This chapter provides an overview of manufacturing trends and policies in France, Germany, Japan, Korea and the United States. It examines key developments in the manufacturing sector with a focus on three main policy priorities: digital transformation, the transition towards more energy-efficient and low-carbon production, and the strengthening of supply chain resilience. The chapter also assesses the readiness of SMEs to respond to these megatrends and reviews main policy and support measures designed to facilitate their transition. The analysis draws on country- and sector-specific evidence, complemented by insights from stakeholder interviews.
Fit-for‑Future Manufacturing SMEs
Effective Policies for Transformation
Abstract
The five countries covered in the chapter were selected based on several criteria, including the size of their GDP, the relative weight of the manufacturing sector in the economy, and the level of competitiveness or specialisation in the manufacturing industry. Focus is thus placed on countries where the manufacturing sector accounts for a sizeable share of GDP. As part of this report, interviews were conducted with a diverse range of stakeholders to inform the country-specific and sectoral analyses. These stakeholders were selected based on their relevant expertise in the design, implementation, and impact of SME-relevant programmes, as well as their sector-specific knowledge, particularly regarding barriers faced by SMEs in adapting to ongoing megatrends. The stakeholder group included experts from industry associations, federal-level policymakers, regional innovation agencies, and academic researchers. The expert interviews helped to gather qualitative insights on the main challenges SMEs face, the support mechanisms they consider most effective, and areas where further action is needed.
Introduction
SMEs are vital to the operations of the French manufacturing sector, which accounted for approximately 11% of the gross value added and 11% of total employment in 2023, below the EU average (Figure 3.1). Labour productivity in the French manufacturing sector experienced a sharp drop in 2020 (-8.5 percentage points with respect to 2019), more than double the average drop in productivity for this sector across EU27 countries (-4.2 pp). In 2021, labour productivity increased significantly (8pp with respect to 2020) but remained below the EU average increase (10.7pp) and in 2022 it decreased again by 2.8 percentage points while labour productivity increased on average in the sector across the EU (by 2.4 pp). Nevertheless, the French manufacturing sector has seen a positive trend in labour productivity in 2023, increasing by 1.2 pp with respect to 2022. This is a favourable comparison to the EU-wide decrease in productivity during the same period, by 1.7 pp (Figure 3.2).
As a share of total gross value added generated in the EU-27, France and Germany respectively.
Note: Calculations by the authors.
Source: (Eurostat, 2024[1])
Percentage change on previous period
Source: (Eurostat, 2024[2]).
In France, the manufacturing sector accounts for 61% of total business enterprise R&D spending, a key indicator of innovation and competitiveness. Notably, 18% of this spending is concentrated in vehicle manufacturing, over 17% is allocated to the computer, electronics, and optical products sector, and 5% to machinery production (Figure 3.3). France is further experiencing a rising influx of requests for funding from industrial start-ups. In 2023, deep tech startups captured half of all funding for French Tech1 (EUR 4.1 billion out of EUR 8.3 billion) with deep tech increasing its share by 38% despite an overall drop in funding (Bpi France, 2024[3]; Fagot, 2024[4]).
SMEs represent 99% of businesses in the French manufacturing sector, but challenges to their competitiveness – such as skills gaps – are increasing. A lack of workforce can lead to production constraints and heavily limit productivity and innovation, which rely on skilled workers. (World Economic Forum, 2023[5]; World Economic Forum, 2023[6]). High job vacancies especially affect small manufacturing businesses (1-9 employees). In 2023, on average, the job vacancy rate was 6.4% in companies with 1 to 9 employees against 2.6% in companies with 10 or more employees (Dares, 2024[7]). A recent report by the General Inspectorate for Education, Sport and Research (IGESR) draws attention to an important mismatch between training offers and demand from companies, ascribing recruitment difficulties to low employment rates among vocationally trained individuals and their tendency to choose non-industrial careers, despite having industrial training (IGESR, 2023[8]). To address the mismatch between the training on offer and the demand from companies, the IGESR recommends increasing collaboration between businesses and training programs, enhancing apprenticeships, improving the industry's image, and ensuring better alignment between education and job market demands, particularly at the technician level (IGESR, 2023[8]).
Stakeholder interviews further highlighted the need to challenge stereotypes to increase female participation in the workforce. Women are indeed underrepresented in this sector, only accounting for 28,5% of the industrial workforce in 2022 (Secrétariat d'État chargé de l'égalité entre les hommes et les femmes, 2023[9]). It must be noted however that a number of initiatives are already in place to boost the attractiveness of industrial professions and ensure a steady influx of talent, including the Industry Week (“Semaine de l’Industrie”) coordinated by industry federations or the campaign “Industri’elles” to encourage more women to enter industry sectors.
As a share of total enterprise spending in R&D and total spending in R&D in the manufacturing sector (2021)
Source: (Eurostat and OECD, 2024[10])
In 2022, the manufacturing sector accounted for 18% of France's greenhouse gas (GHG) emissions. Emissions from this sector have decreased by 48% since 1990, significantly contributing to a 25% reduction in France's overall GHG emissions during the same period (France. CGDD SDES, 2023[11]). Panel A of Figure 3.4 shows that manufacturing and construction sector emissions have decreased by 24 percentage points since 2014 (Citepa, 2024[12]). Panel B further illustrates the emissions trajectory since 1990, highlighting how, despite this progress, current emissions remain slightly above the carbon budget for the manufacturing and construction sector defined in the National Low-Carbon Strategy (SNBC-2) providing guidance for implementing the transition to a low-carbon, circular and sustainable economy across sectors. In 2023, SMEs accounted for 20% of the French manufacturing sector’s GHG emissions, below the EU average of 30% (OECD, 2023[13]).
Note: SNBC-2 stands for “Stratégie Nationale Bas Carbonne” or National Low-Carbon Strategy introduced by the Energy Transition for Green Growth Act (LTECV) and providing guidance for implementing the transition to a low-carbon, circular and sustainable economy across sectors.
Source: (Citepa, 2024[12])
Manufacturing SME readiness
Manufacturing SME sustainability readiness
Businesses in the manufacturing industry and the industrial sector as a whole are taking measures to reduce and decarbonise their energy consumption, but SMEs are lagging behind. A survey by Banque de France reveals that, in 2022, 90% of businesses in the industrial sector had adopted energy saving measures and 65% energy efficiency measures. In the manufacturing sector, 19% of surveyed businesses considered they were “very exposed to transition risks”, 6% considered they were exposed to physical risks and 56% to energy security risks. On average, surveyed businesses indicated they were planning to double their investments for the energy transition in the three following years. However, this was less the case for SMEs: while 65% of large companies indicated implementation of energy decarbonisation measures, less than 20% of surveyed SMEs did so (Banque de France, 2023[14]). The 2024 SME climate survey by Bpifrance shows a slowdown in green investments, with only 28% of SMEs investing in 2023, down 14 percentage points from 2021, and just 26% planning future green investments. Nonetheless, the industrial sector stands out, with 57% of managers planning investments, including in green technologies, compared to lower activity in sectors like Construction and Commerce (Bpifrance Le Lab, 2024[15]).
Recent studies show that French SMEs are increasingly aware of environmental challenges and proactively assessing their carbon emissions. According to a study by Bpifrance Le Lab, the share of SME leaders that are attentive to the environmental issues affecting their companies more than doubled since 2020, reaching 67% in 2023 against only 31% in 2020. Further, while many SMEs are exempt from the stringent regulatory obligations faced by larger companies, 35% of surveyed SMEs were proactively tracking their carbon emissions in 2023 (Bpifrance Le Lab, 2023[16]). Nevertheless, many SMEs still face barriers to their environmental transformation, including limited financial resources, time and capacity to deal with complex administrative procedures and regulations.
SMEs remain constrained in their decarbonisation efforts due to limited resources and staffing capacities, which hinder their ability to manage complex administrative requirements, and to identify and implement decarbonisation investments. The Banque de France Survey reveals that while regulatory or tax uncertainty remained a major obstacle for large enterprises in the industrial sector in 2022 (42% compared to 26% of SME), the lack of skills to identify and implement investments represents a greater concern for SMEs (23% identifying this as a major obstacle) than for large companies (12%) (Banque de France, 2023[14]). Further, SMEs are increasingly challenged by the growing complexity of administrative procedures. According to a survey by Bpifrance Le Lab, 76% of SMEs declare being constrained by complex administrative procedures, even more so than by limited access to financial resources (74%) or lack of time (67%). In addition, 66% mention cumbersome and sometimes contradictory standards for decarbonisation (Bpifrance Le Lab, 2023[16]). Lacking the dedicated staff or technical capabilities of larger organisations, this can add to the already limited time that SMEs have to focus on technical issues, including environmental action (Bpifrance Le Lab, 2023[16]; Bpifrance Le Lab, 2024[17]).
While evolving non-financial reporting requirements offer SME manufacturers opportunities to improve sustainability and attract investment, they can also add pressure. New regulations are being introduced at the EU level to reach greening targets. While most SMEs are not yet mandated, they are still subject to reporting requirements through supply chains and financial institutions and are encouraged to prepare in anticipation of future regulatory changes, including to attract investments (OECD, 2022[18]). For example, Socially Responsible Investment (SRI) funds have the same standards for SMEs as for larger businesses to provide labels, increasingly demanding non-financial data to assess climate-related risks (Label ISR, 2024[19]; Bpifrance Le Lab, 2024[17]). This however can also put additional strain on SME manufacturers lacking the resources of their larger counterparts. Further, audits are crucial to ensure the accuracy of sustainability reports that are voluntarily published by companies, to ensure credible actions are implemented and deter greenwashing (Bpifrance Le Lab, 2024[17]).
A lack of certainty and predictability in financial support frameworks can deter decarbonisation investments by French SMEs. Steadfast public commitment to decarbonising industry is also instrumental for SME manufacturers to engage in long term and substantial decarbonisation investments. When the France 2030 programme was initially launched in October 2021, EUR 5.6 billion were earmarked for the decarbonation of industry. However, during a reprogramming exercise of the investment plan in October 2023, the budget for industry decarbonisation was reduced by over EUR 1 billion resulting in EUR 4 billion being allocated to this purpose (Sénat, 2024[20]). This instability can deter decarbonisation investments by SMEs. In fact, the Bpifrance Le Lab survey revealed that 70% of surveyed SMEs perceived decarbonisation investments as a short-term competitive disadvantage.
Manufacturing SME digital readiness
The adoption of basic and advanced digital solutions by French enterprises is below the EU average and the digitalisation of French SMEs remains an area with notable potential for further development. In 2023, 52% of French SMEs had “basic level of digital intensity”, against 57.7% on average in the European Union (European Commission, 2024[21]). The adoption of cloud solutions by French enterprises is also significantly below the EU average, respectively standing at 22.9% and 38.9%. As for the adoption of AI, 5.9% of French enterprises had adopted AI applications in 2023, against 8% in the EU (European Commission, 2024[21]). Bridging this digital gap can support the manufacturing sector’s transition towards more efficient and sustainable production processes. The installation of sensors and other digital tools, for example, enables SMEs across sectors to engage in energy optimisation strategies (OECD, 2023[22]).
France also experiences a lag in the automation and robotisation of its industry with respect to other EU countries. According to the International Federation of Robotics (IFR) the robot density per 1 000 employees in the manufacturing sector stood at 180 in France in 2022, below the EU average of 208 (IFR, 2023[23]). Encouraging the adoption of robotics by SMEs can have important impacts on their competitiveness, production at lower cost and enabling them to compete more effectively with large groups (bpifrance, 2024[24]). Further, stakeholder interviews for this study highlighted that, in the case of SMEs lagging behind in the digital transition, incremental improvements are often more desirable than attempting a direct leap to the most advanced stages of digital transformation. This is primarily due to resource constraints, limited digital capabilities, and the need to align new technologies with existing operations and workforce skills. A phased approach can help mitigate risk and build internal confidence, enabling firms to advance their digital transformation more effectively.
There are fewer innovative SMEs in France than in other EU countries, while 53% of French industrial SMEs were considered to be innovation-active in 2022, this share is considerably higher in a number of EU countries as can be seen in Figure 3.5, including Germany (67%) or Italy (64%). This includes innovation in products and production processes. A recent survey by the European Union Intellectual Property Office reveals that the share of SMEs holding Intellectual Property Rights in France is lower (47%) than in other EU countries, including Italy (57%) and Spain (58%). The survey also indicates that, in France, SMEs that are IPR owners more frequently introduce innovations that are novel to their market or the world (25% of SME IPR owners) than non-IPR owners (18%) (EUIPO, 2022[25]).
Note: An innovation-active firm is one that has had innovation activities during the period under review, including those with ongoing and abandoned activities (Eurostat, 2023[26]).
Source: (Eurostat, 2022[27])
Manufacturing SMEs in the face of supply chain disruptions
Since 2020, SMEs in the manufacturing sector have been increasingly facing supply chain disruptions, but recent findings suggest most are addressing these challenges. In 2020-2021, shortage of semiconductors had a strong impact on French automotive and tech sectors, particularly SMEs. While large corporations could secure their supplies through established relationships and financial resources, many SMEs struggled to navigate these disruptions (Madelaine, 2021[28]). Since 2020, 31% of SMEs reported having been confronted with supply chain disruptions according to an SME survey by Bpifrance Le Lab. Nevertheless, the same survey shows that 61% of SME managers that declared being affected by supply chain disruptions, have taken measures to address this. Most effective measures include increasing stocks and diversifying suppliers, with respectively 78% and 72% of surveyed SME managers indicating they contributed to mitigating disruptions. Surveyed businesses also report the effectiveness of resorting to suppliers that are geographically closer, with 50% considering this strategy effective in reducing their supply difficulties (Bpifrance Le Lab, 2024[29]).
Suppliers in the automotive sector have been under increased pressure first with the Covid-19 crisis and then due to semiconductor shortages. While car manufacturers have managed such pressures by raising prices, suppliers are struggling more, especially those hit by the rapid shift towards electrification, which diminishes the demand for traditional components like casting and stamping used in internal combustion engine vehicles (Euroactiv, 2024[30]). Caught between rising material costs and demands from carmakers, automotive suppliers are currently facing workforce reductions and plant closures (Fay, 2024[31]). Stakeholders interviewed noted that concerted efforts beyond crisis periods, such as the Covid-19 pandemic or the semiconductor crisis, lack continuity. Carmakers are placing excessive pressure on suppliers, which weakens them. Promoting longer-term relationships with suppliers could strengthen the supply chain.
Finally, it is crucial to recognise that the resilience of supply chains depends on overarching industrial strategies at both national and European levels, including robust monitoring initiatives. Leading to an incipient shift toward regionalisation to mitigate future disruptions at the EU level, the "European Chips Act" aims to bolster regional tech sovereignty by 2030, addressing geopolitical tensions and rising logistics costs. At the national level, the France 2030 strategy emphasises industrial sovereignty and securing strategic materials to limit supply chain disruptions. Further, the French Observatory of Mineral Resources for Industrial Sectors (OFREMI) brings together the expertise of France's leading players in the analysis of strategic metals value chains, with the goal of ensuring better coordination and foresight in managing critical resources for industrial sectors. For example, by performing critical stress tests across the industry to ensure preparedness and strength against potential disruptions, in an effort to provide systemic support to enhance supply chain resilience (OFREMI, 2022[32]).
Government policy (automotive, machinery and electronics)
France 2030
In 2021 the government launched the France 2030 5-year investment plan to support the development of innovative technologies, sustainable transformation and industrial competitiveness. Representing a total investment of EUR 54 billion to be spent in 5 years – including EUR 20 billion from the 4th “Investments for the Future” programme – 50% of the plan’s expenditure should be allocated to purposes contributing to decarbonising the economy and 50% to supporting emerging players driving innovation (Site officiel du Gouvernement, 2021[33]).
SMEs are indicated as key beneficiaries of the investment plan – in line with broader government efforts to support industrial SMEs – along with start-ups and mid-sized companies2. Efforts in this field include the draft legislation “Projet de loi de simplification de la vie économique”3 or Simplification Law, which aims to reduce the administrative burden on businesses, particularly SMEs, and to streamline various administrative processes. The law aligns public participation, consultation and investigation for environmental authorisations in order to speed up administrative investigation procedures, preventing delays caused by the environmental authority's potential objections (Gouvernement, 2024[34]). Importantly, the law intends to ease industrial and infrastructure projects, like data centres and renewable energy installations. The proposed legislation has been reviewed by the Senate; however, its vote was postponed due to the dissolution of the National Assembly (Direction de l’information légale et administrative, 2024[35]). This is in line with efforts at the EU level to cut red tape, including the “Better Regulation Guidelines” aiming to rationalise reporting requirements. However, diverse stakeholders highlight the need to improve impact assessments and promote the “SME test” to ensure that regulations are fair and manageable for SMEs, as well as scaling up SME capacity building initiatives and giving SMEs access to affordable sustainability reporting professionals (SMEunited, 2023[36]).
There are complementary efforts to decarbonise the industrial sector outside the scope of the France 2030 plan. These include the Green Industry Act or “Loi Industrie Verte”, approved by the government in October 2023 with the goal of accelerating the country’s reindustrialisation and turning France into a European green industry leader (see Box 3.1). Other examples include the Energy Saving Certificates (“Certificats d’Économie d’Énergie”) programmes by the environmental agency ADEME. The “PACTE Industrie” initiative is for instance designed to support industrial companies in their transition to energy efficiency and low-carbon operations through tailored training and advisory services. Financial assistance covers 40% to 80% of training costs and 60% to 70% for studies and coaching. The programme also includes incentives for implementing Energy Management Systems (EMS) and supports companies as they establish comprehensive energy efficiency and carbon reduction strategies (ADEME, 2023[37]).
The measures put in place by the Green Industry Act should bring about a reduction of 41 million tonnes of CO2eq by 2030 – equivalent to a 1% reduction in France’s overall emissions and accelerate the mobilisation of public and private capital for the transition, bolstering the creation of green jobs within the industry sector (Ministère de l'Économie des Finances et de la Souveraineté Industrielle et Numérique, 2023[38]).
The law foresees leveraging funds collected from life insurance and retirement savings plans to further finance the decarbonisation of SMEs. The law identifies a growing interest among French savers to invest in projects that support the ecological transition and outlines several measures to meet this demand including (Légifrance, 2023[39]) :
A climate savings plan for young people to finance climate-related projects.
The creation of a Green Industry Label to identify companies and projects that support decarbonisation to channel green investment.
Simple labelling for green investments through straightforward labels that make these opportunities more transparent and reliable.
Development of European Long Term Investment Funds (ETILF 2) and green private equity as part of financial products such as life insurance and retirement savings, encouraging private investment by insurance policy holders and investors in green industries.
The law also aims to facilitate the establishment of industrial complexes, with a goal to halve the timeframe for setting up factories through increased speed of administrative procedures. Projects of "major national interest", determined by decree, now benefit from simplified procedures.
Additionally, it favours more environmentally virtuous operators for public procurement, with the possibility of excluding operators who do not meet their obligations at the European (CSRD) or national level (publication of GHG emissions assessment report and transition plan). The law makes the integration of environmental criteria in public procurement contracts compulsory since July 2024 (instead of August 2026) for key decarbonisation products (electric cars, heat pumps, etc.) (Ministère de l'Économie, des Finances et de la Souveraineté Industrielle et Numérique, 2024[40]). Finally, companies benefiting from public aid for the ecological and energy transition from the State and its operators will have to measure their environmental impact, via a GHG emissions assessment with a simplified procedure for medium-sized companies employing between 50 and 500 employees.
As part of the Green Industry Act, the government introduced in March 2024 a tax credit, to support companies in the financing of key industrial projects in the energy transition. The key beneficiaries of the Green Industry Tax Credit (C3IV) are manufacturers of batteries, wind power, solar panels and heat pumps, all of which contain semiconductors. This tax credit supports the entire production chain of these sectors, ranging from the production of essential equipment and components to the production or valorisation of critical raw materials. It is expected to generate EUR 23 billion in investment and the creation of 40 000 direct jobs by 2030. It should also make it possible to reduce emissions by 35 million tonnes of CO2. In March, 20 applications for approval had been submitted, covering the four sectors concerned, for a total investment amount of 1.8 billion EUR (Ministère de l'Économie, des Finances et de la Souveraineté Industrielle et Numérique, 2024[41]).
Electronics
Securing the access to strategic materials and components is recognised as a key condition to achieving the objectives of the France 2030 investment plan. This is particularly the case in strategic areas such as electronics, robotics and intelligent machines, as well as the development of national software solutions in the fields of artificial intelligence, cybersecurity, cloud computing and quantum computing. In the field of electronics, the plan acknowledges the strategic importance of semiconductors, particularly in light of the recent shortages which paralysed the automotive industry. In this context, the plan allocated EUR 5 billion to the production of electronic components and aims to double chip production in France by 2028, expected to generate investments of around EUR 18 billion in the country. Efforts to boost production of semiconductors have already started, with the launch of a new factory in Crolles in 2023 (Box 3.2).
In 2023 a new semiconductor components factory started production in Crolles, a city in the Grenoble region. This was the result of a partnership between two private sector companies (GlobalFoundries and STMicroelectronics) for a total investment of EUR 7.5 billion with EUR 2.9 billion invested by the State within the framework of the France 2030 investment plan.
The factory focuses on the production of energy-efficient high-performance components for key European industrial sectors – including the automotive sector but also telecommunications and aerospace among others – adding nearly 6% of new production capacity across Europe by 2028 and contributing to easing supply tensions.
Further, in June 2023, the European Commission approved 12 projects by French enterprises within the framework of the Important Projects of Common European Interest (IPCEI) in the field of microelectronics and connectivity. These projects will mobilise EUR 7 billion to create about ten factories in the electronics industry supply chain and are expected to create more than 2 500 jobs. These projects also target specific applications of microelectronics in multiple sectors, including the telecommunications and the automotive sector. It will also support researchers, SMEs and start-ups through financing and partnerships with research centres and key ecosystem players (Ministère de l'Économie, des Finances et de la Souveraineté Industrielle et Numérique, 2023[43]).
In addition to production targets, France is also committed to investing in research and development in the electronics industry and increasing electronics training capacity. R&D efforts are particularly focused on the development of thin-etched 10 nanometre Fully Depleted Silicon on Insulator (FD-SOI) semiconductors in collaboration with the French Atomic Energy Commission (CEA) (Ministère de l'Économie, des Finances et de la Souveraineté Industrielle et Numérique, 2023[42]). This technology is four times more powerful than the current technology and consumes four times less energy. Overall, the strategy establishes that 800 million should be devoted to supporting R&D in the electronics industry and a dedicated support scheme for innovative start-ups, SMEs and mid-sized companies should be created. Finally, the strategy allocates EUR 50 million to skills capacity building to support skills requirements throughout the industry (Ministère de l'Économie, des Finances et de la Souveraineté Industrielle et Numérique, 2022[44]).
Automotive sector
The France 2030 investment plan earmarks EUR 5 billion for the transport sector, including a sub-objective of producing about 2 million electric and hybrid vehicles by 2030 (Ministère de l'Économie, des Finances et de la Souveraineté Industrielle et Numérique, 2023[45]). In October 2023, 1 million electric vehicles had already been secured (Gouvernement, 2023[46]).
In order to support the automotive sector as it undergoes key transformations, the strategy aims to support R&D, the production of vehicles and components in France and to support businesses, in particular subcontractors, employees and regions (Ministère de l'Économie, des Finances et de la Souveraineté Industrielle et Numérique, 2023[47]). In reaction to the stricter regulation on CO2 emissions for new cars and vans adopted by the EU Council in March 2023, which currently bans the sale of new combustion engine cars in the European market from 2035 (Council of the European Union, 2023[48]), the strategy foresees the implementation of a targeted support mechanism for upstream SMEs in the automotive supply chain, particularly exposed to sustainable transformation and digitalisation megatrends.
To achieve the goals set out in the France 2030 strategy for the automotive industry, the government presented the 2024-2027 strategic contract for the automotive sector. The contract includes measures to promote the development of affordable, competitive, connected and decarbonised mobility offerings, the development of the circular economy and the decarbonisation of the fleet as well as structuring an electric battery industry (Conseil Nationale de l'Industrie, 2024[49]). Further, the contract suggests efforts to enhance the co-operation of stakeholders along the supply chain, as it highlights that the government will act as a guarantor of good relations between contractors and suppliers, and that exchanges between public authorities and contractors will be strengthened through regular high-level meetings (Conseil Nationale de l'Industrie, 2024[49]).
The France 2030 strategy includes several targeted supports for SMEs in the automotive industry in partnership with key stakeholders:
An accelerator programme for upstream companies in the automotive industry: Accélérateur automobile
This accelerator programme consists of a 2-year support programme in collaboration with Bpi France and the Automotive Platform (PFA), representing 4 000 enterprises in the automotive sector, including manufacturers, equipment suppliers, subcontractors, and mobility players. Eligible upstream companies in the automotive industry should have a turnover of more than EUR 10 million, over 10 employees and at least 40% of their activity in the automotive sector. In addition to tailored consulting services, the support includes trainings and workshop opportunities by HEC on topics like strategy, energy transition, financing, governance, and leadership. Additionally, there are industry-specific meetings for networking and knowledge sharing. 66% of the cost of the programme is financed by the government with EUR 33 000 remaining to be paid by beneficiaries in instalments (Bpi France, 2024[50]).
The Steering Committee for Automobile and Mobility Research “CORAM 2024” call for projects
The Steering Committee for Automobile and Mobility Research was first launched in 2020 to fund projects in line with the automotive sector’s strategic goals and focusing on developing clean vehicles and improving the sector’s environmental performance (Ministère de l'Économie, des Finances et de la Souveraineté Industrielle et Numérique, 2020[51]). The CORAM 2024 call for projects, operated by Bpifrance, in line with the France 2030 strategy, offers financial supports for projects in the automotive sector with a focus on six priority areas, including the production of zero-emissions vehicles as well as connected and automated mobility. Eligible projects must exceed EUR 1 million for SMEs and mid-sized companies, and EUR 4 million for large enterprises and are evaluated on innovation, environmental impact, socio-economic benefits, and financial viability. The support includes a combination of grants and recoverable advances, structured according to EU state aid regulations (Bpi France, 2024[52]). Since 2020, this programme has supported 60 projects with EUR 393 million for EUR 1.2 billion of investments (Conseil Nationale de l'Industrie, 2024[49]).
Support for investment projects to produce the vehicles of tomorrow and their components.
A new call for projects to support automotive investment in 2024 will support projects to industrialise components dedicated to the vehicles of tomorrow and to modernise the industrial facilities of subcontractors. With an overall budget of EUR 900 million between 2023 and 2026, the support is addressed to companies of all sizes working on initiatives in key areas of automotive innovation. It includes developing and assembling future vehicles, producing essential components and equipment, creating infrastructure for electric and hydrogen vehicle refuelling, diversifying automotive subcontractors, and improving the environmental performance of production processes and sites. Projects must align with these strategic goals to be eligible for support (Bpi France, 2023[53]). In 2023, the 49 winners had invested EUR 577 million and received public support of near EUR 107 million. The 2024 edition resulted in 68 new investment projects that will receive EUR 210 million in aid. Between 2023 and 2024, 33% of selected projects are attributed to SMEs, supported with EUR 60 million for about EUR 160 million of productive investments. An additional 20% of selected projects are attributable to mid-sized companies, having received EUR 66 million for more than EUR 310 million of productive investments (Conseil Nationale de l'Industrie, 2024[49]).
Support for skills: the “Compétences et Métiers d’Avenir” initiative
This initiative supports training for key roles in the sector's energy transition, with EUR 67 million in public funds allocated to seven projects, for a total investment of over EUR 120 million. These projects focus on reskilling workers for digital and ecological roles, particularly in battery and hydrogen technologies. Additionally, the "Rebond industriel" initiative, with a budget of EUR 100 million until 2026 (Ministère de l'Économie, des Finances et de la Souveraineté Industrielle et Numérique, 2023[54]), aims to support employment in regions heavily impacted by industry changes, ensuring future job prospects.
Machinery sector
The France 2030 strategy also allocates EUR 800 million to support the emergence of Industry 4.0 projects and strengthening France's supply of equipment for the industry of the future (Site officiel du Gouvernement, 2021[33]). The strategy has a strong focus on robotics for the industry sector:
The "Transfert Robotique" challenge under France 2030 was launched in 2023 and aims to accelerate the transfer of research results into practical robotic solutions for key industries (both in large enterprises and SMEs), supporting the development and integration of robotics in sectors critical to the future of industry. This initiative seeks to identify and implement the most suitable technological components for operational constraints across various sectors, without discriminating by industry or technology type. Eligible projects include a wide range of robotics and intelligent machines, from drones to industrial robots. The challenge consists of two phases, managed by the National Research Agency (ANR) and Bpifrance, with substantial funding opportunities. Phase 1 focuses on preliminary feasibility studies, with grants between EUR 50 000 and EUR 100 000, while Phase 2 supports more advanced projects with budgets between EUR 2 million and EUR 10 million. The deadline for applications was in May 2024, with the total project duration can extend up to 40 months (ANR, 2023[55]; Ministère de l'Enseignement Supérieur et de la Recherche, 2023[56]).
Bpi France launched a call for projects in 2023 to support the development of high-value-added robotic and industrial equipment sectors. It targets emerging markets or strategic areas critical to energy and ecological transitions. Eligible projects should involve significant R&D, software, and production equipment investments, aiming to surpass current technological standards while addressing market demand and contributing to economic, social, and environmental goals. The call, open until June 2025, includes amendments to encourage participation from small businesses – by reducing the minimum requirements that a company must meet to qualify for participation – and emphasises ecological transition and AI integration. Funding will consist of grants and recoverable advances (Bpi France, 2023[57]; Ministère de l'Enseignement Supérieur et de la Recherche, 2023[56]).
The regional dimension of the France 2030 investment plan
The France 2030 investment plan also includes a strong regional dimension. The regionalised component of the France 2030 strategy focuses on four key areas: accelerating the emergence of innovative companies through innovation projects; fostering sustainable industrial collaborations via collaborative R&D projects that bring together multiple partners, including SMEs; enhancing the competitiveness of strategic sectors through sector-specific projects by providing shared production and R&D resources; and supporting businesses in adapting to economic and organisational changes through Professional Training Projects, which focus on skill development for new professions in partnership with training providers. Examples of supports put in place in the Normandy region are further described in Box 3.4.
Regional programs, which often involve state-regional co-financing, are instrumental to aid SMEs as they are often able to provide more tailored support. They complement national initiatives, which are often thematically focused, and can cater to less advanced technological SMEs by offering a more accessible pathway to innovation. This territorial dimension is also reflected in the implementation of France 2030. Within the component of France 2030 supported by French public sector investment bank Bpifrance – one of the four operators of the investment strategy along with the National Research Agency (ANR), the Ecological Transition Agency (Ademe) and the Deposits and Consignments Fund (CDC) – 26% of the aid had been directed to SMEs two years after the launch of the investment strategy. Excluding notified major projects, SMEs accounted for 52% of planned aid, while 12% was intended for research laboratories within the framework of the European Research Area. Finally, 75% of the EUR 12.4 billion in aid approved by the France 2030 Ministerial Operational Steering Committee, was for projects outside the Paris Region, with a strong focus on innovation and low-carbon transition (Bpifrance, 2022[58]).
The sector specific component of the regional France 2030 Normandy investment plan
Jointly funded by the State and the Normandy Region and implemented by Bpifrance, the supports align with the strategic priorities outlined in regional development plans as well as the regional climate plan.
The "Improvement and Transformation of Sectors" initiative
The initiative is designed to boost the competitiveness and innovation of strategic regional industries, including electronics, automotive, and logistics sectors. It provides financial aid in the form of both grants (50%) and repayable advances (50%), with total aid ranging between EUR 250 000 and EUR 2 000 000 per project. Projects must have eligible expenses exceeding EUR 500 000 and funding can cover up to 50% of these costs, depending on the project’s specifics, risk level, and innovation potential.
Priority is given to projects that support the regional economic transition, particularly those involving shared industrial units, collaborative technical skill development, or the establishment of mutual technological platforms. Projects should demonstrate a clear contribution to structuring a strategic regional sector, involving multiple SMEs or mid-sized companies, and should aim for financial independence from public support in the long term. The initiative is open continuously from February 7, 2023, until available funds are exhausted.
The "Projets d'Innovation" initiative
The initiative supports innovation-driven projects by SMEs and mid-sized enterprises (ETIs). It offers funding between EUR 75 000 and EUR 500 000 (up to 50% of eligible expenses) for projects in two stages: feasibility and development/pre-industrialisation. Eligible costs include personnel, equipment, subcontracting, and operational expenses (DRAAF Normandie, 2023[59]).
The "Projets i-Démo Régionalisés" initiative
This initiative supports collaborative research and development projects to boost innovation, growth, and competitiveness in the region. This call for projects is open to consortia consisting of at least two companies (including one SME or ETI) and a research partner, with the aim of aligning with Normandy’s strategic priorities. The programme finances projects with eligible expenditures between EUR 1 million and EUR 4 million, covering personnel, equipment, subcontracting, and operational costs. Funding is provided as grants, with up to 60% for businesses and up to 100% for research institutions. The initiative prioritises projects in sectors such as energy, cybersecurity, and health (DRAAF Normandie, 2023[59]).
Note: This table provides an example of the policies researched by the OECD for this project and does not offer a comprehensive overview of the country's policies in the manufacturing sector.
Source: OECD analysis based on desk research. (Ministère de l'Économie, des Finances et de la Souveraineté Industrielle et Numérique, 2023[62]). (Bloom Legal, 2024[63]). (ADEME, 2023[64]). (DRAAF Normandie, 2023[59])
Conclusion
Policies within the framework of the France 2030 investment plan, fit into a two-pronged approach: the national top-down strategy and a bottom-up approach tailored to local innovative projects, proactively reaching out to SMEs. Efforts to establish a cohesive strategy linking national and regional policies have been highlighted as successful in improving SME access to funding and tailoring supports to SME needs, especially in the automotive sector. The France 2030 Investment Strategy addresses a wide spectrum of industries and includes targeted supports for the automotive, semiconductors and machinery sectors.
Supports financed by the France 2030 investment programmes focus both on skills development and technology adoption, crucial for adapting to the rapidly evolving industrial landscape. Initiatives like “Compétences et Métiers d’Avenir”, the “Accélérateur Automobile,” or the PACTE Industrie, which offer trainings and/or consulting services, play a key role, alongside existing support for technology adoption (e.g., “Transfert Robotique,” “Appel à projets: Offre de robots et machines intelligentes d’excellence,” and “Support for investment projects to produce the vehicles of tomorrow and their components”). Investing in education and reskilling for industry-specific roles is particularly relevant to reduce the manufacturing sector's job vacancy rate and increasing the attractiveness of industrial professions.
Stakeholder interviews highlighted that strengthening financial incentives, raising awareness, and simplifying access to existing resources could further enhance the effectiveness of these public initiatives. This is particularly important for decarbonisation investments in the manufacturing sector. SMEs, in particular, often face greater financial constraints than larger companies and therefore rely on a stable and accessible regulatory framework, as well as predictable funding at both national and EU levels, to plan and invest for the long term, especially given the manufacturing sector’s typically long investment cycles.
Efforts are being put in place at the national level to cut red tape, including the Simplification Law which contributes to diminishing administrative burdens. Finally, stakeholder interviews suggest that enhancing coordination between French industrial players – particularly in the automotive sector – and supporting a cohesive industrial policy are key, with efforts in this direction being suggested in the latest automotive sector strategic contract.
Introduction
The manufacturing sector represents the backbone of the German economy, contributing 20.4% of gross value added in 2023, a higher share than in other large EU economies (Destatis, 2024[62]). In 2024 manufacturing directly employed nearly 9% of the German workforce. More broadly, around 15 million of Germany’s 45 million jobs are directly or indirectly linked to the manufacturing sector (BMWE, 2023[63]; Eurostat, 2024[64]). Germany also exhibits a strong manufacturing orientation in terms of R&D expenditure, a key indicator of future competitiveness (see Figure 3.6), underscoring the sector's strategic importance and ongoing efforts to maintain Germany's technological and industrial leadership.
SMEs account for the vast majority of firms in the manufacturing sector, representing on average 95% of enterprises across the three selected manufacturing industries. They play a crucial role in Germany’s key industrial value chains, particularly in the automotive and machinery sectors. While larger enterprises generate the majority of turnover, SMEs remain important contributors to employment, accounting for around 38% of the manufacturing workforce in 2021 and serve as key suppliers and sources of innovation. Especially the automotive industry, with its extensive network of manufacturers, SME suppliers, dealers, and workshops, represents a key driver of economic activity in Germany, in particular in selected regions. The automotive supplier industry plays a key role in employment, with around 270 000 employees (in October 2023) as well as being a driver of technological advancements (Oliver Wyman, 2023[65]). Besides the automotive sector, Germany is a leading global exporter in machinery and equipment, accounting for 16% of global trade in 2021, with many SMEs generating sizeable shares of turnover (20% in the machinery and equipment sector in 2022).
Shares of R&D spending, Germany, 2021
Source: Enterprise statistics by size class, BERD by NACE Rev.2 activity (from 2021 onwards) and source of funds [rd_e_berdfundr2__custom_12710480]: https://ec.europa.eu/eurostat/databrowser/view/sbs_sc_ovw__custom_12499124/default/table?lang=en
Manufacturing SME readiness
Digital transformation
The widening gap in digital adoption between SMEs and large firms as well as the manufacturing sector’s shift of focus in value creation from mechanics to electronic systems and from hardware to software puts German SMEs under pressure. A 2018 survey of 68 German manufacturing SMEs highlights common challenges to the adoption of new technologies for manufacturing SMEs. These include high costs related to IT infrastructure, personnel, and technical training (Mittal et al., 2019[66]). Further, challenges consist in the need to improve the flow of data between the stakeholders involved in the value creation process in the automotive industry (VDA, 2020[67]).
In the face of those challenges, many SMEs have undertaken significant investments to adapt to ongoing transformations. In recent years there has been a significant increase in the number of German SMEs investing in digitalisation projects, particularly in the manufacturing sector. This trend is especially pronounced among SMEs in the R&D-intensive manufacturing sector, where 54% are engaged in digitalisation efforts between 2020 and 2022, compared to less than 37% of SMEs in the service sector. Overall, spending on digitalisation projects in German SMEs reached an all-time high in 2021, with EUR 23 billion invested (KfW, 2024[68]).
Economic shocks and supply chain disruptions
The German economy was significantly impacted by high-energy prices following Russia’s war of aggression against Ukraine. Energy-intensive industries that compete internationally (such as manufacturing) were affected, with a 10% decrease of production in 2022, followed by a recovery driven by the German price-cap policy and subsequently falling energy prices (OECD, 2023[69]; OECD, 2023[70]). However, rising energy costs are compounding other challenges to the competitiveness of German businesses, including SMEs, such as administrative and regulatory burdens and shortage of skilled workers in an ageing society. This is exemplified by Volkswagen's 2024 consideration of factory closures in Germany, an unprecedented step in the company's history5.
In the German automotive industry, specific challenges for suppliers consist in stagnating volumes of car sales, with unparallel fluctuations due to factors such as the semiconductor crisis, and high energy prices and inflation (Oliver Wyman, 2023[65]). This is coupled with a shift in production to Asia and North America, where the German economy is expected to lose a substantial portion of its car production – among other factors due to high energy costs, and regulatory requirements. For example, parts of the electric vehicles value chain have shifted to Asia, reflecting the region’s dominance in battery cell production. For example, comparing the two Mercedes models S-Class (internal combustion engine) and EQS (electric drive), 40% of production has moved to from Europe to Asia (e-mobil BW, 2023[71]).
Low-carbon transition and electrification
In the German manufacturing sector, SMEs contribute around 23% of GHG emissions (OECD, 2023[13]) while facing significant barriers to resource efficiency and circularity, including a lack of specialised skills and infrastructure. A main challenge consists in adjusting to the evolving demands of OEMs (e.g., switch to lighter materials to reduce OEMs’ emissions in production). Interestingly, the most impacted firms in the automotive sector are not exclusively the suppliers of component for internal combustion engine, but also those SMEs that manufacture parts of the auto interior, such as seats or flooring (Sarkar, 2018[72]). The reason is the pricing pressure on OEMs (e.g., through needs to invest in technologies and business model transformations), which cascades down the supply chain, compelling OEMs and Tier-1 suppliers to demand lower-cost components, such as seats made from less expensive materials. According to a 2023 survey of 74 automotive car suppliers in Germany, the transition from internal combustion engines to alternative drive technologies is consuming significant financial and personal resources. This shift is resulting in higher current costs than the benefits provided (see Figure 3.7). Additionally, the sudden political shift to phase out the environmental bonus for the purchase of EV at the end of 2023 may have temporarily decreased supplier’s share of profits from e-mobility products.
Germany, 2023
Note: The results contain survey responses from 73 German suppliers from October/ November 2023 (25% with annual revenues below EUR 100 million and 33% between EUR 100-500 million)
Source: VDA-survey in (Oliver Wyman, 2023[65]).
The machinery sector plays a key role in decarbonisation efforts, as machinery and plant engineering enable decarbonisation through its products. A survey among 57 German machinery manufacturers6 reveals that the vast majority considers the sustainability transformation as chance to maintain or expand their business, with 31% expecting to broaden their product portfolio with green products (McKinsey & VDMA, 2022[73]). Customers of machinery manufacturers are already demanding features like reduced energy consumption (32%) and minimised product losses (30%)7, pushing machinery companies to adapt.
Government policy (automotive, machinery and electronics)
The government support landscape for equipping SMEs to undergo transformative changes in the manufacturing sector is complex, as it comprises several initiatives from varying funding sources, including the EU, national programmes, and federal state programmes8. The present section provides an overview of key policies aimed at future competitiveness, resilience and adaptation to digitalisation and greening, starting with major flagship programmes at national level. Some of the analysed national policies also include broader support programmes that are promoted through regional partners such as state agencies. The following section presents targeted state level policies which offer manufacturing SMEs a concrete point of contact and multiple support services to undergo transformations.
The primary focus of the policies analysed is the leading automotive sector. However, SMEs from machinery and equipment, and electronics sectors are also impacted by these policy measures, either due to their direct involvement in the automotive supply chain, or through benefitting from the evolution of policy support over time, which, at both national and regional levels, extended to a variety of sectors beyond the automotive industry (see “Manufacturing-X” in Box 3.7 and “Transformationslotse Bayern” in Box 3.11).
In the electronics sector, SME-specific programmes are limited, but, innovative SME may benefit from other main policy initiatives, such as R&D projects under the European IPCEI9 project on Microelectronics and communication technologies (including government funding of EUR 4 billion), as well EUR 5 billion funding to support the new European Semiconductor Manufacturing Company in Dresden (BMWE, 2023[74]; DW, 2024[75]). Also, major policy initiatives targeting the automotive sector such as the measures to increase supply and demand of EVs (Box 3.5) have a significant impact on market conditions, requiring many SMEs to adjust to these evolving conditions to remain competitive.
Commitment: With the amendment of the Climate Protection Act, the federal government has tightened existing climate protection regulations and set the goal of becoming net greenhouse gas neutral by 2045. As an interim target, Germany's greenhouse gas emissions are to be reduced by 65% compared to 1990 levels by 2030.
Policies: The transport sector experiences the transformation to more environmentally friendly vehicles as a gradual process, with a variety of policies driving the shift from traditional internal combustion engine-centred value chains to EV production. Key policies to increase the supply and demand of EVs, as to reach a total number of 15 million fully electric vehicles on the streets by 2030, include:
Increasingly strict EU fleet-wide CO2 emission targets (95g CO2/km for cars from 2021, and a 100% emission reduction from 2035 onwards),
Environmental bonus for purchase of EVs (2016-2023, up to EUR 4500 EUR per car; EU 10 billion spent for the purchase of 2.1 million EVs), support halted by government’s decision following the ruling of the Federal Constitutional Court on the Climate and Transformation Fund,
Vehicle tax relief for battery electric vehicles (BEV) until 2031,
Other measures include the development of charging infrastructure, free parking in inner cities, measures to use bus lanes (with the 2015 Electric Mobility Act acting as basis for granting EVs those special privileges in public traffic areas).
Impacts of policies and shifting market conditions:
When compared to selected European countries, in 2022, 31% of newly registered passenger vehicles in Germany were EVs – both Battery Electric Vehicles (BEV) and Plug-in Hybrid Electric Vehicles (PHEV) – placing the country ahead of France (22%) and the UK (24%), but behind the Netherlands (34%), Sweden (56%), and Norway (88%) (e-mobil BW, 2023[71]). In December 2022, the combined share of BEV and PHEV reached its peak with 51% of market share of newly registered vehicles – potentially due to the reduced environmental bonus from beginning of 2023 that led customers to bring forward planned purchases in 2022 (now-gmbh, 2023[76]). While the share of BEV had increased to 31% in August 2023, the share of new BEV registration went down to less than 14% one year later in August 2024, following the final halt of environmental bonus for the purchase of EVs in autumn 2023 (ADAC, 2024[77]). The subsequent decrease in demand and forecasts for EVs led to uncertainty among investors in the EV market and a backlash for supplier companies, including SMEs, investing in production of EV components.
Targeted investment subsidies and R&D activities (digitalisation/ low-carbon transition/ resilience)
As part of the 2020 economic stimulus package (KoPa 35c), the German government launched a bonus programme earmarking EUR 1 billion to enhance the competitiveness of vehicle manufacturers and supplier industry by promoting future investments. The overarching SME-relevant funding framework is called “forward-looking investments by vehicle manufacturers and their suppliers”, implemented by the Federal Ministry for Economic Affairs and Energy (BMWE) and co-financed by the EU. Within this framework, Module a1 (investment promotion programme) and a2 (R&D programme) are designed to enhance the productivity and resilience of vehicle manufacturers and component producers.
Investment grants to modernise production (automotive)
The funding programme “modernisation of production” (Module a1), running from 2021-2023, aimed to support the transformation of the automotive industry via the promotion of investments in new manufacturing facilities, processes and industry 4.0-capable manufacturing infrastructure. This explicitly included investments to help SMEs in the component supplier industry introduce digital and sustainable manufacturing processes, supporting them against the consequences of the COVID-19 pandemic. 50% of applications were submitted by SMEs. 496 projects were supported – each project covering from 10-50% of the investment costs –amounting to an overall volume of EUR 190 million. Eligible costs included investments in production facilities such as acquisition of machinery, equipment and software, as well as complementary investments for building competencies such as consulting services and employee training.
R&D support and transfer: Digitalisation of supply chains in the industry (automotive, machinery, electronics)
Module a2 “Digitalisation of vehicle manufacturers and the supplier industry” of the funding framework supports collaborative R&D projects defined by the automotive industry. The support specifically targets innovative, data-driven production processes and the implementation of Industry 4.0 approaches within the complex value creation systems of vehicle manufacturers and the supplier industry. The funded projects are led and driven by companies from the automotive and supplier industry, with a strong involvement of SMEs whose participation is explicitly encouraged. The solutions, which aim to be developed through application-oriented, collaborative projects cover the following areas:
Development of digital manufacturing concepts beyond traditional assembly line and cycle operation,
Establishment of connected value creation processes increasing transparency and resilience of the production system against disruption – and allowing comprehensive data analysis along the supply chain,
Development of holistic and collaborative, cooperative business models and processes in digital ecosystems,
Implementation of Digital Twins which fully map product life cycles and thereby contribute to ecologically sustainable production.
With the targets set, the programme supports the National Industrial strategy 2030 to strengthen new technologies as well as objectives such as knowledge and technology transfer, which are anchored in the government’s High-Tech Strategy 2025. Moreover, the programme is embedded in the "Transformation Dialogue for the Automotive Industry” and the “Industry 4.0 Platform”, supported by the Federal Ministry for Economic Affairs and Energy (BMWE) and the Federal Ministry of Research, Technology and Space (BMFTR) (BMWE, 2024[78]).
Until the end of 2023, 37 collaborative projects have started working (363 subprojects) with a total funding of EUR 690 million, of which EUR 351 million is state funding. Project partners led by one major industrial company involved OEMs, supplier and technology companies (12 vehicle manufacturers, 11 Tier-1 suppliers, 14 Tier-2 suppliers, 7 Tier-n suppliers, 192 equipment/ technology companies). The first and flagship project Catena-X was running from 2021-2024 (see Box 3.6).
Project volume: approx. EUR 245 million (44.6% financed by the BMWE)
Timeline: 2021-2024 (followed by the establishment of the existing association “Catena-X Automotive Network e.V.” in 2021)
Goal: establishment of uniform standards for data and information flows along the entire automotive value chain; development of “SME-ready” data solutions
Description:
The flagship project Catena-X aimed to implement a cooperative data ecosystem operating along the automotive value chain, with the objective to enable manufacturers, suppliers and recycling companies to fully harness the potential of data. While many companies already stored and analysed their data, collaboration is challenging, which hinders the creation of seamless data chains (BMWE, 2024[78]).
By establishing a uniform data standard, project partners expect to improve performance in quality management and logistics processes, transparency regarding CO2 reductions and progress in product development. The development of “SME ready” solutions aims to integrate SMEs into the network by offering them low-cost and easily accessible solutions.
The developed solutions fall under various use cases such as Traceability, Sustainability and Digital Twins, all of which incorporate elements relevant to SMEs. For example, Catena-X has developed end-to-end traceability solutions that can be used through Excel uploads via standardised interfaces, enabling seamless integration with open-source, manufacturer-specific traceability systems (Catena-X Automotive Network, 2023[79]).
The results of Catena-X and other projects under Gaia-X for future mobility will be gathered and made accessible through Transfer-X, a platform designed to establish a transformation hub for SME participation in the digital economy (budget: EUR 8 million, 2022-2025). This publicly accessible platform will offer the outcomes of the KoPa35c initiative available as target group-specific, standardised self-learning modules.
Manufacturing-X
While Catena-X (2021-2024) focused on the automotive industry, building on its results, the projects of the Manufacturing-X initiative (from 2023) (see Box 3.7) aim to create a cross-industry, open data ecosystem for the manufacturing sector, including both data on product and production. Manufacturing-X is a joint initiative by businesses, policy makers and academia, and in close collaboration with European and international stakeholders – with global collaboration institutionalised in the International Manufacturing-X Council.10 The BMWE supports the Manufacturing-X initiative in Germany with an accompanying funding programme of around EUR 150 million, thereby, assisting cross-industry, pre-commercial collaborative projects led by an industry partner.
Budget: EUR 150 million (2024-2026 for consortia/subprojects)
Operated by: Federal Ministry for Economic Affairs and Energy (BMWE)
Timeline: 2024-2026
Goal: Support the creation of industrial data ecosystems channelled through consortia (R&D support)
Rationale: Industry 4.0 requires a common, open and trustworthy data ecosystem, in which all participants in the value chain can share their product and production data securely and interoperable. So far, there are few standardised data interfaces, each use case is unique.
Role of SMEs: SMEs are the primary users of developed applications. While project consortia are led by major industry companies, SMEs are present in the various consortia. Besides the technical implementation of the cross-industry data ecosystem, a main goal of Manufacturing-X is the transfer of the results through SME participation and development of “plug-and-play” solutions that are easily accessible to SMEs. A funding allocation of EUR 4 million is earmarked, starting in 2024, for establishing structures to transfer the results of R&D projects. Additionally, all sector-specific R&D projects include a transfer component.
Sector-specific projects (selection):
Factory-X: (Flagship-project with EUR 70 million of budget allocation with focus on machinery sector): Under the leadership of Siemens and SAP, 47 partners collaborate to develop a data ecosystem for factory equipment suppliers and operators on the basis of Catena-X results and concepts of Platform Industrie 4.0. The project focus on aspects such as data consistency across manufacturers, carbon footprint and energy management, digital “as-a-service” business models, and traceability of materials.
Robot-X: Robot-X aims to lower barriers for SMEs to entry into robotic systems and automation lines via the use of model-based systems engineering and AI.
Semiconductor-X: This collaboration between industry leaders and research partners develops digital twins for the semiconductor sector based on Catena-X and Gaia-X architectures. The digital twins model critical supply and value chain segments, while AI-based analysis intents to help companies master industry specific challenges (such as high throughput times, varying process yields and high product variance).
Transfer and cross-sectional projects:
DAVID: DAVID is a cross-sector project to ensure interoperability based on Asset of Administration Shells. Among other goals, the project is developing an SME “adapter” to make the data space accessible to SMEs.
Decide 4ECO: Decide 4Eco aims to create a digital tool that supports sustainability-focused decision-making across the entire product lifecycle and value chain ion the manufacturing sector. Among other, the project develops interfaces, including a standardised Digital Product Passport.
ScaleMX:
This project aims to consolidate the strategy for transferring Manufacturing-X solutions, with a budget allocation of EUR 4 million. The goal is to facilitate the widespread implementation of these solutions across the industry by building the network’s capacity to transfer them.
Source: (BMWE, 2024[80])
Beyond the flagship initiative Manufacturing-X, which targets various sectors including automotive, machinery and semiconductor, different modules of the 2020 economic stimulus package (KoPa 35c) have supported SMEs in the automotive sector. These include the above-mentioned module a2 to support the digitalisation of vehicle manufacturers and the supplier industry as well as the module b targeting medium-sized companies in the automotive sector. With over EUR 200 million (until Q1 of 2024), module b has supported the development of R&D projects for new vehicle and system technologies. The projects involve technologies for automated driving, innovative driveline concepts towards decarbonisation and system technologies, with a special focus on the promotion of SMEs. Finally, module c of the KoPa 35c establishes regional transformation networks (2021-2025) targeting the transformation of the automotive sector (see State policy programmes offer targeted support for manufacturing SME transformation).
Further SME-targeted R&D support programmes
The Federal Ministry of Research, Technology and Space (BMFTR)’s initiative “SME-innovative” (“KMU-innovativ”) supports cutting-edge research of SMEs in 11 areas of technological innovation.11 This long-standing initiative was launched in 2007 and has since then supported more than 2700 individual and collaborative projects, involving around 4 379 SMEs. A main objective of this programme is the simplified access of funding for cutting-edge research for SMEs. This accessibility of the offer is facilitated through a dedicated advisory telephone service, a timely decision on the approval of funding within 2-3 month12 as well as the application of particularly simple rules for proving the required equity capital for SMEs13 (BMFTR, 2023[81]). Selected supporting guidelines for promotion of projects within the different areas of technological innovation such as “SME-innovative: Future of Value Creation” (2023-2024) (Box 3.8) place a strong emphasis on manufacturing SMEs.
Type of support: Grants for individual R&D projects led by a single SME or collaborative projects involving one or more SMEs, with or without the participation of research institutions 14 , with variable amount of funding and two application windows per year.
Development of the programme: The guideline “Zukunft der Wertschöpfung” under “SME-innovative” evolved from its predecessor, the guideline on “Production research”, to address the more wholistic nature of SME needs in response to industrial trends. For instance, the ongoing servicification of the manufacturing sector made it logical to consolidate research on production and services under a single guideline.
Thematic areas (selection) and target: Thematic areas eligible for project funding are: Innovative products, machines and equipment for industrial production; new manufacturing technologies and process chains; digitalisation and visualisation of production systems; innovative business models; new forms of collaboration in value creation networks; and robotics integration across value chains.
Due to the thematic areas of the R&D projects, as well as the evolution of the guideline from its predecessor on production research, so far, the majority of participating SMEs are from the machinery sector (58%) and other manufacturing industries (21%).
Current project example: “Humans and modular painting with robots (MemoLaRo)”
The MemoLaRo research project aims to develop a future-oriented painting workstation that significantly improves working conditions for employees in the painting process. The project focuses on creating assistive painting robots that use sensor systems and automatically generated painting programmes to paint components. The project runs over a period of three years and involves collaboration between two SMEs and one research institution. By the end, it will produce a modern workstation with better ergonomics, reduced health risks, and the potential for widespread use in industries where small production batches are still painted manually.
Development of the programme: The guideline “Zukunft der Wertschöpfung” under “SME-innovative” evolved from its predecessor, the guideline on “Production research”, to address the more wholistic nature of SME needs in response to industrial trends. For instance, the ongoing servicification of the manufacturing sector made it logical to consolidate research on production and services under a single guideline.
Thematic areas (selection) and target: Thematic areas eligible for project funding are: Innovative products, machines and equipment for industrial production; new manufacturing technologies and process chains; digitalisation and visualisation of production systems; innovative business models; new forms of collaboration in value creation networks; and robotics integration across value chains.
Due to the thematic areas of the R&D projects, as well as the evolution of the guideline from its predecessor on production research, so far, the majority of participating SMEs are from the machinery sector (58%) and other manufacturing industries (21%).
Current project example: “Humans and modular painting with robots (MemoLaRo)”
The MemoLaRo research project aims to develop a future-oriented painting workstation that significantly improves working conditions for employees in the painting process. The project focuses on creating assistive painting robots that use sensor systems and automatically generated painting programmes to paint components. The project runs over a period of three years and involves collaboration between two SMEs and one research institution. By the end, it will produce a modern workstation with better ergonomics, reduced health risks, and the potential for widespread use in industries where small production batches are still painted manually.
Source: (BMFTR, 2024[82])
SMEs from all sectors, including the manufacturing sector, can also apply for R&D support under the R&D flagship programme the “Central Innovation Programme for SMEs (ZIM)”, managed by the Federal Ministry for Economic Affairs and Energy (BMWE) (see Box 3.9). In comparison to the initiative “SME-innovative”, which focuses on cutting-edge research in specified high-tech industries, the ZIM is a broadly applicable, technology- and sector-neutral funding programme, offering extensive support to a large number of SMEs. However, a recent evaluation of the Central Innovation Programme for SMEs (ZIM) showed that SMEs realising R&D projects often consider the above-described BMFTR-managed “SME Innovative” initiative as the main alternative to the ZIM15 (ZEW & Prognos AG, 2024[83]). This reflects the comparable support services offered by both initiatives.
Timeline: 2017-2024 (programme will be continued new upcoming guidelines in 2025)
Budget: EUR 694 million in 2023
Operated by: Federal Ministry for Economic Affairs and Energy (BMWE)
Type of support: Grants for individual or collaborative R&D projects (25-60% funding quota, max. EUR 550 000), all sectors
Target: Companies with less than 500 employees (max. of EUR 50 million in annual revenues); from January 2018 to July 2023 around 18 000 projects were supported.
Evaluation: The 2024 evaluation of the programme showcased its positive role in facilitating technology transfer, especially for SMEs with initially low levels of R&D intensity. The leverage effect on R&D spending is estimated at 1.9, meaning that for every euro of funding received, companies contribute an additional 90 cents towards research and development.
SME success story (machinery sector):
Through e-commerce, goods like textiles are often shipped in prefabricated standard boxes, which require filling of cavity by additional packaging materials, leading to additional paper and plastic waste. The medium-sized company Hugo Beck Maschinenbau GmbH&Co.K (110 employees), specialising in packaging machines and automated solutions, aimed to tackle this challenge. With the technical support by the Central Innovation Programme for SMEs, the company developed a variable and automatable packaging solution to save material, weight and transport space. The solution was successfully introduced into the market (BMWE, 2024[84]).
Source: (BMWE, 2024[84])
Business Development Services available to manufacturing SMEs
Further SME-targeted support open to all sectors is available through national programmes, which are not directly linked to sectoral initiatives. This includes the initiative “Funding of business consultancies for SMEs” (Förderung von Unternehmensberatungen für KMU) (see Box 3.10). To help SMEs navigate the opportunities and challenges of digitalisation, the BMWE launched the “Mittelstand-Digital”-initiative in 2015. This initiative established nationwide Mittelstand-Digital Innovation Hubs, serving as regional contact points where SMEs can access expert knowledge, technology demonstrations, networking opportunities, and training. Selected hubs specialise and share expertise in areas highly relevant for manufacturing SMEs adaption to megatrends. For instance, the “Klima.Neutral.Digital” Hub training climate coaches to develop climate neutrality roadmaps within SMEs, in particular specialising on digitally-supported optimisation of production process in the manufacturing industry (BMWE, 2024[85]).
Operated by: Federal Ministry for Economic Affairs and Energy (BMWE)
Type of support: Grant
Target: SMEs across all sectors (not specifically targeted towards manufacturing SMEs)
Budget: EUR 25-30 million per year (2023-2026), funding of up to 80% of costs, max. EUR 2800
Main objective and description:
The programme supports SMEs and freelancers seeking external consultancy. This funding covers advice on all aspects of business management, including economic, financial, personnel, and organisational matters (investment planning, optimisation of work processes, sustainability and environmental protection etc.).
Source: (BMWE, 2024[86])
State policy programmes offer targeted support for manufacturing SME transformation
Germany’s federal system divides power between the national government and the 16 federal states, which can lead to variations in the regulation and support of manufacturing SMEs across states. Regions with strong economic specialisations in manufacturing, particularly in the automotive industry – such as the Federal States of Baden-Württemberg and Bavaria – showcase robust and targeted state-level programmes to support SME transformation in manufacturing. In these two federal states, the automotive industry is particularly important, with a combined total of over 400 000 employees directly working in the automotive sector in the states (bayern-innovativ, n.d.[87]).
These programmes not only complement national policy programmes, but they primarily serve as an initial point of contact for SMEs to access different kind of business support services (EU, national, and state level). As showcased by the two flagship programmes Transformationswissen BW and Transformationslotse Bayern (see Box 3.11), these policy programmes fulfil particularly important functions of:
Disseminating knowledge (publications, workshops, seminars) targeted to a heterogenous SME audience,
Offering training opportunities to SMEs across varying levels of preparedness towards megatrends; this includes technical advice or business development services, or networking opportunities,
Providing support to navigate and identify suitable funding opportunities,
Offering a range of networking opportunities, by connecting SMEs with regional partners and networks (such as regional transformations networks, and thematic transformation hubs).
As supplement to the measures of the economic stimulus package (KoPa 35c) (see Targeted investment subsidies and R&D activities (digitalisation/ low-carbon transition/ resilience), the Automotive Industry Fund (“Zukunftsfonds Automobilindustrie”) provides support for strengthening the automotive industry at the regional level, through the establishment of regional transformations networks, and thematic transformation hubs. Those networks explicitly aim to promote and transfer knowledge to SMEs in automotive and component supplier industries. 25 currently active regional transformation networks (funding volume of around EUR 161 million from BMWE) – implemented by project partners who feed in their expertise – focus on networking and exchange of experience between regional stakeholders and automotive and component supplier industries and develop a regional transformation strategy. The regional transformation networks work together with 10 currently active thematic transformation hubs (funding volume of around EUR 60 million). These are led by state agencies, or research institutions and specialise in specific issues such as electric mobility, battery hydrogen or digital infrastructure and software, thereby, aiming to improve knowledge transfer and raise awareness of resource efficiency and sustainable production in value chains. The hubs primarily serve as nation-wide point of contact between R&D stakeholders and companies, in particular SMEs.
Transformationswissen BW (State of Baden- Württemberg)
The programme Transformationswissen BW (Transformation Knowledge BW) aims to support SMEs in the state of Baden- Württemberg in navigating ongoing transformations by offering an easily accessible and neutral point of contact. It emerged from the political dialogue format Strategiedialog Baden-Württemberg. The programme targets SMEs in the automotive industry including suppliers and SMEs in services (such as maintenance and repair) with the goal to collect and consolidate existing support services and making them widely accessible for SMEs. The state pilot centre, managed by the State agency e-mobil BW, offers concrete support to SMEs which is accessible through their online platform. The support is designed in collaboration with regional partners, existing networks, organisations and political stakeholders. Further, Transformationswissen BW and e-mobil BW support the 6 regional transformation networks active in the state of Baden-Württemberg.
More concretely, Transformationswissen BW supports SMEs with services which include external consulting, training, events relevant to the target group, or thematically relevant studies and informational materials. Concrete support activities include:
Database with over 400 publications, including major publications and shorter documents of the format “Knowledge Compact” (Wissen Kompakt) to make technical knowledge in various areas of transformation (e.g., battery technologies, hydrogen powered fuel cells, semiconductors) accessible to a wide audience including SMEs;
Database with over 300 training offers, gathering training offers including (online) seminars, advances study programmes from partners on regional and national level;
Continuously updated event calendar, including SME-targeted workshops to support SME in product design and innovation, knowledge events (e.g., on latest developments and innovations in the field of battery technology and electric drivetrains), networking events – organised by e-mobil BW or partners.
Overview of current funding and advisory information, targeted to SMEs and displayed in a database for companies to obtain an overview of various funding programmes.
One successful support instrument that received strong SME demand was the consulting voucher “transformation automotive industry” (Beratungsgutschein). Targeted specifically at medium-sized suppliers in the automotive industry (up to 250 employees), this voucher provided easy access to strategic consulting around the transformation of the automotive industry. The voucher covered financial support of up to 80% (and max. EUR 10 000 per voucher, max. 3 vouchers) to receive external advice (in strategy, diversification, business model development, data analytics etc.) by one of the consultants listed on Transformationswissen BW’s website. Overall, the programme, running from 2020 to 2024, received 800 applications from around 500 SMEs, with half of the applications received from the manufacturing sector and the other half from services (automotive trade and maintenance) (e-mobil BW, n.d.[88]).
Success factors
Key success factors of Transformationswissen BW include effective outreach and communication with a diverse group of SMEs, followed by a tailored needs assessment conducted collaboratively with each company through a dedicated one-hour online call. Additionally, the programme offers a wide range of support instruments tailored to different needs, alongside access to experts in various fields, backed by a comprehensive support network of thematic clusters and hubs.
Transformationslotse Bayern (State of Bavaria)
Description, development of the programme and objectives
The programme Transformationslotse Bayern (Transformation Guide Bavaria) is a SME targeted programme and single point of contact to support SMEs in Bavaria in their process of transformation. The programme, managed by the State agency Bayern Innovativ (also one of the key implementing partners of the project transform.by to create 4 regional transformation networks) received its mandate from the Bavarian Ministry of Economic Affairs in 2020. Initially, the focus was on the Bavarian automotive industry, but since 2022 the support to advance SME transformation efforts was broadened to other sectors.
Concrete support instruments include:
Initial point of contact and needs analysis through online call (around 1h) and self-assessment, and follow-up calls (over one thousand calls including over 70 physical visits of SMEs)
The subprogramme called “Funding guide” (Förderlotse) helps SMEs with advanced project ideas navigate the funding landscape and identify and access suitable funding and advice,
Organisation of events, event calendar and weekly lecture series along three core areas technology, markets, and cross-industry opportunities.
Success factors
Recognising the challenges SMEs face in choosing the right support, Bayern Innovative experts provide targeted advice across sectors. This helps SMEs navigate transformation paths, such as shifting from parts production to components manufacturing or from combustion engines to micromobility. The support responds a wide range of needs including idea generation, funding guidance, networking, and patenting assistance. Furthermore, many manufacturing SMEs, producing components for automotive or machinery sectors, often defy strict sector classification. Successful transformation relies on leveraging their expertise to enter new markets. Thus, one example of important support in this area is weekly lectures, such as the introduction to medical technology markets, a growing and highly regulated sector that offers potential opportunities, particularly for SME suppliers in the automotive industry. These lectures showcase market opportunities and help navigate regulations to facilitate market entry. As with the Transformationswissen BW programme, a key success factor is the strong connection to a support network with dedicated expertise. In this case, the ability to link SMEs with one of the 17 clusters established through the Cluster Initiative Bavaria (“Cluster-Offensive Bayern”, supported by Bavarian Ministry of Economic Affairs, Regional Development and Energy) plays a crucial role. These include clusters coordinated by Bayern Innovativ, such as Automotive, Medical Technology, Mechatronics and Automation, and New Materials.
Note: This table provides an example of the policies researched by the OECD for this project and does not offer a comprehensive overview of the country’s policies in the manufacturing sector.
Source: OECD analysis based on desk research and stakeholder interview.
Conclusion
German government policy features a strong emphasis on SMEs in the manufacturing sector, through different programmes, including SME-targeted measures, that focus on R&D activities, business support services and knowledge transfer. The support is particularly concentrated in the key industry, the automotive sector, encompassing services for the variety of SMEs involved in the automotive value chain. Broader cross-sector SME-targeted R&D support programmes (ZIM) as well as more specialised R&D support initiatives for high-tech sectors (“SME-innovative”) receive overall strong interest and uptake by manufacturing SMEs. Furthermore, flagship initiatives such as the Manufacturing-X project also involve R&D projects for different sectors including machinery and semiconductor industries with the goal to create collaborative data ecosystems for the manufacturing industry. However, the success of these policy measures hinges on successful transfer of knowledge and solutions to SMEs for which also major efforts are currently underway.
Major policy initiatives in Europe and Germany (such as in the area of electric mobility and semiconductors) have set the direction for the German industry and have benefitted manufacturing SMEs in their adaption to ongoing megatrends. At the same time, policy changes, such as the sudden halt of environmental bonus for EVs, have also created uncertainty in the markets and for SMEs in the value chain. Furthermore, SMEs reliant on the traditional car industry, such as internal combustion engine component manufacturers, and those unwilling or unable to shift production methods or product lines, face mounting challenges in adapting to the changing market landscape. In this context, institutional support through SME-targeted programmes from regional partners, including state agencies, plays a crucial role in facilitating adaptation among a diverse group of SMEs. These agencies provide manufacturing SMEs with guidance and targeted assistance, while also supporting the implementation of major national government programmes, such as regional transformation networks, and thematic hubs.
Introduction
The manufacturing sector is a cornerstone of Japan’s economy, contributing 19.4% to the country’s GDP in 2022 (Figure 3.8) and employing 15.5% of the workforce in 202316 (Figure 3.9). Furthermore, labour productivity in manufacturing was 24.7%17 higher than the average across all sectors in 2022 (METI, 2024[89]). Over 2012-22, productivity per capita in the manufacturing sector grew by 8%18, against 4% growth across all sectors, highlighting its importance as an engine of Japan’s economic growth.
Japan is a world leader in the use of robots and AI, driven by a significant labour shortage due to its aging population. As illustrated in Figure 3.10, over 2007-2022 the share of employees aged 15 to 34 decreased by close to 5 percentage points, standing at 24.4% in 2022. This push for innovation has accelerated the spread of autonomous vehicles and strengthened semiconductor manufacturing capabilities, both critical for advancing AI technologies.
Japan faces energy challenges due to its reliance on imported fossil fuels. To break away from excessive dependence on fossil fuels and achieve a supply-demand structure that can withstand an energy crisis, it needs to secure “3E” energy goals (energy security, economic efficiency, and environment). To address this, Japan is making efforts to rapidly transition towards renewable energy and nuclear power, aiming to increase their share from 27% in 2022 to 56-60% by 2030. Additionally, energy conservation efforts aim to maintain 2030 energy consumption at 2019 levels (METI, 2021[90]).
As a share of total gross value added generated in Japan in 2022
Source: (METI, 2024[89])
As a share of total number of employees in Japan in 2022
Source: (MIC, 2022[91])
As total number of employees in manufacturing sector and the share of employees aged 15-34 years in the sector in Japan
Note: The data in 2011 was not reported because of the 2011 off the Pacific coast of Tohoku Earthquake
Source: (MIC, 2022[91])
Manufacturing SME readiness
Overview
The manufacturing sector in Japan, including the automotive, semiconductor and machinery industries, is being reshaped by the combined effects of the transition towards lower-emission production, the adoption of digital technologies and evolving geopolitical developments.
The manufacturing sector is a significant source of greenhouse gas (GHG) emissions and, therefore, plays a crucial role in efforts to reduce these emissions. According to National Institute for Environmental Studies (NIES, 2021[92]), the manufacturing sector is responsible for 23.3 %19 of total CO2 emissions in Japan in 2021. The machinery category, which includes automotive and semiconductor industries, accounts for 0.8% of total emissions20. As for SMEs in this sector, they have significant impact as SMEs account for 66% of employees and 55% of value-added (Figure 3.11). Moreover, as labour shortages intensify in Japan, with only 76.3%21 of job positions filled, the demand for digitalisation, including autonomous vehicles, AI chips, and smart factories continues to grow. Additionally, geopolitical tensions are reshaping supply chains and prompting Japan to enhance its capacity to produce essential goods and limit the export of semiconductors and machines.
Source: (METI, 2021[93])
Low-carbon transformation
The transition towards lower-emission and more resource-efficient production is essential for Japanese SMEs, especially as the government targets carbon neutrality by 2050. The GX promotion Strategy (Cabinet Secretariat, METI, Cabinet Office, etc., 2023[94]) highlights the importance of SMEs especially in the automotive sector, where SMEs form a significant part of the supplier base 22. However, SMEs often face challenges in adapting to these developments due to limited resources and expertise. According to Forbes Japan, only 20% of SMEs have successfully implemented GX initiatives. In a recent survey, 28.9% of companies that recognised the need for GX but have not yet taken action cited the lack of skilled personnel as the main reason for inaction (Forbes Japan, 2023[95]).
Digital transformation and labour shortage
Japanese SMEs are experiencing critical labour shortages, primarily driven by an aging workforce. The demographic shift is making it increasingly difficult to attract younger workers while raising the risk that valuable tacit knowledge and technical expertise will be lost as experienced employees retire. An ageing workforce can also create additional challenges for productivity, including difficulties in adapting to new technologies and evolving work processes. In many SMEs, insufficient succession planning and limited leadership renewal further exacerbate risks to business continuity and can reduce the attractiveness of these firms to younger generations. While many SMEs have sought to address labour shortages and productivity pressures through digitalisation, their efforts often remain focused on external recruitment rather than on internal strategies to improve employee satisfaction, retention, and work environment quality (JILPT, 2020[96]).
Additional drivers of increasing labour shortages include declining birth rates, and increased competition from large corporations, which often provide more competitive salaries and benefits (SMEA, 2024[97]). This puts SMEs at a disadvantage when it comes to attracting and retaining skilled workers. In response, the government has introduced various measures, such as promoting a work environment that encourages greater participation from women, elderly workers, and foreign nationals.
Many SMEs continue to struggle with their digital transformation, which has been identified as a key issue to attract and retain talent. The government’s Action Plan for Realising Work Style (Council for the Realization of Work Style Reform, 2017[98]) emphasises the need for SMEs to adapt to new work styles and technologies, such as teleworking and leveraging data, to attract younger generations and to improve labour efficiency. There are some cases of SMEs who are successful in dealing with digital transformation as illustrated in Box 3.12. Nevertheless, many SMEs struggle with the digital infrastructure and managerial expertise required to implement such reforms effectively. The data provided by the MIC in 2021 showed that only around 30% of SMEs had adopted remote work practices, citing concerns over cybersecurity, operational efficiency, and employee monitoring (MIC, 2021[99]).
In Niigata Prefecture, Japan, a metal processing company successfully undertook a digital transformation project for its production processes. Many of the company’s veteran employees, aged 60 and older, play key roles, as there is no mandatory retirement age. These skilled workers are integral to producing a wide variety of products in small quantities, but the company faced challenges with meeting deadlines and managing production.
The initial implementation of a packaged system failed due to its complexity for older employees. In response, the company introduced a new production management system incorporating AI voice recognition technology. By customising the system based on feedback from the shop floor, the company improved progress tracking and operational efficiency. Leveraging data also enhanced productivity, enabled better client negotiations on pricing, and reduced overtime, which boosted value-added per minute. Employees have gained a deeper understanding of digital technologies, and the company continues to drive management improvements through data utilisation.
Source: (JFC, 2022[100])
SME resilience amidst economic shocks and supply chain disruptions
Japanese SMEs are particularly vulnerable to economic shocks and supply chain disruptions, as illustrated by the impact of the COVID-19 pandemic and the subsequent global supply chain crisis. According to the Small and Medium Enterprises Agency of Japan (SMEA), many SMEs operate with limited financial reserves and heavily rely on specific suppliers, making them susceptible to sudden interruptions in the flow of goods and raw materials. The impact of these disruptions is magnified by the fact that SMEs often lack the financial flexibility and negotiation power of larger corporations, leaving them unable to secure alternative suppliers in times of crisis (SMEA, 2024[97]). In response to these vulnerabilities, the Japanese government has introduced a series of measures aimed at strengthening the resilience of SMEs. The subsidy programme for business restructuring and diversification (METI, 2024[101]) was established to support SMEs in diversifying their supply chains.
The pandemic also highlighted the importance of digitalisation in maintaining supply chain continuity. The Ministry of Economy, Trade, and Industry of Japan (METI) survey from 2021 showed that SMEs with more advanced digital infrastructure were better able to navigate disruptions by leveraging data for real-time inventory management and alternative sourcing (METI, 2021[102])23 .
Government policy (automotive, machinery and electronics)
Overview: Society 5.0 and SIP program
Society 5.0 is Japan's vision for a "super-smart society", integrating advanced technologies such as AI, IoT, robotics, and big data into all aspects of life to address societal challenges like an aging population, environmental sustainability, and economic stagnation. It aims to create a human-centered society where digital transformation improves quality of life and drives innovation across sectors, from healthcare to mobility (Cabinet Office of Japanese government, 2015[103]). Complementing this, the Cross-ministerial Strategic Innovation Promotion Programme (SIP) is a Japanese government initiative designed to advance science and technology research to solve critical national issues. SIP focuses on fostering innovation in areas like energy, infrastructure, disaster management, and health, with a goal to enhance Japan's global competitiveness and address domestic challenges in line with the Society 5.0 vision (Box 3.13).
In addition to this, METI published the 2024 white paper on manufacturing which discusses smart manufacturing practices and presents some initiatives to support its expansion. In light of recent survey results, highlighting challenges in promoting digitalisation within the manufacturing sector, especially to enhance employee awareness and digital skills. METI is developing guidelines to enhance support for digital transformation (DX) investment and implementation in the manufacturing sector. These guidelines focus on helping manufacturers address management challenges and promoting understanding of the methods and processes necessary for optimisation and successful implementation of smart manufacturing initiatives. The framework covers factors like external and internal influences, transformation challenges, standardisation, project design, and examples of successful smart manufacturing initiatives (METI, 2024[89]).
Japan is harnessing digital innovations to tackle environmental challenges and achieve carbon neutrality by 2050. Japan has reduced greenhouse gas emissions by 19.3% from 2013 to 2022 and aims to achieve carbon neutrality by 2050. To achieve this goal, the government launched a 10-year JPY 150 000 billion green transformation program, including a JPY 2 000 billion Green Innovation Fund24 and the 2023 GX Promotion Act, which supports further technological advancements through bonds, carbon taxation, and a carbon trade market.
In parallel, Japan is addressing the semiconductor shortage and advancing digital technologies through METI’s Semiconductor and Digital Strategy, which includes a JPY 1 067 billion Semiconductor Fund and initiatives to accelerate AI, autonomous vehicles, and supply chain digitalisation. Additionally, Japan’s Economic Security Promotion Act, created in 2022, aims to mitigate geopolitical risks by securing critical products like semiconductors and robotics, supported by a 2 trillion JPY fund for economic security technology development. By fostering innovation and resilience in the manufacturing sector, these initiatives aim to ensure that companies can navigate both current and future challenges while contributing to Japan's overall economic stability.
The cabinet office of Japan set up target areas where the development and diffusion of innovative technologies and reform of social systems are required beyond the boundaries of conventional industries and fields, in order to realise "Society 5.0” objectives.
Rather than working independently in each area, the programme will work toward the realisation of Society 5.0 through the development of an integrated promotion system, data collaboration among areas, the development of common indicators related to cross-cutting social issues such as well-being and carbon neutrality, and the use of comprehensive knowledge for the construction of social systems.
Mobility: Mobility Digital Transformation (DX) Strategy
Japan views software-defined vehicles (SDVs), mobility services, and data utilisation as key areas of global competition and recognises the need for stronger public-private collaboration. Accordingly, the Ministry of Economy, Trade and Industry (METI) and Ministry of Land, Infrastructure, Transport and Tourism (MLIT) has launched the "Mobility DX Strategy," aiming to capture a 30% share of SDVs by 2030 and 2035 through the development of “multi forms of SDVs across various price and functionality ranges (Figure 3.13). This initiative includes efforts in areas such as API standardisation, semiconductors (SoC), simulation, generative AI, LiDAR, high-precision 3D maps, and security. It also promotes projects like automated vehicle implementation and the Ouranos ecosystem25 for secure data utilisation. Furthermore, the "Mobility DX Platform" aims to facilitate collaboration among industry, startups, and academia.
Source: (METI, 2024[106])
The Digital Lifeline Development Plan is a 10-year masterplan, involving significant investment from both the public and private sectors to create a digital infrastructure with standardised hardware, software, and regulations. This will speed up the social implementation of innovations such as CAV (Connected Autonomous Vehicles) and AI, contribute to address issues like labour shortages, and help create local living areas where the cyberspace and physical space are highly integrated.
Japan has launched four Early-harvest projects, developing UAS (Urban Aircraft System) corridors from 180km in 2024 to 50,000km in 2034, CAV corridors from 100km in 2024 to all major highways in 2034, implementing digital transformation of infrastructure management from two major cities in 2024 to 50 major cities in 2034 and Okunoto Digital Lifeline.
As for automotive sector, to address labour shortages and enable the free movement of people and goods according to demand, it is establishing "CAV corridors" to facilitate autonomous vehicles through hardware, software, and rules. These corridors support autonomous driving by providing vehicles with information on the surrounding environment detected by cameras, LiDAR, and other sensors. Additionally, they sometimes set priority lanes for autonomous vehicles; On the Shin Tomei Expressway, approximately 100 km between Suruga Bay Numazu SA and Hamamatsu SA, designated for the priority use of autonomous vehicles to facilitate the realisation of autonomous driving by fiscal year 2024. These corridors will ensure the safe and efficient operation of self-driving cars. In 2024, it plans to designate over 100 km of priority lanes for autonomous vehicles on sections of the Shin Tomei Expressway to enable the operation of autonomous trucks.
The policy is characterised by the vertical launch of the entire supply chain by identifying the elements necessary for automated services, investing in each of them, and developing new rules with the co-operation of the government and the private sector.
Source: (METI, 2023[107])
Electronics (Semiconductor)
METI revised its Semiconductor and Digital Strategy in 2023, driven by urgent requirement to mitigate intensive shortage of semiconductors due to Covid-19 and rising demand for chips because of advancing digital technologies, such as AI and big data analysis. METI developed Specified Semiconductor Fund with JPY 1 699.2 billion. It also utilises the Green Innovation Fund, the Economic Security Fund, and tax credit based on production. METI has enhanced stable supply with existing technologies and invested in R&D of future technologies. As a result of strategic investments by the government and funds, large-scale semiconductor investment projects worth JPY several tens of billions each are starting to take shape across Japan (Figure 3.15).
Machinery
Japanese policies on machinery are based on The Initiatives for Ensuring the Stable Supply of Machine Tools and Industrial Robots, established by METI to strengthen the resilience and competitiveness of the country's manufacturing base. The initiatives aim to ensure a stable domestic supply of critical manufacturing equipment while reducing vulnerabilities arising from disruptions in global supply chains. At the same time, they seek to support technological innovation and maintain Japan's competitive position in advanced manufacturing technologies
A strong emphasis is placed on the role of SMEs and on fostering collaboration among firms, research institutions and other stakeholders to strengthen the domestic manufacturing ecosystem. The initiatives also incorporate measures to improve energy efficiency and support technological advances in machine tools. For example, research has focused on the application of new structural materials, such as carbon fibre reinforced plastics (CFRP), to machine tools and on the development of advanced control methods to optimise their performance. These innovations are expected to reduce energy consumption through both lower power requirements and improved machining efficiency. The project targets total energy savings of 20%, comprising a 15% reduction in power consumption and a further 5% gain through enhanced machining efficiency (NEDO, 2015[109]). In addition, METI supports the stable supply and technological upgrading of the machine tool and industrial robotics sectors through subsidy programmes aimed at strengthening production capabilities and fostering innovation among key industry players (see Table 3.3).
Policies for SMEs
SMEs can access a range of government support programmes, including the Business Restructuring Subsidy and the Manufacturing Subsidy, which help firms invest in innovation, productivity improvements and business transformation. Additionally, METI launched the Mikata Project to support SMEs in the automotive sector to transform their business model for CASE era, by providing training program, offering individual consultation, dispatching experts, and introducing subsidies (Box 3.15). Furthermore, major investments in semiconductor manufacturing are creating new business opportunities for domestic suppliers. For example, Japan Advanced Semiconductor Manufacturing (JASM), which has invested USD 8.6 billion in new chip production facilities, aims to source around 60% of its equipment and materials from Japanese companies, creating significant opportunities for local SMEs and manufacturers (JASM, n.d.[111]).
The Mikata project is designed to support SMEs in the automobile parts industry as they navigate the shift towards electrification and digitalisation. This initiative addresses the needs of SMEs, which are crucial suppliers in the automotive supply chain but may face challenges adapting to new technologies and market demands brought about by the electrification and digitalisation of automobile. “Mikata” means “view” and “ally” in Japanese, meaning this project provides a “view” for SMEs involved in the automotive industry to respond to CASE, and supports them as an “ally” of the company. The project includes:
On-site training and seminars: Free seminars on the latest information on the automotive industry, such as carbon neutrality and EVs, as well as hands-on training (e.g., exhibition of electric vehicle parts, etc.).
Individual consulting services: Experienced experts provide consultation on CASE-related issues and help companies sort out issues in accordance with their own circumstances.
Dispatch of Experts free for five times: Technical issues and support for accompanying the company in its strategy formulation, technological development, and other specific issues. This project provides services with over 300 experts able to provide individualised consulting to each company, covering SMEs in all 47 prefectures.
Capital Investment Subsidy
Source: (METI, 2024[112])
Note: This table provides an example of the policies researched by the OECD for this project and does not offer a comprehensive overview of the country's policies in the manufacturing sector.
Source: OECD analysis based on desk research
Conclusion
Japan has established clear strategic priorities for the automotive, semiconductor and machinery sectors, supported by substantial financial incentives. Across these strategies, digital transformation is promoted as a key enabler of both emissions-reduction objectives and supply chain resilience. Several initiatives specifically target SMEs, helping them adapt their business models, upgrade capabilities and seize new opportunities as digitalisation and sustainability transitions reshape industrial ecosystems.
At the same time, acute labour shortages, population ageing and the slow adoption of new work practices continue to constrain SMEs' ability to advance their digital and sustainability-related transformations. These challenges risk widening productivity and innovation gaps between SMEs and larger firms.
To address these challenges, Japan has adopted a comprehensive policy approach that combines regulatory measures, public investment and tax incentives. The automotive and semiconductor sectors have been a particular focus of support, reflecting their strategic importance for economic competitiveness, technological leadership and supply chain security. In the machinery sector, policy attention has increasingly focused on strengthening domestic production capabilities and reducing vulnerabilities associated with external dependencies and supply chain disruptions. More broadly, the government is seeking to support manufacturing SMEs in adapting to demographic pressures and structural economic change through digital transformation initiatives and targeted business support measures.
Japan's approach is underpinned by a long-standing tradition of public-private collaboration, with government, industry and other stakeholders working together to develop strategic priorities and investment plans. Recent policy initiatives appear to have strengthened private-sector investment momentum, reflecting growing business confidence in strategic sectors and the government's commitment to supporting industrial transformation (Cabinet Secretariat, METI, Cabinet Office, etc., 2023[113])26.
Introduction
Korea plays a leading role in the global manufacturing industry, contributing 28% of the world’s manufacturing output. At the national level, SMEs account for 96.9% of all manufacturing firms, employ 67.0% of the workforce and generate 34.1% of the total value added in this sector (MSS, 2022[114]). Given the sector’s importance, the government has prioritised raising awareness among firms about ongoing megatrends that are expected to reshape the economic landscape. In response to these megatrends, it is essential to ensure sufficient levels of investment to secure the necessary human capital, advanced technology and modern equipment. This is particularly crucial for maintaining competitiveness in key subsectors such as machinery, automotive and electronics, where investments are pivotal. These three subsectors together account for 41% of the total manufacturing industry investment, illustrating their significance in Korea’s economy, as shown in Figure 3.16.
As a percentage of total spending in R&D in the manufacturing sector in KRW
Source: (KOSIS, 2022[115])
The transition towards lower-emission production poses significant challenges for Korea's economy. Korea had the lowest share of renewable energy in primary energy supply among OECD countries, at 1.44% in 2020, well below the OECD average of 7.89% (OECD, 2020[116]). Given the prominence of energy-intensive industries such as steel, electronics and shipbuilding, reducing emissions while maintaining industrial competitiveness remains a key policy challenge.
Korea’s active labour force peaked in 2019 (KOSIS, 2024[117]) and has since experienced a steady decline. Therefore, productivity gains from Industry 4.0 technologies are essential to sustaining current levels of economic output. Additionally, many manufacturing SMEs are owned by an ageing generation nearing retirement, posing a further challenge for the future of the sector (see Box 28).
Strengthening supply chain resilience has become a key policy priority in Korea, reflecting the country's exposure to geopolitical tensions and global trade disruptions. with China and the United States accounting for 25.0% and 21.9% of goods exports respectively (Korean Customs Service, 2023[118]), Korea is particularly vulnerable to disruptions affecting the flow of inputs, components and finished products across international markets.
Korea’s aging population presents significant challenges for SMEs, primarily due to the rising average age of SME leadership and a shrinking pool of workers willing to engage in manufacturing roles. In 2023, the average age of CEOs of SMEs in Korea was 55.3 years, continuing an upward trend from 51.3 years in 2012 and 54.1 years in 2018 (KOSIS, 2023[119]). With the average retirement age in Korea at 63 years (Korea Institute of Public Finance, 2023[120]), a substantial proportion of SME leaders are nearing retirement, potentially leading to a wave of business closures or liquidations. A survey conducted by KOSIS in 2022 revealed that 37% of SME owners over 55 plan to retire within the next five years, and 60% of these owners intend to liquidate their businesses rather than invest in innovation.
Moreover, the country is grappling with a declining labour force. Korea’s total working-age population (aged 15-64) is projected to decrease by 12% by 2030, with the manufacturing sector anticipated to be one of the most affected areas (KOSIS, 2023[119]).This labour shortage is intensified by geographic preferences, as 72% of the population between the ages of 20 and 39 prefer living in the Greater Seoul area, which houses 50% of Korea’s population but only 24% of its SMEs (KOSIS, 2023[119]). According to a survey by the Korean Chamber of Commerce in 2022, 68% of SMEs located outside of Seoul face difficulties in running their business from diminishing non-metropolitan population with 51% attributing this challenge to the reluctance of young people to relocate from the capital (Korea Chamber of Commerce and Industry, 2022[121]).
The shortage of highly skilled labour necessary for digital transformation further exacerbates these challenges. Only 9.7% of SMEs have implemented educational programs related to digital skills, and 84.0% lack a dedicated data analytics specialist (TIPA, 2022[122]). This trend further limits the talent pool available for digitally oriented manufacturing roles, complicating efforts by SMEs to modernise and adapt to new technological demands.
The key to addressing the challenge of an aging population lies in boosting productivity to compensate for the shrinking working-age population and ensuring a successful transfer of businesses to the younger generation. However, this is a complex issue, largely due to the shortage of skilled labour, which exerts upward pressure on wages. As a result, many SMEs struggle to attract the talent necessary for advancing production methods and adopting new technologies. The high cost of labour further discourages investment in workforce development, creating a cycle where SMEs are unable to innovate and increase productivity at the pace required. This labour shortage is particularly acute in sectors such as manufacturing, where digital skills and technological expertise are increasingly essential to maintain competitiveness. Without sufficient human resources, the productivity gains needed to offset demographic decline remain out of reach, exacerbating the economic challenges posed by Korea’s ageing population.
Manufacturing SME readiness
Industry 4.0: Data and Digital Readiness of Firms
A significant proportion of firms in Korea lack the necessary infrastructure for data management and analytics. According to the 2022 SME Informatisation Level Survey, 41.4% of firms do not have a system for collecting and storing data in Data Collection and Sharing. Additionally, 22.6% of firms collect data but do not share it with others, while 36.1% of firms share at least some data. In terms of Data Analytics Capability, 84.0% of firms do not employ any data analytics specialists, and only 9.7% provide some form of training for staff in data analysis. Only 6.3% of firms allocate resources to analysing the data they collect. Reflecting this lack of data-related capabilities, 72.6% of firms do not have a strategy for transitioning to smart manufacturing processes (TIPA, 2022[122]). These figures underscore the challenges Korean firms face in adapting to Industry 4.0, particularly in areas related to data management, analytics, and the adoption of smart manufacturing technologies. Human resources remain a key limitation in this transition, with skilled labour in high demand, and jobs in less desirable locations often dissuading workers from joining manufacturing firms, which are frequently located far from the capital. This is particularly problematic for smaller size firms as the trend towards digital transformation is far better amongst Large or Middle Market firms compared to Small-Sized firms as shown in Figure 3.17.
As a share of businesses that have implemented or plan to implement digital transformation measures by size (%)
Source: (TIPA, 2022[122])
Decarbonisation and energy efficiency
SMEs in Korea face considerable challenges in adopting measures to reduce greenhouse gas emissions. In the manufacturing sector, 89.1% of small firms and 52.4% of mid-sized firms have not implemented any strategies to lower energy consumption or decrease their carbon footprint as illustrated in Figure 3.18. Similar to the barriers observed in the adoption of Industry 4.0 technologies, many firms lack the tools and capabilities needed to measure and monitor emissions effectively. In addition, SMEs have historically faced limited incentives and regulatory pressure to track their environmental performance. This underscores the need for greater awareness, technical support and capacity-building efforts to help SMEs respond to evolving sustainability requirements and contribute to Korea's emissions-reduction objectives. The challenge is further compounded by limited access to public support measures, such as incentives for energy-efficiency investments and specialised technical assistance.
As a share of businesses implementing measures to reduce their energy consumption or carbon footprint by business size.
Source: (STEPI, 2022[123])
Supply Chain Readiness
Many SMEs in Korea are unprepared to address potential supply chain disruptions that could halt production. According to the 2022 KOSME Survey, among 126 firms that reported a severe or very severe negative impact from global supply chain disruptions, 50% identified raw material procurement as their most significant challenge, followed by logistics delays at 19.8% (KOSME, 2023[124]). Regulatory barriers around raw material procurement and the concentration of supply from specific countries exacerbate these issues. Many Korean firms are heavily reliant on single supplying country due to competitive pricing from dominant countries, which leaves them vulnerable to external shocks. For instance, out of the ten electronic parts that are imported with reliance on single country of over 40% and USD 10 million revenue, the reliance on China ranges from 76.7% to 96.8% for the top five imported parts for the electronics industry (Bank of Korea, 2023[125]).
Over-reliance on single-country suppliers, especially in sectors like electronics, automotive, and chemicals, poses a considerable risk. For instance, Korea’s dependence on imports of key components from China exposes SMEs to geopolitical tensions and market volatility (Bank of Korea, 2023[125]). Furthermore, many SMEs lack formal risk management strategies, with only a small proportion having contingency plans in place to diversify suppliers or secure alternative sources. As global supply chains become increasingly fragile due to factors such as the COVID-19 pandemic and geopolitical conflicts, the need for SMEs to enhance supply chain resilience through diversification, stockpiling or digital supply chain monitoring has become more urgent. However, a lack of awareness and resources, combined with the complexity of navigating trade regulations, has left many firms ill-equipped to adapt. Survey results show that only 2% of Korean firms indicate they are prepared to handle supply chain disruptions (Figure 3.19).
As a share of surveyed businesses indicating their current preparation status for a potential supply chain disruption
Source: (KOSME, IIT and KITA, 2024[126])
Government policy (automotive, machinery and electronics)
To respond to these industrial megatrends, the Korean government has set ambitious targets for the coming decades. The 2050 Carbon Neutrality and Green Growth Commission, established in 2021, brings together government representatives and civilian experts to co-ordinate efforts to reduce greenhouse gas emissions. Its near-term objective is to reduce emissions by 40% by 2030 relative to 2018 levels, drawing on a combination of direct emissions reductions, carbon absorption measures and international mitigation efforts.
With regard to the digital transformation, the I-KOREA 4.0 policy framework, which promotes the integration of new technologies into the industry, has evolved into the Presidential Committee on Digital Platform Government in 2022. This initiative focuses on leveraging AI and data analytics to support firms in their digital transformation efforts.
To enhance supply chain resilience, the MPE (Materials, Parts and Equipment) Competitiveness Committee aims to strengthen domestic production and supply chains under the Industry Supply Chain 3050 Strategy. The primary objective is to reduce reliance on any single country for critical parts to less than 50%, thereby mitigating risks associated with global supply chain disruptions.
Future of Korean Manufacturing Innovation 3.0
Launched in 2014, Manufacturing Innovation 3.0 marked Korea’s first major strategy for modernising its manufacturing sector and preparing it for the global shift towards Industry 4.0 (MOTIE, 2015[127]). The policy aimed to integrate advanced digital technologies, focusing on the adoption of smart factories, automation, and the Internet of Things (IoT). It sought to drive productivity, reduce costs, and enhance the competitiveness of Korean manufacturing in global markets.
The core objective of Manufacturing Innovation 3.0 was the digitalisation of manufacturing processes across industries. By encouraging the use of IoT, big data, and cloud computing, the strategy aimed to optimise production, enable real-time data-driven decision-making and automate repetitive tasks. A key element of the policy was the development of smart factories, which rely on interconnected systems and data to automate manufacturing, reduce reliance on manual labour and improve efficiency (MOTIE, 2015[127]).
In particular, the policy emphasised supporting SMEs in adopting these new technologies. The government established financial assistance programs and provided technical guidance to help businesses integrate smart factory models into their operations. One of the main initiatives under this strategy was the Smart Factory Propagation Program, which was designed to help manufacturers develop digital and automated production lines through the use of model factories (MOTIE, 2015[127]).
Although this top-down approach was largely unsuccessful due to weak take-up from the firms due to high cost and lack of knowledge in its implementation, the policy laid the foundation for subsequent digital strategies such as I-KOREA 4.0 and the Digital New Deal. By focusing on the adoption of advanced technologies like AI and robotics, Manufacturing Innovation 3.0 played a role in positioning Korea as a leader in Industry 4.0. Its goals were further expanded in later policies, which continued to build on the need for smart factory infrastructure, digital transformation and technological innovation in manufacturing.
I-KOREA 4.0
Launched in 2017, I-KOREA 4.0 is Korea’s overarching policy framework guiding the nation’s transition to the Fourth Industrial Revolution, similar to Germany’s Industry 4.0. I-KOREA 4.0 emphasises key elements of Industry 4.0, such as big data, AI, and cloud computing, encapsulated in the concept of D.N.A. (Data, Network, AI). The policy aims to expand the use of data by enhancing resource availability and establishing model smart factories to boost productivity and accelerate digital transformation (MSIT, 2017[128]).
Key measures under this initiative include expanding medical data infrastructure, incentivising smart factory construction, regulating autonomous vehicles and reforming policies related to SME-Venture capital startups. Additionally, the government has enacted legislation on the use and protection of information, such as the Act on Promotion of Information and Communications Network Utilization, the Personal Information Protection Act, and the Credit Information Use and Protection Act. These laws provide the legal framework necessary for firms to utilise data effectively, gaining valuable insights for supply chain optimisation (MSIT, 2017[128]).
Digital New Deal
Introduced in 2020 as part of the Korean New Deal, the Digital New Deal drove Korea’s shift into the Fourth Industrial Revolution by promoting digital transformation across various sectors. It focuses on key technologies such as AI, big data, 5G and cloud computing, highlighting the importance of data in conducting the transition to new technology. Additionally, the policy includes the development of digital healthcare, smart cities and AI education. These advancements are supported by legislation that governs data protection and the use of information, enabling firms to use data effectively. The Digital New Deal is backed by KRW 58 trillion (approximately USD 48 billion), with investments directed toward AI-powered industries, data infrastructure and digital startups to foster innovation and job creation across the economy (MOEF, 2017[129]). The Korea AI Manufacturing Platform (KAMP) was launched one year later in 2021 to help accelerate the adoption of artificial intelligence (AI) in the manufacturing sector (Box 3.17).
However, some shortcomings of this policy are related with limited data collection, unequal sectoral benefits, worsened regional disparities, infrastructure gaps and human resource development. Ultimately, SMEs still lacked the targeted support they required that would fill the gap in technical guidance. These aspects were noted and improved upon in MIDAS 2027.
The Korea AI Manufacturing Platform (KAMP), launched in 2021, was designed to promote AI utilisation and manufacturing data analysis among SMEs in the manufacturing. With over 25 000 Smart Factories constructed, the keystone to harnessing the technological advancements into production is to utilise the production data for analysis. Through the introduction of Smart Factories, productivity increased by 28.5%, product quality increased by 42.5%, revenue increased by 7.4% and delivery date compliance increased by 16.4% (MSS, 2021[23]). However, harnessing the data and training the AI is expected to further increase these figures through three main channels: quality control, preventive maintenance and autonomous operations. To support this initiative, KAMP provides 50 types of manufacturing AI datasets and 13 AI analysis support tools, facilitating data and AI usage among manufacturing SMEs. The platform has achieved a total of 46,000 dataset downloads, driving increased AI usage within the sector.
Defective product prediction using AI-based SMT process data
In the semiconductor industry, PJ Electronics commissioned a project with Brique to reduce errors and improve the efficiency of Surface Mount Technology (SMT). The goal was to enhance failure rate prediction and optimise their existing small-volume, high-variety production process. Many outsourcing companies face similar challenges, managing low-quantity, high-variety production for multiple clients, making optimisation through failure prediction essential to lowering costs. By training their data with artificial intelligence (AI), PJ Electronics reduced data analytics time from eight man-hours to 40 seconds, achieving 98.53% accuracy. Instead of relying on manual sampling for quality control, their production process can now be optimised without delay when failures occur (KAMP, 2023[24]).
Development of an AI model to predict when to change cutting tools
In the machinery sector, Dongpyeong Tech partnered with NSmarts to optimise production through preventive maintenance. Milling machinery represents a significant cost factor, as wear and tear necessitate machinery replacement. Previously, expert operators used intuition and experience to decide when to replace equipment. However, less experienced operators often mistimed these judgements, leading to increased costs from damaged raw materials. By installing Manufacturing Execution System (MES) data recording equipment, the project harnessed vibration data to train AI models. This led to an increase in production per machine from 200 to 258 units and reduced costs by 22.8%, demonstrating the value of preventive maintenance (KAMP, 2023[25]).
Both use cases highlight the key advantage of AI in supplementing or replacing expert operators in the production process. As discussed in earlier section, the manufacturing workforce is nearing retirement, and the loss of their know-how risks reducing productivity in the sector. AI-trained models, built through manufacturing data analytics, can replicate this expertise, filling the gap left by experienced staff who previously relied on intuition and experience to calibrate procedures.
However, a key limitation of the Korea AI Manufacturing Platform (KAMP) is the scarcity of available data. While KAMP offers data to new analytics firms for AI model training, the market for data is not fully developed. This stems largely from concerns over firms' data sovereignty, closely tied to their production know-how. The valuation of data and analytics services remains uncertain, and significant shifts in perception will be required to create an active marketplace.
MIDAS 2027 (Manufacturing Innovation and DX Acceleration Strategy)
Launched in 2023, MIDAS 2027 focuses on transforming the manufacturing sector, particularly SMEs. This strategy is aligned with broader digital transformation goals but specifically targets manufacturing by accelerating the adoption of Industry 4.0 technologies like AI, digital twin systems and automated robotics. One of its main goals is to create 25,000 digital manufacturing companies by 2027. To achieve this, the KOSMO offers financial and technical support to SMEs, helping them adopt automation, AI and other advanced technologies. The government has allocated KRW 218 billion (around USD 180 million) for these efforts, promoting automation through robotics and establishing a data ecosystem that enhances production optimization. MIDAS 2027 aims to improve productivity by advancing digital capabilities with a focus on data standardization across manufacturing processes (MSS, 2023[130]).
The evolution of Korea’s manufacturing policy reflects a structured approach to promoting digital transformation, especially for SMEs. Initially, Manufacturing Innovation 3.0 and I-Korea 4.0 laid the groundwork for smart factory models, providing a standardised template that firms were encouraged to follow. However, while these policies defined the ideal digitalised production framework, they faced challenges in broad adoption. SMEs in particular, struggled due to a lack of financial resources, data infrastructure, and skilled personnel, which hindered their ability to transition to the new technologies.
The Digital New Deal built on this by creating the data infrastructure necessary for firms to begin optimising their production processes. It provided broader access to digital tools and facilitated the use of big data in manufacturing. However, while the availability of data improved, the transformation process remained uneven, with many SMEs still unable to fully utilise the technologies at hand.
With MIDAS 2027, the government is now addressing these challenges by offering tailored support to firms. This policy focuses on accommodating the specific needs of different production procedures, allowing for a more flexible transition to smart manufacturing (MSS, 2023[130]). This approach is designed to ensure that both financial assistance and technical guidance are aligned with the unique circumstances of each firm, particularly those of SMEs, which were underserved by earlier policies.
In this way, MIDAS 2027 marks a shift toward a more adaptive and targeted strategy, aiming to resolve the gaps identified in previous initiatives and accelerate the digital transformation of Korea’s manufacturing sector.
Smart Manufacturing Innovation Support Programme
As the key element of MIDAS 2027, the KOSMO, operating under the Technology Innovation Promotion Agency (TIPA), plays a crucial role in supporting SMEs in their transition towards advanced technologies, including Industry 4.0 (MSS, 2024[131]). The programme's budget stands at KRW 218 billion.
This initiative strategically positions firms with strong DX capabilities to progress towards implementing AI and digital twin technologies, while simultaneously supporting firms that are struggling with the basic stages of digitalisation. The models used in this programme are tailored to different categories, ranging from cross-industry models to those aligned with carbon-neutral industries. The programme also promotes automation, particularly through the use of manufacturing robotics (MSS, 2024[131]).
A significant aspect of this initiative is its aim to establish a manufacturing innovation infrastructure and a data ecosystem that enables analytics and production optimisation. These efforts are expected to boost productivity and fully harness the potential of Industry 4.0, AI and Big Data (MSS, 2024[131]) - areas where the manufacturing sector has traditionally been underdeveloped.
Semiconductor Mega Cluster
To strengthen its high-tech industry, Korea is establishing a Semiconductor Mega Cluster in Yongin, near the capital, aimed at securing USD 465 billion in private investment. The cluster will host 16 fabs, including 13 production and 3 research facilities, focusing on both system and memory semiconductors (MOTIE, 2024[132]).
The government has passed several laws to support this effort, including the Special Act on the Expansion of the National Power Grid, which fast-tracks construction permits to reduce project timelines by 30%. Additional measures include tax credits to encourage investment and a High-Tech Industry Regulation Index to minimise bureaucratic obstacles.
The policy also aims to address weaknesses in the Korean semiconductor industry, which currently has a supply chain self-reliance rate of 30%, exposing it to global supply chain risks. The cluster is expected to boost the parts industry, aiming to increase self-reliance to 50% by 2030. Further objectives include scaling up AI semiconductors and foundries, with a specific focus on fabless companies supported by USD 18 billion in financial loans and a USD 224 million Semiconductor Ecosystem Fund. The government aims to increase the market share of system semiconductors from 3% to 10% by 2030 (MOTIE, 2024[132]).
To ensure the availability of skilled labour, three Academia-Industry Liaisons will be established in Pangyo, Suwon, and Pyeongtaek, complemented by AI semiconductor graduate schools and industry-specific R&D and mentoring programs (MOTIE, 2024[132]).
Carbon Neutral Green Growth National Strategy
Announced in 2023, the Carbon Neutral Green Growth National Strategy is Korea’s primary policy for advancing the green transition within the manufacturing sector. The strategy focuses on four main areas: shifting production in energy and goods, promoting green industries and investments, reducing energy consumption, developing climate change infrastructure, and expanding global green Official Development Assistance (ODA). The policy aims to reduce carbon emissions by 45.9% by 2030, reaching a target of 435.6 million tonnes. The largest reductions will come from transitioning energy and industrial production, achieving a combined reduction of 155 million tonnes of carbon (2050 Carbon Neutral Committee, 2023[133]).
For energy production, Korea plans to expand nuclear power by constructing new plants and increasing the share of renewable energy from 9.2% in 2022 to 21.6% by 2030, supported by the RE100 Fund (USD 224 million) and the formation of RE100 Industrial Complexes. In industrial production, the government will provide incentives for firms to manage energy consumption more effectively, supported by the expansion of Advanced Metering Infrastructure (AMI), Meter Data Management Systems (MDMS), and Energy Management Systems (EMS).
To foster the green industry, the Technology Innovation Fund will match private investments to support green startups, complemented by tax credits for green technology investments. Existing industries will be encouraged to adopt carbon-reducing measures through Contracts for Difference (CCfD) and incentivised carbon emission trading.
Acknowledging the lag in SME transitions, the government offers targeted support through the SME Carbon Neutral Transition Support program, providing up to USD 224 000 for carbon-reducing initiatives, and the Carbon Neutral Smart Factory Formation policy, which provides up to USD 150 000 for upgrading production facilities. The New-Growth Infrastructure Fund also offers loans of up to USD 4.5 million for green technology investments, with a total budget of USD 72 million.
Mobility
As part of the Carbon Neutral Green Growth Strategy, the government aims to expand the supply of electric vehicles (EVs), increasing the market penetration of electric and hydrogen vehicles from 1.7% in 2022 to 16.7% by 2030. The policy includes transitioning industrial vehicles to alternative energy sources such as e-fuel, hydrogen, and electricity, while gradually reducing subsidies for consumers as the supply of EVs increases.
Given the significance of the automotive industry to the Korean economy, the policy also addresses the challenges of transitioning certain supply chain components, such as engines, to electric vehicles. The government aims to support current suppliers in shifting their business focus while recognising that demand for parts will continue in aftermarket and developing markets (2050 Carbon Neutral Committee, 2023[133]).
SME CBAM Response Infrastructure Support Programme
A key driver prompting firms to take action on environmental issues has been the EU's Carbon Border Adjustment Mechanism (CBAM), which requires companies to provide certification of the carbon emissions associated with their products. In response, MSS has stepped in to offer financial support, assisting firms in certifying the carbon output for each product line and providing consulting services throughout the process. In 2024, MSS supported 110 firms with KRW 1.7 billion worth of services, aiming to ease the financial burden on businesses. This assistance included establishing carbon footprint inventories for each product, verifying them and advising firms on the cross-border carbon taxes they may be subject to. This initiative serves as a prime example of how government policy can effectively address a financial need stemming from an external regulatory shock, enabling firms to better navigate the evolving trade environment (MSS, 2024[134]).
Industry Supply Chain 3050
Following the passage of new supply chain legislation, Korea aims to reduce reliance on raw materials and parts from any single country to 50% by 2030. This objective will be pursued through three strategies: self-sufficiency, diversification, and materials stocking. The government plans to increase investment in supply chain R&D from USD 7.5 million in 2023 to USD 55 million in 2024, supported by amendments to the Act on Corporate Revitalization, which allows firms to merge for vertical integration to manage supply chain shocks (MOTIE, 2023[135]).
A dedicated team within the Ministry of Trade, Industry, and Energy (MOTIE) monitors 185 critical materials using Big Data and AI to ensure production continuity. Firms are encouraged to diversify raw material sources through transport cost difference compensation, whereby 50% of additional import costs are covered when sourcing from alternative countries. The budget for key raw material reserves, such as lithium and nickel, has also been significantly expanded from USD 65 million to USD 226 million. This is important for SMEs which often operate on low margins, which are severely impacted by transport costs of raw materials (MOTIE, 2023[135]).
Note: This table provides an example of the policies researched by the OECD for this project and does not offer a comprehensive overview of the country's policies in the manufacturing sector.
*Smart Manufacturing Innovation Support Programme includes the budget for KAMP
Source: OECD analysis based on desk research.
Conclusion
Korea’s manufacturing SMEs are at a critical juncture, facing both challenges and opportunities as they navigate the complexities of digital transformation, low-carbon transition and supply chain resilience. Despite their pivotal role in the national economy, representing 96.9% of all firms and employing 67% of the workforce in the manufacturing sector, SMEs are struggling to keep pace with evolving global trends.
Government initiatives such as the I-Korea 4.0 policy, the Semiconductor Mega Cluster and the Carbon Neutral Green Growth National Strategy aim to address these gaps. By fostering innovation, investing in infrastructure, and offering targeted support, these policies seek to enhance the competitiveness of Korean SMEs in a rapidly changing global market. Programmes like the KAMP demonstrate the potential of collaborative platforms in driving digital adoption and efficiency gains, while the Industry Supply Chain 3050 strategy outlines a path towards greater self-sufficiency and reduced vulnerability to global disruptions.
However, significant obstacles remain. The aging population of SME leaders, coupled with a shrinking and geographically concentrated labour force, poses a unique challenge. Many SME owners are nearing retirement, with little incentive to innovate, and the lack of skilled labour outside the capital region further constrains growth. Addressing these demographic challenges will require innovative policy approaches, including targeted training programmes, incentives for younger entrepreneurs, and greater support for regional development.
As digitalisation, sustainability requirements and supply chain considerations continue to reshape manufacturing, Korean SMEs will need to strengthen their capacity to adapt and innovate. Public support measures, private-sector investment and co-operation across stakeholders can play an important role in helping SMEs navigate these changes and remain competitive.
Introduction
Like many advanced industrial economies, the United States has seen manufacturing employment decline over the past several decades. Nevertheless, it remains a global manufacturing leader, with manufacturing output continuing to expand in absolute terms. In 2021, U.S. manufacturing value added reached approximately USD 2.5 trillion, representing 15.4% of the global total and exceeding the combined output of Japan, Germany and Korea (World Bank Group, 2024[136]).
However, these figures do not fully reflect the broader role of U.S. companies in the global industry. Many U.S. companies retain high-value activities such as research, design and product development while relying on international production networks for manufacturing. This is particularly evident in the semiconductor industry, where numerous "fabless" firms specialise in chip design and contract fabrication to external partners. As a result, a substantial portion of their economic activity is not reflected in standard manufacturing statistics. In fact, fabless firms captured USD 153 billion in revenue in 2020, accounting for about one-third of the global semiconductor industry value (Yeung, Huang and Xing, 2023[137]). In 2020, the U.S. also ranked as the world's fourth-largest steel producer, while in 2021, it was the second-largest automaker and the top exporter of aerospace products (Grabow, 2023[138]).
The manufacturing industry is a critical component to the U.S. domestic economy. In 2024, the manufacturing sector added USD 2.91 trillion in value added to the economy, which represents 10% of U.S. GDP, and the value of U.S. manufactured goods exported in 2024 was USD 1.6 trillion (NAM, 2024[139]; World Bank Group, 2024[136]). Importantly, manufacturing accounts for 53% of all private-sector R&D in the U.S., which makes the sector a key driver of innovation. In 2022, total R&D spending reached USD 361.2 billion with manufacturers of semiconductors and other electronic components accounting for close to 16%. The automotive sector also contributed significantly, accounting for about 9% of the sector’s total spending in R&D. Furthermore, manufacturing supported nearly 13 million jobs in 2025 (NAM, 2025[140]), with 74% of manufacturing firms having fewer than 20 employees. The average annual earnings for manufacturing employees stood at USD 98 846 and in 2023 (NAM, 2024[141]).
U.S. manufacturing contributes significantly to global value chains, with a large share of its value added absorbed abroad. According to the OECD-WTO Trade in Value Added (TiVA) 2025 edition, 18.2% of U.S. manufacturing value added in 2022 was absorbed abroad in foreign final demand, compared with an OECD average of 13%. For the economy as a whole, the share was 8.8% in the U.S., above the OECD average of 6.8% (OECD, 2025[142]). This illustrates that manufacturing generates a large share of the country’s internationally traded value added, underscoring its global competitiveness.
However, the U.S. manufacturing industry faces several pressing challenges that could hinder its long-term competitiveness. Chief among them is a persistent struggle to attract and retain skilled talent. According to the 2025 Manufacturing Outlook Survey of the National Association of Manufacturers (NAM), 48% of producers cite talent attraction and retention as their top concern (NAM, 2025[140]). A 2024 study by Deloitte and the Manufacturing Institute estimates that 3.8 million new manufacturing jobs will be created by 2033, with nearly three-fourths openings expected from retirement. Yet, half of these may go unfilled (NAM, 2024[139]; Deloitte and the Manufacturing Insitute, 2024[143]). The NAM survey also points to regulatory costs as a major challenge for manufacturers, costs that were estimated to be over 70% higher for manufacturers with fewer than 50 employees.
As a percentage of total manufacturers in the US
Source: (NAM, 2024[144]).
The U.S. semiconductor industry is an important driver of economic growth and innovation. As illustrated in Figure 3.21, computer and electronic products were the largest manufacturing subsector in the U.S. in 2023. According to the Semiconductor Industry Association (SIA), U.S. semiconductor sales totaled USD 264 billion in 2023, accounting for 50% of global semiconductor sales, which stood at USD 526.9 billion the same year. The industry directly employs 338 000 people in the U.S., primarily in device manufacturing, but also in machinery manufacturing, design and Electronic Design Automation (EDA). It further indirectly supports nearly an additional 2 million jobs in over 300 downstream sectors (SIA, 2024[145]). Semiconductors play a critical role in driving innovation across diverse fields, including artificial intelligence, automotive technologies, , and healthcare. To meet rising demand worldwide, with global sales forecasted to reach USD 1 trillion by 2030, new investments by semiconductor companies are rising. In the U.S., R&D investments by semiconductor companies reached USD 50.3 billion in 2023 (SIA, 2024[145]). The U.S. plays a major role in the front-end design phase of semiconductor manufacturing process, with key players such as Intel, AMD, Nvidia, Qualcomm, and Texas Instruments. Nevertheless, the industry also relies strongly on global supply chains for materials and components, with significant dependency on Asia for certain manufacturing and assembly processes. For instance, while the U.S. fab capacity is expected to increase by 203% in 2032 compared to 2022, well ahead of Europe’s at 124%, China’s is expected to increase by 365% in the same period (SIA, 2024[145]).
As a percentage total value added
Note: Calculations by the author. Original figure presented value added for durable goods by type in billions of chained dollars (2008-2022)
Source: (NIST, 2023[146])
Manufacturing SME readiness
Digital transformation
U.S. small and medium-sized manufacturers increasingly recognise the strategic importance of technological advancement. Yet, high IT infrastructure costs and workforce skill requirements continue to present significant obstacles. To better understand these challenges, the Manufacturing Institute conducted two surveys in February and September 2021, focusing on how SME manufacturers responded to the aftermath of the COVID-19 pandemic and the impact of disruptive technologies. The February survey revealed that 43.9% of SME manufacturers viewed technology adoption as critical to their growth, while over 77% were investing in technology to reduce production costs. Additionally, 73.4% reported investing to improve operational performance. However, talent shortages remain a major barrier: 77% of surveyed SMEs indicated they were struggling to identify and retain skilled workers, underscoring the need for workforce development alongside digital transformation (Manufacturing Institute and BKD, 2021[147])..
By September 2021, the Manufacturing Institute’s follow-up survey revealed growing momentum among SMEs in adopting disruptive technologies. Among businesses investing in these technologies, 64.3% reported improvements in production efficiency and flexibility. Overall, one in three respondents had accelerated their investments, signalling a shift toward more proactive digital transformation strategies. Of those accelerating investments, 61.4% cited enhanced operational performance as the primary driver, suggesting that SMEs increasingly view disruptive technologies as essential tools for staying competitive in a rapidly evolving market landscape (Manufacturing Institute and BKD, 2021[148]).
Economic shocks and supply chain disruptions
The U.S. manufacturing sector, including SMEs, was significantly affected by the global semiconductor shortage and supply chain disruptions triggered by the COVID-19 pandemic. These challenges reflected a broader global trend, and were compounded by geopolitical tensions, rising raw material and energy costs, and persistent labour shortages, all of which contributed to production volatility. Around the world, SMEs faced heightened difficulties due to their limited flexibility and bargaining power compared to larger firms (OECD, 2023[149]). Some U.S.-based manufacturers relocated production to Mexico and Asia (Gantz, 2024[150]; Van Wyck et al., 2023[151]), with cost pressures such as structural energy costs likely contributing to those decisions (The Manufacturing Institute and KPMG, 2020[152]; NAM, 2025[140]). For example, the production of EV components, particularly batteries, has increasingly shifted to Asia due to cost advantages and the established infrastructure in the region (Bhutada, 2023[153]; Verpraet and Harrison, 2021[154]; BCG, 2024[155]). At the same time, supply chain reconfigurations generate opportunities for SMEs in regions benefiting from nearshoring, as well as for firms that are able to innovate and adapt to evolving production and market dynamics.
Trade uncertainties and supply chain disruptions remained a major concern for U.S. manufacturers in 2025. According to the National Association of Manufacturers Outlook Survey for the fourth quarter of 2025, 73% of surveyed firms identified trade uncertainties as one of their main business challenges, while 30% cited supply chain challenges, and 59% indicated increased raw material costs (NAM, 2025[156]).
Low-carbon transition and resource efficiency
SME manufacturers in the United States continue to face significant barriers to operational change that promotes resource efficiency. Escoto, Gebrewot and Morris (2022[157]) reviewed assessments from the American Society of Mechanical Engineers (ASME) and Indiana University to examine the challenges facing U.S. SME manufacturers in adopting low-carbon and energy efficient processes and improving performance. Their analysis identifies three main types of barriers: strategic alignment barriers, where changes related to the low-carbon transition are perceived as misaligned with short-term business growth and customer demands; financial barriers, as investments in new technologies and methods are often judged to have uncertain returns; and organisational barriers, as many SMEs lack the structure, skills, or resources needed to implement and maintain operational changes. Based on historical data, the study suggests that investment in low-carbon technologies and practices, especially when supported by recognised standards such as ISO or ASTM, was associated with improved returns on investment and higher sales among SMEs, including smaller manufacturers
Beyond the organisational and financial hurdles, U.S. SME manufacturers face skills-related barriers to implement more resource-efficient processes and benefit from changes in manufacturing markets. Recent evidence by LinkedIn shows that the U.S. trails behind other auto manufacturing countries in EV skill development, with only 3.7% of auto workers having EV-related skills, roughly half the rate observed in the UK (LinkedIn, 2023[158]).
SMEs are increasingly exploring low-carbon and resource-efficient manufacturing practices, as a means of improving productivity, reducing operating costs and strengthening competitiveness. Evidence also points to potential benefits in areas such as product quality, organisational performance and supply-chain management (Escoto, Gebrehewot and Morris, 2022[157]; EPA, 2024[159]). To support implementation, some SMEs have engaged in partnerships and collaborative initiatives, while firms with greater financial resources or access to external support have invested in measures such as energy-efficiency improvements and the use of recycled materials. Nevertheless, uptake remains uneven, reflecting differences in financial resources, technical capabilities, access to technology and the availability of external support (Jamwal et al., 2025[160]; Prasannath, Maniam and Sundaresan, 2024[161]; Suchek and Franco, 2024[162]).
Government policy (automotive, machinery and electronics)
In recent years, U.S. government policies related to the manufacturing industry have been shaped in part by increased global competition. The noticeable shift in production overseas has led to a renewed focus on revitalising the manufacturing industry (Adler and Bonvillian, 2023[163]). Recent policy initiatives have focused on supporting domestic manufacturing and strengthening industrial capabilities. Support for such effort has been particularly visible in regions with a long industrial history, including the so‑called “Rust Belt” states (Brownstein, 2024[164]).
The notable increase in industrial policy measures, including major legislation providing direct support to the manufacturing sector, reflects a shift in the overall policy approach towards industry. Historically, the U.S. has relied largely on market-oriented frameworks with limited direct intervention in manufacturing (Adler and Bonvillian, 2023[163]). The recent emphasis on targeted support therefore signals a broader reorientation in industrial policy and responds to megatrends such as digitalisation, geopolitical considerations, and resource efficiency. This section provides a broad overview of these policy measures and discusses their implications for SMEs. The section illustrates mainly policy initiatives implemented over 2022-24, referencing reviews, adjustments or phasing out adopted or announced in 2025-26.
The CHIPS Act
The CHIPS and Science Act for America was enacted in 2022. Since 2025, its implementation has been subject to review and adjustment, which includes changes in governance and implementation of programmes as well as the renegotiation of some of the grants in place.
While primarily supporting large-scale semiconductor investments, the initiative was also expected to benefit SMEs indirectly through supply chain opportunities and participation in innovation activities. The CHIPS Act’s initial provision included USD 39 billion in incentives for manufacturing facilities, aimed at constructing, expanding, and modernising semiconductor production sites. This encompassed both advanced “front-end” fabrication and “back-end” packaging technologies (CRS, 2023[165]; CRS, 2023[166]). The Act allocated USD 2 billion to semiconductor or semiconductor manufacturing equipment manufacturers to produce “legacy” chips, which are widely used in machinery and automotive sectors (e.g., in vehicle systems), and remain critical for everyday operations. The funding was therefore aimed to develop stable supply chains for critical components (The White House, 2022[167]).
The Regional Technology and Innovation Hubs (“Tech Hubs”) programme was established by the CHIPS and Science Act to strengthen U.S. capacity in key technology areas. The programme, authorised by the U.S. Congress in 2022, aims to foster collaboration between businesses of all sizes, research institutions, non-profit organisations, Tribal communities, labour unions, and state and local governments. In October 2023, the U.S. Department of Commerce designated 31 Tech Hubs across 32 states and territories. These consortia were eligible to compete for implementation grants of up to USD 75 million to expand innovation ecosystems, build supply-chain resilience, and create jobs27. A core objective was to broaden participation in advanced technology sectors so that firms, including SMEs, can benefit from improved access to R&D, partnerships, and workforce development opportunities regardless of location. Notably, 75% of the tech hubs aim to support underserved or rural communities (Buttle, 2024[168]; The White House, 2023[169]). Box 3.18 expands on the activities of some of these Tech Hubs and their relevance for SMEs.
The Tech Hubs funded under the CHIPS Act aim to foster collaboration among private companies, academic institutions, and state and local governments, particularly in underserved regions.
The Tulsa Tech Hub, led by Tulsa Innovation Labs in Oklahoma, focuses on advancing secure autonomous systems in industries like agriculture, pipeline inspections, and transportation. The Tech Hub seeks to strengthen economic and national security while linking small manufacturers to the autonomous systems supply chain. It received grant funding to implement six key projects, including commercialisation strategies among universities and the startups, testing environments, workforce training, and AI development (EDA, 2026[170]).
The Ocean Tech Hub, led by the Rhode Island Commerce Corporation, aims to advance maritime technologies, focusing on AI-enabled robotics and sensors. Serving Massachusetts and Rhode Island, it leverages the region's coastal assets, including seven commercial ports, to meet the growing demand for ocean technology testing and commercialisation. It aims to provide growth-ready startups and legacy manufacturers with technical assistance and access to capital, helping them participate in and serve the ocean technology market. This includes offering resources like co-working spaces, fabrication labs, and access to ocean testing sites (EDA, 2023[171]).
CHIPS for America programmes also incorporated measures to support the participation of SME manufacturers in regional semiconductor clusters. Among these were support services delivered through the Manufacturing Extension Partnership (MEP), which provided assistance on technical requirements, business needs and workforce training (NIST, 2022[172]; Congress.gov, 2022[173]). The scope and delivery of these support services have been subject to change since 2025.
The Small Business Innovation Research (SBIR) program and the Small Business Technology Transfer (STTR) program provide funding to SMEs engaged in R&D for innovative technologies. By supporting the development and commercialisation of new solutions, these programmes contribute to technological advancement and digital transformation across a range of industries, including semiconductors (U.S. Department of Commerce, 2024[174]; NIST, 2024[175]).
The Advanced Manufacturing Investment Credit offers a 35% federal income tax credit for companies investing in semiconductor manufacturing equipment. Enacted under the CHIPS Act, the credit is available to manufacturers of semiconductors and semiconductor manufacturing equipment within the United States that meet certain eligibility requirements. This mechanism can also serve smaller manufacturers by helping offset the capital costs of upgrading their manufacturing lines (IRS, 2024[176]). Under the One Big Beautiful Bill Act (OBBBA), the tax credit was raised from 25% to 35% for all properties placed into service after December 31, 2025. For domestic manufacturing businesses, the OBBBA also allows a full 100% deduction of research and experimental expenditures, including previously unamortised costs. In addition, eligible small business taxpayers may amend prior-year tax returns to retroactively claim these deductions.
The Inflation Reduction Act (IRA) and the One Big Beautiful Bill Act (OBBBA)
The Inflation Reduction Act (IRA) was signed into law in 2022 with the aim to support domestic energy production, investments in clean energy, deficit reduction, healthcare, and tax reform. This act targeted the decarbonisation of the U.S. economy and aimed to reduce dependency on foreign supply chains (The White House, 2023[177]). The IRA’s provisions included specific measures targeted to SMEs, particularly in the automotive, electronics, and machinery sectors. The One Big Beautiful Bill Act (OBBBA), signed in July 2025, has fundamentally reshaped the clean‑energy and industrial‑policy provisions of the IRA, accelerating repeal schedules, compressing qualification deadlines for remaining projects, and imposing new rules barring access to IRA credits for entities linked to certain foreign countries.
Automotive sector
The IRA included tax incentives to accelerate the transition to electric vehicles, such as the Section 45W Commercial Clean Vehicle Credit. This provision allowed businesses, including smaller firms, to claim up to 30% of the purchase cost of qualified electric and fuel-cell commercial vehicles, with caps of USD 7 500 for light duty and USD 40 000 for heavy duty vehicles up to September 2025 (The White House, 2023[177]).
The Act introduced tax incentives for the use of U.S.-sourced materials, including batteries for EVs and components for EV infrastructure (U.S. Department of the Treasury, 2024[178]). By creating additional demand for locally manufactured parts, the policy was expected to support SMEs involved in producing automotive components, including electric motors and battery modules.
Electronics
The IRA introduced measures intended to support domestic manufacturing in the energy and electronics sectors. Among these, the Advanced Manufacturing Production Credit provided incentives for the U.S. production of components used in renewable energy technologies, including solar panels, wind turbines, batteries and critical minerals processing. The credit was relevant to manufacturers across these supply chains, including SMEs. Many of the incentivised technologies also rely on advanced semiconductors, linking the measure to demand for components used in applications like energy infrastructure or smart grids (crux, 2024[179]; The White House, 2023[177]). Subsequent legislative changes under the One Big Beautiful Bill Act (OBBBA) modified some of these provisions, including by accelerating the phase-out of support for certain technologies and introducing restrictions related to prohibited foreign entities.
Machinery sector
The IRA established the Clean Energy and Sustainability Accelerator, a financing mechanism intended to support clean-energy deployment through state and local institutions. The initiative was designed to prioritise investment in underserved and disadvantaged communities through distributed-energy technologies such as heat-pumps, community solar and EV charging infrastructure, which may have required specialised manufacturing equipment and installation machinery. Subsequent changes under the One Big Beautiful Bill Act repealed or shortened most credits and incentives that would have fed capital into the Accelerator framework.
The Infrastructure Investment and Jobs Act
The Infrastructure Investment and Jobs Act, also known as the Bipartisan Infrastructure Law (BIL) was signed into law in November 2021. The law’s provisions aimed to modernise transportation systems, enhance disaster management capabilities, and develop clean energy infrastructure, while closing the digital divide. Since 2025, implementation of some climate-, clean-energy- and EV-related provisions has been subject to review and adjustment.
The law also aimed to reinforce domestic manufacturing competitiveness and strengthen supply‑chain resilience, notably by expanding U.S. capacity in battery materials and critical‑minerals processing. Federal initiatives included nearly USD 1 billion in new DOE funding for critical‑minerals production, processing and recycling. In 2026, the US administration launched Project Vault, a USD 12 billion public-private strategic critical minerals reserve designed to strengthen supply-chain resilience and mitigate disruptions in access to critical raw materials.
These measures have relevance to SMEs in the automotive, electronics, and machinery sector, as they influence their operations both directly and indirectly, through access to critical components, as well as federal contracts, new market opportunities, and investment in innovation.
The Automotive sector
The BIL included a major USD 7.5 billion investment to develop a national EV‑charging network and supported the federal goal of deploying 500 000 public EV chargers by 2030 (U.S. Department of Transportation, 2022[180]). The expansion of charging infrastructure has implications for a range of economic activities involving SMEs and larger firms alike, including the manufacturing, installation and maintenance of charging equipment, as well as grid-integration services. It may also influence demand across the broader electric mobility value chain, including demand for components, batteries, power electronics and EV-related software solutions.
Electronics sector
The BIL included a USD 65 billion investment in broadband infrastructure to expand digital connectivity across the United States. The deployment of broadband networks involves a range of activities, including the production and installation of network equipment, routers and fibre-optic technologies, in which SMEs participate (U.S. National Telecommunications and Information Administration, 2025[181]). In addition, investments in grid modernisation rely on technologies such as advanced sensors, automated control systems and battery storage, creating demand for electronic components and related services supplied by firms across the value chain, including SMEs.
Machinery sector
The BIL allocated USD 110 billion for roads, bridges and major infrastructure projects, to upgrade the U.S. transport network. These investments were expected to increase demand for construction machinery such as excavators, cranes and paving equipment (The White House, 2021[182]). The associated demand for machinery, components and technical services may affect firms operating in these markets, including SMEs. Additional investments in public transit, rail, airports and other infrastructure assets were also expected to increase activity in sectors supplying equipment, components and related support services.
Additional government services available to manufacturing SMEs
Manufacturing USA is a network of public-private Manufacturing Innovation Institutes, established in 2014. These institutes focus on advancing digital manufacturing technologies by bringing together academia, industry, and government. SMEs are encouraged to participate, gaining access to cutting-edge innovations in areas such as advanced materials, smart manufacturing, and digitalisation. Through these collaborations, SMEs can improve their production processes and reduce costs, through access to shared facilities, collaborative research processes and technical expertise (Manufacturing USA, 2024[183])
In 2025, the U.S. Small Business Administration (SBA) launched the “Manufacturer’s Access to Revolving Credit (MARC) Loan Program”, specifically dedicated to small manufacturers. It targets firms in NAICS manufacturing sectors 31–33, covering food, textiles, chemicals, plastics, metals, machinery, electronics, transport equipment, furniture, and related manufacturing industries. The programme provides flexible working capital to support inventory purchases, new projects, scaling operations, and customer expansion (SBA, 2025[184]). In 2026, the SBA also announced a “Made in America Loan Guarantee” under its International Trade Loan Program. Covering the same manufacturing sectors (NAICS 31-33) the programme provides a 90% federal loan guarantee to support investments in equipment, facilities, production capacity, inventory resilience, supply-chain diversification, and strategic acquisitions (SBA, 2026[185]).
The Workforce Innovation and Opportunity Act (WIOA), enacted in 2014, provides federal funding to states for workforce development and training programs aimed at improving the skills and employability of workers in a rapidly evolving economy. The Act promotes career pathways and sector‑based partnerships, enabling employers, including those in advanced manufacturing, to collaborate with workforce boards and educational institutions to design training aligned with emerging skill needs. Manufacturing SMEs can draw on WIOA-supported programmes to upskill workers in areas such as digital technologies, automation and semiconductor production, helping them adapt to evolving technological demands and remain competitive in high‑tech manufacturing environments (U.S. Department of Labour, 2025[186]).
Source: OECD analysis based on desk research.
*The 2025 One Big Beautiful Bill Act (OBBBA) significantly curtailed the Inflation Reduction Act by accelerating the phaseout of many clean‑energy tax credits and imposing new foreign‑entity restrictions that limit eligibility for remaining incentives.
Note: This table provides an example of the policies researched by the OECD for this project and does not offer a comprehensive overview of the country's policies in the manufacturing sector.
Conclusion
Recent U.S. legislation has introduced a range of measures relevant to manufacturing SMEs, spanning innovation, energy, infrastructure and industrial development.
These measures combine tax incentives, R&D funding, grants and large‑scale public infrastructure investments to strengthen competitiveness in sectors such as semiconductors, energy and transportation. Tax credits have been applied in areas including energy efficiency, electric vehicle production and advanced manufacturing, while grants and infrastructure projects have supported investment and activity across related value chains. Workforce development and collaborative initiatives have also sought to address skills needs and facilitate SME participation in evolving industrial ecosystems.
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← 1. French Tech refers to the French government-backed initiative and broader ecosystem supporting startups across sectors. Coordinated by the Mission French Tech and supported by Bpifrance and other public actors, it aims to accelerate the growth of innovative startups through funding, international promotion, and policy support.
← 2. Mid-sized companies or “Entreprises de Taille Intermédiaire” (ETI) in French are defined as having 250 to 4 999 employees and either a turnover not exceeding EUR 1.5 billion or a balance sheet total not exceeding EUR 2 billion.
← 3. As of January 2025, the bill has been adopted by the Senate and submitted to the National Assembly for discussion.
← 4. Can take multiple forms: Grant/Interest rate subsidy; Loan/Repayable advances/Reimbursable grant; Guarantee; Tax advantage or tax exemption; Risk finance; Other. See: (EU Commission, 2021[187])
← 5. Reuters (2024), Volkswagen considers historic German plant closures in cost drive, 3 September 2024
← 6. Survey of managing directors from VDMA specialist associations and organized companies in the specialist associations for printing and paper machines, plastic and rubber machines, waste and recycling technology, as well as food and packaging machines. Source: VDMA in (McKinsey & VDMA, 2022[73]).
← 7. 43 companies. Source: VDMA
← 8. All EU, national and regional programmes are gathered and accessible through the online funding data platform (Foerderdatenbank): https://www.foerderdatenbank.de/FDB/DE/Foerderprogramme/foerderprogramme.html
← 9. IPCEI: Important Project of Common European Interest
← 10. Currently the following initiatives are involved in the IM-X Council: Alliance Industrie du Futur (France), CESMII The Smart Manufacturing Institute (USA), Confindustria (Italy), Korea Smart Manufacturing Office Kosmo (Korea), Offensive de Transformation Numérique (Canada), Plattform Industrie 4.0 (Germany), Plattform Industrie 4.0 (Austria), RRI Robot Revolution & Industrial IoT Initiative (Japan), Smart Industry Programme (the Netherlands).
← 11. These areas are: Bioeconomy; biomedicine; electronics, autonomous driving and high-performance computing; energy efficiency, climate protection and adaptation; medical technology; information and communication technologies; interactive technologies for health and quality of life; materials research; photonics and quantum technologies; resource and circular economy; and the future of value creation.
← 12. Following the submission of project outline on one of the two deadline dates as well as the application
← 13. For projects of less than EUR 100 000 of equity contribution.
← 14. Partners in collaborative projects are composed on average by 60% SMEs and 40% research institutions. The amount of funding per project is variable, dependent on demand, number of projects and overall budget. Funding for the October application window (for projects not exclusively focused on technical innovation) receives co-financing from the European Social Fund Plus Programme “Future of Work”. The project length, once the support has started, usually goes beyond 24 months.
← 15. Around of 45% of SMEs with accepted projects under the ZIM reported “SME-innovative” as alternative funding initiative that could have been considered for the R&D project.
← 16. The manufacturing sector’s added value in 2022 was JPY 107.6 trillion, and it hired 10.44 million employees out of all 67.23 employees in 2022.
← 17. In 2022, nominal labour productivity in the manufacturing sector stood at JPY 10.31 million against JPY 8.27 million on average across all sectors.
← 18. Between 2012 and 2022, average nominal labour productivity per capita across all sectors went from JPY 7.92 million in 2012 to JPY 8.27 million in 2022. In the manufacturing sector, it grew from JPY 9.53 million in 2012 and JPY 10.31 million in 2022.
← 19. CO2 emissions of the manufacturing sector / those of all sectors = 247,771 kt CO2 / 1,064,001 kt CO2 = 23.3%
← 20. CO2 emissions of the machine sector / those of all sectors = 8,981 kt CO2 / 1,064,001 kt CO2 = 0.8%
← 21. According to the Japan Institute for Labour Policy and Training, the effective job offer rate, meaning job offer divided by applicants, was 1.31 in 2023. Therefore, there were only 76.3% (=1/1.31) of applicants for jobs.
← 22. “Japan's automotive industry is a key industry with world-class comprehensive technological capabilities that supplies vehicles to countries around the world, and it is necessary to take comprehensive measures by paying attention to the goals, regulations, support, and other measures related to electrification in other countries and the status of the electric vehicle market as a result of these measures. Since many of the related industries are dominated by SMEs, we should aim to create an industrial structure that can positively work toward the realization of Carbon Neutrality by responding to electrification, challenging new fields, changing business categories, diversifying, and fostering co-operation and mergers among companies.” (Cabinet Secretariat, METI, Cabinet Office, etc., 2023[94])
← 23. METI argues that to maintain and enhance the competitiveness of Japan's manufacturing industry, strengthening dynamic capabilities is essential. Dynamic capabilities refer to a company's ability to transform itself in response to rapidly changing environments. This includes three key abilities: sensing threats and crises, seizing opportunities by reorganizing assets and knowledge to gain competitiveness, and transforming the organization to sustain long-term competitiveness. Digital technologies amplify all these abilities, especially through data collection and analysis.
← 24. Toward the goal of achieving carbon neutrality by 2050, METI has established a Green Innovation Fund at the level of 2 trillion yen under the FY2020 Tertiary Supplementary Budget and decided to assign the New Energy and Industrial Technology Development Organization (NEDO) to its operation. In this fund, the government is providing continuous support to companies and other organizations which are committed to taking on the challenge of ambitious targets for 2030 shared by the public and private sectors, from R&D through to demonstration to social implementation over the next 10 years. These target areas where policy effects are significant, and long-term continuous support is required to realize public implementation, from among the priority fields for which implementation plans have been formulated within the Green Growth Strategy, which is a set of industrial policies to create a “virtuous cycle of the economy and the environment.”
← 25. METI, in collaboration with other ministries and agencies, has been developing and implementing mechanisms for sharing data processing systems across multiple stakeholders. These initiatives, focused on creating interoperable data infrastructures, have been collectively named the Ouranos Ecosystem (METI, 2023[191]).
← 26. “Investments are being made at a different level than has been the case up to the present. Micron, Sony, Kioxia, Tokyo Electron, and others have already launched investment plans. The government has been proactive in providing support in recent years, recognising that the infrastructure for a digital society has been put in place and that semiconductors are also strategic commodities from the perspective of security. There are concerns that the industry may become overheated, but it is a high-risk industry, in which fierce competition is endured in order to realise considerable profit.” (Kuroda, 2023[192]).
← 27. In July 2024, the U.S. Economic Development Administration (EDA) awarded USD 504 million in Implementation Grants to 12 of the 31 designated Tech Hubs. The remaining 19 Tech Hubs received USD 500,000 Consortium Accelerator Awards to refine their strategies and mobilise additional investment. EDA also provided USD 500,000 each to 18 Strategy Development Grantees to strengthen regional planning and coordination. In September 2025, EDA opened a new funding call for the 19 designated Hubs that had not yet received Implementation awards, enabling them to compete for support for new Implementation projects (Regional Technology and Innovation Hubs (Tech Hubs) | U.S. Economic Development Administration).