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Multi-KETs Pilot Lines

Final report

mKETs Final report

Assessing support of pilot production in multi-KETs activities D7 Final report of the multi-KETs Pilot lines project, including the tentative policy roadmap

Date: Authors:

Number of pages: Number of Annexes:

Friday, 28 August 2015 Maurits Butter, Marcel de Heide, Carlos Montalvo, Koen Dittrich, Laura Seiffert, Laura Cid Navazo, Axel Thielmann, Annette Braun, Michael Meister, David Holden, Finbarr Livesey, Eoin O’Sullivan, Christian Hartman, Mirari Zaldua, Nicolo Olivieri, Leo Turno 125 4

The opinions expressed in this study are those of the authors and do not necessarily reflect the views of the European Commission

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No part of this publication may be reproduced and/or published by print, photo print, microfilm or any other means without the previous written consent of the mKETs-PL consortium. Submitting the report for inspection to parties who have a direct interest is permitted.

The project partners of the mKETs-PL consortium are:  Netherlands Organisation for Applied Scientific Research TNO  Fraunhofer-Gesellschaft  Commissariat à l'énergie atomique et aux énergies alternatives (CEA)  Cambridge University Technical Services ltd.  VTT  Fundación TECNALIA Research & Innovation  Technology Foundation Partners  JOANNEUM Research  D’Appolonia S.p.A  Strauss & Partners  Spark Legal Network and Consultancy ltd.  Noblestreet

During the project, the following four organisations were selected as Demonstrator to collect practical experience on pilot production in a multi-KETs environment:  Acreo Swedish ICT AB (Norrköping, Sweden)  Bio Base Europe Pilot Plant (Ghent, Belgium)  Sofradir (Veurey-Voroize, France)  Infineon IFAT (Villach, Austria)

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Executive summary Objectives and methodology The goal of this project was to prepare and foster consensus for future actions focusing on multi-KETs pilot lines. This is supported by providing concrete evidence, useful lessons, best practices and detailed policy recommendations at regional, national and EU level regarding future activities targeting large scale multi-KETs pilot lines.

A vast participation of experts Over 1,000 experts from industry, research and policy actively contributed to the content of this report. Over 200 experts were interviewed and about 50 experts participated during 4 expert workshops. Over 150 different experts joined the discussions during two conferences. A Steering Committee evaluated the (intermediary) results. Almost 650 experts participated in an online survey. From the consortium partners, over 40 experts were directly involved in the research and during 4 case studies, some 80 experts provided information on concrete pilot production activities.

The main focus of the project was on pilot production, originated from the observation that “pilot lines” are crucial in the problems of crossing the so-called valley of death. They are capital intensive and decisive to transform the outcomes of technological research into competitive manufacturing. Core to the project was the assessment how policy can support the activities during this pilot production, but even before this, how to define what pilot lines/plants or pilot production activities are? The project assessed these activities within the domain of “multi-KETs”, as it is believed that the combination of KETs can create new avenues of inspiring innovation, highly beneficial to the economy and society at large.

During the project, a vast number of interviews were conducted and expert workshops organised, complemented by an online survey among experts from research, industry and government throughout the world. Four case studies of actual industrial pilot production activities (Demonstrators) allowed an in-depth 1 insight in the problems and characteristics during scale-up . The project results were disseminated through a 2 series of workshops during these Demonstrator activities, as well as in two conferences (mid-term and final). Defining and demarcating “pilot lines” and “multi-KETs” The first phase of the project focused on better understanding pilot lines and multi-KETs. With regard to “pilot lines”, the observation was that this concept was mainly used for the technical equipment used during the scale-up activities. Also is especially used for discreet products, like chips and electronic components. With regard to industrial biotech and advanced materials, the term “pilot plants” or “demonstrators” is used instead of pilot lines. As the valley of death is not only about the development of this technical equipment, the project coined the concept “pilot production”. This is considered being a more neutral and holistic concept to the problems encountered during scale up of prototypes to low rate pre-commercial manufacturing, integrating technological and non-technological issues.

1

The four case organizations were: Acreo Swedish ICT AB (Norrköping, Sweden), Bio Base Europe Pilot Plant (Ghent, Belgium), Infineon IFAT (Villach, Austria), Sofradir (Veurey-Voroize, France). 2 All published documents are available at the website of the project: www.mkpl.eu 28 August 2015 Page 3 of 125 © mKPL, 2015

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Defining “pilot production” is important to demarcate and focus policy to address the specific issues that are creating the valley of death. The overall conclusion of the project is that crossing the valley of death requires a diverse set of (pilot production) activities, linking technological development and first commercialization of a product. These activities address the development of technologies (manufacturing and product oriented), as well as more organisational and market oriented activities. This stage of the innovation process has a systemic nature and these multi-disciplinary activities show strong inter-linkages. Important is that pilot production activities do not automatically lead to full production, especially within SMEs. The TRL scale is often used to highlight that pilot production typically correspond to the production of small series of precommercial products. But important is that this includes a wider range of activities. The conclusion of the project is that for pilot production the TRL approach must be used as a sliding scale. Although starting in TRL5-7, the actual pilot production activities can also include activities related as low as TRL3 and as high as TRL8. However, these lower TRLs activities are not the core activities. Pilot production is a highly dynamic process, with many feedback loops and multi-technological developments. This also implies that RTOs and universities can have a role in pilot production activities supporting the lower TRL levels, although pilot production activities are closer to the market. It is difficult to define and demarcate pilot production. The project shows that the most practical way is to use a set of activities, which than also can be translated into policy interventions. The following activities are considered pilot production activities: • Research and development with the objective to validate both technology/component/subsystem development in laboratory environment and “transferability” to pilot manufacturing activity level; • Set up of pre-commercial pilot manufacturing system operated by one or multiple industry including participation of external bodies like SMEs and research organisations; • Production of first small series of pre commercial products and prototypes for testing and validation of the product by customers and the manufacturing process (including cost efficiency); • Adjusting product design based on pre-commercial manufacturing; • Creation of market relationships with lead customers giving them access to new technologies, preparing the company for full commercialisation. • Business development with internal and/or external investors; • Preparation of the internal and external organisation for full manufacturing, including the value chain development.

With regard to the concept of multi-KETs, an important finding from the Country assessments is that the term Key Enabling Technologies is not often used in other countries. But the vision that some specific technologies are fundamental drivers for our economy and crucial to solve our societal challenges is well accepted. The 6 areas are often mentioned, but missing is specific attention to ICT and software. The vision that cross-fertilization between different research and innovation communities can lead to new innovative avenues of economic development is crucial to further define and demarcate multi-KET projects. Therefore the mKPL project defines multi-KET activities as follows: Multi KETs are the combination of at least two different KETs in a high-tech manufacturing environment in a way that value is created above and beyond the mere combination of the individual technologies.

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Important to further demarcate these multi-KETs activities is the notion that KETs are the early phase of the life of the final important result. KETs are the first step in an evolution to create KETs based products that are sellable on the market. The concept of multi-KETs can be seen important in the first stage, to create a new type of technology, but in the later stages when combining KETs they can lead to new components, subsystems or even products to be used in our society. Policy to support multi-KETs should therefore not be limited to the support of technological development, or even pilot production, but also should ensure that our society benefits from the result of multi-KETs development.

Risk is the core barrier to pilot production What are the core issues for companies and other stakeholders not to engage in pilot production activities? To formulate policy that addresses the valley of death this question needs to be answered. One of the project observations is that the main barrier for pilot production can be found in its financial economic risk. Financial economic risk are influenced by the size of the investment made and by the uncertainty that the investment will make a profit. The required investments for innovation increase exponentially during pilot production due to e.g. high equipment costs. But the uncertainty of making a profit will decrease significantly only after pilot production. The result is a severe increase in economic risk during pilot production; investments and reduction of uncertainty are out of phase. This is why private investors are reluctant to invest in pilot production and wait to invest after the uncertainty is reduced.

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With regard to these risks and the overall process of pilot production, the following main barriers have been identified:  Access to finance: The cost of pilot lines/plants are high and often external investment is needed. There is relatively limited capital available and private investors are reluctant to invest due to economic risk. Single investors often cannot bear the high risk individually.  Limited market articulation: To lower economic risks, reduction of uncertainty of demand is crucial. An articulated market, with explicit market demands will boost pilot production.  Quality of the industrial ecosystem: Pilot production requires cooperation in the industrial value chain. Suppliers of input materials as well as equipment suppliers need to synchronize their activities, as well as complementary producers and end-users. These relationships are difficult to create.  Available human capital: Core to successful pilot production activities are e.g. the technical, managerial, organisational, marketing skills of personnel. These skills are not always available. These barriers are the starting point for policy and are analysed in detail during the project. The first barrier of Access to finance finds its origin in the high investments needed to build a pilot line/plant and to conduct the related research and development. Pilot lines/plants can demand investments from some hundreds of thousands of euros, up to hundreds of millions of euros of investments. Often this financial capital is retrieved through equity capital, but also public funding and private investors are investing; the required investments are often so high that they need multiple sources of funding. The project concludes that although there are many sources, still the overall availability of financial capital for pilot production is limited compared to the vast demand. This issue is enlarged by the earlier described problems of private investors due to economic risks. These risks can hardly be assessed due to uncertain estimations. Investors wait to invest until the pilot production stage has been gone through and reduce uncertainty. 28 August 2015 Page 6 of 125 © mKPL, 2015

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The second barrier on the quality of the innovation network finds its origin in the importance of cooperation during pilot production, especially within the multi-KETs domain. Due to e.g., the technological complexity, its innovative character and the high capital investments cooperation is crucial to establish an innovative network of organisations. It is however not easy to find partners and establish trust. Also engaging RTOs and universities in these networks is becoming more difficult, as national governments reduce their funding for these organisations. Another important point of attention is involving private investors and educational institutes, which are crucial for multi-KETs pilot production but less common. A last point is that initiating and maintaining a long term oriented dynamic ecosystem is difficult and needs support. Overall many policy interventions are available to enhance the quality of the innovation ecosystem, both on the European, national and regional level. But cooperation and alignment of these interventions is limited and many are project based and lack a more long term and continuous approach that enhancing the quality of the ecosystems requires. An important aspect of funding and a barrier to pilot production is the articulation of the market. If market partners are highly involved in pilot production initiatives, also finding investors will be easier. However, customers are reluctant to commit on future orders when a testable product is not present and the producer will often only get funding (from private investors) when a customer has placed an order. This creates a deadlock situation. This is directly connected to the problem that market information is often not readily available, especially for SMEs. And the temporal window of opportunity is often small given the rapid evolution of markets and the necessary short time-to-market to get a first-mover advantage. Especially establishing bilateral and international cooperation with downstream partners (customers) is difficult and hardly supported by policy. A last important barrier is the availability of human resources needed to both research and operate the pilot lines/plants. Important aspect is the multi-disciplinary character of the skills and expertise needed. This does not only include technology, but also the more soft skills on organisation, market and entrepreneurship (especially for SMEs and start-ups). But even the availability of personnel trained in technological skills is under pressure, which is even more problematic due to the fast development of technologies in multi-KETs. High mobility of personnel and life-long-learning are two issues to be addressed, as well as the limited focus of educational institute towards industrial and operational skills. As educational policy is within the mandate of the Member States, educational policy interventions from the European Commission are limited. Especially cooperation actions between educational institutes and the industry within multi-KETs pilot production projects and shared facilities should be supported. 28 August 2015 Page 7 of 125 © mKPL, 2015

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During the second stage of the project, the mKPL project selected four organisations as Demonstrators for the mKPL project. This aimed at two objectives: 1) They acted as case studies and were assessed in depth on their practical experience with pilot production activities. This information fed into the overall assessment and policy recommendations. 2) They acted as live demonstrators to show the broader community what pilot production activities in a multi-KETs environment is. The assessments showed the importance of long term cooperation to create trust and understanding, as well as the focus of pilot production on the manufacturing process and market. Pilot production is about taking technological, financial and market risks. Shared facilities proved to be pivotal, providing both technological infrastructure and expertise. Finding high quality personnel is crucial, but very difficult. The assessments also showed the importance of public support to engage successfully in pilot production. In some cases pilot production equipment is later used for the full production or pilot production is even executed on the production equipment. The difference in costs is also important, where the range is from some hundreds of thousands of euros, up to hundreds of millions, even exceeding 1 billion euros. Therefore, mitigation of overall risks through risk sharing among partners is crucial, but governmental support is often very much needed to engage more efficiently and effectively in pilot production.

To obtain a better insight into international business and policy practices concerning pilot production activities an international benchmark was conducted. In total 20 countries and the European Union were covered (+1). Country assessment reports are available.

Countries assessed Austria Germany Belgium United Kingdom Brazil Ireland China Italy EC Japan Finland Netherlands France Poland

Portugal Slovenia South Korea Spain Sweden Switzerland USA

From the business perspective the main observation is that the market is the point of departure, especially on participation. Competences, IPR and time to market are important issues, as well as cost reduction through shared facilities. Pilot production is a broader concept and very heterogeneous. Differences between large enterprises and SMEs are fundamental, especially considering costs and support needed. However, most approaches are industry and market driven, but there is high attention to the support of building ecosystems. Pilot production policy is an emerging trend. Most approaches are market and industry driven, but there is high attention to support of the innovation ecosystem. A wide variety of instruments are identified, from vouchers to “funding of funds”. Clear is the need for a systematic approach with aligned policy interventions (policy mix); there is no “golden bullet”. Crucial is a transparent and streamlined approach to support pilot production.

Why should governments support pilot production? Often policymakers are reluctant to support pilot production, as they consider investing in (high risk) pilot production the responsibility of entrepreneurs, or companies. But the economic risk is often too high for investors and companies, especially for SMEs and start-ups. Markets are still too uncertain and in particularly multi-KETs technologies are too complex to make the large investments needed to better understand potential costs and revenues. Without public support this deadlock prohibits the step to valorisation. And as technology valorisation is key to solving societal issues, the consequence of such a deadlock is that innovative solutions for e.g. climate change, ageing, new jobs, and environmental challenges will not reach the market. Eventually, the society will not benefit from the vast public investments in research and development. And indirectly, the innovation ecosystem and downstream industries will not benefit from the opportunities from new innovative KETs based components, weakening the economy at large.

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Main policy recommendations The barriers described are the focal point for governmental policy, as policy focuses on taking away the barriers that are in the way of a desired policy view. In the report, the barriers were assessed in detail and over 50 3 possible policy interventions were identified . The project concludes that five policy strategies are crucial for the support of pilot production in the multi-KETs domain: 1. Coordination and alignment of innovation policies between the different policy levels and along the innovation chain. Pilot production is one (crucial) step in a broader innovation chain towards full uptake of technologies. Pilot production feeds on and delivers to other innovation steps. Efficiency and effectiveness of pilot production policy are therefore highly influenced by policy strategies that support these other steps, such as R&D support. Examples to make this link are stimulating active participation of a manufacturing expert during in R&D projects, preparing research for scale-up; aligning administrative procedures between R&D and scale-up policy instruments; and alignment of the different instruments from regional, national and European policy levels to increase mass and effectiveness. 2. Combining funding, including the combination of different public funding mechanisms (regional, national, EU) as well as the creation of leverage to private funding and support of the articulation of markets (creating active customers). The sheer size of the investments needs for pilot production often cannot be provided by a single public intervention, or even often a single private investor. But also enabling risk assessments is crucial. A combination of public and private funding is needed and public policy should give priority to combining sources and creating leverage to private investors. Fund-of-Funds, development of new risk assessment tools and tripartite funding programmes are just three examples. 3. Enhance the innovation ecosystems in which pilot production is carried out to ensure an optimal and sustained impact on their quality. A single support of an isolated pilot production initiative would have suboptimal benefits; it should be part of a longer term ecosystem development, with a long-term innovation strategy. Special attention must also be given to the downstream markets, as they create the societal benefits (jobs, solving grand challenges, etc.). Specific programmes to support the supplier/user interaction and network road mapping projects are examples. 4. Support of the use of shared facilities for pilot production. They are crucial to SMEs and start-ups, but shared facilities are also in general an important policy mechanism to reduce the barriers during pilot production. They reduce cost by sharing equipment and offer specific services often not available in a company. Horizon 2020 and European Structural and Investment Funds (ESIF) should be further developed to accommodate these long term facilities, but also experiment vouchers for SMEs, programmes to link shared facilities with educational institutes are examples of policy interventions. 5. Overall enhancement of the availability of human capital to support pilot production and overall valorisation of research. Also support for the development of specific multi-disciplinary skills and expertise is key not only to operate the pilot production, but also to initiate new business. From the EC perspective, especially the Marie-Sklodowska-Curie programme can be adjusted to facilitate gaining experience in pilot production, but also life-long learning programmes including pilot production are relevant. These strategies are important for all policy levels. Cooperation between all policy levels is crucial (European, Member States and regions), as well as other stakeholders (industry, research, private investors). For all policy levels, the alignment and coordination of policy is crucial. Also enhancing the policy process flexibility and speed of decision making is crucial to facilitate the small window of opportunity of pilot production. Cooperation should also lead to combined funding schemes, also with private investors. On the European level, the coordination of especially shared facilities for pilot production is needed to limit capital destruction of public expenditures on regional and national level. Smart specialisation is needed, allowing regions to have high quality infrastructures, but also limiting competition between semi-public 3

In Annex 4 an overview is provided of the policy interventions identified during the study, making the five pillar strategy operational. 28 August 2015 Page 9 of 125 © mKPL, 2015

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entities. With regard to funding, not only cooperation with other governmental levels is needed, but also with private investors. The European Commission can play an important role to stimulate this alignment of funds. Other important issues are support of capacity building of SMEs, the development of meta-market information, support of brokerage, including bringing industry and research together. As this has a trans/international character, this can be addressed on the European level. Examples of policy interventions (see Annex 4 for the full list of 54 suggestions and their description) Alignment and coordination  Improve alignment of EU national and regional instruments for pilot production and demonstration and within the innovation chain  Increase national institutional funding for public R&D&I to allow them to participate in pilot production activities and offer shared facilities  Improve fast track approaches in funding procedures to address the small window of opportunity Combined funding  Co-finance Angel funds for SME pilot production projects  Stimulate and support funding for market assessments  Development of pilot production risk assessment tools for investors  Increase tripartite funding for pilot production programmes  Support bilateral supply/demand projects to articulate markets Enhancing the ecosystem  Program to support downstream KETs based product development  Small funding schemes to support consortia building along the value chain  Support long term strategic networks, for pilot production Support shared facilities  Create innovation vouchers for SMEs to use shared facilities  Create an EU coordination mechanism for shared facilities  Support feasibility studies for shared facilities  Provide long term support for shared facilities Stimulate human capital  Use Marie-Sklodowska-Curie for pilot production training  Include educational activities in programs supporting pilot production and demonstration activities For national governments, SMEs (and start-ups) are also a crucial priority that can be addressed by connecting pilot production to incubator activities and shared facilities. The involvement of RTOs and universities is important, but need additional support. Present financial pressure on their budgets weakens the ability of RTOs and universities to participate. On a regional level, more support of shared facilities and incubator programs on especially pilot production is needed, but aligned with national and European activities.

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Content overview 1

Introduction ................................................................................................................................................... 12 1.1 Context: Supporting valorisation of KETs research in our society ....................................................... 12 1.2 Objectives: Common understanding, policy recommendations and demonstration .......................... 13 1.3 Structural elements of the project ....................................................................................................... 13 2 Framework for pilot production assessment ................................................................................................ 17 2.1 Introduction to the assessment framework ........................................................................................ 17 2.2 Starting point: The valley of death ....................................................................................................... 17 2.3 KETs, KETs-components and KETs based products .............................................................................. 19 2.4 What is Multi-KETs ............................................................................................................................... 20 2.5 What is pilot production ...................................................................................................................... 22 3 Insights from international benchmarking .................................................................................................... 26 3.1 Introduction to the benchmark ........................................................................................................... 26 3.2 Business practices concerning pilot production .................................................................................. 26 3.3 Policy practices concerning pilot production ....................................................................................... 28 3.4 In-between public and private: Examples of joint piloting activities ................................................... 32 3.5 Main lessons for policy intervention .................................................................................................... 33 4 Lessons learned from four demonstrator case studies ................................................................................. 37 4.1 Introduction to the Demonstrators ..................................................................................................... 37 4.2 Primary results from the demonstrator assessments .......................................................................... 37 4.3 Main lessons for policy interventions .................................................................................................. 41 5 The policy context of pilot production .......................................................................................................... 44 5.1 Introduction ......................................................................................................................................... 44 5.2 State Aid rules ...................................................................................................................................... 44 5.3 Government levels ............................................................................................................................... 45 5.4 Target groups ....................................................................................................................................... 47 5.5 Main barrier: Economic risk of the investment ................................................................................... 48 5.6 Different types of pilot production ...................................................................................................... 51 6 Towards a policy portfolio and roadmap ...................................................................................................... 53 6.1 A rationale for pilot production policy ................................................................................................. 53 6.2 Access to financial capital .................................................................................................................... 55 6.3 Quality and development of the innovation network ......................................................................... 61 6.4 Market articulation – creating market demand................................................................................... 67 6.5 Availability of human resources ........................................................................................................... 72 6.6 Sharing the equipment and expertise .................................................................................................. 76 7 Conclusions and recommendations .............................................................................................................. 82 7.1 A contextual introduction to the conclusions ...................................................................................... 82 7.2 Towards an overall policy strategy for pilot production ...................................................................... 83 7.3 The pillars for pilot production policy .................................................................................................. 84 7.4 Policy strategies for the EC, Member States, regions and other stakeholders .................................... 88 Annex 1: Overview of country policies .................................................................................................................. 96 ‘New Growth Strategy’ to shift towards more demand oriented R&D and innovation policy to trigger economic growth. ............................................................................................................................................ 104 Annex 2: An introduction to Market failures ....................................................................................................... 110 Annex 3: State Aid Rules, the concept of market failure and PPAs ..................................................................... 111 Annex 4: Overview of suggested policy interventions ........................................................................................ 114

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1

Introduction

1.1

Context: Supporting valorisation of KETs research in our society 4

In September 2009 the Commission published a Communication "Preparing for our future: Developing a Common Strategy for Key Enabling Technologies in the EU", which identified the need to facilitate the industrial deployment of Key Enabling Technologies (KETs) in order to make the European industry more innovative and globally competitive. This KETs strategy distinguished the following six key enabling technologies:  advanced materials (AM),  nanotechnology (NT),  micro- and nano-electronics (MN-E),  industrial biotechnology (IB),  photonics (PHOT) and  advanced manufacturing systems (AMS). 5

Figure 1: The 2011 HLG KETs final report.

The Commission established in July 2010 a High Level Expert Group (HLG KET) on KETs with representatives from EU Member States, industry, the European Investment Bank 6 th and the research community. The group delivered its report on 28 of June 2011 providing the Commission with policy recommendations on a long-term strategy to improve conditions for the deployment of KETs. As a follow-up the Commission adopted 7 a Communication in June 2012 on "A European strategy for Key Enabling Technologies – A Bridge to Growth and Jobs" presenting a common framework to enhance the industrial deployment of KETs in the EU in order to enhance its competitiveness, growth and jobs creation. It covered a number of policies including R&D and innovation, cohesion, state aids, education and skills as well as the external dimension, including trade. In 2013, a new High Level Group on KETs was inaugurated, aiming at the further fostering of the industrial deployment of European KETs in order to keep pace with our main international competitors, restore growth, create jobs and help address today’s major societal challenges.

Applications of KETs are considered to stimulate competitiveness and generate jobs, economic growth and welfare. The HLG KET showed that bridging the so-called “Valley of Death” to upscale new KET technology based prototypes to commercial manufacturing often is a weak link in successful use of the potential of these technologies. To bridge this gap, pilot production activities are conducted, aiming at the development of pilot lines and pilot plants. However, policy is needed to support crossing this valley of death. Also, the Commission proposed in the new R&D and innovation programme Horizon 2020 an integrated approach that takes into account the cross-fertilisation potentials between individual KETs. This multi-KETs, or cross-cutting KETs element of Horizon 2020 may be built upon the single technology programmes on the one hand, and the user needs in the societal challenges programmes on the other. The Multi-KETs pilot lines project (mKPL) was assigned by the European Commission to research this valley of death within the multi-KETs domain.

4

COM (2009) 512 final, of 30.09.2009

5

See: http://ec.europa.eu/enterprise/sectors/ict/key_technologies/kets_high_level_group_en.htm

6

See: http://ec.europa.eu/enterprise/sectors/ict/files/kets/hlg_report_final_en.pdf

7

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1.2

Objectives: Common understanding, policy recommendations and demonstration The HLG KET in their 2011 final report observed the gap on knowledge on what multi-KETs pilot lines are. Within this context of pilot production, multi-KETs and the HLG KET, the overall aim of the multi-KETs Pilot lines (mKPL) project was as follows: To prepare and foster a common understanding and consensus for future actions in Europe focusing on a systematic policy to support multi-KETs pilot production activities. This final report is written within the framework of the multi-KETs Pilot Lines project. The mKPL project aims at “establishing a common understanding of the concept of pilot lines deploying multiple Key Enabling Technologies, their role in strengthening the innovation capacity of the European industry, and how these can be supported by EU policy”. This report provides policy makers (either national, regional or on EU level) with further understanding concerning support for pilot production, with existing but also new policies.

The subsequent underlying objectives of the project can be summarized as: • to analyse the state-of-play in Europe compared with other regions in the world; • to develop a compelling vision on what pilot production is and multi-KETs are; • provide a methodology and criteria for improved competitiveness of multi-KETs pilot lines in Europe; • to realize a one-year demonstration experience in relevant multi-KETs pilot lines located in different EU Member States. The project was divided into two stages. The first stage aimed at demarcation and defining the field, including the assessment of activities in other countries, collecting views of experts, benchmarking Europe against the rest of the world and establishing a common understanding on what “pilot lines” and “multi-KETs” are. In the second stage, demonstrating pilot production activities in the multi-KETs domain was targeted. This included selecting four organisations involved in multi-KETs pilot production activities and conducting workshops on their premises where the broader audience was invited. The impact of the project aimed at creating a common understanding of pilot lines and multi-KETs. Additionally, the final report is intended as an input to the further development of European policy on the topic, as well as policy on the Member State and regional level. Target audiences were both policy makers from the different levels (EU, MSs and regions), as well as representatives from industry and research.

1.3

Structural elements of the project

1.3.1 What are multi-KETs Pilot Lines Within the framework of the mKETs-Pilot lines project, pilot production activities are defined as: “(…) technological, organisational and market related activities to prepare and provide information to both the organisation and external (value chain) stakeholders to prepare for the full commercial production of a product”. Typical activities include:  R&D and construction of pre-commercial pilot manufacturing systems. 8  Manufacturing of prototypes and pre-commercial mass manufacturing of products for testing and validation of the product and manufacturing process in a relevant environment.  Adjusting product design based on pre-commercial manufacturing.  Creation of market relationships with lead customers.  Business development with internal and/or external investors.  Preparation of the organisation for full manufacturing.

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1.3.2 What has been done This report is the outcome of the various activities conducted during the multi-KETs Pilot lines project. A vast series of activities were conducted during this two year project:  200 interviews were conducted, discussing pilot production and multi-KETs with representatives from industry, research and government, as well as intermediary organisations. This included interviews in all 20 countries on which also country reports were developed.  An online survey was conducted among stakeholders concerned with KET pilot production with more than 650 respondents from major European and non-European countries from industry, research and policy.  4 high level workshops were organised, were experts were invited to discuss various topics: o The broader context of pilot production and multi-KETs; o Convergence towards a common understanding and consensus on the two concepts; o Specific issues which SMEs are confronted with during pilot production in a multi-KETs environment; o Possible policies on multi-KETs pilot production activities.  Four (Demonstrator) organisations that are involved in mKETs pilot production were analysed in depth on their activities (interviews, workshops and desk research).  Within the context of the Demonstrator assessments, also a series of dissemination discussions were organised in 6 workshops. Target audiences included policy, industry and research.  Two conferences were organised in Brussels to share the (intermediary) outcomes of the project to the broader audience. The first was organised in cooperation with the sister project Ro-cKETs and had around 70 external participants. The Final conference had over 100 external participants from industry, research and government.

Figure 2: Activities and outcomes during the mKPL two year project.

In addition to these activities all partners conducted extensive desk research. This report is the final deliverable of the mKPL project, including its main conclusions, However, during the project many (interim) reports are delivered, including a) 21 country studies, b) 4 workshop reports, c) a benchmark report, d) a survey report, e) a green paper, f) 7 summary papers, g) 4 demonstrator assessment reports, h) tutorials. In these reports further background information can be found. The material is available at www.mkpl.eu. The most important other documents that provide background information to this final report are the summary papers. These short and concise reports provide in-depth information on a specific topic. On the following topics summary papers are available:  Definitions on pilot production and multi-KETs;  Legal issues concerning multi-KETs pilot production;  The ecosystem and multi-KETs pilot production;  Multi-KETs pilot production in small and medium enterprises;  Skills and competences and multi-KETs pilot production;  Shared facilities for pilot production;  Research and multi-KETs pilot production. 28 August 2015 Page 14 of 125 © mKPL, 2015

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1.3.3 The project organisation The mKPL project organization included 5 groups. First of all, the core team built the experts the first tier of the project consortium. This team acted as the daily project team and carried out most of the work. This core team included experts from TNO (main contractor), Fraunhofer-ISI, Commissariat à l'énergie atomique et aux énergies alternatives (CEA).

A vast participation of experts Overall some 1,000 experts from industry, research and policy actively contributed to the content of this report. Over 200 experts were interviewed and about 50 experts contributed during 4 expert workshops. Over 150 different experts joined the discussions during the conferences. A Steering Committee evaluated the (intermediary) results. Survey: Almost 650 experts participated in an online survey.

The second group focused on the interviews and country From the consortium partners, over 40 experts reports. These supporting organisations included experts were directly involved in the research and from the from various countries to analyse the innovation policy Demonstrator organization and their network some and industrial approaches of the selected countries. Also 50 experts were actively involved (either directly as they were involved in several partners, or interviewed). workshops. One partner was included in the consortium to assess the legal issues concerning pilot production. These supporting organisations include University of Cambridge, VTT, Tecnalia, Technology Partners Foundation, JOANNEUM Research Austria and D’Appolonia S.p.A. Spark Legal Network was contracted to conduct an assessment on legal issues The third group was responsible for the organisational and communication activities. Two specialised organizations, Strauss & Partners and Noblestreet, were included in the consortium to carry out the organisation of events and development of the website. Four organisations were selected as Demonstrators and built the fourth group. The pilot production activities of these organisations were analysed in depth and provided a practical context to show the outcomes of the project to the broader audience. The following organizations were selected as Demonstrators:  Acreo Swedish ICT AB (Norrköping, Sweden);  Bio Base Europe Pilot Plant (Ghent, Belgium);  Infineon IFAT (Villach, Austria);  Sofradir (Veurey-Voroize, France). The fifth group advised on content and process: The project Steering Committee. This team of experts from the 6 KETs areas and representatives from the European Commission evaluated the deliverables, supported the workshops and assisted in the selection of the four demonstrators. The following experts were members of the Steering Committee:  Luuk Borg (EC-DG Connect);  Heico Frima (EC-DG RTD);  Gavino Murgia (EC-DG GROWTH);  Dr. Paul Mijlemans (UMICORE; member of the HLG KET Sherpa group), Advanced materials;  Dr. Mike Wale (Oclaro), Photonics;  Prof. Terry Wilkins (Leeds University), general;  Prof. Paolo Matteazzi (Nanofutures), nanotech  Dr. Andreas Wild (Ecsel), micro- and nano-electronics;  Dr. Manfred Kircher (CLIB2021), Industrial Biotech;  Dr. José Carlos Caldeira (Manufuture, EFFRA), Advanced manufacturing systems.

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1.3.4 Reader to the report After this introduction chapter on some backgrounds of the mKPL project, chapter 2 outlines the framework for pilot production assessment, including the demarcation and definition of both pilot production and multi-KETs. Chapter 3 provides an overview of existing policies for pilot production, based on 21 country assessments. Chapter 4 reports the outcome of the four demonstrator case studies. In chapter 5, contextual backgrounds on policy for pilot production are discussed and in Chapter 6 a gap analysis of what is available and what is missing on policies is provided. Finally chapter 7 outlines the overall conclusions and recommendations for short and medium term and new actions needed at national, regional, EU level and industry & research, as well as policy conclusions addressing individual KETs and multi-KETs. Chapters 6 and 7 can be seen as the “tentative roadmap”, as they will provide an overview of the policies that can be taken up by the different levels of policy.

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2

Framework for pilot production assessment

2.1

Introduction to the assessment framework This report describes the outcomes of the mKPL project, with focus on the policy implications. This report makes use of the insights gained and translates them into policy recommendations and suggestions for new policy interventions. In this chapter, the approach to this translation is provided. The rationale for policy within the EU and its Member States is that government action is needed when societal objectives are not met and societal actors are reluctant to take action. In our society government interventions aim at taking away the barriers for these actors in order to pursue those societal objectives. Within the domain of research and innovation, these interventions address so-called market and system failures. National government intervention is governed by the State Aid Rules.

The focus of the study is to address the so-called “valley of death” and to develop policy recommendations on how to address the problems with Figure 3: Overview of the policy approach of the report. transforming research/prototypes into low rate mass manufacturing (pilot lines, pilot plants). The specific focus is on multi-KETs innovations, hence the project name: Multi-KETs Pilot lines. But first a sound understanding is to be provided on what policy can do and how policy is to be fine-tuned to the target groups. As various actors are engaged in pilot production and KETs, a distinction between those actors must be made based on the specific barriers they encounter. In addition, policy delivery is not the responsibility of a single entity, but involves a heterogeneous mix of different institutions. A distinction needs to be made between different levels of government in order to relate policy interventions to the realm of their perspective of action. Summarizing, the framework of the assessment includes the following steps:  Demarcation of the domain, including multi-KETs and pilot production.  Assessment of the barriers that limit the contribution of actors to engage in mKETs pilot production activities.  Assessment of the potential policy interventions that are offered by the EU and countries to address these barriers.  Analysis of the gap between the policies offered and needed to cross the valley of death, leading to conclusions on how to use/adapt existing policies and potential new policies needed.  Finalising the overall assessment by drawing policy conclusions, differentiating between the target groups, governmental levels and the different KETs in order to set up a policy portfolio and roadmap for the next years. The aspects of this assessment framework will be discussed in the following sections.

2.2

Starting point: The valley of death The core reason for developing a dedicated policy on Pilot activities is found in the observation that the valorisation of research towards economic and societal benefits is suboptimal. Europe is losing manufacturing jobs relative to the rest of the world. Within this context, the so-called “three-pillar bridge” approach is put at the centre of the discussions.

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This concise approach was introduced by the KETs-HLG and provides a vision on creating an integrated strategy to develop KETs. The approach differentiates the innovation chain of KETs and KETs-based products into three fundamental stages, from basic research to competitive manufacturing: 1. Technological research, where European scientific research on KETs transforms fundamental research into technologies. 2. Product demonstration, where KETs are exploited to create product prototypes and develop facilities to fabricate a significant quantity of innovative products to establish a product validation and demonstration in terms of user performance. Figure 4: Three pillars Bridge approach (KETs-HLG ). 3. Competitive manufacturing, where the validated products and production systems are fully developed to enable competitive production in economic viable and international environments. The three pillars can be seen as a simplified representation of the innovation chain a KETs component will experience during its development. Essential in this approach is the observation that new technologies usually do not cross the bridge to the market. To do so, the stage of product demonstration is crucial, allowing the transformation of product prototypes to market oriented (mass) production; the actual economic and social benefits can only be realised after the product has entered the stage of mass production and use. Note that the innovation ecosystem on KETs is much more complex than for commodity products. In practice it is not a sequential chain linked model, but more a network of research and industrial activities. The notion that 9 innovation is initiated by research is a mere simplification . Even without research, many innovations will still be developed. A policy on reducing this commercial valley of death will often not be centred on a single technology, but faces multiple technology challenges. And not all of these will be in sync, so multiple policy approaches are needed to create an efficient and effective policy. For example, supporting a pilot activity without possible funding for related R&D can be ineffective when new manufacturing technologies also need to be researched and developed. Furthermore, this discussion on a valley of death does not provide enough details on the problems concerning the barriers in the innovation process. The Breakthrough Institute analysed the valley of death concerning 10 clean energy and came to the conclusion that there are two valleys of death: The technological and the commercial valley of death. The technological valley of death is positioned between the first and second stage of technological development, as laboratory research seeks capital to develop technologies for the product and to prove its market viability. The commercial valley of death occurs in a later stage of technological Figure 5: The technological and commercialisation valleys of death during the innovation development, as entrepreneurs process Jenkins, J. & Mansur, S. (2011). 9

Kline, S.J. & N. Rosenberg (1986). “An overview of innovation.” In R. Landau & N. Rosenberg (eds.), The Positive Sum Strategy: Harnessing Technology for Economic Growth. Washington, D.C.: National Academy Press, pp. 275–305. 10 Jenkins, J. & Mansur, S. (2011), Bridging the clean energy valleys of death, The Breakthrough institute, Oakland. 28 August 2015 Page 18 of 125 © mKPL, 2015

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seek capital to fund prototype products, first stage commercial manufacturing and demonstration, as well as creating an operational view on the potential markets they can address (including e.g. acceptance, distribution and partnerships). The last type of commercial valley of death is fundamental to the pilot activities. The conclusion is that a more in depth view on obstacles, solutions and policies are needed, which is the premise of this project.

2.3

KETs, KETs-components and KETs based products In the Communication of 2009 and the COMMISSION STAFF WORKING DOCUMENT, the Commission provided a 11 definition of KETs : KETs are knowledge intensive and associated with high R&D intensity, rapid innovation cycles, high capital expenditure and highly-skilled employment. They enable process, goods and service innovation throughout the economy and are of systemic relevance. They are multidisciplinary, cutting across many technology areas with a trend towards convergence and integration. KETs can assist technology leaders in other fields to capitalize on their research efforts.

There are several aspects of a KET that can be derived from this definition:  They are knowledge and R&D intensive and need highly-skilled workforce;  They are accompanied with high capital expenditures;  They initiate and enable innovative new products, goods and services and can assist in the valorisation of research in other domains;  They are systemic to the industry base, the economy and the society and can be seen as industrial technologies. These aspects create a first view on the KETs. It is clear that KETs emerge from extensive research and create a competitive advantage that cannot be easily “copied” due to their knowledge base and long term investments. On the other hand, KETs are crucial for the economy to keep being on the cutting edge, innovative and competitive, and being in the forefront of market developments (emergence and growth). They increase the competitive character of the economy with regard to quality and functionality, but can also stimulate cost competitiveness by offering innovative solutions. Concluding, KETs emerge from research and are essential building blocks for a competitive and innovative economy.

Furthermore, KETs must be seen as a first step in a chain of developments towards a product. The Key Enabling Technologies are just the starting point of a series of metamorphoses, like a butterfly that changes its appearance during its life cycle. A KET is a key knowledge on how to solve certain problems with tools, 12 Figure 6: Metamorphoses of KETs - evolution from technologies, to components, to endmachines, or other techniques . But user products. these technologies are the first step and will transform into technological components of products (KETs based components), which in turn will transform into end-user products (KETs based products). Stimulating KETs must be seen as the first stage of this metamorphoses process, finally resulting in an end-user, KETs-based product. Furthermore, this final product is essential to benefit from the investments in technologies and components by economic and social benefits. At the final stage, most jobs are created, societal challenges are addressed and economic growth is stimulated at full range.

11 12

COM (2009) 512 final, of 30.09.2009 Technology: from Greek τέχνη, techne, "art, skill, cunning of hand"; and -λογία, -logia, “account, explanation, narrative”. 28 August 2015 Page 19 of 125 © mKPL, 2015

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The characteristics of these KETs-based products are :  Enabling innovative goods and services: an enabling product for the development of goods and services enhancing their overall commercial and social value;  Unique by its (multiple) use of KETs: unique properties/functionalities induced by constituent parts that are based on nanotechnology, micro/nano-electronics, industrial biotechnology, advanced materials and/or photonics;  Using advanced manufacturing technologies: The manufacturing of KETs-based products is not only using KETs for the product functionalities, but also is using advanced manufacturing technologies.

2.4

What is Multi-KETs An important objective of the mKPL study is to further enhance the view and vision on what the concepts of MULTI and CROSS-CUTTING are in relation to KETs. Defining and demarcating the concept of multi-KETs is important as it can also lead to the attribution of funding towards projects. A good understanding is therefore of importance. The concept of Multi-KETs (and cross-cutting KETs) was introduced in the European Commission's Communication "A European Strategy for Key Enabling Technologies: A Bridge to Growth and Jobs", which was adopted on 26 June 2012. It states in particular that: "While individual KETs are recognised as indispensable sources of innovation, the cross-fertilisation of different KETs is vital, in particular for the transition from R&D to pilot and industrial scale production. A considerable part of the KETs activities planned under Horizon 2020 will be dedicated to cross-cutting activities, which will bring together different KETs for developing innovative products and for contributing to solving societal challenges".

Also a recent report from the HLG provides a definition of the concept of multi-KETs [HLG, 2013]: “Multi-KETs activities are defined as the combination of Advanced Manufacturing technologies/processes and at least two other KETs in a way that value is created above and beyond the mere combination of the individual technologies” Figure 7: Three different types of multi-KETs.

To provide a sound definition of multi-KETs, a theoretical and practical assessment can be made. From a theoretical point of view, a semantic analysis can be made between the wording “single” and “multi”. With regard to a technology and their semantics, the use of the word “multi” can lead to the following definitions:  Multi technology: Creating a single capability using several fundamentally different scientific disciplines. In this case, technology is used as a noun, leading to another single technology (Figure 7, left).  Multi-technology application: Using several technologies in a single application. In this case, technology is used as an adjective, defining the innovation (Figure 7, centre). The technology oriented approach creates new trans/multiple disciplinary sciences. If the term multitechnology is seen as an adjective to components and systems, technologies are combined. From the application perspective, combining several technologies can create new and more innovative components/products. Some examples of (emerging) multi-KET application areas are bio-photonics, nanomaterials and photo-sensory systems. It is clear that the combination of technologies result in unique product properties / technology features, which “could not have been obtained with single technologies”. A third approach to the term multi is more process oriented ((Figure 7, right). Because of the six KETs there is a third fundamentally different combination, emerging from the different character of process and product of the AMT KET. This third type combines process/product technologies. 13

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From a practical point of view, it is interesting to analyse how industrial and research actors address single- and multi-KETs. During the project, a survey was conducted among 7,000 experts (650 respondents) in the field, asking them which KET they address in their activities. This information allows for an indication of how the number of KETs affects the percentage of initiatives relevant to multi-KETs. It is to be expected that the outcome shows a strong emphasis on single KETs, but the assessment of the survey information shows that the limiting mechanism is significant but not typical. About 30% of all initiatives characterised in the survey are 14 considered to be addressing 3 or more KETs . Figure 8: Results from the mKPL survey: number of KETs addressed in respondents initiatives.

Figure 9: Correlation between the individual KETs based on the mKPL online survey 2013.

The next step is also to assess the multi-KETs character of the individual KETs. Analysis and feedback on the KETs shows that several individual KETs are multi-KETs already. MNE, PHOT and NT show much overlap that e.g. addressing PHOT in most cases will already also address MNE and PHOT. This characteristic is considered less relevant for IB. The survey initiatives are more or less balanced concerning the individual KETs, although the difference between AMT (45%) and IB (20%) is significant. Looking at the set of data collected in the survey, correlation is most positive on MNE/PHOT, NT/AM and AMT/AM. Correlations between the other KETs are less significant. Although the analysed initiatives might not be fully representative, the conclusion can be drawn that there is indication that some KETs show intrinsically connection to others. Correlation with 3 KETs is highly unlikely. Overall, the mKPL study defines multi-KET activities as follows: The combination of least two different KETs in a high-tech manufacturing environment in a way that value is created above and beyond the mere combination of the individual technologies

14

It should be noted that this information is influenced by the set-up of the survey and should be analysed in full.

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Within the KETs community, next to multi also the term cross-cutting KETs is used . To come to a uniform approach, the question is what is the difference? Theoretically, the difference between multi-KETs and crossKETs can be seen as Multi: integrating KETs in a new discipline and Cross: parallel, but separate usage of disciplines. These differences are theoretical and it can be concluded that in practice these concepts do not need different policy approaches and can be used interchangeably. The objective of policy is to stimulate activities that are societally desirable and the fine line between these two concepts do not lead to different policy needs or potential societal outcomes.

2.5

What is pilot production The second element at the core of the project is “Pilot lines”, or pilot production. This term originates from the observation that the valorisation of research towards economic and societal benefits is suboptimal. It was introduced by the HLG-KET and is instrumental to the creation of a vision on an integrated strategy to develop KETs. Pilot production can be related to two different types of innovation. The first is to reduce costs of existing production systems with new types of process technology. The second is to increase the market by introducing new products. The term “Pilot line” is used by the HLG-KET as the term to integrate the activities during pre-commercial first operational versions of production systems (TRL4-8). In companies (mostly ICT sector), the term pilot lines is used for the pre-commercial production equipment that produce discreet products. Within e.g. the chemical and biotechnology industry often batch and continuous production systems are core to the production. In this case, the pre-commercial production systems are often called “pilot plants”. A third relevant term used is “pilots”, used for the precommercial testing of products in an operational environment. To integrate all these concepts, the term pilot production activity (PPA) is introduced. Pilot production is related to a set of activities linked to each other in a coherent way with the objective of the development of technologies and their translation into manufacturing goods and services. To do so, these activities range from technological development of the pilot line/plant, to the product pre-production performed in the manufacturing plant.

Pilot lines and plants, part of Pilot production With regard to pilot lines, the first observation is that this concept is used for the physical technological equipment to produce discreet products, like chips and electronic components. Looking at industrial biotech and advanced materials, the term used is “pilot plants” or “demonstrators”. As the valley of death is not only about the development of this technical equipment, the study uses the concept “Pilot production”, being a more neutral and holistic concept to the problems encountered during scale up of prototypes to low rate precommercial manufacturing.

The issue of valley of death and pilot production was often mentioned during the country studies and many governments are shifting their policy to address this issue. But what is this valley of death? In order to assess the barriers and consequently the related policy interventions, a better understanding and demarcation of the concept of pilot production is needed. Core to pilot production is the observation that it is difficult to transform prototype products into commercial production. This stage in the innovation process focuses on the manufacturing of the product at hand. To Figure 10: Simplified overview of the different activities during the innovation better understand this stage a holistic view chain. The arrows indicate feedback and re-development. on the innovation chain must be taken to differentiate to the other activities during the research, development and innovation trajectory. Pilot production can be considered the linking set of activities between technology development and the first commercial market introduction of a product.

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To demarcate and classify the readiness of technologies during this innovation trajectory, the European Commission uses the Technology Readiness Level (TRL) approach. This approach is based on the TRL approach developed by NASA that acts as a communication tool between technological experts and planners. The scale is now used by the Commission to demarcate innovation activities and the intensity of public intervention (funding) according to the development maturity and proximity to market. Because of its purpose, pilot production should be inclusive to all linked activities from low to high TRL for important validation activities (See Figure 11). An example with both low and high TRL activities is the Infineon ETP300/EPPL Pilot line (projects), funded by the Pilot line program of ENIAC. This project includes fundamental research conducted by universities at low TRLs and validation activities for the pilot line output product at higher TRLs.

Figure 11: Focus of pilot production activities, centred at TRL5-7, but sometimes also needing more basic research and extending to validation and testing activities.

Perhaps even more important is the mKPL project conclusion that it is not only about the technological development of the product but equally the process. Although policy often emphasizes the high costs of manufacturing equipment (CAPEX), pilot production is also about preparing the organization for this market introduction. Four different elements can be distinguished between:  Product technology: Further development of the product is needed in order to be able to achieve economically viable costs. This often means adjusting the product. Also the product needs to be tested and validated. Both have strong links to the manufacturing process.  Process technology: Some manufacturing concepts might be identified, but pilot production is highly focused on the full development of the related production technologies (pilot line/plant). Maximizing yield, minimizing costs, ensuring quality are some aspects that need to be researched and optimized. This can also lead to changes in the product and includes research and development.  Organisation: The integration of a new production line/plant has strong impact on the company. Not only new personnel, marketing strategies, business model, logistics, investments, and other internal organisational aspects need to be restructured, but also the external organisation of the value chain and overall innovation ecosystem has to be adapted to the new activity.  Market: One of the most Figure 12: Pilot line activities in the innovation chain, integrating developments in crucial aspects of pilot product/process technologies, markets and the organisation. production is establishing a market. This is not only essential for viability, but also the investments needed for full production depend on establishing market demand. Also market feedback is crucial to redesign the product. Testing and validation, up to qualification, is needed to convince a buying customer, but many products can only be validated once production is set.

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Figure 13: Overview of the typical activities on product/process developments, organisational changes and market developments during the innovation process.

A concise definition of pilot production helps policymakers to focus policy interventions. However, experience within the mKPL project shows that within the domain of multi-KETs, a uniform definition of pilot production is not possible. Although the activities are more or less similar in different cases, the objectives can differ in various KETs environments. Based on two mKPL Demonstrator assessments, two examples can be provided comparing pilot production activities for IB, compared with those organized in MNE. An industrial biotech company can engage in pilot production activities in order to better understand the production system requirements, its potential yield and if the product will be interesting for customers. This information is needed to inform management in order to allow them to invest in a full manufacturing plant. But with a manufacturing of a new advanced electronic device, the intention to invest in a full production line is implicitly made before the pilot line is developed; the pilot production activities aim at optimizing the production system (e.g. increasing yield and reduce costs). However, the activities in both pilot production approaches are more or less similar. The following activities can be used as a demarcating mechanism for the concept of pilot production:  Research and development with the objective to validate both technology/component/subsystem development in laboratory environment and “transferability” to pilot manufacturing activity level.  Set up of pre-commercial pilot manufacturing system (pilot line/plant) operated by one or multiple industry partners including participation of external bodies like SMEs and research organisations  Production of first series of pre commercial products and prototypes for testing and validation of the product and manufacturing process (including cost efficiency)  Adjusting product design based on pre-commercial manufacturing  Creation of market relationships with lead customers giving them access to new technologies  Business development with internal and/or external investors  Preparation of the internal and external organisation for full manufacturing, including the value chain development.

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The benefit of using activities as a demarcating mechanism is that it also makes the concept of pilot production operational to policy, as policy usually supports activities.

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3

Insights from international benchmarking

3.1

Introduction to the benchmark To obtain a better insight into international business and policy practices concerning pilot production activities an international benchmark was conducted. In total 20 countries (15 EU member States plus China, Japan, Korea and USA) and the European Union were covered. The benchmarking drew on a variety of sources such as desk research, an online survey with some 650 respondents, 2 workshops and over 200 interviews.

Table 1: Overview of the 20+1 countries assessed during the mKPL 16 project and the consortium partner responsible . Countries assessed (partner) Austria (JR) Germany (FhG) Belgium (TNO) Great Britain (CUTS) Brazil (CEA) Ireland (CUTS) China (FhG) Italy (DAP) European Union (TNO) Japan (FhG) Finland (VTT) Netherlands (TNO) France (CEA) Poland (TCP)

Portugal (Tecnalia)

In the following section the main insights Slovenia (JR) from the benchmarking are presented. South Korea (FhG) Spain (Tecnalia) Firstly, common business practices across Sweden (TNO/VTT) countries are examined. Secondly, policy Switzerland (CEA) practices concerning pilot production are USA (TNO) analysed in-depth, with a focus on the different policy instruments countries use. Thereafter, two common examples of joint pilot activities - shared facilities and R&D platforms - are examined. The section is concluded with a presentation of the main lessons for public intervention stemming from the benchmarking.

3.2

Business practices concerning pilot production The main insights from the cross-country benchmarking of business practices concerning pilot production activities are presented below. The main driver for KET pilot production activities is the market The benchmarking shows that across countries the main driver for KET pilot production activities is the market. Many representatives from companies emphasise that all pilot production activities have to be considered 17 from a market rather than from a technology perspective . This is supported by the findings of the Online Survey where more than 90 % of the respondents see market reasons as the main trigger for innovation 18 activities . Even in Japan, one of the leading technology-based economies world-wide, a significant shift of priorities in business and policy can be observed: While the ‘technology push’ was the major principle of 19 innovation strategies in the past, nowadays the ‘market pull’ becomes increasingly important . However, market uncertainties are also the one of the main barriers for pilot production. To overcome these uncertainties companies pursue a number of strategies, such as including lead customers in technology development, investing in extensive market studies, involving market experts in pilot production activities, and combining the results of market and technology assessments when deciding on whether to pursue pilot production activities.

16

The Country assessment reports are available at www.mkpl.eu FI p. 12; SE p. 11; FR p. 3; PL p. 12; DE p. 11 18 Online Survey p. 18 19 JP p. 13 17

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Industry-led in-house pilot production is (still) the standard Pilot production activities are in most cases owned by a single company, especially if there is a significant 20 market potential. This was confirmed in most of the interviews with industrial stakeholders . Also the online 21 survey showed that 70 % of all pilot lines are owned by one company . The main reasons for keeping pilot production in-house are:  Better protection of intellectual property (as only staff from one company can access the pilot facilities)  Shorter time to market (as pilot production is often already integrated in the regular production process)  Competences built up during pilot production activities are seen as core assets by companies  Higher degree of flexibility (as companies are not dependent on external parties participating in pilot production) However, also alternative forms of pilot production activities are increasingly pursued by companies, for example in shared facilities or through R&D platforms (see section 3.4 for more information). The benchmarking also showed that the vast majority of pilot production activities are industry-led. Even in China, where technology-based pilot production activities used to be in the hand of research institutes, it is 22 estimated that today 60% of pilot production activities are industry-led . According to industry stakeholders, industry-led pilot production activities have a higher probability of success than publicly-led activities, as industry typically only invests in fields with assessable relevance to the market. The set-up and costs of pilot production activities vary Companies use different approaches to implement pilot production: Existing facilities are adapted for new tasks, stand-alone sites are installed for testing, new equipment serves as a seed for future full-scale production, or pilot production is outsourced completely to external research facilities. Accordingly, costs for pilot production activities vary widely. In some cases – in particular in micro- and nano-electronics and industrial biotechnology – they exceed hundreds of millions of euros. Therefore, even large companies can afford only a small number of pilot lines and public and private technological infrastructures are often used to 23 reduce costs . Co-operation along the value chain is a key success factor Co-operation along the value chain is highly valued by companies engaging in pilot production activities. In particular the collaboration with lead customers is attractive, as it reduces markets risks and helps to tailor new technologies to market demand. The online survey shows that 63 % of the respondents, especially SMEs, 24 cooperate with customers . However, these collaborations are not always voluntary: Large companies occasionally try to capitalise their market position by pushing the burden of development risk to their 25 suppliers . Proximity of cooperation partners can also be important, especially in projects where feedback structures are necessary. While public authorities acknowledge the importance of regionally embedded ‘eco-systems’ to stimulate innovation, most of the public finding is allocated based on ‘excellence’ criteria. For companies this bears the risk that important local partners are excluded in case they do no fulfil the required criteria.

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SW p. 11; EU p. 9; IT p. 13; DE p. 12; FI p. 12; FR p. 3; CH p. 13; CN p. 10; ES p. 13; JP p. 9, 13 Online Survey p. 24 22 CN p. 11 23 Confirmed by the Demonstrator case studies. 24 Online Survey p. 25, 37 25 IE p. 12 21

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Pilot production for SMEs differs from large enterprises SMEs have lower levels of investment available for pilot production compared to large enterprises; however they still perform pilot activities. They tend to use existing production facilities for pilot purposes or rely on a manual production approach. Concerning investments, more than 70 % of the SME-respondents to the online survey stated that they invested less than one million Euros in pilot production activities. SMEs are also more reluctant to try to access uncertain or less mature markets, and are less risk tolerant. The mKPL survey also shows that the investments made by SMEs in pilot production are significantly lower than the large enterprises. It can be concluded that therefore the nature of SME pilot production activities will be different with regard to technological complexity and needs for networking. Timing of pilot production is crucial Timing is crucial with respect to the “window of opportunity”. A company wants to be the first in a new market, but does not want to be too early either, as then markets won’t be able to absorb its novel technology. Moreover, within companies funding for pilot production activities competes with funding for other projects, such as the expansion of existing markets. The latter has the advantage that returns on investment can be realised within a relatively short timeframe, while investments in pilot production might take years to pay back. A significant barrier for pilot production is the deadlock between developers and users Downstream users of potential new KET-related products generally do not want to commit to purchasing a KETproduct without testing it in advance. However, for proper testing, a sufficient number of pilot products are needed; which only can be produced through pilot production activities. Conversely, the management of the KET-producing company usually refuses investment in pilot production without the commitment of potential customers. This creates a deadlock situation in which neither the potential users nor the KET-developing company want to bear the risk of pilot production activities.

3.3

Policy practices concerning pilot production The following section outlines common policies addressing pilot production that have been identified through the benchmarking. An overview of the main policies by country is provided in Annex 4. In this section an overview of the different policy instruments that are most commonly used is discussed (e.g. direct funding, public loans, public procurement) and related country experiences are elaborated upon.

3.3.1 Overview of policy instruments and related country experiences The benchmarking has shown that policy makers use a wide variety of instruments to stimulate pilot production activities. The following section provides an overview of policies that are commonly used across countries, and outlines practical experiences of countries with these instruments.

Direct funding In most of the assessed countries, pilot production is considered to be the responsibility of industry. Only a limited number of countries maintain direct funding programmes exclusively dedicated to KETs-related pilot production activities. This is due to the fact that governments generally perceive pilot production as being “too close to the market”, and that direct aid to the industry could undermine its competitiveness. In addition, state aid rules often prevent governments from directly interfering in the market, as highlighted in the Belgium country report. Companies generally perceived public funding as useful, though it is not decisive for their general decision to start an innovation activity. Various experts mention in interviews that public funding can accelerate the innovation process, lower the threshold to start pilot production and foster EU-wide collaboration regarding 26 pilot production activities. The online survey also showed that companies are well positioned to make use of available funding sources: Public funding is the second most often mentioned resource for pilot production financing, after company equity. 26

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While funding priorities are often determined by responsible ministries, concrete funding decisions are generally taken by intermediary organisations, such as the Finnish Funding Agency for Technology and Innovation (‘TEKES’), France’s National Research Agency (‘Agence nationale de la recherche’), or the Polish Agency for Enterprise Development (‘PARP’). Governments generally use a range of criteria to allocate public finding to pilot production activities. Even though these vary considerably between countries, several commonly used criteria can be identified: 

Funding for pilot production is restricted to companies that already have a critical mass regarding market knowledge and R&D capacities – This is because the overall investment in pilot production is massive and can, even in case public funding is available, only be afforded and managed by larger companies.



Funding is often attached to pilot production in sectors that are internationally competitive and have the potential to 27 reach world-class level.



Funding is often conditional to the eco-system supporting the project – As a strategic network of partners is essential for the success of pilot production activities, funding agencies often require a certain number and/or types of partners 28 to be part of the project. Generally the participation of industry, including a financial contribution, is mandatory.

Procedures to allocate funding are in many countries complex and tailored to the needs of the public administration rather than the private sector. Also the often long periods of time needed to allocate funding are a barrier for companies to apply, especially when the delay negatively affects the time-to-market. In contrast to research-oriented projects, industry representatives are generally involved in the evaluation of proposals of near-to-market projects, such as pilot lines. For example in Finland the public funding agency TEKES has a long track record 29 of these application-oriented funding schemes and approval procedures . Especially the evaluation juries have to be 30 dominated by experts from the industry . The German Federation of Industrial Research Associations (AiF) has long term 31 experiences with mixed expert groups from both different sectors and academia-industry-juries .

All of the examined 20 countries have some kind of direct funding instruments, which, even though not explicitly stated in the most cases, can be used by companies to fund pilot production activities. The UK has a number of government agencies investing in KET-related R&D. In the context of the KET pilot production activities, ‘Innovate UK’ is perhaps the most relevant, given its focus on TRL4-6 research. Innovate UK has a planned core budget for 2014-2015 of approximately 537 million Euros. As part of its portfolio, Innovate UK supports activities in KET-related enabling technology domains (ca. 26 million Euros), such as advanced materials, biosciences, electronics, sensors and photonics, and ICT; as well as high value manufacturing (ca. 92 million Euros). Sweden has with VINNVÄXT a programme for pilot production activities which covers in particular 32 biotechnology and photonics VINNVÄXT explicitly stimulates the creating of pilot lines. The programme consists of a competition for long-term funding (up to 10 years) which aims to reach different sectors in fostering innovation. This includes KETs, but is not limited to it, as the primary goal is to increase the overall international competitiveness of Sweden in various sectors. Spain operates a number of funding programmes supporting collaboration between researchers and companies. An example is INNPACTO which supports joint projects of research organisations and companies that pursue demand-driven development and testing of novel products and technologies (827.5 million Euros in 2010, 951.9 million in 2011 and 851.7 million in 2012).

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BE p. 21 EU p. 17; FR p. 4; IT p. 8 29 FI p. 9 30 AT p. 13 31 DE p. 6 32 SE p. 9 28

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Public loans and guarantees Next to direct funding, public loans are an important policy instrument to stimulate KETs-related pilot production activities. 25 % of policy makers answering the online survey named public loans and guarantees as 33 an instrument that they use to support technology-related innovation activities . Loans have the advantage that they require a more substantial commitment from industry and leave more discretion to market actors concerning priority areas they want to invest in. Especially interest reduced loans are seen as very relevant by SMEs to finance pilot production, as revealed by the online survey. They are often the only chance for SMEs to obtain a loan at all, as they lack capital and often do not fulfil the strict requirements for banks loans. An extreme example of the use of public loans is Poland, which changed its public R&D funding completely to a 34 loan-based system in 2014 . But also many other countries provide public loans and guarantees, for example: 

The technology agency TEKES in Finland awards loans for pilot production activities and demonstrators. In 35 general, loans of TEKES are dedicated for projects in the commercialisation phase .



In France, BPI (formerly OSEO), a public entity, provides financial support to SMEs and companies of up to 5000 employees. It facilitates especially the access to bank loans by providing guarantees. Also cofinancing for ‘growth and innovation investments’ is available.



In Portugal there is a loan-based supporting scheme within the framework of COMPETE (a public programme that promotes knowledge transfer between research organisations and companies, and the valorisation of R&D) where companies can obtain an interest-free loan which can be transformed to a 36 grant in case the company can prove success .



In Switzerland the government has supported a number of regional, non-profit organisations which act as a cooperative for the mutual backing of loans to SMEs. Cooperative credit backing allows SMEs to obtain bank loans more easily by spreading the risk of default across many SMEs. Guarantees are provided for loans up to 470,000 Euros per SME and up to a risk of default of 65%.

Closely related to direct loans and guarantees, also the concept of Fund of Funds can be seen. The European Investment Fund is an example, where the European Commission is investing in a fund, together with the EIB and other private investors. The intervention aims at providing easier access to capital and reduced rates. The loan guarantees provide leverage to private capital to invest in pilot production. The policy instrument of loans and guaranties are often regarded as problematic to companies. Often these interventions are in principle revolving, but research shows 37 that the actual efficiency is limited .

Public procurement Another important instrument to support pilot production activities is public procurement. The rationale behind public procurement is that governments create additional demand for technologies and products that they consider to be of strategic importance for the future competitiveness of their national economies. In interviews company representatives expressed that they would favour the government increasing market 38 volume for technology innovations through public procurement even over direct financial support. However, the online survey also showed that currently public procurement as a policy measure is unknown to every 39 second industry stakeholder . Besides contributing to the creation of demand, public procurement plays an

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Online Survey p. 27 PL p. 6 35 FI p. 5, 7, 9, 10 36 PT p. 8 37 In practice, firms will alter their investment decision in case they have to repay part of the initial support (such as in case of a revolving fund). The total financial resources required to initiate innovation are subsequently similar as in the case of for example a subsidy (see De Heide (2001), R&D, Innovation and the Policy Mix, Thela Services). 38 NL p. 17, DE p. 17 39 Online Survey p. 27 34

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important role in creating trust in new technologies: If the government acts as a first customer, doubts 40 regarding the trustworthiness and applicability of a technology among market actors can be overcome . Within some countries there are first experiences with public procurement directed towards KETs. In Finland there has been an initiative for public procurement of clean technologies used in recycling, construction, and transport. The target is that 1% or about 300 million Euros of the procurement budget has to be allocated to clean technologies. Often the USA is presented as best practice example regarding public procurement. There, 41 in particular the Department of Defense pursues an innovation-oriented purchasing policy . The actual added value of public procurement to the multi-KETs and pilot production domain is troublesome. As multi-KETS are focusing on the support of components and procurement mechanisms focus on products, an 42 indirect approach is needed. This is difficult to make operational .

Tax breaks Tax breaks – including tax exemptions, tax deductions, and tax credits – are another policy instrument to stimulate pilot production activities. Tax breaks are usually more general and less targeted on a specific topic than the policy instruments examined above (e.g. direct funding). Accordingly the tax breaks identified during the benchmarking are of general nature and not addressing a specific KETs-related pilot production activity. France has a tax credit for innovation and research activities in place, which is available to all companies, regardless of size. The crédit d’impôt innovation (Innovation Tax Credit) provides a tax credit of up to 400,000 Euros to SMEs for setting up production facilities in France. It explicitly targets the transition from first prototypes to pilot production, eventually leading to full production. The crédit d’impôt recherche (Research Tax Credit) is a tax credit for R&D expenditure aimed at promoting research by businesses located in France. The Irish R&D tax credit scheme provides a 25% tax credit to companies for incremental expenditure on R&D (applicable to basic and applied research through to experimental development). In contrast to many other countries, Germany does not offer any R&D tax credits, even though this has been called for by industry organisation for some years now. Other examples are seen in the Netherlands and USA. The leverage effect of tax breaks on innovation are often disputed. The investment decision of a company will often not be influenced; they just increase the investment with the size of the tax break. However, for pilot production many examples are observed where the decision for the location of the pilot production activity is highly influenced. Examples can be found in the USA and Germany reports.

Regulation Regulation can be a strong instrument to support pilot production - even though it is not highly ranked as 43 supporting measure by companies in the online survey . Companies generally tend to forget that regulations are essential to set up favourable framework conditions in which they can do business. These framework conditions range from the provision of a functioning infrastructure, over the enforcement of intellectual property rights, to the provision of skilled labour. Moreover, important lead markets for KETs (e.g. health care, energy, telecommunications, environment, or transportation) are shaped by their respective regulatory frameworks (e.g. safety standards, environmental standards). Also regulations affecting consumer behaviour, for example the EU's Energy Labelling Directive (which stipulates that certain products must be labelled according to their energy efficiency), can create demand for new and innovative products. Therefore, a welldesigned and transparent legal framework can without doubt boost technological development, including KETs-related pilot production.

Other innovative instruments Next to the policy instruments mentioned above, countries use many other ways to stimulate pilot production. Some innovative examples are elaborated in the following: 40

CN p. 6, 8, 11, 12 USA p. 7 42 Demonstrator workshop Infineon 43 Online Survey pp. 27-29 41

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Ireland established a central Technology Transfer Office (TTO) to act as a ‘one stop shop’ for industry engagement with the public research system. The office is the first of its kind in Europe. The key service it provides is a website that contains “a comprehensive overview of the research capabilities of all Irish Universities, Institutes of Technologies and specialist research centres; a searchable databases of research expertise; details of over 160 pre-commercial technologies developed by research institutions which are 44 available to license; and access to all patents filed by Ireland’s publicly-funded research institutions” .



While the Netherlands does not have a dedicated policy in place to promote KETs, it has developed an interesting model to align priorities of private and public actors: The ‘innovation contracts’. Innovation contracts are agreements concluded between different actors (government, business, research organisations) in one sector that commit to spend jointly a certain amount of money for the research and development of innovative products and services in the respective sector. One of the sectors covered by such an innovation contract is ‘High Tech Systems and Materials’. Much of the funding that is made available through the contract is dedicated to the set-up of public private partnerships, including pilot production. In Belgium the government put in place a coupon scheme which provides start-up companies with a 10,000 to 30,000 Euro voucher for a scale-up experiment at the shared pilot production facility ‘Bio Base Europe Pilot Plant’ (BBEPP) in Ghent (for more information see Table 3).



3.4

In-between public and private: Examples of joint piloting activities Pilot production activities can be extremely costly and extend over longs periods, up to more than a decade in some cases. To share financial burdens, but also to profit from each other’s know-how, companies increasingly cooperate with third parties in pilot production. The two main forms of cooperation that were observed across countries are shared facilities and R&D platforms, which are described in detail below.

3.4.1 Shared facilities for pilot production Shared facilities are physical locations where multiple parties share access to infrastructure, equipment and related costs. Companies use shared facilitates for a number of pilot production activities, including testing, low-volume production, performance analysis, testing and validation. Many companies, especially SMEs, are only able to experiment with pilot production by using shared facilities, as they often lack the funds to set up their own pilot line or plant. Shared facilities also offer a speedy and low-cost possibility to test innovations without having to conduct major investments. Intellectual property and confidentiality is a ‘hot’ issue at shared facilities, as in most cases the users aim to exploit the same core technology. Hence, special attention has to be paid to IP-protection. In the best case the user companies are active in different markets. To avoid a conflict of interest, ownership could be given to independent companies, Research and Technology Organisations (RTOs), or even universities. Often shared facilities are started from regional funding (cofounded by national government) and then scaled up to the national level. Concerning funding, experiences with shared facilitates show that often the operation and maintenance costs are underestimated in the beginning and the continuity is under pressure when long-term public co-financing is missing. The focus of shared facilities according to the TRL scale is diverse. Universities and industry/academia research cooperation institutes like the Albany College of Nanoscale Science and Engineering (CNSE) focus more on offering facilities for research and prototyping, whereas the RTOs shift their attention more to TRL4-6 and support scale-up and pilot production. Also private shared facilities can be seen, where focus is even shifted towards TRL5-7/8. The conclusion can be drawn that the shift from public to private also shifts the focus to the higher TRL levels, but also limiting the capabilities to conduct adjacent research often needed for the pilot production activities in the multi-KETs domain. Examples of shared facilities were identified in a number of countries, for example:  The publicly driven South Korean Research Institute of Chemical Technology (KICET) provides a ‘Ceramic Test Bed’ as shared facility. Companies, in particular SME, can gain access to the facility by paying a fee and

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use it for test production of their prototypes. In addition, small companies can use the facility as a 45 production line, supported if necessary with technological development and consulting expertise . 

In France, in the Nantes region, the ‘Techno Campus EMC²’ offers specialised equipment for pilot production of composite technologies. Application sectors are aerospace, with in particular Airbus and 46 EADS as funding partners, and the automotive sector .



In the United States, the Bioethanol pilot plant was funded by the Department of Energy to support the scale-up of bio based production of ethanol for the NREL partners and industry.

3.4.2 R&D platforms R&D platforms are a location where several partners gather in jointly-used premises for complementary innovation activities. In contrast to shared facilities, R&D platforms are also dedicated to cooperative and precompetitive research and development up to the first pilot products. In this case the TRL of the activities can range from an early stage up to TRL8, as the more holistic approach requires flexibility and a high permeability of new developments. These entities are mainly characterised by open innovation approaches with several stakeholders collaborating throughout the innovation and value chain. R&D platforms have the advantage for participating companies that they can help to close the innovation cycle with partners from other disciplines. Often the cooperation leads to an accelerated research and development process. In particular, for breakthrough innovations this kind of ‘co-innovation’ along the whole value chain seems to be crucial. The benchmarking showed that many countries have R&D platforms in place and often support them with dedicated policies:  The IMEC in Belgium began as a joint activity between different Universities. With its 2000 staff members it is specialised in micro- and nanoelectronics and nanotechnology. One of the most prominent activities is the development of a 450 mm line. Beside joint leading-edge development, the organisation also offers 47 shared equipment e.g. test beds .  The ‘Campus Vienna Biocenter’ in Austria is an example of a R&D platform, set up as a public private partnership. Within the facility, more than 1400 scientists foster leading-edge R&D in the field of life48 sciences. Different companies and universities are involved in the activity .

3.5

Main lessons for policy intervention The previous sections have described the main results of the international benchmarking from a business and policy perspective. Experiences from other countries are extremely useful as they show what has worked well in the past and what didn’t. They provide important lessons and therewith help policy makers to choose for the most effective mix of policy instruments when designing future KETs-related pilot production policies. The main lessons that can be extracted from the international benchmarking are described in the following sections.

3.5.1 Pilot production is a global and emerging policy trend One of the pillars of the mKPL project is the issue of crossing the valley of death. Industrial policy started more or less during the 1940s and started with the structural support to the research infrastructure (science push). During the 1970s, the focus shifted towards creating a science pull from industry. With attention now shifting towards the valley of death and scale-up pilot production, a new era of policy is emerging. The country reports show that this new era of policy is a global emerging trend, also stated by the presentation of Antonio Andreoni 49 during the Industrial Economics Day . The combination between the economic crisis and increasing global competition create pressure to support valorisation of research and development. 45

KO p. 13 PT p. 9 47 BE p. 13, 15, 18 48 AT p. 10 49 Andreoni A. (2104), Manufacturing the European Renaissance: Towards a New Industrial Policy Integrated System, Industrial Economics Day, Brussels 15 December 2014. 46

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However, this shift towards support of scale-up pilot production activities still is not widely accepted. Policy rationale to support pilot production in general is not common, as normally this is seen as the responsibility of 50 the industry itself . But countries that traditionally focus on strengthening the research infrastructure, like Japan, UK and US now are developing pilot production policy. Especially within the field of advanced manufacturing new initiatives are initiated to support pilot production, like the Catapult programs (UK) and the National Networks for Manufacturing Innovation (US). Other countries like China and South Korea already have experience with these activities, but also here new momentum is growing. It can be concluded that the European Commission is at the forefront of the development of a policy on pilot production. Policies in this field in countries are still in its early stages, but rapidly developing. Learning from their experiences is crucial in order to enhance efficiency and effectiveness.

3.5.2 Government has a crucial role to play in supporting KETs-related pilot production The benchmark showed that an increasing number of countries use dedicated policies to support pilot production activities. Also the interviews and online survey of industry stakeholders indicates that public support is deemed crucial to enable companies to engage in pilot production at the first opportunity (especially SMEs), and to speed up and enhance the quality of the pilot production process.

3.5.3 Policies supporting pilot production should be market-driven and/or be led by industry priorities The benchmarking showed that the market is the main driver for companies to engage in pilot production. Businesses feel that support for pilot production should therefore be directed to initiatives with high market potential. Hence, instead of policies focusing on a ‘technology push’, governments should rather enable companies to follow the ‘market pull’. In this respect it is generally assumed that companies, and not the public sector, are better placed to identify and prioritise market opportunities. Translating this insight into policy practice can be done in various ways, for example by involving industry representatives on a regular basis in the evaluation of funding proposals (e.g. as done by the Finnish funding agency TEKES), or by using ‘innovation contracts’ which are negotiated between government, business, research organisations to agree upon funding priorities, as done in the Netherlands.

3.5.4 Policy can increase the chance of success of pilot production by supporting the building of eco-systems The benchmarking showed that cooperation along the value chain is a key success factor for pilot production. In this respect public support is generally perceived as having a high added value, as it enables more partners to be involved in pilot production activities. For example potential customers can be involved, which significantly increases the chance of market success. However, the benchmarking also showed that large companies occasionally try to capitalise their market position by pushing the burden of development risk to their suppliers, which are often SMEs. Public support to eco-system building should therefore stimulate the involvement of potential customers and ensure that the risks of pilot production activities are shared as equally as possible between partners. When extensive coordination is required between partners, physical proximity can be decisive for the success of pilot production. Hence, the importance of proximity should be considered when designing policy instruments to support pilot production (e.g. more weight should be given to proximity criteria when judging funding proposals).

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While in-house pilot production is still most common, more outwards-looking forms of pilot production activities become increasingly important, such as shared facilities. The benchmarking has clearly shown their added value (especially for SMEs). Hence, governments should explore how to best support these forms of cooperation.

3.5.5 To stimulate KETs-related pilot production a mix of policy instruments is required Countries use a variety of policy instruments to support pilot production activities, such as direct funding, public loans or guarantees, tax breaks, public procurement, and regulations. The benchmarking showed that there is not ‘the one’ policy instrument, but rather that a well-designed policy mix, which might be different in every country, is most likely to be successful. For example France offers several tax credits for companies conducting pilot production, while Germany has no R&D tax credits in place at all. Each policy instrument has its distinct advantages and disadvantages, and its effectiveness is strongly context-dependent (see Table 2) for a detailed overview). In developing pilot production policies, countries need at first to clearly define the policy objectives and then chose, after careful consideration of costs and benefits, the policy instrument that is most likely to deliver the best results. Table 2: Advantages and disadvantages of different policy instruments in supporting pilot production. Policy instrument Direct funding

Public loans and guarantees

Public procurement

Tax breaks

Regulation

Advantages

Disadvantages

Effective if…

 Very targeted  Can be neatly tailored to specific policy objectives  Support relatively generous (e.g. doesn’t need to be paid back)

 Award procedure and administration relatively bureaucratic, slow and labourintensive (for both businesses and the public administration)  Bears risk of market distortion and mismanagement  Limited excess for financially weak companies (many SMEs, especially after the crisis) 

 … the goal is to support very specific kinds of initiatives (e.g. in a specific region, concerning a specific sector, or concerning a specific form of cooperation)

 Bears risk of investing in the wrong markets  Bears risk of market distortion and mismanagement  Not very targeted towards KETs and pilot production  Award procedure and administration can be complex and slow  Not very targeted  Can complicate tax system  The leverage on the investment decision is limited; more on location decision.  Takes time to be implemented (long legislative processes)  Can create unnecessary burdens  Effects are very indirect and can be difficult to predict and to measure

 … the goal is to create new markets that have a huge potential but appear unlikely to develop by themselves needs to be informed by sound market analysis in order to avoid investment in the wrong markets!

 Very targeted  Public support follows market opportunities, as industry bears the costs  High leverage to private investors  Can provide a significant competitive advantage by opening up new markets  Creates confidence in new technologies

 Leaves freedom to companies concerning how to use the additional money  Efficient policy instrument  Can be essential in shaping markets, creating incentives for innovation and establishing favourable framework conditions

 … the goal is to support specific kinds of initiatives without massive public spending

 … the goal is to support business in general assuming that they know best where to invest  … the goal is to create favourable framework conditions for businesses and to develop markets

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3.5.6 The allocation of public support should be transparent and as streamlined as possible Overly complex, slow and labour-intensive award procedures can be a significant barrier for companies to apply for public support. Especially if the duration of procedures negatively affects the time-to-market companies will be unlikely to apply for public funding. Consequently, this means that the longer the approval procedure takes, the less relevant and promising activities are supported. The benchmarking indicates that for funding of near-to-market activities, a period of about three month, from application to signature, seems to be acceptable from a business perspective. Overly complex procedures are especially a burden for SMEs, as they lack the capacity and specialised knowledge to understand the requirements and to provide the necessary information (large enterprises often have a specialised department for such purposes in place).

3.5.7 Market knowledge and data is crucial for companies to make informed decisions As the decision to start pilot production is strongly depended on market prospects, reliable market information is crucial for companies in order to make an informed choice on whether to pursue pilot production or not. However, the benchmarking showed that such information is often not readily available and as a consequence market uncertainties form the most important barrier to pilot production. Governments could address this problem by supporting market research activities of companies, provide external market intelligence, or improve data availability.

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4

Lessons learned from four demonstrator case studies

4.1

Introduction to the Demonstrators During the mKPL project four organisations were selected as so-called Demonstrators for the mKPL project. Including these Demonstrators in the project had two objectives. First they acted as case studies and were assessed in depth on their pilot production activities. The objective of theses assessments was to gain practical experience with pilot production. What are the barriers for pilot production, how are these activities organised and with whom? This information feeds into the overall assessment and policy recommendations. The second objective was that they acted as demonstrators and workshops were conducted on their premises to show the broader community what pilot production activities in a multi-KETs environment is.

For the selection of the four demonstrators, an open procedure was set up to find the most suitable pilot production initiatives for the purpose of the project: 1. Expression of interest: An invitation to Expressions of Interest (EoI) was published to invite the community to provide basic information about potential demonstrator activities by the respondent. In total 26 expressions of interest were send in. 2. Selection of long list: In close consultation with the Commission and the mKPL Steering Committee, 9 Expressions of Interest were selected by the mKPL core team to be further developed into a full project proposal. Figure 14: The selection process for the 3. Invitation to tender: The selected organisations were invited to Demonstrators. develop and send in full project proposals for the mKPLDemonstrators. 4. Ensuring full understanding: The selected organisations were contacted to ensure a full understanding of the requirements of the full project proposal. 5. Evaluation of proposals: The full project proposals were evaluated by the Steering Committee and Commission. During this step the organisation can be asked to provide additional information. 6. Selection of proposals: Based on a pre-evaluation from the mKPL-consortium and mKPL-Steering Committee, the European Commission awarded 4 proposals. In this chapter, a short synthesis of the lessons learned from the case studies is provided. For a full overview of the detailed information gained in each assessment one is referred to the corresponding a report. The four so-called Demonstrators organisations are Infineon, Sofradir, Acreo and the Bio Base Europe Pilot Plant (BBEPP). Two of these Demonstrators (Infineon, Sofradir) are product dedicated pilot lines, operated by a single company and an early stage of their production line/plant. The other two (Acreo, BBEPP) are not-for-profit organisations and can be seen as multiple user infrastructure and service providers that help external customers to develop and test new manufacturing processes and products. The main characteristics of each demonstrator are provided in Table 3.

4.2

Primary results from the demonstrator assessments In the following table, the main lessons learned from the four demonstrator case studies are outlined.

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Table 3: Characteristics of the four demonstrators: Infineon, Sofradir, Acreo and the Bio Base Europe Pilot Plant (BBEPP). Infineon

Sofradir

Acreo

Description of pilot production activity

Infineon is a manufacturer of power electronics. The pilot production activity concerns the testing of a new system that produces power electronics based on a larger wafer (300mm). This is expected to lead to a reduction in costs, but also to enable new type of chips.

Sofradir is a manufacturer of cooled infrared detectors as key component of high performance thermographic cameras. The pilot production activity concerns the new production line of next generation detector arrays and the establishment of a 115mm wafer size in order to improve capabilities and to reduce costs.

Acreo is an independent non-profit research institute within the area of ICT. The pilot production activity concerns the so-called Printed Electronics Arena (Acreo-PEA) in Norrköping, which offers a set of printed electronics related manufacturing and applied research facilities.

Location Start of project Funding sources

Austria, Villach 2011 Parts of the pilot production activities are publicly funded, largely by ENIAC (‘European Nanoelectronics Initiative Advisory Council’). The rest is financed by Infineon itself and its partners.

France, Veurey-Voroize near Grenoble 2012 The main part of the R&D-expenditures is paid by Sofradir itself. Public support comes in particular indirectly by the financing of CEA LETI and their contribution to the technology development. But, furthermore some other public agencies contributes to the research programme and funding of Sofradir, including:  the European Space Agency (ESA)  the French Space Agency  the French Ministry of Defence  the French Department of Industry

Sweden, Norrköping 2000 Acreo-PEA is one third financed by Sweden’s innovation agency ‘VINNOVA’. The other two thirds of funding are provided by Norrköping and Katrineholm municipalities, Linköping University and Norrköping Science Park.

Legal nature Partners in ecosystem

Private Research organisations: University of Klagenfurt, Technical University Dresden, Technical University Eindhoven and many more (>10)

Private Research organisations: CEA LETI (research and technology organization)

Not-for-profit Research organisations: University of Linköping (Norrköping Campus), Swedish Research Institutes (RISE)

Businesses: Infineon, Lam Research Corporation, Philips Healthcare, and many more (>30).

Government: French Ministry of Defence

Bio Base Europe Pilot Plant (BBEPP) Bio Base Europe Pilot Plant (BBEPP) is a non-profit scale-up facility for industrial biotech that offers an extensive set of services to customers to validate processes and engage in pilot production. This includes among others pre-treatment of biomass, conversion of biomass, product recovery and purification. The entire facility is assessed as a pilot production activity. Belgium, Ghent 2009 In total, BBEPP received around 13 million euro of “one-shot” public funding from the European Union (via INTERREG), the province of East-Flanders, and the City of Ghent to set up the pilot plant. BBEPP does not receive any public funding on a structural yearly basis. Its running costs are covered roughly half by public projects grants (European and national projects) and half by private bilateral contracts. Depreciation cost is not covered by contracts, so upgrades or investments in new capital equipment and facilities are not possible without assistance from external bodies, either public or private. Not-for-profit Research organisations: Businesses: business are involved as clients

Businesses: Thales, Sagem Businesses: pool of clients and suppliers Government: Norrköping Municipal Government, National and State Regional Authorities, the municipal local, regional state

Government: EU (through INTERREG funding), Province East Flanders, Belgian Ministry of Economy, City of Ghent Intermediaries: Ghent Bio Economy Valley,

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Infineon

Sofradir

Government: ENIAC (‘European Nanoelectronics Initiative Advisory Council’

Pilot lines integrated in regular production process Main lessons learned from demonstrator case study

Yes

Yes

1) The involvement of the whole ecosystem is essential for the success of innovation, as it allows bundling necessary competences and parallelises developments. Moreover, not only the technological risks are reduced, but also financial risks are shared and even the market risk is positively affected. 2) Pilot lines that are ‘embedded’ in the regulator production process have several advantages. For example they are less expensive than separate pilot lines and the transition to standard production is smoother. 3) Pilot production activities are mostly focused on process development. 4) The most important risk for pilot production is uncertainty relating to market opportunities. 5) Even though, public funding will never be the reason to start a pilot production activity, it promotes the success of the innovation (e.g. by enabling more actors to be involved, such as lead clients or research organisations, which reduce scientific and market risks). 6) Advanced pilot production activities, as well as mass production needs highly skilled workers.

1) The involvement of the whole eco-system is essential for the success of innovation, as it allows to bundle necessary competences and parallelises developments. Moreover, not only the technological risks are reduced, but also financial risks are shared and even the market risk is positively affected. 2) Pilot lines that are ‘embedded’ in the regulator production process have several advantages. For example they are less expensive than separate pilot lines and the transition to standard production is smoother. 3) A main focus of pilot production activities is process development. 4) The most important risk for pilot production is uncertainty relating to market opportunities. 5) Even though, public funding will never be the reason to start a pilot production activity, it promotes the success of the innovation (e.g. by enabling more actors to be involved, such as lead clients or research organisations, which reduce scientific and market risks). 6) Advanced pilot production activities, as well as mass production needs highly skilled workers.

Acreo

Bio Base Europe Pilot Plant (BBEPP)

authorities

Port of Ghent, IWT (Agency for Innovation by Science and Technology), Enterprise Flanders (Agentschap Ondernemen), PMV (a private-public venture to fund financing), Zeeland Seaports

Intermediaries: the Swedish Agency for Innovation Systems (VINNOVA), Norrköping Science Park, Industrial Pulp and Paper and Printing Association, Charity National Foundations (e.g. The Knut and Alice Wallenberg Foundation) No

1)

2)

3)

While capital is important, overall Ecosystem support for the pilot production activity is even more important in the long term. Few companies can actually make effective use of the patenting system to protect their investments. Especially SMEs have little capacity to monitor and pursue infringements of IPRs at the worldwide level. As KETs require a long time to reach the maturity of market applications (in this case more than fifteen years), the limited an availability of cash flow can be a problem.

No

1)

2)

3)

4)

The initial investment in capital needed to create a pilot plant of meaningful size is significant. At the time of inception of BBEPP, no single government funding agency had the means to support such an initiative. Without multiple funding sources, BBEPP would not have been possible. Managing industrial innovation with many customers requires a strong commitment to confidentiality. BBEPP would not survive without a strict policy of confidentiality. The most significant distinguishing characteristic of BBEPP with respect to the competition is the high level of expertise in industrial biotech, which is considered to be a key success factor for users of BBEPP. An interesting lesson from the BBEPP experience is the so called “coupon scheme”, initiated via a European project, which provides start-ups with a 10-30k€ voucher for a scale-up experiment at BBEPP. It is clear that these dedicated subsidies enabled BBEPP to offer its services to a set of start-ups it would not have otherwise encountered.

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Infineon

Sofradir

Acreo

Bio Base Europe Pilot Plant (BBEPP)

7) RTOs and universities play a vital role in pilot production activities.

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4.3

Main lessons for policy interventions

4.3.1 Long-term cooperation with partners is essential All four demonstrators stressed repeatedly that key to their success was long-term cooperation with partners. Establishing a well-functioning eco-system has many advantages. First and foremost, pilot production would not be possible without the contribution of partners, be it in terms of financial support and/or knowledge sharing. Moreover, strategic partnerships mitigate risks. For example Sofradir addressed technological risks by involving the research and technology organisation CEA LETI, which has a considerably broader scientific knowledge base than Sofradir. A common strategy to tackle market risks is to integrate potential customers in the ecosystem. For example Acreo makes a dedicated effort to ensure active participation of a pool of clients in the product, process and equipment development, in order to align development activities with future market demand. All demonstrators highlight that physical proximity between partners helps to speed up pilot production and to organise cooperation more efficiently. For example Acreo benefits from the physical concentration of its activities in Norrköping, where also its main partners - the Norrköping Campus of the University of Linköping, the Norrköping Science Park, and the Norrköping Municipal Government – are located. Where pilot production activities have to be organised over long distances, for example between Dresden and Villach in the case of Infineon, regular communication is crucial. Infineon works with so-called “transfer teams”. Dresden sends these teams to Villach (typically engineers) to be educated. Some personnel are also shifted from one place to the other for longer periods of times. There is also a strong exchange via jour fixes, meetings, online meetings, etc.

4.3.2 Process development (and not product development) is often the core of pilot production activities There is a common misperception that ‘pilot production’ and ‘pilot lines’ predominantly concern product development, maybe due to the fact that the results of process development (e.g. higher production yields) are far less “attractive” and “glossy” than the development of a new product prototype. However, the four case studies have shown that at the core of their pilot production activities lays process development and optimisation. For example during Infineon’s pilot production activities the first step was to transfer already existing products to 300mm wafers, requiring especially process, material and equipment research and development, but no product development. Only in a second step, new product technologies were developed, enabled by the new equipment for 300mm wafers. Thus for Infineon the main challenge was not product but process development. To optimise its pilot production activities Sofradir has even established a dedicated ’Process Group’ as part of its Production Division. The six people of the group are responsible for the implementation of new processes in the production. The predominant task is to stabilise the processes. After successful process design the training of the operators in the Production Division demarcates the transition to the normal manufacturing. And finally the maintenance and incremental improvement of the process is a continuous task. What was also noticeable from the case study is that pilot production activities are often integrated in the regular production process. Especially in case of the private initiatives, such as Sofradir and Infineon, it is often not feasible to set up whole new processes and product lines for pilot production activities. Therefore, pilot production is generally run in parallel to standard processes. This means that equipment is used for pilot production purposes at the same time as it is used for normal high-volume production. In case equipment only serves the pilot production, e.g. for a completely new process step, it will eventually be used as production equipment, when the process is optimised and goes into production. Integrating pilot production activities into regular production processes has the advantage of being able to fine-tune and integrate new processes into the already existing processes at an earlier stage and more easily. A disadvantage is that pilot production activities have to compete with normal high-volume production regarding timeslots and capacity.

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4.3.3 Shared facilities for pilot production are a win-win form of cooperation 51

The concept of shared facilities for pilot production – meaning that multiple parties share access to infrastructure and related costs – is at the core of the two not-for-profit initiatives Acreo and BBEPP. Many companies are only able to experiment with pilot production by using shared facilities, as they often lack the funds to set up their own pilot line. Shared facilities also offer a speedy and low-cost possibility to test innovations without having to conduct major investments. This “easy access” effect can even be enhanced by public support schemes, such as the “coupon scheme” of BBEPP which provides start-ups with a 10-30k€ voucher for a scale-up experiment at BBEPP. Also private pilot production initiatives make use of shared facilities: But they are rather used for highly specialized equipment e.g. for measuring purposes and dedicated laboratories. This can be explained by the inherent risk of shared facilities for intellectual property theft (due to more parties having access to pilot production facilities). Hence, confidentiality, if requested by the facility users, is a key success factor for the operation of shared facilities. Furthermore, shared facilities for pilot production are important but are only one piece for the pilot production stage, not necessarily applicable to all kinds of pilot production activities.

4.3.4 The protection of intellectual property rights is key for companies involved in pilot production An issue that is strongly brought up by the four demonstrators are Intellectual Property Rights (IPR). Few companies can actually make effective use of the patenting system to protect their investments. This does not only concern the successful application for a patent, but also the enforcement of the IPRs covered in the patent. Most companies (SMEs) have no capacity to monitor and pursue infringements of IPRs at the worldwide level. Also between partners conflicts concerning IPR might arise. The case studies have shown that it is important to discuss IPR arrangements early in the formation of partnerships. As it is hard to protect intellectual property once the knowledge is available to the outside world (e.g. patents), many companies involved in pilot production chose confidentiality as an alternative to protect their investment. For BBEPP (which conducts pilot production activities according to clients’ specification in its own facilities) confidentiality is even one of its core values. BBEPP generally grants industrial property rights developed along projects to its customers, and Non-Disclosure-Agreements guarantee a high level of confidentiality, reinforced by BBEPP’s status as an independent not-for-profit organisation. Most private actors using the services of BBEPP choose confidentiality to protect their investment.

4.3.5 Highly-qualified personnel are needed Pilot production activities require highly skilled and specialised personnel. Infineon observed that, with respect to both pilot and mass production, the share of highly qualified personnel is increasing. On the other side, the lower qualified operators (e.g. that used to transport wafers from one machine to another) are more and more replaced by automated systems. Since specialised training is often not provided by public education, companies have to train personnel themselves in the necessary skills.

4.3.6 Combined technological, financial and market risks are the main barriers The case studies showed that the main barriers for the pilot production activities were the combined technological, financial and market risks. However, the risk of technological failure can be mitigated through the involvement of experienced and specialised partners from supplying companies, universities, and research and technology organisation (RTOs). All of the four demonstrators involve partners to mitigate technological risks to some extent. Besides that, the technological risk can be assessed and controlled up to a certain degree through early technical feasibility studies; a practice explicitly mentioned by Infineon. As a consequence, the financial and market risk play a stronger role as a barrier in the combined risk assessment. The financial risk is generally high, as very high capital investments have to be made for equipment, personnel and material. But, 51

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the market risk is the one which is hardest to assess and thus introduces the greatest uncertainty. The pilot production activity is only economically feasible, when it leads to reasonable market volume. The assessment of the future market volume, the expected sales and the related uncertainty is of high importance when it is decided whether to pursue a pilot production or not. Sofradir tries to mitigate the market risks by closely involving its lead clients (Thales, Sagem, and the French Ministry of Defence) in pilot production. This enhances the chance of developing products that are highly demanded in the market, and therewith increasing sales.

4.3.7 Public actors and policies have an important role to play in enabling pilot production Public actors and policies have an important role to play in all of the four case studies, be it indirectly through creating conditions that facilitate pilot production, e.g. operating an education system that provides highlyqualified personnel, or having regulations in place that stimulate innovation, or through direct measures, such as public funding for pilot production activities or vouchers for companies who use pilot production facilities. In all four case studies a part of the funding is obtained from public sources. BBEPP even received all of its initial 13 million euro funding to set-up the pilot production facility from public sources, including INTERREG, the Province of East-Flanders, and the City of Ghent. The impact of the public funding on the pilot production activity is diverse. Infineon highlights that public funding, most importantly, promotes the success of the innovation by affecting especially the technological risk. It allows more partners, scientific and engineering manpower to be involved, leading to a deeper understanding, optimised solutions and better handling of processes. Public funding can also reduce market risks if it is used to involve important customers. This mitigates the uncertainty regarding applications and sales forecast. Altogether, it can be said that due to public funding pilot production activities are faster and more innovative. The involvement of public actors also favours the openness of innovation processes and the dissemination of results. Pilot production activities, as it has been carried out in the case of Sofradir, appear to be less likely to create publicly available knowledge which can be used by other companies as well. BBEPP deliberately set the target to have 50% of its contracts with public authorities, which place less emphasis on IPR protection, in order to be able to disseminate its results and to increase its visibility. However, the case studies also point to a number of concrete recommendations on how to improve public involvement in pilot production activities:  Public funding for process development should be more easily available, reflecting the fact that nowadays most KETs-related pilot production activities focus predominately on process development than on product development. Consequently, support should not be constrained to pilot production facilities and equipment, but extend to R&D and non-hardware components, such as manpower and networking, as well.  Administrative requirements attached to public funding should be simplified to be more “naturally” to the industry. For example due to the high flexibility of a production system, the requirement to provide daily time sheets for production staff is not feasible. Furthermore, drawing up a detailed planning in advance is also not always feasible, especially when it comes to maintenance and production costs. A justified lumpsum calculation would be more adequate compared to exact person-day calculations down to single workers.

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5

The policy context of pilot production

5.1

Introduction The previous chapter provided an overview of the activities conducted during the mKPL project, including their outcomes. Based on this information, this chapter will start with making the translation to policy. Providing support for PPAs implies that a government allocates scarce public resources (i.e. tax revenues) to specific actors within an economy, thereby affecting their competitiveness. In practice, such an intervention in the functioning of the market is economically efficient and legally justified if and only if it addresses specific forms of market failure. First, the policy context on mKETs pilot production will be described, including the State Aid Rules. Then a distinction will be made between the different governmental levels engages in policy, including the different characteristics and limitations of their policy. Next a further description is given of the target groups of policy. In the last chapter, a meta-analysis is provided on the barriers which policy address. This all will describe the contextual framework of an mKETs pilot production policy, which will be described in more detail in the next chapter. The previous section of this report described the reason for the formulation of dedicated policy supporting the set-up of PPAs in the EU: future sustainable growth requires the translation of (research-based) knowledge into actual production. This section discusses the underlying rationale for such a dedicated policy: the justification of support for PPAs by a government.

In this section we model (i.e. simplify and describe) the investment decision of a firm concerning a PPA as to indicate when government intervention is required. We also indicate how government support could alter this investment decision. Last we introduce the legal framework that governs such intervention. Note that this introduction and subsequent discussion on the rationale for policy intervention is not an academic (i.e. theoretical) one amongst innovation policy makers. The policy field addressed by the recommendations concerning PPAs includes also industry/entrepreneurs, scientists, and innovation policy researchers. These different actors have adopted different definitions for innovation, and subsequently have diverging viewpoints on, and rationales for intervention that might be in conflict with what is allowed under international regulations.

5.2

State Aid rules The actual design of the (financial) support for PPAs (i.e. which aspect of the investment decision of the firm to address, which actors to address, and which modality of the instrument) depends of course on the specific barriers encountered by the different types of PPAs. But above all, the intervention must be in line with the State Aid Rules for R&D&I, and the underlying rationale for policy intervention: the concept of market failure. 52 In practice actual government intervention is governed by the so-called State Aid rules and support for PPAs is covered primarily by dedicated rules for the funding of R&D&I. The State Aid Rules on R&D&I (EC 2014) define a framework of conditions that the intervention should adhere to in order to be eligible, and the corresponding maximum allowed aid intensities (which differ for specific actors and activities within the 53 innovation process). 52

TFEU article 107 (1) : must be made clear the notion of state aid ( i.e. public funding) which distorts or threatens to distort competition ….is incompatible with internal market 53 EC (2014) Framework for state aid for research and development and innovation (C(2014) 3282). Rules on State Aid are set at the European level, article 107 TFEU in particular. In essence the State Aid Rules on R&D&I stipulates that R&D&I support (that includes support for PPAs) can distort competition by favoring certain undertakings is incompatible with the single market. In order for notified aid granted for R&D&I to be compatible with the internal market, it must pass the 28 August 2015 Page 44 of 125 © 2015

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Most relevant condition is that the intervention should address market imperfections. As such the State Aid rules are a legal interpretation of the actual implementation of the concept of market failure. The State Aid Rules on R&D&I (EC 2014) identify the following types of market failures: (i) spill-over effects from first movers; (ii) imperfect / asymmetric information about risks; and (iii) coordination and network failures between actors in the value chain. We argue that there are however also other types of market imperfections of relevance in case of PPAs: (iv) market power exercised by incumbents; and (v) network effects / externalities that hinder new entries in a market. See Annex 3 for further details on market failures associated to R&D / the set-up of PPAs. The concept of market failure originates from economic theory. Within the framework of this theoretical concept, it is argued that the behaviour of the actors (i.e. producers, consumers and other institutions) in a free market, results in a certain allocation of resources (i.e. production factors). Market failure is said to occur when the resulting distribution is not efficient, leading to a loss in welfare. This implies that a different and more efficient distribution would result in a situation where all actors in the market would be better off. See Annex 2: An introduction to Market failures for further details on the concept of market failure. Specific forms of the market failures result in suboptimal levels of investments in R&D&I (which includes investments in PPAs). As stated in (EC, 2014): “[…] R&D&I takes place through a series of activities, which are upstream to a number of product markets, and which exploit available R&D&I capabilities to develop new or improved products and services and processes in these product markets, thus fostering growth in the economy. However, given the available R&D&I capabilities, market failures may prevent the market from reaching the optimal output and lead to an inefficient outcome […].” Underinvestment in R&D&I (or in our case PPAs) because of market failures implies that the incentives for the actors in the economy to invest are not sufficient. Market failure as such is subsequently regarded as a rationale for policy support. It provides governments with a justification to intervene in the market, by supporting certain actors (i.e. provide them with a competitive advantage) such that they alter their decision concerning investing in R&D&I (or in our case PPAs). See Annex 2: An introduction to Market failures for further details on market failures associated to R&D / the set-up of PPAs. Note that in practice EU funding centrally managed by the institutions and agencies of the Union, such as the Framework Programmes addressing R&D&I, is exempt from the EU State Aid rules. But for example for (co-) financing by Member States and Associated States of R&D&I (including PPAs), it is important that intervention 54 fits the State Aid Rules. The State Aid rules on R&D&I also define aid intensities of financial support for the set-up of PPAs (i.e. the percentage of the eligible cost of the PPA project up to which state aid can be granted). PPA related projects are according to the revised R&D&I State Aid rules defined as “applied research” (i.e. including either/both “industrial research” and “experimental development”, see Annex 3: State Aid Rules, the concept of market failure and PPAs). The corresponding maximum aid intensities for PPA projects are: up to 60% of eligible costs for large enterprises, and 80% for small enterprises; and in cases of collaboration up to 70% of eligible costs for large enterprises and 90% for small enterprises.

5.3

Government levels There are different governmental levels that address the issues during pilot production. Three different levels can be distinguished between: European Union, national/country level and the regional level. The

balancing test. It is first necessary to demonstrate market failure. This can be done by reference to econometrics (where sufficient data are available) or by the use of benchmarking analysis. Having satisfied itself as to the existence of a market failure, the Commission assesses the compatibility with the remaining conditions. See Appendix II for further details on the State Aid rules on R&D&I. 54 Note that the EU State Aid rules are in line with the WTO Disciplines on Subsidies). 28 August 2015 Page 45 of 125 © 2015

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opportunities and rationales for public administrations to intervene in innovation differ according to these governmental levels:  The European level (European Union, focussing DG Regional & Urban Policy, DG Internal Market, Industry, Entrepreneurship and SMEs, DG Research & Innovation, DG Communications Networks, Content & Technology);  Country level (national governments, focusing on science/technology and industry/economic departments);  Regional level (regional governments and regional development agencies). The aim of EU industrial innovation policy is to modernise the EU industrial base through accelerating the uptake of innovation. With regard to innovation oriented policy interventions, most interventions focus on cofunding of R&D&I (economic), support of trans-national innovation network development (communication) and regulatory interventions (e.g., progressive standardization, State Aid Rules, IPR-regulation). Also some institutional interventions are seen like the European Institute for Technology (EIT). Part of the EU innovation strategy is the Smart Specialisation within Europe, enhancing the regional capacities, ensuring transnational cooperation and limiting duplication of efforts. The Framework Programme and the European Regional Development Funds are the main funding instruments. Policy is more research oriented, but during the last decade a shift towards industrial development can be seen. Target audiences are research organisations, companies (large enterprises and SMEs), as well as regional governments. Policy differs from national and regional policy by enhancing the EU knowledge base and the efficiency and effectiveness of the European innovation system. On a national level, European Member States the rationale for policy intervention is usually found in improving the national innovation system. National governments focus on supporting the general national innovation framework, including offering high skilled labour, a solid research infrastructure and general positive innovation environment for industry. This is done by co-funding national R&D&I initiatives through economic incentives, as well as optimizing the communication on innovation. Important is also the creation of national innovation ecosystems to support cooperation between the horizontal and vertical partners in the value chain. Regulatory instruments are sometimes used to stimulate innovative technologies (e.g., a progressive standardization like the car emissions legislation that includes future emission targets), but even then this is often used on a European level. Target audiences are balanced between research and industry stakeholders (both large enterprises and SMEs). Policies differ from EU and regional levels by their focus on enhancing the national innovation system by strengthening the national science & technology base and its connection to national innovation challenges. Also typical is the use of national funding agencies. The regional level includes regional governments (and regional development agencies). In various countries, regions are crucial entities in the innovation system (e.g., the German states, the Belgium regions, the Dutch provinces, the Spanish autonomous communities, the British countries). Their focus is on regional economic development, limiting its focus on strengthening the science & technology base (this is the responsibility of national governments). Policy interventions include focused co-funding of industrial innovation initiatives, directly creating regional jobs and economic growth. Part of this is often focused on specific industrial R&D&I activities in the region to further increase valorisation of specific inventions and strengthen the regional industry. Both innovation network support and high investments are often seen made operational to regional funding agencies (development agencies) who also act as incubator and venture capitalist. The target audiences of regional governments are more industrial enterprises, applied research organisations (specific focus) and sometimes educational institutions (also specific focus). Main difference of these regional organisations to the national and European level is the focus on specific topics and industrial/economic activities. Also their support is towards activities that are at a higher TRL level in order to ensure regional valorisation (jobs, jobs, jobs).

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5.4

Target groups Policy is about stimulating actors. However there is not one type of actor relevant for mKET and pilot production. And different actors need different types of policy. Based on their policy needs and effectiveness of policy interventions, the following policy target groups for mKETs pilot production have been identified:  Large enterprises;  MidCaps;  Small and medium enterprises;  New Technology Based Firms and research spinoffs;  Research organisations. The most obvious target group are large enterprises. These types of actors are mostly engaged in complex pilot production activities with high costs, mainly because of related high capital expenditures and conducted R&D. Large enterprises can use the company equity to invest in pilot production and usually have extensive experience with setting up pilot lines/plants. Important other characteristics are that they are highly international, act within a strong network, have extensive capacity in the multi-disciplinary skills needed (including soft-skills). An example of this is that most large enterprises have a group of highly trained specialists dealing with intellectual property. Large companies have less difficulty with finding investors. Private investors tend to prefer large companies, as investments will be spread over several activities and have more internal spill-over effects. Also large companies can allocate internal capital, reducing the risks of external investors. In addition, already some of the needed technical infrastructure will often be available. However, studies show that larger companies are less efficient in transforming innovation inputs into innovation outputs than smaller 55 companies . Also the flexibility to innovate and create new business is often supplemented by a buy-in strategy in which innovative companies are acquired and assimilated. An important characteristic of pilot production activities with large companies as main partner is that usually they are a central actor in a larger network with companies and other organisations, interconnected as in a spider web. A second target group are MidCap companies. With more than 250 employees MidCaps are larger than medium sized companies, but regarding their organizational structure they are rather similar and less formally structured including divisions. For KET-deployment this size and structure has significant advantages. They are often focused on specific market segments to deliver high-value KET-based products for specialized business to business applications. In contrast to start-ups and small companies, these companies are capable of bearing the necessary investment for technology development and pilot production and are rather able to develop a global market strategy in their specific segments. They have more diverse in-house expertise compared with SMEs. Compared to large enterprises, they are more flexible and can make fast decisions due to flat hierarchies. On the other hand, they will be less able to combine pilot production initiatives and spread financial investments over several activities. For employment reasons these MidCaps are valuable, because they are more likely to create jobs in manufacturing than large enterprises, e.g. because they are less likely to relocate their activities to low-wage countries because of regional roots. These companies are part of highly specialized multi-KET value chains and maintain strong relations with both their customers and their suppliers. Small and medium enterprises are a third target group. However, this target group is very heterogeneous and includes many types of companies. General characteristics are that these companies are limited in skills (because of economy of scale), have a more horizontal organizational (flat) structure and have less access to financial capital than MidCap and larger companies. SMEs usually cannot afford investment needed to operate a large scale pilot activity. They also evolve in particular business, usually “mono-product” requiring a low scale productivity to operate in a sector amid market uncertainty. Innovative SMEs have cutting-edge technology inhouse, but often no manufacturing capabilities to turn the technology into a successful and profitable business. Often, there is less extensive experience with pilot production and their international network is limited. SMEs are more likely to create jobs (over 60% of all jobs created in EU are SME related). Looking at the industry value chain, a basic distinction can be made between upstream and downstream SMEs:

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Bitard P. Edquist C. Hommen L. Rickne A. (2008), “The paradox of high R&D input and low innovation output: Sweden”, Paper no. 2008/14, CIRCLE, Lund University, Lund. 28 August 2015 Page 47 of 125 © 2015

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Upstream SMEs participate within the larger enterprise network as suppliers (including suppliers of equipment). Their participation within pilot production activities can be more responsive to the demands of the larger enterprises, although also a more independent position can be taken. Downstream SMEs incorporate the components produced by the larger enterprises and translate them into final consumer products and services. These companies have an independent position, but play a crucial role in the innovation ecosystem to take up the KETs components.

Pilot production is perhaps by definition related to Start-ups, as these will engage in new business activities to produce and market (new) products and services. This category can be seen as another special type of SME and is also highly heterogeneous. Within the framework of this study, the start-ups are limited to the technology based start-ups, often called New Technology-Based Firms. They are often seen as an important creator of jobs and economic growth. These new companies can be the result of spin-offs from companies and public research organisations like universities. They are (small teams of) young entrepreneurs, or entrepreneurs that have discontinued their previous business (e.g., selling, bankruptcy) and started new companies. Some crucial characteristics are of importance to see them as a new category. First, the number of employees is limited to a few and they are highly connected and intensively invested in the product development. Funding for these companies is limited and main source is often their own capital, or so-called Family, Friends and Fools (FFF). 56 Expertise to setup business is often limited and there is a need for business buddies . In the US, these companies often focus on establishing a certain market value and then go public (IPO) or get bought by larger enterprises. In Europe, going public is less common and the young entrepreneurs have a longer term 57 commitment to the enterprise . The last target group are (public) research organisations, including universities, research & technology 58 organisations (RTOs), as well as independent (semi-)private research organisations (including CROs ). Although not the primary leaders of pilot production, these organisations often play a crucial role in facilitating pilot production activities by providing high level expertise on KETs/multi-KETs and offering the most advanced equipment and facilities to conduct early stages of technology development before the transfer to the pilot line/plant. They investigate potential breakthrough technologies for the mid to long term (next generation products). These combined expertise/infrastructures are crucial to enterprises, because they require high long term investments and can be shared with multiple users from research and teaching. Also, they are related to the previous Start-up category, as they frequently spinoff and spinout new companies based on their inventions and scientific discoveries. University valorisation programs are common throughout the world and most major RTOs have business incubator programs to initiate New Technology Based Firms (NTBFs). An important characteristic in which they differ from enterprises is their (partially) institutional funding by governments and play a more societal role in creating multi-user capabilities.

5.5

Main barrier: Economic risk of the investment As mentioned, in our society government interventions aim at taking away barriers to stimulate actors to take actions that contribute to societal objectives. Within this project, the objective was to formulate policy stimulating the engagement in pilot production of mKETs based products. So, an assessment is to be made on the barriers that hinder pilot production, within the multi-KETs domain. Although the multi-KET aspect has impact on the actual barriers, pilot production in other domains are expected to experience the same issues. Within this assessment, the characteristics of KETs (capital intensive, in need of highly skilled expertise, R&D intensive, systemic to industry, etc.) acted as a focusing mechanism.

56

Entrepreneurship in the EU and beyond (2012), Flash Eurobarometer 354, Brussels Wayne Embree, Venture Capital expert, TechColumbus. 58 CRO: Contract Research Organizations 57

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The assessment focuses on the policy related barriers that hinder pilot production. So also opportunities for pilot production are of importance, but only if a barrier is hindering the full exploitation of these opportunities (if the opportunities can be taken by stakeholders, no policy interventions are needed). The main question to this section is: What are the core issues for companies and other stakeholders to not engage in pilot production activities?

Figure 15: Usual start of the planning of a pilot production. (Share of international industrial respondents involved in pilot production).

The assessment of barriers in the innovation process is often common practice. An example is the OECD Oslo manual, which distinguishes between the factors, like economic, enterprise characteristics, regulation, infrastructure and customers. A barrier assessment normally analyses the entire innovation chain. In this study, the main focus was on pilot production: What barriers hinder crossing the valley of death? This limits the barriers that are highly relevant, as several barriers are more relevant in the invention and prototyping stage of the innovation process.

As already discussed in chapter 2, pilot production is all about risk management. The risk that the invested capital will have too low return on investment, even up to a level that it jeopardizes the existence of the organisation. This is not only relevant to the core organisation, also all participating organisations will be at risk, especially the external investors. The concept of Risk is used in all kinds of domains. In general “risk” includes two components: 1) the 59 probability that something happens and 2) the actual resulting impact when it does . A good example is healthcare risks. This is not only about the chance of getting ill, but also about the outcome. Therefore the risk that comes with an ordinary flu is much less than that of a stroke, although the chance of getting a flu is much higher: The impact of a stroke is more severe. This same mechanism applies for economic risk, or even more specific in case of Pilot production, financial60 economic risks . This can be defined as the possibility that an actual return on an investment will be lower than the expected return. Economic risk is highly influenced by 1) the investment made and 2) by the uncertainty that the investment will make a profit. During pilot production, the (perceived) financial economic risk is increasing rapidly, under influence of the increased investments made. The amount of investments needed for the equipment, as well for human resources are high. This is the result of the fact that as the product development leaves the laboratory and gets into the much more costly stage of acquiring and development of the production system. The mKPL Demonstrator assessments show that on the other hand the production system is analysed/tweaked in order to establish maximum yield. But also during this stage, the view on the potential market becomes clearer as potential customers can test a (validated) product. Both lead to a decrease of the uncertainty of the estimation of the expected turnover. The result is more clarity on overall operational cost and estimated profits. This reduction in uncertainty lowers the economic risks, as the probability that the investment will be successful is increased. Private investors can then take a better decision on possible investment. However, this reduction of uncertainty during pilot production requires a disruptive increase in financial, technological and human capital, leading to an overall high risk investment during a stage where the uncertainty is not yet reduced.

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Figure 16: Economic risk is the fundamental barrier to pilot production and is highly influenced by the size of the investment and the uncertainty of getting return on the investment.

It is clear that the amount of investments can be a barrier for companies to engage in pilot production, as many companies have limited own capital to fund these activities and need external capital (especially SMEs). If expected turnover is high, operational costs low and accompanying uncertainties low: risks are low. It is clear that if an investment has high expected return on investment and reliable estimations (low uncertainty) of costs and profits, private investors will not hesitate to invest. However, especially the uncertainty creates a barrier for e.g., venture capitalists and banks to invest. In the beginning of the innovation trajectory these uncertainties are high due to e.g. unknown technical and market characteristics. Especially during the pilot production they will be reduced, as the product/production characteristics become more clear and subsequently also potential market demand. The technological/business/market experiences gained reduce the risks to a level that enables private investors to invest in full production. Reduction of these uncertainties is not only about the technological feasibility of the product and production concept. Many studies show that the technological feasibility is often rather an issue of financing manpower than a generic problem and also the activities in mKPL-project 61 confirmed this . Especially for pilot production, the project shows that similarly important barriers are the further adjustment of the internal and external organisation/network, as well as the development of the market perspective/demand. During the mKPL project, many barriers were mentioned that are increasing the risks to a level where companies are reluctant to invest in pilot production. The following main barriers are identified based on the interviews and desk research:

In the 2014 report on “Accelerating the U.S. Advanced Manufacturing”, the President’s Council of Advisors on Science and Technology (PCAST) highlights three important barriers for advanced manufacturing: 1) Flow of technical and market insights, stressing the needs of especially SMEs to have market insights; 2) Flow of relationships (supply network deals/development), including enhancing relationships by sharing, developing and transferring knowledge across networks. 3) Flow of capital, improving private sector investments by demand creation, sharing expertise and reducing risks of manufacturing investments.

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 



Access to finance: Especially for multi-KETs pilot production activities, the capital expenditures to set up the pilot line/plant are high and also the accompanying investments in human capital (e.g., R&D personnel). Often external investment is needed to support pilot production. However, external investors are reluctant to invest due to the economic risks involved and there is limited capital available for these activities. Limited market articulation: To reduce financial-economic risks, reduction of uncertainty of demand is crucial. Markets need to be articulated and market demand expressed. Quality of the industrial ecosystem: Pilot production requires cooperation in the industrial value chain. Suppliers of input materials as well as equipment suppliers need to synchronize their activities, as well as complementary producers and end-users. These relationships are difficult to create. Available human capital: Core to successful pilot production activities are e.g. the technical, managerial, organisational, marketing skills of personnel. If these skills are not available in the project team, realisation of the pilot production is under pressure.

Of course these barriers are linked. Foremost are the vast investments needed to set up the pilot line/plant, with their accompanying problems to get the financial capital needed. But the limited market articulation and quality of the ecosystem are creating the uncertainties that are core to economic risk. Last but not least, the availability of human capital can lead to problems in the actual pilot production activities. Next to these direct barriers, the mKPL project identified an additional set of barriers to discuss. Core to the high investment costs are the capital expenditures. During the project, the observation was made that often general pilot line/plant facilities were offered by external organisations to reduce the costs. These organisations can be private or public and often combine offering the pilot line/plant with high quality expertise (technological and non-technological) to external customers. However, the observation was made that these “Shared facilities for pilot production” also struggle with providing the services to support pilot production to external companies. As their role is important, also an assessment is made on the barriers for these shared facilities.

5.6

Different types of pilot production The project shows that pilot production is a heterogeneous concept, including many characteristics that can differ. The previous discussion about defining pilot production makes clear that pilot production activities can be conducted for different reasons. While discussing policy options and organizing pilot production activities, it is important to distinguish between different types of pilot production. But what different types can be distinguished between? To distinguish between different classes must be based on the purpose of the classification. In this case, the overall reason why the distinction is made finds its origin in policy implications. With regard to policy, there are certain factors that influence policy:  The first is the target group. It is clear that SMEs need different policy than large enterprises, or even research organisations; a distinction between public and private is also crucial. SMEs are more supported than large enterprises, with other instruments (e.g., incubator support, versus financial support).  Second is the innovation stage of the product. This is crucial, as governments tend to use different supporting interventions for products in a lower TRL level (e.g. prototyping) and higher level (focus on pilot production). Lower level activities are funded with higher percentages than higher levels.  Third are the barriers that are addressed by policy. In this case (see chapter 5), the basic barriers are 1) access to financial capital; 2) Access to human capital; 3) The quality of the innovation ecosystem and 4) Market articulation. Often specific policy interventions can be linked to the specific barriers.  Also a crucial distinction is the difference between an individual, dedicated industrial pilot production activity and a shared facility that can facilitate many. Supporting an individual pilot production activity has a different rationale then supporting a shared facility, leading to different interventions. In Table 4, an overview is provided of the characteristics that have the most prominent impact on the classification of pilot production activities. 28 August 2015 Page 51 of 125 © 2015

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Table 4: Overview of characteristics that have impact on the type of pilot production. Characteristic Type of consortium

Actors involved Position on the TRL scale Costs

Societal impact Geographical scope Ownership organisations Multi-user and openness

Variation Single company dominated, joined ventures, extensive network Large enterprise, MidCap, SME, start-up, R&D Development, prototyping, scale up, testing, validation High cost vs low cost

Turnover, jobs created, addressing grand challenges Regional, national, EU, International Public vs private Shared facility vs dedicated, single PPA

Impact on pilot production The extent in which networking activities are part of the activities and need for their support. The impact of pilot production activities on the liquidity of the organisation and the Percentage and type of (co)funding mechanisms. Higher up the TRL scale will reduce the percentage cofounding. The funding budget needed. Need for combining funds and possible confounding mechanisms (high costs are limiting public cofounding). Connection to societal challenges will increase funding possibilities Directly connected to the governmental level that has responsibility Type of funding possible (grant vs contract vs loan) and level of funding. Type of funding possible (grant vs contract vs loan) and level of funding.

Looking at these characteristics, the following types of pilot production activities can be distinguished between:  Large single actor dominated PPA High cost, dedicated pilot production activities, dominated by a MidCap, or large enterprise. Here, policy support is limited and focuses on contract-based support, loans and availability of public technology competences.  Small singe actor dominated PPA Pilot production activities organised by start-ups and small & medium enterprises. Policy support will be more focused on offering financial support, more comprehensive technology and incubator support.  Networked PPA Network organised pilot production activities, including horizontal and vertical value chain partners. These types of PPA require both financial support and network oriented support.  Shared facilities for pilot production Multi-user, (semi)open access organisations that offer equipment and expertise to third parties on a project basis. Initial funding is needed to start the organisation, as well as continuous support to increase the sustainability of the impact to the broader industry.

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6

Towards a policy portfolio and roadmap In this chapter, policy suggestions will be formulated for multi-KETs pilot production activities. After a short introduction on the rationale of governments to engage in pilot production supporting interventions, the barriers identified in the previous chapter will be analysed in more detail and policy strategies formulated to address gaps in the present policy portfolio. In the Annex 4, a more detailed description will be provided on the individual policy interventions identified during the project.

6.1

A rationale for pilot production policy In the past, public innovation support was mostly focused on proof of concepts or developing single prototypes, which was eligible for funding in R&D projects. Scale-up was straight forward and facilitated by companies, thus no additional funding was needed. Nowadays, the (multi-KET) Technologies get ever more complex, and also the production processes for scale up – implemented in pilot production – contribute strongly to the technological complexity. This increasingly higher technological complexity goes hand in hand with an ever higher complexity of both markets and ecosystems, e.g. through increasing diversity of markets, globalisation, competition, speed and complex value chains, more actors need to collaborate closer, respectively. This high complexity shifts unbearable risks by means of technology, financing and commercialization to later stages in the innovation process. From a company’s perspective this substantially increases the economic risk and barriers for pilot production. As such, the valorisation of publically funded research projects is endangered and the public money spent for applied research is not efficient, when the researched products do not lead to valorisation. The point of origin for the mKPL study is the observation that the innovation process tends to halt after the 62 initial stages of successful knowledge creation (i.e. the so-called Valley of Death). A general underutilization of the knowledge created within research and development for economic and societal benefits seems an important driver for public demand for government action. The mKPL project observed that various policymakers are reluctant to provide governmental support to pilot production activities, as this is often seen as undesired distortion of the functioning of the market. In this section we link the identified barriers to market failures, as a rationale for government support. The identified barriers are clustered according to the following groups: (i) available technology infrastructure; (ii) available human capital; (iii) low quality industrial value chain; (iv) limited market articulation; (v) access to financial capital. Note that we present an indication of general forms of market failure that could be associated to the identified barriers. In practice, government intervention addressing these specific barriers will be assessed individually i.e. on a case by case basis with the help of the conditions that constitute the State Aid rules, including the market failure criterion.

(i)

Support of existing technology infrastructure and the prospects for future needs.

An important barrier for implementation of PPAs is the availability of technological infrastructure (e.g. testing equipment and basic multiple usage production equipment). The associated costs for owning technical infrastructure are relatively high (with an accelerated depreciation rate of such cutting-edge technological equipment that might not even be required for future PPAs by the firm). The amount a firm is willing to invest in them is restricted by spill-over effects: the expected impact on profit after successful completion of the PPA will be limited as competitors will simply embrace / copy the resulting knowledge (implying that it is better to copy than to act as a first mover). These factors limit the incentives for investments in own infrastructure. Sharing technological infrastructure is also hindered by specific forms of market failure. Again spill-over effects occur as important expertise / experience created within the framework of a PPA is “left behind” in the shared facility after completion (due to potential problems with protection of IP). Due to coordination and network failures firms might not be aware of the availability and quality of external technological infrastructure and 62

HLG on Key Enabling Technologies (2011). Key Enabling Technologies: Final Report. Brussels: European Commission. 28 August 2015 Page 53 of 125 © 2015

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expertise. Owners of unique technological infrastructure might exercise market power, and network externalities might be internalised.

(ii)

Available human capital

Core to successful pilot production activities are the technical, managerial, organisational, marketing skills of personnel. If these skills are not available in the PPA project team, successful completion of the pilot production is under pressure. The availability of skilled labour in an economy is primarily a task of the government, as education and (re)training is considered a public good. Note that educational institutions might have problems with offering specific education and training of skills, because of a lack of resources, or because it is difficult to adapt to the fast changing needs required for PPAs. They might also lack incentives to invest in specific education and training, because of the way they are governed. Shortfalls in the specific skills required for PPAs sought by employers could persist because students lack information about the job market, especially regarding which professions are in high demand (i.e. imperfect and asymmetric information). Note that the high cost of labour in an international context (due to for example taxation and social security costs, rigid labour market regulations that limit flexibility of workforce to be deployed in multi-purpose project based PPA infrastructure) might result from government failure (instead of market failure, see Annex 3: State Aid Rules, the concept of market failure and PPAs). But within the context of increased mobility in the international labour of highly qualified personnel, also firms have to be willing to invest in / remunerate personnel such that they want to commit themselves to the PPA.

(iii)

Low quality innovation network

Often the pilot production activities require cooperation in the industrial value chain. Suppliers of input materials as well as equipment suppliers need to synchronize their activities, but also cooperation with complementary producers and end-users can be crucial to increase the efficiency of the production ecosystem. Specific barriers to increase the quality of the innovation network include: lack of awareness and communication, and difficulties in creation of trust. These hinder the creation of innovation consortia (including financiers. the education system, and especially downstream partners). Underlying types of market failures include imperfect and asymmetric information (e.g. awareness of appropriate partners), coordination and network failures, and spill-over effects, (PPA projects create a more general high quality innovation network).

(iv)

Limited market articulation

Because of imperfect and asymmetric information, especially new entrants to a market might be discouraged to get involved in PPAs. Incumbents furthermore might exercise market power, and network externalities might be internalised (i.e. existing actors in a market might use their position to hinder new firms from entering the market, for example because they own the rights certain standard). In practice this limits innovation, and affects the total level of welfare within an economy. A very specific barrier for the set-up of PPAs refers to the deadlock situation where clients require a functional prototype as a basis for a positive decision on an order or investment, while producers need such an order or investment as a financial basis for the set-up of a pilot. The underlying type of market failure is here is also imperfect and asymmetric information. Note that this occurs more often (i.e. at different places) in the value chain: especially for downstream industry it is difficult to assess / perceive the potential of a specific innovation.

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(v)

Access to financial capital63

In practice, external private financiers (including banks, venture capitalists, etc.) are reluctant to provide loans or other forms of capital, as they are not well able to adequately assess relevant characteristics of a PPA. This often is the result of a lack of background information: real cost, probability of success of a PPA, and impact on profitability of the firm. The corresponding form of market failure refers to imperfect and asymmetric information. Note that for smaller amounts of financing required (which is relevant especially for smaller firms), there is an additional type of market failure. It refers to the fact that the cost associated to providing a small or large loan (i.e. cost related to the process of providing a loan) are in practice comparable. This makes the latter for financiers more attractive to grant. A third market failure is that for certain societal challenges, limited private funding is available. Although these topics are governmental priorities (e.g. the bio-based economy), other topics are more interesting to private financers because of shorter return on investments and higher overall profits (e.g. the app economy). Scarce private resources are then suboptimal focused on societal challenges. The set-up of a PPA involves in general also a relatively large investment that cannot always be covered by a single financier. In practice coordination and network failures seem to prevent the combination of different sources (i.e. financial resources might in practice be available, but because of coordination and network failures, financiers have problems with joint financial support).

6.2

Access to financial capital

6.2.1 Assessment of barriers During pilot production, pilot lines/plants are constructed and R&D&I conducted. Based on the mKPL survey it is usually within the €10 million range, but can be over €100 million, depending on the KET and the specific activity. Especially within the (multi-)KETs domain, pilot production activities are capital intensive, as the core technologies are complex, need high-skilled experts and are usually conducted within consortia of partners. Three extreme examples can be found in the mKPL Demonstrators: 1) the PPA costs of the new pilot line of Infineon (€500 million, versus the annual turnover of around €3.5 billion), 2) a BBEPP supported bio-based SME starting a new production line (€10 million venture capital) and an Acreo spin-out start-up company (all activities could be considered PPA). One part of the high expenditures for PPA is the equipment costs. In some cases after the pilot production the equipment can be partially taken up in the full production process, at least some equipment is only used during pilot production. This is particularly the case in advanced materials and industrial biotech. But also upfront, the specific needs for technical equipment are not always clear and later modular changes need to be made. The consequence is that after the pilot production stage (parts of) the equipment can become obsolete and can be accompanied with accelerated depreciation.

63

Governments also address (i.e. finance) the shortfall in what a firm is willing to invest, if this does not cover the corresponding cost of the PPA (e.g. with subsidies, etc.). Firms perceive a gap in available public funding, and actual need for financial support. This barrier falls however outside the scope of this section, as it does not refer to market failures:  When the rationale for public support does not refer to market failure, or when the aid intensities exceed those as mentioned in the previous section, the level playing field for firms in different economies becomes imbalanced. The resulting market distortion (that is perceived to be created especially by governments in non-EU Member States) however should not be addressed by providing (or asking for) additional government support. It should be addresses at WTO level, as it violates the Disciplines on Subsidies (that are in line with the State Aid rules).  The exact budget for government support for PPAs (assuming that is provided in line with the State aid rules) is defined by political decision making (i.e. prioritization).  Firms believe that governments are not willing to provide financial support for PPAs as this refers to the later stages in the innovation process. The State Aid rules on R&D&I however have been modernized, addressing this specific issue. 28 August 2015 Page 55 of 125 © 2015

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Production equipment from existing production lines can be used, especially in established companies. As a pilot production is a set of production steps that transforms product parts into the desired final product, the new production line/plant will also often include existing steps of the production. The new pilot line/plant must be within the same technological family of the equipment that is used by the company and to reduce costs the existing equipment is used and virtually integrated in the pilot line or plant. An important limiting factor of this reuse is the character of the production equipment. As pilot production is still experimental, the possibility of tweaking and adjustment the production system is needed. Also the production volume is limited, as this is directly linked to the costs of the equipment. If existing production equipment is used, this cannot be used for daily operations. This leads to additional costs, due to loss of production output. Even with the use of existing available equipment, the capital expenditures needed are high and difficult to fund by the company, especially for SMEs and startups. Also large companies are reluctant to invest in the pilot production equipment, as actual use limited (only during pilot production) and with high economic risk. A first source is the company’s equity capital or assets (ether individually, or in industrial partnerships). But often external capital is needed due to the large Figure 17: Investments needed for pilot production (mKPL survey investments needed. The discussion on economic risk results-2013). in the previous chapter shows that private investors are reluctant to invest. During pilot production, external investments more often come from public funding (governmental funding programs), either by contract research, or public-private partnerships. Venture capitalists and angel funds play an interesting role during pilot production, but focus on specific enterprises like SMEs and star-ups. A last category to mention is banks, which can provide loans. Although they can be a source of financial capital, usually the risks involved must be low to get them involved.

Figure 18: Sources of funding for firms to finance pilot production.

An important distinction is to be made between large enterprises, networked initiatives and SMEs. Especially large enterprises can (partially) fund a pilot production activity from company capital, as the investment needed for the pilot production activity is often limited compared to the overall business turnover. Also they are usually part of a broader investment portfolio, so risks are reduced as the outcomes can also be used for other company activities. A networked initiative included a constellation of organisations, distributing economic risks among the partners, but available funding for the actual networking activities is limited. For SMEs and start-up companies a single pilot production activity is usually core to their business. Especially for start-ups and SMEs, the financial capital needed exceeds their company financial capacity. External funding is important.

The first barrier to discuss is of course the overall availability of financial capital. Although there are many sources for financial capital, the overall availability for especially pilot production activities is suboptimal. Institutionally, banks play a less important role to support pilot production. Public funding is more important, but as pilot production requires large investments, there is scarcity; one pilot production project can require €500M investment (see the Infineon case), more than the 28 August 2015 Page 56 of 125 © 2015

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budget to run a university. Venture capitalists and angel funds are positioned earlier in the innovation process (see Figure 19), but in general their priority is to support initiatives that lead to fast returns on investments. Being capital intensive, many KETs are more large term investments and of less interest (e.g. industrial biotech and long term investments in high-tech production equipment). Also, for many individual private investors the amount of capital needed is often too high to be supported by one investor. A consortium of investors is needed. Especially the present economic climate and problems in the banking system even reduces the opportunities of especially banks to invest in innovation due their policy to limit financial risks and enhance their capital buffers. To external investors pilot production is considered a high risk investment. During pilot production the outcome is still uncertain (what are the revenues?), as the technical concept (especially the process) and accompanying costs are not fully clear. The scale up activity includes a significant R&D on the manufacturing technology to increase the economic feasibility of the production process. Also the market demand is often not yet clear and patents are pending. The combination of large capital needed with this significant uncertainty will reduce the interest of private investors to provide the capital. This is even more problematic because the technological, market and other characteristics are so complex that a trustworthy assessment of risks is difficult for private investors. Another issue is Intellectual property. Many private investors require patents as collateral for their financial support. However, dealing with IPR is costly, both acquiring the patent and enforcing it. And pilot production is more about the process and acquiring and enforcing process related IP is in general more difficult than product related IP. Especially with some Asian countries enforcing IP is virtually impossible, 64 particularly for SMEs . The result is that especially SMEs are reluctant to patent inventions and choose not to disclose their knowledge as a strategy. So if in order to have access to private funds, IP is needed as collateral, this forces SMEs to abandon their non-disclosure strategy. This again is accompanied by a risk that disclosing the IP can reduce the competitive position of their business, as their competitors can use the IP with little risk of being challenged. Governments can support access to financial capital. However, the western view is that governmental support should not lead to unfair market distortion. The result is that western governments are reluctant to support pilot production. Within the WTO regulation, public support to R&D&I is limited if a market failure, or system failure occurs. As pilot production is located in a later stage of the innovation chain, the opportunities to support by governments are limited (see section on State Aid Rules). Directly connected to this issue is the often mentioned level playing field. Some Asian countries show substantial investments in pilot production that can be disputed based on the WTO regulations. This financial support creates an additional financial pressure on the competitiveness of European companies. Concluding, the following issues are to be addressed:  Overall availability of capital on the financial market and government funds;  Unwillingness of private investors to invest because of high uncertainty;  Hesitation of governments to invest because of market distortion and State Aid Rules;  Create a level playing field for global competition.

6.2.2 What policy interventions are available With regard to availability of financial capital, a broad set of public and private sources can be seen. Governments have a wide range of interventions, from contract R&D&I funding and grants, to co-funding through PPP and bank guarantees. From the public side, a distinction can be made based on the geographical level (EU, Member states, Regional governments). Many private investors are also present to support innovation activities, but the support of pilot production is limited.

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Figure 19: Focus of private (blue) and European Commission (red) funding towards in relation to the innovation process (Source: Editing of mKPL based on Brainport Development input).

The European Commission provides support to pilot production mainly through the Horizon 2020 program (H2020), the European Regional Development Funds (ERDF), and the European Institute of Innovation and Technology (EIT). These types of policy instruments address the needs of individual organisations for financing.  Within H2020, pilot production activities are supported, but budgets available are limited compared to the overall investment needs of the industry. Private co-funding is possible, but institutionally the opportunities are limited. Also the mechanisms provide a limited leverage effect towards private funding; they are more a contract investment where organisations are expected to co-fund their own activities. The EU SME instrument is the main funding instrument from the European Commission to support innovation 65 in SMEs, with a budget of almost €3 billion and following the approach from the successful US-SBIR programme.  The ERDF is focused on innovation and offers financial support for regional development. It offers limited financial support and acts more as leverage to private investments and regional cooperation. Also, only specific activities are supported and not the full range of activities that are included in pilot production. An important aspect of the ERDF is that it aims at the improvement of regional economies.  Although not strictly EC policy instruments, the ECSEL, JTI and other PPP programs are mechanisms by which a tripartite investor approach is used (EU, national, company). This policy is to focus private investments to EU policy priorities and to leverage overall R&D spending, including pilot production. The European Investment Bank also offers a series of financial support instruments for pilot production activities. It includes loans, guarantees, venture capital, project bonds, investments in equity, micro-finance and other sorts of financial support (€13 billion annually). This is both concrete financial support and leverage to other investors. Often, budgets must be above a certain level (large projects) and projects tend to be low on risk, which limits the feasibility for pilot production activities. For smaller budgets, cooperation with local banks is organised (fund of funds). Through the European Investment Fund (EIF) the European Commission in participation with the EIB and other private investors invests in SMEs to initiate new business (€14 billion annually). This also again includes Fund of Funds mechanisms. On a national level, a series of opportunities are provided. Most funding opportunities from national governments are focused on the pre-pilot production stages, but there are also other mechanisms that support the later TRL levels:  Funding of research organisations is common (RTOs and universities). A trend can be seen that national governments support the higher TRL levels. 65

The US Small Business Innovation Research (SBIR) programme allocates some 3% of all federal RDI expenditures towards supporting innovation in SMEs (annual budget: $2,5 billion). It supports pilot production through grants and contracts and is connected to the Small Business Technology Transfer (SBTT) programme to further support valorization 28 August 2015 Page 58 of 125 © 2015

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   

 

Forgivable loans, where governments invest and when not successful no payback is required. Tax deduction of R&D investments and/or costs of labour made by companies. Although often not explicitly mentioned, this governmental support in practice often supports pilot production. The SBIR mechanism of the US is copied in many other countries (also at EU level). A grant and contract approach is both used. Innovation vouchers, where governments provide quick and smart budgets for SMEs to include a research organisation in their R&D&I activities. Often these vouchers aim at making use of the existing knowledge of research organisations and focus on valorisation. Publicly co-funded shared facilities are used as policy instruments to reduce the costs of pilot production by sharing expensive technological infrastructure. Providing seed money and venture capital, some governments will also invest based on equity. This can then be organized based on a revolving mechanism, allowing governments to have a return on their investments.

On a regional level, investments in pilot production are often seen as economic development. The investment in the pilot line/plant is seen as a mechanism to create jobs and economic growth. This means that besides capital investments, also other means of support is provided, e.g. providing land, infrastructure and human resources. The financial capital is often provided either as a starting grant, or by taking a share in the company. If a new organisation is set-up, often this is accompanied by being represented in the board of directors. Next to public investment support, it is also important to provide an overview of private investment support. Although diverse, the following type of investors can be distinguished between:  Banks, insurance companies, pension funds and other loaning institutions lent financial capital to a company for further development of their business. Funding is mainly for activities with short time return on investment (high TRL) and usually of limited use to pilot production. These institutions are risk averse and especially today require a sound and proven business case.  Venture capitalists (VCs) are more focused on pilot production, but still also on even higher TRLs. Often taking a share in the firm as collateral, they invest in more risk taking activities than e.g. banks. In general VCs have more focus on the ICT related areas, where there are shorter returns on investments then like e.g. biotech.  Angel funds take even more risk and accompany these investments with active participation to reduce risks. Again, these investments will often be as getting a share from a firm. Often angel funds have a more active role in the new business, but like VCs also focus on specific areas.  Financing the pilot out of the company equity is an often used mechanism with larger firms. Smaller firms and start-up companies often do not have the equity to invest in the pilot production activities.

6.2.3 Gap analysis The innovation steps to get into commercial production take different types of investors. In the earlier stages, governmental support is often used to account for the high risk. And in these lower TRL levels, often grants and contracts are used with up to 50% funding. At higher TRL levels, a shift is often made with lower funding and even loan based mechanisms (e.g. using guarantees), or tax deductions. Also at these higher TRL, the regional governments are more active (also the EU with the ERDF). At European level, the mechanism to have combined funding is now explored in order to enable more financial capital to the An example of limited budgets is the often high budgets needed for pilot production activities. With regard to important SME instrument, that has a the EIB and the EIF, these offer loaning to pilot production initiatives budget of €2.7 billion for the period of (large enterprises and SMEs), but these focus on initiatives with relative 2014-2020. To put this in perspective, low risk and strong bankability. pilot production activities require some €1-100 million and in 2014 had only 155 projects selected for funding out of the some 2600 projects sent in (6% success rate, using all available funding). The US federal budget of the SBIR/SBTT instrument for the period of 2014-2020 is approximately $20 billion.

With regard to these opportunities, there are still some important gaps that can be identified. First, the overall available financial capital is still limited, not being able to cover all pilot production activities. Also coverage is often focused on equipment and direct costs of human resources. Other more indirect costs like organisational and market development are not covered. The feedback mechanisms towards R&D 28 August 2015 Page 59 of 125 © 2015

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is hardly addressed, providing problems with funding if problems occur with scale up that need additional research. Overall, support of pilot production activities is often not considered to be R&D by governments and therefore often funding is limited. There are limited tools to assess risks of pilot production and later commercial production. Therefore, some private investors will be reluctant to invest. But perhaps the main problem is the combination, “relay race” needed between different financial mechanisms is complex and almost impossible. With regard to the “Valley of death”, both the combination of chance of failure and high investments needed several mechanisms are needed but must be aligned.

6.2.4 Suggestions to adjust existing interventions and for new interventions Table 5: Overview of policy suggestions to improve access to financial capital (see Annex 4 for further information) Alignment of procedures and “red tape” Tripartite funding schemes Support the development of market assessments Development of existing risk assessment tools

Stimulation of Venture Capital Funds European service to settle IP infringements Training of policymakers

Pressure on countries to enforce WTO regulation Governmental Loan guarantees Create a risk insurance service with insurance companies

Actively support getting access to private funding and funding on national and regional level

To increase the overall availability of capital, core is increasing the possibility to combine funding between public/public and public/private sources, both on European, national, regional level. The alignment of procedures and “red tape” is crucial to reduce the burden of companies and an overall initiative should be initiated by the EC to further pursue this. This includes e.g. better alignment of public interventions with EIB instruments and better alignment of funding interventions used in the different steps in the innovation chain. For other KETs the tripartite funding schemes for NME available in ESCEL can also be developed for other (multi)KETs areas. However, increasing participation of national governments and even regional governments should be pursued. To address the unwillingness of private investors, several additional policy interventions can be mentioned. A first option is to support the development of market assessments for the pilot production based business. Objective information about possible market developments is crucial to private investors to decide to invest. This is also connected to the support of private investors to assess risks to engage in pilot production activities, including for the short term the adaptation of existing risk assessment tools and on mid-term, further research on risk assessment for PPA incorporated in an H2020 call. Another intervention is the stimulation of Venture Capital Funds for KETs domains that are less attractive for private VCs, by taking public partnerships in these VCs. This will shift their focus to economically less interesting areas. Highly connected to this is the IP dilemma, where support to SMEs to enforce IP by providing a European service to settle IP infringements. Last but not least, an intervention often seen is the use of governmental Loan guaranties for private investors to reduce economic risk. To take away the reluctance of policymakers to develop pilot production policy, the State Aid Rules can be better fitted to pilot production. But more important is the training of policymakers to better understand the concept of pilot production, including explaining the market failures and governmental rationale to intervene. Also policymakers can use risk assessment tools to better understand the risks of companies and private investors to invest in pilot production. These tools can be adapted to support policymakers in their decision to fund pilot production activities. As especially SMEs struggle with finding funding for PPA, the EU H2020 work programme on supporting SMEs can be enhanced to actively support getting access to private funding and funding on national and regional level. Also the combination with ERDF funds and EIB should be simplified. Crucial is support to find and access investments for this higher TRL scale activities. Both finding sources should be facilitated (e.g., a 28 August 2015 Page 60 of 125 © 2015

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website supporting finding of investment, supported by experts), as well as services to assist formalization of investments. Cooperation with Member States and regional governments need to be organised. Last but not least, the level playing field needs to be addressed. The European Commission needs to continue their action to pressure countries to enforce WTO regulation on state aid. However, a full and objective overview of worldwide initiatives that are disrupting the level playing field is not available, as well as the opportunities provided by the present legislation on state aid. Clarity on this issue could focus efforts on opportunities.

6.3

Quality and development of the innovation network Due to its complexity, in mKETs pilot production activities typically several stakeholders have to collaborate in order to solve the technical and non-technical problems (see Figure 20). The competence needed to successfully implement a pilot production activity does not lie in a single organization. Owing to the technological and the market complexity, the owner of a pilot production has to involve other stakeholders such as suppliers, RTOs or customers to get access to competence or resources or speed up the innovation process (see Figures below). Especially for KETs deployment, involvement of downstream industrial partners for new KET-based materials, components or equipment can be important, as additional efforts might be needed to integrate the KETs component. The introduction of such a new product or process can mean a deep cultural change in the company of the customer. The validation and testing of the processed products or the provision of new materials or components can require other industrial up- and downstream pilot production partners. This can even lead to a joint pilot production activity of a whole value chain, where the implementation of a new technology is fostered ranging from the material and equipment suppliers, via the further value chain steps down to the end customers. Additionally, the involvement of other innovation actors such as universities or RTOs is needed. This provides additional independent input and unconventional solutions, as R&D and a research eco-system are crucial for multi-KET pilot production activities. This is reflected in RTOs being the second most and universities the fourth most often quoted collaboration partner in pilot production (see Figure below on the left). Furthermore, in some cases external partners are even responsible for the setup of the pilot production, as the mKPL online survey shows (quoted by about 1/3 of the respondents), which demands Figure 20: Cooperation and sharing an intense collaboration and renders the collaboration partner to be activities with regard to pilot production. absolutely essential for the pilot activity. In summary, it is reasonable to recognize that a whole innovation network of multi industrial stakeholder systems is necessary for KETdeployment and the eco-system is essential for a successful pilot production activity. We observed a trade-off in KET-manufacturing collaboration regarding excellence vs. proximity, for example in the Infineon Demonstrator case. Excellence is the key for successful technology development. However, in some cases spatial proximity also plays an important role, especially when feedback structures are necessary to establish efficient cooperation and trust. If a feed-back structure is not necessary a sound logistic accessibility can be sufficient. Thus, local or regional ecosystems can also be success factors, e.g. in terms of access to skilled human resources or to lead markets and customers.

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Figure 21: Share of EU firms cooperating in pilot production.

Figure 22: Reasons for EU firms to cooperate in pilot production (share of EU firms).

Although such an innovation network can be beneficial for the pilot production activity, several barriers exist that lead to the avoidance of engaging in collaboration (see Figure 23). The mKPL survey shows that the risk of losing core-knowledge is the most important barrier for cooperation. This is connected to the creation of trust between potential partners. Besides that, the finding of right partners and the reduced flexibility are barriers to engage in collaboration when it comes to pilot production. It is obvious that the lack of communication or a lack of partners in a (not yet established) value chain can be the origin of these above mentioned barriers. This includes the insufficient contact to downstream (customers), upstream (equipment, material, logistics suppliers) companies, and research partners (RTOs, universities), also on international level.

Figure 23: Share of EU firms not cooperating in pilot production.

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With respect to the creation of the innovation network, the region and already established partnerships are often the starting point, as many policy interventions require pre-existing partnerships. This is supported by the fact that actively engaging in networks is more efficient and successful when based on previous collaborations. Trust is a very important factor in the decision making of whether to collaborate with a particular partner or not. IP handling and setting up of consortium agreements and the related legal affairs are highly complex and lengthy issues. Especially the negotiations for IP regulations within the setup phase of a collaboration project can be exhaustive and delay the whole project development. From the workshops it became clear that the present Grant agreement constructions do not optimally fit to the requirements of pilot production activities (e.g. changing consortia, how to deal with IPR, flexibility). When engaging in pilot production, time is typically a decisive factor (“window of opportunity”); early development of the ecosystem is important and the timing of consortium building is crucial. However, often finding the right partners can be difficult and laborious by means of identifying and approaching them. The origin for that barrier is the lack of knowledge about possible partners, the missing access to the right partners or networks and the limited time available for the design of the consortium. With respect to finding the right partners upstream, in academia, or on the same value chain level, it is hard to identify the right partners having the technological expertise needed to tackle the problems of the particular pilot production activity. Especially, when several needed competences are spread over many companies or actors this can be complex task, particularly for SMEs. When it comes to downstream partnerships, besides the identification of possible (international) markets and customers, also the establishment of a collaborative partnership can be difficult. Some downstream customers rather screen and accept what the market offers and do not actively engage in collaboration to get purpose designed solutions and influence the developments. For the collaboration with universities or RTOs, additional barriers exist. Researchers are typically experts in their particular field of technology but often miss the incentive and drive to transfer their technology to a company turning their findings into an innovation. This leads to the problem that technologies remain in the laboratory and are over-engineered, although a company might be interested to take it up. Furthermore, the landscape of university groups and RTOs is very broad and with limited visibility beyond national borders, so that it is difficult to find and approach the right partner with the needed expertise. During one of the Demonstrator workshops it was mentioned by industry that in the present funding landscape RTOs and universities have difficulties to participate because of the reduction in basic funding over the last decade. With regard to financing collaboration, a barrier can be the cost to involve appropriate partners. It can be a rather huge financial effort to involve the needed partners, which additionally add up to the needed investments in equipment, etc. Although there are benefits to the establishment of these larger consortia, the complexity and costs are often an incentive to limit a broader, more ecosystem oriented consortium. Especially the share of who will pay for what as well as which partner will benefit from the developments and to which extent can lead to tension. Besides that, also the allocation of risks and liability in case of default are potential barriers for joining or creating an innovation network. This is especially relevant for RTOs and universities, who mostly rely on full cost coverage and typically address high risk projects with a large probability of failure that companies typically do not want to bear alone financially. On the other hand, especially these partners can generate solutions that are a leap compared to conventional solutions to the benefit of both, the researcher and the company. After the decision to engage in collaboration has been made, several barriers are also still prevalent related to the formation or maintenance of a functional and efficient innovation network. All the already mentioned barriers can be amplified, when a collaboration project is planned to exist for a short time, but requires a longer term perspective to be successful. Furthermore, for collaborative innovation networks, a joint long-term innovation strategy can help to focus efforts in complex areas. Such a joint strategy is also essential to effectively combine efforts and help to identify gaps in a consortium easing the entry of new partners. However, maintaining such an innovation eco-system with appropriate partners is difficult and some efforts as well as a dedicated management structure are needed. The time, capacity and even skills to maintain and

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manage such a consortium as well as to participate actively are not always available, which is especially true for SMEs and start-ups. To conclude, with respect to the barriers related to the quality and development of the innovation network the following issues need to be addressed:  Finding the right partners and establishing partnerships based on trust;  Establishing participation of downstream partnerships;  Establishing participation with universities and RTOs;  Financing ecosystems, including learning aspects;  Available ecosystem and establishing a joint innovation strategy.

6.3.1 What policy interventions are available Policy on network support is often seen on regional, national and supra-national level. Most of the existing measures are working well, but are suboptimal aligned, especially between the different governmental levels. Most of the policy interventions provided by the European Commission include support the development of the network/eco-system. H2020 includes a specific mechanism, the Coordination Support Actions, of which in general its main focus is to create innovation networks. But also the H2020-Innovation actions often include a component to establish consortia along the value chain, although conducting R&D&I is the main focus. The ERDF is open for many network development activities and especially the inter-regional development programs focus on the creation of innovation ecosystems. The Smart specialisation strategy is highly instrumental to ecosystem development, in cooperation with regional governments. First experiences on the European level with network support especially dedicated to pilot production have been collected in the ENIAC joint undertaking, which will be continued in the successive ECSEL initiative. In this intervention, the EU cooperates with national governments to support pilot production. Also other PPPs, technology platforms and Horizon 2020 itself currently implement pilot production and most have a network development component. Relevant is also the EC Cluster Strategy, which is available through the Cluster Portal, including the Cluster observatory, training and benchmarking interventions (Cluster Excellence), internationalisation activities to profile and exchange information (Cluster internationalisation) and a portal to provide information about EU initiatives on cluster activities (Clusters and Emerging Industries). The cluster activities are mostly made operational under the H2020 framework, including specific Cluster Actions under the SME instrument. No specific attention to KETs and pilot production is given. Developing networks is also often taken up on the national level, even with focus on pilot production. For instance recently the German high-tech strategy announced the support of pilot production projects. There is also a pilot production programme planned in Finland, heading for public support and coordination of bigger consortia. With VINNVÄXT Sweden has a specific programme for pilot production activities which covers in particular biotechnology and photonics, which does not include expenses for equipment. In Belgium the Fund for Transformation and Innovation Acceleration (TINA) provides risk capital for consortia to foster breakthrough innovations in fields of high economic risks. In Poland there is a programme called DEMONSTRATOR+ which aims at the support of technology transfer. Beside technology and product verification, testing and demonstration are addressed and the whole innovation chain is explicitly addressed. In the Netherlands, the Topsector policy aims towards the creation of sectorial innovation networks and also focusses on establishing cooperation between research and industry. In general, it can be concluded that many national governments give attention to the development of innovation ecosystems, but often limited to communicative interventions and highly connected with R&D&I activities. On a regional level, the development of local partnerships is also considered important, but more focus is given to concrete innovation actions. This is the result of the focus of regional governments towards economic development. In general, most of the network development activities are more focused on establishing communication between local actors. Although a systematic approach towards ecosystem development is considered to be the responsibility of the national government, there are some examples of regional initiatives. The Smart specialisation strategy from the EU plays a role in the initiation of these activities. Recently a 28 August 2015 Page 64 of 125 © 2015

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governmental strategy has been initiated by the Flemish government to create networks on the specific KETs using technology road mapping. Also the Acreo Demonstrator case is an example initiative to establish a regional, even local ecosystem on printed electronics; regional funding was crucial. In France, regional innovation agencies support ecosystem development by supporting business incubators and technology parks.

6.3.2 Gap analysis Perhaps the most important gap in policy is the cooperation between the different levels of government. Cooperation between EC, Member States and regions is crucial to establish the innovation ecosystems and all contribute in different ways – whereas the EC supports the more fundamental creation of international networks, the Member States focus on the national innovation system, and the regional governments focus on specific partnerships. Although all three are more or less complementary, lack of coordination leads to suboptimal results. Especially for the development of (Europe wide) ecosystems, coordination can have high impact and improved effectiveness of policy interventions. The Smart Specialisation strategy supports better coordination, but has limited value to regions that are economically well established. An important factor in this is that, within KETs pilot production activities, due to the specialisation international partnerships are crucial (including outside of Europe). Especially policy interventions at Member State and regional level are suboptimal suited for these consortia. The barriers identified often are only indirectly addressed by the policy interventions. Often concrete, articulated and existing partnerships are well supported, but establishing new partnerships and trust are not, especially on a national and regional level. This includes both the finding of partners, as well as the creation of partnerships and broader ecosystems. Especially the support of building (bilateral) partnerships with downstream customers is difficult, as this often is considered the responsibility of the industry (see next section). Participation of public research organisations is often partially funded, but universities and RTOs need to co-fund these activities from other sources. As the basic funding from national governments is in general reduced Europe wide, this barrier is not addressed. Most network oriented interventions are focused on communication and R&D&I support. For example creating connection between industrial innovation and regional educational is hardly seen, as well as support for active participation with downstream industries and consortium building. The support of ecosystems at large is mostly supported by the EC, but still limited with regard to the overall needs. The creation of a basic (national and regional) innovation ecosystem is crucial to lower the threshold for new research/industry/policy partnerships. Long-term development of strategies and more regional roadmaps is crucial to further enhance these cooperation activities. Most roadmaps and strategies developed are on a sectorial level and too generic to act as instrument for regional ecosystem support. Most network support measures focussing on pilot production are still in the setup or testing phase or the first projects are still running. As such, the following consideration is not actually focussing on gaps to these existing measures but rather gives recommendations for adaption, or the creation of new (accompanying) measures to foster the building of pilot production collaboration and networks.

6.3.3 Suggestions to adapt existing interventions and new interventions Looking at the available interventions and the gaps that are still present for pilot production with regard to the barriers identified, a number of suggestions can be made to improve the policy on supporting the ecosystem development. An overview is provided in the following table.

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Table 6: Overview of policy suggestions to support the innovation ecosystem (see Annex 4 for further information) Address coverage of parts of value chain in funding criteria, also downstream/customers Allow international partners to be involved Create incentives for downstream partners Institutional funding for public RDI

Small funding programs to develop consortia/trust

Support employing a coordinator

Match making/brokerage activities on KETs Increase flexibility for partners and involvement of new partners SME networks

Program to support downstream product development in SMEs (related to Market attraction) Toolbox for IPR issues and consortium agreements

Financing training of consortium members

Provide a mentor for coordinators from SMEs/Start-ups Application oriented joint development networks Stimulate long term strategic cooperation in networks or bilateral Include educational institutions in network projects

Support for strategic planning for specific KET domains on sub-sectoral networks

Overall, an important policy strategy to increase the efficiency and effectiveness of policy interventions that support the further development of high quality innovation ecosystems is to improve the coordination and alignment of the many instruments on the European, Member State and regional level. A more relay oriented approach is needed that creates a policy chain linking the policy interventions.

Finding the right partners and establishing partnerships is an important specific barrier to engage in consortium building. The available instruments to find partners can be supported by small funding programs to develop consortia and matchmaking/brokerage events specifically for KETs. Also an instrument can be developed that supports a coordinator of new consortia to lower the barrier for new initiatives and partnerships. As already pointed out, establishing participation from downstream partners is difficult. This can be addressed by requiring in proposals specific coverage of downstream organisations. However, active participation must be guaranteed and new policy interventions need to be developed to create incentives for these downstream partners to participate. Also allowing bilateral partnerships are crucial. The participation of universities and RTOs are considered important to KETs pilot production activities. To enhance their participation, the decreasing trend for basic funding is to be reversed (increasing institutional funding), but with specific requirements to engage in KETs related pilot production activities and initiating new projects (including start-up support). This can also be linked to the Shared facilities for pilot production strategy and support of education discussed in later sections. The overall financing of ecosystems is now limited to specific projects. The EU opportunities for coordination support actions can be better linked to actual projects, increasing their more ecosystem development functionalities. Enhancing SME ecosystem development, allowing more flexibility in projects on consortia partners are just two examples. Crucial is also to finance more educational partners and training of the consortia to enhance their more general capacities, especially for SMEs. A more indirect suggestion to improve the financing of ecosystems is also to support skills development on IPR and adjust standard consortium agreements to answer the practical side of the pilot production reality. A last issue to discuss is establishing a joint innovation strategy in networks. Many of the strategy building activities from governments focus on the sectorial and meta level. New interventions are needed that support strategic planning for specific KET domains on sub-sectoral value chain, even consortia level. Closely connected to this are interventions that support market assessments (see next section), as these will be instrumental to create and enhance the value chains. But also interventions that support the more long term “maintenance” of innovation ecosystems is crucial to keep the ecosystem high quality.

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6.4

Market articulation – creating market demand On first sight it might be surprising to address the issue of market articulation by policy interventions, as traditionally this is seen as the responsibility of the company. But it can be stated that these public interventions have a positive leveraging impact on pilot production activities. Sure, the tasks of market development are in particular in the duty of the KET-companies themselves, but instead of providing financial support to pilot production, supporting the establishment of a market demand can be more efficient for public funding as financing pilot production then becomes more easy. In the mKPL project interviews many representatives from industry underpinned, when it comes to pilot production that the key factor is rather the market than the technology. The success of a new technology depends decisively on its potential applications and the related revenue. Pilot production, especially in the (multi-)KETs domain, is crucial to articulate market demand. During the research and development stages of the innovation trajectory there is usually a rough idea about the area of deployment and target markets, but the actual market potential is often unclear and uncertain. Although participation with the customer is needed in earlier stages, often during pilot production lead customers are really engaged as the prototypes are then to be tested. Also overall markets can be fully explored as the operationalizing mass production becomes clear. And this last element is crucial, as the yield of the production and accompanying costs of production are a crucial indicator needed for clear market volume estimations.

In the previous section, the issue about access to financial capital is discussed. An important aspect connected to this is the expected market demand, as this is crucial for internal and external investors to make the decision to invest. But before pilot production, this market demand is still highly uncertain and for investors this is not acceptable. A commitment of at least one key customer is often required as precondition for a positive decision to finance pilot production. On the other hand, potential customers are reluctant to commit to buying a product, if testing the final product is not possible. A laboratory product often has different characteristics then a mass produced product. This is because the production of a product with several different process steps entails highly delicate manufacturing procedures and changes in performance and quality are unavoidable during the implementation process. Figure 24: Deadlock between producer and market. Especially with (multi-)KETs based products, because of their complexity and capital intensity. This causes a deadlock situation, as pilot production is difficult to fund before a commitment from a key customer, and a customer is reluctant to commit before testing a pilot production produced product. This this appears to be a crucial barrier for multi-KET pilot production. Another important issue for market development is time. On the one hand, the “return on investment period” has to be as short as possible, as huge investments are necessary for pilot production activities. Thus, the relevant horizon is rather month than years. On the other hand, the industrialization of multi-KET products are multi stakeholder processes with many different process steps. Each stakeholder and each step bears the threat of a slowdown: Vital building blocks might be missing, decision and approval procedures can be time consuming, personnel shortage in relation to specific skills can occur, or technology loops might extend the implementation period. Beside the production process, the development of the business model can take longer than expected and last but not least getting public and private funding can be time consuming. But “time to market” is critical; the innovation can miss the window of opportunity. Thus, a slowdown of the industrialization process can endanger the whole undertaking and represents a critical barrier; the acceleration

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of the overall process is a key success factor. But another element is that the window of opportunity is time and the maturity of a market has to be assessed; being too early might be as critical as being too late. One of the main macro-economic impacts of multi-KETs components for the European economy is found in the downstream markets. As production of KETs components is often highly automated, the impact on direct jobs creation is relatively limited. But many jobs are created in large diversity of companies that use the components in their KETs based (end-user) products. And on the other hand, as Porter already pointed out in 66 the 1980s , a domestic market (close proximity) is crucial for successful innovation. Integrated in end-user systems, the new KET-based components deliver potential for unique selling propositions and competitive advance by innovation. But the Demonstrator cases show that the downstream sectors are not always aware of its potential. The various application oriented companies show significant differences regarding perception and absorption of new technologies. Also the willingness to bear risk is distinctive in the different sectors. In some downstream branches the habit prevails to wait for an innovation until all the problems have been overcome and the certificated product can be bought off the shelf. Moreover, the new KET-based products have to compete with the well-established state of the art and the persistence of existing solutions can be tough. In particular, mass applications which could justify the investment of a pilot production activity appear rather reluctant regarding a not proved and certified KET-based innovation. In particular for SMEs, the assessment of target markets can be a great hurdle, but often crucial to get investors interested. Missing information and skills are the main pitfalls and can cause a relevant additional risk. To address both new application sectors and global markets can overstrain the capabilities of SMEs, even though the technology they provide might deliver an attractive solution. Potential demand has to be checked and new KET-based solutions have to be assessed against the background of existing solutions: For commodity products e.g. a reduced price of the final product can be of interest; for niche applications additional functionality of end systems might be relevant. In the end, the customer has to approve the difference between the state of the art and the innovation. The intelligence on potential customers, their demand and their solidity is important same as strategic steps of the competition. Market studies on a macro and even meta level might be of no help (traditional Eurostat information) for SMEs which are planning to approach a globally distributed market with a specific KET-product. More micro oriented market data is crucial, but not easily and publically available. This barrier is especially important to SMEs, as larger companies are able to buy commercial information and consultancy because of their financial situation and the often broader use of the information in several company activities. And even if an SME is well informed about a potential market, a huge barrier remains: the access to the market. Technology related markets often span globally and thus, for several key applications of multi-KETsproducts global players have an important role as downstream companies. For SMEs which provides multi-KET products it is very difficult to approach these huge companies – even though the technology has a reasonable potential. Offering a new product, they have to first of all convince the development department of such a company. That can mean in the real life to contact an unknown person who might be living in a totally different region. The target person probably is not aware of the brand or the name of the SME and might not always be eager to pursue the contact. But however, if the R&D-representative is convinced, an even more difficult barrier occurs: the purchase of the global player. Here it is not enough to show the potential of a KET-product but as well to name the exact price and to guarantee a specific quantity delivered – which just can be assessed on the basis of a pilot production. SMEs often have the problem to overcome these hurdles, also because there is an imbalance in power and cultural differences. Concluding, the following barriers are to be addressed:  Deadlock situation due to missing demonstrator products;  The risk of slowdown as a crucial barrier;  Downstream industry does not perceive the potential;  Readily available market information;  Access to markets. 66

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6.4.1 What policy interventions are available Traditionally, public authorities have two fundamental, direct interventions to promote innovation by generating a demand: Public procurement and regulation. With regard to the public procurement, no actual policy interventions are identified that stimulate certain KETs. During the workshops, several discussions were conducted on this subject, concluding that in principle it is an interesting type of policy, but it is difficult to make operational because of the indirect character. Being selective towards specific technologies was regarded as unwanted, because of the market distortion. The efficiency and effectiveness was regarded as low. Using progressive norms for specific multi-KETs and KETs are also not identified. Again here, market distortion is to be expected if specific KETs are explicitly addressed. But, many norms have stimulated innovation and, as a consequence, triggered technology and particularly KET development. E.g. with ambitious legal limit values, a technology supplying company can rely on a valuable future market, if it can only demonstrate the technology contribute significantly to a related solution. A last type of policy that supports market attractiveness is standardization. After standardizing a certain technology, the markets will be more homogenous and will create more demand for a specific technology (e.g., the standardization of Blue-ray instead of HD-DVD). However, this is usually left to the market. Next to these traditional policy interventions, involvement of markets are sometimes required in R&D&I policy interventions. H2020 and also many national/regional policy interventions see the participation of possible customers as positive. However, often a formal requirement is not the case and these organisations can have a limited participation with low responsibilities. As market information is crucial to engage in pilot production, this type of information is also supported by European and national governments. The Eurostat information and information provided by the related national statistical bureaus is an example. But, most of the provided information is very generic. To assess the real market potential of a technology application requires awareness of both the very specific application framework and the market size, considering the limitations of this very technology, including e.g. prices. The capabilities of SMEs to “create” markets are often supported by incubator programs and the H2020 SME instruments. As this is absolutely essential for KET deployment it appears also very relevant for interventions targeting the pilot production phase. In particular SME get and require a broad bundle of support measures regarding that issue and it has to cover both financial and skills related aspects. Overall it can be concluded that supporting the creation of market attractiveness is not jet a policy priority on all three governmental levels.

6.4.2 Gap analysis It is clear that the gap between existing policy interventions and the need for policy interventions to support the development of market attractiveness is large. Some indirect support mechanisms can be found, but overall the availability is limited. Until now it is often seen as core business of the companies and is ceded to the market forces. But, in the discussions with technology experts the main reason for abandoning a technology is less the maturity but the mismatch with market needs. Thus, to support an early alignment of both technology and markets would lead to significantly higher success rates. One of the most important missing aspects is that a one-on-one direct participation between a manufacturer and a customer is hardly supported. Usually, commitment of the full value chain is possible e.g. in the form of an advisory board, but the projects themselves are often set more in an earlier stage of the innovation chain. The involvement of KETs’ integrating partners is not commonly widespread. The close collaboration of the KET

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supplier and the KET integrator in an earlier stage of development would have the beneficial effect that the whole development would be far more target driven and costly detours would be avoided. Also the stimulation of broader downstream innovations (multiple companies) during pilot production of the manufacturer is hardly supported. An example is a program initiated by Infineon to create a downstream ecosystem that uses their components as a technology platform for new innovations (supported by the regional government). This mechanism can also be developed in other countries or on European level. Often the information of statistical bureaus is too macro oriented to articulate markets. There is a large gap of the need of individual companies and this information. This is the case in most information sources governments provide. Sometimes, commercial organisations are filling this gap, but the information is often either too generic or too expensive – at least for SMEs and start-ups.

6.4.3 Suggestions to adapt existing interventions and new interventions Looking at the available interventions and the gaps that are still present for pilot production with regard to the barriers identified, a number of suggestions can be made to improve the policy on supporting the articulation of the market demand. An overview is provided in the following table. Table 7: Overview of policy suggestions to support articulation of market demand (see Annex 4 for further information) Bilateral supply/demand projects

SME: KET related trade missions

Fast approving procedures

SME: Funding of KET and PPA specific market intelligence SME: Vouchers for market studies

Fast track, high priority mechanisms for individual cases SME: Vouchers for market creation in Shared facilities

SME: Angel networks for SME PP developments Regulation to promote KETs based products Public procurement on KETs

SME: Match making activities on KETs

The Deadlock situation due to missing demonstrator products, a reasonable support measure to establish trustful collaborations between technology suppliers and KET integrating companies is the funding of bilateral multi-KET related supply-demand projects. These projects should benefit both partners of such an undertaking as both invests and bears a significant risk. Purpose of these projects is less to support the benefitting companies but to foster the KET-validation and thus, to overcome the valley of death. It appears necessary that these projects are exclusive and limited to just the two or a very few partners. In the centre of the projects has to be the application testing and the related adaption on the KET-products and production. The further steps e.g. regarding scaling up of the production can be taken by the companies themselves. Another approach to generate a trustful collaboration between the KET-producer and the KET-integrator could be to accompany the cooperation building. Shared pilot production facilities might have a key role in this approach. Experts, who are in depth familiar with both the technology and the target markets, can first of all initiate the contact between KET-suppliers and open-minded downstream partners. Then they can promote the agreements and deliver contract templates in order to accelerate the negotiation process. And in the implementation phase they can moderate the process and mitigate in the case of tensions. This approach appears reasonable in particular if one of the partners is an SME. The public authorities could foster these activities by emitting related vouchers to the SMEs. From industry perspective, to slow down a decision process and thus increase the risk to miss the market in a later stage of an innovation process is worse than a public authority refuses a funding proposal at all. If the company does not meet the window of opportunity it loses the whole investment. Thus, fast approving procedures are even more important for PPA support measures than they are for R&D support measures. All kind of supporting instruments which entail easy and fast approval procedures are reasonable in this case. Moreover a “Fast track”-mechanism should be considered – at least as an option for individual cases. With such a high priority mechanism in particular the near to market activities can be pushed to a decision if the window of opportunity looms to close. One important tool to accelerate the overall innovation process is to parallelize 28 August 2015 Page 70 of 125 © 2015

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important process steps. That could be that the production set-up is already started while the research and development is still ongoing, or the production development and implementation runs in parallel to the endsystem’s development. Indeed, this procedure increases the risk of double work as it might come out that the original approach is not feasible and that fundamental changes are necessary. But, the risk of being too late is so fatal that the parallelization could be a good advice. Today, both the private and the public innovation planning orients in step-by-step models for the innovation process like stage-gate-processes and Technology Readiness Level scales. In the future these approaches have to be assessed regarding their impact on overall process speed. It might be necessary to adapt the procedures to make a parallelization of innovation steps possible. Public authorities can stimulate the development of KETs-integrated products in the downstream sectors. With specific application oriented calls, which requires the integration of a KET-based product, the awareness of the KET-potential for the sector could be increased. Moreover, pre commercial public procurement can be oriented in the presumption that the end-product uses KET-based products in an innovative way. However, if the first key application is successfully implemented, the next application bears at least a lower technological risk. To raise the awareness of the downstream industry, public authorities can also promote all kind of exchange platforms and brokerage events, where KET-companies present the capabilities to specific downstream industry sectors. The downstream companies as there are tier-1-suppliers or OEMs, often engage technology scouts, which could be attracted and convinced to perceive the potential of a specific KET. Moreover the R&D-divisions of the downstream companies are crucial target groups to stir discussions on KETs-potential. In order to obtain missing of market intelligence information, the companies can be supported in two ways: External experts can be established which are specialized in a KET and analyses new markets as a service for SMEs. These competences could be provided by shared pilot production facilities. Or internal technology scouts can be supported. It is important to underline that this task is not at all covered by the sales or communication department but is a separate activity. Today, these technology grounded market specialists are not common. As the necessary competences are demanding, the related working forces are expensive and might not be affordable for SMEs. From a public authority’s perspective it would be a good investment to foster this expertise in order to improve technology deployment and pilot production. Technology oriented companies, and particularly SMEs, tend to have problems to get access to global downstream markets: This could be because the customer’s companies are multi nationals or global players which are not on the same eye level or because the target company is located abroad and is therefore difficult to approach. In both cases “cultural” differences inhibit a matchmaking of KET-product and downstream applications. To overcome these “cultural” barriers it might make sense to train SMEs. These highly condensed courses should not comprise general cultural aspects but should address specific conditions in the actual downstream sector, and if applicable, in the country at issue. These cultural barriers can also be surmounted with specific trade missions. This could pave the way for SMEs in unknown terrain. Currently, these missions are already offered and often related to a specific country. But, it would be of help to focus on only one downstream sector and to concentrate on specific KETs with high potential for the related applications. In a similar way, other common matchmaking instruments like booth at trade fairs could be adapted to KET-focused measures to communicate with the downstream industry.

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6.5

Availability of human resources Pilot production is not only about new technologies and equipment. As the level of R&D intensity is still high, also the need for high skilled labour is strong. However, the skills needed are not only in the technological research, but requires experts from different areas of expertise. Pilot production is about integration of product & process technology, technology & business development, research/production & sales, equipment & human resources and other traditionally competences from different communities. These competences require specific personnel that are highly multi-disciplinary and will be difficult to find in an organisation that focuses on a stable production.

Figure 25: Difference in skills requirements between various pillars in KETs (PWC, 2015).

With regard to the availability of human resources, the assessments, workshops and interviews identified various barriers that slowed down pilot production. The first is that the overall availability of workers with high technological skills is limited in Europe. The shortage on the labour market on technological experts creates tension on the planning of the development of pilot lines and plants as the window of opportunity for new product launches is often short in the highly competitive KETs industries. Underlying is both the unawareness of society towards the possibilities of KETs and pilot production related jobs, as well as the low popularity with students (especially with KETs). Also, the opportunities to study KETs related pilot production are limited and a limited number of European students are interested in these studies.

Part of the issue on availability of human resources is that the KETs industry is a highly international, even global industry. The result is that highly qualified personnel show a high international mobility. Personnel are drawn to other non-EU countries and to get qualified personnel EU companies also look at countries outside of Europe. However, as confidentiality is key to (multi)-KETs, competitiveness can create problems due to leaking of knowledge to the competition. In certain areas like defence and security, qualified personnel are preferably drawn from the national workforce. Access to this international labour market is more difficult for SMEs than for large enterprises. But also there are qualitative gaps between industry requirements and the skills of graduating students, or other available workforce. Pilot production activities generated out of research labs are about starting new business. This requires a highly entrepreneurial attitude. In many of the interviews, workshops and in the Demonstrator assessments, the conclusion was drawn that inspiring entrepreneurial personnel is hard to find. The entrepreneurial spirit that is strong in e.g. the USA, is suboptimal in Europe, limiting also risk taking and business development. Connected to this, there is limited coaching of starting organisations and young entrepreneurs, including e.g. how to get access to finance and other managerial skills. Also high growth SMEs need to be trained in these aspects in order to better grow to a MidCap company. “Intrapreneurship” i.e. the development of entrepreneurial employee behaviour and competences may be an approach to build the right type of human resources for pilot production activities. As already mentioned, pilot production is highly multi-disciplinary. Not only the researchers involved require competences in both the related process and product technologies, but also the focus on the market needs to be strong. This requires to experts that combine the technological skills with business oriented skills. Personnel that combine these two competences are hard to find, as e.g. universities have a more mono-disciplinary education and normally a student will focus on one aspect. Especially higher educations in product oriented 28 August 2015 Page 72 of 125 © 2015

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technologies have limited attention to applied sciences and production technologies. Another aspect is the attention to more business oriented skills and expertise. Technology educated experts often have limited training on developing markets and finding investors, crucial to pilot production stage. In recent years a number of universities in Europe are giving priority to the development of entrepreneurial skills in technology oriented studies in the form of start-up bootcamps and short term training courses – these are also useful for stimulating entrepreneurship. Next to this, the pilot production activity is not an activity that is routine to a company, especially with smaller companies. Personnel needed are not easy to find in the regular company workforce and also persons capable of managing technology transfer from research environments to production are highly valued. The combination of flexibility required and specialized multi-disciplinary skills creates a barrier. As confidentiality is essential to pilot production, the need for a flexible workforce is even harder to achieve. Close to this demand for flexibility, is the issue that KETs and pilot production requires a continuous training of personnel. Not only the strong dynamics because of stages in the innovation, also the KETs domain is highly under development. Automation of the manufacturing process is experiencing a strong development and the further operationalization of Internet of Things, Industry 4.0, and Smart industry will change the industry needs in the coming years. This requires availability of opportunities for retraining personnel, which is suboptimal in Europe, both from the educational institutions. PPA is at the forefront of technology development and educational institutions cannot keep up with this rapid pace of change– this requires a much bigger role of companies and associations in skills development. The last barrier to be mentioned is the suboptimal connection of companies that are conducting pilot production activities, to local and regional educational institutions (e.g. universities, graduate schools, vocational schools, private training centres). This leads to a mismatch between educational programs and the industry needs. So, the specific PPA training of personnel by these educational institutions often does not include the expertise needed. Training on site and on the job is needed to bring the skills up to the required level, but this takes time within the limited window of opportunity. Concluding, the following barriers are to be addressed:  Shortage on technological personnel;  Highly international labour market, leading to brain-drain and issues on competitiveness;  Limited entrepreneurial mind-set and skills with science and technology experts; st  Problems with the multi-disciplinary skill set of available workforce, limited attention to 21 Century skills such as problem solving and communication;  Flexibility of the workforce due to the transitional character of the PPA;  Suboptimal focus on retraining to account for the fast changing industrial requirements (in the context of a lifelong learning approach);  Connection to the local and regional educational institutions.

6.5.1 What policy interventions are available Educational policy is organised on a Member State level and the European Commission has no explicit educational policy. However, on the European level still a limited number of policy instruments are offered to further develop skills and competences. The first to be discussed is the ESF, of which its main objective is to support getting better jobs and it can be used to increase the skills and competences. The ESF is specifically used for educational initiatives, but acts as co-funding for regional initiatives. Other large European programs are also available, but less focused on education and training. The European Regional Development Fund allows the support of education and training, but this is not a core activity. Within the H2020 program, education/training and research are seen as two separate activities and although education/training is supported, the number of projects and accompanying budget is limited. An exception is the H2020-Marie Skłodowska-Curie fellowships, which aim at the further education of academic researchers through a secondment in other academic institutes.

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As said, the main policy mandate on skills development is on the national level, or even the regional level (the German Länder being an example). Also the previous described separation between education/training and research is often followed on the national/regional level. A limited number of national governments show a combined support on the development of (multi)KETs and pilot production with R&D&I policy; a recent Dutch strategy on Industry 4.0 (Smart Industry) includes this combined supporting approach in a type of shared facilities (FieldLabs). Most policy instruments have the character of educational programs, funded by the national government and carried out by public educational entities (e.g., universities (of applied sciences), and higher vocational training institutes). Private activities on skills training are in principle not supported by national and regional governments. The industrial participation in non-technical universities is present, but often limited. Industrial presence in universities of applied sciences is stronger, as the focus of these institutions is more operational and technical. It can be quest lectures, presence on the board of directors and in individual PhDs. Training and education is not part of the mission of RTOs and therefore not formally organised. However, many RTOs play a significant role in education and training just by employing experts and spin-out of new companies and personnel. Through contract research and publically funded research early graduated students are confronted with applied and industrial science. The participation of the industry in higher vocational training is limited but becoming more and more intensive, due to the renowned gap between industry needs and training of students. Universities of applied sciences and institutes for vocational training are often more regionally organised and industry participation is also. However, due to the public nature of the public institutes, governments are reluctant to increase industrial participation in public education. There are some private support actions available that are of interest to mKETs pilot production. In several countries, industry associations provide training courses to boost the level of expertise of their members. These are often limited “fast track” activities, where individual workers can be trained on specific fields. Also full commercial private training centres can provide these training courses. Mostly these courses aim to keep the individual worker qualified (refreshing) for their existing jobs regarding new developments (e.g. new legislation, and technological developments).

6.5.2 Gap analysis The first issue to discuss is the shortage of technical personnel and personnel that have multi-KETs and pilot production capacities. The first step in getting qualified personnel is having students! The awareness of primary education and society at large towards multi-KETs and pilot production is limited. The capacities needed within the framework of multi-KETs and pilot production are not only technological. The mix of science, technology, engineering, mathematics (STEM), but also a range of business and soft skills is not often seen. Also the level of expertise is diverse, from lower education training to an academic level. A third aspect is that the field of KETs is dynamic and traditional schools and universities usually are long term oriented and limited in their agility to change their curricula according to the latest development in science and technology. Although some development is seen in the cooperation between industry and public education, this is still limited. Public education is generally educating students on a broader level and the specific capabilities of multi-KETs and pilot production is perhaps too specific to be part of the training on vocational and academic institutions. A better connection is needed.

6.5.3 Suggestions to adapt existing interventions and new interventions After this gap analysis, suggestions can be provided that further address the barriers identified in Chapter 5. Looking at the core issues described on the availability of highly skilled personnel and the policy interventions supplied by the EC, Member State governments and regional governments, the gap can be addressed by several specific interventions (see Table 8).

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Table 8: Overview of policy suggestions to support human resources development (see Annex 4 for further information) Shared facilities as training centre Increasing national/regional and public awareness Include international cooperation in training schemes SME instrument

Support of industrial participation in universities Support training on PPA in EIT

Initiation of academia/industry collaboration on training activities Facilitate flexible workforce on PPA

Adaptation of curricula in research infrastructures

Support of private retraining programs on PPA

With regard to the barriers on human resources, the mandate of educational policy is on a Member State level the point of departure. However, cooperation between European, national and regional can be suggested. As pilot production is highly industry driven, new policy interventions can be suggested that link the institutional educational organisations to industry. This can be initiated by all three policy levels. Shared facilities can have an important role in filling the gap described. Using mechanism like vouchers and also requesting participation of educational organisations in programs, the connection between education and industry can be stimulated. This addresses several barriers, like the shortage of qualified personnel, the multi-disciplinary skill-set, the entrepreneurial focus and the issues on linkage with local and regional educational institutions. The barriers where the linkage between industry and education is to be stimulated also require a broader approach. Some existing policy interventions can be adapted towards pilot production, but in general creating more awareness and knowledge with policymakers on pilot production is important. This strategy also suggests interventions that stimulate involving more private educational organisations in the further development of training on pilot production. Also here, live long learning and addressing fast changing industrial requirements can be addressed.

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6.6

Sharing the equipment and expertise

6.6.1 An introduction to Shared Facilities for Pilot Production With regard to the overall barrier of economic risk, it is clear that this is partially the result of the high investments needed to build a pilot line or plant. Although the pilot production equipment often is combination of new production technologies and existing production systems, much of the investments are still often dedicated to the pilot production activities. And pilot production is about further tweaking the production system and the product. This requires testing, validation and also research, often done by external laboratories. For further research (mostly on the manufacturing technologies) external research facilities can also be used. As made clear in section 6.2, investments needed for pilot production equipment and expertise are high. An approach often used is the use of external services of third parties. In these Shared facilities for pilot production, the most advanced expertise, equipment and know-how in specific focus areas are brought together. These centres could include design centres, computational simulation, materials testing, reliability testing or environmental Figure 26: Sharing facilities between different pilot production activities. impact assessments. Cost for pilot production is reduced as equipment is already available and accelerated depreciation of equipment is not applicable. But also problems with human resources are addressed, as the personnel of these organisations have extensive experience in upscaling and pilot production. Not only the technological expertise is available, but as within the family of technologies many products are developed also market information is often (indirectly) available. As many start-ups use shared facilities, also extensive incubator related experience is often available. Often the Shared facility is well known in the innovation ecosystem, providing customers access to contacts in the horizontal and vertical value chain. They also support the creation of market articulation, as they generally have knowledge about the market needs. Last but not least, the facilities also include laboratory Figure 27: Major reasons to use Shared facilities (EU companies engaged in pilot services. So testing/validation of production). Source: mKPL-survey. products, as well as support of certain research needs is available. The mKPL survey showed that about 50% of both SMEs and large enterprises use, or have used these facilities, where the primary reason is access to know-how and financial reasons. Over 40% of the companies which are indeed engaged in pilot production but do not use shared facilities, stated that they fear to lose now-how and

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or it does not fit in their competitiveness strategy . However, the use of the shared facilities is different with regard to SMEs and large enterprises. For SMEs the use of these organisations is crucial, as the investments needed are simply too high. Also the expertise offered is often beyond the expertise of an SME. For large companies, the use of a Shared facility is often just plain economics. Although perhaps the required investments can be found, accelerated depreciation has negative consequences, as well as the down time of production. And also the expertise offered has specific added value and the available equipment is modular and supports experimentation. The use of Shared facilities (for pilot production) is seen in many countries. A recent study shows that almost 1,000 technology infrastructures are available and regional governments are in general interested to initiate these facilities. Recently an advice to the US government by PCAST has called Manufacturing Innovation Institutes as one of the main actions for their Advanced Manufacturing Strategy, whereas the essential function of these entities are is that equipment and expertise can be shared. However, there are different types of shared facilities to be distinguished between. A first distinction can be made between public and private shared facilities:  The first type of shared facilities are public entities, often seen in universities and RTOs. Shared facilities within universities are often focused on the prototyping and highly experimental research activities. Although some pilot production can be facilitated, their focus is more on research and development. Within RTO owned shared facilities often the connection with pilot production is made. The experimental nature and research spill-over character allows public funding and the services provided are accordingly. A 68 variation of these Public Shared Facilities are joined (closed) laboratories .  A second type of Shared facilities are private endeavours. To ensure open access, often they are not industry owned, but multiple industry used. Focus is less on research and development and more on pilot production. An example is the mKPL Demonstrators BBEPP, but also the US ChemCeption initiative. Highly focused on industrialisation of prototypes and pre-commercial production, they offer a wide range of services to start-ups, SMEs and large enterprises. This includes R&D, scale-up, training, testing, validation, business incubator services, but even micro-production. They offer highly experienced personnel, low scale production equipment and laboratories. Multiple clients, confidentiality and sharing facilities are core to 69 their business model, focussing on full industrialisation . Shared facilities for pilot production are focused on the TRL levels that are most relevant for achieving pilot production, namely from TRL 4-7. They are composed of a combination of advanced equipment and trained personnel with the necessary expertise for realizing testing, validation and demonstration of manufacturing at a scale which is meaningful to potential customers. While prototypes can be considered TRL 4-5, shared facilities go beyond research centres and RTOs by also delivering pre-production series at TRL 6-7 and even to TRL 8. A shared facility for pilot production is considered “shared” in the sense that it serves multiple users, as opposed to a captive facility which is reserved for internal use by a single owner/user. Shared facilities fill a gap for emerging technology. In existing industries, company-internal resources or external contract manufacturing organizations can fulfil the role of providing late stage product development and pilot production. Shared facilities are therefore best positioned in the context of emerging technologies or industries where structured manufacturing capability is not yet widely available, but on the other hand has common characteristics. Shared facilities are usually created as a result of public financing aimed at stimulating development of SMEs and/or emerging industries. The governance structure of shared facilities is generally non-profit, although the activity is managed as a business providing contract based manufacturing development services. The mission of a shared facility is to provide pre-competitive pilot production assistance to the broader community of a targeted industry sector.

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The mKPL online survey, 2013. Good examples of public shared facilities are the Sofradir-CEA Defir institute, where Sofradir benefits from the general (public) infrastructure and CEA benefits from the more industrial expertise of Sofradir. Other examples are the Holst Centre (TNO), the Fraunhofer pilot plant centre (PAZ) for polymer synthesis and polymer processing, Feed and Biomass Pilot Plant (DTI), Centre for Advanced Metrology Solutions (IMEC) and the mKPL Demonstrator Acreo-PEA. 69 More background information can be found in the mKPL Summary paper on “Shared facilities for pilot production”. 68

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6.6.2 Barriers to use Shared facilities for pilot production These public and private shared facilities play an important role crossing the valley of death, but are often struggling to survive in a full commercial context. They address important barriers for pilot production and can be seen as a governmental intervention. As a result, the initiation of shared facilities often is accompanied by governmental co-funding. Public shared facilities often receive basic funding from a national government, but especially regional governments are often involved in the initiation of (semi-)private initiatives; the establishing a shared facility can result in regional economic development. Several barriers are seen that hinder the viability and optimal use of the shared facilities for pilot production. A first barrier is their long-term funding. Often initial funding from especially government is available. However, especially private shared facilities face problems to sustain their business on a longer term. First reason is that due to depreciation of equipment, additional large investments are needed after a facility is in operation some 5 years. Although the initial investments created a high quality technology base, a second investment is often harder to achieve as governments aim at commercial operation within a few years. This is often difficult as a including normal depreciation of equipment in the tariffs would create a barrier to use the facility, especially for start-ups and SMEs. This is especially the case for private Shared facilities; public Shared facilities show less problems, as national funding is more long term oriented, but the decreasing national budgets for many countries are putting pressure on a high quality shared infrastructure. A second issue is increasing competition. During the first period the facility is operational, local, regional markets (close proximity) are addressed, but will show reduced need for their services over time. Upscaling to the national level, even to an international level is needed. But this then leads to a stronger competition. As in western economies free market is important and governments tend to follow this path of creative destruction. So initiatives will start regionally, but need to expand their market after some time and face severe competition with other former regional initiatives. Without a Smart specialisation strategy, this will lead to destruction of public capital. Creating centres of sub-critical size should therefore be avoided. This is particularly true for centres and RTO facilities which are intended to go beyond the technology validation in the lab by showing technology validation in a relevant environment. It is better to have critical mass in fewer centres than to have a multitude of sub-critical centres incapable of making significant contributions. The experiences gained during pilot production within these external facilities can be needed to run the later new production line/plant. Running the pilot line/plant needs specific expertise. Either experts stay behind at the shared facility, or they can be transferred to the customer company. In either case, this creates problems. Finding specialised personnel is difficult due to their unique skills. If the customer company takes the expert, the shared facility is left with a vacant position that is difficult to fulfil; if the experts stays with the facility, the start-up of the pilot line/plant is difficult for the customer company. A last issue to address in regard to shared facilities for pilot production is that due to the large number and variety of shared facilities, potential customers are unaware of all available services on a European level. Often, regional services are well known due to the existing business networks, but a Europe wide overview of services is complex. Also the experiences with the quality of the service are an important aspect. Barriers to be addressed by policy on technological infrastructures:  Insure long term quality equipment at the shared facility;  Healthy competition between Shared facilities on European level;  Expertise and experiences in Shared facility;  Unknown availability and quality of external equipment, expertise and services.

6.6.3 What policy interventions are available On the European level, ERDF and H2020 are funding programs that can support independent technological infrastructures through Shared facilities. On a project base, these multi-user facilities can be uses as important mechanisms to support innovative activities, such as prototype development and pre-series production. Depreciation of technical capital is facilitated when it is used for specific project based activities. In H2020, 28 August 2015 Page 78 of 125 © 2015

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R&D&I focused activities can include a Shared facility as partner in broader consortia. Equipment and expertise can then be co-funded for the part that they are used for the project. Also the ERDF can support Shared facilities in a similar way. It is difficult to use EIB sources for Shared facilities, as they usually do not produce an innovative product on which a business can be based. The Shared facility as such is often a “not for profit” endeavour, supporting commercial pilot production activities. As said, depreciation is only possible during project phase, and therefore difficult to set-up for novel ecosystems. On a national level, governments are reluctant to fund private shared facilities for pilot production, e.g. because of State Aid reservations. Public shared facilities are often funded through universities and RTOs by providing continuous basic funding. These financial contributions are not always directly linked to the shared facilities (infrastructure and experts), but provide a more general financial base for the institutions. As in many cases these public research organisations are providing a technological infrastructure, the basic funding is used to acquire equipment and hire expert personnel. Some national governments also co-fund private shared facilities, but usually to support the initiation of the endeavour in combination with other governments (e.g., regional governments) and private investors. Often private shared facilities started with an investment from a regional government, or (public) regional investment organisations. They are more likely to invest in shared facilities, as the equipment and expertise often lead to regional job creation and ecosystem/economic development. Often regional governments or have stake in a shared facilities and are also actively involved in the further development, e.g. through regional development agencies. The investments can be substantial and are often not project based but used for the initiation of the facility by acquiring equipment and first hiring of personnel. This “founds” the Shared Facility, but additional funding is needed from other public and private investors to also make the endeavour viable in a later phase/stage. Private investors are hardly directly participating in Shared facilities. Due to the usual “non-for-profit” character, the return on investment is limited. Indirectly, the customers of Shared facilities are often directly getting funding from private investors like Venture capitalist and Angel funds. These customers are engaged in pilot production and the use of Shared facilities reduces the financial capital needed and thereby reducing risks. Also the expertise available is reducing uncertainty of costs and enhancing yield. But all investments are on a project basis. Banks are reluctant to invest due to the high risks, as the long term viability of shared facilities is often uncertain.

6.6.4 Gap analysis The main gap between the issues especially private Shared facilities face and the policy interventions available are long term and sustained policy support. The initial investment is usually made by a regional government, but long term investments are not provided. This leads to problems in long-term viability in operating of such expensive infrastructures. Private investors are reluctant to invest and an important other issue is that EU and national are more project oriented in their funding. The consequence is that a long term “basic” funding is not available and equipment gets outdated and not renewed. With regard to Shared Facilities offered by public research organisations, the issue of long-term funding is less problematic, as national governments provide basic funding. However, in general over the last decade the budget provided has decreased and shifted towards project based funding. This puts the quality of public Shared Facilities under pressure. The mechanism of project based funding used by the EU enhances this problem, as national governments more and more rely on the EU for funding innovation. During the workshops, the observation was made that this even has impact on the participation of universities and RTOs in EU co-funded projects in general. Especially the construction of flat fee financing limits the possible coverage of overhead cost. Both public and private Shared facilities mainly get funding from private investors through project based activities (contract research and innovation). Sometimes membership fees in share research activities are seen, but this mechanism creates a barrier to newcomers to use the facility, especially as technology is developed in an ongoing faster pace. 28 August 2015 Page 79 of 125 © 2015

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With regard to the barriers on skills and IPR, no policy interventions are offered. There is some policy support to enhance visibility of the Shared Facilities through the Enterprise Europe Network and other websites. However, this support is mostly passive and of limited use to the customers and they still depend highly on past experience and their community; trust and quality is key to the actual use of the facilities (depending on the business model).

6.6.5 Suggestions to adapt existing interventions and new interventions During the project, many suggestions were offered to enhance the viability of Shared facilities for pilot production. Table 9: Overview of policy suggestions to support Shared facilities for pilot production (see Annex 4 for further information) Long-term co-funding equipment Support of high TRL development of experimental equipment

Pilot Production vouchers EU coordination on establishing Shared facilities

Feasibility studies for Shared facilities Retraining of (unemployed) workers

To ensure that long term quality of the shared facility is supported, additional policy intervention is needed for long-term co-funding equipment. This can be made operational through the ERDF, as the benefit of these investments is aligned with the character of the ERDF to be linked to the national and regional policy level. As said, the ERDF can be used to support Shared facilities, but the co-funding intervention should not be within the context of a project, but an overall long term investment to facilitate acquiring new equipment. It can be linked to support of high TRL development of experimental equipment, resulting in a close cooperation between Shared facilities and developers of production equipment. This long term viability can also be supported by the funding of Shared facilities through Pilot Production vouchers. Coordinated through the Shared facilities, within the H2020 program vouchers can be given to SMEs to allow them access to the infrastructure and expertise. This will both support long term viability of the facilities and support SMEs with their pilot production activities. Too many Shared facilities will put pressure on the long term viability of the individual Shared facilities. This overrepresentation is likely, as Shared facilities tend to outgrow their often initial regional market orientation within 5 years. Entering into a European market will overcrowd the market and too strong competition can lead to low quality services and capital destruction. As their services can be seen as an important facilitator to the economy and industry, with strong spill over effects, governmental support is justified. EU coordination on establishing Shared facilities would lead to a limited number of specialised high quality facilities, highly suited as part of the ERDF Smart Specialisation strategy. This also can be connected to the co-funding of feasibility studies for Shared facilities (predevelopment). In order to limit the number of facilities, cofounding would lead to a better insight if the need for a specific facility exists and if it is long term viable. Again, this is can be facilitated through the ERDF, in connection to the H2020. Also these feasibility studies can be used as input for a business plan to be used to find regional, national, European and private funding. Close to this barrier is the issue of dealing with the unknown availability of Shared facilities. This is a typical market failure and as such needs governmental intervention. Solving this issue goes beyond the merely reactively presenting the shared facilities on an internet website. A quality control aspect and active role in knowledge transfer needs to be included, combined with the earlier mentioned role of coordinator. A long term Shared Facility coordinating agency can be instrumental to address these issues. Its activities are often seen in national governmental agencies and it can be made operational within the framework of H2020, as part of the SME instrument, or the European Research Infrastructures. Previous experiences gained in the Testnet project can be used, but also a social network approach might be beneficial to the overall knowledge transfer and awareness creation, as well as making the quality control operational.

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The final issue of getting high skilled experts for Shared facilities is challenging. On one hand, Shared facilities show a need for specific expertise not trained in traditional educational institutes and on the other hand also a brain drain to customers can be seen. If Shared facilities are supported to have a training mission, acquiring new experts will become easier and also providing pilot production expertise to industrial stakeholders is facilitated. Using the ESF as co-funding mechanism, also unemployed workers can be retrained to meet these industry objectives. The Marie-Curie instrument can also be used to further train more product oriented experts to the issues of pilot production.

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7

Conclusions and recommendations

7.1

A contextual introduction to the conclusions The project started in 2012. At that time, based on the outcomes of the HLG KETs, the European Commission felt that new policy was needed to support the scale up of prototypes towards economic and social valorisation. Although the issue of valley of death at that stage was widely recognized, its implications towards policy and actual policy instruments were hardly explored. Both the concepts of “multi-KETs” and “Pilot lines” were coined, but a common understanding was still to be developed.

Although the mKPL project aimed at assessing the opportunities to support pilot production in the multi-KETs domain, the project concludes that the outcomes of the study are applicable also for the other industrial technology areas.

Multi-KETs are the combination of least two different KETs in a high-tech manufacturing environment in a way that value is created above and beyond the mere combination of the individual technologies

After more than two years this has changed. KETs have become a mainstream strategy within the European context and also Member States are more and more incorporating its conceptual characteristics. Within the European context, KETs are broadly recognized as being key to industrial and societal change. And although the concept of multi-KETs is less recognized, the essence that Figure 28: KETs being the beginning of a metamorphosis towards inspiring combining different technology communities is of innovations. high importance is undisputed. There are no detailed KETs, crosscutting KETs and multi-KETs definitions used for policy, but they are more used as an innovation philosophy. Examples are the new strategies developed to stimulate Digitization of the industry, Industry 4.0 and Smart Industry on European Level and Member State level, highlighting its importance of combining ICT with manufacturing technologies.

Figure 29: Pilot production is about integrating organisational and market developments, product and manufacturing process technology development. Including, research development, piloting, testing and validation.

The importance of pilot lines or pilot production in general is different. The country assessments conducted in 2012 clearly showed that an emerging but important worldwide trend can be observed that pilot production is becoming a systematic part of the innovation policies of governments. Today this is even more the case. The th recently published US strategy on advanced manufacturing and the Chinese 12 5 year plan for national economic and social development are just two important examples of the global attention for industrial 28 August 2015 Page 82 of 125 © 2015

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development and pilot production. And although the connection to the six KETs is not often made explicitly, this trend is connected to the overall concept of key enabling technologies and industrialisation. This strongly supports the decision of the European Commission in 2011 to assign this project and investigate the opportunities for the Commission, the Member States and other stakeholders to support pilot production in the KETs domain. The project contributes highly on creating insight on what scale-up of prototypes towards economic and social valorisation is. It is not only about technological development, but as much about creating conditions to invest. To develop a pilot line or plant is not enough. It is about a package of activities reducing economic risks and boosting investments.

It is difficult to define and demarcate pilot production. The project shows that the most practical way is to use a set of activities, which than also can be translated into policy interventions. The following activities are considered pilot production activities: • Research and development with the objective to validate both technology/component/subsystem development in laboratory environment and “transferability” to pilot manufacturing activity level; • Set up of pre-commercial pilot manufacturing system operated by one or multiple industry including participation of external bodies like SMEs and research organisations; • Production of first series of pre commercial products and prototypes for testing and validation of the product and manufacturing process (including cost efficiency); • Adjusting product design based on pre-commercial manufacturing; • Creation of market relationships with lead customers giving them access to new technologies • Business development with internal and/or external investors; • Preparation of the internal and external organisation for full manufacturing, including the value chain development.

And this is not only about public policy. Capital investments needed for supporting pilot production activities are too high for the European Commission alone; efforts between national governments, regional governments, industry, research and private investors need to be combined. But also the contextual environment must be optimized. Support of the innovation ecosystem in which pilot production takes place, the creation of facilities to share costs and expertise, as well the support of the educational system to produce the skills and expertise needed to optimally benefit from the opportunities that new science and technologies offer to our economy and society. All stakeholders need to coordinate and align their efforts to optimize not only the support of pilot production, but also linking it to research, development and market expansion and consider the entire innovation chain from invention to market expansion.

7.2

Towards an overall policy strategy for pilot production Core to policymaking for pilot production are the barriers that hinder the uptake of technologies by the industry. Although many issues contribute to this valley of death, the project observed that during pilot production the core issue is economic risk. Especially the combination of high investments needed for equipment, R&D personnel costs, reorganizing the organisation and the accompanying uncertainties is creating high risks. Companies themselves, as well as external partners and investors are then reluctant to participate. Chapter 5 and 6 showed that the following underlying barriers were identified during the project as being crucial contributors to this economic risk:  Access to financial capital: Being capital intensive, often external investors must support pilot production. However, these external investors are reluctant to invest and there is limited capital available.  Quality of the industrial ecosystem: Pilot production requires cooperation in the industrial value chain, both horizontally and vertical. Suppliers of input materials as well as equipment suppliers need to synchronize their activities, as well as complementary producers, end-users. Being research intensive, also the connection with research must be made. All these relationships are difficult to create.  Limited market articulation: To reduce financial risks, reduction of demand uncertainty is crucial. Markets need to be articulated and market demand expressed. This is often a prerequisite for investors to invest. 28 August 2015 Page 83 of 125 © 2015

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Available human capital: Core to successful pilot production activities are e.g. the technical, managerial, organisational, marketing skills of personnel. If these skills are not available in the project team, realisation of the pilot production is under pressure.

The translation to a trans-actor policy strategy for pilot production is complex. Crucial point of departure is that pilot production is a weak link within the entire innovation process. But the entire innovation process must be taken into account. Creating linkages between public policies and strategies from research, industrial and other partners is crucial. Alignment of activities will increase the efficiency and effectiveness, without the vast investments which are just not possible. Within a policy strategy 5 pillars can be distinguished between:  Coordination and alignment of innovation policies between the different policy levels. Being a crucial step in the innovation process, it efficiency and effectiveness is highly influenced by policy strategies that are supporting the other links.  Combining funding, including the creation of leverage to private funding, including support of the articulation of markets. The high investments needed for pilot production cannot be provided by public interventions. A combination of public and private is needed and public policy should give priority to combining and creating leverage.  Enhance the innovation ecosystems in which pilot production is carried out to ensure an optimal and sustained impact on their quality. A single support of a pilot production initiative would have suboptimal societal benefits. It should be part of a longer term ecosystem development. But give special attention to the downstream markets, as the societal benefits are created there (jobs, addressing grand challenges, etc.).  Support of the use of shared facilities for pilot production to enhance their efficiency and effectiveness. Although crucial to SMEs and start-ups, shared facilities can be an important policy mechanism to reduce the barriers during pilot production for companies in general. Cost reduction by sharing equipment and availability of specific expertise is key. But, they are not applicable to all kinds of pilot production.  Overall enhancement of the availability of human capital to support pilot production and overall valorisation of research. As innovation is about people, also support for the development of specific multidisciplinary skills and expertise is key to not only operate the pilot production, but also initiate new business. To make these strategies operational and optimally support pilot production is a task that cannot be done by the European Commission alone. It needs cooperation with the other policy levels (Member States and regions), as well as other stakeholders (industry, research, private investors). In this chapter, these strategies will be further described based on the previous chapters. After a short further definition and demarcation of both pilot production and multi-KETs (one of the objectives of the project), policies and strategies for these policy levels and stakeholders will be described in more detail.

7.3

The pillars for pilot production policy

7.3.1 A rationale for policy interventions The point of departure of the mKPL study is the observation that the innovation process tends to halt after the initial stages of successful knowledge creation. A general underutilization of the knowledge created within research and development for economic and societal benefits seems an important driver for government action. The mKPL project observed that various policymakers are reluctant to provide governmental support to pilot production activities, as this is often seen as undesired distortion of the functioning of the market. In this section we link the identified barriers to market failures, as a rationale for government support. Note that we present an indication of general forms of market failure that could be associated to the identified barriers.

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Why should governments support pilot production? Often policymakers are reluctant to support pilot production. Many consider investing in pilot production the responsibility of entrepreneurs. Companies are to take the risk. However, as described in chapter 5, nowadays this economic risk is often too high for investors and companies. Technological, market and ecosystem complexities increase. This high complexity shifts unbearable risks by means of technology, financing and commercialization to later stages in the innovation process. Additionally, markets are still too uncertain to make the large investments that will lead to a better understanding of potential revenues especially for SMEs and start-ups. Without public support often this deadlock prohibits the step to valorisation. And as technology is key to solving societal issues, its consequence is that innovative solutions for climate change, aging, new jobs, environmental challenges will not reach the market. The society will not benefit from the vast public investments in research and development. But no support will not only impact the organisations directly involved. Indirect, the innovation ecosystem and downstream industries will not benefit from the opportunities from new innovative KETs based components. This will weaken the economy at large.

The associated costs for owning and operating technical facility with high standard equipment (CAPEX) are relatively high (with an accelerated depreciation rate of such cutting-edge technological equipment that might not even be required for future PPAs by the firm). The amount a firm is willing to invest in such equipment is restricted by spill-over effects: the expected impact on profit after successful completion of the PPA will be limited as competitors will simply embrace/copy the resulting knowledge (implying that it is better to copy than to act as a first mover). These factors limit the incentives for investments in own infrastructure.

Sharing technological infrastructure through shared facilities is also hindered by specific forms of market failure. Again spill-over effects occur as important expertise/experience created within the framework of a PPA is “left behind” in the shared facility after completion (due to potential problems with protection of IP). Due to coordination and network failures firms might not be aware of the availability and quality of external technological infrastructure and expertise. Owners of unique technological infrastructure might exercise market power, and network externalities (of value to other actors that the investor) might be internalised. The availability of skilled labour in an economy is primarily a task of the government, as education and (re)training is considered a public good. Note that educational institutions might have problems with offering specific education and training of skills, because of a lack of resources, or because it is difficult to adapt to the fast changing needs required for PPAs. They might also lack incentives to invest in specific education and training, because of the way they are governed. Shortfalls in the specific skills required for PPAs sought by employers could persist because students lack information about the job market, especially regarding which professions are in high demand (i.e. imperfect and asymmetric information). Specific barriers to increase the quality of the innovation network include: lack of awareness and communication, and difficulties in creation of trust. These hinder the creation of innovation consortia (including financiers. the education system, and especially downstream partners). Underlying types of market failures include imperfect and asymmetric information (e.g. awareness of appropriate partners), coordination and network failures, and spill-over effects, (PPA projects create a more general high quality innovation network). Because of imperfect and asymmetric information, especially new entrants to a market might be discouraged to get involved in PPAs. Incumbents furthermore might exercise market power, and network externalities might be internalised (i.e. existing actors in a market might use their position to hinder new firms from entering the market, for example because they own the rights certain standard). In practice this limits innovation, and affects the total level of welfare within an economy. A very specific barrier for the set-up of PPAs refers to the deadlock situation where clients require a functional prototype as a basis for a positive decision on an order or investment, while producers need such an order or investment as a financial basis for the set-up of a pilot. The underlying type of market failure is here is also imperfect and asymmetric information. Note that this occurs more often (i.e. at different places) in the value chain: especially for downstream industry it is difficult to assess / perceive the potential of a specific innovation. 28 August 2015 Page 85 of 125 © 2015

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7.3.2 Pilot production policy needs a systemic approach Pilot production is one of the stages during the innovation process, where many barriers are present. The project shows that there is not one barrier that can be seen that is holding back valorisation. It is a chain of barriers, with a “weakest link” philosophy. Strengthening the weakest link, only leads to a new weakest link that is holding back success. Pilot production therefore needs a systemic policy approach. Larger public funds will provide better “Access to financial capital”, but no success as bad market articulation will hinder pilot production and market expansion. Figure 30: The innovation chain is as strong as its weakest link; a systemic approach is needed.

During the project, it has become clear that many policy interventions are available. But combining them is difficult. Not only the administrative procedures are suboptimal aligned, but also content wise one intervention can lead to a result that is not suited to be taken up by a next intervention. A third element is that the availability of the interventions is not clear, so high efforts and expertise are needed from companies and other stakeholders to become aware and make use of their availability. A last element is that addressing pilot production during this dynamic innovation chain even might ask for preventive interventions in the earlier stage of innovation. An example is that requiring the participation of manufacturing experts during the early stage of the product development can improve its manufacturability during pilot production. The further coordination and alignment of these policy interventions need a multi-level approach. The EU administration, as well as the national Member State administrations and regional administrations support pilot production. Coordinating interventions on all levels will increase the overall efficiency and effectiveness of policy, leading to less budget needs, better outputs and less destruction of public capital.

7.3.3 Combine funds and create leverage on private investors Pilot production is accompanied by high investments. This especially applies for multi-KETs inventions. The project shows that although there are many sources for funding, the vast amounts of investments needed for a pilot line or plant exceed their present availability. It is clear that a shift in policy focus towards pilot production is accompanied by an increasing capital need. One initiative can require €500 million, the entire innovation budget of a small country. The sheer size of pilot production activities compared to activities earlier in the innovation process requires more investments. But also with other types of policy interventions, as common grants and contracts are not sufficient. Another aspect of the shift of policy focus towards pilot production is that leverage and combination must be pursued. A single investor can often not take the risk for an investment and support of pilot production requires combination of funds. Combination of funding and creating leverage to private investors to engage in pilot production is key. The following issues are to be addressed:  A shift in policy towards pilot production requires more budget, as supporting in research is less capital intensive. However, this shift must not lead to reduction of funding for research and development, as then the pipeline of innovation will be put under pressure and lead to a reduction of the innovation capacity of Europe.  As said, one of the solutions is combining funds. However, often policy instruments are suboptimal aligned and cofounding is difficult. As cofounding must be organised on a multi-policy level, this even makes it more difficult. Administrative alignment must be perused and a more “relay” approach is needed.  Increasing involvement of private investors is part of the solution. However, economic risk is core to financing pilot production. Private investors will be reluctant to invest in pilot production, due to the combination of the size and its uncertainty of return on investments. One of the approaches of governments is to enhance available sources by creating leverage to private investors. Better supporting the creation of market articulation is one of the suggested approaches, but also the development of better assessment tools for economic risks can enhance private investments.  The distinctions made between larger enterprises and SMEs in the State Aid Rules are highly relevant. Both types of organisations need a fundamentally different approach. 28 August 2015 Page 86 of 125 © 2015

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Shared facilities can be instrumental to reduce the investments needed, as sharing equipment and expertise can reduce costs and decrease uncertainty. This not only is beneficial for SMEs, but also for large enterprises. But shared facilities alone will not solve the pilot production problems.

7.3.4 Pilot production pivotal in driving innovation ecosystems A single company, or a consortium of partners engaged in a single multi-KETs pilot production initiative as such will not have a large impact on the innovation capacity of region or country. However, these initiatives are often pivotal in the creation of a broader network of organisations, or a (regional) innovation ecosystem. They create a network of cooperating and innovating partners and boost downstream innovation by offering new components. It is clear that Shared facilities for pilot production will even have more impact, allowing new business to be developed and tested. This is also one of the reasons for governments to invest in pilot production initiatives. Supporting the broader network of partners will create innovation dynamics, leading to new innovations among the partners and the partners, as well as the broader region. Also the support of especially SMEs in enhancing their capacity to be involved in the ecosystems is important to later create new business. This all will boost innovation in the network and create spill-overs and network externalities, but is also crucial for focusing investments, create critical mass and attract market demand. The following aspects must be considered:  The creation of innovation ecosystems provides a crucial fertile soil for the creation of pilot production initiatives. Trust and efficient partnering requires pre-existing contacts in innovation ecosystems. Although some policy interventions are available, improvement is required.  The maintenance of innovation ecosystems is often not supported by governmental policy. As most policy interventions use a project approach, especially the long-term support of ecosystems with development of technology road maps and other aligning activities is weak. At EU level and some Member States experience is available.  RTOs can play an important role in establishing and maintaining innovation ecosystems. However, due to reduction in national funding this role risks being jeopardized. Coordination between RTOs on a transnational level can be considered an interesting new strategy.  Support and participation of downstream companies, using the products of multi-KETs pilot production in new end-user product development is crucial to benefit from the multi-KETs inventions on a societal level. However, this is normally not supported by policy interventions.  Shared facilities can play an important role in the creation and maintenance of innovation ecosystems. However, their present often stressful financing situation focuses on attracting customers, limiting the opportunities to contribute to the ecosystem development.  (Regional) educational can play an important role in innovation ecosystems. Present policy interventions do not stimulate the participation of educational institutes in ecosystem development.

7.3.5 Shared facilities as a crucial instrument Shared facilities for pilot production are often mentioned as an important way to reduce the barriers for pilot production and can be seen as an effective and efficient policy intervention. It directly reduces the economic risks by reducing the investments needed to setup a pilot line or plant. And they also help to reduce other barriers, e.g. in shared facilities most pilot production steps can be tested before an own pilot production is set up. As pilot production requires specific expertise, the long term participation of the experts employed by a shared facility creates extensive knowledge and experiences that can be used to improve pilot production activities. Also shared facilities will be able to act as a spider in the web of regional, national and even international innovation and add to the quality of the innovation ecosystem. Traditionally, shared facilities focus on providing expertise and equipment. However, they can also expand their services with incubator services. Especially for SMEs and start-ups they can help to improve create new businesses. They can even play an important role in training and educating when they expand their partnerships with universities from research oriented activities to educational activities. Their equipment and expertise are unique and offer the practical educational environment that is required by industry. And although 28 August 2015 Page 87 of 125 © 2015

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often seen as an instrument to support SMEs, the shared facilities also are important to large companies. Cost of pilot production is often also too high for large companies and they also make use of the facilities and services, especially for early testing and when entering into new technologies, before own pilot productions are set up. Even the access to specific knowledge is of high added value to them. Offering commercial renting of equipment for both pilot production activities and micro production can be part of the business model. A multibusiness model approach is needed to ensure long term viability. Shared facilities often start on a regional level, as the facilities can have high impact on boosting the regional economy (jobs, local economy, and local innovation capacity). The initial capital investments needed are high, but regional governments are willing to participate because of these regional benefits. However, after a period of time the regional benefits will be reduced. Their markets need to expand to the national level and on midterm even to the international level to be viable. But when reaching the international level, competition with other (regional started) shared facilities is eminent, jeopardizing their viability. As these shared facilities are often a public mechanism to stimulate innovation, this competition (with winners and losers) can result in destruction of public capital. The following issues and recommendations can be given to enhance the impact of shared facilities for pilot production:  Funding shared facilities need an initial investment to setup the equipment and location, as this is needed to attract pilot production projects. However, a renewed funding is needed after some years to guarantee state of the art equipment.  Shared facilities have to be in line with an industrial demand to assure sound usage and efficiency of public funding.  As many shared facilities are originally regional, international governmental coordination is needed to optimize the use of public expenditures and avoid wasting public resources. Strong competition would lead to destruction of public investments.  Voucher mechanisms can be recommended for especially start-ups and SMEs to lower the barrier to make use of the facilities.  Shared facilities for pilot production can also be used for innovation hubs, but then more policy interventions are needed to support a more holistic approach to the initiatives. It must be made clear that shared facilities are not applicable to all kinds of pilot production and KETs. The more unique a technology is the less can be shared. Also high costs complex pilot production activities often seen in large enterprise dominated pilot production initiatives can only use shared facilities partially.

7.4

Policy strategies for the EC, Member States, regions and other stakeholders

7.4.1 Policy strategies for larger enterprises Successful implementation of policy measures for pilot production will require strong participation from industrial actors in the overall innovation scheme. Without commitment from industry, both in terms of moral commitment and financial contribution, the best intentions of government policy cannot succeed alone. The engagement of industry can be applied at various levels of interaction, not only with public authorities, but also with regional cluster organizations and other companies within the value chain. Building mutually beneficial relationships and contributing to a strong “local European” community for business will have a multiplier effect on growth. Strong regional ecosystems can be extended along the value chain, as well as geographically to other regions, in order to enhance European competitiveness. The following industrial engagement strategies are important:  With respect to pilot production and the development of future manufacturing capability, companies need to create a development plan which has the necessary elements that can be shared with public funding agencies as a basis for mutual commitment. By creating a better understanding at the public level of the challenges and limitations faced by the company, opportunities for “co-investment for growth” can be anticipated and better orchestrated. 28 August 2015 Page 88 of 125 © 2015

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 

Take some limited risk to expand project consortia beyond the circle of usual partners to include other upstream, downstream and out of area partners. Offering a minor, non-critical role to new partners allows for a means of getting to know them and assessing their capabilities. Participate actively in cluster organizations, create more if they do not yet exist. Provide access to KETs products while they are still in the development phase as a means of creating links with applications developers. This could be particularly useful with university platforms and design centres.

7.4.2 Policy strategies for small and medium enterprises Policy conclusions for SMEs are diverse, as one SME is fundamentally different than the other due to the different problems they encounter during their pilot production activities. With regard to SMEs, the following different types of SMEs require fundamentally different policy support:  SMEs that are cooperating in a large enterprise dominated pilot production initiative. Here, the large enterprise is driving the initiative and the SME is dependent. These are normally initiatives with high capital investments, with complex technologies and needing many partners in the value chain. SMEs usually are component suppliers.  SMEs that are engaged in a pilot production activity as main actor (including small sized MidCap companies). Other partners can be connected, but these smaller scale initiatives need less participation of value chain partners. Being less capital intensive and more driven by the SME, the company is more in control and participation with other organisations is less directive.  Start-up companies. As multi-KETs are high-tech and technology intensive, these firms usually have been spun-out from universities, RTOs, or larger enterprises. But they also can be young entrepreneurs, initiating new business. Being young entrepreneurs, expertise and skills on business development are often limited, as well as availability of capital. In general, strategy development and strategic cooperation with other organisations is often limited as daily business is demanding. A typical characteristic of SMEs is that there are no organisational units in the organisation to systematically pursue strategy development; often the manager is responsible. The creation of market demand is crucial for most of these organisations, but also complicated. Also their skills and ecosystem participation is limited, as well as access to financial capital. Industry associations can play an important role in the further strategy development of these enterprises. With regard to the possible policy interventions for these types of SMEs, the following conclusions can be drawn:  In general, SMEs typically require interventions that support all barriers. Important general conclusions for SMEs are: o Due to the small size of the organisation, a full spread of required skills cannot be expected. In depth knowledge on IPR issues is just one example, but also how to cooperate with new global partners (e.g. China) is often a new venture. Summer camps and other training programmes are required, but often also difficult to attend due to their daily schedules. Combination with business development is creating efficiency. o Another important aspect is availability of capital. Although some enterprises have a strong capital position, the large investments needed for pilot production can be problematic. Shared facilities can address these problems, especially as also the expertise offered will help overcome both business challenges as well as technological challenges. Interventions that support market articulation are needed. o Cooperation between two nationalities is difficult, as national programmes often do not support this transnational innovation and EU support requires more nationalities. This should be further developed, as often only a limited number of nationalities are participating in pilot production activities.  SMEs in large enterprise dominated pilot production activities require programs that support their full participation. Important is not only to focus on a single pilot production initiative, but more on the creation of an innovation ecosystem. Especially existing European policy interventions give attention to these aspects (e.g., ECSEL, H2020. Also nationally this is often addressed, especially in the larger innovation driven Member States.

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Pilot production activities where SMEs are the main actor require interventions to broader support. Supportive services on getting investors, IPR information, creation of markets, market assessments are just some examples. Start-up companies usually require a full set of incubator support. Connected to universities and RTOs, shared facilities are crucial (technology and business development support), but also a more direct consultation with experienced industrialists (e.g., retired entrepreneurs through business angels). Also the need for capital is accompanies with high economic risks and additional sources are to be created.

7.4.3 Policy strategies for Universities70 Although the role of academic universities, technical universities and universities of applied sciences during pilot production is not always obvious, they do have important roles to play. From the observations during the project, the following roles can be distinguished:  Fundamental and applied research to create knowledge on the KETs, including multi-KETs opportunities (e.g., scientific models, new device concepts). This is important to maintain a funnel of new inventions that ignites new innovation processes. But although limited, this research is often also needed during the pilot production stage as the development of the process can face more fundamental (technology) challenges. These challenges are not only hardware-related, i.e. for instance material or process technology related, but often also address software-related issues, e.g. theoretical modelling, process flow optimization or design.  Offering high-tech research and development equipment. Although the full scale support of pilot production is not supported, still universities provide technological infrastructure and expertise to support prototyping and early stage pilot production. Full support of pilot production is hardly available in individual universities, but they often do participate in shared facilities for pilot production.  Technology transfer from research lab to pilot line. Universities constitute the early stage of the innovation chain. The portability of new device concepts to an industrial pilot line is a crucial factor that is rate-determining for the introduction of new applications. During the proof-of-concept phase (Technology Readiness Levels 3 and 4), industrial requirements (such as manufacturability, reliability, design aspects) have to be taken into account to ensure a successful transfer to and validation in the pilot line (TRL5).  Educating and training of high-skilled personnel that is needed for both the development of the pilot lines and plants (academic/technical universities), as well as operating the equipment (universities of applied sciences). As Human resources proved to be an important barrier, they are crucial to address this barrier. There is a need for dedicated educational trajectories at universities, incorporating technology transfer into the curriculum.  Initiating new business through star-ups. The educational role of universities includes the training of students. And they can become young entrepreneurs. Many universities therefore offer incubator services to support these young entrepreneurs to start new businesses. With regard to pilot production, these roles are not optimally filled in by the universities. Connection between product and process are often suboptimal, as universities are often organised in a mono-disciplinary way. Also the Demonstrator case studies showed that the knowledge and expertise of universities are at a lower TRL level and the step from their new inventions towards commercial application is large. Practical implications are often only touched in a limited way. Also cooperation between universities and industry is in general not extensive, although the technical universities show more involvement from industry in their work. Often universities have an incubator facility connected. The project did not assess in full their efficiency and effectiveness, but more connection to the broader regional, national and even European level might enhance their effectiveness. The following suggestions can improve the efficiency and effectiveness of universities in pilot production activities:  Increase the relation between product oriented R&D to and manufacturing oriented R&D in the educational approaches. But also link this to the non-technological skills development, like entrepreneurship and market assessments. This could be addressed by setting up “PhD+” type programs (three years scientific research plus one year technology transfer/valorisation).

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In consultation with Mart Graef, Strategic Program Manager Delft University of Technology. 28 August 2015 Page 90 of 125 © 2015

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Embed the incubator activities in the broader regional, national and international innovation systems, including linkages with other incubators and public (H2020, ECSEL, ESF, EIF) and private investors (angel funds and venture capital funds). Also strong connection to industrial partners and industry associations can increase effectiveness and by creating direct linkages to shared facilities. Connection with industry can be improved by increased internships, but this needs specialised courses. The three types of universities can all make use of shared facilities for pilot production. Cooperation can be through the use of their infrastructure and expertise to better educate students (practical experience), but also to increase the availability of human resources. This can be connected with the pilot production internships.

With regard to supporting policy, several possible interventions can be suggested to support universities with these strategies. First, it must be stated that the national funding for universities are decreasing, reducing their capabilities for joining pilot production initiatives. Also, some of the more peripheral activities as stated above cannot be supported optimally. Increase in basic funding is required, although due to their educational activities within the university structure overhead costs are limited in comparison with the RTO structure. An important policy intervention supporting universities are mechanisms to include also educational activities in projects. Also the Marie-Curie programme can be beneficial when adjusted to support pilot production activities (more operational).

7.4.4 Policy strategies for Research and Technology Organisations RTOs traditionally are positioned between fundamental research and industry. More than universities, they focus on getting research and technologies towards application. Their core role in the innovation system is to combine the different multi-disciplinary views and perspectives on new scientific insights and inventions, providing technology-based applications as sustainable solutions towards societal benefits. In that perspective, RTOs remain at the key position in the innovation chain, in developing technologies at the complexity and maturity level in their technology infrastructures, ready to be transferred into industry (e.g. through pilot production activities). But RTOs are not limited to that position: The outcomes of the mKPL survey showed that in many pilot production activities RTOs are considered as a vital partner, often as organizer of the innovation eco-system. The findings of the mKPL study show that pilot production projects aiming at the scale-up of a prototype towards a (pre)commercial product that can be produced in an economically viable way need a large number of players in the (horizontal and vertical) value chain/ecosystem. This includes R&D actors to develop, mature and debug the manufacturing process and related challenges. With regard to pilot production, the following possible roles can be seen for RTOs:  Direct support to actual pilot production activities: o Providing expertise on the convergence of product technologies and manufacturing technologies, as well as more applied scientific insights in the transformation of prototypes to commercialisation (including non-technological expertise, modelling, optimization). o The provision of high-tech, state-of-the-art (even experimental) equipment and expertise in closed and shared environments to facilitate pilot production. This high-tech equipment (pilot lines/plants, as well as important laboratory services) is crucial to reduce costs and their financial and technical risks when following a sharing approach.  Peripheral activities, increasing the contextual quality of pilot production: o Initiating and supporting new business development, either start-ups (including RTO-spinouts), and existing enterprises (with special attention to SMEs). This includes both the scientific and technical expertise, as well as the more strategy, business and market oriented expertise that is needed to create a successful businesses o Creation and maintenance of an innovation ecosystem. This includes the building of new consortia, as well as a spider in the web function, communicating and organizing between the different stakeholders. Again, SMEs have special attention, as for them bringing new products to markets can be either too costly and/or taking too long to do on their own. They need more and more support in (regional smart specialization) eco-systems 28 August 2015 Page 91 of 125 © 2015

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o Training of high skilled personnel on multi-disciplinary skills and applied science & technology. By employing students and involving them in pilot production oriented project, they will be trained and educated. Also personnel in general and elderly technicians who missed the computer era at school will be prepared to work with the newest technologies. More and more society can’t afford to lose capable technical employees who can be trained to use digital tools in relevant environments. Also some dedicated courses are offered by RTOs in applied sciences, or experts from RTOs have a (parttime) position in universities often on applied areas. Although active in pilot production, the efficiency and effectiveness of RTOs concerning this subject can be enhanced. In particular attention of RTOs in general on pilot production is suboptimal and a more systemic approach would be beneficial. Especially during pilot production activities, the skills required are multidisciplinary, connecting process, product, organization and market expertise. Multi-KETs research activities within RTOs in many cases follow a too narrow approach, focusing on specific technological issues. RTOs could improve the link between their activities on product development and those on the development of manufacturing technologies. But also the connection between technological and non-technological issues could be enhanced, considering the entire value chain (e.g., market knowledge, innovation management expertise). Also from a funding perspective, these linkages are important: Connecting the activities within an RTO (even among RTOs), using a more innovation chain oriented approach, and would improve the effectiveness of the use of available national and international funding sources. Next to this, sharing cost and responsibilities for pilot production between RTOs can be suggested as an important element of a pilot production strategy. This can be an interesting approach to improve the efficiency of RTOs and their role for valorisation and pilot production. Centred on technological infrastructures, expertise can be offered, both technical and nontechnical. In this way, possible spinouts are accompanied and supported by business services, helping them to valorise science and technologies. The following suggestions can be given to improve the role of RTOs in pilot production:  Establish a European framework of technology Infrastructures by supporting networks which provide access to SMEs, share their expertise, cooperation and business practices, develop common projects, build up shared visions and common roadmaps in strategic areas. This network should connect RTOs to academic/industrial actors of European value chains and promote synergies across different European regions built on the smart specialization strategies.  Consider the shared facilities concept for pilot production within RTOs as an additional way to share costs and risks between public RTOs and industry. However, coordination and alignment within the RTO community is needed to ensure avoiding duplication and capital destruction. Being capital intensive and the crucial contribution to our industry, specialisation is in order, with an optimal geographic spread.  Enhance focus on spin-outs and start-ups, including support of pilot production related incubator activities, e.g. offering support in (the development of) pre-commercial production. This needs an increase in the available skills and expertise in RTOs on business development. Pilot production is as much about technical expertise, as non-technical expertise.  Give special attention to SMEs supporting them with multi-KETs development and pilot production. A one stop shop approach is desired, where SMEs can contact an RTO to support them with creating new innovation initiatives. This is connected to the barrier on availability of expensive equipment and accompanying human capital.  RTOs can also play an important role in providing skills and competences. Next to offering direct expertise through their employees, they can also develop programs for the training of experts in the field of pilot production and offer this training and the expertise to companies. This can be connected to the offering of shared facilities for pilot production.  RTOs can increase their role in the creation and maintenance of innovation ecosystems. They are well positioned in the innovation system due to their linkages to science and technologies and their bridging role between science and industry. These strategies can enhance the crucial contribution of RTOs to pilot production, focus efforts and make better use of available budgets. However, during the project some fundamental issues were observed that limit the opportunities. An important issue is that these strategies require an increasing pro-active role from RTOs, 28 August 2015 Page 92 of 125 © 2015

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which today is hampered by the overall reduction of national budgets for RTOs. This issue is aggravated, as shifting towards pilot production requires significant additional investments and as shown in chapter 6 support of shared facilities is limited. It is therefore important to (financially) support RTOs to set-up pilot lines/plants. A workable funding mechanism should be found, allowing funding of capital-intensive expenditures as initial investment to support cooperation activities in particular between KETs and SMEs (until fabrication of preseries of products). Also long term support must be considered to ensure long-term viability and prevention of destruction of public capital. Crucial is that, if the RTOs are considered as important initiators and organizers for innovation ecosystems in which pilot production activities are key, this calls for new funding mechanisms (national, and/or EU). But perhaps the most important issue is establishing coordination and linkages in the innovation chain, as also the impact of RTOs is determined by the weakest link. This also calls for coordination among the different governmental levels (EU, national, regional) to ensure efficient and effective support. Linkages between existing policy interventions must be optimized. As long-term perspective, it is important to prepare the future by anticipating needs, gaps and related opportunities to support new technological infrastructures offering capabilities for the most pressing technological challenges that merit focused attention and appropriate support.

7.4.5 Specific strategies at European level As already stated, the European Commission has various interventions that can be used to support pilot production. The main instruments are the H2020 program (including the SME instrument), the cluster policy instrument, the ERDF and recently the important projects of common European interest. The overall conclusion is that although there are many opportunities provided to support pilot production, still some changes can be suggested. The following policy strategies for the European Commission can be highlighted:  The European Commission is well positioned to play an active role in the coordination and alignment of policies to enhance the efficiency and effectiveness of pilot production policy. This not only includes the better connection between European interventions, but also alignment with national and regional policies. Next to coordination of policy interventions, also coordination pilot production related topics (including shared facilities for pilot production) are in order, using the ERDF and Smart Specialisation strategies as core vehicle.  To support pilot production and multi-KETs, a faster, more agile and more aligned policy process is needed. Interventions should be adapted and made more agile and flexible, on one hand connected to other interventions (also national and regional), but on the other hand offering fast-track mechanisms. The window of opportunity within the fast developments of KET, as well as the market and pilot production are too quickly evolving and need monthly actions.  The H2020 program can be used for direct co-financing pilot production activities. However, a strong leverage effect needs to be ensured, either by using mechanisms to initiate private investors, or stimulate participation of national and regional governments. Combined funding mechanisms should be leading in order to provide the large budgets needed for pilot production. 71  The H2020 program can also be used to develop crucial meta market-information . Crucial market information can be used to reduce investment risk and stimulate (private) actors to invest in pilot production. The European Commission can develop crucial meta-information (and tools) that are needed for investment decisions (innovation intelligence). This will reduce the costs of tailor made information for investment decisions produced by commercial organisations.  The SME instrument can be used to enhance the capacities of SMEs to better address the problems with engaging in pilot production. This includes training and other innovation oriented activities. Although the SME instrument already supports these activities, a systematic approach for SME in general, also connected to the pilot production problems would improve efficiency and effectiveness. 71

This differs from the commercial market information made available by commercial organizations. The data developed is at a higher aggregation level, but can be used by these commercial organizations. 28 August 2015 Page 93 of 125 © 2015

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Active brokerage between manufacturers and potential customers can be an important intervention to create market attractiveness, but also the support of value chain covered partnering should be more addressed using the various opportunities H2020 provide. The European Commission can also play a limited, but important role in training and education of personnel on pilot production capabilities. The ESF and H2020-Marie-Curie as primary interventions, but also the ERDF and H2020-LEIT as secondary intervention can stimulate the educational and training institutions to address the issues on human capital. Bringing together industry and research is crucial for multi-KETs pilot production activities. Although not new, it is still complex and difficult. The European Commission can support partnerships between industry universities and RTOs. Also on the political and governmental level, some actions can be formulated where politicians and the European Commission officials can directly contribute to the support of mKET pilot production activities. This includes the creation of awareness within the public, stimulation Member States on their actions, as well as trade missions and discussion on the WTO level. Due to the emerging character of policy for pilot production, policymakers and governments on all levels are also possible object of interventions. Creating awareness and understanding among policymakers about the concept, as well as actions to improve is a relevant policy strategy.

7.4.6 Specific strategies at National level At a national level (EU28), also policy interventions can be suggested as shown in Chapter 6. With regard to the policy focus of national governments, especially the educational policy and basic support for the national research infrastructure are of importance. In general, it can be concluded that national governments in general still have low awareness of pilot production, although in some countries a shift can be noticed. With regard to multi-KETs, there is awareness of enabling technologies and KETs is clearly an emerging topic for policy. Policy on multi-KETs pilot lines needs cooperation between the European and the national level, not only because the high budgets needed for pilot production, but also because of the fact that KETs are systemic to the national and European economy. Although the European Commission provides support for multi-KETs pilot production, there are number of additional policy strategies that are of importance to the national governments:  As counterpart of the EU strategy to align and coordinate innovation policy, perhaps the most important national policy strategy is to align their national interventions with European interventions. But also often the efficiency within the national context can be improved (in cooperation with regional governments).  Also the EU policy suggestion to create a faster, more agile and more aligned policy process applies for the national governments. Many pilot production activities (especially for SMEs and Midcaps) will still be nationally supported. Also organizing (bilateral) participation of partners from other countries should be considered due to the transnational nature of multi-KETs.  As start-ups and more grown SMEs are often nationally oriented, brokerage, training and other pilot production related skills in general incubator programs are crucial. Also more support is needed with special attention to multi-KETs innovations.  Although there are opportunities for funding of pilot production available, multi-KETs related activities are research intensive and joining tripartite programs like ECSEL can create more critical mass for especially large enterprise networks. But also national interventions can create leverage towards the creation of public/private funding programs (e.g. Venture capital funds, Angel funds, loan guarantees).  Training and education is a national priority. National governments are advised to enhance the attention to skills for multi-KETs Pilot production activities in their educational policy. A national action plan on pilot production is suggested, including attention to the multi-disciplinary character, as well as the academic/industry participation. Included should be actions to increase private participation.  Technology transfer from research to industry, provided by RTOs, will change with regard to pilot production activities. In the future long lasting strategic partnerships of companies, in particular SMEs, and RTOs will be necessary to guarantee the transition from the lab to an efficient industrial production. National / Regional funding mechanisms of related organizations should be adapted to this new task. 28 August 2015 Page 94 of 125 © 2015

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A shift can be seen towards European funding for R&D&I, but to ensure optimal use of EU interventions, additional national basic funding is often needed to make full coverage possible. This can be connected to a strategy to better make use of university/RTO spin-outs, as multi-KETs often is high-tech. Also offering an easy access flexible workforce is a potential activity. It is suggested that national governments create programs to optimally make use of innovative KETs component manufactured in Europe. Innovation programs that support downstream SMEs to valorise these opportunities are important for the societal success of the EU KETs strategy.

7.4.7 Specific strategies at Regional level Pilot production especially has regional implications, as it is highly connected to economic development. These policies often root at the regional level. The ERDF and ESF provide financial capacity to strengthen the region, also with regard to multi-KETs pilot production. However, the regional governments and agencies play a crucial role in making this operational. Shared facilities can be an efficient and effective mechanism to further support regional and local multi-KETs pilot production. Not only will it provide a high quality technological infrastructure (and expertise) to be used by many enterprises, but also they can be instrumental to create innovation ecosystems. Important is that also the connection to the educational institutions is addressed, as well as the long term development of these facilities to international markets. The ERDF Smart Specialisation strategy can be instrumental. However, being part of the European Regional Development Fund, the Smart Specialisation Strategy aims at supporting less developed European regions in specializing on specific topics. The result can be that support for strong regions is limited and in the end will show a relative reduced position. The following regional policy strategies are important:  Also on the regional level, alignment with national and European policy interventions is important. This is highly relevant for technological infrastructures and incubator programs.  Although in principle also relevant for national governments, creating regional public/private investment funds (e.g. venture capital and angel funds) are even more crucial for the further development of the region. Using national and EU interventions can create critical mass and opportunities for the region.  The national governments traditionally have an important role in supporting national shared facilities (e.g. in RTOs). However, the support of existing and creation (when necessary) of Shared facilities can be also seen as an important strategy for regional governments and agencies to enhance the innovation capacity of the region. But it has to be emphasized that these facilities require a relevant and steady public financing in particular for operational costs, which are in most of the cases not covered by using fees. Thus, a region has to be aware that a Shared facility entails relevant ongoing costs.  Incubator programs are often regional, together with regional funding agencies, universities, RTOs and other science and technology oriented organisations. These regional interventions enhanced by including more pilot production aspects to the training. This will enhance spin-out to fast growing tech-based companies. Multi-disciplinary support to start-ups is crucial for success, as well as connection to the industry.

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Annex 1: Overview of country policies To inform the benchmarking detailed country reports on 20 countries (15 EU member States plus China, Japan, Korea and USA) and the EU were compiled. The following information on each country has been extracted from the country reports and is presented in the table below:  Gross domestic expenditure on R&D (called GERD) in % of total GDP, based on 2013 OECD data  Rank in the 2014 Global Innovation Index  Whether a country has an explicit policy addressing (multi)KETs in place  Public authorities relevant for KETs  Main relevant initiatives  Examples of policy instruments used The colours indicate how a country is performing on lead indicators compared to other countries (GERD: 3%=green; Rank in Global Innovation Index: >25=red, between 1025=yellow,