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Machine Powerhouse Germany Finally Wants to Embrace the Future

(Bloomberg) — After years of tinkering in a Bavarian research lab in the 1980s, electrical engineering student Karlheinz Brandenburg and his professor arranged a meeting to pitch a promising innovation.Grundig AG, once Europe’s biggest maker of radios, sent two engineers for a demo at the university’s tiny audio lab on the outskirts of Nuremberg. While mildly intrigued, they passed on funding the research, saying they didn’t see a way to use it.

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“Come back to us once this works well enough that even the most critical listeners can’t distinguish it from the original signal,” Brandenburg recalled them saying.

The MP3 audio file was later licensed by Microsoft Corp. and would go on to become the gold standard for digital music, enabling Apple Inc.’s iPod and earning Brandenburg and his co-inventors at Fraunhofer Institute millions in royalties. Grundig, the postwar electronics pioneer, filed for insolvency in 2003.It’s a cautionary tale that speaks to how Germany, the inventor of the automobile, aspirin and the SIM card, has fallen behind global rivals in capitalizing on innovation and building world-leading technology giants. The U.S. has Apple and Amazon.com Inc., China has Alibaba Group Holding Ltd. and Tencent Holdings Ltd., but Germany hasn’t built a globally dominant tech company since business software firm SAP SE was founded half a century ago.

That isn’t just a knock for national self-confidence in a country synonymous with high-end engineering. It’s an economic and political liability at a time when the world is being carved into spheres of influence between the U.S. and China, with technology as a key dividing line.That reality shows the scale of the challenge for the new government in Berlin as it sets about reinvigorating an ethos of innovation and entrepreneurialism while transitioning from a machinery making powerhouse into the industries of the future. Get it right, and Germany can lead Europe to renewed global relevance; botch it, and business leaders warn the country could be reduced to a kind of industrial museum for Chinese and American tourists.

“Germany hasn’t lost its mojo when it comes to science, but when you want to turn great inventions into products, we fall behind,” said Rafael Laguna de la Vera, the Leipzig-based founding director of the Federal Agency for Disruptive Innovation, known by its German acronym SPRIND. His mission is to give the small-time innovators “an easy way to scale what they do,” and so create corporate successes.Chancellor Olaf Scholz has called for “a decade of investment” to modernize the economy, with a focus on digitalization and green technology. “We cannot afford to stand still,” the three coalition parties say in their platform for government unveiled Nov. 24.

They have a point: Whichever way you measure it, Germany is a tech laggard. It ranks 11 out of 27 European Union member states in the annual Digital Economy and Society Index 2021. It scores particularly poorly on use of digital technology by public institutions and businesses, with only 18% of small and medium-sized companies — the backbone of the economy — issuing e-invoices.

Electronic payments are still adventurous new ground in Germany, where average card transactions per capita are less than half the volume of the U.K., according to consulting firm McKinsey & Co.

What might be shrugged off as German quirks belie deeper cultural traits that hold the country back, namely risk aversion and a weakness in product development and marketing.

Take StudiVZ: the leading social network among German students a decade-and-a-half back, it turned down an offer from Facebook Inc. for a stake that would now be worth billions. The site’s operator ended up filing for insolvency.

Talking to politicians, entrepreneurs and business executives, they also cite a tendency to rest on the laurels of past success that borders on smug complacency. “Germany has been tremendously well off in the last century and everybody in the world bought quality products ‘Made in Germany,’” said Christian Miele, president of the German Startups Association in Berlin. “Maybe because we’ve been such sticklers about building high quality products that don’t break down, taking risks hasn’t necessarily been part of our cultural DNA.”

No one questions the lineage of the German automotive industry, with its luxury marques BMW, Porsche, Mercedes-maker Daimler AG and VW’s Audi, which this year celebrates the 50th anniversary of the world-renowned slogan “Vorsprung durch Technik,” which roughly translates to progress through technology. Yet what is still the global calling card for German economic and technological leadership is playing catch up to the likes of Tesla Inc. as regards electrical vehicles. Tesla has a market capitalization of over $930 billion, more than seven times VW’s valuation, despite the American rival selling only a fraction of the vehicles.

Still, diagnosing the problem is a first step to affecting change, and Scholz’s government says it’s determined to modernize after Angela Merkel’s 16 years in office. Perennial business complaints over Germany’s high taxes and labor costs are no more likely to be tackled under a Social Democrat-led government than they were under Merkel, but the coalition plans financial incentives to attract talent while creating new innovation and research clusters, replicating what the U.K. has done around Cambridge and Oxford.

Possible candidates include marine technology hubs in the port towns of Kiel and Bremen; climate and earth sciences around Potsdam; and biotech in the so-called mRNA Valley in Mainz, home to BioNTech SE, already a source of national pride after developing one of the first successful Covid-19 vaccines with Pfizer Inc. There’s also scope to build on an existing chip-manufacturing hub around Dresden dubbed “Silicon Saxony.”

“I believe a lot has changed and there is a great deal of fluidity between academia and industry in Germany and Europe,” said Maria Leptin, president of the European Research Council, which is supporting BioNTech co-founder Ugur Sahin with a major grant at the Johannes Gutenberg University Mainz.

Still, even BioNTech, whose husband-wife team of Sahin and Ozlem Tureci parlayed their medical research into a $69 billion market cap company, chose to list on New York’s NASDAQ exchange, where deep-pocketed investors fueled a biotech listing wave.

The coalition’s goal is to make Germany the No. 1 location for startups in Europe, according to a section of the agreement that bears the imprint of the pro-business Free Democratic Party. So there’s to be a new Agency for Transfer and Innovation focused on sharing data between universities and research institutes and helping commercialize ideas; and plans to make it easier for start-ups to attract state and private capital at all stages of growth, including further support from state development bank KfW.Initial public offerings and capital increases are to be greased with different dual class shares, especially for SMEs, to try and lure listings back to Frankfurt from New York and London. And for the first time, Germany’s $400 billion annual pension system is to be allowed to invest in capital markets including stocks, bonds, private equity — and startups.

“If you want to run a start-up, then it’s up to us to ensure you don’t need to go the U.S. for funding,” said Mario Brandenburg, a member of the Bundestag and expert on technology policy for the FDP. “It would be better to show we believe in the future and invest our pensions in younger people who want to grow.”

Money helps, of course, but predicting the next disruptive technology still isn’t easy. Climate-related innovation may be one potential growth area for Germany. After several investors declined to back Roland Damann’s technology that uses tiny bubbles to clear microplastics from rivers, lakes and oceans, SPRIND stepped in with funding. He’s now looking to take it global. “For the first time in my life, I have the opportunity to develop something that can make a difference and don’t need to worry about the money,” he said.

Germany has hosted a recent startup boom, with vibrant communities in Berlin and Munich building 20 unicorns, or companies valued at over $1 billion, according to PitchBook data from December 2021. That still pales in comparison to the 510 in the U.S., 176 in China, and even the 31 in the U.K., although the number of German unicorns doubled since last year.

Germany’s benchmark DAX stock index also added several big tech companies this year including online retail clone Zalando SE and meal-kit provider HelloFresh SE, both of which were backed by serial German tech incubators the Samwer brothers.

For all the criticism, government hasn’t been entirely idle. In June 2020, Merkel and then-Finance Minister Scholz presented a 130 billion-euro ($146 billion) pandemic stimulus package that gave Berlin powers to seed industries like artificial intelligence, quantum computing and hydrogen technologies. Scholz may yet reap the benefits, much as Merkel profited from her predecessor’s welfare and labor reforms.For Miele at the Startup Association, Germany is in a position to “do something amazing” to kick start entrepreneurialism. It just depends if the nation’s political leaders are prepared to follow through on their promises. “All three parties seem aligned in their goal to change gears,” he said. “It will be really important to see what it means in reality and practice.”

Back in Bavaria, Karlheinz Brandenburg and his small team are working away on virtual sound sources at his latest startup, Brandenburg Labs.

“Yes there are problems,” he said of the outlook for innovation. “But I’m also very hopeful when I see these bright young people.” He tells them unicorn status is just around the corner.

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