fraunhofer Institute President Reimund Neugebauer.

 

Do Germany and Europe run the risk of missing the boat?

Something has to happen, both on the technical and political side of things. There are 28 data protection regimes in the E.U and even more regulations at state levels. How is the Mittelstand supposed to navigate this? And we need technical solutions. That’s where Fraunhofer is working together with businesses.

A powerful consortium rooted in the U.S. has developed which includes IBM, Cisco and General Electric. Does Europe need something comparable?

There’s great interest among the most important players in Germany and Europe, for example those in IT and associated industries.

Which problems need to be solved?

There are two. First, the issue of data protection – how can data protection be guaranteed? Every company has to keep control over its data. And we have to considerably reduce the response time of data connections. What we need is data transfer in real-time.

What exactly does that mean?

Industry 4.0 applications require quick and precise controlling of machines, which requires the development of a communications infrastructure with very short response times and a reduction in latencies. We’re far from the one millisecond we’ll need in the future. As long as these problems aren’t solved, we will be restricted to pilot projects and won’t be able to apply industry 4.0 across the board.

Should Germany and Europe set standards here? And isn’t there a risk that others will beat us there?

We have a window of two to three years to set our own standards. We do have strengths. Google might dominate the simple search. But we’re right at the top in semantic searches, because we understand the processes in industry and are leading in hardware production. We’re at least at eye level in this sector.

Have companies been sufficiently sensitized to data security questions?

Our companies in Germany are highly sensitized. At international conferences, you can hear from some companies "We have to be open. We need big data and open data.'' But you know, if you don’t have anything to lose, it’s easy to say those things. Germany has a lot to lose.

What is the issue of standards all about?

We need a protected, internationally open data landscape for businesses that can be accessed through common standards and is open for all those adhering to the standards.

How could such a project succeed?

It presupposes a unity among the heavyweights of industry. Standardization means companies working together in a coordinated fashion. When big players form the main stream, the Mittlestand (of German small- and mid-sized companies) will follow.

The agenda is being set in other innovative sectors as well, for example in electro mobility. Has Germany already missed the boat in the crucial field of battery technology?

That’s an important field. After all, half of the value added of e-cars is the batteries. At the moment, there are different solutions for storage technologies. No one knows which one will persist, everyone’s waiting for someone else to make a move.

But Germany doesn’t play a role at all in battery technology. Has that ship sailed already?

Not at all. I think that Volkswagen for example with Siemens and Fraunhofer would be perfectly capable of developing battery technology here. Within one or two years, they could build a factory.

Many expect the Koreans to dominate the market in the future.

Asians are leading the pack in today’s technology, but they also have their weaknesses. If another technology prevails, they won’t be ahead of us.

Video: A funny take on innovative technologies at Fraunhofer.

One of the pioneers is Tesla, which invests heavily in batteries.

What Tesla does is very interesting. Everyone is watching closely. But it’s not like we’re not doing anything. There’s very intense research over here as well. We have several projects at Fraunhofer focusing on battery cell development. We have solutions for cells which reach very promising output and energy densities in the lab. But I don’t want to go into too much detail on this when it’s still too early.

But can we expect Fraunhofer to provide solutions to the battery problem?

Like our name sake Joseph von Fraunhofer once said: “I have to cut out anything from my research that doesn’t serve the product.” We’re on it.

Energy storage systems are not only necessary for e-cars, but also to achieve the Energiewende, Germany’s transition from nuclear power and fossil fuels to renewable energy. Which contribution can you make there?

We’re working on big projects there. For example, we’re planning an E.U. project for virtual grids. Renewable energies are being channeled according to performance, demand and quality using intelligently controlled power grids.

What other research are you doing?

Another important project focuses on solar energy. We have increased solar cells’ efficiency to 46 percent with new cell types. That can make German industry competitive again in this sector. That might make it possible for large European solar power plants to be exported all across the world.

So you’re not worried about the innovativeness of German industry?

Not at all. Germany’s innovativeness displays the edge that’s necessary to secure our prosperity. Fifty percent of "hidden champions,'' (little-known global market leaders in their fields,) are located in Germany. Mittelstand companies are simply often very modest.

How can you tell? Where does this modesty show?

I once gave a speech at a company anniversary and deservedly praised the firm. After me, the owner took the stage and said he felt like clarifying something, saying that the company was just one of many and that everyone in the room was good at what they did. He was worried that the praise would not be well received. That’s so typical! In a way, I like this modesty too. But we also have to be able to say that we’re good. Germany wouldn’t be the world’s No. 1 exporter of research-intensive goods if we had constantly missed the boat on innovations.

 

Axel Höpner is a Handelsblatt editor and the newspaper's bureau chief in Munich. To contact the author: [email protected].